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Wednesday, February 28, 2007

Not So Tiny Bubbles?

Robert Reich says watch out, the bubble bursting may not be over:

Why the Stock Market Tumbled -- and What's to Come, by Robert Reich: As of right now (11:15 am Pacific time, Wednesday), it looks like Wall Street is putting a the best face possible on yesterday's "correction." (A "correction" is a Wall Street euphemism for "holy shit!") But it's way too early for a sigh of relief. When the stock market takes a big hit, ... ask yourself two questions: What underlying speculative trend has been getting out of control? And what was the wake-up call that alerted investors to it?

This time, the out-of-control trend has been excess liquidity... (excess petro-dollars, excess sino-dollars, excess saving in the rest of Asia) that investors have been overly optimistic in lending money and buying stocks. In other words, they’ve taken on way more risk than they’ve thought...

The biggest speculative bubble has been in China – which isn’t surprising given the growth of China’s economy and the under-regulation of its financial markets. Because global financial markets are so intertwined, that bursting bubble has hurt investors all over the world. ...

There have been other excess-liquidity speculative bubbles right here in America, too. One prime example has been sub-prime loans... When the housing market started to tumble, some of these risky loans have revealed just how risky they are.

Another liquidity bubble has emerged in hedge funds and private-equity funds, which have so much money they’re buying up whatever they see. When these bubbles burst, the noise will be loud enough to shake foundations from New York to San Francisco.

The wake-up call this time was Alan Greenspan, the Oracle of Ayn Rand, whose visage had been beamed by satellite to a group in Hong Kong on Monday (New York time). Greenspan warned the gathering of excess liquidity in global financial markets, leading to over-optimism, and he predicted a recession later this year.


Too early yet to tell how big this explosion will be.

Also from Robert Reich: Time to Join a Union (Or At Least Have the Right To).

    Posted by on Wednesday, February 28, 2007 at 01:15 PM in Economics, Financial System | Permalink  TrackBack (0)  Comments (39) 

    "Budget Costs Should Not Shape Our Iraq Policy"

    When Robert Samuelson said in 2002 that we shouldn't worry about how much the Iraq war will cost when formulating policy, he underestimated the cost of the war by hundreds of billions of dollars. But he still believes that the cost of the war should not impact Iraq policy:

    A $2 Trillion Footnote?, by Robert J. Samuelson, Commentary, Washington Post: ...As the situation in Iraq has deteriorated, some readers have suggested that I revisit [my September 2002 column ... "A War We Can Afford."] and confess to error. Let me take up their invitation, because today's ferocious war debate raises many of the same issues.

    Yes, that column made big mistakes. The war has cost far more than I (or almost anyone) anticipated. Still, I defend the column's central thesis, which remains relevant today: Budget costs should not shape our Iraq policy. Frankly, I don't know what we should do now. But in considering the various proposals -- President Bush's "surge," fewer troops or redeployment of those already there -- the costs should be a footnote. We ought to focus mostly on what's best for America's security.

    To be sure, the war's costs have been huge. Since September 2001, Congress has provided $503 billion for Iraq, Afghanistan and related activities... The administration's request for fiscal 2007 ... and fiscal 2008 would bring the total to $746 billion. Iraq represents about 70 percent of that. By contrast, my original column put the cost of an Iraq war at up to $80 billion. ...

    As to the future, the CBO has created two "illustrative scenarios"... By CBO estimates, the scenarios would involve extra spending from 2009 to 2017 of $269 billion and $696 billion, respectively.

    Finally, the war has created costs that, though they don't appear in accounts labeled "Iraq," are properly attributed to Iraq. Trucks, helicopters and tanks are wearing out at faster rates; they'll have to be replaced or refurbished. Recruiting costs have risen. Veterans' disability benefits and health costs are increasing. ... Linda Bilmes, a Harvard budget expert ... estimates the present value of future disability and health benefits at $300 billion to $600 billion.

    The war on terrorism has clearly worsened the long-term budget outlook. How then can I treat that so lightly? What's missing is context..., the federal budget now totals nearly $3 trillion annually. Suppose the war's ultimate costs reach $2 trillion by 2017... That's a big number, perhaps too big. It's also a wild guess. Still, the CBO estimates all federal spending over the same period (2002-17) will total $48 trillion; war spending would be about 4 percent. In the same period, the income of the U.S. economy ... would total an estimated $248 trillion; war spending would be less than 1 percent of that. The point, as I said in 2002, is that we're so wealthy we "can wage war almost with pocket change."

    With hindsight, it seems almost incontestable that the Iraq war should never have been fought. It has eroded our global power, weakened our military and resulted in thousands of American and Iraqi deaths. What I most regret about my earlier column is that it seemed to bless a war, when I was mainly trying to focus attention on questions more important than money. Given the headline (I wrote it) and the fact that those questions came at the end of the column ("Is this war justifiable? . . . What would happen if we don't fight? What will happen if we do?"), the reaction was understandable. In truth, I was uncertain about the war then, just as I'm unsure of what to do now.

    But I am certain -- now as then -- that budget consequences should occupy a minor spot in our debates. It's not that the costs are unimportant; it's simply that they're overshadowed by other considerations that are so much more important. We can pay for whatever's necessary. If we decide to do less because that's the most sensible policy, we shouldn't delude ourselves that any "savings" will rescue us from our long-term budget predicament, which involves the huge costs of federal retirement programs. Just because the war is unpopular doesn't mean it's the source of all our problems.

    The total cost of the war as a percentage of overall federal spending or cumulative income over the 2002-20017 time period may be small, but it's what is sacrificed at the margin that matters. What else could we have done with the money spent on the war, currently around $200 billion a year? Schools, roads, health care, environmental investments, port inspectors, preschool, police, there is a long list of valuable alternative uses for the money used to pay for the war.

      Posted by on Wednesday, February 28, 2007 at 02:25 AM in Budget Deficit, Economics, Iraq and Afghanistan | Permalink  TrackBack (0)  Comments (120) 

      Amy Finkelstein: The Costs and Benefits of Universal Health Insurance

      This WSJ commentary from Amy Finkelstein of MIT discusses the costs and benefits of adopting universal health insurance:

      The Cost of Coverage, by Amy Finkelstein, Commentary, WSJ: Thanks to widespread concern about the millions of Americans without health insurance, several states have recently mandated universal coverage... Massachusetts enacted legislation...; other proposals are brewing in California, Pennsylvania and elsewhere. Such reforms are likely to affect health-care spending...

      For evidence of how such programs can lead to increased spending, just look at the effects of the introduction of Medicare in 1966. Medicare provides health-insurance coverage to virtually all Americans aged 65 and over. Prior to its enactment, only about one-quarter of these individuals had any meaningful health insurance. As a result of Medicare's introduction, about three-quarters of the elderly ... gained health-insurance coverage. (For perspective, this is a similar increase in the share .. as ... will happen in Massachusetts under its new universal coverage program.)

      Research I conducted shows that Medicare had a substantial effect on the health-care sector. By 1970, the program caused a 37% increase in hospital spending. This is an enormous number. If I extrapolate from the Medicare ... to ... the ... overall spread of insurance -- both public and private -- between 1950 and 1990, it suggests that it is responsible for about half of the sixfold growth in real per capita health-care spending during this period.

      Why does increased health insurance lead to increased health spending? One factor is that when individuals have insurance, they tend to consume more health care. ...

      Another reason is that hospitals and doctors respond to the increased demand for health care by changing some of the ways in which they practice medicine. For example, hospitals were more likely to adopt new medical technologies after Medicare... because ..., with greater insurance coverage, there were more people who could afford these new technologies. ... All of this contributes to higher health-care spending.

      Of course, the effect of health insurance on health spending tells us only of the costs of expanding health insurance coverage. We can also ask, what are the benefits? And once again, we can learn something from the Medicare experience. Robin McKnight of the University of Oregon and I have examined the data, and as best we can tell, Medicare did not have any effect at reducing elderly mortality in its first 10 years of existence. Of course, mortality is only one measure of health, and it is possible that other aspects of health improved. It is also possible that in the long run, the new technologies adopted ... because of Medicare had important health benefits that our 10-year analysis would not capture.

      While the health benefits from Medicare therefore remain uncertain, we found clear evidence of a different type of benefit: It provided substantial financial protection to the elderly. Prior to Medicare, they faced the risk of large out-of-pocket medical expenditures. About one in 10 of elderly individuals spent one-fifth of their annual income on medical expenses... By 1970, we estimate that Medicare had reduced this risk of extremely large out-of-pocket medical expenditures by half.

      What all this means is that, as best we can tell, the elderly were not foregoing life-saving treatments prior to Medicare. Rather, they were getting these treatments, albeit at large or even enormous personal financial cost. But overall Medicare did not so much save lives as it did provide financial security. This is the goal of insurance -- not to prevent an awful event from occurring, but to make sure that if it does occur you are not devastated financially.

      The Medicare experience offers valuable lessons for today. Recent state efforts to create universal health-insurance coverage would reduce the fraction of the population in a state without insurance by similar amounts as did the introduction of Medicare... And if that program is any guide, we may perhaps see changes in the structure of the health-care system, such as the development and adoption of new medical technologies. We are likely to witness an improvement in the financial security of the currently uninsured. There are also likely to be increases in health-care spending -- quite possibly substantial ones.

      The paper she co-authored with Robin is noted and briefly discussed here. The paper itself is here. Here's a non-technical summary.

      Here are some statistics related to the paper Robin has used in presentations. This table shows that medical spending is very skewed: If you order people according to their spending on health care, the top 10% of spenders account for 72% of all spending and the top 1% of spenders account for 30% of all spending. 

      Share of health care spenders Cumulative share of US medical spending
      Top 1% 30%
      Top 5% 58%
      Top 10% 72%
      Top 30% 90%
      Total population 100%
      Source: Berk & Monheit (1992)

      It's the people in the tails, of course, that use most of the resources and receive most of the benefits from adopting universal insurance coverage.

        Posted by on Wednesday, February 28, 2007 at 12:15 AM in Economics, Health Care, University of Oregon | Permalink  TrackBack (0)  Comments (133) 

        Tuesday, February 27, 2007

        Japan's Food Security

        Is Japan's protection of its agricultural industry justified by the fact that it is an island nation, or should Japan drop its worries about food security and end the subsidies it gives to domestic farmers? First, here's Malcolm Cook of the Lowy Institute for International Policy in Australia writing for Project Syndicate. He's hopeful Japan's protectionist tendencies in agriculture are subsiding, and that Japan will lead the way for others to relax their agricultural protections. An editorial from the Japan Times follows and gives additional perspective: 

        Japan is showing the way forward for agricultural free trade, by Malcom Cook, Project Syndicate: Last year was a bad one for free trade. The Doha Round was supposed to make agriculture the centerpiece of negotiations... But instead of breathing life into free trade in food, rural protectionism in rich countries seems to have killed the Doha Round... Most galling, agriculture is a small and declining part of these "rich club" economies...

        Continue reading "Japan's Food Security" »

          Posted by on Tuesday, February 27, 2007 at 01:23 PM in Economics, International Trade | Permalink  TrackBack (0)  Comments (18) 

          Is the Wide, Wide World of Economics Too Wide?

          Is there anything economists won't study? Should there be?:

          Is an Economist Qualified To Solve Puzzle of Autism?, by Mark Whitehouse, WSJ: In the spring of 2005, Cornell University economist Michael Waldman noticed a strange correlation in Washington, Oregon and California. The more it rained or snowed, the more likely children were to be diagnosed with autism. ...

          [This] soon led Prof. Waldman to conclude that something children do more during rain or snow -- perhaps watching television -- must influence autism. Last October, Cornell announced the resulting paper in a news release headlined, "Early childhood TV viewing may trigger autism, data analysis suggests."

          Prof. Waldman's willingness to hazard an opinion on a delicate matter of science reflects the growing ambition of economists -- and also their growing hubris, in the view of critics. Academic economists are increasingly venturing beyond their traditional stomping ground, a wanderlust that has produced some powerful results but also has raised concerns about whether they're sometimes going too far. ...

          Such debates are likely to grow as economists delve into issues in education, politics, history and even epidemiology. Prof. Waldman's use of precipitation illustrates one of the tools that has emboldened them: the instrumental variable, a statistical method that, by introducing some random or natural influence, helps economists sort out questions of cause and effect. Using the technique, they can create "natural experiments" that seek to approximate the rigor of randomized trials -- the traditional gold standard of ... research. ...

          But as enthusiasm for the approach has grown, so too have questions. One concern: When economists use one variable as a proxy for another -- rainfall patterns instead of TV viewing, for example -- it's not always clear what the results actually measure. Also, the experiments on their own offer little insight into why one thing affects another.

          "There's a saying that ignorance is bliss," says James Heckman ... at the University of Chicago who won a Nobel Prize in 2000... "I think that characterizes a lot of the enthusiasm for these instruments." Says MIT economist Jerry Hausman, "If your instruments aren't perfect, you could go seriously wrong." ...

          In principle, the best way to figure out whether television triggers autism would be to do what medical researchers do: randomly select a group of susceptible babies at birth to refrain from television, then compare their autism rate to a similar control group that watched normal amounts of TV. If the abstaining group proved less likely to develop autism, that would point to TV as a culprit.

          Economists usually ...[cannot] perform that kind of experiment. ... Instead, economists look for instruments -- natural forces or government policies that do the random selection for them. First developed in the 1920s, the technique helps them separate cause and effect. Establishing whether A causes B can be difficult, because often it could go either way. If television watching were shown to be unusually prevalent among autistic children, it could mean either that television makes them autistic or that something about being autistic makes them more interested in TV. ...

          Prof. Waldman and his colleagues had such [techniques]... in mind when they approached autism and TV. By putting together weather data and government time-use studies, they found that children tended to spend more time in front of the television when it rained or snowed. Precipitation became the group's instrumental variable, because it randomly selected some children to watch more TV than others.

          The researchers looked at detailed precipitation and autism data from Washington, Oregon and California -- states where rain and snowfall tend to vary a lot. They found that children who grew up during periods of unusually high precipitation proved more likely to be diagnosed with autism. A second instrument for TV-watching, the percentage of households that subscribe to cable, produced a similar result. Prof. Waldman's group concluded that TV-watching could be a cause of autism.

          Criticism quickly arose, illustrating some of the perils of the economists' approach. For one, instruments are often too blunt. As Prof. Waldman concedes, precipitation could be linked to a lot of factors other than TV-watching -- such as household mold -- that could be imagined to trigger autism. ... "It is just too much of a stretch to tie this to television-watching," says Joseph Piven, director of the Neurodevelopmental Disorders Research Center at the University of North Carolina. "Why not tie it to carrying umbrellas?"

          Also, Prof. Waldman's findings do nothing to explain the mechanism by which television would influence autism, a gap that instrumental variables are inherently unable to fill. That's one reason many autism researchers think he shouldn't have publicized his results or made recommendations to parents. "I think this is irresponsible," says Dr. Klin of Yale. "We should not provide clinical advice unless there is scientific evidence to substantiate it." ...

          David Card, a professor at the University of California, Berkeley, who has done influential work on the minimum wage, fears that the fascination with the instrumental-variables technique "leads to interest in topics that economists are not particularly well-trained to study."

          Those who favor the method say it's just one tool among many -- all of which have flaws -- and is intended to help fill in the picture. ... Prof. Waldman welcomes the scrutiny, saying he hopes his work will also provoke autism researchers to conduct clinical trials. "Obviously this is an unusual thing for an economist to be looking at," says Prof. Waldman. "Maybe I was overconfident. We'll see."

            Posted by on Tuesday, February 27, 2007 at 12:36 AM in Economics, Methodology | Permalink  TrackBack (1)  Comments (33) 

            Monday, February 26, 2007

            John Taylor: The Iraq Currency Plan Was a Big Success

            John Taylor says the plan to ship U.S. currency into Iraq after the fall of Saddam Hussein was a big success:

            Billions Over Baghdad, by John B. Taylor, Commentary, NY Times: Earlier this month, the House Committee on Oversight and Government Reform held a hearing that criticized the decision to ship American currency into Iraq just after Saddam Hussein’s government fell. As the committee’s chairman, Henry Waxman of California, put it .., “Who in their right mind would send 360 tons of cash into a war zone?” His criticism attracted wide attention, feeding antiwar sentiment and even providing material for comedians. But a careful investigation ... paints a far different picture.

            The currency that was shipped into Iraq in the days after the fall of Saddam Hussein’s government was part of a successful financial operation that had been carefully planned months before the invasion. Its aims were to prevent a financial collapse in Iraq, put the financial system on a firm footing and pave the way for a new Iraqi currency. ...

            The plan ... had two stages ... designed to work for Iraq’s cash economy, in which checks or electronic funds transfers were virtually unknown and shipments of tons of cash were commonplace.

            In the first stage, the United States would pay Iraqi government employees and pensioners in American dollars. These were obtained from Saddam Hussein’s accounts in American banks, which ... amounted to about $1.7 billion. Since the dollar is a strong and reliable currency, paying in dollars would create financial stability until a new Iraqi governing body was established... The second stage of the plan was to print a new Iraqi currency for which Iraqis could exchange their old dinars.

            The final details of the plan were reviewed in the White House Situation Room by President Bush and the National Security Council on March 12, 2003. I attended that meeting. Treasury Secretary John Snow opened the presentation with a series of slides. ... [A] slide indicated that we could ship $100 million in small denominations to Baghdad on one week’s notice. President Bush approved the plan...

            To carry out the first stage of the plan, President Bush issued an executive order on March 20, 2003, instructing United States banks to relinquish Mr. Hussein’s frozen dollars. From that money, 237.3 tons in $1, $5, $10 and $20 bills were sent to Iraq. During April, United States Treasury officials in Baghdad worked with the military and the Iraqi Finance Ministry officials ... to make sure the right people were paid. The Iraqis supplied extensive documentation of each recipient of a pension or paycheck. ...

            On April 29, Jay Garner ... reported to Washington that the payments had lifted the mood of people in Baghdad during those first few confusing days. Even more important, a collapse of the financial system was avoided.

            This success paved the way for the second stage of the plan. In only a few months, 27 planeloads (in 747 jumbo jets) of new Iraqi currency were flown into Iraq from seven printing plants around the world. Armed convoys delivered the currency to 240 sites around the country. From there, it was distributed to 25 million Iraqis in exchange for their old dinars, which were then dyed, collected into trucks, shipped to incinerators and burned or simply buried.

            The new currency proved to be very popular. It provided a sound underpinning for the financial system and remains strong, appreciating against the dollar even in the past few months. Hence, the second part of the currency plan was also a success...

            One of the most successful and carefully planned operations of the war has been held up in this hearing for criticism and even ridicule. As these facts show, praise rather than ridicule is appropriate: praise for the brave experts in the United States Treasury who went to Iraq in April 2003 and established a working Finance Ministry and central bank, praise for the Iraqis in the Finance Ministry who carefully preserved payment records in the face of looting..., and yes, even praise for planning and follow-through back in the United States.

              Posted by on Monday, February 26, 2007 at 07:56 PM in Economics, Financial System, Iraq and Afghanistan | Permalink  TrackBack (0)  Comments (69) 

              Inflation and Unemployment II

              This post from earlier today noted that there is evidence that the relationship between inflation and measures of real activity such as the unemployment rate has weakened in the last twenty-five years. I want to return to this topic.

              There are two types of causality we can examine with respect to the relationship between unemployment and inflation (there are others as well). The first is how a monetary (aggregate demand) shock that impacts inflation affects unemployment and other measures of real activity. It's possible that unemployment reacts less to a change in monetary policy than it did in the past. The second type of causality is how a shock to unemployment or output, perhaps from a supply-shock such as a change in productivity or a real cost shock, affects inflation in subsequent periods. The first is a demand driven change in the economy while the second originates on the supply side. This will address the first type - demand driven fluctuations of the kind that generate Phillips curve type movements in inflation and measures of real activity.

              The causality here runs from monetary policy shocks to inflation to unemployment. I am going to use an expectations augmented Phillips curve framework to illustrate ideas. It's not the most up-to-date framework, but the ideas carry through to more modern theoretical structures and it has the advantage of being a simple and familiar structure.

              The following figure shows two short-run Phillips curves, one for an expected inflation rate of π0 and one for an expected inflation rate of π1. Consider the PC labeled PC(πe = π0). This curve shows that if the inflation rate is equal to its expected value of π0, then the unemployment rate will be at the natural rate, U*. However, if the inflation rate is different than what is expected, then the economy will slide along the short-run Phillips curve and output will differ from its natural rate.


              For example, suppose that agents expect an inflation rate of  π0, but the actual inflation rate turns out to be, unexpectedly, the lower rate of π1. Then instead of ending up at the natural rate rate, i.e. at point A, the economy will move to point B and the unemployment rate will increase. Thus, any unexpected inflation causes deviations from the natural rate of output.

              If the lower inflation is permanent, over time expectations will adjust to reflect the lower actual inflation rate. That is, over time, the expected inflation rate will drop from  πe = π0  to  πe = π1 and the Philips curve will shift downward as shown in the diagram. As the Phillips curve shifts down, the economy will move from point B to point C as the unemployment rate returns to the natural rate.

              Notice that the path of unemployment in response to an unexpected shock is from point A to B to C as unemployment first rises, then falls back to its initial level. But what if the change in policy was expected rather than unexpected? In this case, the fall in unemployment is less costly.

              If the change in inflation is anticipated in advance, then the PC will shift as the inflation rate changes and the economy can move from point A to point C without as much (or with perfect flexibility without any) increase in unemployment. That is, with some degree of price and wage rigidity present, an unexpected change in inflation will move the economy from A to B to C, while an expected change will move more directly from A to C as shown, for example, by the dashed line in the diagram. Thus, importantly, anticipated changes lead to much less variation in unemployment than unanticipated changes.

              This means that one explanation for increased stability (when causality is from policy to real activity) is that policy is easier to anticipate than in the past. Has this happened in the last twenty five years, i.e. is this a realistic assumption? It seems so for at least three reasons, the use of interest rate rules that have stabilized both actual and expected inflation making them more predictable, transparency about how the interest rule is implemented, and increased credibility.

              Since the 1980s, the Fed has followed an interest rate rule and it has, at the same time, attempted to be much more transparent and communicative about its policy procedures. To the extent that this has allowed policy to be predicted more accurately, the economy should be more stable.

              Increased credibility since the 1970s is also important. If the monetary authority says it is committed to a policy of lowering inflation and announces such intentions, but then allows inflation to continue to creep upward so that it loses credibility (as the Fed did in the 1970s), then there will be much more uncertainty about Fed policy and therefore much less predictability. All of these factors - committing to a rule, increasing transparency, and enhancing credibility allow policy to be predicted with less error and, according to the model above as well as more modern versions of it, the economy ought to stabilize. With a more stable economy, a given change in inflation will be associated with smaller changes in real activity.

                Posted by on Monday, February 26, 2007 at 05:46 PM in Economics, Inflation, Unemployment | Permalink  TrackBack (0)  Comments (6) 

                How Should Changes in Inequality Be Measured and Assessed?

                My latest at Cato Unbound:

                How Should Changes in Inequality Be Measured and Assessed?, by Mark Thoma, Cato Unbound: I am pleased to see that Alan Reynolds is finally taking a closer look at some of the evidence that works against his claim that inequality has been stagnant in recent decades, though he predictably dismisses it. I will not convince him the evidence is valid, and he most certainly has not convinced me that it isn't, so I encourage anyone who is still puzzled about the evidence that profits have been mismeasured and that it matters for assessing changes in inequality in recent years to look at the research and draw their own conclusions. I have no doubt that a fair reading of the evidence will lead to the conclusion that inequality may in fact be worse than we thought which runs opposite of Reynolds' claims. The essence is fairly simple, if we're mismeasuring real investment, then we are also mismeasuring profits. Given the concentration of corporate ownership at higher incomes, and the extent of the mismeasurement, this correction matters.

                One additional note on Reynolds' responses since my last post, then I'd like to move on to other issues, particularly those raised in the contributions others have made to this debate. Given Reynolds wholly unsubstantiated and uncalled for attack on the ethics of Piketty and Saez in a commentary on the opinion pages of the Wall Street Journal where he accuses them of fabricating results in academic journals to support an agenda, and given other things he has said at other times, it made me chuckle to see him say in his latest response that "all we have seen so far" are "comments about my temperment or assumed policy agenda" as though no evidence rebutting his stance has been presented, just personal attacks on his character or charges that he's pursuing an ideological agenda. Reynolds says there's not a strand of evidence that he's wrong ("no evidence has yet been presented to show any significant and sustained increase in inequality"). Not a strand he'll acknowledge anyway, but as has been pointed out in previous posts here, and has been documented elsewhere in many different ways, there's overwhelming evidence against his claims.

                I want to follow up on the post from Dirk Krueger and Fabrizio Perri ("Inequality in What?") because I think they bring something important to the discussion, the academic underpinnings of how we approach the measurement and assessment of inequality changes. In their introduction they say:

                Continue reading "How Should Changes in Inequality Be Measured and Assessed?" »

                  Posted by on Monday, February 26, 2007 at 11:52 AM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (10) 

                  Paul Krugman: Substance Over Image

                  Paul Krugman explains the similarity between presidential elections and high school popularity contests and the trouble that similarity has caused us. In an attempt to avoid such problems this time around, he poses some questions for Democratic candidates that are intended to cut through their superficial, well-crafted images, test their knowledge of the issues, and gauge their "judgment, seriousness and courage":

                  Substance Over Image, by Paul Krugman, Commentary, NY Times: Six years ago a man unsuited both by intellect and by temperament for high office somehow ended up running the country.

                  How did that happen? First, he got the Republican nomination by locking up the big money early.

                  Then, he got within chad-and-butterfly range of the White House because the public, enthusiastically encouraged by many in the news media, treated the presidential election like a high school popularity contest. The successful candidate received kid-gloves treatment — and a free pass on the fuzzy math of his policy proposals — because he seemed like a fun guy to hang out with, while the unsuccessful candidate was subjected to sniggering mockery over his clothing and his mannerisms.

                  Today, with thousands of Americans and tens of thousands of Iraqis dead thanks to presidential folly, with Al Qaeda resurgent and Afghanistan on the brink, you’d think we would have learned a lesson. But the early signs aren’t encouraging. ...

                  Enough already. Let’s make this election about the issues. Let’s demand that presidential candidates explain what they propose doing about the real problems facing the nation, and judge them by how they respond. ... So here are some questions for the Democratic hopefuls. (I’ll talk about the Republicans another time.)

                  First, what do they propose doing about the health care crisis? All the leading Democratic candidates say they’re for universal care, but only John Edwards has come out with a specific proposal. The others have offered only vague generalities...

                  Second, what do they propose doing about the budget deficit? There’s a serious debate within the Democratic Party between deficit hawks, who point out how well the economy did in the Clinton years, and those who, having watched Republicans squander Bill Clinton’s hard-won surplus on tax cuts for the wealthy and a feckless war, would give other things — such as universal health care — higher priority than deficit reduction.

                  Mr. Edwards has come down on the anti-hawk side. But which side are Mrs. Clinton and Mr. Obama on? I have no idea.

                  Third, what will candidates do about taxes? Many of the Bush tax cuts are scheduled to expire at the end of 2010. Should they be extended, in whole or in part? And what ... about the alternative minimum tax...?

                  Fourth, how do the candidates propose getting America’s position in the world out of the hole the Bush administration has dug? All the Democrats seem to be more or less in favor of withdrawing from Iraq. But what do they think we should do about Al Qaeda’s sanctuary in Pakistan? And what will they do if the lame-duck administration starts bombing Iran?

                  The point of these questions isn’t to pose an ideological litmus test. The point is, instead, to gauge candidates’ judgment, seriousness and courage. How they answer is as important as what they answer.

                  I should also say that although today’s column focuses on the Democrats, Republican candidates shouldn’t be let off the hook. In particular, someone needs to make Rudy Giuliani, who seems to have become the Republican front-runner, stop running exclusively on what he did on 9/11.

                  Over the last six years we’ve witnessed the damage done by a president nominated because he had the big bucks behind him, and elected (sort of) because he came across well on camera. We need to pick the next president on the basis of substance, not image.

                  Previous (2/23) column: Paul Krugman: Colorless Green Ideas
                  Next (3/2) column: Paul Krugman: The Big Meltdown

                    Posted by on Monday, February 26, 2007 at 12:15 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (105) 

                    The Weakened Link Between Unemployment and Inflation

                    Greg Ip reports that the relationship between inflation and unemployment seems to have shifted over time. Variations in output and unemployment in the current time period appear to have less influence over future inflation than they did twenty five years ago:

                    Policy Makers At Fed Rethink Inflation's Roots, by Greg Ip, Wall Street Journal: For decades, a simple rule has governed how the Federal Reserve views the nation's economy: When unemployment falls too low, inflation goes up, and vice versa.

                    But Fed officials have rethought that notion. They believe it takes a far bigger change in unemployment to affect inflation today than it did 25 years ago. Now, when inflation fluctuates, they are far more likely to blame temporary factors, such as changes in oil prices or rents...

                    One explanation for why inflation is influenced less by changes in unemployment is that the American public has come to expect inflation to remain stable. When inflation moves up or down, it is less likely to get stuck at the new level because companies and workers don't factor the change into their expectations... Another explanation is that the Fed is better at adjusting interest rates in anticipation of swings in unemployment before those swings can affect inflation.

                    This ... doesn't mean unemployment can be ignored. But it does mean that in the short run, a period of high or low joblessness would be less likely to alter the Fed's view of inflation and trigger an immediate change in interest rates. A shift in public expectations of inflation, however, would carry more weight in the Fed's calculations. ...

                    Though the trend has been under way for 25 years, only recently has intensive research by Fed economists and others incorporated it into mainstream thinking. ...

                    "Among the feet-on-the-ground Fed inflation forecasters, who do this for a living, there's been a lot of concern for the last 10 years about whether there's...less of a relationship between output and future inflation," says Harvard University economist James Stock. "The accumulation of evidence occurs at a snail's pace. The evidence now is a lot stronger."

                    Mr. Stock and fellow economist Mark Watson at Princeton University presented evidence ... in late 2005 that inflation's long-term trend has varied little since 1984, and that most fluctuations were the result of temporary disturbances, such as a change in energy prices. ...

                    While a given drop in unemployment is less likely to spark inflation, the potential is still there. The Fed's staff estimates it takes up to twice as much additional unemployment to achieve a percentage drop in inflation as it did before 1984. ...

                    What Stock and Watson have shown (e.g. see  “Has Inflation Become Harder to Forecast?") is that inflation is both harder and easier to forecast at the same time. It's easier because it is more stable. Thus, the root mean square error for even fairly naive forecasts has fallen over time as inflation has stabilized. However, inflation has become harder to forecast because changes in real activity such as unemployment or output have less predictive power for future inflation than in the past.

                    What is the source of the change in the relationship? At the end of the paper Stock and Watson say:

                    One thing this paper has not done is to attempt to link these changes in time series properties to more fundamental changes in the economy. The obvious explanation is that these changes stem from changes in the conduct of monetary policy in the post-1984 era, moving from a reactive to a forward-looking stance... But obvious explanations are not always the right ones, and there are other possibilities. To a considerable extent, these other possibilities are similar to the ones raised in the context of the discussion of the great moderation, including changes in the structure of the real economy, the deepening of financial markets, and possible changes in the nature of the structural shocks hitting the economy. We do not attempt to sort through these explanations here, but simply raise them to point out that the question of deeper causes for these changes merits further discussion.

                    I think it's a combination of technological change (in particular, computers and digital technology that improved business processes, e.g. inventory management) and better monetary policy. Monetary policy has improved by reducing unexpected policy changes through transparency and enhanced credibility, and the implementation of inflation targeting rules that have stabilized both expected and actual inflation.

                      Posted by on Monday, February 26, 2007 at 12:06 AM in Economics, Inflation, Unemployment | Permalink  TrackBack (0)  Comments (16) 

                      Sunday, February 25, 2007

                      Larry Summers: History Lessons for China

                      Larry Summers looks to history for lessons China can use to limit the chances that it follows Japan into a "lost decade of deflation and considerable deterioration in its international relations":

                      History holds lessons for China and its partners, by Lawrence Summers, Financial Times (free): A rising Asian power has emerged as an export powerhouse and enjoys rapid, export-led growth fuelled by extraordinarily high savings and investment rates. Its technological capacity is upgraded at prodigious rates and its businesses threaten an ever greater swathe of industry in Europe and the US. Its high level of central bank reserves and burgeoning current account surplus lead to claims that its exchange rate is being unfairly manipulated.... Its financial system is ... heavily regulated in ways that favour domestic institutions and has close ties to government and industry. Rapid productivity growth holds down product prices but asset price inflation is rampant.

                      US congressional leaders demand radical action to contain the economic threat. Delegations of senior US economic officials engage in “dialogue” ..., warning of the congressional demons who stand ready to act if “results” are not achieved quickly.

                      All of this describes what is happening in and with China today. It also describes the Japanese economy in the late 1980s and early 1990s before its lost decade of deflation and considerable deterioration in its international relations. While there are obvious differences, notably China’s much lower level of development, the similarities are striking enough to invite an effort to draw some lessons for China and its partners from the earlier Japanese experience. [...read more...]

                      After discussing the lessons to be learned from the causes of Japan's difficulties, including policy errors made by Japanese officials, he notes that pressure on other countries to reform their economic systems and policies can be counter-productive:

                      These lessons contrast sharply with those drawn by some observers in and out of China, who attribute Japan’s deflation and consequent poor performance to its willingness to accede to US pressure for exchange rate appreciation. ...

                      [There is a] need for modesty regarding economic policy dialogues that seek to create pressure for change. Events and national and political decisions, not international communiqués, shape economic outcomes. The impact of events beyond the control of governments – the collapse of Japan’s asset markets, information technology’s spur to US productivity growth, the Asian financial crisis – dwarfed the issues debated in economic dialogues.

                      Even where government policies might have significant impact, there is no evidence that Japan in the 1980s and 1990s made any changes in domestically sensitive structural policy areas such as housing finance, social security or retail regulation in response to the US Structural Impediments Initiative or its successors. Policy in areas of this kind is shaped by domestic politics; if heavy-handed pressure makes it easier for special interests to invoke nationalism as they resist change, high-profile dialogues can be counter-productive. In a world where goodwill is scarce, heavy-handed dialogues engender resentments that spill over into other spheres. ...

                        Posted by on Sunday, February 25, 2007 at 11:11 AM in China, Economics | Permalink  TrackBack (0)  Comments (48) 

                        Republicans Could Have Diffused the "AMT Bomb," But Didn't

                        Linda Beale of ataxingmanner takes on a recent Wall Street Journal editorial on "Bill Clinton's AMT Bomb":

                        Wall Street Journal AMT Editorial, by Linda Beale: The Wall Street Journal is an important source of financial news, but people should not expect to read its editorial page without their spin antennae turned on. Today's editorial on the AMT is a good example of the way the Journal does partisan (and misleading) spin. It's titled "Bill Clinton's AMT Bomb," Wall Street Journal, Feb. 23, 2007...

                        What's wrong with it?

                        Continue reading "Republicans Could Have Diffused the "AMT Bomb," But Didn't" »

                          Posted by on Sunday, February 25, 2007 at 10:06 AM in Economics, Politics, Taxes | Permalink  TrackBack (0)  Comments (16) 

                          Saturday, February 24, 2007

                          Maximizing Flexicurity: Finding the Optimal Mix of Flex and Security

                          Louis Uchitelle of the NY Times says there is reason to doubt the claim that labor market protections in Europe and Japan explain most of the differences in output growth and other measures of economic performance between Europe, Japan, and the U.S.:

                          Job Security, Too, May Have a Happy Medium, by Louis Uchitelle, NY Times: For more than a decade, many American economists have pointed to Europe and Japan as prima facie evidence that layoffs in the United States are a good thing. The economies in those countries were not nearly as robust as this country’s. And the reason? Too much job security...

                          American employers, in sharp contrast, have operated with much more “flexibility.” Hiring and firing at will, they shift labor from where it is not needed to where it is needed. ...

                          This shuffling out of one job and into another shows up in the statistics as nearly full employment. Never mind that the shuffling does not work as efficiently as the description implies or that many of the laid-off workers find themselves earning less in their next jobs, an income roller coaster that is absent in Europe and Japan. A dynamic economy leaves no alternative, or so the reasoning goes among mainstream economists.

                          “Trying to prevent this creative destruction from happening is a recipe for less economic growth and less productivity,” said Barry Eichengreen ... at the University of California, Berkeley.

                          Starting in the mid-1990s, Europe and Japan did wallow in recession or weak growth while the American economy expanded at a spectacular clip. But no longer. Growth is slowing in the United States just as it speeds up in the 25-nation European Union and in Japan. Unemployment rates in those countries are also beginning to come down...

                          As the gaps close, does that mean that job security, in the European and Japanese style, is the right way to go after all? The question would be easier to answer if the European Union countries and Japan had stuck to their orthodox job security. They have not. On their way to revival, they adopted some of America’s practices.

                          “A number of countries have found ways to make their labor markets more flexible, without sacrificing their greater commitment to a government role in equalizing incomes,” said Paul Swaim, a senior economist at the Organization for Economic Cooperation and Development in Paris.

                          So the old dichotomy — insecurity versus security — is gradually giving way to a new debate. “It is obviously the right mix of security and insecurity that has to be achieved,” said Richard B. Freeman ... at Harvard...

                          The guideposts in this search for the right mix should not be just economic growth rates and unemployment levels. These are too often affected by business cycles. Many American economists, bent on demonstrating the payoff from layoffs, paid relatively little attention to the cyclical reasons for the underperformance of Japan and Europe. “Sometimes we forget these cyclical forces,” said Sanford M. Jacoby ... at the University of California, Los Angeles. ...

                          Cycles count. But so do labor policies.

                          In some European countries, employers are using temporary and part-time workers much more than they did in the past. That gives them leeway to expand and contract their work forces without having to add full-timers who are protected against layoffs. ...Japan ... also relies for “flexibility” on part-timers and temps.

                          If cost-cutting is necessary in Japan, there is a pecking order, says Yoshi Tsurumi, an economist at Baruch College in Manhattan... Dividends are cut first, then salaries — starting at the top. Finally, there are layoffs — if attrition is not enough to shrink staff. “The matter of flexibility is important,” Mr. Tsurumi said, “but the Japanese notion is to retrain and transfer people within an organization.”

                          Elsewhere, France and Germany have eased job protection for employees of small businesses. ... And the Danish model is getting a lot of attention. Employers in Denmark are relatively free to lay off workers, but the state then steps in with benefits that replace 70 percent of the lost income for four years. Government also finances retraining and education, pressuring the unemployed to participate and then insisting that they accept reasonable job offers or risk cuts in their benefits.

                          The Danish government devotes 3 percent of the nation’s gross domestic product to retraining, compared with less than 1 percent in the United States. And, of course, everywhere in Europe, the state pays for health insurance and for pensions that often encourage early retirement by replacing big percentages of preretirement income.

                          “What the Europeans and the Japanese understand is that modern economies can sustain social protections without killing the golden goose,” said Jared Bernstein, a senior economist at the Economic Policy Institute in Washington.

                          That is an understanding that perhaps will take root among American economists and policy makers, deprived as they now are of their long-running contention that job security resulted in weak economic growth in Europe and Japan.

                          Here's a pretty lukewarm endorsement of the flexicurity model in a working paper from Jianping Zhou at the IMF. The paper makes a point similar to a point made above, that part of Denmark's success has been from reforms since the 1980s giving people an increased incentive to train for and take new jobs. In particular, eligibility for programs has been tightened while the time people are allowed to be on some programs has been shortened. Still, relative to many countries, the programs offer substantial income protection:

                          Danish for All? Balancing Flexibility with Security: The Flexicurity Model, by Jianping Zhou, February 2007: ...V. Concluding Remarks The Danish flexicurity model has been widely praised for its association with a low unemployment rate and a high standard of social security for the unemployed. The model combines a high degree of labor market flexibility with a high level of social protection. While most European countries are facing chronically high unemployment rates and the needed labor market reforms often face strong political opposition, the flexicurity model looks increasingly attractive to policymakers in Europe.

                          However, whether the Danish model should and can be adopted by other European countries to reduce unemployment is not obvious. First, Denmark has traditionally had a combination of a flexible labor market and a high level of income protection. Economic performance under this system has varied, as demonstrated by the economic crisis during the early 1980s and the remarkable labor market performance in recent years. Second, other countries have been able to reduce their high unemployment rates to low levels with rather different social models (e.g., Ireland, Sweden, and the United Kingdom). Finally, generous unemployment benefits often raise moral hazard issues that might hinder effective implementation of the Danish model. In this regard, a strict job search requirement and tight eligibility criteria for unemployment benefits are key.

                          The Danish model is costly. The tax burden in Denmark is heavy because of the need to finance the country’s high spending on labor market programs and unemployment benefits. As most countries that are tempted to adopt the Danish model will typically start from a high unemployment level, a move toward the Danish model will, in the short run, trigger a sharp increase in the cost of unemployment benefits and active labor market policies, thereby widening the tax wedge, with an adverse impact on labor demand and supply. This implies that the Danish model may not be suitable for countries facing high unemployment and budgetary difficulties. Using a calibrated model for France, the paper finds that implementation of the flexicurity model could be costly, and reduction in structural unemployment during the first few years might be limited.

                          Nonetheless, certain key aspects of the Danish model could usefully be studied and considered by other countries. Among others, they include the various relationships between the population’s willingness to accept labor market flexibility, its confidence in a well functioning social safety net, and the accompanying need to develop effective labor market policies in order to avoid high costs and perverse incentives. The Danish government’s constant awareness and analysis of the challenges facing the flexicurity model and its ability to respond to them with policy actions are noteworthy in this regard. For instance, since the economic crisis in the early 1980s, reforms have been implemented to shorten the maximum period for participation in active labor market programs and tighten the eligibility criteria for unemployment benefits.

                            Posted by on Saturday, February 24, 2007 at 05:51 PM in Economics, Social Insurance | Permalink  TrackBack (0)  Comments (43) 

                            Bill Gates: Open the Doors to More High-Skill Immigration

                            Bill Gates continues his crusade to allow more high-skilled immigrants into the U.S.:

                            How to Keep the U.S. Competitive, by Bill Gates, Commentary, Washington Post: ...Innovation is the source of U.S. economic leadership and the foundation for our competitiveness in the global economy. Government investment in research, strong intellectual property laws and efficient capital markets are among the reasons that America has for decades been best at transforming new ideas into successful businesses.

                            The most important factor is our workforce. Scientists and engineers trained in U.S. universities -- the world's best -- have pioneered key technologies such as the microprocessor, creating industries and generating millions of high-paying jobs.

                            But our status as the world's center for new ideas cannot be taken for granted. Other governments are waking up to the vital role innovation plays in competitiveness. ...

                            Two steps are critical. First, we must demand strong schools so that young Americans enter the workforce with the math, science and problem-solving skills they need to succeed in the knowledge economy. We must also make it easier for foreign-born scientists and engineers to work for U.S. companies. ...

                            Our schools can do better. Last year, I visited High Tech High in San Diego; it's an amazing school where educators have augmented traditional teaching methods with a rigorous, project-centered curriculum. Students there know they're expected to go on to college. This combination is working: 100 percent of High Tech High graduates are accepted into college, and 29 percent major in math or science, compared with the national average of 17 percent.

                            To remain competitive in the global economy, we must build on the success of such schools...

                            American competitiveness also requires immigration reforms that reflect the importance of highly skilled foreign-born employees. Demand for specialized technical skills has long exceeded the supply of native-born workers with advanced degrees, and scientists and engineers from other countries fill this gap.

                            This issue has reached a crisis point. Computer science employment is growing by nearly 100,000 jobs annually. But at the same time studies show that there is a dramatic decline in the number of students graduating with computer science degrees.

                            The United States provides 65,000 temporary H-1B visas each year to make up this shortfall -- not nearly enough to fill open technical positions.

                            Permanent residency regulations compound this problem. Temporary employees wait five years or longer for a green card. During that time they can't change jobs, which limits their opportunities to contribute to their employer's success and overall economic growth.

                            Last year, reform on this issue stalled as Congress struggled to address border security and undocumented immigration. As lawmakers grapple with those important issues once again, I urge them to support changes to the H-1B visa program that allow American businesses to hire foreign-born scientists and engineers when they can't find the homegrown talent they need. This program has strong wage protections for U.S. workers: Like other companies, Microsoft pays H-1B and U.S. employees the same high levels...

                            Reforming the green card program to make it easier to retain highly skilled professionals is also necessary. These employees are vital to U.S. competitiveness, and we should welcome their contribution to U.S. economic growth.

                            We should also encourage foreign students to stay here after they graduate. Half of this country's doctoral candidates in computer science come from abroad. It's not in our national interest to educate them here but send them home...

                            During the past 30 years, U.S. innovation has been the catalyst for the digital information revolution. If the United States is to remain a global economic leader, we must foster an environment that enables a new generation to dream up innovations, regardless of where they were born. Talent in this country is not the problem -- the issue is political will.

                            On High Tech, the fact that more graduates major in math and science in college than at other schools (29% versus 17%) is not, in and of itself, evidence that these schools work since a high degree of selectivity bias is likely present (those who like math and science are more likely to enroll in a "High Tech High" than other students, the web site says they get 3,000 applications for 300 slots). I agree completely with the message on education, but worry that instead of building upon what works, we are too ready to tear it all down and start over. We have a Gates Foundation small schools initiative here in Eugene that broke an existing high school into three smaller specialty schools (an International High School, a school specializing in Invention, Design, Engineering, Arts, & Science, and North Eugene Academy of Arts). If it works, great, but these are kids lives we are playing with and if it doesn't work and outcomes deteriorate, the price of innovation, the risk, becomes very localized and very steep for those students who participate in the failed experiments (and it's not always voluntary). I wish there was a better way to spread the risk of these experiments across the population rather than localizing it in schools that are already, for the most part, having troubles.

                            As for immigration, I am generally supportive of open door policies. However, I do want to point out that there is another solution for Gates and others. They believe that there is plenty of talent in the U.S., that's not the problem, it's just that workers lack the training they need. Microsoft could provide the training itself instead of free-riding on the educational system. It takes a little longer and costs more, of course, but consistent with advocates of privatization and efficient markets, it forces Microsoft to internalize the costs of training its workers, particularly specialized training. But I can't blame Microsoft for wanting to avoid these costs if it can, and for wanting to increase the supply of labor as much as possible by opening the borders to more high-skill immigration.

                            The shortage of U.S. graduates in this area may be because students have no certainty that specialized skills in these areas will retain their value in the future, a consequence of changes in technology that undermine existing skills over time, digital technology that allows collaborative work to be performed outside of the U.S., and the prospect of more temporary visas being issued in the future.

                            My observation is that there is a large set of talented students who respond strongly to expected employment prospects when they choose a major, though there is, of course, a time-delay between the appearance of shortages and surpluses in particular areas and changes in the number of majors. But the effect is there. If U.S. students perceive that an investment in computer science training relative to investing their time elsewhere will have the largest long-run payoff, any shortage will take care of itself. [And, as noted in comments, access to education may not be equal so that another way to increase supply is to increase educational opportunities within the U.S.]

                            In the long-run, due to technology and globalization and to comparative advantage, trying to close doors to high-skilled workers is, for the most part, a losing battle. We can create artificial barriers to foreign competition and steer our students in particular directions but there is a danger that in doing so, we set them up for a bigger fall later. If the walls keeping out foreign competition cannot be maintained in a digital age, and if we artificially direct students to particular occupations, once the walls do come down people employed in these areas will be very exposed and in danger of a large fall in income and employment prospects due to the increased competition. For that reason, I think we are better off letting the walls come down now, within reason of course, and allowing prices direct our students to the places they will, so far as markets can predict, be most highly valued in the future.

                            Update: Dean Baker also comments in Bill Gates Comes to the Coward's Corner. PGL too.

                              Posted by on Saturday, February 24, 2007 at 11:07 AM in Economics, International Trade, Regulation, Unemployment, Universities | Permalink  TrackBack (0)  Comments (82) 

                              Friday, February 23, 2007

                              Manufacturing Employment and Extended Mass Layoffs

                              Here are two Economic Trends articles from the Cleveland Fed. The first looks at parallels between declines in manufacturing and agricultural employment, and the second characterizes extended mass layoffs since 2000:

                              Continue reading "Manufacturing Employment and Extended Mass Layoffs" »

                                Posted by on Friday, February 23, 2007 at 10:53 PM in Economics, Unemployment | Permalink  TrackBack (0)  Comments (41) 

                                Child Labor

                                This NBER paper by Eric Edmonds gives an overview of the recent empirical literature on child labor. Here's the conclusion:

                                Child Labor, by Eric V. Edmonds, NBER WP 12926, February 2007: ... 6. Conclusion The recent boom in empirical work on child labor has substantially improved our understanding of why children work and what the consequences of that work might be. This survey aims to assess what we currently know about child labor and to highlight what important questions still require attention.

                                Child labor research needs to carefully define exactly what measures of time allocation are being considered. Studies that consider too narrow a scope of activities are apt to generate misleading conclusions. Children are active in a wide variety of tasks and appear to substitute between them easily. Thus, if a child is observed working less in one task (like wage work), one cannot assume that she is working less. Moreover, though wage work appears less likely to be associated with simultaneous schooling, differences in schooling associated with variation in hours worked are much greater than those associated with location of work. Work is typically classified as market work or domestic work. Domestic work (often labeled "chores") is too often ignored in child time allocation studies. For a given number of hours worked, domestic work appears as likely as work in the farm or family business to trade off with school. Hence, studies of child labor need to consider as wide a range of activities as the data permit. There is considerable scope for learning about total labor supply or schooling changes by looking at changes in participation in various disaggregate activities.

                                Policy interest in child labor in today's rich countries arose during the late 19th century because of what Zelizer (1994) terms the "sacralization" of children's lives. She writes: "The term sacralization is used in the sense of objects being invested with sentimental or religious meaning" (p. 11). This view is behind much of policy's and the public's interest in child labor in developing countries today. This issue arises within economics because of concern about whether child labor is driven by agency problems –do parents fully consider the tradeoffs and costs of work when sending their children to work? However, despite some suggestive evidence, the primacy of agency problems in determining child labor supply has yet to be established.

                                Instead, most contemporary research in economics on child labor is interested because of the impact of work on human capital accumulation. There are a finite number of hours in a day, so at some margin, there must be a tradeoff between work and schooling. However, work and schooling are simultaneous outcomes of a single decision-making process. Identifying a causal relationship between the two seems likely to be an uninformative exercise. Moreover, work is not the residual claimant on child time outside of school, and the incidence of children who neither work nor attend school appears highest where schooling is the lowest. Consequently, it is somewhat problematic to motivate interest in child labor out of a concern for schooling. Studies of schooling should consider child labor supply in attempts to understand schooling variation, but the existing evidence is insufficient to motivate studying of child labor alone without considering schooling if human capital is the researcher's only concern. Researchers have considered several other consequences of child labor that might go beyond the child's time constraint and agency problems such as whether there are health consequences, externalities, effects on attitudes and values, occupation choice, fertility, or local labor markets. Much of this work is in its infancy.

                                The interconnection of child labor and poverty seems intuitive, but evidence has been more difficult to establish. This is because the assertion that child labor stems from poverty is often taken to imply that the only reason children work is because of high marginal utility of income. The data are inconsistent with this extreme view in general.

                                In fact, a more general description of the child labor problem is that the child works when the utility from working today is greater than the utility associated with not working. This raises several issues that the literature has considered about why children work. Perhaps the most important issue is the least researched: who makes child labor decisions –that is, whose marginal utility matters?

                                There is some evidence that child time allocation is influenced by the net return to schooling. While estimating the return to schooling is a challenge, there is suggestive evidence that it influence child time allocation. Several studies document a correlation between the employment opportunities open to children inside and outside their household and child time allocation. Hence, there should be situations when work is the most efficient use of child time, and there is nothing in the literature which precludes this.

                                The fact that work can be optimal does not exclude the possibility that child labor's prevalence owes less to its efficiency but more to the family's need for the child's contribution to the household. There appears to be a fairly broad consensus that credit constraints force families to make child labor decisions without fully considering future returns to education, and several studies document that declining poverty is associated with rapid declines in the fraction of children who are working, especially in market work. For this to be true, there needs to be both credit constraints among the very poor and substantive changes in the marginal utility of the child's contribution as the family exits poverty. However, while transitioning out of poverty may be associated with declining economic activity levels, higher income households are apt to have more employment opportunities both outside and inside the household. This creates a difficult econometric problem for researchers if both labor supply and labor demand change in opposite ways with rising income. A failure to understand this has caused many to assert that there is little link between poverty and child labor. Fortunately, as research progresses, there has been increasing attention to all of the different factors that can influence child labor.

                                While the quantity and quality of research on child labor has been increasing dramatically in recent years, there are several omissions in the literature that need to be resolved (beyond the agency issues we have already mentioned). Policy appears to be largely operating in a vacuum from research. Namely, rhetoric is increasingly directed against "worst forms of child labor," but I am not aware of any current empirical work on why children select into worst forms that has survived peer review in a contemporary mainstream economics journal. Moreover, outside of conditional cash transfer programs, policies targeted at these worst forms and more common forms of child labor are not being evaluated in a scientific way as far as I can find. This is unfortunate. Not only could more effective policies be designed but fundamental questions about why children work could be answered in the process. Hopefully, future work on child labor will aim to combine rigorous research on these unanswered questions with formal evaluation of child labor policy. [Link to Edmonds' papers on child labor, link to this paper]

                                  Posted by on Friday, February 23, 2007 at 09:01 PM in Academic Papers, Economics | Permalink  TrackBack (0)  Comments (9) 

                                  Paul Krugman: Colorless Green Ideas

                                  Now that the scientific debate over global warming is all but over, Paul Krugman looks at what we can do limit greenhouse gas emissions:

                                  Colorless Green Ideas, by Paul Krugman, Commentary, NY Times: The factual debate about whether global warming is real is, or at least should be, over. The question now is what to do about it.

                                  Aside from a few dead-enders on the political right, climate change skeptics seem to be making a seamless transition from denial to fatalism. In the past, they rejected the science. Now, with the scientific evidence pretty much irrefutable, they insist that it doesn’t matter because any serious attempt to curb greenhouse gas emissions is politically and economically impossible.

                                  Behind this claim lies the assumption, ... that any substantial cut in energy use would require a drastic change in the way we live. To be fair, some people in the conservation movement seem to share that assumption.

                                  But the assumption is false. Let me tell you about ... an advanced economy that has managed to combine rising living standards with a substantial decline in per capita energy consumption, and managed to keep total carbon dioxide emissions more or less flat for two decades, even as both its economy and its population grew rapidly. And it achieved all this without fundamentally changing a lifestyle centered on automobiles and single-family houses.

                                  The name of the economy? California.

                                  There’s nothing heroic about California’s energy policy... [T]he state has adopted ... conservation measures that are ... the kind of drab, colorless stuff that excites only real policy wonks. Yet the cumulative effect has been impressive...

                                  The energy divergence between California and the rest of the United States dates from the 1970s. Both the nation and the state initially engaged in significant energy conservation after that decade’s energy crisis. But conservation in most of America soon stalled...

                                  In California, by contrast, the state continued to push policies designed to encourage conservation, especially of electricity. And these policies worked.

                                  People in California have always used a bit less energy ... because of the mild climate. But the difference has grown much larger since the 1970s. Today, the average Californian uses about a third less total energy than the average American, uses less than 60 percent as much electricity, and ... emit[s] only about 55 percent as much carbon dioxide.

                                  How did the state do it? In some cases conservation was mandated directly, through energy efficiency standards for appliances and rules governing new construction. Also, regulated power companies were given new incentives to promote conservation...

                                  And yes, a variety of state actions had the effect of raising energy prices. In the early 1970s, the price of electricity in California was close to the national average. Today, it’s about 50 percent higher. ... As the higher price of power indicates, conservation didn’t come free. Still, it’s striking how invisible California’s energy policy remains...

                                  So is California a role model for climate policy? No and yes. Even if America as a whole had matched California..., we’d still be emitting about as much carbon dioxide now as we were in 1990. That’s too much.

                                  But California’s experience shows that serious conservation is a lot less disruptive, imposes much less of a burden, than the skeptics would have it. And the fact that a state government, with far more limited powers than those at Washington’s disposal, has been able to achieve so much is a good omen for our ability to do a lot to limit climate change, if and when we find the political will.

                                  Previous (2/19) column: Paul Krugman: Wrong is Right
                                  Next (2/26) column: Paul Krugman: Substance Over Image

                                    Posted by on Friday, February 23, 2007 at 12:15 AM in Economics, Environment, Regulation | Permalink  TrackBack (0)  Comments (99) 

                                    James Galbraith on Progressive Alternatives to the Hamilton Project

                                    James Galbraith looks for progressive alternatives to the Hamilton Project:

                                    What Kind of Economy?, by James Galbraith, The Nation: In a debate over the Democratic future, no one should confuse the Hamilton Project with the Republican past. Robert Rubin and his associates have invited a broad dialogue on economic inequality and strategic investment, and on many specific policy questions--including education, health, taxes and wages--they will define the high-profile, wholly respectable neo-Clintonian position in the season ahead. There's nothing wrong with that.

                                    But these advances come at a price ... in two areas: the world trading system and domestic fiscal policy. ... Indeed, one purpose of the Hamilton Project, it seems clear, is to propose just enough creative social advances--such as wage insurance, better teacher pay and healthcare reform--so as to divert discussion from the bedrock commitments to free trade and a balanced budget.

                                    Progressives shouldn't let this happen. And yet we have our own work to do... We need to be talking trade and budgets, not simply ... to contest Rubin's worldview, but to build one of our own that is realistic, compelling and also serves larger purposes, including environmental survival and social justice.

                                    On trade, the Hamiltonians favored the North American Free Trade Agreement, while most populists and progressives opposed it. This fight has been replayed endlessly, and it continues to color the arguments over ... free-trade agreements now under negotiation. But ... it's time to get over it. Whether NAFTA created or cost jobs initially, the economies of Mexico and the United States are now about as integrated as they are going to get, and the effect is basically finished. ... Almost all discussion of outsourcing now focuses on China and India...

                                    So what's the debate these days really about? Why are the Hamilton Projectors so passionate about "free trade"?

                                    Continue reading "James Galbraith on Progressive Alternatives to the Hamilton Project" »

                                      Posted by on Friday, February 23, 2007 at 12:06 AM in Economics, Policy | Permalink  TrackBack (0)  Comments (64) 

                                      Thursday, February 22, 2007

                                      Early Warning System

                                      This video is from SciAm Observations:

                                      "Unchained Goddess" (An excerpt on global warming from a Frank Capra science movie of 1958)

                                        Posted by on Thursday, February 22, 2007 at 06:14 PM in Economics, Environment, Video | Permalink  TrackBack (0)  Comments (5) 

                                        Tyler Cowen: Cultural Imperialism

                                        Tyler Cowen argues that "The complaint of 'cultural imperialism' is looking increasingly implausible":

                                        Some Countries Remain Resistant to American Cultural Exports, by Tyler Cowen, Economic Scene, NY Times: ...Loyalties to cultural goods and services — be it heavy metal music or the opera — are about social networking and choosing an identity and an aspiration. That is, we use culture to connect with other people and to define ourselves...

                                        Local culture commands loyalty when people are involved in networks of status and caste, and they pursue religious and communal markers of identity. Those individuals use local cultural products to signal their place in hierarchies. ...

                                        Globalization is most likely to damage local culture in regions like Scandinavia that are lightly populated, not very hierarchical and looking for new global cultural symbols. But the rest of the world’s population is in countries — China and India, of course, but also Brazil, Mexico, Egypt and Indonesia — that do not fit that description. ...

                                        Hollywood movies are popular in Europe in part because of the successes of European welfare states and of European economic integration. Western Europe has become more equal in its treatment of citizens, it has moved away from an aristocratic class society, and it has strong global connections. All those factors favor an interest in American and global popular culture... Social democracy, which the Europeans often hold up in opposition to the American model, in fact aided this cultural invasion by making Europe more egalitarian.

                                        Many smaller countries have been less welcoming of cultural imports. ... The complaint of “cultural imperialism” is looking increasingly implausible. ... Culture is not a zero-sum game, so the greater reach of one culture does not necessarily mean diminished stature for others. In the broad sweep of history, many different traditions have grown together and flourished. American popular culture will continue to make money, but the 21st century will bring a broad mélange of influences, with no clear world cultural leader.  [full article]

                                        Update: I just saw this:

                                        How Eminem can save the Middle East: Marc Lynch: Some conservatives criticise the presence of western culture in the Middle East. But rap music resonates deeply with many Arabs.

                                          Posted by on Thursday, February 22, 2007 at 01:11 AM in Economics | Permalink  TrackBack (0)  Comments (68) 

                                          How Secure is Global Capitalism's Future?

                                          Timothy Garton Ash of Oxford University and a senior fellow at the Hoover Institution at Stanford University says that Karl Marx "was prescient" in his description of global capitalism:

                                          Will capitalism fall victim to its own success?, by Timothy Garton Ash, Commentary, LA Times: What is the elephant in all our rooms? The global triumph of capitalism. Democracy is fiercely disputed. Freedom is under threat, even in old democracies like Britain. Western supremacy is on the skids. But everyone does capitalism.

                                          Americans and Europeans do it. Indians do it. Russian oligarchs and Saudi princes do it. Even Chinese communists do it. And now the members of Israel's oldest kibbutz, that last best hope of egalitarian socialism, have voted for salaries based on individual performance. Karl Marx is turning in his grave. Or perhaps not, because some of his writings eerily foreshadowed our era of globalized capitalism. His prescription failed, but his description was prescient.

                                          What, after all, are the big ideological alternatives? Hugo Chavez's "21st century socialism" still looks like, at most, a regional phenomenon best practiced in oil-rich states. Islamism — billed as democratic capitalism's great competitor in a new ideological struggle — offers no alternative economic system (aside from the peculiarities of Islamic finance) and does not appeal beyond the Muslim umma. Most anti-globalists are better at pointing out the failings of global capitalism than they are at suggesting systemic alternatives. "Capitalism should be replaced by something nicer," read a placard at a May Day demonstration...

                                          Does the lack of any clear ideological alternative mean that capitalism's triumph is secure? Far from it. For a start, the history of capitalism hardly supports the view that it is an automatically self-correcting system. ...[G]lobal markets are now more than ever constantly out of equilibrium — and teetering on the edge of a larger disequilibrium. Again and again, capitalism has needed the visible hands of political, fiscal and legal correction to complement the invisible hand of the market.

                                          And the bigger it gets, the harder it can fall. An oil tanker is more stable than a dinghy, but if the tanker's internal bulkheads are breached and the oil starts swilling from side to side in a storm, you have the makings of a major disaster. Increasingly, the world's capital is like oil in the holds of one giant tanker, with ever fewer internal bulkheads to stop it from swilling around.

                                          Then there is inequality. One feature of globalized capitalism seems to be that it rewards its high performers disproportionately. What will be the political effects of having a small group of super-rich people in China, Russia and India or other countries where the majority are super-poor? In more developed economies, such as Britain and the U.S., ... if a lot of middle-class people begin to feel that they are personally losing out as a few fund managers get stinking rich and jobs are outsourced to India, you may have a backlash. Watch Lou Dobbs on CNN for a taste of the rhetoric to come.

                                          Above all, though, there is the inescapable dilemma that this planet cannot sustain 6.5 billion people living like today's middle-class in its rich north. In just a few decades, we would use up fossil fuels that took about 400 million years to accrete — and change Earth's climate as a result. Sustainability may be a gray and boring word, but achieving it is the biggest single challenge to global capitalism today. However ingenious modern capitalists are in finding alternative technologies ... somewhere down the line richer consumers will have to settle for less rather than ever more.

                                          Marx thought capitalism would have a problem finding consumers for the goods that improving techniques of production enabled it to churn out. Instead, it has become expert in a new branch of manufacturing: the manufacture of desires. It's that core logic of ever-expanding desires that is unsustainable on a global scale. But are we prepared to abandon it?

                                          We may be happy to insulate our lofts, recycle our newspapers and bicycle to work, but are we ready to settle for less so others can have more? Am I? Are you?

                                            Posted by on Thursday, February 22, 2007 at 12:33 AM in Economics, International Finance, International Trade | Permalink  TrackBack (0)  Comments (35) 

                                            In Defense of Economics

                                            Diane Coyle asks "Why do non-economists persist in such as dismissive view of the subject, which flies in the face of plentiful evidence? And why should economists like me care?":

                                            Economics, the soulful science, by Diane Coyle: Would you agree with the following statement? "[Economists] should take credit for the deteriorating quality of existence. For it is their philistine notions of personal and national welfare that have helped to ruin the natural world; confused technology with culture; reduced art to money, time to interest, sexual relations to pornography, friendship to advantage, and liberty to shopping, and wasted whole generations who, because they have only been taught to think in categories of money, have, in Schopenhauer's phrase, 'missed the purpose of existence'."

                                            If so, you'd have plenty of company. This was the writer James Buchan, ranting in Prospect... He represents an extreme, perhaps, but such views about economics are to be found repeatedly expressed in political and literary journals. Even the Financial Times, from time to time, indulges in economist-bashing. A column by Philip Ball on its op-ed pages ... made the same points: economists have an arid view of human nature, miss all that is rich and complex about life, and reduce everything to the profit motive.

                                            Even sophisticated critics of the establishment, like the brilliant economists Deirdre McCloskey and Paul Ormerod make this claim. ...

                                            What is truly bizarre about this persistent and frequent set of claims - economics ignores or over-simplifies reality, is based on a false conception of human nature, is only about money, thinks the world operates like a machine - is how untrue it is. Those who make the claims haven't been reading any of the economics published since about 1980. The caricature never represented reality all that accurately, but a whole generation of research has made it completely unrecognisable. ...

                                            Two questions arise. Why do non-economists persist in such as dismissive view of the subject, which flies in the face of plentiful evidence? And why should economists like me care?

                                            On the latter question, the answer is that the conventional criticism has set the tone for a popular view that economists are, although wrong, extremely powerful: evil Svengalis of government policy. The risk is that public opinion turns against influence of economics on public policy - at a time when the hidden renaissance in economics during the past twenty years or so has vastly increased its potential contribution to public policy. ...

                                            There could be many [reforms] with the potential to improve policies based on a growing body of careful evidence, thanks to the impact of computers and new data sets during the past twenty years. The quality of outcomes will be greatly impoverished if voters distrust the technical economic decision-making behind such policies.

                                            What about the first question - why do people hate us, still, after all these years? We certainly haven't done ourselves great favours. Economists are typically very bad at communicating, and lag behind natural scientists in grasping the need to engage with public opinion in a new way. But at the heart of it, I believe, is the reluctance of many people to accept that human behaviour can appropriately be modelled at all - that is, adequately described at a general level in a few relatively simple rules. ...

                                            I believe (as I argue in my book The Soulful Science) that economics offers a uniquely powerful way of thinking about society, and how individuals make choices in their social context. Other approaches, those of the other social sciences, or history or literature and music, are valid too - I feel no need to dismiss them. But only economics with its choice-based models emphasises the opportunity costs and trade-offs that inevitably arise from the social and physical realities of our existence.

                                              Posted by on Thursday, February 22, 2007 at 12:15 AM in Economics, Methodology | Permalink  TrackBack (0)  Comments (44) 

                                              Wednesday, February 21, 2007

                                              Stephen Gordon: Economics and Climatology

                                              Stephen Gordon at Worthwhile Canadian Initiative:

                                              Economics and climatology: Why perfect markets are like a dishpan, Worthwhile Canadian Initiative: Brian Ferguson at A Canadian Overview makes an interesting point:

                                              Ever wonder why so many economists are sceptical about man-made global warming? It's because we've had a lot of humbling experience with just how quickly large scale computer models can go very badly wrong. Remember when we had inflation and unemployment under control through Keynesian fine-tuning?

                                              There are some interesting parallels between the atmospheric sciences (climatology and meteorology) and economics: they study highly complex systems, the available data are non-experimental, and their results have significant policy implications. Not surprisingly, both rely heavily on models as tools for understanding what is going on and why. Of course, models need not be based on a computer simulation, or even mathematics. As Paul Krugman notes, you can put one together using some ordinary household appliance ...[read more]...

                                              Update: Here's another view from Michael Perelman, someone I first met long ago during my undergraduate days at CSU Chico where was a faculty member in the Economics Department: Economics as a Science of Modeling: A Skeptical View.

                                                Posted by on Wednesday, February 21, 2007 at 01:23 PM in Economics, Environment, Methodology | Permalink  TrackBack (0)  Comments (39) 

                                                Tuesday, February 20, 2007

                                                Robert Reich: Minimum Half Median

                                                Robert Reich is trying to broker a deal: renewed trade authority for the president in return for labor standards on future trade deals:

                                                A Labor Standard for Future Trade Deals: Minimum Half Median, by Robert Reich: The Bushies want to renew the President's authority to negotiate trade deals... This gives House and Senate Dems an opportunity to win a long-sought Democratic goal -- putting labor standards into all future trade deals.

                                                But what sort of labor standard? If workers in developing nations were required to have the same, or even nearly, the level of wages and working conditions as Americans, jobs wouldn't go to developing nations. This would be a back-door form of protectionism.

                                                Here's a better idea. First, borrow from standards already issued by the International Labor Organization -- barring slave labor, forced labor, and the labor of young children under 12. ILO standards also recognize the ... right of all workers to form unions. ...

                                                Step two: Encourage developing nations to raise their labor standards as their economies grow. The easiest way to do this is to require that they set a minimum wage that's half their median wage. With this ... standard in place, more of their people will share the gains from trade. ...

                                                Market fundamentalists will object that establishing any minimum wage in a developing nation will force some poor workers out of jobs and into the black market. But that's what market fundamentalists argued almost seventy years ago when America first established our own minimum wage. A minimum wage -- like minimum health and safety standards -- is the hallmark of a civilized society.

                                                The biggest hurdle is that this "minimum half median" standard will force the United States to set and keep our own minimum wage at half our median -- which would be about $7.50 in today's dollars...

                                                This seems reasonable. For many decades, America's minimum wage was roughly half its median wage; only since the late 1970s has it fallen much lower than that. ...

                                                  Posted by on Tuesday, February 20, 2007 at 06:18 PM in Economics, International Trade, Politics, Unemployment | Permalink  TrackBack (0)  Comments (44) 

                                                  Inequality is Still Rising - Part 2

                                                  I have a new post up at Cato Unbound:

                                                  It’s Time to Ask the Next Question, by Mark Thoma, Cato Unbound: I had hoped to move on to new issues, but that will have to wait as I want to respond to some of what Alan Reynolds says in his reply essay...

                                                  This is part of the Conversation phase and reacts to Reynolds' "Why Change the Subject." After pointing out several ways in which Reynolds mischaracterizes the evidence on inequality and what I say about it, here's how it ends:

                                                  ...If you only look at evidence on one side of the issue, cherry pick results, start in specific years (and insist everyone else follow suit), use the “right” measures of income or wealth, ignore data problems that work against your results, and so on, and so on, you might be able to argue, if everything falls in your favor, that inequality is no worse since 1988. But that does not fairly characterize the overall evidence.

                                                  This debate reminds me of the debate over global warming, though using the word debate implies there is more disagreement than there really is. There are three questions in the global warming debate. The first question is whether global warming exists. The second question is, if it does exist, what is causing it. The third question is what to do about it. In order to avoid the consequences involved with the third step, doing something about it, there are many who try to cloud the issue and keep the first question alive and kicking for as long as possible, or claim the cause is from natural forces that we can do nothing about.

                                                  The inequality debate appears to be unfolding similarly with those who would like to avoid policies to address inequality, policies such as more progressive taxation, hoping to keep the first question open as long as possible or claiming that the rise in inequality is the inevitable result of natural market forces and we should not interfere. 

                                                  There is a role for skeptics, but there is also a time to accept that the preponderance of evidence points in one direction and to begin to think about and implement corrective measures. I believe an important question is how we respond to inequality – will it be through progressive taxation, minimum wage legislation, changes in the structure of health care, investments in education and retraining programs, wage insurance and so on, or will we do nothing? 

                                                  The question of what to do is linked to the causes of rising inequality. Has inequality been rising because of tax policy, the decline in unions, the rising skill premium, global competition and changing technology, a falling minimum wage in real terms, or for other reasons? How much does each factor contribute? Is the income of  those who have experienced the largest gains based upon economic fundamentals, i.e. does their pay reflect their contribution to production, or does the pay of, say, CEOs depend upon market failures that allow departures from competitive market outcomes? 

                                                  There are lots and lots of important questions to be answered involving both equity and efficiency (many of which do not require rising inequality since 1988, just its existence) and as I said in my first essay, it will be too bad if attempts to cloud the issue divert us from discussing how best to respond to income and wealth inequality.

                                                  So far, we have:

                                                  Lead Essay

                                                  Reaction Essays


                                                    Posted by on Tuesday, February 20, 2007 at 04:11 PM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (133) 

                                                    Russia's Return to the Past

                                                    Martin Wolf looks at Russia's return to economic and political systems from its past:

                                                    As long as it is trapped, the Russian bear will growl, by Martin Wolf, Commentary, Financial Times: The Russian bear is awake. But this is ... a Russia ... caught in a failed transition. So long as this continues, Russia will disturb its neighbours and disappoint its citizens. Is there a chance of something better? Yes, but it is a small one. ...

                                                    We need to ask what sort of a country Russia has become. The answer is a “limited access order”, in the language of a recent paper co-authored by the Nobel-laureate economic historian Douglass North... In such an order, an elite uses the political system to create rents and uses the rents to stabilise the political system. It is an order based on a balance of power among insiders and the exclusion of outsiders. Russia has always been an extreme example of such an order in European history. ...

                                                    Thus has Russia gone “back to the future”. Today’s system of rent-seeking in a centralised state is similar to earlier ones, with the difference that it is now natural resources, rather than “souls” that are the most valuable asset. Historically, the Russian elite has done a tacit deal with the Russian people: “as individuals you are nothing; but as Russians you are great”. Now, again, Mr Putin offers Russians a share in a restored Russia in return for depriving them of an effective political voice. It is an old bargain and, the polls suggest, it works.

                                                    What has made this restoration both successful and fragile is the source of the rents and so the power: Russia’s natural resources. The Russian economy has enjoyed a superb turnround: gross domestic product was up by 73 per cent between the third quarters of 1998 and 2006...

                                                    Yet, as the latest economic survey from the Organisation for Economic Co-operation and Development makes plain, “growth has largely been underpinned by temporary factors”: the now lost legacy of the devaluation of 1998; the high prices of resource exports; and the exploitation of now exhausted spare capacity. Meanwhile, investment is only 18 per cent of GDP; oil production is stagnating; and, above all, the reform process itself has stalled. ... Russia is a country with high corruption, and an ineffective and repressive state... It is also quite poor...

                                                    Professor North and his co-authors contrast a limited-access society with an “open-access” one – a society in which the economy and politics are open to competition. As they note, a close relationship exists between the two...

                                                    The most important point about the state in an open-access society is that it provides services to the people at large. It must do so if those in power are to stay there. The move from limited to open-access societies is then also a move from the state as master to the state as servant. That is, alas, the move Russia has failed to make. ...[I]t has consequences.

                                                    Among those consequences is that Russia’s government views attempts to make the government subservient to the people in countries of the former Soviet Union as a political threat. ... It is trapped in an outmoded and dysfunctional view of Russia’s political future. This is a tragedy for itself and an inescapable worry for its neighbours.

                                                    The big question is whether Russia will evolve into an open-access society able to take its place as a close friend of the open-access societies to its west. The paper by Prof North and co-authors argues that there are three pre-conditions: a rule of law for the elites; perpetual organisations for the elites; and effective political control over the military.

                                                    Russia is not there yet. Maybe it never will be. But a collapse in oil prices would help, by shrinking rents and forcing reforms...

                                                      Posted by on Tuesday, February 20, 2007 at 01:08 PM in Economics | Permalink  TrackBack (0)  Comments (50) 

                                                      "How to Screw Up Social Security"

                                                      As you may have noticed, I like to rerun old columns from economists occasionally and I've presented past columns from quite a few people. This one is from Greg Mankiw. It's from Fortune magazine and it was written in 1999 while Bill Clinton was president:

                                                      How to Screw Up Social Security, by By N. Gregory Mankiw, Fortune issue: March 15, 1999: Having trouble saving for your retirement? Try this simple solution: Borrow some money at 7%, buy stocks that return 10%, and pocket the 3% difference. Still running short? Don't worry--just do it again.

                                                      This is, of course, ridiculous advice. Buying equities with borrowed money is a risky strategy, and no one should do it without understanding those risks. But this is in effect what President Clinton proposes we do as a nation. He wants to "save Social Security" in part by selling some government bonds and using the proceeds to invest in stocks.

                                                      It is easy to see why he'd be tempted: Over the President's lifetime, stocks have outperformed bonds by a large margin, on average--about 6% per year. And over the past decade, the gap has been even larger. Owning bonds seems like a sucker's bet. Why not return the Social Security system to solvency by taking advantage of the huge equity premium? (Hell, while we're at it, why not fund the Pentagon, welfare, and Amtrak by buying stock on margin?)

                                                      Alan Greenspan has objected to this idea, fearing that if the government owned a large share of corporate America, capital would be allocated on political rather than economic grounds. There's another problem, however, a problem pointed out in the fine print in most mutual fund ads: "Past performance cannot guarantee future results." Sadly, the SEC does not require a similar disclaimer on State of the Union addresses.

                                                      So let's consider the downside. Suppose the federal government put some of the Social Security trust fund in equities. Now suppose that the next decade turns out less like the early 1990s and more like the early 1930s, when the Dow Jones industrial average fell from 381 to 41--or like Japan today, where the stock market is still at less than half the level it reached a decade ago. What would happen?

                                                      Clearly, Social Security would be in big trouble. Not only would baby-boomers be starting to retire, automatically boosting government spending on retirement programs, but the market collapse would likely coincide with a recession, reducing tax revenue. With the trust fund drained by low stock prices, Social Security benefits would almost certainly be cut. A lot.

                                                      One might argue that this downside isn't so bad. After all, the President proposes to invest only 15% of the trust fund in stocks--much less than the typical private pension plan. But this overlooks the fact that because the government taxes capital gains and 401(k) distributions, it already has a large implicit position in equities. Indeed, that position is one reason for the current budget surplus; if the stock market tanks, the budget will swing back toward deficit, even without a direct government holding of equities.

                                                      Although the downside risk is far from negligible, it could still be a risk worth taking. Buying stocks rather than bonds does work out, on average, and we would be irrational to avoid risk at all costs. But there are several reasons to think it's a bad bet.

                                                      First, it seems an unlikely coincidence that the President's proposal comes on the heels of several years of truly exceptional stock returns. If we take a look at history, however, the stock market isn't nearly as impressive: In the 19th century, the average premium for investing in stocks over bonds was less than 3%.

                                                      Second, the stock market's historical performance reflects a large amount of good luck. We live in the world's richest country, at the end of the most prosperous century ever; it should come as no surprise that the market has done so well. The future may give us a similarly lucky draw, but let's not count on it.

                                                      Third, some economists see the large historical equity premium as an anomaly that's already been corrected. Most measures of stock market valuation are now at historical extremes. Perhaps this is because investors, realizing stocks were undervalued in the past, have corrected the problem. If so, stocks are unlikely to keep outperforming bonds by the same margin.

                                                      None of this means equities should be excluded from the debate over Social Security reform. But the risks of holding equities should be brought into the open and stressed. One advantage of privatization proposals, advocated by many members of Congress, is that they are clear about where the risk would fall.

                                                      The President's plan, by contrast, emphasizes the upside of equity ownership without mentioning the downside--just the way they'd do it in Vegas.

                                                        Posted by on Tuesday, February 20, 2007 at 02:07 AM in Economics, Social Insurance | Permalink  TrackBack (0)  Comments (25) 

                                                        Barney Frank: Explicit Inflation Target a "Terrible Mistake"

                                                        Barney Frank says he won't support an explicit inflation target:

                                                        Fed chief warned on inflation target, by Krishna Guha, Financial Times: It would be a “terrible mistake” for the Federal Reserve to adopt any form of inflation target to guide its interest rate decisions, Barney Frank, the Democratic chairman of the House financial services committee, has told the Financial Times.

                                                        Mr Frank ... said such a target “would come at the expense of equal consideration of the other main goal, that is employment”. His comments come as Fed policymakers enter the later stages of a far-reaching strategy review that has included detailed debate over the merits of adopting an inflation target.

                                                        Ben Bernanke, chairman of the Fed, believes that the bank would be better off with a relatively flexible inflation target – one that would be achieved on average, rather than within a specific time, giving maximum latitude to respond to output shocks.

                                                        However, Fed watchers say that, in order to make any such change, Mr Bernanke would need at least the tacit consent of key figures in Congress. Mr Frank’s unequivocal statements suggest this consent will still be difficult to secure...

                                                        In an interview, Mr Frank told the FT that Mr Bernanke “has a statutory mandate for stable prices and low unemployment. If you target one of them, and not the other, it seems to me that will inevitably be favoured.” ...

                                                        Advocates of an inflation target at the Fed say it is important to distinguish between the relatively rigid form of target used, for instance, by the Bank of England, and the relatively flexible form favoured by Mr Bernanke.

                                                        Mr Frank, though, said he would not support even a flexible target “without equal attention to unemployment also”. He agreed that Mr Bernanke and his colleagues probably had an implicit inflation target in mind already, but said it would be dangerous to make it explicit.

                                                        “I think when you make it more transparent you enhance its importance,” Mr Frank said. “No question he has something in his head. But when you make it public you lose flexibility.”

                                                        Mr Frank said he would listen to the Fed chairman’s arguments, but suggested he was quite firm in his views. “I am always willing to talk to him,” he said. “But he is as likely to change my mind as I am to change his.”

                                                        To help with the discussion, let the rule for monetary policy be of the standard modified Taylor rule form:

                                                        fft = a + bfft-1 + c(yt-yt*) + d(πt - πt*) + ut

                                                        where ff is the federal funds rate target, y is output, π is inflation, and u is the uncontrollable part of policy. A * indicates the target value of a variable and a, b, c, and d are choice parameters for the Fed. The parameters c and d determine how forcefully the Fed responds to deviations from its output and inflation targets. (In more general models the deviations might be expected future deviations rather than the deviations today, there are issues about whether to use real-time or revised data, the rule can have additional terms, and there are other issues as well such as what target to adopt when market imperfections are present, but this will suffice.)

                                                        Barney Frank says we must pay "equal attention to unemployment.” If he means that the Fed should respond as forcefully to deviations of output from target as it does deviations of inflation from target, that is at odds with current monetary theory which states that the best way to stabilize output and employment - Barney Franks' concern - is to respond more forcefully to inflation deviations than to output deviations. Thus, the value of d is around three times as large as c in standard formulations. If he means the Fed should take account of deviations of output from target (or employment deviations), they already do that.

                                                        As to explicit inflation targeting, the issue is whether to announce the value of πt*, the inflation target. Barney Frank is worried this will elevate the importance of inflation deviations, but nothing I know of suggests that announcing πt* changes the values of d or c.

                                                        Targeting inflation is a means to an end - that of output and employment stability just as Barney Frank wants - and not an end in and of itself. Both theory and evidence tell us that the Fed can stabilize employment and output around their long-run trends, but it cannot change the long-run trends themselves with monetary policy. Thus, the best the Fed can do is to stabilize the economy around these long-run trends and that, we believe, requires stable and low inflation and an aggressive response to deviations of inflation from target.

                                                        Barney Frank has his heart in the right place, no doubt at all about that, but he is looking at the economy and at monetary policy through a theoretical lens that is no longer used by macroeconomists. That being the case, it's too bad he has said his mind is all but closed on this matter. I would hope instead that he would devote effort to understanding why an explicit inflation target is on the table and favored by so many people who study monetary policy. There is a need for Congressional oversight, and for Congress to step in if the Fed steps beyond certain bounds, but this is not the time for Congress to interfere, particularly if the interference is based upon a faulty understanding of the purpose of the policy.

                                                        I am not 100% convinced that an inflation target is needed, though I lean that way. But I am convinced that people such as Bernanke and Mishkin (and others on the FOMC along with their staffs) know this literature as well as anyone, anywhere, and I trust them to deliberate carefully and come to the best possible decision they can make. But that won't be possible if interference from Congress prevents them from doing what their collective judgment says is best.

                                                          Posted by on Tuesday, February 20, 2007 at 12:15 AM in Economics, Monetary Policy | Permalink  TrackBack (1)  Comments (21) 

                                                          Monday, February 19, 2007

                                                          Thomas Palley: Expand Sarbox

                                                          Here are Thomas Palley's reform proposals for Sarbox:

                                                          Expand Sarbox, Not Shrink It, by Thomas Palley: There is a growing business chorus calling for shrinking the Sarbanes – Oxley Act (Sarbox) regulating U.S. capital markets. Recently, a self-appointed “blue ribbon” committee financed by Wall Street interests called for making shareholder class action suits more difficult to bring, lowering the legal liability of auditors and directors, and easing accounting certification requirements. In response, the Securities and Exchange Commission (SEC) appears to be moving to implement some of this wish list.

                                                          However, corporate behavior over the last few years speaks for expanding Sarbox, not shrinking it. Thus, the CEO pay problem has continued – exemplified by recent massive termination payments to Bob Nardelli of Home Depot and Henry Mckinnell of Pfizer. Major accounting restatements continue at large corporations. And most importantly, there is the CEO stock option backdating scandal, which may extend to one thousand companies and appears to implicate boards of directors, including outside directors.

                                                          This backdating scandal scotches the notion that America’s corporate governance problem concerns a “few bad apples” and makes plain that the problem is the “barrel”. That speaks to expanding Sarbox rather than shrinking it.

                                                          Here is a set of reforms entirely different from those in the Wall Street blue ribbon Committee’s report. These reforms address the rotten barrel problem, thereby truly improving corporate governance and making America a better place for savers and investors.

                                                          Continue reading "Thomas Palley: Expand Sarbox" »

                                                            Posted by on Monday, February 19, 2007 at 06:53 PM in Economics, Regulation | Permalink  TrackBack (0)  Comments (16) 

                                                            "The Globally Integrated Enterprise"

                                                            An email says:

                                                            You might wish to discuss this article on your blog. The article traces the development of MNC’s up to the present. It is a celebration of the MNCs and their positive impact on globalization.

                                                            Unfortunately, Palisiano (CEO of IBM) does not address the issue of corporate power in distorting the market place and in controlling governments themselves (think K Street). Nor does he seriously address the rising global inequality of wealth (think sweat shop labor).

                                                            Nor does he address the issue of global warming, environmental decay, and resource depletion—and the ability of MNC’s to cast doubt on the seriousness of these issues. All of these issues are the dark underside of globalization, on which I tend to focus. He frames the discussion in such a way as to avoid these issues—most economists follow his lead.

                                                            Anyway, the article is worth discussing. Most economists would agree with Palisano. ...

                                                            I'm a bit rushed until much later today and can't do much with this, so, quickly, here's the beginning and end of the article along with a link to the whole thing. Hopefully, some of you can provide analysis:

                                                            The Globally Integrated Enterprise, by Samuel J. Palmisano, Foreign Affairs: Beyond Multinational The multinational corporation (MNC), often seen as a primary agent of globalization, is taking on a new form, one that is promising for both business and society. From a business perspective, this new kind of enterprise is best understood as “global” rather than “multinational.”

                                                            Continue reading ""The Globally Integrated Enterprise"" »

                                                              Posted by on Monday, February 19, 2007 at 12:51 PM in Economics, International Trade, Technology | Permalink  TrackBack (0)  Comments (183) 

                                                              Paul Krugman: Wrong is Right

                                                              Paul Krugman explains why Hilary Clinton and others should have followed John Edward's lead and admitted they were wrong to vote for the Iraq war resolution:

                                                              Wrong Is Right, by Paul Krugman, Admit Errors Commentary, NY Times: Many people are perplexed by the uproar over Senator Hillary Clinton’s refusal to say, as former Senator John Edwards has, that she was wrong to vote for the Iraq war resolution. Why is it so important to admit past error? And yes, it was an error...

                                                              The answer ... in two words: heckuva job. Or, if you want a longer version: Medals of Freedom to George Tenet, who said Saddam had W.M.D., Tommy Franks, who failed to secure Iraq, and Paul Bremer, who botched the occupation.

                                                              For the last six years we have been ruled by men who are pathologically incapable of owning up to mistakes. And this pathology has had real, disastrous consequences. ...

                                                              The experience of Bush-style governance, together with revulsion at the way Karl Rove turned refusal to admit error into a political principle, is the main reason those ... words... “I was wrong” matter so much to the Democratic base.

                                                              The base is remarkably forgiving toward Democrats who supported the war. But the base and, I believe, the country want someone in the White House who doesn’t sound like another George Bush..., someone who doesn’t suffer from an infallibility complex, who can admit mistakes and learn from them.

                                                              And there’s another reason the admission by Mr. Edwards ... is important. If we want to avoid future quagmires, we need a president who is willing to fight the inside-the-Beltway conventional wisdom..., which still — in spite of all that has happened — equates hawkishness with seriousness about national security... By admitting his own error, Mr. Edwards makes it more credible that he would listen to a wider range of views.

                                                              In truth, it’s the second issue, not the first, that worries me about Mrs. Clinton. Although she’s smart and sensible, she’s very much the candidate of the Beltway establishment... Still, she’s at worst a triangulator, not a megalomaniac; she’s not another Dick Cheney.

                                                              I wish we could say the same about all the major presidential aspirants.

                                                              Senator John McCain, whose reputation for straight talk is quickly getting bent out of shape, appears to share the Bush administration’s habit of rewriting history to preserve an appearance of infallibility. Last month he asserted that he knew full well what we were getting into by invading Iraq: “When I voted to support this war,” he said on MSNBC, “I knew it was probably going to be long and hard and tough...”

                                                              But back in September 2002, he told Larry King, “I believe that the operation will be relatively short,” and “I believe that the success will be fairly easy.”

                                                              And as for Rudy Giuliani, there are so many examples of his inability to accept criticism that it’s hard to choose.

                                                              Here’s an incident from 1997. When New York magazine placed ads on city buses declaring that the publication was “possibly the only good thing in New York Rudy hasn’t taken credit for,” the then-mayor ordered the ads removed...

                                                              Now imagine how Mr. Giuliani would react on being told, say, that his choice to head Homeland Security is actually a crook. Oh, wait.

                                                              But back to Mrs. Clinton’s problem. For some reason she and her advisers failed to grasp just how fed up the country is with arrogant politicians who can do no wrong. I don’t think she falls in that category; but her campaign somehow thought it was still a good idea to follow Karl Rove’s playbook, which says that you should never, ever admit to a mistake. And that playbook has led them into a political trap.

                                                              Previous (2/16) column: Paul Krugman: The Health Care Racket
                                                              Next (2/23) column: Paul Krugman: Colorless Green Ideas

                                                                Posted by on Monday, February 19, 2007 at 12:15 AM in Economics, Iraq and Afghanistan, Politics | Permalink  TrackBack (0)  Comments (61) 

                                                                Barney Frank: The Fed is Overly Concerned about Inflation

                                                                An interview with Barney Frank on the economy and Federal Reserve policy:

                                                                With economic fairness for all, MarketPlace:

                                                                KAI RYSSDAL: They weren't just debating the war on Capitol Hill today, there were also hearings on the state of the economy. Fed Chairman Ben Bernanke ... said inflation looks like it will weaken, and numbers out today on wholesale prices backed them up. But the House Financial Services Committee was after ... balanced economic growth with social fairness. We gave Congressman Barney Frank a call. He's a Democrat from Massachusetts and the chairman of the House Financial Services Committee. ...

                                                                If you look at the numbers, sir, if you just look at unemployment, and inflation, and gross domestic product, the economy seems to not be doing so badly. Why do you feel the need for this conversation now?

                                                                FRANK: Well, because the economy and the people in the economy are not identical. Then, we have this problem with even President Bush acknowledged last week that inequality has been increasing. Now, inequality is necessary in the capital system. It performs a lot of important functions. But the problem has been that the real wages, take home pay for the average worker, and I'm talking about the great majority of workers, has been somewhat negative. It's actually declined a little bit. We have a good Gross Domestic Product. But it has unfortunately . . . the increase has gone disproportionate to a very small number of people.

                                                                RYSSDAL: Just to make sure I understand, it seems to me you're making sort of a moral argument here...

                                                                FRANK: Oh, yeah. It's a moral argument to me that, I think, it is wrong to have a situation in which people work very hard because of the circumstances, legally and otherwise, in which they find themselves don't get increases. I think that there's a moral problem here. But it also becomes a political problem. We're in gridlock now. What's happened now is that, that the average citizen has said, look, don't come to me and tell me you want a trade bill. Don't come to me and tell me that I should support a more generous immigration policy from the standpoint of letting people in because I think I'm getting hurt by it. People who want to see trade promotion authority expanded. People who want to see an immigration bill of the sort the President talked about, and want to see no obstacles to the implementation of technology must understand that as long as we have these obstacles to fair treatment for working people, the political system won't allow it.

                                                                RYSSDAL: Are you ready to try to deny things to the president, like fast-track and like an immigration bill, if he doesn't, at least listen to your argument?

                                                                FRANK: Yes and no. I certainly am prepared to deny him fast-track and the trade bills. On other areas, like immigration, I am supportive of the Administration position. But until we do something about this anger, I'm afraid it won't be successful.

                                                                RYSSDAL: Let me get back to your hearings for just a second. I spent some time watching you and Fed Chairman Ben Bernanke on C-Span. You seemed to spend a lot of time on inflation and the Fed's policy on interest rates. It seem to me you didn't really buy Mr. Bernanke's arguments about the way the economy is headed.

                                                                FRANK: Well, I think that there is a bias there to focus on the potential danger of inflation, while ignoring the very real current danger of inequality. Now, he's acknowledged inequality, and I appreciate that. And that's a real advance. I mean, you don't generally get that from a Republican-appointed chairman of the Federal Reserve. But I was quoting his own monetary report. He said, first of all, in the monetary report, production is below the economy's potential, and we'll stay that way for a few quarters. And we'll probably get up to potential, but not above it.

                                                                FRANK: Secondly, he said, inflation seems to be under control. Reading those two, I'm then surprised to turn the page and see them say, And therefore, our major concern is to worry about inflation happening. And if you focus excessively on the possibility of inflation, even when there is no real indication of it, then you are inclined to do things that make it harder to reach the full economic potential. And I do think growth alone doesn't provide the kind of equity I'd like to see. But the absence of growth guarantees that we won't have it.

                                                                RYSSDAL: Barney Frank, Democrat of Massachusetts, chairman of the House Financial Services Committee. Congressman, thanks for your time.

                                                                FRANK: Thank you.

                                                                When presented with this, here's how Bernanke responded:

                                                                Bernanke, Sparring With Frank, Says Fed May Lift Rate, by Vivien Lou Chen and Craig Torres, Bloomberg: Federal Reserve Chairman Ben S. Bernanke, in his first clash with the Democratic-controlled House of Representatives, signaled the central bank will need to raise interest rates if inflation accelerates.

                                                                Bernanke sparred with House Financial Services Committee Chairman Barney Frank of Massachusetts, who said it was ''troubling'' the Fed chief was biased toward raising rates even while forecasting only moderate growth. Frank said he didn't understand why inflation was the main concern and wanted to be ''kept involved'' with the Fed's decision-making.

                                                                ''If inflation becomes higher for some reason, then the Federal Reserve would have to respond to it,'' Bernanke said ... in response to Frank's questioning...

                                                                ''We have had a period where inflation has been above where we'd like to see it as far as consistency where price stability is concerned,'' the Fed chairman said. ''In order for this to continue in a sustainable way, inflation needs to be well- controlled.'' ...

                                                                Frank said the question for the Fed should be whether it will consider lowering rates, not raising them, because the economy is expanding below its ''potential.'' ...

                                                                There are theoretical reasons to believe that responding more forcefully to increases in inflation stabilizes output and employment in the long-run. While allowing some inflation today may increase employment presently, and hence be politically attractive, the costs of eliminating the inflation later can be even larger and the Fed is, I believe, correct to resist letting inflation begin drifting upward once again. If output growth weakens considerably, the story changes, but for now a policy of holding the federal funds rate steady is difficult to criticize.

                                                                  Posted by on Monday, February 19, 2007 at 12:06 AM in Economics, Monetary Policy, Politics | Permalink  TrackBack (0)  Comments (23) 

                                                                  Sunday, February 18, 2007

                                                                  China's Economic and Political Future

                                                                  Jagdish Bhagwati reviews Will Hutton's The Writing on the Wall: Why We Must Embrace China as a Partner or Face It as an Enemy:

                                                                  Made in China, by Jagdish Bhagwati, NY Times Book Review: It is only 20 years since Japan was getting under the skin of many Americans. They feared that the 21st century would be Japan’s, as the 19th had been Britain’s and the 20th America’s. ...America near the end of the 20th seemed to be in the grip of what I have called a “diminished giant syndrome.” These worries appear astonishing now. For well over a decade Japan has been deeply mired in macroeconomic failure, its feared dominance having dissolved into dreary ordinariness.

                                                                  Is China now poised to turn the 21st century into its century? Or will it, despite its phenomenal nearly two-digit annual growth over the past 15 years, rejoin the human race with a slower economy? Or is it possible that its powerful locomotive will, as Japan’s did, shift into reverse gear?

                                                                  Certainly, any number of popular writers believe China will only continue to go up and up, turning into a gigantic power. Some economists, like Richard Freeman and Alan Blinder, agree. Will Hutton, the former economics editor of ... The Guardian, calls this the prevailing view, and in his interesting book “The Writing on the Wall,” he seeks to overturn it.

                                                                  He is hardly the only one. ... Signs of looming difficulties are not hard to find. Standard economic analyses indicate that China is likely to face problems with its exchange-rate policy, its financial sector and the inefficiency of its state-owned enterprises. Hutton certainly knows his economics... But his central thesis is that China’s main problem is not the inadequacy of its capitalist economics, but the limitations of its Communist politics.

                                                                  Indeed, it’s true, as Hutton shows in great detail, that China faces a number of critical economic difficulties that are directly traceable to its lack of democracy. He mentions ..., for example, .. environmental destruction... [T]he Chinese experience shows dramatically, as the Russian experience did, that environmental damage is likely to become ever more crippling in the future because there are no democratic institutions like public opposition and a free press to countervail and contain it.

                                                                  Similarly, because China has an authoritarian regime, it cannot fully profit from the information revolution, thus inhibiting the technology that is at the heart of growth today. The PC (personal computer) is incompatible with the C.P. (Communist Party). So India ... has moved dramatically ahead of China in computer technology. ... Hutton ... points out, too, that China damages itself by seeking to control and stifle what its citizens can learn and disseminate. “Yahoo, Microsoft and Google are part of the cultural yeast of globalization,” he says, “yet each has been at the receiving end of China’s Internet firewall of censorship.”

                                                                  And it’s not just growth prospects that are handicapped. China’s authoritarianism creates political uncertainties that are equally problematic. Democratic governments facilitate orderly change; Communist regimes do not. ... Asked many years ago by the economist Robert Heilbroner how China would evolve, the Sovietologist Padma Desai answered: It all depends on whether Mao Zedong or Zhou Enlai dies first.

                                                                  What’s more, China’s authoritarianism is a breeding ground for corruption. As Hutton says, “The morality of revolution — that the end justifies the means — becomes a morality that justifies corruption.” Consider how the phenomenon of “takings” — commissars and their cronies appropriating land from peasants — has led to numerous disruptions. In a political system lacking the essential attributes of a functioning democracy, social groups can’t turn to a free press to take up their cause, or an independent judiciary to appeal to, or opposition parties to embrace their complaints. Revolts are what they have left.

                                                                  All of these are problems within China. But the lack of freedom is likely to affect its trade strategy as well. As its flood of exports leads to ever increasing fears of job loss and reduced wages in the United States, there will be a strong temptation on the part of the American government to exploit human rights violations as a way of rolling back Chinese goods. When Japan was the perceived threat, those who feared competition, like the carmakers in Detroit and the chip manufacturers in Silicon Valley, had no convenient basis for their complaints and were forced simply to demonize Japan as a wicked trader. In China’s case, the protectionist critics can credibly assail its lack of democracy and human rights abuses.

                                                                  The question, then, is whether, the Chinese Communists will be able to make the necessary accommodations... Or will China’s leaders dig in their heels, suppressing dissent and opposition and possibly precipitating political and economic chaos? It’s anybody’s guess; and Hutton is not particularly helpful on this matter.

                                                                  He does think, however, that the West can actively help the Chinese make the wiser choice, and a major part of his book ... is devoted to arguing for engagement rather than confrontation. So he supports China’s participation in the World Trade Organization and opposes protectionism. But the question, frankly, is: How does one make an 800-pound gorilla move in the right direction? Offering it Jessica Lange isn’t going to make any difference; and kicking it in the rear, a course Hutton rightly counsels against, will not accomplish much either.

                                                                  In the end, no matter what the West does, China is going to make its own choices, the way it did when, after nearly three decades of really bad economics, it turned to reforms under Deng Xiaoping. The giant everyone had expected to rise up in the 1950s continued snoring until the 1980s. Now it has awakened, and all the rest of us can do is watch as it takes its own faltering steps.

                                                                    Posted by on Sunday, February 18, 2007 at 02:18 PM in China, Economics | Permalink  TrackBack (0)  Comments (34) 

                                                                    Saturday, February 17, 2007

                                                                    Jim Hamilton: Saudi Oil Production Cuts

                                                                    Jim Hamilton says there's potentially a big story concerning the reasons for Saudi Arabia's cuts in oil production that the press hasn't noticed:

                                                                    Saudi oil production cuts, by Jim Hamilton: This is a potentially huge story that is not being adequately investigated by the financial press...

                                                                    Update: A follow-up:

                                                                    Study sees harmful hunt for extra oil, by Carola Hoyos, Financial Times: All the world’s extra oil supply is likely to come from expensive and environmentally damaging unconventional sources within 15 years, according to a detailed study.

                                                                    This will mean increasing reliance on hard-to-develop sources of energy such as the Canadian oil sands and Venezuela’s Orinoco tar belt.

                                                                    A report ... calculates that the world holds 3,600bn barrels of unconventional oil and gas that need a lot of energy to extract. ...

                                                                    Only 15 per cent of the 3,600bn is heavy and extra-heavy oil, with the rest being even more challenging.

                                                                    The study makes clear the shift could come sooner than many people in the industry had expected, even though some major conventional oil fields will still be increasing their production in 2020. Those increases will not be enough to offset the decline at other fields.

                                                                    “It becomes unclear beyond 2020 that conventional oil will be able to meet any of the demand growth,” ... The report added that natural gas products such as liquids and condensate would also become important sources of growth.

                                                                    The increasing reliance on unconventional oil will require a substantial reshaping of the energy industry. ...

                                                                    [T]he challenge is huge, said Matthew Simmons, an industry banker who sent shock waves through the oil world when he questioned whether Saudi Arabia, the most important oil source, would be able to continue to expand production.

                                                                    “The ability to extract this heavy oil in significant volumes is still non-existent,” he said in a recent speech.

                                                                    “Worse, it takes vast quantities of scarce and valuable potable water and natural gas to turn unusable oil into heavy low-quality oil.” ...

                                                                      Posted by on Saturday, February 17, 2007 at 06:02 PM in Economics, Oil | Permalink  TrackBack (0)  Comments (44) 

                                                                      "Hitler's Beneficiaries"

                                                                      This is a review of Hitler's Beneficiaries: Plunder, Racial War, and the Nazi Welfare State, by Götz Aly. The book argues that Hitler exploited self-interest to maintain his grip on power:

                                                                      Handouts From Hitler, by Dagmat Herzog, NY Times Book Review: What was life like for a typical non-Jewish German under Nazism? Answers vary. A discredited though still popular view has it that the Third Reich was a nightmarish inferno where informants, scoundrels and sadists ruled through fear and intimidation. ...

                                                                      Another position ... is that Germany in the 1930s and early ’40s was a land gripped by Jew-hatred. In this view, the German populace ... required little or no incentive to summon both disgust and rage at the Jews in its midst...

                                                                      Yet another interpretation focuses on the tremendous personality cult that surrounded Hitler. German citizens were so entranced by the vision of a better National Socialist world to come that they happily submitted to the allures of fascism. In one version ..., typical Germans are cast as unwitting victims of an unparalleled propaganda campaign (and thus also come to represent a cautionary tale of how media manipulators can redirect an innocent society...). In more sophisticated versions, the German people are understood to have been taken in by Hitler’s charisma not least because the remilitarization he initiated ... was a balm to wounded national pride.

                                                                      The provocative power of Götz Aly’s “Hitler’s Beneficiaries,” available in this fine English translation after having created a fierce debate in Germany, is that it seeks to move beyond each of these explanations. That it is not wholly successful does not diminish its intellectual significance as a fresh model for grasping how the Nazis gained such broad support...

                                                                      In Aly’s view, Nazism secured the compliance of the German people not because of Hitler’s charisma or Goebbels’s propaganda, nor because of its anti-Semitic policies or the Gestapo’s ruthlessness. A majority of Germans were not seduced or scared by the Nazis. On the contrary, their loyalty to the regime was bought and paid for — quite literally so.

                                                                      According to Aly, who teaches at the University of Frankfurt, millions of care packages of plundered items were sent back home from the occupied territories by Wehrmacht soldiers who were themselves given hearty rations and plenty of disposable cash. Clothing and household objects that had once belonged to Jews were sold at affordable prices at government-organized public auctions, or simply handed out free as emergency relief. And the Nazis also introduced a progressive income tax that shifted a far greater tax burden onto corporations and the very rich.

                                                                      “Hitler’s Beneficiaries” argues that nothing more than an unremarkable pursuit of self-interest led most Germans to pledge allegiance to the Nazi regime. Germans wanted their children to have nice Christmas gifts. They wanted to set aside money for retirement. They wanted to send a special someone back home ... perfumed soap from France. Citizens were sated with decent wages, generous overtime pay and innovative pension plans — that is, through the establishment of a complex, if absolutely amoral, welfare state.

                                                                      Aly, in short, makes a serious and well-researched attempt to put the “socialism” back in National Socialism. And in so doing, he offers his own explanation for why so many Germans closed their eyes to the systematic expropriation of Jewish property and ultimately to the deportation of their Jewish fellow citizens...

                                                                      Aly makes the case that although goods and gold, stocks and bonds, real estate and savings accounts stolen from murdered Jews accounted for at best 5 percent of the Third Reich’s operational revenues, this 5 percent was often the essential piece that stabilized the vulnerable economies of the occupied nations. The money allowed the regime to pass the costs of war and occupation onto the occupied while keeping the local populations and the German soldiers alike quiescent and complacent...

                                                                      This was grand larceny on a scale seldom seen in the modern world. From Tunisia to Greece, Czechoslovakia to the Netherlands, France and Italy to Serbia and Romania, Aly walks us through the Aryanization process. He demonstrates how Jewish property was first nationalized via a variety of tricks ... and then funneled into German government coffers, and eventually into keeping the working and lower middle classes satisfied. He also shows that in a number of instances the urgency of the thievery process hastened deportations and killings.

                                                                      “Hitler’s Beneficiaries” is based on a wealth of military and economic documents, and it is chock full of data on consumer spending power, money-laundering techniques, and bankers’ and civil servants’ inventiveness in making theft look legal — or invisible. ... The evidence is powerful on its own terms. Yet the connections Aly draws are not equally persuasive.

                                                                      When “Hitler’s Beneficiaries” first appeared in Germany in 2005, scholars challenged Aly’s figures. ... Aly’s rebuttals to his critics have been included in this English edition. ...

                                                                      The more significant problems have to do with interpretation. First, there is Aly’s monochromatic notion of human nature — the assumption that Germans under Nazism were moved primarily by material self-interest...

                                                                      The second difficulty has to do with assumptions about causation. It is Aly’s great accomplishment to demonstrate that World War II could not have gone on for as long as it did, nor the German populace kept content for as long as it was, without the expropriation of the property and monies of slaughtered Jews. But correlation is not causation, and illustrating connections does not prove motivation. ...

                                                                       “Hitler’s Beneficiaries” offers stark proof that the murder and the theft were in many cases integrally linked. The Holocaust was unquestionably accompanied by outrageous greed. Yet this fact cannot make us conclude that greed alone drove the Holocaust.

                                                                        Posted by on Saturday, February 17, 2007 at 02:25 PM in Economics | Permalink  TrackBack (0)  Comments (142) 

                                                                        Is Inequality Destabilizing?

                                                                        Robert Shiller looks at the relationship between social unrest and inequality across countries. He argues that how inequality is perceived to arise is an important contributing factor to social problems, and that building trust in economic relationships is the key to overcoming perceptions of inequities:

                                                                        Inequality and its discontents, by Robert J Shiller, Project Syndicate: Leaders around the world seem to be convinced that inequality and lack of broad participation in economic growth, if allowed to persist, will lead to social discord and even violence. But is inequality the real problem?

                                                                        As Indian Prime Minister Manmohan Singh put it ..., “Even as absolute poverty may be reduced by growth, inequalities can get sharpened. This can be politically and socially extremely destabilising.” So India must “take steps that reduce social and economic inequalities, without hurting the process of growth and without reducing the incentives for individual enterprise and creativity.” ...

                                                                        Such arguments have the ring of common sense. If people believe that they will share in overall economic growth, they should be more likely to support social peace. If they do not, unrest will become more likely.

                                                                        However, social scientists have found it difficult to prove that point. In fact, some statistical analyses of the correlation between inequality and social conflict conclude that there may even be an inverse relationship: societies that are more unequal tend to show less conflict, because the rich are better able to control the poor.

                                                                        There is some evidence that social unrest follows from inequality. The economists Alberto Alesina and Roberto Perotti have shown that, after controlling for several other factors, high-inequality countries do tend to have more social instability...

                                                                        Nevertheless, one wonders why the evidence that inequality causes social unrest is not stronger. One part of the problem may be that it is not always inequality per se that causes social discord, but also how inequality is perceived to have come. Unrest may reflect more a sense of betrayal – that others are not living up to their implied promises or are not behaving honourably.

                                                                        Indeed, a sense of trust in others’ intentions is central to a functioning economy. Lawyers write a lot of contracts, and courts spend a lot of time enforcing them, but these institutions cannot cover everything. Most economic relationships depend on good will, a basic inclination to do the right thing even if no one is checking.

                                                                        Trustworthiness is hardly universal. But the business world is built on our intuitive knowledge of when we can trust people fairly well and when we can’t trust them much at all. We design contracts around imperfect trustworthiness and construct elaborate institutions that take account of the hills and valleys of human honour. When these function well, we have a general sense that, even though people are not always trustworthy, basic fairness prevails. ...

                                                                        By contrast, when inequality is perceived as the result of a breakdown in trusting relationships, it can lead to bitterness, and, ultimately, social unrest. This frequently occurs in times of rapid economic change. For example, in a rapidly globalising world, people may have to leave their long-term employers, with whom they have built a sense of trust... In such cases, inequality may be perceived more intensely, for people may link it with the loss of good will.

                                                                        What Singh, Lula, and other world leaders really seem to want is to strengthen trust and cooperation even amidst a rapidly changing economy. If they succeed in devising policies, laws, and incentives that achieve this, a by-product would likely be a reduction in inequality, which one hopes would reinforce the improved sense of trustworthiness.

                                                                        If he is saying that rising inequality is the result of solid underlying economic fundamentals, that people are fairly rewarded for their contributions to the economy but rapid economic change obscures this from view generating misperceptions and lack of trust, I don't agree. It is entirely possible that the perceptions of unfairness are justified in many of these countries and that trust will reemerge only when the economic system itself is changed to ensure that government policy, market failures, cronyism, and other departures from solid economic fundamentals are not the source of the unequal distribution of goods and services. Trust follows action.

                                                                          Posted by on Saturday, February 17, 2007 at 06:22 AM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (18) 

                                                                          Thomas Schelling on Nuclear Deterrence

                                                                          Two Nobel prize winning economists, Michael Spence and Thomas Schelling,  discuss strategies to prevent the proliferation and use of nuclear weapons:

                                                                          Mr. Counterintuition, by Michael Spence, Commentary, OpinionJournal (Free): On a recent Sunday, I showed up on Tom Schelling's doorstep for lunch... Tom, now 86 years of age, was my Ph.D. thesis adviser at Harvard...

                                                                          The last time I saw Tom ... was in Stockholm in December 2005, when ... he received the Nobel Prize in economics for the originality and impact of his applications of game theory to negotiation, nuclear deterrence, global warming, and the surprising effect of preferences for diversity on the composition of neighborhoods. If Tom's work has a leitmotif, it is counterintuition. ...

                                                                          Tom tells me that he "was in South Korea shortly after North Korea exploded their [recent] nuclear device. ... "The first mission should have been to encourage the three countries most threatened, Taiwan, South Korea and Japan--all of whom have the capacity to develop nuclear weapons--to reaffirm their commitment to the NPT ... with support from the U.S. and the leading nuclear powers, signaling that they had no intention of using North Korea as an excuse to start building weapons. I view this as a significant missed opportunity on the part of the international community and the U.S. to reaffirm the deep importance of the non-proliferation regime."

                                                                          Tom Schelling expects Iran to get nuclear weapons. "Once a country becomes the owner of nuclear weapons, it is imperative that they learn to deal with them responsibly." He pointed out that it took the U.S. 15 years after World War II to learn to think seriously about the security of its weapons. Before that, weapons did not have combination locks, let alone complex electronic security codes. ...

                                                                          The issue of learning to be a responsible owner of these weapons goes beyond security and codes. "The Soviet Union," Tom says, "always had civilian officials in charge of the weapons, and never let an aircraft carrying nuclear weapons out of Soviet airspace. China has a very separate army unit for this purpose. Who has control, are they trustworthy... And if [control is] given to civilians, is that an act of mistrust of the military that may have adverse consequences? What are the safeguards against theft, sabotage or unauthorized use, and how will the weapons be protected and hence be credible with respect to retaliation and deterrence?

                                                                          "These issues were addressed collectively and quietly by the nuclear powers during the Cold War. There was, for much of the Cold War, a surprising, effective, direct and entirely unofficial conversation involving policy makers and 'military' intellectuals..." This took placed because of the recognition on the part of all nuclear powers that there was a shared interest in elevating the level of competence in the nuclear club. "India and Pakistan and China were all involved in these conversations and have deep knowledge of the issues and best practices. Iran should probably be the next member of the group with North Korea to follow. Perhaps China ... could start the process by organizing a conference ... with ... India, Pakistan, and then Iran and North Korea."

                                                                          It was clear to me that Tom ... was deeply worried that in the post-Soviet period, the isolation of the newly arrived owners of weapons would lead to seriously inadequate strategic preparation, and therefore imperfect deterrence, and the risk of miscalculation or misuse.

                                                                          "Except for the end of World War II and the devices exploded over Hiroshima and Nagasaki, nuclear devices have not been used, and we have come to understand that they are useful for deterrence and not really for anything else. Part of the learning process is learning to be deterred." Iran and North Korea probably think they need nuclear weapons to prevent being attacked by us or others hostile to them. They need to learn that success in this limited objective consists of never using them. ...

                                                                          Our conversation turns to present times... Terrorists, Tom insists, "also need to understand that nuclear devices are really only useful for deterrence. They would be unlikely to have the capacity to deliver them on planes or missiles, and would be more likely to smuggle them into a hostile country and ... then threaten to detonate them if attacked--or unless their aims and conditions are met. The object should be not to blow up a city but to deter attacks on their country, region or organization." One is struck, once again, by the counterintuitive nature of the strategic issues related to these weapons--one has, to a large extent, a powerful strategic interest in the sophistication of one's enemies. ...

                                                                          China worries Tom; but typically, it is our approach to China, and not Chinese policy, that is the source of his discomfiture. "I believe that we do not pay enough attention to China. China has a small, well-managed nuclear arsenal, which they have never brandished or threatened to use. China does not react well when we treat it as if it were irresponsible. Recently China conducted a test and shot down a satellite, and was criticized for contributing to the militarization of space. What appears not well known in the U.S. is that China has been trying to negotiate treaties on outer space, antisatellite weapons, and limiting the production of fissile material for a number of years, and has not been able to get the U.S. to participate. Since we are clearly developing antisatellite capabilities, accusations against China for escalation are viewed by them and others as hypocritical."

                                                                          Here, on display, was perhaps his most striking characteristic--intellectual courage, and an unwillingness to pander to public opinion. ... In the latter stages of the Vietnam War, and at considerable personal cost, he led a group of 12 scholars to Washington to object to the invasion of Cambodia. He thought the invasion was a costly mistake, and not strategically or morally justified. For a period of time, he lost his place at the official table in the formulation of military policy and strategy. But his interest and his influence continued. ...

                                                                            Posted by on Saturday, February 17, 2007 at 01:11 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (52) 

                                                                            Friday, February 16, 2007

                                                                            FRBSF: The Outlook for the Economy

                                                                            FedViews, FRBSF (no permalink): Mark Spiegel of the Federal Reserve Bank of San Francisco gives his view of the outlook for the economy:

                                                                            Continue reading "FRBSF: The Outlook for the Economy" »

                                                                              Posted by on Friday, February 16, 2007 at 08:45 PM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (3) 

                                                                              Should Central Bankers "Stick to Their Knitting"?

                                                                              I wondered the same thing as Willem Buiter. Should the Federal Reserve Chair talk only about matters directly related to monetary policy, or is it okay to discuss broader issues such as inequality, minimum wages, and Social Security without making the direct connection to monetary policy evident? This is from Martin Wolf's Economists' Forum:

                                                                              Willem Buiter: Martin's Column "Why America will need some elements of a welfare state", refers extensively to a recent speech by Ben Bernanke...

                                                                              I believe it is a serious mistake for central bankers to express public views on politically contentious issues outside their mandates. The mistake is no less serious for being made so commonly by central bankers all over the world.

                                                                              Central bank Governors have a lengthy and unfortunate track record of holding forth in public on matters that are outside the domains of their mandate (in the case of the Fed, monetary policy and financial stability)... With the exception of the Governors of the Bank of England and the Reserve Bank of New Zealand, every Governor on the block appears to want to share his or her views on necessary or desirable fiscal, structural and social reforms. Examples are social security reform and the minimum wage, subjects on which Alan Greenspan liked to pontificate when he was Chairman of the Board of Governors of the Federal Reserve System. Jean-Claude Trichet cannot open his mouth without some exhortation for fiscal restraint or structural reform rolling out. In the case of Chairman Bernanke's speech, equality of opportunity, income distribution, teenage pregnancy and welfare dependency are clearly not part of the (admittedly broad) three-headed mandate of the Fed: maximum employment, stable prices and moderate long-term interest rates. ...

                                                                              When the Head of a central bank becomes a participant, often a partisan participant, in public policy debates on matters beyond the central bank's mandate..., the institution of the central bank itself is politicised and put at risk of becoming a partisan-political football. This puts at risk the central bank's operational independence in the management of monetary policy and in securing financial stability.

                                                                              Central bankers, Mr. Bernanke included, should 'stick to their knitting' (if I may borrow Alan Blinder's phrase). Being the head of an institution with the national and global visibility of the Fed or the ECB gives one an unparalleled platform for addressing whatever one considers the great issues of the time. The temptation to climb that unique pulpit must be near-irresistible. Nevertheless, unless the text for the sermon concerns monetary policy or financial stability, that temptation is to be resisted in the interest of the institutional integrity and independence of the central bank.

                                                                              As I've said before, I agree.

                                                                                Posted by on Friday, February 16, 2007 at 12:22 PM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (19) 

                                                                                Paul Krugman: The Health Care Racket

                                                                                Paul Krugman on the tactics insurance companies use to avoid paying medical bills:

                                                                                The Health Care Racket, by Paul Krugman, Commentary, NY Times: Is the health insurance business a racket? Yes, literally - or so say two New York hospitals, which have filed a racketeering lawsuit against UnitedHealth Group and several of its affiliates...

                                                                                [T]he lawsuit illustrates perfectly the dysfunctional nature of our health insurance system, a system in which resources that could have been used to pay for medical care are instead wasted in a zero-sum struggle over who ends up with the bill.

                                                                                The two hospitals accuse UnitedHealth of operating a "rogue business plan" designed to avoid paying clients' medical bills. ... The legal outcome will presumably turn on whether ... it can be proved that UnitedHealth deliberately misled plan members. But it's a fact that insurers spend a lot of money looking for ways to reject insurance claims. And health care providers, in turn, spend billions on "denial management," employing specialist firms ... to fight the insurers.

                                                                                So it's an arms race between insurers ... trying to find claims they can reject, and doctors and hospitals, who ...[try] to outsmart or challenge the insurers. And the cost of this arms race ends up being borne by the public...

                                                                                Of course, ...[t]he best way ... to avoid paying medical bills is to avoid selling insurance to people who really need it. An insurance company can accomplish this ... through marketing that targets the healthy, and through underwriting: rejecting the sick or charging them higher premiums. ...

                                                                                Like denial management, however, marketing and underwriting cost a lot of money. McKinsey & Company ... recently released an important report dissecting the reasons America spends so much more on health care than other wealthy nations. One major factor is that we spend $98 billion a year in excess administrative costs, with more than half ... accounted for by marketing and underwriting - costs that don't exist in single-payer systems.

                                                                                And this is just part of the story. McKinsey's estimate of excess administrative costs counts only the costs of insurers. It doesn't ... include other "important consequences of the multipayor system," .... The sums doctors pay to denial management specialists are just one example.

                                                                                Incidentally, while insurers are very good at saying no to doctors, hospitals and patients, they're not very good at saying no to more powerful players. ... McKinsey estimates that the United States pays $66 billion a year in excess drug costs, and overpays for medical devices like knee and hip implants, too.

                                                                                To put these numbers in perspective: McKinsey estimates the cost of providing full medical care to all of America's uninsured at $77 billion a year. Either eliminating the excess administrative costs of private health insurers, or paying what the rest of the world pays for drugs and medical devices, would by itself more or less pay the cost of covering all the uninsured. And that doesn't count the many other costs imposed by the fragmentation of our health care system.

                                                                                Which brings us back to the racketeering lawsuit. If UnitedHealth can be shown to have broken the law - and let's just say that this company, which is America's second-largest health insurer, has a reputation for playing even rougher than its competitors - by all means, let's see justice done. But the larger problem isn't the behavior of any individual company. It's the ugly incentives provided by a system in which giving care is punished, while denying it is rewarded.

                                                                                Previous (2/12) column: Paul Krugman: Scary Movie 2
                                                                                Next (2/19) column: Paul Krugman: Wrong is Right

                                                                                  Posted by on Friday, February 16, 2007 at 12:15 AM in Economics, Health Care | Permalink  TrackBack (0)  Comments (61) 

                                                                                  Daniel McFadden: An Evaluation of Medicare Part D

                                                                                  Daniel McFadden, winner of the Nobel Prize in Economics in 2000, evaluates the Medicare Part D prescription coverage program. He says that so far the results indicate the program has worked reasonably well, but "caution is advised" before implementing programs of this type in other segments of the health care industry:

                                                                                  A Dog's Breakfast, by Daniel L. McFadden, Commentary, WSJ: Last year, Medicare underwent a major expansion with the addition of Part D prescription drug coverage. A controversial feature of this new program was its organization as a market in which consumers could choose among various plans offered competitively by different insurers and HMOs, rather than the single-payer, single-product model…

                                                                                  Part D is a massive social experiment on the ability of a privatized market to deliver social services effectively. ...[M]y research group has monitored consumer choices and outcomes from the new Part D market. I will summarize our findings, but first I want to provide some perspective on the American health-care system...

                                                                                  Most Americans are aware that our health-care system is in deep trouble, a dog's breakfast of private providers and insurers that has weak and inconsistent incentives for quality control and cost containment. Many consumers cannot obtain health insurance at reasonable cost, and financing the system is stressing employers, pension funds, and the government's Medicare and Medicaid programs.

                                                                                  In terms of health delivered per dollar of cost, our system is grotesquely inefficient. ... Canada's single-payer system costs … about half our expenditure... The Canadian ... outcomes are typical of developed countries, where government managed and financed systems predominate. The extra cost of our system is not buying us better health. ...

                                                                                  In the future, things are going to get much worse. If current trends continue, health care in the U.S. as a proportion of GDP will rise to 40% by 2050, a level that will break the current system...

                                                                                  There are a number of reasons for this gathering storm. First, the U.S. population is getting older, and the old require more medical maintenance. Second, we are getting wealthier, and staying alive is the ultimate luxury good. Third, we demand expensive medical innovations... About a third of all medical costs are incurred in the last year of life, and are at best marginally effective. The incentives in the system do not force hard choices.

                                                                                  To deal with this future, three substantial reforms are needed. First, we need to wring out some of the inefficiencies. Something like 30% of our health costs come from administrative overhead, legal costs and defensive medicine. These could be largely eliminated...; we just need to emulate best practice in other developed countries.

                                                                                  Second, we need universal health insurance coverage, with active emphasis on preventive medicine... Perhaps this can be accomplished by cobbling together existing sources of finance, as in Gov. Arnold Schwarzenegger's current proposal for California. However, eventually we will have to go to a system that is not channeled through employers, something like a tax-financed medical voucher system.

                                                                                  Third, we need incentives that match choice of expensive treatments with consumers' willingness to pay for them, a benefit-cost analysis that places treatment choices and financial responsibility on the individual.

                                                                                  This brings us to Medicare Part D. This experiment in privatizing the prescription drug insurance market ... gives the individual the right, and responsibility, to make insurance plan choices that are in his or her self-interest. If consumers are up to this task, then their choices will ensure that the plans, and insurers, that succeed in the market are ones that meet their needs. However, if many are confused or confounded, the market will not get the signals it needs to work satisfactorily. ...

                                                                                  So, how well has the Part D market worked? ...

                                                                                  Continue reading "Daniel McFadden: An Evaluation of Medicare Part D" »

                                                                                    Posted by on Friday, February 16, 2007 at 12:06 AM in Economics, Health Care | Permalink  TrackBack (0)  Comments (26) 

                                                                                    Deng Right?

                                                                                    Wang Yong of Shanghai Daily says Brad DeLong "has a valid point":

                                                                                    Deng's legacy: Equality, justice and openness, by Wang Yong, Commentary, Shanghai Daily: The American economist J. Bradford Delong says that China would have been much stronger if Deng Xiaoping had come to power in 1956 instead of 1976. ...

                                                                                    You can't turn history back, and you can't be sure whether China's soil for a market economy, even in its most pristine form, would have been fertile in 1956. But Delong has a valid point: All of China has Deng Xiaoping to thank for her prosperity and freedom...

                                                                                    Next Monday marks the 10th year since Deng passed away... Most people, of course, remember the great leader for his dedication to a socialist market economy and an open-door policy. But why did he prefer an open market economy? What made him believe that markets exist in both socialist and capitalist economies?

                                                                                    I think Deng's philosophy is more important than his economic policies. ... In his mind, the fundamental difference between socialism and capitalism is that the former advocates common prosperity, while the latter focuses largely on efficiency and accommodates extreme inequalities.

                                                                                    Deng's pragmatic and democratic spirit is best reflected in his thinking about common prosperity. To achieve that goal, he allowed for some people getting rich ahead of others.

                                                                                    He did not sacrifice efficiency just to preserve the utopian idea of equality, which proved elusive in the people's communes late Chairman Mao invented in the 1950s and 1960s.

                                                                                    But Deng never ever allowed for extreme inequalities, though some Chinese economists since Deng's death have preached that they are inevitable in an advancing economy. In particular, Deng hated inequalities caused by official corruption. He once said that high-level officials must be strictly monitored for corruption. ...

                                                                                    Quite a few people have misunderstood Deng as an advocate of efficiency only. Deng's most important legacy is to do away with extreme inequalities, especially those resulting from official corruption.

                                                                                    Indeed, official corruption has been rampant in many parts of the country in the past decade, and with it, the awkward justification by certain economists, such as Zhang Weiying from Peking University, ... that corruption and inequality are inevitable if efficiency is to be advanced.

                                                                                    But don't think the current Chinese leadership will allow inequality to develop to a dangerous point. Common prosperity has always been an ideal of the Communist Party of China, although many other countries have long ago abandoned this idea as beyond human reach.

                                                                                    To achieve common prosperity is not just a purely economic matter. It requires leadership to heed even the voice of the smallest sparrow falling to the ground. ...

                                                                                    It will be interesting to see how the tensions between common prosperity and a market economy are managed as China develops further. Brad DeLong has one answer:

                                                                                    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 encourage 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.

                                                                                    For me, equality of opportunity is an important principle, and also an area where we have room to improve. As just one example:

                                                                                    Long before children turn 5, there are already enormous gaps in their abilities. One study found that 3-year-olds with professional parents know about 1,100 words on average, while 3-year-olds whose parents are on welfare know only 525. Much of the gap is caused by environment...

                                                                                    And there's evidence that opportunity, at least as reflected in income mobility, has declined in recent decades:

                                                                                    [A]cademic 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 [an economist at the Federal Reserve Bank of Chicago].

                                                                                    And there are other ways in which opportunity appears to have fallen as well. I'm not much for ex-post redistribution policies when everyone has an equal chance at success, but when opportunity is limited for some groups through no fault of their own, and when opportunity is potentially declining with time, it's harder to maintain that position.

                                                                                      Posted by on Friday, February 16, 2007 at 12:03 AM in China, Economics, Income Distribution, Policy | Permalink  TrackBack (0)  Comments (1) 

                                                                                      Thursday, February 15, 2007

                                                                                      Single-Payer Health Care and Vouchers

                                                                                      Robert Frank argues for a single-payer health care system with universal coverage supported by a voucher system:

                                                                                      A Health Care Plan So Simple, Even Stephen Colbert Couldn’t Simplify It, by Robert H. Frank, Commentary, NY Times: In his State of the Union address, President Bush proposed tax cuts to make health insurance more affordable for the uninsured. The next day, Stephen Colbert had this to say on his show on Comedy Central: “It’s so simple. Most people who can’t afford health insurance also are too poor to owe taxes. But if you give them a deduction from the taxes they don’t owe, they can use the money they’re not getting back from what they haven’t given to buy the health care they can’t afford.”

                                                                                      Just so. As health economists have long known, market incentives induce private insurers to spend vast sums to avoid people who may actually require health care. This problem is mitigated (though not eliminated) by employer-provided group policies. Because Mr. Bush’s proposal would steer people toward individual policies, it would actually strengthen the incentive to shun unhealthy people. Such people can now keep their insurance by not changing jobs. But no private company would want them as individual policyholders...

                                                                                      Continue reading "Single-Payer Health Care and Vouchers" »

                                                                                        Posted by on Thursday, February 15, 2007 at 10:09 AM in Economics, Health Care, Politics | Permalink  TrackBack (0)  Comments (14) 

                                                                                        Wednesday, February 14, 2007

                                                                                        Edward Prescott: 'Competitive Cooperation'

                                                                                         Edward Prescott, winner of the 2004 Nobel Prize in Economics, defends globalization:

                                                                                        'Competitive Cooperation' by, Edward C. Prescott, Commentary, WSJ: Of all the thankless jobs that economists set for themselves when it comes to educating people about economics, the notion that society is better off if some industries are allowed to wither, their workers lose their jobs, and investors lose their capital -- all in the name of the greater glory of globalization -- surely ranks near the top. This is counterintuitive to many people (politicians among them), because they view it the government's economic responsibility to protect U.S. industry, employment and wealth against the forces of foreign competition. If the government has any economic role at all, surely this must be it.

                                                                                        Actually, no. Government has a higher calling ..., which is to provide the opportunity for people to seek their livelihood on their own terms, in open international markets, with as little interference from government as possible. That doesn't mean we shouldn't provide short-term social insurance policies to aid those displaced by foreign competition, but the purpose of that aid should be to prepare workers, not protect them. ...

                                                                                        [B]roadly speaking -- and these broad operating principles matter -- those countries that open their borders to international competition are those countries with the highest per capita income. ...

                                                                                        How to explain this phenomenon? The answer lies predominantly with competition ... [I]t is useful to consider the example of the U.S., which, from its early days, created wealth from the healthy competition among businesses and industries in its member states. ...

                                                                                        This same competitive cooperation has been firing the economic engine of Europe for 50 years... And there is other evidence throughout the world for the benefit of international openness. Like the U.S., Australia is also a tale of competition among member states... The five wealthy countries of Eastern Asia -- Taiwan, Singapore, Japan, South Korea and Hong Kong -- were not so well off just a few decades ago, but their subsequent commitment to export markets and international competition put them on an upward trajectory that has improved the lives of millions of people.

                                                                                        And what of Latin America? Unfortunately, the region provides a case study in the perils of protectionism. ... [There is] much evidence to support ... that competitive barriers are to blame for Latin America's retarded growth. ...

                                                                                        Of course, many other factors account for marginal differences in productivity and wealth among countries that are already wealthy -- tax rates being key among those factors -- but they are comparative "frosting on the cake," and the cake in this case is the institutional commitment to international competition. ...

                                                                                        Protectionism is seductive, but countries that succumb to its allure will soon have their economic hearts broken. Conversely, countries that commit to competitive borders will ensure a brighter economic future... This lesson should not be lost on the U.S., the paragon of competitive growth, where politicians and policy makers are contemplating whether to construct more protective barriers. It is openness that gives people the opportunity to use their entrepreneurial talents to create social surplus, rather than using those talents to protect what they already have (or to protect rents, as economists like to say). Social surplus begets a rising standard of living, which begets growth, which begets social surplus, and so on. Rent protection stops growth cold and keeps people poor.

                                                                                        People in all countries are motivated to improve their condition, and all countries have their share of talented risk-takers, but without the promise that a competitive system brings, that motivation and those talents will only lie dormant. ...

                                                                                          Posted by on Wednesday, February 14, 2007 at 11:02 PM in Economics, International Trade | Permalink  TrackBack (0)  Comments (24) 

                                                                                          Arnold Kling: Guilty as Charged

                                                                                          Arnold Kling responds to my post on global warming and Social Security. I said:

                                                                                          Here's what I've noticed. Some of the same people who argue there's too much uncertainty about the climate 75 years in the future to justify drastic action now use the so-called crisis in Social Security funding 75 years from now (which is far more uncertain than climate change) to argue for drastic change today.

                                                                                          He says he's guilty as charged, but for good reason:

                                                                                          Social Security and Global Warming, by Arnold Kling: ...The reason we should try to fix Social Security now is that the cure can be painless now. The problem is that under conservative assumptions about productivity, promised future benefits exceed future revenues by an ever-growing amount. So cut promised future benefits, and then if productivity does well, you can restore benefits if you like. The point is, planning for the worst case scenario does not hurt anybody in the non-worst-case scenario.

                                                                                          In the case of global warming, taking drastic steps now to prevent the worst-case scenario has real costs, against benefits that are potentially nil--in fact likely nil, for a variety of reasons. So, contra Jane and Mark, it is possible to be rationally precautionary about Social Security and not so much about global warming--or precautionary in a different way about global warming, as I've been suggesting.

                                                                                          As an aside, I disagree with Mark's assessment of the relative likelihood of a Social Security crisis and a global warming crisis. ...

                                                                                          If I were to put numbers on it, my subjective probabilities would be that there is about a 5 percent chance of a significant shortfall in Social Security down the road, and less than a 1 percent chance of a climate catastrophe caused by carbon dioxide emissions. The climate catastrophe is potentially much, much worse, which makes it a legitimately larger worry. But the cost of acting now on Social Security is essentially zero, and the cost of acting now on carbon dioxide emissions is huge…

                                                                                          Arnold also says, in reference to a December 2004 post by Jane Galt about him:

                                                                                          Before I plead guilty, let me remind Mark that Jane Galt made this point over two years ago.

                                                                                          I appreciate the reminder. I didn't have a blog until a few months after Jane's post and had only just discovered econ blogs at that time so he's right, I missed that one.

                                                                                          I'm confused about something though. If you were to tell me that I will receive 1 million dollars on the day I turn 67 would that change my behavior today? Yes. I'm pretty sure it would. Would I feel better off today? Yes again.

                                                                                          So, go in the other direction. If you tell me I will have less money in the future because my benefits will be cut, maybe not by a million dollars but by enough to matter, will that change my behavior today? Yes it will, and I’ll feel worse off.

                                                                                          More importantly, is it reversible like Arnold says? Suppose I give up a vacation and save instead because I believe benefits will be cut in the future. I can't always reverse that later (I can't necessarily climb the same mountain or ski the same slopes when I'm older, and even if there's no physical constraint, the opportunities will differ with time). Or maybe the benefit cuts make it so I can't simultaneously send a child to college and save as much as I need to for retirement due to resource constraints. How does cutting future benefits, even probabilistically, leave me unaffected in such a case?

                                                                                          The point is that changing expected future benefits alters the time paths for consumption and saving (a premise, or at least a hope, of those in favor of privatization of Social Security)  which, contrary to the claim above, does affect people "in the non-worst-case scenario."

                                                                                          Update: Angry Bear has more, including rebuttal comments by Arnold Kling.

                                                                                            Posted by on Wednesday, February 14, 2007 at 08:22 PM in Economics, Environment, Social Security | Permalink  TrackBack (0)  Comments (27) 

                                                                                            Robert Reich: Why Balancing the Budget is a Stupid Idea

                                                                                            Robert Reich says worrying about balancing the budget is stupid:

                                                                                            Why Balancing the Budget is a Stupid Idea, by Robert Reich: When Bill Clinton was in the White House and the Republicans ran Congress, it was Republicans who demanded that the federal budget be balanced. That was because they wanted to cut federal spending. Now that George Bush is in the White House and Democrats run Congress, it’s Democrats who are outraged by what they consider to be an irresponsibly rosy scenario in the President’s new budget, which he claims will be balanced by 2012. Impossible, say the Democrats, who want to roll back his tax cuts on the wealthy.

                                                                                            Let’s call a time-out here and ask ourselves why it’s so important to balance the federal budget in the first place. The federal budget is just an accounting convention – and a lousy one at that. It doesn’t distinguish between three types of spending: (1) spending that's necessary to pay off obligations made in the past, (2) spending intended to make us better off today, and (3) spending to make us more productive in the future.

                                                                                            Any family knows the difference between past, present, and future – between, say, paying down the mortgage, going on an ocean cruise, or paying college tuition for the kids. You’ve got to honor past obligations, because your credit-worthiness depends on it. ... Meanwhile, you’ve got to live today on the basis of what you can afford to do today. That ocean cruise may be tempting but if you haven’t saved enough for, forget it. It’s an extravagance. And you should make investments in the future. Even if you have to borrow to send the kids to college you should do so because that’s a smart investment. And smart investments will help your family live better in the future and pay off its loans more easily.

                                                                                            But the federal budget doesn’t at all resemble a family budget. The federal budget is a static account that tells us nothing about past, present, or future. Price supports designed to protect today’s farmers are treated the same way as education and health care for our nation’s children. ... Social Security surpluses show up in the budget as this year’s revenues that offset this year’s expenses. But in reality the surpluses are payments by post-war boomers who are still working – but who in a few years will be retired and making big withdrawals. What look like revenues will soon turn into big liabilities. The federal budget hides this inconvenient fact.

                                                                                            No one in their right mind should worry about balancing this silly agglomeration. Hats off to politicians (like John Edwards) who recognize this. We should worry instead about putting aside enough to deal with past obligations, devoting no more than we can now afford to current needs, and making adequate future investments – even if we have to borrow in order to make them.

                                                                                            Update: PGL at Angry Bear disagrees.

                                                                                              Posted by on Wednesday, February 14, 2007 at 01:18 PM in Budget Deficit, Economics | Permalink  TrackBack (0)  Comments (35) 

                                                                                              The Welfare State or The Insurance State?

                                                                                              Robert Samuelson is at it again:

                                                                                              Welfare State Stasis, by Robert J. Samuelson, Commentary, Washington Post: ...In 1956, defense dominated the budget; the Cold War buildup was in full swing. The welfare state, which is what "payments to individuals" signifies, was modest. Now everything is reversed. ... The welfare state has made budgeting an exercise in futility. Both liberals and conservatives, in their own ways, peddle phony solutions. ...

                                                                                              It might help if Americans called welfare programs -- current benefits for select populations, paid for by current taxes -- by their proper name, rather than by the soothing (and misleading) labels of "entitlements" and "social insurance." That way, we might ask ourselves who deserves welfare and why. ...

                                                                                              [M]ost Americans don't want to admit that they are current or prospective welfare recipients. They prefer to think that they automatically deserve whatever they've been promised simply because the promises were made. ...

                                                                                              To the archive:

                                                                                              Fire Insurance is not Welfare and Neither is Social Security, by Mark Thoma: Robert Samuelson, and many others, appear to believe that any time there is a transfer of income between individuals or groups it is welfare. This is wrong. According to Samuelson:

                                                                                              Welfare is a governmental transfer from one group to another for the benefit of those receiving. The transfer involves cash or services (health care, education). We have welfare for the poor, the old, the disabled, farmers and corporations. Social Security is mainly welfare...

                                                                                              Not it isn’t. Social Security is mainly a means of insuring against economic risk. It is fundamentally an insurance program, not a saving program, and as such it is not welfare.

                                                                                              Just because an economic activity transfers income from one person or group to another does not make it welfare. ... Social Security is ... insurance ... against economic risk as I explain in this Op-Ed piece. ...

                                                                                              There is an important distinction between needing insurance ex-ante and needing it ex-post. Insurance does redistribute income ex-post, but that doesn't imply that it was a bad deal ex-ante (i.e., when people start their work lives). ...

                                                                                              Angry Bear agrees with me on this and the two of us have been independently saying the same thing (in fact, I first encountered AB in a Google search for Social Security, insurance, and risk). As AB said (the full text is well worth reading):

                                                                                              What does all of this have to do with Social Security? Those who are hard-working, fortunate, and not too profligate will have a large nest egg at retirement and Social Security will account for only a small portion of their retirement portfolio. This is tantamount to paying for insurance and then not needing it. This happens all the time -- every year someone fails to get sick or injured and, while surely happy in their good health, would have been better off not buying insurance. That's the nature of insurance: if you don't need it, then you'll always wish you hadn't purchased it. Only in the context of retirement insurance is this considered a crisis.

                                                                                              On the other hand, those with bad luck or insufficient income will not have a nest egg at retirement. Because of Social Security, instead of facing the risk of zero income at retirement, they are guaranteed income sufficient to subsist.

                                                                                              This is precisely like the insurance example I worked through above: people with good outcomes will wish they hadn't paid into the insurance fund; those with bad outcomes will be glad they did. Ex-ante, everyone benefits from the insurance. Overall, society is better off because risk is reduced; because people are risk-averse, the gains are quite large.

                                                                                              When I think of welfare, I think of pure money transfers from one group to another without any economic basis for the transfer. In such cases, one person’s gain arises from another’s loss. But economic activity that results in the exchange of goods and services is different. It is not a zero sum game. One person’s gain does not come at the expense of someone else.

                                                                                              The main feature of Social Security is not welfare as Samuelson asserts. The main feature is insurance against economic risks and as such it makes us collectively better off. Calling it welfare when it isn’t is misleading and causes unnecessary class distinctions and resentments from the losers ex-post. More importantly, it ignores and obscures the important role Social Security plays in society as insurance against the economic risks we all face.

                                                                                              If you think you are so rich and powerful that you don’t need such insurance, consider this. The stock market collapse of 1929 at the onset of the Great Depression wiped out substantial quantities of wealth. The typical stock was worth only one sixth its pre-crash value once the bottom was reached. Whatever insurance existed in the stock market evaporated as the crash unfolded.

                                                                                              It wasn’t the poor jumping out of windows on Wall street. If you think it can’t happen to you, think again.

                                                                                              [See also "The Need for Social Insurance."]

                                                                                                Posted by on Wednesday, February 14, 2007 at 12:15 AM in Economics, Social Insurance, Social Security | Permalink  TrackBack (0)  Comments (66) 

                                                                                                Denial Management, Genetic Testing, and Health Care

                                                                                                A lot of money is spent in the health care business just trying to figure out who will pay the bills, something that doesn't happen with a single-payer system:

                                                                                                Fights Over Health Claims Spawn a New Arms Race, by Vanessa Fuhrmans, WSJ: Four years ago, Paluxy Valley Physicians of Glen Rose, Texas, was struggling to recoup more than $500,000 in denied or unpaid claims from insurers. Two of its eight doctors left the practice, while three others had to borrow $100,000 to keep it afloat.

                                                                                                To turn things around, the medical practice turned to Boston-based athenahealth Inc., one of the biggest of hundreds of companies in a lucrative niche: helping doctors wring payments from health plans. Athenahealth's software flagged and corrected the complex coding for thousands of claims, preventing them from getting hung up in insurers' Byzantine rules. Today, Paluxy Valley has whittled its claims outstanding to $179,000 and repaid the bank loan. ...

                                                                                                "The insurers outcode us, they outsmart us and they have more manpower," says Shari Reynolds, the administrator at Paluxy Valley... "Now at least we have a fighting chance."

                                                                                                Doctors increasingly complain that the insurance industry uses complex, opaque claims systems to confound their efforts to get paid fairly for their work. Insurers say their systems are designed to counter unnecessary charges... Like many tug-of-wars over the health-care money pot, the tension has spawned a booming industry of intermediaries.

                                                                                                It's called "denial management." Doctors, clinics and hospitals are investing in software systems costing them each hundreds of thousands of dollars to help them navigate insurers' systems and head off denials. They're also hiring legions of firms that dig through past claims in search of shortchanged payments and tussle with insurers over rejected charges. "Turn denials into dollars," promises one consultant's online advertisement.

                                                                                                The imbroglio is costing medical providers and insurers around $20 billion -- about $10 billion for each side -- in unnecessary administrative expenses, according to a 2004 report by the Center for Information Technology Leadership, a nonprofit health-technology research group based in Boston. ...

                                                                                                The denial-management industry's rise shows how much of medical spending is consumed by propping up and doing battle over an arcane patchwork of claims systems. Roughly 30% of physicians' claims are denied the first time around. Sales of physician-billing and practice-management technology grew 25% to more than $7.5 billion last year...

                                                                                                Here's more on a related topic, health care and genetic testing. I think this is a step in the right direction:

                                                                                                Congress May Prohibit Genetic Testing for Jobs, Health Coverage, by William Roberts, Bloomberg: The Democratic-controlled Congress, with the backing of President George W. Bush, may soon pass the first U.S. legislation preventing the use of genetic testing by employers and insurers.

                                                                                                The measure ... would prohibit health plans from denying coverage or charging higher premiums based on a person's genetic predisposition to disease. It also bars companies from collecting genetic information on employees.

                                                                                                The legislation had been stalled in the Republican-led House for more than a decade because of opposition from business groups such as the U.S. Chamber of Commerce...

                                                                                                With the Democrats now in charge, prospects for passage ''look excellent,'' said Representative Louise Slaughter, a New York Democrat who sponsored the measure.

                                                                                                Scientists and other supporters of the legislation say the lack of privacy protections has hampered research on treatments for cancer and other diseases. They say volunteers have been reluctant to participate in genetic testing to identify a predisposition to disease because confidentiality couldn't be guaranteed. ...

                                                                                                The Senate approved the bill in 2005 by a 98-0 vote. Slaughter said it died in the House because Republican leaders ''would not even hold a hearing'' on it. ''The drug companies and the insurance companies were dead set against it,'' she said...

                                                                                                Does this matter?:

                                                                                                Individuals with genetic conditions twice as likely to report health insurance denial, EurakAlert: A new study published in the February 2007 issue of the American Journal of Medical Genetics reveals that individuals with genetic conditions are twice as likely to report having been denied health insurance than individuals with other chronic illnesses. ...[This is] believed to be the first large-scale study to systematically compare and contrast the health insurance experiences, attitudes, and beliefs of persons with genetic conditions versus individuals with other serious medical conditions. ...

                                                                                                "Anyone with chronic medical conditions should be legitimately concerned about access to health insurance, but individuals with genetic conditions may have additional reasons to worry," said principal investigator Nancy Kass, ScD, deputy director for public health at the Johns Hopkins Berman Institute of Bioethics and a professor at the Johns Hopkins Bloomberg School of Public Health. "We learned that there is considerable concern about being denied health insurance because of a genetic condition, as well as maintaining some privacy about the status of that condition." ...

                                                                                                Almost all of the individuals in the study ... said they obtained their health insurance through either their employer ... or their spouse’s employer... Nearly half of employed individuals ... said they felt they could not leave their jobs because they would lose their health insurance. Individuals with genetic conditions were also more likely to report trying to obtain additional health insurance compared to individuals with other serious medical conditions. Only 67.2 percent of these individuals reported success in obtaining additional health insurance. ...

                                                                                                The Health Insurance Portability and Accountability Act (HIPAA) expressly forbids a group health insurance plan from using genetic information to establish rules for eligibility or continued eligibility. HIPAA also prohibits insurance companies from treating genetic information as a "pre-existing condition in the absence of the diagnosis of the condition related to such information." Individuals cannot be denied health care coverage for a medical condition as a result of a genetic marker for the condition. However, individuals can be denied if they have symptoms of genetic disease. As such, HIPAA provides no protection for the vast majority of respondents in the new study.

                                                                                                "As we spoke to family after family, it became clear that people with all types of medical conditions are quite worried about access to health insurance and make life changes in order to preserve their access to it," added Kass. "But people with genetic conditions may face additional challenges... Bioethicists are problem-finders, and we found a big one." ...

                                                                                                It's not clear to me what the new legislation offers over and above the HIPAA, but any additional protection is welcome.

                                                                                                  Posted by on Wednesday, February 14, 2007 at 12:14 AM in Economics, Health Care | Permalink  TrackBack (0)  Comments (14) 

                                                                                                  Optimal Provocation

                                                                                                  Iran should provoke the U.S. right up to the point where the marginal benefit from an additional unit of provocation - higher oil revenues from a rising risk premium - just equals the marginal cost:

                                                                                                  Troubled Waters Over Oil, by James Surowiecki, The New Yorker: The past few months haven’t been easy for Iran’s President, Mahmoud Ahmadinejad. His refusal to halt Iran’s uranium-enrichment program led the United Nations to impose sanctions... Inflation in Iran has exploded... In the country’s recent municipal elections, Ahmadinejad’s political allies were crushed, and clerics and lawmakers have begun criticizing him in public. Worse still, through the second half of 2006 the price of oil tumbled almost thirty per cent, a disaster for an economy as dependent on oil revenue as Iran’s. ... And then the Bush Administration said that it had authorized U.S. troops to detain or kill any Iranians found to be working with the Iraqi insurgency, and dispatched a second aircraft-carrier group to the Persian Gulf, sparking rumors that a military strike against Iran was in the works.

                                                                                                  This latest confrontation with the U.S. should have been the capper... Strangely, though, it may instead have brought about an upturn in his fortunes. Soon, oil prices started to rise, jumping twenty per cent in just two weeks. As a result, the Iranian regime suddenly has an extra twenty million dollars or so to spend every day, a windfall that will help Ahmadinejad to placate his critics and solve some of his country’s more pressing economic problems.

                                                                                                  The jump in oil prices wasn’t entirely a geopolitical phenomenon—the cold snap in the U.S. was also a big factor—but it was driven in part by an increase in what oil traders call the “risk premium.” ... In the current confrontation between the U.S. and Iran, ...[there is a] a perverse set of incentives: whenever the U.S. says things that make a military conflict with Iran seem more likely, the price of oil rises, strengthening Iran’s regime rather than weakening it. The more we talk about curbing Iranian power, the more difficult it gets.

                                                                                                  It’s hard to measure the risk premium exactly, but most estimates suggest that in the past couple of years ... it has accounted for somewhere between ten and twenty dollars on each barrel of oil. ... Ten months ago ... when Iranian leaders were talking about their progress in enriching uranium, and were threatening to attack Israel in response to any U.S. attack, the price of oil rose to more than seventy-five dollars a barrel. The economic consequences of this are not trivial; in the past few years, the inflated risk premium has given Iran tens of billions of dollars that it would otherwise not have had.

                                                                                                  This helps Ahmadinejad enormously, because Iran has made huge commitments to government spending that can be kept only by relying on oil revenue. ...

                                                                                                  The persistence of the risk premium means that Ahmadinejad ... has an economic incentive to say confrontational things that spook the oil market. But the effect of his pronouncements is limited, because traders know that self-interest is likely to keep Iran from doing anything that would cut off the supply of oil. What really keeps the risk premium high is the American penchant for public responses to Iran’s provocations. So cooling down the martial rhetoric—even if we plan to take military action eventually—would likely bring oil prices down for a time, making Iran weaker. ... Talking tough may look like a good way of demonstrating U.S. resolve, but when tough talk makes our opponent richer and stronger we may accomplish more by saying less.

                                                                                                    Posted by on Wednesday, February 14, 2007 at 12:06 AM in Economics | Permalink  TrackBack (0)  Comments (1) 

                                                                                                    Tuesday, February 13, 2007

                                                                                                    What Solvency Crisis?

                                                                                                    James Pethokoukis at U.S. News & World Report's blog Capital Commerce emails:

                                                                                                    Bush's Secret Plan to Save Social Security, by James Pethokoukis: Is the Social Security solvency "crisis" really not a crisis at all? Maybe not, if Edward Lazear, chairman of President Bush's Council of Economic Advisers, has his numbers correct. Yesterday, Lazear held a media briefing about the 2007 Economic Report of the President. During the press conference, Lazear said the following about the future rate of productivity growth:

                                                                                                    I wouldn't necessarily say 3 percent. But I would expect that we could expect to see high rates, perhaps not quite at the 3 percent level, but somewhere higher than 2 percent. I would expect somewhere closer to 3 percent...

                                                                                                    ...Now here is why Lazear's prediction is important: Higher productivity growth–and the stronger economy and higher wages that it implies–would completely solve Social Security budget woes for the next 75 years. Right now, the Social Security Administration is assuming that long-term productivity growth is 1.7 percent. An alternative, rosier forecast has it at 2 percent. If the rosier forecast were correct, the 75-year shortfall would be 25 percent less. But if Lazear's even more optimistic prediction is right, the 75-year shortfall would be eliminated.

                                                                                                    Here is what economist Brad DeLong ... wrote in his popular blog on the topic: "Each 0.1 percentage point increase in the growth rate of productivity reduces the long-horizon Social Security deficit by approximately 0.1 percent of taxable payroll. Elementary. Obvious to everyone who has even a surface knowledge of how our current system works. Real wage and productivity growth of 3 percent per year ... would wipe out the 75-year deficit."

                                                                                                    Now DeLong doubts such growth is possible. But Lazear thinks it is doable with the right policies: "And I think we do have that kind of an economy, because, again we have a relatively low-tax economy, we have an economy that's open to trade for the most part, we've encouraged foreign investment, all of which have been important and instrumental in creating our economic growth."

                                                                                                    Those on the left might also add other factors that they think are necessary for growth, such as greater public investment in basic scientific research or a modified social insurance system–improved healthcare, wage insurance–to make worried workers more willing to take entrepreneurial risks like starting their own business. ...

                                                                                                    Here's what I've noticed. Some of the same people who argue there's too much uncertainty about the climate 75 years in the future to justify drastic action now use the so-called crisis in Social Security funding 75 years from now (which is far more uncertain than climate change) to argue for drastic change today.

                                                                                                      Posted by on Tuesday, February 13, 2007 at 02:31 PM in Economics, Social Insurance, Social Security | Permalink  TrackBack (0)  Comments (102)