« June 2007 | Main | August 2007 »

Tuesday, July 31, 2007

Milton, the Money Stock, and an Apolitical Fed

William Poole's birthday present to Milton Friedman is to give a speech saying his advice on monetary policy was less than optimal. Here's a summary of that part of Poole's speech from David Wessel followed by Poole's comments related to political influence on Fed policy:

Milton Friedman Wasn’t Right About Everything, by David Wessel, Real-Time Economics: William Poole, a self-described “card-carrying monetarist” who is now president of the St. Louis Federal Reserve Bank, says the Fed’s track record over the past 25 years is better than it would have been had it followed Milton Friedman’s prescription of maintaining steady growth in the money supply.

“I believe that the Fed’s actual adjustments of its federal funds rate target have yielded superior outcomes since 1982 to what we would have observed under steady money growth,” he said in the prepared text of a speech ... to mark the 95th anniversary of the late Milton Friedman’s birth. “I also believe that advances in knowledge permit us to say with some confidence that these gains are not just an accident of Alan Greenspan’s special skills and intuition,” Mr. Poole said.

So what’s the secret? Persuading the public, businesses and the markets that the Fed won’t let inflation get out of control or, in the jargon of economists, “anchoring inflationary expectations.”

“Everything Milton argued about money stock control is true,” he added, “but the effect of inflation expectations on the practice of monetary policy itself was, I believe, a missing element in the analysis. The economy functions differently when inflation expectations are firmly anchored. If a central bank allows expectations to become unanchored, then interest-rate control becomes a dangerous and potentially destabilizing policy. But should the practice of monetary policy depend on how well inflation expectations are anchored? I do not recall Milton discussing this question, perhaps because he believed that the best way to maintain well-anchored expectations over time was for the central bank to commit to steady and low money growth under all circumstances.”

Continue reading "Milton, the Money Stock, and an Apolitical Fed" »

    Posted by on Tuesday, July 31, 2007 at 11:43 AM in Economics, Fed Speeches, Monetary Policy | Permalink  TrackBack (0)  Comments (16) 

    "Too Uninformed to Vote?"

    I hardly ever read Jonah Goldberg's columns, but I scanned this one and, though there are lots of "maybes" scattered about, I think he's actually serious. The GOP elites strike again:

    Too uninformed to vote?, by Jonah Goldberg, Commentary, LA Times: ...Instead of making it easier to vote, maybe we should be making it harder. Why not test people about the basic functions of government? Immigrants have to pass a test to vote; why not all citizens? ... If you threaten to take the vote away from the certifiably uninformed, voter turnout will almost certainly get a boost.

    Voter turnout will get a boost? An increase the price of something does not, except in the most unusual of circumstances, cause a "boost" in the quantity demanded. Thus, increasing the price of voting by requiring people to pass a test will exclude some people who would have voted otherwise and, since it's unlikely those who get excluded would be scattered randomly across the population of voters, this will exclude particular groups of people from the political process.

    I don't see why individuals or groups should be excluded from expressing their preferences in the voting booth over, say, issues such as the war or building a local school or anything else just because they don't know how many years a senator serves, how cloture works, or precisely how a bill becomes a law.

    If we are going to go this route, why not test for knowledge of the issues too, not just the functions of government? Thus, when a vote on tax issues comes up, if someone like Jonah "Economics makes my brain itch" Goldberg checks the box that says "tax cuts pay for themselves," then he should not be allowed to vote on that issue. We could apply the same rule in the Senate and House. Can't tell a Sunni from a Shiite? Sit this one out. Don't know the difference between MySpace and YouTube? No votes for you on digital technology issues. The internet is a "series of tubes" you say? You sit down too. Seems like the president should follow the same rules as everyone else, doesn't it? So, for example, if the president can't speak English properly, a word like "nuclear" perhaps, no signing bills in this area until competency has been established. This is, after all, an English speaking country. Vice president too. Shoot someone in the face with a shotgun? That shows a certain lack of competency, so let's leave firearm related legislation to someone else.

    I'm not serious of course, we should make it easier to vote, not harder, and we should do our best at education, but I don't understand the desire to make it more difficult for others to participate in the political process.

      Posted by on Tuesday, July 31, 2007 at 03:33 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (73) 

      In a Surprise, a Republican is Using Scare Tactics Based upon Misleading Claims

      In a thoroughly misleading article designed to scare people about what might happen to the economy because the Republicans did not have the courage to make the tax cuts they enacted permanent, GOP Senator John Kyl says:

      Failing to extend the tax relief we have passed would result in a de facto tax hike that could cripple our economy...

      But according to a recent CBO report:

      CBO director Peter Orszag said, “The short-term effects of [the 2001 and 2003 tax cuts] in stimulating aggregate demand in the economy have largely dissipated by now, and the supply-side effects of those policies are uncertain but are probably small.”

      Some of the tax cuts’ provisions “increased incentives for people to work and save (which can increase growth), but other provisions had no effect on incentives. In addition, the two tax laws increased the budget deficit, and doing so tends to reduce economic growth over the medium and long term. At this point in time (several years after enactment), once those various factors have been taken into account, the overall impact of the tax legislation on the economy is likely to be modest”

      Thus, despite the scare tactics claiming otherwise, it won't "cripple our economy" if we allow the Republican's tax policy to be enacted exactly as written. There's simply no evidence that these tax cuts had a substantial impact on saving, investment, and growth.

      Kyl also uses careful wording to describe tax cuts and deficit reduction:

      The tax relief has helped produce an economy that has generated higher than expected tax revenues for the federal government. Tax receipts have risen 37 percent over the last three years and are projected to increase another 7 percent this year. These rising tax receipts have, in turn, helped drive down the deficit...

      Though it makes it sound like the tax cuts reduced the deficit without actually saying so, i.e. the standard Laffer curve nonsense, as I hope you know by now that didn't happen (as noted above, "the two tax laws increased the budget deficit"). In fact, the supply-side impact of the tax cuts is estimated to be very small, so small that it generated very little tax revenue. From the CBO report:

      the tax cuts’ indirect impact on economic growth, investment and saving and could affect this year’s budget deficit anywhere from an increase of $3 billion to a reduction of $14 billion...

      The CBO report also points out that "without the tax cuts, the budget would probably be in surplus this year".

      Thus, while there is evidence that leaving the Republican tax legislation exactly as they wrote it and allowing the tax cuts to expire will improve the government's fiscal position, there is no evidence that keeping the Republican tax legislation in place will cripple the economy as claimed.

        Posted by on Tuesday, July 31, 2007 at 12:33 AM in Budget Deficit, Economics, Politics, Taxes | Permalink  TrackBack (0)  Comments (18) 

        links for 2007-07-31

          Posted by on Tuesday, July 31, 2007 at 12:24 AM in Links | Permalink  TrackBack (0)  Comments (9) 

          Monday, July 30, 2007

          David Warsh on Amity Shlaes' "The Forgotten Man: A New History of the Great Depression"

          David Warsh takes a look at Amity Shlaes' The Forgotten Man: A New History of the Great Depression and finds that it is "an elaborate cautionary tale..., designed to support a particular interpretation of the present by selective reference to the past." This is part of a longer review:

          Good Old Cal?, by David Warsh, Economic Principles: ...Amity Shlaes' The Forgotten Man: A New History of the Great Depression ... is not fiction, though it reads almost as smoothly as if it were a novel. But neither is it professional history. (The author is a veteran journalist and Bloomberg columnist.) Perhaps it could be thought of as ... an account of various versions of the great event, the interpretations ventured both by those who lived through it and by those who sought to manage it and justify their actions to the public.

          Probably it is more accurate, though, to describe it as an elaborate cautionary tale (464 pages), designed to support a particular interpretation of the present by selective reference to the past.

          Continue reading "David Warsh on Amity Shlaes' "The Forgotten Man: A New History of the Great Depression"" »

            Posted by on Monday, July 30, 2007 at 12:15 PM in Economics | Permalink  TrackBack (0)  Comments (18) 

            Barry Eichengreen: The German Economy: Be Careful What You Ask For

            Barry Eichengreen on challenges facing the German economy if it continues to rely upon manufacturing as an important part of its economic base. Though the focus is on Germany, the message can be applied more broadly:

            The German economy: be careful what you ask for, by Barry Eichengreen, Vox EU: Germans are having a hard time getting their minds around the fact that their economy is doing better. I know this because of a seminar in which I participated in Munich this week to mark the publication of Hans-Werner Sinn’s Can Germany be Saved? – and my own book, The European Economy Since 1945.[1]

            Professor Sinn’s book has actually gone through eleven editions, which in and of itself tells us something about the economy’s survival capacity. But the professor has not changed his hyper-pessimistic views. Growth in Germany has lagged growth in the EU for more than a decade, and there are no reasons for thinking that this will change.

            Continue reading "Barry Eichengreen: The German Economy: Be Careful What You Ask For" »

              Posted by on Monday, July 30, 2007 at 12:06 PM in Economics | Permalink  TrackBack (0)  Comments (37) 

              Paul Krugman: An Immoral Philosophy

              Paul Krugman wonders what sort of philosophy allows health care to be denied to children:

              An Immoral Philosophy, by Paul Krugman, Commentary, NY Times [Update: full column]: ...Congressional Democrats, with support from many Republicans, are trying to expand [the State Children’s Health Insurance Program (Schip)], which already provides essential medical care to millions of children, to cover millions of additional children who ... lack health insurance.

              But President Bush says that access to care is no problem — “After all, you just go to an emergency room” — and, with the support of the Republican Congressional leadership, he’s declared that he’ll veto any Schip expansion on “philosophical” grounds.

              It must be about philosophy, because it surely isn’t about cost. One of the plans ... would cost less over the next five years than we’ll spend in Iraq in the next four months. And it would be fully paid for by an increase in tobacco taxes.

              The House plan, which would cover more children ... offsets Schip costs by reducing subsidies to Medicare Advantage — a privatization scheme that ... costs taxpayers 12 percent more per beneficiary than traditional Medicare.

              Strange to say, however, the administration, although determined to prevent any expansion of children’s health care, is also dead set against any cut in Medicare Advantage payments.

              So what kind of philosophy says that it’s O.K. to subsidize insurance companies, but not to provide health care to children?

              Well, here’s what Mr. Bush said...: “They’re going to increase the number of folks eligible through Schip; some want to lower the age for Medicare. And then all of a sudden, you begin to see a ... a strategy ... to get more people to be a part of a federalization of health care.”

              Now, why should Mr. Bush fear that insuring uninsured children would lead to a further “federalization” of health care...? It’s not because he thinks the plans wouldn’t work. It’s because he’s afraid that they would ...[and] that voters, having seen how the government can help children, would ask why it can’t do the same for adults.

              And there you have the core of Mr. Bush’s philosophy. He wants the public to believe that government is always the problem... But it’s hard to convince people ... when they see it doing good things. So his philosophy says that the government must be prevented from solving problems, even if it can. In fact, the more good a proposed government program would do, the more fiercely it must be opposed.

              This sounds like a caricature, but it isn’t. ...[T]his good-is-bad philosophy has always been at the core of Republican opposition... Thus back in 1994, William Kristol warned against passage of the Clinton health care plan “in any form,” because “its success would signal the rebirth of centralized welfare-state policy at the very moment that such policy is being perceived as a failure in other areas.”

              But it has taken the fight over children’s health insurance to bring the perversity of this philosophy fully into view. ...[D]enying basic health care to children whose parents lack the means to pay for it, simply because you’re afraid that success in insuring children might put big government in a good light, is just morally wrong.

              And the public understands that. According to a recent ... poll, 9 in 10 Americans — including 83 percent of self-identified Republicans — support an expansion of the children’s health insurance program.

              There is, it seems, more basic decency in the hearts of Americans than is dreamt of in Mr. Bush’s philosophy.

              Previous (7/27) column: Paul Krugman: The Sum of Some Fears
              Next (8/3) column: Paul Krugman: A Test for Democrats

                Posted by on Monday, July 30, 2007 at 12:33 AM in Economics, Health Care, Policy, Politics | Permalink  TrackBack (0)  Comments (51) 

                links for 2007-07-30

                  Posted by on Monday, July 30, 2007 at 12:24 AM in Links | Permalink  TrackBack (0)  Comments (0) 

                  Larry Summers: Funds that Shake Capitalist Logic

                  Larry Summers argues there is reason to be concerned about how the sovereign wealth funds. i.e. the build-up of foreign reserves and other assets in the hands of developing countries, might be used:

                  Funds that shake capitalist logic, by Lawrence Summers, Commentary, Financial Times [free - I think]: For some time now, the large flow of capital from the developing to the industrialised world has been the principal irony of the international financial system. ... Indeed, Morgan Stanley has estimated ... that there is now close to $2,500bn in [sovereign wealth funds] SWFs and that this figure will increase to $5,000bn by 2010 and $12,000bn by 2015.

                  Inevitably, and appropriately, countries possessed of publicly held foreign assets far in excess of anything needed to respond to financial contingencies feel pressure to deploy them strategically or at least to earn higher returns than those available in US Treasury bills or their foreign equivalents. ...

                  [A] crucial question for the global financial system ... is how these funds will be invested. The question is profound and goes to the nature of global capitalism. A signal event of the past quarter-century has been the sharp decline in ... government-owned companies. Yet governments are now accumulating various kinds of stakes in what were once purely private companies through their cross-border investment activities. ...

                  To date most of the official commentary on the issue of SWFs has been framed in terms of traditional arguments about cross-border capital flows. US and UK officials have raised concerns that focus only on ... reciprocity and transparency and on ... national security questions. Others, particularly in continental Europe, have been less positive and have emphasised nationalist considerations about the benefits of local ownership and control.

                  What has received less attention are the particular risks associated with ownership by government-controlled entities, particularly ... direct investments. The logic of the capitalist system depends on shareholders causing companies to ... maximise the value of their shares. It is far from obvious that this will ... be the only motivation of governments as shareholders. They may want to see their national companies compete effectively, or to extract technology or to achieve influence.

                  We have seen the degree of concern over News Corp’s attempt to buy The Wall Street Journal. How differently should one feel about a direct investment stake of a foreign government in a media or publishing company?

                  Apart from ... what foreign stakes would mean for companies, there is the additional question of what they might mean for host governments. What about the day when a country joins some “coalition of the willing” and asks the US president to support a tax break for a company in which it has invested? Or when a decision has to be made about whether to bail out a company, much of whose debt is held by an ally...?

                  All of these risks would be greatly mitigated if SWFs invested through intermediary asset managers, as is the case with most institutional pools of capital such as endowments and pension funds. ...

                  To the extent that SWFs pursue different approaches from other large pools of capital, the reasons have to be examined. The most plausible reasons – the pursuit of objectives other than maximising risk-adjusted returns and the ability to use government status to increase returns – are also most suspect from the viewpoint of the global system.

                  None of this is to propose policy. That can come only after the investment policies of SWFs have been much more extensively debated and many details have been clarified. But it is to register a cautionary note... Governments are very different from other economic actors. Their investments should be governed by rules designed with that reality very clearly in mind.

                    Posted by on Monday, July 30, 2007 at 12:15 AM in Economics, Financial System, Policy | Permalink  TrackBack (0)  Comments (13) 

                    Sunday, July 29, 2007

                    "Some People Worry about Peak Oil. I Worry More about Peak Grain."

                    Was Malthus right?:

                    Worry about bread, not oil, by Niall Ferguson, Commentary, telegraph.co.uk [via]: ...Thomas Malthus ... published his Essay on the Principle of Population. [in 1798]... Malthus's key insight was simple but devastating. "Population, when unchecked, increases in a geometrical ratio," he observed. But "subsistence increases only in an arithmetical ratio." In other words, humanity can increase like the number sequence 1, 2, 4, 8, 16, whereas our food supply can increase no faster than the number sequence 1, 2, 3, 4, 5. We are, quite simply, much better at reproducing ourselves than feeding ourselves.

                    Malthus concluded from this inexorable divergence between population and food supply that there must be "a strong and constantly operating check on population". This would take two forms: "misery" (famines and epidemics) and "vice", by which he meant not only alcohol abuse but also contraception and abortion (he was, after all, an ordained Anglican minister).

                    "The vices of mankind are active and able ministers of depopulation," wrote Malthus in an especially doleful passage... "They are the precursors in the great army of destruction; and often finish the dreadful work themselves.

                    "But should they fail in this war of extermination, sickly seasons, epidemics, pestilence, and plague advance in terrific array, and sweep off their thousands and tens of thousands. Should success be still incomplete, gigantic inevitable famine stalks in the rear, and with one mighty blow levels the population with the food of the world."

                    I wish I could have a free lunch for every time I've heard someone declare: "Malthus was wrong." Superficially, it is true, mankind seems to have broken free of the Malthusian trap. ...

                    The conventional explanation for our seeming escape from Malthus is the succession of revolutions in global agriculture, culminating in the post-war "Green Revolution" and the current wave of genetically modified crops.

                    Since the Fifties, the area of the world under cultivation has increased by roughly 11 per cent, while yields per hectare have increased by 120 per cent. ... Yet these statistics don't disprove Malthus. As he said, food production could increase only at an arithmetical rate, and a chart of world cereal yields since 1960 shows just such a linear progression...

                    Meanwhile, vice and misery have been operating just as Malthus foresaw to prevent the human population from exploding geometrically. On the one hand, contraception and abortion have been employed to reduce family sizes. On the other hand, wars, epidemics, disasters and famines have significantly increased mortality.

                    Together, vice and misery have ensured that the global population has grown at an arithmetic rather than a geometric rate. Indeed, they've managed to reduce the rate of population growth from 2.2 per cent per annum in the early Sixties to around 1.1 per cent today.

                    The real question is whether we could now be approaching a new era of misery. Even at an arithmetic rate, the United Nations expects the world's population to pass the 9 billion mark by 2050.

                    But can world food production keep pace? Plant physiologist Lloyd T Evans has estimated that "we must reach an average yield of four tons per hectare. to support a population of 8 billion". But yields right now are ... just three tons per hectare. And a world of eight billion people may be less than 20 years away.

                    Meanwhile, man-made forces are conspiring to put a ceiling on food production. Global warming and the resulting climate change may well be increasing the incidence of extreme weather events as well as inflicting permanent damage on some farming regions.

                    ... At the same time, our effort to slow global warming by switching from fossil fuels to bio-fuels is taking large tracts of land out of food production. According to the OECD, American output of corn-based ethanol and European consumption of oilseeds for bio-fuels will double by 2016. ...

                    Some people worry about peak oil. I worry more about peak grain.

                    The fact is that world per capita cereal production has already passed its peak, which was back in the mid-Eighties, not least because of collapsing production in the former Soviet Union and sub-Saharan Africa. Simultaneously, however, rising incomes in Asia are causing a surge in worldwide food demand.

                    Already the symptoms of the coming food shortage are detectable. The International Monetary Fund recorded a 23 per cent rise in world food prices during the last 18 months. ...

                    "The great question now at issue," Malthus asked more than 200 years ago, "is whether man shall henceforth start forwards with accelerated velocity towards illimitable, and hitherto unconceived improvement, or be condemned to a perpetual oscillation between happiness and misery."

                    For a long time we have deluded ourselves that "illimitable improvement" was attainable. As the world approaches a new era of dearth, expect misery - and its old companion vice - to make a mighty Malthusian comeback.

                      Posted by on Sunday, July 29, 2007 at 10:44 AM in Economics, History of Thought | Permalink  TrackBack (0)  Comments (51) 

                      Alan Blinder: Low Capital Gains Taxes Cause Distortions

                      Alan Blinder discusses distortions that are introduced into the economy when the tax rate on capital gains is lower than the tax rate on other types of income. He begins by explaining the current debate over whether income from private-equity and hedge fund management should be taxed as capital gains or as regular income, and comes down on the side of treating it like ordinary income (see the article for details), and then he asks why the rates should differ at all:

                      The Under-Taxed Kings of Private Equity, by Alan S. Blinder, Economic View, NY Times: An arcane debate is raging in Congress over the appropriate taxation of the bountiful incomes of people who manage private-equity and hedge funds — incomes that can range into the hundreds of millions a year. I don’t recommend trying to master the details unless you have either an accounting degree or insomnia. But one thing is easy to understand, though hard to swallow: Some people who are richer than Croesus are paying 15 cents in federal income taxes on the marginal dollar, while you may be paying 25 or 35 cents...

                      Why do we have a preference for capital gains in the first place? The main argument is that lower taxes on capital gains boost investment. But the evidence on that point is iffy at best, and there are better ways to spur investment, like, say, the investment tax credit. Besides, lower taxes on capital gains reduce the tax bills of the rich relative to the rest of us — after all, they own most of the capital. But in this age of hyper-inequality, shouldn’t we be making the tax code more progressive, not less?

                      A far more important objection is that the tax preference for capital gains undermines capitalism — a system in which capitalists, not the state, are supposed to make the investment decisions. When I discuss this issue with my Economics 101 students, I show them an example of a proposed investment that loses money before tax (and which, therefore, should be rejected) but which actually turns a profit after tax because of the preferentially low capital gains rate. ... The government thus induces people to make bad investments, which is a good way to run an economy into the ground. Come to think of it, that’s just what the old Soviet Union did. It invested copiously, but badly.

                      But would taxing capital gains like other types of income imperil our economy? No. The Tax Reform Act of 1986 did exactly that, and it did not end capitalism as we know it. In fact, the gross domestic product in 1987 and 1988 grew at about the same rate as in 1985 and 1986, and the investment share of G.D.P. barely budged.

                      As the tax debate unfolds, you may find it difficult to follow the mind-numbing complexities. Who doesn’t? So just remember one simple principle: If we tax Activity A at 15 percent and Activity B at 38 percent, a free-market economy will give us more A and less B. Some of this shifting will represent genuine movements of resources out of B and into A — including those bad investments I just mentioned. The rest will be paper manipulations devised to avoid taxes.

                      Which of these do you think our tax code should favor?

                        Posted by on Sunday, July 29, 2007 at 02:07 AM in Economics, Income Distribution, Policy, Taxes | Permalink  TrackBack (0)  Comments (40) 

                        links for 2007-07-29

                          Posted by on Sunday, July 29, 2007 at 12:21 AM in Links | Permalink  TrackBack (0)  Comments (2) 

                          Saturday, July 28, 2007

                          George Borjas: Things Could Have Been Worse under Kerry

                          In response to a recent post, George Borjas argues that things could have been worse under Kerry, something I disagreed with, and still do:

                          More Kerryisms, by George Borjas: One of my remarks about John Kerry in this post has left Mark Thoma a little puzzled. I wrote:

                          No matter how disappointed one is with the Bush administration, all it takes is a little googling of John Kerry's latest nonsense to appreciate that things could be worse.

                          My original post was motivated by Kerry's statement that increasing the minimum wage would be beneficial to employers. It is hard to justify such a statement on the basis of economic models. As Peter Schaeffer wrote in one of the comments to my original post, even an efficiency wage argument makes little sense in this context:

                          If the efficiency effect was large enough, why wouldn't employers raise wages themselves?

                          Nevertheless, Mark has a good point about how very disappointing the Bush years have been. Mark says that "Iraq alone is enough to convince" him that things could not be worse with a President Kerry. I'm not so sure.

                          As I said, all it takes is a little googling to find that Kerry's thoughts on many subjects are, at best, puzzling--and, at least to me, show an undisciplined mind at work. Here are some national security-related examples (all from here):

                          "I'm an internationalist. I'd like to see our troops dispersed through the world only at the directive of the United Nations."

                          "You know, education, if you make the most of it, you study hard, you do your homework and you make an effort to be smart, you can do well. If you don’t, you get stuck in Iraq."

                          On the terrorist threat: "I think there has been an exaggeration."

                          Admittedly, the signature policies of the Bush presidency have been poorly thought out and/or badly managed (e.g., Iraq, Katrina, immigration). And this admission comes from someone who strongly supported Bush the first time around, and less strongly the second time.

                          Despite this, it is far from clear that the U.S. would be better off if things had turned out differently in 2004. What would this counterfactal world look like if the man at the helm was someone who thought that the terrorist threat was exaggerated, who didn't think much of the men and women in uniform, and who was willing to surrender a big chunk of U.S. sovereignty and place the lives of those men and women he didn't think much of under the "directive" of a very corrupt United Nations?

                          On the efficiency wage argument, I agree. As I said originally, I didn't mean to endorse the argument, only try to suggest what Kerry might have had in mind ("Without endorsing Kerry's argument, I believe he has in mind an efficiency wage argument..."). My point was that under the argument I thought Kerry was making, pushing the minimum wage higher and higher would not continue to have benefits for firms. Thus the exercise in George's first point does not, in and of itself, rebut Kerry's claims.

                          On the rest of the post, I have disagreements with all three points, but let me focus on the claim that Kerry does not "think much of the men and women in uniform." How one can say that about a war hero while endorsing someone who has mismanaged the military into disaster after disaster is, well, puzzling (where are George Bush's Purple Hearts, Silver Star, and Bronze Star?). I don't think I need to do a point by point of all the ways George Bush has hurt the military, and directly or indirectly shown disrespect to the men and women in uniform in the process, but I can't see how, say, misleading us into a war that causes needless death and injury on both sides and continuing to push a failed strategy shows much respect for the men and women who pay the costs of Bush's deceptions and decisions.

                          And it may be useful to remind people that this was an attempt at a joke that Kerry got wrong. What he intended to say was:

                          Do you know where you end up if you don't study, if you aren't smart, if you're intellectually lazy? You end up getting us stuck in a war in Iraq.

                          Using a misstated joke to characterize Kerry's position on the troops when there is a whole history that says otherwise is less than fair.

                            Posted by on Saturday, July 28, 2007 at 09:45 AM in Economics, Iraq and Afghanistan, Politics | Permalink  TrackBack (0)  Comments (114) 

                            Is Malt Liquor the Problem?

                            I'm missing something here. I don't see how you get from malt liquor, marijuana use, and alcohol problems later in life are correlated to the conclusion that malt liquor causes marijuana use and alcoholism. I didn't read the study so maybe there's some way to tease causality out of the data, but why should we be surprised that someone who, when given a choice, chooses a high alcohol content beverage, and one that has a relatively low per dollar alcohol cost (see bottom of table 1 for responses to "because it is cheap" and "to get drunk quickly," the two most often cited reasons for choosing malt liquor), would also tend to use other drugs at a higher than average rate and be at a higher risk for alcoholism later in life?:

                            Malt liquor linked to marijuana use among young adults, EurakAlert: Drinking malt liquor -- the cheap, high-alcohol beverage often marketed to teens -- may put young adults at increased risk for alcohol problems and use of illicit drugs, particularly marijuana, according to a new study of malt liquor drinkers and marijuana use by scientists at the University at Buffalo’s Research Institute on Addictions (RIA).

                            “In our study of young adults who regularly drink malt liquor,” reports lead researcher R. Lorraine Collins, senior research scientist at RIA, “we found that malt liquor use is significantly related to reports of alcohol problems, problems specific to the use of malt liquor and to marijuana use above and beyond typical alcohol use.” ...

                            The study consisted of 639 young adults (456 men) of approximately 23 years of age who regularly consume 40 ounces or more of malt liquor per week. ... The participants were heavy drinkers, averaging 30 alcoholic drinks -- including 17 malt liquor drinks -- per week.

                            In addition to malt liquor use, marijuana was the illicit drug of choice, with 46 percent reporting simultaneous use of malt liquor and marijuana. Individuals who used malt liquor and marijuana together smoked 19 marijuana joints, on average, during a typical week, whereas those who did not use the two together smoked two marijuana joints, on average, during a typical week. Very few participants reported regular use of other illicit drugs.

                            For those individuals who use malt liquor and marijuana simultaneously, the study showed that they first drank alcohol at a younger age (between 13 and 14 years) and reported more substance use (particularly marijuana use) and more alcohol-related problems than those who did not use both malt liquor and marijuana together. Sixty-one percent of the participants reported that they consumed one to two 40-ounce containers of malt liquor on a typical drinking occasion. Given malt liquor’s higher alcohol content -- 6-11 percent alcohol -- this level of intake could translate into 3.5 (one 40-oz. bottle at 6 percent) to 14 (two 40-oz. bottles at 11 percent) standard drinks.

                            “These results suggest that regular consumption of malt liquor, beyond that associated with typical alcohol use, may place young adults at increased risk for substance abuse problems,” Collins says. “Although many of these young people may not yet meet diagnostic criteria for alcohol dependence, there is clearly a need for prevention strategies targeted to ... excessive drinking of malt liquor.”

                            I have a hard time believing that stopping people from drinking malt liquor in and of itself will do much, if anything, to prevent addiction problems. If malt liquor disappears, another drink will take its place. The focus needs to be on changing the behavior and thought processes that lead to excessive drinking and drug use, not on eliminating a particular type of drink.

                              Posted by on Saturday, July 28, 2007 at 09:36 AM in Economics, Health Care | Permalink  TrackBack (0)  Comments (9) 

                              Disclosing Conflicts of Interest May Not Help

                              Forcing advisers to disclose conflicts of interest, thereby making it more difficult for them to influence clients in a particular direction, can lead the advisers to make more exaggerated claims:

                              Disclosing Bias Doesn’t Cancel Its Effects, by M.P. Dunleavy, NY Times: ...Nobody likes to be at the mercy of an expert, especially of those who charge for their services and whose trustworthiness can be hard to assess. Mechanics are a common source of this frustration, but there are many others: doctors, plumbers, financial advisers, real estate agents and technical support people, to name a few.

                              We ordinary folks have to gauge, sometimes on the spot, whether a specialist’s opinion is worth the price, and whether that person stands to gain... [R]esearch suggests that consumers would do well to think twice before assuming a professional’s advice is worth the price.

                              Continue reading "Disclosing Conflicts of Interest May Not Help" »

                                Posted by on Saturday, July 28, 2007 at 01:35 AM in Economics | Permalink  TrackBack (0)  Comments (4) 

                                links for 2007-07-28

                                  Posted by on Saturday, July 28, 2007 at 12:22 AM in Links | Permalink  TrackBack (0)  Comments (1) 

                                  Friday, July 27, 2007

                                  Jeremy Piger: A 1.3% Probability We Were in Recession in 2007Q1

                                  Jeremy Piger's monthly recession probability index says there is a 1.5% chance we were in a recession in April, 2007 and the average probability for the first quarter of 2007 is 1.3%:



                                  As Brad DeLong notes, Jim Hamilton's index has the probability at 26.2% for the first quarter of 2007:


                                  Jim's post, part of which is repeated at Brad's, gives more details.

                                    Posted by on Friday, July 27, 2007 at 04:50 PM in Economics | Permalink  TrackBack (0)  Comments (2) 

                                    Questions for Prominent Economists

                                    A couple of things from Greg Mankiw and George Borjas caught my attention, so I want to make sure I understand what they are saying. First, Greg Mankiw says:

                                    Brooks on the Economy, by Greg Mankiw: A prominent Harvard economist emails me to recommend David Brooks's column from a few days ago. He calls it "truly fantastic and obviously correct."

                                    With such a strong recommendation from a colleague, I ... read Brooks. ...[T]he Brooks piece is well worth reading. It is far more informed by cutting-edge economic research than most things you find on the op-ed pages.

                                    In case you missed it, here is Brooks [...reprint of column...]

                                    If Greg is going to claim the authority of a "prominent economist" as standing behind this, he should tell us who that person is, there's no reason for secrecy here, but my question is if Greg (and "prominent economist") stand behind all the claims in Brooks article (see here for a list of posts questioning the claims)? If not, if this isn't a blanket endorsement, could you please give us more guidance as to where you agree or disagree so we can better evaluate your position? There are implications that can be drawn from Brooks's column, e.g. that low-income people are generally lazier than higher income, well-educated people:

                                    today, many highly educated people work like dogs while those down the income scale have seen their leisure time increase by a phenomenal 14 hours a week

                                    so it would be helpful to have positions on this and other points Brooks makes clarified, especially in  light of claims that high taxes have caused high-income individuals to reduce their work effort.

                                    And I was a little bit surprised to find out that George Borjas believes that:

                                    No matter how disappointed one is with the Bush administration, all it takes is a little googling of John Kerry's latest nonsense to appreciate that things could be worse.

                                    This statement is made in the context of the minimum wage, so if the statement is not intended to be broader than policies surrounding the minimum wage, I'm less surprised. But if it is intended as a broader comment, then I have to strongly disagree. Iraq alone is enough to convince me, and that's just the beginning of the missteps from this administration. How could things be worse?

                                    On the other point George is making, in response to a quote from Kerry on how raising the minimum wage can cause "increased productivity, ultimately improving a firm's bottom line," he says:

                                    If a $5.85 minimum wage creates a more "prosperous future for our small businesses" than a $5.15 minimum wage, isn't it a little irresponsible to stop there? Let's go for the $10.00 minimum wage? Or a $15 one? Or...

                                    Without endorsing Kerry's argument, I believe he has in mind an efficiency wage argument where raising wages enhances incentives for low income workers - much as cutting taxes makes the rich work harder in supply-side stories - and thus can stimulate productivity and reduce costs. If so, then one would expect diminishing returns to further increases in the minimum wage so that pushing the wage up to $10 or $15 wouldn't necessarily, by the efficiency wage argument, continue to be worthwhile.

                                    Update: Brad DeLong has follow-up comments.
                                    Update: George Borjas responds.

                                      Posted by on Friday, July 27, 2007 at 01:44 PM in Economics, Income Distribution, Iraq and Afghanistan, Policy, Politics | Permalink  TrackBack (0)  Comments (61) 

                                      "Strengthening IMF Surveillance"

                                      The Managing Director of the International Monetary Fund, Rodrigo de Rato, discusses attempts to and strengthen IMF surveillance over the economic policies of member nations:

                                      Strengthening IMF surveillance, by Rodrigo de Rato, Project Syndicate: In today's globalized economy, one country's economic and financial policies can reverberate far beyond its borders. Be it the spread of inflation or the impact of currency devaluation half a world away, global economic forces can have a direct impact on every person's livelihood. Under such circumstances, international cooperation is essential to ensure stability and growth and prevent disruptive crises. ...

                                      For many years, the IMF has engaged its member countries in a process known as "surveillance," in which it monitors, analyzes, and consults on each country's economic policies - both exchange rate policies and relevant domestic policies. These regular checkups help to identify potential vulnerabilities and maintain economic stability. However, the increasingly complex policy challenges of the globalized economy demand a fresh look at this process.

                                      This June, the IMF's Executive Board did just that... This is one of the most important reforms to the Fund's work in the 30 years since the surveillance process was designed. ...

                                      Continue reading ""Strengthening IMF Surveillance"" »

                                        Posted by on Friday, July 27, 2007 at 12:06 PM in Economics, International Finance | Permalink  TrackBack (0)  Comments (11) 

                                        Paul Krugman: The Sum of Some Fears

                                        Paul Krugman discusses three fears about the economy:

                                        The Sum of Some Fears, by Paul Krugman, Commentary, NY Times: Yesterday’s scary ride in the markets wasn’t a full-fledged panic. The interest rate on 10-year U.S. government bonds — a much better indicator than stock prices of what investors think will happen to the economy — fell sharply, but ... ended the day ... well above its levels earlier in the year. This tells us that investors still consider a recession ... fairly unlikely.

                                        So it wasn’t the sum of all fears. But it was the sum of some fears — three, in particular.

                                        The first is fear of bad credit. Back in March, ... I spun a fantasy about how a global financial meltdown could take place: people would suddenly remember that bad stuff sometimes happens, risk premiums ... would soar, and credit would dry up.

                                        Well, some of that happened yesterday. “The risk premium on corporate bonds soared...,” reported Bloomberg... “And debt sales faltered...” Mark Zandi of Moody’s ... said ... another major hedge fund stumble..., “...could elicit a crisis of confidence and a global shock.”...

                                        But what’s really striking is ... the current angst ... over two things that I thought had been obvious for a long time: the magnitude of the housing slump and the persistence of high oil prices.

                                        I’ve written a lot about housing..., so let me just repeat the basics. Back in 2002 and 2003, low interest rates made buying a house look like a very good deal. As people piled into housing, ... prices rose ... and ... the boom fed on itself...

                                        Eventually the bubble had to burst, and ... it did... And ... past boom-and-bust cycles in housing tells us that it should be several years ... before things return to normal.

                                        I’ve written less about oil prices, so let me emphasize ... we’re now in our third year of very high oil prices..., even though there hasn’t been any major disruption in world oil supply.

                                        It’s pretty clear what’s happening: ...finding new oil is getting a lot harder. Meanwhile, emerging economies, especially in Asia, are burning ever more oil... With demand soaring and supply growth sluggish at best, high prices are what you get.

                                        So why did people seem so shocked by a few more bad housing and oil numbers? What I guess I didn’t realize was how deep the denial still runs.

                                        Over the last couple of years a peculiar conviction emerged among some analysts — mainly, for some reason, among those with right-wing political leanings — that the housing bubble was a myth and that the real bubble was in oil prices.

                                        Each new peak in oil prices was met with declarations that it was all speculation — like the 2005 prediction by Steve Forbes that oil was in a “huge bubble” and that its price would be down to $35 or $40 a barrel within a year. And on the other side, as recently as this January, National Review’s Buzzcharts column declared that we were having a “pop-free” housing slowdown.

                                        I didn’t think many people believed this stuff, but the market’s sudden freakout over housing and oil suggests that I was wrong.

                                        Anyway, now reality is settling in. And there’s one more thing worth mentioning: the economic expansion that began in 2001, while it has been great for corporate profits, has yet to produce any significant gains for ordinary working Americans. And now it looks as if it never will.

                                        Previous (7/23) column: Paul Krugman: The French Connections
                                        Next (7/30) column: Paul Krugman: An Immoral Philosophy

                                          Posted by on Friday, July 27, 2007 at 12:33 AM in Economics, Financial System, Housing, Oil | Permalink  TrackBack (0)  Comments (46) 

                                          links for 2007-07-27

                                            Posted by on Friday, July 27, 2007 at 12:22 AM in Links | Permalink  TrackBack (0)  Comments (1) 

                                            Thursday, July 26, 2007

                                            Traditional News vs. Opinion-Mongering

                                            Traditional news is fading away?:

                                            Make news, not views, by Dan Kennedy, Comment is Free: Don't cry for Paula Zahn. Her show on CNN's US network wasn't all that great, hardly anyone watched... But before her August 2 departure from the House That Ted Turner Built, it's worth pondering what she told Jacques Steinberg of the New York Times:

                                            "We worked so hard to maintain a high quality of objective reporting on the air," she said. "Yet what has become clear when you look at the landscape, particularly in the eight o'clock hour, it seems pretty obvious the audience is drawn to opinion-driven shows. That is not what I do."

                                            Zahn is right. There's less and less news on the three cable news channels - CNN, Fox News, and MSNBC - and that's especially true in the evening, when people might actually be watching.

                                            Zahn had it particularly tough. In her 8-to-9pm time slot, she was up against ... Bill O'Reilly, Fox's loofah-wielding ratings king. MSNBC counters with cable's sole liberal host, Keith Olbermann. The entirely predictable result: Zahn's program is a distant third. ...

                                            Rupert Murdoch's Fox News, which now dominates the market, offers one conservative talk show after another, with the sole exception of Shepard Smith's 7pm newscast. Even Special Report with Brit Hume (how can it be special if it's on every night?), hosted by an actual journalist, tilts noticeably to the right, while primetime hosts O'Reilly and Sean Hannity deal strictly in cartoonish stereotypes. ... Greta Van Susteren offers an hour's worth of tabloid trash before the O'Reilly rerun.

                                            MSNBC's signature personalities are Olbermann and political shouter Chris Matthews...

                                            CNN - the original cable news outlet, ... has done a little better. But its best-known host these days may be Lou Dobbs, whose attacks on illegal immigrants have made him an unlikely star... Larry King's talk show is non-ideological, but it's also non-news. At least the network continues to put on something resembling an actual newscast: Anderson Cooper 360....

                                            CNN's once-sober sibling, Headline News, has gone on a bender with loathsome programs hosted by sob sister Nancy Grace and reactionary doofus Glenn Beck.

                                            It wasn't always this way. Just a few years ago, CNN and MSNBC competed head-to-head with hour-long newscasts at 10pm... Since then, the success of Fox has clearly affected the competition. Opinion is cheaper than news, and apparently more popular, too. ...

                                            The problem with all this opinion-mongering is that it contributes to cynicism about the news and the alleged biases of the folks who report it. ... Thus we have arrived at a point where even the horrors of, say, Abu Ghraib can be dismissed as little more than partisan sniping. ... If the cable news channels can't survive by bringing us, you know, news, then that's a pretty sad commentary.

                                            When I still watched, I was never much impressed with Paula Zahn, partly because the way the show was structured, its "he said-she said" format allowed the impression to emerge that important issues are nothing more than partisan sniping. I stopped watching during the run-up to the last presidential election when there was far too much back and forth argument presented as journalism at a time when people needed much more than that from those responsible for making sense of the world. I remember sending an email to Zahn (which I doubt anyone read) asking why, after one guest had uttered what were demonstrable lies, the guest was invited back for another of CNN's "news" reports to offer more of the "other side," where the other side was nonsense. It didn't seem like there was anything an entertaining guest could say that would prohibit them from being asked to return. There also seemed to be a coziness or mutual reliance between Zahn and many of her guests, guests who were mostly the same mouthpieces recycled again and again on every issue, and the mutual dependence was more than you would hope for from an objective news source. It did not appear she was willing to take any chances, to risk ruffling any feathers by challenging even the obvious distortions, because that would risk access to the guests, those connected with the administration in particular, and potentially bring the scorn of the noise machine standing ever ready to protect its own.

                                            I don't know the answer, it appears that the profit maximizing strategy, i.e. the business strategy that maximizes entertainment value, is not consistent with producing news and information that optimally serves the public interest. But I do know we are not well served by what we have.

                                              Posted by on Thursday, July 26, 2007 at 04:23 PM in Economics, Press | Permalink  TrackBack (0)  Comments (27) 

                                              "I Find It Hard to Take Them Seriously"

                                              Rudy Giuliani thinks he has a great idea - energy independence - and he's going to lead the way:

                                              Leading America Toward Energy Independence, by Rudy Giuliani, Real Clear Politics: America needs to become energy independent. We should have started to move toward energy independence back in the 1970s... Presidents Nixon and Carter talked about energy independence, but not a lot got done. The next President of the United States is going to have to make it a major goal... Most people will say it's impossible... I'm running for president because I know how to get things done.

                                              I will move America toward energy independence... In the long-run, energy independence can become a great industry for America. We can sell our advances to countries like China and India. They need energy independence even more than we do... The government has to approach energy independence the way we put a man on the moon. ...

                                              I'm going to turn this over to Jim Hamilton:

                                              Finally, it is worth pointing out that, even if the U.S. somehow were to achieve energy self-sufficiency, that would not be the same thing as energy independence. It is hard to envision an arrangement that could effectively decouple the price of oil in the U.S. from that elsewhere in the world, even if our imports were zero. As a result, even if we were importing no oil from Saudi Arabia, I would expect a disruption in Saudi production to still have a very dramatic effect on the price that consumers pay in the U.S.

                                              For these reasons, I am open to discussion about the extent to which it might be desirable to try to reduce the amount of oil that the U.S. imports, and strategies for achieving that goal. But when someone talks about "energy independence", I find it hard to take them seriously.

                                              It's hard to take Giuliani seriously in any case.

                                              Update: Free Exchange at The Economist follows up with "how vacuous such ideas really are."

                                                Posted by on Thursday, July 26, 2007 at 03:33 AM in Economics, Oil, Politics | Permalink  TrackBack (0)  Comments (29) 

                                                David Wessel: Globalization Study Moves Past Rhetoric

                                                While I've had issues with material on the Wall Street Journal's editorial page, and today is no exception, I want to be careful to separate what goes on there from what gets presented elsewhere in the WSJ.

                                                David Wessel's Capital column is not on the editorial page, and it does not belong there. I don't always agree with everything he says, and I don't always disagree either, but I never get the impression that facts are twisted to sell a preconceived notion:

                                                Globalization Study Moves Past Rhetoric, by David Wessel, WSJ: Most of the policy briefs, working papers and trade-association reports that cross a columnist's desk slide easily into the trash can or onto the read-someday pile.

                                                But a recent study on globalization, commissioned by the Financial Services Forum, an association of the chief executives of 20 huge financial companies, ranging from American International Group and Citigroup to UBS and Wachovia, stands out.

                                                The analysis, written by a former member of President Clinton's Council of Economic Advisers, a former member of President Bush's and a former Bush Commerce Department official, says:

                                                (1) Globalization is good for the U.S. economy. (No surprise coming from a bunch of financial firms that make money doing business across borders.)

                                                (2) Gains from globalization aren't evenly shared. (A little surprising, but in the past couple of years, there has been a willingness among business to publicly acknowledge that economic reality.)

                                                (3) To avoid a backlash against globalization, governments and businesses must come up with new ways to spread its benefits more widely and assist those hurt by all sorts of economic change. (Very surprising, more like a Democratic candidate's talking points than a report issued and promoted by an outfit led by Citigroup Chief Executive Charles Prince and Don Evans, the former Bush commerce secretary.

                                                What's Going On? Business interests with a strong stake in globalization ... see rising public anxiety about globalization as a threat. And they realize that preaching the gospel of comparative advantage isn't going to win the debate.

                                                "The mounting opposition is in response to the other side of globalization -- outsourcing of jobs, economic dislocation, anxiety and fear," the forum said ... early this year. "Making the case for trade and globalization requires...a list of specific, meaningful, practical, cost-efficient, and effective public- and private-sector responses to the reality that while the aggregate benefits of free trade and globalization are tremendous, it can sometimes bring with it painful dislocations for individuals, families, towns, regions, even entire industries." ...

                                                Some business executives, prodded by politicians such as House Ways and Means Chairman Charles Rangel, finally are realizing that trade-friendly Democrats will be overwhelmed by trade skeptics unless there is something tangible to offer workers worried about their livelihoods and their children's. A new Pew Global Attitudes survey finds Americans generally optimistic about the next five years, but only 31% expect their children's lives will be better than their own; Europeans are even more pessimistic. By contrast, 81% of the Chinese expect their children to do better.

                                                The Financial Services Forum report is, in part, a response to that. The specifics are intriguing ... because they move beyond inadequate approaches such as making the failing Trade Adjustment Assistance program for dislocated workers a tad more generous.

                                                Among the Proposals: Raise taxes on winners to share benefits of globalization more widely. Replace TAA and unemployment insurance with a big new program for displaced workers that offers wage insurance to ease the pain of taking a lower-paying job. Provide for portable health insurance and retraining. Create a way for communities to ensure their tax base against big factory closures. Eliminate tax hurdles for businesses that do what International Business Machines is proposing: Offer 50 cents for every $1 (up to $1,000 a year) that workers set aside to pay for training. ...

                                                Grant Aldonas of the Center for Strategic and International Studies think tank, one of the report's three authors [said] "...We are renegotiating the social contract in America, but we're letting it be done by the United Auto Workers and Delphi, and leaving a lot of others out -- including the poor and the businesses on the leading edge."

                                                Mr. Aldonas and his co-authors, Dartmouth's Matthew Slaughter and Harvard's Robert Lawrence, ... say the U.S. need not accept as inevitable the steady widening of the gap between economic winners and losers, an inequality that threatens to produce barriers to trade, investment and immigration that will hurt U.S. prosperity. ...

                                                Now the question is whether business will go beyond talk. As C. Fred Bergsten ... puts it: "They haven't gone to the mat and talked to Charlie Rangel and Democrats who are wavering, if not worse, and said, 'We want to support a meaningful program of wage insurance, and we'll be willing to give up some of our beloved tax breaks to pay for it.' "

                                                One troubling sign: Although forum chief executives issued statements blessing the new report, not one has been willing to talk to a Wall Street Journal reporter about it.

                                                One thing that bothers me about the whole inequality debate is the presumption that the winners deserve their incomes because it reflects their contribution to the firm, i.e. it is the wage that would be earned in well-functioning competitive markets, with the reward is equal to the person's marginal contribution to the firm. Thus, the analysis often begins with the idea that any tax takes away someone's hard-earned income and redistributes it elsewhere.

                                                But for the incomes where inequality is rising most - those at the very top of the income distribution - this is a questionable claim. The idea that the salary of a CEO or hedge fund manager is set by competitive markets, or even approximately so, seems unlikely, or at least open to serious question. It should not just be assumed in these debates.

                                                If the incomes of the winners are higher than they would be in a competitive market, then many of the arguments against taxing their "hard-earned money" melt away. For example, if a person would earn $1,000,000 in a competitive market, but because of market imperfections earns $1,200,000 instead, is it unfair to tax away the extra $200,000?

                                                At a 33% tax rate in a competitive market, after-tax income would be $667,000, i.e. the competitive income of $1,000,000 minus 33%. At the non-competitive income of $1,200,000, it would take a tax rate of around 44% to leave the person equally well off (i.e. $1,200,000 - 44% of $1,200,000 =  approx. $667,000).

                                                For this reason, I would argue that tax rates such as the 44% rate in this example are not as high as they might seem. Part of the tax simply levels the playing field, i.e. taxes away the income in excess of the competitive level, and the tax rate is then 33%, not 44%, on the part of income that would be earned in a competitive market.

                                                Update: Free Exchange at the Economist has a different take on this issue.

                                                  Posted by on Thursday, July 26, 2007 at 12:24 AM in Economics, Market Failure, Policy, Taxes | Permalink  TrackBack (0)  Comments (46) 

                                                  FRB Dallas: Measuring the Taylor Rule's Performance

                                                  Adriana Z. Fernandez and Alex Nikolsko-Rzhevskyy of the Dallas Fed review the performance of Taylor Rules as a guide to monetary policy:

                                                  Measuring the Taylor Rule's Performance, by Adriana Z. Fernandez and Alex Nikolsko-Rzhevskyy, Economic Letter, FRB Dallas: In the Full Employment and Balanced Growth Act of 1978, Congress gave the Federal Reserve two goals: Keep inflation low and stable while promoting economic growth.[1] Financial markets, businesses, economic analysts and others expend considerable effort trying to fathom how the Fed attempts to meet its dual mandate.

                                                  One tool for understanding Fed policy is the Taylor rule, with its many variations. The brainchild of Stanford University's John B. Taylor, it relates output and inflation to the historical behavior of the federal funds rate—the Fed's most important policy lever—to show the general way the central bank responds to changing economic circumstances. The Taylor rule recognizes the Fed's two monetary policy goals, with rates rising to control inflation when it gets too high and falling to stimulate output and employment when the economy turns sluggish.

                                                  The Fed doesn't explicitly follow the Taylor rule or any other formula in making decisions. Instead, the Federal Open Market Committee studies a wide range of information to determine the best course of action. Nonetheless, the rule has proven a reasonable guide to how the federal funds rate adjusts to economic developments.

                                                  The Fed has taken steps in recent years to increase the transparency of its decision-making, hoping that clearer communication will improve the public's comprehension of its actions, thereby enhancing the economy's performance. In a similar way, the Taylor rule has contributed to better understanding of monetary policy by providing a general guide to how the Fed operates.

                                                  What makes a good Taylor rule? We addressed this issue by using a recently developed econometric technique to determine how the original rule and subsequent variations perform using different measures of inflation, output and unemployment. We found that the rule remains relevant today, despite the changes wrought by globalization, financial market innovations and technological advances.

                                                  Continue reading "FRB Dallas: Measuring the Taylor Rule's Performance" »

                                                    Posted by on Thursday, July 26, 2007 at 12:15 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (1) 

                                                    links for 2007-07-26

                                                      Posted by on Thursday, July 26, 2007 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (0) 

                                                      Wednesday, July 25, 2007

                                                      The Plot against FDR

                                                      An email brings a link to a radio program at the BBC on an attempted coup during the Roosevelt presidency:

                                                      The Whitehouse Coup, BBC: Document uncovers details of a planned coup in the USA in 1933 by right-wing American businessmen  The coup was aimed at toppling President Franklin D Roosevelt with the help of half-a-million war veterans. The plotters, who were alleged to involve some of the most famous families in America, (owners of Heinz, Birds Eye, Goodtea, Maxwell Hse & George Bush’s Grandfather, Prescott) believed that their country should adopt the policies of Hitler and Mussolini to beat the great depression. Mike Thomson investigates why so little is known about this biggest ever peacetime threat to American democracy. [Listen to this programme in full] [View a picture gallery of images related to this edition]

                                                      I'm not overly familiar with this episode, so here's what Wikipedia has to say:

                                                      Business Plot, Wikipedia: The Business Plot, The Plot Against FDR, or The White House Putsch, was an uncovered conspiracy involving several wealthy businessmen to overthrow President Franklin D. Roosevelt in 1933.

                                                      Purported details of the matter came to light when retired Marine Corps Major General Smedley Butler testified before a Congressional committee that a group of men had attempted to recruit him to serve as the leader of a plot and to assume and wield power once the coup was successful. Butler testified before the McCormack-Dickstein Committee in 1934. In his testimony, Butler claimed that a group of several men had approached him as part of a plot to overthrow Roosevelt in a military coup. One of the alleged plotters, Gerald MacGuire, vehemently denied any such plot. In their final report, the Congressional committee supported Butler's allegations on the existence of the plot, but no prosecutions or further investigations followed, and the matter was mostly forgotten.

                                                      General Butler claimed that the American Liberty League was the primary means of funding the plot. The main backers were the Du Pont family, as well as leaders of U.S. Steel, General Motors, Standard Oil, Chase National Bank, and Goodyear Tire and Rubber Company. A BBC documentary claims Prescott Bush, father and grandfather to the 41st and 43rd US Presidents respectively, was also involved. ...

                                                      Continue reading "The Plot against FDR" »

                                                        Posted by on Wednesday, July 25, 2007 at 02:43 PM in Economics, Social Insurance | Permalink  TrackBack (0)  Comments (24) 

                                                        Brad DeLong: Robert Samuelson's "Intellectual Three-Card-Monte"

                                                        Since Brad took the time to do this good deed, I should help out as I can, so here's his reaction to Robert Samuelson's latest column:

                                                        Carbon Blogging: "In That Case, We Have No Time to Lose. Plant [the Trees] This Afternoon!" (Why Oh Why Can't We Have a Better Press Corps?/Robert J. Samuelson Is a Bad Person/Washington Post Edition), by Brad DeLong: Mark Thoma does an evil deed by telling me that somebody should take note of Robert Samuelson. And he's right: somebody should. But why does it have to be me?

                                                        First, some history: The last time we tried to put a "Pigou tax" on carbon emissions--back in 1993 with the Gore BTU tax proposal--Robert Samuelson opposed it: "Congress," he said, "should... deliver a firm message: We won't pass this [energy] tax... [without] more spending cuts. This would give Congress more time to evaluate the energy tax and put more pressure on the White House to cut spending.... Congress... [should not] be stampeded."

                                                        Remember that: Robert Samuelson did not want Congress to be "stampeded" into including a carbon tax in the 1993 reconciliation bill.

                                                        Economists believe that things work well when the incentives individuals face--the good or ill that their actions cause for themselves--match up to the good or ill of the impact that their actions have on society as a whole. Thus our liking for energy taxes...: ...a tax on carbon makes [individuals] feel that harm in their pocketbook and so matches up individual incentives with social outcomes. That's what the Gore BTU tax proposal was trying to do.

                                                        There are in general two ways that you can match private incentives with social outcomes.

                                                        Continue reading "Brad DeLong: Robert Samuelson's "Intellectual Three-Card-Monte"" »

                                                          Posted by on Wednesday, July 25, 2007 at 11:16 AM in Economics, Environment, Policy, Press | Permalink  TrackBack (0)  Comments (27) 

                                                          Jeffrey Sachs: Peace through Economic Development

                                                          Jeff Sachs uses Darfur to illustrate the connections between the natural environment, poverty, population growth, and war:

                                                          No development, no peace, by Jeffrey D. Sachs, Project Syndicate: Anyone interested in peacemaking, poverty reduction, and Africa's future should read the new United Nations Environment Program (UNEP) report "Sudan: Post-Conflict Environmental Assessment." ... It is a vivid study of how the natural environment, poverty, and population growth can interact to provoke terrible human-made disasters like the violence in Darfur.

                                                          When a war erupts, as in Darfur, most policymakers look for a political explanation and a political solution. This is understandable, but it misses a basic point. By understanding the role of geography, climate, and population growth in the conflict, we can find more realistic solutions than if we stick with politics alone.

                                                          Extreme poverty is a major cause, and predictor, of violence. The world's poorest places, like Darfur, are much more likely to go to war than richer places. This is not only common sense, but has been verified by studies and statistical analyses. ...

                                                          Extreme poverty has several effects on conflict.

                                                          Continue reading "Jeffrey Sachs: Peace through Economic Development" »

                                                            Posted by on Wednesday, July 25, 2007 at 04:05 AM in Economics, Policy | Permalink  TrackBack (0)  Comments (39) 

                                                            Caroline Baum: 'Imported' Inflation?

                                                            Caroline Baum on the source of inflation:

                                                            'Imported' Inflation? Try 'Made in the U.S.A.', by Caroline Baum, Bloomberg.com: For years globalization was touted ... in terms of the low prices it delivered to consumers. It was unqualified bad news only if you happened to be the fellow who made the goods now being produced in China.

                                                            Now the tide has turned. After more than a decade of ''exporting'' deflation, ... the ... price of Chinese imports to the U.S. has risen in the last few months, triggering predictable reactions based on faulty assumptions.

                                                            Specifically the question is, can one country import inflation from another? In the case of China and the U.S., it depends on whether one is flying from east to west or west to east. China pegs its currency to the U.S. dollar. ... If the U.S. inflates, China inflates, not the other way around. ...

                                                            The broader issue is whether a sovereign nation with an independent central bank can import inflation -- or deflation -- from overseas. ...

                                                            Forget about borders and exchange rates for a moment and think about individual prices in the domestic economy. Let's say the price of oil goes up because demand increases. Is that inflationary?

                                                            Former Federal Reserve Chairman Alan Greenspan used to explain to Congress that relative price changes are not inflationary per se. ... For a given stock of money, a rise in the price of oil may translate into a one-time rise in the price level. With time, the price of something else will fall as consumers cut back on non-oil purchases.

                                                            The same is true for the price of imports. If consumers have to pay more for items made in China, they will have less money to spend on domestic goods and services and other foreign imports --unless the central bank accommodates those higher prices by allowing the money supply to increase.

                                                            So it is always and everywhere the province of the central bank to determine its domestic inflation rate. ... As long as globalization doesn't mean one world central bank -- Trilateral Commission and Bilderberg Group conspiracy theorists, restrain yourselves -- ''flexible exchange rates give countries the independence to set their own inflation goals,'' Glassman says. ''That insulates everyone else from what you choose to do.''

                                                            And as for price shocks, the central bank has the ability to offset them, whether they occur at home or abroad. Inflation isn't transmitted via spores in the air. It's a monetary phenomenon, and as such, starts and ends on native shores. Globalization hasn't made central banks impotent. ...

                                                            Let me add a bit to the last paragraph. Inflation is caused by money growth and in the long-run inflation and money growth move together, but there can also be episodes of inflation in the short-run as relative prices adjust to oil price or other shocks. However, whether or not the movement of prices from one level to another in response to shocks should be called inflation is a matter of definition, some monetary economists reserve the term inflation for a continual run-up in the price level, not a one-time change to a new level, but whatever such movements in prices are called there's still a role for central banks to play in response to shocks that cause short-run movements in the price level.

                                                              Posted by on Wednesday, July 25, 2007 at 02:16 AM in Economics, Inflation | Permalink  TrackBack (1)  Comments (7) 

                                                              links for 2007-07-25

                                                                Posted by on Wednesday, July 25, 2007 at 12:33 AM in Links | Permalink  TrackBack (0)  Comments (1) 

                                                                The First Mach 3 Flight: The XB-70A

                                                                Seeing an uncle of mine this summer reminded me to make an image of this, which is getting very old and brittle. I don't mean to bore you with my scrapbook, this is just so I have a digital copy, but maybe someone will be interested. It's a postcard, and the test pilot signatures (Al White and Joe Cotton) from the first flight to break the Mach 3 barrier:

                                                                Continue reading "The First Mach 3 Flight: The XB-70A" »

                                                                  Posted by on Wednesday, July 25, 2007 at 12:24 AM in Miscellaneous, Technology | Permalink  Comments (7) 

                                                                  Tuesday, July 24, 2007

                                                                  On the Editorial Pages

                                                                  People have, rightly, jumped all over the David Brooks column today in the New York Times that tries to spin a positive story about rising inequality. He is effectively rebutted at:

                                                                  There are also questions about whether he came up with this himself, or whether he was fed (and willingly ate) the data and arguments:

                                                                  If so, and it's hard to believe he did this by himself, I wonder who's feeding him?

                                                                  There is another editorial today, this one in the WSJ, that also deserves a little scrutiny. Apparently Paul Krugman's column on competition among high-speed internet service providers rattled some cages and brought this response from Robert McDowell, a commissioner on the Federal Communications Commission. ("Mr. McDowell is a George W. Bush appointee. He is a former FCC lobbyist from Virginia for telephone companies.")

                                                                  As you read this keep in mind that when you don't have an argument to offer in rebuttal, a common tactic is to attack the data. The scare tactics, beginning in the second paragraph with every "heavy-handed" possibility he could come up with, also point to the lack of effective counterargument Modern market-based telecommunications regulation that promotes competition through correct market incentives does not fit the "mandates" description he gives, not at all, e.g. see "Designing Incentive Regulation for the Telecommunications Industry," by David E. M. Sappington and Dennis L. Weisman. So his "heavy-handed government mandates" are nothing more than scare tactics. And when argument actual is provided, it's less than convincing:

                                                                  Broadband Baloney, by Robert M. McDowell, Commentary, WSJ: American consumers are poised to reap a windfall of benefits from a new wave of broadband deployment. But you would never know it by the rhetoric of those who would have us believe that the nation is falling behind, indeed in free fall.

                                                                  Looming over the horizon are heavy-handed government mandates setting arbitrary standards, speeds and build-out requirements that could favor some technologies over others, raise prices and degrade service. This would be a mistaken road to take -- although it would hardly be the first time in history that alarmists have ignored cold, hard facts in pursuit of bad policy.

                                                                  Exhibit A for the alarmists are statistics from the Organization for Economic Cooperation and Development. The OECD says the U.S. has dropped from 12th in the world in broadband subscribers per 100 residents to 15th.

                                                                  The OECD's methodology is seriously flawed, however. According to an analysis by the Phoenix Center, if all OECD countries including the U.S. enjoyed 100% broadband penetration -- with all homes and businesses being connected -- our rank would fall to 20th. The U.S. would be deemed a relative failure because the OECD methodology measures broadband connections per capita, putting countries with larger household sizes at a statistical disadvantage.

                                                                  I need to jump in here. This whole thing about household sizes, which he makes a big deal of, is a red herring. If you look at this table you see that if you do it as subscribers per household, not per capita, France goes from having slightly more penetration than the US to slightly less. Big deal. And Japan still has higher penetration. Back to the "counterargument":

                                                                  Furthermore, the OECD does not weigh a country's geographic size...

                                                                  This is followed by an argument where the author, surprise, "does not weigh a country's geographic size." Comparing the number of "Wi-Fi hot spots" in the U.S. to the number in smaller countries doesn't tell us much:

                                                                  The OECD conclusions really unravel when we look at wireless services, especially Wi-Fi. One-third of the world's Wi-Fi hot spots are in the U.S., but Wi-Fi is not included in the OECD study...

                                                                  Most American Wi-Fi users do so with personal portable devices. It is difficult to determine how many wireless broadband users are online at any given moment, since they may not qualify as "subscribers" to anyone's service.

                                                                  In short, the OECD data do not include all of the ways Americans can make high-speed connections to the Internet, therefore omitting millions of American broadband users. Europe, with its more regulatory approach, may actually end up being the laggard because of latent weaknesses in its broadband market.

                                                                  The portable device usage isn't included for other countries either, so it's not clear how this adjustment would turn out without actually doing the calculations. Also, when he says "Europe ... may actually end up being the laggard," he implies Europe is not the laggard now, contrary to the impression he is trying to give. Oh well, that's what happens when you are grasping for any argument that might convince the unwary. Continuing:

                                                                  Our flexible and deregulatory broadband policies provide opportunities for American entrepreneurs to construct new delivery platforms enabling them to pull ahead of our international competitors. For instance, newly auctioned spectrum for advanced wireless services will spark unparalleled growth and innovation.

                                                                  Soon, we will auction even more spectrum in the broadcast TV bands to spur more broadband competition. In addition, we are in the midst of testing powerful new technologies to use in spectrum located in the "white spaces" between broadcast TV channels.

                                                                  This is all wonderful news for our future.

                                                                  But the point is that we are behind now. What happens in the future is a guess, not a certainty, and does not rebut the existing statistics on high-speed access that have been given. He also says:

                                                                  In a competitive market, consumer demand compels businesses to innovate. ...

                                                                  Yes, in a competitive market that's true. But these markets are not competitive and that's why we need incentive based regulation to ensure a robust, competitive, telecommunications market. Continuing again:

                                                                  When it comes to broadband policy, let's put aside flawed studies and rankings, and reject the road of regulatory stagnation. ... Belief in entrepreneurs and a light regulatory touch is the right broadband policy for America.

                                                                  Better yet, "when it comes to broadband policy, let's put aside flawed" editorials and reject scare tactics. Belief in regulation of monopoly power "is the right broadband policy for America."

                                                                  Update: Tyler Cowen has more on the WSJ commentary.

                                                                    Posted by on Tuesday, July 24, 2007 at 06:12 PM in Economics, Market Failure, Policy, Regulation | Permalink  TrackBack (0)  Comments (18) 

                                                                    Jagdish Bhagwati: Treat Illegal Immigrants Decently

                                                                    Jagdish Bhagwati on illegal immigration:

                                                                    Treat illegal immigrants decently, by Jagdish Bhagwati, Commentary, Financial Times: ...US immigration reform ... collapsed in the Senate on June 28 and the nation was left more polarised than ever. What went wrong? ...

                                                                    The main problem ... was that the 1986 Immigration Reform and Control Act had tried similar reforms ... but had failed. Many who opposed the proposed reforms knew this and would not go along..., convinced that history would repeat itself. As John Kenneth Galbraith once said about his foe Milton Friedman: “Milton’s problem is that his policies have been tried.”

                                                                    The IRCA had a two-pronged strategy. The amnesty would take care of the stock of illegals, estimated at 6m. Only half took advantage of it, leaving an equal number in illegal status... The flows of illegals were to be taken care of through enforcement at three levels: enhanced border enforcement, employer sanctions and raids against illegals who were already in the US.

                                                                    None of these worked. Borders could not be controlled unless you were willing to be rough. But you could not be, because illegal immigrants are human beings... [T]hose caught were not incarcerated but simply sent across the border and came back again and again till they got through. ...

                                                                    As for employer sanctions, hardly any legal actions against employers were undertaken. But even if there had been, few judges would have used draconian punishment against those giving employment to the “huddled masses” seeking work. Equally, few Americans could contemplate with equanimity a manifold increase in disruptive raids against illegals that many considered inhumane.

                                                                    So, the IRCA predictably did not eliminate the problem. By the time the new reforms were being proposed, the stock of illegals had in fact doubled to an estimated 12m ..., with a yearly absorption of 300,000 illegal workers in the labour force.

                                                                    The only significant change proposed from the failed IRCA approach was that Mr Bush had asked for a temporary guest-worker programme. The idea was that it would siphon off most of the illegals into a legal channel. But by the time it had been moulded and mauled through successive compromises, it could not be expected to do much...

                                                                    But all is not lost. Once passions aroused by the proposed reforms have cooled, Americans should be ready to see that a way must be found to treat illegals with the decency and respect that humanity requires, while respecting equally the innate American sense that laws matter. ... Perhaps a different and more realistic approach might get us what we could not achieve with uncompromising proposals.

                                                                    In particular, why not build on the unappreciated fact that the illegals are not today the underclass with few rights that they were for many years? ... With vastly increased ethnic minority populations, especially Hispanic, the illegals enjoy a higher comfort level than at the time of the IRCA. ... There are numerous non-governmental organisations, such as the National Council of La Raza and civil rights groups such as the American Civil Liberties Union, that give the illegals a substantial sense of protection.

                                                                    If asking for full citizenship through the amnesty is currently impossible, we can work instead to raise this comfort level to something much closer to what citizenship brings, without asking for full citizenship. Cities such as New Haven have begun to do this. It never makes sense for the best to be the enemy of the good.

                                                                    Here's more on the reference to New Haven:

                                                                    New Haven opts to validate its illegal residents, csmonitor.com: At a time when a rising number of states and cities are cracking down on illegal immigrants, New Haven, Conn., is reaching out to them with a unique perk: an ID card.

                                                                    Besides serving as identification for bank services and if police ask for ID, the card can be used at municipal locations such as libraries, beaches, and parks – and as a debit card for city parking meters and at 15 downtown shops.

                                                                    Cities – and critics – ... are watching closely as New Haven prepares to hand out its first batch of cards July 24. The idea: integrate illegal immigrants into the community, protect them from crime that can happen because of a lack of documentation, and encourage them to be more willing to report crimes to police. Reaction to the first-of-a-kind program has been swift and sharp, illustrating the wide divide in US public opinion over the issue. ...

                                                                    In New Haven, the main motivation for the ID cards was public safety, says Kica Matos, the city's community services administrator and a main initiator of the program. One reason the illegal immigrant community doesn't trust the police and doesn't come forward to report crimes is that police invariably ask to see ID. ...

                                                                    The card isn't just for illegal immigrants, either, Matos says. It was designed to be useful for all residents, she adds, so it wouldn't be regarded as a "scarlet U" for "undocumented."

                                                                    The city has fielded calls from governments and immigrant-rights groups in New York, San Francisco, and Washington State, she says. "There's a lot of buzz around the card, but they're waiting for us to get our program rolling."

                                                                      Posted by on Tuesday, July 24, 2007 at 12:51 PM in Economics, Immigration, Policy | Permalink  TrackBack (0)  Comments (56) 

                                                                      Should Rawls be Banished?

                                                                      John Rawls seems to be showing up in discussions quite a bit lately:

                                                                      Liberals' misplaced love of John Rawls, by Linda Hirshman, TNR: The year 2006 marked the thirty-fifth anniversary of the publication of the Bible of twentieth-century liberalism, John Rawls's A Theory of Justice. ... In over 500 densely argued pages, Rawls claimed that politics had to be conceived in fundamentally moral terms." ...

                                                                      Rawls's appeal is that he created a justification for the liberal state that did not require a lot of apparatus. No appeals to history, no metaphysics about how people differ from animals, no lists of virtuous political values to constrain the process. Just close your eyes, Rawls said, and think of what kind of political society you would make if you didn't know who you were. Black, white, male, female, smart, dumb--you might be anyone who would then have to live in the society you imagined. Rawls said if you did this, you'd produce unlimited free speech and moderately redistributive capitalism. ...

                                                                      Perversely, Rawlsian liberalism also produced a slippery slope into its opposite, complete selfishness. After all, unless you could achieve the degree of selflessness he required, there was no other place to stop. John Gray, the wandering Brit of contemporary philosophy, correctly called Rawls's hegemony "the legal disestablishment of morality." The game that Rawls set in motion, designed to eliminate common preexisting political values, could also produce the result that everybody simply advocated for himself.

                                                                      It is not a coincidence that the only successful two-term Democratic presidency of the Age of Rawls was engineered in part for Bill Clinton by Bill Galston, a political theorist with a background in classical thought. Although Galston pays due homage to Rawls, his crucial work is ends-driven, not justified on the blindness of the procedure... Rawls's work--the best effort to take a tradition grounded in the bourgeois revolutions of the seventeenth and eighteenth centuries--and make it relevant to a modern, industrial state simply left the country to the conservatives.

                                                                      As intellectuals have struggled to get the basic Rawlsian framework to work in the real world, none have made the argument for the metaphysical assumptions that must be a part of their political prescriptions. Even now, liberal thinkers like Paul Starr and Michael Tomasky, who are trying to generate richer visions for liberalism, cannot completely free themselves from Rawls's legacy.

                                                                      This failure is but the sorry hangover of the years of Rawls. Make a public, political argument for classical political virtues of courage, philanthropy, and temperance, and armies of philosophy professors and various amateurs emerge from the blogosphere to remind you that Aristotle's metaphysics supported slavery. What is then left? But such insistence on purity is a victory only for those for those who would rather the Right be President. It is time for the thinkers of the Democratic revival to leave the senior common room.

                                                                      I don't know as much about Rawls as I should - it's not something I rely upon when I think about government intervention - so for a bit more on Rawls I'll turn it over to Brad DeLong. He wrote this in response to a recent op-ed by Greg Mankiw that mentions Rawls as a basis for redistribution, though I've cut the part that responds directly to Greg:

                                                                      Let's Not Tell Hilzoy!, by Brad DeLong: ...Rawls does not think that the primary goal of public policy should be to redistribute resources to help those at the very bottom. Rawls thinks that the first goal of public policy is to maximize liberty for all. He thinks that the second goal of public policy is to make everybody better off. Redistribution plays third fiddle in Rawls's orchestra: it is a constraint on social wealth maximization--things that make people better off must be shared: choose that set of social and economic arrangements that makes everybody better off, but don't choose a set of social and economic arrangement that makes some people better off at the price of making the worst-off even worse off.

                                                                      Here is what I think is the best way to think of this third point, of Rawls's "Difference Principle":

                                                                      A group of people are sitting around the campfire, after a hard day's worth of work and pay in which what jobs people did and how hard they worked and how they were rewarded was determined by some complicated and not very transparent process.

                                                                      Looking around, the person who is worst off says: "Hey! Wait a minute! This isn't fair. Everybody else is better off than I am."

                                                                      And one of the others replies: "I'm sorry. You do get less than everybody else. But we set things up in the best way we could. Given the constraints imposed by human psychology and the natural world, we couldn't have set things up in any way so that you would have been better off."

                                                                      "Oh. That's OK then."

                                                                      According to Rawls, an arrangement that passes this test is "just" and "fair."

                                                                      Now I don't think that Rawls has it correct: I don't think that socioeconomic arrangements that pass Rawls's test are necessarily just, and I don't think socioeconomic arrangements that are just necessarily pass Rawls's test. There are too many lexicographic orderings wandering around Rawls's setup for any economist to be happy with it...

                                                                        Posted by on Tuesday, July 24, 2007 at 04:32 AM in Economics, Income Distribution, Policy, Politics | Permalink  TrackBack (0)  Comments (28) 

                                                                        George Borjas on Immigration and the Minimun Wage: "Am I the Only One Who Finds the Contradictory Inferences Disturbing?"

                                                                        George Borjas is puzzled:

                                                                        The Minimum Wage And Immigration: A Puzzle, by George Borjas: The federal minimum wage is rising today for the first time in a decade, from $5.15 to $5.85 an hour. And this reminds me of an important puzzle in labor economics that remains unresolved ... between the studies that examine the impact of a rising minimum wage on employment and those that examine the impact of immigration on wages.

                                                                        Many studies in each of these literatures calculate correlations between wages and employment across cities or geographic regions. The minimum wage studies, for instance, relate changes in employment across states to changes in the minimum wage across states. The immigration studies relate changes in wages across regions to immigration-induced changes in supply. ...

                                                                        The ... two sets of studies draw completely contradictory inferences from the data. On the one hand, the minimum wage literature often finds that a regression of employment on wages reveals a near-zero coefficient on the wage, and this is interpreted as saying that changes in the minimum wage have little effect on employment. On the other hand, the immigration literature often finds that a regression of wages on employment reveals a near-zero coefficient on employment, and this is interpreted as saying that immigration has little effect on the wage.

                                                                        In the minimum wage literature, the inference is that the labor demand curve is almost vertical (or very inelastic), while in the immigration literature, the inference is that the labor demand curve is almost horizontal (or very elastic).

                                                                        Let me rephrase the puzzle another way. If one were to believe the zero-effect result in the minimum wage literature, one would be forced to conclude that immigration must have huge adverse effects on the wage of native workers (at least in the short run). But if one were to believe the zero-effect result in the immigration literature, one would then have to conclude that minimum wage increases would have huge disemployment effects.

                                                                        The only thing in common between the two sets of studies is that there is a zero correlation between wages and employment across geographic areas. What one puts on the left-hand side and the right-hand side of the regression model doesn't change this fundamental empirical fact.

                                                                        Am I the only one who finds the contradictory inferences disturbing? It seems to me that at least one (and perhaps both) of the inferences economists draw from these cross-region correlations must be wrong.

                                                                          Posted by on Tuesday, July 24, 2007 at 12:15 AM in Economics, Immigration, Unemployment | Permalink  TrackBack (0)  Comments (33) 

                                                                          links for 2007-07-24

                                                                            Posted by on Tuesday, July 24, 2007 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (0) 

                                                                            Monday, July 23, 2007

                                                                            Northern California before the Gold Rush

                                                                            There were less posts than usual today. One reason is that I started reading this history of the town I grew up in, a small town in Northern California called Colusa, and it captured my attention. This probably interests me more than you since the places, names, etc. are all so familiar to me, but if you are interested, here's the chapter I just read.

                                                                            If you know Northern California at all, Sutter's Mill where gold was discovered in 1848, Bodega, Sacramento, Yerba Buena, Chico, etc., this will be familiar to you too. It's an account by John Bidwell of his early experiences in California (this is in the 1840s just before the Gold Rush, he was one of the first to arrive in many areas of Northern California, there's a Bidwell Mansion in Chico adjacent to the CSU Chico campus). Toward the end, he describes an encounter with native Americans where he was the first white person they had ever seen, and his account also describes, among many other things, the harsh treatment the native Americans received from the new arrivals. The bear hunting lessons given in two places might be of interest, there's a woodsman who can't find his way home, and there's some economics here and there as well if you look for it:

                                                                            Colusa County: Its History Traced from a State of nature through the Early Period of Settlement and Development to the Present Day with a Description of its Resources, Statistical Tables, etc., Biographical Sketches of Pioneers and Prominent Residents. Orland. 1891: Explorations of Colusa County, Chapter 3, Furnished by Gen. John Bidwell.

                                                                            [General John Bidwell, of Chico, was one of the first to cross the plains from the Missouri River, making his journey to California between May 5 and November 5 1841. But as the first-known white explorer of Colusa County, his travels and experiences form necessarily an interesting chapter in the early periods of Colusa County. General Bidwell kindly consented to furnish us with his autobiography, of which we gladly availed ourselves, taking down his narrative as he dictated to us. As the autobiography is complete and somewhat lengthy, we are obliged to cull only those passages therefrom which pertain to Colusa County. The narrative as a whole is most interesting, in some places thrilling, and is told in such simplicity of style and attractiveness of manner that, feeling obliged to omit it, we do so with regret. Only a fear of marring the unities of our purpose to treat here solely of Colusa County caused us to forego the pleasure of giving his autobiography in its entirety.-Author.]

                                                                            I may premise what I have to say further on concerning what is now Colusa County and as I saw it then in a state of nature, which no white man had ever entered except a few wandering trappers till I passed through it, by giving a brief outline of my earlier experiences in California. These may be necessary, in order not to lead up too abruptly to my little narrative concerning Colusa County.

                                                                            After completing my journey across the plains, which occupied six months of the year 1841, I went to Sutter's ranch, near Sacramento, and entered the employ of Sutter, where I remained till the January following. There was at that time no fort yet built, only a station for a few ranchers, hunters, and fur traders. Sutter employed Indian hunters and trappers. They used carbines chiefly, though a few had rifles. The settlement, if it could then be so designated, was in an embryo state. No crops had been raised; grain had been sown, but, owing to an unprecedentedly dry season, it had failed to mature. There was no such thing as bread, so we had to eat beef, and occasionally game, such as elk. deer, antelope, wild geese, and ducks. Our Christmas dinner that year was entirely of ducks.

                                                                            Continue reading "Northern California before the Gold Rush" »

                                                                              Posted by on Monday, July 23, 2007 at 09:00 PM in Economics, Miscellaneous | Permalink  TrackBack (0)  Comments (1) 

                                                                              "Maybe the People Who Think There's a Conspiracy Out There are Right"

                                                                              Haven't seen much about this, so thought I'd note it here. This is an editorial from the local paper about the Bush administration's refusal to allow Homeland Security Committee member Congressman Peter DeFazio to examine plans for government action following a terrorist attack or natural disaster:

                                                                              Access denied, Editorial, Register-Guard: If the Bush administration wanted to fuel conspiracy theories about its classified plan for maintaining governmental control in the wake of an apocalyptic terror attack, it could not have come up with a better strategy than refusing to let Congressman Peter DeFazio examine it.

                                                                              Continue reading ""Maybe the People Who Think There's a Conspiracy Out There are Right"" »

                                                                                Posted by on Monday, July 23, 2007 at 10:53 AM in Politics, Terrorism | Permalink  TrackBack (0)  Comments (23) 

                                                                                Paul Krugman: The French Connections

                                                                                Paul Krugman discusses how lack of competition among providers of high-speed internet service has caused the U.S. to fall behind other countries:

                                                                                The French Connections, by Paul Krugman, Commentary, NY Times: There was a time when everyone thought that the Europeans and the Japanese were better at business than we were. In the early 1990s airport bookstores were full of volumes ... promising to teach you the secrets of Japanese business success. Lester Thurow’s 1992 book, “Head to Head: The Coming Economic Battle Among Japan, Europe and America,” which spent more than six months on the Times best-seller list, predicted that Europe would win.

                                                                                Then it all changed, and American despondency turned into triumphalism. Partly this was because the Clinton boom contrasted so sharply with Europe’s slow growth and Japan’s decade-long slump. Above all, however, our new confidence reflected the rise of the Internet. ...[M]ost of Europe except Scandinavia lagged far behind the U.S. when it came to getting online.

                                                                                What most Americans probably don’t know is that ... as dial-up has given way to ... high-speed links — it’s the United States that has fallen behind.

                                                                                The numbers are startling. As recently as 2001, the percentage of the population with high-speed access in Japan and Germany was only half that in the United States. In France it was less than a quarter. By the end of 2006, however, all three countries had more broadband subscribers per 100 people than we did.

                                                                                Even more striking is the fact that our “high speed” connections are painfully slow by other countries’ standards. ... Oh, and access is much cheaper...

                                                                                What happened to America’s Internet lead? Bad policy. Specifically, the United States ... forgot — or was persuaded by special interests to ignore — ...that sometimes you can’t have effective market competition without effective regulation.

                                                                                You see, ... to get [to the internet] you need to go through a narrow passageway, down your phone line or down your TV cable. And if the companies controlling these passageways can behave like the robber barons of yore, levying whatever tolls they like on those who pass by, commerce suffers.

                                                                                America’s Internet flourished in the dial-up era because federal regulators ... forced local phone companies to act as common carriers, allowing competing service providers to use their lines. Clinton administration officials ... tried to ensure that this open competition would continue — but the telecommunications giants sabotaged their efforts, while The Wall Street Journal’s editorial page ridiculed them as people with the minds of French bureaucrats.

                                                                                And when the Bush administration put Michael Powell in charge of the F.C.C., the digital robber barons were basically set free to do whatever they liked. As a result, there’s little competition in U.S. broadband — if you’re lucky, you have a choice between ... the local cable monopoly and the local phone monopoly. The price is high and the service is poor, but there’s nowhere else to go.

                                                                                Meanwhile, as ... Business Week explains, the real French bureaucrats used judicious regulation to promote competition. As a result, French consumers get to choose from a variety of service providers who offer reasonably priced Internet access that’s much faster than anything I can get, and comes with free voice calls, TV and Wi-Fi.

                                                                                It’s too early to say how much harm the broadband lag will do to the U.S. economy as a whole. But it’s interesting to learn that health care isn’t the only area in which the French, who can take a pragmatic approach because they aren’t prisoners of free-market ideology, simply do things better.

                                                                                Previous (7/20) column: Paul Krugman: All the President’s Enablers
                                                                                Next (7/27) column: Paul Krugman: The Sum of Some Fears

                                                                                Update: Paul Krugman emails:

                                                                                I wrote a piece on this, "Digital Robber Barons?", back in 2002 - unfortunately, it looks my worries were justified. Also, Matthew Yglesias had a piece 2 years ago (which I somehow missed).

                                                                                The broadband penetration statistics are at http://www.oecd.org/document/7/0,3343,en

                                                                                Connection speeds are at http://www.websiteoptimization.com/bw/0705/

                                                                                 And he adds his personal experience:

                                                                                When Robin and I moved into our current house, which is in Princeton Township a few minutes' drive from the university, we had NO broadband available. We actually got a satellite dish - which provided lousy access, but better than dialup. Eventually Verizon offered DSL - pretty slow DSL. And last year Patriot Media, our cable monopoly, finally came up with its own offering. But that's it. 

                                                                                  Posted by on Monday, July 23, 2007 at 12:33 AM in Economics, Market Failure, Regulation, Technology | Permalink  TrackBack (1)  Comments (111) 

                                                                                  "Goodbye to Newspapers?"

                                                                                  This is Russell Baker with an analysis of the fate of newspapers in the internet age, the failure of the press in the run-up to the Iraq war, and other issues. This is part of a much longer essay:

                                                                                  Goodbye to Newspapers?, Book Review by Russell Baker, NY Review of Books: ...The American press has the blues. Too many ... good newspapers are in ruins. It has lost too much public respect. Courts ... now taunt it with insolent subpoenas... It is abused relentlessly on talk radio and in Internet blogs. It is easily bullied into acquiescing in the designs of a presidential propaganda machine determined to dominate the news. Its advertising and circulation are being drained away by the Internet, and its owners seem stricken by a failure of ... entrepreneurial imagination...

                                                                                  Then there are the embarrassments: hoaxers like Jayson Blair and Stephen Glass turn journalism into farce. The elite Washington press corps is bamboozled into helping a circle of neoconservative connivers create the Iraq war. What became of heroes? Journalists used to dine out on the deeds of Bob Woodward and Carl Bernstein during Watergate; of David Halberstam, Neil Sheehan, and Malcolm Browne in Vietnam; of "Punch" Sulzberger and Kay Graham risking everything to publish the Pentagon Papers. Instead of heroes, today's table talk is about journalistic frauds and a Washington press too dim to stay out of a three-card-monte game.

                                                                                  Rupert Murdoch of course has long spread melancholy in newsrooms around the world, but it was the disclosure in May that the Bancroft family, which controls The Wall Street Journal, might be ready to sell him their paper ... that really struck at journalism's soul. ... The Wall Street Journal is not another newspaper. It is one of the proudest pillars of American journalism. Like The New York Times and The Washington Post, it has for generations been controlled by descendants of a founding patriarch.

                                                                                  Family control has sheltered all three newspapers from Wall Street's most insistent demands, allowing them to do high-quality—and high cost— journalism. It was said, and widely believed, that the controlling families were animated by a high-minded sense that their papers were quasi-public institutions. Of course profit was essential to their survival, but it was not the primary purpose of their existence. That one of these families might finally take the money and clear out heightens fears that no newspaper is so valuable to the republic that it cannot be knocked down at market for a nice price. Murdoch at the Journal is a dark omen for journalists everywhere. ...

                                                                                  Papers everywhere [feel] relentless demands for improved stock performance. The resulting policy of slash-and-burn cost-cutting has left the landscape littered with frail, failing, or gravely wounded newspapers which are increasingly useless to any reader who cares about what is happening in the world, the country, and the local community. ...

                                                                                  2. ...Neil Henry's ... book is concerned with...: How does the Internet affect what we still call "the press"? Is "blogging" the journalism of the future? How can the journalist avoid being manipulated by the vast and deadly effective propaganda machinery of government and business? ...

                                                                                  Continue reading ""Goodbye to Newspapers?"" »

                                                                                    Posted by on Monday, July 23, 2007 at 12:15 AM in Economics, Politics, Press | Permalink  TrackBack (0)  Comments (15) 

                                                                                    links for 2007-07-23

                                                                                      Posted by on Monday, July 23, 2007 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (0) 

                                                                                      Sunday, July 22, 2007

                                                                                      Supply-Side Effects of 2001 and 2003 Tax Cuts "Small"

                                                                                      About that Laffer curve:

                                                                                      CBO: Tax Cuts’ Impact Has Faded, by Greg Ip, WSJ Washington Wire: The stimulative effect of Bush’s tax cuts has worn off and the supply-side benefits are “small,” the Congressional Budget Office says. At the request of House Budget Committee [chair] John Spratt (D., S.C.), the CBO analyzed the impact on the economy other than through the direct impact on tax revenues of the Economic Growth and Taxpayer Relief Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA).

                                                                                      In a letter to Spratt released Friday, CBO director Peter Orszag said, “The short-term effects of EGTRRA and JGTRRA in stimulating aggregate demand in the economy have largely dissipated by now, and the supply-side effects of those policies are uncertain but are probably small.”

                                                                                      Some of the tax cuts’ provisions “increased incentives for people to work and save (which can increase growth), but other provisions had no effect on incentives. In addition, the two tax laws increased the budget deficit, and doing so tends to reduce economic growth over the medium and long term. At this point in time (several years after enactment), once those various factors have been taken into account, the overall impact of the tax legislation on the economy is likely to be modest,” Orszag wrote.

                                                                                      Orszag concluded that the tax cuts’ indirect impact on economic growth, investment and saving and could affect this year’s budget deficit anywhere from an increase of $3 billion to a reduction of $14 billion, depending on the assumptions used. That is separate from the direct boost to the deficit through lost revenue and the added interest on borrowing to cover the gap of $211 billion.

                                                                                      It currently expects this year’s deficit to be between $150 billion and $200 billion, implying that without the tax cuts, the budget would probably be in surplus this year.

                                                                                        Posted by on Sunday, July 22, 2007 at 11:07 AM in Budget Deficit, Economics, Politics, Taxes | Permalink  TrackBack (0)  Comments (19) 

                                                                                        Backlash Against Globalization and CEOs

                                                                                        Note that the color for the "no" category is not consistent from top to bottom:


                                                                                        I'm surprised how many people support pay caps for CEOs, and at the large number of people who do not believe that there is equal opportunity. The article reports that "Large majorities of people in the US and in Europe want higher taxation for the rich and even pay caps for corporate executives to counter what they believe are unjustified rewards and the negative effects of globalisation." There is also more uncertainty about the effects of globalization than I would have guessed. Although the majority of those with an opinion view globalization negatively, more than 40% of the people polled weren't sure how to answer. More detail here (free).

                                                                                          Posted by on Sunday, July 22, 2007 at 10:53 AM in Economics, Income Distribution, International Trade, Policy | Permalink  TrackBack (1)  Comments (25) 

                                                                                          "The Effect of Internal Migration on Local Labor Markets: American Cities During the Great Depression"

                                                                                          I haven't had a chance to read past the introduction and conclusion yet, but this paper looks worth taking a closer look. Here's the conclusion:

                                                                                          The Effect of Internal Migration on Local Labor Markets: American Cities During the Great Depression, by Leah Platt Boustan, Price V. Fishback, and Shawn E. Kantor NBER WP 13276, July 2007 [open link]: ...V. Conclusion Throughout American history there has been extensive debate about the impact of immigrants on the economic status of native-born workers. The conversation has become particularly heated recently as the nation considers immigration reform. Economists working with modern data have not reached a consensus about the impact of immigrants on wages and work opportunities.

                                                                                          During the Depression, immigration from abroad was dampened by the combination of a massive economic downturn and strict immigration quotas. Even so, residents in areas where the Depression was less severe protested influxes of migrants from other parts of the country. The most famous example was the outcry in California against the Dust Bowl migrants, but the same debates occurred throughout the country. The new arrivals were accused of taking jobs, lowering wages, and crowding relief rolls. Using aggregate data on internal migration flows matched to individual records from the 1940 Census, we examine the impact of positive net migration on the economic welfare of workers along a variety of dimensions.

                                                                                          As is often the case in the modern literature, we find that the impact of in-migration on hourly earnings was small and not statistically significant in the 1930s. However, in-migrants threatened the economic prospects of longer-term residents in other ways. During a decade in which unemployment rates stayed above 10 percent and many workers were unable to find jobs that offered 40 hours of work per week, work hours and access to work relief were highly valued. Residents of metropolitan areas that experienced high in-migration during the Depression decade worked fewer weeks during the year and thus experienced a significant drop in their annual earnings. Although the probability of obtaining a regular job was not reduced, those who were out of work faced greater difficulty in securing a work relief position. Finally, as has been found in the modern era, greater in-migration stimulated out-migration by longer term residents.

                                                                                          The experiences in the Great Depression help to understand why the anticipated economic disruption of in-migration causes resident workers to oppose newcomers to their areas. Workers in cities protested the in-migration of fellow citizens, arguing that all the newcomers could do was make things worse for the existing population. Our findings, which are from an historical period when international immigration fell to a trickle, suggest that localized protests against in-migration would likely still occur today even if our borders were completely sealed. What opponents of immigration today often fail to recognize is that disparities in labor markets across geographic areas causes people to migrate internally, thus affecting labor market outcomes. While the vehemence of the protests might be lessened to some degree if the newcomers happened to be similar in race, ethnicity, and citizenship to the longer-term residents, the economic impact of the migration would still be felt.

                                                                                            Posted by on Sunday, July 22, 2007 at 12:15 AM in Economics, Unemployment | Permalink  TrackBack (0)  Comments (21) 

                                                                                            links for 2007-07-22

                                                                                              Posted by on Sunday, July 22, 2007 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (1) 

                                                                                              Saturday, July 21, 2007

                                                                                              Why Do People Buy Sports Teams?

                                                                                              Austan Goolsbee, of the University of Chicago Graduate School of Business and an adviser to the campaign of Senator Barack Obama, on why people buy sports teams:

                                                                                              A Billion Bucks for the Cubs? It’s Only Money, by Austan Goolsbee, Economic View, NY Times: What makes a man so desperate to own a sports team that he would be willing to pay a billion dollars for it? ... Answering why people buy teams turns out to be important to more than just sports fans. There is big money at stake.

                                                                                              After owners indulge their childhood fantasy of buying a team, they tend to switch to an adult perspective and start viewing the team as a business. And they typically conclude that it’s a bad business.

                                                                                              Consider the Seattle SuperSonics basketball franchise. The Starbucks mogul Howard Schultz sold the team to an Oklahoma businessman, Clayton Bennett, last year. Evidently, the Sonics lost about $60 million in the five years that Mr. Schultz owned the team. Mr. Bennett now wants a big subsidy from the city of Seattle to build a new arena, or else he may move the team to Oklahoma City. Other team owners use large losses to force tough salary caps and other restrictions on the pay of the athletes during labor negotiations. If teams can’t make money, they reason, the business can’t survive.

                                                                                              But if this is such a bad business, we are back to the same questions: Why do these guys line up to buy the teams? Should we really care that it’s a bad business? If a billionaire throws a lavish 60th birthday party, it costs a lot of money. But that doesn’t make it a bad business. It’s a party. It’s not supposed to make money. Is a sports team really that different?

                                                                                              Owners’ complaints about losses leave out the basic fact that capital gains are profits, too. And when scores of grown men desperately want to buy sports teams, there tend to be big capital gains.

                                                                                              Take the Sonics. The team may have lost $60 million while Mr. Schultz owned it. But he bought it for $200 million in 2001 and sold it for $350 million five years later. So he ended up making something like $90 million (taxed at the favorable capital gains tax rate, no less) on top of the fame, prestige and free tickets he got while he was owner.

                                                                                              If the Cubs ... sell for $1 billion, Tribune will have earned an annual return of almost 15 percent since it bought the team for around $20 million in 1981. Given the company’s recent problems, it’s probably the best investment it ever made.

                                                                                              So owning a sports team gives budding billionaires local stardom and a big return — no wonder that they are lining up to buy these teams. The only question that remains, I suppose, is why the vanity value of teams keeps climbing. You might have thought that this value would be about the same whenever there’s a sale, so that the capital gain wouldn’t be such a big component. But because ever-richer guys are bidding against one another, there has been persistent inflation in team values. ...

                                                                                                Posted by on Saturday, July 21, 2007 at 06:57 PM in Economics, Politics | Permalink  TrackBack (0)  Comments (12) 

                                                                                                "In Praise of Theory"

                                                                                                Kartik B. Athreya of the Richmond Fed defends the use of theory to evaluate data, and to guage past and future policy decisions [link to Lucas critique added].

                                                                                                In Praise of Theory, by Kartik B. Athreya, Opinion, Richmond Fed: Here is an interesting story: The pace of personal bankruptcies rose quickly during the 1990s, even as the overall economy fared well. What might we conclude from these facts? One possibility is that improvements in financial intermediation have made credit-granting decisions easier and have led to greater borrowing by risky groups previously denied credit. Another is that nothing has changed in the lending industry, yet households anticipated rapid future income growth. This led them to borrow, but for those whose income failed to grow as expected, default proved useful, leading overall bankruptcy rates to rise. Still another explanation is that neither lender behavior nor income expectations have changed, but instead that there is no longer any “shame” in defaulting on debts.

                                                                                                Each of these explanations may partially account for the facts, and some may fail altogether. But interpreting historical behavior and predicting future patterns first requires a theory about how consumers make financial decisions. What are people considering when they choose how much to spend, how much to borrow, and how much to save? By themselves, the data tell us little.

                                                                                                Modern economics develops theories in the form of mathematical models of household and firm decision-making in which their collective behavior is required to be consistent with the feasibility requirements imposed by the model. This is known as an “equilibrium” approach. Equilibrium analysis may be clearly contrasted with an alternative still prevalent in consumer finance, one that places far less emphasis on modeling explicit decision-making. The latter approach instead relies on summarizing observed features of the data, usually using regression analysis, and treating the correlations as being informative for the effects of policy.

                                                                                                Why should we not simply stare at data, perform a purely statistical analysis, and hope to learn from the results?

                                                                                                Continue reading ""In Praise of Theory"" »

                                                                                                  Posted by on Saturday, July 21, 2007 at 12:33 PM in Economics, Monetary Policy, Policy | Permalink  TrackBack (0)  Comments (13) 

                                                                                                  "Economics is the Dope of the Religious People"

                                                                                                  This is from Joan Robinson. It's about using economics as an ideological defense of wealth. Keep in mind as you read this that it was written in 1936, not today.

                                                                                                  A lot of the discussion is about tax cuts, and I was amused at the end where she says that even though her opponent wasn't clever enough to think of it, to be fair, there is a way a tax cut can affect employment. She then goes on to foreshadow supply-side arguments, then dismisses them as unlikely to have much of an impact in alleviating short-run economic difficulties.

                                                                                                  The introduction to this section of the book where this essay appears (the fourth volume of Collected Economic Papers by Joan Robinson) says that "Keynes read the drafts and I cut out anything that I could not persuade him was correct..." And, though it doesn't relate to the essay that follows, given the charges that the traditional Keynesian model ignores inflation, this is an interesting statement (it is in reference to an essay called "Full Employment" in the same section), "It is certainly absurd to suppose [Keynes] was not aware of the prospect of inflation setting in when near-full employment is maintained for a run of years." Here's her essay, "An Economist's Sermon":

                                                                                                  An Economist's Sermon: Economics is the Dope of the Religious People, by Joan Robinson, 1936: Consider the case of a man to-day who has an honest intelligence, a strong social conscience and an independent income.

                                                                                                  His intelligence tells him that he has no particular right to enjoy a privileged position. 'Right' is a vague phrase. A doctor has in a sense a right to a motor-car because it makes him do his work better than he could without it. And if he uses it to visit his friends as well as his patients, no harm is done to anyone. But our man is too honest to try to persuade himself that his own comfort really makes very much difference to the amount of benefit that he does to other people. His conscience tells him that he would be doing a good act if he endowed a hospital with his wealth and worked for his living. But his inde­pendent income is not easy to give up.

                                                                                                  He cannot keep all three - integrity of mind, a quiet conscience, and the privileges of wealth. One must be sacrificed. If he is a saint he sacrifices the wealth - but we will suppose that he is not. If he is a man of no definite religious creed he can keep his mental honesty and his income by sacrificing his conscience. He can say "I am a selfish individual. I don't pretend to have any better right than anyone else to a comfortable life, but I propose to enjoy it if I can."

                                                                                                  But if he belongs to a definite religion this line of escape is impossible for him. Conscience is more precious than anything else. Without its approval he can have no peace. He will have to sacrifice his honesty of mind instead, and make up arguments to show that it is right for him to be better off than the majority of his neighbours.

                                                                                                  Now, it is here that the economist is a godsend to him. The economist is a self-appointed expert. It is his business to know about these things. A man may have an honest and independent mind and yet take on trust the opinion of experts on a subject that he has not time to master for himself. If the economist tells him it is all right, then he can keep his integrity, his income and his conscience all intact.

                                                                                                  One of the main effects (I will not say purposes) of orthodox traditional economics was to fill this want. It was a plan for explaining to the privileged class that their position was morally right and was necessary for the welfare of society. Even the poor were better off under the existing system than they would be under any other. There is a significant passage in the reminiscences of Alfred Marshall. As a young man, a mathematician and philosopher, before he had embarked upon economics, he began to be troubled by social conscience:

                                                                                                  Continue reading ""Economics is the Dope of the Religious People"" »

                                                                                                    Posted by on Saturday, July 21, 2007 at 12:15 AM in Economics, Taxes | Permalink  TrackBack (0)  Comments (18) 

                                                                                                    links for 2007-07-21

                                                                                                      Posted by on Saturday, July 21, 2007 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (0)