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The Economist asks "Is America Turning left?" The answer given is "Probably—but not in
the way many foreigners (and some Americans) hope":
Is America turning left?, The Economist: For George Bush, the presidency is
becoming a tragic tale of unintended consequences. In foreign policy, the man
who sought to transform Iraq, the Middle East and America's reputation has
indeed had revolutionary effects, though not the ones he was aiming for. Now
something similar seems to be happening in domestic politics. The most
conservative president in recent history ... may well end up driving the Western
world's most impressive political machine off a cliff.
That machine has put Republicans in the White House in seven of the past ten
contests. ... Watergate helped Jimmy Carter in 1976, just as the end of the cold
war and Ross Perot's disruptive third-party campaign helped Bill Clinton in
1992. Better organised and more intellectually inventive than their “liberal”
rivals, American conservatives have controlled the agenda even when they have
lost: Mr Clinton is best remembered for balancing the budget and passing welfare
reform, both conservative achievements. In a country where one in three people
see themselves as conservatives (against one in five as liberals) ..., it is
easy to see why Mr Bush and his strategist, Karl Rove, dreamed of banishing
Democrats from power for a generation.
Now they would settle for a lot less. Having recaptured Congress last year,
the Democrats are on course to retake the presidency in 2008. Only one
Republican, Rudy Giuliani, looks competitive..., and his campaign is less slick
than those of Hillary Clinton and Barack Obama. Voters now favour generic
Democratic candidates over Republican ones by wide margins. Democrats are more
trusted even on traditional conservative issues... (see
For this, he is not guilty
The easy scapegoat is Mr Bush himself. During his presidency, the words
Katrina, Rumsfeld, Abramoff, Guantánamo and Libby have become shorthand for
incompetence, cronyism or extremism. Indeed, the failings of Mr Bush's coterie
are oddly reassuring for some conservatives: once he has gone, they can regroup,
as they did after his father was ousted in 1992.
Yet this President Bush is not a good scapegoat. Rather than betraying the
right, he has given it virtually everything it craved, from humongous tax cuts
to conservative judges. Many of the worst errors were championed by conservative
constituencies. Some of the arrogance in foreign policy stems from the armchair
warriors of neoconservatism; the ill-fated attempt to “save” the life of the
severely brain-damaged Terri Schiavo was driven by the Christian right. Even Mr
Bush's apparently oxymoronic trust in “big-government conservatism” is shared in
practice by most Republicans in Congress.
Continue reading "The Economist: Is America Turning Left?" »
Posted by Mark Thoma on Sunday, August 12, 2007 at 03:33 AM in Economics, Politics |
One of the consequences of anticipated global warming:
The Great Arctic Oil Rush, Editorial, NY Times: For a brief moment it seemed
that Adm. Robert Peary and Dr. Frederick Cook had risen from the mists to renew
their race to the North Pole.
On Aug. 2, a couple of Moscow legislators in a small submersible vessel
deposited a Russian flag on the seabed two miles under the polar ice cap —
backing up Russia’s claim to close to half the floor of the Arctic Ocean.
Canada’s foreign minister, Peter McKay, dismissed the move, sniffing that “this
isn’t the 15th century.” But just in case, Canada dispatched no less a personage
than Stephen Harper, its prime minister, on a three-day tour of the region and
announced plans to build two new military bases to reinforce the country’s
At stake is control of the Northwest Passage and, with it, what could be huge
deposits of oil and natural gas in the seabed below.
In a 21st-century twist unimaginable to Cook and Peary, global warming —
driven, in part, by humanity’s profligate use of those same fossil fuels — has
begun to melt the polar ice, exposing potentially huge deposits of hitherto
unreachable natural resources. ...[W]ith oil at $70 a barrel, the rewards of
discovery could be huge.
Russia and Canada are not alone in the great Arctic oil race. Denmark,
Finland, Norway, Iceland and the United States also have a deep interest in the
One thing is clear. To the extent that ownership can be determined, it will
not be decided by photo-ops or even by planting flags.... It will be decided by
geologists, lawyers and diplomats.
Under international law, nations have rights to resources that lie up to 200
miles off their shores. The rest is regarded as international waters, subject to
negotiation under the Law of the Sea. A nation can claim territory beyond the
200-mile limit, but only if it can prove that the seabed is a physical extension
of its continental shelf.
The Russians are claiming that the huge Lomonosov Ridge underneath the pole
is in fact an extension of their continental shelf. And to show just how crazy
this could get, the Danes are spending a fortune trying to prove that their end
of the same ridge — though now detached — was once part of Greenland, which
belongs to Denmark.
The United States does not find itself in a strong position. Misplaced fears
among right-wing senators about losing “sovereignty” has kept the Senate from
ratifying the Law of the Sea even though the United Nations approved it 25 years
ago. This, in turn, means that the United States, with 1,000 miles of coastline
in the Arctic, has no seat at the negotiating table.
President Bush and moderate Republicans like Senator Richard Lugar ... will
try to remedy this blunder when Congress reconvenes. This would at least enable
Washington to stake its claims to the continental shelf extending northward from
Alaska. We may never need a share of that oil, but it seems foolish not to keep
it in reserve.
Posted by Mark Thoma on Sunday, August 12, 2007 at 12:15 AM in Economics, Oil, Politics |
Posted by Mark Thoma on Sunday, August 12, 2007 at 12:06 AM in Links |
Posted by Mark Thoma on Saturday, August 11, 2007 at 05:50 PM in Miscellaneous |
Paul Dutton on healthcare in France:
France's model healthcare system, by Paul V. Dutton, Commentary, Boston Globe:
Many advocates of a universal healthcare system in the United States look to
Canada for their model. While the Canadian healthcare system has much to
recommend it, there's another model that has been too long neglected. That is
the healthcare system in France.
Although the French system faces many challenges, the World Health
Organization rated it the best in the world in 2001 because of its universal
coverage, responsive healthcare providers, patient and provider freedoms, and
the health and longevity of the country's population. The United States ranked
The French system is also not inexpensive. At $3,500 per capita it is one of
the most costly in Europe, yet that is still far less than the $6,100 per person
in the United States.
An understanding of how France came to its healthcare system would be
instructive in any renewed debate in the United States.
That's because the French share Americans' distaste for restrictions on
patient choice and they insist on autonomous private practitioners rather than a
British-style national health service, which the French dismiss as "socialized
medicine." Virtually all physicians in France participate in the nation's public
health insurance, Sécurité Sociale.
Their freedoms of diagnosis and therapy are protected in ways that would make
their managed-care-controlled US counterparts envious. However, the average
American physician earns more than five times the average US wage while the
average French physician makes only about two times ... average earnings of ...
compatriots. But the lower income of French physicians is allayed by two
factors. Practice liability is greatly diminished by a tort-averse legal system,
and medical schools, although extremely competitive to enter, are tuition-free.
Nor do France's doctors face the high nonmedical personnel payroll expenses
that burden American physicians. Sécurité Sociale has created a standardized and
speedy system for physician billing and patient reimbursement...
It's not uncommon to visit a French medical office and see no nonmedical
personnel. ... No back office army of billing specialists who do daily battle
with insurers' arcane and constantly changing rules of payment.
Moreover, in contrast to Canada and Britain, there are no waiting lists for
elective procedures and patients need not seek pre-authorizations....
How might the French case inform the US debate over healthcare reform?
National health insurance in France stands upon two grand historical bargains --
the first with doctors and a second with insurers.
Doctors only agreed to participate ... if the law protected a patient's
choice of practitioner and guaranteed physicians' control over medical
decision-making. Given their current frustrations, America's doctors might
finally be convinced to throw their support behind universal health insurance if
it protected their professional judgment and created a sane system of billing
French legislators also overcame insurance industry resistance by permitting
the nation's already existing insurers to administer its new healthcare funds.
Private health insurers are ... central to the system...
The French system strongly discourages the kind of experience rating that
occurs in the United States, making it more difficult for insurers to deny
coverage for preexisting conditions or to those who are not in good health. ...
Like all healthcare systems, the French confront ongoing problems. Today
French reformers' number one priority is to move health insurance financing away
from payroll and wage levies because they hamper employers' willingness to hire.
Instead, France is turning toward broad taxes on earned and unearned income
alike to pay for healthcare. ...
Perhaps it's time for us to take a closer look at French ideas about
healthcare reform. They could become an import far less "foreign" and
"unfriendly" than many here might initially imagine.
Posted by Mark Thoma on Saturday, August 11, 2007 at 03:33 AM in Economics, Health Care, Politics |
Jim Hamilton takes a look at recent "troubling" events in financial markets:
What is a liquidity event?, by Jim Hamilton: It was an exciting week in
financial markets, including some dramatic central bank interventions in
short-term money markets. ...
First, a little background... The banking system as a whole usually holds only a small amount of reserves
in excess of what is required. A bank that ends up with extra reserves would
find it advantageous to loan Federal Reserve deposits overnight to a bank with a
deficit in what is called the federal funds market. The interest rate on these
overnight loans is usually very sensitive to the quantity of excess reserves in
the system, so the Fed could change this rate by adding or subtracting deposits
through open market operations. The Fed simply announces the rate it intends to
maintain, with the current target being 5.25%, and the announcement is credible
because all participants know that the Fed will be adding or draining reserves
as necessary to keep the rate near the target.
Not all loans will take place exactly at the target rate, however. These
loans are unsecured, and though their very short-term nature makes the risk
small, it is not zero. Small banks will often pay a slightly higher rate to
borrow fed funds than will big banks, and an individual bank will have a maximum
amount it is willing to lend to any given other bank. If a bank has a really big
outflow of reserves, or its usual sources for borrowing short-term funds dry up,
it may need to offer a rate well in excess of 5.25% in order to maintain a
positive level of reserves.
This was the case on Friday, on which the fed funds market opened with
some trades at
6%, some 75 basis points above the rate that the Fed has declared it will
defend. So, the Fed used open market operations in the form of repurchase
agreements to create new reserves, evidently in the amount of $38 billion. One
can put this number in perspective with the following graph of what Federal
Reserve deposits usually turn out to be over a two-week period. This was a huge
intervention, on a par with the remarkable measures taken September 11, 2001,
when the interbank loan market faced
severe disruption from the physical destruction of a large number of the key
institutions that make these markets. Again this week it seems that banks
suddenly desired a huge volume of reserves in excess of the amounts they are
required to maintain.
Federal Reserve deposits (in billions of dollars) and size of this week's
reported liquidity injection. Original weekly data have been converted to
biweekly. Data source:
...Some analysts have interpreted the Fed's action as "bailing out the banks",
and are particularly troubled by the fact that the assets purchased by the Fed
through the open market operations apparently involved mortgage-backed
securities. I too was a little surprised that the Fed would consider buying
anything other than Treasury bills, though I agree with
Calculated Risk that since the reserves were injected in the form of a 3-day
unless the banks go under in 3 calendar days, they will pay the loan back
with 3 days of 5.25% interest. No big deal.
More sound analysis was provided by
Paul Krugman, and
Mark Thoma. And here's
A lot of entities holding mortgage backed securities needed liquidity. They
were willing to borrow at a higher overnight rate to get that liquidity as
evidenced by the spike in the funds rate early in the morning. The Fed, quite
understandably, did not want the funds rate to spike, and so they loaned these
banks reserves accepting mortgage backed securities of the highest quality as
collateral (the Fed was NOT bailing them out by buying distressed subprime
loans). This kept anyone from unloading good quality assets at fire sale prices
just to get liquidity. That would have been disastrous. The agreement is that on
Monday the banks get their securities back and the Fed takes back the reserves.
The bottom line is that the Fed was doing exactly what it needed to do. But
the fact that this was needed is a very troubling development.
Posted by Mark Thoma on Saturday, August 11, 2007 at 12:33 AM in Economics, Monetary Policy |
Christina Romer and David Romer report on the state of monetary economics. It appears there's still work left to do:
Economics, by Christina D. Romer and David H. Romer, NBER Program Report: The subject matter of monetary economics encompasses a large part of
macroeconomics. Most obviously, monetary economics is concerned with the
conduct, effects, institutions, and history of monetary policy. But it extends
far beyond that. The sources of aggregate fluctuations, the channels through
which changes in monetary policy and other developments are transmitted to the
macroeconomy, and households' and firms' decisions about consumption,
investment, prices, and other variables that are critical to aggregate
fluctuations are all important subjects in monetary economics. Indeed, the
unofficial working definition of "monetary economics" that is used by the NBER's
Program in Monetary Economics is "anything that central bankers should be
In this report, we provide an overview of some of the lines of research that
have been pursued in the program in the past few years. As the previous
discussion suggests, however, the work done in the program is so diverse that we
can only discuss a small part of it.
The Zero Lower Bound on Nominal Interest Rates
When the central bank wants to stimulate the economy, its usual tool is an
open-market purchase of government debt. By increasing the stock of high-powered
money, the open-market purchase drives down nominal and real interest rates, and
so increases consumption and investment.
Nominal interest rates, however, cannot be negative: since high-powered money
has a nominal return of zero (that is, since the nominal value of a dollar next
year will be a dollar), investors will never hold bonds with negative yields.
Thus when the nominal interest rate on government debt reaches zero, one
critical channel through which monetary policy can stimulate the economy is no
longer present. Moreover, when the nominal interest rate is zero, government
debt and high-powered money are perfect substitutes: both are
non-interest-bearing assets issued by the government. In this situation, an
open-market purchase is just an exchange of two assets that are perfect
substitutes. Thus, there is reason to fear it will have no effects.
Until recently, the possibility of an economy finding itself in such a
"liquidity trap" seemed to be only a historical and theoretical curiosity. Two
developments, however, changed that perception. First, in Japan, short-term
nominal interest rates were virtually zero for most of the period from 1999
until quite recently. Second, in the United States, the combination of very low
inflation and a weak recovery caused the Federal Reserve to push the federal
funds rate down to one percent in the summer of 2003 and raised the possibility
that it might want to lower the funds rate further.
Continue reading "An Overview of Research in Monetary Economics" »
Posted by Mark Thoma on Saturday, August 11, 2007 at 12:15 AM in Economics, Monetary Policy |
Posted by Mark Thoma on Saturday, August 11, 2007 at 12:06 AM in Links |
This Economic Letter from Reuven Glick of the San
Francisco Fed looks at the prices of identical goods across countries and asks
why price dispersion is U-shaped over time:
Are Global Prices Converging or Diverging?, by Reuven Glick, Economic Letter,
FRBSF: Most people barely think twice anymore when they discover that their
toothbrush was made in China, their tee-shirt was made in Honduras, and their
car was made in Germany. With an increasing volume of goods and services flowing
around the world, it is natural to assume that the marketplace has become
"global," which is to say, much more integrated. One implication of greater
integration among the world's markets is that prices for equivalent goods and
services from country to country should tend to converge.
This Economic Letter reports on recent research that analyzes trends
in global prices over the past decade and a half (Bergin and Glick 2007). It
finds that, in fact, according to one measure, there was a trend of convergence
from 1990 through 1997, which is consistent with the view that the world has
become increasingly more trade-integrated over time, due to fewer governmental
barriers and declining costs for transportation and communication. Somewhat
surprisingly, however, it also finds that this trend was interrupted and then
reversed in subsequent years, implying a general U-shaped pattern over the past
one and a half decades. In exploring possible factors accounting for this
reversal, a likely suspect turns out to be the hike in oil prices in recent
years, which has raised transportation costs.
Continue reading "FRBSF: Are Global Prices Converging or Diverging?" »
Posted by Mark Thoma on Friday, August 10, 2007 at 02:52 PM in Economics, International Trade |
Floyd Norris makes a good point about modern bank runs, or something just
like them. The problem is that entities outside the traditional banking sector
have been engaged in bank-like functions and are hence subject to bank-like
problems such as bank-runs. Here's how it works.
Hedge funds can be hit with withdrawals even if they are not in trouble
themselves, at least initially, due to uncertainties about the future state of
But like a bank who lends out most of the deposit it receives, a hedge fund
uses the deposits it receives to purchase securities and other assets for its portfolio. Thus,
unless it has substantial cash reserves on-hand (part of the scramble now is to build cash reserves), when investors make withdrawals the fund must begin to liquidate its portfolio to pay them off.
But if nobody will purchase mortgage-backed securities, who do you sell to?
With nobody buying the assets the fund is trying to sell, they are forced to try to raise cash in other ways, and
And it can feed on itself, just like a bank run. If investors
hear that people are having trouble getting their money out of a particular
fund, or from funds generally, they will rush to get their money out before the
fund fails, and the problems get worse as funds try to sell assets to raise the needed cash.
So it's sort of like a bank run, but without a standing lending facility
(i.e. the equivalent of a discount window) available to meet the demand for
liquidity, though such institutions could be created.
I see Brad DeLong has noted this as well in " Paul Krugman Recommends Floyd Norris Today," so I'll send you there to read the
Posted by Mark Thoma on Friday, August 10, 2007 at 11:34 AM in Economics, Financial System, Monetary Policy |
The Fed accepted mortgage backed securities as part of today's operations to offset the fall in liquidity from the mortgage market meltdown. More on that below, but first, the Federal Reserve issued this Press Release today:
Press Release, FRB: The Federal Reserve is providing liquidity to facilitate
the orderly functioning of financial markets.
The Federal Reserve will provide reserves as necessary through open market
operations to promote trading in the federal funds market at rates close to the
Federal Open Market Committee's target rate of 5-1/4 percent. In current
circumstances, depository institutions may experience unusual funding needs
because of dislocations in money and credit markets. As always, the discount
window is available as a source of funding.
Continue reading ""To Facilitate the Orderly Functioning of Financial Markets"" »
Posted by Mark Thoma on Friday, August 10, 2007 at 10:17 AM in Economics, Monetary Policy |
Paul Krugman discusses the potential for problems due to the evaporation of
liquidity from financial markets over the last few days:
Scary Things, by Paul Krugman, Commentary, NY Times: In September 1998, the collapse of Long Term Capital Management, a giant
hedge fund, led to a meltdown in the financial markets similar, in some ways, to
what’s happening now. ... The Fed coordinated a rescue..., while Robert Rubin,
the Treasury secretary..., and Alan Greenspan,... the Fed chairman, assured
investors that everything would be all right. And the panic subsided...
What’s been happening in financial markets over the past few days is
something that truly scares monetary economists: liquidity has dried up. That
is, markets in ... financial instruments backed by home mortgages ... have shut
down because there are no buyers.
This could turn out to be nothing more than a brief scare. At worst, however,
it could cause a chain reaction of debt defaults.
The origins of the current crunch lie in the financial follies of the last
few years... The housing bubble was only part of it; across the board, people
began acting as if risk had disappeared.
Everyone knows now about the explosion in subprime loans ... and the
eagerness with which investors bought securities backed by these loans. But
investors also snapped up ... junk bonds, driving the spread between junk bond
yields and U.S. Treasuries down to record lows.
Then reality hit... First, the housing bubble popped. Then subprime melted
down. Then there was a surge in investor nervousness about junk bonds...
Investors were rattled recently when the subprime meltdown caused the
collapse of two hedge funds operated by Bear Stearns... Since then, markets have
been manic-depressive, with triple-digit gains or losses in the Dow ... the rule
rather than the exception for the past two weeks.
But yesterday’s announcement by BNP Paribas, a large French bank, that it was
suspending ... three of its own funds was, if anything, the most ominous news
yet. The suspension was necessary, the bank said, because of “the complete
evaporation of liquidity in certain market segments” — that is, there are no
When liquidity dries up ... it can produce a chain reaction of defaults.
Financial institution A can’t sell its mortgage-backed securities, so it can’t
raise enough cash to make the payment it owes to institution B, which then
doesn’t have the cash to pay institution C...
And here’s the truly scary thing about liquidity crises: it’s very hard for
policy makers to do anything about them.
The Fed normally responds to economic problems by cutting interest rates...
It can also lend money to banks that are short of cash: yesterday the European
Central Bank ... lent banks $130 billion, saying that it would provide
unlimited cash if necessary, and the Fed pumped in $24 billion.
But when liquidity dries up, the normal tools of policy lose much of their
effectiveness. Reducing the cost of money doesn’t do much ... if nobody is
willing to make loans. Ensuring that banks have plenty of cash doesn’t do much
if the cash stays in the banks’ vaults.
There are other, more exotic things the Fed and, more important, the
executive branch of the U.S. government could do to contain the crisis if the
standard policies don’t work. But for a variety of reasons, not least the
current administration’s record of incompetence, we’d really rather not go
Let’s hope, then, that this crisis blows over as quickly as that of 1998. But
I wouldn’t count on it.
Previous (8/6) column:
Paul Krugman: The Substance Thing
Next (8/13) column: Paul Krugman: It’s All About Them
Posted by Mark Thoma on Friday, August 10, 2007 at 12:33 AM in Economics, Financial System, Monetary Policy |
In an essay at
...Peter T. Leeson ... of ... George Mason University, explores what pirate
“constitutions,” credit institutions among 19th century African bandit traders,
and the well-being of Somalians after the collapse of the Somalian state have to
tell us about the possibility of practical anarchy. Can organizations solve
complex problems of coordination without government coercion? Can voluntary
bands provide public goods? Are there conditions under which groups really are
better off stateless? ...
Peter Leeson argues that:
I have argued that anarchy works better than you think. In the face of
obstacles that stand in the way of individuals’ ability to cooperate for mutual
gain, individuals develop solutions to overcome these obstacles. This is as true
in society ruled by government as one that exists without government. Where the
state does not provide law, order, or the institutions required to produce these
things, private institutions emerge to perform these roles instead.
In reaction to this, after re-writing Leeson' conclusion, Dani Rodrik says:
The Limits of Self-Enforcing Agreements, by Dani Rodrik. Reaction Essay, Cato
Unbound: ...I do not have any trouble with the idea that self-enforcing
agreements (...“anarchy”) can sometimes substitute for third-party (i.e.,
government) enforcement. Such self-enforcing agreements are maintained through
the force of repeated interaction (“if you cheat me now, I will cheat you in the
future,”) through reputational mechanisms (“see, I am not the cheating kind of
guy”), and collective punishment schemes (“if you cheat me, I will bring the
wrath of my colleagues on you”). The literature is replete with examination of
such informal institutions. [...examples...] ...
The problem with self-enforcing agreements is that they do not scale up. ...[S]elf-enforcing
arrangements to manage the “commons” work well only when the geographic scope of
the activity is clearly delimited and membership is fixed. It is easy to
understand why. Cooperation under “anarchy” is based on reciprocity, which in
turn requires observability. I need to be able to observe whether you are
behaving according to the rules, and if not, I have to be able to sanction you.
When the size of the in-group becomes large and mobility allows opportunistic
behavior to go unpunished, it becomes difficult to maintain cooperation. ...
Unlike in pirate societies or pre-colonial Angola, modern economies require
an elaborate and ever-evolving division of labor... The complexity, fluidity,
and geographic non-specificity of these activities leave too much room for
opportunistic behavior for self-enforcing arrangements to work well. They
require an external backstop in the form of government-enforced rules. ...
A modern post-industrial economy requires rule-based governance because it
needs to elicit cooperation within a large group—that of the nation-state.
Which is why the scatter plot below, showing the relationship between
per-capita GDP and the size of the public sector, should not be a surprise.
There is a strong, statistically highly significant, and positive association
between countries’ income levels and the share of their economy that the
government consumes. This highlights the complementarity between markets and the
state. ... Certainly no one believes that “any government is always superior to
no government.” But ... There is no example of a society that has become
prosperous without a state machinery.
The chart shows the relationship between (the logarithm of)
per-capita GDP and the share of government consumption in GDP in 2003, for all
countries for which data exist in the World Development Indicators of the World
Bank. The estimated slope coefficient is 1.5, and is statistically significant
at more than 99%.
It may be objected that the operation of the global economy is proof in
itself that a high level of economic activity can be maintained without
political institutions. After all, we do not have a global central bank, a
global anti-trust authority, a global court, and so on—not to mention a global
government. ... But ... there is in fact a significant global institutional
architecture that supports the international economy: globalization would not
have reached this far in the absence of the WTO, IMF, World Bank and a host of
regional supranational institutions. The global public sector is not
non-existent. Second, it is often national legal and political institutions that
provide the backstop where international institutions prove inadequate. ... And
third, precisely because the arrangements just mentioned ... are inadequate, the
world economy remains full of transaction costs and is subject to all kinds of
syndromes that were banished long ago from national economies. Financial panics
are a thing of the past at home thanks to the Fed; but they remain rampant in
international finance because there is no international lender-of-last-resort.
Leeson writes: “Most of the world, for most of its history, has existed
without effective governments.” Indeed. That is why most of the world for most
of its history has remained poor, with lives that are nasty, brutish, and short.
Posted by Mark Thoma on Friday, August 10, 2007 at 12:24 AM in Economics, Politics |
Posted by Mark Thoma on Friday, August 10, 2007 at 12:06 AM in Links |
PGL at Angry Bear is driven to shrillness by the latest from the president:
President Bush on Bridge Safety: Spend Smarter Not More, by PGL: AP reports that President Bush is opposed to raising gasoline taxes so we can have more bridge inspections:
week after a deadly bridge collapse in Minneapolis, President Bush on
Thursday dismissed raising the federal gasoline tax to repair bridges
at least until Congress changes how it spends highway money. "The way
it seems to have worked is that each member on that (Transportation)
committee gets to set his or her own priorities first," Bush said.
"That's not the right way to prioritize the people's money. Before we
raise taxes, which could affect economic growth, I would strongly urge
the Congress to examine how they set priorities."
Rivlin would be impressed. Her counsel to John Kerry during the 2004
Presidential race was spend smarter, not more. So President Bush is
arguing that we should spend more transportation dollars on repairing
bridges and less on bridges to nowhere. I would find this to be a
credible argument from a President who had a track record of allocating
our Federal dollars where most needed for public policy reasons. But
when President Bush has discussed priorities in the past, it would seem
his mantra for spending our Federal monies wisely was more driven by
some Karl Rove calculus to maximize GOP votes than to maximize the
General Welfare. But if President Bush has decided to finally adopt the
fiscal wisdom of Alice Rivlin, I say: IT’S ABOUT TIME!
Posted by Mark Thoma on Thursday, August 9, 2007 at 06:21 PM in Economics, Politics, Taxes |
Scientific American wonders if greed is good (this is a much shortened
Is Greed Good?, by Christoph Uhlhaas, Sciam.com: Could you buy a used car
online, sight unseen and without a test-drive? ... A vehicle changes hands on
eBay Motors every 60 seconds... Every second buyers collectively swap more than
$1,839 for products through eBay, sending money to complete strangers with no
guarantee that the goods they buy will in fact arrive, let alone in the
condition they expect.
As a rule, they are not disappointed. To some economists, this is a
borderline miracle, because it contradicts the concept of Homo economicus
(economic man) as a rational, selfish person who single-mindedly strives for
maximum profit. According to this notion, sellers should pocket buyers’ payments
and send nothing in return. For their part, buyers should not trust sellers—and
the market should collapse.
Economist Axel Ockenfels of the University of Cologne ... and his colleagues
have spent the past several years figuring out why this does not happen. It
turns out that ... a sense of fairness often plays a big role in people’s
decisions..., and it is also an essential part of what drives trust in markets
full of strangers such as eBay.
Ockenfels’s Equity, Reciprocity and Competition (ERC) theory, ... developed
with economist Gary Bolton of Pennsylvania State University, states that people
not only try to maximize their gains but also watch to see that they get roughly
the same share as others: they are happy to get one piece of cake as long as the
next person does not get two pieces. ... On eBay, however, fairness takes the
system only halfway, researchers have now learned; eBay’s reputation system is
critical for augmenting the level of trust enough for the market to work.
Circumstance also sculpts behavior, studies have revealed... That is, whether
a person is competing in a market of strangers or negotiating with a partner can
make a big difference in whether fairness, reciprocity or selfishness will
predominate. In fact, the ERC theory hints at ways to alter economic
institutions to nudge people to compete—or cooperate—more or less than they
Continue reading "Equity, Reciprocity, and Competition" »
Posted by Mark Thoma on Thursday, August 9, 2007 at 05:31 PM in Economics |
Dr. Interest of the blog Journal of Interest notes this paper by sociologists Marion
Fourcade and Kieran Healy:
Moral Views of Market Society, by Dr. Interest: A good paper on market
morality - here is an excerpt from the introduction:
In 1982, a soft-spoken economist with a self-diagnosed propensity for
subversion (and self-subversion) published a short article on a big topic
(Hirschman 1982): How have intellectual elites understood and judged market
society throughout history? Somewhat contrary to his expectations, Albert
Hirschman found that the market was initially seen as a civilizing force
(Hirschman 1977). For most of the eighteenth century, the doux commerce thesis
held that market relations made people more cordial and less inclined to fight
one another. By the late nineteenth century, however, this harmonious vision
faced a challenge. Marx, among others, argued that capitalist society tended to
undermine its own moral foundations, to the point where it would ultimately
self-destruct. In response to this gloomy prediction, the doux commerce thesis
was transformed. The market was still an essentially good force, its defenders
thought, but a feeble one. According to this “feudal shackles” thesis, the
persistence of cultural and institutional legacies from the past hampered the
market’s beneficial effects. Conversely, the absence of such a heritage in the
U.S. case was seen as a blessing, and a critical element in explaining that
country’s moral character and economic success.
The authors instead suggest:
Despite the value of Hirschman’s framework, we also seek to go beyond it. In
his scheme, the causal relationship between the market and the moral order is
straightforward. Markets can exert a huge direct effect for good, or do
tremendous damage. Alternatively, the arrow points the other way and fragile
markets are overwhelmed by the moral order (or, much more rarely, nurtured by
it). We shall argue that a body of important work, most of it quite recent,
rejects this clean division between the moral order and the market. Instead,
research on the classification of exchange relations, on the performativity of
economics, and on the regulation of countries and corporations in the
international economy is united by a view of markets as intensely moralized, and
moralizing, entities. We suggest that this new emphasis reflects not simply a
shift in scholarly fashion, but also trends in the public justification of the
contemporary economic order itself.
Marion Fourcade, Kieran Healy (forthcoming). “Moral Views of Market Society”.
Annual Review of Sociology 33 (2007).
Posted by Mark Thoma on Thursday, August 9, 2007 at 03:33 PM in Economics |
Today there was, as Brad DeLong
in a series
topic, a "significant liquidity event." Because of this event, "today the monetary base in the
North Atlantic economies is 7% higher than it was yesterday."
Let's back up. From the first post of Brad's linked above:
This morning, the ECB allocated about $130 billion in a one-day quick tender
to calm jittery markets. The scramble for liquidity in Europe spilled over into
the U.S.: The Fed, in an effort to get the federal funds rate back down to its
target 5.25% and meet the spike in demand for cash, twice entered the market
today to inject cash.
Just for fun, I thought I'd present a textbook version of this event. Here's
the graph of the market for bank reserves:
The initial equilibrium, before the event, is at E1 where the supply and demand for bank reserves intersect (this is a picture of the federal funds market, i.e. the market for overnight loans of bank reserves between banks). The demand curve slopes downward because the federal funds rate is the opportunity cost of holding bank reserves. Thus, when the cost of holding bank reserves falls (i.e. the ff falls), more reserves are held (as insurance against deposit outflows, and for other purposes).
Reserve supply, shown as vertical lines at R1 and R2 in the diagram is controlled by the Fed through open-market operations. At any point in time, the supply of reserves is fixed, so the line is vertical (or at least approximately so in more general models).
Banks can borrow money in many different places using different financial instruments, but two places to obtain reserves are the federal funds market and the discount window. So long as the ff-rate is lower than the discount rate, banks will choose the ff market over the discount window. But if the ff-rate tries to rise above the discount rate, banks will switch to the discount window since that will be the cheaper source of funds. In the diagram, this is represented by a vertical supply of reserves up to the discount rate, then a horizontal line at that the discount rate (which is always the ff+1% under current bank operating procedures) since the Fed stands ready to lend as much as banks want through the discount window at the discount rate.
Now let's turn to today. As noted in the quote above (from the WSJ Economics blog), "The scramble for liquidity in Europe spilled over into
the U.S." This is shown as an increase in the demand for reserves (i.e. for liquidity) indexed by (a) in the diagram.
If the Fed did not respond, the ff-rate would begin rising, potentially even reaching the discount rate. To avoid this, and maintain a federal funds rate of 5.25%, the "Federal Reserve subsequently poured a little more cash than usual
into the U.S. banking system in order to deal with demand spilling over
from Europe." The total amount of the injection was $24 billion, and this is represented by the shift in the supply of reserves indexed by (b) in the diagram. The result is a new equilibrium at E2 where reserves have been increased to accommodate the increase in demand, and the ff-rate is at 5.25%. once again.
Update: I should have noted that this was an attempt to illustrate the statement from the WSJ: "The Fed, in an effort to get the federal funds rate back down to its
target 5.25% and meet the spike in demand for cash." Demand for reserves would go up, for example, if banks anticipate bad mortgage loans in the
future since they would want to have extra reserves on hand as
insurance against that eventuality (to the extent they are exposed), or if alternative sources of funds dry up due to the evaporation of liquidity. The graph does not show the effects of the problems in mortgage markets on the supply of reserves, i.e. a fall in the supply of reserves from bad loans would also increase the ff-rate and require an injection of reserves to offset it.
Posted by Mark Thoma on Thursday, August 9, 2007 at 01:17 PM in Economics, Monetary Policy |
Bruce Bartlett on "talking heads" in the news media:
Talking Heads, by Bruce Bartlett: In this morning's Wall Street Journal, my
friend Brian Wesbury complains about the "talking head" culture on business
television where every interview seems designed to provoke debate. If one of the
guests is a bull, Brian says, then the other has to be a bear. If there is only
one guest, he says, the interviewer generally plays Devil's advocate.
The result, Wesbury says, is that viewers are often misled into thinking that
there is a great deal of disagreement among economists when in fact there may be
a virtual consensus. By seeking out a few incompetents or cranks just to have
"balance" and create sparks, news shows may be unintentionally misleading
viewers by implying that isolated views that are well outside the mainstream
actually have validity. ...
This is a pet peeve of my own and a reason why I avoid these sorts of
programs. One thing that annoyed me particularly was that the producers would
often put me up against some total nobody who had no clue about what he was
talking about. In one case--I kid you not--I debated the minimum wage with an
honest-to-God, fresh-off-the-streets homeless person. I refused to ever appear
on that channel ever again and it eventually went off the air. ...
I don't mind debating those whose views are diametrically opposed to mine. In
fact, I enjoy a good debate... I know that we can probably agree on the facts
and will argue along predictable lines. But too many producers find such sober
discussions to be boring, so they try to liven things up by setting up debates
with people who make up their own facts, argue illogically, make no effort to be
consistent, and, too often, use up most of the alloted air time. Thus you end up
wasting your own time refuting the other guy's errors rather than making your
This is not an ideological problem. I know that my friends on the left are
just as frustrated by the system as I am. And the problem is not isolated to
economic discussions but extends into every area of news...
I have noticed that over the years there has been a dumbing-down of the
talking heads. Whereas previously the two heads would belong to noted experts
from respected institutions, today they are more likely to be labeled
"Democratic consultant" or "Republican strategist." These people are often so
obscure that when I do a Google search on them there is no evidence that they
I know that the artificial debate format is not going to go away. But maybe
it would be possible for the networks to encourage those conducting the
interviews to be a little more proactive when one of the guests goes off on a
tangent or makes outrageous claims with no factual basis. They should behave
more like baseball umpires than boxing referees who just want to keep it clean.
I am not sure what the right answer is. The
false, misleading ideas driven by politics, ideology, pursuit of profit, etc., are out there looking for
a place to express themselves, and forums such as talk shows and opinion pages
are a key place where that occurs. One hope is that news agencies, talk shows,
and so on will not invite people on the air or print their views if they are not credible brokers.
But that requires the news agencies actually knowing the difference, to
understand the underlying theoretical and empirical evidence, and that seems to
be a big hurdle. It also requires them to look beyond ratings and entertainment
value, which is understandably difficult. It's a hurdle they should be able to get
over, credible and entertaining are not mutually exclusive, but don't seem to be
able to. I think a lot, or at least some of the "he said-she said" journalism
(particularly in print) is not for "balance" for the sake of balance, where
balance here means a view from two sides, but rather it's because the reporter
does not have any idea which side is correct and tries to cover all the bases.
So the question for me is, if these ides are going to be expressed one way or
the other, then what's the best way to rebut them? Do we refuse to go on shows,
call reporters idiots, and generally make their lives as miserable as possible
from blogs, etc. in the hopes of changing their behavior, i.e. in the hope they
won't invite these people on their shows or present their views in their
stories? Do we give these ideas credibility by simply engaging with the people
who are promoting them, or does engaging show the problems with their arguments
and undermine their positions?
I think these people are going to appear in the the media one way or the
other and I am more likely than Bruce to advocate an active role in trying to
rebut them. It's a fine line - I often don't engage with things I see because
shining a light on the views gives them an audience, and I don't want to do
that. But if it's an idea I see a lot, or if it's from a person who has been
pushing nonsense repeatedly, then I am likely to react, perhaps more so than
Bruce. I see no need to debate someone literally dragged off the street as in
the story above, but there are people and ideas that do require rebuttal no
matter how annoyed I am that they are even in the public discourse.
Posted by Mark Thoma on Thursday, August 9, 2007 at 11:34 AM in Economics, Press |
Joseph Stiglitz says George Bush and Alan Greenspan have some explaining to
Greenspan, Bush errors finally home to roost, by Joseph Stiglitz, Project
Syndicate: The pessimists who have long forecast that America's economy was
in for trouble finally seem to be coming into their own. Of course, there is no
glee in seeing stock prices tumble as a result of soaring mortgage defaults. But
it was largely predictable, as are the likely consequences...
The story goes back to the recession of 2001. With the support of US Federal
Reserve Chairman Alan Greenspan, US President George W. Bush pushed through a
tax cut designed to benefit the richest Americans but not to lift the economy
out of the recession that followed the collapse of the Internet bubble.
Given that mistake, the Fed had little choice if it was to fulfill its
mandate to maintain growth and employment: it had to lower interest rates. ...
But, given that overinvestment in the 1990s was part of the problem underpinning
the recession, lower interest rates did not stimulate much investment.
The economy grew, but mainly because American families were persuaded to take
on more debt, refinancing their mortgages and spending some of the proceeds.
And, as long as housing prices rose as a result of lower interest rates,
Americans could ignore their growing indebtedness.
In fact, even this did not stimulate the economy enough. To get more people
to borrow more money, credit standards were lowered, fueling growth in so-called
"subprime" mortgages. Moreover, new products were invented ... making it easier
for individuals to take bigger mortgages. ...
Alan Greenspan egged them to pile on the risk by encouraging these
variable-rate mortgages. But did Greenspan really expect interest rates to
remain permanently at one percent - a negative real interest rate? Did he not
think about what would happen to poor Americans with variable-rate mortgages if
interest rates rose, as they almost surely would? ...
Fortunately, most Americans did not follow Greenspan's advice to switch to
variable-rate mortgages. Even as short-term interest rates began to rise, the
day of reckoning was postponed... [But the] housing price bubble eventually
broke, and, with prices declining, some have discovered that their mortgages are
larger than the value of their house.
Too many Americans built no cushion into their budgets, and mortgage
companies, focusing on the fees generated by new mortgages, did not encourage
them to do so.
Just as the collapse of the real estate bubble was predictable, so are its
consequences... By some reckonings, more than two-thirds of the increase in
output and employment over the past six years has been real estate-related,
reflecting both new housing and households borrowing against their homes to
support a consumption binge.
The housing bubble induced Americans to live beyond their means - net savings
has been negative for the past couple of years. With this engine of growth
turned off, it is hard to see how the American economy will not suffer from a
There is an old adage about how people's mistakes continue to live long after
they are gone. That is certainly true of Greenspan.
In Bush's case, we are beginning to bear the consequences even before he has
Posted by Mark Thoma on Thursday, August 9, 2007 at 01:08 AM in Economics, Monetary Policy, Policy, Taxes |
Mexicans are sending less money home:
Fewer Mexican Immigrants Are Sending Money Back Home, Bank Says, by Julia
Preston, NY Times: This year a smaller percentage of Mexican immigrants in
the United States sent money back to their homeland than in 2006, according to a
report ... by the Inter-American Development Bank. ...
Bank officials, pointing to a survey of Mexican immigrants in the report,
said the decline reflected a rising sense of insecurity and uncertainty about
whether they would stay in the United States. Anticipating a possible move back
to Mexico, these immigrants appear to be saving more. “They have decided because
of the uncertainty of the future that they need to step back and save a bit,”
said Donald F. Terry, general manager of the Multilateral Investment Fund at the
Mr. Terry said the slowdown would affect about 500,000 Mexican homes. “For
those families in Mexico, there is going to be economic and social dislocation,”
Over all, the percentage of Mexicans who regularly sent money home fell to 64
percent in the first half of this year, compared with 71 percent for all of last
year... The sharpest decline in such transactions — known as remittances — came
among Mexicans living in states where they have settled in large numbers only
recently, like Georgia, North Carolina and Pennsylvania. In those states, the
percentage of Mexicans sending money home fell to 56 percent from January to
June, from 80 percent in 2006. ...
Sergio Bendixen, a Miami pollster who conducted the survey, said the
percentage of Mexicans considering a return to their country was the highest in
the more than two decades he has interviewed Hispanic immigrants.
The immigrants in the survey included American citizens and legal and illegal
residents. They identified discrimination as the biggest problem they faced,
with 83 percent saying that discrimination against Latin American immigrants in
general was growing in the United States.
“Mexican immigrants don’t feel welcome in the U.S. anymore,” Mr. Bendixen
said. “They feel they are not wanted here, and their contributions are not
Until this year, money sent home by Mexicans working in the United States had
shown spectacular annual growth since 2000, the first year it was systematically
recorded by Mexico’s central bank. Last year, these funds totaled $23 billion,
making them the country’s second-largest source of foreign income after oil.
But in the first half of 2007, there was no significant increase over the ...
first half of 2006, a period that recorded a 23 percent increase over the same
months in 2005.
By contrast, the amount of money sent home by immigrants from Central America
has continued to grow... Remittances to Mexico have become vital to the
economics of the country’s poorest regions, bank officials said. ...
Remittances could fall because less people are employed (even if the saving rate is the same), or because the saving rate increases (even if income is the same). I wish the article had given some sense of how much of the fall in
remittances and other payments is due to a fall in employment and income due to
the housing crash, and how much is due to the increased desire to save for a potential return trip to Mexico. (The
increased desire to save could be due to the housing crash as well since a fall in
employment prospects would make return to Mexico more likely. The article cites
feeling less welcome as a large factor behind the motivation to return, but this could also be due to a fall
in the number of available jobs.)
Posted by Mark Thoma on Thursday, August 9, 2007 at 12:24 AM in Economics, Immigration |
Posted by Mark Thoma on Thursday, August 9, 2007 at 12:06 AM in Links |
Is rapid economic growth in China and India the source of problems with the
economies of Latin America? This paper argues that, contrary to what many
believe, the overall effect of growth in China and India on the economies of Latin America has been positive:
Latin America’s Response
to the growth of China and India: overview of research findings and policy
implications, by Daniel Lederman, Marcelo Olarreaga, and Guillermo, Vox EU:
China's and India's fast economic growth during the past decade is paralleled
only by their growing presence in policy discussions throughout the Latin
America and the Caribbean (LAC) region. The success of these Asian countries is
looked upon with admiration, but there is also concern about the effects that
growing Chinese and Indian exports may have on the region’s manufacturing and
services sector. China and India’s growing share in world markets is often
blamed for the poor performance of the private sector in LAC.
Continue reading ""Latin America’s Response to the Growth of China and India"" »
Posted by Mark Thoma on Wednesday, August 8, 2007 at 07:02 PM in Economics, International Trade |
Jonathan Schwarz at A Tiny Revolution finds George Orwell peering into the future:
Describes The Right Wing Blurghosphere, by Jonathan
Schwarz, A Tiny Revolution: The Scott
Beauchamp affair is reminding me of this, from 1984:
A Party member...is supposed to live in a continuous frenzy of hatred of
foreign enemies and internal traitors, triumph over victories, and
self-abasement before the power and wisdom of the Party. The discontents
produced by his bare, unsatisfying life are deliberately turned outwards and
dissipated by such devices as the Two Minutes Hate, and the speculations which
might possibly induce a sceptical or rebellious attitude are killed in advance
by his early acquired inner discipline...called, in Newspeak, crimestop.
Crimestop means the faculty of stopping short, as though by instinct, at the
threshold of any dangerous thought. It includes the power of not grasping
analogies, of failing to perceive logical errors, of misunderstanding the
simplest arguments if they are inimical to Ingsoc, and of being bored or
repelled by any train of thought which is capable of leading in a heretical
direction. Crimestop, in short, means protective stupidity.
At first it seems amazing that Orwell could have precisely described today's
right-wing blurgh world sixty years ago. But the right-wing blurghs are just an
outgrowth of human nature, which never changes...
Posted by Mark Thoma on Wednesday, August 8, 2007 at 03:33 PM in Politics, Weblogs |
This is about the role of academics in public discourse. Much of what
academics say is dismissed as "ivory tower nonsense," or something similar, but
should it be dismissed so easily? The essay below from Mark Kleiman was written
partly in response to Michael Ignatieff's apparent
apology for his support of the Iraq war that appeared in the New York Times
Magazine. In the article, Ignatieff blames his errors about Iraq on an thinking
like an academic rather than with the good judgment he has learned in politics:
I’ve learned that good judgment in politics looks different from good
judgment in intellectual life. Among intellectuals, judgment is about
generalizing and interpreting particular facts as instances of some big idea. In
politics, everything is what it is and not another thing. Specifics matter more
than generalities. Theory gets in the way.
But he has this wrong. Academics learned long ago to look at the data rather
relying on emotions, precisely what Ignatieff says he has now learned from being
in practical politics. Go back and see
what the academics
were saying (here
too) and compare it to what the "practical politicians" were saying and
judge for yourself who had the better perspective on the likely consequences of
the war and its aftermath. As Mathew Yglesias states:
Academics in the field of Middle East studies were overwhelmingly opposed to
the war. Similarly, international relations scholars opposed the war by a very
large margin. The war's foci of intellectual support were in the institutions of
the conservative movement, and in the DC think tanks and the punditocracy where
the war had a lot of non-conservative support. People with relevant academic
expertise -- notably people who weren't really on the left politically -- were
massively opposed to the war. To imply the reverse is to substantially obscure
one of the main lessons of the war, namely that we should pay more attention to
what regional experts think and give substantially less credence to the idea
that think tankers are really "independent" of political machinations.
The academic community has often been opposed to conservative plans in a variety of areas, and there have
been concerted attempts by some conservatives to undermine academic voices in
public discourse (liberal bias, ivory tower, etc.) The attempts have been fairly
obvious, and somewhat successful, or so it seems to me. Mark Kleiman says
academics should speak up, but if they want to maintain their credibility with the public they
should avoid claiming any special authority when speaking outside their main
area of expertise:
The academic estate and the political process, by Mark Kleiman: In general,
academic specialists in foreign policy, strategy, and Middle Eastern affairs
made much better guesses about what would happen if we invaded Iraq than did
politicians and pundits. (Yeah, yeah,
I shoulda listened. Sorry, sir! Won't happen again, sir!)
And yet "ivory tower" remains an unanswerable insult in political discourse,
as if journalists and politicians were proud of their ignorance. Many academics
don't speak out much in public fora, even in areas of their expertise. Why
doesn't the academic estate do more to claim its rightful voice in public
affairs, and why, when it does, is it so little heeded?
I think there are two key distinctions here that are often lost: the
distinction between an expert's proper authority in his own field of expertise
and a general claim by people with faculty appointments to opine about public
affairs, and the distinction between research and policy analysis.
Academics are, by nature, specialists. In general, the claim of specialists
to offer expert opinion outside their specialities is to be treated with
skepticism. (Socrates made that point, if I recall correctly.)
Back in 2003, the UCLA Faculty (or, rather, the 200 people who bothered to
show up for the meeting) voted its
opposition to the pending invasion of Iraq. That conclusion was arrived at
by vote after a short and chaotic debate (mostly among people with no scholarly
credentials relevant to the choice at hand), and was not subjected to the sort
of peer review or careful analysis that we require in our scholarly lives. I
thought then that the resolution did not deserve the attention that, in fact, it
didn't get. By passing it as a faculty, we were illicitly claiming for our
political opinions the authority that properly belongs only to our scholarly
views. I still think so, though the proponents of that resolution turned out to
That's not to say that academics, per se, have no proper public
role. Someone who studies Iraq or climate change or taxation professionally is
entitled to a hearing — and, elitist though it may be to say it, to a more
respectful hearing than a non-expert ... Non-experts, including other academics,
ought to disagree with experts, or disregard expert views, only cautiously and
tentatively, unless there are comparably credentialed experts on the other side.
But, even if someone is a genuine expert in a relevant subject area, his
claim to dictate the correct policy has much less force than his claim to
describe what is the case and predict what is likely to happen, unless that
person is also an expert in thinking about choosing good policies...
Read the "policy implications" section of a typical social-science paper. It
rarely reflects the sort of cautious judgment about the relationship between
observation and inference displayed in the "methods and results" section. That's
partly because many social scientists haven't thought about the very different
methods appropriate to policy analysis...
To earn respectful attention to our opinions about what ought to be done, we
need to learn to make those opinions intellectually respectable, which means,
among other things, both carefully distinguishing what we know from what we
prefer and accurately representing the limits of our knowledge.
I'm not saying that, if we do so, we will get such attention; we probably
won't. But I am saying that the attempt to use intellectual prestige, separated
from serious and dispassionate critical truth-seeking, as a weapon in political
struggle is no more legitimate than the use of money or celebrity as a weapon in
political struggle, and less so if that attempt falsely claims the respect due
to actual expert relevant knowledge.
Since academics have some capacity to lead opinion, some leisure, and some
money, and since they're mostly on the right side of the current major political
divide, I'd like to see them more active in politics. ...
But when I saw an ad in the New York Times in October 1968, with a
bunch of professors' signatures under the headline "A Thousand People Who Think
for a Living Think You Should Vote for Hubert Humphrey," I thought that was
arrogant bullsh*t: "elitism" in the legitimately pejorative sense of the term.
And I still think so.
And don't miss this commentary on the Ignatieff article [as highlighted by Brad DeLong].
Update: I've been bothered by how to fit someone like Paul Krugman, who I think has earned the right to be heard on a broad array of issues, not just economics, into the framework outlined by Mark Kleiman. So I don't think we should rule out that people can establish credibility beyond their academic area of expertise.
Posted by Mark Thoma on Wednesday, August 8, 2007 at 12:33 PM in Economics, Politics, Universities |
I don't generally link or present things from the NY Sun, but since it's Edward Glaeser
writing about poverty programs, a topic worthy for discussion, I'll make an
Where Edwards Is Right, by
Edward Glaeser, Commentary, nysun.com: Last week in the New York
Times, David Brooks compared the anti-poverty programs of Barack Obama and John
Edwards. Senator Obama's plan focuses on making impoverished places more
successful with funding for public transportation and community centers while
Mr. Edwards wants to give housing vouchers directly to a million people. ...
Should the government focus on fixing poor places or should it provide poor
people with the resources to leave those communities?
Mr. Obama's poverty proposal includes some person-based policies, like
expanding the Earned Income Tax Credit, but he also is awfully fond of
place-based strategies, like Community Development Block Grants and a "promise
neighborhoods" program, which uses national resources to develop 20 impoverished
areas. Mr. Edwards is a bigger fan of person-based strategies like housing
vouchers and temporary jobs. I am no supporter of Mr. Edwards, but he is right
to focus more on helping poor people than poor places.
Continue reading "Edward Glaeser: Where Edwards Is Right" »
Posted by Mark Thoma on Wednesday, August 8, 2007 at 12:24 AM in Economics, Policy, Politics |
Chapter 14 of Gregory Clark's new book A Farewell to Alms on the
social consequences of the Industrial Revolution begins with:
14 Social Consequences
In proportion, therefore, as the repulsiveness of the work increases, the
wage decreases. -- Karl Marx and Friedrich Engels (1848)
The Industrial Revolution was driven by the expansion of knowledge. Yet,
stunningly, unskilled labor has reaped more gains than any other group. Marx and
Engels, trumpeting their gloomy prognostications in The Communist Manifesto in
1848, could not have been more wrong about the fate of unskilled workers. Figure
14.1 shows a typical image of Industrial Revolution misery that somehow has
worked its way into modern popular consciousness.
Figure 14.1 Able-bodied poor breaking stones for roads in Bethnal Green, London, 1868
The reality is very different. By 1815 real wages in England for both farm
laborers and the urban unskilled had begun the inexorable rise that has created
affluence for all. Nor was it even the case that the gains to land and capital
initially exceeded those of labor. From 1760 to 1860 real wages in England rose
faster than real output per person. The innovators, the owners of capital, the
owners of land, and the owners of human capital all experienced modest rewards,
or no rewards, from advances in knowledge. Thus modern growth, right from its
start, by benefiting the most disadvantaged groups in preindustrial society,
particularly unskilled workers, has reduced inequality within societies.
But while growth so far has been benign, there is no guarantee that it will
continue to promote equality within societies. We may soon face the gloomy
dystopia feared by so many writers, in which the wages of unskilled labor drop
below the socially determined "subsistence wage" and societies are forced to
support a large fraction of the population permanently through the public purse.
This section of the chapter (pgs. 285-289) is part of a more
general discussion of changes in inequality. It looks at past and potential
future changes in the wages of unskilled labor:
Technological Advance and Unskilled Wages
We think of the Industrial Revolution as practically
synonymous with mechanization, with the replacement of human labor by machine
labor. Why in high-income economies is there still a robust demand for unskilled
labor? Why do unskilled immigrants with little command of English still walk
across the deserts of the U.S. Southwest to get to the major urban labor markets
to reap enormous rewards for their labor, even as undocumented workers? Why were
there people camped out for months and even years at the Channel Tunnel freight
depot in northern France, waiting for a chance to break through the security
fence and hop onto a train for Britain?
Continue reading "Social Consequences of the Industrial Revolution" »
Posted by Mark Thoma on Wednesday, August 8, 2007 at 12:15 AM in Economics, Income Distribution, Technology |
Posted by Mark Thoma on Wednesday, August 8, 2007 at 12:06 AM in Links |
Willem Buiter says we should legalize drugs if we want to disable terrorist
Legalise drugs to beat terrorists, by Willem Buiter, Commentary, Financial Times
(Free): The UK government is considering reclassifying cannabis from a class
C drug to a class B drug, carrying higher penalties for using and dealing. As an
economist with a strong commitment to personal liberty and responsibility, my
preference would be to see all illegal drugs legalised. The only exception would
be substances whose consumption leads to behaviour likely to cause material harm
Following legalisation, the production and sale of these drugs should be
regulated to ensure quality and purity. They should also be taxed, as are
tobacco products and alcoholic beverages...; more money should be spent on the
rehabilitation of addicts. Ideally legalisation should occur simultaneously in a number of neighbouring
The principle-based argument for legalisation is that behaviour that harms
others ought to be criminalised, not behaviour that hurts only the person
engaged in it. It is not the government’s job to protect adults of sound mind
from the predictable consequences of their actions.
If the public is ill-informed about the consequences of drug taking, there is
an educational role for the state. Children should be protected..., as they are
from tobacco and alcohol. ... Parents should be paternalistic, but when it comes
to mentally competent grown-ups the state should not be. ...
A pragmatic argument against criminalising drugs is that criminalisation
creates vast rents and encourages criminal entrepreneurs to use violence,
intimidation, bribery, extortion and corruption to extract these rents. Another
pragmatic argument is that it is pointless to waste resources fighting a war
that cannot be won. The losing war on drugs wastes resources that could be used
to fight terrorism and other crimes.
Another important argument for legalising, in particular, all cultivation of
poppy and of coca (and their illegal derivatives) is that this would take away a
vital source of income and political support for terrorist movements, including
the Taliban and al-Qaeda in Afghanistan, and Colombia’s Revolutionary Armed
Forces (Farc) and various paramilitary groups.
Continue reading "How to Beat Terrorists" »
Posted by Mark Thoma on Tuesday, August 7, 2007 at 01:53 PM in Economics, Market Failure, Regulation, Terrorism |
Once again the Fed left the target federal funds rate at 5.25%, but there
were some changes in the press release. Notably, there is more certainty that
economic growth has moderated, and there is an increase in the assessment of the
downside risks to economic growth. In addition, financial volatility and
tightening credit markets are mentioned and the slowdown in housing continues to
be described as ongoing. Nevertheless, the Committee continues to believe that
"the economy seems likely to continue to expand at a moderate pace over coming
quarters, supported by solid growth in employment and incomes and a robust
global economy." In addition, "the Committee continues to view the balance of
risks as tilted toward inflation."
Comparing today's press release to the release from the previous meeting:
Continue reading "The FOMC Holds Target Rate at 5.25%" »
Posted by Mark Thoma on Tuesday, August 7, 2007 at 11:56 AM in Economics, Monetary Policy |
In the Preface to his book on the cause of the Industrial Revolution,
A Farewell to Alms, Gregory Clark says:
This book takes a bold approach to history. ... It is an unabashed attempt at
big history, in the tradition of The Wealth of Nations, Das Kapital,
The Rise of the Western World, and most recently Guns, Germs, and Steel.
All these books, like this one, ask: How did we get here? Why did it take so
long? Why are some rich and some poor? Where are we headed? ...
Doubtless some of the arguments developed here will prove oversimplified, or
merely false. They are certainly controversial, even among my colleagues in
economic history. But far better such error than the usual dreary academic sins,
which now seem to define so much writing in the humanities, of willful
obfuscation and jargon-laden vacuity. As Darwin himself noted, "false views, if
supported by some evidence, do little harm, for every one takes a salutary
pleasure in proving their falseness: and when this is done, one path towards
error is closed and the road to truth is often at the same time opened."' Thus
my hope is that, even if the book is wrong in parts, it will be clearly and
productively wrong, leading us toward the light. ...
Here's part of a longer write-up on the book:
In Dusty Archives, a Theory of Affluence, by Nicholas Wade, NY Times: For
thousands of years, most people on earth lived in abject poverty... But with the
Industrial Revolution, some societies traded this ancient poverty for amazing
Historians and economists have long struggled to understand how this
transition occurred and why it took place only in some countries. ...
Gregory Clark, an economic historian at the University of California, Davis,
believes that the Industrial Revolution — the surge in economic growth that
occurred first in England around 1800 — occurred because of a change in the
nature of the human population. The change was one in which people gradually
developed the strange new behaviors required to make a modern economy work. The
middle-class values of nonviolence, literacy, long working hours and a
willingness to save emerged only recently in human history, Dr. Clark argues.
Because they grew more common in the centuries before 1800, whether by
cultural transmission or evolutionary adaptation, the English population at last
became productive enough to escape from poverty, followed quickly by other
countries with the same long agrarian past. ...
Continue reading "Gregory Clark's "A Farewell to Alms"" »
Posted by Mark Thoma on Tuesday, August 7, 2007 at 02:07 AM in Economics, Technology |
Does increased police deployment decrease crime? According to these results, "a 10% increase in police leads to a 3% fall in crime." [Alex Tabarrok of
Marginal Revolution is cited in the references]:
Policing and crime:
evidence from the London bombings re-deployment, by Mirko Draca, Stephen Machin,
and Robert Witt, Vox EU: Debate over law and order policy in most countries is often characterised by
calls for ‘more police’. Compared with debates over the efficacy of
incarceration or increases in criminal sanctions, a call for more police is much
less controversial. Indeed, politicians from both left and right-wing parties
are often eager to make commitments to increase police resources, particularly
those related to the visible deployment of police officers in community areas or
prominent public places.
However, in empirical terms very little is known about the effects of
increased police deployment on crime. ...[S]pending on law and order is a major
area of public expenditure. Furthermore, the intuition that extra police must
deter crime is as appealing... However, in practice the realisation of this intuition
can face obstacles. In the case of crime, the deployment of police in one area
or at one time can shift or displace criminal activity thereby reducing the net
effect of the deployment. And like all types of investment, the provision of
extra police resources faces inevitable diminishing returns.
Continue reading "Vox EU - Policing and Crime: Evidence from the London Bombings Re-deployment" »
Posted by Mark Thoma on Tuesday, August 7, 2007 at 12:15 AM in Economics |
Posted by Mark Thoma on Tuesday, August 7, 2007 at 12:06 AM in Links |
Paul Krugman has a recommendation for policymakers:
Foreclosures: A Call
to Action, by Paul Krugman, Money Talks: In today's Times, Gretchen
Morgenson has a frightening piece about the troubles facing many homeowners,
Maze May Increase Foreclosures." ...[T]his isn't just a sad story. It's a
call to action.
If a homeowner is fundamentally unable to pay his or debt, there's not much
that can be done to avoid foreclosure. What's happening now, however, is that
many borrowers who would in the past have been able to work out a mutually
beneficial deal with their bank, restructuring the terms of their loan so as to
avoid foreclosure, are now stuck. Their mortgage has been "securitized" — sold
off to third parties, then pooled with many other mortgages and repackaged into
various component parts. And because of the complexity of the securitization,
there's nobody for the homeowner to deal with.
Regulators, and the Federal Reserve in particular, need to step in and serve
as coordinators, ensuring that deals do get made when possible.
This wouldn't be at all unprecedented. The Fed and the Treasury stepped in to
coordinate lenders to Latin American countries in the 1980s, acting to prevent a
rush for the exits that would have led to widespread defaults. An emergency loan
to Brazil in 2002 gave that country a chance to work its way out of a potential
financial crisis. If we can rescue third-world economies, why can't we rescue
I hope that people at the Fed are working on this. If not, Congress should
hold hearings and prod them into action.
Posted by Mark Thoma on Monday, August 6, 2007 at 04:05 PM in Economics, Financial System, Housing, Monetary Policy, Regulation |
John Berry of Bloomberg on helping displaced workers. I added a few comments at the end:
Focusing on Jobs Lost to Trade Is Big Mistake, by John M. Berry, Commentary,
Bloomberg: Millions of Americans lose their jobs every month for a
host of reasons: falling demand for the goods and services they produce,
efficiency gains, bad management decisions, a company restructuring.
Foreign competition is way down the list of reasons for job losses, though
you would never know that from listening to the politicians debating the issue.
For almost 50 years special benefits have been available to factory workers
who can demonstrate that their jobs disappeared because of imports -- or in
recent years that their employer shifted production to a country with a
free-trade agreement with the U.S.
This Trade Adjustment Assistance program, or TAA, expires at the end of next
month, and some members of Congress want both to extend it and make service
industry workers eligible for help. ...
The justification for special assistance for workers hurt by trade is based
on the notion that freer trade benefits the nation as a whole even though
employees in some industries will suffer. ...
What about the impact on jobs of other types of national policies, such as
environmental regulations that may cause a plant to close because it isn't
economical to upgrade its emissions controls? Or perhaps the limits on cutting
old growth forests on public lands in the Pacific Northwest because of damage to
spotted owl habitat? ...
Instead of an expansion of the TAA program, Congress should be examining the
adequacy of the safety net for anyone who loses a job in an economy as dynamic
as that of the U.S.
Continue reading "Helping Displaced Workers" »
Posted by Mark Thoma on Monday, August 6, 2007 at 03:15 PM in Economics, Social Insurance, Unemployment |
Mathew Yglesias notes the press's failure to challenge false statements about
tax-cuts made by Giuliani in the GOP debate:
Laffer Press Roundup, by Mathew Yglesias: Here's an interesting test case
for the press. It seems that at yesterday's GOP debate, Rudy Giuliani derided
the idea that higher taxes raise revenues as a "Democratic, liberal" assumption
and put forward his alternative view that you generate revenue by lowering
tax rates. This is a stunning confession of total ignorance of tax policy and
economics by the GOP front runner. So how did the press cover it? Chris Cilizza
at the Fix lives down to my expectations by
totally ignoring the fact that Giuliani is incorrect:
"There is a liberal Democratic assumption that if you raise taxes, you raise
more money," said Giuliani to huge applause from the crowd assembled at Drake
Michael Shear in The Washington Post's page A1 story
also doesn't care about the merits of the issue:
Former New York mayor Rudolph W. Giuliani sparked loud applause when he
declared that "the knee-jerk liberal Democratic reaction -- raise taxes to get
money -- very often is a very big mistake."...
Nor does Stephen Braun of The Los Angeles Times
care at all whether or not GOP tax policy makes sense:
Referring to last week's devastating bridge collapse in Minneapolis, the GOP
rivals found common ground in insisting that increased private investment from
cutting taxes would provide more money to repair the nation's failing
Mike Glover at the AP
seem to mention the issue at all.
Adam Nagourney at The New York Times, by contrast, doesn't go nearly
as far as I'd like, but does way better than his colleagues at the
major papers. Here he is
on the NYT political blog:
Mr. Giuliani proceeded to explain that when he was mayor of New York he had
cut taxes, and that those tax cuts had produced revenues that allowed him to
finance bridge reconstruction. (Actually, there’s a good argument that it was
the stock market boom in New York that brought all that money into the city’s
coffers, but we’ll let that pass for now).
And here he is
teamed up with Michael Cooper in the print edition:
Mr. Giuliani said that as mayor of New York, he had increased revenues to pay
for bridge and road repair by cutting taxes, thereby jolting the economy, and
that he would do the same thing as president. The city’s treasury in that period
was flush largely with revenues produced by the stock-market boom of the late
It'd be nice to see reporters go further than Nagourney does here, but
improvements at the margin deserve recognition and the Times is doing a
much better job than the Post here.
Even Nagourney's "we’ll let that pass for now" is inadequate.
Any reporter who thinks there's a debate about whether cutting taxes has increased tax revenues has not been paying
attention and has no business covering economics. Let's take a
cue from Paul Krugman and ask what the press should have asked, what does
this say about Giuliani's character? First, I disagree with the characterization
of his statements as ignorant. I don't believe he is ignorant about this topic,
so that is no excuse (and if he were ignorant, i.e. if he has not bothered to
find out about the consequences of tax cuts by now, that would tell us a lot
too.) He noted that he is aware of the evidence, but chooses to portray it
as a "liberal Democratic assumption" even though it is nothing of the sort (see
Andrew Samwick and Greg Mankiw's statements about this, both of whom served
under Bush in the Council of Economic Advisers, or any reputable conservative
economist for that matter, or this recent
What this tells us is that just like George Bush in the run-up to the Iraq
war, Giuliani is not an honest broker. He is willing to tell people what they
want to hear in spite of compelling evidence to the contrary, and to surround
himself with people who will not challenge him when he uses misleading
statements to push a policy. He has no problem using dishonest statements to
sell policy. There's a lot to be gleaned about his character from his
willingness to engage in this type of dishonest salesmanship, a style of
leadership that led us into our current predicament, and it's disappointing to
see the press not even bother to make the connections.
Posted by Mark Thoma on Monday, August 6, 2007 at 12:06 PM in Budget Deficit, Economics, Politics, Press, Taxes |
Paul Krugman evaluates the policy positions of the presidential candidates
and what it tells us about them:
Substance Thing, by Paul Krugman, Commentary, NY Times: Two presidential elections ago, the conventional wisdom said that George W.
Bush was a likable, honest fellow. But those of us who actually analyzed what he
was saying about policy came to a different conclusion — namely, that he was
irresponsible and deeply dishonest. His numbers didn’t add up, and in his
speeches he simply lied about the content of his own proposals.
In the fifth year of the disastrous war Mr. Bush started on false pretenses,
it’s clear who was right. What a candidate says about policy, not the supposedly
revealing personal anecdotes political reporters love to dwell on, is the best
way to judge his or her character.
So what are the current presidential candidates saying about policy, and what
does it tell us about them?
Well, none of the leading Republican candidates have said anything
substantive about policy..., you’ll see a lot of posturing, especially about how
tough they are on terrorists — but nothing at all about what they actually plan
In fact, I suspect that the real reason most of the Republicans are ducking a
YouTube debate is that they’re afraid they would be asked questions about
policy, rather than being invited to compare themselves to Ronald Reagan.
But didn’t Rudy Giuliani just announce a health care plan? No, he vaguely
described a tax cut proposal... But he offered no specifics about how the plan
would work, how much it would cost or how he would pay for it.
As Ezra Klein of The American Prospect has pointed out, in the speech
announcing his “plan”... Mr. Giuliani never uttered the word “uninsured.” He
did, however, repeatedly denounce “socialized medicine” or some variant thereof.
The entire G.O.P. field, then, fails the substance test.
There is, by contrast, a lot of substance on the Democratic side... Most
notably, in February, Mr. Edwards transformed the whole health care debate with
a plan that offers a politically and fiscally plausible path to universal health
Mr. Edwards has also offered a detailed, sensible plan for tax reform, and
some serious antipoverty initiatives.
Four months after the Edwards health care plan was announced, Barack Obama
followed with a broadly similar but somewhat less comprehensive plan. Like Mr.
Edwards, Mr. Obama has also announced a serious plan to fight poverty.
Hillary Clinton, however, has been evasive ... and ... she’s offered few
specifics. ... In fact, what Mrs. Clinton said ... in February’s Democratic
debate suggested a notable lack of urgency: “Well, I want to have universal
health care coverage by the end of my second term.”
On Saturday, at the YearlyKos Convention in Chicago, she sounded more
forceful: “Universal health care will be my highest domestic priority as
president.” But does this represent a real change in position? It’s hard to
And even if you believe Mrs. Clinton’s contention that her positions could
never be influenced by lobbyists’ money ... there’s reason to worry about the
big contributions she receives from the insurance and drug industries. Are they
simply betting on the front-runner, or are they also backing the Democratic
candidate least likely to hurt their profits?
All of the leading Democratic candidates are articulate and impressive. It’s
easy to imagine any of them as president. But after what happened in 2000, it
worries me that Mrs. Clinton is showing an almost Republican aversion to talking
Previous (8/3) column:
Paul Krugman: A Test for Democrats
Next <8/10) column: Paul Krugman: Very Scary Things
Posted by Mark Thoma on Monday, August 6, 2007 at 12:33 AM in Economics, Policy, Politics |
Jonathan Wight of the University of Richmond says Adam Smith "pointed out that consumers often buy
products not so much for their usefulness, as for the intrinsic beauty of their
form and function":
Adam Smith and the iPhone, by Jonathan B. Wight, Commentary, ProJo.com:
Consumers have now had a few weeks to fiddle with their new iPhones — the latest
“must-have” device that makes phone calls, plays music, schedules appointments,
surfs the Web...
Two questions emerge: Do consumers gobble up gadgets actually intending to
use all these dazzling functions? Is the iPhone another example of wasteful
spending by consumers crushed with debt — or, is it the sharp edge of
technological innovation and progress that will bear fruit over time?
The history of economic thinking offers some insights. Adam Smith, the 18th
Century economist and moral philosopher, pointed out that consumers often buy
products not so much for their usefulness, as for the intrinsic beauty of their
form and function. He writes, “What pleases these lovers of toys is not so much
the utility, as the aptness of the machines which are fitted to promote it.”
A man, for example, buys a new watch that keeps exquisite time — not because
he wishes to arrive on time, but because he wishes to own a machine capable of
producing perfect time. Smith says the person who buys this watch “will not
always be found either more scrupulously punctual than other men, or more
anxiously concerned upon any other account, to know precisely what time of day
it is.” Rather, what interests him is “the perfection of the machine” that
attains this knowledge.
This is an important insight into human nature. A machine’s beauty is judged
on the basis of hypothetical usefulness, and this characteristic is often valued
more highly than actual usefulness. People buy fast cars that can potentially go
150 miles an hour, without ever intending to take them on the track.
Hence, products are purchased for what may seem like superficial or wasteful
reasons. Many critics of capitalism bemoan our throw-away society, and the
pressure to take on credit-card loans merely to assuage peer insecurity, in the
guise of $100 sneakers or some other fad.
Smith would agree, and he worries, “How many people ruin themselves by laying
out money on trinkets of frivolous utility? . . . All their pockets are stuffed
with little conveniencies. They contrive new pockets, unknown in the clothes of
other people, in order to carry a greater number.”
The owners of iPhones can actually unburden their pockets of the devices that
the new machine replaces. But will owning the iPhone make anyone happier? People
delude themselves into thinking so, but Smith says that after the initial rush
of excitement, they will return to whatever state of happiness is their natural
equilibrium. Only by constantly upgrading can one rekindle a blissful rush.
Smith’s system of progress through competition thus relies on consumers who
stimulate markets by buying ever-more beautiful goods. The “invisible hand”
operates through the self-delusion that compels people to think happiness
depends on owning machines that perform feats of little actual utility. This
stimulates technological innovation, which paradoxically may produce genuine
human progress in the long run.
The genius of a competitive market system is not in the individual products
produced, but in the climate of experimentation and discovery that unleashes the
creativity of a society. ...
Posted by Mark Thoma on Monday, August 6, 2007 at 12:24 AM in Economics, History of Thought, Technology |
James Surowiecki of The New Yorker wonders why we have a corrupt student-loan
program where "it’s four times as expensive for the government to subsidize and
guarantee private loans as for it to issue those loans itself":
Rent-Seekers, by James Surowiecki, The New Yorker: ...[T]his spring, ...
news broke that student-loan companies had been using unsavory and possibly
illegal tactics to get preferential treatment from university financial-aid
officers. ... In response, the Senate passed a bill toughening rules against
“inducements” from lenders to administrators. All well and good, but it leaves
untouched a more fundamental scandal: the huge profits that lenders make from
student loans are being earned on the government’s dime. ...
We want college students to be able to finance their education at reasonable
rates. But banks are understandably leery of lending to people with no
collateral and uncertain future earnings. So we provide incentives to lend. The
federal government, for instance, guarantees the so-called Stafford loans... On
top of that, the government hands out billions of dollars in subsidies to
lenders every year... In effect, lenders get a guaranteed return with very
This convoluted process is good at making student-loan companies rich... But
it’s not very good at getting government money to students cheaply and
efficiently. President Bush’s 2007 budget shows, for instance, that it’s four
times as expensive for the government to subsidize and guarantee private loans
as for it to issue those loans itself. In other words, the current system is not
just corrupt. It’s also inefficient. So why are we stuck with it?
Continue reading "James Surowiecki: Rent-Seekers" »
Posted by Mark Thoma on Monday, August 6, 2007 at 12:15 AM
Posted by Mark Thoma on Monday, August 6, 2007 at 12:06 AM in Links |
Matt Miller says that progress in social policy in the U.S. is impeded by "phony populist fears":
Phony fears grip America, by Matt Miller, Commentary, Financial Times: A
spectre is apparently haunting America – the spectre of “populism”. “New
populism spurs Democrats on the economy,” cried the front page headline in The
New York Times the other day. Republicans rail against unseemly “class warfare”,
while centrist Democrats fret that hard-edged populist appeals will spook
suburban voters. ...
Consider John Edwards, who the press and Republicans have cast as the
heartthrob of the resurgent “left”. The centrepiece of Mr Edwards’ agenda is a
call for universal health coverage. It sounds radical to American ears, perhaps.
But Margaret Thatcher would have been chased from office in the UK if she had
proposed a health plan as radically conservative as Mr Edwards’...
Mr Edwards wants to lift the minimum wage substantially, and to boost wage
subsidies for low-income work besides. But the outer limits of Mr Edwards’
ambition would leave low income work less generously compensated than the
minimum wage and subsidy blend enacted by ... Tony Blair and Gordon Brown –
arrangements Conservative party leader David Cameron says suit him just fine.
On taxes, Mr Edwards wants to return marginal rates for high earners from 35
per cent to the 39.6 per cent level that existed under Bill Clinton – rates
slightly lower than those in force after Mrs Thatcher got through cutting them.
... Mr Edwards’ plans for college aid would still leave American graduates far
deeper in debt than anything conservative parties across Europe would tolerate.
Mr Edwards and others question the received wisdom that “free trade is good
no matter how many people get hurt”, but here again, this is not as “leftist” as
some seem to think. ... The idea that the consequences of free markets are worth
considering when assessing how open an economy should be has ... already been
conceded by the economics profession. ...
I could go on, but you get the point. The fact that a Thatcher-Cameron-Buffet
agenda can be hyped as “populist” says more about propaganda success and media
norms than anything else. Over three decades, America’s conservative movement
has so deftly shifted the boundaries of debate to the right that even modest
adjustments to the market system can be cast as the second coming of Marx
without anyone blushing. Today’s phony populist fears also remind us that the
real problem with the media is not ideology but stenography. If official sources
call something “populist” often enough, it is.
More depressing is that many Democrats fall into the same trap, worrying that
a Thatcher-Cameron agenda in America will frighten suburban swing voters, rather
than asking themselves how they might win the argument over the direction
America needs to take. At this rate, Americans will be lucky to catch up a
decade from now to today’s social policy consensus in the UK. Meanwhile, Brits
and others will have moved forward on a new generation of ideas to help citizens
find security and opportunity in a global economy.
But maybe America’s latest surreal debate should not come as a surprise. It
stands to reason that a country capable of turning Bill Clinton’s lies about sex
into an epic national crisis can morph a prim Tory platform into some scary rush
to the barricades. And so America hyperventilates again, too busy gasping
theatrically for breath to know its actual condition.
Posted by Mark Thoma on Sunday, August 5, 2007 at 12:33 PM in Economics, Policy, Social Insurance |
Ken Rogoff says rising medical costs could "pose a major
challenge to contemporary capitalism":
Better red than dead, by Kenneth Rogoff, Commentary, Project Syndicate: Will the inexorable rise in medical costs around the world someday pose a
major challenge to contemporary capitalism? I submit that in the not-so-distant
future, moral, social, and political support for capitalism will be severely
tested as would-be egalitarian health systems face ever-rising costs. ...
Some leading economists project that health expenditures, which already
constitute 16% of the US economy, will rise to 30% of GDP by 2030, and perhaps
approach 50% later in the century. Other rich and middle-income countries ...
won't lag far behind. Countries in Europe and elsewhere have shielded their
citizens from a part of this rise by piggybacking on US technological advances.
Ultimately, though, they face the same upward cost pressures. ...
Many societies view healthcare as a right, not a luxury. When medical
expenses constituted only a small percentage of income, as was typically the
case 50 years ago, an egalitarian approach to healthcare was a small
extravagance. The direct and indirect costs were relatively minor and
One often hears about rising healthcare costs in the context of future
government budget projections, with old-age health costs expected to dominate
growth in government expenditures in coming years. But a careful look at the
projections ... show[s] that the aging of our societies is only a part of the
problem, and not the larger part. The real issue is whether societies are
willing to provide elderly people with equal access to ever newer and improved
A change on the horizon that will exacerbate current frictions is the growing
importance of individualised health care. For most of modern history, relatively
inexpensive public health precautions, such as providing clean drinking water
and routine vaccinations, have been the main factor pushing up life expectancy.
Public health measures have trumped the importance of individual care.
But today, the balance is shifting. Heart operations are already a major
factor in extending life in many rich countries. Sophisticated x-ray diagnostic
techniques such as CT scans make it possible to detect many cancers at a
Some drug researchers predict that with continuing advances in understanding
the human genome, doctors may eventually be able to predict illnesses 15-20
years in advance, and begin prophylactic treatment immediately. ...
In principle, greater use of market mechanisms to allocate health care can
slow or even temporarily reverse the rise in healthcare costs. But improved
efficiency has its limits. Ultimately, the evidence suggests that societies
spend ever-larger fractions of their income on health over time, in contrast to
food expenditures, for example, which fall as countries become wealthier. ...
I am not arguing against healthcare capitalism, but warning that support will
become fragile, far more so than for, say, globalisation nowadays. Most
countries rely far too much on command and control, and provide far too few
incentives for patients and providers to make efficient choices. Nevertheless,
it remains to be seen whether healthcare pressures will ultimately cause the
current trend towards free (and freer) market capitalism to reverse, with a very
large chunk of the economy reverting to a more socialist system. Some societies
might decide that it is better to be red than dead.
Posted by Mark Thoma on Sunday, August 5, 2007 at 02:07 AM in Economics, Health Care, Policy |
Posted by Mark Thoma on Sunday, August 5, 2007 at 12:20 AM in Links |
David Broder is back on his "end the partisanship" soapbox, a theme he hammers
A Polarized, and Polarizing, Congress, by David S. Broder, Commentary, Washington Post:
The distinguishing characteristic of this Congress was on vivid display the
other day when the House debated a bill to expand the federal program that
provides health insurance for children of the working poor.
Even when it is performing a useful service, this Congress manages to look
ugly and mean-spirited. So much blood has been spilled, so much bile stockpiled
on Capitol Hill, that no good deed goes untarnished.
The State Children's Health Insurance Program (SCHIP) is ... up for renewal
this year and suddenly has become a bone of contention. President Bush
underfunded it in his budget; the $4.8 billion extra he proposed spending in the
next five years would not finance insurance even for all those who are currently
But when the Senate Finance Committee proposed boosting the funding to $35
billion -- financed by a hefty hike in tobacco taxes -- Bush threatened a veto,
and he raised the rhetorical stakes by claiming that the measure was a step
toward "government health insurance."
That was surprising news to Republican Sens. Chuck Grassley of Iowa and Orrin
Hatch of Utah, two staunch conservatives who had joined in sponsoring the Senate
But rather than meet the president's unwise challenge with a strong
bipartisan alternative, the House Democratic leadership decided to raise the
partisan stakes even higher by bringing out a $50 billion bill that not only
would expand SCHIP but would also curtail the private Medicare benefit delivery
system that Bush favors.
To add insult to injury, House Democratic leaders then took a leaf from the
old Republican playbook and brought the swollen bill to the floor with minimal
time for debate and denied Republicans any opportunity to offer amendments.
The result was undisguised fury -- and some really ugly exchanges on the
floor. ... In the end, the House bill passed on a near-party-line vote, 225 to
204, far short of the margin that would be needed to override the promised Bush
No rational human being could explain why a program that both parties support
and both want to continue could ignite such a fight. But that is Washington in
this era of polarized politics. ... [W]hat the public has seen and heard is
mainly the ugly sound of partisan warfare. ...
[W]hen this Congress had an opportunity to take a relatively simple,
incremental step to extend health insurance to a vulnerable group, the members
managed to make a mess of it.
It's no wonder the approval ratings of Congress are so dismal.
Broder says "No rational human being could explain why a program that both
parties support and both want to continue could ignite such a fight." The
premise of this statement - that both sides want this program to continue - is
false. Being unwilling to kill a program because of the political consequences is not the same a supporting it, and many Republicans believe this is a step towards federalization of health care, something they oppose. Recall that President Bush doesn't believe access to care is a problem
for children anyway, “After all, you just go to an emergency room,” and he's promised
to veto any expansion of Schip on “philosophical” grounds. Under that umbrella,
i.e. knowing that a veto is coming, it's easy for Republican members of Congress
to appear bipartisan and supportive of expansion of care for children for the political advantage it
gives them, but in the end, there will be enough votes to sustain the veto. In
any case, I think it's time to rerun this:
Being Partisan, by Paul Krugman, Commentary, NY Times: American politics is
ugly these days, and many people wish things were different. ... If all goes
well, we’ll eventually have a new era of bipartisanship — but that will be the
end of the story, not the beginning. ...
You see, the nastiness of modern American politics isn’t the result of a
random outbreak of bad manners. It’s a symptom of deeper factors — mainly the
growing polarization of our economy. And history says that we’ll see a return to
bipartisanship only if and when that economic polarization is reversed.
After all, American politics has been nasty in the past. Before the New Deal,
America was a nation with a vast gap between the rich and everyone else, and
this gap was reflected in a sharp political divide. The Republican Party, in
effect, represented the interests of the economic elite, and the Democratic
Party, in an often confused way, represented the populist alternative. ...
[T]he G.O.P.’s advantage in money, and the superior organization that money
bought, usually allowed it to dominate national politics. ... Then came the New
Deal. I urge ... everyone ... who thinks that good will alone is enough to
change the tone of our politics — to read the speeches of Franklin Delano
F.D.R. faced fierce opposition as he created ... Social Security,
unemployment insurance, more progressive taxation and beyond ... that helped
alleviate inequality. And he didn’t shy away from confrontation.
“We had to struggle,” he declared in 1936, “with the old enemies of peace —
business and financial monopoly, speculation, reckless banking, class
antagonism, sectionalism, war profiteering. ... Never before in all our history
have these forces been so united against one candidate as they stand today. They
are unanimous in their hate for me — and I welcome their hatred.”
It was only after F.D.R. had created a more equal society, and the old class
warriors of the G.O.P. were replaced by “modern Republicans” who accepted the
New Deal, that bipartisanship began to prevail.
The history of the last few decades has basically been the story of the New
Deal in reverse. Income inequality has returned to levels not seen since the
pre-New Deal era, and so have political divisions in Congress as the Republicans
have moved right, once again becoming the party of the economic elite. The
signature domestic policy initiatives of the Bush administration have been
attempts to undo F.D.R.’s legacy... And a bitter partisan gap has opened up
between the G.O.P. and Democrats, who have tried to defend that legacy.
What about the smear campaigns, like Karl Rove’s...? Well, they’re
reminiscent of the vicious anti-Catholic propaganda used to defeat Al Smith in
1928: smear tactics are what a well-organized, well-financed party with a
fundamentally unpopular domestic agenda uses to change the subject.
So am I calling for partisanship for its own sake? Certainly not. By all
means pass legislation, if you can, with plenty of votes from the other party:
the Social Security Act of 1935 received 77 Republican votes in the House, about
the same as the number of Republicans who recently voted for a minimum wage
But politicians who try to push forward the elements of a new New Deal,
especially universal health care, are sure to face the hatred of a large bloc on
the right — and they should welcome that hatred, not fear it.
Posted by Mark Thoma on Saturday, August 4, 2007 at 11:07 AM in Economics, Politics |
Daniel Gross reviews Robert Frank's book Falling Behind: How Rising
Inequality Harms the Middle Class:
Thy Neighbor’s Stash, by Daniel Gross, Book Review, NY Times: ...In his new
book “Falling Behind: How Rising Inequality Harms the Middle Class,” Professor
[Robert H. ] Frank deftly updates the argument for our current gilded age. The
rise of an overclass, he convincingly argues, is indirectly affecting the
quality of life of the rest of the population — and not in a good way.
Knowing that Steve Schwarzman of the Blackstone Group made almost $400
million last year, or that he spent $3 million last February on his
60th-birthday party..., doesn’t simply make the typical American green with
envy, and hence unhappy. Rather, Frank argues, the problem is that extreme
consumption ... helps shape norms for the whole society, not just his fellow
plutocrats. “The mere presence of ... larger mansions, for example, may shift
some people’s perceptions about how big a house one can build without seeming
overly ostentatious,” Frank writes.
That shifting perception combines with the powerful driving force of
“relative deprivation.” ... Frank urges fellow economists to look at numbers and
data in relative terms, not absolute ones. A Web surfer with a 56K modem today
knows, intuitively, that he is better off than he was 20 years ago, when he had
to rely on a 1,200-baud modem. But when everybody else has broadband, that 56K
makes you feel like a cyberloser. The desire to avoid such relative deprivation
drives consumption in a range of goods, especially those that Frank calls
“positional goods” — things like housing and cars, in which differences in
quality and size are readily visible. ...
What does this society-wide arms race for goods have to do with income
inequality? Frank trots out sobering data. ...[S]ince 1979, gains have flowed
disproportionately to top earners. In an economy where the wealthy set the norms
for consumption..., that spells trouble. In today’s arms race, the top 1 percent
are armed to the teeth and everybody else is scavenging for ammunition. ... The
end result? Frank methodically presents data showing that the typical American
now works more, saves less, commutes longer and borrows more to maintain what he
or she views as an appropriate standard of living.
Oh, and it’s getting worse. Frank notes that “many of the forces that have
been causing inequality to grow seem to be gathering steam.” ... Frank’s
elegant solution? A progressive consumption tax that would discourage those at
the top from spending more, thus lowering the bar. ...
Here's part of the first and second chapters (the points are explained more thoroughly in the article):
‘Falling Behind: How Rising Inequality Harms the Middle Class’, by Robert H.
Frank, First Chapter, NY Times: ...I want to begin by asking you to conduct
not one but two thought experiments. ... Try as best you can to imagine that you
are actually confronting the hypothetical choices...
Continue reading "Robert Frank: How Rising Inequality Harms the Middle Class" »
Posted by Mark Thoma on Saturday, August 4, 2007 at 03:06 AM in Economics, Income Distribution |
Lily Hsueh looks at trends in IT employment in this Economic Letter from the San Francisco Fed:
Trends in Bay Area IT Employment, by
Lily Hsueh, Economic Letter, FRBSF:
...For the purposes of this analysis, IT will be divided into two broad
components: manufacturing and services. The IT manufacturing component includes
companies that make computers, communications equipment and their primary
building blocks, semiconductors, and other advanced electronic machinery, as
well as a variety of advanced measuring and testing equipment, such as photonics
and electrometrical and aeronautical devices, along with consumer electronics
(Daly and Valletta 2004). The IT services component includes internet service
providers and computer programming, design, management services, and research
and engineering services.
1 provides telling evidence on the evolution of IT employment trends in the Bay
Area as well as on the region's long dominance as a leader in IT employment. The
figure plots the share of the nation's IT employment from 1990 to 2006 for the
five metropolitan areas cited among the nation's largest centers for IT
employment by the American Electronics Association (2000). This 16-year period
covers the years leading up to a productivity surge that was largely driven by
developments in IT, the dot-com boom, the recession in 2001-2002, which was
largely led by a retrenchment in IT investment (marked by the second gray bar in
the figure), and the subsequent recovery.
Although the Bay Area has seen a fall in its share of the nation's IT
employment, it nonetheless has been the leader among metropolitan areas
throughout this period of booms and busts in the industry, and remains so today.
Shares also have shifted for the other top IT centers. For example, although Los
Angeles has maintained its second-place ranking, its share of the nation's IT
employment has fallen. The Boston area, too, has seen some erosion in its IT
employment share, and, indeed, it has ceded its third-place ranking to
Washington, D.C., where the share has risen. Seattle remains in the fifth-place
position, with its share showing a steady upward movement...
Continue reading "Trends in IT Employment" »
Posted by Mark Thoma on Saturday, August 4, 2007 at 02:43 AM in Economics, Technology, Unemployment |
Posted by Mark Thoma on Saturday, August 4, 2007 at 12:20 AM in Links |
Paul Klemperer says economists don't know everything so we will need
"scientists, sociologists and philosophers to get climate change policy right":
Why economists don't know
all the answers about climate change, by Paul Klemperer, Vox EU:
Disagreement is usually more instructive than consensus, and economists' current
debate about climate change is no exception. It reveals three important
questions that have gone largely unanswered in popular discussions. But though
economists have exposed the questions, we need the scientists, the sociologists
and the philosophers to answer them.
The root of the problems is that the costs of preventing climate change start
now, while many of the benefits come in a hundred years or more. If growth
continues at its recent historical rate, world GDP per capita will be at least
five times higher in 100 years. So we should not feel too obliged to make
sacrifices that make future generations even richer, any more than our
grandparents should have given up their only television so that we can have yet
one more set in the house. But it doesn't mean that because most likely
climate-change scenarios leave economic growth broadly unchanged, we can stop
worrying: it simply means that the outcomes that really matter in cost-benefit
calculations about climate change are those that are so disastrous that they
wipe out the benefits of economic growth.
These outcomes may matter even if they are unlikely, just as the risk of your
house being gutted by fire also matters. Even if the costs of mitigating climate
change turn out not quite as small as the 1% of GDP that the Stern Report
estimated, we might still be happy to pay them to prevent a small chance of
catastrophe - just as most of us insure our houses even though we know the
insurance companies make money from the odds they offer us.
This, then, is the first question: how likely are the catastrophes against
which we should be paying an "insurance premium"? We do not know the answer
because there is little that serious scientists feel comfortable saying about
the likelihood of truly disastrous events, such as feedback effects turning the
planet into another Venus, as some distinguished scientists argue is possible.
We urgently need research to tell us the likelihood of disastrous outcomes.
The second crucial uncertainty is that we do not know what future generations
will regard as disastrous outcomes. Views change: 200 years ago many people
thought slavery was reasonable, and 100 years ago women were commonly assumed
inferior. Tastes about the environment can change surprisingly fast - it seems
hard to believe now that the US government came within an ace of flooding the
Grand Canyon to produce hydropower as recently as 1966, before being thwarted by
so-called "extremists". (Not that the lesson has been noticed - perhaps in 40
years time the Chinese people will be stunned that their government flooded the
Three Gorges.) When I was young, vegetarianism seemed restricted to eccentrics,
but today many of my students regard my meat eating as unethical, and there is
increasing awareness of the similarity between us and other animals.
So do we know, for example, how our great-grandchildren will feel about the
likely extinction of several million of the world's species? Maybe they will
feel that, despite their fabulous wealth, and despite being awash with mobile
phones and super-high-resolution TVs, they have actually experienced a
The third critical question is the ethical one: how much should we care about
the future? Nick Stern and his allies evaluate costs and benefits using real
interest rates that discount the future very little except for the effects of
economic growth. Many of his critics use interest rates at least 2% higher
which, compounded over a hundred years, values the welfare of our
great-grandchildren less than one-seventh as much as Stern does.
Current market interest rates are more similar to those used by Stern's
critics, but those rates tell us only about individuals' willingness - possibly
irrational - to invest today for benefits tomorrow. How much society should
spend on unborn generations is a somewhat different question.
Is it morally correct to value our great-grandchildren one-tenth as much as
ourselves? Should we instead use a lower discount rate, or one that falls over
time from the current market rate - which reflects the cost of forgoing
alternative investments - to a rate more like Stern's in the more distant
future? Furthermore, how cautious should we be on our descendants' behalf when
deciding whether the "insurance premium" is a good buy? Is human welfare the
only criterion anyway? These are questions for philosophers as much as for
In short, it's all about our great-grandchildren, stupid, and we need the
scientists to tell us more about what will happen to them, the sociologists to
tell us what they will think about it, and the philosophers to tell us whether
we should care what they think. Posing these awkward questions may make
economists unpopular, but we are used to that.
Posted by Mark Thoma on Friday, August 3, 2007 at 02:34 PM in Economics, Environment, Policy |
Paul Krugman on good Democrats, bad Democrats, and the ugly thing the bad Democrats are about to do:
Test for Democrats, by Paul Krugman, Commentary, New York Times: It’s been a
good Democrats, bad Democrats kind of week. The bill expanding children’s health
insurance that just passed in the House makes you want to stand up and cheer.
Reports that Senator Charles Schumer opposes plans to close the hedge fund tax
loophole make you want to sit down and cry.
Let’s start with the good news: The House bill ... would provide coverage to
five million children who would otherwise be uninsured.
The bill is so good that it has Republicans spluttering. “The bill uses
children as pawns,” declared Representative Pete Sessions of Texas. Yes, the
Democrats are exploiting children — by providing them with health care.
The horror, the horror!
What’s especially encouraging is the way House Democrats were willing to take
on the insurance companies. The bill pays for children’s health care in part by
cutting subsidies to Medicare Advantage, a privatization scheme that yields big
profits for insurers...
All in all, the bill is both a fine piece of legislation and a demonstration
that Democrats can stand up to special interests. Happy days are here again.
Or maybe not.
The hedge fund tax loophole is a crystal-clear example of unjustified
privilege. ... For example, ... pension fund ... manag[ers] ... are taxed ... at
rates up to 35 percent. But if that money is invested with a hedge fund ... the
fees the ... manager receives ... are mainly taxed as capital gains, with a
maximum rate of 15 percent. ...
We’re told that the tax rate on hedge fund managers has to be kept low to
encourage risk-taking. But the managers aren’t risking their own money. The only
risk ... is the uncertainty of their fees — and as any ... salesman who depends
on commissions can tell you, most people with uncertain incomes don’t get any
special tax breaks.
We’re also told that management fees would rise, reducing returns to
investors... — as if someone with a $100-million-a-year hedge fund job would
walk away if his take-home pay fell from $85 million to $65 million.
And we’re talking about a lot of lost revenue here. The Economic Policy
Institute estimates ... $6.3 billion a year — the cost of providing health care
to three million children. Of that total, almost $2 billion a year ... goes to
just 25 individuals.
If being a Democrat means anything, it means opposing this kind of exorbitant
privilege. Yet ... Mr. Schumer says that he opposes any increase in hedge fund
taxes unless tax breaks for the energy and real estate industries are also
eliminated, and pigs start flying. Seriously, his claim that he really would
support closing the hedge fund loophole if other, deeply entrenched tax
privileges were eliminated ... is a fig leaf that hides nothing.
Mr. Schumer ... insists that the large financial contributions that hedge
funds make to his party aren’t influencing him. Well, I can’t read his mind, but
from the outside his position looks remarkably like money-driven politics as
usual. And that’s not acceptable.
Look, the worst thing that could happen to Democrats is for voters to
conclude that there’s no real difference between the parties, that when you
replace Republicans with Democrats, all you do is replace sweet deals for
Halliburton with sweet deals for hedge funds. The hedge fund loophole is a test
— and it’s one that Mr. Schumer is failing.
Previous (7/30) column:
Paul Krugman: An Immoral Philosophy
Next (8/6) column: Paul Krugman: The Substance Thing
Posted by Mark Thoma on Friday, August 3, 2007 at 12:33 AM in Economics, Health Care, Politics, Taxes |
Posted by Mark Thoma on Friday, August 3, 2007 at 12:06 AM in Links |