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Sunday, August 12, 2007

The Economist: Is America Turning Left?

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 article).

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 on Sunday, August 12, 2007 at 03:33 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (61) 

    Polarized Resource Claims

    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 territorial claims.

    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 matter.

    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 on Sunday, August 12, 2007 at 12:15 AM in Economics, Oil, Politics | Permalink  TrackBack (0)  Comments (15) 

      links for 2007-08-12

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

        Saturday, August 11, 2007

        Spontaneous Vacation

        iPhone Road Blogging.

          Posted by on Saturday, August 11, 2007 at 05:50 PM in Miscellaneous | Permalink  TrackBack (0)  Comments (1) 

          "France's Model Healthcare System"

          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 37.

          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 and reimbursement.

          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 on Saturday, August 11, 2007 at 03:33 AM in Economics, Health Care, Politics | Permalink  TrackBack (3)  Comments (117) 

            Jim Hamilton: What is a Liquidity Event?

            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: FRED

            ...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 repurchase agreement,

            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 Felix Salmon, King Banian, Paul Krugman, and Mark Thoma. And here's William Polley:

            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 on Saturday, August 11, 2007 at 12:33 AM in Economics, Monetary Policy | Permalink  TrackBack (1)  Comments (19) 

              An Overview of Research in Monetary Economics

              Christina Romer and David Romer report on the state of monetary economics. It appears there's still work left to do:

              Monetary 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 interested in."...

              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 on Saturday, August 11, 2007 at 12:15 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (3) 

                links for 2007-08-11

                  Posted by on Saturday, August 11, 2007 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (0) 

                  Friday, August 10, 2007

                  FRBSF: Are Global Prices Converging or Diverging?

                  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 on Friday, August 10, 2007 at 02:52 PM in Economics, International Trade | Permalink  TrackBack (0)  Comments (3) 

                    "A New Kind of Bank Run"

                    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 the market.

                    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 problems mount.

                    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 Norris article.

                      Posted by on Friday, August 10, 2007 at 11:34 AM in Economics, Financial System, Monetary Policy | Permalink  TrackBack (0)  Comments (20) 

                      "To Facilitate the Orderly Functioning of Financial Markets"

                      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 on Friday, August 10, 2007 at 10:17 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (22) 

                        Paul Krugman: Very Scary Things

                        Paul Krugman discusses the potential for problems due to the evaporation of liquidity from financial markets over the last few days:

                        Very 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 buyers.

                        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 there.

                        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 on Friday, August 10, 2007 at 12:33 AM in Economics, Financial System, Monetary Policy | Permalink  TrackBack (0)  Comments (54) 

                          Dani Rodrik: The Limits of Self-Enforcing Agreements

                          In an essay at Cato Unbound:

                          ...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? ...

                          And 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 on Friday, August 10, 2007 at 12:24 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (56) 

                            links for 2007-08-10

                              Posted by on Friday, August 10, 2007 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (0) 

                              Thursday, August 09, 2007

                              PGL: Bush on Bridge Safety: Spend Smarter Not More

                              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:

                              A 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."

                              Alice 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 on Thursday, August 9, 2007 at 06:21 PM in Economics, Politics, Taxes | Permalink  TrackBack (0)  Comments (4) 

                                Equity, Reciprocity, and Competition

                                Scientific American wonders if greed is good (this is a much shortened version):

                                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 currently do.

                                Continue reading "Equity, Reciprocity, and Competition" »

                                  Posted by on Thursday, August 9, 2007 at 05:31 PM in Economics | Permalink  TrackBack (0)  Comments (5) 

                                  "Moral Views of Market Society"

                                  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. More

                                  Marion Fourcade, Kieran Healy (forthcoming). “Moral Views of Market Society”. Annual Review of Sociology 33 (2007).

                                    Posted by on Thursday, August 9, 2007 at 03:33 PM in Economics | Permalink  TrackBack (0)  Comments (7) 

                                    A "Significant Liquidity Event"

                                    Today there was, as Brad DeLong notes in a series of posts on the 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 on Thursday, August 9, 2007 at 01:17 PM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (18) 

                                      Bruce Bartlett: Talking Heads

                                      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 own points.

                                      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 even exist.

                                      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 on Thursday, August 9, 2007 at 11:34 AM in Economics, Press | Permalink  TrackBack (0)  Comments (13) 

                                        Joseph Stiglitz: Greenspan, Bush Errors Finally Come Home to Roost

                                        Joseph Stiglitz says George Bush and Alan Greenspan have some explaining to do:

                                        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 slowdown.

                                        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 departed.

                                          Posted by on Thursday, August 9, 2007 at 01:08 AM in Economics, Monetary Policy, Policy, Taxes | Permalink  TrackBack (0)  Comments (29) 

                                          Mexican Immigrants are Sending Less Money Back Home

                                          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 bank.

                                          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,” he said.

                                          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 appreciated.”

                                          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 on Thursday, August 9, 2007 at 12:24 AM in Economics, Immigration | Permalink  TrackBack (0)  Comments (9) 

                                            links for 2007-08-09

                                              Posted by on Thursday, August 9, 2007 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (0) 

                                              Wednesday, August 08, 2007

                                              "Latin America’s Response to the Growth of China and India"

                                              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 on Wednesday, August 8, 2007 at 07:02 PM in Economics, International Trade | Permalink  TrackBack (0)  Comments (4) 

                                                George Orwell Foresees "The Right Wing Blurghosphere"

                                                Jonathan Schwarz at A Tiny Revolution finds George Orwell peering into the future:

                                                George Orwell 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 on Wednesday, August 8, 2007 at 03:33 PM in Politics, Weblogs | Permalink  TrackBack (0)  Comments (41) 

                                                  The "Ivory Tower" Insult in Public Discourse

                                                  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 be right...

                                                  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 on Wednesday, August 8, 2007 at 12:33 PM in Economics, Politics, Universities | Permalink  TrackBack (0)  Comments (47) 

                                                    Edward Glaeser: Where Edwards Is Right

                                                    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 exception:

                                                    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 on Wednesday, August 8, 2007 at 12:24 AM in Economics, Policy, Politics | Permalink  TrackBack (0)  Comments (33) 

                                                      Social Consequences of the Industrial Revolution

                                                      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 on Wednesday, August 8, 2007 at 12:15 AM in Economics, Income Distribution, Technology | Permalink  TrackBack (0)  Comments (23) 

                                                        links for 2007-08-08

                                                          Posted by on Wednesday, August 8, 2007 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (2) 

                                                          Tuesday, August 07, 2007

                                                          How to Beat Terrorists

                                                          Willem Buiter says we should legalize drugs if we want to disable terrorist networks:

                                                          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 to others.

                                                          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 countries...

                                                          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 on Tuesday, August 7, 2007 at 01:53 PM in Economics, Market Failure, Regulation, Terrorism | Permalink  TrackBack (1)  Comments (29) 

                                                            The FOMC Holds Target Rate at 5.25%

                                                            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 on Tuesday, August 7, 2007 at 11:56 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (8) 

                                                              Gregory Clark's "A Farewell to Alms"

                                                              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 affluence.

                                                              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 on Tuesday, August 7, 2007 at 02:07 AM in Economics, Technology | Permalink  TrackBack (0)  Comments (56) 

                                                                Vox EU - Policing and Crime: Evidence from the London Bombings Re-deployment

                                                                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 on Tuesday, August 7, 2007 at 12:15 AM in Economics | Permalink  TrackBack (0)  Comments (3) 

                                                                  links for 2007-08-07

                                                                    Posted by on Tuesday, August 7, 2007 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (0) 

                                                                    Monday, August 06, 2007

                                                                    Foreclosures: A Call to Action

                                                                    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, headlined "Mortgage 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 American homeowners?

                                                                    I hope that people at the Fed are working on this. If not, Congress should hold hearings and prod them into action.

                                                                      Posted by on Monday, August 6, 2007 at 04:05 PM in Economics, Financial System, Housing, Monetary Policy, Regulation | Permalink  TrackBack (0)  Comments (40) 

                                                                      Helping Displaced Workers

                                                                      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 on Monday, August 6, 2007 at 03:15 PM in Economics, Social Insurance, Unemployment | Permalink  TrackBack (0)  Comments (55) 

                                                                        Not Laffing

                                                                        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 University.

                                                                        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 infrastructure. ...

                                                                        Mike Glover at the AP doesn't 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 1990s.

                                                                        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 CBO report).

                                                                        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 on Monday, August 6, 2007 at 12:06 PM in Budget Deficit, Economics, Politics, Press, Taxes | Permalink  TrackBack (0)  Comments (14) 

                                                                          Paul Krugman: The Substance Thing

                                                                          Paul Krugman evaluates the policy positions of the presidential candidates and what it tells us about them:

                                                                          The 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 to do.

                                                                          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 insurance...

                                                                          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 know...

                                                                          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 about substance.

                                                                          Previous (8/3) column: Paul Krugman: A Test for Democrats
                                                                          Next <8/10) column: Paul Krugman: Very Scary Things

                                                                            Posted by on Monday, August 6, 2007 at 12:33 AM in Economics, Policy, Politics | Permalink  TrackBack (0)  Comments (38) 

                                                                            "Adam Smith and the iPhone"

                                                                            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 on Monday, August 6, 2007 at 12:24 AM in Economics, History of Thought, Technology | Permalink  TrackBack (0)  Comments (14) 

                                                                              James Surowiecki: Rent-Seekers

                                                                              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 little risk.

                                                                              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 on Monday, August 6, 2007 at 12:15 AM Permalink  TrackBack (0)  Comments (7) 

                                                                                links for 2007-08-06

                                                                                  Posted by on Monday, August 6, 2007 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (0) 

                                                                                  Sunday, August 05, 2007

                                                                                  "Phony Populist Fears"

                                                                                  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 on Sunday, August 5, 2007 at 12:33 PM in Economics, Policy, Social Insurance | Permalink  TrackBack (0)  Comments (56) 

                                                                                    Kenneth Rogoff: Better Red than Dead

                                                                                    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 affordable. ...

                                                                                    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 medical techniques.

                                                                                    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 treatable stage.

                                                                                    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 on Sunday, August 5, 2007 at 02:07 AM in Economics, Health Care, Policy | Permalink  TrackBack (0)  Comments (49) 

                                                                                      links for 2007-08-05

                                                                                        Posted by on Sunday, August 5, 2007 at 12:20 AM in Links | Permalink  TrackBack (0)  Comments (0) 

                                                                                        Saturday, August 04, 2007

                                                                                        Surprise! David Broder Calls for and End to Partisanship

                                                                                        David Broder is back on his "end the partisanship" soapbox, a theme he hammers often:

                                                                                        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 being served.

                                                                                        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 bill...

                                                                                        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 veto. ...

                                                                                        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:

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

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

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

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

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

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

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

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

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

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

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

                                                                                          Posted by on Saturday, August 4, 2007 at 11:07 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (15) 

                                                                                          Robert Frank: How Rising Inequality Harms the Middle Class

                                                                                          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...

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                                                                                            Posted by on Saturday, August 4, 2007 at 03:06 AM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (55) 

                                                                                            Trends in IT Employment

                                                                                            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.

                                                                                            Figure 1: Share of U.S. IT employmentFigure 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...

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                                                                                              Posted by on Saturday, August 4, 2007 at 02:43 AM in Economics, Technology, Unemployment | Permalink  TrackBack (0)  Comments (16) 

                                                                                              links for 2007-08-04

                                                                                                Posted by on Saturday, August 4, 2007 at 12:20 AM in Links | Permalink  TrackBack (0)  Comments (3) 

                                                                                                Friday, August 03, 2007

                                                                                                "Why Economists Don't Know All the Answers about Climate Change"

                                                                                                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 catastrophe.

                                                                                                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 economists.

                                                                                                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 on Friday, August 3, 2007 at 02:34 PM in Economics, Environment, Policy | Permalink  TrackBack (0)  Comments (38) 

                                                                                                  Paul Krugman: A Test for Democrats

                                                                                                  Paul Krugman on good Democrats, bad Democrats, and the ugly thing the bad Democrats are about to do:

                                                                                                  A 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 on Friday, August 3, 2007 at 12:33 AM in Economics, Health Care, Politics, Taxes | Permalink  TrackBack (0)  Comments (87) 

                                                                                                    links for 2007-08-03

                                                                                                      Posted by on Friday, August 3, 2007 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (2)