Wednesday, September 12, 2007
Tuesday, September 11, 2007
Paul Krugman at TPM Cafe Book Club discussing Jonathan Chait's new book:
Crank Politics, by Paul Krugman, TPM Bookclub: ...I’d like to take this conversation in a slightly different direction by talking about the second part of the book, on the political environment that lets crackpot economics flourish; Jon’s description is correct, but, I think, somewhat incomplete.
First, supply-side quackery is only one of the gambits used to sell tax cuts.
There are other, older versions – notably the claim that government is wasting your money on vast armies of useless bureaucrats. ... Second, Jon talks at some length about the media, and in particular about the Republican ability to get journalists to harp endlessly on supposed character flaws of Democrats, while their own candidates get a free pass. He emphasizes the right-wing echo chamber, but there’s more to it than that. It’s also – as I can report from my own experience – a result of asymmetrical intimidation. Quite simply, if you point out character flaws in a conservative, there will be an all-out effort, involving major media as well as blogs and talk radio, to discredit and ruin you, personally. This just doesn’t happen on the other side.
So journalists feel that it’s safe to ridicule Democrats, even if the supposed character-defining episode never happened; they choke up and shy away when it comes to Republicans. That’s why even the most grotesque stuff, like Giuliani’s claim that he’s a rescue worker too, or Romney’s remark that his sons are serving the country by helping him become president, doesn’t get picked up.
Third, I’m surprised that Jon doesn’t talk at all about the key political role of race in the political shift in this country. Reagan didn’t start as a supply-sider: he started as the enemy of welfare queens in their welfare Cadillacs. And what I’ve learned from Larry Bartels, Tom Schaller, and other political scientists is that race is really central to the whole thing. Here’s a preview quote from my own [forthcoming book, The Conscience of a Liberal]:
“The overwhelming importance of the Southern switch suggests an almost embarrassingly simple story about the political success of movement conservatism. It goes like this: thanks to their organization, the interlocking institutions that constitute the reality of the vast right-wing conspiracy, movement conservatives were able to take over the Republican Party, and move its domestic policies sharply to the right. In most of the country, this rightward shift alienated voters, who gradually moved toward the Democrats. But Republicans were nonetheless able to win presidential elections, and eventually gain control of Congress, because they were able to exploit the race issue to win political dominance of the South. End of story.”
This is from the latest issue of Scientific American:
The Really Hard Science, by Michael Shermer, Commentary, Scientific American: Over the past three decades I have noted two disturbing tendencies in both science and society: first, to rank the sciences from “hard” (physical sciences) to “medium” (biological sciences) to “soft” (social sciences); second, to divide science writing into two forms, technical and popular. And, as such rankings and divisions are wont to do, they include an assessment of worth, with the hard sciences and technical writing respected the most, and the soft sciences and popular writing esteemed the least. Both these prejudices are so far off the mark that they are not even wrong. ...
[I]f there must be a rank order (which there mustn’t), the current one is precisely reversed. The physical sciences are hard, in the sense that calculating differential equations is difficult, for example. The variables within ... the subject matter, however, are comparatively simple to constrain and test when contrasted with, say, computing the actions of organisms in an ecosystem... Even the difficulty of constructing ... models in the biological sciences pales in comparison to ... modeling the workings of human brains and societies. By these measures, the social sciences are the hard disciplines, because the subject matter is orders of magnitude more complex and multifaceted.
Between technical and popular science writing is what I call “integrative science,” a process that blends data, theory and narrative. Without all three of these metaphorical legs, the seat on which the enterprise of science rests would collapse. ...
Consider data and theory first. ... Darwin ...[explains] the proper relation between data and theory: “About thirty years ago there was much talk that geologists ought only to observe and not theorize, and I well remember someone saying that at this rate a man might as well go into a gravel-pit and count the pebbles and describe the colours. How odd it is that anyone should not see that all observation must be for or against some view if it is to be of any service!”
Charles Darwin’s dictum holds that if observations are to be of any use they must be tested against some view—a thesis, model, hypothesis, theory or paradigm. The facts that we measure or perceive never just speak for themselves... We can[not]...separate our theories and concepts from our data...
Data and theory are not enough. As primates, humans seek patterns and establish concepts to understand the world around us... We are storytellers. If you cannot tell a good story about your data and theory— that is, if you cannot explain your observations, what view they are for or against and what service your efforts provide—then your science is incomplete. The view of science as primary research published in the peer-reviewed sections of journals only, with everything else relegated to “mere popularization,” is breathtakingly narrow and naive. Were this restricted view of science true, it would obviate many of the greatest works in the history of science, from Darwin’s On the Origin of Species to Jared Diamond’s Guns, Germs, and Steel...
Well-crafted narratives by such researchers as Richard Dawkins, Steven Pinker, the late Stephen Jay Gould and many others are higher-order works of science that synthesize and coalesce primary sources into a unifying whole toward the purpose of testing a general theory or answering a grand question. Integrative science is hard science.
Robert Reich says tax cuts are the answer:
The Way to Prevent the Looming Recession, by Robert Reich: With the economy heading for recession, all eyes are on Ben Bernanke and the Fed... But a Fed rate cut won't stimulate the economy. That's because lending institutions, fearing their portfolios are far riskier than they assumed several months ago, won't lend lots more just because the Fed lowers interest rates.
Average consumers are already so deep in debt ... they can't borrow much more, anyway. With average home prices dropping... And given last Friday’s report showing the first employment drop in four years, people are not in the mood to keep spending.
So if a Fed rate cut can't prevent a recession, what can? Putting more money into American pockets by cutting their taxes. Yes, I know: Tax cuts have gone out of style ever since Democrats became born-again deficit hawks, and George Bush squandered the $5 trillion surplus he inherited in 2000 mainly by cutting taxes on the rich. ...
[T]ax cuts for the rich won't help because the rich don’t increase their spending when their taxes are cut. They already spend as much as they want to spend. That's what it means to be rich. It's middle and lower-income Americans who spend more when their taxes are cut. And because the biggest tax they face is the payroll tax, the payroll tax needs to be cut in order to keep them spending and avoid a recession.
I say exempt the first $15,000 of earnings from payroll taxes for a year, starting as soon as possible. Sure, this may cause the budget deficit to widen a bit. But if the economy goes into the tank, the deficit will be far bigger.
There are reasons that work both for and against the use of fiscal policy to stabilize the economy, and I'm not fully convinced it can work very well in the present political environment in any case. But as to worries about the deficit, in general that is much less of a concern in a recession, and in this particular instance I don't see why workers should risk unemployment now because tax cuts for the wealthy, and the deficit the tax cuts brought about, limit our ability to respond to negative shocks.
Here's the last part of Federal Reserve Board Governor Frederic Mishkin's detailed assessment of the outlook and risks facing the U.S. economy:
Outlook and Risks for the U.S. Economy, GovernorFrederic S. Mishkin, FRB: ...In my remarks this evening, I will review the current economic situation and outlook and make some specific observations about recent developments in financial markets. ...
Let me shift gears and discuss developments in financial markets. As you know, the recent turmoil had its beginnings in the subprime mortgage market. The development of the subprime market in the 1990s was an important financial innovation that enabled borrowers with higher credit risk to obtain mortgages that previously were unavailable to them. This expansion appears likely to have been a significant factor in raising the rate of homeownership from 64 percent, the level in 1994, to about 68 percent currently. In addition, subprime and other nonprime lending played an important role in the high volume of home sales in the mid-2000s. Indeed, data collected under the Home Mortgage Disclosure Act indicate that about 25 percent of the loans used to purchase single-family, owner-occupied homes in 2005 were high-priced loans, including primarily subprime and some near-prime mortgages.
However, as has been the case in previous instances of rapid financial innovations, adequate mechanisms to control excessive risk-taking may not have been in place during the subprime market’s greatest growth. One innovation, further development of securitized products, gave mortgage lenders greater access to the capital markets and spread risks more broadly. However, securitization also widened the separation of the originators from the ultimate holders of the loans--that is, those who bought securities backed by loans. In this setup, a classic principal-agent problem can arise if originators (the agents) do not have a sufficient incentive to shield the owners of the securities (the principals) from suffering higher-than-expected losses.
Monday, September 10, 2007
Alan Krueger on the motivation to become a terrorist:
What makes a terrorist?, Alan B. Krueger, Vox EU: My former classmate Tyler Cowan, in his review of my new book, What Makes a Terrorist: Economics and the Roots of Terrorism, said, “My only complaint is that the book does not deliver on its title; it tells me what doesn’t make a terrorist, but I still don’t know what does make a terrorist.” He also wrote that the book was “full of first-rate empirical work” and that it “punctuates many myths about terrorism.” Since I strongly agree with the second part of his comments, I’ll use this space to respond to the first part.
Beware of Generals bearing slides.
What do you think of the Petraeus/Crocker testimony so far, and about MoveOn's "General Betray US" ad?
David Warsh at Economic Principles reports on black swans, fat tails, questions about rational expectations, what to do about global warming, and other matters:
In Which Those Troublesome "Black Swans" Find a Champion in Economics, by David Warsh, Economic Principles: ...Nassim Nicholas Taleb burst upon the scene with a 2001 best-seller, Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets. ... The book was a highly-engaging guide to common mistakes that the statistically unsophisticated make in persuading themselves that patterns exist where there are none, especially in financial markets. After a few years seeking to turn his insights into cash with a hedge fund, Empirica Capital, without pronounced effect ..., Taleb is back with The Black Swan: The Impact of the Highly Improbable. The new book is an even greater success.
Paul Krugman says the experience since the Bush tax cuts shows that trickle down theory does not work:
Where’s My Trickle?, by Paul Krugman, Commentary, NY Times: Four years ago the Bush administration, exploiting the political bounce it got from the illusion of success in Iraq, pushed a cut in capital-gains and dividend taxes through Congress. It was an extremely elitist tax cut even by Bush-era standards: the nonpartisan Tax Policy Center says that more than half of the tax breaks went to Americans with incomes of more than $1 million a year.
Needless to say, administration economists produced various misleading statistics designed to convey the opposite impression, that the tax cut mainly went to ordinary, middle-class Americans. But they also insisted that the benefits of the tax cut would trickle down — that lower tax rates on the rich would do great things for the economy, helping everyone.
Well, Friday’s dismal jobs report showed that ... working Americans have a right to ask, “Where’s my trickle?” ... What’s really remarkable ... is that four years of economic growth have produced essentially no gains for ordinary American workers.
Wages, adjusted for inflation, have stagnated..., benefits have deteriorated..., [a]nd one of the few seeming bright spots of the Bush-era economy, rising homeownership, is now revealed as the result of a bubble inflated in part by financial flim-flam...
Now you know why 66 percent of Americans rate economic conditions in this country as only fair or poor, and why Americans disapprove of President Bush’s handling of the economy almost as strongly as they disapprove of the job he is doing in general.
Yet the overall economy has grown at a reasonable pace over the past four years. Where did the economic growth go? The answer is that it went to the same economic elite that received the lion’s share of those tax cuts. ...
The absence of any gains for workers in the years since the 2003 tax cut is a pretty convincing refutation of trickle-down theory. So is the fact that the economy had a much more convincing boom after Bill Clinton raised taxes on top brackets. It turns out that when you cut taxes on the rich, the rich pay less taxes; when you raise taxes on the rich, they pay more taxes — end of story. ...
[T]he whole idea that a rising tide raises all boats, that growth in the economy necessarily translates into gains for the great majority of Americans, is belied by the Bush-era experience. As far as I can tell, America has never before experienced a disconnect between overall economic performance and the fortunes of workers as complete as that of the last four years.
America was a highly unequal society during the Gilded Age, but workers’ living standards nonetheless improved as the economy grew. Inequality rose rapidly during the Reagan years, but “Morning in America” was nonetheless bright enough to make most people cheerful, at least temporarily. Inequality continued to increase during the Clinton years, but wages rose, as did the availability of health insurance — and the great majority of Americans felt prosperous.
What we’ve had since 2003, however, is an economic expansion that looks good if not great by the usual measures, but which has passed most Americans by.
Guaranteed health insurance ... would eliminate one of the reasons for this disconnect. But it should be only the start of a broader range of policies — a new New Deal — designed to turn economic growth into something more than a spectator sport.
Tim Duy says the Fed has painted itself into a corner:
The Box Closes, by Tim Duy: Last time I wrote, I concluded:
Tough times for a Fed watcher – knowing the Fed wants to hold steady, but seeing the box they made closing in around them. It is difficult to see what combination of data and events will allow the Fed to hold steady in the months ahead at this point. The best chance for the Fed to avoid a rate cut (a cut they don’t want) is that both the financial markets remain calm and the August jobs report is very strong.
As it turns out, the August jobs report was pretty much the opposite of strong. Normally, the Fed would wait for another jobs report to confirm the weakness; I think they will see this number by itself as an aberration. Just the day before, as the Wall Street Journal noted, policymakers were out in force with a seemingly choreographed message intended to dissipate expectations of a rate cut. After all, the Beige Book did seem to confirm their contention that the overall damage from recent financial turmoil was limited. And August retail sales are looking considerably better than expected. The ISM numbers held mostly solid. Indeed, the data had been cutting their way. This all, however, is now just dust in the wind.
The pressure to cut is enormous, too much so, I think, for the Fed to resist. Politically, the Fed erred with the August discount rate cut. It was a clear example of academics thinking they are cleverer than everyone else. That action, and the accompanying statement, only entrenched expectations for Fed funds rate cut. They should have known that. Now, given that the jobs report did not cut their way, in addition to pressure from Wall Street, the pressure from Capitol Hill is overwhelming. From Bloomberg:
Sunday, September 09, 2007
Some of you might be quite closed-minded about this:
Brain study finds political divide, by Denise Gellene, Los Angeles Times: Exploring the neurobiology of politics, scientists have found that liberals tolerate ambiguity and conflict better than conservatives because of how their brains work.
Scientists at New York University and UCLA showed through a simple experiment to be reported Monday in the journal Nature Neuroscience that political orientation is related to differences in how the brain processes information.
Previous psychological studies have found that conservatives tend to be more structured and persistent in their judgments whereas liberals are more open to new experiences. The latest study found those traits are not confined to political situations but also influence everyday decisions.
The results showed "there are two cognitive styles -- a liberal style and a conservative style," said UCLA neurologist Dr. Marco Iacoboni, who was not connected to the latest research. ...
Frank J. Sulloway, a researcher at UC Berkeley's Institute of Personality and Social Research who was not connected to the study, said results "provided an elegant demonstration that individual differences on a conservative-liberal dimension are strongly related to brain activity." ...
Sulloway said the results could explain why President Bush demonstrates a single-minded commitment to the Iraq war and Sen. John F. Kerry, the liberal Massachusetts Democrat who opposed Bush in the 2004 presidential race, was accused of being a flip-flopper for changing his mind about the conflict.
Based on the results, he said, liberals could be expected to more readily accept new social, scientific or religious ideas.
"There is ample data from the history of science showing that social and political liberals indeed do tend to support major revolutions in science," said Sulloway, who has written about the history of science and has studied behavioral differences between conservatives and liberals.
Lead author David Amodio ... of ... New York University cautioned that the study looked at a narrow range of human behavior and it would be a mistake to conclude that one political orientation was better than another. The tendency of conservatives to block distracting information could be a good thing depending on the situation, he said.
Political orientation, he noted, occurs along a spectrum, and positions on specific issues, such as taxes, are influenced by many factors, including education and wealth. Some liberals oppose higher taxes...
Still, he acknowledged that a meeting of the minds between conservatives and liberals looked difficult given the study results.
"Does this mean liberals and conservatives are never going to agree? Maybe it suggests one reason why they tend not to get along," Amodio said.
Might this also explain why college faculty tend to be Democrats?
Ezra Klein says we shouldn't place a lot of weight on the stock market as a measure of the economy's performance, no problem with that, but by implying that economics is the study of stock markets, he sort of falls into that trap himself:
Wall Street isn't the economy, by Ezra Klein, Commentary, LA Times: People say that economics is complicated. But it sure looks simple to me. After all, what's so complicated about a sector that can be represented in a single arrow? Up for good, down for bad. And if that weren't easy enough, we've got green for good, and red for bad. It's child's play. ...
Looks, however, can be deceiving. And so it is with the ubiquitous stock ticker arrow that increasingly serves as a stand-in for broad economic data. More and more, the arrow is all that's discussed -- did stocks rise or did they fall? -- as if the movement of the market were synonymous with the fortunes of the economy. ...
But Wall Street is not Main Street. Its fluctuations may demonstrate economic health and distress, but they may not. The stock market can go up for a variety of reasons. It can be reacting to evidence of rapid, broadly shared economic growth -- or the prospect of such growth -- and in those cases, it should elicit a cheer from us all. But it also can be reacting to higher corporate profits that come ... out of wages, benefits, higher prices or a variety of cost-saving, corner-cutting measures that don't make the median American's life any better. Sometimes, the market ... can go up because of simple irrational exuberance...
The market's fluctuations may not say much about the economy... The media, however, don't have a whole lot of time to treat them with care. ... Increasingly, the stock tickers serve the same purpose in economic reporting that poll numbers serve for political scribes: They provide constant, reportable data that can be used to draw broad conclusions about the subject as a whole -- but at a cost of accuracy, random fluctuations and significant separation from the issue at hand. ...
But polls at least pretend to reflect the relevant metric: election results. The stock market, however, lays claim to no such relevance. ...To focus on the performance of the market ... is to zero in on an economic indicator that can do well even as the country does poorly. ...
Part of the reason the movements of the stock market get so much more attention than those of the labor market is that the stock market more directly affects those with the power to publicize it. It is said that a recession is when your neighbor loses his job, and a depression is when you lose yours. Both, however, may pass without the individuals who run the nation's media properties feeling even the slightest tremor of insecurity. ...
The economy ... is a complicated thing... The merry green arrow not only neglects the hungry child but the median worker. It tells the story of one of our many economies, but not all, nor even most. And we can't be unduly distracted by it.
Farmers argue for subsidies:
Farmers: Subsidies a needed safety net, The Garden City Telegram: The question and replies it receives are as heated and passionate as the topic it addresses: What would southwest Kansas look like without subsidies, or farm payment programs?
While it's not an easy question, part of the response is assurance by [farmers] Russell Komlofske, ... Carol Deaver, her husband ... Mike Deaver and other[s] ... that not as many of them would be seated around the table for the farm bureau's Wednesday night meetings or even call themselves farmers without ... the "safety net"...
The safety net comes into play when the Deavers and other producers are looking at the weather determining their income, while at the same time going through the bills they still have to pay... There's no guarantee expenses will be covered, that they'll get back what they put into a crop -- there's no guarantee of anything, Komlofske said. ...
There's a host of conditions out of their control, Carol Deaver said, such as a stretch of 100-degree weather or lack of needed rain, and producers plant not when it's financially best to do so but when Mother Nature says it's time to. It's when Mother Nature doesn't perform as hoped during those planting times that the Deavers and other members of the Farm Bureau say farm payment programs, such as with the direct and counter-cyclical payments, as well as marketing assistance loans and loan deficiency payments, provide somewhat of a safety net.
Without payment programs, there'd be no safety net and as a result, bigger farms and fewer farmers, Komlofske said. ...
[Farmer] Steve Rome ... agrees... "no doubt, it's a safety net." The payments have been a stabilizing factor, he said... And Rome would tell people the money received isn't "a welfare check." "We're working way too hard if you're gonna call this welfare," he said, adding that the benefit from the payment programs goes back to the business.
As for direct payments still coming when commodity prices are good, he said he didn't always know whether he agreed with it. But Rome ... said the payment programs do cover risk -- risk that even those who've been in the industry for awhile find daunting at times.
According to Dumler, current farm subsidies originated as part of President Franklin Roosevelt's New Deal legislative package in 1933, and at that time, the average farm household income was about half that of non-farm households -- 21.5 percent of the U.S. workforce in 1930 was employed in production agriculture... That's changed with 1.9 percent of the workforce employed in 2000... Many farm households also are earning more than non-farm households, with farm household income being 33 percent higher than non-farm income in 2004. This fact brings into play one of the arguments against payment programs: that they become more difficult to justify based on the difference between today's farm income and economy and when farm programs started.
A report from Dumler states that ... 39 percent of U.S. farms received government payments in 2003. Of those farms receiving farm subsidies, 66 percent of the total payments went to the five commodities of corn, cotton, wheat, soybeans and rice. Dumler said a higher percentage of the payments go to medium, large and "very large" farms -- farms with annual sales greater than $100,000 -- because they have a higher percentage of farms specializing in ... crops eligible for and receiving subsidies. That is where criticism comes in that "large farms get all the payments," Dumler said, adding that large commercial farms receiving the bulk of government payments has less to do with large farms abusing payment programs and more to do with the actual structure of the payment programs.
The argument also is made that payment programs help save rural communities, Dumler said, and that if farmers are doing well and making more money, then more money will be spent in rural communities and they'd do better economically. ...
While production agriculture still will be around regardless of farm payments existing ..., there may be fewer producers if payment programs cease to exist... And while it's debatable that farm payment programs exist now because they're necessary to sustain agriculture compared to their environment when created in 1933, eliminating them "would certainly have an impact," Dumler said.
Barry Flinchbaugh, an agricultural economics professor at Kansas State University, agrees, saying numbers don't back up the "huge myth" that wealthy farmers are the ones getting all of the payments. ...
In 2004, the best year on record nationwide for farm income, Flinchbaugh said, the average return for the about 2,000 farmers belonging to Kansas Farm Management Association and others was about $62,000 -- about $25,000 of that average return was related to farm payments. Flinchbaugh said the answer seemed obvious that to "pull the plug" all at once on farm payment programs would mean disaster for the typical family farmer.
For Komlofske and other producers, ... the help they receive ... serves as the net for he and others when Mother Nature decides to take a turn without telling them.
They aren't making the argument I think they need to make. If the government pulled up stakes and discontinued these programs, then someone could begin selling insurance to the farmers that protected them against large losses and fill the void. The only real difference is who pays the premiums. When the government provides the insurance and the programs are paid for out of general tax revenues, we all pay for the insurance. However, with private insurance the farmers themselves (and those who consume their products) would have to pay for the insurance. Nothing wrong with that.
For the government to be involved, there needs to be a basis such as market failure. One market failure, of course, is the usual moral hazard argument -- knowing they are protected they won't work as hard to prevent losses -- but deductibles and loss sharing can be built into the contracts to alleviate some of the negative incentives. Other insurance markets have this problem and are able to function, so the mere existence of moral hazard does not rule out a private insurance program (and payments can also be linked to events such as average rainfall which do not depend upon individual effort and hence eliminate the moral hazard problem).
Perhaps there are substantial market failures here, but I don't know what they are and if farmers want to argue for the continuation of these programs, it would be useful to hear why the private sector cannot step in and fill the void if the government ends its farm support programs.
What are the forces driving the shift from government funded charity that represents collective political choice to a system that relies more on private sector sources and individual choice, particularly the choices of the wealthy, to support worthy social causes?:
Gift economies, by Henry: [edited] Christopher Caldwell is a columnist whom I usually find quite annoying, but his attack today ... on Bill Clinton’s forthcoming book on charitable giving gets to the crux of the issue.
...Mr Clinton['s] ... book ... is evidence that he has cracked the code of an inchoate form of political power that is still illegible to most of his contemporaries. … Giving tells us something about a decisive shift that is just beginning – from helping people (soup, a bath) to helping humanity (rain forests, greenhouse gases); from local, self-abnegating charity (the Salvation Army) to glamorous, globalised philanthropy (Angelina Jolie). …
We have seen this shift before. In The Gospel of Wealth (1889), the steel magnate Andrew Carnegie urged the very rich to give away their money during their lifetimes. … When plutocrats are involved in philanthropy, to place philanthropy above criticism is to place money-making above criticism. … If there is a refreshing lack of dogmatism in Mr Clinton’s book, there is also an inattention to elementary questions of political legitimacy. ...
Mr Clinton praises the rock singer Bono’s campaign to obtain debt forgiveness for African countries. Whether this is a wise move or not, who elected Bono to do it? The answer is, capitalism did. Today’s celebrity philanthropists are empowered by a society that specialises in movies and songs in exactly the way the robber barons were empowered by one that specialised in railroads and steel. Philanthropy is a route through which celebrity can be laundered into political power. It is also one means by which the responsibility for important tasks is being reassigned from democratic structures to less democratic ones.
The politics of giving is becoming an important issue ... because of the increasing disparities in wealth between the very rich indeed and the rest of us. It serves at best as a weak and inefficient means of redistribution – the emphasis tends to be more on circuses than on bread, and in particular on the kinds of circuses (alumni associations, high-prestige arts) that have obvious social or personal payoffs for the giver. The increased emphasis on gift-giving reflects how collective political choice ... is increasingly giving way to individual choice (and most importantly the individual choices of a very small minority of people). Contrary to some of the more glib arguments out there, there is no reason to believe that this is an improvement on the previous situation, and some reason to believe that it is a substantial disimprovement. It’s nice to see someone like Caldwell, who is clearly on the right, getting that.
Many people start with the presumption that the private sector is more efficient than the public sector, then use this to argue that there is a net social benefit when tax incentives and other schemes are used to replace public spending with private sector charity. The presumption itself maybe false in many cases, but if the result is that spending is distorted in the sense that resources are directed to uses that are inconsistent with collective political preferences, then another kind of inefficiency arises and it's not at all clear there is a net social benefit. Doing things we don't much care about at low cost is not optimal if important social problems are left unattended as a consequence.
The fact that people help more when the government helps less doesn't relieve the government from its responsibility to broker collective political choice to solve social problems. The government should do what needs to be done and if people or organizations in the private sector want to top it off with more, so much the better. I don't want to criticize Bono, or anyone else, for stepping in and trying to help even if their motive is, ultimately, for personal gain. Operas, museums, soup kitchens, shelters, cash grants to people on the street, whatever, so long as the government is doing its job, it's all just icing on the cake.
Saturday, September 08, 2007
It’s Monetary Policy, Not a Morality Play, by Tyler Cowen, Economic View, NY Times: Wherever there are problems, people look for villains. The subprime mortgage crisis is a case in point. Hedge fund managers and speculators have been blamed for buying securitized loans heedlessly and spreading financial risk beyond the banking sector.
And since every villain must be punished, the Federal Reserve is being attacked as “bailing out the speculators.” Because it has injected additional liquidity into the economy, and kept short-term interest rates from rising, the Fed has been portrayed as a craven tool of the rich, in the pocket of Wall Street but neglecting the concerns of Main Street.
But financial markets rarely fit into simple moral narratives... Talk of a bailout is overstated. Some institutions have benefited from Fed policy, but the story is not a conspiratorial one: liquid markets are good for many investors, and if the Fed succeeds in keeping markets running, that helps hedge funds, too.
The Fed, for all its economic influence, cannot undo most investment mistakes. Bad mortgage loans, in particular, are of many years’ duration and won’t be made good by a temporary dip in short-term interest rates.
It is true that a more liquid short-term loan market can give a highly leveraged institution a second chance. An immediate infusion of cash can be a lifeline for a solvent, but illiquid, company. But keeping loan markets open is not a bailout; it’s simply getting part of the economic infrastructure back on line, much as the police clear a road after a traffic accident. ...
Colorful interpretations of recent monetary policy abound, from both commentators and politicians. Depending on the storyteller, the policy reflects the triumph of the rich over the poor, an atonement for the sins of the Bush administration, a long-awaited comeuppance for the American economy, a continuing hangover from the dot-com bubble, or an inability of the professor (Ben S. Bernanke) to handle a real-world job (running the Fed).
Journalists are especially likely to embrace narratives, if only because their editors and their readers clamor for them. ...
Nonetheless, Fed watchers should resist the tendency to put all events into a simple or a morally plausible narrative. Monetary policy is a largely technical subject, and its ups and downs don’t usually fit into the kinds of emotion-laden stories that human beings apply to daily life. The “us versus them” tag registers in human memory, but monetary policy is not always or even usually about moral issues. As Freud famously noted, sometimes a cigar is just a cigar. ...
In the case of subprime mortgages, many investors did not foresee the risk of collateralized debt securities. In response to this crisis, the Fed has been trying to keep a steady hand and prevent a credit crunch. We don’t yet know how well the Fed has succeeded... And the storm has not yet fully passed. ...
Debating Fed policy in terms of strong moral narratives makes it harder for the Fed to do a good job. For instance, if interest-rate cuts are portrayed as a bailout for hedge fund managers, it’s harder for the Fed to cut interest rates, if that turns out to be the appropriate policy. ...
The American public has a hard-enough time understanding relatively simple economic issues like the benefits of free trade, much less the Fed or monetary policy. So if the picture sticks that the Fed is a shill for hedge fund managers, or that it is treating homeowners unfairly, the pressure will mount for Congress to limit the Fed’s independence. Yet most economists ... agree that relatively independent central banks have a better record of maintaining economic stability...
Wealthy financiers and hedge funds make for easy targets, especially when combined with the arcane field of central banking. But the real moral question is whether we will prove mentally tough enough. Can we resist the temptation to force financial markets and the Fed into oversimplified moral narratives? Or will we continue to blame Zeus for lightning strikes? ...
It's interesting how many libertarians and conservatives support active
government intervention into the economy to manage short-run fluctuations in
output and employment in this particular case. Welcome aboard, and I hope this
thinking will extend beyond the financial sector to all sectors of the economy,
beyond monetary policy to include fiscal and other policy tools, and extend to
individuals who are also subject to shocks that can affect their economic
well-being. With all the talk about how bailouts cause moral hazard, I hope we
will remember that "policy is not always or even usually about moral issues" and
give people the help they need when they lose a job, have a costly health problem, or their are other events that cause them economic difficulties.
There are always going to be people who try to take advantage of whatever system of help we have in place, and some will succeed and become poster children for the evil moral hazard that occurs when the people are protected from falling too far. We should, of course, try to minimize the opportunities to take advantage of the system, but just because a few people will take advantage is no reason to withhold help from the vast majority who do not need rules and regulations to stop them from finding ways to exploit the system. Maybe this is a holdover from grade school - I used to hate it when one or two kids who couldn't behave would prevent the whole class from doing fun things - but too often we forget that most people are not simply looking for a way to beat the system and take advantage of the kindness of others. Most people are just like you. When things go bad, they don't need to be taught a moral lesson they already learned long ago, they need help and we shouldn't hesitate to give it to them.
Daniel Gross wonders if the spending by the rich will be enough to keep the economy out of a recession:
Hey, Big Spenders, by Daniel Gross, Slate: For the last several years, personal consumption has accounted for about 70 percent of gross domestic product. .... Friday morning's disappointing employment report ... shows that the economy lost payroll jobs ... for the first time in four years...
So, should we fear an impending collapse in consumer spending? Recent sales figures from retailers like Wal-Mart, J.C. Penney, Dollar General, and Sears have been less than encouraging. But the huge mass retailers may not be the best indicators of overall spending. Instead, we should probably focus on the what the rich are doing. ... As Citigroup equity strategist Tobias Levkovich noted...: "The top 20 percent of American income earners spend more in a given year than the bottom three quintiles combined. Thus, they have far more influence on economic direction." ... Consumer Expenditure Survey data ... indeed shows that in 2005, the average family in the top 20 percent spent $90,469 on consumer expenditures. The average families in the bottom three quintiles spent a combined $87,139.
And how are the rich doing? Quite well, thank you. Median income has been stagnant ... and it is still below the level of 1999. But as ... reported .. in the New York Times last month, people making more than $1 million "reaped almost 47 percent of the total income gains in 2005, compared with 2000" and "received 62 percent of the savings from the reduced tax rates on long-term capital gains and dividends that President Bush signed into law in 2003." ...
In theory, the rich, and the ultra-rich, are subject to some of the same economic woes that trouble the middle class: the slumping housing market, the rising cost of credit, and job insecurity. But they aren't showing many signs of stress. Some hedge funds have imploded, and a few investment bankers have lost their jobs, but financial-services job losses have thus far been contained to the rank-and-file employees of subprime lenders.
Bonuses at Wall Street may be down this year, but many investment bankers are clearly still spending last year's haul. At Saks, same-store sales in August were up a stunning 18.2 percent; at Tiffany, same-store U.S. sales rose 17 percent in the second quarter. Indeed, luxury retailers are in an expansive mood. ...
Nationwide, the housing sales market may be a bust. But the Journal reports ... that while many California housing markets suffer, "[e]ye-popping sales are spreading along a 40-mile stretch of southern Santa Barbara County." In July, sales in the area, "the only region of California where the median sales prices surpassed $1 million," rose nearly 28 percent. ... Or take personal transport. While auto sales are down, "the market for private jets is stronger than it has ever been," said Richard Aboulafia... Economically speaking, a Gulfstream G550, which is made in the United States ..., is worth the equivalent of 3,200 Ford Focus coupes...
Today, analysts are likely sifting through the jobs report and ratcheting down their forecasts for the Christmas season. It may well turn out to be a glum one for many retailers. But as long as the lights are on in the mansion on the top of the hill, the growing number of stores and businesses that cater to their residents will be busy.
1. If the price is set at $600:
CS = A
PS = B + C + E
TR = B + C + E +G
2. If the price is set at $400:
CS = A + B + C + D
PS = E + F
TR = E + F + G + H
3. If the price is set at $600, then dropped to $400:
CS = A + D
PS = B + C + E + F
TR = B + C + E + F + G + H
4. If there is a $100 rebate to those who paid $600:
CS = A + B + D
PS = C + E + F
TR = C + E + F + G + H
Change due to two-part pricing strategy (compare 2 to 3):
ΔCS = -(B+C)
ΔPS = +((B+C)
Change due to rebate (Compare 3 to 4):
ΔCS = +B
ΔPS = -B
The dynamic two-part pricing strategy captures B+C for producers, and the rebate gives B back to consumers. For numbers, this article says iPhone sales at the end of September are projected to be 600,000-720,000, optimistically a million, and will reach 4,500,000 by the end of the year. I can't vouch for the accuracy of the projections, but based on those numbers, and the reports that the price cuts are in anticipation of the Holiday season, Q1=500,000 and Q2=4,500,000 seems reasonable. This then gives B = $50,000,000, and B+C = $100,000,000.
The pricing strategy could have been planned from the start, but it could also be that none of this is intentional, i.e. that demand was projected to be higher and the price cut is in recognition of the faulty forecast. The Street says:
Steve Jobs got up at a press conference, unexpectedly said that he was slashing the price of the iPhone and promptly declared victory, saying that the the move was one made out of strength and that it would push sales. ...
Now, if you can name a product in the annals of commerce that was introduced to great fanfare and shortly afterward had its price slashed to ribbons where that worked out to be a good thing, well, do let me know.
Investor's Business Daily highlights the thoughts -- and I use that term lightly -- of an analyst who essentially says: This was the plan all along, to take an ax to the price by a factor of a third. Uh, dude, if it was the plan all along, they sure didn't account for the rebellion of the loyal Apple customers who waited in line for the higher-priced iPhone weeks back. Jobs had to rush out an apology and store credit to those suckers.
Clearly this analyst does not believe it was not an intentional strategy, though I'll note that the explanation above shows that an intentional price cut doesn't necessarily make the company worse off, though the $50 million dollar gain after the rebate would have to be balanced against any future costs due to unhappy customers.
[Note: the measurement of producer surplus depends upon the assumption that $400 is the competitive equilibrium price. The actual equilibrium price could be lower, e.g. there could be a three-part strategy where the price falls to $350 in a few months. It's easy to see how to extend the analysis to handle these cases and the basic message is the same, the price discrimination captures surplus for producers, and the rebate transfers some of the surplus back to consumers.]
[Update: See William Polley who predicted this might happen, and he says a bit more about the nature of the price discrimination.]
Olivier Blanchard and Jordi Gali: The Macroeconomic Effects of Oil Shocks. Why are the 2000s So Different from the 1970s?
Why did the economy respond differently to oil price shocks in the 2000s as compared to the 1970s?:
The Macroeconomic Effects of Oil Shocks. Why are the 2000s So Different from the 1970s?, by Olivier J. Blanchard and Jordi Gali, NBER WP 13368, September 2007 [open link]: Abstract We characterize the macroeconomic performance of a set of industrialized economies in the aftermath of the oil price shocks of the 1970s and of the last decade, focusing on the differences across episodes. We examine four different hypotheses for the mild effects on inflation and economic activity of the recent increase in the price of oil: (a) good luck (i.e. lack of concurrent adverse shocks), (b) smaller share of oil in production, (c) more flexible labor markets, and (d) improvements in monetary policy. We conclude that all four have played an important role.
Friday, September 07, 2007
It's interesting to go back and read the post titles from the "Housing" category on the sidebar. Did the Fed know there was a bubble and should it have pricked it? Were there concerns about the regulatory structure and excess risk? Reading through these posts, we were more worried about the housing bubble than I remembered. It's clear we knew there was a potential problem at least two years ago, but there was just enough uncertainty and just enough opposition to intervening in markets to stop us from taking any bold action to avert trouble. The list is chronological, the first post title is from just after the blog started nearly two and a half years ago, and all posts listed are at least one year old:
Fed Watch: The Fed and the Housing Bubble, Permalink, May 23, 2005
Greenspan Says Policy Not Intended to Prick Bubble, Permalink, July 19, 2005
The Fed Should Take More Responsibility for the Housing "Bubble", Permalink, July 20, 2005
Greenspan Says Regulatory Authorities are Monitoring Housing Market, Permalink, July 21, 2005
A Tale of Two Greenspans, Permalink, July 22, 2005
Congress to Propose Tighter Controls on Fannie and Freddie, Permalink, July 23, 2005
The Insurance Value of Fixed-Rate Mortgages, Permalink, July 24, 2005
Bernanke and Bush on the Housing Bubble..., Permalink, August 09, 2005
Greenspan Pressures Regulators to Rein in Housing Speculation, Permalink, August 13, 2005
Robert Reich says moral hazard is for the little people:
Moral Hazard, by Robert Reich: One day while sitting on a beach last summer I overheard a father tussle with his young son about whether the child was old enough to take out a small sailboat. The father finally relented. "Go ahead, but I’m not gonna save you," he said, picking up his newspaper. A while later, the sailboat tipped over and the child began yelling for help, but father didn’t budge. When the kid sounded desperate I put down my book, walked over to the man, and delicately told him his son was in trouble. "That’s okay," he said. "That boy’s gonna learn a lesson he’ll never forget." I walked down the beach to notify a lifeguard, who promptly went into action.
Letting children bear the consequences of their risky behavior -- what some parents call "tough love" -- is equally applicable adults, and conservatives have made something of a fetish out of it. A few weeks ago, as George W. announced a paltry plan to help out a few of the millions of homeowners who got caught in the sub-prime loan mess, he reiterated the credo: "It’s not government’s job to bail out ... those who made the decision to buy a home they knew they could not afford."
It’s true that people tend to be less cautious when they know they’ll be bailed out. Economists call this "moral hazard." But even when they’re being reasonably careful, people cannot always assess risks accurately. Many of the mostly poor home buyers who got into trouble did NOT in fact know they couldn’t afford the mortgage payments they were signing on to. The banks and mortgage lenders ... pulled out all the stops to persuade them to the contrary...
The real moral hazard in this saga started when Fed Chair Ben Bernanke cut the Fed’s discount rate ... and announced that the Fed would take whatever action was needed to "promote the orderly financing of markets." Translated, this means that lenders, credit-rating agencies, financial intermediaries, and hedge funds will be bailed out, one way or another, because they’re simply too big to fail. ...
When it comes to risky behavior in the market, America has a double standard. We’re told that economic risk-taking as the key to entrepreneurial success, but when big entrepreneurs take big risks that fail it’s amazing how often they get bailed out. ... Some are well known, such as the Chrylser bailout of 1979, the savings and loan bailout of 1989, and the airline bailout of 2001. Most occur in the relative dark, such as the 1998 bailout of giant hedge fund Long-Term Capital Management (courtesy of former Fed chair Alan Greenspan), the not infrequent bailouts of under-funded corporate pension plans by the government’s Pension Benefit Guarantee Corporation, price supports for big agribusinesses facing market downturns, or the current bailout of Wall Street... Behind every one of these bailouts are CEOs or financial executives who were rescued from their bad bets.
CEOs get away with stupid mistakes all the time. Some, like Robert Nardelli, the former CEO of Home Depot, drive their company’s stock low that their boards eventually oust them. But they leave with eye-popping going-away presents nonetheless. ... If you’re an average American who gets canned from his job, even through no fault of your own, you probably won’t even get unemployment insurance (only 40 percent of job-losers qualify these days). Conservatives tell us that unemployment insurance reduces their incentive to find a new job quickly. In other words, moral hazard.
Some CEOs use bankruptcy as a means of getting out from under pesky labor contracts they might have "known they could not afford" when they agreed to them (Northwest Airlines most recently, for example). Others use it as a cushion against bad bets. Donald ("you’re fired!") Trump’s casino empire has gone into bankruptcy twice ... with no apparent diminution of the Donald’s passion for risky, if not foolish, endeavor. After all, his personal fortune is protected behind a wall of limited liability, and he collects a nice salary from his casinos regardless. But if you’re an ordinary person who has fallen on hard times, just try declaring bankruptcy to wipe the slate clean. A new law governing personal bankruptcy makes that route harder than ever. Its sponsors argued -- you guessed it -- moral hazard.
Bush’s "ownership society" has proven a cruel farce for poor people who tried to become home owners, and his minuscule response to their plight just another example of how conservatives use moral hazard to push their social-Darwinist morality. The little guys get tough love. The big guys get forgiveness.
PS: I'm on the road flogging my new book, "Supercapitalism," these days. Book tours are to book writing what a Bush press conference is to governing. Please do me a favor and buy the book so I can come home.
As you are probably aware, job creation fell last month and we actually lost 4,000 jobs, on net, for the first time in several years.
I haven't done much forecasting here, I'm too optimistic and get too invested in my own calls when I do, and I find myself tending to interpret incoming data in ways that support the call. So I mostly avoid calling the economy. It's not a game you can win very often, and I don't devote enough time to looking at all the underlying data to really get a good sense of, say, what employment in this or that industry is doing this month, etc.
So I will leave forecasting to others, Tim does it here, but it's hard to interpret today's report and recent trends in job creation positively. Those who do make forecasts, some of whom have been calling a recession for a year or more - several years in a couple of cases - may finally see their forecasts validated and be able to pat themselves on the back, but I still find myself hoping that somehow this will work itself out and the workers who have lost their jobs will get reabsorbed quickly into equivalent employment in other sectors.
For the supply-side types who support tax cuts because they promote economic growth by reducing economic distortions, I guess it's time to start writing the inevitable "think how bad things would have been without the tax cuts" columns. But as you are writing and find yourself tempted to call for further tax cuts to avoid a recession, remember that using tax policy to stimulate the economy and reduce the severity of downturns is Keynesian economics, not supply-side policy, something that many of you have confused in the past. I am not at all opposed to interventions to stabilize the economy, though tax policy is just one of many options (and who gets the tax cuts matters as well), but let's not pretend that using tax policy to stimulate the economy is faithful to supply-side ideals.
I'm short on time for the moment, so to fill the void here's something I wrote a little over two years ago on this general topic [edited]:
The Insurance Value of Increasing the Federal Funds Rate: ...The extraordinarily low interest rates brought about a sectoral imbalance in the economy. In models with sluggish prices and wages, it is the change in relative prices brought about by the accommodative money that causes the imbalance. We hear stories about the imbalance all the time, the high number of workers in housing construction, the rising number of realtors, all of the secondary jobs, and so on. It seems very clear that a relative price distortion between sectors brought about by low interest rates has led to an economy that is very unbalanced towards interest sensitive sectors such as housing, and there is a lot of concern about our vulnerability due to that imbalance. If the imbalance was caused by low interest rates, then the solution is to raise interest rates to take away the incentive that caused the imbalance to begin with. Until the incentive that caused the imbalance is removed, until rates are raised, the imbalance and the vulnerabilities that come with it will remain.
Paying the fiddler is always painful. If we intentionally unbalance the economy to attenuate a recession, then much like Keynesian policy of running a surplus in good times to pay for the deficits used to stimulate the economy in bad times, rising interest rates and slower economic growth are the costs that must be paid to attain a healthier more balanced economy during the recovery period. But it's always tempting to avoid such costs.
Think of the housing sector as a balloon with too much air, a balloon ready to pop if subjected to additional stress. The chance of the balloon bursting is reduced if we let the air out very slowly and carefully. Thinking further of the escaping air as resources flowing out of the housing sector, we shouldn't allow the air escape, but instead use it to re-inflate balloons representing other sectors of the economy, hopefully sectors that could use the infusion of resources. There are lots of policies that can be implemented to facilitate this structural change outside of monetary policy, policies that allow as little air to escape as possible during the sectoral rebalancing, and those ought to be pursued vigorously.
I believe that getting the air out of the balloon at a slow, measured pace so as to re-inflate other sectors, with everybody warned that it is happening so that if the balloon pops loudly nobody jumps out of their seat, is best for now. This will require raising the federal funds rate. I want labor and other resource and output markets to be as robust as possible against shocks when the next one hits, and one will hit someday, and rebalancing the economy is an essential insurance policy against such risks. Slower output growth during the rebalancing period is the cost of the insurance premium for labor and I understand that some feel the insurance is far too expensive. For now, I do not.
We did raise rates, but it appears that resources may not have moved out of housing fast enough to avoid a "pop". We shall see.
Paul Krugman says that if Democrats remember five things when General David Petraeus testifies before Congress next week on progress in Iraq, it will help them take a firm stand on ending the war:
Time to Take a Stand, by Paul Krugman, Commentary, NY Times: Here’s what will definitely happen when Gen. David Petraeus testifies before Congress next week: he’ll assert that the surge has reduced violence in Iraq — as long as you don’t count Sunnis killed by Sunnis, Shiites killed by Shiites, Iraqis killed by car bombs and people shot in the front of the head.
Here’s what I’m afraid will happen: Democrats will look at Gen. Petraeus’s uniform and medals and fall into their usual cringe. They won’t ask hard questions out of fear that someone might accuse them of attacking the military. After the testimony, they’ll desperately try to get Republicans to agree to a resolution that politely asks President Bush to maybe, possibly, withdraw some troops, if he feels like it.
There are five things I hope Democrats in Congress will remember.
First, no independent assessment has concluded that violence in Iraq is down. ... So how can the military be claiming otherwise? Apparently, the Pentagon has a double super secret formula that it uses to distinguish sectarian killings (bad) from other deaths (not important); according to press reports, all deaths from car bombs are excluded, and ... “if a bullet went through the back of the head, it’s sectarian. If it went through the front, it’s criminal.” So the number of dead is down, as long as you only count certain kinds of dead people.
Oh, and by the way: Baghdad is undergoing ethnic cleansing... When a Sunni enclave is eliminated and the death toll in that district falls because there’s nobody left to kill, that counts as progress by the Pentagon’s metric.
Second, Gen. Petraeus has a history of making wildly overoptimistic assessments of progress in Iraq that happen to be convenient for his political masters.
I’ve written before about the op-ed article Gen. Petraeus published six weeks before the 2004 election, claiming “tangible progress” in Iraq. ...
Third, any plan that depends on the White House recognizing reality is an idle fantasy. According to The Sydney Morning Herald, on Tuesday Mr. Bush told Australia’s deputy prime minister that “we’re kicking ass” in Iraq. Enough said.
Fourth, the lesson of the past six years is that Republicans will accuse Democrats of being unpatriotic no matter what the Democrats do. ...
Finally, the public hates this war and wants to see it ended. Voters are exasperated with the Democrats ... because they don’t see Congress doing anything to stop the war.
In light of all this, you have to wonder what Democrats, who ... are considering a compromise that sets a “goal” for withdrawal rather than a timetable, are thinking. All such a compromise would accomplish would be to give Republicans who like to sound moderate — but who always vote with the Bush administration when it matters — political cover.
And six or seven months from now it will be the same thing all over again. Mr. Bush will stage another photo op ...[in] Iraq. The administration will move the goal posts again, and the military will come up with new ways to cook the books and claim success.
One thing is for sure: like 2004, 2008 will be a “khaki election” in which Republicans insist that a vote for the Democrats is a vote against the troops. The only question is whether they can also, once again, claim that the Democrats are flip-floppers who can’t make up their minds.
We find that the Bush administration has not fully met any of its eighteen benchmarks, and has partially met four:
Edward Glaeser suggests shared-appreciation mortgages as a possible response to the mortgage meltdown:
Sensible solutions to the lending mess, by Edward L. Glaeser, Commentary, Boston Globe: ...[A] proposal that would give up to $5,000 to people who lose their homes in a foreclosure ... is a sensible and humane response to the subprime crisis, but there may also be ways to help avoid more foreclosures altogether. If the [government] can induce lenders to offer refinancing at lower interest rates, by offering them a share of future housing price appreciation, then foreclosures could be reduced without trampling on creditors' rights. ...
Over the past 15 years, American credit has become far more democratic, as ordinary people have found it easier to borrow to buy homes or cars or send their kids to school. ... Lenders who broke the law should be punished, but a wholesale attack on creditors' rights will punish the prospective low-income borrowers of the future by making it impossible for them to get a loan. ...
More can be done to avoid foreclosures than just urging lenders to renegotiate, but bailouts must be avoided and creditors' rights must be respected. A perpetual moratorium on foreclosures, for example, would be a foolish repudiation of the rights of lenders. Who would lend after that precedent?
Another way is to make refinancing at lower interest rates more attractive for lenders by encouraging shared-appreciation mortgages. These mortgages ... offer lower interest rates in exchange for some of the upside potential on the house. For example, a lender might offer a 6 percent interest rate instead of an 8 percent rate, in exchange for 50 percent of the increase in the value of the house at the time of eventual sale. Most borrowers don't want to lose this upside, but for someone facing foreclosure, losing the upside may be a lot better than losing the house altogether.
The best case scenario for shared-appreciation mortgages would be that with ... regulatory encouragement, new private lenders would refinance some mortgages completely at a lower rate in exchange for some upside. Competition among lenders could help borrowers get the best deal possible. ...
Punish law-breaking lenders, not future borrowers. If we eliminate the rights of creditors to foreclose, then we will make it impossible for borrowers to get a loan. A better way is to offer financial aid to people who lose their homes, and to look for ways to induce lenders to refinance at lower interest rates.
John Berry says if the Fed cuts the target rate, it won't be by more than .25%, and there will be no hint that another rate cut will follow [Update 9/12: This column has been removed from the Bloomberg site - not sure why]:
Fed May Cut to 5 Percent Without Promising More, by John M. Berry, Bloomberg: If Federal Reserve officials cut their 5.25 percent target for the overnight lending rate when they meet on Sept. 18, it will be by only a quarter-percentage point with no promise of more to come.
Officials have already disappointed many market participants by refusing to cut the target in response to turmoil in financial markets. And they will surely disappoint those hoping for a half-point cut...
While the Fed might decide on a rate reduction as a bit of insurance against having growth weaken too much, there's no sign of serious problems in the economy outside of housing.
New information can still influence the meeting's outcome... But right now there's no worry among Fed officials that the economy is about to fall out of bed, or that some major financial institution is going belly up. ...
So what the FOMC does on Sept. 18 probably comes down to a matter of risk management. If the data and the anecdotes continue to depict a pretty healthy economy, the unusual degree of uncertainty about the outlook might lead officials to decide the best decision is a 25 basis point cut just in case the impact of the financial turmoil turns out to be greater than they expect.
Officials haven't dropped all concern about inflation, though at the moment it seems clear that potential economic weakness is the greater risk. The FOMC statement issued on Aug. 17 made that clear.
The good news is that core inflation has receded enough that it gives the committee more freedom to respond to any growth threat...
Thursday, September 06, 2007
This paper by Claudia Goldin and Lawrence F. Katz documents the sources of the growing disparity in economic outcomes in recent decades. They find that "the majority of the increase in wage inequality since 1980 has come from rising educational wage differentials, particularly rising returns to post-secondary schooling." But the reason is interesting. They find it's not because of an increase in the growth of demand for skilled workers, i.e. from an increase in demand driven by skill-based technical change. Instead, "the growth of the supply of skills slowed considerably after 1980 and the wage structure, in consequence, widened. The slowdown in the relative supply of skills of the working population came about largely from the slowdown in the growth in the educational attainment of U.S. natives for cohorts born since around 1950."
This is the introduction and (part of) the conclusion to the paper:
Long-Run Changes in the U.S. Wage Structure: Narrowing, Widening, Polarizing, Claudia Goldin and Lawrence F. Katz, September 2007: From the close of World War II to 1970 ... America enjoyed widespread prosperity. Not only did the nation grow rapidly, all parts of the income distribution expanded at fairly similar rates. America was “growing together.” But in the mid-1970s, economic growth slowed. By the early 1980s the wage structure began a period of widening that has lasted until the present day. Even though productivity growth surged again starting in the mid-1990s, the benefits of economic growth have been concentrated at the top end of the distribution. America has been “growing apart.”
Click on figure to enlarge
The “growing together” and “growing apart” patterns are shown in Figure 1, which compares real income growth across the family income distribution for the postwar period before and after 1973. For the pre-1973 period, real income growth was fastest near the bottom of the income distribution and slowest near the top, making the changes modestly equalizing. In sharp contrast, for 1973 to 2005 family incomes virtually stagnated for the lowest quintile but grew more than three times as rapidly for the top 5 percent as for the middle group.
There's an argument being made (Tyler Cowen, Megan McArdle) that supply-side economics, the kind that says tax cuts pay for themselves, is no longer mainstream in the Republican party, i.e. it no longer has any influence and is no longer used as an argument for cutting taxes.
Is it true that supply-side economics no longer has influence in the Republican party? This is straight from Giuliani's web site:
Rudy is the real fiscal conservative in the race. He cut taxes 23 times in New York and turned a $2.3 billion budget deficit into a multi-billion dollar surplus, while balancing the city’s budget. Because he turned his conservative principles into action, New York City taxpayers saved more than $9 billion in taxes and enjoyed their lowest tax burden in decades, while the economy grew and city government saw its revenues increase from the lower tax rates. Rudy Giuliani believes in supply-side economics, because he did it and he saw it work.
Update: Free Exchange quotes last night's Republican debate (Brendan Nyhan too):
Laffer Riot, Free Exchange: ...Over at The Atlantic, Megan McArdle took issue with Mr Chait's assessment of supply-side tax policies (whereby lower tax rates increase revenues) as hugely influential...
Matthew Yglesias [cited] ... the embrace of supply side orthodoxy by much of the conservative establishment, including prominent columnists and intellectuals, along with GOP congressional leadership and the president himself.
Tyler Cowen now places himself firmly in Ms McArdle's corner, disavowing supply sider influence. ...[A]s a counterpoint, I would refer him to last night's Republican debate in New Hampshire. Looking over the transcript one finds Senator John McCain saying:
I stand on my record, and my record is 24 years of opposing tax increases, and I oppose them, and I’ll continue to oppose them. I think it’s very clear that the increase in revenue that we’ve experienced is directly related to the tax cuts that were enacted, and they need to be made permanent rather than the family budgets and businesses being uncertain about their future.
Moments later, Rudy Giuliani chimes in:
I have without any doubt of all the people running for president the strongest record of lowering taxes. I did it 23 times in a city that had never lowered a tax before well over $9 billion. I lowered the personal income tax 25 percent, and I was collecting 40 percent more in revenues from the lower tax than the higher tax. I made supply-side economics work in a city that didn’t understand it, and I ended up having a very positive impact on the economy of the city as a result of that.
It seems that at least as far as major candidates for the highest elected office in the land are concerned, supply side tax policies remain influential.
With all the debate about tax cuts the last few days, this is timely. Here is Jason Furman testifying before the House Ways and Means Committee today about the impact of the 2001-06 tax cuts on the level and distribution of after-tax incomes. The extent to which the tax cuts helped to pay for themselves is also examined, and the dynamic impacts are almost imperceptible (and may even work in the wrong direction).
But the fact that these tax cuts did not pay for themselves or even offset the costs to any noticeable degree is old news. What's interesting about these estimates is that they imply that the tax-cuts leave nearly three quarters of households with lower after-tax incomes. Why does this occur? Most dynamic economic models that predict tax cuts will lead to higher GDP growth also generally assume that the tax cuts are paid for by reducing benefits or raising other taxes (e.g. replace labor/capital taxes with lump-sum taxes as in the Mankiw-Weinzerl model).
Thus, although tax cuts may result in efficiency gains, which is often one of the main arguments given for tax cuts (e.g. "tax cuts, by reducing deadweight loss ... will be good for the economy"), when you factor in the new taxes and who pays them (or equivalently reductions in benefits like Social Security, Medicare, or food stamps) and look at the resulting distribution of winners and losers, the outcome is one where three quarters of households come out behind. Jason terms this "dynamic distributional analysis":
The Effect of the 2001-06 Tax Cuts on After-Tax Incomes, by Jason Furman, Testimony Before the U.S. House Committee on Ways and Means, September 6, 2007 (summary): Mr. Chairman and other members of the Committee, thank you for the invitation to testify today at this hearing on fair and equitable tax policy for America’s working families. I would like to start with a confession: as an economist I have no special expertise in fairness or equity. The members of this committee were elected, in part, to make critical value judgments about these fundamental questions. But in order to make these value judgments you need the understand who is impacted by the tax changes and how they are impacted. And economists do have a special expertise that can help further this understanding and thus inform the debate on the bigger issues.
Evaluating a tax change requires understanding the impact it has on households through three different channels: (1) the direct impact of the tax changes on take-home pay; (2) the economic effects of the tax change on before-tax incomes; and (3) the impact that the associated budgetary changes have on future taxes or government spending on households. All three channels can be usefully summarized in a single variable: the change in the after-tax incomes of households.
Policy analysts and official scorekeepers have made varying degrees of progress on each of these three channels but have seldom integrated them into one comprehensive assessment of tax proposals. My testimony today applies such an integrated approach, potentially termed “dynamic distributional analysis,” to examine the long-run impact of the tax cuts enacted from 2001 to 2006 on the after-tax income of American families.
Some of the key findings of this analysis are:
- The direct effect of the tax cuts enacted from 2001-06 is to increase after-tax income inequality. Ignoring the effects on the economy and the budget, making the tax cuts permanent would result in a 0.7 percent increase in the after-tax income of the bottom quintile and a 6.7 percent increase in the after-tax income of the top 1 percent. As a result, the gap between these incomes would grow.
- Economic models generally rule out the possibility of a large, positive impact of the tax cuts on the economy and incomes. In one favorable – but highly unrealistic – scenario the Treasury found that making the tax cuts permanent would be equivalent to raising the growth rate by 0.04 percentage points annually spread out over 20 years. In other words, the growth rate could rise from 3.00 percent to 3.04 percent – a change that would barely be perceptible in quarterly data on the economy. In more realistic scenarios the Treasury found the tax cuts would result in higher debt and lower savings – thus reducing long-run output.
- Economic models show that the need to eventually finance the tax cuts could result in a large, negative impact on the disposable income of households, for example through reduced Social Security benefits, Medicare benefits, or higher future taxes. This occurs because no economic model finds that tax cuts pay for themselves. The results of dynamic macroeconomic feedback show that the tax cuts are only slightly more expensive or slightly less expensive than shown by the official estimates that ignore such feedback.
- Taken together, illustrative estimates show that even in the unrealistic best case scenario – in which tax cuts boost incomes and pay for part of their long-run cost through higher economic output – the financing costs of the tax cuts would leave 74 percent of households with lower after-tax incomes. If the increased debt and reduced savings associated with the tax cuts leads to lower incomes, then 76 percent of households would end up with lower after-tax incomes.
First, news that liquidity problems in the financial sector are continuing followed by an explanation of why the crisis is so widespread:
ECB and Fed intervene in money markets, by Ralph Atkins and Michael Mackenzie, Financial Times: The European Central Bank and the US Federal Reserve intervened in the money markets again on Thursday, with the ECB injecting €42.2bn and the Fed adding a total of $31.25bn into temporary reserves, more than market participants had expected. ...
The operation, making extra cash available for one day, followed a surge in overnight interest rates this week that has set back the ECB’s hopes that conditions in money markets were normalising. ...
Does private sector philanthropy help "society more effectively and efficiently than government"?:
Big Gifts, Tax Breaks and a Debate on Charity, by Stephanie Strom, NY Times: Eli Broad, a billionaire businessman, has given away more than $650 million over the last five years... The rich are giving more to charity than ever, but people like Mr. Broad are not the only ones footing the bill for such generosity. For every three dollars they give away, the federal government typically gives up a dollar or more in tax revenue, because of the charitable tax deduction and by not collecting estate taxes.
Mr. Broad ... says his gifts provide a greater public benefit than if the money goes to taxes for the government to spend. “I believe the public benefit is significantly greater than the tax benefit an individual receives,” Mr. Broad said. “I think there’s a multiplier effect. What smart, entrepreneurial philanthropists and their foundations do is get greater value for how they invest their money than if the government were doing it.”
It is an argument made by many of the nation’s richest people. But not all of them. Take the investor William H. Gross, also a billionaire. Mr. Gross vigorously dismisses the notion that the wealthy are helping society more effectively and efficiently than government.
“When millions of people are dying of AIDS and malaria in Africa, it is hard to justify the umpteenth society gala held for the benefit of a performing arts center or an art museum,” he wrote in his investment commentary this month. “A $30 million gift to a concert hall is not philanthropy, it is a Napoleonic coronation.”
Elaborating in an interview, Mr. Gross said he did not think the public benefits from philanthropy were commensurate with the tax breaks that givers receive. “I don’t think we’re getting the bang for the buck for gifts to build football stadiums and concert halls, with all due respect to Carnegie Hall and other institutions,” he said. “I don’t think the public would vote for spending tax dollars on those things.” ...
Research shows that less than 10 percent of the money Americans give to charity addresses basic human needs, like sheltering the homeless, feeding the hungry and caring for the indigent sick, and that the wealthiest typically devote an even smaller portion of their giving to such causes than everyone else. ...
Philanthropists like Mr. Broad say that looking at philanthropy solely as a means of ameliorating need is too narrow. “If you look historically at what Carnegie did with creating a library system and the Rockefellers in creating Rockefeller University, I think it does a lot more for society than simply supporting those in need,” Mr. Broad said. ...
Like many major philanthropists, Mr. Broad said he considered [his] gifts an illustration of the Chinese proverb: “Give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for a lifetime.” The argument is that simply taking care of the poor does nothing to eliminate poverty and that they will ultimately benefit more from efforts to, say, find cures for the diseases that afflict them or improve public education. ...
I have no problem with wealthy people doing charitable things, that's great, but it shouldn't crowd out the government's ability to act in the public interest or relieve the wealthy from their share of the bill. To use language from another debate, private sector charity as an "add-on" is desirable and the wealthy should do as much or little of this as their hearts desire, but if it's a "carve-out" there's reason to question "the notion that the wealthy are helping society more effectively and efficiently than government."
Since Andrew Carnegie came up:
Andrew Carnegie: The Gospel of Wealth, 1889, Modern History Sourcebook: [Andrew Carnegie (1835-1919) was a massively successful business man - his wealth was based on the provision of iron and steel to the railways, but also a man who recalled his radical roots in Scotland before his immigration to the United States. To resolve what might seem to be contradictions between the creation of wealth, which he saw as proceeding from immutable social laws, and social provision he came up with the notion of the "gospel of wealth". He lived up to his word, and gave away his fortune to socially beneficial projects, most famously by funding libraries. His approval of death taxes might surprise modern billionaires!]
Megan McArdle says supply-siders -- the ones who say tax cuts pay for themselves -- are out of the mainstream of the Republican party:
I'm all for someone taking on the sillier kind of supply siders who fanny about claiming that tax cuts increase tax revenue, but they've been rather thin on the ground lately. ...
The second three may be a "motley collection of names" and have little influence over the party, but the first four? Are Bush, McCain, Romney, and Giuliani part of the "barking moonbats"? [yes...] I agree they are making a silly assertion, but don't they run counter to the claim that nobody of importance in the party tries to sell tax cuts by saying they pay for themselves?
And, right on cue, in today's Washington Times we have this piece of hackery:
Tax cut extension needed, by David Limbaugh, Commentary, Washington Times: ...Contrary to liberal propaganda, the Reagan tax cuts led to dramatic increases in federal revenues even after adjusting for inflation. ...
Since President Bush's tax cuts took effect, Democrats have been condemning them because of their alleged responsibility for soaring deficits. ... Recent reports definitively confirm ... federal revenues increasing; the deficits are decreasing, just as in the later Reagan years. ... It's past time to extend the Bush tax cuts.
The idea that tax cuts pay for themselves, wrong as it is, is still being actively promoted as part of the sales pitch to cut taxes. It may not be official party policy, but influential members of the Republican party are more than willing to play along and even help to promote this idea, and they do so even though they ought be aware by now that there's no evidence to support such claims.
Update: Brendan Nyhan extends the list of statements from the administration claiming that tax cuts pay for themselves.
Here's more from the paper by Robert Gordon and Ian Dew-Becker, "Unresolved Issues in the Rise of American Inequality." This section addresses whether the principle agent model of CEO pay is valid, i.e. whether the best interests of boards of directors, CEOs, and shareholders are in alignment and finds "a substantial amount of evidence that the principal-agent setting cannot explain the salient facts about CEO pay." This important because, according to this evidence, the manner in which CEO pay is set is inconsistent with the best interests of shareholders:
6.4 Firm‐Level Models of CEO Pay The Gabaix and Landier model can be thought of as a general equilibrium model of CEO pay. It involves firms that are differentiated only by size and does not consider any sort of bargaining. However, there is an extensive literature that studies exactly how CEO compensation is set, in particular, the interactions between CEOs, boards of directors, and shareholders (see Murphy (1999), for a survey of this literature). The classic principal-agent model treats directors as chosen by shareholders, and then studies the optimal contracts they set up for CEOs. This framework requires that boards have only the shareholders' interests in mind. As we have discussed above, this assumption seems at best implausible.
Bebchuk and Fried (2004) provide a substantial amount of evidence that the principal-agent setting cannot explain the salient facts about CEO pay. They propose an alternative model in which CEOs have control over boards of directors and are mainly restricted by an "outrage constraint" where shareholders retaliate if they perceive executive compensation to be excessive. Weisbach's (2007) review notes a number of especially convincing pieces of evidence that the Bebchuk-Fried model is superior to the principal-agent model. Specifically, they provide evidence that CEO contracts are far from optimal, that CEOs control directors, and that directors put substantial effort into disguising the size of CEO compensation packages. Their proposal obviously has been met with some criticism, notably in the Chicago Law Review with articles by Bebchuk, Fried, Walker (2002), and Murphy (2002).
The key assumption that directors are independent turns out to be highly questionable. To start, their pay is far from negligible-an average of $152,000 per year in the top 200 firms. While directors also usually own stock in the companies they oversee, presumably the amount they stand to gain from good governance is smaller than the salary they would lose if they were not renominated. Moreover, directors receive substantial non-salary benefits in the form of perks, or in business directed to their own firms. Also, as we have noted before, if a CEO is also on the boards of any of his directors, there are ample opportunities for tit-for-tat relationships.
Bebchuk and Fried also provide compelling evidence that CEO contracts are in no sense optimal.
Wednesday, September 05, 2007
Robert Samuelson says lack of progress on poverty is caused by immigration:
Importing Poverty, by Robert J. Samuelson, Commentary, Washington Post: The government last week released its annual statistical report on poverty and household income. .. The stubborn persistence of poverty, at least as measured by the government, is increasingly a problem associated with immigration. As more poor Hispanics enter the country, poverty goes up. ...
The standard story is that poverty is stuck; superficially, the statistics support that. The poverty rate measures the share of Americans below the official poverty line... Look again at the numbers. In 2006, there were 36.5 million people in poverty. ... In 1990, the population was smaller, and there were 33.6 million people in poverty... The increase from 1990 to 2006 was 2.9 million people... Hispanics accounted for all of the gain. ... From 1990 to 2006, the number of poor Hispanics increased 3.2 million...
Only an act of willful denial can separate immigration and poverty. The increase among Hispanics must be concentrated among immigrants, legal and illegal, as well as their American-born children. ...
Why is it important to get this story straight? One reason is truthfulness. ... A second reason is that immigration affects government policy. .. By default, our present policy is to import poor people. This imposes strains on local schools, public services and health care.
We need an immigration policy that makes sense. My oft-stated belief is that legal immigration should favor the high-skilled over the low-skilled. ... At the same time, we should clamp down on new illegal immigration through tougher border controls and employer sanctions.
Whatever one's views, any sensible debate requires accurate information. ...
Free Exchange says yes, we do need accurate information, but you didn't provide it:
Poverty on the op-ed page, by Free Exchange: ...Today ... Robert Samuelson, ... trots out statistics to make a case against immigration. Mr Samuelson argues that we have made progress against poverty, but that progress is obscured by a flood of poor hispanic immigrants.
Robert Reich says democracy is being snuffed out by the pursuit of profit:
How Capitalism Is Killing Democracy, by Robert B. Reich, Foreign Policy (free w/reg.): Free markets were supposed to lead to free societies. Instead, today's supercharged global economy is eroding the power of the people in democracies around the globe. Welcome to a world where ... government takes a back seat to big business. ...
Conventional wisdom holds that where either capitalism or democracy flourishes, the other must soon follow. Yet today, their fortunes are beginning to diverge. Capitalism ... is thriving, while democracy is struggling to keep up. China ... has embraced market freedom, but not political freedom. Many economically successful nations-from Russia to Mexico-are democracies in name only. They are encumbered by the same problems that have hobbled American democracy in recent years, allowing corporations and elites ... to undermine the government's capacity to respond to citizens' concerns. ...
[T]hough free markets have brought unprecedented prosperity to many, they have been accompanied by widening inequalities..., heightened job insecurity, and environmental hazards such as global warming. Democracy is designed to allow citizens to address these very issues in constructive ways. And yet a sense of political powerlessness is on the rise among citizens in Europe, Japan, and the United States... In short, no democratic nation is effectively coping with capitalism's negative side effects.
This fact is not, however, a failing of capitalism. ... Capitalism's role is to increase the economic pie, nothing more. ... Democracy, at its best, enables citizens to debate collectively how the slices of the pie should be divided and to determine which rules apply to private goods and which to public goods. Today, those tasks are increasingly being left to the market. What is desperately needed is a clear delineation of the boundary between global capitalism and democracy-between the economic game, on the one hand, and how its rules are set, on the other. If the purpose of capitalism is to allow corporations to play the market as aggressively as possible, the challenge for citizens is to stop these economic entities from being the authors of the rules by which we live.
Brad DeLong on how the Fed should respond to troubles in the financial sector:
Brad DeLong: Central Banks Must Lower Interest Rates, by J. Bradford DeLong, Project Syndicate: ...[T]he market for overnight reserves now appears to be divided into ... segments. Banks known to be healthy can borrow at much less than 5.25 percent. But banks facing possible liquidity problems -- which the Fed wants to be able to borrow at 5.25 percent -- are borrowing from the Fed itself at 5.75 percent...
Such a difference in the prices charged to "regulated banks" in financial markets is a sign of a potential breakdown. To date, the premiums charged are small: for an overnight loan of US$100 million, even a one-percentage-point spread in the interest rate is only US$3,000. That reflects the small probability that the market is assigning to the occurrence of a full-blown financial crisis... In normal times, however, there is no such premium at all.
The fact that there is even a small liquidity crunch for banks implies larger liquidity crunches for less intensively regulated financial institutions, and even greater liquidity crunches for manufacturing and real-estate companies. It is hard to imagine that manufacturers are not now postponing orders of capitals goods, and that new home sales in the US are not dropping right now.
How does the Fed deal with such a situation?
Gingerly. A decade ago, former Fed chairman Alan Greenspan likened his problems of monetary management to driving a new car, having it suddenly stop, opening the hood, and not understanding a thing about what he saw. The changes in finance had been that great.
The Fed's actions have involved what former Fed governor Larry Meyer calls "liquidity tools," as opposed to interest rate-based monetary policy. The Fed hopes that it can handle the current situation without being forced to rescue market liquidity by cutting interest rates and thus giving what it fears would be an unhealthy boost to spending. The Fed still hopes that liquidity and confidence can be restored quickly, and that this summer will serve future economists as an example of how de-linked financial markets can be from the flows of spending and production in the real economy.
I think that the Fed is wrong: The fallout from the current liquidity panic means that a year from now we are likely to wish that the Fed had given a boost to spending this month.
The reason is that ... the banking system is much larger than the set of institutions formally called "banks" that are intensively regulated by central banks and treasuries.
A bank, at bottom, is something that (a) takes deposits, (b) provides loans, (c) pretends to its depositors that their money (its liabilities) are more liquid than its assets, (d) collects net interest as a result, and (e) gets away with it almost all the time. The deposits can be individuals' paychecks and the loans can be to small businesses. Or the deposits can be consumer paper issued by KKR Atlantic Financing, and the loans can be CDO sub-prime mortgage tranches that KKR Atlantic holds in its portfolio. Or the deposits can be investments in D.E. Shaw's funds and the loans can be the complex derivatives that make up D.E. Shaw's portfolio.
In all these cases, the liability holders -- i.e., the depositors -- have been promised liquidity, yet that promise cannot be kept if it is ever doubted. It is being doubted now.
Central banks should not focus only on keeping markets liquid. In the future, even liquid markets will be willing to intermediate fewer transactions than they were two months ago. So central banks must also focus on how the fall in the volume of money flowing through financial markets will affect spending, and on how much they should cut interest rates ... to offset these effects.
Menzie Chinn says we could avoid a lot of problems if the administration would stop "dismantling the regulatory apparatus -- CPSC, FDA, USDA -- that would be able to monitor the goods coming into the country" and enforce the import safety regulations that currently exist:
AWOL on safety regulation and the protectionist surge, by Menzie Chinn: Many observers have long worried about protectionist pressures even as the economy operates at full-employment. What, I wonder, will occur when the economy slows appreciably and unemployment increases, against a backdrop where the safety of imports is already at issue? Those of us who believe that a open and free trading regime is preferable to a restricted trading regime should be concerned. ...
I think the Administration, in abdicating responsibility for enforcing the regulations that currently exist, has unintentionally ... aided the cause of protectionists. All one has to do is to consider the current uproar over imports of lead-tainted toys, melanin contaminated pet food, anti-freeze laden toothpaste, all sourced from China. The current trade regulation regime allows for restrictions of imports that are deemed to be unsafe; these "sanitary and phytosanitary standards" have been a long-standing fixture of the international trade regime (specifically, Article XX of the GATT, as well as separate agreements on food safety and plant and animal health).
But in order to use these regulations, one needs a regulatory infrastructure with sufficient resources, and policy level backing, to operate. Otherwise, there will be a temptation to implement more blunt tools of outright protection.
However, instead of maintaining the regulatory framework that was in place, the current Administration has spent the past seven years essentially dismantling the regulatory apparatus -- CPSC, FDA, USDA -- that would be able to monitor the goods coming into the country (for discussion, see , , , ; a CRS report lays out current deficiencies). Indeed, until the uproar over Chinese food imports, the Administration was intent on closing FDA labs. ...
Tuesday, September 04, 2007
Nouriel Roubini on sovereign wealth funds:
Bogeymen of Financial Capitalism, by Nouriel Roubini, Project Syndicate: The sub-prime crisis has diverted attention from rising fears about Sovereign Wealth Funds (SWF’s) as the new bogeyman of global finance. But the minute the sub-prime crisis subsides, anxieties about SWF’s will return. For the emergence of this vast and growing pool of state-controlled funds may have implications more far-reaching, and certainly more politically sensitive, than the hopefully temporary distress caused by the subprime crisis.
Indeed, if SWF’s continue to grow their investments are bound to permanently alter the relative weight of state and privately controlled assets in advanced economies. ... Thus some of the biggest investors ... in financial markets in the coming years will be government institutions. That the biggest of these institutions are in China, Vladimir Putin’s Russia and some unstable petro-states adds another worry to the mix.
Whenever one discusses inequality and CEO pay, the results from a paper by Gabaix and Landier inevitably come up as rebuttal to the idea that CEO pay is unjustified in the sense of being disconnected from underlying economic fundamentals. Here's a summary of their work from Tyler Cowen (repeats part of this post):
A Contrarian Look at Whether U.S. Chief Executives Are Overpaid, by Tyler Cowen, Economic Scene, NY Times: ...Not surprisingly, many people think ... American executives are overpaid. ...
But in a new paper "Why Has C.E.O. Pay Increased So Much?," the economists Xavier Gabaix of the Massachusetts Institute of Technology and Augustin Landier of the Stern School of Business at New York University ... suggest that the higher salaries for chief executives can largely be explained by increases in the value of the stock market. Viewed as a whole, these salaries are a result of competitive pressures rather than the exploitation of shareholders.
Their core argument is simple. If we look at recent history, compensation for executives has risen with the market capitalization of the largest companies. For instance, from 1980 to 2003, the average value of the top 500 companies rose by a factor of six. Two commonly used indexes of chief executive compensation show close to a proportional sixfold matching increase (the correlation coefficients are 0.93 and 0.97, respectively; 1.0 would be a perfect match). ...
[T]he debate over chief executives' salaries has moved a step forward. Yes, there are numerous examples of corporate malfeasance. But it is not obvious that the American system of executive pay — taken as a whole — is excessive or broken. ...
But a new paper by Robert Gordon and Ian Dew-Becker ("Unresolved Issues in the Rise of American Inequality") challenges these results:
6.3 The Conflict among Hypotheses ...[I]t is worth considering the simple equilibrium explanation of Gabaix and Landier (2006) that executive pay moves in proportion to market capitalization.
Ken Rogoff weighs in on how the Fed should respond to the subprime meltdown:
The Fed v the financiers, by Kenneth Rogoff, Project Syndicate: In his ... address to the ... annual monetary policy conference in Jackson Hole..., US Federal Reserve chairman Ben Bernanke coolly explained why the Fed is determined to resist pressure to stabilise swooning equity and housing prices. Bernanke's principled position ... has set off a storm in markets, accustomed to the attentive pampering lavished on them by Bernanke's predecessor, Alan Greenspan.
This is certainly high-stakes poker, with huge sums hanging in the balance in the $170 trillion global financial market. ... But who is right, Bernanke or Greenspan? ...
Barry Eichengreen says if you have dollars and believe the chance of a recession is increasing, now would be a good time to sell them:
Now is a good time to sell the dollar, by Barry Eichengreen, Commentary, Financial Times: Does the subprime crisis bode the long-anticipated unwinding of global imbalances? ... A recession ... has long been seen as one way in which global imbalances could be “corrected”. ...
But the recent behaviour of the dollar is difficult to reconcile with the impending unwinding of global imbalances. If domestic spending falls, US producers will have to rely on foreign customers. The dollar will have to decline to price American goods into foreign markets. If the dollar has to fall in the future, traders should be selling it now.
In fact, however, the dollar has been one of the principal beneficiaries of the subprime crisis. It has risen against the euro. It has risen against sterling. It has risen against a variety of emerging market currencies.
Instead of taking responsibility for the decision to disband the Iraqi army, President Bush has said he doesn't remember much about it, and has given the appearance of trying to shift the responsibility elsewhere. But L. Paul Bremer says President Bush was aware of the decision and has released an "exchange of letters" to back up his claims.
But why should people have to provide evidence to force the president to take responsibility for key decisions about the war? He may not have been aware it was a key decision - that seems to be the case - but not understanding how important it was doesn't absolve him of responsibility for it. Instead, it highlights the poor understanding he and others in the administration had about what postwar conditions would be like, and what would be needed to stabilize the country:
Envoy’s Letters Counter Bush on Dismantling of Iraq Army, by Edmund Andrews, NY Times: A previously undisclosed exchange of letters shows that President Bush was told in advance by his top Iraq envoy in May 2003 of a plan to “dissolve Saddam’s military and intelligence structures,” a plan that the envoy, L. Paul Bremer, said referred to dismantling the Iraqi Army.
Mr. Bremer provided the letters to The New York Times on Monday after reading that Mr. Bush was quoted in a new book as saying that American policy had been “to keep the army intact” but that it “didn’t happen.”
The dismantling of the Iraqi Army in the aftermath of the American invasion is now widely regarded as a mistake that stoked rebellion... In releasing the letters, Mr. Bremer said he wanted to refute the suggestion in Mr. Bush’s comment that Mr. Bremer had acted to disband the army without the knowledge and concurrence of the White House. ...
Monday, September 03, 2007
An intelligently designed research effort uses evidence from mitochondrial DNA to learn more about the spread of agriculture among Stone Age farmers in Europe and the Middle East:
Pig study sheds new light on the colonisation of Europe by early farmers, EurekAlert: The earliest domesticated pigs in Europe, which many archaeologists believed to be descended from European wild boar, were actually introduced from the Middle East by Stone Age farmers, new research suggests.
The research ... analysed mitochondrial DNA from ancient and modern pig remains. Its findings also suggest that the migration of an expanding Middle Eastern population, who brought their ‘farming package’ of domesticated plants, animals and distinctive pottery styles with them, actually ‘kickstarted’ the local domestication of the European wild boar.
While archaeologists already know that agriculture began about 12,000 years ago in the central and western parts of the Middle East, spreading rapidly across Europe between 6,800 – 4000BC, many outstanding questions remain about the mechanisms of just how it spread. This research sheds new and important light on the actual process of the establishment of farming in Europe.