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Monday, October 22, 2007

links for 2007-10-22

    Posted by on Monday, October 22, 2007 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (8) 


    Sunday, October 21, 2007

    Future Mortgage Resets

    Menzie Chinn is distressed:

    Distressing Picture of the Day, by Menzie Chinn: From the IMF's September Global Financial Stability Report:

    reset.jpg
    Figure 1.7: from IMF's September Global Financial Stability Report:

    The subprime resets in 2008 should put to rest the notion that the housing market's troubles are soon to be put behind.

      Posted by on Sunday, October 21, 2007 at 07:56 PM in Economics, Financial System, Housing | Permalink  TrackBack (0)  Comments (4) 


      Pension Fund Buyouts

      I've been sitting on this for several days trying to find time to think it through, but that hasn't happened, so let me toss it out to all of you. What do you think of this plan for financial firms to buy out frozen pension funds? Is this a positive development or something to worry about? I don't find myself particularly concerned, but like PBGC interim director Charles Millard, I believe the "regulatory issues and hidden risks are very complex," and that makes me wary of taking a position on the proposal before having a more complete understanding of the consequences:

      On and Off The Hook, by Tomoeh Murakami Tse, Washington Post: Some financial services firms are trying to clear a regulatory path that would let them buy out pension plans, freeing employers from pension obligations while potentially giving profit-driven financiers direct control over the retirement savings of millions of Americans.

      The interested players range from venerable Wall Street banks such as J.P. Morgan Chase and Citigroup to start-ups, including one co-founded five months ago by Bradley D. Belt, the former executive director of the federal Pension Benefit Guaranty Corp. These groups say the buyouts would not only benefit companies that want to get off the hook of pension responsibilities, but also help workers by putting their retirement assets in the hands of shrewd money managers. And if those assets are profitably invested, the groups say, it would reduce pressure on the PBGC, which insures the pensions of nearly 44 million Americans but has a deficit of $18 billion. ...

      Opposition groups mistrust the motives of the financial firms seeking a piece of the $2.3 trillion in assets in corporate pension plans around the country.

      Continue reading "Pension Fund Buyouts" »

        Posted by on Sunday, October 21, 2007 at 02:34 PM in Economics | Permalink  TrackBack (0)  Comments (39) 


        Rural America

        I have to take issue a bit with this characterization of the importance of rural versus urban America in the political process. One of the claims is that rural America, particularly the part that are actually farmers, is too tiny to justify the attention the media gives to it:

        Continue reading "Rural America" »

          Posted by on Sunday, October 21, 2007 at 01:53 PM in Economics, Politics | Permalink  TrackBack (1)  Comments (15) 


          Constitutional Restraints on Presidential Power over the Budget

          I am not a fan of the line item veto, so I find myself in rare agreement with George Will who wishes that Republican candidates understood the constitutional restraints on presidential power:

          Line-Item Foolishness, by George F. Will, Commentary, Washington Post: Mitt Romney ... faults Rudy Giuliani for opposing the presidential line-item veto. But Giuliani doesn't, unfortunately. The facts -- not that they loom large in this skirmish -- are:

          When in 1997 Bill Clinton used the line-item veto, with which Congress had just armed him, to cancel $200 million for New York state, Giuliani harried Clinton all the way to the Supreme Court. It agreed with Giuliani that the line-item veto was an unconstitutional violation of the "presentment" clause. Today, Giuliani says ... he favors amending the Constitution to give presidents such a veto, thereby substantially augmenting what should not be further augmented -- presidential power...

          Forty-three governors have, and most presidents have coveted, the power to have something other than an all-or-nothing choice when presented with appropriations bills. ... But were a president empowered to cancel provisions of legislation, what he would be doing would be indistinguishable from legislating. He would be making, rather than executing, laws, and the separation of powers would be violated. Furthermore, when presidents truncated bills by removing items, they often would vitiate the will of Congress. ...

          The line-item veto expresses liberalism's faith in top-down government... Liberalism assumes that executive branch experts, free from parochial constituencies, know, as Congress does not, what is good for the nation "as a whole." This is contrary to the public philosophy of James Madison's "extensive" republic with its many regions and myriad interests.

          If Romney thinks a line-item veto would be a major force for federal frugality, he is mistaken. Gov. Reagan used his line-item veto to trim, on average, only about 2 percent from California's budgets. And much larger proportions of state budgets than of the federal budget are susceptible to such vetoes. ...

          And the line-item veto might result in increased spending. Legislators would have even less conscience about packing the budget with pork, because they could get credit for putting in what presidents would be responsible for taking out. Presidents, however, might use the pork for bargaining, saying to individual legislators: If you support me on this and that, I will not veto the bike path you named for your Aunt Emma.

          After a century of the growth of presidential power and after eight years of especially aggressive assertions of presidential prerogatives, it would be unseemly to intensify this tendency with a line-item veto. Conservatives used to be the designated worriers about the evolution of the presidency into the engine of grandiose government. They should visit the Rotunda for the Charters of Freedom in the National Archives building on Constitution Avenue. There the Constitution is displayed under four large glass plates. Almost half of the glass is required to cover just Article One. That concerns the legislative branch, which is the government's "first branch" for a reason.

          A polite assessment of Romney's -- and Giuliani's -- enthusiasm for a line-item veto would resemble a 19th-century scholar's assessment of a rival's translation of Plato: "The best translation of a Greek philosopher which has ever been executed by a person who understood neither philosophy nor Greek."

          Romney is explicit about his belief that the executive branch needs to become more powerful. This is from his economic plan:

          BLUEPRINT #13: Giving The President Additional Flexibility To Cut Taxes: Governor Romney Proposes Giving The Executive Branch The Authority To Spend Up To 25% Less Than Congress Appropriates. Governor Romney believes the President has an important role to play in the budget process, but that Presidential authority has been unjustifiably curbed in recent decades. With the proliferation of earmarks and with Congress unwilling to make tough spending choices, it is clear we need to re-insert the President into the budget process. The amount of money Congress tells the President to spend should be a spending ceiling, not a final price tag.

          He wants this power in addition to a line-item veto. I get the impression these guys don't want to be president where they have to deal with the constitutional restraints on their power, they want to be king. We all know Bush failed because his powers were severely limited by the Republican congress (the way he wielded that veto pen during those years was incredible!). Maybe they should just buy themselves a sovereign island somewhere, declare themselves king of everything within their realm, and leave the rest of us to struggle with our inferior constitutional democracy.

            Posted by on Sunday, October 21, 2007 at 11:43 AM in Budget Deficit, Economics, Politics | Permalink  TrackBack (1)  Comments (16) 


            links for 2007-10-21

              Posted by on Sunday, October 21, 2007 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (6) 


              Saturday, October 20, 2007

              "Invisible Handcuffs"

              Robert Frank reviews Robert Reich's "Supercapitalism: The Transformation of Business, Democracy, and Everyday Life" [first chapter]:

              Invisible Handcuffs, by Robert Frank, NY Times: ...The supply of moral outrage is limited. When we aim it at the wrong targets, we squander a valuable resource. In “Supercapitalism,” Robert B. Reich argues that the current political debate in the United States is drowning in misdirected moral outrage. ...

              Reich ... is quick to concede that rising inequality, environmental degradation and a dysfunctional health care system are problems worth worrying about. But he argues that social critics are wrong to attribute them to increased greed and corruption. Today’s corporate and political leaders are no different, he says, from their earlier counterparts. What has changed is that new technology has made the economic environment dramatically more competitive.

              As Adam Smith first described clearly, individuals who pursue only their own narrow interests in a competitive system often inadvertently create widespread social gains. But not always. Unlike many of his modern disciples, Smith was keenly aware of the invisible hand’s limitations. Individual and social interests often diverge, he realized, and in such cases, greater competition makes matters worse. If a firm can cut costs by removing the filter from its smokestack, for example, it will feel greater pressure to do so when competition intensifies.

              If our social ills are indeed rooted in increased competition, our only recourse, Reich argues, is to change the rules. Denouncing greed is simply wasted energy. If we want less inequality, we must make taxes more progressive. If we want cleaner air and water, we must adopt more stringent environmental laws.

              Reich’s narrative begins with his account of the “not quite golden age” — roughly, the three decades following World War II — in which limited competition enabled large companies to earn high profits. High profits, in turn, enabled unions to bargain for high wages and benefits. Legislators, who were less influenced by corporate cash in those days, passed laws in the public interest.

              Things changed when the Internet and other new communications and transportation technologies enabled the economy’s most able producers to extend their reach. Many established firms were swept away.

              Continue reading ""Invisible Handcuffs"" »

                Posted by on Saturday, October 20, 2007 at 07:47 PM in Economics, Politics | Permalink  TrackBack (0)  Comments (13) 


                New York Times Review of "The Conscience of a Liberal"

                Here is a review of Paul Krugman's new book, The Conscience of a Liberal from David Kennedy. The review appears in the New York Times. When you start, as David Kennedy does, with the premise that "maybe Krugman is not really an economist" because he believes that sometimes government intervention is necessary to correct market failures, you have to wonder if it's worth reading on. It's not "anti-economist" as Kennedy suggests to believe markets sometimes need to be corrected. The suggestion that it is "anti-economist" displays the reviewer's ignorance about basic economics. Also, if you are going to have an historian rather than an economist or political scientist review Paul Krugman's work, it ought to be one who at least gets history right. Paul Krugman reviews his review:

                Continuing the tradition, by Paul Krugman: Well, I’ve gotten a dismissive review in the NYT. It’s sort of a tradition. After all, The Great Unraveling received an equally dismissive review from Peter Beinart, in which he portrayed my conclusion that the Bush administration deliberately misled us into war as a crazy conspiracy theory, and contained this immortal pronouncement:

                But most Americans do not consider the Bush administration corrupt, and Paul Krugman cannot convincingly prove it is.

                I think David Kennedy’s review will hold up about as well as Peter Beinart’s. I presented facts on voting behavior, which point to the centrality of race — he ignores them. I presented polling evidence about the timing and role of the perception that Democrats are weak on national security; he just waves it away.

                Oh, and when Kennedy says, to illustrate my alleged factual problems, that

                Kansas, whatever its other crimes and misdemeanors, is not customarily regarded as the birthplace of Prohibition

                you have to ask who’s got the factual problems. I don’t know what “customarily regarded” means, but Carrie Nation wielded her ax in Kansas - and Kansas was the first state to ban alcohol in its constitution.

                And here's the review itself:

                Malefactors of Megawealth, by David Kennedy, NY Times: Paul Krugman is a justly renowned professor of economics... His abundant accolades include the John Bates Clark Medal, ... perhaps even more prestigious than receipt of the Nobel in economic science. His twice-weekly column in The New York Times routinely and authoritatively demystifies complex economic arcana.

                And yet maybe Krugman is not really an economist — at least not according to the definition offered more than a century ago by Francis Amasa Walker, the first president of the American Economic Association, who wrote that laissez-faire “was not made the test of economic orthodoxy, merely. It was used to decide whether a man were an economist at all.”

                Most modern economists continue to celebrate Walker’s orthodoxy, and behind it, the classical doctrines of Adam Smith, whose fabled “invisible hand” regularly works wonders of production, distribution, innovation and efficiency, provided it is kept free of the meddlesome “nanny state.” Against the constant threat of encroachment from that benighted quarter the free-market faithful are ever vigilant.

                Krugman will have none of this — well, very little of it (he won the Clark Medal for work demonstrating the limitations, but not the total illogic, of free trade). Where the orthodox see nothing but market miracles, he sees many a market failure. And where they detect the invisible hand, he finds manipulation by the richest Americans to rig the game in their favor.

                In our time, Krugman argues, the malefactors of megawealth have triumphed. He recites the now-familiar data that the wealthiest 0.01 percent of Americans are seven times richer than they were three decades ago, while the inflation-adjusted income of most American households has barely nudged upward. ...

                But Krugman the anti-economist does not believe that growing economic inequality incubated modern political conservatism. In his view, the “arrow of causation” points the other way: political change, cunningly engineered by “radicals of the right,” has spawned egregious economic disparity, as well as a toxic level of partisanship. Ever the iconoclast, Krugman says “this strongly suggests that institutions, norms and the political environment matter a lot more for the distribution of income — and that the impersonal market forces matter less — than Economics 101 might lead you to believe.” In short, it’s the politics, stupid.

                The bulk of this book consists of a historical explanation for how this sorry state of affairs came to be. It’s a story that is as factually shaky as it is narratively simplified. (Kansas, whatever its other crimes and misdemeanors, is not customarily regarded as the birthplace of Prohibition; the Voting Rights Act passed in 1965, not 1964.) History according to Krugman goes something like this: the nation suffered through a “Long Gilded Age” of let-’er-rip, dog-eat-dog capitalism until the New Deal created a new social order characterized by income-leveling taxes, job security, strong labor unions, a prosperous middle class, bipartisan solidarity and general social bliss. Krugman invokes that post-World War II “paradise lost” in his first paragraph, and his yearning to restore that Edenic moment informs all the pages that follow.

                But as the story unfolds, serpents slither into the garden, in the form of pesky “movement conservatives.” Those upstarts set out in the 1960s to exploit racial tensions, national security anxieties and volatile value-laden matters like abortion, school prayer and gay rights “to change the subject away from bread and butter issues.” By century’s end they had managed to fasten upon their hapless fellow citizens “a second Gilded Age” in which inequality is on the rise and even the modest American version of the welfare state that the New Deal put in place is in danger of being dismantled.

                For this dismal state of affairs the Democratic Party is held to be blameless. Never mind the Democrats’ embrace of inherently divisive identity politics, or Democratic condescension toward the ungrammatical yokels who consider their spiritual and moral commitments no less important than the minimum wage or the Endangered Species Act, nor even the Democrats’ vulnerable post-Vietnam record on national security. As Krugman sees it, the modern Republican Party has been taken over by radicals. “There hasn’t been any corresponding radicalization of the Democratic Party, so the right-wing takeover of the G.O.P. is the underlying cause of today’s bitter partisanship.” No two to tango for him. The ascendancy of modern conservatism is “an almost embarrassingly simple story,” he says, and race is the key. “Much of the whole phenomenon can be summed up in just five words: Southern whites started voting Republican. ... End of story.”

                A fuller and more nuanced story might at least gesture toward the role that environmental and natural-resource issues have played in making red-state country out of the interior West, not to mention the unsettling effects of the “value issues” on voters well beyond Dixie. And as for national security — well, as Krugman sees things, it was not Democratic bungling in the Iranian hostage crisis or humiliation in Somalia or feeble responses to the first bombing attack on the World Trade Center or the assault on the U.S.S. Cole, but the runaway popularity of the Rambo films (I’m not making this up) that hoodwinked the public into believing that the party of Carter and Clinton (not to mention McGovern and Kucinich) might not be the most steadfast guardian of the Republic’s safety.

                For all that he inveighs against the evils of partisanship, Krugman astonishingly concludes by repudiating the chimera of “bipartisan compromise” and declaring that “to be a progressive, then, means being a partisan — at least for now.” Indeed, at times he seems more intent on settling his neocon adversaries’ hash than on advancing solutions to vexed policy issues. “Yes, Virginia, there is a vast right-wing conspiracy,” he writes, a sentence that both stylistically and substantively says much about the shortcomings of this book.

                That assorted wing nuts have pretty much managed to hijack the Republican Party in recent years is scarcely in doubt. That the market is at least occasionally fallible is also not at issue. Nor is it deniable that the New Deal rendered the lives of millions of Americans more secure, and that they have become markedly less so in recent decades. A tidal wave of risk-shifting — from defined-benefit to defined-contribution retirement plans, and from employer-financed to individually-paid health care insurance, to cite but two examples — has set millions of American families anxiously adrift on a sea of uncertainty. Krugman’s chapter on the imperative need for health care reform is the best in this book, a rueful reminder of the kind of skilled and accessible economic analysis of which he is capable, and how little of it is on display here. Like the rants of Rush Limbaugh or the films of Michael Moore, Krugman’s shrill polemic may hearten the faithful, but it will do little to persuade the unconvinced or to advance the national discussion of the important issues it addresses. It may even deepen the very partisan divide he denounces. Where is the distinguished economist when we need him?

                More to the point, where's a decent reviewer when we need him? As Krugman notes in his response, David Kennedy is wrong about the history of prohibition, and the other "error" is a pretty trivial slip of writing 1964 instead of 1965. If those are the best examples of Krugman's errors Kennedy (as an historian himself) can come up with, then you have to conclude that Krugman is on pretty solid ground with the historical story he tells.

                The review also ignores a lot of evidence from political scientist Larry Bartels on values voting that supports Krugman's position on the influence of racial politics. The values voting conclusions aren't things Krugman simply asserts - as you might conclude from the review - Krugman reviews solid evidence before coming to this conclusion. So when Kennedy launches into other reasons why voters may have supported Republicans, it does nothing to undermine Krugman's thesis that a large amount of the change arises from racial politics. The Bartels evidence is still there, nothing is presented in the review to counter it, and it paints a clear picture.

                The author also takes issue with the statement that “Yes, Virginia, there is a vast right-wing conspiracy,” but once again he does not tell us about nor bother to try to rebut the careful, detailed discussion of right-wing institutions and their common funding sources that comes before this statement. Krugman's statement is a summary of this evidence, and to focus on the summary statement rather than than the evidence that supports it is not much of a rebuttal.

                It's too bad that Kennedy chose to argue that, in essence, "Democrats have problems too" -- as though that somehow excuses Republicans for issues like racial politics -- rather than dealing with the evidence Krugman presents concerning the political and economic changes that produced the New Gilded Age.

                Update: Brad DeLong adds:

                David M. Kennedy of Stanford Makes His Play for the Stupidest Man Alive Crown, by Brad DeLong: Stanford's David M. Kennedy reveals that he is a serious contender for the "Stupidest Man Alive" title. Let's roll the tape: the start of his review of Paul Krugman's The Conscience of a Liberal:

                Continue reading "New York Times Review of "The Conscience of a Liberal"" »

                  Posted by on Saturday, October 20, 2007 at 10:35 AM in Economics, Income Distribution, Politics | Permalink  TrackBack (1)  Comments (132) 


                  links for 2007-10-20

                    Posted by on Saturday, October 20, 2007 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (5) 


                    Friday, October 19, 2007

                    "Debunking Myths Can Backfire"

                    FactCheck.org wonders if debunking false and misleading claims does more harm than good:

                    Cognitive Science and FactCheck.org, or Why We (Still) Do What We Do, by Joe Miller, FactCheck.org: Have you heard about how Al Gore claimed to have invented the Internet? What about how Iraq was responsible for the attacks on the World Trade Center? Or maybe the one about how George W. Bush has the lowest IQ of any U.S. president ever? Chances are pretty good that you might even believe one (or more) of these claims. And yet all three are false. At FactCheck.org our stock in trade is debunking these sorts of false or misleading political claims, so when the Washington Post told us that we might just be making things worse, it really made us stop and think.

                    A Sept. 4 article in the Post discussed several recent studies that all seemed to point to the same conclusion: Debunking myths can backfire because people tend to remember the myth but forget what the debunker said about it. As Hebrew University psychologist Ruth Mayo explained to the Post, “If you think 9/11 and Iraq, this is your association, this is what comes in your mind. Even if you say it is not true, you will eventually have this connection with Saddam Hussein and 9/11.” That leaves myth busters like us with a quandary: Could we, by exposing political malarkey, just be cementing it in voters’ minds? Are we contributing to the problem we hope to solve?

                    Possibly. Yet we think that what we do is still necessary. And we think the facts back us up.

                    The Post story wasn’t all that surprising to those who follow the findings of cognitive science research, which tells us much of our thinking happens just below the level of consciousness. The more times we hear two particular bits of information associated, for example, the more likely it is that we’ll recall those bits of information. This is how we learn multiplication tables – and why we still know the Big Mac jingle.

                    Our brains also take some surprising shortcuts. In a study published in the Journal of Personality and Social Psychology, Virginia Tech psychologist Kimberlee Weaver shows that the more easily we recall something the more likely we are to think of it as being true. It’s a useful shortcut since, typically, easily recalled information really is true. But combine this rule with the brain’s tendency to better remember bits of information that are repeated frequently, and we can run into trouble: We’re likely to believe anything we hear repeated frequently enough. At FactCheck.org we’ve noted how political spin-masters exploit this tendency ruthlessly, repeating dubious or false claims endlessly until, in the minds of many voters, they become true. Making matters worse, a study by Hebrew University's Mayo shows that people often forget “denial tags.” Thus many people who hear the phrase “Iraq does not possess WMDs” will remember “Iraq” and “possess WMDs” while forgetting the “does not” part.

                    The counter to this requires an understanding of how it is that the brain forms beliefs.

                    Continue reading ""Debunking Myths Can Backfire"" »

                      Posted by on Friday, October 19, 2007 at 07:47 PM in Economics, Press | Permalink  TrackBack (0)  Comments (12) 


                      A Unified Voice is Not Always a Good Thing

                      They're already bigger than they ought to be, but Big Media wants to get even bigger and FCC chairman Kevin Martin is doing his best to quietly aid and abet the cause:

                      Stopping the press barons, by Robert McChesney, Guardian: Yesterday, the New York Times revealed that Federal Communications Commission (FCC) chairman Kevin Martin is rushing through a plan to rewrite media ownership rules by the end of the year, making it possible for the biggest media companies to continue their march toward consolidation. And he's doing it without giving the public a fair chance to respond.

                      The FCC under then-chairman Michael Powell tried to do this in 2003, and nearly 3 million people rose up in protest. This massive public outcry forced ... the agency back to the drawing board. But in a move that even Powell calls "courageous," Martin is trying to quickly and quietly ram through this massive giveaway before the Bush administration leaves office. ...

                      During his tenure at the FCC, Martin has consistently gamed the regulatory process - hiding research, leaking sensitive information to industry lobbyists, pushing forward a biased research agenda and making critical decisions in secret - while putting up an official façade of proper procedure.

                      Fortunately, some members of Congress have had enough of this regulatory subterfuge. Democratic senator Byron Dorgan of North Dakota ... teamed up with Mississippi Republican senator Trent Lott in a letter warning Martin to "slow down" and "proceed with caution."...

                      These senators prove that media is not a left-right issue, but one of concern to people from all walks of life. It is simply unacceptable for a self-governing people to tolerate any public policies that reduce the diversity of opinion in our democracy. ...

                      Americans ... frustrated by what is happening to news and journalism in this country ... witness every day how celebrity nonsense, talking head shouting matches and glorified stenography dominate the news.

                      The poverty of news content is not the fault of work-a-day journalists - among the most hardworking people on the planet. The problem sits squarely on the shoulders of public policies that make it good business to form massive media conglomerates whose mission is to cut costs, shed reporters and reduce output to the lowest common denominator.

                      But when the spotlight is put on the process, the public interest always wins. It is why corrupt insiders work so hard to keep the policymaking process hidden behind closed doors, and then try to pollute public discourse with the most outrageous, misleading propaganda.

                      Media ownership is a citizen issue of urgent importance - consolidation is a one-way street and there's no turning back. Rich media equals poor democracy.

                      You can't take your eyes off Bush appointees even for a moment, can you? We need more competition in this industry, not less, that's pretty clear.

                        Posted by on Friday, October 19, 2007 at 02:34 PM in Economics, Market Failure, Press | Permalink  TrackBack (0)  Comments (20) 


                        Paul Krugman: Death of the Machine

                        Business contributions to political parties are moving away from Republicans and going to Democrats instead. What does this mean for the future of the two parties?:

                        Death of the Machine, by Paul Krugman, Commentary, NY Times: “There are two things that are important in politics. The first is money, and I can’t remember what the second one is.” So declared Mark Hanna, the great Gilded Age political boss.

                        Karl Rove has often described Hanna as his role model. And predictions that Mr. Rove and his disciples would succeed in creating a permanent Republican majority ... depended crucially on the assumption that the G.O.P. would have vastly more money than its opponents. It might even, some thought, match the 10-to-1 advantage Hanna gave William McKinley when he ran against William Jennings Bryan.

                        Oops. According to ... the Center for Responsive Politics, in the current election cycle every one of the top 10 industries making political donations is giving more money to Democrats. ... Oil and gas is the only major industry that the G.O.P. can still call its own. ...

                        To some extent it’s a matter of cold political calculation. Polls, plus a wave of G.O.P. retirements, suggest that next year the Democrats will expand their majority in the House, which is already bigger than anything the Republicans ever had during their 12-year reign. ...

                        Add to this the weakness of the Republican presidential field, and it’s not surprising that lobbyists are casting in their lot with the likely winners. But that’s not the whole story. There’s also disgust, even in the corporate world, with the corruption and incompetence of the Bush years. ...

                        The truth is that while the administration has lavished favors on some powerful, established corporations, the biggest scandals have involved companies that were small or didn’t exist at all until they started getting huge contracts thanks to their political connections. Thus, Blackwater USA was a tiny business until it somehow became the leading supplier of mercenaries for the War on Terror™.

                        And the lethal amateurishness of these loyal Bushies on the make horrifies the corporate elite almost as much as it horrifies ordinary Americans.

                        Last but not least, even corporations are relieved to see the end of what amounted to a protection racket. ...

                        Nicholas Confessore ... described the efforts of people like former Senator Rick Santorum to turn K Street into an appendage of the Republican Party — not the other way around. ...

                        But corporations weren’t happy. According to The Politico, “many C.E.O.’s” used the term “extortion” to describe “the annual shakedowns by committee chairmen with jurisdiction over their industries.” And now that Mr. Santorum is out of office, ... the faint sound you hear from K Street is that of lobbyists singing: “Ding, dong, the witch is dead.”

                        All of this greatly increases the odds that the Republicans, far from establishing a permanent majority, will be out of power for quite a while. But it also raises the question of what Democratic rule will really mean. ...

                        Here’s an example of the sort of thing that makes you wonder: yesterday ABC News reported ... that the Clinton campaign is holding a “Rural Americans for Hillary” lunch and campaign briefing — at the offices of the Troutman Sanders Public Affairs Group, which lobbies for the agribusiness and biotech giant Monsanto. You don’t have to be a Naderite to feel uncomfortable about the implied closeness.

                        I’d put it this way: many progressives, myself included, hope that the next president will be another F.D.R. But we worry that he or she will turn out to be another Grover Cleveland instead — better-intentioned and much more competent than the current occupant of the White House, but too dependent on lobbyists’ money to seriously confront the excesses of our new Gilded Age.

                          Posted by on Friday, October 19, 2007 at 12:33 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (31) 


                          "Libertarians Rising"

                          Michael Kinsley says computers turn people into libertarians:

                          Libertarians Rising, by Michael Kinsley, Time: To oversimplify: Democrats are for Big Government; Republicans are against it.

                          To oversimplify somewhat less, Democrats aren't always for Big Government, and Republicans aren't always against it. Democrats treasure civil liberties, whereas Republicans are more tolerant of government censorship to protect children from pornography, or of wiretapping to catch a criminal, or of torture in the war against terrorism. War in general and Iraq in particular--certainly Big Government exercises--are projects Republicans tend to be more enthusiastic about. Likewise the criminal process: Republicans tend to want to make more things illegal and to send more people to jail for longer. Republicans also consider themselves more concerned about the moral tone of the country, and they are more disposed toward using the government in trying to improve it. In particular, Republicans think religion needs more help ... through the government, while Democrats are touchier about the separation of church and state.

                          Many people feel that neither party offers a coherent set of principles... For them, the choice is whether you believe in Big Government or you don't. And if you don't, you call yourself a libertarian. Libertarians are against government in all its manifestations. ... And what is the opposite of libertarianism? Libertarians would say fascism. But in the American political context, it is something infinitely milder that calls itself communitarianism. The term is not as familiar, ... in general communitarians emphasize society rather than the individual and believe that group responsibilities (to family, community, nation, the globe) should trump individual rights.

                          The relationship of these two ways of thinking to the two established parties is peculiar. Republicans are far more likely to identify themselves as libertarians... And yet Republicans have a clearer vision of what constitutes a good society and a well-run planet and are quicker to try to impose this vision on the rest of us. Now that the Republican Party is in trouble, critics are advising it to free itself of the religious right on issues like abortion and gay rights. That is, the party should become less communitarian and more libertarian. With Democrats, it's the other way around.

                          Very few Democrats self-identify as libertarians, but they are in fact much more likely to have a live-and-let-live attitude toward the lesbian couple next door or the Islamofascist dictator halfway around the world. And every time the Democrats lose an election, critics scold that they must put less emphasis on the ... rights of individuals and more emphasis on responsibilities to society. That is, they should become less libertarian and more communitarian. ...

                          The ... party that does well in the future will be the one that makes the better guess about where to place its bets. My money's on the libertarians. ... The computer revolution has bred a generation of smart loners, many of them rich and some of them complacently Darwinian, convinced that they don't need society--nor should anyone else. They are going to be an increasingly powerful force in politics.

                          He says "Republicans have a clearer vision of what constitutes a good society and a well-run planet..." They do?

                            Posted by on Friday, October 19, 2007 at 12:24 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (131) 


                            links for 2007-10-19

                              Posted by on Friday, October 19, 2007 at 12:21 AM in Links | Permalink  TrackBack (0)  Comments (17) 


                              Thursday, October 18, 2007

                              Price versus Wage Indexing

                              Amity Shlaes at Bloomberg is trotting out the old let's save Social Security by using price rather than wage indexing:

                              Social Security Peg Is a Fix Boomers Can Embrace, by Amity Shlaes, Bloomberg: ...On Oct. 15 the first baby boomer demonstrated she's ready for more beach-time by applying for a Social Security pension. ... As the boomers head for the beach, the revenue flowing to the government will begin to recede.

                              Many Americans believe ... there's nothing they can do but watch. This is wrong. Fixing Social Security is doable. ... Though you might have missed it, the best method for such a fix was offered by Fred Thompson..., ''one of the things that could be done would be to index benefits to inflation. Index benefits to inflation for future retirees.''...

                              Under the current system, seniors' base pension ... is calculated to reflect not only inflation but also real increases in the average wage over their careers. Real wages in the U.S. tend to rise over time... Growing productivity gives workers this reward. ...

                              Thompson was suggesting that we base the formula upon inflation alone. Then every pensioner gets what his big brother or sister did, adjusted for inflation. But not more.

                              Some call such an adjustment ''a cut.'' But the change is only a cut against what is on the theoretical Social Security books. ...[T]he change could better be described as ''a reduction in growth.''...

                              So why do plans like Thompson's get so little traction?

                              As Thompson demonstrated, the Keynesian lexicon over indexing is a problem. These days we don't really know what we are saying when we talk about inflation. ''Wage inflation'' in this context happens to include a real increase in wages. ...

                              How about a $100 million ad campaign to demystify Thompson's peg proposal? ... If a clear explanation of this problem actually penetrated the boomer consciousness, they might be willing to trim growth in benefits. ...

                              As we know, the crisis in Social Security is way overblown, so I don't mean to buy into the hysteria by responding, but let's take a look at the proposal anyway because we are sure to hear it again.

                              First, the comment about Keynesian lexicon getting in the way is pretty uninformed (to put it mildly). It does appear that someone doesn't "really know what we are saying when we talk about inflation."

                              The basics are very simple. Remember the basic equation for profit maximization from your principles of microeconomics class? It said that the money wage equals the price level times marginal productivity (you may have called the right-hand side the value of marginal product of labor). It's nothing more than MC = MR on the input side, the standard profit maximization condition:

                              W = P*MP

                              Or, in terms of the real wage

                              W/P = MP

                              Now put the first equation in percentage change terms:

                              %ΔW = %ΔP + %ΔMP

                              or, in words,

                              wage inflation = price inflation + growth in productivity.

                              All she is saying is that the change in real wages, (Δ%W - %ΔP) equals the change in productivity. There's nothing Keynesian about that, it's just a basic neoclassical result, and her attempt to take a swipe at Keynesians reveals the political rather than economic nature of her argument. 

                              Now, as to indexing, here's what happens if you don't adjust for rising living standards. Nominal wage indexing (as is done now) accounts for both changes in inflation and changes productivity over time (see the %Δ equation above), whereas price indexing only adjusts for price changes, it makes no allowance at all for changes in living standards (i.e. for changes in productivity).

                              The first regular social security payment was to Ida May Fuller on January 31, 1940. The payment was for $22.54 (a month) according to Wikipedia. Let's adjust that figure to its value today using only a CPI adjustment, i.e. we won't make any adjustment at all for rising living standards, just for changing prices. Using these index numbers for the CPI to adjust the $22.54 payment and convert it to today's dollars gives a payment of $335.67.

                              [For more detail and a fuller picture, the minimum and maximum payments by year are listed here. For 1940 the benefit was a minimum of $10 and a maximum of $41.20. In today's dollars, that range is $149.92 to $613.56 (for comparison, the actual maximum payment for 2007 is $2,116).]

                              Maybe Ida May's $335.67 was enough to live on in 1940 given the living standards at the time, no computers, no internet, no TVs, no advances in health care, etc., but good luck living on that now. If we go to pure inflation indexing, fifty years from now we'll have the same problem and the payments will have to be adjusted upward to reflect changes in living standards. This "solution" doesn't solve anything long-term, it simply pushes the problem forward by delaying the living standard adjustment.

                                Posted by on Thursday, October 18, 2007 at 06:57 PM in Economics, Social Security | Permalink  TrackBack (1)  Comments (22) 


                                Fed Watch: Absolutely Maddening

                                Tim Duy wishes new data would clarify the path the Fed will take at its next meeting, but so far that hasn't happened:

                                Absolutely Maddening, by Tim Duy: This is undeniably the most maddening array of data and anecdotes that I can remember having to sort through. Maddening enough that it makes me wonder if I am making an easy story more difficult that it has to be.

                                The trouble starts in housing…there is nothing good to be said about housing. Nothing at all. Now, time spent reading Calculated Risk had long ago convinced me that nothing good was going to happen until starts bottom at a million or so annual units, and that would have occurred regardless of recent credit tightening. The central delusion that propelled housing to new heights – the belief that housing prices only go up – has been dispelled.  No amount of easy credit is going to jump start the bubble now.

                                By all rights, or at least to the extent that we believe history should repeat itself, the housing downturn should already have tipped the economy into recession. This, however, implies a causal relationship, and the no-recession crowd, myself included, have been betting that the relationship is really driven by some third dynamic. So far, that bet has paid off – the impact of the housing downturn has been largely contained. From the most recent Beige Book:

                                Continue reading "Fed Watch: Absolutely Maddening" »

                                  Posted by on Thursday, October 18, 2007 at 12:33 AM in Economics, Fed Watch, Monetary Policy | Permalink  TrackBack (0)  Comments (31) 


                                  Reich: The logic of Taxing the Rich, and Why Dems are Afraid to Use It

                                  Robert Reich makes the case for a more progressive tax structure:

                                  The logic of Taxing the Rich, and Why Dems are Afraid to Use It, by Robert Reich: No candidate for president has suggested that the nation should raise the marginal tax rate on the richest beyond the 38 percent rate it was under Clinton (it’s now 35 percent, but the richest of the rich, as I’ll explain in a moment, are paying only 15 percent). Yet new data from the IRS show that income inequality continues to widen. ...

                                  The biggest emerging pay gap is actually inside the top 1 percent. It's mainly between CEOs, on the one hand, and Wall Street financiers – hedge-fund managers, private-equity managers ..., and investment bankers – on the other. ... The 25 highest paid hedge fund managers are earning more than the CEOs of the largest five hundred companies in the Standard and Poor’s 500 combined. CEO pay is outrageous; hedge and private-equity pay is way beyond outrageous. Several of these fund managers are taking home more than a billion dollars a year.

                                  You might think that Democrats would do something about the anomaly in the tax code that treats the earnings of private-equity and hedge fund managers as capital gains rather than ordinary income, and thereby taxes them at 15 percent... But Senate Democrats recently backed off a proposal to do just that. Why? It turns out that Dems are getting more campaign contributions these days from hedge fund and private equity partners than Republicans are getting. They don’t want to bite the hands that feed.

                                  Taxing the super-rich is not about class envy, as conservatives charge. It’s about the nation having enough money to pay for national defense and homeland security, good schools and a crumbling infrastructure, the upcoming costs of boomers’ Social Security ..., and, hopefully, affordable national health insurance. Not to mention the trillion dollars or so it will take to fix the Alternative Minimum Tax, which is now starting to hit the middle class.

                                  If the rich and super-rich don’t pay their fair share of this tab, the middle class will get socked with the bill. But the middle class can’t possibly pay it. America’s middle class is under intense financial pressure. Median wages and benefits, adjusted for inflation, have been going nowhere for thirty years; health costs are soaring..., fuel costs are out of sight, the prices of the houses occupied by the middle-class are in the doldrums.

                                  What’s fair? I’d say a 50 percent marginal tax rate on the very rich (earning over $500,000 a year). Plus an annual wealth tax of one half of one percent on net worth of people holding more than $5 million in total assets. Can’t be done, you say? Well, the highest marginal tax rate under Republican Dwight Eisenhower was 91 percent. It dropped under JFK to the 70 percent range. You say the rich will leave the country rather than face a marginal tax of 50 percent? Let them, and take away their citizenship.

                                  If the Democrats stand for anything, it’s a fair allocation of the responsibility for paying the costs of maintaining this nation. So far, neither the Dem candidates for president nor the Senate Dems have shown a willingness to uphold this fundamental principle. It seems the rich have bought them out.

                                  The Democratic leadership's decision to sell-out on the capital gains versus ordinary income tax issue was disappointing. On Robert Reich's proposal, whaddayathink? Is 50% fair?

                                    Posted by on Thursday, October 18, 2007 at 12:24 AM in Economics, Taxes | Permalink  TrackBack (0)  Comments (127) 


                                    links for 2007-10-18

                                      Posted by on Thursday, October 18, 2007 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (12) 


                                      Wednesday, October 17, 2007

                                      The Other Half

                                      I think it was Greg Mankiw who wrote about lesser known co-authors getting the short end of the stick when it comes to recognition for their work even when they are the driving force behind the research. The IPCC is suffering a similar fate with Al Gore seeming to have won the Nobel Prize all by himself from the press and pundit coverage, so I'm glad to see Jeff Sachs shine a light on scientists at the IPCC who played a key role in establishing the scientific basis for the climate change problem:

                                      The appliance of science, by Jeffrey Sachs, Project Syndicate: Al Gore's Nobel peace prize is a fitting tribute to a world leader who has been prescient, bold, and skillful in alerting the world to the dangers of man-made climate change. Gore's co-recipient of the Nobel peace prize is less known, but no less deserving. The Intergovernmental Panel on Climate Change (IPCC) is the UN's global body for assessing the scientific knowledge on climate change and bringing that knowledge to the attention of the public and the world's policy makers. Its receipt of the Nobel peace prize sends three powerful messages.

                                      First, the world's leading climate scientists and most of the world's governments have brought climate science to the forefront of global policy debates. Climate change is complicated. ... A worldwide effort is needed to understand changes in all parts of the world.

                                      Since its inception in 1988, the IPCC has harnessed the best scientific minds from around the world to document and explain what is known and not known about human-induced climate change. ... The review process is transparent and governments are invited to participate by nominating experts to various working groups, reviewing and commenting on IPCC draft documents, and approving final IPCC reports. This process builds accuracy and confidence. ...

                                      The second message is that such a global process linking scientists and governments in a common effort is vital, because without it the airwaves can get clogged with the ignorance and misinformation peddled by special interest groups. For years, oil companies such as Exxon ... sponsored misleading journalism and groups that masqueraded as "thinktanks." The IPCC faced down these vested interests. Today, ExxonMobil and other major oil companies are much more honest and constructive in their discussions... They could not, in the long-term, beat the science without gravely damaging their reputations.

                                      Finally, this year's Nobel peace prize is a wake-up call to governments, starting with the United States, to get more serious about science and sustainable development. The Bush administration has been disastrously anti-scientific. It has been staffed with ideologues who reject or neglect climate science... Most governments are in fact ill-equipped to understand the scientific issues, even when they are much less ideological and dogmatic than Bush. ...

                                      The world should respond in three ways. First, we should take seriously the need for a new climate-change accord when global negotiations begin in Bali, Indonesia this December. ...

                                      Second, we should initiate IPCC-like scientific processes for other global challenges, including the global loss of biodiversity, desertification, and over-fishing of the oceans. In each area, the general public and the world's governments only dimly perceive a global crisis. Governments have signed treaties to limit the damage, but they are not acting on those promises with the urgency required, in part because they do not understand the underlying scientific challenges.

                                      Finally, we must revamp national governments so that they have processes and capabilities similar to the IPCC. Global processes like the IPCC are crucial, but the issues must also be "brought home" to the conditions and challenges facing each country. ... The IPCC proved that science can contribute powerfully to meeting these challenges, and that scientists and policymakers can work together to help solve problems of critical importance for humanity.

                                        Posted by on Wednesday, October 17, 2007 at 05:58 PM in Economics, Environment, Politics, Science | Permalink  TrackBack (0)  Comments (3) 


                                        Comment on "Tests of Statistical Significance in Economics"

                                        This comment scrolled down the sidebar fairly quickly, so many of you may have missed Deirdre McCloskey's response to your comments to the post "Tests of Statistical Significance in Economics." As you'll recall, the post highlighted comments by Andrew Gelman on a debate between McCloskey/Zilliak and Hoover/Siegler over the use of classical statistical methodology in economics. Here's the comment:

                                        Dears,

                                        I can't keep all your monickers straight, so let me "reply" in a general way. Ziliak and I are to get the page proofs of a book about all this in a couple of week, out in I think December: The Cult of Statistical Significance (University of Michiagn Press).

                                        (1.) There we tell how R. A. Fisher resisted calls to make his procedures relevant to scientific hypotheses (by Neyman and Pearson, for example, or by the inventor of the t test, Gossett; or by later exponents of statistics with loss functions such as Wald). He stuck with 5% and tests of one kind of scepticism, supposing (as is very frequently not the case) that the only source of scientific error is one of inference from a sample to a population.

                                        (2.) But the basic point, which some of you-all are not quite seeing, is that good fit is not the same thing as importance. In fact, usually it has nothing to do with importance. Yet SPSS-sciences have thoroughly confused the two. As one of you said, irrelevant reporting of standard errors (when for example the issue is not one of sampling anyway!) is used as a referee-enforced entry fee to journals, and makes no contribution to the scientific oomph of the argument.

                                        (3.) It's rather important to understand (see the book or any of the articles we wrote) that we are making a very old and elementary point. So it just won't do to say, "Wow, this is crazy. Who are these people anyway?" We're merely reporting on scores of the leading minds on statistics from the beginning who make the same point. See for example Bill Kruskal's devastating article on "significance" in The old Encyclopedia of Statistics. It's not our point. It's Savage's point, or Freedman's point (Freedman, Pisani, and Purvis).

                                        In other words, some fields---not physics and engineering and chemistry---have made a dreadful mistake, which vitiates most of their statistical work.

                                        Sincerely,

                                        Deirdre McCloskey

                                          Posted by on Wednesday, October 17, 2007 at 02:07 PM in Economics, Methodology | Permalink  TrackBack (0)  Comments (19) 


                                          Is Inflation a Threat to China's Stability?

                                          In the comments at Martin Wolf's Forum, there is a very nice analysis of China's inflation problem from Yu Yongding:

                                          Comment on "China: Inflation is not the big threat to stability" by Yu Yongding: It is fair to say that inflation is not immediate threat to China’s economic stability. However, there are many reasons for the Chinese government to worry about inflation.

                                          First, China’s growth rate will be more than 11 percent in 2007. According to consensus until very recently, China’s potential growth rate was 8-9 percent. ... Perhaps, China’s productivity gain in recent years is great. However, ... it is hard to believe that China’s productivity ... has improved so dramatically that China’s potential growth rate has risen from 8 percent to 11 percent and will be able to maintain the current growth momentum without causing serious inflation. ... My guess is that there is excess demand in China and the excess demand is increasing. As a result, there is material inflation pressure on the economy.

                                          Second, the recent food price hike cannot be entirely attributed to one-off external shocks. Virtually, prices of all inputs for food production, from feeding-stuff to fertilizer, have increased, which in turn may partially be attributed to demand-pull factors of the economy. ... Though the government will be able to contain the rise of food prices at a time via administrative methods, these factors are not one-off and will not go away automatically.

                                          Third, inflation expectations have been established among the public. According to a recent survey by the PBoC, the public believed that inflation will deteriorate further. People have started to adjust their behavior correspondingly by withdrawing their deposits to buy shares and real estate, and pushing for more increases in wages and salaries. Therefore, at this stage, even if inflation is not a big threat to stability, worsening inflation expectations are.

                                          Continue reading "Is Inflation a Threat to China's Stability?" »

                                            Posted by on Wednesday, October 17, 2007 at 01:08 PM in China, Economics, Inflation | Permalink  TrackBack (0)  Comments (17) 


                                            PGL: Composition of the Tax Bite

                                            Since Greg Mankiw no longer allows comments (a sentiment I understand on those days when comments are particularly trying), we'll have to do it this way:

                                            Composition of the Tax Bite, by pgl: Greg Mankiw should be congratulated as he provides a graph of personal current taxes that includes what we pay at the state and local level relative to GDP. It does not include deferred taxes but no one knows how these will be paid as George W. Bush just scoffs at this reality. It also does not include payroll taxes but that’s OK as long as we are not denying the Trust Fund reserves.

                                            But I do have a complaint. It leaves the impression that we are paying a lot more now they we have ever paid except during the Clinton years. To be fair – Greg did not say that... But we should notice that Greg left off what I’d call business taxes. Since Greg was kind enough to cite his source – line 3 from table 3.1 found here - I’m defining business taxes to be the sums of lines 3 and 4. I’ve also graphed line 2 from the same table as total current tax receipts. Total taxes as a share of GDP are not higher than they’ve ever been. You see – we may be paying more in personal taxes but business taxes as a share of GDP have declined from their levels before 1981.

                                              Posted by on Wednesday, October 17, 2007 at 12:51 PM in Economics, Taxes | Permalink  TrackBack (0)  Comments (0) 


                                              "The Great Wall of America"

                                              The Great Wall of America "will cause more death in the desert":

                                              Don't fence them in, by Rubén Martínez, Commentary, LA Times: I stood on the cottonwood-lined banks of the San Pedro River in Arizona recently...

                                              If the Department of Homeland Security and the Army Corps of Engineers have their way, a "vehicle barrier" made of railroad ties will cut across the river (although it will have to be removed each year before the monsoon floods, which would easily whisk it away). There are plans for permanent vehicle barriers just beyond the riverbed -- steel posts sunk into 3 feet of concrete. And for "pedestrian fencing" made of double rows of concrete-filled 14- to 17-foot-high bollards. ... There will be a new "all-weather" road, lighting and electronic surveillance towers.

                                              And a price tag of $7 billion. For starters.

                                              Faraway Washington has forgotten just how much cowboys can't stand fences. And in this case, there are lots of cowboys: artists, students, activists, even politicians. ...

                                              The San Pedro River, which runs atypically from south to north, will be virtually dammed as far as most people and many animals are concerned. Human migrants will be pushed from the river valley to torturous trails that cross the 9,000-foot-high peaks of the Huachuca Mountains; it is nearly certain the human death toll will begin to rise in the area.

                                              This will happen because the Department of Homeland Security says so. The Secure Fence Act of 2006 mandates 700 miles of barriers... And although the department does indeed have the power to say so -- including the authority to waive National Environmental Policy Act rules in the name of national security -- resistance to the "wall" is proving to be a political obstruction Beltway politicos and Homeland Security functionaries hadn't counted on.

                                              It's a new political convergence in the borderlands: environmentalists, social justice advocates and a cohort of new border activists who are apparently driven less by ideology than a simple Western love of open vistas -- and plain common sense. ...

                                              The bulldozers were already within sight of the San Pedro River last week when a federal judge stayed further construction in response to a joint appeal from Defenders of Wildlife and the Sierra Club, which argued that "immediate and irreparable harm" would come to the river and its ecosystem.

                                              In Texas, meanwhile, several Lower Rio Grande communities also are threatening lawsuits against the Homeland Security Department. Brownsville Mayor Pat Ahumada said his city will "instruct DHS to stop the building of the wall." Some local officials have stalled construction by blocking the department's access to the border. ...

                                              At the University of Texas, Brownsville students marched against a proposed barrier that would literally cut off access to part of its campus.

                                              On the Tohono O'odham Reservation in Arizona -- which overlays 74 miles of the border -- tribal Chairman Ned Norris Jr. declared that Homeland Security officials would build a wall through O'odham land only "over my dead body." ...

                                              All of these join veterans of immigrants rights campaigns such as Tucson-based No More Deaths, which each summer focuses attention on the terrible toll of migrants who die of exposure in the deserts -- the most tangible result of the 1990s wall-building frenzy.

                                              As for the political imagination that urges the fence into being, a kind of post-9/11 paranoid optimism is at work.

                                              The Great Wall of America underscores a delusional faith in technology as the only solution to a problem that has nothing to do with technology. Ultimately, such Ozymandian monuments say more about the minds that conceived them than any "enemies" they actually contain. Think of the grandiose barriers of history -- the walls of Troy and China and Berlin; the wall that kept the Jews in the Warsaw Ghetto. Think of their fate, their ultimate symbolism. Each began with the idea that people -- and their ideas -- could be restrained by barriers, just like rivers can be dammed. A simple feat of engineering.

                                              And yet we believe that our wall will be the exception. ...

                                              The cowboys who can't stand fences -- the environmentalists and artists, the anarchists and the migrants -- know that the wall will cause more death in the desert and leave a scar upon the land. ...

                                                Posted by on Wednesday, October 17, 2007 at 02:34 AM in Economics | Permalink  TrackBack (0)  Comments (115) 


                                                links for 2007-10-17

                                                  Posted by on Wednesday, October 17, 2007 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (4) 


                                                  Tuesday, October 16, 2007

                                                  "It Violated Their Editorial Line on Taxation"

                                                  Wow. I didn't think it would be this blatant:

                                                  I take it all back, by Megan McArdle: A conservative publication, which I will not name, just spiked a book review because I said that the Laffer Curve didn't apply at American levels of taxation, even while otherwise expressing my vast displeasure with the (liberal) economic notions of the book I was reviewing. This isn't me looking for an alternative explanation for the spiking of a bad review: the literary editor accepted it, edited it, and then three hours later told me it couldn't be published because it violated their editorial line on taxation.

                                                  I suppose I ought to have known, but I didn't. Go ahead liberals, pile on: you told me so. The Laffer Curve and the supply siders pushing it seem to be the teacher's unions of the right.

                                                  [From earlier today, Paul Krugman pokes holes in the Laffer curve.] Update: Ezra Klein asks:

                                                  "A Conservative Publication" by By Ezra Klein: Shouldn't McMegan name the outlet that spiked her book review because she refused to toe the line on the Laffer Curve? Wouldn't it be useful knowledge for her readers?

                                                  I wondered the same thing. Why protect them?

                                                  Update: Brad DeLong adds:

                                                  ...McMegan concludes:

                                                  The Laffer Curve and the supply siders pushing it seem to be the teacher's unions of the right.

                                                  Funny how I have never heard of a liberal publication spiking a piece because it was insufficiently friendly to teachers' unions or trial lawyers or AARP. Don't I remember seeing a lot of things in liberal publications about how school systems are overbureaucratized, in large part because of the unions?

                                                  It is true that I have seen a lot of right-wing hyenas but haven't seen many liberals attack teachers for being overpaid and underworked. Liberals are more likely to take a line like this:

                                                  Pay Teachers More Money: Without improving the average quality of our teachers, there is little hope of improving the system... teacher quality has declined over time... ironically... [because of] reduced discrimination against women. Fifty years ago, talented, educated women had few options other than teaching, and the schools were filled with highly qualified and able teachers. Today, college-educated women have moved into other occupations....

                                                  This is no surprise. Teachers are not paid very well, and many talented potential teachers have other options.... Why are teachers so important? Since most education in this country takes place in classrooms where there are many children, disruption by one child imposes penalties on other children in the class. The evidence suggests that child behavior is very sensitive to teacher quality....

                                                  [S]chools are failing badly for some subgroups... education has been demonstrated conclusively to be very important both for a country's economic growth and for raising the wages of individual citizens. Each year of schooling is associated with about a 10 percent increase in subsequent annual earnings....

                                                  [T]he reality is that the public school system will be with us for years to come, and it is important to make that system stronger.... To improve our schools in the 21st century, it is first necessary to attract more high-quality teachers...

                                                  That's the liberal line--that teachers need more money. But that line is not just a liberal line. It is a reality-based line. The quote is from Eddie Lazear, Hoover Institution Senior Fellow and Chair of President Bush's Council of Economic Advisers. (Eddie is also strongly, strongly in favor of vouchers, educational competition, and parental voting-with-the-feet--things that liberals tend to be more skeptical of.)

                                                  Also see Ezra Klein and Mathew Yglesias. One more point on this. The supply-siders are enforcing a big lie - that tax cuts pay for themselves - a lie that helped them to push through huge tax cuts. Show me where liberal publications are enforcing  message discipline based upon a lie about unions. As the above makes clear, they aren't enforcing message discipline at all, let alone to support a falsehood.

                                                    Posted by on Tuesday, October 16, 2007 at 07:20 PM in Budget Deficit, Economics, Taxes | Permalink  TrackBack (0)  Comments (35) 


                                                    More from Vox...

                                                    There are too many from Vox EU today to post them all, so here are the links and summaries (and there's one more following this post). I'm tempted to post a couple of them just to read the comments they would generate:

                                                    Obesity’s on the rise – let’s have the courage to tax junk food! Pierre Dubois: Obesity is a becoming a major health problem in Europe and it's driven to some extent by rising junk food consumption. Junk food has negative externalities and recent research finds that its demand is fairly elastic. If it is so natural to tax cigarettes, why not tax junk food as well?

                                                    Gender discrimination lowers output per capita (a lot) Tiago V. de V. Cavalcanti, José A. Tavares: Gender discrimination is economically inefficient since it prevents equalisation of marginal products. Recent simulations based on calibrated macro models indicate that the economic loss is large. In one thought experiment, the research suggests that a very large fraction of the income differences between many nations and the US is due to gender inequality.

                                                    Financial crisis: why it may last Angel Ubide: The subprime crisis was first characterised as a liquidity crisis, but a month and billions of dollars of liquidity injections later, the situation has not improved. Perhaps it was not about liquidity, after all.

                                                    Sovereign wealth funds Richard Portes: Sovereign wealth funds are politically so hot that they competed with the summer's financial crisis for media attention - both politicians and the press have expressed concern about their activities. Not many corporates have complained, however, and some like Barclays and Blackstone have welcomed sovereign wealth fund investment. How are sovereign wealth funds apt to respond?

                                                    Free trade agreements and trade liberalisation Dean A. DeRosa, Gary Clyde Hufbauer: Global tariff-cutting over the past decade was dominated by preferential trade agreements. These deals stimulate trade among members, but by creating tariff discrimination, they also divert trade from non-members. Recent research suggests that the majority of the world’s preferential deals created more trade than they diverted and so constitute a constructive force in the world economy.

                                                      Posted by on Tuesday, October 16, 2007 at 06:30 PM in Economics | Permalink  TrackBack (0)  Comments (7) 


                                                      The Impact of Short-Term Interest Rates on Risk-Taking: Hard Evidence

                                                      It is always rewarding to see former students doing well. There's already one post by a former student appearing here today, and here's another. This paper from Vox EU looks at the relationship between short-term interest rates and risk-taking behavior. One conclusion from the work is that interest rates do affect risk-taking behavior, and therefore "prudential [bank] supervision cannot act independently of the stance of monetary policy." In particular, "When short-term interest rates are too low and there is excessive liquidity in the financial markets, prudential standards may have to be tightened, through dynamic and forward-looking capital requirements and/or provisioning":

                                                      The impact of short-term interest rates on risk-taking: hard evidence, by Vasso P. Ioannidou, Steven Ongena, Jose Luis Peydro-Alcalde: In the heat of the summer turmoil in the global financial markets, observers immediately argued that the low levels of short-term interest rates during the 2002-2005 period created the conditions for excessive risk-taking and were consequently one of the main causes of these almost unprecedented credit market convulsions.[1,2] Despite the theoretical appeal and wide-spread resonance of this contention,[3] no detailed empirical evidence — as far as we are aware — has established a clear and direct link from monetary policy onto bank risk-taking.[4]

                                                      To analyse the impact of short-term interest rates on bank risk-taking is not straightforward. Monetary policy is endogenous: when financial stability is jeopardised, for example, monetary authorities may react by lowering interest rates, making any econometric identification extremely difficult. After the collapse of LTCM in 1998, for example, the Federal Reserve reduced the federal funds rate during the ensuing period of high financial uncertainty.

                                                      An excellent setting to econometrically identify the impact of short-term interest rates on bank risk-taking is Bolivia. In recent years, the boliviano was pegged to the US dollar and the financial system was highly dollarised. During this period, the proper measure of short-term interest rates in Bolivia was the US federal funds rate, which is exogenous to Bolivian economic conditions. Hence, using the Bolivian credit registry, we analyse on a loan-by-loan basis the impact of the US federal funds on risk-taking and credit risk. The registry contains detailed contract information on all loans issued by any bank operating in the country as well as several measures of bank risk-taking such as ex-post loan performance, internal credit ratings, loan rates, and borrower credit history. The analysis draws from the 1999-2003 period, when the funds rate varied between 0.98% and 6.5%, and the boliviano was pegged to the US dollar.

                                                      We find that short-term interest rates affect risk-taking and credit risk. In particular, low interest rates encourage ex-ante risk-taking. Prior to loan origination, low interest rates imply that banks soften their lending standards for new loans – banks give more loans to borrowers with lower credit score and/or with bad credit history. Not only do banks take loans with higher ex-ante risk but also grant new loans that have higher ex-post credit risk, which we measure using a loan’s hazard rate, i.e. the default rate per unit of time. In addition, banks do not seem to price these extra risks they take. This finding suggest that our results are not driven by a higher demand for loans from risky firms (vis-à-vis less risky firms) when interest rates are low.[5] All in all, low short-term interest rates seem to increase the banks’ appetite for risk.

                                                      We also find that banks which are less-well monitored and disciplined (i.e., subject to more moral hazard) not only take on more risk but they especially take it when interest rates are low. Low rates therefore imply excessive risk-taking. When rates are low not only do these banks take on more risk, but loan spreads are further reduced at these banks despite the higher ex-post realisation of credit risk.

                                                      Continue reading "The Impact of Short-Term Interest Rates on Risk-Taking: Hard Evidence" »

                                                        Posted by on Tuesday, October 16, 2007 at 04:23 PM in Economics, Financial System, Monetary Policy | Permalink  TrackBack (0)  Comments (3) 


                                                        Who’s Laffering now?

                                                        Paul Krugman on the Laffer curve:

                                                        Who’s Laffering now?, by Paul Krugman: The Bushies have used rising tax receipts since 2004 as supposed proof that tax cuts pay for themselves — carefully ignoring the fact that revenues plunged in the early years of the administration, and that the subsequent rapid growth basically just gets us back to the previous trend. Also, they’ve pretended not to notice that mainly the revenue comes from an incredible surge in corporate profits, the byproduct of an economy in which economic growth leaves most workers behind.

                                                        But anyway, the revenue surge is over.

                                                        The chart currently shown at the top of the CBO home page tells most of the story. (Sorry, getting graphics up on this blog is a real pain — no time right now.) A read of the report shows that the revenue slowdown is continuing: September 2007 revenues were only 2 percent higher than September 2006 revenues.

                                                        Bye-bye Bush revenue boom.

                                                        Here's the graph:

                                                        Cboforkrug

                                                        Estimated Year-to-Year Growth Rates (Percent)

                                                        Here's an update:

                                                        Failing to Pass the Laffer Test, by Paul Krugman: OK, a follow up on my previous tax revenue post. The revenue boom of the last few years, which mainly depended on booming corporate profits, is over. Here’s a chart from the Congressional Budget Office [see above]:

                                                        And a further slowdown is visible within the fiscal 2007 data: revenue in September was up only 2 percent from the previous year. To put this in perspective, here’s revenue as a percent of GDP since Clinton took office:

                                                        Krugtax

                                                        So everything you’ve heard about how revenues have boomed since the Bush tax cuts is wrong. What really happened was that revenue plunged, as a percent of GDP, in the early Bush years, then staged a partial, but only partial, recovery. And that recovery seems to have run its course.

                                                        Yet on the basis of this experience, both Bush and his would-be Republican successors are proclaiming that tax cuts actually increase revenue.

                                                          Posted by on Tuesday, October 16, 2007 at 01:08 PM in Budget Deficit, Economics, Taxes | Permalink  TrackBack (1)  Comments (23) 


                                                          Fed Watch: Set to Hold Steady

                                                          Tim Duy says based upon current data, the Fed is unlikely to change the target interest rate:

                                                          Set to Hold Steady, by Tim Duy: While I was swamped with work over the past two weeks, market participants as well as John Berry at Bloomberg, have done my work for me, increasingly pricing out a rate cut at the FOMC’s next outing. Incoming data have remained strong enough to keep Bernanke & Co. on the sidelines for the moment.

                                                          Last time I wrote, I concluded with:

                                                          Bottom Line: The housing down/inflation down data flow gives the Fed room to continue cutting on the basis of forecast uncertainty. Presumably, strong data would undermine the case for additional cuts, leaving me wary of blow out ISM and employment reports. There is a risk that the Fed did intend the September move to be a “one and done” action, but unless they want to get into the habit of surprising financial markets, they need to make that clear – or the data need to be strong enough to do it for them.

                                                          On average, incoming data, outside of housing, has signaled enough strength that the Fed can be more confident in their baseline forecast of moderate growth. To be sure, I wouldn’t exactly call the ISM report a “blowout,” although it did confirm that the immediate impact of the credit disruption on manufacturing activity was minimal. Perhaps more of a surprise was the strong showing on manufacturing reported by the New York Fed, but I am wary of putting too much weight on regional numbers as they can vary greatly from month to month. Still, it reveals that the nightmare scenario imagined by the bears remains in their heads.

                                                          More surprising was the jobs report, not the gain in nonfarm payrolls reported in September, but the sharp revision to the formerly negative read on August. That, coupled with a still stable level of initial unemployment claims, suggests a slowing of the labor market, in some cases reflecting specific industries, such as construction and retail trade, in some cases likely caution on the part of employers, but with enough underlying strength in the economy to avoid the mass layoffs typically seen in recessions.

                                                          Not that anyone really believes that a recession is underway, not at least during the third quarter. Incoming data on consumption and trade leave forecasters comfortable with a growth rate of around 3%, give or take. To be sure, it doesn’t feel like 3%, because a solid piece of that growth stems from an “improvement” in the trade deficit. I believe it is commonly forgotten that a portion of the slowdown in consumer spending, perhaps a big portion, is borne by overseas producers in the form of slower import growth. And stronger export growth simply means that we are producing stuff for other people to consume. Rebalancing will look good on paper, and is necessary, but I doubt will produce the warm, fuzzy feelings expected by the anti-trade group.

                                                          It is still tough to imagine that the Fed cut interest rates in a quarter that is likely to yield a solid growth number, right after a 3.8% quarter. In last night’s speech, Fed Chairman Ben Bernanke justified the Fed’s decision to cut interest rate as insuring against the possibility that Wall Street CEOs will not be able to make the payments on their yachts the troubles in financial markets would lead to a more general credit crunch:

                                                          This action was intended to help offset the tightening of credit conditions resulting from the financial turmoil. Risk-management considerations also played a role in the decision, given the possibility that the housing correction and tighter credit could presage a broader weakening in economic conditions that would be difficult to arrest. By doing more sooner, policy might be able to forestall some part of the potential adverse effects of the disruptions in financial markets.

                                                          What about the future path of policy?

                                                          Continue reading "Fed Watch: Set to Hold Steady" »

                                                            Posted by on Tuesday, October 16, 2007 at 12:33 AM in Economics, Fed Watch, Monetary Policy | Permalink  TrackBack (1)  Comments (16) 


                                                            Treasury: Is the Social Security Trust Fund Real?

                                                            I don't get this. Why is Treasury doing this now? This is the second of three briefs sent to me by Bruce Bartlett on "Social Security Reform: A Framework for Analysis."

                                                            Here's the best I can come up with. It seems that this may be part of a concerted effort to put Social Security reform back on the table (we’ve been seeing this lately) and to try, yet again, to sell some sort of private account system. It’s played as a straightforward analysis, but I suspect there’s more behind it than that.

                                                            The brief makes the case, or at least considers it a strong possibility, that the Trust Fund cannot be protected from congress. The claim is that congress spends more when the surplus is present, so we need to look to ways to protect the Trust Fund assets (it's based upon an intergenerational equity argument premised on all congresses acting like the recent Republican congress). It mentions private accounts as a way to lock up the Trust Fund, and it promises another brief on how to protect trust fund assets in the future. Also, notice the suggested solution to the intergenerational inequity problem, i.e. reducing benefits.

                                                            Here's part of the second brief from the link above. The part in the box may be familiar - it explains how the Trust Fund operates. The rest of the discussion is about whether Social Security pre-funding is "real", and what happens if it isn't. Again, though, the question is why Treasury is spending the time and resources to do this now when there's no realistic chance of reform moving forward in the coming year:

                                                            Fourth Key Question: Is Attempted Pre-Funding Real? If Not, How Does That Affect the Answers to the Questions About Fairness and Benefit Size? ...The imminent retirement of the relatively large baby-boomer cohorts and sustained improvements in longevity are expected to cause the ratio of retirees to workers to rise rapidly over the next 30 years. In these circumstances, maintaining Social Security contributions and benefits that are stable relative to peoples’ wages while working implies that the system will collect more revenues than it pays out as benefits in the near term when the ratio of retirees to workers (the old-age dependency rate) is relatively low. It also implies that the system will pay more benefits than it collects in taxes later when the old-age dependency rate is relatively high. This financing strategy is reasonable provided that the near-term surplus revenues are safeguarded in a way that allows them to be used in the future to pay for benefits.

                                                            Continue reading "Treasury: Is the Social Security Trust Fund Real?" »

                                                              Posted by on Tuesday, October 16, 2007 at 12:24 AM in Economics, Social Insurance, Social Security | Permalink  TrackBack (1)  Comments (73) 


                                                              The Euro, the Dollar and the Renminbi

                                                              Thomas Palley emails his latest:

                                                              Triangular Trouble: the Euro, the Dollar and the Renminbi , by Thomas I. Palley: For the last several years the euro has been appreciating steadily against the U.S. dollar. Given the Chinese renminbi and other East Asian currencies are pegged to the dollar that means the euro has been appreciating steadily against all. This spells trouble for Euroland, and it suggests European policymakers should join with the U.S. to address the global problem of under-valued currencies.

                                                              The euro has now appreciated approximately seventy percent relative to its historic low against the dollar, set on October 26, 2000. This appreciation has been economically justified given Europe’s large trade surplus with the United States. That surplus peaked in 2005 and is now gradually coming down as the Euro appreciates, which is the exactly how a market based global economy is supposed to correct international financial imbalances.

                                                              Some in Europe are beginning to raise red flags regarding this appreciation, but the reality is it is still within the bounds of reasonableness. Though the euro has appreciated seventy percent against its historic low, it has only appreciated twenty percent relative to its January 1999 introductory parity.

                                                              That said, European concerns about exchange rates are justified, but the focus should be East Asia’s currencies, not the dollar. The key player is China, which has the largest surplus. Additionally, other East Asian countries are rationally reluctant to adjust their currencies absent a Chinese revaluation, as they fear losing competitiveness. This means China’s refusal to significantly revalue its currency against the dollar is forcing a lop-sided adjustment process that places the burden of rebalancing the U.S. trade deficit exclusively on Europe. That is imposing a deflationary burden on Europe that could easily undermine the European economy.

                                                              Continue reading "The Euro, the Dollar and the Renminbi" »

                                                                Posted by on Tuesday, October 16, 2007 at 12:15 AM in Economics, International Finance | Permalink  TrackBack (0)  Comments (5) 


                                                                links for 2007-10-16

                                                                  Posted by on Tuesday, October 16, 2007 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (18) 


                                                                  Monday, October 15, 2007

                                                                  Mechanism Design and Financial Panics

                                                                  Jeffrey Lacker, president of the Richmond Fed, uses mechanism design theory to analyze and explain the recent financial panic. This is from the WSJ Economics blog:

                                                                  Nobel Theory Offers Insights Into Turmoil, Fed’s Lacker Says: Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, said mechanism design theory, which won its architects a Nobel prize today, offers insight into what happened in financial markets this summer.

                                                                  Mechanism design theory, basically, is about the use of incentives and rules to create efficient methods for allocating resources, essentially setting rules for markets or alternatives to markets. “It takes very seriously the informational constraints that people operate under,” Mr. Lacker said... It “looks for the optimal allocation without taking a stand on what institutions exist or arise… Often markets can achieve an optimal allocation, but sometimes government intervention is required, and sometimes institutional arrangements like financial intermediaries or clearing houses are capable of achieving good allocations.”

                                                                  Mr. Lacker says mechanism design theory suggests “it’s not clear that liquidity was an important constraint” in causing the recent turmoil in financial markets. Rather, it suggests that the problem was more a shortage of information, a conclusion he deemed “consistent with the lack of use we’ve seen in the discount window,” ... “I supported the discount rate reduction and I think it was the right thing to do,” he said. However, “if liquidity was the problem we would have seen more use of the discount window… It just didn’t turn out to be crucial.”

                                                                  “If liquidity wasn’t the problem, I think it makes sense in that situation to keep interest rate policy focused on growth and inflation rather than the functioning of the financial market per se,” said Mr. Lacker, discussing the Fed’s decision to wait until September to cut interest rates. The Federal Open Market Committee “waited until more information was available about the implications for growth and inflation.”

                                                                  “I want to make sure people understand how deep and important this field is,” Mr. Lacker concluded. “...It’s the only coherent approach to figuring out what the economic role of banks or other financial intermediaries is.”...

                                                                  [For more from the WSJ Economics Blog on financial panics, see Bernanke’s Insight on Why Crashes Happen in October by Phil Izzo.]

                                                                    Posted by on Monday, October 15, 2007 at 04:23 PM in Economics, Financial System, Monetary Policy | Permalink  TrackBack (0)  Comments (5) 


                                                                    The Nobel Prize in Economics

                                                                    The Nobel Prize in Economics goes to Leonid Hurwicz, Eric Maskin, and Roger Myerson. Busy for a bit with things I cannot set aside - so let me go with links to others:

                                                                    I will add more links if I come across particularly good summaries of their work, and please add links/information in comments as well. Update:

                                                                      Posted by on Monday, October 15, 2007 at 09:54 AM in Economics | Permalink  TrackBack (0)  Comments (7) 


                                                                      Housekeeping

                                                                      A housekeeping note:

                                                                      I went through the blogroll and removed inactive or dead blogs (i.e. no posts for several months). If I made a mistake and deleted yours, please let me know so I can restore it to the list (it wasn't a judgment about content). Also, if you have a blog that has an identifiable economics theme, I'd like to have you on the list so please send me an email and let me know.

                                                                        Posted by on Monday, October 15, 2007 at 08:28 AM in Economics, Weblogs | Permalink  TrackBack (0)  Comments (2) 


                                                                        Paul Krugman: Gore Derangement Syndrome

                                                                        There's something about Al Gore:

                                                                        Gore Derangement Syndrome, by Paul Krugman, Commentary, NY Times: On the day after Al Gore shared the Nobel Peace Prize, The Wall Street Journal’s editors couldn’t even bring themselves to mention Mr. Gore’s name. Instead, they devoted their editorial to a long list of people they thought deserved the prize more.

                                                                        And at National Review Online, Iain Murray suggested that the prize should have been shared with “...Osama bin Laden, who implicitly endorsed Gore’s stance.” You see, bin Laden once said something about climate change — therefore, anyone who talks about climate change is a friend of the terrorists.

                                                                        What is it about Mr. Gore that drives right-wingers insane?

                                                                        Partly it’s a reaction to what happened in 2000, when the American people chose Mr. Gore but his opponent somehow ended up in the White House. Both the personality cult the right tried to build around President Bush and the often hysterical denigration of Mr. Gore were, I believe, largely motivated by the desire to expunge the stain of illegitimacy from the Bush administration. ...

                                                                        The worst thing about Mr. Gore, from the conservative point of view, is that he keeps being right. In 1992, George H. W. Bush mocked him as the “ozone man,” but three years later the scientists who discovered the threat to the ozone layer won the Nobel Prize in Chemistry. In 2002 he warned that if we invaded Iraq, “the resulting chaos could easily pose a far greater danger to the United States than we presently face from Saddam.” And so it has proved.

                                                                        But Gore hatred is more than personal. ... For the truth Mr. Gore has been telling about how human activities are changing the climate isn’t just inconvenient. For conservatives, it’s deeply threatening.

                                                                        Consider the policy implications of taking climate change seriously. ... It’s in the interest of most people (and especially their descendants) that somebody do something to reduce emissions of ... greenhouse gases, but each individual would like that somebody to be somebody else. Leave it up to the free market, and in a few generations Florida will be underwater.

                                                                        The solution to such conflicts between self-interest and the common good is to provide individuals with an incentive to do the right thing..., either by requiring that they pay a tax on emissions or by requiring that they buy emission permits, which has pretty much the same effects as an emissions tax. ... Climate change is ... global. ... So dealing with climate change ... also requires international negotiations in which the United States will have to give as well as get.

                                                                        Everything I’ve just said should be uncontroversial — but imagine the reception a Republican candidate for president would receive if he acknowledged these truths at the next debate. Today, being a good Republican means believing that taxes should always be cut, never raised. It also means believing that we should bomb and bully foreigners, not negotiate with them.

                                                                        So if science says that we have a big problem that can’t be solved with tax cuts or bombs — well, the science must be rejected, and the scientists must be slimed. For example, Investor’s Business Daily recently declared that the prominence of James Hansen, the NASA researcher who first made climate change a national issue two decades ago, is actually due to the nefarious schemes of — who else? — George Soros.

                                                                        Which brings us to the biggest reason the right hates Mr. Gore: in his case the smear campaign has failed. He’s taken everything they could throw at him, and emerged more respected, and more credible, than ever. And it drives them crazy.

                                                                          Posted by on Monday, October 15, 2007 at 12:33 AM in Economics, Environment, Policy, Politics | Permalink  TrackBack (0)  Comments (175) 


                                                                          "A More Competitive Dollar is Good for America"

                                                                          Martin Feldstein continues to stay on message regarding the fall in the dollar:

                                                                          A more competitive dollar is good for America, by Martin Feldstein, Commentary, Financial Times: The dollar has finally begun its long overdue correction. The dollar’s decline in recent weeks is just a prelude to the much more substantial fall needed to shrink the US current account deficit, running at a nearly $800bn annual rate, about 6 per cent of gross domestic product.

                                                                          If the dollar remained at its current level, the US trade deficit would continue to expand because Americans respond to rising incomes by increasing imports more rapidly than foreign buyers raise their imports from the US. Although a faster growth rate in the rest of the world would raise US exports and reduce the US trade deficit, experience shows that even substantially faster foreign growth would have only a very small impact. A lower dollar has to do most of the work of reducing the global trade imbalance.

                                                                          America’s trade deficit must be financed by a capital inflow from the rest of the world. ... The largest purchasers of this debt are foreign governments and their related investment funds. A big uncertainty hanging over the dollar is how long those governments will be willing to keep adding to their dollar holdings, knowing that they will eventually incur losses as the dollar falls. Even if governments are prepared to do so, private investors may drive the dollar down as they try to shift from dollars to euros and other currencies. ...

                                                                          If foreign buyers do not want to keep acquiring US bonds at the current exchange rate, the dollar must fall enough to convince investors that it is unlikely to fall further or US interest rates must rise enough to compensate investors for the risk of holding dollar bonds.

                                                                          The falling dollar should not be seen as a problem for the US economy. A more competitive dollar will raise net exports, reducing the probability that the current weakness will turn into an outright recession. Looking further ahead, as the US household saving rate rises from its current low of nearly zero to a more normal level, consumer spending will slow, driving down aggregate demand. A declining dollar will then help to maintain growth and employment by raising exports and causing American consumers to shift their spending from imports to domestically produced goods and services.

                                                                          Nor should the falling dollar be a problem for our trading partners if they take the appropriate measures to offset the reduction in demand that will be caused by their declining exports and rising imports. ...

                                                                          Since a falling dollar raises the cost of imports and increases the export demand for US products, a dollar decline by itself puts upwards pressure on the US inflation rate. But the overall inflation rate need not rise if the Federal Reserve sticks to its goal of price stability. ...

                                                                          Markets must look beyond the slogan that a strong dollar is good for America to recognise that a more competitive dollar will help sustain US growth and is necessary to correct America’s trade deficit. ... With appropriate policies, the dollar’s decline will correct the imbalances that threaten the global economy without higher inflation in the US or decreased growth in the rest of the world.

                                                                          PGL agrees.

                                                                            Posted by on Monday, October 15, 2007 at 12:24 AM in Economics, International Finance | Permalink  TrackBack (0)  Comments (9) 


                                                                            Do Temporary Jobs Improve Workers Long-Term Labour Market Performance?

                                                                            Previous research on temporary employment found that it provided important on the job training that increased skill levels and allowed better employment outcomes. But a new study contradicts this work and finds that it is mainly better matching, not enhanced skills, that explains why temporary workers tend to do better in the labor market. This implies that there are informational or other problems preventing fully efficient labor market outcomes, and that there is room for government agencies or private sector firms to improve outcomes by acting as intermediaries between workers and firms:

                                                                            Do temporary jobs improve workers long-term labour market performance?, by Fredrik Andersson, Harry J. Holzer, and Julia Lane, Vox EU: What are the long term labour market consequences of temporary help work? As the importance of temporary help work has increased across OECD countries, economists have started paying attention to this question.

                                                                            If, on the one hand, temp agencies provide a productive stepping stone on the path to more stable employment, both by increasing access to “good” jobs and by imparting useful job skills, workforce development agencies should actively promote temp jobs. If, on the other hand, they are actually part of a “secondary” labour market in which low-wage workers churn from bad job to bad job, workforce development agencies should avoid placing workers in temp help agencies, and concentrate their efforts on more successful strategies. The importance of answering this question can be seen from a glance at the table. Across the OECD, about a quarter of young workers, and more than one in eight workers with low education are in temp help employment, and for some countries, like Spain, the proportions reach as high as two out of three and more than one in three, respectively.

                                                                            Continue reading "Do Temporary Jobs Improve Workers Long-Term Labour Market Performance?" »

                                                                              Posted by on Monday, October 15, 2007 at 12:15 AM in Economics, Unemployment | Permalink  TrackBack (0)  Comments (30) 


                                                                              links for 2007-10-15

                                                                                Posted by on Monday, October 15, 2007 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (5) 


                                                                                Sunday, October 14, 2007

                                                                                Is There a Productivity Crisis in Our Future?

                                                                                Dean Baker and John Schmitt are worried about a productivity slowdown (graph):

                                                                                The real economic crisis, by John Schmitt and Dean Baker, Comment is Free: All the bad news about the bursting of the US housing bubble ... has deflected the world's attention from what is arguably an even more fundamental problem...: the sharp deceleration in productivity growth since the middle of 2004. ...

                                                                                For Europeans, long-encouraged to see the United States as the flexible economic ideal, the productivity slowdown sounds another note of caution about the US model. Europeans already know that the US economy generates substantial inequality. The last three years of slow productivity growth now suggest that all that inequality apparently doesn't even guarantee faster growth.

                                                                                Economists ... agree that the growth rate of productivity is the single most important determinant of the long-run prospects for a country's standard of living.

                                                                                The deceleration in US productivity growth since the second half of 2004 is striking by historical standards. Between 1947 and 1973, the golden age of postwar capitalism, productivity growth averaged about 2.8% per year in the United States. At that pace, the output of the average worker was set to double about every 25 years... From 1973 through 1995, however, productivity growth took a nosedive, with the average rate dropping to just 1.4%. At this lower rate, average worker output would take about 50 years to double, implying far slower progress in living standards.

                                                                                From the mid-1990s on, however, official productivity growth again accelerated rapidly, returning to a 2.9% rate reminiscent of the golden age. Quite suddenly, though, in the second half of 2004, productivity growth dropped sharply. From the third quarter of 2004, productivity growth rate, at 1.3% per year, has not even managed to match the 1.4% growth rate of the productivity bust of 1973-1995. ...

                                                                                The productivity numbers are likely even worse than they look. The most important reason is that the official productivity figures don't handle the rapid depreciation of new technology very well. Productivity gauges average output per hour worked - including what workers produce simply to replace obsolete machinery. But, the portion of output that workers produce just to replace worn-out machinery does not actually improve our standard of living. ...

                                                                                In the earlier postwar period, when machinery depreciated fairly slowly, ignoring this depreciation effect on productivity growth didn't matter much. The driving force behind the 1996-2004 productivity acceleration, however, was massive investment in computers, software and related high-tech machinery, all of which become obsolete much faster than earlier generations of capital goods. (Try running Windows Vista on the computer you bought just a couple of years ago.) Since 1995, however, the depreciation effect is large - almost 0.2 percentage points per year. After we make this adjustment, productivity growth since the middle of 2004 falls from an already disappointing 1.3% per year to a mere 1.1%... Such a severe deceleration in productivity growth constitutes a serious long-term threat to US living standards.

                                                                                Meanwhile, how has Europe been faring? According to internationally comparable data from the Groningen Growth and Development Centre, between 1995 and 2004, the United States outperformed most of Europe...

                                                                                Between 2004 and 2006, however, the US lead all but evaporated. The US rate fell to 1.7%, not much different from the rates in Germany (1.7%), France (1.4%), and the United Kingdom (1.4%). If current trends continue, US growth rates may soon be trailing those of Europe (as was the case for almost the entire postwar period before 1995).

                                                                                Europeans who want their countries to adopt economic policies that are more like those in the United States should consider these data carefully. There is an argument for adopting policies that lead to more inequality and less economic security when the result is more rapid economic growth. There is no obvious argument for more inequality and less security when the result is the same or even slower economic growth.

                                                                                  Posted by on Sunday, October 14, 2007 at 12:33 PM in Economics, Productivity | Permalink  TrackBack (0)  Comments (39) 


                                                                                  links for 2007-10-14

                                                                                    Posted by on Sunday, October 14, 2007 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (19) 


                                                                                    Saturday, October 13, 2007

                                                                                    Human Capital

                                                                                    An email suggests this article from Economic Principles:

                                                                                    The Generation of 1958, by David Warsh: Fifty years ago last week, the Soviet satellite known as Sputnik roared into orbit around the Earth, catching the United States completely by surprise. Americans had expected that their Vanguard satellite would lead the way into space. ... The Soviets’ successful launch was a beacon to some, a fright to many. A future in space for mankind suddenly seemed an exhilarating possibility, at least to those who had thought about it since the time of Jules Verne. But so did missile-driven global thermonuclear war. In its way, Sputnik was every bit as galvanizing an event as 9/11. ...

                                                                                    The real watershed came the next year, however, when Congress passed the National Defense Education Act. President Dwight Eisenhower signed the NDEA into law on September 2, 1958. School reform had been on the table for most of a decade. ...  As Peter Dow makes clear in Schoolhouse Politics: Lessons from the Sputnik Era, the October surprise broke a longstanding logjam on Capitol Hill. Southern Democrats in the House of Representatives, for whom “the three Rs” meant Reds, race and religion, were finally forced to report out a bill

                                                                                    What exactly was the $10 billion NDEA?  It depends on whom you ask.  (A billion dollars was a lot of money in the 1950s; the National Defense Highways Act of a couple years before, which created the Interstate highway system, was budgeted at $25 million over a decade. In today’s dollars, each program would cost ten or fifteen times as much.)

                                                                                    Continue reading "Human Capital" »

                                                                                      Posted by on Saturday, October 13, 2007 at 07:47 PM in Economics, Science | Permalink  TrackBack (0)  Comments (58) 


                                                                                      "Swarm Theory"

                                                                                      Part of a much longer article:

                                                                                      Swarm Theory, by Peter Miler, National Geographic: I used to think ants knew what they were doing. ... I just figured they had a plan... How else could ants organize highways, build elaborate nests, stage epic raids, and do all the other things ants do?

                                                                                      Turns out I was wrong. Ants aren't clever little engineers, architects, or warriors after all—at least not as individuals. When it comes to deciding what to do next, most ants don't have a clue. ... Deborah M. Gordon, a biologist at Stanford University. ... [says] "Ants aren't smart, ... Ant colonies are." A colony can solve problems unthinkable for individual ants, such as finding the shortest path to the best food source, allocating workers to different tasks, or defending a territory from neighbors. .... They do it with something called swarm intelligence.

                                                                                      Where this intelligence comes from raises a fundamental question in nature: How do the simple actions of individuals add up to the complex behavior of a group? ...

                                                                                      Continue reading ""Swarm Theory"" »

                                                                                        Posted by on Saturday, October 13, 2007 at 07:38 PM in Economics, Science | Permalink  TrackBack (1)  Comments (11) 


                                                                                        "The Narrative is Still Unfolding"

                                                                                        Robert Shiller says that though some are starting to sound the all clear sign for the economy, it's too early to conclude there won't be tougher times ahead:

                                                                                        Sniffles That Precede a Recession, by Robert Shiller, Economic View, NY Times: A recession has much the same pattern as the flu — starting with vague feelings of malaise and quickly building in misery until a patient’s activities are drastically curtailed. Then, all too gradually, comes an extended period of recovery...

                                                                                        With the unemployment rate up to 4.7 percent in September from 4.4 percent in March, the economy is feeling a chill. Is it descending into recession? Most economists seem to be concluding that the current unpleasantness is a false alarm. They point to some good vital signs: the stock market is up, the dollar is cheap, the rest of the world is strong and the Fed is ready to respond.

                                                                                        But there are worrisome symptoms... The most important is a creeping sense of malaise that could turn into a general loss of confidence. The downturn in the housing market and the repercussions in financial markets are critical factors. ...

                                                                                        Diagnosis of a recession is hard because ... a recession seems to be a result of a confluence of many hard-to-measure factors. A decline in investment spending is typically one of them, and a recession is generally one of those rare events when residential and nonresidential investment both happen to decline together.

                                                                                        Continue reading ""The Narrative is Still Unfolding"" »

                                                                                          Posted by on Saturday, October 13, 2007 at 02:34 PM in Economics, Financial System, Housing | Permalink  TrackBack (0)  Comments (15) 


                                                                                          John Taylor's Contributions to Monetary Theory and Policy

                                                                                          Papers from the Dallas Fed Conference held to honor of John Taylor's contributions to monetary theory and policy:

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                                                                                            Posted by on Saturday, October 13, 2007 at 12:51 PM in Academic Papers, Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (0) 


                                                                                            Trickled Pink

                                                                                            From The Onion, evidence of trickle-down effects:

                                                                                            Reaganomics Finally Trickles Down To Area Man, The Onion: Twenty-six years after Ronald Reagan first set his controversial fiscal policies into motion, the deceased president's massive tax cuts for the ultrarich at last trickled all the way down to deliver their bounty, in the form of a $10 bonus, to Hazelwood, MO car-wash attendant Frank Kellener. ...

                                                                                            "Back when Reagan was in charge, I didn't think much of him," Kellener, 57, said, holding up two five-dollar bills nearly three decades in the making. "But who would have thought that in 2007 I'd have this extra $10 in my pocket? He may not have lived to see it, but I'm sure President Reagan is up in heaven smiling down on me right now."

                                                                                            Leading economists say Kellener's unexpected windfall provides the first irrefutable proof of the effectiveness of Reagan's so-called supply-side economics, and shows that the former president had "incredible, far-reaching foresight."

                                                                                            "When the tax burden on the upper income brackets is lifted, the rich and not-rich alike all benefit," said Arthur Laffer, who was a former member of Reagan's Economic Policy Advisory Board. "Eventually." ...

                                                                                            Prior to joining Marlin Car Wash in 2005, Kellener worked for nearly two decades at a local Ford assembly plant that is now defunct. Before that, he was employed by the FAA as an air traffic controller until his union went on strike and Reagan fired him, along with nearly 13,000 others. ...

                                                                                            Kellener, who has cared for his schizophrenic sister ever since her federally funded mental institution was closed in 1984, said that he plans to donate the full $10 to the Republican presidential candidate who best embodies Reagan's legacy.

                                                                                              Posted by on Saturday, October 13, 2007 at 12:33 AM in Economics, Policy, Taxes | Permalink  TrackBack (0)  Comments (20) 


                                                                                              links for 2007-10-13

                                                                                                Posted by on Saturday, October 13, 2007 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (6) 


                                                                                                Friday, October 12, 2007

                                                                                                The "Harsh Side"

                                                                                                In response to the debate over SCHIP, this is intended as a comment on attitudes toward social insurance:

                                                                                                Death Reveals Harsh Side of a ‘Model’ in Japan, by Norimitsu Onishi, NY Times: In a thin notebook discovered along with a man’s partly mummified corpse this summer was a detailed account of his last days, recording his hunger pangs, his drop in weight and, above all, his dream of eating a rice ball...

                                                                                                “3 a.m. This human being hasn’t eaten in 10 days but is still alive,” he wrote. “I want to eat rice. I want to eat a rice ball.”

                                                                                                These were ... the last words of ... a 52-year-old urban welfare recipient whose benefits had been cut off. And his case was not the first here.

                                                                                                One man has died in each of the last three years in this city in western Japan, apparently of starvation, after his welfare application was refused or his benefits cut off. Unable to buy food, all three men wasted away for months inside their homes, where their bodies were eventually found. ...

                                                                                                In a way that the words of no living person could, the diary has shown the human costs of the economic transformation in Japan. As a widening income gap has pushed up welfare rolls in recent years, struggling cities like Kitakyushu have been under intense pressure to tighten eligibility.

                                                                                                The fallout from the most recent death has shown just how far the authorities in Kitakyushu went to achieve a flat welfare rate.

                                                                                                Japan has traditionally been hard on welfare recipients, and experts say this city’s practices are common to many other local governments. Applicants are expected to turn to their relatives or use up their savings before getting benefits. Welfare is considered less of an entitlement than a shameful handout.

                                                                                                “Local governments tend to believe that using taxpayer money to help people in need is doing a disservice to citizens,” said Hiroshi Sugimura, a professor specializing in welfare at Hosei University in Tokyo. “To them, those in need are not citizens. Only those who pay taxes are citizens.”

                                                                                                Continue reading "The "Harsh Side"" »

                                                                                                  Posted by on Friday, October 12, 2007 at 03:15 PM in Economics, Health Care, Social Insurance | Permalink  TrackBack (0)  Comments (29) 


                                                                                                  Paul Krugman: Sliming Graeme Frost

                                                                                                  Paul Krugman looks at yet another example of "character assassination in place of honest debate":

                                                                                                  Sliming Graeme Frost, by Paul Krugman, Commentary, NY Times: Two weeks ago, the Democratic response to President Bush’s weekly radio address was delivered by a 12-year-old, Graeme Frost. Graeme, who along with his sister received severe brain injuries in a 2004 car crash and continues to need physical therapy, is a beneficiary of the State Children’s Health Insurance Program. Mr. Bush has vetoed a bipartisan bill that would have expanded that program to cover millions of children who would otherwise have been uninsured. ...

                                                                                                  The Frosts and their four children are exactly the kind of people S-chip was intended to help: working Americans who can’t afford private health insurance.

                                                                                                  The parents have a combined income of about $45,000, and don’t receive health insurance from employers. When they looked into buying insurance on their own before the accident, they found that it would cost $1,200 a month — a prohibitive sum given their income. After the accident, ... they couldn’t get insurance at any price. ...

                                                                                                  Maryland ... has relatively restrictive rules for eligibility: ... income under 200 percent of the poverty line. For families with four children that’s $55,220, so the Frosts clearly qualified. ...

                                                                                                  Soon after the radio address, right-wing bloggers began insisting that the Frosts must be affluent because Graeme and his sister attend private schools (they’re on scholarship), because they have a house in a neighborhood where some houses are now expensive (the Frosts bought their house for $55,000 in 1990 when the neighborhood was rundown and considered dangerous) and because Mr. Frost owns a business (it was dissolved in 1999). ...

                                                                                                  The charge was led by Michelle Malkin, who according to Technorati has the most-trafficked right-wing blog on the Internet, and ... has a nationally syndicated column, writes for National Review and is a frequent guest on Fox News. The attack ... was also quickly picked up by Rush Limbaugh...

                                                                                                  And G.O.P. politicians were eager to join in the smear. ... Republicans had already made their first move: an e-mail message from the office of Mitch McConnell, the Senate minority leader, sent to reporters ... repeated the smears against the Frosts and asked: “Could the Dems really have done that bad of a job vetting this family?”

                                                                                                  And the attempt to spin the media worked, to some extent: despite reporting that has thoroughly debunked the smears, a CNN report yesterday suggested that the Democrats had made “a tactical error...,” and closely echoed the language of the e-mail from Mr. McConnell’s office.

                                                                                                  All in all, the Graeme Frost case is a perfect illustration of the modern right-wing ... reliance on character assassination in place of honest debate. If service members oppose a Republican war, they’re “phony soldiers”; if Michael J. Fox opposes Bush policy on stem cells, he’s faking his Parkinson’s symptoms; if an injured 12-year-old child makes the case for a government health insurance program, he’s a fraud.

                                                                                                  Meanwhile, leading conservative politicians, far from trying to distance themselves from these smears, rush to embrace them. And some people in the news media are still willing to be used as patsies...

                                                                                                  And there’s one more point that should not be forgotten: ultimately, this isn’t about the Frost parents. It’s about Graeme Frost and his sister.

                                                                                                  I don’t know about you, but I think American children who need medical care should get it, period. Even if you think adults have made bad choices — a baseless smear in the case of the Frosts, but put that on one side — only a truly vicious political movement would respond by punishing their injured children.

                                                                                                    Posted by on Friday, October 12, 2007 at 12:42 AM in Economics, Health Care, Politics | Permalink  TrackBack (0)  Comments (183) 


                                                                                                    "The 'Death of Distance' May be Premature"

                                                                                                    How has the growth of digital technology changed the spatial distribution of service industries in the U.S?:

                                                                                                    The geographic concentration of services today mirrors that of manufacturing a century ago, by Klaus Desmet and Esteban Rossi-Hansberg, Vox EU: In the last two decades, rapid improvements in Information and Communications Technology – ICT – has wrought enormous change on the world. As with other so-called general purpose technologies, its productivity impact was initially not much felt. As Solow quipped in 1987, computers were everywhere “except in the productivity statistics”. But with the passing of time, the potential of ICT unfolded. The productivity figures started to pick up. One concrete example of the benefits from ICT is the recent growth in outsourcing and offshoring of different tasks. Now that “everything you can send down a wire is up for grabs”, in the words of Nandan Nilekani, the CEO of Infosys Technologies, it would appear that distances no longer matter, and that any task can be performed anywhere.

                                                                                                    However, evidence from the US suggests that announcing the “death of distance” may be premature. If distances were to cease to play a role, then economic activity should become more equally spread across space, as firms and workers move from areas with high land rents to areas with low land rents. In line with this prediction, manufacturing employment inside the US has de-concentrated in recent decades; US counties with small manufacturing employment have experienced faster than average manufacturing job growth. The pattern for services, however, looks very different.

                                                                                                    Except for very small and very large counties, the last 20-30 years have witnessed increasing spatial concentration in services. Focusing on intermediate-sized US counties, the larger ones, in terms of service employment, have seen faster growth in service jobs. The picture below shows how, between 1970 and 2000, manufacturing became increasingly de-concentrated, whereas the different service sectors, such as retail, exhibited an S-shape growth pattern, with growing concentration for intermediate-sized counties.

                                                                                                    Continue reading ""The 'Death of Distance' May be Premature"" »

                                                                                                      Posted by on Friday, October 12, 2007 at 12:33 AM in Economics, Technology | Permalink  TrackBack (0)  Comments (6)