« October 2007 |
| December 2007 »
Joseph Stiglitz explains why he's not surprised that "the world is once again
facing a period of global financial instability, with uncertain outcomes for the
Financial Hypocrisy, by Joseph E. Stiglitz, Project Syndicate: This year
marks the tenth anniversary of the East Asia crisis, which began in Thailand on
July 2, 1997, and spread to Indonesia in October and to Korea in December.
Eventually, it became a global financial crisis, ... unleashing forces that
played out over the ensuing years... It was the worst global crisis since the
Great Depression. ...
Looking back at the crisis a decade later, we can see more clearly how wrong
the diagnosis, prescription, and prognosis of the IMF and United States Treasury
were. The fundamental problem was premature capital market liberalization. It is
therefore ironic to see the US Treasury Secretary once again pushing for capital
market liberalization in India - one of the two major developing countries
(along with China) to emerge unscathed from the 1997 crisis.
It is no accident that these countries that had not fully liberalized their
capital markets have done so well. Subsequent research by the IMF has confirmed
what every serious study had shown: capital market liberalization brings
instability, but not necessarily growth. ...
Of course, Wall Street (whose interests the US Treasury represents) profits
from capital market liberalization: they make money as capital flows in, as it
flows out, and in the restructuring that occurs in the resulting havoc. ...
The contrast between the IMF/US Treasury advice to East Asia and what has
happened in the current sub-prime debacle is glaring. East Asian countries were
told to raise their interest rates, in some cases to 25%, 40%, or higher,
causing a rash of defaults. In the current crisis, the US Federal Reserve and
the European Central Bank cut interest rates.
Similarly, the countries caught up in the East Asia crisis were lectured on
the need for greater transparency and better regulation.
But lack of transparency played a central role in this past summer's credit
crunch... And there is now a chorus of caution about new regulations, which
supposedly might hamper financial markets (including their exploitation of
uninformed borrowers, which lay at the root of the problem.) Finally, despite
all the warnings about moral hazard, Western banks have been partly bailed out
of their bad investments.
Following the 1997 crisis, there was a consensus that fundamental reform of
the global financial architecture was needed.
But, while the current system may lead to unnecessary instability, and impose
huge costs on developing countries, it serves some interests well. It is not
surprising, then, that ten years later, there has been no fundamental reform.
Nor, therefore, is it surprising that the world is once again facing a period of
global financial instability, with uncertain outcomes for the world's economies.
Posted by Mark Thoma on Tuesday, November 20, 2007 at 02:25 AM in Economics, Financial System, Regulation |
Posted by Mark Thoma on Tuesday, November 20, 2007 at 12:06 AM in Links |
Richard Baldwin reviews Martin Feldstein's May 2007 predictions about the
fate of the dollar, predictions he says are "looking pretty good at the moment":
Feldstein’s view on the
dollar, by Richard Baldwin, Vox EU: President Kennedy said “Victory has a
thousand fathers, but defeat is an orphan.” If the dollar’s slide is a defeat,
then contrary to Kennedy’s wisdom, this defeat has a thousand fathers. Any
number of observers now tell us that it was inevitable. One of my hobbies is to
go back and see who saw it coming. Not from a pure forecasting perspective, but
from an economic logic perspective. Who understood the key economic factors in
advance and had the conviction to write them down? Marty Feldstein is one of
those and this column presents my interpretation of the economic reasoning in
his May 2007 paper.
Continue reading "Richard Baldwin: Feldstein’s View on the Dollar" »
Posted by Mark Thoma on Monday, November 19, 2007 at 04:23 PM in Economics, Financial System, International Finance, Saving |
At the risk of Krugman overkill, this is too good to pass up. Paul Krugman tries to see if he can tell a pessimistic story about the falling dollar:
Thinking about the dollar, by Paul Krugman: I have to do some teaching on
the subject of the falling dollar and whether it’s recessionary. So herewith
some ruminations. WARNING: FAIRLY WONKISH. [...read full post here...]
Posted by Mark Thoma on Monday, November 19, 2007 at 01:44 PM in Economics, International Finance |
Paul Samuelson (not to be confused with columnist Robert Samuelson) says recovery may not be
around the corner," and we need to get ready for the worst case scenario. That
means imposing financial market regulation and being ready to take take action immediately if there are any further signs of trouble. [On the continuation page, there are also comments from Yves Smith on a speech on financial market regulation by Minneapolis Fed president Gary Stern, and part of a Vox EU post by Stephen Cecchetti on how to regulate financial markets without stifling innovation]:
Balancing market freedoms, by Paul A. Samuelson, Commentary, IHT: All through the years of the Great Depression, Wall Street publicists and
President Herbert Hoover would repeatedly declare: "Recovery is just around the
corner." They were wrong. And history repeats itself.
Today, Federal Reserve Chairman Ben Bernanke admits that nobody, including
him, is able to guess how near to bankruptcy the biggest banks in New York,
London, Frankfort and Tokyo might be as a result of the real estate crisis.
As one of the economists who helped create today's newfangled securities, I
must plead guilty: These new mechanisms both mask transparency and tempt to rash
The situation is not hopeless.
Continue reading "Paul Samuelson: Balancing Market Freedoms" »
Posted by Mark Thoma on Monday, November 19, 2007 at 10:17 AM in Economics, Financial System, Regulation |
Paul Krugman continues his discussion of Reagan, Republicans, and race:
Republicans and Race, by Paul Krugman, Commentary, NY Times: Over the past
few weeks there have been a number of commentaries about Ronald Reagan’s legacy,
specifically about whether he exploited the white backlash against the civil
The controversy unfortunately obscures the larger point, which should be
undeniable: the central role of this backlash in the rise of the modern
The centrality of race — and, in particular, of the switch of Southern whites
from overwhelming support of Democrats to overwhelming support of Republicans —
is obvious from voting data. ... Southern white voting behavior remains
The G.O.P.’s own leaders admit that the great Southern white shift was the
result of a deliberate political strategy. “Some Republicans gave up on winning
the African-American vote, looking the other way or trying to benefit
politically from racial polarization.” So declared Ken Mehlman, the former
chairman of the Republican National Committee, speaking in 2005.
And Ronald Reagan was among the “some” who tried to benefit from racial
True, he never used explicit racial rhetoric. Neither did Richard Nixon. As
Thomas and Mary Edsall put it in their ... book,... “Reagan paralleled Nixon’s
success in constructing a politics ... that attacked policies targeted toward
blacks and other minorities without reference to race — a conservative politics
that had the effect of polarizing the electorate along racial lines.”
Thus, Reagan repeatedly told the bogus story of the Cadillac-driving welfare
queen — a gross exaggeration of a minor case of welfare fraud. He never
mentioned the woman’s race, but he didn’t have to.
There are many other examples of Reagan’s tacit race-baiting... My colleague
Bob Herbert described some of these... Here’s one he didn’t mention: During the
1976 campaign Reagan often talked about how upset workers must be to see an
able-bodied man using food stamps.... In the South — but not in the North — the
food-stamp user became a “strapping young buck” buying T-bone steaks.
Now, about the Philadelphia story: in December 1979 the Republican national
committeeman from Mississippi wrote a letter urging that the party’s nominee
speak at the Neshoba Country Fair, just outside the town where three civil
rights workers had been murdered in 1964. It would, he wrote, help win over
“George Wallace inclined voters.”
Sure enough, Reagan appeared, and declared his support for states’ rights —
which everyone took to be a coded declaration of support for segregationist
Reagan’s defenders protest furiously that he wasn’t personally bigoted. So
what? We’re talking about his political strategy. His personal beliefs are
Why does this history matter now? Because it tells why the vision of a
permanent conservative majority, so widely accepted a few years ago, is wrong.
The point is that we have become a more diverse and less racist country over
time. The “macaca” incident, in which Senator George Allen’s use of a racial
insult led to his election defeat, epitomized the way in which America has
changed for the better.
And because conservative ascendancy has depended so crucially on the racial
backlash ... I believe that the declining power of that backlash changes
Can anti-immigrant rhetoric replace old-fashioned racial politics? No,
because it mobilizes the same shrinking pool of whites — and alienates the
growing number of Latino voters.
Now, maybe I’m wrong about all of this. But we should be able to discuss the
role of race in American politics honestly. We shouldn’t avert our gaze because
we’re unwilling to tarnish Ronald Reagan’s image.
Posted by Mark Thoma on Monday, November 19, 2007 at 12:33 AM in Economics, Politics |
What the Fed says is different from what financial markets expect. Here's Tim
Headed For Another Game of Chicken?, by Tim Duy: Over the last two weeks, Fedspeak has been undeniably
hawkish. Does anyone listen? As near as I can tell, pretty much no one in the
global financial markets is listening. Expectations for additional easing in the months
ahead are only growing. What’s a Fed watcher to do? Listen to the Fed or the
financial markets? The smart money is on the markets and suggests the best move
is to continue to shade expectations toward another rate cut in December.
The hawk parade was kicked off when Federal Reserve
Governor Frederic Mishkin
stepped up to the podium to reinforce the recent FOMC statement – delivering
a clear message that he sees growth and inflation risks as equally balanced, and
that the data, not the markets, will drive the outcome of the December meeting. Mishkin’s remarks were clearly intended to
reduce expectations that the Federal Reserve is driving an unstoppable rate cut
train. More interestingly, he waived the inflation flag, suggesting that Fed
officials are starting to worry that inflation expectations are fraying. In
total, he wants us to believe that if the data stream remains consistent with
recent patterns, the Fed will hold tight in December. He bolstered that warning
with a reminder that the Fed can always take back what was given in the last two
outings of the FOMC:
The FOMC perhaps could have waited for more
clarity and left policy unchanged last week, but I believe that the potential
costs of inaction outweighed the benefits, especially because, should the easing
eventually appear to have been unnecessary, it could be removed.
much a clear message – don’t take another rate cut for granted. And the hawkish beat kept up through the week; a nice little compilation
can be found in the
WSJ Marketbeat blog. A particularly blunt statement came from Philadelphia Fed President Charles
Continue reading "Fed Watch: Headed For Another Game of Chicken?" »
Posted by Mark Thoma on Monday, November 19, 2007 at 12:24 AM in Economics, Fed Watch, Monetary Policy |
Barry Eichengreen argues that:
Adopting the euro is effectively irreversible. Leaving would require lengthy
preparations, which, given the anticipated devaluation would trigger the mother
of all financial crises. National households and firms would shift deposits to
other euro-area banks producing a system-wide bank run. Investors, trying to
escape would create a bond-market crisis. Here is what the train wreck would look like.
The description is at "Eurozone breakup would
trigger the mother of all financial crises."
Posted by Mark Thoma on Monday, November 19, 2007 at 12:15 AM in Economics |
Posted by Mark Thoma on Monday, November 19, 2007 at 12:06 AM in Links |
Eek ... If commercial real estate goes the way of residential housing, we’re
headed for recession city.
Here's the report that caught his attention:
shows first drop in commercial property value since '03 Indicates housing woes,
credit crunch 'may be spreading', MIT News: The value of U.S. commercial
real estate owned by big pension funds fell 2.5 percent in the third quarter of
2007, according to an index produced by the MIT Center for Real Estate.
The drop in the MIT quarterly transaction-based index (TBI) may not only
spell the end of a five-year rally that saw commercial property prices
effectively double, but it may also signal that weakness in the housing market
is spilling over into commercial real estate.
"The fall in our index is the first solid, quantitative evidence that the
subprime mortgage debacle, which hit the broader capital markets in August, may
be spreading to the commercial property markets," stated MIT Center for Real
Estate Director David Geltner.
The TBI decline in the third quarter of 2007 marks its first quarterly
downturn since the third quarter of 2003, when prices fell 2.4 percent. The last
time prices fell more than in the third quarter of 2007 was in the fourth
quarter of 2001 (9/11, recession), when they fell 3.9 percent. ...
The TBI is based on transaction price data from the National Council of Real
Estate Investment Fiduciaries (NCREIF). Launched in February 2006 and covering
the period since 1984, the index of commercial real estate prices is updated
quarterly and published on the Center's website, http://web.mit.edu/cre. ...
Posted by Mark Thoma on Sunday, November 18, 2007 at 03:24 PM in Economics |
I can't find or think of anything to post today. I'll keep trying.
While I do, here's a bunch of posts that, for one reason or another, were all ready to go but never got posted here:
Continue reading "And the Cupboard was Bare" »
Posted by Mark Thoma on Sunday, November 18, 2007 at 01:44 PM in Economics |
Posted by Mark Thoma on Sunday, November 18, 2007 at 12:06 AM in Links |
This is easy for me. It doesn't matter whether the research on the issue is valid or not. I'm against the death penalty. Period.:
Does Death Penalty Save Lives? A New Debate, by Adam Liptak, NY Times:
...According to roughly a dozen recent studies, executions save lives. For each
inmate put to death, the studies say, 3 to 18 murders are prevented. The effect is most pronounced, according to some studies, in Texas and other
states that execute condemned inmates relatively often and relatively quickly. The studies, performed by economists in the past decade, ... say that murder
rates tend to fall as executions rise. ...
The studies have been the subject of sharp criticism, much of it from legal
scholars who say that the theories of economists do not apply to the violent
world of crime and punishment. Critics of the studies say they are based on
faulty premises, insufficient data and flawed methodologies.
The death penalty “is applied so rarely that the number of homicides it can
plausibly have caused or deterred cannot reliably be disentangled from the large
year-to-year changes in the homicide rate caused by other factors,” John J.
Donohue III, a law professor at Yale with a doctorate in economics, and Justin
Wolfers, an economist at the University of Pennsylvania, wrote... “The existing
evidence for deterrence,” they concluded, “is surprisingly fragile.”
Gary Becker, who won the Nobel Prize in economics in 1992 ..., said the current empirical evidence was “certainly not decisive”
because “we just don’t get enough variation to be confident we have isolated a
deterrent effect.” But, Mr. Becker added, “the evidence of a variety of types — not simply the
quantitative evidence — has been enough to convince me that capital punishment
does deter and is worth using...”
The ... studies have started to reshape the debate over capital punishment
and to influence prominent legal scholars. ... To a large extent, the participants in the debate talk past one another
because they work in different disciplines.
Continue reading ""Does Death Penalty Save Lives? A New Debate"" »
Posted by Mark Thoma on Saturday, November 17, 2007 at 05:04 PM in Economics |
I must be missing something, becasue I don't get the point of this. This is Greg Mankiw:
Inequality Everywhere You Look, by Greg Mankiw:
Mark Perry examines the incomes of professional football players and reports
the pattern of income distribution in the NFL is strikingly similar to the
income inequality of the general population, and is actually slightly greater in
the NFL....perhaps this pattern of income distribution is a natural and expected
outcome of any extremely competitive environment where talent is scare, valuable
and highly paid, whether it's the NFL or the overall economy.
Continue reading "What is This Supposed to Tell Us?" »
Posted by Mark Thoma on Saturday, November 17, 2007 at 11:25 AM in Economics, Income Distribution |
Tyler Cowen writes a letter "To: President George W. Bush" with the subject identified as "The Hidden Costs of Iraq":
What Does Iraq Cost? Even More Than You Think, by Tyler Cowen, Commentary.
Washington Post: ...One commonly cited estimate of Iraq's cost, based on an August analysis by
the nonpartisan Congressional Budget Office, is
$1 trillion, and that's probably on the low side. A report released last
week by the Democratic staff of Congress's Joint Economic Committee put the
war's 2002-08 tab at
But all these figures don't quite get at Iraq's real cost. ... We often think
of cost simply in terms of dollars spent, but the real cost of a choice
-- what economists call its "opportunity cost" -- consists of the forgone
alternatives, of the things we could have had instead. ... This idea sounds
simple, but if applied consistently, it requires us to rethink and, yes, raise
the costs of the Iraq war.
Set aside the question of what we could have accomplished at home with the
energy and resources we've devoted to Iraq and concentrate just on national
security. Here, the hidden cost of the war, above all, is that the United States
has lost much of its ability to halt nuclear proliferation.
Mr. President, when the war started, I was convinced by your arguments that
we had to stop Iraq's dictatorship from getting the bomb. No longer. Let's look
at some of the opportunity costs the United States has incurred so far:
1. We still haven't secured our ports against nuclear terrorism. The
$1 trillion we've probably spent on the war could have funded the annual
budget of the Department of Homeland Security 28 times over.
2. The human toll of the war is dreadful: more than 3,800 U.S.
soldiers dead and more than 28,000 wounded, plus more than 1,000 private
contractors killed and many more injured. It's harder to know how many Iraqis
have died; some estimates claim that the war has caused a million or more Iraqi
deaths, and even if that's an overstatement, the toll is still very high. But
it's not just the lives that are gone; we've also lost the contributions that
these people would have made to their families and to humanity at large.
3. Another major hidden cost: Many of the wounded have severe brain
injuries or other traumas and will never return to "normal" life. Furthermore,
Washington will find it far harder to recruit and retain quality troops and
National Guardsmen in the future.
4. Don't forget the small statistics, which are often the most striking.
250,000 bullets have been fired for every insurgent killed in Iraq. That's
not just a waste of ammunition; it's also a reflection of how badly the country
has been damaged and how indiscriminate some of the fighting has been. Or take
another straw in the wind: The cost of a coffin in Baghdad has risen to
from just $5-10 before the war, according to the Nation magazine.
5. Above all, governing Iraq has, so far, been a fruitless investment.
According to 2006 figures, U.S. war spending came out to $3,749 per Iraqi --
almost as much as the per capita income of Egypt. That staggering sum hasn't
bought a lot of leadership from Iraq, or much of a democratic model for its Arab
In fact, Mr. President, your initial pro-war arguments offer the best path
toward understanding why the conflict has been such a disaster...
Following your lead, Iraq hawks argued that, in a post-9/11 world, we needed
to take out rogue regimes lest they give nuclear or biological weapons to
al-Qaeda-linked terrorist groups. But each time the United States tries to do so
and fails to restore order, it incurs a high -- albeit unseen -- opportunity
cost in the future. Falling short makes it harder to take out, threaten or
pressure a dangerous regime next time around.
Foreign governments, of course, drew the obvious lesson from our debacle --
and from our choice of target. The United States invaded hapless Iraq, not
nuclear-armed North Korea. To the real rogues, the fall of Baghdad was proof
positive that it's more important than ever to acquire nuclear weapons... Iran,
among others, has taken this lesson to heart. The ironic legacy of the war to
end all proliferation will be more proliferation.
The bottom line is clear, Mr. President: ... you must now realize that the
costs of a failed war are far higher than you've acknowledged.
Ironically, it's probably the doves who should lower their mental estimate of
the war's long-haul cost: By fighting a botched war today, the United States has
lowered the chance that it will fight another preventive war in the near future.
The American public simply does not have the stomach for fighting a costly,
potentially futile war every few years. U.S. voters have already lost patience
with the pace of reconstruction in Iraq, and that frustration will linger;
remember, it took the country 15 years or more to "get over" Vietnam. The
projection of American power and influence in the future requires that an
impatient public feel good about American muscle-flexing in the past.
Even if the wisest way forward is sticking to our guns, the constraints of
politics and public opinion mean that we cannot always see U.S. military
commitments through. Since turning tail hurts our credibility so badly and
leaves such a mess behind, we should be extremely cautious about military
intervention in the first place. The case for hawkish behavior often assumes
that the public has more political will than it actually has, so we need to save
up that resolve for cases when it really counts. ...
Posted by Mark Thoma on Saturday, November 17, 2007 at 09:36 AM in Economics, Iraq and Afghanistan, Terrorism |
Paul Krugman explains Social Security's long-run budget situation:
Long-run budget math, by Paul Krugman: Some commenters have asked for more
about Social Security’s role in the long-run budget problem, and in ... my
assertion that the Beltway obsession with Social Security reflects ignorance. So
here’s a quick, informal explanation.
Start with the current position. Last year, federal spending on Social
Security, Medicare, and Medicaid was 8.5 percent of GDP, equally divided between
Social Security and the health care programs. Dismal long-run projections, like
those of the
GAO, have this total rising by 10 percentage points of GDP by mid-century.
So, how much of this is a Social Security problem? ...[T]he percentage of GDP
spent on Social Security [will rise] from about 4 to 6 — that is, a rise of
about 2 percentage points of GDP, which is a small fraction of the entitlements
problem. See, for example, this
chart from my NY Review of Books piece on the subject.
What’s more, Social Security has already been strengthened to deal
with this rise. In 1983 the payroll tax was increased and adjustments made to
the retirement age, so as to build up a trust fund. According to the
“intermediate” projection of the Social Security trustees, this trust fund will
be exhausted in 2041 — but they also present a more optimistic scenario, based
on economic assumptions that don’t seem at all outlandish, in which the trust
fund goes on forever.
This brings us to the claim that the trust fund doesn’t exist, because it’s
invested in government bonds. The full explanation of why this is sophistry is
The bottom line is that Social Security is just not the major problem.
Now, part of the projected rise in Medicare and Medicaid costs represents the
effects of an aging population. But as a new report from the CBO
explains, demography is only a minor factor — mainly it’s rising health care
costs. What’s more, the proposed “solutions” for the Social Security problem
have no relevance to the issue of rising Medicare costs — even if privatization
were a good idea, which it isn’t, it would do nothing to solve the problem of
rising medical bills.
The Beltway obsession with Social Security is a classic case of a little
knowledge being a dangerous thing. People have picked up a few facts about
demography, and think they understand the long run budget problem. They don’t.
Update: See also Millions, Billions, Trillions, Who's Counting? by Dean Baker.
Posted by Mark Thoma on Saturday, November 17, 2007 at 09:27 AM in Economics, Social Security |
Posted by Mark Thoma on Saturday, November 17, 2007 at 12:27 AM
Among rich countries, is it the absolute or the relative level of poverty
that matters for children's well-being? The answer is relative poverty, and it's
a result that holds both across countries and across states within the U.S.:
Low standards of child well-being linked to greater income inequality,
EurekAlert: Improvements in child wellbeing in rich countries might
depend more on reductions in income inequality rather than further economic
growth, according to a study published today on bmj.com.
Poorer children fare less well than richer ones in each society. But a recent
UNICEF report detailing 40 indicators of child wellbeing, said children in the
UK and the USA fared worse than in any of the other rich countries. The new
research examines whether the damage is done by being poor, or by being poorer
Continue reading ""Relative Poverty Kills as Effectively as Any Disease"" »
Posted by Mark Thoma on Friday, November 16, 2007 at 10:44 AM in Economics, Health Care, Income Distribution |
Barack Obama tries to earn his "badge of seriousness," but ends up "being
played for a fool":
Played for a Sucker, by Paul Krugman, Commentary, NY Times: Lately, Barack
Obama has been saying that major action is needed to avert what he keeps calling
a “crisis” in Social Security... Progressives who fought hard and successfully
against the Bush administration’s attempt to panic America into privatizing the
New Deal’s crown jewel are outraged, and rightly so. ...
To understand the nature of Mr. Obama’s mistake, you need to know something
about the special role of Social Security in American political discourse.
Inside the Beltway, doomsaying about Social Security ... is regarded as a sort
of badge of seriousness, a way of showing how statesmanlike and tough-minded you
Consider, for example, this exchange about Social Security between Chris
Matthews of MSNBC and Tim Russert of NBC, on ... “Hardball.”
Mr. Russert: “Everyone knows Social Security, as it’s constructed, is not
going to be in the same place it’s going to be for the next generation....”
Mr. Matthews: “It’s a bad Ponzi scheme, at this point.”
Mr. Russert: “Yes.”
But the “everyone” who knows that Social Security is doomed doesn’t include
anyone who actually understands the numbers. In fact, the whole Beltway
obsession with the fiscal burden of an aging population is misguided.
As Peter Orszag, the director of the Congressional Budget Office, put it in a
recent article co-authored with senior analyst Philip Ellis: “The long-term
fiscal condition of the United States has been largely misdiagnosed. Despite all
the attention paid to demographic challenges, ... our country’s financial health
will in fact be determined primarily by the growth rate of per capita health
How has conventional wisdom gotten this so wrong? Well, in large part it’s
the result of decades of scare-mongering about Social Security’s future from
conservative ideologues, whose ultimate goal is to undermine the program. ...
Fortunately, the scare tactics failed. Democrats in Congress stood their
ground; progressive analysts debunked, one after another, the phony arguments of
the privatizers; and the public made it clear that it wants to preserve a basic
safety net for retired Americans.
That should have been that. But what Jonathan Chait of The New Republic calls
“entitlement hysteria” never seems to die. ...
Which brings us back to Mr. Obama. Why would he, in effect, play along with
this new round of scare-mongering and devalue one of the great progressive
victories of the Bush years?
I don’t believe Mr. Obama is a closet privatizer. He is, however, someone who
keeps insisting that he can transcend the partisanship of our times — and in
this case, that turned him into a sucker.
Mr. Obama wanted a way to distinguish himself from Hillary Clinton — and for
Mr. Obama, who has said that the reason “we can’t tackle the big problems that
demand solutions” is that “politics has become so bitter and partisan,” joining
in the attack on Senator Clinton’s Social Security position must have seemed
like a golden opportunity to sound forceful yet bipartisan.
But Social Security isn’t a big problem that demands a solution; it’s a small
problem, way down the list of major issues facing America, that has nonetheless
become an obsession of Beltway insiders. And on Social Security, as on many
other issues, what Washington means by bipartisanship is mainly that everyone
should come together to give conservatives what they want.
We all wish that American politics weren’t so bitter and partisan. But if you
try to find common ground where none exists — which is the case for many issues
today — you end up being played for a fool. And that’s what has just happened to
Update: Robert Waldmann disagrees with Paul Krugman.
Update: PGL at Econospeak adds this update to his comments on the return of entitlement hysteria:
Greg Mankiw chastises Paul Krugman for that criticism of Senator Obama. But
I don’t get what Greg is trying to say here. OK, back in 1998 we may have been
forecasting that the Trust Fund reserves would be depleted by 2029. But I hope
Greg has kept up with the revised forecasts that Paul was mentioning today. And
Greg should know that what President Clinton was saying in 1998 is a far cry
from the rightwing spin that Paul noted. Seriously – if one wants to attack Paul
Krugman for something he said, one should be more accurate with what the
argument was. And one should also use updated forecasts – and not some forecast
from a decade ago.
Posted by Mark Thoma on Friday, November 16, 2007 at 12:42 AM in Economics, Politics, Social Insurance, Social Security |
Robert E. Lucas, Jr. Lecture
"Trade and the Diffusion of the Industrial Revolution"
November 15, 2007
[Video of the Presentation]
Robert E. Lucas presents his recent study on global economic growth and
cross-country flows of production-related knowledge. He argues in his paper that
these flows are the main force for reducing income inequality. Using evidence on
successfully industrialized countries, he proposes a model to describe the
evolution of real GDPs in the world economy that is intended to apply to all
open economies. The five parameters of the model are calibrated using the
Sachs-Warner definition of openness and time-series and cross-section data on
incomes and other variables from the 19th and 20th centuries. The model predicts
convergence of income levels and growth rates and has strong but reasonable
implications for transition dynamics. [via
Posted by Mark Thoma on Friday, November 16, 2007 at 12:21 AM in Economics, Income Distribution |
Danielle DiMartino and John V. Duca of the Dallas Fed examine the recent
"boom-to-bust housing cycle" and ask"Why did it occur, and what role did subprime
lending play? How is the retrenchment in lending activity affecting housing
markets, and will it end soon? Is the housing slowdown spilling over into the
and Fall of Subprime Mortgages, by Danielle DiMartino and John V. Duca, Economic
Letter, Vol. 2, No. 11, Federal Reserve Bank of Dallas: After booming the
first half of this decade, U.S. housing activity has retrenched sharply.
Single-family building permits have plunged 52 percent and existing-home sales
have declined 30 percent since their September 2005 peaks (Chart 1).
A rise in mortgage interest rates that began in the
summer of 2005 contributed to the housing market's initial weakness. By late
2006, though, some signs pointed to renewed stability. They proved short-lived
as loan-quality problems sparked a tightening of credit standards on mortgages,
particularly for newer and riskier products. As lenders cut back, housing
activity began to falter again in spring 2007, accompanied by additional rises
in delinquencies and foreclosures. Late-summer financial-market turmoil prompted
further toughening of mortgage credit standards.
The recent boom-to-bust housing cycle raises important
questions. Why did it occur, and what role did subprime lending play? How is the
retrenchment in lending activity affecting housing markets, and will it end
soon? Is the housing slowdown spilling over into the broader economy?
Rise of Nontraditional Mortgages
Monitoring housing today entails tracking an array of mortgage products. In the
past few years, a fast-growing market seized upon such arrangements as "option
ARMs," "no-doc interest-onlys" and "zero-downs with a piggyback." For our
purposes, it's sufficient to distinguish among prime, jumbo, subprime and
Continue reading "FRB Dallas: The Rise and Fall of Subprime Mortgages" »
Posted by Mark Thoma on Friday, November 16, 2007 at 12:15 AM in Economics, Housing |
Is the war worth the cost?
Billions for Guns, Vetoes for Butter, by E. J. Dionne, Commentary, Washington
It's time that we subject the Iraq war to the same cost-benefit analysis that
we are called upon to impose on other government endeavors. We are supposed to
repeal or revise domestic programs that don't work. Shouldn't a troubled war
policy be treated the same way?
The ruling assumption of the moment is that we can't afford to withdraw our
troops from Iraq because of the chaos that would ensue. The idea seems to be
that somehow -- against the evidence of the past 4 1/2 years -- good things will
happen if we just keep the war going.
This upside-down debate puts the burden of proof in the wrong place. We
should be asking whether keeping our forces in Iraq over an extended period is
worth the cost in lives, injuries, money, lost opportunities and strain on our
military. How will a prolonged stay in Iraq enhance our security? Is Iraq
distracting us from foreign policy questions that will matter far more to our
national interest in the long run?
President Bush regularly brags about the accomplishments of the troop surge.
... The question to which the administration has no answer is how this ... will
produce a decent outcome down the road.
From Thomas E. Ricks, The Post's military correspondent, comes a disturbing
Continue reading ""Billions for Guns, Vetoes for Butter"" »
Posted by Mark Thoma on Friday, November 16, 2007 at 12:12 AM in Economics, Iraq and Afghanistan |
Posted by Mark Thoma on Friday, November 16, 2007 at 12:06 AM in Links |
Tom Oliphant remembers Gus Hawkins:
A quiet giant, by Tom Oliphant, Comment is Free: Serious progressives
everywhere can hope that the passing this week of a quiet giant will not also
produce an epitaph for one of Gus Hawkins's great passions - the struggle
against economic stagnation.
The death of this courtly, understated but zealous California legislator at
100, unfortunately, is a reminder that for now progressives can only hope that
the vigorous promotion of job-producing growth that swells the incomes of
ordinary households is not becoming part of the politics of the past. ...
Augustus F Hawkins ... was a New Deal Democrat in the California legislature,
representing what is today called south-central Los Angles from the 1930s until
the early 1960s, when he won a congressional seat he never lost until his
retirement in 1991. From a perch on the old education and labour committee - the
famous redoubt of Adam Clayton Powell, Gus Hawkins quietly used his clout to
profoundly change the country. He was one of the architects of the fabled Civil
Rights Act of 1964 and the father of its vital Title VII, whose prohibition of
employment discrimination is as critical today as it was 40 years ago.
But it was during the stagflation era of the 1970s that he led a fight to
make jobs-producing growth the top priority of the government's fiscal and
monetary policy. Allied with another liberal of some note, the late Hubert
Humphrey, he sought to require the monetary authorities at the Federal Reserve
to put growth ahead of belt-tightening inflation-fighting when unemployment was
high and growth was sluggish. In so doing, he and Humphrey were trying to end a
debate that had been unresolved by mushy language in the government's first
attempt at defining economic policy priorities - the Employment Act of 1946 -
which was supposed to incorporate a few of the big lessons learned from the
Great Depression, but didn't. The result has been a decades-long tilt toward
what progressives have believed is tighter money and higher interest rates than
is necessary to ward off inflation.
Humphrey and Hawkins were essentially thwarted by ... Jimmy Carter who
negotiated hard to water down the attempted refocusing of the government's
priorities toward economic growth. ...[T]here is so much Carter-inspired fudge
in the law that only its title, Humphrey-Hawkins, is what remains as a practical
Continue reading "Augustus Hawkins" »
Posted by Mark Thoma on Thursday, November 15, 2007 at 07:11 PM in Economics, Monetary Policy |
How much do we value an equitable distribution of income?
People can put a price tag on economic justice, economists say, EurekAlert:
How much would you pay to live in an equitable society in which people get what
they deserve and deserve what they get" Economists at Carnegie Mellon University
and the Free University of Berlin have developed a mathematical model to measure
the value that people place on distributive justice – whether goods are
distributed fairly among all members of society.
Applying their model to pre-existing survey data, the authors found that, on
average, people are willing to sacrifice about 20 percent of their disposable
income to live in an equitable society – but they also found that the value a
person places on equity is substantially affected by their race and educational
background. Whites place a higher value on equity than non-whites, and equity is
valued more by those with high levels of education than those with less
education. The paper was written by Giacomo Corneo at the Free University of
Berlin and Christina Fong at Carnegie Mellon, and it is being published in the
Journal of Public Economics. ...
Distributive justice can be guided by one of three principles: need, in which
income is distributed to individuals based on their needs; equality, in which
income is shared equally by all members of a society; or equity, in which income
is distributed based on a person’s effort. Whether a person believes we live in
an equitable society depends in large measure on whether they believe that labor
markets are inherently fair. Do people succeed mostly because of their own hard
work, or do people often fail because of bad luck or circumstances beyond their
Corneo and Fong analyzed data from the 1998 Gallup poll titled “Haves and
Have-Nots,” which gauged respondents’ attitudes toward wealth and poverty as
well as government welfare policies. The Gallup poll included questions about
why the respondents believed that people became rich or poor, and whether
government should redistribute wealth. The survey did not explicitly ask what
monetary value the respondents placed on distributive justice, so Corneo and
Fong developed their model to use the survey data to answer that question.
Simply asking people outright how much they would pay to achieve an
economically just society poses many problems. For example, someone who believes
that justice is important to them could exaggerate their response to a question
about how much they’d be willing to sacrifice to achieve, because there is no
actual cost involved, but an artificially strong response may affect policy
makers. People also tend to state higher values of items that they are
considering giving up, and lower values of things they are looking to acquire.
For the purposes of their model, Corneo and Fong assume that people hold one
of two diametrically opposed beliefs: a laissez-faire view of the economy in
which labor markets are inherently fair, rewarding hard work alone and that any
form of income redistribution (e.g. via income taxes and welfare) is unjust; or
a belief that labor markets are unjust and reward people based on luck. People
who have a laissez-faire attitude toward the economy would give up 20 percent of
their income to live in a society in which government does not transfer income
from the rich to the poor. On the contrary, those who hold the opposite belief
would give up 20 percent of their income to live in a society in which the
government does transfer income to the poor. In reality, of course, many people
do not hold such black-and-white views, and the authors write that further
research might examine how more nuanced perceptions affect the value a person
places on distributive justice.
The authors also found that education and race significantly influenced the
value a person placed on an equitable distribution of income. Educated whites
placed the highest value on equity, while non-educated non-whites valued it the
least, regardless of a person’s personal income. This does not mean that
non-whites or those with less education do not value distributive justice which,
again, can be based on principles other than equity – namely, equality or need.
Posted by Mark Thoma on Thursday, November 15, 2007 at 09:43 AM in Economics, Income Distribution |
Why don't grocery stores locate in poor neighborhoods?:
It shouldn't take a road trip to shop, by Nathan Berg, Dallas News:
...[M]any of us take it for granted that there are grocery stores in our
neighborhoods selling a wide variety of nutritious foods at relatively low cost.
But not all residents of ... cities are so lucky, especially if they live in
Lack of access to a grocery store often means lack of access to fresh
vegetables, fruits and meats. Imagine buying your food primarily from
convenience stores and fast food chains. More than convenience is at stake.
Costs are generally higher. And the foods typically contain high concentrations
of unhealthy fats, carbohydrates and additives, which contribute to obesity,
diabetes and heart disease.
My colleagues at the Center for Urban Economics ...[at] the University of
Texas at Dallas made a map of Dallas County showing which neighborhoods have no
grocery stores within one mile. These neighborhoods are concentrated in southern
Dallas. And there are stark differences between them and neighborhoods that have
three or more grocery stores within one mile...
The typical no-grocery-store neighborhood has half the white residents, twice
the black residents, roughly the same number of Hispanic residents, $20,000 less
in median annual income and twice the number of HHS clients.
Is this what economic theory predicts? No. It may not surprise you that
grocers open few stores in low-income neighborhoods, but economic theory
actually predicts the opposite.
Economic theory predicts that the typical low-income resident spends a lot
less on luxuries like vacations, but not very much less on necessities like
food. Everyone has to eat. And because there is no good substitute for food,
low-income residents spend a higher fraction of their incomes on food than
high-income residents do.
Economic theory suggests other reasons why grocery stores should thrive in
low-income neighborhoods. Rents are lower, which means stores can save on costs
by locating there, and there are few competitors nearby to steal away sales.
It seems that store owners are not behaving as economic theory would predict.
That led me to investigate ... how business owners choose where to locate their
Economists expect business owners to choose locations by considering a long
list of possible locations and picking the one with maximum net benefits. But
this leads to the conclusion, which economists are beginning to challenge, that
abandoned neighborhoods are abandoned for good reason – because there are no
profitable opportunities there.
However, in interviews with a number of top executives, I found that most of
them consider only a few locations for new stores and that these locations are
nearly always discovered more or less by accident – while the executive is
running errands or driving through town on other business. This ... can lead to
an unhealthy side effect: Neighborhoods that are ignored today may be ignored
for a long time, despite their advantages.
The positive side of these findings is that ... cities facing shortages of
grocery stores in low-income neighborhoods possess a number of policy tools for
attracting businesses. ...
Rather than expecting small tax incentives to attract new stores, the mayor
and City Council members should directly try to persuade two or three grocery
chains to open new stores... To do that, they can cite the growing number of
success stories that demonstrate the surprising profits retailers can reap by
locating in overlooked neighborhoods. Once other businesses see the potential
for stores to thrive in low-income neighborhoods, they will want to follow. ...
Does the suggestion that there are fewer grocery stores in low income areas
because executives don't happen to be in those areas very often ring true? I
would have guessed other forces are at work besides simply being overlooked - a
market failure we don't expect to see - but I suppose it's possible.
Posted by Mark Thoma on Thursday, November 15, 2007 at 02:52 AM in Economics, Market Failure |
A call to reopen the debate over the mission in Iraq and for progressives to
"offer a clear challenge" that represents a "a real change in course":
Strategic Drift Where's the Pushback Against the Surge?, by John Podesta,
Lawrence J. Korb and Brian Katulis, Commentary, Washington Post: With
apparent disregard for the opinion of the American people, the debate over
whether the large U.S. military presence in Iraq threatens our national security
has been put on hold. Both political parties seem resigned to allowing the Bush
administration to run out the clock ... and bequeath this
quagmire to the next president. The result is best described as strategic drift,
and stopping it won't be easy.
President Bush claims that his strategy is having some success, but toward
what end? He argued that the surge would provide the political breathing space
needed to achieve a unified, peaceful Iraq. But its successes, which Bush says
come from a reduction of casualties in certain areas, have been accompanied by
massive sectarian cleansing. The surge has not moved us closer to national
Progressives must be careful not to repeat the mistakes made in 2002 and
2004, when they failed to offer a clear challenge or choice on Iraq. Splitting
the difference and hedging on positions helped get America into this quagmire.
... Progressive candidates should be offering clarity on Iraq and pushing for a
real change in course. ...
Rather than push for a realistic end to U.S. engagement, the Bush
administration claims doomsday scenarios would become reality if a phased U.S.
withdrawal began. Iraq, it says, would become a terrorist sanctuary, incite
regional war or be the scene of sectarian genocide. These arguments are as
faulty as those that led us into Iraq, and progressive leaders must push back.
The real security problem in Iraq is a vicious power struggle among competing
militias and factions. Foreign terrorists are mainly Sunni and represent only a
small percentage of the problem. ... [I]n Anbar province, Sunni tribal leaders
rose up against the pro-al-Qaeda Sunni elements well before the surge began.
Drifting along the current path actually enhances the al-Qaeda narrative of
America as an occupier of Muslim nations.
Similarly, the presence of a large U.S. combat force contributes to regional
instability. Since the surge began, the number of internally displaced Iraqis
has more than doubled. The U.N. ... has said that
more than 2 million Iraqis have left the country, and tens of thousands flee
every day, often to squalid camps in Syria and Jordan.
As long as U.S. forces remain in Iraq in significant numbers, regional powers
feel free to meddle, knowing that America must bear the consequences. If we
clearly state our intent to leave, these states will have incentive to intervene
constructively; it would endanger their own security if Iraq were to become a
failed state or a launching pad for international terrorism. Even
Shiite-dominated Iran, which has become the region's largest power as a result
of the war, would not want an Iraqi haven for Sunni-controlled al-Qaeda.
There is one sure way to stop this drift. The United States must set a firm
withdrawal date. It is the only way Iraqis and regional leaders will make the
compromises necessary to stabilize Iraq and the entire Middle East. This
withdrawal can be completed safely in 12 to 18 months and should be started
President Bush seems content to let Iraq drift until he leaves office, but
America can ill afford this policy...
Posted by Mark Thoma on Thursday, November 15, 2007 at 12:33 AM in Iraq and Afghanistan, Terrorism |
John Williams of the San Francisco Fed uses twelve graphs to illustrate and support his view of the current economy
and the economic outlook:
FedViews, by John Williams, Economic Outlook, FRBSF: Conditions in money
markets continue to improve following the turmoil of August and September.
The spread between the one-month LIBOR rate and the
comparable maturity Overnight Indexed Swap (OIS) rate is now about 20 basis
points, well below the peak of about 90 basis points reached two months ago.
Similarly, the spread between rates on second-tier A2/P2 nonfinancial commercial
paper and AA commercial paper has declined to about 30 basis points. Still,
these spreads remain above the levels seen in July.
Securitization of jumbo loans remains impaired and the spread between
so-called “jumbo” and conforming fixed-rate mortgages has come down only
modestly since the peaks of August and early September.
The housing slump has deepened further. Sales of existing homes fell 8
percent in September and are down 19 percent over the past 12 months. New-home
sales rebounded in September, but are still down 23 percent over the past year.
Inventories of new and existing homes for sale are at high levels, putting
downward pressure on house prices and building.
Continue reading "FRBSF: The Economic Outlook" »
Posted by Mark Thoma on Thursday, November 15, 2007 at 12:24 AM in Economics, Monetary Policy |
Posted by Mark Thoma on Thursday, November 15, 2007 at 12:06 AM in Links |
Does going on strike raise worker compensation?
Striking Out, by James Surowiecki, The New Yorker: In the spring of 1988,
television and movie writers went on strike. The strike, which lasted for
twenty-two weeks, was rhetorically bitter and economically destructive: it cost
an estimated half billion dollars in lost revenues and wages and sent network
ratings down by nine per cent. But the walkout had only limited impact at the
negotiating table: when an agreement was finally reached, it looked very much
like a deal that could have been made five months earlier. The strike almost
certainly cost both sides more than the sums they had been fighting over.
Twenty years later, entertainment writers are on the picket lines once again.
... Walkouts may call to mind labor triumphs like the Flint sitdown strike of
1936-37, which gained union recognition for the United Automobile Workers at G.M.,
but most don’t end that well—nor do they generally end as badly as the 1981
air-traffic controllers’ strike, in which everyone got fired. Instead, strikes
often end tepidly, with no major gains or rollbacks, and economists have found
that, on average, strikes these days have little, if any, impact on what workers
get paid. (Paradoxically, unions raise worker wages, but strikes generally
don’t.) Given the negative economic consequences—lost paychecks for workers and
lost business for employers—the economically rational thing for both sides is
usually to settle before the walkout starts. So why don’t they?
One obvious hurdle to a settlement is that neither side knows what the
other’s true position is. In economists’ terms, strikes happen as a result of
“asymmetric information”—when one side knows more than the other about the real
economics of the situation. ... Going on strike is one way to find out ...[i]f a
company ... was just bluffing. If it’s willing to endure a long strike, that may
be a sign that it meant what it said. That’s why the longer a strike lasts, the
less likely it is to produce a big victory for either side: you’re willing to
cut a deal after a long strike that you wouldn’t have been willing to cut before
in part because the strike has told you that the other side wasn’t just
Even if negotiators are acting in good faith, it’s still hard to settle. Both
sides, to begin with, are likely overestimating their chances of victory, thanks
to the well-documented tendency people have toward overconfidence. A strike
isn’t always a mistake: sometimes workers do win big. But if both sides think a
strike will help their cause at least one of them must be wrong. ...
And justice matters quite a bit in strikes, which often turn more on
questions of fairness than on strict economics. Fairness doesn’t matter much in
conventional economics, which assumes that, if you and I can make a deal leaving
us both better off, we’ll make it. But, in the real world, if the deal seems
unfair to me I may very well reject it, even if doing so leaves me worse off.
The quintessential example of this is the so-called ultimatum game, where
participants offered a share of a ten-dollar bill by a fellow-participant will
actually turn down the free money if they think their share isn’t big enough.
... Readiness to pay a price in order to enforce an idea of what is right is
part of what keeps sides from settling:... The paychecks and the profit-and-loss
statements may indicate that the writers and the producers should be able to
resolve their dispute quickly. But in labor relations the bottom line isn’t
always the bottom line.
Then there's this from Ezra Klein:
Labor Matters, by Ezra Klein: I've still got my problems with Wal-Mart, but
the health care offerings for their valued "associates" do seem to be
getting better. This is, of course, entirely a function of the pressure
unions have exerted on Wal-Mart -- pressure exerted despite the unions having
almost no hope of actually unionizing Wal-Mart. Organized Labor has expended
tens of millions of dollars over the past few years on this campaign, and while
it hasn't increased union density one iota, it has given a hundred thousand
Wal-Mart workers health insurance, spurred Wal-Mart to launch an effort to drive
down prescription drug prices, drove them into the "Divided We Fail" health
reform coalition, and contributed to the company's focus on greening their
stores (they needed good press to counteract all the bad). This is why we need
Organized Labor. They act as a countervailing force to make corporations think
seriously about their roles in our society. No other powerful actors do that.
But it needs to be done.
It's very difficult to measure the impact off the threat of a strike on
worker compensation. Thus, while the measured impact of actual strikes may be
small, the threat of a strike may not be, hence the finding that "unions raise
worker wages, but strikes generally don’t." Those of you closer to the labor
literature than I am, what is the evidence on how the threat of a strike impacts
Posted by Mark Thoma on Wednesday, November 14, 2007 at 10:44 AM in Economics, Unemployment |
A passage from John
Bates Clark's book, The Philosophy of Wealth: Economic Principles Newly
Formulated published in 1894. Clark, an American neoclassical economist famous for developing the marginal productivity theory of distribution, was "one of one of the leading figures of the Marginalist Revolution":
THE ECONOMIC FUNCTION OF THE CHURCH: ...The laws of spiritual poor-relief
are of importance to the economist. The kind of spiritual poor-relief to be
discussed here does not fall under the head of charity. Place a dozen men, each
in his own boat, on the open sea, and start them for the nearest land. They are
on an equality and completely independent. If any will not row, his destruction
is on his own head. If any try to row and fail, it is the great law of charity,
and that only, which constrains another to help him. If any venture to burden
himself by towing a weaker brother to the shore, he is compelled to do so by no
law legal or equitable, but the universal law of love.
But that is no picture of actual society. No man can paddle his own canoe as
a member of that great social organism in which each individual labors, not for
himself, but for the whole, and is dependent on the whole for employment and for
pay. Independence is the law of isolation; interdependence is the law of
society. Again and again, in actual history, society ceases to desire the
product of a particular man's labor. The organic whole is in the position of
employer to the millions who work, and it cannot always keep them busy; but it
is not at liberty to starve them. It may take away their comforts; but, if it
take their lives, it is murder. Civilization has placed us all in one boat; by
mutual help we are sailing the homeward-bound ship of humanity. He who will not
help may be thrown overboard, possibly; but he who, by force of circumstances,
cannot, must be carried to the end.
It is thus in the nature of the social organism that the great principle of
English law which asserts the ultimate right of every man to a maintenance finds
its philosophical ground. That is an evil teaching which ventures to question
this principle, and it would fare ill with a state which should attempt to
follow such teaching in practice. Such action would surrender to the communists
the championship of a great truth; it would place society in the wrong, and
revolutionists in the right.
When a man who has had no hand in getting his neighbor into trouble, lends
his aid in getting him out, that is charity. When an organized society relieves
suffering which the society as a whole has caused, that is justice. Whatever
part of the poor-tax goes to relieve sufferings resulting from general social
causes, is paid, not given; the claim to it is as equitable as that of any
officer to his salary. We may assume as a premise the principle asserted in the
poor-law of Queen Elizabeth, which established the right of every man, not to be
kept in idleness, indeed, but to be kept, while willing to work, from absolutely
The higher nature may starve as well as the lower; and the duty of preventing
such starvation has heretofore been made to rest mainly on spiritual grounds,
and presented as a high order of charity. We place it on the ground of justice.
The soul of man is not independent; the organic union of mankind includes mind
as well as matter, and it is its nature, in every relation, to absorb and to
subordinate the individual lives which are its molecules. He who is born into
such a society is never independent in body or mind.
Posted by Mark Thoma on Wednesday, November 14, 2007 at 12:21 AM in Economics, History of Thought |
Clive Crook agrees with
Paul Krugman that a recent WSJ editorial on income mobility doesn't tell us
much. He also compares income mobility in the U.S. to mobility in other
opportunity, by Clive Crook: The Wall Street Journal's editorial writers are
impressed by a new study on income mobility ... I would call this a case of being prematurely stunned. Studies of this kind
always and everywhere show people rising out of lower quintiles and dropping out
of higher ones... By themselves these numbers tell you very little about the
life-chances of people who are born poor compared with the life-chances of
people who are born rich (mobilty)...
Changes over time in the ratios tell you more. The WSJ notes that the study
finds no great change in relative income mobility over the past ten years. But,
... international comparisons are what you need to test
the view that the United States really is the land of opportunity, as compared
with other places. What do those comparisons say?
Most researchers now give America much lower marks than they used to for
intergenerational economic mobility... As flaws in early postwar studies
have been addressed, estimates of mobility have fallen. Before the 1990s,
researchers tended to put the correlation between parents’ incomes and their
children’s at around 20 percent, implying a high degree of mobility between
generations. (Zero would imply no connection at all; a correlation of 100
percent would imply that parents’ incomes entirely determined the incomes of
their children.) In the 1990s, using better data and techniques, experts tended
to put that figure at about 40 percent. Recent estimates run as high as 60
percent. The finding is not that mobility has fallen since World War II—the
studies point to no clear trend. It is that as methods of measuring mobility
have improved, the result, across a span of recent decades, has gotten worse.
The earlier view that postwar America was an economically mobile society is less
and less borne out. Perhaps it was once (before data became available to track
such things accurately); but it isn’t now.
More telling, maybe, is the international comparison. America stands lower in
the ranking of income mobility than most of the countries whose data allow the
comparison, scoring worse than Canada, all of the Scandinavian countries, and
possibly even Germany and Britain (the data are imperfect, and different studies
give slightly different results).
Strikingly, the research suggests that mobility within America’s
middle-income bands is similar to that in many other countries. The stickiness
is at the top and the bottom. According to one much-cited study, for instance,
more than 40 percent of American boys born into the poorest fifth of the
population stay there; the figure for Britain is 30 percent, for Denmark just 25
percent. In America, more than in other advanced economies, poor children stay
poor. Other data show that in America, more than in, say, Britain, rich children
stay rich as well.
Posted by Mark Thoma on Wednesday, November 14, 2007 at 12:18 AM in Economics, Income Distribution |
Posted by Mark Thoma on Wednesday, November 14, 2007 at 12:06 AM in Links |
Paul Krugman is unhappy with reporting on income inequality on the WSJ
Movin' On Up, Editorial, WSJ: If you've been listening to Mike Huckabee or
John Edwards on the Presidential trail, you may have heard that the U.S. is
becoming a nation of rising inequality and shrinking opportunity. We'd refer
those campaigns to a new study of income mobility by the Treasury Department
that exposes those claims as so much populist hokum. ...
The study ... show[s] beyond doubt that the U.S. remains a dynamic society
marked by rapid and mostly upward income mobility. Much as they always have,
Americans on the bottom rungs of the economic ladder continue to climb into the
middle and sometimes upper classes in remarkably short periods of time.
...The key point is that the study shows that income mobility in the U.S.
works down as well as up -- another sign that opportunity and merit continue to
drive American success, not accidents of birth. The "rich" are not the same
people over time.
The study is also valuable because it shows that income mobility remains
little changed from what similar studies found in the 1970s and 1980s. Some
journalists and academics have cited selective evidence to claim that income
mobility has declined in recent years. ...
All of this certainly helps to illuminate the current election-year debate
about income "inequality" in the U.S. The political left and its media echoes
are promoting the inequality story as a way to justify a huge tax increase. But
inequality is only a problem if it reflects stagnant opportunity and a society
stratified by more or less permanent income differences. That kind of society
can breed class resentments and unrest. ...
As the Treasury data show, we shouldn't worry about inequality. We should
worry about the people who use inequality as a political club to promote
policies that reduce opportunity.
Here's what he says:
WSJ goes green, by Paul Krugman: Let it not be said that the editors of the
Wall Street Journal lack ecological awareness. Today they save energy, both
theirs and mine, by repeating
exactly the same bogus arguments about income inequality that they made —
and I refuted — fifteen
Let me just highlight what I had to say about essentially the same
calculation highlighted by the chart in the middle of today’s piece:
Continue reading "Inequality and Income Mobility" »
Posted by Mark Thoma on Tuesday, November 13, 2007 at 08:46 AM in Economics, Income Distribution |
New estimates for the cost of the Iraq and Afghanistan wars:
'Hidden Costs' Double Price Of Two Wars, Democrats Say, by Josh White,
Washington Post: The economic costs ... of the wars in Iraq
and Afghanistan so far total approximately $1.5 trillion, according to a new
study by congressional Democrats that estimates the conflicts' "hidden costs"--
including higher oil prices, the expense of treating wounded veterans and
interest payments on the money borrowed to pay for the wars. That amount is nearly double the $804 billion the White House has spent or
requested ... through 2008... [The] report, titled "The Hidden Costs of the Iraq
War," estimates that the wars ... have thus far cost the
average U.S. family of four more than $20,000...
Posted by Mark Thoma on Tuesday, November 13, 2007 at 02:07 AM in Economics, Iraq and Afghanistan |
A colleague, Bruce Blonigen, and his co-author Alyson Ma say there's little evidence to support the view that
"China extracts rents and technology from foreign competitors, thus allowing it
to grow even faster and longer than most would have imagined possible." China has managed to attract considerable foreign
investment, but that investment has only had a moderate impact on technology transfer and the
sophistication of Chinese firms:
Will China soon be making
not only cheaper, but also better, products than everyone else?, by Bruce
Blonigen and Alyson C. Ma, Vox EU: The opening of China and its breathtaking
ascendancy to major-player status in world markets has led to significant
hand-wringing by the rest of the world on many fronts. The huge outflow of cheap
unskilled-labour-intensive products from China and its ramifications for wages
and welfare in both developed and other less-developed countries has been a
Recently, new hand-wringing concerns have been raised by various
commentators. As it turns out, the composition of China’s exports is much closer
to that of OECD countries than its level of per-capita income would suggest.
This has substantial implications not only for China’s ability to sustain its
growth, but also for real wages of all workers in developed countries, not just
A significant factor behind this surprising export sophistication by China
may be the role of industrial policy to promote technologically-advanced
industries. While it is well known that the Chinese government has historically
had preferential tax treatment and free trade zones for foreign firms, it also
often negotiates technology transfer arrangements with foreign firms. These are
either through restrictions that limit FDI to joint venturing with a domestic
partner or simply offering quid pro quo arrangements of technology transfer from
the foreign firm to domestic ones in exchange for the foreign firm’s ability to
sell to the huge Chinese market.
A prime example of how this may be successful is a case in the auto industry.
The Chinese government has always required foreign automakers to partner with
domestic producers. Shanghai Automotive (a Chinese-owned firm) recently
announced plans to start up its own factory to produce a luxury sedan after
jointly producing autos in China with General Motors and Volkswagen for many
The X-factor in all of this is China’s large and growing domestic market. It
may be precisely the pivotal factor allowing China the leverage to wring out
important and significant technology transfer concessions from foreign firms.
China’s predecessors (such as Japan, Korea, and Taiwan) did not have this same
advantage when pursuing their own industrial policies for growth in previous
decades. Thus, one wonders if the upcoming growth of China will make the
previous Asian miracles look pedestrian.
While the scenario we have just laid out is plausible, recent evidence
suggests otherwise. China’s ability to gain technology from foreign firms and
develop its own productive sophistication has actually not been that
Continue reading "China’s Ability to Gain Technology from Foreign Firms" »
Posted by Mark Thoma on Tuesday, November 13, 2007 at 12:42 AM in China, Economics, International Trade, Productivity, Technology |
Continuing with the subject of how to model
exchange rate dynamics, this is Roman Frydman and Michael Goldberg
describing how their work on imperfect knowledge economics can help us to
understand exchange rate movements, and how policymakers can use this knowledge
to reduce deviations of exchange rates from parity:
Currency fluctuations cannot be eliminated, but they can be limited, by Roman
Frydman and Michael D. Goldberg, Project Syndicate: "Dollar denial," that
state of willful blindness in which bankers and central bankers claim not to be
worried about America's falling currency, seems to be ending. Now even European
Central Bank Governor Jean Claude Trichet has joined the chorus of concern. ...
Every day seems to bring a new low against the euro.
In the face of the dollar's ongoing fall, policymakers have seemed paralyzed.
The reasons for inaction are many, but it is difficult to avoid the impression
that they are related to the current state of academic theorizing about exchange
rates. Simply put, economists believe either that nothing should be done or that
nothing can be done. Their so-called "rational expectations models" predict that
exchange rates should not deviate from parity in any lasting way. Believing
that..., they see no need for intervention because, save for temporary
deviations, markets always get currency values right.
"Behavioral economists," by contrast, acknowledge that currencies can depart
from parity for a long period. But they attribute this to market psychology and
irrational trading, not to the attempts of currency traders to interpret
changing macroeconomic fundamentals. This implies that intervention is not only
unnecessary; it is ineffective: Faced with wide swings and trading volumes of $2
trillion per day, central banks are helpless to counteract traders' irrational
But both the "rational expectations" and the "behavioral" models are flawed,
because they seek to generate exact predictions of human behavior. Both
disregard the fact that rationality depends as much on individuals' imperfect
understandings of history and society as on their motivation.
If we place "imperfect knowledge" at the heart of economic analysis, the
implications of our limited ability to predict market outcomes becomes clear.
When it comes to currency markets, parity levels based on international trade
are merely one of many factors that traders consider. In attempting to cope with
imperfect knowledge, they are not irrational when they pay attention to other
macroeconomic fundamentals and thereby bid an exchange rate away from its parity
Continue reading "Frydman and Goldberg: Imperfect Knowledge Economics and Exchange Rate Dynamics" »
Posted by Mark Thoma on Tuesday, November 13, 2007 at 12:24 AM in Economics, International Finance, Macroeconomics, Methodology |
Posted by Mark Thoma on Tuesday, November 13, 2007 at 12:06 AM in Links |
Robert Reich is looking past the next recession, Calculated Risk looks at residential construction employment, and Nouriel Roubini sounds the alarm:
After the Next Recession, by Robert Reich: All signs point to a recession... We may pull out of it,
yet. Bernanke and company may make bigger cuts in interest rates. Congress may
enact a payroll tax holiday on the first fifteen thousand of income, as I’ve
But look beyond the business cycle and the consequences may be larger. For
years now, America's middle class has lived beyond its paycheck. Middle-class
lifestyles have flourished even though median wages have barely budged.
The reason is we’ve been able to borrow so much so easily. With housing
prices rising, home equity loans have financed renovations and home
improvements. With credit cards raining down like manna from heaven, we’ve
bought plasma TVs, new appliances, vacations. With dollars artificially high
because foreigners have held them even as the nation sank deeper into debt, we
could summon cheap goods and services from the rest of the world.
But now, the era of easy money is over.
Continue reading ""After the Next Recession"" »
Posted by Mark Thoma on Monday, November 12, 2007 at 02:01 PM in Economics, Housing, Unemployment |
Brad DeLong says the debate between David Brooks and Paul Krugman is over,
it's clear Krugman was right:
Set, and Match to Paul Krugman..., by Brad DeLong: It appears that Paul
Krugman wins his fight with David Brooks, who had written this about Paul
Krugman's invocation of Ronald Reagan in Philadelphia, Mississippi:
David Brooks: History and Calumny: Today, I’m going to write about a slur.
It’s a distortion that’s been around for a while, but has spread like a weed
over the past few months. It was concocted for partisan reasons: to flatter the
prejudices of one side, to demonize the other and to simplify a complicated
reality into a political nursery tale.... But still the slur spreads. It’s
spread by people who, before making one of the most heinous charges imaginable,
couldn’t even take 10 minutes to look at the evidence. It posits that there was
a master conspiracy to play on the alleged Klan-like prejudices of American
voters, when there is no evidence of that conspiracy. And, of course, in a
partisan age there are always people eager to believe this stuff.
Here, via Rick Perlstein, is Joseph Crespino:
Did David Brooks Tell the Full
Story About Reagan's Neshoba County Fair Visit?: In his November 9, 2007,
column in the New York Times, David Brooks discussed Ronald Reagan’s appearance
at the Neshoba County Fair in 1980 and his use of the term “states’ rights.” Brooks absolved Reagan of racism, but he ignored the broader significance of
Reagan’s Neshoba County appearance.... Consider a letter that Michael Retzer,
the Mississippi national committeeman, wrote in December 1979 to the Republican
national committee. Well before the Republicans had nominated Reagan, the
national committee was polling state leaders to line up venues where the
Republican nominee might speak. Retzer pointed to the Neshoba County Fair as
ideal for winning what he called the “George Wallace inclined voters.”...
Continue reading "St. Ronnie and the Southern Strategy" »
Posted by Mark Thoma on Monday, November 12, 2007 at 11:25 AM in Economics, Politics |
I am part of a seminar at Crooked Timber on Dani Rodrik's new book One
Economics, Many Recipes: Globalization, Institutions and Economic Growth. My
entry is at the end of this batch, but do read the others as I'm sure they are
much better, and there will be more entries posted tomorrow along with Dani
Rodrik's response. The first day's entries are more descriptive so that people
who haven't read the book can get a better idea of what it is all about, though
they do have points to make, while the the second batch focuses on more specific
Introduction: Dani Rodrik Seminar, Crooked Timber, by Henry Farrel: Dani
Rodrik’s new book, One Economics, Many Recipes: Globalization, Institutions
and Economic Growth (
Amazon ) is a major contribution to debates on globalization, economic
development and free trade. It brings together much of his existing work
bringing together an important critique of the Washington Consensus with
positive suggestions about how best to encourage economic growth, and how to
build a global system of rules that can accommodate diverse national choices.
We’re pleased and happy that both Dani and several other guests have agreed to
participate in a new Crooked Timber seminar. This seminar will be published in
two parts – the first today (featuring Henry Farrell, John Quiggin, Mark Thoma
and David Warsh), the second tomorrow (featuring Daniel Davies, Dan Drezner,
Jack Knight, Adam Przeworski, and Dani’s reply post). As with previous Crooked
Timber seminars, it is published under a Creative Commons license (see below).
Tomorrow, I will post a PDF of the entire seminar (plus a LaTeX file for anyone
who wants to play around with it). If you have specific comments about the
contributions, please post them in the relevant comments section for the
specific post. For general technical glitches etc, post comments here.
The (non-CT regular) participants in the seminar are, in alphabetical order:
(1) Dan Drezner blogs at
http://www.danieldrezner.com/blog/. He is an Associate Professor at the
Fletcher School of Law and Diplomacy, at Tufts University. He has written two
academic books on international political economy (looking at sanctions and
globalization), as well as a Council of Foreign Relations report and numerous
articles. He possesses specific expertise on the intersection between celebrity
culture and global politics.
(2) Jack Knight is Sidney W. Souers Professor of Government at Washington
University in St. Louis. He is author of a widely cited book on institutional
theory, Institutions and Social Conflict as well as numerous articles. He
has a new book co-authored with Jim Johnson on rational choice, pragmatism and
deliberative democracy, which will be published next year.
(3) Adam Przeworski is Carroll and Milton Petrie Professor of European
Studies and Professor of Politics at New York University. He is the author of
several monographs and numerous articles on topics including social democracy,
democratic transitions and economic development. This
interview (previously discussed in
this CT post) gives a good overview of his life, politics, and academic
(4) Dani Rodrik blogs at
Dani Rodrik’s Weblog. He is Professor of International Political Economy at
the Kennedy School of Government of Harvard University, where he teaches on
international development issues. He has written two books, copious numbers of
academic articles and policy papers, and was recently awarded the inaugural
Albert O. Hirschman Prize of the Social Science Research Council.
(5) Mark Thoma blogs at
which has quickly become established as one of the key forums for debate of
economics and politics on the Internet (with occasional interjections by Paul
Krugman and others). He is professor of economics at University of Oregon, where
he has published numerous articles on aspects of macroeconomics theory.
(6) David Warsh is the editor of
He previously covered economics issues for The Boston Globe and Forbes
Magazine for 25 years, and is the author of a widely acclaimed (and rightly
so) intellectual history of the new growth theory in economics, Knowledge and
the Wealth of Nations
This work is licensed under a
Creative Commons Attribution-Noncommercial-Share Alike 3.0 United States License.
Through the Hourglass by David Warsh: From his title on, Dani Rodrik is at
pains to identify himself as a neoclassical economist, bred in the bone. He
writes, “If I often depart from the consensus that ‘mainstream economists’ have
reached in matters of development policy, this has less to do with different
modes of analysis than with different readings of the evidence and with
different evaluations of the ‘political economy’ of developing nations.” Not to
start an argument, if the book were about professional cooking, he might have
called it One Chemistry, Many Recipes (and Plenty of Chefs). True,
economics is not very much like chemistry, but the reason for Rodrik’s emphasis
on the primacy of theory, I think, has less to do with the presence of
economics’ many competitors in the development game – political scientists,
sociologists, lawyers, business executives, savants of all sorts—than with what
happened in mainstream economics itself in the twenty-five years since he began
» Continue reading “Through the Hourglass.”
More Politics, Many Recipes, by Henry Farrel: A good way to start thinking
about Dani Rodrik’s genuinely excellent new book is to contrast its statement of
objectives with a programmatic statement from another new book on international
economics, Roberto Unger’s Free Trade Reimagined.
First of all, Rodrik:
First, this book is strictly grounded in neo-classical economic analysis. At
the core of neoclassical economics lies the following methodological
predisposition: social phenomena can best be understood by considering them to
be an aggregation of purposeful behavior by individuals – in their roles as
consumer, producer, investor, politician, and so on – interacting with each
other and acting under the constraints that their environment imposes. This I
find to be not just a powerful discipline for organizing our thoughts on
economic affairs, but the only sensible way of thinking about them. If I often
depart from the consensus that “mainstream” economists have reached in matters
of development policy, this has less to do with different modes of analysis than
with different readings of the evidence and with different evaluations of the
“political economy” of developing nations. The economics that the graduate
student picks up in the seminar room – abstract as it is and riddled with a wide
variety of market failures – admits an almost unlimited range of policy
recommendations, depending on the specific assumptions the analyst is prepared
to make … the tendency of many economists to offer advice based on simple rules
of thumb, regardless of context (privatize this, liberalize that), is a
derogation rather than a proper application of neoclassical economic principals
» Continue reading “More Politics, Many Recipes.”
If so many recipes can work, why do so many fail?, by John Quiggin?: Dani
Rodrik’s book opens with a discussion of the policy approach that dominated the
development debate for much of the 1990s, and to some extent still does. The
term ‘Washington consensus’ was coined by John Williamson of the IIE, to
described the views of Washington-based institutions (IMF, World Bank and US
Treasury in the 1980s, but escaped from its creator and came to encompass a
program of dogmatic adherence to a revived version of 19th century economic
orthodoxy, commonly referred to as neoliberalism.
» Continue reading “If so many recipes can work, why do so many fail ?.”
Setting the Stage for Growth, by Mark Thoma: Dani Rodrik’s new book, One
Economics, Many Recipes: Globalization, Institutions, and Economic Growth
takes on a problem of fundamental importance, how to stimulate and sustain
economic growth in underdeveloped countries and lift people out of poverty.
Past attempts to solve this problem can, for the most part, be identified
with one of two polar extremes, solutions that involve pervasive and persistent
government intervention, and solutions that rely upon extreme laissez faire
market-oriented policies. Neither of these approaches has been very successful,
and the book argues for a different approach that combines these extremes and
allows market forces to operate in an environment shaped by government policy.
Under this combination approach the government in partnership with the private
sector uses industrial policy and institutional change to strategically
kick-start, coordinate, and sustain economic activity.
Continue reading "Dani Rodrik Seminar at Crooked Timber" »
Posted by Mark Thoma on Monday, November 12, 2007 at 09:45 AM in Economics, International Trade, Policy |
This has received quite a bit of attention already, though I did try to add
something new at the end with a discussion of some recent work by Bob Flood
and Andrew Rose, but in case you missed it this is Menzie Chinn on modeling
exchange rates. I won't repeat the entire post, but here's part of it followed
by a description of the new work by Flood and Rose (which has a
very nice description of the impact of the Messe-Rogoff paper discussed below):
Modeling Exchange Rates: What Does Current Academic Thinking Have to Say about
the Dollar's Future?, by Menzie Chinn: As the dollar continues its
decline, I think it's useful to step away from the high frequency analysis
,, to consider what the currents in academic thinking on the enterprise of
predicting exchange rates are. ...
Now, as I've observed before, one of the key stylized facts regarding the
empirical modeling of exchange rates is the one associated with Meese and
Rogoff's 1983 paper: that it is difficult to outpredict a random walk in out of
sample forecasts where the ex post values of the explanatory variables
are used (what are sometimes called ex post historical simulations).
This stylized fact has been remarkably durable in its 20 year history. After
some work which seemed to indicate that one could outpredict a random walk at
long horizons (Mark (1995) [pdf] and Chinn and Meese (1995) [pdf]), subsequent
research demonstrated that this long horizon outprediction was an artifact of
sample period, at least insofar as RMSE criteria are concerned. Cheung, Chinn
and Fujii (2003) [pdf] showed that at long horizons, one could find cases where
the random walk was outpredicted at long horizons using interest rate parity,
but not (typically) structural macro models of the type examined by Meese and
One path has been undertaken by Roman Frydman and Michael Goldberg, where
they have dispensed with the rational expectations approach, and forwarded what
they call the "imperfect knowledge expectations". In a recent paper [pdf], they
explain their approach thusly:
Why do academic economists believe that short-run currency fluctuations are
not connected to macroeconomic fundamentals, whereas the individuals most
connected to financial markets obviously do? Our answer is that market
participants and observers recognize that the relationship between the exchange
rate and macroeconomic fundamentals changes at times and in ways that cannot be
fully foreseen. While they may use economic theory to understand and forecast
markets, they recognize that they cannot base their actions solely on a fixed
The basic premise of our approach, called "imperfect knowledge economics"
(IKE), is that the search for sharp predictions of market outcomes is futile.
Market participants and policy makers must cope with ever-imperfect knowledge in
forecasting the future exchange rate. As a result, our knowledge and our
institutions (e.g., the conduct of monetary policy) change over time. Indeed,
capitalist economies provide powerful incentives for individuals to find new
ways of thinking about the future and the past. In such a world, it is rather
odd for economists to expect that a fixed set of economic fundamentals would
matter in exactly the same way for more than 30 years, or that they could fully
prespecify how this relationship might have changed over time.
It is thus not surprising that academic economists have found that their
models forecast exchange rates no better than flipping a coin does. This finding
still attracts much attention among academic researchers. Indeed, it is one of
the main reasons why they have concluded that markets participants'
irrationality, rather than macroeconomic fundamentals, moves currency markets.
...Given that some of my own research suggests nonlinearities in exchange
rates [pdf], and changes in what factors traders consider important [pdf], I'm
sympathetic to some of the ideas Frydman and Goldberg propound. At the same
time, I should observe that a quite different approach to thinking about
exchange rates adheres to the rational expectations view -- and indeed takes the
inability of typical exchange rate determinants to predict the exchange
rate as proof that the rational expectations/present value approach is correct.
This approach, developed by Engel and West [pdf], was discussed in
this post. [See] a paper provocatively titled
Exchange Rate Models Are Not as Bad as You Think [by]... Engel, Mark, and
Perhaps more interesting is some recent work by Engel and West, as well as
Molodtsova and Papell, suggesting that Taylor rule fundamentals (namely output
and inflation gaps) can be used as predictors of exchange rates. I discussed
this point in this post from January. ...
What I take from this discussion is that some of the movements in the
dollar are explicable in terms of fundamentals. The fundamentals that matter
differ depending upon the horizon, with perhaps Taylor rule fundamentals (and
consequently revisions to expectations regarding those fundamentals) driving the
exchange rate at short horizons. ...
I also think conventional monetary model fundamentals matter at longer
horizons. These include money stocks, incomes, interest rates and inflation
rates, and possibly the relative price of nontradables (this is where
productivity trends can come into play). This predictability might not be seen
in the RMSE criteria typically used, but sometimes shows up in direction of
But, traveling full-circle, I want to stress that these factors overlay the
structural factors ... that are in some sense harder to model. Will central
banks change the pace of dollar acquisition...? ... What will sovereign wealth
funds do? What are investors' views regarding the substitutability of dollar
denominated assets versus euro or pound denominated assets? Because some of
these questions pertain to infrequent, discrete, events (de-pegging from the
dollar), or to relatively new phenomena (SWFs), or to imperfectly measured
relationships (investor perceptions of substitutability), one should expect much
greater uncertainty surrounding the effects of these structural changes.
This assessment is consistent a view I forwarded (along with others) two
years ago. In a
Council on Foreign Relations report [pdf], I argued that one of the
implications of happily borrowing away at the Federal and national levels (the
budget deficit and the current account deficit) was that, given the source of
the funding, we would place the fate of the dollar and other asset prices to
some extent in the hands of foreign, state, actors. Current events have, I
think, vindicated that view.
Let me try to add something to Menzie's discussion. There
is a recent paper by Flood and Rose that places a new interpretation on the
Meese-Rogoff results. The Flood-Rose paper doesn't revive exchange rate models,
but it does show that if you apply the Meese-Rogoff result to other assets, e.g.
to stock prices, you get exactly the same result again and again. This suggests,
and the paper verifies, that there may be something about the econometric
technique that builds the Meese-Rogoff outcome into the results and, because of
that, care needs to be taken in interpreting the results from the Meese-Rogoff
procedure. In particular, the results appear to rely upon persistence in the
model's error term:
Glum? The Meese-Rogoff Methodology Meets the Stock Market”, by Andrew Rose and
Robert Flood [PDF file]:
I. Motivation In their now-classic (1983a, b) papers,
Richard Meese and Kenneth Rogoff (hereafter “MR”) examined the forecasting
performance of a number of then-popular exchange rate models. They found that a
random walk “model” of the exchange rate consistently out-forecast the
structural models, despite the latter’s being given the advantage of using
actual future values of market fundamentals. The full reaction to the MR message
took years to process, but was eventually devastating for the field of
International Finance. Academic modeling of exchange rate determination
basically ceased. The area fell into disrepute; indeed, the area is not even
represented on many first-rate academic faculties. By academic standards the MR
paper had a huge impact and its fallout is still felt whenever exchange rates
are intelligently discussed. In the current paper we ask a simple question: What
happens when the MR method is applied to assets other than foreign exchange? We
consider aggregate stock market indices in Germany, Japan, the UK and the USA,
countries that correspond to the bilateral exchange rates considered by MR. We
carry out the same forecasting analysis as MR, over the same sample period,
1973m3 through 1981m6. Just as MR did for foreign exchange rates, we consider a
number of time-series and structural models, and use a number of metrics to
compare them out of sample with a random walk. Crucially, we follow MR in
allowing structural models to forecast asset prices with actual future values of
fundamentals (which would ordinarily be unknown). Where MR forecast exchange
rates with money, income, and the like, we provide the forecaster with
information about the levels and growth rates of earnings, dividends, and
interest rates. It turns out that not only is our methodology similar to that of
MR; so is our conclusion. Just as MR found with foreign exchange, we find that
none of our models with fundamentals perform consistently and substantially
better than a simple random walk model of the aggregate stock market. However,
we also show that this may be an artifact of the Meese-Rogoff methodology. In
particular, the technique seems to hinge inadvertently on the time-series
persistence of the model’s error term.
• International finance is in no worse shape at modeling important asset
prices than domestic finance, at least over the MR sample period.
• The Meese-Rogoff methodology may not be revealing for any asset price,
especially with a lot of persistence in the composite residual.
• Fundamentals may eventually seem to kick in, but not at any short horizon.
Most of the finance literature is at longer horizons than one year (e.g., Fama
and French). Alternatively, coefficients linking fundamentals to stock prices
may not be reasonably viewed as constant at the short run. Alternatively, lots
of variation in discount rates.
Posted by Mark Thoma on Monday, November 12, 2007 at 12:42 AM in Economics, International Finance |
As the exchange rate continues to fall, illegal imports are declining. Get ready for a glut of B.C. bud in Canada, and a dry spell in Montana. Given the asymmetric flexibility in these markets - exit is much faster than entry for obvious reasons - it will take awhile for supply lines to be reestablished in Montana, but things should return to normal in Canada much faster:
Pot trade slows, by Michael Jamison, Missoulian: For years, backpacks
crammed with cash have slipped north into Canada, followed closely by hockey
bags packed with premium marijuana skating south into Montana. A favorable exchange rate (not long ago, one American dollar bought one and a
half Canadian dollars) made the smuggling profitable, and thus popular.
But last month, for the first time in more than 30 years, the two currencies
were at par, ... and Sunday a Canadian dollar bought $1.06 U.S. The financial tables have turned, and global economics have done what U.S.
law enforcement could not: Capitalism has stopped the smugglers in their tracks.
Call it Marijuanomics 101.
Continue reading ""Marijuanomics 101"" »
Posted by Mark Thoma on Monday, November 12, 2007 at 12:24 AM in Economics |
[Please feel free to add more links in comments.]
Posted by Mark Thoma on Monday, November 12, 2007 at 12:06 AM in Links |
International trade produces both winners and losers, but "the winners win
more than the losers lose, so governments should boost public support for trade
by creating ex ante mechanisms that share the pains and gains." This research
provides evidence that these types of mechanisms are actually able to reduce
public resistance to free trade policies [see also
Comparing Flexicurity in Denmark and Japan for more on this general topic]:
Big governments and
globalisation are complementary, by Anna Maria Mayda and Kevin H. O’Rourke, Vox
EU: While economists have preached the virtues of free trade for over two
centuries, the majority of their fellow citizens remain stubbornly
protectionist. When over 60,000 people in 47 countries were asked in 1995-1997
whether they favoured free trade or stricter limits on imports, approximately
60% of them chose the latter option. As China and India rise to economic
prominence over the coming decades, it is predictable that such opinions will
become even more prevalent in Europe and the United States than they are now.
Faced with such fears, is there anything that governments can do to reassure
their fellow citizens, or do they face a straightforward choice between facing
down and giving into protectionist demands?
One of the main complaints against globalisation is that it heightens
economic insecurity, making for a riskier, less predictable environment for
individual workers. If globalisation does increase risk, then one response would
seem to be for governments to provide workers with insurance, guaranteeing them
appropriate safety nets in the event of unexpected dislocation. According to a
famous paper by Dani Rodrik, this explains why more open economies have bigger
governments; far from being substitutes for each other, governments and markets
are in fact complementary, with appropriate government programmes being
essential in shoring up political support for trade.
Indeed, economic history provides considerable evidence in favour of this
view, since it was precisely during the heyday of the first great globalisation,
in the decades running up to the First World War, that the foundations of the
modern welfare state were laid. Across Europe, socialist parties then supported
liberal free trade policies, in return for the introduction of a range of social
insurance programmes, such as old age pensions, accident insurance or
unemployment insurance. These reforms tended to be most advanced in those
countries which were most open to the world economy of the day. Far from
globalisation leading to a race to the bottom, this was a period in which free
trade and social progress went hand in hand in Europe, and recent historical
research suggests that this is precisely why governments were able to maintain a
consensus in favour of free trade. Similarly, the post-1945 political
settlement, which combined a commitment to both open markets and domestic
stability, can be seen as acknowledging that while the interwar move towards
autarky had been disastrous, and that openness was essential to economic
recovery, such openness would be unsustainable without active government
intervention to reduce and insure against economic volatility.
In a recent paper co-authored with Richard Sinnott, a political scientist, we
uncovered suggestive microeconomic evidence in support of the view that
government expenditure can boost support for free trade. Using survey data
for 18 countries in Europe and Asia, we found that those who were more
risk-averse were most opposed to trade. However, this effect was considerably
weaker in countries where government expenditure accounted for a higher share of
Continue reading ""Big Governments and Globalisation are Complementary"" »
Posted by Mark Thoma on Sunday, November 11, 2007 at 06:48 PM in Economics, Social Insurance |
George Soros calls for "new ground rules for political discourse":
Democratic politics manipulates truth: But there’s a way out, by George Soros,
Project Syndicate: In his novel 1984 , George Orwell chillingly described a
totalitarian regime in which all communication is controlled by a Ministry of
Truth and dissidents are persecuted by political police. The United States
remains a democracy governed by a constitution and the rule of law, with
pluralistic media, yet there are disturbing signs that the propaganda methods
Orwell described have taken root here.
Indeed, techniques of deception have undergone enormous improvements since
Orwell's time. Many of these techniques were developed in connection with the
advertising and marketing of commercial products and services, and then adapted
to politics. ... More recently, cognitive science has helped to make the
techniques of deception even more effective, giving rise to political
Karl Popper's concept of open society, ... is based on the recognition that,
while perfect knowledge is unattainable, we can gain a better understanding of
reality by engaging in critical thinking.
Popper failed to recognize that in democratic politics, gathering public
support takes precedence over the pursuit of truth. In other areas, such as
science and industry, the impulse to impose one's views on the world encounters
the resistance of external reality. But in politics the electorate's perception
of reality can be easily manipulated. As a result, political discourse, even in
democratic societies, does not necessarily lead to a better understanding of
The reason democratic politics leads to manipulation is that politicians do
not aspire to tell the truth. They want to win elections, and the best way to do
that is to skew reality to their own benefit. ...
We must abandon Popper's tacit assumption that political discourse aims at a
better understanding of reality and reintroduce it as an explicit requirement.
... We need to introduce new ground rules for political discourse. These cannot
be identical to scientific method, but they should be similar in character,
enshrining the pursuit of truth as the criteria on which political views are to
be judged. Politicians will respect, rather than manipulate, reality only if the
public cares about the truth and punishes politicians when it catches them in
deliberate deception. ...
The practical difficulty is in recognizing when political professionals are
distorting reality. There is an important role here for the media, the political
elite, and the educational system, which must all act as watchdogs. In addition,
the public needs to be inoculated against the various techniques of deception.
The most effective techniques operate at the subconscious level. When emotions
can be aroused by methods that bypass consciousness, the public is left largely
defenseless. But if the public is made aware of the various techniques, it is
likely to reject them.
One influential technique — which Republican pollster Frank Luntz says that
he learned from 1984 — simply reverses meanings and turns reality on its head.
Thus, Fox News calls itself "fair and balanced," and Karl Rove and his acolytes
turn their opponents' strongest traits into their Achilles' heels, using
insinuations and lies to portray the opponents' achievements as phony. ...
The American public has proven remarkably susceptible to the manipulation of
truth, which increasingly dominates the country's political discourse. Indeed, a
whole network of publications, some of which manage to parade as mainstream
media, is devoted to the task. Yet I believe that it is possible to inoculate
the public against false arguments by arousing resentment against Orwellian
Newspeak. What is needed is a concerted effort to identify the techniques of
manipulation — and to name and shame those who use them.
Now is an ideal time to begin that effort. Americans are now awakening, as if
from a bad dream. What we have learned from recent years' experience — what we
should have known all along — is that the supremacy of critical thought in
political discourse cannot be taken for granted. It can be ensured only by an
electorate that respects reality and punishes politicians who lie or engage in
other forms of deception.
He doesn't mention the role of wealth in this process. The main reason George
Soros has a voice in the media is because of his wealth, and there are others
with far greater control over the messages coming daily from the nation's
editorial pages, people with the ability to influence the interpretation and
framing of the news more generally, and with the means to shape the political
discourse. My biggest frustration is not with the public's inability "to
identify the techniques of manipulation," it's the fact that the media seems to
have lost the ability to self-police in a way that weeds out those who engage in
this type of deception, and ownership and control of the media needs to be part of an examination of why this has happened. A professional ethic has eroded, it seems, so that unethical
reporting and editorial practices are allowed to pass without much comment or
condemnation from within. I think people already have the tools they need if information is
reported to them in an way that allows fact to be sorted from fiction without requiring considerable additional effort to augment the reporting and ferret out the
truth. So sure, let's make people aware of how they can be manipulated, that might help some, but
let's not stop there because teaching people to cover their ears may not be the
best solution to pervasive political messages backed by powerful interests that distort reality for political gain.
Posted by Mark Thoma on Sunday, November 11, 2007 at 03:24 AM in Economics, Politics |
Posted by Mark Thoma on Sunday, November 11, 2007 at 12:06 AM in Links |
Poor Ronald Reagan, one innocent mistake after another has, according to David Brooks and others, left the wrong impression about him:
Innocent mistakes, by Paul Krugman: So there’s a campaign on to exonerate
Ronald Reagan from the charge that he deliberately made use of Nixon’s Southern
strategy. When he went to Philadelphia, Mississippi, in 1980, the town where the
civil rights workers had been murdered, and declared that “I believe in states’
rights,” he didn’t mean to signal support for white racists. It was all just an
Indeed, you do really have to feel sorry for Reagan. He just kept making
those innocent mistakes.
When he went on about the welfare queen driving her Cadillac, and kept
repeating the story years after it had been debunked, some people thought he was
engaging in race-baiting. But it was all just an innocent mistake.
When, in 1976, he talked about working people angry about the “strapping
young buck” using food stamps to buy T-bone steaks at the grocery store, he
didn’t mean to play into racial hostility. True, as the New York Times reported,
The ex-Governor has used the grocery-line illustration before, but in states
like New Hampshire where there is scant black population, he has never used the
expression “young buck,” which, to whites in the South, generally denotes a
large black man.
But the appearance that Reagan was playing to Southern prejudice was just an
Similarly, when Reagan declared in 1980 that the Voting Rights Act had been
“humiliating to the South,” he didn’t mean to signal sympathy with
segregationists. It was all an innocent mistake.
In 1982, when Reagan intervened on the side of Bob Jones University, which
was on the verge of losing its tax-exempt status because of its ban on
interracial dating, he had no idea that the issue was so racially charged. It
was all an innocent mistake.
And the next year, when Reagan fired three members of the Civil Rights
Commission, it wasn’t intended as a gesture of support to Southern whites. It
was all an innocent mistake.
Poor Reagan. He just kept on making those innocent mistakes, again and again
Posted by Mark Thoma on Saturday, November 10, 2007 at 09:54 PM in Economics, Politics |
Austan Goolsbee on what the Iraqi bond market is telling us about the chance
of success in Iraq (this has come up previously, see
"Is The 'Surge' Working? Some New Facts" and
Jim Hamilton: Economic Indicators of Success in Iraq):
In the Bond Market, a Bleak Prognosis for Iraq, by Austan Goolsbee, Commentary,
NY Times: President Bush's surge of troops in Iraq has done little to
resolve the political debate over the Iraq war. But global financial markets
have been monitoring the war for months, and with remarkable consistency, they
have concluded that the long-term prospects for a stable Iraq are very bleak.
That is the picture that emerges from a study by Michael Greenstone, an
economics professor at the Massachusetts Institute of Technology... Professor
Greenstone started by reviewing basic statistics on the Iraqi economy and on the
battle for security within Iraq since February. This data provided a murky view,
at best. ... Sifting through these facts was time-consuming, but it provided
little real guidance on the state of affairs in Iraq.
It wasn’t until Professor Greenstone began examining the financial markets’
pricing of Iraqi government debt that he had his eureka moment. It was
immediately clear that the bond market — which, historically, has often been an
early indicator of the demise of a political system — was pessimistic about the
Iraqi government’s chances for survival. ...
Continue reading "Forward Looking Markets See Trouble in Iraq" »
Posted by Mark Thoma on Saturday, November 10, 2007 at 09:00 PM in Economics, Iraq and Afghanistan |
Paul Krugman corrects Robert Rubin:
Robert Rubin is wrong about the dollar, by Paul Krugman: He
“You could have had surpluses that affected the savings rate and would have
helped the trade balance. I think you would have had more confidence in the
policy framework and you would have had a better dollar,” he says regretfully.
He pauses to reflect. “But we are where we are.”
This is what John Williamson of the Institute for International Economics
calls “the doctrine of immaculate transfer.” As I wrote a
very long time ago, ... I know
this is a bit obscurely written in economese. Here’s a (somewhat)
The problem becomes apparent if one asks how a higher savings rate translates
into a smaller trade deficit. It is not enough to insist that the accounting
ensures that it must. A consumer deciding between a Ford and a Honda cares
nothing about the US’s national income accounts. How does a lower US budget
deficit persuade Americans to buy fewer foreign goods and foreigners to buy more
Continue reading ""The Fallacy of 'Immaculate Transfer'"" »
Posted by Mark Thoma on Saturday, November 10, 2007 at 04:32 PM in Economics, International Finance |