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Fairness makes us happy:
Brain reacts to fairness as it does to money and chocolate, EurekAlert: The
human brain responds to being treated fairly the same way it responds to winning
money and eating chocolate, UCLA scientists report. Being treated fairly turns
on the brain's reward circuitry.
"We may be hard-wired to treat fairness as a reward," said study co-author
Matthew D. Lieberman, UCLA associate professor of psychology...
"Receiving a fair offer activates the same brain circuitry as when we eat
craved food, win money or see a beautiful face," said Golnaz Tabibnia, a
postdoctoral scholar at ... UCLA and lead author of the study...
The activated brain regions include the ventral striatum and ventromedial
prefrontal cortex. Humans share the ventral striatum with rats, mice and
monkeys, Tabibnia said.
"Fairness is activating the same part of the brain that responds to food in
rats," she said. This is consistent with the notion that being treated fairly
satisfies a basic need, she added.
In the study, subjects were asked whether they would accept or decline
another person's offer to divide money in a particular way. If they declined,
neither they nor the person making the offer would receive anything. Some of the
offers were fair, such as receiving $5 out of $10 or $12, while others were
unfair, such as receiving $5 out of $23.
"In both cases, they were being offered the same amount of money, but in one
case it's fair and in the other case it's not," Tabibnia said.
Almost half the time, people agreed to accept offers of just 20 to 30 percent
of the total money, but when they accepted these unfair offers, most of the
brain's reward circuitry was not activated; those brain regions were activated
only for the fair offers. Less than 2 percent accepted offers of 10 percent of
the total money. The study group consisted of 12 UCLA students...
"The brain's reward regions were more active when people were given a $5
offer out of $10 than when they received a $5 offer out of $23," Lieberman said.
"We call this finding the 'sunny side of fairness' because it shows the
rewarding experience of being treated fairly."
A region of the brain called the insula, associated with disgust, is more
active when people are given insulting offers, Lieberman said.
When people accepted the insulting offers, they tended to turn on a region of
the prefrontal cortex that is associated with emotion regulation, while the
insula was less active.
"We're showing what happens in the brain when people swallow their pride,"
Tabibnia said. "The region of the brain most associated with self-control gets
activated and the disgust-related region shows less of a response."
"If we can regulate our sense of insult, we can say yes to the insulting
offer and accept the cash," Lieberman said.
Can taking economics courses can to overcome the fairness
What We Learn, by Ray Fisman, Forbes: ...[W]e put 70 Yale Law students in a
computer lab, and had them play a game that would reveal to us their views on
fairness. (The study, which was coauthored with Shachar Kariv and Daniel
Markovits, can be found
The students made 50 decisions about giving. In some cases students started
with $10, and for each dollar they gave up, their (anonymous) partner in the
game would get, say, $5. In this case, giving was "cheap." In others, giving was
expensive (each dollar given up yielded only 20 cents for the partner).
Someone who gives a lot when it's cheap and keeps most of the pie for himself
when giving is expensive focuses on efficiency: He's making sure the maximum
amount is paid out to him and his partner combined. Someone who keeps 80% of the
pie when it would be cheap to give is more focused on equality. Someone who
always keeps everything, regardless of the price of giving, is just plain
selfish, the very embodiment of the rational, self-interested Homo economicus.
It turns out that exposure to economics makes a big difference in how
students split the pie, in terms of both efficiency and outright selfishness.
Students assigned to classes taught by economists were more likely to give a lot
when it was cheap to do so. But they were also much more likely to take the
whole pie for themselves.
Posted by Mark Thoma on Monday, April 21, 2008 at 04:09 PM in Economics, Equity, Science |
Jeronimo Cortina, Andrew Gelman, David Park, and Boris Shor ask: "Who are the values voters?" They find that values impact high income voters much more than low income voters. The one thing I wonder about is if we have enough controls in these studies, and if we are explaining the right thing. What we want to know is if, after taking out all the other things that might influence church attendance (or gun ownership), a fall in economic conditions (e.g. income) increases the likelihood of church attendance (which is different than voting Republican, though they are correlated). In addition, how important are economic factors relative to other factors? Suppose, for example, there is a variable that is correlated with income and has a very large impact on church attendance. Then, without a control for this variable, church attendance would appear to rise when income rises. But if the effect of this variable is taken out, there is no guarantee that this result would persist:
The opiate of the
elites, by Jeronimo Cortina, Andrew Gelman, David Park, and Boris Shor, Vox EU:
Barack Obama attracted attention recently by describing small-town Americans who
were “bitter” at economic prospects who “cling to guns or religion’’ in
frustration. This statement, made during the height of the Democratic nomination
battle, has received a lot of attention, but it represents a common view. For
example, Senator Jim Webb of Virginia
wrote, “Working Americans have been repeatedly seduced at the polls by
emotional issues such as the predictable mantra of ‘God, guns, gays, abortion
and the flag’ while their way of life shifted ineluctably beneath their feet.’’
And this perspective is not limited to Democrats. For example, conservative
columnist David Brooks
associates political preference with cultural values that are modern and
upscale (“sun-dried tomato concoctions”) or more traditional (“meatloaf
All these claims fit generally into the idea of religion as the opiate of the
masses, the idea that social issues distract lower-income voters from their
natural economic interests. But there is an opposite view, associated with
political scientist Ronald Ingelhart, of post-materialism—the idea that, as
people and societies get richer, their concerns shift from mundane
bread-and-butter issues to cultural and spiritual concerns.
Which story better describes how Americans vote? Who are the values voters?
Are they the poor (as implied by the “opiate of the masses’’ storyline) or the
rich (as would be predicted by “post-materialism”)?
Continue reading ""The Opiate of the Elites"" »
Posted by Mark Thoma on Monday, April 21, 2008 at 01:24 PM in Economics, Politics |
Will increasing world demand for limited resource supplies pose a threat to
world economic growth, or will technology keep peak oil and other such commodity
peaks safely out in front of us?:
Running Out of Planet to Exploit by Paul Krugman, Commentary, NY Times: ...Last week, oil hit $117. It’s not just oil... Food prices have also
soared, as have the prices of basic metals. And the global surge in commodity
prices is reviving a question we haven’t heard much since the 1970s: Will
limited supplies of natural resources pose an obstacle to future world economic
How you answer ... depends largely on what you believe is driving the rise in
resource prices. Broadly speaking, there are three competing views.
The first is that it’s mainly speculation — that investors ... at a time of
low interest rates have piled into commodity futures, driving up prices. On this
view, someday soon the bubble will burst and high resource prices will go the
way of Pets.com.
The second view is that soaring resource prices do, in fact, have a basis in
fundamentals — especially rapidly growing demand from newly meat-eating,
car-driving Chinese — but that given time we’ll drill more wells, plant more
acres, and increased supply will push prices right back down again.
The third view is that the era of cheap resources is over for good — ...we’re
running out of oil, running out of land to expand food production and generally
running out of planet to exploit.
I find myself somewhere between the second and third views.
There are some very smart people ... who believe that we’re in a commodities
bubble... My problem with this view...: Where are the inventories?
...inventories of food and metals are at or near historic lows, while oil
inventories are only normal.
The best argument for the second view, that the resource crunch is real but
temporary, is the strong resemblance between ... now and ... the 1970s.
What Americans mostly remember about the 1970s are soaring oil prices... But
there was also a severe global food crisis...
In retrospect, the commodity boom of 1972-75 was probably the result of rapid
world economic growth that outpaced supplies,... bad weather and Middle Eastern
conflict. Eventually, the bad luck came to an end, new land was placed under
cultivation, new sources of oil were found..., and resources got cheap again.
But this time may be different: concerns about what happens when an
ever-growing world economy pushes up against the limits of a finite planet ring
truer now than they did in the 1970s.
For one thing, I don’t expect growth in China to slow sharply anytime soon.
That’s a big contrast with ... the 1970s, when growth in Japan and Europe ...
downshifted — and thereby took ... pressure off ... resources.
Meanwhile,... Big oil discoveries ... have become few and far between, and in
the last few years oil production from new sources has ... barely ... offset
declining production from established sources.
And the bad weather hitting agricultural production this time is starting to
look more fundamental and permanent... Australia, in particular, is now in the
10th year of a drought that looks more and more like a long-term manifestation
of climate change.
Suppose that we really are running up against global limits. What does it
Even if it turns out that we’re really at or near peak world oil production,
that doesn’t mean that one day we’ll say, “Oh my God! We just ran out of oil!”
and watch civilization collapse into “Mad Max” anarchy.
But rich countries will face steady pressure on their economies from rising
resource prices, making it harder to raise their standard of living. And some
poor countries will find themselves living dangerously close to the edge — or
Don’t look now, but the good times may have just stopped rolling.
Posted by Mark Thoma on Monday, April 21, 2008 at 12:24 AM in Economics, Oil, Productivity, Technology |
Tim Duy looks for signs that the bottom of the cycle is approaching:
Time to Think About The Other Side?, by Tim Duy: It is easy to fall
into “the world is ending” trap. But economic downturns do not last
forever, and the current episode is no exception. Ever since last summer, the
yield curve, particularly the 10-2 steepness, has been sending a signal that I
find difficult to ignore – a signal that the technical recession will be rather
shallow and short-lived. Indeed, the 10-2 spread currently is consistent with
the end rather than the beginning of a downturn:
Continue reading "Fed Watch: Time to Think About The Other Side?" »
Posted by Mark Thoma on Monday, April 21, 2008 at 12:21 AM in Economics, Fed Watch, Monetary Policy |
Thomas Frank on the culture war:
Obama's Touch of Class, by Thomas Frank, Commentary, WSJ [open link]: ...According to the general clucking of the national punditry, my 2004 book –
"What's the Matter With Kansas?" – is supposed to have persuaded Barack Obama to
describe the yeomanry of Pennsylvania as "bitter" people who "cling to guns or
religion or . . . anti-trade sentiment as a way to explain their frustrations."
The media flurry kicked up by Mr. Obama's gaffe powerfully confirms an
argument I ... make: That as they return again to the culture war, what the
soldiers on all sides are doing is talking about class without actually
addressing the economic basis of the subject.
Consider, for example, the one fateful charge ... fastened upon Mr. Obama –
"elitism." No one means ... Mr. Obama is a wealthy person... What they mean is
that he has committed a crime of attitude, and revealed his disdain for the
It is a stereotype you have heard many times before: Besotted with
latte-fueled arrogance, the liberal looks down on average people... He scoffs at
religion because he finds it to be a form of false consciousness. He believes in
regulation because he thinks he knows better than the market. ...
Mr. Obama reminds columnist George Will of Adlai Stevenson, rolled together
with the sinister historian Richard Hofstadter and the diabolical economist J.K.
Galbraith, contemptuous eggheads all. Mr. Obama strikes Bill Kristol as some
kind of "supercilious" Marxist. ...
Ah, but Hillary Clinton: Here's a woman who drinks shots of Crown Royal...
And when the former first lady talks about her marksmanship as a youth, who
cares about the cool hundred million she and her husband have mysteriously piled
up...? Or her years of loyal service to Sam Walton, that crusher of small towns
and enemy of workers' organizations? ... Didn't he have a funky Southern
accent...? Surely such a mellifluous drawl cancels any possibility of elitism.
It is by this familiar maneuver that the people who have ... brought the
class divide back to America – the people who have actually, really transformed
our society from an egalitarian into an elitist one – perfume themselves with
the essence of honest toil, like a cologne distilled from the sweat of laid-off
workers. Likewise do their retainers in the wider world – the conservative
politicians and the pundits who lovingly curate all this phony authenticity –
become jes' folks, the most populist fellows of them all.
But suppose we read on, and we find the news item about the hedge fund
managers who made $2 billion and $3 billion last year, or the story about the
vaporizing of our home equity. Suppose we become a little . . . bitter about
this. What do our pundits and politicians tell us then?
That there is no place for such sentiment in the Party of the People. That
"bitterness" is an ugly and inadmissible emotion. That "divisiveness" is a thing
to be shunned at all costs.
Conservatism, on the other hand, has no problem with bitterness... They have
welcomed it, they have flattered it, they have invited it in with millions of
treason-screaming direct-mail letters, they have given it a nice warm home on
angry radio shows... There is not only bitterness out there; there is a
Consider the shower of right-wing love that descended in February on
small-town newspaper columnist Gary Hubbell, who penned this year's great eulogy
of the "angry white man," the "man's man" who "works hard," who "knows that his
wife is more emotional than rational," and who also, happily, knows how to
"change his own oil and build things."
This stock character, unchanged ... in the culture-war battles of the last
few decades, is said to be as furious as ever, and still blaming the same
villains for his problems: namely intellectuals, in the guise of "judges who
have never worked an honest day in their lives." But what he really wants is a
chance to vote against Hillary Clinton, and "make sure she gets beaten like a
drum." I guess our angry toiler didn't yet know about the Crown Royal.
If Barack Obama or anyone else really cares to know what I think, I will
simplify it all down to this. The landmark political fact of our time is the
replacement of our middle-class republic by a plutocracy. If some candidate has
a scheme to reverse this trend, they've got my vote, whether they prefer
Courvoisier or beer bongs spiked with cough syrup. I don't care whether they
enjoy my books, or would rather have every scrap of paper bearing my writing
loaded into a C-47 and dumped into Lake Michigan. If it will help restore the
land of relative equality I was born in, I'll fly the plane myself.
Posted by Mark Thoma on Monday, April 21, 2008 at 12:18 AM in Economics, Politics |
Posted by Mark Thoma on Monday, April 21, 2008 at 12:06 AM in Links |
Wolfgang Münchau says monetary policy shows "contempt for the poor":
The princess’s cake gets an added crunch, by Wolfgang Münchau, Commentary,
Financial Times: “I remembered the way out suggested by a great princess
when told that the peasants had no bread: ‘Well, let them eat cake.’”
Jean-Jacques Rousseau, Confessions
When I saw reports of food riots, I was reminded of these immortal words,
often attributed to Marie Antoinette, although there is no evidence that she
used them. The modern equivalent to “let them eat cake” is: “Core inflation is
well contained.” Core inflation is a measure that excludes goods whose prices
are currently rising the most – food and oil. It is a popular concept among
some central bankers and academics, and an insult to consumers...
The global rate of headline inflation is 4.5 per cent and rising. Some
economists had us believe a year ago that the rise in inflation was just a
blip. But it kept on blipping. ... Now, they say it will fall next year.
We can waste a lot of time talking about the mechanics of the oil market or
about speculators. Persistent inflation is not caused by oil sheikhs, ethanol
producers or retailers, but by monetary authorities. A point Milton Friedman
once made ... is that “inflation is always and everywhere a monetary
phenomenon”. The rise in commodity prices is the consequence of a
credit-financed economic expansion that has hit natural supply constraints. It
is a very familiar story, except for geography. ... Too much money is ...
chasing too few goods –... it creates an asset price bubble on the way.
Unsurprisingly, not everybody agrees. There are four common, and not very
convincing, arguments. First, core inflation is under control. Yes, incredibly,
people are actually making that argument. ...
Second, financial market indicators do not show any strong evidence of a
rise in long-term inflationary expectations. ... In fact, some of these
indicators have actually gone up a little. But more importantly, they are not
really forward-looking. The yield difference tells us more about liquidity
conditions in those markets than about future inflation.
Third, the expected slowdown of US and global economic growth will take care
of the inflation problem. A devastating global depression would probably have
that effect. But fortunately, the world economy will be spared this calamity.
... The US recession will put a temporary lid on US inflation but, once the
recession is over, prices will go up.
Finally, there is an argument I have been hearing a lot more recently: why
bother? Let inflation go up a little. It oils the wheels of the adjustment, in
particular for house owners.
Unfortunately, this may work for people with high levels of mortgage debt,
but not for the poor and those on fixed incomes. ... Since poorer people spend
a higher proportion of income on food and petrol than middle-class people, the
inflation rise hits them hard. Higher inflation is the transfer of wealth from
the poor to the middle classes. You might as well say: if you cannot afford the
bread, let me eat the cake. ...
I expect that the biggest danger to global economic stability will be not
the credit crisis, but the way we are overreacting to it. Both in the US, and
increasingly in Europe as well, monetary policies are no longer consistent with
price stability. Since a pre-revolutionary contempt for the poor is a side
effect of this policy, I suspect Rousseau’s unnamed princess would have found
our early 21st century most congenial.
A key part of this story is that monetary policy caused the increase in food
and oil prices. I'll just add this:
Commodities and speculation: metallic evidence, by Paul Krugman: We’ve had
a huge runup in commodity prices — fuels, food, metals. But why? Broadly, the
debate is between those who see it as a speculative phenomenon, driven by some
combination of low interest rates and irrational exuberance, and those who see
it as a collision of rapidly growing demand with constrained supply.
My problem with the speculative stories is that they all depend on something
that holds production — or at least potential production — off the market. The
key point is that the spot price equalizes the demand and supply of a
commodity; speculation can drive up the futures price, but the spot price will
only follow if the higher futures prices somehow reduces the quantity available
for final consumers. The usual channel for this is an increase in inventories,
as investors hoard the stuff in expectation of a higher price down the road. If
this doesn’t happen — if the spot price doesn’t follow the futures price — then
futures will presumably come down, as it turns out that buying futures produces
Which brings me to this chart, from the IMF’s
bubble, where’ the bubble?
As far as I can see, this creates real problems for any claim that high
metal prices are speculatively driven. Food inventories are also historically
low. I just don’t see how a low-interest-rate or bubble story works here.
Posted by Mark Thoma on Sunday, April 20, 2008 at 01:05 PM in Economics, Monetary Policy |
George Will tries to talk about Fed policy, but if you don't understand the
Fed's goals - and he doesn't - then the analysis of policy will be based on a
faulty premise and reach incorrect conclusions. George Will
The Fed's mission is to preserve the currency as a store of value by
preventing inflation. ... The Fed should not try to produce this or that rate
of economic growth or unemployment
But that's wrong. As Mishkin
In a democratic society like our own, the ultimate purpose of the central
bank is to promote the public good by pursuing a course of monetary policy that
fosters economic prosperity and social welfare. In the United States, as in
virtually every other country, the central bank has a more specific set of
objectives that have been established by the government. This mandate was
originally specified by the Federal Reserve Act of 1913 and was most recently
clarified by an amendment to the Federal Reserve Act in 1977.
According to this legislation, the Federal Reserve's mandate is "to promote
effectively the goals of maximum employment, stable prices, and moderate
long-term interest rates." Because long-term interest rates can remain low only
in a stable macroeconomic environment, these goals are often referred to as the
dual mandate; that is, the Federal Reserve seeks to promote the two
coequal objectives of maximum employment and price stability.
How concerned is George Will about the working class and employment? Should
we use monetary policy to try to stimulate employment even if there's a chance
of inflation? Not in George Will's world:
A surge of inflation might mean the end of the world as we have known it.
He ends his column by putting his analytical skills to work:
If Congress cannot suppress its itch to "do something" while markets are
correcting the prices of housing and money, Congress could pass a law saying:
No company benefiting from a substantial federal subvention ... may pay any
executive more than the highest pay of a federal civil servant ($124,010). That
would dampen Wall Street's enthusiasm for measures that socialize losses while
keeping profits private.
First he tells us - incorrectly - that the Fed's sole job is to "to preserve
the currency as a store of value." But now he tells us that government should
not intervene when markets are "correcting the prices of housing and money." So
which is it, do we let markets correct the price of money or not?
He doesn't think the Fed should do anything to help the working class stay employed, but that didn't stop him from trying to make the case in his last column that Democrats, Barrack Obama in particular, follow a "doctrine of condescension toward those people":
What had been under FDR a celebration of America and the values of its
working people has become a doctrine of condescension toward those people...
That is, of course, a crock, but what is the condescension here? I think
making up Fed goals to support a policy that ignores working class' needs is the
condescending act. It's telling in any case.
Why is George Will so elitist? Maybe it's his
Barack Obama's comments about the white working class have thrown the
political campaign into a particularly comic spasm of pretense and hypocrisy,
but I was planning to let it go, I really was, until George F. Will decided to
leap to the defense of the proletariat. Yes, that George F. Will. The
fabulously wealthy, bow tie-wearing, pretentious reference-mongering,
Anglophilic fop who grew up in a university town as a professor's son, earned
two advanced degrees, has a designated table at a French restaurant in
Georgetown, and, had he dwelt for any extended time among the working class,
would be lucky to escape without his underwear being yanked up over his ears.
George, stick to writing about baseball. I don't know if your analytical
skills are any better, probably not, and let's hope it doesn't somehow fool
people into thinking you are "regular folks," you're not, but making the heroic
assumption that the things you write matter at all, at least the damage you can
do from misinforming people will be limited to baseball rather than having the
potential to cost people their jobs.
Posted by Mark Thoma on Sunday, April 20, 2008 at 11:21 AM in Economics, Inflation, Monetary Policy, Unemployment |
Posted by Mark Thoma on Sunday, April 20, 2008 at 12:06 AM in Links |
Greg Mankiw on the sources of rising inequality:
The Wealth Trajectory: Rewards for the Few, by N. Gregory Mankiw, Economic
View, NY Times: If there is one thing about the United States economy in recent years that is
beyond dispute, it is this: It’s a great time to be rich. ...
You see it in the daily headlines... Lloyd C. Blankfein, chief executive of
Goldman Sachs, took home $68.5 million last year.... Bill and Hillary Clinton
raked in $109 million. These stories are not mere aberrations. According to the
economists who crunch the numbers, they reflect a long-term trend of increasing
The best data on the superrich comes from Thomas Piketty ... and Emmanuel
Saez... They report that ... the superrich have been getting an increasing slice
of the economic pie. In 1980, the top 0.01 percent of the population had 0.87
percent of total income. By 2006, their share had more than quadrupled to 3.89
percent, a level not seen since 1916.
Critics of the Piketty-Saez data argue, with some justification, that tax
return data is unreliable. ... It is hard to escape the conclusion, however,
that Professors Piketty and Saez are finding something real. ...
Offsetting this trend to some degree is the shrinking gender gap. Female
workers started well below their male counterparts and have been catching up.
But despite this equalizing force, the earnings ratio of the 90th to 10th
percentiles, men and women combined, has risen 30 percent.
What accounts for rising inequality? Some pundits are tempted to look inside
the Beltway for a cause, but the case is hard to make. Government policy makers
do not have the tools to exert such a strong influence over pretax earnings,
even if they wanted to do so.
Also, the trend toward increasing inequality has been fairly steady, despite
changing political winds. The income share of the richest families increased
substantially both during Ronald Reagan’s eight years in office and during Bill
The best diagnosis so far comes from ... Claudia Goldin and Lawrence F.
Katz... Their bottom line: “the sharp rise in inequality was largely due to an
According to Professors Goldin and Katz, for the past century technological
progress has been a steady force not only increasing average living standards,
but also increasing the demand for skilled workers relative to unskilled
For much of the 20th century, however, skill-biased technological change was
outpaced by advances in educational attainment. In other words, while
technological progress increased the demand for skilled workers, our educational
system increased the supply of them even faster. As a result, skilled workers
did not benefit disproportionately from economic growth.
But recently things have changed. Over the last several decades, technology
has kept up its pace, while educational advancement has slowed down. ...
Because growth in the supply of skilled workers has slowed, their wages have
grown relative to those of the unskilled. This shows up in the estimates of the
financial return to education made by Professors Goldin and Katz. In 1980, each
year of college raised a person’s wage by 7.6 percent. In 2005, each year of
college yielded an additional 12.9 percent. The rate of return from each year of
graduate school has risen even more — from 7.3 to 14.2 percent.
While education is the key to understanding broad inequality trends, it is
less obvious whether it can explain the incomes of the superrich. Simply going
to college and graduate school is hardly enough to join the top echelons...
But neither is education irrelevant. If Mr. Blankfein had left the New York
public school system and gone directly to work, instead of attending Harvard
College and Law School, most likely he would not be the head of a major
investment bank today.
If the Clintons had been content with high school diplomas and not attended
Georgetown, Wellesley, Oxford and Yale, they most likely would not ... now be
getting multimillion-dollar book deals and $100,000 speaking dates. A top
education is no guarantee of great riches, but it often helps.
Maybe educational levels are like Willie Wonka’s chocolate bars. A few of
them come with golden tickets that give you opportunities almost beyond
imagination. But even if you aren’t lucky enough to get a golden ticket, you can
still enjoy the chocolate, which by itself is well worth the price.
More from Goldin and Katz on this topic here (see also Krugman: Graduates Versus Oligarchs, Acemoglu: The Source of Rising Inequality, Delong: Driving Forces Behind Rising Income Inequality: Tracking the Internet Debate, and Yellen: Economic Inequality in the United States).
Frank Levy and Peter Temin
provide one counterargument:
institutions in 20th century America, by Frank Levy and Peter Temin, Vox EU:
A central feature of post-World War II America was mass upward mobility:
individuals seeing sharply rising incomes through much of their careers, and
each generation living better than the last. It therefore is problematic that
recent productivity gains have not significantly raised incomes for most
American workers. In the quarter century between 1980 and 2005, business
productivity increased by 71%. Over the same quarter century, median weekly
earnings of full-time workers rose from $613 to $705, a gain of only 14%
(figures in 2005 dollars), as our recent research shows.
Detailed analysis of these years shows that college-educated women are the
only large labour-force group for whom median compensation grew in line with
Continue reading "Mankiw: The Wealth Trajectory: Rewards for the Few" »
Posted by Mark Thoma on Saturday, April 19, 2008 at 02:43 PM in Economics, Income Distribution, Politics, Universities |
This is about the "effort to dupe the American public with propaganda
dressed as independent military analysis."
Continue reading "About Those TV Generals..." »
Posted by Mark Thoma on Saturday, April 19, 2008 at 02:34 PM in Iraq and Afghanistan, Press |
How different is the present financial crisis from those in the past, i.e.
over the last eight centuries?
Eight hundred years of
financial folly, by Carmen M. Reinhart, Vox EU: History is indeed
little more than the register of the crimes, follies, and misfortunes of
mankind. – Edward Gibbon
The economics profession has an unfortunate tendency to view recent
experience in the narrow window provided by standard datasets. With a few
notable exceptions, cross-country empirical studies of financial crises
typically begin in 1980 and are limited in other important respects. Yet an
event that is rare in a three-decade span may not be all that rare when placed
in a broader context.
In a recent paper co-authored with Kenneth Rogoff, we introduce a
comprehensive new historical database for studying debt and banking crises,
inflation, currency crashes and debasements. The database covers sixty-six
countries across all regions. The range of variables encompasses external and
domestic debt, trade, GNP, inflation, exchange rates, interest rates, and
commodity prices. The coverage spans eight centuries, going back to the date of
independence or well into the colonial period for some countries.
In what follows, I sketch some of the highlights of the dataset, with
special reference to the current conjuncture. We note that policymakers should
not be overly cheered by the absence of major external defaults from 2003 to
2007, after the wave of defaults in the preceding two decades. Serial default
remains the norm; major default episodes are typically spaced some years (or
decades) apart, creating an illusion that “this time is different” among
policymakers and investors. We also find that high inflation, currency crashes,
and debasements often go hand-in-hand with default. Last, but not least, we
find that historically, significant waves of increased capital mobility are
often followed by a string of domestic banking crises.
Continue reading ""Eight Hundred Years of Financial Folly"" »
Posted by Mark Thoma on Saturday, April 19, 2008 at 02:20 AM in Economics, Financial System |
Dani Rodrik categorizes the different approaches to regulation of financial
Financial innovation: a case of aspirin or amphetamines?, by Dani Rodrik,
Project Syndicate: ...[A] half-century of financial stability lulled
advanced economies into complacency. That stability reflected a simple quid pro
quo... Governments brought commercial banks under prudential regulation in
exchange for public provision of deposit insurance and lender-of-last-resort
functions. Equity markets were subjected to disclosure and transparency
But financial deregulation in the 1980s ushered us into uncharted territory.
Deregulation promised to spawn financial innovations that would enhance access
to credit, enable greater portfolio diversification, and allocate risk to those
most able to bear it. Supervision and regulation would stand in the way,
What a difference today's crisis has made. We now realize even the most
sophisticated market players were clueless about the new financial
instruments..., and no one now doubts that the financial industry needs an
But what, exactly, needs to be done? Economists who focus on such issues
tend to fall into three groups.
First are the libertarians... If you are selling a piece of paper..., it is
my responsibility to know what I am buying... If my purchase harms me, I have
nobody to blame but myself. I cannot plead for a government bailout.
Non-libertarians recognize the fatal flaw in this argument : Financial
blow-ups entail ... "systemic risk" - everyone pays a price..., the government
may need to bail out private institutions to prevent a panic that would lead to
worse consequences elsewhere. Thus, many financial institutions, especially the
largest, operate with an implicit government guarantee. This justifies
government regulation of lending and investment practices.
For this reason, economists in both the second and third groups - call them
finance enthusiasts and finance skeptics - are more interventionist. But the
extent of intervention they condone differs...
Finance enthusiasts tend to view every crisis as a learning opportunity.
While prudential regulation and supervision can never be perfect, extending
such oversight to hedge funds and other unregulated institutions can still
moderate the downsides. If things get too complicated for regulators, the job
can always be turned over to ... rating agencies and financial firms' own risk
models. The gains from financial innovation are too large for more heavy-handed
Finance skeptics disagree. They are less convinced that recent financial
innovation has created large gains..., and they doubt that prudential
regulation can ever be sufficiently effective. True prudence requires ... a
broader set of policy instruments, including quantitative ceilings, transaction
taxes, restrictions on securitization, prohibitions, or other direct
inhibitions... - all of which are anathema to most financial market
In effect, finance enthusiasts are like America's gun advocates who argue
that "guns don't kill people; people kill people." The implication is clear:
Punish only people who use guns to commit crimes, but do not penalize others by
restricting their access to guns. But, because we cannot be certain that the
threat of punishment deters all crime, or that all criminals are caught, our
ability to induce gun owners to behave responsibly is limited.
As a result, most advanced societies impose direct controls on gun
ownership. Likewise, finance skeptics believe that our ability to prevent
excessive risk-taking in financial markets is equally limited.
Whether one agrees with the enthusiasts or the skeptics depends on one's
views about the net benefits of financial innovation. Returning to the example
of drugs, the question is whether one believes that financial innovation is
like aspirin, which generates huge benefits at low risk, or methamphetamine,
which stimulates euphoria, followed by a dangerous crash.
I think the benefits of deregulation are large, there has been a lot of very
useful financial innovation that we now take for granted that would not have
occurred under the old regulatory regime. I don't want the same restrictions in
place now that were in place in 1980 - I could hardly get cash out of state. But
some restrictions should have stayed in place, and others should have evolved
with the market but didn't. So I also think we need to bring a broad set of
policy instruments to these markets to help them function effectively and to think about how to create more responsive regulatory structures going forward. Avoiding meltdowns will allow us realize the benefits of financial innovation on a consistent basis. And I don't think that's an impossible task, we had a "half-century of financial stability," that's not so bad, nor do I think
regulation is necessarily inconsistent with the incentive to innovate -
effective regulation can create the kinds of stable, competitive conditions
where financial innovation can flourish. So, I
guess I don't fit very well into any of the libertarian, finance enthusiast, or
finance skeptic categories.
Posted by Mark Thoma on Saturday, April 19, 2008 at 12:21 AM in Economics, Financial System, Regulation |
Posted by Mark Thoma on Saturday, April 19, 2008 at 12:06 AM in Links |
We the undersigned deplore the conduct of ABC's George Stephanopoulos and
Charles Gibson at the Democratic Presidential debate on April 16. The debate was
a revolting descent into tabloid journalism and a gross disservice to Americans
concerned about the great issues facing the nation and the world. This is not
the first Democratic or Republican presidential debate to emphasize gotcha
questions over real discussion. However, it is, so far, the worst.
For 53 minutes, we heard no question about public policy from either
moderator. ABC seemed less interested in provoking serious discussion than in
trying to generate cheap shot sound-bites for later rebroadcast. The questions
asked by Mr. Stephanopoulos and Mr. Gibson were a disgrace, and the subsequent
attempts to justify them by claiming that they reflect citizens' interest are an
insult to the intelligence of those citizens and ABC's viewers. Many thousands
of those viewers have already written to ABC to express their outrage.
The moderators' occasional later forays into substance were nearly as bad.
Mr. Gibson's claim that the government can raise revenues by cutting capital
gains tax is grossly at odds with what taxation experts believe. Both candidates
tried, repeatedly, to bring debate back to the real problems faced by ordinary
Americans. Neither moderator allowed them to do this.
We're at a crucial moment in our country's history, facing war, a terrorism
threat, recession, and a range of big domestic challenges. Large majorities of
our fellow Americans tell pollsters they're deeply worried about the country's
direction. In such a context, journalists moderating a debate--who are, after
all, entrusted with free public airwaves--have a particular responsibility to
push and engage the candidates in serious debate about these matters. Tough,
probing questions on these issues clearly serve the public interest. Demands
that candidates make pledges about a future no one can predict or excessive
emphasis on tangential "character" issues do not. This applies to candidates of
Neither Mr. Gibson nor Mr. Stephanopoulos lived up to these responsibilities.
In the words of Tom Shales of the Washington Post, Mr. Gibson and Mr.
Stephanopoulos turned in "shoddy, despicable performances." As Greg Mitchell of
Editor and Publisher, describes it, the debate was a "travesty." We hope that
the public uproar over ABC's miserable showing will encourage a return to
serious journalism in debates between the Democratic and Republican nominees
this fall. Anything less would be a betrayal of the basic responsibilities that
journalists owe to their public.
Spencer Ackerman, The
Thomas Adcock, New York Law Journal
Eric Alterman, City University of New York
Dean Baker, The American Prospect Online
Steven Benen, The Carpetbagger Report
Julie Bergman Sender, Balcony Films
Ari Berman, The Nation
Brian Beutler, The Media Consortium
Michael Bérubé, Crooked Timber, Penn. State University
Joel Bleifuss, In These
Sam Boyd, The American Prospect
Will Bunch, Philadelphia Daily News
Lakshmi Chaudry, In These Times
Michael Cohen, The New America Foundation
Lark Corbeil, Public News Service
Brad DeLong, Brad DeLong's
Semi-Daily Journal and UC Berkeley
Adam Doster, In These Times
Kevin Drum, The Washington Monthly
Gerald Dworkin, UC Davis
Henry Farrell, Crooked Timber,George Washington University
James Galbraith, University of Texas at Austin
Todd Gitlin, Columbia University, TPM Cafe
Merrill Goozner (formerly Chicago Tribune)
Ilan Goldenberg, The National Security Network
Arthur Goldhammer, Harvard University
Robert Greenwald, Brave New
Chris Hayes, The Nation
Don Hazen, Alternet
James Johnson, University of Rochester
Michael Kazin, Georgetown University
Ed Kilgore, The Democratic Strategist
Charlie Kireker, Air America Media
Richard Kim, The Nation
Ezra Klein, The American Prospect
Mark Kleiman, The Reality Based Community, UCLA
Ralph Luker, Cliopatria
Scott McLemee, Inside Higher Ed
Ari Melber, The Nation
Luke Mitchell, Harper's Magazine
Rick Perlstein, Campaign for America's Future
Katha Pollit, The Nation
Joy-Ann Reid, The South Florida Times
David Roberts, Grist
Thomas Schaller, Columnist, The Baltimore Sun
Adele Stan, The Media Consortium
Jonathan Stein, Mother Jones Magazine
Rinku Sen, ColorLines Magazine
Matthew Shugart, UC San Diego
Matt Steinglass, Deutsche Presse-Agentur
Mark Thoma, The Economist's View
Michael Tomasky, The
Cenk Uygur, The Young
Tracy Van Slyke, The Media
J. Harry Wray, DePaul University
Kai Wright, The Root
Matthew Yglesias, The Atlantic Monthly
[Update: In case there is any confusion, I should have made clear that the letter is a group effort.]
Posted by Mark Thoma on Friday, April 18, 2008 at 09:09 AM in Economics, Press |
Paul Krugman looks at the economics, sociology, and political science in Barack Obama's recent statements:
Clinging to a Stereotype, by Paul Krugman, Commentary, NY Times: Will
Barack Obama’s now famous “bitter” quote turn out to have been a big deal
politically? Frankly, I have no idea. But here’s a different question: was Mr.
Mr. Obama’s comments combined assertions about economics, sociology and
voting behavior. In each case, his assertion was mostly if not entirely wrong.
Start with the economics. Mr. Obama: “You go into these small towns ... in
the Midwest, the jobs have been gone now for 25 years and nothing’s replaced
them. And they fell through the Clinton administration, and the Bush
There are, indeed, towns where the mill closed during the 1980s and nothing
has replaced it. But..., the Clinton years were very good for working Americans
in the Midwest, where real median household income soared before crashing after
the numbers at my blog.)
We can argue about how much credit Bill Clinton deserves... But if I were a
Democratic Party elder, I’d urge Mr. Obama to stop blurring the distinction
between Clinton-era prosperity and Bush-era economic distress.
Next, the sociology: “And it’s not surprising then that they get bitter,
they cling to guns or religion or antipathy toward people who aren’t like
The crucial word here isn’t “bitter,” it’s “cling.” Does economic hardship
drive people to seek solace in firearms, God and xenophobia?
It’s true that people in poor states are more likely to attend church
regularly... But this result largely reflects ... that southern states are both
church-going and poor... Furthermore, within poor states, people with low
incomes are actually less likely to attend church... Over all, none of this
suggests that people turn to God out of economic frustration.
Finally, Mr. Obama, in later clarifying remarks, declared that the people
he’s talking about “don’t vote on economic issues,” and are motivated instead
by things like guns and gay marriage.
That’s a political theory made famous by Thomas Frank’s “What’s the Matter
With Kansas?” According to this theory, “values” issues lead working-class
Americans to act against their own interests by voting Republican...
I was impressed by Mr. Frank’s book when it came out. But ... Larry Bartels
... convinced me that Mr. Frank was mostly wrong...
Mr. Bartels cited data showing that small-town, working-class Americans are
actually less likely ... to vote on the basis of religion and social values.
Nor have working-class voters trended Republican..., Democrats do better with
these voters now than they did in the 1960s. ...
So why have Republicans won so many elections? In his book, “Unequal
Democracy,” Mr. Bartels shows that “the shift of the Solid South from
Democratic to Republican control in the wake of the civil rights movement”
explains all — literally all — of the Republican success story.
Does it matter that Mr. Obama has embraced an incorrect theory about what
motivates working-class voters? His campaign certainly hasn’t been based on Mr.
Frank’s book, which calls for a renewed focus on economic issues as a way to
win back the working class.
Indeed, the book concludes with a blistering attack on Democrats who cater
to “affluent, white-collar professionals who are liberal on social issues”
while “dropping the class language that once distinguished them sharply from
Republicans.” Doesn’t this sound a bit like the Obama campaign?
Anyway, the important point is that working-class Americans do vote on
economic issues — and can be swayed by a politician who offers real answers to
And one more thing: let’s hope that once Mr. Obama is no longer running
against someone named Clinton, he’ll stop denigrating the very good economic
record of the only Democratic administration most Americans remember.
Posted by Mark Thoma on Friday, April 18, 2008 at 12:51 AM in Economics, Politics |
Another attempt to blame the Community Reinvestment Act for the subprime crisis. Don't believe a word of it:
Don't Blame the Markets, by
Jerry Bowyer, Commentary, NY Sun: The government compels banks to make
loans in poor neighborhoods even if the applicants are not considered prime
borrowers. You may not know about that because the Community Reinvestment Act
is not exactly a household ... name.
But the commercial banks do know about it. ... They get a CRA rating. They
know that the way to get a high CRA rating is to make loans to poor applicants
or in poor urban neighborhoods regardless of the financial prudence of the
They know that if they don't do this, they will be punished severely by the
regulators... So, they grit their teeth and stamp a big inky "yes" on an
application which they know, according to traditional financial standards,
deserves a "no."
Up until 1995 the Community Reinvestment Act was largely a requirement to
support "community groups" in poor neighborhoods. ... But after 1995 the scope
of the law was dramatically increased.
Over the strenuous objections of the banks themselves and some Republicans
in Congress, CRA was renewed and modified in such a way that it gave far more
power to the federal government to punish banks for not lending more widely in
poor neighborhoods. The classic "fair housing" laws from the Martin Luther King
Jr. era of civil rights were deemed insufficient. ... Subprime loans to minority applicants exploded ten fold in the mid-1990s as
a result. ...
Under New Deal-era regulatory rules of Glass-Steagall, commercial banks and
investment banks were separated. When that act was repealed as part of banking
deregulation in 1999, commercial banks and investment banks were able to merge,
subject to approval by regulators.
However, the banks' CRA rating was taken into account in the decision. This
meant that a high CRA rating became an important prerequisite for mergers,
which increased the pressure on the banks to make these risky loans. The banks
also were given permission to put these loans into packages of securities that
could then be sold into investment markets.
Last week, a front page Wall Street Journal article set off a national
debate about the legacy of Alan Greenspan. ... But it is not Mr. Greenspan's
fault that Congress substituted identity politics for financial prudence...
The fault lies with the small army of hard left political hustlers who spent
the early 1990s pushing risky mortgages on home lenders. And the fault lies
especially with the legislators that gave them the power to do it.
As noted below, what a load of crap (which is the null hypothesis, or better,
the exceptionally strong prior, whenever you see anything with byline on the article above). Here's
The new line we're hearing is that the financial meltdown was really the
product of the Community Reinvestment Act, a piece of legislation from the
late-70s that required federally-insured banks to lend throughout the areas
from which they take deposits, including poor neighborhoods, which were being
systematically excluded from credit. The legislation, by all accounts, worked.
Now, however, conservatives are trying to argue that it's behind the crisis: If
the CRA hadn't been pushing these banks to make all these unsafe loans, then
the birds would still sing...
As Robert Gordon
shows, however, this is crap. First, there's the timing. CRA came in 1977.
The crisis came in 2007. Indeed, by 2004, the Bush administration had weakened
the CRA -- and after that (though not, presumably, because of it), bubble
lending really took off. Further, CRA only governs a certain class of federally
insured banks. Problem is, half of the subprime loans came from mortgage
companies with no CRA involvement at all. Another 25%-30% came from companies
with very little CRA exposure. For those who left their abacus at home, that's
80% of the loans which were fully or largely outside CRA jurisdiction. More
than that, the non-CRA mortgage firms made subprime loans at twice the rate of
CRA-covered firms. Which basically leaves a stake in the heart of this
particular theory. Indeed, until now, some conservatives have been moaning that
no one is talking about the CRA part because it's so racially charged.
Poppycock. It's just a false charge...
Ezra didn't cover the change in 1995, except indirectly by noting the timing
of the crisis, but for completeness, here's
Robert Gordon. He also covers why the merger argument is flawed:
In the mid-1990s, new CRA regulations and a wave of mergers led to a flurry
of CRA activity, but, as noted by the New America Foundation's Ellen Seidman
(and by Harvard's Joint Center), that activity "largely came to an end by
2001." In late 2004, the Bush administration announced plans to sharply weaken
CRA regulations, pulling small and mid-sized banks out from under the law's
toughest standards. Yet sub-prime lending continued, and even intensified -- at
the very time when activity under CRA had slowed and the law had weakened...
The real agenda behind this shameless push to blame the CRA is evident.
Update: See here too.
Posted by Mark Thoma on Friday, April 18, 2008 at 12:33 AM in Economics, Housing, Politics, Regulation |
This post from yesterday asks whether full disclosure alone is sufficient to
protect consumers in mortgage markets, or whether regulations to restrict the
terms that can be offered on mortgages are also necessary to protect consumers from assuming too much risk. For credit cards, which, like
mortgages, are becoming increasingly complex, the Fed has decided that "Careful
measures that would restrict credit card terms or practices may in some
instances be more effective than disclosure to prevent particular consumer
Credit cards, Sandra F. Braunstein, Director, Division of Consumer and
Community Affairs, Federal Reserve, Testimony Before the Subcommittee on
Financial Institutions and Consumer Credit, Committee on Financial Services,
U.S. House of Representatives: ...In June 2007, the [Federal Reserve] Board proposed substantial
revisions to the credit card disclosures required under the Truth in Lending
Act (TILA) regulations. Those revisions are focused on ensuring that consumers
have the information they need about credit card costs and terms, when they
need it, in a form they can use. In addition, as Chairman Bernanke indicated in
testimony..., the Board plans to use
authority under the Federal Trade Commission Act (FTC Act) to propose rules
prohibiting unfair or deceptive credit card practices. The proposal will be
issued this spring. ...
Implications for Consumers of Increased Credit Card Complexity In the
early 1980s, less than half of American families had a general purpose credit
card (43 percent in 1983). Currently close to three-quarters have at least one
card (71 percent in 2004). The increase in credit card holdings was sharpest
among lower-income families: from 1983 to 2004, the share of families in the
lowest income quintile that hold such cards jumped from 11 percent to 37
percent. In addition, consumers are using their cards more both as a payment
device and as a source of credit. Total charges on bank credit cards increased
by about five times and total debt outstanding as of year-end by almost four
times from 1991 to 2006. This growth is explained by several factors,
including substitution of cards for cash and installment credit and the
development of credit scoring and risk-based pricing, which have made credit
cards available to more people.
As consumers have relied more on credit cards, card plans have become more
Continue reading "Truth in Lending, Disclosure, and Regulation" »
Posted by Mark Thoma on Friday, April 18, 2008 at 12:17 AM in Economics, Financial System, Regulation |
Posted by Mark Thoma on Friday, April 18, 2008 at 12:06 AM in Links |
Now that we're down to two candidates for the Democratic nomination, do we need moderators for debates? What
would be wrong with the moderator introducing a topic and then stepping aside and letting the candidates question and debate each other?: "For the next ten minute segment the
topic is the economy. Senator Obama, you go first in this round." Then let it go from there. I might feel different if the
moderators were skillfully extracting information we wouldn't get otherwise, but
that's not what they are doing. It seems like they are more interested in
making a name for themselves by playing gotcha than in pursuing questions in the
public interest. So get the moderators out of the way, at most they should enforce very broad guidelines, and let's have a real
debate. It couldn't possibly be any worse than what we saw last night.
Posted by Mark Thoma on Thursday, April 17, 2008 at 07:33 PM in Politics |
This came by email:
I wanted to let you know that Dave Cass passed away over the weekend. I was one of Dave's Ph.D. students at Penn and we stayed close over the
years, so obviously this was a shock.
Dave did seminal work in economics, starting with his investigations of the
neoclassical capital model, and his characterization -- now known as the Cass
criterion -- of when growth paths are inefficient. With Karl Shell, he explored
a number of different mathematical techniques for analyzing multi-sector growth
models. He then moved on to overlapping generations models, where he did
pioneering work with Manny Yaari on continuous time OLG economies, and, with
Karl and Yves Balasko, work on the existence, uniqueness and optimality of
competitive equilibrium in the overlapping generations environment. This work
included the rigorous demonstration of the existence and welfare properties of
phenomenon they called "sunspot equilibrium," where economic expectations about
the future become self-fulfilling. Dave wasn't satisfied, though, with just two
major contributions to economics, and went on to found the so-called General
Equilibrium with Incomplete Markets literature (though with help from people
like John Geanakoplos, Herakles Polemarcharkis, and Wayne Shafer), now known as
GEI, which is having a major impact on financial economics.
Dave was well-known for his crusty personality, and it's distinctly possible
that his crustiness might have cost him a Nobel prize. Even so, I doubt that
anyone familiar with his work wouldn't agree that he was one of the giants of
the late 20th century Economics.
Obviously, this is just a brief summary of the man, but for those who might
be interested, there's a lot more on his work and impact in an interview that
Randy Wright and I did with him for Macroeconomic Dynamics, which can be
accessed at http://econ.tepper.cmu.edu/econ/cass_interview.pdf.
His undergraduate degree was from the University of Oregon. There is a statement here, and Tyler Cowen has a bit more here.
Posted by Mark Thoma on Thursday, April 17, 2008 at 06:44 PM in Economics |
Larry Bartels on small town demographics and political persuasions:
Who’s Bitter Now?, by Larry Bartels, Commentary, NY Times: During Wednesday
night’s Democratic presidential debate in Philadelphia, Barack Obama once more
tried to explain what he meant when he suggested earlier this month that
small-town people of modest means “cling to guns or religion or antipathy to
people who aren’t like them” out of frustration with their place in a changing
American economy. Mr. Obama ... reiterated his impression that “wedge issues
take prominence” when voters are frustrated by “difficult times.”
Last week in Terre Haute, Ind., Mr. Obama explained that the people he had
in mind “don’t vote on economic issues, because they don’t expect anybody’s
going to help them.” He added: “So people end up, you know, voting on issues
like guns, and are they going to have the right to bear arms. They vote on
issues like gay marriage. And they take refuge in their faith and their
community and their families and things they can count on. But they don’t
believe they can count on Washington.”
This is a remarkably detailed and vivid account of the political sociology
of the American electorate. What is even more remarkable is that it is wrong on
virtually every count.
Small-town people of modest means and limited education are not fixated on
cultural issues. Rather, it is affluent, college-educated people living in
cities and suburbs who are most exercised by guns and religion. In contemporary
American politics, social issues are the opiate of the elites.
For the sake of concreteness, let’s define the people Mr. Obama had in mind
as people whose family incomes are less than $60,000 (an amount that divides
the electorate roughly in half), who do not have college degrees and who live
in small towns or rural areas. For the sake of convenience, let’s call these
people the small-town working class, though that term is inevitably imprecise.
In 2004, they were about 18 percent of the population and about 16 percent of
For purposes of comparison, consider the people who are their demographic
opposites: people whose family incomes are $60,000 or more, who are college
graduates and who live in cities or suburbs. These (again, conveniently
labeled) cosmopolitan voters were about 11 percent of the population in 2004
and about 13 percent of voters. While admittedly crude, these definitions
provide a systematic basis for assessing the accuracy of Mr. Obama’s view of
contemporary class politics.
Small-town, working-class people are more likely than their cosmopolitan
counterparts, not less, to say they trust the government to do what’s right.
... Do small-town, working-class voters cast ballots on the basis of social
issues? Yes, but less than other voters do. ... Small-town, working-class
voters were also less likely to connect religion and politics. ...
It is true that American voters attach significantly more weight to social
issues than they did 20 years ago. It is also true that church attendance has
become a stronger predictor of voting behavior. But both of those changes are
concentrated primarily among people who are affluent and well educated, not
among the working class.
Mr. Obama’s comments are supposed to be significant because of the popular
perception that rural, working-class voters have abandoned the Democratic Party
in recent decades and that the only way for Democrats to win them back is to
cater to their cultural concerns. The reality is that John Kerry received a
slender plurality of their votes in 2004, while John F. Kennedy and Hubert
Humphrey, in the close elections of 1960 and 1968, lost them narrowly.
Mr. Obama should do as well or better among these voters if he is the
Democratic candidate in November. If he doesn’t, it won’t be because he has
offended the tender sensitivities of small-town Americans. It will be because
he has embraced a misleading stereotype of who they are and what they care
I need to think about this more, but having grown up in a small-town in one
of the poorest counties in California, a town where the inequality was stark, it
seems to me that we are missing something with this type of analysis (in the
town I grew up in, there were very few people in the upper middle class, there
were wealthy rice farmers and others with wealth derived from other sources,
there were a few doctors, dentists, insurance brokers, etc., but mostly the
upper middle was absent, e.g. median household income in 2000 was $35,062). I
tried to express some of what I think we are missing
here in terms of perceptions of fairness, but I'm not sure that does a very
good job of expressing what middle and lower class residents of small towns are
What does this analysis miss - what do Democrats miss - about this
demographic that makes it so hard to capture (even if shares have remianed constant over the last 40 years as Bartel's contends, with rising inequality, stagnant wages, etc., shouldn't shares have risen?)? In the county I grew up in, the
votes for president in 2004 were: 67.2% for the GOP, 31.6% for Democrats, and
1.2% for other (the county is 47% Hispanic or Latino). I can't say how
that breaks down demographically, but the
show that support for Democrats has eroded over time, and purely from the
standpoint of economic interests, it's difficult to understand why. Maybe
Bartels is correct, Democrats will never capture this demographic beyond breaking nearly even in vote shares, but I'd like
to have a better understanding of what the problem is. It's not that this group
is, from my experience, socially conservative (though this is Northern
California), so I agree with Bartels on that point. Identity is big part of it I
think, the Republicans have done a better job of tapping into the pickups with
gun racks, duck and pheasant hunting, beer drinking, go to church on
Easter, type of demographic (I no longer hunt, but I took my first hunter safety course at age 11,
most of us did - I should write more about guns because rural residents
view the issue very differently from urban residents, at least that's
my experience). The people I know don't identify well with the
faces they see representing the Democratic party, and as much as I hate that it does, the DFH kind of stuff works
with them - that's true across income levels to a large degree - and as silly as
the costumes, forced beer drinking episodes and the like seem at times, this is
a theater that seems to work in establishing identities people are comfortable
associating themselves with. Democratic politicians, at least in the West, who happen to wear cowboy boots and jeans regularly do well with the rural demographic.
But I really don't know about all of this, I don't fully understand what's behind the Democrat's difficulties with this group, and am hoping to hear other
Posted by Mark Thoma on Thursday, April 17, 2008 at 11:07 AM in Economics, Politics |
Dean Baker on the latest sighting of a flat tax proposal:
The Meltdown Lowdown, by Dean Baker: ...Senator Lamar Alexander tried to
upstage Senator McCain with his own April Fools' tax prank. He wants to give
every taxpayer the option to either pay the tax owed under the current system
or to pay a 17 percent flat tax. For most taxpayers this would not be a very
good deal. The poorest people who pay Federal income taxes fall into the 10
percent bracket, meaning that their income (above the taxable threshold) is
only taxed at a 10 percent rate. Slightly higher income taxpayers will fall
into the 15 percent bracket.
A couple with two kids will not reach the 25 percent bracket unless their
income is over $80,000. Even then, most of their income will be taxed at the
lower 10 percent or 15 percent rate. The 25 percent tax rate only applies to
the income that is over the cutoff, not the family's entire income. To have an
average tax rate of more than 17 percent a couple with two children would have
to earn more than $100,000. Needless to say, Senator Alexander's tax plan is
not going to save your typical schoolteacher or firefighter any money.
While Alexander's plan wouldn't save ordinary folks money it would be
fantastic for the rich. Imagine that you're one of those investment banker
types that lost billions on bad loans and helped to push the economy into
recession. Since it's been a bad year, your salary might have been slashed to a
paltry $5 million or so. Under the current tax system, you might owe in the
neighborhood of $1,500,000 in taxes. But, under Senator Alexander's plan, you
could save about $700,000. That's almost enough money to make a difference even
to an investment banker.
The idea of giving even more taxpayer dollars to incompetent investment
bankers is pretty funny, but that's not even the best part of Senator
Alexander's prank, in comedy it's all in the delivery and Alexander excels in
that department -- he said that his plan is "designed to be revenue neutral."
No one pays more, some rich people pay a lot less, and we end up with just as
much money. Now that's funny. ...
Posted by Mark Thoma on Thursday, April 17, 2008 at 12:51 AM in Economics, Taxes |
A call for "simplified transparency":
Economic policy for humans, by Richard H. Thaler and Cass R. Sunstein,
Commentary, Boston Globe: ...If the next president appointed a behavioral
economist as the chairman of the Council of Economic Advisors, what sort of
advice should we expect to hear? Let's consider the mortgage crisis as an
In a standard economic analysis..., the working hypothesis is that borrowers
are capable of choosing the best mortgage for their financial circumstances.
This assumption might have been reasonable back ... when nearly every
mortgage was a simple 30-year fixed-rate loan. It is now preposterous.
In today's markets with variable rates, prepayment penalties, balloons, and
so forth, even economists have trouble sorting out which mortgage is best. It
doesn't help that the market has some pushy mortgage brokers who get paid based
on the profitability of the loan.
Many borrowers who are now in trouble made poor choices... Other borrowers
were just speculators... Policies aimed at helping those in trouble now should
be targeted at the first group, not the second.
From the standpoint of behavioral economics, two kinds of policies make good
bipartisan sense. First, some aid should be offered to the homeowners who were
bamboozled into taking bad loans. Congress is considering several such
Critics of such a plan call it a "bail-out." But if the program is limited
to owner-occupied homes, the adverse effects will be limited. Stabilizing the
real estate market is a legitimate government goal.
Far more important, it is crucial to design policies that will prevent
similar problems in the future. Behavioral economics provides specific
suggestions not just for mortgages but also for credit cards, cellphone plans,
prescription drugs, and student loans. The basic idea is that for complex
financial products, the government should strive for what might be called
The Truth in Lending Act, enacted in 1968, was a good start... That law
required lenders to report interest rates in terms of Annual Percentage Rate,
so that borrowers could easily compare ... different loans.
The problem now is that both mortgages and credit cards have rates that vary
over time, and numerous other fees that are difficult to understand. It has now
become virtually impossible to offer a simple, one-page, plain-English document
that explains all the relevant features...
The best response would make use of modern technology to create a Truth in
Lending Act for the 21st century. In brief, government would achieve simplified
transparency by requiring all lenders to provide borrowers with an electronic
file that contains, in standardized form, information on every feature of the
contract. ... And because disclosure would be standardized, consumers could
Now, you might wonder, how do these electronic files, even if standardized,
help us mortals who have trouble learning how to record a TV show...? The
answer would come through the market.
As soon as the government required electronic disclosures, websites would
quickly emerge to help people in the task of comparing offerings. A borrower
would go to "mortgageevaluator.com," upload the relevant quote, and receive an
This proposal illustrates the essence of good policymaking from the
standpoint of behavioral economics. Government does not tell people what to do.
Instead, it tries to improve markets by making it easier for busy people to
make good decisions.
Whether we use behavioral economics to justify forcing disclosure of easy to
understand, useful information to market participants, or use the justification that markets function
best when participants are well-informed, i.e. the more old-fashioned reasoning that forcing disclosure of
information overcomes a market failure, the current foreclosure problem shows
that more transparency would be helpful. But we shouldn't stop there, there other problems to worry about
in these markets besides lack of transparency, and no single policy will be enough to resolve all of them.
addition, I wonder if people would be sufficiently informed even with a system
like this in place. Maybe it will get easier as all of this goes online, but it still seems a bit cumbersome to do the actual comparisons, and even with nice clear charts, explanations, etc., there's a lot of information to absorb to compare loans of various types given all the possible variations in loan terms. If it's generally overwhelming no matter how patiently and well it's explained, should the types of risks people are allowed to be
offered be regulated in some way to prevent people from being coerced into
accepting high risk contracts? Perhaps realigning incentives in these markets so
that mortgage brokers have a greater share in the consequences of loan
foreclosures would accomplish this goal without having to specify the types of
loans that could be offered. In any case, we should use whatever behavioral
economics has to offer, but that shouldn't be all that we do.
Posted by Mark Thoma on Thursday, April 17, 2008 at 12:47 AM in Economics, Financial System, Market Failure |
Posted by Mark Thoma on Thursday, April 17, 2008 at 12:41 AM in Links |
David Wessel on the current state of financial markets and the economy:
May Be Over, but..., by David Wessel, WSJ: ...Here's where the story stands
right now: Barring any unanticipated collapse of a pillar of Wall Street or a
European bank, the risk of financial catastrophe has receded, even though
markets remain so far from normal that they're exceptionally hard to read. But
the wave of economic pain -- the foreclosures, bankruptcies, pay cuts and
layoffs -- has yet to crest. ...
Yet some key measures suggest things are moving in the right direction. In
markets where speculators can bet on the collapse of a big bank or company, the
odds placed on a big bank going bust have fallen... The odds the markets put on
a wave of defaults by nonfinancial corporations also are down. And yields on
short-term U.S. Treasury bills, which plunged as money rushed into the ultimate
in safe securities, have inched up...
The Fed's aggressive actions -- cutting short-term rates ... and devising
new ways to lubricate money markets -- have helped. Equally important is the
ability and willingness of big financial companies -- Citigroup, Wachovia,
Washington Mutual and (if they keep their promises to regulators) mortgage
giants Fannie Mae and Freddie Mac -- to raise billions of dollars to rebuild
their diminished capital cushions. This capital-raising is essential if banks
are to keep lending... It's also a hopeful hint that some big-money players
think it's time to invest in U.S. banks, albeit at bargain-basement prices.
But all is not yet well. Persistent strains in the market where banks lend
to one another overnight, or for just a few days, are baffling... Banks
understandably continue to be cautious about making mortgages and other
loans... But cautious about lending to other banks? That's unnerving to say the
What about the rest of the economy? Employment is falling. So are housing
prices. The bulk of forecasters in the latest Wall Street Journal survey
foresee home prices declining into 2009; nearly one in eight say they won't
touch bottom until 2010.
Prices of food and energy are rising. And a credit crunch is sure to make it
tougher than usual for American consumers to borrow to keep spending. ...
Offsetting that drag on the economy is the vigor of U.S. exports. And, of
course, the impact of the interest-rate cuts the Fed already has made and the
checks Mr. Bush and Congress decided to send to most American families this
spring has yet to be fully felt. ...
Nevertheless, the economy where most Americans live and work -- that is, off
Wall Street -- looks likely to get worse before it gets better. ...
I can't resist adding this Mike Luckovich cartoon (from The Big Picture):
Posted by Mark Thoma on Wednesday, April 16, 2008 at 06:09 PM in Economics |
Fold-Ins, Past and Present: Al Jaffee's fold-ins for Mad magazine, from the 1960s
to the present, in interactive form.
Posted by Mark Thoma on Wednesday, April 16, 2008 at 03:26 PM in Miscellaneous |
Do you find paying taxes to be "difficult, time-consuming, and infuriating"?
Maybe that's no accident:
Why The White House Doesn't Want To Modernize The IRS, by Stan Collender:
There have been lots of stories this week about the Bush administration
threatening to veto a bill that would stop the IRS from using private
collection agencies to collect unpaid taxes, about how using the private
collection agencies somehow has cost the government money, and how the IRS
doesn't seem to have requested enough resources to provide outstanding customer
All of this follows what is now a perennial story about how the
modernization of the IRS computer system is still going very badly, is way way
behind schedule (as in a decade or more), and is costing far in excess of what
had been projected.
What's going on here? Few Republicans in general (and especially the Bush
White House) want to do anything that will make the tax paying experience
easier, simpler, and more pleasurable because IRS is more efficient.
The result of all of the issues mentioned above is that paying taxes is more
difficult, time-consuming, and infuriating. That decreases support for paying
taxes and increases the likelihood that tax cuts will be seen by a larger group
of people as preferable.
Why not make customer service something that would get an award from JD
Power? Because you want people to find the tax system confusing and hard to
Why allow decades to go by on the computer project? Because you don't want
taxpayers to get quick answers.
Making paying taxes more difficult, time-consuming, and infuriating
decreases support for paying taxes and increases that tax cuts will be an
issue. That plays directly to what most believe is a Republican political
It also plays into the push for a flat tax.
Should Democrats make tax simplification and tax fairness bigger issues in
their campaigns? This hasn't been a priority for me, but maybe I have a tin ear
on this issue and a more aggressive push for simplification and more attention
to perceived and real inequities would find a receptive audience.
As I've said, I think perceptions of fairness play a larger role in economic
policy than economists have generally realized.
Carbon taxes can be defeated by pointing out that they are unfair to
truckers and farmers who have to use a lot of fuel due to the nature of their
jobs. Never mind the economic arguments, that sells and this type of reaction is
what Bush is hiding behind in his opposition to the imposition of a carbon tax,
and in other matters (are estate taxes fair?). Here where I live, there was a
proposal to fund health care with higher taxes on cigarettes. It was defeated
because many people who supported the idea of expanded health care thought it
was unfair to place the entire burden of funding the expansion on this group of
I think it's possible to explain why the Bush tax cuts have been unfair to
the middle and bottom of the income distribution- the cuts have helped to
distribute the gains from globalization and technical change to the upper income
tier leaving those in the middle no better off or actually worse off in terms of
the real wage they are receiving. Are we hearing that argument forcefully
enough? Maybe, but it's been more about the fairness of trade agreements than
the fairness of how gains have been distributed.
If Democrats want to capture middle America, I think they need to do a better
job of tapping into the perceptions of unfairness that exist among middle and
lower income households struggling to meet this months bills. Many in these
groups, like it or not, see social programs and other government activities as
unfair to them. Not all programs, and not all aspects of programs are viewed this way, but
I'm convinced people are far less worried about issues such as moral hazard than
they are about basic fairness. Why should they work hard every day at a job they
absolutely hate only to see (or so they have been told) others having things
handed to them? They've been told all the reasons why this is unfair to them -
the right has been very good at this - and there's been no strong,
countervailing voice to explain why the system is fair as it is, or more
importantly to acknowledge and fix the cases where it isn't.
I don't mean that Democrats should play along with perceptions that are based
upon falsehoods, misinterpretations, prejudices, and so on, but they do need to
recognize that feelings of unfairness exist. Perhaps they are based upon faulty
foundations, perhaps not, but the feelings are there. Next time your
spouse comes home from work after a hard day and wants to vent, respond by
analyzing why they shouldn't feel that way and see how they react. People don't want to hear
an analysis of why they feel like they do, whether they are right or wrong to
feel that way, they don't want to hear about how economic conditions or
politicians have manipulated them into feeling a particular way about an issue. They give
themselves more credit than that and believe, as you would in their shoes, that
they are perfectly capable of coming to their own conclusions. The world through
their eyes is not very fair in a lot of ways - people want to know that you
understand that, and they want to know what you are going to do about it. Maybe I have this wrong - maybe Democrats do this already - but it seems to me they haven't played the fairness game as well as Republicans.
Are humans hardwired for fairness?, EurekAlert: Is fairness simply a ruse,
something we adopt only when we secretly see an advantage in it for ourselves?
Many psychologists have in recent years moved away from this purely utilitarian
view, dismissing it as too simplistic. ...
UCLA psychologist Golnaz Tabibnia, and colleagues Ajay Satpute and Matthew
Lieberman, used a psychological test called the “ultimatum game" to explore
fairness and self-interest in the laboratory. In this particular version of the
test... The idea was to make sure the subjects were responding to the fairness
of the offer, not to the amount of the windfall. When they did this, and asked
the subjects to rate themselves on scales of happiness and contempt, they had
some interesting findings: Even when they stood to gain exactly the same dollar
amount of free money, the subjects were much happier with the fair offers and
much more disdainful of deals that were lopsided and self-centered.
The psychologists wanted to know if there is something inherently rewarding
about being treated decently. So, they scanned several parts of the
participants’ brains while they were in the act of weighing both fair and
miserly offers. Consistent with previous results, the researchers found that a
region previously associated with negative emotions such as moral disgust (the
anterior insula) was activated during unfair treatment. However, interestingly,
they also found that regions associated with reward (including the ventral
striatum) were activated during fair treatment even though there was no
additional money to be gained.
As reported in the April issue of the journal Psychological Science, ... the
brain finds self-serving behavior emotionally unpleasant, but a different bundle
of neurons also finds genuine fairness uplifting. What’s more, these emotional
firings occur in brain structures that are fast and automatic, so it appears
that the emotional brain is overruling the more deliberate, rational mind. Faced
with a conflict, the brain’s default position is to demand a fair deal.
Furthermore, when the scientists scanned the brains of those who were
“swallowing their pride” for the sake of cash, the brain showed a distinctive
pattern of neuronal activity. It appears that the unconscious mind can
temporarily damp down the brain’s contempt response, in effect allowing the
rational, utilitarian brain to rule, at least momentarily.
Posted by Mark Thoma on Wednesday, April 16, 2008 at 11:39 AM in Economics, Politics, Taxes |
We have had an ongoing discussion about whether foreclosures are driven by
falling house prices or interest rate resets (here and
here for example, a theoretical approach to interest rate resets is here). Both could be at work, but via Calculated Risk, Janet Yellen says falling prices that are the main problem:
Fed's Yellen: House Price Declines are Best Predictor of Delinquency Rates, by
San Francisco Fed President Janet Yellen repeated an
earlier speech today:
Economy: Where Are We and What Will Happen Next?.
This section is worth repeating:
[R]esearch ... reveals that the single best predictor of subprime
delinquency rates is the pace of house price changes. ...
The link between house prices and delinquency rates is not surprising. When
house prices have been stagnant or declining, a borrower with a recent
mortgage secured with a very small or no down payment has little, if any,
equity in the house and, therefore, can’t rely on it to help weather income
and wealth stresses like job loss, illness, or divorce. Moreover, though some
borrowers may be able to afford their loans, they may decide just to walk
away, if, for example, their house is worth less than their mortgage.
I should also note that, while default rates for prime loans are lower than
for subprime loans, delinquency rates among all categories are highly
correlated with house price declines across the country, whether borrowers are
prime or nonprime, or whether loans have fixed or variable rates.
Now that house prices are falling rapidly in many areas, delinquency rates
can be expected to increase sharply for all loan categories; prime or subprime,
fixed or variable.
Posted by Mark Thoma on Wednesday, April 16, 2008 at 11:00 AM in Economics, Financial System, Housing |
I have not been a proponent of using court enforced loan modification to try
to limit the mortgage foreclosure problem, but there may be reason to change that view.
One of the reasons for government to intervene into private markets is the
presence of substantial market failures. When market failures exist that prevent
desirable trades from taking place, government can sometimes intervene and
overcome whatever problem is preventing parties from engaging in mutually
beneficial exchange. Overcoming market failures is one of the main reasons I
have advocated government intervention in the past, and if market failures
(agency issues) are preventing beneficial loan modifications from occurring,
then government may have a larger role to play here than I originally thought.
This post from Credit Slips argues that the structure of the mortgage
loan market may prevent mortgage modifications from taking place that could make
all parties to the contract better off. I'd still like to hear a little bit more
about the exact nature of the market failure, but this does provide the
necessary foundation for courts to step in and modify the terms of existing
Who Speaks for Mortgage "Lenders"?, by Adam Levitin: Katie Porter makes an incredibly important point in her recent post about how
securitization structures may be impeding mortgage modifications because the
ultimate holders of risk on the mortgages are not the ones involved in the
modification decision. Mortgage servicers, who typically hold a small interest
(if any) in the loans are the ones making the modification decisions. When
servicers do hold positions in the mortgage-backed securities, they are first
lost positions, so the servicers likely takes a loss regardless of a
modification or foreclosure, meaning that their interests are not aligned with
the other MBS holders.
Let me take Katie's post a step further and suggest that the relevant voices
on the lending side of the mortgage market have not been heard. The ultimate
risk on mortgages is held by mortgage-backed securities holders, private
mortgage insurers, and pool-level bond insurers. These parties have been
entirely absent from the conversation on modification and bankruptcy reform.
Instead, we have been hearing servicers and originators (such as the Mortgage
Bankers Association) speaking for the entire mortgage lending industry. But
there is strong evidence that servicers are themselves part of the problem and
that some may be faithless agents to the MBS holders they represent. ...
There seems to be little disagreement that foreclosure would result in a
larger loss on a mortgage than a modification. One would think, then, that the
market would respond by modifying non-performing mortgages to a level that
homeowners could afford. But this hasn't been happening on a large scale. As we
think about why this market isn't working, securitization structures should get
a lot of attention.
As Katie noted, securitization structures can create impediments to
modification. Sometimes it is contractual, such as pooling and servicing
agreements (PSAs) that forbid servicers from modifying mortgages or severely
constrain the modifications that are allowed. Other times the PSAs create
incentive structures that lead servicers to prefer foreclosure to modification.
Going forward, one hopes that the securitization market will fix this... But
for existing mortgages, the contractual and incentive impediments created by
securitization pooling and servicing agreements remain a problem, and the only
clearly Constitutional way to overcome them is via bankruptcy. ... Bankruptcy
modification is an involuntary workout that should be possible when there are
market problems preventing voluntary workouts. This is essentially a parallel to
companies with public debt using bankruptcy to restructure the terms of their
bonds. Many bond indentures forbid the indenture trustee from modifying the
terms of the debt absent unanimous consent of the bondholders, raising a huge
structural obstacle to loss-minimizing modifications.
Notably, the loss calculus for MBS holders or PMI insurers or bond insurers
should not change depending on whether a workout is voluntary or not--it will
still produce a smaller loss than foreclosure. The Bankruptcy Code's best
interest test guarantees that, and in the current market especially foreclosure
outcomes are brutal.
This, of course, is just my evaluation of the market. But the voices that
should be heard from the mortgage industry about this are the MBS holders and
the insurers, not the servicers and originators.
Posted by Mark Thoma on Wednesday, April 16, 2008 at 12:57 AM in Economics, Financial System, Housing, Market Failure |
Is there any evidence that the Bush administration's preferred method for
combating global warming - companies voluntarily reducing their carbon
footprint - can succeed in reducing greenhouse gases? According to these
results, "the federal government’s reliance on voluntary measures to reduce
greenhouse gas emissions will likely prove unsuccessful":
Why the U.S. policy for
climate change is flawed, by Karin S. Thorburn, Vox EU: Climate change may
prove to be the most severe environmental challenge of this century. Yet, the
United States, one of the world’s largest producers of greenhouse gases, has
refused to ratify the Kyoto Protocol mandating a reduction of greenhouse gas
emissions. Rather than national regulation of greenhouse gas emissions, the
Bush administration relies on voluntary measures to combat global warming. The
success of U.S. climate change policy therefore ultimately depends on how
profitable it is for companies to voluntarily reduce their carbon footprint. In
other words, in order to be widely adopted, investments required to reduce
greenhouse gas emissions must increase shareholder wealth and thus have a
positive net present value.
Porter and van der Linde (1995) and Reinhardt (1999) argue that
environmentally responsible investments can improve corporate financial
performance. They propose that pollution-reducing investments create “green
goodwill,” which differentiates the firm’s products and increases its market
share. Such investments may also reduce production costs and the risk of future
environmental liabilities, as well as give the firm a competitive advantage if
subsequent regulatory actions force industry rivals to follow. In addition,
Heinkel, Kraus and Zechner (2001) suggest that if investors refuse to hold the
stock of polluting firms, the cost of capital may rise to the point where it is
optimal for some firms to undertake environmentally responsible investments.
Continue reading ""Why the U.S. Policy for Climate Change is Flawed"" »
Posted by Mark Thoma on Wednesday, April 16, 2008 at 12:48 AM in Economics, Environment, Policy |
John Berry says the Fed needs to be given the power to oversee investment
Fed Needs Permanent Investment Bank Oversight, by John M. Berry, Commentary,
Bloomberg: ...Federal Reserve examiners now are operating inside the
nation's biggest investment banks, and by all accounts the banks are happy to
have them looking over their shoulders.
In a world of tight liquidity and shaken confidence, the Fed presence gives
valuable reassurance to counterparties that the investment banks, at least the
ones that are primary dealers in government securities, are creditworthy.
Of course, the reason the examiners are there is that these firms ... can
now borrow directly from the central bank.
But the Primary Dealer Credit Facility ... was created under a provision of
the Federal Reserve Act applicable only in an emergency. Eventually, the crisis
will pass, and when it's over, ''we will have to take this window back,'' Fed
Chairman Ben S. Bernanke told a Senate Banking Committee...
Congress ought not to let that happen. ... First, the major investment banks
have become much too important in the financial system not to have access to
the Fed in its role as a lender of last resort.
Second, the Securities and Exchange Commission, the investment banks'
primary regulator, simply doesn't have the expertise to oversee the banks'
financial activities and their safety and soundness. ...
Congress has to act promptly. ... Giving the Fed authority to oversee
investment banks is no panacea. It already has such power over bank holding
companies and that did little to rein in the widespread use of SIVs --
structured investment vehicles -- and conduits that were set up to handle
highly leveraged, off-balance-sheet activities that have produced tens of
billions in losses for commercial banks.
Still, the Fed is better suited for the job than the SEC. ...
Posted by Mark Thoma on Wednesday, April 16, 2008 at 12:30 AM in Economics, Financial System, Regulation |
Posted by Mark Thoma on Wednesday, April 16, 2008 at 12:24 AM in Links |
Are employment growth and productivity growth negatively correlated in the
short-run? If so, what does this mean for policy? Ian Dew-Becker and Robert Gordon use data from the EU to look at this question:
growth revived after 1995 while productivity growth slowed: Is it a
coincidence?, by Ian Dew-Becker and Robert J. Gordon, Vox EU: As of 1995,
Europe (the EU-15) had almost caught up to the PPP-adjusted level of US labour
productivity, while its per-capita income ratio to the US stagnated at only 70
percent. This discrepancy is explained by a decline over 1960-1995 in hours
worked per capita in Europe compared to the US. Edward Prescott (2004) has
blamed low hours exclusively on high labour taxes, while Prescott’s critics,
although accepting a role for taxes, have broadened the list of culprits to
employment protection legislation, product market regulation, a high average
replacement rate of unemployment insurance, high union density, and high
“corporatism” (cooperative bargaining between unions, management and the
government). We label this group of potential explanatory factors as the
The previous literature and many policy debates, especially in the US, have
missed three important points.
Continue reading "The Short-Run Costs of Labor market Liberalization" »
Posted by Mark Thoma on Tuesday, April 15, 2008 at 03:51 PM in Economics, Productivity, Unemployment |
Kathy G. has a nice discussion of some of research on the impact of marriage
and divorce on economic outcomes:
economic impact of marriage and divorce: research vs. researchiness, by By
Kathy G.: In an earlier
of mine, I took Slate's Emily Yoffe to task for her ill-informed and
intellectually dishonest characterization of the research about the impact of
single motherhood on children. Over at the Freakonomics blog, economist Justin
looks at two new studies that concern a similar subject: the economic
impact of marriage and divorce. Viewing these studies side by side is highly
edifying. Call the the pair of them the Goofus and Gallant of divorce research.
The Do-Bee and the Don't-Bee. Or what you will.
One of the studies is a scholarly
paper in a peer-reviewed journal which seeks to disentangle the question of
whether, in Wolfers' words, "divorce causes lower income, or whether lower
income (or its correlates) cause divorce." The authors, Elizabeth Ananat and
Guy Michaels, attack the problem of determining the direction of the causality
by using what is called an instrumental variables approach. ...
The paper Wolfers looks at wants to measure the impact of divorce on income.
To do an IV analysis, the researchers needed to find a factor that is
correlated with divorce, but is not correlated with other unmeasured factors
that may also have a causal impact on income (such as, for example, a person's
health status). The IV they settle on is the sex of the first-born child.
Research strongly suggests that if the first-born child is female, a couple is
more likely to divorce, all other factors held constant. Therefore, the sex of
the first -born seems to be a good IV, because while it does impact the
likelihood of divorce it does not seem to be related to unmeasured factors that
may have an impact on income.
What is the upshot of their study? The authors find that divorce "has little
effect on mean income." ... This goes against the conventional wisdom but it is
in keeping with other recent research on the topic. As the authors point out,
"the negative correlation between mean income and divorce appears to be driven
by selection." In other words, it's likely that there's some unobserved factor
that both causes people to get divorced and causes their income to
decrease after divorce.
In his post, Wolfers also mentions a new study released by the Institute for
American Values and other conservative groups. This report purports to show
that divorce and single motherhood costs American taxpayers some $112 billion
per year. Only, it really doesn't. As Wolfers writes, the researchers "counted
costs and ignored benefits":
The Ananat-Michaels result is that divorce seems to help the finances of
about as many women as it hurts, and those who gain, may gain more than those
who lose. But this report counts up the costs to the taxpayer from the women
who lose income, but refuses to count even a single dollar of the rise in
taxes linked to those who gain income. ...
Well not counting the benefits, that was pretty dumb. But wait, it gets
Amazingly, the advocates put together “fiscal” costs of divorce without
even understanding the tax code. The U.S. tax system is structured so that
when poor single mothers marry men with higher incomes, in most cases, the
total tax paid by husband and wife would fall. Yet this isn’t counted.
Those poor single women aren’t robbing us of tax revenue, they are actually
paying more than if they were married! (Yes, the tax code does include a
marriage penalty for some couples who are both high earners, but for most
couples, the U.S. gives you a tax break for getting married.)
The authors of the report make one other whopper of a mistake, they
"fundamentally miss what marriage is about":
Many of the gains from marriage that they count are gains mainly from
forcing poor single women to live with others, thereby realizing economies of
scale. If there is a fiscal case to be made for encouraging such behavior, the
same fiscal case suggests we should encourage them to live with just about
anyone — a same-sex lover, a polygamous family, or even with good friends. Yet
for some reason, the advocates seem reluctant to extend their argument to its
This reminds me of
Echidne's excellent snark: "If two parents are better than one parent, how
about ten parents per family?"
Perhaps the fact that many women are willing to face the prospect of
poverty to get out of their marriages tells us that, beyond fiscal
implications, there are other, more important, costs and benefits of marriage
and divorce that also need to be counted.
Posted by Mark Thoma on Tuesday, April 15, 2008 at 02:15 PM in Economics, Politics |
I figured I should start doing my taxes. I just downloaded the fillable forms, so I'm practically done.
[Update: 1:28 - All done.]
Posted by Mark Thoma on Tuesday, April 15, 2008 at 12:06 PM in Economics, Taxes |
The press ought to be all over McCain for his lack of an effective plan to
help struggling Americans. From the WSJ report below, here's what McCain proposes to do:
Temporarily reduce gas taxes and quit adding to Strategic Reserve. The reduction in taxes
would last from Memorial Day to Labor Day of this year.
Make sure states support student loans.
Double the tax exemption for children.
Cut real discretionary spending.
On the first proposal, a temporary cut in gas taxes, this isn't even a
proposal for when he is in office, so he hasn't promised to do anything except hope
this Congress and administration take measures to make global warming and our
energy import problems worse. We'd be better off with a rebate to the poor of
the same amount rather than lowering gas taxes - there are a multitude of ways
to provide relief with better economic properties. Why not spend the money on infrastructure instead and provide a boost to employment at the same time? This proposal is, well,
pretty dumb and it shows McCain's weakness in economics. It might have populist
appeal, but the economics are just plain lousy.
The student loan proposal asks states to do something, but the federal
government hasn't promised anything. So, McCain hasn't promised much here.
Thus, so far, two proposals and the net promises for the federal government if McCain is actually in office? Zero. He hasn't promised to spend a dime to help the
Finally, a proposal that might help - double the exemption for children - and
this would be worth around $3,500 per child. But if you have children, and if
your tax rate is, say, 20%, this is only worth $700. That will likely be more
than offset by McCain's planned cuts in programs - programs that in many cases
help the working class - so the net benefit here is small or negative.
So that's it, the plan McCain has devised for when he is actually in office
is to increase the deduction for children and cut lots of other programs. But will the press focus on this, and
ask the hard questions about McCain's commitment to make things better for the
people who have endured the costs of economic change in recent decades? Or will they continue to help bash Obama for his remarks? Lack of action - and we've seen plenty of that from the Republicans when it comes to helping the working class - ought to speak louder than words.
Here's more detail form the WSJ:
Continue reading "McCain Turns His Back on the Working Class" »
Posted by Mark Thoma on Tuesday, April 15, 2008 at 11:07 AM in Economics, Politics |
Stephen Roach says Alan Greenspan is "guilty as charged":
Greenspan’s Follies, by Stephen S. Roach, Foreign Policy: There’s
just one problem with Alan Greenspan’s attempts to defend his record on the
financial crisis: The former Fed chairman is guilty as charged. ... Greenspan’s
blend of politics and ideology led to bad economics and a succession of policy
blunders whose severity is only now becoming clear.
Greenspan’s handling of the housing bubble is the smoking gun. The Greenspan
mantra is that markets know best—that central bankers should not attempt to
override the verdict of millions of market participants by declaring that an
asset bubble has formed. After all, there are the costs to economic growth to
consider if monetary policy is used to deflate such bubbles. And why should any
modern economy have to incur those costs? After all, goes the script, the
authorities always have the wherewithal to clean up any post-bubble mess. Maybe
not. This time, the mess is almost beyond the realm of comprehension—most
likely a good deal larger than any growth that might have been foregone had the
U.S. housing bubble been handled more judiciously. ...
One of the weakest links in the Greenspan defense is his fixation on whether
a serious bubble was forming in America’s housing market. Never mind his
earlier arguments that housing markets were local, not national, and that it
was highly unlikely that home prices could ever fall nationwide. Whoops. Never
mind also his equally irrelevant point that there were lots of housing bubbles
in the world at the same time... Everyone’s doing it, so it’s not the Fed’s
Wrong. The trouble with America’s housing bubble was never its comparison
with Ireland. The core of the problem lies in the distortions that asset
bubbles created on the real side of the U.S. economy. Courtesy of the most
rapid rates of sustained U.S. house price appreciation in the modern post-World
War II era, along with innovative financing techniques that allowed American
homeowners to extract equity with ease..., the new age of the asset-dependent
consumer was born. ...
Increasingly supported by the confluence of both property and credit
bubbles, U.S. consumers spent well beyond their means. Personal consumption
climbed... At the same time, household debt soared... America certainly
achieved the rapid growth that Greenspan felt the body politic wanted. But it
was growth based increasingly on fumes. ...
Saving rates plunged to zero for the first time since the Great Depression.
An increasingly asset-dependent U.S. economy then had to borrow surplus saving
from places like China ... Greenspan and his disciple Ben Bernanke saw this
situation exactly backwards. America, they insisted, was simply doing the rest
of the world a huge favor by absorbing its surplus saving. Serious dollar risks
were characterized as a problem for a distant day. Suddenly, that day doesn't
seem so distant.
What Greenspan missed repeatedly over the years ... are the corrosive
impacts this bubble had in fostering the imbalances and excesses of an
asset-dependent U.S. economy. ... Global imbalances are also an outgrowth of
this era of excess—underscored by America’s massive external deficit and, by
the way, the protectionist fires it stokes. Alas, these fault lines were made
all the deeper by the Fed’s regulatory laxity in an era of unprecedented
financial innovation—a laxity made all the more dangerous by the cheap
borrowing costs of a Fed-induced credit bubble. ...
It didn't have to be this way. Just saying no to asset bubbles was always an
option. A variety of anti-bubble tools—the bully pulpit of jawboning, more
disciplined regulatory oversight, and, ultimately, a tighter monetary
policy—could have prevented disaster. Yes, economic growth would probably have
been slower, but that shortfall likely pales in comparison to the post-bubble
carnage now before us. Too bad Greenspan couldn’t bring himself to follow the
sage advice of one of his predecessors at the Fed and “take away the punch bowl
just when the party was getting good.” ... The legacy of Alan Greenspan will be
forever tarnished by this dangerous and painful reality check.
I've been meaning to cover the topic of whether the Fed should target asset prices, and with the repeated charge that the
Fed should have let the air out of the housing bubble I've been hearing lately,
now seems like a good time.
I have not been in favor of the Fed using monetary
policy to try to prevent asset price bubbles. But there is a sense in which I
think they should do this.
First, a bit of background. The point of monetary policy in New Keynesian
models of sluggish wage and price adjustment, the framework I'll use here, is to
shut down misleading price signals. The flow of resources in the economy is
dictated by relative prices, i.e. the price of good A divided by the price of
good B (e.g., the number of loaves of bread you can get for a gallon of gas),
and when there are sticky prices and sticky wages, inflation can push relative
prices away from their long-run, equilibrium levels. Inflation requires all
prices to move in proportion, and changing local conditions require prices to move
differentially, but the presence of price rigidities prevents these adjustments
causing relative prices to move away from their desired values. This sends false
signals to both input and output markets, resources go to the wrong places, the
wrong goods are produced, at some point the resources must be redirected, and
all of this makes us worse off.
The policy solution is to try to make sure that relative prices do not
deviate from their optimal values. How do you do that? Here's
The theory ... provides important insights into the question of which price
index or indexes it is more important to stabilize. Again, the answer depends
on the nature of the nominal rigidities. If prices are adjusted more frequently
in some sectors of the economy than in others, then the welfare-theoretic loss
function puts more weight on variations in prices in the sectors where prices
are stickier... This provides a theoretical basis for seeking to stabilize an
appropriately defined measure of "core" inflation rather than an equally
weighted price index. ... Similarly, if wages are sticky as are goods prices,
... then instability in the rate of growth of a broad index of nominal wages
results in distortions similar to those created by variations in goods price
inflation. ... In this case, optimal policy involves a tradeoff between
inflation stabilization, nominal wage growth stabilization, and output-gap
Thus, according to this, to stabilize the economy you first create a price
index - call it core CPI or core inflation - that contains only the inflexible
prices and leaves out the flexible prices (or better, uses weights that increase
with the degree of inflexibility - thus, the price index the Fed targets will be
different from the CPI or other measures of the cost of living which use a
different set of weights). A similar core index is created for wages. Monetary
authorities then use policy to target the core indexes for prices and wages so
that they are as stable and as predictable as possible, and this allows the
flexible prices to adjust in response to changing conditions and keep relative
prices as close as possible to their optimal values.
Theoretically, the monetary policy rule should include deviations of the core indexes for prices and wages from their target values.
Whether the prices of financial assets such as stocks and bonds should also be
indexed and targeted is an open question, but theoretical results mostly point
to leaving the asset price index out of the stabilization equation, and this has
been the approach the US central bank has followed (against the advice of people
like Steven Cecchetti).
The core price index the Fed uses does not include the
asset value of houses, but it does have an imputed value for housing services
the household consumes each time period, i.e. the opportunity cost of living in
an owner occupied house. However, this imputed value has not always tracked
housing prices very well, and it
appears to suffer from measurement error.
I think two things ought to be considered. First, housing prices are sticky,
at least in the downward direction where they are very sticky, and this makes
the value of housing services sticky as well. Thus, this value should be included in
the core price index the Fed targets. However, the imputed value used now
appears to be flawed, and it needs to be reexamined and improved. Precision here
is important (I would also consider using a measure that tracks actual housing
prices better. I'm assuming more precision would do that, i.e. lead to more
stable rent/price values, but if not I'd also take a weighted average of housing
services and housing prices, or use some other scheme to make the measure used in the core index track housing prices better than it does now). Second,
the Fed needs to pay more attention to housing prices as reflected in (an
accurate measure of) housing services - this component needs to have a larger
weight in the overall index.
With these changes, more precision in the measurement of the value of housing
services, better tracking of actual housing prices, and more weight on the measure of the cost of housing services in the
core index the Fed targets, any run-up in housing prices will cause a larger
deviation of core inflation from its target value and bring a stronger interest
rate response from the Fed. Thus, to some degree, the Fed will let the air out
of the housing bubble automatically whenever rising housing values cause the
core inflation index to start rising above its target value. This isn't quite the same as
targeting asset values directly, and it only indirectly gets at one asset - housing - but
it would lean against housing markets a little more than we do now.
[Note: A quick search brings up this 2006 paper by Mishkin and Schmidt-Hebbel
summarizing views on asset prices and monetary policy:
Monetary Policy Under Inflation Targeting: An Introduction, by Frederic S.
Mishkin and Klaus Schmidt-Hebbel: ... 1.5 Asset Prices and Monetary
Policy under Inflation Targeting A heated debate has taken place in recent
years regarding the optimality of monetary policy—whether under inflation
targeting or alternative monetary regimes—to react to asset prices or perceived
asset price misalignment. Cecchetti and others (2000) argue that reacting to
asset prices, in addition to inflation and the output gap, is likely to achieve
superior performance and a smoother inflation path by reducing the likelihood
of an asset price bubble. (This view was restated by Cecchetti, Genberg, and
Wadhwani, 2002, in their response to some of the counterarguments presented
next.) Much of the academic and policy literature reacted with skepticism to
their proposal. Bernanke and Gertler (2001) contend that reacting to equity
prices is counterproductive (over and above its effects on inflation and the
output gap), while Batini and Nelson (2000) state that reacting to the exchange
rate is not optimal (over and above its effects on inflation and the lagged
interest rate). A related argument holds that since inflation-targeting central
banks focus on inflation expectations, they need not target asset prices
directly, but rather can use them to improve their prediction of the path of
future inflation (Bean, 2003). Most inflation-targeting (and other) central
banks have thus far sided with the skeptical view on monetary policy reaction
to asset prices. Reasons for skepticism include the difficulty of measuring
asset price misalignment, the difficulty of anticipating future asset price
booms and busts or the future effects of preventive nonmonotonic policy
actions, the difficulty in discriminating among different asset prices (such as
housing prices, equity prices, and the exchange rate), and the possible
dilution of the inflation objective.]
Posted by Mark Thoma on Tuesday, April 15, 2008 at 03:45 AM in Economics, Financial System, Housing, Monetary Policy |
Martin Feldstein says the Fed has cut the federal funds rate enough, further
cuts will hurt the domestic economy more than they will help, and the cuts would
have a negative impact on developing economies:
Enough With the Interest Rate Cuts, by Martin Feldstein, Commentary, WSJ:
It's time for the Federal Reserve to stop reducing the federal funds rate,
because the likely benefit is small compared to the potential damage.
Lower interest rates could raise the already high prices of energy and food,
which are already triggering riots in developing countries. ...
Many factors have contributed to the recent rise in the prices of oil and
food, especially the increased demand from China, India and other rapidly
growing countries. Lower interest rates ... add to the upward pressure on these
commodity prices – by making it less costly for commodity investors and
commodity speculators to hold larger inventories of oil and food grains. ...
An interest rate-induced rise in the price of oil also contributes
indirectly to higher prices of food grains. It does so by making it profitable
for farmers to devote more farm land to growing corn for ethanol. ...
Rising food and energy prices can contribute significantly to the inflation
rate and the cost of living in the U.S. ...[A] 10% rise in the prices of food
and energy adds 2.5% to the overall price level. Commodity price inflation is
of particular concern now that the CPI has increased 4% in the past 12 months.
Surveys indicate that households are expecting a 4.8% rise in the coming year.
In lower-income, emerging-market countries, food and energy are generally a
larger part of consumer spending. A rise in these commodity prices can
therefore add proportionally more to the cost of living in those countries, and
therefore depress real incomes to a greater extent than in the U.S.
Government actions to dilute these effects by increased subsidies on the
prices of energy and food add to the government deficits, reducing the national
saving available for investment in plant and equipment that would otherwise
contribute to faster economic growth.
The rise in the U.S. inflation rate, and the adverse effects in emerging
market countries, might be defensible if lower interest rates could
significantly stimulate demand and reduce the risk of a deep recession. But
under current conditions, reducing the federal funds interest rate from the
current 2.25% by 50 or 75 basis points is not likely to do much to stimulate
The current conditions in the housing industry and in credit markets mean
that ... with the massive inventory of unsold homes ... a further cut in the
fed funds rate would have little effect on housing construction. Moreover,
lowering the fed funds rate has not brought down mortgage interest rates. ...
Economic recovery will require resolving the difficult problems of the
credit markets, dealing with the millions of homeowners who may now be tempted
to default on mortgages that exceed the value of their homes, and reducing the
risk that the ongoing decline in house prices will push millions of additional
homeowners into a vulnerable, negative equity condition. A lower fed funds rate
will not solve any of those problems.
I've shared Feldstein's concern that lowering interest rates won't do much to stimulate the economy from the onset of the crisis, so I think we should continue to look for and implement non-traditional policy solutions designed to restore the flow of credit and to stimulate aggregate demand. Even so, I'd be willing to take rates a bit lower if conditions continue to deteriorate.
Posted by Mark Thoma on Tuesday, April 15, 2008 at 12:39 AM in Economics, Monetary Policy |
Are fiscal policy authorities in the EU incompetent?:
Do fiscal policymakers
know what they are doing? A modern view of the merits and demerits of fiscal
activism, by Kerstin Bernoth, Andrew Hughes Hallett, and John Lewis, Vox
EU: For more than 40 years, at least since the publication of Dow’s (1964)
scathing review of British post-war economic policy, there has been a debate
among economists about the wisdom, desirability and effectiveness of fiscal
policy as a stabilisation tool. Two issues have long dominated this debate: a)
whether the discretionary fiscal policies have been countercyclical in practice
and b) how strong the automatic stabilising effects are, relative to the
discretionary interventions around the cycle or over the longer term.
Both questions stem from uncertainty about the effects of fiscal policy:
uncertainty about implementation lags and uncertainties about the size, speed,
and maybe even the sign of the impacts when they come. It is entirely possible
that a stabilising fiscal action could have its impact later than intended,
exaggerating the cycle and turning a downturn into a slump or an upturn into
inflation. Similarly, the impacts may be stronger or weaker than anticipated.
This has led some to argue that we should rely on the automatic stabilising
effects that are built into the tax and unemployment benefit rules of any fiscal
system; and deny oneself the right to intervene directly for fear of making
things worse rather than better. A succinct and modern view of this argument is
given in Taylor (2000).
Another strand of the literature argues that fiscal policy makers are
malintentioned or even incompetent.
Continue reading "Do Fiscal Policymakers Know What They are Doing?" »
Posted by Mark Thoma on Tuesday, April 15, 2008 at 12:17 AM in Economics, Fiscal Policy |
Posted by Mark Thoma on Tuesday, April 15, 2008 at 12:06 AM in Links |
Robert Reich has something to say:
Obama, Bitterness, Meet the Press, and the Old Politics, by Robert Reich: I
was born in Scranton, Pennsylvania, 61 years ago. My father sold $1.98 cotton
blouses to blue-collar women and women whose husbands worked in factories. Years
later, I was secretary of labor of the United States, and I tried the best I
could – which wasn’t nearly good enough – to help reverse one of the most
troublesome trends America has faced: The stagnation of middle-class wages and
the expansion of poverty. Male hourly wages began to drop in the early 1970s,
adjusted for inflation. The average man in his 30s is earning less than his
father did thirty years ago. Yet America is far richer. Where did the money go?
To the top.
Are Americans who have been left behind frustrated? Of course. And their
frustrations, their anger and, yes, sometimes their bitterness, have been used
since then -- by demagogues, by nationalists and xenophobes, by radical
conservatives, by political nuts and fanatical fruitcakes – to blame immigrants
and foreign traders, to blame blacks and the poor, to blame "liberal elites," to
blame anyone and anything.
Rather than counter all this, the American media have wallowed in it. Some,
like Fox News and talk radio, have given the haters and blamers their very own
megaphones. The rest have merely "reported on" it. Instead of focusing on how to
get Americans good jobs again; instead of admitting too many of our schools are
failing...; instead of showing why we need a more progressive tax system to
finance better schools and access to health care, and green technologies that
might create new manufacturing jobs, our national discussion has been mired in
the old politics.
Listen to this morning’s “Meet the Press” if you want an example. Tim Russert
... interviewed four political consultants – Carville and Matalin, Bob Schrum,
and Michael Murphy. ... And what do Russert and these four consultants talk
about? The potential damage to Barack Obama from saying that lots of people in
Pennsylvania are bitter that the economy has left them behind; about HRC’s spin
on Obama’s words (he’s an “elitist,” she said); and John McCain’s similarly
Does Russert really believe he’s doing the nation a service for this parade
of spin doctors talking about potential spins and the spin-offs from the words
Obama used to state what everyone knows is true? Or is Russert merely in the
business of selling TV airtime for a network that doesn’t give a hoot about its
supposed commitment to the public interest but wants to up its ratings by
pandering to the nation’s ongoing desire for gladiator entertainment instead of
real talk about real problems.
We’re heading into the worst economic crisis in a half century or more. Many
of the Americans who have been getting nowhere for decades are in even deeper
trouble. Large numbers of people ... are losing their homes and losing their
jobs, and the situation is likely to grow worse. ...
Bitter? You ain’t seen nothing yet. And as much as people like Russert,
Carville, Matalin, Schrum, and Murphy want to divert our attention from what’s
really happening; as much as HRC and McCain seek to make political hay out of
choices of words that can be spun cynically by the mindless spinners of the old
politics; as much as demagogues on the right and left continue to try to channel
the cumulative frustrations of Americans into a politics of resentment – all
these attempts will, I hope, prove futile. Eighty percent of Americans know the
nation is on the wrong track. The old politics, and the old media that feeds it,
are irrelevant now.
The working class has been largely ignored by this administration, save a few
tokens when elections are near, and that's what the questions ought to be about.
What do each of the candidates plan to do to change the conditions that led to
being "more pessimistic about their situation than they have been for more
than a quarter century"? How many times has McCain flip-flopped on economic
policy? Does he have any plans at all to address these problems (beyond
wishful thinking), or will he follow in this administration's footsteps on (the lack of) domestic policy? But no, instead, we get this drivel. The public has not
been well served by a press that seems, as I watch CNN, to spend more time
picking out their clothes than they do preparing to talk about issues, and they
aren't even the worst offenders. I shouldn't be surprised, it happens every four
years, but I hoped for better. I'm afraid old politics still works.
What do you think? Is Robert Reich right that economic conditions will nullify old politics and make this election different?
Posted by Mark Thoma on Monday, April 14, 2008 at 03:24 PM in Economics, Politics, Press |
People are not happy about the economy:
Crisis of Confidence, by Paul Krugman, Commentary, NY Times: The Survey
Research Center of the University of Michigan has been tracking American
economic perceptions since the 1950s. On Friday the center released its latest
estimate of the consumer sentiment index — and it was a stunner. Americans are
more pessimistic about their situation than they have been for more than a
Meanwhile, a recent Pew report found that the percentage of Americans saying
that they’re better off than they were five years ago is at its lowest level in
44 years of polling.
What’s striking about this bleak mood is that by the usual measures the
economy isn’t doing that badly — at least not yet. In particular, the official
unemployment rate of 5.1 percent, though rising, is still fairly low by
historical standards. Yet economic attitudes are worse now than they were in
1992, when the average unemployment rate was 7.5 percent.
Why are we feeling so down?
Our bleakness partly reflects the fact that most Americans are doing
considerably worse than the usual economic measures let on. The ... percentage
of prime-working-age Americans without jobs ... is historically high. Gross
domestic product is up, but the inflation-adjusted income of the median family
is probably lower than it was in 2000. ...
A major reason we’re feeling so down now is that for working Americans the
boom never did come back. Job creation in the post-2001 recovery was pathetic
by Clinton-era standards; wages barely kept up with inflation. Instead,
corporate profits and the incomes of a tiny elite surged — sucking up so much
of the economy’s growth that only crumbs were left for everyone else.
Now the boom that wasn’t has gone bust — and Americans, understandably, have
lost confidence in the prospects for a return to real prosperity.
They have also, I’d suggest, lost confidence in the integrity of our
Early this decade, when the great corporate scandals broke — Enron,
WorldCom, and so on — I expected big-business corruption to become a major
political issue. It didn’t, partly because the march to war had the effect of
changing the subject, partly, perhaps, because Americans weren’t ready to take
a broadly negative view of the system that brought them the previous decade’s
But my impression is that the subprime crisis — with its revelation that
titans of finance were dealing in funny money and its tales of failed
executives receiving hundred-million-dollar going-away presents — has
resurrected the sense that something is rotten in the state of our economy. And
this sense is adding to the general gloom.
The question is, can the next administration end America’s malaise?
Some of the causes of poor economic performance since 2000 are probably
beyond any administration’s control. Raw materials were cheap in the 1990s, but
in the years ahead the rise of China and other emerging economies will place
increasing pressure on world supplies of oil, copper and so on, no matter what
the next president does.
But reinvigorated regulation could help restore confidence to the financial
system. A return to pro-labor policies could help raise real wages.
Pro-competitive policies — which are not the same thing as giving powerful
businesses whatever they want — could help America regain its leadership in
information technology. In other words, there’s a lot that could be done to
perk up our sagging confidence.
That won’t happen, however, unless the next president is someone who
understands what went wrong. And right now, that doesn’t look at all certain.
Posted by Mark Thoma on Monday, April 14, 2008 at 12:42 AM in Economics |
Tim Duy is worried:
Not a Pretty Picture, by Tim Duy: It is simply delusional to deny the impact of surging inflation on household
spending. The April reading on consumer confidence pegs year-ahead
inflation expectations at 4.8%, up from 3.4% just three months earlier in
January and the highest since 1990. This is not good. True, the Fed can
take comfort in the fact that long-term expectations continue to hover around
3%, but I would not become to complacent on that front. If the Fed
continues to pursue policy that confirms agents near term inflation
expectations, longer term expectations will rise accordingly. That would leave
the weak job market as the last defense against a fundamental shift in the
inflation regime. Let’s hope it won’t come to that.
Of course, the Fed sees inflation – it is all over
the most recent minutes:
Real disposable personal income was unchanged in the fourth quarter, held
down by higher food and energy prices, and moved up only slightly in January…
Household survey measures of expectations for year-ahead inflation jumped in
March to their highest levels in about two years; in contrast, survey measures
of longer-term inflation expectations were unchanged or up slightly…
Payroll employment declined substantially; oil prices surged again, crimping
real household incomes; and measures of consumer and business sentiment
Honestly, it is tough to justify the Fed’s continue description of inflation
as merely “elevated” given their own descriptions of inflation in the minutes.
And note the Fed remains hesitant to recognize its role in fostering higher
inflation. They come close on at least one front:
Continue reading "Fed Watch: Not a Pretty Picture" »
Posted by Mark Thoma on Monday, April 14, 2008 at 12:21 AM in Economics, Fed Watch, Monetary Policy |
Ed Leamer says there's only one solution to the housing crisis, use a tax cut
to stimulate demand, a tax cut that has the potential to magically pay for itself:
Home Buyers Needed, by Edward E. Leamer, Commentary, NY Times: Our
politicians are devising economic stimulus measures to encourage consumers to
spend more. These measures will cost taxpayers $200 billion or more. This is
not money well spent. The problem is not too little consumer spending; the
problem is too few home buyers.
Many argue that we don’t need government intervention to bring the buyers
back; we just need the market to work its magic through lower prices.
Well, not entirely. When it comes to housing, lower prices don’t inevitably
cause sales to rise. Why? Because lower housing prices create the expectation
of still lower prices later, causing buyers to wait for a better deal. Left
alone, a weak market therefore overshoots with prices too low and construction
too little. ...
The only solution is for the federal government to offer a temporary 5
percent tax rebate — up to $25,000 — for first-time home buyers. ...
Timing is important. ... Based on what I’m seeing, a stimulus should commence in the second half of
this year and be offered for about 12 months, depending on how the housing
market is responding.
The really good news is that the cost for this program is minimal and would
likely stimulate enough spending and growth to more than pay back the Treasury
with higher revenues later.
Posted by Mark Thoma on Monday, April 14, 2008 at 12:15 AM in Economics, Housing, Taxes |
Posted by Mark Thoma on Monday, April 14, 2008 at 12:06 AM in Links |
Brad DeLong's cure for the third mode?:
The third mode is like the second: A bursting bubble or bad news about
future productivity or interest rates drives the fall in asset prices. But the
fall is larger. Easing monetary policy won't solve this kind of crisis, because
even moderately lower interest rates cannot boost asset prices enough to
restore the financial system to solvency.
When this happens, governments have two options. First, they can simply
nationalize the broken financial system and have the Treasury sort things out
-- and reprivatize the functioning and solvent parts as rapidly as possible.
Government is not the best form of organization of a financial system... It is merely the
best organization available.
The second option is simply inflation. Yes, the financial system is
insolvent, but it has nominal liabilities and either it or its borrowers have
some real assets. Print enough money and boost the price level enough, and the
insolvency problem goes away without the risks entailed by putting the
government in the investment and commercial banking business.
The inflation may be severe, implying massive unjust redistributions and at
least a temporary grave degradation in the price system's capacity to guide
resource allocation. But even this is almost surely better than a depression.
At the start, the Fed assumed that it was facing a first-mode crisis -- a
mere liquidity crisis -- and that the principal cure would be to ensure the
liquidity of fundamentally solvent institutions.
But the Fed has shifted over the past two months toward policies aimed at a
second-mode crisis -- more significant monetary loosening, despite the risks of
higher inflation, extra moral hazard and unjust redistribution.
As Fed Vice Chair Don Kohn recently put it: "We should not hold the economy
hostage to teach a small segment of the population a lesson."
No policymakers are yet considering the possibility that the financial
crisis might turn out to be in the third mode.
John Makin says it's time:
The Inflation Solution to the Housing Mess, by John H. Makin, Commentary, WSJ:
The policy alternatives in the post-housing-bubble world are painfully
unpleasant. In my view, the least bad option is for the Federal Reserve to
print money to help stabilize housing prices and financial markets. Yes, use
reflation to soften the pain for Main Street and Wall Street. If instead we let
housing prices fall another 25%-30% – as predicted by the Case-Shiller Home
Price Index – it's almost certain that Washington will end up nationalizing the
So far, the Fed's lending programs have not provided adequate liquidity to
Congress and the Treasury have proposed voluntary measures to help mortgage
borrowers, but the impact on mortgage availability has been nil. ... Overall
access to credit is contracting...
Meanwhile, the collapse of house prices and the attendant damage to credit
markets have become so severe that the Fed has been forced to create new policy
measures at a fast clip, including the radical decision to take $30 billion
worth of Bear Stearns' risky mortgages onto its own balance sheet, and to open
the discount window to investment banks.
The bottom line is this: The Fed could have watched a run on investment
banks quickly turn into a run on commercial banks, or protected the creditors
of investment banks (like the depositors of commercial banks) at the expense of
Bear Stearns' shareholders. The Fed wisely chose the second alternative.
Still, the Fed's intervention has done no more than buy a respite from the
crisis... The monetary easing I'm recommending can occur by having the Fed
print money to purchase mortgages directly, or purchase Treasury securities
directly. The latter is probably more desirable because it adds higher-quality
assets to the Fed's balance sheet. ...
Fed reflation – to slow the fall in home prices and alleviate the distress
for households and lenders – carries many risks. But the alternative is to
struggle with a patchwork of inadequate efforts to shore up mortgage markets,
while the Fed sticks to its current tactic of pegging the fed funds rate
without increasing the money supply. This, I would submit, is even more risky.
It risks a severe recession that will only intensify the drive for reregulation
of financial and mortgage markets after the election. ...
While there is no guarantee,
direct injection of money holds some promise of alleviating the worst of the
credit crisis. This means that, after the election, Congress will not feel
justified in nationalizing mortgage markets.
While there is a substantial risk that inflation may rise for a time – this
would be the policy goal – monetization is more easily reversible than
nationalization of the mortgage market. ...
I don't think we are there yet.
Posted by Mark Thoma on Sunday, April 13, 2008 at 08:19 PM in Economics, Inflation, Monetary Policy |
Lane Kenworthy says there is evidence suggesting "that inequality matters to people":
Do People Care About Inequality?, by Lane Kenworthy: A question in the
International Social Survey
Programme’s 1999 survey offered respondents pictorial illustrations of
various income distributions and asked “What do you think the distribution in
your country ought to be like — which do you prefer?” The choices were depicted
A relatively small share, fewer than 20% in most countries, said
they preferred type A, B, or C. This isn’t surprising; each of those three has a
large share of the population at the bottom. The bulk of respondents selected
either type D or type E.
D and E are identical in their population shares at the bottom. The
difference between them is that D has a larger share in the middle, whereas E
has a larger share at the top. Average income is higher in E. Inequality is
lower in D.
Interestingly, more respondents in the ISSP survey preferred D than preferred
E. The results are strikingly similar across countries, even among nations that
seemingly have very different orientations toward affluence and equality.
I wouldn’t go so far as to conclude from this that people tend to value low
inequality over high incomes. Other ways of posing the question might yield
different results. But it does suggest that inequality matters to people.
I chose E.
Posted by Mark Thoma on Sunday, April 13, 2008 at 04:56 PM in Economics, Income Distribution |
Brad Setser says case closed:
Case closed: A savings glut, not an investment drought, by Brad Setser: The data at the back of the IMF’s latest WEO (table
A16) indicates that the emerging world’s savings surplus stems from a “glut”
of savings, not a “drought” of investment.
In 2007, the savings rate of the emerging world savings was
almost 10% of GDP higher than its 1986-2001 average. Investment was up as well –
in 2007, it was about 4% higher than its 1986-2001 average. However the rise in
the emerging world’s savings was so large that the emerging world could
investment more “at home” and still have plenty left over to lend to the US and
Europe. That meets my definition of a “glut.”
The big drivers of this trend. “Developing Asia” and the “Middle East.” ... It is historically unusually for an oil importing region to
be saving so much when the oil exporters are also saving so much. Usually a rise
in the savings of the oil exporters is offset by a fall in the savings of the
oil importers. The enormous rise in Chinese savings even as China’s oil import
bill has soared ...
implies a bigger fall in the savings of other oil importing economies.
Government policy has played a big role in the high savings
rates in both regions – whether the undistributed profits of Chinese state firms
(a policy choice) or large fiscal surpluses of the Gulf financed by the
undistributed profits of the Gulf’s state oil companies. It isn’t an accident
that the emerging world’s savings glut has coincided with a rise of state
I suspect the emerging world’s savings glut largely reflects a glut in
government (and SOE) savings.
Dr. Delong has argued that this savings surplus will persist for a long
time, keeping US and European rates low and keeping housing prices in both the
US and Europe higher than otherwise would be the case.
Krugman’s fear that home prices need to fall significantly to bring the
price-to-rent ratio closer to its long-term average won’t be born out.
Possibly. However, I don’t think it entirely implausible
that savings rates in both Asia and the Middle East might start to converge
toward their long-term average. What goes up sometimes also comes down. ...
Posted by Mark Thoma on Sunday, April 13, 2008 at 12:52 PM in Economics, International Finance |
If You Think Your Taxes Are Unjust, Just Think Again, by Kwame Anthony Appiah,
Commentary, Washington Post: Is the U.S. tax code fair? That question is
always in the air at this time of year... But how do we decide what's "fair"?
It's a trickier question than it appears at first. Over the past few
decades, behavioral economists and social psychologists have shown that our
sense of fairness is both powerful and easily manipulated.
In the 1970s, the Nobel Prize-winning economist Thomas Schelling used to put
some questions to his students ... to show how people's ethical preferences on
public policy can be turned around. Suppose, he said, that you were designing a
tax code and wanted to provide a credit -- a rebate, in effect -- for couples
with children. ... In a progressive tax system such as ours, we try to ease the
burden on the less well off, so it might make sense to adjust the child credit
accordingly. Would it be fair, do you think, to give poor parents a bigger
credit than rich parents? Schelling's students were inclined to think so. ...
It would certainly be unfair, they agreed, for richer families to get a bigger
Then Schelling asked his students to think about things in a different way.
Instead of giving families with children a credit, you'd impose a surcharge on
couples with no children. ... Would it be fair to make the childless rich pay a
bigger surcharge than the childless poor? Schelling's students thought so.
But -- hang on a sec -- a bonus for those who have a child amounts to a
penalty for those who don't have one. ... So when poor parents receive a
smaller credit than rich ones, that is, in effect, the same as the childless
poor paying a smaller surcharge than the childless rich. To many, the first
deal sounds unfair and the second sounds fair -- but they're the very same tax
That's a little disturbing, isn't it? Especially if your judgments about
social justice and taxation are central to your moral and political beliefs.
Intuitions about fairness are some of the most basic moral sentiments we have
-- arising, developmental psychologists tell us, soon after we're toddlers.
Stanford psychologist William Damon has conducted studies in which he asked
groups of children to make bracelets. Afterward, the group got a pile of
candies as a reward and was told to divvy them up among themselves. From the
age of 5 on, the arguments kids had about dividing the loot were all about what
was truly "fair" -- equal amounts for everybody or more candy for more
One thing we know is that our sense of what's fair can be hard to reconcile
with a "rational" assessment of costs and benefits. Not least in the realm of
taxation, policymakers ignore the workings of moral psychology at their peril.
Consider the first major defeat of the Clinton presidency. In the spring of
1993, the administration proposed, and the House passed, the nation's first
comprehensive energy tax, a BTU-based levy on fossil fuel consumption...
Surveys showed that most Americans were swiftly convinced that the tax was
unfair because some people, such as truck drivers or farmers with their
tractors, had no choice but to burn more fuel than others. When the president
tried to assuage the noisiest opponents with a host of exemptions, he only made
things worse. (What, special breaks for coal, natural gas and jet fuel? No
How, in the first Bush administration, did the movement to repeal the estate
tax prevail? Not just because it was craftily renamed the "death tax." The
number of Americans who told pollsters that they opposed the "death tax" was
just a few percentage points higher than the number who said they opposed the
"estate tax." As Yale scholars Michael Graetz and Ian Shapiro have shown, it
mattered more that proponents of repeal made a moral argument (however
specious): that the tax was unfair because, for one thing, it involved taxing
Defenders of the tax typically countered with an appeal to self-interest:
But you're not paying it, because it applies to just 2 percent of households.
They didn't quite grasp how powerful appeals to fairness are. In fact, when the
barnstorming Teddy Roosevelt proposed the tax a century ago, he made the case
for it precisely in terms of fairness: He talked about what the wealthy owe to
a nation that made their success possible. ...
[O]nce you start thinking about how powerfully affected we are by our sense
of fairness -- and about how powerfully that sense can be affected by the way
issues are described to us -- it's hard to dodge the fact that whiffy moral
rhetoric can have practical consequences when April 15 rolls around.
At some level, we're those kids with the candy bars. We may change our minds
about what's truly just, but not about how much fairness matters. As faltering
as our intuitions about fairness in public policy are, success comes to the
politician who can enlist them effectively. It's not enough to craft good
policies, you have to convince people that they're wise and just. ...
In case the example isn't clear, suppose that the second tax scheme described
above, the one where there is a penalty for not having children, looks like
||> 0 Children
||No tax or credit
||No tax of credit
Under this tax scheme, if a poor person moves from no children to having
children, they gain (avoid a tax of) $10. But a rich person gains $20. So, in
effect, the rich person is paid more for having children than the poor.
change it to the first example, that is no longer a problem:
||> 0 Children
||No tax or credit
||Credit of $20
||No tax or credit
||Credit of $10
Now it's the opposite problem, it costs the poor $20 to go childless, but it
only costs the rich $10.
Combining the two schemes could avoid this altogether so it doesn't have to
come out this way, this example is only intended to show that the perception of
fairness can be altered by how the question is framed. But I think this example
arises because people have not thought through the problem and realized there is a contradiction of their equity principle (the rich should pay more than the
poor) in each of the two proposed tax schemes. They wouldn't think of it as fair
if they realized the contradiction from the start. If they were aware of the problems, and presented with a third
alternative with no such contradiction, then this
example would come out differently.
To show it's possible to avoid contradictions, consider:
||> 0 Children
||Credit of $20
||Credit of $10
Now, within each column there is the desired equity - the rich always pay
more than the poor (or get a smaller credit), and when moving from no children
to having children, the poor gain $30 (avoid a tax of $10, get a credit of $20),
while the rich only get $25 (avoid $15 in tax, get a credit of $10).
Thus, it seems like all that is going on here is that people did not
thoroughly understand the equity consequences of the policies, and with only two
options available, there was no possible way to avoid a contradiction (i.e., in
the first two example above, there will either be a contradiction within a
column, or from moving between columns).
But while I'm not so sure about the example, I want to sign onto the main
message - the perception of fairness matters (a
point I made here with respect to carbon taxes). Economists think mainly in terms of the efficiency properties of policy alternatives, and often
forget the importance equity considerations in the actual implementation of public policy.
[I've never liked what the editor did to my opening and closing in this
piece, but here's an op-ed from almost exactly three years ago on this topic:
Principles of Taxation.]
Posted by Mark Thoma on Sunday, April 13, 2008 at 10:27 AM in Economics, Taxes |