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Wednesday, May 21, 2008

"The Malthusian Trap Is Not the Whole Story"

Gavin Kennedy wonders if per capita income captures the full story of what was happening during "the first millennia of commerce":

The Malthusian Trap Is Not the Whole Story, Adam Smith's Lost Legacy: ...I am reading Robert Payne’s ‘The Christian Centuries from Christ to Dante’, 1966. ... I didn’t acquire this book from a religious interest in the topic; my motives for doing so are forgotten now, but my interest ... is from a discussion we were having some months ago on Gregory Clarke’s book, Farewell to Alms ... on The Marginal Revolution Blog...

The proposition that I lodged at the back of my mind which did not seem to fit the assertion that population grew (excluding the Black Death years), subsistence incomes had remained the lot of the population (the Malthusian trap) for millennia. Now, I didn’t deny the statistical evidence; I had trouble reconciling the facts with other evidence that this was not the whole story.

Societies were changing slowly and remained unequal; a necessary consequence of the Adam Smith’s last three Ages of Man (shepherding, farming and commerce). The elites of these societies certainly were not generally on subsistence compared to the majority of their populations. They lived differently, if in many years the differences were marginal.

But, and this is what irritated my understanding of Greg Clarke’s thesis, from the great agricultural settled societies onwards, these settled societies (unlike the mobile shepherding tribes) were associated with stone buildings, defensive walls, armed retainers on them, religious mystics and rituals, later, with special buildings (temples, synagogues, churches), and in some cases, philosophers.

Now all these had to be paid for (even in conditions of slavery), both materials and wages (subsistence goods), or circulating capital in Adam Smith’s theory of growth. The only source of this capital is by extraction from annual revenue of society, which the ruling elites controlled. If this diversion is significant (and it was) the per capita subsistence of the majority is not the key statistic about what was happening from the first millennia of commerce.

Moreover the products of what we call stone-based ‘civilisations’ had a lasting impact on future generations in wide areas of knowledge, the pre-condition of the technology that made what is called the ‘industrial revolution’ possible and the almost simultaneous solution to the Malthusian trap as Malthus was writing his book about it.

Back to Robert Payne’s Christian Centuries, which details the stone-built evidence of centuries of architectural monuments, ever greater in their magnificence, to the extraction thesis applied across Europe. Judging by the accounts in Payne’s book, the substance of my nagging doubts about Clarke’s focus on per capita incomes seems firmer now than before.

But then I am only up the 12th century (‘The Gothic Splendour') of Christian Rome’s complicity in the extraction process. I shall press on with the next chapter...

    Posted by on Wednesday, May 21, 2008 at 12:15 AM in Economics, History of Thought | Permalink  TrackBack (0)  Comments (24) 


    links for 2008-05-21

      Posted by on Wednesday, May 21, 2008 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (13) 


      Tuesday, May 20, 2008

      Inexpensive, Low-Quality Goods and Inequality

      A paper by Christian Broda and John Romalis implies that inequality may not have changed as much as we thought in recent decades, and the result is getting lots of publicity. But Lane Kenworthy doesn't think the claim about inequality is very compelling:

      Inequality and Prices, by Lane Kenworthy: Steven Levitt and Will Wilkinson point to a new paper that Levitt says “shatters the conventional wisdom on growing inequality” in the United States. The paper is by Christian Broda and John Romalis, economists at the University of Chicago.

      Here’s their argument: Income inequality has increased over time. But analysis of consumption data indicates that people with low incomes are more likely than those with high incomes to buy inexpensive, low-quality goods. In part because those goods increasingly are produced in China, their prices rose less between 1994 and 2005 than did the prices of goods the rich tend to consume. Hence the standard measure of inequality, which is based on income rather than consumption, greatly overstates the degree to which inequality increased. The incomes of the rich rose more than those of the poor, but because the cost of living increased more for the rich than for the poor, things more or less evened out.

      Their point that the prices of some goods have risen less than the overall inflation rate, and that this is due in large part to imports from China, seems perfectly valid and worth making. It has important implications for our understanding of how absolute living standards for America’s poor have changed over time.

      But I’m not sure why Broda and Romalis, or Levitt and Wilkinson, think this should alter our assessment of the trend in inequality. Do they mean to suggest that the revealed preference of the poor for cheap goods is exogenous to their income? In other words, people with low incomes simply like buying inexpensive lower-quality goods, and they would continue to do so even if they had the same income as the rich. Likewise, the rich simply have a taste for better-quality but pricier goods, and they would continue to purchase them even if they suddenly became income-poor. If this is the assumption, I guess the conclusion follows. But I can’t imagine the authors, or anyone else, really believe that.

      Actually, Levitt may believe it. “How rich you are,” he says, “depends on two things: how much money you have, and how much the stuff you want to buy costs” (my emphasis).

      Consumption is worth paying attention to. But income is important in its own right because it confers capabilities to make choices. What matters, in this view, is what you are able to buy rather than what you want to buy. If a rich person with expensive tastes gets an extra $100,000, she can continue buying high-end clothes and gadgets. Or she can choose to purchase low-end Chinese-made products and save the difference. Suggesting that if she opts for the former there has been no rise in inequality is not very compelling.

      And on the consumption data, recall Gordon and Dew-Becker's statement:

      The paper concludes that data on consumption inequality are too fragile to reach firm conclusions...

      [Felix Salmon also responds in "Rich-Poor Inflation Differentials: Smaller Than You Might Think" (there's a rebuttal comment from James Surowiecki), and my indirect response is here. My point was that an assessment of how imports of low-priced manufactured goods impacts the welfare of the working class has to include all of the changes that have hit labor and product markets as a consequence of increased international trade, and when you do that, it is far less clear that workers have benefited overall even if you take the Broda and Romalis result as given.]

        Posted by on Tuesday, May 20, 2008 at 11:07 AM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (48) 


        "Minimum Wages and Firm Profitability"

        With all of the recent discussion about the minimum wage (e.g.), I thought this paper was worth noting. It finds evidence that the minimum wage transfers income from owners to workers, i.e. that it reduces profit and increases wages, but it does not change the probability of a firm going out of business, and it does not reduce employment. Thus, this paper raises the possibility that an increase in the minimum wage reduces inequality without having much of an impact on aggregate activity or employment:

        Minimum Wages and Firm Profitability, by Mirko Draca, Stephen Machin, and John Van Reenen, NBER WP 13996, May 2008[Open Link]: I. Introduction In debates on the economic impact of labour market regulation, much work has focused on minimum wages. Although standard economic theory unambiguously implies that wage floors raise the wages of the low paid and have a negative impact on employment (Borjas, 2004; Brown, 1999), the existing empirical literature is not so clear. Whilst many studies have shown that minimum wages significantly affect the structure of wages by increasing the relative wages of the low paid (e.g. DiNardo et al, 1996), empirical evidence on the effect on jobs is considerably more mixed (see the recent comprehensive review by Neumark and Wascher, 2007). Some studies have found the expected negative impact on employment[1], yet others have found no impact or, in occasional cases, a positive effect of minimum wages on jobs.[2]

        In the light of this, one may wonder how firms are able to sustain the higher wage costs induced by the minimum wage. One possibility is that firms simply pass on higher wage costs to consumers in the form of price increases. However, there is scant evidence on this score (exceptions are Aaronson, 2001, and Aaronson and French, 2007).[3] An alternative is that the higher wage costs are not fully passed on to consumers and the minimum wage eats directly into profit margins.[4] Since there is a complete absence of any study directly examining the impact of minimum wages on firm profitability, this is the focus of this paper.

        Our identification strategy uses variations in wages induced by the introduction of the national minimum wage (NMW) in the UK as a quasi-experiment to examine the impact of wage floors on firm profitability. The introduction occurred in 1999 after the election of the Labour government that ended seventeen years of Conservative administration. There is evidence that the NMW increased wages for the low paid, but had little impact on employment[5] and so this provides a ripe testing ground for looking at whether profitability changed. We use the fact that the intensity (or “bite”) of the NMW is higher for firms with many low paid workers relative to firms with fewer low paid workers in order to construct treatment and comparison groups. We then compare outcomes in terms of wages, profitability and firm exit and entry using difference in differences methods.

        Our work does uncover a significant negative association between the minimum wage introduction and firm profitability. This association is robust across two very different panel data sources, namely a specialized UK data source on workers in residential care homes (a very low wage sector) and an economy-wide firm level database FAME (Financial Analysis Made Easy) that covers all registered firms in the UK.[6] In both data sets, firm profit margins fall in relatively low wage firms following the introduction of the minimum wage. These effects correspond to about a fifteen percent fall in profit margins for the average care home and an eight to eleven percent reduction in profit margins for the average affected firms in FAME.  ... Finally, we could not find any evidence that low wage firms were forced out of business by the higher wage costs resulting from the minimum wage. Our analysis of an industry level panel dataset suggested that there was some fall in net entry rates following the minimum wage, hinting at a longer run negative effect on the number of firms. These results were rather imprecise, however, and not significant at conventional levels.

          Posted by on Tuesday, May 20, 2008 at 12:33 AM in Economics, Policy, Unemployment | Permalink  TrackBack (1)  Comments (26) 


          "When You Really Go after Each Other, We Get a Spike."

          Robert Reich is worried about "gladiator politics":

          The Real Source of Gladiator Politics, by Robert Reich: I was on television recently, debating a conservative. ... During a commercial break, the producer spoke into my earpiece. "A bit more energy," he said. ... "Rip into him. Only three minutes in the next segment and we want to make the most of it."

          John McCain says he's intent on waging a respectful and civil presidential campaign. Barack Obama says the same. Is it possible...?

          We've grown so accustomed to gutter politics we've even turned it into verbs -- "to bork" (to impugn one's opponent's character), "to swiftboat" (to lie about a critical fact in one's opponent's biography), and, perhaps, "to reverend wright" (to create the impression that one's opponent shares a set of beliefs with a person he has associated with).

          All three require a relentless attack that feeds on itself. Unproven allegations are repeated so often that the attack itself becomes news, as does the manner in which the target responds, after which point the question becomes whether the attack has hurt its target and, if so, whether the damage is fatal. The target is then watched for any signs of personal distress, defensiveness, or anger. Can the target take it? Will the target recant, backtrack, cover up, apologize, reveal more, disassociate himself, go on a counter-attack? What does the target's response tell us about his or her character? The story then shifts to the media -- are they continuing to report it? Are they being responsible in doing so? And after this self-referential orgy, the story moves to the polls -- is the public losing confidence in the candidate? In the days or weeks this goes on, the target has no opportunity to talk about anything other than the attack, and the public hears about nothing else, so the target’s polls may fall, which creates the final story: Can the target ever come back?

          Character assassination, outright lies, and guilt by association are hardly new to American politics. Aaron Burr, New York City Parks Commissioner Robert Moses, Senator Joe McCarthy, and J. Edgar Hoover were avid practitioners. But the modern media, coupled more recently with the blogosphere and YouTube, have made these kinds of attacks even more potent. Political consultants -- those snakelike creatures who slither through the swamps and sinkholes of politics -- have turned all three into low-brow but highly lucrative art forms, cynically valued by the media for their effectiveness. And so-called “527’s -- the headless and mysterious bodies that grow in the interstices of our election laws -- have become their launching pads. In the logic of this underworld, "going negative" is no longer considered a campaign option; it is a necessity. ...

          So what are the odds that McCain and Obama will make an historic break with this sordid tradition...? Each man may sincerely wish to do so. Both have based their candidacies, to some extent, on creating a new politics that rejects the gutter-ball tactics of the old. ... Each is distancing himself from his party’s mud-slinging... Mostly, though, the public is fed up with the rancor -- isn't it?

          I asked the producer who was talking into my earpiece why I had to rip into my opponent. "We see viewership minute by minute," he said, hurriedly (the commercial break was about over). "When you really go after each other, we get a spike."

          It's the spike I'm worried about. I chose not to rip into my opponent but, then again, I'm not running for president. The public says it's tired of gladiator politics. But take a closer look. Political ripping and slashing is is one of America's favorite spectator sports. And the media that informs us about the candidates, and the advertisers who dictate the terms by which they do so, have data to prove it.

          But what makes one attack resonate over another? Attacks occur every day, some capture our attention and others don't. Why is that? I really don't understand what captures the herds attention. Does the media simply mirror our desires as Reich implies, or does the media decide for itself what to hype? Is it because control of the media is concentrated in just a few hands allowing certain issues to be trumped up until they become the news? Is more competition the answer?:

          Obama --Let's Challenge the Murdochization of Our Media, by Katrina vanden Heuvel, The Nation: In a speech Sunday, Barack Obama said he would pursue a vigorous antitrust policy if he becomes U.S. president and singled out the media industry as one area where government regulators would need to be watchful as consolidation increases.

          His statement signals a key opening for media and democracy reformers and the movement they have spawned in this last decade...

          Obama's speech comes on the heels of a sweet victory: Senator Byron Dorgan's successful push back against the Republican-dominated FCC's efforts to repeal the cross-ownership rule --which would allow media oligarchs like Murdoch to gobble up more outlets in one city. Dorgan's Senate resolution --which would work to ban a single owner from controlling a tv station and a newspaper in the same market--has 25 co-sponsors and corresponding legislation has been introduced in the the House.

          Obama is tapping into the powerful and passionate view shared by millions of Americans that our current hyper-consolidated media landscape--with 90% of it controlled by some six corporations- is a disservice to a democracy which demands diverse voices and views.

          I wish it was as simple as adding competition. Don't get me wrong, I'd like to see less concentration in this industry, that's needed, I'm just no sure that we can blame the "gladiator politics" problem on lack of effective competition. If anything, it probably comes from competition.

          I do think it is a market failure, but it's an incentive compatibility problem, not a problem with competition. What entertains people, what captures their eyes and ears, may not be what's best for them as voters. Because their votes are unlikely to make a difference, given a choice between watching an entertaining exchange, or watching something less entertaining but more informative in terms of the issues that matter in the election, they'll choose the entertainment. So the maximization of profit does not result in the maximization of informed voters.

          Sometimes bloggers like to think they are different, but they also play the "monitor the viewership and see what generates spikes" game (checked your site meter lately?). Snarky, shrill, combative "gladiator politics" tend to get the most play among the brand-name blogs just as it does in more mainstream media outlets. Of course the trick is to get both, someone with the talent to be entertaining but also knowledgeable on the issues they are discussing, but you get the sense that when push comes to shove, entertainment does not always take a back seat to news in blogland. I don't mean to equate the blogs and traditional media on every level, that would be silly, but in this respect there are common features. In both cases, the incentive to provide entertainment is strong and as much as we would like journalists to maintain certain standards of professionalism, the economic incentives work against them and in the long-run, left unchecked, the market usually wins.

          So what is the answer? If it were a firm trying to maximize profits, I'd recommend a change in the rules or structure that brings incentives into alignment, e.g. to overcome problems where a manager's personal interests are different from what's best for the firm. For a firm, the goal is known and measurable, it's to maximize profit, so the changes can be gauged against this standard. But if we intervene on behalf of voters, who decides what is in their best interests, what information should get more or less attention, what subjects should be covered, etc.? How do we decide what it means to be informed, and even if we know, how do we measure it to see if our policies are effective? I'm not sure I know how to answer that. If we know the goal, we can look for policies that get us there, but if the goal is vague, how do we determine policy, how do we institute changes that bring the profit motive in line with the motive of having optimally informed voters go to the polls? Maybe you have the answer?

            Posted by on Tuesday, May 20, 2008 at 12:24 AM in Economics, Market Failure, Politics | Permalink  TrackBack (0)  Comments (60) 


            Health Savings Tax Shelter Accounts

            Given the economic incentives built into Health Savings Accounts - which were identified when these accounts were first proposed - there are no surprises here: Health savings accounts offer the most benefit to people who don't really need them:

            GAO Study Again Confirms Health Savings Accounts benefit Primarily High-Income Individuals, by Edwin Park, CBPP: A new Government Accountability Office (GAO) report indicates that Health Savings Accounts are used disproportionately by affluent households.  Its findings also suggest that HSAs are being used extensively as tax shelters.[1]

            What Are Health Savings Accounts and Why Are They Attractive as Tax Shelters? ...Health Savings Accounts (HSAs) are accounts in which individuals with a high-deductible health insurance policy can save money to pay for out-of-pocket health expenses.  In tax year 2008, someone who enrolls in a health plan with a deductible of at least $1,100 for individual coverage and $2,200 for family coverage may establish an HSA.

            HSA contributions are tax deductible.  In 2008, individuals may contribute up to $2,900 for individual coverage and $5,800 for family coverage.  These tax-preferred contributions may be placed in stocks, bonds, or other investment vehicles, with the earnings accruing tax free.  Withdrawals also are tax exempt if used for out-of-pocket medical costs.

            HSAs thus have a unique tax structure.  No other savings vehicle in the federal tax code offers both tax-deductible contributions and tax-free withdrawals, as HSAs do.  Moreover, because the value of a tax deduction rises with an individual’s tax bracket, HSAs provide the largest tax benefits to high-income individuals.  In addition, higher-income individuals generally can afford to contribute more money into HSAs each year than lower-income people.  And since there are no income limits on HSA participation, very affluent individuals whose incomes who are too high for them to qualify for IRA tax breaks, or who have “maxed out” their 401(k) contributions, can use HSAs to shelter additional funds.

            As a result, many health and tax policy analysts have warned that HSAs are likely to be used extensively as tax shelters by high-income individuals.  The Bush Administration and other HSA proponents have repeatedly dismissed this concern and argued that HSAs will not have such effects. ...

            The GAO’s new report on the use of Health Savings Accounts examines IRS data for tax year 2005, as well as employer surveys. The findings bolster those from the GAO’s earlier study.[4] The ... principal findings include:

            Continue reading "Health Savings Tax Shelter Accounts" »

              Posted by on Tuesday, May 20, 2008 at 12:15 AM in Economics, Health Care | Permalink  TrackBack (0)  Comments (30) 


              links for 2008-05-20

                Posted by on Tuesday, May 20, 2008 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (7) 


                Monday, May 19, 2008

                Paul Krugman: Stranded in Suburbia

                Paul Krugman is in Berlin:

                Stranded in Suburbia, by Paul Krugman, Commentary, NY Times: I have seen the future, and it works.

                O.K., I know that these days you’re supposed to see the future in China or India, not in the heart of “old Europe.”

                But we’re living in a world in which oil prices keep setting records... And Europeans who have achieved a high standard of living in spite of very high energy prices — gas in Germany costs more than $8 a gallon — have a lot to teach us about how to deal with that world.

                If Europe’s example is any guide, here are the two secrets of coping with expensive oil: own fuel-efficient cars, and don’t drive them too much.

                Notice that I said that cars should be fuel-efficient — not that people should do without cars altogether. In Germany, as in the United States, the vast majority of families own cars... But the average German car uses about a quarter less gas per mile than the average American car. By and large, the Germans don’t drive itsy-bitsy toy cars, but they do drive modest-sized passenger vehicles rather than S.U.V.’s and pickup trucks.

                In the near future I expect we’ll see Americans moving down the same path. We’ve already done it once: over the course of the 1970s and 1980s...

                Can we also drive less? Yes — but getting there will be a lot harder.

                There have been many news stories in recent weeks about Americans who are changing their behavior in response to expensive gasoline...

                But none of it amounts to much. For example, some major public transit systems are excited about ridership gains of 5 or 10 percent. But fewer than 5 percent of Americans take public transit to work, so this surge of riders takes only a relative handful of drivers off the road.

                Any serious reduction in American driving will require more than this — it will mean changing how and where many of us live.

                To see what I’m talking about, consider where I am at the moment: in a pleasant, middle-class neighborhood consisting mainly of four- or five-story apartment buildings, with easy access to public transit and plenty of local shopping.

                It’s the kind of neighborhood in which people don’t have to drive a lot, but it’s also a kind of neighborhood that barely exists in America, even in big metropolitan areas. Greater Atlanta has roughly the same population as Greater Berlin — but Berlin is a city of trains, buses and bikes, while Atlanta is a city of cars, cars and cars. ...

                Changing the geography of American metropolitan areas will be hard. For one thing, houses last a lot longer than cars. Long after today’s S.U.V.’s have become antique collectors’ items, millions of people will still be living in subdivisions built when gas was $1.50 or less a gallon.

                Infrastructure is another problem. Public transit, in particular, faces a chicken-and-egg problem: it’s hard to justify transit systems unless there’s sufficient population density, yet it’s hard to persuade people to live in denser neighborhoods unless they come with the advantage of transit access.

                And there are, as always in America, the issues of race and class. Despite the gentrification that has taken place in some inner cities, and the plunge in national crime rates to levels not seen in decades, it will be hard to shake the longstanding American association of higher-density living with poverty and personal danger.

                Still, if we’re heading for a prolonged era of scarce, expensive oil, Americans will face increasingly strong incentives to start living like Europeans — maybe not today, and maybe not tomorrow, but soon, and for the rest of our lives.

                  Posted by on Monday, May 19, 2008 at 12:42 AM in Economics, Environment, Oil | Permalink  TrackBack (0)  Comments (107) 


                  "The Free-Trade Paradox"

                  James Surowiecki says closing markets will hurt middle and low income households because it will increase prices on goods that make-up a large fraction of their budgets:

                  The Free-Trade Paradox, by James Surowiecki, The New Yorker: All the acrimony in the primary race between Barack Obama and Hillary Clinton has disguised the fact that ... when it comes to free trade, ... the campaign has looked like a contest over who hates free trade more... The candidates are trying to win the favor of unions and blue-collar voters in states like Ohio and West Virginia, of course, but their positions also reflect a widespread belief that free trade with developing countries, and with China in particular, is a kind of scam perpetrated by the wealthy, who reap the benefits while ordinary Americans bear the cost.

                  It’s an understandable view: how, after all, can it be a good thing for American workers to have to compete with people who get paid seventy cents an hour? As it happens, the negative effect of trade on American wages isn’t that easy to ... quantify. But it’s safe to say that the main burden of trade-related job losses and wage declines has fallen on middle- and lower-income Americans. So standing up to China seems like a logical way to help ordinary Americans do better. But there’s a problem with this approach: the very people who suffer most from free trade are often, paradoxically, among its biggest beneficiaries.

                  The reason for this is simple: free trade with poorer countries has a huge positive impact on the buying power of middle- and lower-income consumers—a much bigger impact than it does on the buying power of wealthier consumers. The less you make, the bigger the percentage of your spending that goes to manufactured goods—clothes, shoes, and the like—whose prices are often directly affected by free trade. The wealthier you are, the more you tend to spend on services—education, leisure, and so on—that are less subject to competition from abroad. In a recent paper..., the University of Chicago economists Christian Broda and John Romalis estimate that poor Americans devote around forty per cent more of their spending to “non-durable goods” than rich Americans do. That means that lower-income Americans get a much bigger benefit from the lower prices that trade with China has brought.

                  Then, too, the specific products that middle- and lower-income Americans buy are much more likely to originate in places like China than the products that wealthier Americans buy. ... (By some estimates, Wal-Mart alone has accounted for nearly a tenth of all imports from China in recent years.) By contrast, much of what wealthier Americans buy is made in the U.S. or in high-wage countries like Germany and Switzerland. ...

                  This may not always be the case; as China’s economy continues to boom, its companies will likely move up the quality ladder and, eventually, become serious competition for high-end American and European manufacturers. But for the moment the benefits of free trade with China, at least when it comes to shopping, are concentrated overwhelmingly among average Americans. ... That means that free trade with China has made average Americans, at least as consumers, much better off—in the sense that it’s made their dollars go further than they otherwise would have.

                  Now, there’s a lot that’s left out of this equation, such as the fact that free trade may help richer Americans by increasing corporate profits. And cheap DVD players may not, on balance, make up for lost jobs. But the reality is that if we toughen our trade relations with China the benefits will be enjoyed by a few, since only a small percentage of Americans now work for companies that compete directly with Chinese manufacturers, while average Americans will feel the pain—in the form of higher prices—far more quickly and more directly than rich Americans will. Obama and Clinton, in their desire to help working Americans—and gain their votes—are pushing for policies that will also hurt them.

                  One comment. Just because someone gained, say, $10 doesn't necessarily mean they will be completely pleased. If they deserved $25 but only received $10, they might object. Thus, while trade may have benefited lower income households by lowering prices on the goods they are likely to consume, and that is certainly a positive, that doesn't mean they won't be frustrated if they aren't receiving what they view as a fair share of the gains from globalization.

                  We know, for example, that real wages for the working class have been stagnant in recent decades, or even declined slightly. So even if you argue that the CPI overstates inflation for low income groups because they consume a disproportionate share of goods with prices that have not risen as fast as the CPI, it's still hard to make the case that the gains have been large. Couple that with the rise in inequality, loss of health care and retirement benefits, decreased job security, etc., and it's easy to see why workers might not feel as though they have been adequately compensated for the change in labor market conditions and economic security that they have endured.

                  But I do agree with the main theme. The answer is not to close markets, the answer is, quoting Larry Summers, to "design more ways to insure that a more integrated and prosperous global economy is one from which all will benefit." We need to find a way to distribute the gains (and the pains) of globalization so they are shared more equally, to increase opportunity so that everyone has the chance to reach their full potential, and we need to reverse the declines in economic security, retirement benefits, and health care coverage that have occurred for middle and lower income households over recent decades.

                    Posted by on Monday, May 19, 2008 at 12:33 AM in Economics, International Trade, Social Insurance | Permalink  TrackBack (0)  Comments (57) 


                    "Who is the Recapitaliser of Last Resort for the ECB?"

                    Richard Baldwin says if the ECB is going to purchase risky assets when financial markets are unstable, then there needs to be a plan to recapitalize the bank in case it goes broke:

                    Buiter’s warning: Who is the recapitaliser of last resort for the ECB?, by Richard Baldwin, Vox EU: The Fed, Bank of England and ECB have recently loaned money to banks against collateral that is riskier than usual – including mortgage-backed securities that are at the heart of the current crisis. Since some of these loans could go bad, questions arise: Can the central bank go broke? Who would recapitalise it if it did?

                    For example, it is not hard to envisage a situation where the Fed would suffer a capital loss on its private assets larger than $40bn. The $29 billion non-recourse loan it extended to JP Morgan to help fund the Bear Stearns transaction is surely at risk. Any loss greater than $40bn would wipe out the Fed’s capital as measured by conventional measures (see detailed discussion in Willem Buiter’s Policy Insight No. 24) and could indeed give it negative capital or equity. Similar calculations apply to other central banks. Would and should this be a cause for concern?

                    The good news is that the conventional balance sheet of the Fed or of any other central bank is a completely unreliable guide to its financial strength. A central bank can always bail out any entity – including itself – through the issuance of base money (as long as the liabilities are domestic-currency-denominated), so there is really no limit. The Fed could double its $900bn balance sheet almost immediately. But this would lead to inflation.

                    An alternative would be for a recapitalisation of the central bank by the national treasury. This option, however, would be quite different in the cases of a national central bank and the ECB. In the usual national setting, a single national treasury or national fiscal authority stands behind its central bank. Unique complications arise in the euro area.

                    Who is the recapitaliser of last resort for the ECB? Under current Eurozone rules, each national fiscal authority stands behind its own central bank, but no fiscal authority stands directly behind the ECB. The lender of last resort function is assigned to the ECB’s members – an arrangement that should work well when the failing private bank has a clear nationality. But who stands behind the ECB as its recapitaliser of last resort?

                    Not the European Community. It has a tiny budget and no discretionary taxation or borrowing powers. Presumably the burden would fall on the Eurozone national treasuries, but in what proportions would they participate in the recapitalising the ECB, should the need arise?

                    Conclusions Central banks can go broke and have done so historically, albeit mainly in developing countries (e.g. Zimbabwe and Tajikistan). As central banks assume risky assets in their support of private banks that are “too large to fail”, it is not impossible to think that the issue could arise in Europe. Recapitalising a central bank involves either a large inflation tax or a recapitalisation by the national treasury. If we are to avoid the former, we need a plan for the latter. But who would do this for the ECB?

                    The ECB euro area has a single central bank but fifteen national fiscal authorities. As long as the nationality of a failing bank is clear, the appropriate national central and treasury can be expected to handle the necessary lender of last resort and recapitalisation responsibilities. The growing complexity of cross-border banking activities in the euro area, however, is creating ambiguities and doubt as to who are the lender of last resort and recapitaliser of last resort for specific banks. To avoid decision-making in crisis settings, the euro area fiscal authorities should – right away – agree on a formula for dividing the fiscal burden of recapitalising the European Central Bank, should the need ever arise.

                      Posted by on Monday, May 19, 2008 at 12:24 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (5) 


                      Experiment: A Second Comment Thread

                      I am trying something new which may not work, but it's worth a try. I have added a second comment link with the title "Technical Comments" to each post. I'm hoping to encourage a wider range of participation, particularly from people interested in the core economic issues surrounding a particular post (both theoretical and empirical).

                      I am going to moderate the comments in the new thread with a heavy hand and keep the discussion at the level you would find in the classroom or in a seminar. The idea is to promote a respectful interchange among people with some formal training in the area and in doing so, get participation from people who might not otherwise leave a comment. As far as I'm concerned, nothing is too technical. Clarifications, qualifications, extensions, links to related academic work (your own work included), debates about the technical merits of claims in a post, anything along those lines is welcome. [I have asked that people leave their names, and that is preferred, but pseudonyms are allowable if you identify yourself in an email.]

                      This is not intended to substitute for the regular comments which are unmoderated for the most part (though there are limits), and nothing will change there. It's intended to serve as a complement that (hopefully) brings about a wider range of participation and more discussion on substantive economic issues. I don't expect that there will be such a discussion with every post, or even that the discussions will be all that common, but hopefully there will be times when a debate on the more technical issues will take place. That would be nice, and I encourage those of you who have studied the economic issues related to things posted here to share what you know with the rest of us.

                        Posted by on Monday, May 19, 2008 at 12:15 AM in Economics, Weblogs | Permalink  TrackBack (0)  Comments (11) 


                        links for 2008-05-19

                          Posted by on Monday, May 19, 2008 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (12) 


                          Sunday, May 18, 2008

                          "The Politics of Human Capital"

                          Will Wilkinson:

                          The Politics of Human Capital, by Will Wilkinson: At Club Troppo, Don Arthur has an excellent long post on the politics of the human capital approach to poverty and inequality. An excerpt:

                          These research findings on early childhood ... create a dilemma for egalitarians. On the one hand, the research suggests that publicly funded investments in early childhood could significantly improve the well being of children from disadvantaged families. But on the other hand, they seem to be stigmatising less educated adults — particularly those who are unable to work and depend on welfare benefits. The poor are portrayed as underdeveloped human beings — ignorant, lethargic and unable to control their impulses. Worse still, their parenting practices have been identified as an important cause of intergenerational disadvantage.

                          This has a familiar ring to it. In the early 19th century Alexis de Tocqueville warned that England’s system of poor relief was cultivating a class of unproductive and disorderly citizens:

                          The number of illegitimate children and criminals grows rapidly and continuously, the indigent population is limitless, the spirit of foresight and of saving becomes more and more alien to the poor. While throughout the rest of the nation education spreads, morals improve, tastes become more refined, manners more polished — the indigent remains motionless, or rather he goes backwards. He could be described as reverting to barbarism. Amidst the marvels of civilisation, he seems to emulate savage man in his ideas and his inclinations (pdf).

                          It’s a fear that’s never really gone away. Recently, the Age’s Russell Skelton spoke with a group of Indigenous elders in Walgett about the effect of the Australian government’s baby bonus:

                          “My daughter has four kids and she cannot read or write,” says a member of the group, who feels powerless as a parent. It will become a terrible circle, predicts another: “Kids who cannot read or write have babies that won’t be able to read or write. But nobody can tell them that. They don’t want to listen.”

                          Some egalitarians worry that embracing the rhetoric of human capital means joining with conservatives to slander to disadvantaged. Social welfare initiatives become less about social justice and more about social control. Instead of focusing on the obligations of the rich, the human capitalists increasingly focus on the behaviour of the poor.

                          I think this is a profound insight. And I think one can see the outlines of a workable third way here. On the one side are conservatives and libertarians overly attached to genetic explanations of socioeconomic achievement, who therefore see spending on early childhood development as futile. On the other side are liberals overly attached to abstract structural explanations of the reproduction of class, who therefore see a focus on state interventions in early childhood as elitist victim-blaming. I find that I actually side more with the liberal complaint than with the conservative one, though not so much for the reason that it is victim-blaming. Many poor parents are to a large extent to blame for the under-development of their children. There doesn’t seem to be a way around that. But I worry very much about the social control of the poor by elites, which Don mentions. However, I worry about the harms of self-reproducing poverty even more. At this point, I’m not sure where I really stand, though I think I’m tilting in favor of Heckmanesque early childhood programs as part of the liberaltarian package, which also would include wage subsidies and beefed-up unemployment benefits together with a radical deregulation of the labor market and the economy at large.

                          This statement seems controversial to me:

                          Many poor parents are to a large extent to blame for the under-development of their children. There doesn’t seem to be a way around that.

                          Is it the parents, or is it their circumstances? Would they still be bad parents if they had been born in a different place (perhaps here), gone to different schools, etc., etc.? If the answer is no, in what sense are the parents to blame for not rising above their circumstances (yes, I know you would have found a way out - you're special - but most people don't)? And if you  believe they still would have been lousy parents even if their social environment had been different, then isn't that just another version of the genetic or inherent traits argument? [Update: I'm wondering if I bought into the "they are bad parents" idea too easily (and think I did) - maybe parenting isn't the problem, it's other social factors that make the difference...]

                          I think circumstances matter a lot, and I don't view "state interventions in early childhood as elitist victim-blaming". If there's blame to be handed out, it should go to our collective societal choice to allow these circumstances to endure even as the nation as a whole has become so wealthy. We put people into nearly impossible conditions to overcome, then point fingers of blame when they cannot escape (and throw great numbers of them into prison).

                          This is, of course, one of the big divides on this issue, those who believe it is largely personal choices that cause people to end up struggling, and those who believe it is largely due to circumstances beyond an individual's control. If you believe that it is largely from things outside an individual's control - the luck of the draw in terms of where you are born or inherited wealth at birth for example - rather than from poor personal choices, then helping people with generous social insurance seems like the right thing to do. Very little of what the individual did personally caused the outcome, so why should they be held accountable for it? But if you believe the opposite, that bad outcomes arise largely from poor personal choices made with free will, and that an individual ought to be held accountable for their choices, then your view of society's obligation to help will differ.

                          I don't know how to solve the poverty problem for sure, and I don't mean that people should never be held accountable for their actions as individuals. But I do know that when it comes to human capital, according to estimates, only "65 percent of blacks and Hispanics leave secondary schooling with a diploma," and that "there is little convergence in high school graduation rates between whites and minorities over the past 35 years." We need to do better than that, we need to do our best to give everyone an equal chance to realize their potential, and if  "Heckmanesque early childhood programs" are part of the answer, what are we waiting for? [Update: See here for more on Heckman's work.]

                            Posted by on Sunday, May 18, 2008 at 02:43 PM in Economics, Social Insurance | Permalink  TrackBack (0)  Comments (48) 


                            Did Larry Summers Concede to the "Forces of Darkness"?

                            Larry Summers responds to charges from Devesh Kapur, Pradap Mehta, and Arvind Subramanianand that he is promoting protectionism, economic nationalism, and unilateralism (see "Is Larry Summers the canary in the mine?"):

                            Larry Summers: I am sorry but not terribly surprised to have provoked Devesh Kapur, Pradap Mehta and Arvind Subramanian (henceforth KMS) with my recent columns on globalization and appropriate American policy responses. Their recent response distorts what I wrote in important respects and much more importantly adopts a posture towards globalization that is analytically dubious and politically untenable.

                            My columns included the assertions that ..., after stating a number of standard economic arguments for free trade “all of these arguments have the very considerable virtue of being correct arguments…the United States will be better off with than without trade agreements and the world will be a richer and safer place with increasing economic integration”.

                            I am neither urging protection nor economic nationalism nor US unilateralism only suggesting a domestic stategy that emphasizes inclusive prosperity and an international strategy that calls for more global cooperation to assure that it is still possible to pursue the necessary objectives of social insurance and economic regulation. Why then have I set KMS off? There are at least two points that need clarification.

                            Continue reading "Did Larry Summers Concede to the "Forces of Darkness"?" »

                              Posted by on Sunday, May 18, 2008 at 12:15 PM in Economics, International Trade, Social Insurance | Permalink  TrackBack (0)  Comments (8) 


                              Bubbles, Not in the Abstract

                              Tim Duy uses an analysis of local conditions as a lead-in to a more general discussion of "The Scars of Losing a Home," bubbles, and Fed policy:

                              Bubbles, Not in the Abstract, by Tim Duy: I am working on a presentation for an audience in the Bend, OR area next week, and thought I would share some charts that I thought interesting. They touched a nerve as well. Using Census data from the American Community Surveys, I looked at relative income profiles in Bend and Eugene in 2000:

                              Continue reading "Bubbles, Not in the Abstract" »

                                Posted by on Sunday, May 18, 2008 at 12:24 AM in Economics, Housing, Monetary Policy | Permalink  TrackBack (0)  Comments (30) 


                                How Transparent?

                                The optimal communications strategy for a central bank is not known:

                                What we know and what we would like to know about central bank communication, by Alan S. Blinder, Jakob de Haan, Michael Ehrmann, Marcel Fratzscher, and David-Jan Jansen: Central banks used to be shrouded in mystery – and believed they should be.[1] A few decades ago, conventional wisdom in central banking circles held that monetary policymakers should say as little as possible and say it cryptically. Over recent years, the understanding of central bank transparency and communication has changed dramatically. As it became increasingly clear that managing expectations is a central part of monetary policy, communication policy has risen in stature from a nuisance to a key instrument in the central banker’s toolkit. As a result, many central banks have become remarkably more transparent by placing much greater weight on their communication.

                                What constitutes an “optimal” communication strategy is, however, by no means clear. The recent debate between Morris and Shin (2002), on the one hand, and Woodford (2005) and Svensson (2006) on the other hand, illustrates that there is still a large controversy on the welfare effects of central bank communication. The recent research on this topic has made several advances but also raises many open questions. A key question is whether communication contributes to the effectiveness of monetary policy by creating genuine news (e.g., by moving short-term interest rates in a desired way) or by reducing noise (e.g., by lowering market uncertainty). There are two main strands in the literature. The first line of research focuses on the impact of central bank communications on financial markets. The basic idea is that, if communications steer expectations successfully, asset prices should react and policy decisions should become more predictable. Both appear to have happened for a great majority of central banks in advanced economies. The second line of research seeks to relate differences in communication strategies across central banks or across time to differences in economic performance.

                                Despite the benefits that communication can in principle generate, it is no panacea. Poorly designed or poorly executed communications clearly can do more harm than good; and it is for instance not obvious that a central bank is always better off by saying more. In practice, central banks do limit their communications. In most cases, internal deliberations are kept secret. Only a few central banks project the future path of their policy rate.[2] And most observe a blackout or “purdah” period before each policy meeting, and in some instances also before important testimonies or reports. The widespread existence of such practices illustrates the conviction of most central bankers that communication can, under certain circumstances, be undesirable and detrimental.

                                Continue reading "How Transparent?" »

                                  Posted by on Sunday, May 18, 2008 at 12:15 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (6) 


                                  links for 2008-05-18

                                    Posted by on Sunday, May 18, 2008 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (16) 


                                    Saturday, May 17, 2008

                                    "The Scars of Losing a Home"

                                    Robert Shiller explains why the president should sign the mortgage relief bill:

                                    The Scars of Losing a Home, by Robert Shiller, Economic View, NY Times: Across the United States, there were 243,353 foreclosure filings in April alone, nearly three times the total in the same month just two years ago... The trend is unmistakable, and suggests that, without government intervention, many millions of American families will be losing their homes before long. ...

                                    Picture a line of moving trucks extending for hundreds of miles: they are taking the furniture of countless families to storage lockers. Picture schoolchildren saying goodbye to their classmates...: they are being abruptly moved to the other side of town.

                                    It’s easy to take a stern view of this spectacle. The arguments go something like this: Foreclosure is not the end of the world. There are valuable lessons to be learned... After all, we live in a capitalist economy that thrives on the sanctity of contracts. The founders of our nation put the contract clause into the Constitution to make it clear that people need to live up to the documents they sign.

                                    This stern view may, in fact, be winning the battle of public opinion. On May 9, the House approved legislation aimed at helping some of the people facing foreclosure, but the president has said he would veto it. ...

                                    Now, let’s ... examine some arguments against the stern view. They have to do with the psychological effects of strict enforcement of a mortgage contract, and economists and people in business may need to be reminded of them. After all, too much attention to abstract economic statistics just might make us overlook what is really important.

                                    Continue reading ""The Scars of Losing a Home"" »

                                      Posted by on Saturday, May 17, 2008 at 02:43 PM in Economics, Housing, Policy | Permalink  TrackBack (0)  Comments (29) 


                                      Taxes During Wars

                                      What do you think of this? It's the Introduction to a book from the Urban Institute, War and Taxes. The argument is that in criticizing the Bush administration for its policies regarding financing the war, "we should be careful not to compare today’s policies to some cardboard cutout version of an imagined past."

                                      Continue reading "Taxes During Wars" »

                                        Posted by on Saturday, May 17, 2008 at 01:17 PM in Budget Deficit, Economics, Fiscal Policy, Iraq and Afghanistan, Taxes | Permalink  TrackBack (0)  Comments (19) 


                                        "Obama and Keynesianism"

                                        The people who believe tax cuts pay for themselves continue to prove they don't really understand economics:

                                        Obama and Keynesianism, by donpedro: In my periodic Googlings for "Obama economics" I've come across this odd post "Obama's Excremental Economics." You might think the title would give it away as a hysterical screed, but it seems to have picked up attention on conservative blogs, and the language doesn't sound completely insane, so I thought it would be worth pointing out what's wrong with it. Here are the main parts of the text:

                                        As prolongation of the 1930s Depression and stagflation in the 1970s demonstrated, Senator Obama’s announced policies are a prescription for economic disaster. Keynesian economic doctrine, not under that name, but in substance, is back in the news in a truly menacing way. Senator Obama proposes to repeat the policies of Franklin Roosevelt’s New Deal that turned an ordinary two-year recession into an eight-year disaster, with unemployment rates continuously in the high teens.

                                        The key elements of Senator Obama’s proposed economic policies, as in the New Deal and the stagflation of the 1970s, are much higher taxes, along with a pervasive increase of business regulations and price controls in healthcare and energy (which sharply depress business activity and employment rates), full-frontal embrace of labor unions (which will push up wages and benefits to levels deterring profitable expansion of industrial production), and massive new government deficit spending (which will accelerate the already dangerously high rate of inflation and devaluation of the dollar). Carried out as he proposes, Senator Obama’s polices will lead us again into the swamp of stagflation.

                                        So, to sum up the key points: 1) Keynesianism is a bunch of bad stuff. 2) Keynesianism (or the New Deal) caused the Great Depression. 3) Keynesianism caused the stagflation of the 1970s. 4) Obama is proposing to reintroduce Keynesianism/bad stuff.

                                        1) Keynesianism is a bunch of bad stuff. So what is Keynesiasm anyway? Boiled down to its essence, Keynesiansim is an economic theory that says that the government can help get the economy out of a slump. For a more complete explanation, Wikipedia isn't bad. Of the points mentioned in the post--higher taxes, business regulation, price controls, labor unions, deficit spending--none are really "Keynesian," except for deficit spending, and that only in time of an economic downturn. In boom times, the Keynesian view is that the government should run a surplus.

                                        2) Keynesianism (or the New Deal) prolonged the Great Depression. This is a fringe view, and I'd never even heard of the idea until I read this post. Here is part of a discussion in which Brad Delong defends his statement that "A normal person would not argue that the New Deal prolonged the Great Depression."

                                        3) Keynesianism caused the stagflation of the 1970s. I believe the mainstream view of the stagflation of the 1970s is that it was caused by a combination of the oil price shock and the subsequent unsuccessful effort of central banks to avoid an economic downturn by priming the money supply (a Keynesian response.) But this was really a damned-either-way situation. If the central banks had reined in the money supply, we would have had a bigger recession, albeit without inflation.

                                        4) Obama is proposing to reintroduce Keynesianism/bad stuff. Obama can't be reintroducing Keynesianism, since it's been the guiding force for macroeconomic policy almost as long as John McCain has been alive. In recent months, when the Fed lowered interest rates and Bush signed a fiscal stimulus package, we saw Keynesianism in action. There are differences of opinion as to which Keynesian levers to use, and how hard to pull, but no one seriously argues that when it comes to the recession the government should just sit back and wait for it to end. (OK, OK, there are a few academics, but even the Republicans have had enough sense to keep them far away from actual macroeconomic policy.)

                                        How about higher taxes, increased business regulations, price controls, more support for labor unions, and deficit spending? Yes, Obama is proposing higher taxes on the wealthiest Americans, but wants to lower taxes for the middle class. Yes, he does want to modernize financial regulation, as do both McCain and Bush. Yes, in the energy sector, he wants to introduce cap-and-trade, but so does McCain. Yes, Obama is proposing a greater role for the government in health care. McCain, in contrast, wants to kill the current health care system. Yes, Obama does support labor unions, and, yes, greater union power just might push up wages and benefits a bit, but most people take that as a good thing.

                                        On deficit spending, if that's your issue, you should definitely vote for Obama. As we've noted before, McCain's program would result in massive new deficits which would dwarf what Obama is proposing. Consider this:

                                        Mr. McCain’s plan would appear to result in the biggest jump in the deficit, independent analyses based on Congressional Budget Office figures suggest. A calculation done by the nonpartisan Tax Policy Center in Washington found that his tax and budget plans, if enacted as proposed, would add at least $5.7 trillion to the national debt over the next decade.

                                        Fiscal monitors say it is harder to compute the effect of the Democratic candidates’ measures because they are more intricate. They estimate that ... the impact of either on the deficit would be less than one-third that of the McCain plan.

                                        Although the "excremental" essay is mostly crap, in some sense it gets Obama's vision right. He does hope to build on the successes of the New Deal--things like Social Security, Medicare, unemployment insurance, and federal deposit insurance--that have made our lives better. Fortunately, despite years of Republican propaganda (like the above essay) which has tried to make government out to be the enemy, most Americans understand that the New Deal was a good thing, and few will be scared by the prospect of "menacing" Keynesianism.

                                          Posted by on Saturday, May 17, 2008 at 12:51 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (87) 


                                          "Reflections on Stolper and Schumpeter"

                                          Michael Perelman recalls his time as a student of Wolfgang Stolper:

                                          Two Degrees of Separation: Reflections on Stolper and Schumpeter, by Michael Perelman : A few months ago, I was asked to write an article about my experiences as an undergraduate student of Wolfgang Stolper, probably based on a conversation that I had with Mike Scherer. After I submitted it, the editors told me that they wanted details about Stolper’s relationship with Schumpeter, when my conversation with Mike had concerned my lack of any real knowledge of the subject — as the following note will prove.

                                          Two Degrees of Separation: Reflections on Stolper and Schumpeter First of all, I am flattered to be even vaguely associated with such world-class intellectuals as Mark Perlman, Wolfgang Stolper, and Joseph Schumpeter.

                                          I learned about the relationship between Wolfgang Stolper and Joseph Schumpeter as a very young, naïve, and certainly unpromising student. I switched majors every year, a symptom of both my entirely unsystematic manner of learning and my hunger for new ideas.

                                          I only took one international economics class with Professor Stolper in 1959. The course was the most unique educational experience of my life. More often than not he would begin class by handing out papers, explaining that if he were actually going to talk about economics, this is what you would say today. Instead, he would tell us about an upcoming event on campus, whether it was E. Power Biggs, who was going to play Bach on the great organ, or Paul Tillich, who was going to lecture on theology. The rest of the class would be devoted to alerting us to the fine points of the forthcoming presentation ‑‑ its context, its importance, and most important what to look for while attending.

                                          Someone told us that Professor Stolper had made his living for awhile writing Ph.D. theses for wealthy students in various disciplines. I have no idea if this story was true, but judging from his performance, I would not doubt it for a minute. In any case, this class was ideally suited for an enthusiastic student like me.

                                          Needless to say, virtually everything in his lectures was over our heads, yet we were keenly interested in what he said, realizing that it was significant. Although I was not a bashful student by any means and I found his information fascinating, for some reason the idea never entered my head to approach him to ask for elaboration or clarification of any of his classes. I do not recall any of the other students talking with him after class either.

                                          Perhaps, he just seemed to be too important to be approachable, even though he never projected any Old World standoffishness. Months later, and sometimes even after years, students from the class would encounter each other with the greeting, “I finally figured out what Stolper was saying about X.”

                                          However, one recurrent theme in the class is etched in my memory. Professor Stolper often spoke of one person of great importance about whom none of us had ever heard. He probably wrongly assumed that students educated enough to be admitted to the University of Michigan would certainly be familiar with the name Joseph Schumpeter. Of course, we were not. I have no recollection of any theoretical analysis of Schumpeter ‑‑ only that he was a denizen of Old Europe who led a remarkable life.

                                          Professor Stolper told us riveting anecdotes about Schumpeter, including his three great ambitions to be the greatest economist, the greatest horseman, and the greatest lover. Something that sounded so outlandish was sure to capture undergraduates’ attention. One particular story that was firmly imprinted in my mind concerned Professor Stolper’s departure from Europe with Schumpeter. He told us that when Schumpeter was about to depart for Harvard, a man limped up to embrace him, telling him something like, “I can never thank you enough Professor Schumpeter. You, a captain in the cavalry, were willing to duel with me, only a lieutenant in the infantry.” Professor Stolper explained that Schumpeter had made some disparaging remarks about the service that the librarian had given his students, so the librarian challenged him to a duel.

                                          I later read accounts of the duel, but nothing about either the wound or the final embrace. Maybe Professor Stolper embellished a bit, but it was certainly an excellent teaching technique to make students take an interest in more important matters. I suspect all the other students in the class would also still have a strong memory of the story.

                                          If you were to ask me what, in particular, we learned in the class, I would not be able to offer you much. Yet I feel confident that like other fellow students I benefited by unconsciously soaking up ideas, without any recollection of their source.

                                          For example, I have absolutely no recollection about any of Schumpeter’s theories being discussed in class. Yet, decades later, I found strong parallels between Schumpeter’s way of looking at the world and my own.

                                          For example, I became fascinated by the way that the leading economists in the United States analyzed railroads, and other capital-intensive industry. Afterwards, I realized that their analysis was almost identical to that of Schumpeter, especially the Schumpeter of Capitalism, Socialism, and Democracy ‑‑ so much so that I was led to believe that they may have been an unacknowledged source of his work. Of course, both Schumpeter and the American economists were well schooled in the work of the German historical school, which may just as well explain the commonality.

                                          I did find that one of these economists, David A. Wells, a name well known at Harvard, did clearly anticipate the theory of creative destruction (see Perelman 1995, p. 192). For Wells, the measure of success of an invention is the extent to which it can destroy capital values. He offered as an example “[t]he notable destruction or great impairment in the value of ships consequent upon the opening of the [Suez] Canal” (Wells 1889, p. 30). Wells asserted that each generation of ships becomes obsolete in a decade. From here, he concluded, “nothing marks more clearly the rate of material progress than the rapidity with which that which is old and has been considered wealth is destroyed by the results of new inventions and discoveries” (Ibid., p. 31). Wells claimed no originality for his work, writing:

                                          by an economic law, which Mr. [Edward] Atkinson, of Boston, more than others, has recognized and formulated, all material progress is affected through the destruction of capital by invention and discovery, and the rapidity of such destruction is the best indicator of the rapidity of progress. [Wells 1885, p. 146; see also, p. 238; and Atkinson 1889]

                                          Of course, Schumpeter may well have unconsciously assimilated Wells’s notions just as I have done with those of Schumpeter and Professor Stolper.

                                          A few years ago, Professor Stolper stopped by the History of Economics Conference. I told him how inspiring his class was. He seemed a bit embarrassed, or even puzzled, telling me that my response was surprising because people had told him that his teaching was not very good. How wrong he was!

                                          I like to imagine that if Stolper imbued the essence of Schumpeter, my brief and distant encounter with Stolper while sitting in the second or third row of a dingy room in Ann Arbor provided a vague and distant relationship with both great economists.
                                          [References ...]

                                            Posted by on Saturday, May 17, 2008 at 12:24 AM in Economics | Permalink  TrackBack (0)  Comments (6) 


                                            links for 2008-05-17

                                              Posted by on Saturday, May 17, 2008 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (11) 


                                              Friday, May 16, 2008

                                              "Solving the Food Crisis"

                                              Nobel Peace Prize winner Muhammad Yunus outlines steps that need to be taken to solve the world's food crisis:

                                              Solving the food crisis, by Muhammad Yunus, Commentary, Comment is Free: The global food crisis is a dire reality for millions of the world's poor and a major test for the international community. ... Rising food prices have created tremendous pressure in the lives of poor people, for whom basic food can consume as much as two-thirds of their income. ...

                                              UN Secretary-General Ban Ki-Moon deserves credit for convening the leaders of 27 UN agencies and programs to organize a coordinated response. They have agreed to establish a high-level task force under Ban's leadership, with sound immediate objectives.

                                              A comprehensive global plan should include the following six elements:

                                              First, the international community must rapidly mobilize at least $755m, identified by the World Food Programme and UN leaders as necessary for emergency food relief. ...

                                              Second, we must ensure that farmers are equipped to produce the next harvest. Farmers in many areas cannot afford seeds to plant or natural gas-based fertilizer, whose price has risen along with the price of oil. The International Fund for Agricultural Development is delivering $200m to poor farmers in the most affected countries... The Food and Agriculture Organization needs an additional $1.7bn to help provide seed and fertilizer. ...

                                              Relative to the size and gravity of the crisis, these sums are very modest and affordable for the international community. In the US alone, high prices have been a boon to farmers and have saved the government billions in crop support payments. The world should respond promptly and generously to help those struggling to survive what the UN calls a "silent tsunami."

                                              Third, beyond these immediate actions, new policies are needed to address the underlying causes of the crisis. Crop subsidies and export controls in many important countries are distorting markets and raising prices; they should be eliminated. In particular, subsidies for ethanol ... cannot be justified...

                                              Fourth, the current crisis should not deter the world's search for long-term global solutions to poverty and environmental protection. For example, we should continue efforts to move to second-generation fuels made from waste materials and non-food crops without displacing land used food production. Even the limited amount of biofuels on the market today have been credited with reducing the price of oil, and next-generation fuels can be economically advantageous for poor countries with much less effect on food production. As bad as the impact of high food prices has been, the impact of high oil prices has been worse...

                                              Fifth, the world must develop a new system of long-term investments in agriculture. A new "green revolution" is required to meet the global demands, even as climate change is increasing the stresses on agriculture. More productive crops are needed, but also ones that are drought-resistant and salt-tolerant. ...

                                              Sixth, to help fund these important initiatives, I propose that each oil-exporting country create a "poverty and agriculture fund", contributing a fixed amount - perhaps 10% - of the price of every barrel of oil exported. This would be a small fraction of the windfall they have been gaining from higher prices. The funds would be managed by the founding nations and devoted to overcoming poverty, improving agricultural yields, supporting research for new technology, and creating social businesses to help solve the problems of the poor, such as health care, education and women's empowerment.

                                              Just as the US should return a portion of its windfall from grain exports through increased support of food aid, so too should oil-exporting countries contribute a portion of the greatest wealth transfer the world has ever known to help feed the poor. ...

                                              [T]he pressures of a growing and more prosperous population will not go away - demand for food and energy will grow, and the poor will suffer most. The need for long-term investment in agriculture and food aid will grow as well.

                                                Posted by on Friday, May 16, 2008 at 12:51 PM in Development, Economics | Permalink  TrackBack (0)  Comments (34) 


                                                Loyalty Cards and Polymorphic Equilibria

                                                Tyler Cowen:

                                                Retail loyalty card programs, by Tyler Cowen: From some time ago, Kevin Drum reports:

                                                I really loathe retail loyalty card programs.

                                                These programs serve two functions. First, they are a form of price discrimination. Buyers who are willing to collect and show the cards pay lower prices while the "I can't be bothered with this ****" types pay higher prices.

                                                Second, retail loyalty cards enforce partial collusion ex post in an oligopolistic setting. In other words, cards and frequent flyer programs "lock in" buyers to their favored firms. Once that lock-in is accomplished, all firms have weaker incentives to cut price to lure away buyers from their favorites. (The smarty-pants point is to note that firms have to give buyers a better deal upfront in anticipation of this lock-in but still if the company moves first with a non-negotiable offer it still can come out ahead and raise the P/MC ratio.)

                                                The first function is usually welfare-improving, the second function usually is not. Overall you personally benefit from loyalty card programs if you don't mind holding the cards (you have a thick wallet) and you have a strongly favorite company/product anyway. In the latter case you are likely locked in anyway, so the strengthening of the lock-in effect doesn't so much restrict your freedom. This is tricky of course because you might miss out on preemptive price cuts from your favorite firm to keep you, since maybe they don't otherwise know how much you love their stuff. Still, I will stick with this mechanism as a plausible guess of the net effect.

                                                You suffer from loyalty card programs if...you hate them. Not only do the programs and the smiling clerks bug you but you are the kind of person who ends up paying more. Which means you hate the programs even more. Which means...

                                                But wait: the equilibrium seems to converge and so Kevin Drum's anger at retail loyalty card programs remains, in reality, quite low.

                                                Grocery store cards don't lock you in as described above since you can get one for each store, and having one doesn't stop you from shopping for lower prices elsewhere (though occasionally they will give a discount or some other benefit for reaching an accumulated total which does have a lock-in effect). The lock-in is more like S&H or Blue Chip stamps in the old days if you remember those (you would get a certain number of stamps per dollar spent at, say, a grocery store, and the stamps would be collected in books, and the books could be redeemed for items in a catalogue, the more books, the better the item). At that time there were two competing strategies for retail stores, some stores offered stamps and others didn't, and both were successful side by side - one didn't seem to drive out the other - they seemed to coexist in equilibrium (they were polymorphic - the linked paper mentions the trading stamp example). But in the 1970s this changed and the stamps became less common, perhaps because inflation caused variation in the value of the stamps (?), and the programs fell out of favor. Since then, the trading stamp programs have been replaced by other gimmicks that lock customers into using a particular means of payment or shopping in a particular place.

                                                But the two different types of strategies still appear to coexist, e.g some credit cards accumulate rewards and other don't, not all grocery stores require those stupid cards even if they aren't always easy to find, etc., and one reason for that could be strongly polarized customer preferences - Kevin Drum and anti Kevin Drum types - that support a partitioned market.

                                                  Posted by on Friday, May 16, 2008 at 03:33 AM in Economics | Permalink  TrackBack (0)  Comments (27) 


                                                  How and Why Do Bubbles Form?

                                                  What causes bubbles? Here's one set of views:

                                                  Bernanke's Bubble Laboratory, by Justin Lahart, WSJ [Open Link]: First came the tech-stock bubble. Then there were bubbles in housing and credit. Chinese stocks took off like a rocket. Now, as prices soar on every material from oil to corn, some suggest there's a bubble in commodities.

                                                  But how and why do bubbles form? Economists traditionally haven't offered much insight. ... Now, the study of financial bubbles is hot. Its hub is Princeton..., home to a band of young scholars hired by ... Ben Bernanke...

                                                  [T]he Princeton squad argues that the Fed can and should try to restrain bubbles, rather than following former Chairman Alan Greenspan's approach: watchful waiting while prices rise and then cleaning up the mess after a bubble bursts. ...

                                                  The Fed is giving the activist approach some thought. ... Yet the very concept of bubbles is at odds with the view of some that market prices reflect the collective knowledge of multitudes. There are economists who dispute the existence of bubbles -- arguing, for instance, that what happened to prices in the dot-com boom was a rational response to the possibility that nascent Internet firms might turn into Microsofts. But these economists' numbers are thinning. ...

                                                  Bubbles don't spring from nowhere. They're usually tied to a development with far-reaching effects: electricity and autos in the 1920s, the Internet in the 1990s, the growth of China and India. At the outset, a surge in the values of related businesses and goods is often justified. But then it detaches from reality. ...

                                                  Mr. [Harrison] Hong ... argues that big innovations lead to big differences of opinion between bullish and bearish investors. But the deck is stacked in favor of the optimists.

                                                  One who believes a stock is too high can short it, borrowing shares and selling them in hopes of replacing them when they're cheaper. But this can be costly, both in the fees and in the risk of huge losses if the stock keeps rising. Many big investors rarely short stocks. When differences between bullish investors and bearish ones are extreme, many of the bears simply move to the sidelines. Then, with only optimists playing, prices go higher and higher.

                                                  In housing and the credit markets, the innovation was slicing and dicing loans in novel ways. As investors bought the resulting mortgage securities, they provided abundant capital for home buyers; buoyed by this and falling interest rates, house prices surged.

                                                  Betting against house prices is hard; only a few sophisticated investors found roundabout ways to do it, in derivatives markets. Most skeptics about the housing boom just sat it out; the optimists were unchecked.

                                                  At some point in a bubble, optimists' enthusiasm runs its course. Prices turn down... -- and then they tumble. ... Mr. Hong and Harvard's Jeremy Stein ... say ... prices fall more rapidly than they go up. ... That ... offers a strong argument, in Mr. Hong's view, for government to restrain bubbles and the borrowing that fuels them.

                                                  At the height of the tech bubble, Internet stocks changed hands three times as frequently as other shares. "The two most important characteristics of a bubble," says Wei Xiong, are: "People pay a crazy price and people trade like crazy." ...

                                                  According to a model [Wei Xiong] developed with Mr. Scheinkman, investors dogmatically believe they are right and those who differ are wrong. And as one set of investors becomes less optimistic, another takes its place. Investors figure they can always sell at a higher price. That view leads to even more trading, and, at the extreme, stock prices can go beyond any individual investor's fundamental valuation. ...

                                                  Bubbles often keep inflating despite cautions such as Mr. Greenspan's famous warning of "irrational exuberance." Tech stocks rose for more than three years after he said that, in late 1996. Markus Brunnermeier ... thinks he understands why this happens. ...

                                                  Inspired by Mr. Hayek's work, Mr. Brunnermeier studied economics. But in the 1990s, soaring tech stocks made him skeptical of the quality of information that prices convey. ...

                                                  Under the Hayek view, bubbles don't make sense. As soon as some group of traders irrationally pushes prices way up, more-rational traders should take advantage of the mispricing by selling -- bringing prices back down. But the tech boom reinforced an oft-quoted warning from John Maynard Keynes: "The market can stay irrational longer than you can stay solvent."

                                                  So investors who spot the bubble attack only if each is confident that other skeptics are on board. In work done with Mr. Abreu, Mr. Brunnermeier concluded that if all the rational investors could agree to bet against the bubble, they could make big profits. But if they can't coordinate, it's risky for any one of them to bet against a bubble. So it makes sense to ride it up and then get out quickly as soon as the bubble's existence becomes common knowledge. ...

                                                  Looking through security filings, Mr. Brunnermeier and Stanford's Stefan Nagel found that hedge funds on the whole "skillfully anticipated price peaks" in individual tech stocks, cutting back before prices collapsed and shifting into other tech stocks that were still rising. Hedge funds' overall exposure to tech stocks peaked in September 1999, six months before the stocks peaked. They rode the bubble higher and got out close to the right time.

                                                  Mr. Brunnermeier saw the bubble, too. He thought people were crazy for buying tech stocks. But as both the hedge funds' gains and his theoretical work suggest, even if you know there's a bubble, it might be smart to go along.

                                                  "I was always convinced that there was an Internet bubble going on and never invested in Internet stocks," he says. "My brother-in-law did. My wife always complained that I studied finance and her brother was making a lot of money on Internet stocks."

                                                    Posted by on Friday, May 16, 2008 at 02:16 AM in Economics, Financial System | Permalink  TrackBack (0)  Comments (38) 


                                                    ''Governance Writ Small''

                                                    Dani Rodrik argues that development strategies emphasizing good governance instead of specifically targeting binding constraints on growth are unlikely to be effective:

                                                    Getting Governance Right Is Good for Economic Growth, by Dani Rodrik, Project Syndicate: Economists used to tell governments to fix their policies. Now they tell them to fix their institutions. Their new reform agenda covers a long list of objectives, including reducing corruption, improving the rule of law, increasing the accountability and effectiveness of public institutions, and enhancing the access and voice of citizens.

                                                    Real and sustainable change is supposedly possible only by transforming the ''rules of the game'' - the manner in which governments operate and relate to the private sector.

                                                    Good governance is, of course, essential..., the intrinsic importance of the rule of law, transparency, voice, accountability, or effective government is obvious. We might even say that good governance is development itself.

                                                    Unfortunately, much of the discussion surrounding governance reforms fails to make a distinction between governance-as-an-end and governance-as-a means. The result is muddled thinking and inappropriate strategies for reform.

                                                    Economists and aid agencies would be more useful if they turned their attention to what one might call ''governance writ small.''

                                                    This requires moving away from the broad governance agenda and focusing on reforms of specific institutions in order to target binding constraints on growth.

                                                    Poor countries suffer from a multitude of growth constraints, and effective reforms address the most binding among them.

                                                    Poor governance may, in general, be the binding constraint in Zimbabwe and a few other countries, but it was not in China, Vietnam, or Cambodia - countries that are growing rapidly despite poor governance - and it most surely is not in Ethiopia, South Africa, El Salvador, Mexico, or Brazil.

                                                    As a rule, broad governance reform is neither necessary nor sufficient for growth. ... As desirable as the rule of law and similar reforms may be in the long run and for development in general, they rarely deserve priority as part of a growth strategy.

                                                    Governance writ small focuses instead on those institutional arrangements that can best relax the constraints on growth.

                                                    Continue reading "''Governance Writ Small''" »

                                                      Posted by on Friday, May 16, 2008 at 01:17 AM in Development, Economics | Permalink  TrackBack (0)  Comments (5) 


                                                      links for 2008-05-16

                                                        Posted by on Friday, May 16, 2008 at 12:35 AM in Links | Permalink  TrackBack (0)  Comments (14) 


                                                        "The Rights Man"

                                                        A rerun:

                                                        The Right's Man, by Paul Krugman, Commentary, NY Times, March 13, 2006: It's time for some straight talk about John McCain. He isn't a moderate. He's much less of a maverick than you'd think. And he isn't the straight talker he claims to be.

                                                        Mr. McCain's reputation as a moderate may be based on his former opposition to the Bush tax cuts. In 2001 he declared, "I cannot in good conscience support a tax cut in which so many of the benefits go to the most fortunate among us."

                                                        But now — at a time of huge budget deficits and an expensive war, when the case against tax cuts for the rich is even stronger — Mr. McCain is happy to shower benefits on the most fortunate. He recently voted to extend tax cuts on dividends and capital gains, an action that will worsen the budget deficit while mainly benefiting people with very high incomes.

                                                        When it comes to foreign policy, Mr. McCain was never moderate. During the 2000 campaign he called for a policy of "rogue state rollback," anticipating the "Bush doctrine" of pre-emptive war unveiled two years later. Mr. McCain called for a systematic effort to overthrow nasty regimes even if they posed no imminent threat to the United States; he singled out Iraq, Libya and North Korea. Mr. McCain's aggressive views on foreign policy, and his expressed willingness, almost eagerness, to commit U.S. ground forces overseas, explain why he, not George W. Bush, was the favored candidate of neoconservative pundits such as William Kristol of The Weekly Standard. ...

                                                        When it comes to social issues, Mr. McCain, who once called Pat Robertson and Jerry Falwell "agents of intolerance," met with Mr. Falwell late last year. Perhaps as a result, he is now taking positions friendly to the religious right. Most notably, Mr. McCain's spokesperson says that he would have signed South Dakota's extremist new anti-abortion law. ...

                                                        The bottom line is that Mr. McCain isn't a moderate; he's a man of the hard right. How far right? A statistical analysis of Mr. McCain's recent voting record, available at www.voteview.com, ranks him as the Senate's third most conservative member.

                                                        What about Mr. McCain's reputation as a maverick? This comes from the fact that every now and then he seems to declare his independence from the Bush administration, as he did in pushing through his anti-torture bill.

                                                        But a funny thing happened on the way to Guantánamo. President Bush, when signing the bill, appended a statement that in effect said that he was free to disregard the law whenever he chose. Mr. McCain protested, but there are apparently no hard feelings: at the recent Southern Republican Leadership Conference he effusively praised Mr. Bush.

                                                        And I'm sorry to say that this is typical of Mr. McCain. Every once in a while he makes headlines by apparently defying Mr. Bush, but he always returns to the fold, even if the abuses he railed against continue unabated.

                                                        So here's what you need to know about John McCain.

                                                        He isn't a straight talker..., he's a politician as slippery and evasive as, well, George W. Bush. He isn't a moderate. Mr. McCain's policy positions and Senate votes don't just place him at the right end of America's political spectrum; they place him in the right wing of the Republican Party.

                                                        And he isn't a maverick, at least not when it counts. When the cameras are rolling, Mr. McCain can sometimes be seen striking a brave pose of opposition to the White House. But when it matters, when the Bush administration's ability to do whatever it wants is at stake, Mr. McCain always toes the party line.

                                                        It's worth recalling that during the 2000 election campaign George W. Bush was widely portrayed by the news media both as a moderate and as a straight-shooter. As Mr. Bush has said, "Fool me once, shame on — shame on you. Fool me — you can't get fooled again."

                                                          Posted by on Friday, May 16, 2008 at 12:33 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (9) 


                                                          Thursday, May 15, 2008

                                                          "Change is in the Air for Financial Superclass"

                                                          Is the financial superclass about to have its wings clipped?

                                                          Change is in the air for financial superclass, by David Rothkopf, Commentary, Financial Times: ...The re-engineering of international finance has been one of the transformational trends of our times – in just a quarter-century, capital flows became massive, instantaneous and controlled by a new breed of traders representing a handful of major financial institutions from a few countries. Their rewards have transcended any in history as shown by an estimate ... that the top hedge fund manager last year made $3bn.

                                                          The concentration of power has also steadily grown..., the key executives are in the US and Europe, underscoring the transatlantic nature of this elite. Change, however, is in the air. The history of elites is one of their rising up, over-reaching, being reined in and supplanted by a new elite. Several recent developments suggest that the financial crisis could signal the high-water mark of power for this group.

                                                          First, the crisis is prompting a re-regulatory drive. The power of financial elites had been evident in their ability to argue that global financial markets and markets in new securities should remain “self-regulating” (how many of them would hop into a self-regulating taxicab?), then when crisis comes ... these champions of less government involvement have then persuaded governments to cauterise their wounds.

                                                          Now, however, there are encouraging, if preliminary, signs of a push towards more effective collaboration between governments – the first steps towards creating the much needed checks on global markets... This could erode the agility of financial elites to play governments off against each other, with the weakest regulator setting the rules.

                                                          Second, the credit crisis is exacerbating the emerging backlash against corporate excess. Elites make billions on markets whether they go up or down and their institutions win government support while the little guy loses his home. ... The crisis has focused attention on the obscene inequities of this era – the world’s 1,100 richest people have almost twice the assets of the poorest 2.5bn. There are signs of open and growing anger at this, as we have seen this week in the Netherlands with calls to address bonuses, and the attack on the world’s financial markets as “a monster that must be tamed” from Horst Köhler, the German president.

                                                          Third, the accumulation of financial reserves in the Persian Gulf, Russia and China underscores that the centre of gravity in global finance is also shifting. ... The top creators of great new personal fortunes are in China, India and Russia. It seems unavoidable that the transatlantic elite ... will be rivalled in influence by the Asian contingent – a group that has as little appetite for the ... the values and priorities of the western financial superclass.

                                                          So, are we at the beginning of the end of a golden era for transatlantic financial elites? Perhaps, but elites cede power reluctantly and there are signs of an effort to stave off decline. There is now a recognition of the need to accept some global market reforms to avoid more invasive legislation. ... Institutional investors could play a role by demanding more sensible pay packages from money managers. The rise of Asia probably cannot be resisted. But by recognising that there are public interests to which they must respond, the financial superclass can stall the fate of previous elites. To succeed at that they must shun their arrogant “leave-it-to-the-market” explanations for the inequality they have helped foster.

                                                          Is it different this time? [See also Fed Chariman Bernanke's speech today, Risk Management in Financial Institutions. Update: See also How Should We Respond to Asset Price Bubbles? by Fed Governor Mishkin. There's been a lot written about how the Fed's recent communication on bubbles represents a change in policy for the Fed where bubbles will be attacked more aggressively, but they've always said regulatory and supervisory steps were needed to moderate financial markets, the big change would be for the Fed to use interest rate policy to manage bubbles, and I don't see much change in the way the Fed intends to conduct monetary policy.]

                                                            Posted by on Thursday, May 15, 2008 at 02:34 PM in Economics, Financial System, Regulation | Permalink  TrackBack (0)  Comments (60) 


                                                            Grandma Needs a Job

                                                            If older workers want to retire later, or are forced to do so, will they be able to find jobs?:

                                                            Older Staffers Get Uneasy Embrace, by David Wessel, WSJ: Americans are going to have to retire later, we're often told. They live longer than their ancestors. Neither their retirement savings nor the taxes of younger generations can support ever-longer retirements. ... But will employers want more older workers?

                                                            "There's a lot of happy talk around that we're going to have slowing in the rate of growth in young workers and, therefore, employers are going to want to hire older workers just at the time that older workers are going to want to work," says Boston College economist Alicia Munnell... "We think it's much less clear than that." ...

                                                            A significant minority of employers see this demographic reality, broadcast affection for "mature workers" and win plaudits from AARP, an advocacy group for older people. ...

                                                            Bookstore chain Borders Group says it finds "mature workers" appealing because half its customers are over 45 and turnover among older workers is one-sixth that of under-30 workers. About 18% of Borders' 30,000 workers are over 50, double the fraction six years ago, and the company anticipates by 2010 one in four will be.

                                                            At the Blue Cross Blue Shield Association in Chicago, 40% of 1,000 mainly professional employees are 50 or older and 25% are 55 or older. ...

                                                            For all the heart-warming pictures such efforts produce, they appear to be exceptions. ...

                                                            Surveys by Boston College's Center for Retirement Research found that employers expect about a quarter of employees currently in their 50s will want to work two to four years longer than past workers. Then employers were asked if they would accommodate half those who wanted to work later. "On a scale of 1 (unlikely) to 10 (likely), the median response was a lukewarm 6," the researchers say.

                                                            While employers are "reasonably comfortable" with the older workers they currently employ, "they are not keen on retaining even half who want to stay on to age 67 or 69," the Boston researchers concluded. They predict "a messy and uncomfortable mismatch with large numbers of older workers wanting to stay on while employers prefer that they do not."

                                                            Why? Employers fear older workers "cost too much, lack current skills and don't stick around long," Ms. Munnell and co-author Steven Sass write. Wages tend to rise with seniority. Health costs for older workers are higher. Older workers are viewed, rightly or not, as less supple in dealing with new technologies. And old workers tend to be in older industries and occupations in which employment is growing slowly if at all.

                                                            The image of companies loyally retaining scarce, seasoned workers is at odds with reality. Among male workers between 58 and 62, only 44% still work for the outfit that employed them at 50, down from 70% two decades ago. And even if labor shortages emerge, they argue, many employers will hire younger immigrants, shift work overseas or deploy labor-saving technology (like the cashier-less grocery-store checkout) instead of hiring older workers. ... [Video]

                                                              Posted by on Thursday, May 15, 2008 at 01:17 AM in Economics, Social Security, Unemployment | Permalink  TrackBack (0)  Comments (88) 


                                                              "How Do EITC Recipients Spend Their Refunds?"

                                                              Most people know about the Earned Income Tax Credit (EITC). Under this program, payments to qualifying individuals are made once a year. There is also something called the Advance Earned Income Tax Credit (AEITC) that allows qualifying individuals to receive the credit with each paycheck. But even though this program exists, most of the payments are made under the EITC and come around the time tax returns are filed.

                                                              I've often thought this was a potential disadvantage relative to the minimum wage for people living close to the margin. With a minimum wage, the extra income comes with every paycheck and helps with monthly bills, etc., but with the EITC, it comes as one large payment leaving families to struggle each month in return for a feast once a year. [Why more people don't enroll in the monthly payment plan I'm not sure, that seems like the better option (you can always save a bit of each monthly check and mimic the EITC plus interest), but I suspect it is partly the administrative hassles with getting the AEITC put into place, and the restrictions on who qualifies.]

                                                              But maybe this is a feature, not a bug, at least that's the argument below, i.e. that the once a year payment allows households to buy needed durable goods such as cars they wouldn't otherwise be able to purchase. Is it a feature? In essence, this is like forced saving (even under the AEITC only part of the credit is paid), requiring households to give up monthly consumption for one large annual payment. The fact that they are able to buy more durable goods - cars - with the one time payment is nice, and the argument is that this helps them find employment, but we need to know what they gave up each month before we can conclude they are better off.

                                                              In some cases, there are market failure arguments that provide the foundation to force people to participate in particular programs (e.g. adverse selection in health care or insurance for drivers), and there are arguments that can be made here, but the particular argument ought to be made explicit. Why is it better to force people to save (we do this with Social Security)? Unless there's some good reason for the government to step in and make choices for people, I'd rather not have the government get in the habit of thinking it knows better than I do what is good for me:

                                                              How do EITC recipients spend their refunds?, by Andrew Goodman-Bacon and Leslie McGranahan, FRB Chicago: Introduction and summary The earned income tax credit (EITC) is one of the largest sources of public support for lower-income working families in the U.S. The EITC operates as a tax credit that serves to offset the payroll taxes and supplement the wages of low-income workers. For tax year 2004, the EITC transferred over $40 billion to 22 million recipient families... Nearly 90 percent of program expenditures come in the form of tax refunds; the remaining 10 percent serve to reduce tax liability. While other income support programs distribute benefits fairly evenly across the calendar year, EITC payments are concentrated in February and March when tax refunds are received. Because the EITC makes one relatively large payment per year, it may provide low-income, credit-constrained households with a rare opportunity to make important big-ticket purchases. Research on the EITC has tended to focus on the important labor supply effects of the program (Eissa and Liebman, 1996; Meyer and Rosenbaum, 2001; and Grogger, 2003). Relatively little is known about how recipient households actually use EITC refunds. In this article, we use data from the U.S. Bureau of Labor Statistics’ Consumer Expenditure Survey (CES) over the period 1997–2006 to investigate how households spend EITC refunds.[1] ... Barrow and McGranahan found that the EITC has a larger effect on spending on durable goods than on nondurable goods. In this article, we are particularly interested in determining what items within the durables and nondurables categories are purchased using the credit and whether these expenditures reinforce the EITC’s prowork and prochild goals. Our primary finding is that recipient household spending in response to EITC payments is concentrated in vehicle purchases and transportation spending. Given the crucial link between transportation and access to jobs, we believe this finding is consistent with the EITC’s goals. In the next section, we present a brief history of the EITC and the key features of the program. We then review prior research on the uses of the EITC by recipient families. Next, we introduce the CES data and the methodology we use to investigate the data. Finally, we present our results and discuss their implications.

                                                              Update: In comments, Robert Waldmann adds (here too):

                                                              There is a justification for forced savings which is not at all based on market failure.  It is based on dynamically inconsistent preferences.  If people discount future rewards with any function other than the exponential, they may wish to deprive their near future selves of freedom of action in order to protect their more distant future selves.  In particular, if a two period discount factor is greater than the square of a one period discount factor, people will want to force their one period future selves to save.

                                                              Given standard assumptions including individual rationality and dynamically consistent preferences, a public intervention is desirable only to deal with a market failure or to redistribute from the rich to the poor.  The assumptions are standard not because they are plausible but because they make model building much easier.  It is possible to gain some insight on whether people have dynamically inconsistent preferences by asking them their discount factors.  It is not clear that people really have the answer to that question in their minds, but they do answer the question and generally on average claim to have dynamically inconsistent preferences.

                                                              Another way to test would be, say, to give people a choice between the EITC and the AEITC.  If people have dynamically inconsistent preferences, they may rationally chose the EITC over the AEITC.  Thus the fact that they do so is evidence (not proof given the red tape but evidence) that people are right when they claim to have dynamically inconsistent preferences.

                                                              Now, forcing people to save might be paternalistic, but giving people the option to force their future selves to save can't be.  A program where people can choose between the EITC and the AEITC gives them more freedom and is less paternalistic than one in which they are forced to accept the AEITC.

                                                              More generally, the basic principle that we should have laissez faire (or laissez faire with redistribution) unless we can point to a market failure is based on theory which, in  turn, is based on making assumptions that lead to nice simple results like ... we should have laissez faire (or laissez faire with redistribution) unless we can point to a market failure.

                                                              Update: More on time-inconsistent preferences.

                                                              Update: Felix Salmon:

                                                              ...And I'd note that given the choice, people nearly always prefer their income more frequently rather than less frequently. In some situations, workers are now being paid daily, and that's a good thing:

                                                              Upon completion of a daily work shift, an employee's payroll card account is credited with salary payment as quickly as two hours after an approved time card is submitted.
                                                              Temporary workers can receive payments on the day that a shift is completed, giving them faster access to funds to pay basic living expenses such as groceries, gas and utility bills.

                                                              If it's a good idea for income to arrive on a daily basis, why is it a good idea for the EITC to arrive only on an annual basis? Or is there a useful distinction to be made between income, on the one hand, and a tax credit, on the other?

                                                              Update: Manipulating Yourself for Your Own Good, by Daniel Hamermesh is related.

                                                                Posted by on Thursday, May 15, 2008 at 12:24 AM in Economics, Market Failure, Social Insurance | Permalink  TrackBack (0)  Comments (15) 


                                                                "Obsessed with Demographics"

                                                                Slicing the demographic pie for political analysis:

                                                                Polling's fuzzy math, by Crispin Sartwell, Commentary, LA Times: American "political analysis" has become obsessed with demographics.

                                                                For example, pundits and pollsters held that the Democratic contests in Ohio and Pennsylvania between Hillary Rodham Clinton and Barack Obama turned on the vote of "white working-class men,"... Those primaries supposedly showed Obama's problem for the general election.

                                                                I suggest to you that this kind of analysis ... is both fundamentally non-empirical and fundamentally non-explanatory.

                                                                Take an election, for example, that finishes 54% to 46% in Clinton's favor. Now say that white working-class men constitute 12% of the vote, and 10 of every 12 of them (10% of the overall vote) go for Clinton. Obviously, white working-class men were the pivot on which the election turned. If Obama could have broken off half the vote that went to Clinton, he would have won: He would have increased his vote by 5% and reduced hers by 5%, and won 51% to 49%.

                                                                But notice that the vote of any like-sized segment is equally explanatory. If most "soccer moms" or most "people ages 35 to 44" or most people "with annual incomes between $50,000 and $70,000" or most "people in the southeast corner of the state" voted for Clinton, we can say that had they voted for Obama, he would have won.

                                                                So the assertion, for example, that the result turned on the votes of white working-class men is completely unsupported by the demographics. It no more turned on that group than on any other substantial group that supported Clinton. ...

                                                                The way that polling and demographics slice up the population is, ultimately, a matter of preference; it does not derive from, but is a presupposition of, the "science." Searching for segments of the electorate that vote as a bloc, demographers split the population up into groups they decide are important or salient. And their decisions don't necessarily reflect empirical results -- they are more an index of their own social attitudes, presumptions and prejudices.

                                                                It would be nearly as scientific to rig up any segment of the population and regard it as decisive: blue-collar women, black and white, under 35; black men plus Latino women; left-handed divorcees.

                                                                The results might be striking; the voting habits of such groups might be as, or more, strongly correlated than race, income and gender grouped in the conventional ways. But even if the results were not striking, even if the groups were evenly split, they would be decisive by the standards of this sort of demographic analysis.

                                                                When you bring a set of racial or gender-based categories to the data, the divisions these attitudes represent will always be confirmed as the most important divisions in our society. That just reinforces the problematic divisions that infested the attitudes of the pollsters in the first place. And then, at the end of each election, our divisions of race, gender and class are, in our imaginations, stronger.

                                                                The right response to the notion that "scientific polling" shows that the election outcome turns on white men or black women or soccer moms is a shrug of the shoulders and the arch of an eyebrow.

                                                                This has been bugging me, so let me try to put down some thoughts. To answer the question "which groups and which issues were decisive in the election," one way to proceed would be to find groups of people that you believe are particularly sensitive to a political message, a message that differs across the candidates, and then see if the groups are swayed one way or the other. If they are, then it's fair, I think, to say that the particular political stance was a determining factor.

                                                                But it's not enough to just define large groups, or at least groups large enough so that if they had moved substantially one way or the other, then the race would have come out different. The groups have to be sensitive to the message, it has to be possible to move people across the line by adopting a particular stance (or having particular characteristics, some of which you may not be able to change). In addition, this group needs to be more sensitive, significantly so, than any other possible grouping of people to the issue. If everyone is equally sensitive to the issue, then any grouping is arbitrary.

                                                                So I think the real objection is in how the groups are defined. To say white males are sensitive to race, or populist stances, etc. may or may not be true, but this linkage is assumed when the groups are defined - it is often simply asserted. If it then turns out that the votes are skewed as hypothesized, then causality is attributed to the factor in question. If white male votes are skewed to the protectionist candidate, and if we have assumed white males are sensitive to the trade issue, then we will conclude that trade is the determining factor, and white males the determining group (this doesn't have to be unique, there could be another issue and another group that was also decisive in the same sense).

                                                                Given this, the assertion that a group is sensitive to a particular message needs to be established, it can't just be asserted. If it's true that certain groups care deeply about certain issues, and if the candidates differ on these issues, and if the vote is weighted strongly in one direction, then I would accept this as evidence that this issue and this group was a decisive factor in the election. But if I'm reading the above correctly, that would be an invalid conclusion.

                                                                What am I missing?

                                                                  Posted by on Thursday, May 15, 2008 at 12:15 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (14) 


                                                                  links for 2008-05-15

                                                                    Posted by on Thursday, May 15, 2008 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (11) 


                                                                    Wednesday, May 14, 2008

                                                                    The Jobless Rate

                                                                    This article from the Cleveland Fed compares the jobless rate for men and women to the unemployment rate. The jobless rate entire working-age population in the estimate labor market weakness, not just the labor force as in the unemployment rate calculation (the difference includes factors such as discouraged workers). There are interesting movements in the jobless rate over long periods of time as well as in response to economic conditions.

                                                                    The one part that I have a bit of trouble with is the estimates of the trend jobless rate using the Hodrick-Prescott (HP) filter. What is the HP filter? As Paul Krugman would say, don't ask. You want to know anyway? Well, OK. It is a means of separating a time series into trend (long-run) and cycle (short-run movements around the trend) components. However, one of the parameters in the filter must be chosen by the econometrician and, depending upon the choice, it will appear that movements in the series are mainly caused by movements in the trend, or by movements around the trend. For example, using output data for the U.S., it's possible to make the Great Depression look like a trend event rather than a deviation from the long-run, full employment path for the economy. There are conventions about which values of this parameter to use for GDP, but it is still ad hoc and the answers you get depend upon the choice you make (see here and here). That is one of the big shortcomings of the HP filter.

                                                                    Let me say this another way. The HP filter is a mechanical, statistical means of decomposing a series into trend and cycle components, and the decomposition is ad hoc. For example, look at the very end of the last graph below. With a more sluggishly evolving trend component, the jobless rate would be above trend rather than cycling around it, and has a significant impact on the interpretation of recent movements in the jobless rate - things would look much worse. Without some structural based method of estimating the trend that captures its key movements, there is no way to know which view is correct:

                                                                    Gender Differences in Employment Statistics, by Yoonsoo Lee and Beth Mowry, Cleveland Fed: One key measure of the condition of an economy’s labor market is the unemployment rate. Against the backdrop of slowing economic growth and the net loss of 260,000 jobs since the beginning of this year, some see recent unemployment data as further evidence of an economy in distress. The unemployment rate has inched slightly higher in the past few months (4.9 percent in January to 5.0 percent in April) and over the course of the past year (it was 4.5 percent last April).

                                                                    Historically, though, the rate is actually somewhat low. At 5.0 percent, it is lower than the average for most years since the 1970s. Still, there is some concern that the low rate does not necessarily imply a strong labor market because of how the unemployment measure is calculated. For instance, the unemployment rate measures only a subset of employable people—those in a country’s workforce who are over the age of 16, do not currently have a job, and have been actively seeking work in the past month. It does not account for discouraged workers, workers who want a job but are not currently looking due to adverse job market conditions, or part-timers who would like full-time work if it were available. A sudden increase in the number of discouraged workers, for instance, could artificially lower the unemployment rate by reducing what the government calls the “labor force,” or the pool of people who either have jobs or are actively searching for one. By looking at the labor force instead of the entire work-eligible population, the unemployment rate is intended to keep people who are not interested in working from affecting the calculations.

                                                                    Jobless1

                                                                    But some observers are concerned that the proportion of discouraged workers among these unaccounted-for workers may be growing, making the unemployment rate a less accurate measure of true labor market conditions. One alternative measure of employment conditions is the jobless rate, defined as the percentage of the population without a job. Unlike the unemployment rate, its denominator is the entire working-age population, not just the labor force, so it does not have the problem of a denominator that fluctuates over the business cycle. Recently some observers have noted that the jobless rate for prime-age men is historically high.

                                                                    Jobless2

                                                                    The unemployment rate and the jobless rate for men followed each other closely up to the early 1980s. Both rates went up in recessions and down in recoveries. Both were low in the 1950s and 1960s and high in the 1970s and early 1980s. However, since the 1980s, the unemployment rate has followed a downward trend, while the jobless rate for men has continued its upward trend. The jobless rate for men ages 25-54 is currently 13.4 percent, whereas in the late 1940s it was just 5.6 percent.

                                                                    Continue reading "The Jobless Rate" »

                                                                      Posted by on Wednesday, May 14, 2008 at 02:07 PM in Economics, Unemployment | Permalink  TrackBack (0)  Comments (28) 


                                                                      "Trade Growth, Global Production, and Environmental Degradation"

                                                                      One more from Vox EU: Does trade growth harm the environment?:

                                                                      Trade growth, global production, and environmental degradation, by Judith M. Dean and Mary E. Lovely, Vox EU: The sheer scale of China's recent trade growth and its environmental degradation are unprecedented.[1] In current dollars, the value of China’s exports plus imports rose from $280.9 billion in 1995 to $1422.1 billion in 2005 – a growth of over 400%. Meanwhile, there are almost daily media reports of Chinese rivers and lakes poisoned by pollution and algal bloom, water tables dropping too low to meet basic needs, farmlands tainted by industrial pollution and fertilisers, and cities choking on smog. While major improvements have been made in pollution regulation since the mid-1990s (OECD, 2005), and some progress has been made in achieving cleaner water and air, China’s own State Environmental Protection Agency (SEPA) recently stated that, “[r]elative shortage of resources, a fragile ecological environment and insufficient environmental capacity are becoming critical problems hindering China’s development” (SEPA, 2006). Thus, it is no surprise that China's experience has fuelled the popular view that trade growth is harmful to the environment.

                                                                      Why is trade seen as detrimental to the environment? There is solid theoretical reasoning behind this popular view. Copeland and Taylor (1994) develop an elegant theoretical model in which low income countries have lenient environmental standards compared to industrial countries and, hence, a comparative advantage in pollution-intensive goods. They show how trade liberalisation may shift the composition of the country’s output toward its area of comparative advantage, increasing production of “dirty goods.” Moreover, to the extent that trade promotes income growth and raises the scale of production, it raises the use of all inputs, including environmental resources.

                                                                      While these arguments are compelling, there are other factors at work in newly liberalised countries, as Copeland and Taylor (2004) note. Weak environmental standards may not necessarily give poorer countries a comparative advantage in dirty goods. The use of the environment is only one of many “inputs” into production. Comparative advantage is affected by the costs of other inputs as well, such as capital equipment, skilled labour, unskilled labour, etc., and these costs differ across industries in ways that complicate simple calculations based on environmental compliance costs. Importantly, higher incomes generate pressure for more stringent environmental regulations, implying that as liberalisation leads to higher incomes, incentives for firms to pursue cleaner techniques also rise.[2]

                                                                      Continue reading ""Trade Growth, Global Production, and Environmental Degradation"" »

                                                                        Posted by on Wednesday, May 14, 2008 at 02:07 AM in Economics, Environment, International Trade | Permalink  TrackBack (0)  Comments (18) 


                                                                        "Central Banking Doctrine in Light of the Crisis"

                                                                        Axel Leijonhufvud doesn't like strict inflation targeting:

                                                                        Central banking doctrine in light of the crisis, by Axel Leijonhufvud, Vox EU: On April 8 of this year, Paul Volcker addressed the Economic Club of New York about the current crisis. The Federal Reserve, he noted, has gone to “the very edge” of its legal authority. “Out of necessity,” said Volcker, “sweeping powers have been exercised in a manner that is neither natural nor comfortable for a central bank”.[1] He was referring to the $29 billion guarantee of Bear Stearns assets that had been extended to JP Morgan and the subsequent offer to swap $100 billion of Treasuries for illiquid bank assets. The Bear Stearns “rescue” was aimed at averting a dangerous situation in the default risk derivative market, and the swap operation sought to restore some liquidity to “frozen” markets. These were indeed unconventional measures, but ones without which more conventional interest rate policy could not be expected to have much effect in the current situation.

                                                                        It is probably fortunate that the Fed had at its helm the most distinguished student in his generation of the Great Depression and someone, therefore, able to perceive the “necessity” more or less correctly. As in the Japanese case, the lesson of the Depression is that a collapse of credit cannot be reversed and that the consequences linger for a very long time. It is also true, however, that until only a year or two ago Chairman Ben Bernanke was a consistent and outspoken advocate of a monetary policy of strict inflation targeting, which is to say, of a central banking doctrine that required an exclusive concentration on keeping consumer prices within a narrow range with no attention to asset prices, exchange rates, credit quality or (of course) unemployment.

                                                                        Bear Stearns, Northern Rock, and Landesbank Sachsen are the best known institutional victims of the current crisis – so far. But the damage is of course far more extensive and a great many CEOs have had to go into ignominious retirement with only a few million[2] dollars as plaster on their wounded reputations. It is the rule of efficient capitalism that you must pay for your mistakes alas!

                                                                        There are two aspects of the wreckage from the current crisis that have not attracted much attention so far. One is the wreck of what was until a year ago the widely accepted central banking doctrine. The other is the damage to the macroeconomic theory that underpinned that doctrine.[3] In this column, I discuss two central tenets of modern central banking doctrine – inflation targeting and central bank independence.

                                                                        Inflation targeting Critical to the central banking doctrine was the proposition that monetary policy is fundamentally only about controlling the price level.[4] Using the bank’s power over nominal values to try to manipulate real variables such as output and employment would have only transitory and on balance undesirable effects. The goal of monetary policy, therefore, could only be to stabilise the price level (or its rate of change). This would be most efficaciously accomplished by inflation targeting, an adaptive strategy that requires the bank to respond to any deviation of the price level from target by moving the interest rate in the opposite direction.

                                                                        This strategy failed in the United States. The Federal Reserve lowered the federal funds rate drastically in an effort to counter the effects of the dot.com crash. In this, the Fed was successful. But it then maintained the rate at an extremely low level because inflation, measured by various variants of the CPI, stayed low and constant. In an inflation targeting regime this is taken to be feedback confirming that the interest rate is “right”. In the present instance, however, US consumer goods prices were being stabilised by competition from imports and the exchange rate policies of the countries of origin of those imports. American monetary policy was far too easy and led to the build-up of a serious asset price bubble, mainly in real estate, and an associated general deterioration in the quality of credit. The problems we now face are in large part due to this policy failure.

                                                                        Independence A second tenet of the doctrine was central bank independence. Since using the bank’s powers to effect temporary changes in real variables was deemed dysfunctional, the central bank needed to be insulated from political pressures. This tenet was predicated on the twin ideas that a policy of stabilising nominal values would be politically neutral and that this could be achieved by inflation targeting. Monetary policy would then be a purely technical matter and the technicians would best be able to perform their task free from the interference of politicians.

                                                                        Transparency of central banking was a minor lemma of the doctrine. If monetary policy is a purely technical matter, it does not hurt to have the public listen in on what the technicians are talking about doing. On the contrary, it will be a benefit all around since it allows the private sector to form more accurate expectations and to plan ahead more efficiently. But if the decisions to be taken are inherently political in the sense of having inescapable redistributive consequences, having the public listen in on all deliberations may make it all but impossible to make decisions in a timely manner.

                                                                        When monetary policy comes to involve choices of inflating or deflating, of favouring debtors or creditors, of selectively bailing out some and not others, of allowing or preventing banks to collude, no democratic country can leave these decisions to unelected technicians. The independence doctrine becomes impossible to uphold.

                                                                        Consider as examples two columns that have appeared in the Wall Street Journal in recent weeks. One, by John Makin (April 14), argued that leaving house prices to find their own level in the present situation would lead to a disastrous depression. Policy, therefore, should be to inflate so as to stabilise them somewhere near present levels. If the Fed were to succeed in this, it might not find it easy to regain control of the inflation once it had gotten underway, particularly since some of the support of the dollar by other countries would surely be withdrawn. But in any case, the distributive consequences of Makin’s proposal are obvious to all who (like myself) are on more or less fixed pensions. The other column, by Martin Feldstein (April 15), argues that the Fed had already gone too far in lowering interest rates and is courting inflation. He was in favour of the Fed’s attempts to unfreeze the blocked markets and restore liquidity by the unorthodox means that Volcker had mentioned.

                                                                        The likely prospect for the United States in any case is a period of stagflation. The issue is going to be how much inflation and how much unemployment and stagnation are we going to have. To the extent that this can be determined or at least influenced by policy, the choices that will have to be made are obviously not of the sort to be left to unelected technicians.

                                                                        Footnotes

                                                                        1 Quoted as delivered orally www.youtube.com/watch?v═ticXF2h3ypc. New York Times, April 9, has slightly different wording.
                                                                        2 In one case apparently not all that few (reportedly 190 million!).
                                                                        3 For discussion of this damage, see CEPR Policy Insight 23.
                                                                        4 This focus is one of the legacies of Monetarism. Historically, central banks developed in order to secure the stability of credit.

                                                                        Bernanke is accused of being in favor of strict inflation targeting:

                                                                        It is also true, however, that until only a year or two ago Chairman Ben Bernanke was a consistent and outspoken advocate of a monetary policy of strict inflation targeting, which is to say, of a central banking doctrine that required an exclusive concentration on keeping consumer prices within a narrow range with no attention to asset prices, exchange rates, credit quality or (of course) unemployment.

                                                                        I think it's worthwhile to repeat Bernanke's misconceptions about inflation targeting from 2003 - that's certainly before "only a year or two ago." Federal Reserve Governor Mishkin holds similar views:

                                                                        Misconception #1: Inflation targeting involves mechanical, rule-like policymaking. As Rick Mishkin and I emphasized in ...Bernanke and Mishkin, 1997..., inflation targeting is a policy framework, not a rule. ... Inflation targeting provides one particular coherent framework for thinking about monetary policy choices which, importantly, lets the public in on the conversation. ... monetary policy under inflation targeting requires as much insight and judgment as under any policy framework; indeed, inflation targeting can be particularly demanding in that it requires policymakers to give careful, fact-based, and analytical explanations of their actions to the public.

                                                                        Misconception #2: Inflation targeting focuses exclusively on control of inflation and ignores output and employment objectives. Several authors have made the distinction between ... "strict" inflation targeting, in which the only objective of the central bank is price stability, and "flexible" inflation targeting, which allows attention to output and employment as well. ... For quite a few years now, however, strict inflation targeting has been without significant practical relevance. In particular, I am not aware of any real-world central bank (the language of its mandate notwithstanding) that does not treat the stabilization of employment and output as an important policy objective. To use the wonderful phrase coined by Mervyn King, the Governor-designate of the inflation-targeting Bank of England, there are no "inflation nutters" heading major central banks. Moreover, virtually all (I am tempted to say "all") recent research on inflation targeting takes for granted that stabilization of output and employment is an important policy objective of the central bank...

                                                                        A second, more serious, issue is the relative weight, or ranking, of inflation and ... the output gap... among the central bank's objectives. ... As an extensive academic literature shows, ... the general approach of inflation targeting is fully consistent with any set of relative social weights on inflation and unemployment; the approach can be applied equally well by "inflation hawks," "growth hawks," and anyone in between. What I find particularly appealing..., which is the heart of the inflation-targeting approach, is the possibility of using it to get better results in terms of both inflation and employment. Personally, ... I would not be interested in the inflation-targeting approach if I didn't think it was the best available technology for achieving both sets of policy objectives.

                                                                        Misconception #3: Inflation targeting is inconsistent with the central bank's obligation to maintain financial stability. ...The most important single reason for the founding of the Federal Reserve was the desire of the Congress to increase the stability of American financial markets, and the Fed continues to regard ensuring financial stability as a critical responsibility... I have always taken it to be a bedrock principle that when the stability or very functioning of financial markets is threatened, ... the Federal Reserve would take a leadership role in protecting the integrity of the system...

                                                                        I think it's a stretch to blame Taylor rule style inflation targeting used by monetary authorities in the US - which incorporates both inflation and output in the policy rule - for the problems we are having with our financial markets. And since we haven't adopted it as a policy, it's even more of a stretch to place the blame on strict inflation targeting.

                                                                          Posted by on Wednesday, May 14, 2008 at 01:17 AM in Economics, Inflation, Monetary Policy | Permalink  TrackBack (0)  Comments (24) 


                                                                          links for 2008-05-14

                                                                            Posted by on Wednesday, May 14, 2008 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (39) 


                                                                            Tuesday, May 13, 2008

                                                                            "The Canary in the Mine?"

                                                                            I have a hard time picturing Larry Summers as a canary:

                                                                            Is Larry Summers the canary in the mine?, by By Devesh Kapur, Pratap Mehta and Arvind Subramanian, Commentary, Financial Times: Is a liberal international economic order losing intellectual support? Should developing economies be worried? If Larry Summers is the canary in the intellectual mine, his two columns in the Financial Times suggest that the answers to both questions are yes.

                                                                            The liberal economic order of the last several decades was premised on two assumptions. First, that the proliferation of prosperity across countries was a good thing. Second, there would be winners and losers but, on balance, a majority of people in both developing and developed countries would benefit. Mr Summers now appears to be questioning both assumptions ..., his columns ... suggest that globalisation creates competition for America.

                                                                            This is an obvious fact. For the first time since the 17th century the west’s economic pre-eminence is being seriously challenged. But he goes on to draw the disturbing conclusion that the process of globalisation should be attenuated, precisely because it poses potential threats to the US. In doing so he, perhaps unwittingly, presents the rise of the poorer parts of the world ... more as a threat than an opportunity to the US. In effect, globalisation is justified only when it serves American interests.

                                                                            This apparently nationalist argument is couched in appealing distributional terms. The losers in the process are US workers. The structure of globalisation is such that their bargaining power is considerably weakened, while mobile capital reaps all the benefits.

                                                                            Mr Summers is right to worry that US workers have not benefited as much from globalisation... He is also right to assert that globalisation requires democratic legitimation.

                                                                            But the ... terms of what constitutes just globalisation cannot be determined unilaterally from the standpoint of the gains and losses within the US. It has to be determined co-operatively, involving discussions over the costs and benefits to all, especially those least able to defend their interests in both rich and poor countries. ...

                                                                            That globalisation needs appropriate regulation is hardly in doubt. But blaming globalisation preponderantly for the ills of American workers runs the risk of providing an alibi for the sins of omission in domestic policy that have had a much bigger impact.

                                                                            It is undeniable that the best line of defence for protecting workers has to be overwhelmingly domestic – through progressive taxation, improving education, strengthening the bargaining position of labour and improving the safety nets. Since the Ronald Reagan years, the headlong embrace of market solutions has systematically undermined each of these policy responses.

                                                                            One reading is that Mr Summers’ angst about globalisation is motivated by desire to maintain the environment for the continuing spread of prosperity: a need to tweak the rules – through regulatory harmonisation – to bolster the fraying consensus among the US middle class in favour of globalisation.

                                                                            But the manner in which his position is framed, the inconsistencies of the arguments across time, the inappropriate transferring of the burden of any response from domestic actions to international ones, and the susceptibility of the proposed remedies to protectionist misuse point to a more alarming prospect for developing countries. The ground is shifting under their feet. They would do well to take notice.

                                                                              Posted by on Tuesday, May 13, 2008 at 05:04 PM in Economics, Income Distribution, International Trade | Permalink  TrackBack (0)  Comments (36) 


                                                                              The Fed's Blank Check

                                                                              Steve Waldman responds:

                                                                              Capabilities, constraints, and confidence, by Steve Waldman: Mark Thoma offers a very thoughtful rejoinder to my post on whether the Fed should be given authority to pay interest on deposits. Mark's comments range from specific, technical points to broad questions about governance. What follows is a quick response to some of the issues he raises. Do read his piece, The Fed Already Has a Blank Check.

                                                                              My bottom line remains the same. Although the central bank does have the capability to unilaterally expand its balance sheet, it is subject to a variety of constraints that restrain it in practice. I am opposed to relieving the Fed of those constraints unless hard limits are placed upon the scale of its direct investment in the financial system, both to protect taxpayers from absorbing losses, and to support the long-term ability of financial markets to allocate real economic capital well.

                                                                              I address some of Mark's points specifically below.

                                                                              • Mark suggests that "the Fed already has a blank check", because it could increase reserve requirements, rather than borrow funds, to sterilize the inflationary effect of printing cash. This is true in theory, but I think it would be very difficult in practice for the US central bank. The Fed has not used reserve requirements as an active instrument of monetary policy for a long time, and has allowed (encouraged) them to atrophy, with an eye towards eliminating them entirely. (See here and here.) Reserve requirements could be reinvigorated, of course, but not easily or quickly. They would have to be restored over time and in careful consultation with banks, whose enthusiasm for the project would be less than overwhelming.
                                                                              • You'll hear no argument from me when Mark suggests that the Fed already has the power to do great harm. Poor monetary policy can lead to unnecessary recessions, or to credit and mis-investment booms that leave the economy structurally crippled. That an institution already has great and terrible power is no argument for handing it yet another means of mischief-making.
                                                                              • While central banking has always entailed risk, customary and statutory constraints usually reduce the likelihood of harm. Any asset can lose value, but restricting Fed purchases to short maturity Treasury securities limits the risk of capital losses, and importantly, distributes gains from seignorage to all taxpayers. Purchasing or lending against more speculative assets provides a subsidy to particular sectors and institutions (undermining legitimacy), puts taxpayer funds at risk, and privatizes the gains of seignorage in the event of nonperformance. (Central bank cash that otherwise would have retired public debt are instead distributed to private parties and never returned.) Fair allocation of seignorage gains is one of the prime virtues of fiat money central banking. Lending against questionable collateral imperils that advance.
                                                                              • Mark correctly points out that the potential upside of the Fed's bank investments is not merely, as I suggested, "about what [taxpayers] would have earned investing in safe government bonds". The purpose of the central bank's activism is to prevent harms to the public that might result from turmoil in the financial sector, and these foregone harms should be included in our calculus. But if we include nonfinancial benefits, we must also consider nonfinacial costs, such as the long-term effects of the "moral hazard", a loss of information in asset prices (assets must be valued as complex bundles of economic claims and options on potential government support), and impaired political legitimacy of the central bank and the financial system as a whole. We must weigh these costs and benefits against alternative policies, not only a straw-man scenario under which all government agencies stand completely aside and watch helplessly as the world falls apart. Of course, in "real time", the Fed did not have the luxury of reflection. But we do have it now. Mark and I would come to very different judgments about the nonfinancial costs and benefits of Fed policies. I assure you that, in general, Mark's judgment is much better than mine. Nevertheless, cranks like me will aver that the long-term costs due to moral-hazard and information loss are inestimably large, that questions of legitimacy and favoritism will haunt financial capitalism for a generation, and that it would be possible (even now!) to adopt uniform procedures for managing the collapse and reorganization of institutions that could not survive without life support from the Fed. Who should be empowered to decide these issues? Ben Bernanke? Hank Paulson? I vote for the people that I voted for, warts and all.

                                                                              I want to make clear that I don't actually disagree with Mark on the technical question of whether an interest rate corridor is a good idea. So long as the Fed restricts itself to traditional monetary policy — that is, so long as it buys only Treasury debt with borrowed funds — I would support this change (mostly because an interest rate corridor is easier for non-experts to understand than open market operations).

                                                                              Unfortunately, not only has the Fed resorted to unorthodox tools during an acute emergency, but all indications are that the central bank plans to expand its innovative practices and continue them indefinitely. The "unusual and exigent circumstances" under which the Fed's extraordinary actions have been justified specifies duration about as precisely as the "global war on terror". Mark has great confidence in the Federal Reserve, and sees little hazard in granting it more freedom to maneuver. I view the central bank as prone to catastrophic error, and wish to see its capabilities clipped, not enlarged. I think the consequences of centralizing private sector risk on public sector balance sheets will turn out be grave, and must oppose any tool that would make it easier for the Fed to continue to do so.

                                                                              Finally, Mark writes regarding the occasional need for fast action in a crisis:

                                                                              This is an old problem — how much authority should be centralized thereby allowing quick and immediate response during a crisis, and how much should be retained in slower, deliberative bodies like the House and Senate? The War Powers Act reflects this compromise — we want the ability to respond quickly to an attack or other military developments, but we worry about the concentration of power in the hands of a single individual. Centralization has the benefit of allowing a quick response to a crisis, but it risks being out of step with the democratic process. In the case of financial market emergencies, however, I have more faith in the Fed than in congress to act quickly and correctly. That's partly because I have little faith in the ability of congress to quickly comprehend what the problem is and attack it directly and effectively — many of them admit to not having a clue about economics, and more worrisome are the ones who think they have a clue but don't — but congress should not give up its oversight role.

                                                                              I have little faith in Congress, and even less faith in the Fed. (That's not, by the way, a reflection of the individuals running the place. Ben Bernanke is quite brilliant. But culture and ideology saddle the Fed with both blind spots and hubris.) I like Mark's idea, though. I'd support a financial "War Powers Act" that would authorize emergency extensions of secured credit by the Fed to private actors deemed systemically important. But here's my deal-breaker: That support would have to be withdrawn within 180 days, and would not be renewable. Six months is long enough for solvent institutions to counter a "liquidity panic" with full disclosure, for modestly troubled institutions to secure new capital, and for regulators to arrange an orderly unwinding of firms that cannot be made solvent and liquid within the statutory timeframe. Whaddaya say?

                                                                              By the way, we'll have our six-month anniversary of the first $40B in TAF financing in June.

                                                                              Specific details aside, I think something along those lines - a compromise of our positions - is worth considering. I do, however, believe that the Fed needs to update its toolbox to be consistent with today's financial market structure, and that as we think about these extensions, trust in the Fed is warranted.

                                                                                Posted by on Tuesday, May 13, 2008 at 12:42 PM in Economics, Financial System, Monetary Policy | Permalink  TrackBack (0)  Comments (11) 


                                                                                The Evolution of the "Economic Web"

                                                                                One of the editors at Scientific American brought this to my attention, and he is hoping to receive feedback. This is part of their "Edit This" series. The idea is that they post a draft of an article they plan to print in a future edition of the magazine, then incorporate feedback into the the print version:

                                                                                Tell us your reactions to the arguments made in this piece. Your feedback will be incorporated into a version of this article that will appear in a future print issue of Scientific American.

                                                                                The article itself, "which is sure to raise the hackles of some members of the economic community," argues that economists cannot explain the relationship between innovation and growth, and proposes a "grammar model" as an alternative to traditional growth models:

                                                                                The Evolving Web of Future Wealth, by Stuart Kauffman, Stefan Thurner, and Rudolf Hanel, SciAm: ...Perhaps the most stunning feature of the economy over time is the explosion of goods and services. Yet contemporary economics has no adequate theory to understand this explosion or its importance for economic growth and the evolution of future wealth.

                                                                                My first reaction was that we do have models of variety and growth:

                                                                                Optimal Product Variety, Scale Effects, and Growth, by Henri L.F. de Groot and Richard Nahuis: ...Product variety is an important determinant of economic welfare. Following the seminal work by Dixit and Stiglitz (1977), and Spence (1976) the welfare effects of variety have been analyzed from various angles.[1] ... With the presence of economies of scale in production, producing a small variety saves resources that can be used to extend the production volume. Hence a trade-off arises... It turns out that the market supports too low product diversity. Subsequent studies addressed the optimality question in the presence of growth. In a dynamic context, reduced variety not only saves resources that can be used for extending the produced quantity, but potentially also to increase the rate of growth. Grossman and Helpman (1991, chapter 3) analyze welfare in a model of endogenous growth. In their analysis, there is (continuous) growth in product variety resulting from investment in R&D. The more labour an economy allocates in the R&D sector, the less labour remains for producing consumption goods. The question here is one of growth in variety versus volume of consumption goods. The optimal trajectory entails more rapid growth of variety than the market equilibrium sustains, as firms ignore the contribution of their knowledge creation to a common ’knowledge pool’. Grossman and Helpman (1991) also analyze a quality ladder model. ... Here innovative effort aimed at quality improvement might be suboptimal high or low, depending on the size of the quality step. Van de Klundert and Smulders (1997) develop an endogenous growth model in which, contrary to Grossman and Helpman (1991), R&D is an in-house activity aimed at improving quality. Besides quality growth, variety is also determined endogenously. ...

                                                                                The studies discussed so far assume that variety has a direct effect on consumers’ welfare as consumers have a love for variety. Another branch of literature looks at the productivity effects of increased product variety...

                                                                                And as footnote 1 notes, "In the overview..., we have no pretension of being exhaustive," so this is by no means all of the work on this topic. But these models don't, as far as I know, explain how new innovations and variety arise, and that is one of the things the Scientific American article is trying to do (though I'm not sure it is fully successful, the model produces broad statistical relationships that predict how frequently innovations ought to occur, but is not precise about the types of innovations that will arise). Back to the article:

                                                                                Economic growth theory is highly sophisticated about the roles of capital, labor, human capital, knowledge, interest rates, saving rates and investment in existing economic opportunities, or investment of savings in research to find novel goods and services. Yet the major conceptual frameworks that undergird contemporary economics (competitive general equilibrium, rational expectations and game theory) share a crucial failing. They assume that all the goods and services (as well as the relations between them) and all the strategies for engaging with them in a local or global economy can be "pre-stated"—that is, known in advance. In reality, novel goods and services may constantly enter markets, thereby requiring economic actors to develop ever more novel strategies: all the relevant variables cannot be pre-stated.

                                                                                Thus standard growth theory misses an essential feature of this "economic web" of goods and services. Even more important, as we shall explain, it ignores the role that the structure of the economic web itself plays in driving the creation of novelty and the evolution of future wealth. ...

                                                                                Continue reading "The Evolution of the "Economic Web"" »

                                                                                  Posted by on Tuesday, May 13, 2008 at 12:33 PM in Economics, Science | Permalink  TrackBack (0)  Comments (43) 


                                                                                  How Do Search Engines Price Ads?

                                                                                  Hal Varian explains how Google uses auctions to set ad prices:

                                                                                  How auctions set ad prices, by Hal Varian, Google: All of the major search engines use auctions to price ads. The reason is simple: there are millions of keywords that need to be priced and it would be impossible to set all those prices by hand.

                                                                                  Using an auction removes the burden of having to do this: the prices are determined by the auction participants. These auctions run every time a user enters a query, so they always reflect the current values that advertisers place on keywords.

                                                                                  The outcome of the ad auction is efficient in the sense that the available ad slots are awarded to those who value them mostly highly. The outcome is also equitable in that the price an advertiser has to pay is determined by the other advertisers -- those with whom it has to compete for slots.

                                                                                  But how do they actually work? There are several steps in the process.

                                                                                  1) Each advertiser enters a list of keywords, ads, and bids.

                                                                                  2) When a user enters a query, Google compiles a list of all the ads whose keywords match that query.

                                                                                  3) The list of ads is then ordered based on the bids and the Ad Quality Scores, which measure the relevance of the ad to the user.

                                                                                  4) The highest ranked ad is displayed in the most prominent position, the second highest ranked ad gets the second most prominent position, and so on.

                                                                                  5) If the user clicks on an ad, the advertiser is charged a price that depends on the bid and Quality Score of the advertiser below it. The price charged is the minimum necessary to retain the advertiser's position in the list.

                                                                                  A simple example is when all ads have the same Quality Score. In this case, the ads will be ranked by bids and the price an advertiser pays per click will just be the bid of advertiser below it in the ranking. Hence the amount that advertisers pay is no more than what they bid and typically less.

                                                                                  In the general case, where ad qualities differ, the price an advertiser pays for a click will depend on its Quality Score relative to the quality of the ad below it in the auction. Roughly speaking, an ad that has twice the quality of another ad will tend to get about twice as many clicks, and will only have to pay half as much per click as the competing ad.

                                                                                  Where does this Ad Quality Score come from? It was originally determined by historical click through rates but has been refined over the years using sophisticated statistical models. Using ad quality as a factor in ranking ads provides strong incentives to advertisers to make sure that they provide relevant ads to end users.

                                                                                  There are many additional tweaks on top of this basic design. For example, Google actually runs two auctions: one for ads at the top of the page, and one for ads on the side of the page. Only ads with particularly high quality are eligible to compete in the top-ad auction. Ads that have particularly low quality may be disabled, and not shown at all. Advertisers also can set and adjust their daily and monthly budget so as to cap their maximum spend.

                                                                                  But the essential structure is that outlined above: advertisers bid for position and pay just enough to beat their runner-up. Prices for keywords are, ultimately, determined by the advertisers.

                                                                                    Posted by on Tuesday, May 13, 2008 at 02:07 AM in Economics | Permalink  TrackBack (0)  Comments (9) 


                                                                                    Bombs Away

                                                                                    Here's what I wish we would have done. Loaded up the bombers until they couldn't carry any more, have a second wave ready, a third, and a put a continuous rotation in place ready to keep it up until the job is done. Then, get them in the air along with escorts that say "just try and stop us" and just bombed the hell out of Burma with food, clothes, and medicine until the job is done. Blast our way in if necessary, and drop crate after crate full of supplies, one drop after another, and keep it up until the mission is complete.

                                                                                    Permission to give aid? We don't need no stinking permission...

                                                                                      Posted by on Tuesday, May 13, 2008 at 12:33 AM in Economics | Permalink  TrackBack (0)  Comments (49) 


                                                                                      What Have the Romans Ever Done for Us?

                                                                                        Posted by on Tuesday, May 13, 2008 at 12:24 AM in Economics | Permalink  TrackBack (0)  Comments (6) 


                                                                                        The Declining High School Graduation Rate in the US

                                                                                        If we want to reduce inequality, increasing the high school graduation rate - it's around 75% -  is a good place to start:

                                                                                        The Declining American High School Graduation Rate: Evidence, Sources, And Consequences, by James J. Heckman and Paul A. LaFontaine, NBER Reporter: Research Summary 2008 Number 1: The high school graduation rate is a barometer of the health of American society and the skill level of its future workforce. Throughout the first half of the twentieth century, each new cohort of Americans was more likely to graduate from high school than the preceding one. This upward trend in secondary education increased worker productivity and fueled American economic growth .[1]

                                                                                        In the past 25 years, growing wage differentials between high school graduates and dropouts increased the economic incentives for high school graduation. The real wages of high school dropouts have declined since the early 1970s while those of more skilled workers have risen sharply.[2] Heckman, Lochner, and Todd[3] show that in recent decades, the internal rate of return to graduating from high school versus dropping out has increased dramatically and is now above 50 percent. Therefore, it is surprising and disturbing that, at a time when the premium for skills has increased and the return to high school graduation has risen, the high school dropout rate in America is increasing. America is becoming a polarized society. Proportionately more American youth are going to college and graduating than ever before. At the same time, proportionately more are failing to complete high school.

                                                                                        One graduation measure issued by the National Center for Educational Statistics (NCES), the status completion rate[4] - widely regarded by the research community as the official rate- shows that U.S. students responded to the increasing demand for skill by completing high school at increasingly higher rates. By this measure, U.S. schools now graduate nearly 88 percent of students and black graduation rates have converged to those of non-Hispanic whites over the past four decades.

                                                                                        A number of recent studies have questioned the validity of the status completion rate and other graduation rate estimators. They have attempted to develop more accurate estimators of high school graduation rates.[5] Heated debates about the levels and trends in the true high school graduation rate have appeared in the popular press.[6] Depending on the data sources, definitions, and methods used, the U.S. graduation rate has been estimated to be anywhere from 66 to 88 percent in recent years-an astonishingly wide range for such a basic statistic. The range of estimated minority rates is even greater-from 50 to 85 percent.

                                                                                        In an NBER Working Paper published in 2007[7], we demonstrate why such different conclusions have been reached in previous studies. We use cleaner data, better methods, and a wide variety of data sources to estimate U.S. graduation rates. When comparable measures are used on comparable samples, a consensus can be reached across all data sources. After adjusting for multiple sources of bias and differences in sample construction, we establish that: 1) the U.S. high school graduation rate peaked at around 80 percent in the late 1960s and then declined by 4-5 percentage points; 2) the actual high school graduation rate is substantially lower than the 88 percent estimate; 3) about 65 percent of blacks and Hispanics leave school with a high school diploma, and minority graduation rates are still substantially below the rates for non-Hispanic whites. Contrary to estimates based on the status completion rate, we find no evidence of convergence in minority-majority graduation rate Exclusion of incarcerated populations from some measures greatly biases the reported high school graduation rate for blacks.

                                                                                        These trends are for persons born in the United States and exclude immigrants. The recent growth in unskilled migration to the United States further increases the proportion of unskilled Americans in the workforce, apart from the growth attributable to a rising high school dropout rate.

                                                                                        Continue reading "The Declining High School Graduation Rate in the US" »

                                                                                          Posted by on Tuesday, May 13, 2008 at 12:15 AM in Economics | Permalink  TrackBack (0)  Comments (62) 


                                                                                          links for 2008-05-13

                                                                                            Posted by on Tuesday, May 13, 2008 at 12:06 AM Permalink  TrackBack (0)  Comments (3) 


                                                                                            Monday, May 12, 2008

                                                                                            Why Did the EPA Fire a Respected Toxicologist?

                                                                                            Herbert Needleman speaks out:

                                                                                            Why did the EPA fire a respected toxicologist?, EurekAlert: In March, the US House Energy and Commerce Committee launched an investigation into potential conflicts of interest in scientific panels that advise the Environmental Protection Agency on the human health effects of toxic chemicals. The committee identified eight scientists that served as consultants or members of EPA science advisory panels while getting research support from the chemical industry to study the chemicals under review. Two scientists were actually employed by companies that made or worked with manufacturers of the chemicals under review.

                                                                                            Such conflicts, Chairman John Dingell (D-Mich.) noted, stand in stark contrast to the agency’s dismissal last summer of highly respected public health scientist Deborah Rice, an expert in toxicology, from a panel examining the health impacts of the flame retardant deca. The EPA fired Rice after the chemical industry’s trade group, the American Chemistry Council, complained that was could not provide an objective scientific review because she had spoken out about the health hazards posed by deca.

                                                                                            This trend is neither new nor unique, argues legendary lead researcher Herbert Needleman, a pediatrician and child psychiatrist, in a new article published this week in the open-access journal PLoS Biology. With his groundbreaking research on the cognitive effects of lead on children, Needleman laid the foundation for one of the greatest environmental health successes of modern times—five-fold reduction in the prevalence of lead poisoning in American children.

                                                                                            In “The Case of Deborah Rice: Who is the Environmental Protection Agency Protecting"” Needleman points out that the EPA summarily fired Rice even though it had honored her just a few years before with one of its most prestigious scientific awards for “exceptionally high-quality research into lead’s toxicity.” Why" Because the American Chemistry Council asked the agency to fire her.

                                                                                            “EPA, without examining or contesting the charge of bias, complied,” Needleman write. “Rice was fired. The next formal act of the EPA was to remove all of her comments from the written report completely erase her name from the text of the review. There is now no evidence that she ever participated in the EPA proceedings, or was even in the room.” Needleman is confident that Rice, who is “widely admired by her colleagues for her intelligence, integrity and moral compass,” will “withstand this insult and continue to contribute to the public welfare.”

                                                                                            The full article from full article from Plos Biology:

                                                                                            The Case of Deborah Rice: Who Is the Environmental Protection Agency Protecting?, by Herbert Needleman: For researchers who operate at the intersection of basic biology and toxicology, following the data where they take you—as any good scientist would—carries the risk that you will be publicly attacked as a crank, charged with scientific misconduct, or removed from a government scientific review panel. Such a fate may seem unthinkable to those involved in primary research, but it has increasingly become the norm for toxicologists and environmental investigators. If you find evidence that a compound worth billions of dollars to its manufacturer poses a public health risk, you will almost certainly find yourself in the middle of a contentious battle that has little to do with scientific truth (see Box 1).

                                                                                            Continue reading "Why Did the EPA Fire a Respected Toxicologist?" »

                                                                                              Posted by on Monday, May 12, 2008 at 07:38 PM in Economics, Science | Permalink  TrackBack (0)  Comments (15) 


                                                                                              "Why Legal Barriers are Not Critical to Deterring Immigrants"

                                                                                              Fences or not, most people choose not to immigrate:

                                                                                              Why legal barriers are not critical to deterring immigrants, by Drew Keeling, Vox EU: Policymakers addressing immigration frequently concentrate on using laws and regulations to influence the selection of immigrants and deter unwanted arrivals. But policymakers and scholars may be overemphasising legal mechanisms at the expensive of economic fundamentals.

                                                                                              Consider an historical period when legal mechanisms played little role in determining the volume of immigration flows. Despite minimal legal restrictions, annual migration rates across the North Atlantic in the nineteenth and early twentieth century rarely exceeded 1-2% of the population. This is not much higher than rates of international migration today.

                                                                                              For decades, scholars have believed that transportation costs severely limited long distance movement during the earlier open-border era. With international travel much cheaper today, strict legal barriers have thus been regarded as essential in keeping migration from rising far above already controversially high levels. But in recent research, I find that the great transatlantic migration of Europeans a century ago was not strongly constrained by the costs of travel.[1] Most people, most of the time, simply prefer to stay put rather than relocate abroad.

                                                                                              The cost of immigration a century ago Globalisation one hundred years ago bears many similarities to globalisation today. Then, as now, a disproportionate volume of the world’s economic activity occurred within the relatively more developed North Atlantic region.[2]

                                                                                              Free trade and free movement of goods, services, finance and information helped economic growth and international convergence persist for many decades until the outbreak of the First World War. One salient difference between that world and ours is that, a century ago, borders were also widely open to mass movements of labour.[3]

                                                                                              The ability to observe more closely the underlying processes of mass migration, unobscured by visa requirements, quotas, and work permit restrictions, has made the “Great Migration” of a century ago a favourite of migration scholars. Until recently, however, there has been very little systematic examination of the travel industry, which brought millions of Europeans overseas to foreign entry stations such as New York’s Ellis Island.

                                                                                              In my research, I develop a continuous long-term record of transatlantic passenger fares between 1885-1914, using shipping records from the Cunard Line’s Liverpool to New York route. During this time, North Atlantic migration volumes tended to fall when fares dropped. This happened during economic recessions in North America when migration declined markedly and shipping companies found it difficult to maintain fare levels.

                                                                                              Continue reading ""Why Legal Barriers are Not Critical to Deterring Immigrants"" »

                                                                                                Posted by on Monday, May 12, 2008 at 06:12 PM in Economics, Immigration | Permalink  TrackBack (0)  Comments (12) 


                                                                                                Did the "Barr" for McCain Just Get Higher?

                                                                                                This adds in interesting twist to the race:

                                                                                                Barr announces Libertarian White House bid, by Ben Evans, AP: Former Republican Rep. Bob Barr launched a Libertarian Party presidential bid Monday, saying voters are hungry for an alternative to the status quo who would dramatically cut the federal government.

                                                                                                His candidacy throws a wild card into the White House race that many believe could peel away votes from Republican Sen. John McCain given the candidates' similar positions on fiscal policy.

                                                                                                Barr, who has hired Ross Perot's former campaign manager, acknowledged that some Republicans have tried to discourage him from running. But he said he's getting in the race to win, not to play spoiler or to make a point. ...

                                                                                                Barr first must win the Libertarian nomination at the party's national convention that begins May 22. Party officials consider him a front-runner...

                                                                                                If he wins the White House, he said he would immediately freeze discretionary spending in Washington. He also would begin withdrawing troops from Iraq and consider slashing spending at federal agencies such as the departments of education and commerce _ as well as at overseas military bases.

                                                                                                The former U.S. attorney also said he would strictly enforce immigration laws. ...

                                                                                                Barr, 59, quit the Republican Party two years ago, saying he had grown disillusioned with its failure to shrink government and its willingness to scale back civil liberties in fighting terrorism. He has been particularly critical of President Bush over the war in Iraq and says the administration is ignoring constitutional protections on due process and privacy.

                                                                                                While in Congress, he was a persistent critic of President Clinton and was among the first to press for impeaching the former president. He helped manage House Republicans' impeachment case before the Senate. ...

                                                                                                Above: "many believe [Barr] could peel away votes from Republican Sen. John McCain given the candidates' similar positions on fiscal policy." Similar positions? McCain's plan makes no sense. Then again, I guess the two plans are similar...

                                                                                                I'm not counting on this, but in addition to the potential to help Democrats, there's another possible positive. If Barr's entry into the race does anything at all to force other candidates to adopt positions that reduce the "willingness to scale back civil liberties" and the government's "ignoring constitutional protections on due process and privacy," that will be a step in the right direction.

                                                                                                  Posted by on Monday, May 12, 2008 at 03:06 PM in Economics, Politics | Permalink  TrackBack (1)  Comments (14) 


                                                                                                  Paul Krugman: The Oil Nonbubble

                                                                                                  Is the high price of oil price due to fundamentals or speculation?:

                                                                                                  The Oil Nonbubble, by Paul Krugman, Commentary, NY Times: “The Oil Bubble: Set to Burst?” That was the headline of an October 2004 article in National Review, which argued that oil prices, then $50 a barrel, would soon collapse.

                                                                                                  Ten months later, oil was selling for $70 a barrel. “It’s a huge bubble,” declared Steve Forbes...

                                                                                                  All through oil’s five-year price surge, which has taken it from $25 a barrel to last week’s close above $125, there have been many voices declaring that it’s all a bubble, unsupported by the fundamentals of supply and demand.

                                                                                                  So here are two questions: Are speculators mainly, or even largely, responsible for high oil prices? And if they aren’t, why have so many commentators insisted, year after year, that there’s an oil bubble? ...

                                                                                                  Imagine what would happen if the oil market were humming along, with supply and demand balanced at a price of $25 a barrel, and a bunch of speculators came in and drove the price up to $100. ...

                                                                                                  Faced with higher prices, drivers would cut back on their driving; homeowners would turn down their thermostats; owners of marginal oil wells would put them back into production.

                                                                                                  As a result, the initial balance between supply and demand would be broken, replaced with a situation in which supply exceeded demand. This excess supply would, in turn, drive prices back down again — unless someone were willing to buy up the excess and take it off the market.

                                                                                                  The only way speculation can have a persistent effect on oil prices, then, is if it leads to physical hoarding...But ... inventories have remained at more or less normal levels. This tells us that the rise in oil prices isn’t the result of runaway speculation; it’s the result of fundamental factors, mainly the growing difficulty of finding oil and the rapid growth of emerging economies like China. The rise in oil prices ... had to happen to keep demand growth from exceeding supply growth.

                                                                                                  Saying that high-priced oil isn’t a bubble doesn’t mean that oil prices will never decline. ... But it does mean that speculators aren’t at the heart of the story.

                                                                                                  Why, then, do we keep hearing assertions that they are?

                                                                                                  Part of the answer may be ... that many people are now investing in oil futures — which feeds suspicion that speculators are running the show... But there’s also a political component.

                                                                                                  Traditionally, denunciations of speculators come from the left of the political spectrum. In the case of oil prices, however, the most vociferous proponents of the view that it’s all the speculators’ fault have been conservatives — people who you wouldn’t normally expect to see warning about the nefarious activities of investment banks and hedge funds.

                                                                                                  The explanation of this seeming paradox is that wishful thinking has trumped pro-market ideology.

                                                                                                  After all, a realistic view of what’s happened over the past few years suggests that we’re heading into an era of increasingly scarce, costly oil.

                                                                                                  The ... odds are that we’re looking at a future in which energy conservation becomes increasingly important, in which many people may even — gasp — take public transit to work.

                                                                                                  I don’t find that vision particularly abhorrent, but a lot of people, especially on the right, do. And so they want to believe that if only Goldman Sachs would stop having such a negative attitude, we’d quickly return to the good old days of abundant oil.

                                                                                                  Again, I wouldn’t be shocked if oil prices dip in the near future — although I also take seriously Goldman’s recent warning that the price could go to $200. But let’s drop all the talk about an oil bubble.

                                                                                                    Posted by on Monday, May 12, 2008 at 12:33 PM in Economics, Oil | Permalink  TrackBack (0)  Comments (87) 


                                                                                                    The Fed Already Has a Blank Check

                                                                                                    In the interest of continuing the conversation, I want to argue a contrary position and push back a bit on Steve Waldman's post about allowing the Fed to pay interest on reserves, and his worry that this change will allow the Fed to put excessive amounts of public money at risk:

                                                                                                    Let's not write the Fed a blank check, by Steve Waldman: Last week, the Fed decided to ask Congress for the right to pay interest on bank reserves. (Hat tip Barry Ritholtz, see also William Polley, Mark Thoma, Brad DeLong) This is a very big deal.

                                                                                                    Don't be misled into thinking that the Fed's proposal is just some arcane, technocratic change. The Federal Reserve is asking taxpayers for a big pile of signed, blank checks. That's far too much power to put in the hands of a quasipublic organization with little democratic accountability. This authority should not be granted without some strong strings attached. ...

                                                                                                    First, some background. There is a trend among central banks to move from old-fashioned, fractional-reserve banking to a system whereby interest rates are managed via a "channel" or "corridor", and under which fixed reserve requirements might be dispensed with entirely. The basic idea is simple. The Fed ... choose two interest rates, a "floor rate" at which the Fed would stand ready to borrow funds, and a "ceiling rate" at which the Fed would stand ready to lend. As long as there is no stigma attached to transacting with the Fed, banks would never lend for less than the floor rate or borrow for more than the ceiling rate. The interbank interest rate would necessarily lie within a "corridor" defined by these two interest rates. ...

                                                                                                    A corridor system would represent a meaty change to how central banking is done in the US, but the approach seems to work okay in other countries. ...

                                                                                                    As long as the Fed is conducting ordinary monetary policy, switching to a channel system offers modest benefits at a modest cost to taxpayers. But the Fed's monetary policy has not been ordinary at all lately. In fact, it's been quite extraordinary. It is in the context of this extraordinary policy that the Fed has asked Congress to accelerate its authority to implement a channel system...

                                                                                                    The core of the Fed's new exuberance is a willingness to enter into asset swaps with banks. The Fed lends safe Treasury securities to banks, and accepts as collateral assets that private markets consider dodgy or difficult to value. (This is the direct effect of the Fed's TSLF program, and the net effect of TAF and other lending arrangements that the Fed sterilizes in order to hold its interest rate target.) In doing so, the Fed puts taxpayer funds at risk. If a bank that has borrowed from the Fed runs into trouble, the Fed would face an unappetizing choice: Orchestrate a bail-out, or permit a failure and accept collateral of questionable value instead of repayment. Either way, taxpayers are left holding the bag. ...

                                                                                                    In December, the Fed had $775 worth of Treasury securities. That stock will soon have dwindled to $300B, give or take. The difference, about $475B, represents an investment by the central bank in risky assets of the US financial sector.

                                                                                                    $475B is an extraordinary sum of money. It is as if the Fed borrowed more than $1500 from every man, woman, and child in the United States, and invested that money on our behalf in Wall Street banks that private financiers were afraid to touch. For bearing all this risk, if things work out well, taxpayers will earn about what they would have earned investing in safe government bonds. If things don't work out well, the scale of the losses is hard to predict. ...

                                                                                                    If the Fed were to blow through the rest of its current stock of Treasuries, it would have invested more than $2500 for every man, woman, and child in America. Public investment in the financial sector would have exceeded the direct costs to date of the Iraq War by a wide margin. Would that that be enough? If not, how much more? Just how large a risk should taxpayers endure on behalf of companies that arguably deserve to fail, to prevent "collateral damage"? Have we considered other approaches to containing damage, approaches that shift costs and risks towards those who benefited from bad practices, rather onto the shoulders of taxpayers and nominal-dollar wage earners? Does this sort of policy choice belong within the purview of an independent central bank?

                                                                                                    Now I don't actually mean to be too harsh. Putting aside the years of preventable foolishness that got us here, ... a crisis emerged that had to be managed and the Fed was the only organization capable of stepping up to the plate. I don't love the decisions that were made, but decisions did have to be made, and there weren't very good options. But now we have a moment to reflect. If the credit crisis flares hot and bright again, how much more citizen wealth should be put at risk before other policy options are considered? That's not a rhetorical question: We need to choose a number, a figure in dollars. My answer would be something north of zero, but not more than the roughly $300B stock of Treasuries that remains on the Fed's balance sheet. But this is a decision that Congress needs to make.

                                                                                                    And what does all this have to do with the question that will soon be put before the Congress, whether the Fed should be permitted to pay interest on deposits?

                                                                                                    Continue reading "The Fed Already Has a Blank Check" »

                                                                                                      Posted by on Monday, May 12, 2008 at 12:33 PM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (19)