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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,
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
Posted by Mark Thoma on Wednesday, May 21, 2008 at 12:15 AM in Economics, History of Thought |
Posted by Mark Thoma on Wednesday, May 21, 2008 at 12:06 AM in Links |
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
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
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.
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”
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 Mark Thoma on Tuesday, May 20, 2008 at 11:07 AM in Economics, Income Distribution |
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:
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, yet others have found no impact or,
in occasional cases, a positive effect of minimum wages on jobs.
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). An alternative is that the higher wage costs
are not fully passed on to consumers and the minimum wage eats directly into
profit margins. 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 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.
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 Mark Thoma on Tuesday, May 20, 2008 at 12:33 AM in Economics, Policy, Unemployment |
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
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
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
--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 Mark Thoma on Tuesday, May 20, 2008 at 12:24 AM in Economics, Market Failure, Politics |
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
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.
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. The ... principal findings include:
Continue reading "Health Savings Tax Shelter Accounts" »
Posted by Mark Thoma on Tuesday, May 20, 2008 at 12:15 AM in Economics, Health Care |
Posted by Mark Thoma on Tuesday, May 20, 2008 at 12:06 AM in Links |
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
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
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 Mark Thoma on Monday, May 19, 2008 at 12:42 AM in Economics, Environment, Oil |
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
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
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
Posted by Mark Thoma on Monday, May 19, 2008 at 12:33 AM in Economics, International Trade, Social Insurance |
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
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
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 Mark Thoma on Monday, May 19, 2008 at 12:24 AM in Economics, Monetary Policy |
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 Mark Thoma on Monday, May 19, 2008 at 12:15 AM in Economics, Weblogs |
Posted by Mark Thoma on Monday, May 19, 2008 at 12:06 AM in Links |
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
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
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
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
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 Mark Thoma on Sunday, May 18, 2008 at 02:43 PM in Economics, Social Insurance |
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
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 Mark Thoma on Sunday, May 18, 2008 at 12:15 PM in Economics, International Trade, Social Insurance |
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
Continue reading "Bubbles, Not in the Abstract" »
Posted by Mark Thoma on Sunday, May 18, 2008 at 12:24 AM in Economics, Housing, Monetary Policy |
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.
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. 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
Continue reading "How Transparent?" »
Posted by Mark Thoma on Sunday, May 18, 2008 at 12:15 AM in Economics, Monetary Policy |
Posted by Mark Thoma on Sunday, May 18, 2008 at 12:06 AM in Links |
Robert Shiller explains why the president should sign the mortgage relief
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
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 Mark Thoma on Saturday, May 17, 2008 at 02:43 PM in Economics, Housing, Policy |
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 Mark Thoma on Saturday, May 17, 2008 at 01:17 PM in Budget Deficit, Economics, Fiscal Policy, Iraq and Afghanistan, Taxes |
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
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
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
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
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
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
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"
Posted by Mark Thoma on Saturday, May 17, 2008 at 12:51 AM in Economics, Politics |
Michael Perelman recalls his time as a student of Wolfgang
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.
Posted by Mark Thoma on Saturday, May 17, 2008 at 12:24 AM in Economics |
Posted by Mark Thoma on Saturday, May 17, 2008 at 12:06 AM in Links |
Nobel Peace Prize winner Muhammad Yunus outlines steps that need to be taken to solve the world's
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
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
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 Mark Thoma on Friday, May 16, 2008 at 12:51 PM in Development, Economics |
Retail loyalty card programs, by Tyler Cowen: From some time ago, Kevin
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
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 Mark Thoma on Friday, May 16, 2008 at 03:33 AM in Economics |
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
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
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
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
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
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
Posted by Mark Thoma on Friday, May 16, 2008 at 02:16 AM in Economics, Financial System |
Dani Rodrik argues that development strategies emphasizing good governance instead of specifically targeting binding constraints on growth are unlikely to
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
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 Mark Thoma on Friday, May 16, 2008 at 01:17 AM in Development, Economics |
Posted by Mark Thoma on Friday, May 16, 2008 at 12:35 AM in Links |
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
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 Mark Thoma on Friday, May 16, 2008 at 12:33 AM in Economics, Politics |
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
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 Mark Thoma on Thursday, May 15, 2008 at 02:34 PM in Economics, Financial System, Regulation |
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
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
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 Mark Thoma on Thursday, May 15, 2008 at 01:17 AM in Economics, Social Security, Unemployment |
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
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. ... 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
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
Update: Manipulating Yourself for Your Own Good, by Daniel Hamermesh is related.
Posted by Mark Thoma on Thursday, May 15, 2008 at 12:24 AM in Economics, Market Failure, Social Insurance |
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
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
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
What am I missing?
Posted by Mark Thoma on Thursday, May 15, 2008 at 12:15 AM in Economics, Politics |
Posted by Mark Thoma on Thursday, May 15, 2008 at 12:06 AM in Links |
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
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.
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.
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 Mark Thoma on Wednesday, May 14, 2008 at 02:07 PM in Economics, Unemployment |
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. 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
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
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.
Continue reading ""Trade Growth, Global Production, and Environmental Degradation"" »
Posted by Mark Thoma on Wednesday, May 14, 2008 at 02:07 AM in Economics, Environment, International Trade |
Axel Leijonhufvud doesn't like strict inflation targeting:
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”. 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)
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 dollars as plaster on their wounded
reputations. It is the rule of efficient capitalism that you must pay for your
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. 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. 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
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
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
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.
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
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
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
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 Mark Thoma on Wednesday, May 14, 2008 at 01:17 AM in Economics, Inflation, Monetary Policy |
Posted by Mark Thoma on Wednesday, May 14, 2008 at 12:06 AM in Links |
I have a hard time picturing Larry Summers as a canary:
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
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 Mark Thoma on Tuesday, May 13, 2008 at 05:04 PM in Economics, Income Distribution, International Trade |
Steve Waldman responds:
Capabilities, constraints, and confidence, by Steve Waldman:
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.) 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
- 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
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 Mark Thoma on Tuesday, May 13, 2008 at 12:42 PM in Economics, Financial System, Monetary Policy |
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. ... 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
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 Mark Thoma on Tuesday, May 13, 2008 at 12:33 PM in Economics, Science |
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 Mark Thoma on Tuesday, May 13, 2008 at 02:07 AM in Economics |
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 Mark Thoma on Tuesday, May 13, 2008 at 12:33 AM in Economics |
Posted by Mark Thoma on Tuesday, May 13, 2008 at 12:24 AM in Economics |
If we want to reduce inequality, increasing the high school graduation rate
- it's around 75% - is a good place to start:
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 .
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. Heckman,
Lochner, and Todd 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 - 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. Heated
debates about the levels and trends in the true high school graduation rate
have appeared in the popular press. 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, 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 Mark Thoma on Tuesday, May 13, 2008 at 12:15 AM in Economics |
Posted by Mark Thoma on Tuesday, May 13, 2008 at 12:06 AM
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
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
“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
The full article from full article from
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 Mark Thoma on Monday, May 12, 2008 at 07:38 PM in Economics, Science |
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. 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.
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.
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 Mark Thoma on Monday, May 12, 2008 at 06:12 PM in Economics, Immigration |
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
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 Mark Thoma on Monday, May 12, 2008 at 03:06 PM in Economics, Politics |
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
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
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 Mark Thoma on Monday, May 12, 2008 at 12:33 PM in Economics, Oil |
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
to ask Congress for the right to pay interest on bank reserves. (Hat tip
Barry Ritholtz, see also
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
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
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
$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
Continue reading "The Fed Already Has a Blank Check" »
Posted by Mark Thoma on Monday, May 12, 2008 at 12:33 PM in Economics, Monetary Policy |