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Friday, June 20, 2008

"How and When Did the Storybook Kingdom Become Canonical?"

Something a bit different. Anyone know the answer?:

Princes and princesses, kings and queens, by Andrew Gelman: Lots of stories for little kids have kings and queens, not many seem to have presidents, prime ministers, mayors, etc. I don't fully understand this. I mean, I see that these stories are traditional, or imitate traditional forms, and so it makes sense that you'd have a king or queen rather than a president. But there are lots of other traditional forms of government. You can see some examples in children's literature, but they're clearly exceptions. (For example, the wolves in The Jungle Book have a tribal council, and the animals in Winnie the Pooh don't have any government at all.) I guess what I'm asking is: How did the standard storybook world become codified, the world with a kingdom, a king and a queen living in a castle riding horses etc? Even in the late Middle Ages in Europe when, I suppose, such places really existed, there were lots of other, different, sorts of places nearby. How and when did the storybook kingdom become canonical? Maybe Jenny can answer this question--it seems to fall within her bailiwick.

Jenny replies:

I must get some proper work done this morning, so will NOT write a long answer! Some associative thoughts: literary fairy tale a product of later eighteenth and nineteenth-century literature, when kings and queens are already seeming under threat, so there is an inherent hint of Disneyan/Ruritanian nostagia in those princesses in their castles; stories in all cultures naturally cluster around characters distinguished by birth (with strength, talents, etc.) but also by high position in a hierarchical system of government (think of Greek myths re: heroes, gods); if you go to African folklore, say, you will find more of these other structure of government? NB: you do not need a PhD in literature to observe that little girls in particular want to hear stories about princesses in long flowing & preferably pink dresses & tiaras, it is one of the mysteries of life!

    Posted by on Friday, June 20, 2008 at 09:59 PM in Miscellaneous | Permalink  TrackBack (0)  Comments (13) 


    "The Economics of Nice Folks"

    Sam Bowles of the Santa Fe Institute says economists need to recognize the "moral nature of humans":

    The economics of nice folks, EurekAlert: A basic tenet of economics is that people always behave selfishly, or as the 18th century philosopher economist David Hume put it, "every man ought to be supposed to be a knave."

    But what if some people aren't always knaves?

    Sam Bowles argues in Science June 20 that economics will get it wrong then, sometimes badly so. He points to new experimental evidence that people do often act against their own personal self-interest in favor of the common good, and they do so in predictable, understandable ways. Poorly-designed economic institutions fail to take advantage of intrinsic moral behavior and often undermine it. .

    Take this example: Six day care centers imposed a fine on parents who picked their children up late. The effect? Tardiness doubled, and it stayed high even when the fine was removed. Parents, it seems, stopped seeing lateness as an imposition on teachers, and instead saw it as something that could be purchased with no moral failing.

    Another example is a study this year which showed that women donated blood less frequently when they were paid for it than when it was an act of charity.

    These examples show that economists ignore human altruism at their peril. Standard economic theory assumes that incentives that appeal to self-interest won't affect any natural altruism that may exist, but that assumption is clearly wrong. Bowles discusses the research to date that helps to explain when and why that assumption breaks down.

    As the world becomes more interconnected and the resulting challenges to humanity increase, learning to harness these altruistic impulses becomes even more important, Bowles says. So the economists' "holy grail," to learn to design institutions and policies to direct the selfish impulses of individuals to public ends, "will be necessary but insufficient," Bowles says. "The moral nature of humans must also be recognized, cultivated, and empowered."

    [I think I need new glasses, or a new brain, or something. The above came out yesterday, but since the link to the article by Bowles wasn't going to be available until today, I decided to wait to post anything so I could, perhaps, add a few passages from the actual article as well as link to it. This morning, I glanced at Brad DeLong's site and saw a reference to Sam Boyd - which I managed to read as Sam Bowles - and a link to a piece in Science Magazine which I assumed was the Science Magazine piece by Bowles that was posted today. So I figured Brad had this covered. But I was pretty confused, the Science Magazine piece was to an article dated April 18, 2008, a piece called "First, Kill All the Economists," and the reference to Boyd was in an entirely different post from the link to Science magazine. I wasn't even close. Oh well, if anyone is interested, the Bowles article is here.]

      Posted by on Friday, June 20, 2008 at 04:50 PM in Economics | Permalink  TrackBack (0)  Comments (17) 


      FRBSF: Speculative Bubbles and Overreaction to Technological Innovation

      From the SF Fed, the relationship between speculative bubbles, technological innovation, and capital misallocation:

      Speculative Bubbles and Overreaction to Technological Innovation, by Kevin J. Lansing, Economic Letter, FRBSF:

      Bubbles are often precipitated by perceptions of real improvements in the productivity and underlying profitability of the corporate economy. But as history attests, investors then too often exaggerate the extent of the improvement in economic fundamentals. —Greenspan (2002)

      The magnitude of short-term movements in asset prices remains a challenge to explain within a framework of rational, efficient markets. Numerous empirical studies have shown that stock prices appear to exhibit "excess volatility," that is, prices move too much to be explained by changes in the underlying fundamentals, such as dividends or cash flows. Another prominent feature of asset prices is the intermittent occurrence of sustained run-ups above estimates of fundamental value, so-called speculative bubbles, that can be found throughout history in various countries and markets (see Lansing 2007).

      The dramatic rise in U.S. stock prices during the late 1990s, followed similarly by U.S. house prices during the mid-2000s, are episodes that have both been described as bubbles. The former was accompanied by a boom in business investment, and the latter by a boom in residential investment. Both booms were later followed by falling asset prices and severe retrenchments in the associated investment series, as firms and investors sought to unwind the excess capital accumulated during the bubble periods. Coincident booms in asset prices and investment also occurred during the late 1920s—a period that shares many characteristics with the late 1990s. In particular, both periods witnessed major technological innovations that contributed to investor enthusiasm about a "new era." This Economic Letter examines some historical links between speculative bubbles, technological innovation, and capital misallocation.

      Continue reading "FRBSF: Speculative Bubbles and Overreaction to Technological Innovation" »

        Posted by on Friday, June 20, 2008 at 12:15 PM in Economics, Financial System, Oil | Permalink  TrackBack (0)  Comments (10) 


        Paul Krugman: Driller Instinct

        Mr. McCain’s energy gambit:

        Driller Instinct, by Paul Krugman, Commentary, NY Times: Blaming environmentalists for high energy prices, never mind the evidence, has been a hallmark of the Bush administration.

        Thus, in 2001 Dick Cheney attributed the California electricity crisis to environmental regulations that, he claimed, were blocking power-plant construction. He completely missed the real story, which was that energy companies — probably some of the same companies that participated in his secret task force... — were driving up prices by deliberately withholding electricity from the market.

        And the administration has spent the last eight years trying to convince Congress that the key to America’s energy security is opening up the Arctic National Wildlife Refuge to oil drilling — even though estimates ... suggest that ... would make very little difference to the energy outlook...

        But it still comes as a surprise and a disappointment to see John McCain joining that unfortunate tradition.

        I’ve never taken Mr. McCain’s media reputation as a maverick seriously,... on most issues, he’s a thoroughly conventional conservative. On energy policy, however, he has ... seemed to show some independence. Most notably, he voted against the really terrible, special-interest-driven 2005 energy bill, which was backed by the Bush administration — and by Barack Obama.

        But that was then.

        In his Monday speech on energy, Mr. McCain tried to touch all the bases. He talked about conservation. He denounced the evils of speculation... A weird aspect of the current energy debate, incidentally, is ... that many of the same market-worshipping conservatives who first denied that there was a dot-com bubble, then denied that there was a housing bubble, are utterly convinced that nasty speculators are responsible for high oil prices.

        The ... news, however, was Mr. McCain’s call for more offshore drilling... This was a reversal of his previous position, and it went a long way toward aligning his energy policy with that of the Bush administration.

        That’s not a good thing.

        As many reports have noted, the McCain/Bush policy on offshore drilling doesn’t make sense as a response to $4-a-gallon gas: the White House’s own Energy Information Administration says that ... even at peak production its impact on oil prices would be “insignificant.”

        But what I haven’t seen emphasized is the broader picture: Mr. McCain has now aligned himself with an administration that, even aside from its blame-the-environmental-movement tendencies, has established an extensive track record as the gang that couldn’t think straight about energy policy.

        Remember, they didn’t just insist that the Iraqis would welcome us as liberators;... administration officials were also adamant that regime change in Iraq would add millions of barrels a day to the world oil supply, driving oil prices way down...

        So why would Mr. McCain associate himself with these characters? The answer, presumably, is that it’s a cynical political calculation. I’m reasonably sure that Mr. McCain’s advisers realize that offshore drilling would do nothing for current gas prices. But they may believe that the public can be conned...

        And Mr. McCain may also hope to shore up his still fragile relations with the Republican base..., many people on the right ... believe that all our energy problems have been caused by sanctimonious tree-huggers. Mr. McCain has just thrown that constituency some red meat.

        But I very much doubt that Mr. McCain’s gambit will work. In fact, it’s almost certainly self-destructive. To have a chance in November, Mr. McCain has to convince voters that he isn’t just Bush, continued. Energy policy is one of the areas where he could best have made that case.

        Instead, he has ceded the high ground on energy to Mr. Obama, and linked himself firmly to the most unpopular president on record.

          Posted by on Friday, June 20, 2008 at 12:42 AM in Economics, Environment, Oil, Policy | Permalink  TrackBack (0)  Comments (94) 


          Calvo: "Exploding Commodity Prices, Lax Monetary Policy, and Sovereign Wealth Funds"

          Guillermo Calvo argues that fundamentals, not speculation, explain rising commodity prices. He says "when analysed from the perspective of some future time, this whole episode will look very much like a bubble in the commodity market, a market mirage, even though what is behind it is a fundamental factor: lower demand for liquid assets by sovereigns like China, Chile or Dubai."

          Why have sovereign wealth funds lowered their demand for liquid assets? He argues that lax Fed policy is a big part of the inducement to switch out of liquid assets, and that the commodity price explosion is "a harbinger of higher CPI inflation" in the future. However, all is not lost in the inflation battle, but the Fed needs to "seriously start worrying about inflation and stop chasing imaginary destabilising speculators":

          Exploding commodity prices, lax monetary policy, and sovereign wealth funds, by Guillermo Calvo, Vox EU: Oil, metals, and now food prices are heading to the sky with a virulence that is hard to rationalise on the basis of world output growth – not even on the basis of China’s and India’s fast growth, let alone the expected global slowdown. This phenomenon has been accompanied by much higher transaction volumes in forward markets. Thus, analysts and policymakers have been quick in pointing an accusing finger at the proverbial speculator, who has even been declared persona non grata in some countries, like India, where commodity futures have been banned.

          The thrust of this column is that we are not going through another self-fulfilling bubble. Today’s explosion of commodity prices is the result of a very real global financial storm associated with large excess liquidity in several non-G7 countries and nourished by low G7 central banks’ interest rates. This price explosion could be a leading indicator of future inflation driven by fundamentals.

          Commodity stockpiles

          Absence of a substantial increase in physical commodity inventories has been mentioned as evidence of absence of speculative activity (by Martin Wolf and, more guardedly, Paul Krugman).[1] But that is not valid. Suppose, for the sake of the argument, that the demand for commodities for current consumption or production is completely inelastic (food and oil are good examples in the short run). If speculators attempt to stockpile commodities, commodity prices will go up. And they will go up as much as necessary to discourage the speculators from adding to their stocks, that’s all. To keep matters simple, I will zero in on that special case and explain what drives speculators to stockpile so aggressively as to provoke a price explosion.

          Incentives to stockpile commodities stem from the combination of low central bank interest rates (especially in the US) and the growth in sovereign wealth funds. The latter, in my view, is the crucial factor. Sovereign wealth funds have been created partly with the intent of switching the composition of government wealth from highly liquid but low-return assets to more risky but much more profitable investment projects. Thus, their attempt to get rid of excess liquidity resembles the econ 101 exercise in which the student is asked to trace the effects of a portfolio switch away from money and into capital. The answer is – of course – higher prices. I will return to that in a moment after I explain why central bank interest rates are also important.

          Continue reading "Calvo: "Exploding Commodity Prices, Lax Monetary Policy, and Sovereign Wealth Funds"" »

            Posted by on Friday, June 20, 2008 at 12:33 AM in Economics, Inflation, Monetary Policy | Permalink  TrackBack (0)  Comments (16) 


            "Why Worry About the Economy?"

            Why aren't people more upbeat about the economy?:

            Why Worry About the Economy?, by Jill Stoddard, Columbia Business School, Public offering: The Washington Post reported yesterday that although Americans’ perceptions of the economy are very negative, two key measures show that the economy is not as bad as it may seem: unemployment is at 5.5 percent and inflation at 4.2 percent.

            One reason for this disparity, according to Professor Eric Johnson, may be the frequency with which consumers are seeing higher prices. “Things that you buy more frequently and that have large percentage increases will weigh more in people’s perception of inflation,” Johnson was quoted as saying.

            He elaborated in the article with the following example: a person paying an extra $25 to fill up the gas tank is reminded of that cost once a week, or more often if you count the times he or she sees a $4-per-gallon price in giant numbers on a sign. In contrast, a rent increase of $100 would only happen once a month but would have the same financial impact.

            An inflation rate of 4.2% isn't as bad as it seems, it's just that people are reminded of it too often (where they are reminded by either the size of the purchase relative to the overall budget, or by the frequency of the purchase)?  It seems just as likely, or even more likely, that only being reminded once a month leads to an overly optimistic view of the economy. Out of sight might be out of mind, but it doesn't mean the problem isn't still there. In any case, I'm far from convinced that this explains the disconnect, or even that there is a disconnect.

            Part of the problem is the presumption in the question, which has been around for several years now and is basically "why are people so gloomy when the economy is doing so well?" If you ask instead, "why are people so gloomy when the economy has all these problems, reduced economic security, stagnant real wages, rising health care costs, falling home values, rising college costs,  rising food costs, loss of employer based retirement programs, rising energy costs, worries about the future, etc., etc.," there's really no mystery.

            Update: See comments from Andrew Leonard and Richard Green.

              Posted by on Friday, June 20, 2008 at 12:15 AM in Economics, Inflation | Permalink  TrackBack (0)  Comments (23) 


              links for 2008-06-20

                Posted by on Friday, June 20, 2008 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (11) 


                Thursday, June 19, 2008

                "Market Power, Asset Allocation, and Oil Prices"

                Steve Waldman:

                Market power, asset allocation, and oil prices, by Steve Randy Waldman: In response to a (somewhat ridiculous) proposal that we "sue OPEC" over high oil prices, Mark Thoma writes:

                [I]t's unlikely that [monopoly power] is the factor behind the run-up in prices. ...

                I think there may have been a change over the last few years in the market power of oil producers, for structural reasons. Traditionally, OPEC has suffered from the usual problem that makes large cartels unwieldy: Under agreements to restrain production, members individually have an incentive to cheat and sell larger-than-agreed upon quantities at still artificially high prices. But that assumes that the production quotas are significantly beneath the capacity of most members to produce. More subtly, it also assumes that each country gains by producing more rather than less oil, if cartel prices are maintained. Both of those assumptions may no longer hold.

                As the global oil market has grown, demand may have outpaced individual countries' capacity to supply, either because investment in new projects has not kept pace, or because nations have hit domestic "peak oil". (See Indonesia for an extreme example.) Other countries may desperately need money in order to fund current spending, so it is widely known they will produce as much as they can, regardless of quotas. Ironically, as long as the total capacity ... is well below global demand at the cartel's target price, the certainty of their output may enhance the ability of discretionary producers to control the quantity produced.

                It'd always be easier for a cartel of five or six producers to exercise market power than a cartel of, say, thirteen. But that's especially true when cartel members have little incentive to cheat. ...[O]il producers ... spend far less than the oil revenue they receive. For Saudi Arabia, selling a barrel more of oil is a portfolio choice: revenue from the marginal barrel will be saved, not spent, so the question becomes whether it is wise to shift some of the Kingdom's current allocation out of oil and into some asset that can be purchased with currency. For countries that have very little non-oil savings, mere diversification would encourage oil sales. It is unwise to have all ones eggs in one basket, and oil producers remember all too well that world prices can go down as well as up. They'd want to store their national wealth in an "efficient portfolio", one that maximizes their return on risk by including a variety of investments.

                But as oil producing nations have accumulated vast reserves of financial assets, switching from oil-in-the ground to stocks, bonds, or bank accounts is no longer so sure a bet. ... Central banks and sovereign wealth funds of oil-producing nations already hold hundreds of billions of dollars worth of Western financial assets. They might already have reached or exceeded what they view as an optimal allocation of their national wealth into these securities. Of course, producers are still not well diversified, and it's pretty clear that sovereign wealth funds are looking for alternative assets that might hedge their exposure both to oil and Western paper. But allocating into less liquid, unfamiliar categories of assets is slow work if you want to do it well. Perhaps current oil revenues outstrip oil producers' capacity to find good investment opportunities, and they view oil-in-the-ground as a better second-best asset than dollars in the bank.

                Ten years ago, oil producers did not have vast hoards of dollars and euros, and required oil revenue to meet budgetary needs. World demand was low enough that cheating by OPEC members could corrode producer pricing. It was hard to exercise market power. Now, cheaters don't matter, and discretionary producers may be indifferent or worse to the prospect of selling a barrel more of oil at current prices.

                (In a sense you might not call this market power at all, as price equals marginal cost, that is to oil producers, the assets they can buy for the dollar price of a barrel of oil are worth no more to them than a barrel of oil left in the ground.) ... [...more...]

                  Posted by on Thursday, June 19, 2008 at 07:11 PM in Economics, Market Failure, Oil | Permalink  TrackBack (0)  Comments (3) 


                  "Sue OPEC"

                  Should we sue OPEC for anti-trust violations?:

                  Sue OPEC, by Thomas W. Evans, Commentary, NY Times: The president of the United States has the power to attack, and perhaps destroy, the Organization of the Petroleum Exporting Countries, the illegal cartel that has driven the price of oil over $130 per barrel. ... The president need simply allow the states to seek relief in the Supreme Court under our antitrust laws.

                  The oil ministers of the OPEC countries meet periodically to set production quotas ... and in the process establish an artificially high price for crude oil. Under our antitrust laws, this is illegal. Two years ago, Amy Myers Jaffe, an energy expert at Rice University, estimated that the real production cost was $15 a barrel, at a time when the price was approaching $60. Recently, an OPEC spokesman said the price could be $70 a barrel — a little more than half the current price — if speculation and manipulation could be eliminated.

                  Despite this illegal conduct, ... “under the current state of our federal laws the individual member states of OPEC are afforded immunity from suit brought for damage caused by their commercial activities when they act through OPEC.” ...

                  Fortunately, there is another way to sue OPEC. Even if actions by individual citizens fail, a seldom-used provision of Article III of the Constitution grants original jurisdiction to the Supreme Court over lawsuits brought by states against “foreign states”...

                  The attorneys general of the various states should sue OPEC as ... a foreign state. (A joint action by the attorneys general is the method the states used to collectively sue tobacco companies, Microsoft and health maintenance organizations.) ... If the states won the case, the court could recover substantial damages based on assets and commercial activities of OPEC member nations in the United States.

                  Still, even though the states are allowed to sue OPEC in the Supreme Court, they might not prevail. There are significant separation of powers issues. ...

                  That’s where the president ... comes in. If the Supreme Court decided to defer to the policies of the political branches, the states could ask the president to issue a statement permitting the lawsuit to go forward... This pathway was established in a statute passed by Congress in the wake of Cuba’s expropriation of American sugar interests. ...

                  Moreover, confronted with the likelihood of huge damages and restraint of its illegal conduct, OPEC, or some of its members, might seek a settlement establishing production goals that would provide a price closer to actual costs. The probable reduction in the price of heating fuel and gas at the pump might exceed the amount of the current federal stimulus package.

                  If the president allowed the states to sue OPEC, his actions would undoubtedly anger political leaders in the Middle East and create the need for diplomatic initiatives to limit the fallout. But how stable is the Middle East right now? And isn’t starting a lawsuit better than starting a war?

                  And, from the LA Times, Sue OPEC (same title, but different authors, different editorial pages):

                  As the national average price of gasoline raced toward $4 a gallon and airlines laid off workers by the thousands because of rising jet fuel costs, the House of Representatives took action: It overwhelmingly passed the Gas Price Relief for Consumers Act of 2008. The bill would have ... permitted the U.S. Justice Department to charge the Organization of the Petroleum Exporting Countries with violating American antitrust laws.

                  Even before the 324-84 House vote last month, President Bush pledged a veto, saying OPEC might retaliate against U.S. interests overseas or cut oil production further. But he didn't have to make good on that promise. Senate Republicans held the line for him, last week threatening a filibuster... That effectively killed the bill and, for now, any hope that the United States would finally start treating oil the same way it does computer chips, vitamins, rubber and all other products. ...

                  If monopoly power is distorting these markets, then sure, we should fix that just as we should fix other market failures (e.g. not fully internalizing environmental costs into production decisions). However, it's unlikely that this is the factor behind the run-up in prices. Monopoly power explains the level of prices, i.e. why price is $8 rather than $5, but it doesn't explain the change in prices, i.e. why the price would change from $8 to $12. There are ways to tell this story, e.g. a war or some other event giving a cartel the cover it needs to raise prices and blame it on external factors, but I don't think that's what's going on in oil markets today, at least I don't think this is a significant factor behind the oil price increases.

                  For these reasons, if we fix the monopoly power problem, it's unlikely that oil prices will suddenly plummet. Even if monopoly power is a factor, it's unlikely it's as important as the growth in world demand. And while I don't put a lot of faith in the speculation story, I'd be more likely to believe speculation was the cause of the price run up than I would monopoly power.

                  I don't mean to downplay monopoly power, I've been frustrated that we seem to have lost focus on this aspect of markets over the last few decades, and we don't worry enough about market power in public policy. And maybe breaking up OPEC would bring down the price noticeably (for now, world growth will continue to put upward pressure on oil prices). If so, then we should eliminate the monopoly power, there's no reason to pay more than is necessary (though if we impose carbon taxes to correct other problems in these markets, the price will go back up again, the difference will be who gets the extra revenue).

                  But I'd also hate to see the oil price discussion get diverted by false hopes. Breaking up OPEC might bring prices down some, but it won't bring back the good old days and the longer term problems remain. At some point we have to face that things are changing, that we have to adjust - we can't keep hoping for a return of the low oil prices of the past because those days aren't coming back (no matter how many holes we drill in Alaska or off our coasts). Maybe technology will save us, but that too will require that we face reality and devote the resources and effort needed to fully investigate and develop alternative energy sources.

                    Posted by on Thursday, June 19, 2008 at 01:17 AM in Economics, Environment, Market Failure, Oil, Policy | Permalink  TrackBack (1)  Comments (77) 


                    "The Rise in American inequality"

                    Ian Dew-Becker and Robert Gordon discuss possible explanations for the rise in inequality in recent decades, and they conclude that "for top corporate executives, there is strong evidence that incomes have been driven by non-market forces. This is where policy can have the most positive impact on inequality; increased disclosure and improved corporate governance laws can not only raise firm value but help distribute economic gains more evenly across society":

                    The rise in American inequality, by Ian Dew-Becker and Robert J. Gordon, Vox EU: Of all the economic debates with broad political implications, none competes with the puzzling rise in American income inequality since the late 1970s. Both economists and politicians disagree about the forest and the trees – the overall interpretation of rising inequality and the importance of individual causes. People argue about differences between data sources, about the causes of sinking relative incomes in the middle and bottom percentiles, and have especially contentious disagreements about the interpretation of the leap of relative incomes at the top end. Goldin and Katz (2007) and Piketty and Saez (2003) describe changes in the income distribution over time. In this column we focus on possible explanations for the observed changes at both the bottom and top of the income distribution.

                    The data

                    Our initial work on inequality (Dew-Becker and Gordon, 2005) started from an attempt to understand the differential between the growth of mean and median labour income. We documented an important and simple fact: over the period 1966–2001 only the top 10 percent of the income distribution had real compensation growth equal to or above productivity growth. Accordingly here we refer to the lower 90 percent of the distribution as “the bottom” and the top 10 percent as “the top.”

                    If real compensation growth is roughly equal to productivity growth, then labour’s share of national income will be constant. Figure 1 shows that in fact, over the full period 1950–2006 labour’s share has risen, not fallen. The dotted line adds in the labour portion of proprietors’ income, and shows that labour’s share has been almost exactly flat for more than 50 years. This implies that the growth of mean labour income has been roughly equal to the growth in productivity. But our finding that the bottom 90 percent did not enjoy real income gains equal to productivity growth implies that the growth rate of median income has lagged significantly behind growth in the mean.

                    Continue reading ""The Rise in American inequality"" »

                      Posted by on Thursday, June 19, 2008 at 12:24 AM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (140) 


                      "A Home Price Firewall"

                      Martin Feldstein presents his plan to reduce mortgage loan defaults:

                      A Home Price Firewall, by Martin Feldstein, Commentary, Washington Post: Home prices are down 20 percent from their peak in 2006 and are falling rapidly... Experts predict an additional 15 percent decline during the coming year...

                      The danger is that home prices could spiral further down, hurting millions of homeowners and pushing the economy into a deep recession. ...

                      I believe the federal government should create a firewall to prevent too great a fall in housing prices. ... This can best be done through a program of mortgage replacement loans.

                      Such a program might be structured this way: The federal government would offer all homeowners with mortgages the opportunity to replace one-fifth of their existing mortgage (up to some dollar limit) with a government loan. This loan would carry a substantially lower interest rate than the individual's mortgage (reflecting the government's cost of funds). It would be a full-recourse loan that would have to be repaid regardless of what happens to the borrower's mortgage or home. By law, it would take priority over all non-mortgage debt.

                      Such a mortgage replacement loan would eliminate the potential incentive to default for almost all homeowners who now have positive equity. In doing so, it would limit the number of foreclosures that could contribute to a downward spiral.

                      Continue reading ""A Home Price Firewall"" »

                        Posted by on Thursday, June 19, 2008 at 12:15 AM in Economics, Financial System, Housing, Policy | Permalink  TrackBack (0)  Comments (23) 


                        links for 2008-06-19

                          Posted by on Thursday, June 19, 2008 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (15) 


                          Wednesday, June 18, 2008

                          Philanthropic Graffiti

                          Peter Singer says Jesus is wrong about charitable giving:

                          Give and tell: In defense of philanthropic graffiti, by Peter Singer, Project Syndicate: Jesus said that we should give alms in private rather than when others are watching. That fits with the commonsense idea that if people only do good in public, they may be motivated by a desire to gain a reputation for generosity. Perhaps when no one is looking, they are not generous at all.

                          That thought may lead us to disdain the kind of philanthropic graffiti that leads to donors' names being prominently displayed on concert halls, art museums, and college buildings. Often, names are stuck not only over the entire building, but also on as many constituent parts of it as fundraisers and architects can manage.

                          According to evolutionary psychologists, such displays of blatant benevolence are the human equivalent of the male peacock's tail. Just as the peacock signals his strength and fitness by displaying his enormous tail - a sheer waste of resources from a practical point of view - so costly public acts of benevolence signal to potential mates that one possesses enough resources to give so much away.

                          From an ethical perspective, however, should we care so much about the purity of the motive with which the gift was made? Surely, what matters is that something was given to a good cause. We may well look askance at a lavish new concert hall, but not because the donor's name is chiseled into the marble facade. Rather, we should question whether, in a world in which 25,000 impoverished children die unnecessarily every day, another concert hall is what the world needs.

                          A substantial body of current psychological research points against Jesus' advice. One of the most significant factors determining whether people give to charity is their beliefs about what others are doing. Those who make it known that they give to charity increase the likelihood that others will do the same. ...

                          We need to get over our reluctance to speak openly about the good we do. Silent giving will not change a culture that deems it sensible to spend all your money on yourself and your family, rather than to help those in greater need - even though helping others is likely to bring more fulfillment in the long run.

                          [I'm late for an appointment, so I'll leave any commentary to you...]

                            Posted by on Wednesday, June 18, 2008 at 02:07 PM in Economics | Permalink  TrackBack (0)  Comments (22) 


                            The Depopulation Bomb?

                            Should we be worried about depopulation?:

                            The coming population bust, by Jeff Jacoby, First of two columns, Boston Globe: Thomas Malthus has been dead for 170 years, but the Malthusian fallacy - the dread conviction that the growth of human population leads to hunger, shortages, and a ravaged environment - is unfortunately alive and well:

                            • America's congested highways are caused by "population growth wildly out of control," the group Californians for Population Stabilization laments in a new ad. So are "schools and emergency rooms . . . bursting at the seams." And with every additional American, immigrant or native-born, "comes further degradation of America's natural treasures."
                            • In a new documentary, Britain's Prince Philip blames the rising price of food on overpopulation. "Everyone thinks it's to do with not enough food," the queen's husband declares, "but it's really that demand is too great - too many people."
                              ...

                            Like other prejudices, the belief that more humanity means more misery resists compelling evidence to the contrary. In the past two centuries, the number of people living on earth has nearly septupled, climbing from 980 million to 6.5 billion. And yet human beings today are on the whole healthier, wealthier, longer-lived, better-fed, and better-educated than ever before. ...

                            True, fewer human beings would mean fewer mouths to feed. It would also mean fewer entrepreneurs, fewer pioneers, fewer problem-solvers. Which is why it is not an increase but the coming decrease in human population that should engender foreboding. For as Phillip Longman, a scholar of demographics and economics at the New America Foundation, observes: "Never in history have we had economic prosperity accompanied by depopulation."

                            And depopulation, like it or not, is just around the corner. ...

                            Human fertility has been dropping for years and is now below replacement levels - the minimum required to prevent depopulation - in scores of countries, including China, Japan, Canada, Brazil, Turkey, and all of Europe. The world's population is still rising, largely because of longer life spans... But with far fewer children being born today, there will be far fewer adults bearing children tomorrow. In some countries, the collapse has already begun. Russia, for example, is now losing 700,000 people a year. ...

                            By mid-century, the UN estimates, there will be 248 million fewer children than there are now. To a culture that has been endlessly hectored about the dangers of overpopulation, that might sound like welcome news. It isn't. No society gains when it loses its most precious resource, and no resource is more valuable than the human mind. The coming demographic winter will chill us all.

                            Will it? I don't know world demographic history all that well, but in the cases where depopulation is correlated with falling prosperity, what caused the population declines? War, disease, famine, something like that? Were population declines the result of falling prosperity, or were population declines the cause of declining prosperity? In the present case, the (anticipated) population decline appears to be an individual or societal choice, it is not being driven by some other factor such as those listed above. For that reason, the correlation between prosperity and population could be quite different than other cases in the historical record.

                            Update: Andrew Leonard has more on population declines and the standard of living:

                            ...I'm ... interested in the assertion that "Never in history have we had economic prosperity accompanied by depopulation."

                            Is that really true? I am reminded of a startling section from Ronald Findlay and Kevin H. O'Rourke's "Power and Plenty: Trade, War, and the World Economy in the Second Millennium," concerning the consequences of the Black Death for the European economy.

                            Drastic depopulation in Western Europe appears to have led to a dramatic improvement in the living standards of the surviving working class. Total production, is is true, declined overall, but there was a significant rise in "per capita real income and wealth, since land and physical capital remain unchanged and the livestock population was apparently unaffected by the plague."

                            With less labor available, surviving workers were able to command a premium.

                            ... The data suggest a sharp rise in English real wages from the middle of the fourteenth century. Real wages continued rising for about a century, so that by the middle of the fifteenth century laborers were earning more than twice as much in real terms as they had been doing on the eve of the Black Death...

                            I will concede that there is some cognitive dissonance to be mined in the concept of the Black Death having an upside. It's not exactly a strategy one would recommend to labor organizers, for example. But the fundamental premise is provocative: a world with fewer people competing against each other could mean a better life for the workers who do end up getting born.

                              Posted by on Wednesday, June 18, 2008 at 12:42 AM in Economics | Permalink  TrackBack (0)  Comments (82) 


                              A New Role for the IMF?

                              Michael Bordo and Harold James say there are advantages to having the IMF act as a global reserve manager:

                              The IMF as a reserve manager, by Michael Bordo and Harold James, Vox EU: The IMF needs a new job. This column makes the case for the bold proposal that the IMF should manage a significant part of the new surplus countries’ sovereign wealth funds.

                              In the original conception of the 1944 Bretton Woods Conference, the International Monetary Fund (IMF) was created to deal with problems that had afflicted the interwar world, particularly the lopsided distribution of reserves and the deflationary consequences for the international economy – as well as with crisis management. Today the IMF has been almost completely sidelined from many of the major governance issues of the international financial system. In particular, it is much less active as a financial institution. The IMF’s diminished role seems at odds with the world’s need for global governance.

                              Today’s international financial system is characterised by numerous uncertainties. There are major debates about exchange rates; puzzlement about the large increases in reserves of many emerging market economies; worries about the strategic ambitions associated with the rapid rise to prominence of sovereign wealth funds; and concerns about the capacity of international financial institutions to respond to crises.

                              Some potential IMF reforms, such as those proposed ten years ago by Jose de Gregorio, Barry Eichengreen, Takatoshi Ito, and Charles Wyplosz1 , sought to make the IMF more relevant by making it less politically dependent. Such reforms, however, have usually been thought of as impractical.

                              There may be a case for a reform that harks back to the original Bretton Woods conception – although suitably updated for today’s world with its new lopsided distribution of reserves. The IMF could again become a powerful financial stabiliser if it took on a new role as the manager of a significant part of the reserve assets of the new surplus countries.

                              Continue reading "A New Role for the IMF?" »

                                Posted by on Wednesday, June 18, 2008 at 12:33 AM in Economics, International Finance | Permalink  TrackBack (0)  Comments (5) 


                                Oil Prices, Inflation, and the Fed's Next Move

                                What's the Fed likely to do?:

                                Oil Price Realities May Soften Fed Rate Moves, by John M. Berry, Commentary, Bloomberg: ...When the cost of a barrel of crude oil touched $140 on June 16, almost double its price a year earlier, the sky may have seemed the limit.

                                But even with soaring rising demand in China, India and some other emerging-market countries, prices at some point must plateau, and perhaps come down. A doubling of oil prices simply has to reduce demand, which in turn will moderate the price.

                                So Fed officials have common sense on their side in assuming consumer prices won't increase indefinitely at a 4 percent rate, or higher, because of oil. Food prices are also playing a big role in keeping inflation high at the moment, and they too will eventually top out.

                                Still, Fed Chairman Ben S. Bernanke and his colleagues want to make sure food and energy inflation doesn't infect the whole U.S. price-setting process. That's why many of them are talking a tough anti-inflation game these days.

                                ''The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations,'' Bernanke told a Boston Federal Reserve Bank conference...

                                Choosing the best policy course is complicated right now. ... [I]t's not as if the Fed needs to raise rates to cool off an overheated economy; far from it. Nor would food and energy prices be affected very much by higher interest rates.

                                The primary purpose of a rate increase now would be to reassure the public that the Fed will do whatever is needed to hold down core inflation... If that works -- if the public's expectations for inflation remain low -- then temporarily higher food and energy prices are unlikely to generate higher sustained inflation. ...

                                Some private economists have argued that the oil price increases of the past four years, and the more recent food price increases, indicate a sea change in U.S. inflation. There's little evidence to back that up. ...

                                Inflation isn't out of control in the U.S. Fed officials are determined to make sure that remains the case...

                                Since last summer, officials have had to concentrate on keeping the economy afloat in the face of serious financial market turmoil. The danger of a deep recession has subsided.

                                So now it's time for some anti-inflation insurance -- in small, moderate doses.

                                  Posted by on Wednesday, June 18, 2008 at 12:24 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (8) 


                                  How Many Americas?

                                  Lane Kenworthy reads Nixonland:

                                  Nixonland: One, Two, or Many Americas?, by Lane Kenworthy: Rick Perlstein’s Nixonland is a terrific book. It’s a fascinating history of American society and politics from 1965 to 1972, nicely woven together in a compelling and exceptionally well-written narrative. ...

                                  Perlstein suggests that during these years Americans increasingly divided into two political groups, and these groups’ opposition to one another grew more intense and passionate. Here’s how he puts it on the book’s penultimate page (p. 747): “I have written of the rise, between the years 1965 and 1972, of a nation that had believed itself to be at consensus instead becoming one of incommensurate visions of apocalypse: two loosely defined congeries of Americans, each convinced that should the other triumph, everything decent and true and worth preserving would end.”

                                  It’s difficult to read the book and not be at least somewhat convinced. The 1960s brought enhanced government support for economic security and opportunity via Lyndon Johnson’s “Great Society” programs, civil rights legislation that opened economic and social doors for racial minorities and women, and massive cultural liberalization among young Americans. Yet it also brought a backlash. Hence the remarkable contrast between the 1964 and 1972 presidential elections — two of the most lopsided in American history, the former yielding an activist-government Democratic president, the latter a law-and-order Republican. ...

                                  Perlstein is at his best in providing insight into the motivations behind the backlash: the overwhelming sense of chaos, disorder, violence, insecurity, change — urban riots by frustrated African Americans, widespread drug use, disintegration of authority on college campuses and in public spaces, the seeming impotence of the American military in a poor Asian nation, unruly protesters at the Democrats’ 1968 political convention, exploding crime rates, horrific murders in once-calm suburban neighborhoods. The changes were fast, furious, and, to many ordinary Americans, frightening. ...

                                  Is Perlstein right about what happened during these years? Did America harden into two warring camps? I think an argument can be made that something very different occurred: the developments of the 1960s coupled with (and accentuated by) Nixon’s political tactics opened up new fissures that left the political landscape not more crystallized, but more clouded. Instead of shifting from (more or less) one America to two, the shift was, arguably, toward a greater multiplicity of political identities that the two political parties had to struggle mightily to try to shape into manageable coalitions.

                                  Continue reading "How Many Americas?" »

                                    Posted by on Wednesday, June 18, 2008 at 12:15 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (5) 


                                    links for 2008-06-18

                                      Posted by on Wednesday, June 18, 2008 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (9) 


                                      Tuesday, June 17, 2008

                                      The "Enron Loophole"

                                      From Marketplace:

                                      Deflating the oil bubble, by Michael Greenberger: ...Host Kai Ryssdal talks with former commodity regulator Michael Greenberger about ways to keep tabs on speculation.

                                      Kai Ryssdal: ...The [Commodity Futures Trading Commission is] in charge of regulating oil markets in this country and Congress has been after the agency to do something -- to do anything -- about oil and gas prices, what lawmakers perceive to be speculation, in particular.

                                      Michael Greenberger used to run the ... [Division of Trading and Markets for the Commodities Futures Trading Commission. He now teaches law at the University of Maryland.]

                                      Ryssdal: Why is it so hard to figure out what's going on in commodities markets -- oil specifically?

                                      Greenberger: Well, the reason it's hard to figure out is about 30 percent of our crude oil energy futures are traded in what is called a dark market -- that is a market that was deregulated in December of 2000 at the behest of Enron. Prior to that legislation..., all energy futures traded in the United States or affecting the United States in a significant fashion were regulated ... under a very careful regime that had been perfected over about 78 years and many observers believe that because those markets are not being policed, malpractices are being committed and traders are able to boost the price virtually at their will.

                                      Ryssdal: You're not really telling me that seven years on, we're still paying the price for Enron, are you?

                                      Greenberger: Well, this has been called the "Enron Loophole" and there are many legislators working very hard to close that loophole ...[and] bring the speculation under the kind of time-tested controls that were used until Enron had its way and amended the law...

                                      Ryssdal: So what's Congress going to do?...

                                      Greenberger: Well, there are several proposals..., but the bottom line is the speculators will, in the end, be policed. We will know who they are, what they're doing, what their controls are, what effect they're having on the market. Maybe we'll find out that there's nothing there.

                                      Ryssdal: So just to be clear, you do think that we're in a bubble, then?

                                      Greenberger: I believe it and I'm certainly not alone in my belief. If you talk to anybody who trades in these markets on a regular basis, they will tell you that the markets are completely dysfunctional and out of control because of speculative activity.

                                      Ryssdal: How long is it going to take then if we are, as you say, in a bubble, for it to work its way through and us to get back to something more realistic for the price of a barrel of oil, whether its 50 bucks or 80 bucks?

                                      Greenberger: From my own experience as a commodity regulator, I believe that if the Bush Administration were serious about its regulation, we could begin seeing prices drop within a month. If we don't get the kind of regulation that has been done for decades and the market proceeds along the pace its proceeding, we will have to go through a very, very serious recession. The question is do you want to deflate the bubble by that kind of suffering or do you want to deflate the bubble by applying tight U.S. regulatory controls? ...

                                        Posted by on Tuesday, June 17, 2008 at 02:43 PM in Economics, Financial System, Oil, Regulation | Permalink  TrackBack (0)  Comments (34) 


                                        FRBSF: The Current Economy and the Economic Outlook

                                        Reuven Glick of the SF Fed uses fourteen graphs to illustrate the state of the economy, and to predict where the economy might be headed next:

                                        FedViews, by Reuven Glick, FRBSF (no permalink available): Reuven Glick, group vice president at the Federal Reserve Bank of San Francisco, states his views on the current economy and the outlook:

                                        Continue reading "FRBSF: The Current Economy and the Economic Outlook" »

                                          Posted by on Tuesday, June 17, 2008 at 09:54 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (1) 


                                          links for 2008-06-17

                                            Posted by on Tuesday, June 17, 2008 at 12:31 AM in Links | Permalink  TrackBack (0)  Comments (21) 


                                            Access to Health Care

                                            Ben Bernanke on Challenges for Health-Care Reform:

                                            Access to health care is the first major challenge that health-care reform must address. In 2006, a total of 47 million Americans, or almost 16 percent of the population, lacked health insurance. ...[T]he evidence ... indicates that uninsured persons receive less health care than those who are insured and that their health suffers as a consequence. Per capita expenditures on health care for uninsured individuals are, on average, roughly half those for fully insured individuals. People who are uninsured are less likely to receive preventive and screening services, less likely to receive appropriate care to manage chronic illnesses, and more likely to die prematurely from cancer--largely because they tend to be diagnosed when the disease is more advanced. One recent study found that uninsured victims of automobile accidents receive 20 percent less treatment in hospitals and are 37 percent more likely to die of their injuries than those who are insured.

                                            Update: More on health care from Dean Baker:

                                            Insurance fraud, by Dean Baker: The health insurance system in the United States works great, as long as you stay healthy. It's only people who need medical care who have problems.

                                            Continue reading "Access to Health Care" »

                                              Posted by on Tuesday, June 17, 2008 at 12:24 AM in Economics, Fed Speeches, Health Care | Permalink  TrackBack (0)  Comments (40) 


                                              Monday, June 16, 2008

                                              "Stolper-Samuelson for the Real World"

                                              Dani Rodrik says that trade with other nations may not cause the wages of unskilled workers to fall as predicted by generalizations of the Stolper-Samuelson theorem. Instead, the main impact may be the losses associated with the displacement of workers as the least efficient firms are driven out of business. Here's a shortened version:

                                              Stolper-Samuelson for the real world, by Dani Rodrik: (Warning: This is a long and wonkish entry, aiming at self-comprehension...)

                                              The Stolper-Samuelson theorem is a remarkable theorem... But the theorem is also quite limited in its applicability. ...

                                              But there is a version of the theorem that is remarkably general and powerful. It says that regardless of the number of goods and factors, at least one factor of production must experience a decline in real income [as a result of opening up to international trade]... All that this result requires is a very mild assumption... The stark implication is that someone will lose, even if the nation as a whole becomes richer. (Here is the proof. ...)

                                              The theorem does not identify who exactly will lose out. The loser in question could be the wealthiest group in the land. But if the good in question is highly intensive in unskilled labor, there is a strong presumption that it is unskilled workers who will be worse off. ...

                                              I have been thinking about this result in connection with Broda and Romalis's remarkable finding that

                                              the rise of Chinese trade has helped reduce the relative price index of the poor by around 0.3 percentage points per year. This effect alone can offset around 30 percent of the rise in official inequality we have seen over this period.

                                              The puzzle here, at least on the face of it, is that one would expect China's trade to have had the largest price impact on labor-intensive goods. And if so, wages of unskilled workers must have fallen even more, along the lines of the Stolper-Samuelson logic sketched out above. Can we still say that trade with China has helped reduce U.S. inequality? ...

                                              What gives? The Auer and Fischer paper underlines another important result. What lies behind the decline in U.S. producer prices in trade-affected sectors is not wage or other input price reductions but mostly increases in total factor productivity. So perhaps what is going is that the Stolper-Samuelson logic is defeated by increases in sectoral productivity induced by import competition. The ... proof of the generalized S-S theorem ... breaks down whenever there is productivity change. After all, if TFP increases, employers can afford to pay unchanged wages even if the prices they face decline.

                                              The next question inquiring minds will want to know is how and why this TFP improvement comes about. The available economic theory on the impact of market competition on firm-level efficiency is notoriously inconclusive and ambiguous. (Profit-maximizing firms should want to minimize costs regardless of how tough competition is.) Perhaps what is happening is a kind of industry rationalization--exit of the least efficient firms--in which case we should see this restructuring and the associated layoffs in the data as well. Moreover, labor does not exactly come out unharmed in this case either. It is after all job loss, and the threat thereof, that workers complain about.

                                              But if this line of reasoning is correct, the main threat to workers is not a Stolper-Samuelson type permanent compression in wages, but the more temporary (and limited) wage losses incurred by displaced workers. This is the kind of problem that wage insurance is ideally suited for.

                                              Stay tuned--if you managed to read this far...

                                              [Note: Richard Serlin responds here.]

                                                Posted by on Monday, June 16, 2008 at 06:12 PM in Economics, Income Distribution, International Trade | Permalink  TrackBack (0)  Comments (20) 


                                                "Re-thinking That ‘70's Inflation Show"

                                                Thomas Palley says "if the union price - wage spiral story of inflation is correct (which it is), Friedman's natural rate theory is wrong. My comments, along with supporting graphs, are at the end:

                                                Re-thinking That ‘70's Inflation Show, by Thomas I. Palley: The Federal Reserve has recently received much criticism from economic conservatives who claim it has ignored inflation, thereby risking a rerun of the 1970's inflation show. In response, renowned Princeton economist Paul Krugman has come to the Fed's defense arguing today's inflation is fundamentally different from that of the 1970s.

                                                Krugman is right, but his arguments do more than defend the Fed. They also unintentionally demolish the foundations on which central banks have based monetary policy the past twenty-five years. In effect, re-thinking the inflation of the 1970s also compels re-thinking economic policy.

                                                Continue reading ""Re-thinking That ‘70's Inflation Show"" »

                                                  Posted by on Monday, June 16, 2008 at 11:07 AM in Economics, Inflation, Macroeconomics, Unemployment | Permalink  TrackBack (0)  Comments (79) 


                                                  Paul Krugman: Fiscal Poison Pill

                                                  Why aren't progressives doing more to challenge the way in which the Bush administration has managed to restrict the debate over fiscal policy?:

                                                  Fiscal Poison Pill, by Paul Krugman, Commentary, NY Times: A poison pill, in corporate jargon, is a financial arrangement designed to protect current management by crippling the company if someone else takes over. ...

                                                  [T]he tax cuts enacted by the Bush administration are, in effect, a fiscal poison pill aimed at future administrations.

                                                  True, the tax cuts won’t prevent a change in management — the Constitution sees to that. But they will make it hard for the next president to change the country’s direction.

                                                  Exhibit A of the poison pill in action is the sad case of John McCain, part of whose lingering image as a maverick rests on his early opposition to the Bush tax cuts, which he declared excessive and too tilted toward the rich.

                                                  Since then the budget surpluses of the Clinton years have given way to persistent deficits, and income inequality has risen to new heights, vindicating his opposition.

                                                  But instead of pointing this out, Mr. McCain now promises to make those tax cuts permanent — and proposes further cuts that are, if anything, tilted even more toward the wealthy. And how is the loss of revenue to be made up? Mr. McCain hasn’t offered a realistic answer.

                                                  You can explain though not excuse Mr. McCain’s behavior by his need to shore up ... the Republican base... But he’s not the only one seemingly trapped by the Bush fiscal legacy.

                                                  Barack Obama’s tax plan is more responsible than Mr. McCain’s:... the Obama plan would raise revenue by $700 billion over the next decade, compared with a $600 billion loss for Mr. McCain. The Obama plan is also far more progressive...

                                                  But ... $700 billion ...[is] probably not enough to pay for universal health care, which was supposed to be the overriding progressive priority in this election.

                                                  Why doesn’t Mr. Obama propose raising more money? Blame the Bush poison pill.

                                                  First..., Mr. Obama ... isn’t willing to challenge the Bush tax cuts as a whole. He only proposes rolling back tax cuts for those making more than $250,000 a year.

                                                  Second, Mr. Obama proposes giving back a substantial part of the revenue raised by this partial tax-cut rollback ...[with] new tax cuts. These tax cuts would mainly benefit lower- and-middle-income families...

                                                  But ... are these tax cuts, however appealing, a top priority? The most expensive proposal ...  would give most workers $500 in tax credits, at a 10-year cost of more than $700 billion. Isn’t it more important that workers be assured of health care?

                                                  The problem, I believe, is that even Democrats have bought into the underlying premise of the Bush years — that the best thing you can do for American families, or at least the only thing that can win their votes, is to give them a tax break.

                                                  One more thing: on Friday Mr. Obama declared that he would “extend the promise” of Social Security by imposing a payroll-tax surcharge on people making more than $250,000 a year. The Tax Policy Center estimates that this would raise ... $629 billion over the next decade. ...

                                                  Again, one wonders about priorities. Whatever would-be privatizers may say, Social Security isn’t in crisis... So is adding to the trust fund the best use a progressive can find for scarce additional revenue?

                                                  Anyway, back to my main theme: looking at the tax proposals of the two presidential candidates, it’s remarkable and disheartening to see how effective President Bush’s fiscal poison pill has been in restricting the terms of debate.

                                                  Progressives, in particular, have to hope that Mr. Obama will be more willing to challenge the Bush legacy in office than he has been in the campaign.

                                                    Posted by on Monday, June 16, 2008 at 12:33 AM in Economics, Politics, Taxes | Permalink  TrackBack (0)  Comments (75) 


                                                    "A Theory of Military Dictatorships"

                                                    The "three-way interactions between the elite, the military and citizens" in the transition to democracy:

                                                    A theory of military dictatorships, by Daron Acemoglu, Davide Ticchi, and Andrea Vindigni: Throughout history, the military has been concerned with much more than national defense. In Imperial Rome, for instance, by the era of the mid Empire it had become customary for the military to influence the selection of the new Emperor. In modern times, virtually all Latin American and African nations have seen military interventions, often culminating in military coups and the emergence of military dictatorships. There are also instances of military involvement in domestic politics, even in apparently consolidated democracies. In 1958, the democratically-elected French government was forced to back down in a confrontation with a unified military command.

                                                    While, economists have been studying the political logic of transitions to and from democracy (e.g. Wintrobe 1998 and Dixit 2006), the military’s role has been largely ignored. Our recent work, A Theory of Military Dictatorships, takes a first step towards a systematic framework for the analysis of the role of the military in domestic politics. Our objective is to ultimately understand what types of nondemocratic regimes can survive with the support of the military, which regimes will generate interventions from the military, and why the military may align itself with some segments of the society against others.

                                                    Continue reading ""A Theory of Military Dictatorships"" »

                                                      Posted by on Monday, June 16, 2008 at 12:24 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (10) 


                                                      links for 2008-06-16

                                                        Posted by on Monday, June 16, 2008 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (6) 


                                                        Sunday, June 15, 2008

                                                        Graduation

                                                        My Father's Day gift came yesterday afternoon:

                                                        Continue reading "Graduation" »

                                                          Posted by on Sunday, June 15, 2008 at 01:08 PM in Science, Universities, University of Oregon | Permalink  TrackBack (0)  Comments (21) 


                                                          Regulation and Foodborne Disease Outbreaks

                                                          As noted below, in response to this column by Paul Krugman on the failure of food safety regulation in recent years, questions have been raised about whether food borne disease outbreaks have been increasing or decreasing. Here's Alex Tabarrok at Marginal Revolution:

                                                          Krugman gets a Rotten Tomato, by Alex Tabarrok: Paul Krugman is attacking Milton Friedman (again) for rotten tomatoes...:

                                                          Lately, however, there always seems to be at least one food-safety crisis in the headlines — tainted spinach, poisonous peanut butter and, currently, the attack of the killer tomatoes.

                                                          How did America find itself back in The Jungle?

                                                          I was curious so I collected data from the Center for Disease Control on Foodborne Disease Outbreaks from 1998-2006. The data only go back to 1998 because in that year the CDC changed its surveillance system creating a discontinuity but note that we are covering a chunk of the Clinton years and are well within the time frame over which Krugman says the safety system has degenerated. Here's the result:

                                                          Tabarrok61408

                                                          What we see is a lot of variability from year to year but a net downward trend. You can also look at cases per year which are more variable but also show a net downward trend. No evidence whatsoever that we are back "in The Jungle."

                                                          Mathew Yglesias says:

                                                          ...isn't the pattern of spiking in even years and declining in odd years sort of strange...

                                                          I am going to turn this over to a food economist the the U.S. Food Policy Blog:

                                                          Marginal Revolution covers food safety, by Parke Wilde: Alex Tabarrok at Marginal Revolution gives Paul Krugman a hard rap on the knuckles for criticizing federal food safety regulators without noting the relevant data. Krugman's recent column describes a crisis of foodborne illness outbreaks, while Tabarrok points out CDC statistics showing that at least some kinds of outbreaks haven't increased. Still, the CDC data aren't the whole story. Here is my comment:

                                                          ...I try to ignore the ideologues. On the one hand, Grover Norquist and Milton Friedman have hopes for market incentives that are not only unrealistic, they are very far from the current state of good contemporary economic thought on food safety.

                                                          On the other hand, I give little weight to critics who hold out unrealistic expectations for government prevention of all food safety risks, not so much because they care about food safety, but because they just have large ambitions for government interventions in the economy.

                                                          Current economic thought draws on a fairly specific diagnosis of different kinds of imperfect information, each of which calls for a different policy response, which can range from laissez faire to labeling to testing to regulation.

                                                          A standard mainstream -- or even somewhat conservative -- text on the economics of food safety is John Antle's book on food safety. It acknowledges market failures in food safety, and particularly recognizes the need for strong government regulation of food-borne pathogens, because in many cases consumers cannot recognize the safety of the food even after purchase, and hence cannot defend their own interests in the marketplace. In my reading, ... on foodborne disease [Antle] seems to me closer to Krugman than Friedman.

                                                          There are some exciting private market innovations in food safety recently. For example, the buyers for major supermarket chains are getting more sophisticated in demanding safety from their suppliers, which allows the market to achieve good outcomes that individual consumers could not command on their own.

                                                          At the same time, it is fair to say USDA and FDA oversight of food safety have fallen far short of a balanced position. The CDC stats on outbreaks have a number of shortcomings, and don't suffice to make me think otherwise. Take something like the USDA's refusal to let Creekstone beef voluntarily test its own product for BSE. ... The so-called "regulators" are way out of step with the public interest position of economists, even market economists who appreciate the market's accomplishments on its good days.

                                                          Let me take this a step further. Here are the actual data from the individual reports from the CDC (the totals are shown in the graph from Alex's post):

                                                            1998 1999 2000 2001 2002 2003 2004 2005 2006
                                                          Bacterial 257 222 226 235 226 196 208 188 223
                                                          Chemical 48 32 37 52 46 54 47 40 53
                                                          Multiple   2 3 7 12 7 5 6  
                                                          Parasitic 4 3 6 5 5 3 8 6 9
                                                          Viral 59 109 176 156 205 149 251 170 337
                                                                             
                                                          Confirmed 368 368 448 455 494 409 519 410 623
                                                          Suspected                 275
                                                          Unknown 946 976 969 783 838 663 800 572 349
                                                                             
                                                          Total 1314 1344 1417 1238 1332 1072 1319 982 1247

                                                          When I look at these data, it's hard to find any consistent trends. The increase in confirmed cases appears, for the most part, to be due to an increase in confirmed viral outbreaks, but it's hard to know whether the increase is more actual cases, which would be worrisome, or just better technology at identifying them. For the rest of the confirmed cases, there is not that much of a pattern. But no matter what the trends in confirmed cases say, with more than half the cases due to unknown causes and so much variation in the number of unknown etiologies, it's hard to know how to interpret the overall figures shown in the graph above as a rebuttal to Krugman.

                                                          Stepping away from the data for a moment, and given their quality that may be wise, the larger issue is whether the government should intervene and regulate food markets to promote safety, or follow Friedman's advice and let the private sector take care of the problem. The market failure due to asymmetric information identified above, and the advice of experts in the area make a compelling case for regulation.

                                                          Update: Tyler Cowen, Alex Tabarrok, and others have asked in comments that I update the post to say that these data do not support Krugman. Yes, that's true, but it's because these data are too noisy to support anything (they suffer from a huge errors in variable problem that appears to be time-varying, and also appear to be heteroskedastic). These data are of such poor quality that you can't conclude anything. The trend could be rising, it could be flling, it could be constant, but these data can't tell us the answer. So, the rebuttal  argument seems to be as follows. Someone (Krugman) makes a claim. To check the claim, I go get really, really noisy data, run a regression, and say, "see - the hypothesis doesn't stand up to the data!" That doesn't seem very compelling to me.

                                                            Posted by on Sunday, June 15, 2008 at 03:33 AM in Economics, Regulation | Permalink  TrackBack (0)  Comments (56) 


                                                            Alan Blinder: Two Bubbles, Two Paths

                                                            Alan Blinder says there are two types of bubbles, and the Fed should only try to prevent one of them:

                                                            Two Bubbles, Two Paths, by Alan S. Blinder, Economic Scene, NY Times: Lately more and more people have been questioning the received wisdom about what a central bank should do when confronted by an asset price bubble. That piece of wisdom ... holds that deliberate bubble-bursting is something between impossible and dangerous — and thus best avoided. Instead, ... the Fed should let bubbles burst of their own accord, and then be prepared to mop up after.

                                                            This strategy ... is designed to limit collateral damage to the rest of the financial system, and especially to the overall economy. The Fed executed such a mop-up-after strategy with great success when the tech bubble popped spectacularly in 2000. ...

                                                            In taking up these [questions about the received wisdom]..., it’s crucial to distinguish between two types of bubbles. The first, what I’ll call “bank-centered bubbles,” are speculative excesses ... principally fueled by irresponsible ... bank lending. The housing-mortgage bubble was an obvious and painful example. But in other asset bubbles, bank lending plays a minor role, or none at all. The tech-stock bubble was a dramatic example of this second type.

                                                            I would argue that the central bank’s proper role is fundamentally different in the two types of bubbles. Here’s why:

                                                            When bubbles are not based on bank lending, the Fed has no comparative advantage over other observers in distinguishing between rising fundamentals and bubbly valuations. It may see bubbles where there are none, or fail to recognize them until it’s too late...

                                                            Indeed, at the Fed, I recall Mr. Greenspan thinking that he saw a stock market bubble as early as 1995... Fortunately, he did not make the mistake of trying to burst it. ...

                                                            That’s the first problem, and it’s a huge one. Here’s the second:

                                                            Once a central bank correctly recognizes a bubble’s existence, what is it supposed to do? The Fed has no instruments aimed directly at, say, tech stocks, and practically no instruments aimed at stock prices more broadly. (Those who argued that higher margin requirements would have worked were engaged in deeply wishful thinking.)

                                                            Of course, the Fed could have raised interest rates. But why would raising the federal funds rate by, say, two to three percentage points have ended the stock market mania when investors were expecting 19 percent annual returns in the stock market? That much monetary tightening, however, might well have stopped the economy in its tracks. ...

                                                            But a bank-centered bubble is starkly different in both respects.

                                                            As long as the central bank is also a bank supervisor and a regulator, it is extraordinarily well placed to observe and understand bank lending practices — much better positioned than almost anyone else. ...

                                                            And what about instruments specifically aimed at the bubble? ...[T]he Fed’s kit bag is ... stuffed full when it comes to taking aim at bank lending practices. Escalating upward from a sternly arched eyebrow to an outright prohibition of certain types of lending — for example, subprime loans with no documentation...

                                                            Finally, regarding inflation, let’s look at the record. The core inflation rate ... was in the 2 1/2 to to 3 percent range in 1995 to 1996, when serial bubble-blowing supposedly began. It has hovered in the 2 1/4 to 2 3/4 percent range in 2007 and so far in 2008. Do you see a rising trend?

                                                            There are two main conclusions: First, when bubbles are not based on bank lending, the mop-up-after strategy still looks pretty good. When it comes to bank-centered bubbles, however, there are many more things that a central bank can and should do. But raising interest rates to burst the bubble is probably not one of them.

                                                              Posted by on Sunday, June 15, 2008 at 03:24 AM in Economics, Financial System, Monetary Policy | Permalink  TrackBack (0)  Comments (18) 


                                                              Gas Prices and the Urban Land Market

                                                              Richard Green:

                                                              $4 per gallon gasoline and the urban land market, by Richard Green: Over the past six years, the price of gasoline has risen about $2 per gallon. What does this mean for relative urban land prices?

                                                              Let's say the average household makes five one-way trips per day--for work, shopping, entertainment, etc. Let's also say that the average car gets 20 mpg in city driving. Each mile of distance to work, shopping, etc. is therefore now 50 cents per day per household more expensive than before. A household living immediately adjacent to work and shopping should then be willing to pay $5 per day more in rent than a household 10 miles away compared with six years ago, all else being equal. This becomes $150 per month, or $1800 per year. Assuming a five percent cap rate for owner occupied housing, this translates to $36,000 in relative change in value. Given that the median house price in the US is about $220k, this is kind of a big deal.

                                                              The assumptions here are pretty crude (particularly the ceteris paribus assumption), but if gas remains at its current real price, we will see the shape of US cities change.

                                                              On a larger scale, another potential reorganization is that producers may shift production closer to the markets where the goods are sold as transportation costs increase with energy prices (though see Brad Setser). If so, it's possible that higher energy costs could cause producers to shift production to Mexico, and this in turn could reduce the flow of illegal immigrants into the U.S.

                                                              Update: Follow-up from Richard Green here.

                                                                Posted by on Sunday, June 15, 2008 at 01:08 AM in Economics, Oil | Permalink  TrackBack (0)  Comments (8) 


                                                                links for 2008-06-15

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


                                                                  Saturday, June 14, 2008

                                                                  "Microsoft will Survive. Google will Dominate. Yahoo is Toast"

                                                                  Is Yahoo toast?:

                                                                  Microsoft the underdog, by Matthew DeBord, Commentary, LA Times: At long last, we have resolution: Microsoft will not ... be taking over Yahoo and going toe-to-toe with mighty Google... Instead, Yahoo, the definitive Web 1.0 company, will be casting its lot with ... Google, the definitive Web 2.0 company. Microsoft, the definitive Web 0.0 company -- ...plying the increasingly dreary straits of operating systems and software -- is out in the cold.

                                                                  This drama has been playing out since the mid-'90s, when the Internet first established itself as a ... compelling counterpoint to the era of Microsoft, which thanks to its monopoly on the operating system for PCs ... had dominated the dawn of personal computing.

                                                                  Google and its emerging monopoly on search-based Web advertising is the new name of the game. And now that Microsoft is almost categorically excluded from that competition, we are witnessing the final days of Web 1.0. It may look as though Yahoo has somehow saved itself by rebuffing Microsoft and teaming up with the dark lords of Mountain View. But this is not the case. Microsoft will survive. Google will dominate. Yahoo is toast. ...

                                                                  In the end, Yahoo believed that it was better to bond with Google, the big new thing, and continue to flip Microsoft the bird, as it has long done. And so, Yahoo has sealed its doom. Our only hope now, as we spy the gruesome Pax Googleannica of Web 3.0 on the horizon, is that renegade survivors of the Web 1.0 pioneer that took its name from Jonathan Swift's race of barbarians will say, "Enough," and join with their former sworn foe to give hope to those of us who see the Web as something better than a merciless "Matrix"-like monetized quantification of all we do and all we are. That's right, as Yahoo makes its Faustian pact with Google, Microsoft -- Microsoft! -- has finally become the heroic underdog.

                                                                    Posted by on Saturday, June 14, 2008 at 03:33 AM in Economics, Web/Tech | Permalink  TrackBack (0)  Comments (34) 


                                                                    "To Swift-Boat or Not to Swift-Boat?"

                                                                    How would you respond if you thought your opponent was going to use swift-boat tactics against you?:

                                                                    To Swift-Boat or Not, by Michael Kinsley, Time: John McCain and Barack Obama are about to face a moral choice. ... "Yes or no. Do you want to swift-boat?" If you were the presidential candidate, what answer would you give? ...

                                                                    To swift-boat or not to swift-boat? What'll it be? Both candidates have publicly sworn off the practice, and McCain was admirably loud in denouncing the Swift Boat campaign in 2004. Of course, that was when he was still a maverick. I've been shocked by how many Democrats, in an informal poll, take the position that whatever it takes to win is justified. They say, first, that the Republicans will do anything to win, and it would be naive to attempt a higher standard. Second, they say, the stakes in this election are so high that an excess of scruples in trying to win it would be morality misplaced. Many Republicans agree at least with this second point. The belief of some Democrats that only scruples are stopping them from swift-boating as effectively as Republicans is almost touching.

                                                                    If these junior Machiavellis are right, there is no hope for a civilized campaign. McCain will do what Republican candidates always do, and Obama will use skills developed over the long primary season. Or is there hope in the fact that decency is a big part of both candidates' "brands"? If so, swift-boating could backfire. But it never has before. And the most enthusiastic and skilled swift-boater so far--George Bush the Elder, who built his campaign against Michael Dukakis around the Pledge of Allegiance and a furloughed convict named Willie Horton--was also someone peddling decency as part of his official persona. History shows that any candidate who relies on the voters to punish a swift-boater is going to be disappointed. People tell pollsters they are sick of nasty politics, then they respond to it every time.

                                                                    On the other hand, like generals and the last war, pundits are always fighting the last election. Maybe swift-boating will disappear this year. But do you want to bet the presidency on that? Your advisers are knocking on the door with a question. Swift-boat or no?

                                                                    At first I thought I'd suggest a version of playground rules. You don't throw the first punch, i.e. don't swift boat first, but you make it very clear that if the other person does, you will fight back with whatever means are necessary to protect yourself, including matching or exceeding whatever tactics were used against you. The problem is that if moving second rather than first is costly, and if you are fairly certain the other person will use these tactics, than it's tempting to move first.

                                                                    Even if I thought an attack was very likely, I wouldn't throw the first punch. But I would try to find ways of minimizing the cost of being on the defensive, i.e. take the time and effort needed to have a response ready in advance, something that I will likely match or exceed whatever is thrown at me. But there must be a better response than this (it can be cast as a game theory problem). What would you do?

                                                                    Update: From the WSJ's Washington Wire:

                                                                    Barack Obama said [what] he would do to counter Republican attacks "If they bring a knife to the fight, we bring a gun," Obama said at a Philadelphia fundraiser Friday night. ... Obama made the comment in the context of warning donors that the general election campaign against McCain could get ugly.

                                                                      Posted by on Saturday, June 14, 2008 at 03:24 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (109) 


                                                                      "Biophilia"

                                                                      Should we worry that, given enough time and enough economic growth, there will be substantial "aesthetic inequality?:

                                                                      This Land Is Their Land, by Barbara Ehrenreich, Commentary, The Nation: ...I took a little vacation recently--nine hours in Sun Valley, Idaho, before an evening speaking engagement. ... I found a tiny tourist village... What luck--the boutiques were displaying outdoor racks of summer clothing on sale! ...

                                                                      But as I approached the stores things started to get a little sinister--maybe I had wandered into a movie set or Paris Hilton's closet?--because even at a 60 percent discount, I couldn't find a sleeveless cotton shirt for less than $100. ...

                                                                      Then I remembered the general rule, which has been in effect since sometime in the 1990s: if a place is truly beautiful, you can't afford to be there. All right, I'm sure there are still exceptions--a few scenic spots not yet eaten up by mansions. But they're going fast.

                                                                      About ten years ago, for example, a friend and I rented a snug, inexpensive one-bedroom house in Driggs, Idaho, just over the Teton Range from wealthy Jackson Hole, Wyoming. At that time, Driggs was where the workers lived, driving over the Teton Pass every day to wait tables and make beds on the stylish side of the mountains. The point is, we low-rent folks got to wake up to the same scenery the rich people enjoyed and hike along the same pine-shadowed trails.

                                                                      But the money was already starting to pour into Driggs--Paul Allen of Microsoft, August Busch III of Anheuser-Busch, Harrison Ford... I haven't been back, but I understand Driggs has become another unaffordable Jackson Hole. Where the wait staff and bed-makers live today I do not know.

                                                                      I witnessed this kind of deterioration up close in Key West, Florida...

                                                                      Of all the crimes of the rich, the aesthetic deprivation of the rest of us may seem to be the merest misdemeanor. ...

                                                                      If Edward O. Wilson is right about "biophilia"--an innate human need to interact with nature--there may even be serious mental health consequences to letting the rich hog all the good scenery. ... According to evolutionary psychologist Nancy Etcoff, the need for scenery is hard-wired into us. "People like to be on a hill, where they can see a landscape. And they like somewhere to go where they can not be seen themselves," she told Harvard Magazine last year. "That's a place desirable to a predator who wants to avoid becoming prey." We also like to be able to see water (for drinking), low-canopy trees (for shade) and animals (whose presence signals that a place is habitable). ...

                                                                      When I was a child, I sang "America the Beautiful" and meant it. I was born in the Rocky Mountains and raised, at various times, on the coasts. The Big Sky, the rolling surf, the jagged, snowcapped mountains--all this seemed to be my birthright. But now I flinch when I hear Woody Guthrie's line "This land was made for you and me." Somehow, I don't think it was meant to be sung by a chorus of hedge-fund operators.

                                                                      Maybe it's from living in Oregon where there's no shortage of places to satisfy any "innate human need to interact with nature," but I'm finding it hard to get too worked up about this one.

                                                                      Update: Robert Waldmann makes the point I should have made.

                                                                        Posted by on Saturday, June 14, 2008 at 02:07 AM in Economics | Permalink  TrackBack (0)  Comments (17) 


                                                                        links for 2008-06-14

                                                                          Posted by on Saturday, June 14, 2008 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (7) 


                                                                          Friday, June 13, 2008

                                                                          FRBSF: Did Large Recalls of Chinese Consumer Goods Lower U.S. Imports from China?

                                                                          When products imported from China were recalled, e.g. due to excessive lead in toys, how large of an impact did it have on the volume of imports?:

                                                                          Did Large Recalls of Chinese Consumer Goods Lower U.S. Imports from China?, by Christopher Candelaria and Galina Hale, FRBSF Economic Letter: In the latter half of 2007, the media were full of stories about recalls of consumer goods produced in China, with the majority related to high concentrations of lead used in the paint for toys. The volumes and the values of the affected goods were large; for example, the value of toy industry recalls totaled almost 20% of the overall monthly import of toys and related products from China. Some of the multinational manufacturers involved stated that they were not aware of the violation of consumer safety laws in the production process. This raises the question of whether the recalls led such manufacturers to shift production from China to other countries and whether they unleashed a general backlash against the "Made in China" label. This Economic Letter analyzes the extent to which the recalls have led to fewer imports from China in the affected industries.

                                                                          Continue reading "FRBSF: Did Large Recalls of Chinese Consumer Goods Lower U.S. Imports from China?" »

                                                                            Posted by on Friday, June 13, 2008 at 12:15 PM in Economics, International Trade, Regulation | Permalink  TrackBack (0)  Comments (11) 


                                                                            Paul Krugman: Bad Cow Disease

                                                                            "Back in The Jungle":

                                                                            Bad Cow Disease, by Paul Krugman, Commentary, NY Times: "Mary had a little lamb / And when she saw it sicken / She shipped it off to Packingtown / And now it’s labeled chicken."

                                                                            That little ditty famously summarized the message of "The Jungle," Upton Sinclair’s 1906 exposé of conditions in America’s meat-packing industry. Sinclair’s muckraking helped Theodore Roosevelt pass the Pure Food and Drug Act and the Meat Inspection Act — and for most of the next century, Americans trusted government inspectors to keep their food safe.

                                                                            Lately, however, there always seems to be at least one food-safety crisis in the headlines — tainted spinach, poisonous peanut butter and, currently, the attack of the killer tomatoes. The declining credibility of U.S. food regulation has even led to ... mass demonstrations in South Korea protesting the ... decision to allow imports of U.S. beef, banned after mad cow disease was detected in 2003.

                                                                            How did America find itself back in The Jungle?

                                                                            It started with ideology. Hard-core American conservatives have long ... wanted a restoration of the way America was “up until Teddy Roosevelt, when the socialists took over. The income tax, the death tax, regulation, all that.”

                                                                            The late Milton Friedman ... call[ed] for the abolition of the Food and Drug Administration. It was unnecessary, he argued: private companies would avoid taking risks with public health to safeguard their reputations and to avoid damaging class-action lawsuits. (Friedman, unlike almost every other conservative I can think of, viewed lawyers as the guardians of free-market capitalism.)

                                                                            Such hard-core opponents of regulation were once part of the political fringe, but with the rise of modern movement conservatism they moved into the corridors of power. They never had enough votes to abolish the F.D.A..., but they ... did ... deny... these agencies enough resources to do the job. For example,... the F.D.A. has ... a substantially smaller work force now than ... in 1994, the year Republicans took over Congress.

                                                                            Perhaps even more important, however, was the systematic appointment of foxes to guard henhouses.

                                                                            Thus, when mad cow disease was detected in the U.S. in 2003, the Department of Agriculture was headed by Ann M. Veneman, a former food-industry lobbyist. And the department’s response to the crisis —... downplaying the threat and rejecting calls for more extensive testing — seemed driven by the industry’s agenda.

                                                                            One amazing decision came in 2004, when a Kansas producer asked for permission to test its own cows, so that it could resume exports to Japan. You might have expected the Bush administration to applaud this example of self-regulation. But permission was denied, because other beef producers feared consumer demands that they follow suit.

                                                                            When push comes to shove, it seems, the imperatives of crony capitalism trump professed faith in free markets.

                                                                            Eventually, the department did expand its testing, and ... most countries ... have allowed [US beef] back into their markets. But the South Koreans still don’t trust us...

                                                                            The ironic thing is that the Agriculture Department’s deference to the beef industry actually ended up backfiring: because potential foreign buyers didn’t trust our safety measures, beef producers spent years excluded from their most important overseas markets. ...

                                                                            The moral of this story is that failure to regulate effectively isn’t just bad for consumers, it’s bad for business.

                                                                            And in the case of food, what we need to do now — for the sake of both our health and our export markets — is to go back to the way it was after Teddy Roosevelt, when the Socialists took over. It’s time to get back to the business of ensuring that American food is safe.

                                                                              Posted by on Friday, June 13, 2008 at 12:33 AM in Economics, Politics, Regulation | Permalink  TrackBack (1)  Comments (70) 


                                                                              Imports from Low-Wage Nations and US Inflation

                                                                              This research finds that "that trade with low-income countries has had a profound impact on US relative prices," leading to a reduction in producer price inflation of more than two percent per year:

                                                                              The impact of low-income economies on US inflation, by Raphael Auer and Andreas Fischer, Vox EU: Have cheap imports from low-wage nations held down inflation in rich economies? Contrary to what customers at Wal-Mart, Toys"R"Us, or Best Buy observe every day, the academic literature has found surprisingly little evidence that trade with China and other poor, yet rapidly industrializing nations have had a large impact on prices in the rest of the world.

                                                                              Is China exporting deflation?

                                                                              In an influential study, Stephen Kamin, Mario Marazzi, and John Schindler (2006) ask whether China is "exporting deflation" to the United States, a question answered with a definitive no. Imports from China, they find, have a much smaller effect on US import prices than expected and no detectable impact on US producer prices. Related studies for Austria, Norway, Japan, the United Kingdom, and other countries report similar findings.

                                                                              Identifying the effect of import competition on prices is difficult, however, due to the problem of distinguishing supply and demand shocks. For example, winter jackets in US got cheaper when quotas on imports from China and India were removed. Nevertheless, if demand was simultaneously increased by a cold winter, the equilibrium price would not necessarily decrease. Yet it is exactly the supply side that we must identify if we want to know how much dearer jackets would have been without the cheap imports. Because current studies cannot identify the supply and demand shocks that cause changes in trade flows, they cannot establish the true effect of import competition on prices and inflation.

                                                                              Continue reading "Imports from Low-Wage Nations and US Inflation" »

                                                                                Posted by on Friday, June 13, 2008 at 12:24 AM in Economics, Inflation, International Trade | Permalink  TrackBack (0)  Comments (20) 


                                                                                links for 2008-06-13

                                                                                  Posted by on Friday, June 13, 2008 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (20) 


                                                                                  Thursday, June 12, 2008

                                                                                  Is McCain Confused?

                                                                                  Is McCain confused about what he has said in the past, or is he being less than truthful about his previous position on Social Security privatization?:

                                                                                  “Without privatization..." by Cliff Schecter: This is what John McCain said regarding Social Security on November 18, 2004 on C-SPAN's Road To The White House ["...Without privatization, I don't see how you can possibly, over time, make sure that young Americans are able to receive Social Security benefits"]. Why am I telling you this? Because today during a back and forth with an elderly gentleman he said this:

                                                                                  "I am not for privatizing Social Security. I never have been. I never will be."

                                                                                  In other words, here we go again. Honestly, does anyone really believe this guy is a straight-talker anymore? How many more examples of his absolute willingness to say or support anything at any given time do we need?

                                                                                  Ok, you need more? You got it. Here is McCain from March of this year on at least partially privatizing Social Security:

                                                                                  "As part of Social Security reform, I believe that private savings accounts are a part of it – along the lines of what President Bush proposed." [Wall Street Journal, 3/3/2008]

                                                                                  Once again, case closed. McCain has conveniently changed what he believes, because that's just what "straight-talking mavericks" do.

                                                                                  I guess he forgot that he voted for Bush's 2006 Social Security privatization plan.

                                                                                  Here's more "confusion" (this is just two things from today, it's not an exhaustive list by any means). This is part of a discussion of a report from the Tax Policy Center comparing the economic plans of the two candidates. (The report has a graph showing the impact of the plans across the income distribution. Guess which plan is more beneficial to the wealthy, McCain's or Obama's? To the working class?):

                                                                                  Obama And McCain On Taxes, by hilzoy: ...One more interesting note: the Wonk Room points out that this report attributes to McCain some positions that are at odds with his web site and what he's said in the past -- as recently as the day before yesterday, in fact. Most notably, McCain's website says that "John McCain will permanently repeal the Alternative Minimum Tax (AMT) – a tax that will be paid nearly exclusively by 25 million middle class families." The TPC report, by contrast, says: "Senator McCain proposes to extend permanently the AMT "patch" that has prevented most individuals and families with incomes below $200,000 from being affected by the tax."

                                                                                  This is a big difference. ...

                                                                                  The Tax Policy Center consulted with both campaigns before writing this report. If what they say is accurate, then McCain has changed an important part of his tax policy, but neither his website nor (apparently) McCain himself as of two days ago have caught up with this fact. On the other hand, if the TPC is wrong, and McCain does plan to repeal the AMT, then the TPC's estimates of the cost of his tax plans need to be revised as well.

                                                                                  According to the CBPP, the difference between amending the AMT to exclude people with incomes under $200,000 a year and repealing it altogether is over $50 billion dollars a year. Since the CTP estimates the cost of the candidates' tax plans over a ten year period, if they're wrong about what McCain thinks, we'll just have to tack another half a trillion dollars onto their estimate of his plan's cost.

                                                                                  Confusion and reckless profligacy, or no confusion and even more reckless profligacy? We report; you decide.

                                                                                  Maybe it's just an old guy getting confused on a variety of issues, but it's starting to look like more than that. Social Security was and is a huge political issue. The chance that he is confused about or has forgotten positions he has held in the past is just not credible unless age has started to take its toll. He either knows what he said in the past and intentionally said something else to please a voter, or he can no longer remember crucial details about key issues that happened relatively recently. Either way, it raises big questions.

                                                                                  He deserves the same scrutiny from the media that Clinton or Obama (or Kerry) would get if they were doing these things, but that just isn't happening.

                                                                                  Finally, you have to wonder if this is who you want leading you into the digital age:

                                                                                  Sen. McCain, You've Got Be KIDDING Me!, by Maggie Barker: ...I couldn't help but laugh in disbelief at an interview of U.S. Sen McCain admitting that he doesn't know how to use a computer.

                                                                                  When asked by the Politico's Mike Allen whether he uses a Mac or PC, here's what he said:

                                                                                  Neither. I am an illiterate that has to rely on my wife for all the assistance I can get.

                                                                                  I mean, really? How does he not know how to use one of most simple, yet important, technologies in our homes, workplaces, research labs, schools, universities, and enterprises? ... Sen. McCain simply seems out of touch with the modern ways of the world. And he admits it, with no apologies. How can he envision and plan for America's future when he has no interest in or curiousity of current modes of communication, commerce, and education? Sure, Sen. McCain pre-dates the computer age, but how many of us have parents or grandparents who log on every now and then? I respect Sen. McCain immensely for the sacrifices he's made for this country, but times, they are a-changin'. Sen. McCain's already been left behind.

                                                                                  Update: Now McCain is trying to claim that his plan is not a privatization scheme, therefore what he said is not misleading. However, from TPM:

                                                                                  In the post below I noted how John McCain is now going in for the same Social Security 'privatization' bamboozlement that President Bush did, claiming that calling his policy 'privatization' is some sort of lie or spin.

                                                                                  Here's video of McCain using the word himself in 2004 and then claiming it's all a bum rap just this morning...

                                                                                  More from Think Progress.

                                                                                    Posted by on Thursday, June 12, 2008 at 06:48 PM in Economics, Politics, Social Security, Taxes, Technology | Permalink  TrackBack (0)  Comments (72) 


                                                                                    "Interview with James Poterba"

                                                                                    This is part of a much longer Minneapolis Fed interview with the new president and CEO of the NBER, James Poterba. Given the discussions about tax simplification that always come up around elections, e.g. the flat tax, the comments toward the end on the problems with "having one tax schedule for everybody" are notable:

                                                                                    Tax Reform

                                                                                    Region: Let me throw you in the deep end. With the presidential election drawing near, tax policy is sure to become a topic of increasing debate. As a tax scholar and a member of the 2005 President's Advisory Panel on Tax Reform, what kind of advice would you offer to an incoming president on tax policy?

                                                                                    Poterba: We are approaching a period when tax reform will likely move out of academic discussion and attract serious attention from Washington policymakers, for two reasons.

                                                                                    One is the Alternative Minimum Tax, a feature of the tax code that was originally designed to affect very-high-income taxpayers but has over time come to affect a larger and larger fraction of the U.S. tax-paying population because the relevant provisions were not indexed for inflation. Congress has been fixing the AMT one year at a time by raising the thresholds at which it affects taxpayers. But the one-year fix strategy is becoming increasingly expensive... It's likely that Congress will have to do something to fix the AMT in a more permanent way—after the next election would be a natural time.

                                                                                    The other factor that will draw tax reform into the middle of the political debate is the scheduled expiration of the tax changes that were enacted in 2001 and 2003. ...

                                                                                    It's difficult to predict where tax reform is likely to go. When the president's tax panel looked at the AMT and other issues in 2005, we recognized that there was no easy solution to the challenge of tax reform. Fixing the AMT is a very expensive proposition. It costs more than a trillion dollars over a medium-term budget window to repeal the AMT, and if you're going to do that in a revenue-neutral way, you have to either change income tax rates or broaden the income tax base. The tax panel pushed toward the base-broadening approach, which I think has a great deal to recommend it.

                                                                                    Of course, supporting base-broadening is hardly novel. It's almost a reflexive action for most public finance economics. Marginal distortions associated with the tax code tend to rise with the square of the tax rate, so that as the tax rate gets into higher and higher territory, the marginal dead-weight losses tend to grow rapidly. Going from a 30 percent to a 40 percent marginal tax rate, for example, doesn't increase the marginal efficiency cost of taxation by a factor of 1.33, but by the ratio of 16 over 9—close to 75 percent.

                                                                                    Region: Thus the appeal of broadening the base.

                                                                                    Poterba: Exactly. Broadening the tax base reduces the need to impose high marginal dead-weight burdens associated with high marginal tax rates. The challenge of broadening the base—which I fear the tax panel members learned the hard way by proposing a lot of base-broadening and then seeing the proposals go nowhere in the political system—is that most of the things that erode the current income tax base are political sacred cows. These include the home mortgage interest deduction, the exclusion of employer-provided health insurance from the tax base for individuals, the deduction for state and local property taxes, and the relief we provide on medical expenditures of various kinds. They all have constituencies that find them very important and very attractive. There isn't a strong constituency at the moment, and probably never will be, for the efficiency gains associated with broadening the tax base and lowering rates.

                                                                                    So you're faced with one of the classic political economy problems of imposing burdens on an identifiable group that can tell they're going to have their oxes gored by the particular reform you've proposed, while generating broadly diffused benefits for the population at large in the form of a more efficient structure for raising revenue. ...

                                                                                    Region: The advisory panel also suggested a simpler code; is that a feasible goal?

                                                                                    Poterba: Absolutely. Simplification may be the easiest dimension of reform. If you look, for example, at the way we currently provide incentives for saving to finance retirement, education, medical expenditures—we have a dizzying array of programs: 401(k)s, IRAs, Roth IRAs, 403(b)s, 457s—all of these are basically ways of offering households what public finance economists call “consumption tax treatment” on their savings. By investing in these special forms, investors can earn the pretax return on their investments. But each of these account types has its own complicated set of rules, and many households don't know what they're eligible for and don't take full advantage of the opportunities that these programs present. Some simplification could surely be achieved by rolling some of those programs into a smaller number of more broadly available saving vehicles.

                                                                                    There probably are other opportunities for moving in the direction of a return-free system for a substantial number of low-income taxpayers who have relatively simple tax returns. If a taxpayer's only income source is wage income or that plus some very easily identifiable capital income, perhaps from a bank, the IRS could easily compute the household's tax liability and send out a bill.

                                                                                    The problem with simplicity is that while almost everybody thinks that a simpler tax code is an attractive ideal, in many cases the tax code is not simple because it's trying to deal with the complexity of economic life. You could make the tax code simpler, for example, by  and just saying that married couples and single individuals would file on the same schedule; no need to look up different rates or anything else. But of course that would offend some people's sense of fairness. They would say that a two-person household with a given income should not necessarily face the same tax burden as a five-person household with the same income, or as a single individual with that income. So you say, “Okay, we'll have different tax codes for married couples; we'll allow for some dependency deductions.” Soon you're on the path to making the tax system more complicated. The same thing happens to an even greater degree when you're trying to track the income from investment property. A lot of the complexity really comes from the fact that people do complicated things, and we need to track them appropriately.

                                                                                    While it would be straightforward to simplify the tax code for quite a large number of taxpayers, some of the inherent complexity of the tax code that's associated with the measurement of capital income, with the tracking of business receipts and things like that, would be very difficult to get rid of without ending up with a tax system that many people would find objectionable. ...

                                                                                    Also, if you read this Slate piece, "Debunking the 'Wealth Effect,'":

                                                                                    the idea of a wealth effect doesn't stand up to economic data.

                                                                                    Then you should also read the section of the interview called "Housing and the Wealth Effect":

                                                                                    Poterba: ...Much of the discussion of the wealth effect seems to assume that there's a question of whether it exists. I think that's a misapprehension. The simple logic of budget constraints for multiperiod consumers and households tells you that if you reduce the value of the assets that households own at a given point in time, the present discounted value of their consumption stream must be reduced correspondingly. So the real question is simply, How does a household, or the household sector in aggregate, spread the loss of wealth from a drop in equity values or house values over various consumption in various future periods?

                                                                                    Region: So it's not whether, but when and how big.

                                                                                    Poterba: Right...

                                                                                      Posted by on Thursday, June 12, 2008 at 03:06 AM in Economics, Taxes | Permalink  TrackBack (0)  Comments (18) 


                                                                                      A New Washington Consensus?

                                                                                      Dani Rodrik seems pleased with the emerging consensus on the "do's and don'ts for policymakers in developing countries":

                                                                                      Is there a new Washington consensus?, by Dani Rodrik, Project Syndicate: ...Two and a half years ago,... the World Bank approached the Nobel laureate Michael Spence to ask him to lead a high-powered commission on economic growth. The question at hand could not have been more important. The "Washington consensus" — the infamous list of do's and don'ts for policymakers in developing countries — had largely dissipated. But what would replace it? ...

                                                                                      Thus was born the Spence Commission on Growth and Development, a star-studded group of policymakers ... whose final report was issued at the end of May.

                                                                                      The Spence report represents a watershed for development policy... Gone are confident assertions about the virtues of liberalisation, deregulation, privatisation, and free markets. Also gone are the cookie cutter policy recommendations unaffected by contextual differences. Instead, the Spence report ... recognises the limits of what we know, emphasises pragmatism and gradualism, and encourages governments to be experimental. ...

                                                                                      The Spence report reflects a broader intellectual shift within the development profession, a shift that encompasses not just growth strategies but also health, education, and other social policies. ...

                                                                                      [T]he new policy mindset starts with relative agnosticism about what works. Its hypothesis is that there is a great deal of "slack" in poor countries, so simple changes can make a big difference. As a result, it is explicitly diagnostic and focuses on the most significant economic bottlenecks and constraints. Rather than comprehensive reform, it emphasises policy experimentation and relatively narrowly targeted initiatives in order to discover local solutions, and it calls for monitoring and evaluation in order to learn which experiments work. ... This approach is greatly influenced by China's experimental gradualism since 1978 — the most spectacular episode of economic growth and poverty reduction the world has ever seen.

                                                                                      The Spence report ... has no "big ideas" of its own, and at times it tries too hard to please everyone and cover all possible angles. But... It is quite a feat to have achieved the degree of consensus he has around a set of ideas that departs in places so markedly from the traditional approach.

                                                                                      It is to Spence's credit that the report manages to avoid both market fundamentalism and institutional fundamentalism. Rather than offering facile answers such as "just let markets work" or "just get governance right," it rightly emphasises that each country must devise its own mix of remedies. Foreign economists and aid agencies can supply some of the ingredients, but only the country itself can provide the recipe.

                                                                                      If there is a new Washington consensus, it is that the rulebook must be written at home, not in Washington. And that is real progress.

                                                                                        Posted by on Thursday, June 12, 2008 at 01:17 AM in Development, Economics | Permalink  TrackBack (0)  Comments (9) 


                                                                                        links for 2008-06-12

                                                                                          Posted by on Thursday, June 12, 2008 at 12:31 AM in Links | Permalink  TrackBack (0)  Comments (22) 


                                                                                          Jason Furman, Social Security, and Wal-Mart

                                                                                          If you haven't heard, Barack Obama named Jason Furman as his economic policy director. Because of his centrist leanings and his identification with Rubinomics, some have questioned Furman's dedication to progressive causes, and there has been quite a bit written about this, not all of it accurate.

                                                                                          For example, take an article in the LA times on Furman's position on Social Security privatization. This response to the article is from the Economists for Obama web site:

                                                                                          Jason Furman and Social Security, Economists for Obama: As Brad Delong points out, this article in the LA Times completely misrepresents Obama Economic Policy Director Jason Furman's position on Social Security privatization. In fact, Jason is the economist who did the most to supply the intellectual ammunition to gun down Bush's proposal during the great Social Security battle of 2005. Jason, with help from Dean Baker and Brad Delong, was key to victory in that struggle. It's not hyperbole to say that without their efforts (especially Jason's), Bush might have succeeded in his efforts to gut the most important social safety net we have. See this paper for one of Jason's contributions in that battle.

                                                                                          Regarding the broader concerns raised in the article, I think Jared Bernstein has it right:

                                                                                          One economist from the left-leaning Economic Policy Institute, Jared Bernstein, offered praise for Furman, saying he understood why some critics were unhappy, though he thought their fears were misplaced.

                                                                                          "I understand the concerns, given positions he has taken" on some issues, Bernstein said. "But I am 110% certain that it will be Barack Obama -- not Jason Furman or Robert Rubin -- who will be setting the policies for the Obama administration." ...

                                                                                          Brad DeLong emailed the author of the article to ask how the inaccurate representation in the article could have happened given how well-known (and easy to find online) Jason's position on Social Security privatization is:

                                                                                          We Get an Email from Tom Hamburger..., by Brad DeLong: Apropos of the astonishing and false claim in this morning's LA Times that Jason Furman is some sort of a crypto-Bushie with views on Social Security matters "similar" to those Bush proposed in 2005, I write to the reporter involved, Tom Hamburger. And he writes back:

                                                                                          Mr. Hamburger's bottom line appears to be that his leaving a lot of readers with a false view of Jason Furman's position on Social Security is OK because that was "not the point of this story..."

                                                                                          So I write back:

                                                                                          Continue reading "Jason Furman, Social Security, and Wal-Mart" »

                                                                                            Posted by on Thursday, June 12, 2008 at 12:15 AM in Economics, Politics, Social Security | Permalink  TrackBack (0)  Comments (129) 


                                                                                            Wednesday, June 11, 2008

                                                                                            Polanyi's "The Great Transformation"

                                                                                            Economist Greg Clark and sociologist Fred Block, both of UC Davis, illustrate some of the tensions among the social sciences as they discuss the work of Karl Polanyi and the desirability of a free market system. First, Greg Clark with a review of Polanyi's The Great Transformation

                                                                                            Reconsiderations: 'The Great Transformation' by Karl Polanyi: Review of: The Great Transformation, by Gregory Clark, NY Sun: Karl Polanyi's The Great Transformation (1944), published in the same year as Friedrich Hayek's The Road to Serfdom, is as sacred a text to the opponents of free-market capitalism as Hayek's is to the Chicago School.

                                                                                            To his devotees, Polanyi showed the free market to be the enemy of humanity... It was an alien form of social organization, ... created in 18th-century England only by state action propelled by ideologues. By displacing the natural social state — an idyllic system of mutual obligations that bound and protected individuals — the free market brought inequality, war, oppression, and social turmoil to just and peaceful societies.

                                                                                            The Great Transformation has attained the status of a classic in branches of sociology, political science, and anthropology. Stacks of it await undergraduate initiates each year in college bookstores. ... Yet in economics the work is unknown — or, when discussed, derided. Thus the cruel irony of the term "social sciences." ...

                                                                                            The book begins portentously, "Nineteenth-century civilization has collapsed." ... Polanyi believed ... the imposition of the free market ... produced the collapse... Hitler, Mussolini, and Stalin, Polanyi suggested, were the monster children of the free market.

                                                                                            History has not been kind to these prognostications. Free-market capitalism is a resilient and stable system in much of the world... It is conquering vast new domains in places such as China, Eastern Europe, and India. International trade barriers have been substantially reduced. The gold standard is gone, ... replaced by floating exchange rates, set by market forces. ...

                                                                                            Further, while free market capitalism has its troubles, radical alternatives no longer beckon. ... Measured by the success of markets, 19th-century civilization seems to be enjoying a renaissance.

                                                                                            The great puzzle of Polanyi's book is thus its enduring allure, given the disconnect between his predictions and modern realities. The fans of Polanyi seem to be responding to his general belief that ... free market economies are a shocking recent departure from a socially harmonious past. His great criticism is that by breaking the social connections between individuals, by reducing everyone to an isolated atom, markets create inequalities that previously did not exist.

                                                                                            Continue reading "Polanyi's "The Great Transformation"" »

                                                                                              Posted by on Wednesday, June 11, 2008 at 01:44 PM in Economics | Permalink  TrackBack (0)  Comments (62) 


                                                                                              Fed Watch: Between a Rock and a Hard Place

                                                                                              What will the Fed do in coming months?:

                                                                                              Between a Rock and a Hard Place, by Tim Duy: Fedspeak turned decidedly hawkish this week, and market participants responded accordingly, moving up expectations for a rate hike to as early as this August. But is Federal Reserve Chairman Ben Bernanke really ready to follow through? The answer could make or break the Dollar in the coming weeks.

                                                                                              Recall that just last week, Bernanke sent clear signals that rising near-term inflation expectations effectively put an end to the Fed’s rate cutting. But Bernanke’s concerns were quickly overtaken by events in two separate directions at the end of the week. First, on Thursday European Central Bank President Jean-Claude Trichet surprised markets by suggesting that the ECB’s next move might be a rate increase, as early as next month. Trichet’s comments were a slap in the face to traders betting that the interest rate differential between the US and Europe would narrow; instead, it looked like the opposite would happen, and markets needed to adjust accordingly. Dollar down, oil up – neither of which the Fed wanted to see. But this was only a prelude to Friday’s debacle that followed the release of the May employment report.

                                                                                              Market participants were looking for a stronger employment report. Initial unemployment claims fell last week, while the ADP report suggested the private payrolls actually increased. Instead of a strong report, the BLS reported what should have been expected – a continued erosion of the labor market. On the establishment side, the nonfarm payrolls decline was largely consistent with the story told by initial claims. On the household side, the jump in the unemployment rate was shocking, but was magnified by a surge of teenagers entering the job market (presumably seeking additional gas money).

                                                                                              I think discounting this impact is appropriate, at least until we see the June numbers. Still, even adjusting for the teen influx, the report was undeniably weaker than most expected, and brought into question the ability of the Fed to hold rates steady this year, let alone raise them. This realization sent the Dollar into a tailspin, while oil, aided by renewed tensions in the Middle East, rocketed to a new high.

                                                                                              Friday’s price action likely confirmed what Fed officials only grudgingly considered up to now – that they need to take seriously the idea that US monetary policy is directly impacting commodity prices, contributing to a deterioration of US inflation expectations. Bernanke was quick to react, downplaying the employment report, claiming that the risk of a substantial downturn has dissipated over the last month, and, to top it off, claimed that policymakers would “strongly resist” any rise in inflation expectations.

                                                                                              But does anyone believe Bernanke can follow through on this threat? According to MarketWatch, Fedwatchers are lining up to call his bluff. Across the Curve succinctly, and colorfully, describes the situation:

                                                                                              I think the 2 year part of the curve is oversold. I think (I know) the economy is weak. It is an election year and the unemployment rate just jumped to 5.5 percent. The housing market is a debacle. The Fed’s favored metric the core PCE has strayed very little from the top end of its prescribed range. Hemingway and Fitzgerald are not writing novels about World War One and this is not the Weimar Republic. The credit markets are frayed frazzled and fragile. Recovery has barely begun.

                                                                                              And hence we see the crux of the problem for Bernanke. Deserved or not, he has a credibility problem; at this point, he is seen as simply an inflationist hell-bent on fighting the Fed’s ghosts of the Great Depression. It is just so hard to believe that he would raise rates in the current environment, regardless of inflation expectations. We could believe Trichet. We could believe former Fed Chairman Paul Volker. But Bernanke? Still, with central bankers around the globe shifting gears to tackle rising inflation (see Bloomberg and WSJ), Bernanke may not have much choice. Any hint of hesitation to follow on the Fed’s part will likely renew the attack on the Dollar and push oil prices even higher, thereby undoing the recent string of jawboning.

                                                                                              But hiking rates is an equally dangerous path. Most obviously, the economy is clearly in a precarious position, temporarily held together by the flow of fiscal stimulus and cheap money. Raising rates would almost certainly upset this delicate balance. Furthermore, higher rates threaten to intensify and lengthen the housing downturn; a 30-year conventional mortgage is already at 6.25%. Note also the Fed would be raising rates into what many believe will be the second wave of mortgage problems, the Alt-A and option adjustable mortgages that reset beginning in 2009. If the Fed starts raising rates meaningfully at this point, anticipate the yield curve to invert early next year, signaling a recession in 2010.

                                                                                              Another risk is political. Normally, I would not place much weight on the importance of an election year, but to initiate a tightening campaign with rising unemployment and stagnating real incomes gives me pause. The political response is all too predictable: Why is the Fed so eager to support Wall Street in their hour of need, but equally eager to abandon Main Street when unemployment is rising? Indeed, I would not be surprised to see some Senators start jawboning the Fed by the end of this week. With four spots on the Board open for the next Administration to place, independence of the Fed cannot be taken for granted.

                                                                                              Bottom Line: The Fed has no one to blame for their predicament but themselves. Bernanke & Co. cut rates too deeply, fighting a battle against deflation that never was. Now they are backed into a corner; either raise rates and risk upsetting a very fragile economy, or stay the path and risk the inflationary consequences. If the Fed is truly concerned about the Dollar and commodity prices – and their open talk about currency values implies real and serious concerns – Bernanke will have to follow through with his newfound hawkish side. The bluntness of Fedspeak looks to signal a dramatic shift in thinking on Constitution Ave., and that argues for a rate hike by September, earlier than I had previously expected, and I cannot rule out an August move. Such a move is not without considerable risk for the economy.

                                                                                                Posted by on Wednesday, June 11, 2008 at 01:17 AM in Economics, Fed Watch, Monetary Policy | Permalink  TrackBack (0)  Comments (53) 


                                                                                                The Effects of Oil Shocks

                                                                                                From Vox EU, could the surge in oil prices "be good news for developed economies' industries"?:

                                                                                                Oil prices: risks and opportunities, by Francesco Lippi, Vox EU: Recent research by Jim Hamilton shows that the correlation between the price of oil and US production is unstable; it was negative and high in the 1970s but much smaller in more recent years.[1] Nevertheless, the recent surge in oil prices gives rise to worries in Western economies – memories of the recessions of the ‘70s and early ‘80s are still vivid.

                                                                                                Can the 1970s be compared to the current situation? What hypothesis justifies a comparison, and what do the data say about it?

                                                                                                Supply and demand in theory, demand in practice

                                                                                                Most analysts attribute the increase in the price of crude oil to growing demand from Asian economies. Economic theory suggests that the real effect of an oil price increase depends on its underlying fundamentals. If it stems from a change in supply conditions – as was the case with the Iranian revolution, the first Gulf war, or policy tightening by OPEC – the resulting price increase depresses economic activity, as energy inputs are more expensive. But if higher oil prices stem from increased demand by emerging economies, production in other economies like the US is subject to both a negative effect – due to the higher price of energy – and to a positive effect – greater demand for US goods and services by the growing emerging economies. According to this scheme, the weak relationship between oil prices and the US business cycle in recent years reflects oil demand shocks, while the episodes in the ‘70s and ‘80s can be ascribed to oil supply shocks.

                                                                                                Continue reading "The Effects of Oil Shocks" »

                                                                                                  Posted by on Wednesday, June 11, 2008 at 12:42 AM in Economics, Oil | Permalink  TrackBack (0)  Comments (13) 


                                                                                                  "Mr. Right?"

                                                                                                  Hmm...:

                                                                                                  The rise of the Obamacons, by Bruce Bartlett, Commentary, The New Republic: ...A broad swath of the [conservative] movement has been in open revolt against George W. Bush--and the Republican Party establishment--for some time. They don't much care for the Iraq war or the federal government's vast expansion over the last seven-and-a-half years. And, in the eyes of these discontents, the nomination of John McCain only confirmed the continuation of the worst of the Bush-era deviations from first principles.

                                                                                                  But it was hardly inevitable that this revolt would translate into enthusiasm for the Democratic standard-bearer. ... There have been a few celebrated cases of conservatives endorsing Obama... But you probably have not have heard of many of the Obamacons--and neither has the Obama campaign. When I checked..., the campaign seemed genuinely unaware that such supporters even existed. But those of us on the right who pay attention to think tanks, blogs, and little magazines have watched Obama compile a coterie drawn from the movement's most stalwart and impressive thinkers. It's a group that will no doubt grow even larger...

                                                                                                  Continue reading ""Mr. Right?"" »

                                                                                                    Posted by on Wednesday, June 11, 2008 at 12:33 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (56) 


                                                                                                    links for 2008-06-11

                                                                                                      Posted by on Wednesday, June 11, 2008 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (7)