- Charles's fantasy farming won't feed Africa's poor - Paul Collier
- Poverty, Income, and Health Insurance - Jared Bernstein
- A global approach is needed to beat inflation - FT
- Russia's economic ties diminish possibility of new Cold War - Daniel Gross
- Mammals Have "Alarm Detectors" in Noses - National Geographic
- Consumer Inflation: What Do Alternate Measures Say, and Why - Econbrowser
- Market's excess return has been higherunder Democrats - Richard H. Serlin
- How government is back at the heart of economic life - FT
- Discounting Sunstein — Crooked Timber
Friday, August 22, 2008
Thursday, August 21, 2008
Jeff Sachs asks, "Have we beaten Malthus?":
Are Malthus's Predicted 1798 Food Shortages Coming True?, by Jeffrey D. Sachs, Scientific American: In 1798 Thomas Robert Malthus famously predicted that short-term gains in living standards would inevitably be undermined as human population growth outstripped food production, and thereby drive living standards back toward subsistence. We were, he argued, condemned by the tendency of population to grow geometrically while food production would increase only arithmetically.
For 200 years, economists have contended that Malthus overlooked technological advancement, which would allow human beings to keep ahead of the population curve. ...
Another factor undermining Malthus’s argument, it would seem, is ... demographic transition... Malthus did not reckon with the advance of public health, family planning, and modern contraception, which together with urbanization and other trends, would result in a dramatic decline in fertility rates to low levels... Perhaps the human population would avoid the tendency towards geometric growth altogether.
These critiques of Malthusian pessimism have long seemed irresistible. Indeed, when I trained in economics, Malthusian reasoning was a target of mockery, held up by my professors as an example of a naïve forecast gone wildly wrong. ...
Yet the Malthusian specter is not truly banished—indeed far from it. Our increase in know-how has not only been about getting more outputs for the same inputs, but also about our ability to mine the Earth for more inputs. The first Industrial Revolution began with the use of fossil fuel, specifically coal... Humanity harnessed geological deposits of ... coal, oil, and gas... We learned to dig deeper for minerals, fish the oceans with larger nets, divert rivers with greater dams and canals,... and cut down forests with more powerful land-clearing equipment. ... Much of what we call “income,” in the true sense of adding value from economic activity, is actually depletion instead, or the running down of natural capital.
And although family planning and contraception have indeed secured a low fertility rate in most parts of the world, the overall fertility rate remains at 2.6, far above replacement. ... According to the medium-fertility forecast of the United Nations Population Division we are on course for 9.2 billion people by mid-century.
If we indeed run out of inexpensive oil and fall short of food, deplete our fossil groundwater and destroy remaining rainforests, and gut the oceans and fill the atmosphere with greenhouse gases that tip the earth’s climate into a runaway hothouse with rising ocean levels, we might yet confirm the Malthusian curse. Yet none of this is inevitable...
In the coming decades we will have to convert to solar power and safe nuclear power... Know-how will have to be applied to long-mileage automobiles, water-efficient farming, and green buildings... We will need to re-think modern diets and urban design to achieve healthier lifestyles that also cut down on energy-intensive consumption patterns. And we will have to help Africa and other regions to speed the demographic transition to replacement fertility levels, in order to stabilize the global population at around 8 billion.
There is nothing in such a sustainable scenario that violates the Earth’s resource constraints or energy availability. Yet we are definitely not yet on such a sustainable trajectory... We will need new policies to push markets in a sustainable manner (for example, taxes on carbon to reduce greenhouse gas emissions) and to promote technological advances in resource saving rather than resource mining. ...
Have we beaten Malthus? After two centuries, we still do not really know.
The Washington Post says the scale of speculative activity in commodities markets is larger than previous estimates indicated:
A Few Speculators Dominate Vast Market for Oil Trading, by David Cho, Washington Post: Regulators had long classified a private Swiss energy conglomerate called Vitol as a trader that primarily helped industrial firms that needed oil to run their businesses.
But when the Commodity Futures Trading Commission examined Vitol's books last month, it found that the firm was in fact more of a speculator... Even more surprising ... was the massive size of Vitol's portfolio -- at one point in July, the firm held 11 percent of all the oil contracts on the regulated New York Mercantile Exchange.
The discovery revealed how an individual financial player had gained enormous sway over the oil market without the knowledge of regulators. ...
Some lawmakers have blamed these firms for the volatility of oil prices... "It is now evident that speculators in the energy futures markets play a much larger role than previously thought, and it is now even harder to accept the agency's laughable assertion that excessive speculation has not contributed to rising energy prices," said Rep. John D. Dingell (D-Mich.). ...
Using swap dealers as middlemen, investment funds have poured into the commodity markets, raising their holdings to $260 billion this year from $13 billion in 2003. During that same period, the price of crude oil rose unabated every year.
CFTC data show that at the end of July, just four swap dealers held one-third of all NYMEX oil contracts that bet prices would increase. Dealers make trades that forecast prices will either rise or fall. Energy analysts say these data are evidence of the concentration of power in the markets.
CFTC leaders have argued that speculators are not influencing commodities' prices. If any new information arises during the agency's examination of swap dealer activity, officials said they would report it to Congress.
"To date, the CFTC has found that supply and demand fundamentals offer the best explanation for the systematic rise in oil prices," CFTC spokesman R. David Gary said, reading a statement that had been crafted by agency officials. "Regardless of their classification . . . the CFTC's market surveillance group scrutinizes daily the positions of all large traders, both commercial and non-commercial, to guard against market manipulation." ...
For most of the past century, regulators put limits on financial actors to prevent them from dominating commodity exchanges, which were much smaller than the bond or stock markets. Only commercial operations, such as farms, airlines, manufacturers and the middlemen that handle their trading activities, were allowed to buy nearly unlimited quantities. The goal was to allow these businesses to minimize the effect of price swings.
The first major change to this regulatory framework occurred in 1991, when Goldman Sachs, through a subsidiary called J. Aron, argued that it should be granted the same exemption given to commercial traders because its business of buying commodities on behalf of investors was similar to the middlemen who broker commodity transactions for commercial firms.
The CFTC granted this request. More exemptions soon followed...
A second turning point came when Congress passed the Commodity Futures Modernization Act of 2000. ... Critics have called this piece of legislation the "Enron loophole," saying Enron played a role in crafting it.
In the months after the act was passed, private electronic trading platforms sprang up across the country, challenging the dominance of NYMEX. ...
In the coming months, swap dealers expect to have yet another venue for oil speculation. The CFTC has stated it would not stand in the way of trading in U.S. oil contracts overseas in Dubai. ...
Many people have said that recent price movements make it clear a speculative bubble in the commodity markets has popped. I can't add my voice to that exact wording.
The term "bubble" has become watered down with popular usage in the press and elsewhere, but technically a speculative bubble is the result of price movements that are divorced from the underlying fundamentals (as with housing). Yet the stories I hear for oil price and other commodity movements mostly involve fundamental factors.
Let me say this another way. I've also heard that it can't be supply and demand that's pushing prices around. But even if there's a speculative bubble or market manipulation, it's still movements in demand and supply that are pushing up prices around. Demand skyrockets (or plunges in a crash), or perhaps supply is artificially constrained, it's just that the demand shifts are driven by non-fundamental factors. Supply and demand are still at work, it's simply a question of what is driving the shifts in the supply and demand curves, fundamentals or something else.
It's possible for the underlying fundamentals to shift quickly. The possibility of, say, a war can change very fast altering the outlook for future supplies and when it does prices will change along with the change in the outlook, as they should. But that is not a bubble popping, that is a fundamental driving the price around. Big swings in fundamental factors that cause big swings in expected future supply or demand (and hence affect supply and demand today) can cause big swings in the price, and it can happen relatively fast.
I have yet to be convinced that the big swings in prices we have seen are due to prices departing from the underlying fundamental factors and then returning, i.e. that the price swing is from a speculative bubble in the technical sense (or maybe we are simply debating what we can count as a fundamental fundamental factor, but a technical bubble is still something different).
I don't deny, and never have, that speculation is at work in moving prices around, I've drawn diagrams in the past showing how a change in expected future conditions can change today's price. But I agree with the article, I just don't see the evidence of outright, intentional manipulation of the price. Holding large shares, or seeing large volumes alone are not enough to make that case, and it's hard for me to believe that manipulation alone can explain the size of the swings in price that have occurred in commodity markets. I also don't see the case for a more traditional speculative bubble (i.e. a price change driven by a departure from fundamentals rather than manipulation), but as I've said all along, this is hard to prove one way or the other and there could be some of this at work.
So maybe there was some manipulation attempts, I don't know, but if the evidence was strong we would have heard about it. And maybe there has been some departure from fundamentals, again it's hard to know with any certainty, but I still believe the majority of the price movements can, in fact, be explained by fundamentals as defined above.
I could be wrong, maybe there has been manipulation, or perhaps we've seen a more traditional speculative bubble, again in the technical sense, but so far I haven't seen enough evidence to be convinced that this is a better explanation for the preponderance of price movements than shifts in supply and demand driven by underlying fundamentals. But that doesn't mean we shouldn't keep investigating to see if the claim of no manipulation holds up against additional scrutiny, or if there is evidence for a more traditional type of speculative bubble.
I'm with libertarians on this one, this goes too far. I didn't think Americans would ever put up with the kinds of invasions of privacy that we've allowed in the name of preventing terrorism, but I was wrong:
Police to Track All Vehicles into New York City, by David Theroux: The New York City Police Department is now planning on tracking the movements of all vehicles entering Manhattan in a federally funded program designated “Operation Sentinel.” Of course, this massive assault on privacy is being done to track and screen out “terrorism.” And according to the Associated Press:
Police say Operation Sentinel would rely on license-plate readers, radiation detectors and closed-circuit cameras installed at the 16 bridges and four tunnels serving Manhattan. About a million vehicles drive onto the island every day. The vehicle data would be analyzed by computers programmed with information about suspicious vehicles...
....New York City police are admitting that since they neither know who are actual terrorists or how to find them, everyone is a criminal suspect and will be monitored in the stereotypical bureaucratic belief that extracting information on everyone will somehow solve the problem. But, don’t worry:
Police say law-abiding people have nothing to fear: Vehicle data deemed innocent would be purged after 30 days.
Translation: spying, collecting files, and then keeping the information on permanent record is entirely at the discretion of the police bureaucracy. In all:
The plan calls for 116 stationary and mobile license-plate readers and 3,000 closed-circuit cameras that would be monitored by officers at a command center.
...The ... Fourth Amendment of the Bill of Rights states that, “The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated . . . .” But this has certainly not stopped government intrusions into the private lives of innocent people, all of which is based on the “precautionary principle” that abridging the rights of a peaceful, law-abiding individual is justified even if the risk of harm is negligible. But once again, the end never justifies the means, and the rule of law is based on the enduring principles that every person is innocent until proven guilty and that no one, including the police and other government officials, has the right to infringe on the rights of others.
As Benjamin Franklin noted in 1775:
They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety. ...
John Berry joins those saying there's no reason to panic about inflation:
Inflation's Peak Signaled by Tame Labor Costs, by John M. Berry, Commentary, Bloomberg: U.S. inflation reached its highest level in more than a quarter-century this summer. The good news is that the worst of the price increases probably is behind us.
The surge in commodities prices ... drove the year-over-year increase in consumer prices, to 5.6 percent in July. Now, with the prices of ... many ... commodities in retreat, the month-to-month changes in the consumer price index will settle down.
The bad news is that the drop in inflation won't be sudden... What's reassuring is the absence of signs that the surge in inflation has triggered a wage-price spiral. ... While that's hardly cause for celebration among workers who have seen their inflation-adjusted pay fall, some of that loss is being regained as the cost of gasoline comes down. ...
The break in commodity prices is ... good news for Federal Reserve officials, whose prediction that inflation would moderate was based largely on the expectation that such prices wouldn't rise forever. ...
Commodity prices haven't just stopped rising, they have declined. And so long as the outlook for economic growth is weak in the U.S. and Europe, and slowing in many other regions, a quick rebound in commodity prices seems unlikely.
Similarly, productivity growth was strong in the first half of this year, and while slower economic expansion in the second half probably means productivity gains will be smaller, they won't disappear. ...
While the U.S. inflation outlook has improved, there is still a risk that something goes wrong. And even if it doesn't, the Fed's 2 percent target for the overnight lending rate is too low to be maintained indefinitely.
That said, it's ''a good time to be patient, because I do think we will see better news on the inflation front,'' in part because of falling oil prices, Gary Stern, president of the Minneapolis Federal Reserve Bank, said yesterday in an interview.
Let's hope he's right.
Wednesday, August 20, 2008
Jeff Sachs says that when it comes to ending extreme poverty, cell phones and the internet will prove to be "the most transformative technology of economic development of our time":
Internet and mobile phones spur economic development, by Jeffrey D Sachs, Project Syndicate: The digital divide is beginning to close. The flow of digital information – through mobile phones, text messaging, and the Internet – is now reaching the world’s masses, even in the poorest countries, bringing with it a revolution in economics, politics, and society.
Extreme poverty is almost synonymous with extreme isolation, especially rural isolation. But mobile phones and wireless Internet end isolation, and will therefore prove to be the most transformative technology of economic development of our time. ...
Mobile phone technology is so powerful, and costs so little per unit of data transmission, that it has proved possible to sell mobile phone access to the poor. There are now more than 3.3bn subscribers in the world, roughly one for every two people on the planet. ... Probably a significant majority of Africans have at least emergency access to a cell phone, either their own, a neighbour’s, or one at a commercial kiosk. ...
The rural poor in more and more of the world now have access to wireless ... systems... The information carried on the new networks spans public health, medical care, education, banking, commerce, and entertainment, in addition to communications among family and friends. ...
On the fully commercial side, the mobile revolution is creating a logistics revolution in farm-to-retail marketing. Farmers and food retailers can connect directly through mobile phones and distribution hubs, enabling farmers to sell their crops at higher “farm-gate” prices and without delay, while buyers can move those crops to markets with minimum spoilage and lower prices for final consumers.
The strengthening of the value chain not only raises farmers’ incomes, but also empowers crop diversification and farm upgrading more generally. ...
Education will be similarly transformed. Throughout the world, schools at all levels will go global... Universities, too, will have global classes, with students joining lectures, discussion groups, and research teams from a dozen or more universities at a time.
In my book The End of Poverty , I wrote that extreme poverty can be ended by the year 2025. A rash predication, perhaps, given global violence, climate change, and threats to food, energy, and water supplies. But digital information technologies, if deployed co-operatively and globally, will be our most important new tools, because they will enable us to join together globally in markets, social networks, and efforts to solve our common problems.
Jagdish Bhagwati in the Financial Times:
The selfish hegemon must offer a New Deal on trade, by Jagdish Bhagwati, Commentary, Financial Times: ...On the back of economic anxiety in the country, many in both political parties (although far more among Democrats) see freer trade now as a costly giveaway to others at the expense of the US. They ask: “What is in it for me?” Only an agenda for institutional change, one that addresses the true causes of the anxiety in the US today, has a chance of returning trade policy to sanity. ...
The US has ... muscled in to its ... trade agreements (nearly all with small, developing nations) conditions unrelated to trade at the expense of their partner nations. Thus a country that is hardly an exemplar on labour rights, where the right to strike has been severely restrained since the Taft-Hartley legislation more than half a century ago, where union membership in the private sector has declined to less than 10 per cent of the labour force, and which has not ratified all the International Labour Organisation’s core conventions, has had the effrontery to impose standards on others... Why?
It is evidently not because it practises what it preaches and demands. Rather, it is because the labour lobbies believe, without any compelling evidence, that American wages have been stagnant because of competition from the developing nations. ... In short, this is what economists call “export protectionism”.
What is doubly offensive about this exercise of political muscle is that it is advanced in the language of altruism: not by saying frankly that it is because “our unions are worried about competition” but by pretending that it is “in your workers’ interests”. ...
Senator Barack Obama does not quite get this. By asking, as part of his agenda for change, that the US should now impose even more draconian labour requirements in future PTAs, and that the North American Free Trade Agreement should be revised to incorporate yet tougher labour requirements, he is making export protectionism, and the reputation of the US as a selfish hegemon, worse...
Change is indeed in order, although along totally different lines. It must reflect a holistic view of the new reality that the US confronts. In particular, the economic anxiety that overwhelms US workers today stems from the increased fragility of their jobs.
First, ... India and China today are growing and exporting rapidly. ... They create tsunamis for specific industries where their exports concentrate.
Second, competition has intensified. ... No chief executive or any of his workers in tradable industries leads a happy life any more as there is always someone, from somewhere, breathing down his neck. ... It leads to volatility of jobs, as you have an advantage today and can lose it tomorrow.
Third, labour-saving technical change continuously threatens assembly-line jobs for the unskilled. The assembly lines continue but increasingly do not have workers on them...
The agenda for institutional change has to address this fragility of jobs, enabling unskilled and skilled workers to face the new uncertainties. ...
Senator Obama promises change but he needs a deeper understanding of the anxiety-causing “new epoch” to define his new agenda shorn of protectionism. John McCain, the Republican presidential candidate, admirably stands for free trade but shows no evidence whatsoever of comprehending that this needs to be situated in an institutional context that requires a serious overhaul. Who will ultimately offer us the right New Deal?
I don't like to see workers who are struggling given false hope. The research on this issue does not support that US wages or jobs would be much affected by insisting upon these types of standards, and barriers to trade of any type hurt the US overall in almost all cases (and hurt developing countries as well). If we focus a lot of time and energy in congress and elsewhere debating this issue, it crowds out effort that could be devoted to legislation promising much, much more to help people worried about or actually experiencing job insecurity. So, continuing with the discussion of Obama's economic policy in the post below this one, I am not in agreement with this aspect of his trade policies.
This article by David Leonhardt describes Barack Obama's view of economic policy, and it is very similar to my own. Most of the time, it is best to leave markets alone, to let them work without intervention, and that should be our starting point. But markets fail, and part of the disagreement with those holding more conservative views is over how often markets fail, whether they can easily self-correct when there are problems, and how effective the government is at fixing problems when they exist.
On the last point, I am a proponent of market-based regulation when it is possible to use it. For example, if you want to regulate the profit of a public utility, one way to do it is through rate of return regulation. Under this approach, prices are set so as to guarantee investors a particular "fair" rate of return. The problem with this is that there is no incentive for the firm to control its costs, the rate of return to investors will be the same whether it is efficient or inefficient.
An alternative to this approach is to set a price cap and then tell the firm that it can keep some fraction of any profit over a certain amount, with the rest to be returned to its customers through rebates or lower prices. For example, regulators could set a base return of 5%, and anything over that amount is shared equally with taxpayers (you occasionally see these rebates on your phone bill). Thus, if the firm makes 8%, it would keep 6.5%, and 1.5% would be returned to customers. Under this form of regulation, there's an incentive to cut costs - every dollar saved is another dollar in profit - and there's also an incentive to innovate (unlike with rate of return regulation). The price cap, which can be adjusted to target the 5% base rate, prevents the firm from exploiting monopoly power through its pricing behavior. There are important considerations involving commitment by regulators (e.g. they won't change the split when gets gets larger), but the important thing here is that profit is regulated, yet market incentives are preserved.
I bring this up because as I read Obama's economic philosophy I find myself very much in agreement (with some caveats, see below), but the actual policies that are implemented do not always seem to be faithful to the grander vision he expresses in the article. The windfall profits tax is one example that comes to mind (though in other areas, e.g. health care reform, there is at least an attempt to follow market-based regulation principles, though I'd question whether the market failure in the provision of health care can be solved with this particular approach - not every market failure can be overcome through market-based regulation - and universal coverage may require mandates). I also think there has been too much emphasis on behavioral economics due to the presence of economic advisors invested in this approach when it is just one part Obama's belief in market-based regulatory principles rather than command and control.
One place I do disagree is with Obama's belief in the value of some aspects of Reaganomics. I think both Obama and the article give Reaganism too much credit. The article says that, under Reagan:
The government has deregulated industries, opened the economy more to market forces and, above all, cut income taxes. Much good has come of this — the end of 1970s stagflation, infrequent and relatively mild recessions, faster growth than that of the more regulated economies of Europe.
There were some areas in need of deregulation, but to attribute the fall in inflation, the enhanced stability of output, and faster growth to these factors is inconsistent with research pointing to things such as technology and monetary policy as key factors behind the lower inflation rates and enhanced stability we experienced.
Obama echoes this theme:
In Obama’s second book, “The Audacity of Hope,” he goes further: “Reagan’s central insight — that the liberal welfare state had grown complacent and overly bureaucratic, with Democratic policy makers more obsessed with slicing the economic pie than with growing that pie — contained a good deal of truth.”
The article says:
he also says he believes that there are significant parts of Reaganism worth preserving. So his policies often involve setting up a government program to address a market failure but then trying to harness the power of the market within that program.
As I said above, if that's all he means, I have no problem with this idea, in fact my criticism is that he seems to depart from this when he actually implements policy (however, I do understand he needs to get elected, and that a stronger populist appeal may be needed). But he seems to go beyond this in his embrace of Reaganomics.
Finally, I should also say that I was impressed by what I heard from Obama in terms of his knowledge of economics. He has taken the time to learn about the topic and he has intelligent things to say about it. Better yet, I agree with most of what he says. The contrast to McCain, who doesn't seem the least bit interested in learning about economics and prefers instead to rely on the Phil Gramms in his party to tell him what his positions ought to be, was very clear. [Link to article]
Jon Chait says the so-called Bush Boom didn't do much for most people:
George W. Bush's Economy: The Invisible Hand Slaps Conservatives Again, by Jonathan Chait, TNR: ...Ah,... the Bush Boom. It's a bygone era, ... cut short--by ... the Bush recession. Actually, the second Bush recession, to be precise.
Now, I don't really think it's fair to blame a president for having the economy tank on his watch. But... For several years--the "Bush Boom" years--Republicans were essentially arguing that the mere fact that the economy was expanding should be taken as proof that Bush's economic policies succeeded.
President Bush would routinely announce facts such as..., "During the time when we cut taxes to today, our economy has grown by more than $1.9 trillion." He would mock his critics...
The whole trick here was to start at the bottom point of the economic cycle and assume that any subsequent improvement was the result of his policies. Of course,... the economy ... goes through cycles. ... Bush was claiming his miracle fertilizer succeeded because his plants were taller at the end of the summer than at the beginning of spring.
So the justification for Bush's economic policies was that the economy was no longer in recession. Now they can't even claim that any more. It's as if Bush's plants suddenly wilted in August.
- McGame Theory - Economists for Obama
- Many children left behind? Textbooks and test scores in Kenya - Vox EU
- The 'Great Moderation' in an IS/LM Model - Macro and Other Market Musings
- Obama's Geek Economist - Technology Review
- Chameleon Has a Short Life and an Interesting Life History - NYTimes.com
- Misreading the Inflation Data - BusinessWeek
- Did the Stimulus Package Actually Stimulate? - macroblog
Tuesday, August 19, 2008
Some responses to the Tax Foundation's announcement of a new campaign called Compete USA which claims high corporate tax rates are hurting US competitiveness. First, Paul Krugman:
Run for the hills! Excessive taxes on corporations are threatening American prosperity, because we can’t match the low, low taxes of other advanced countries. Or so says the Tax Foundation, which is rolling out a new campaign called Compete USA. John McCain has already made big cuts in corporate taxes a big part of his agenda.
There’s a lot to say about this stuff, but right now I’d just like to mention one aspect. The Tax Foundation people start off with a graph that’s supposed to be terrifying, with the headline “Europe cuts rates while U.S. stands still”; the graph shows European tax rates dropping far below the US rate.
What they don’t make clear is that:
1. The graph shows the “statutory” tax rate, which is the maximum rate a corporation can pay in principle. But because corporate tax rules allow all kinds of deductions and exclusions, the statutory rate is a poor guide to the actual disincentives the corporate tax creates.
2. Even more important, while they don’t explain how they calculate the “average” tax rate, the fact that their own data show that all the big economies have tax rates above 30%, while their graph shows an average rate of about 27%, seems to indicated that they’re showing us an unweighted average — that is, one that makes small economies like Ireland and Greece seem as important as big economies like Japan and Germany. And whaddya know, corporate taxes in big economies tend to be similar to those in the United States, a point made by the Congressional Budget Office in the study from which the chart above is drawn. (Yes Germany cut rates this year. Big deal.)
So basically, the Tax Foundation wants us to be frightened of the Greek menace. How can American business survive in a world in which Greek corporations have a big tax advantage?
Next, from Linda Beale:
Tax Foundation and Competitive Environments: more bunk!, by ataxingmatter: The Tax Foundation is busy again pushing its latest propaganda idea--that the US has such high corporate taxes that it stifles competition and hurts our economy--with a new "competeusa.com" organization.
Wrong. Fact is, though our tax laws include statutory rates that are fairly high (35% for corporations earning about $18 million or more annually) but generally in the same ballpark as those of other developed western nations, the actual tax rates paid by US corporations are extraordinarily low, around 6%. Remember the latest GAO report (reported elsewhere on ataxingmatter) that shows that two-thirds of US corporations pay no federal income tax. That's not just the ones that are losing money, but also many corporations that have record high profits (including some Big Oil companies) that end up paying next to nothing in taxes.
That's because the statutory rate of 35% is only on paper. Corporations engage in aggressive tax planning that cheats the system, and they take advantage of a bountiful number of lucrative loopholes built into the system under the four decades of Reagan-style corporate favoritism and deregulation, including items such as accelerated depreciation, various expensing provisions that let corporations deduct before they really have an economic cost, and the lucrative research & development credit that lowers taxes dollar-for-dollar for R&D expenditures that corporations have to do anyway (so they do not serve as an incentive to greater development) and that corporations have often already done prior to the enactment of the one-year "extensions" of the credit that have been taking place as transitions to no-credit for years.
As a result, the US is actually a corporate tax haven, with the lowest effective corporate tax rates of almost all the countries that participate in the OECD. That's a little fact that the Tax Foundation apparently doesn't want the American public to understand, since all its hype is in terms of statutory rates and not in terms of effective tax rates.
Robert Pindyck is interviewed on the candidate's energy proposals:
A Q&A with MIT Professor Robert Pindyck, by Stephanie Schorow, News Office: This is the first in an occasional series in which MIT experts weigh in on the presidential candidates, their policy ideas and aspects of the campaign.
As jittery consumers contemplate the price at the pump, energy issues have become a major factor in the U.S. presidential race. Have the two major-party candidates forthrightly addressed the hard issues about the country's energy needs? ...
I struggle with this question. If the rules are that you don't do certain things in a war, and the other side is doing them anyway and you are enduring huge losses, do you continue to follow the established rules, which are there for good reason, or do you match dirty tactic with dirty tactic? All's fair in love, war, and politics? Certainly there are lines we shouldn't cross even if the other side does them. Torture comes to mind.
What if the other side breaks the established (if unwritten) rules in a political contest, what should you do? I used to think the answer was to hold your head high and do the right thing, to not go into the gutter with the other side. That the system would work, truth would prevail and all of that. But now I wonder if that's correct. Perhaps a mutually assured destruction strategy would be better. Make it absolutely clear that any tactic will not only be matched, it will be exceeded. Make the response so costly that the other side won't even consider the option. The problem, of course, is this is not a credible threat and short of finding a way to make it credible, which involves the unpleasant task of wallowing in the mud with the other side, I'm not sure what the answer is:
McCain, Obama, and the Inherent Advantage of Caring More About Ends Than Means, by Robert Reich: We’ve been here before: The Republican attack machine at full throttle, spewing lies in best-selling books, on Fox News, on talk radio. The mainstream media reporting on the controversy, thereby giving it more air time and squeezing out the Democrats’ affirmative message. Followed by accusations by Democrats that Republicans are playing unfairly. Responded to by smiling shrugs and winks from Republicans, who say Democrats can’t take the heat or can’t enjoy a joke or are out of touch with average Americans who are concerned about whatever it is the Republicans are lying about. This ignites a furious debate among Democrats about how negative they should go against the Republican. “If we use their tactics, we’ll lose the moral high ground,” say the Democratic doves. “If we don’t, we’ll lose the war,” say the Democratic hawks. The debate is never fully resolved. The Democrats sort of fight back but don’t have the heart to do to Republicans what Republicans do to them. And so it goes.
The underlying problem is that Democrats care about means as well as ends, while Republicans care almost exclusively about ends and will use any means to get there. The paradox lies deeper. For most Democrats, the means are part of the ends. We want an electoral process that eschews the lying and cheating we’ve witnessed since Richard Nixon’s dirty tricks. If we use their tactics, we undermine our own goal, violating one of the very things that distinguishes us from them. Yet if we don’t stoop to their level, how can we prevail in a system that allows – even rewards – such lying and cheating? ...
Democrats also care about the rule of law – adherence to legal norms, rules, and precedents – as an end in itself. Republican administrations view the law as a potential obstacle to achieving particular ends. Anyone trying to chronicle the Bushie’s disregard for the rule of law is quickly overwhelmed with examples, such as violating civil service laws to fill up the executive branch with political hacks; riding roughshod over constitutional laws in firing federal prosecutors; wiretapping Americans in clear violation of law; holding prisoners of war without charge, in violation of international law; using torture. Democrats, once in power, regard laws as serious constraints on that power. (When I was secretary of labor, the department’s lawyers would instruct me about what I could not do because I was unauthorized to do it, rather than how I might reinterpret or bend the laws in order that I could. The lawyers who work in the Bush administration do the opposite.)
Those who are willing to do anything to achieve their ends will always have a tactical advantage over those who regard the means as ends in themselves. The question posed in this election, and, one hopes, by an Obama administration, is whether the moral authority generated by the latter position is itself enough to overcome these odds.
- The Fed can learn from history’s blunders - FT
- Bank capital and write-downs: Zeno’s paradox and the subprime crisis - Vox EU
- Sizing Up the Universe as It Expands in Search of a Dark Force - NYTimes.com
- Peddling Anti-Obamaism - Economists for Obama
- For a New Economics - The Nation
- Global recession will drive down energy prices 30% - Roubini - Project Syndicate
- No Limit to Greenspan's Once-In-A-Century Events - Caroline Baum
- China’s demographic imbalance: Too many boys - Vox EU
- Price-fixing: it's baaaack (and perfectly legal, too) - Kathy G
- On Cornucopian Views of Oil Supplies - Tom Bozzo
- Obama Vows to Shake Off Republican Attacks - Washington Wire
Monday, August 18, 2008
Is it true that many of the effects of environmental policy are likely regressive? According to this, the answer is yes, but rebates to low-income households can offset the regressive effects. "This makes it important to use emissions taxes or the auction of permits, to raise revenue enough to cover the cost of those rebates":
Distributional Effects of Environmental and Energy Policy: An Introduction, by Don Fullerton, NBER Working Paper No. 14241 August 2008: Public economics has well developed tools for analyzing the incidence and distributional effects of ... taxes. ... Yet most pollution policy does not involve taxation at all. Instead, it employs permits or command and control (CAC) regulations such as technology standards, quotas, and other quantity constraints. ...
CAC environmental restrictions do impose costs, and an important question is who bears those costs. Moreover, those restrictions provide benefits of environmental protection, and another important question is who gets those benefits. Thus, full analysis of environmental policy could address all the same questions as in the tax incidence literature. ...
This introduction discusses some initial literature on distributional effects of environmental and energy policy. ... To identify the major effects around which this introduction is organized, consider a simple requirement that electric generating companies cut a particular pollutant to less than some maximum quota. This type of mandate is a common policy choice, and it has at least the following six distributional effects.
Can Obama " find the passion on economic matters that has been lacking in his campaign so far"?:
It’s the Economy Stupor, by Paul Krugman, Commentary, NY Times: By rights, John McCain should be getting hammered on economics. After all, Mr. McCain proposes continuing the policies of a president who’s had a truly dismal economic record... And the public blames the White House, giving Mr. Bush spectacularly low ratings on his handling of the economy.
Meanwhile, The Times reports that ... Mr. McCain still “dials up” Phil Gramm,... who resigned as co-chairman of the campaign after calling America a “nation of whiners” and dismissing the country’s economic woes...
So Mr. McCain would seem to offer a target a mile wide: a die-hard supporter of failed economic policies who takes his advice from people completely out of touch with the lives of working Americans.
But while polls continue to show that the public, by a large margin, trusts Democrats more than Republicans to handle the economy,... Barack Obama has at best a small edge over Mr. McCain on the issue... And Mr. Obama’s failure to achieve a decisive edge on economic policy is central to his failure to open up a big lead in overall polling.
Why isn’t the Obama campaign getting more traction on economic issues? ...[L]ack of passion. When it comes to the economy, Mr. Obama’s campaign seems oddly lethargic.
I was astonished at the flatness of the big ... speech he gave in St. Petersburg... billed as the start of a new campaign focus on economic issues. Mr. Obama is a great orator, yet he began that speech with a litany of statistics that were probably meaningless to most listeners.
Worse..., he seemed to go out of his way to avoid scoring political points. “Back in the 1990s,” he declared, “your incomes grew by $6,000, and over the last several years, they’ve actually fallen by nearly $1,000.” Um, not quite: real median household income didn’t rise $6,000 during “the 1990s,” it did so during the Clinton years, after falling under the first Bush administration. Income hasn’t fallen $1,000 in “recent years,” it’s fallen under George Bush, with all of the decline taking place before 2005.
Obama surrogates have shown a similar inclination to go for the capillaries rather than the jugular. A recent Wall Street Journal op-ed by two Obama advisers offered another blizzard of statistics almost burying the key point — that most Americans would pay lower taxes under the Obama tax plan than under the McCain plan. ...
[T]he last Democrat to make it to the White House ... had no trouble conveying passion over matters economic.
In his speech accepting the Democratic nomination in 1992, a year in which economic conditions somewhat resembled those today, Bill Clinton denounced his opponent as someone “caught in the grip of a failed economic theory.” Where Mr. Obama spoke cryptically in St. Petersburg about a “reckless few” who “game the system, as we’ve seen in this housing crisis” — I know what he meant, I think, but how many voters got it? — Mr. Clinton declared that “those who play by the rules and keep the faith have gotten the shaft, and those who cut corners and cut deals have been rewarded.” That’s the kind of hard-hitting populism that’s been absent from the Obama campaign...
Of course, Mr. Obama hasn’t given his own acceptance speech yet. Al Gore found a new populist fervor in August 2000, and surged in the polls. A comparable surge by Mr. Obama would give him a landslide victory...
But it’s up to him. If Mr. Obama can’t find the passion on economic matters that has been lacking in his campaign so far, he may yet lose this election.
Tim Duy says "the economy will need to shift clearly in one direction or another – deflation or inflation – to drive any change in rate policy":
The Knife Edge Cuts Deep, by Tim Duy: The sharp decline in commodity prices has turned the tables on the inflation crowd, at least for the moment. To be sure, the most recent inflation report was none too encouraging, but as Jim Hamilton notes, it is largely old news. Indeed, bond markets appeared to react more strongly to higher than expected initial jobless claims. Headline inflation was a foregone conclusion, with rising core inflation an inevitable result of the spike in oil prices; while demand has been weak in the US, the depth of the downturn has so far been insufficient to forestall the pass through.
The Fed is powerless to prevent what will likely be a series of uncomfortably high core inflation readings in the month ahead. Expect little but lip service about “carefully watching inflation expectations” for now. Simply put, the case for a rate hike rested entirely on high oil and a weak dollar. Trends in these factors are cutting in the Fed’s direction in the last month, so much so that Across the Curve can posit the possibility that the next rate change will not be a hike:
Prices of treasury coupon securities posted solid gains today in a lackadaisical and lackluster trading session. The dollar continues to trade with new vigor and its strength debilitates commodities. I think that there is a bit of a slow and delayed reaction as participants realize that if the lower energy prices should stick that the Fed will eventually have room to lower rates…
The Fed is not there yet. They have been blindsided so many times over the past year that they will be hesitant to move dramatically on the basis of what could quickly reveal itself to be a temporary turn in commodity prices. More to the point, Bernanke & Co. view the economy as trapped somewhere between inflation and deflation, a knife edge that cuts deep into their policy options. The last FOMC statement was caught between these two outcomes, with the growth outlook diminished somewhat despite heightened inflation expectations. Interestingly, Federal Reserve Bank of Chicago President Charles Evans defines the current stance of policy similarly, stuck between the credit crunch and inflation:
- Export Boom Helps Farms, Not Factories - NYTimes.com
- The Rambo Coalition (8/24/04) - The Unofficial Paul Krugman Web Page
- Bernanke Tries to Define What Institutions Fed Could Let Fail - Bloomberg
- Obama Vows to Shake Off Republican Attacks - Washington Wire
- Despite Assurances, McCain Wasn't in a "Cone of Silence" - NYTimes.com
- Grade Inflation - Crooked Timber
I'm still have doubts about the claim that the Iraq war has hurt the economy (more doubts here), but Joseph Stiglitz doesn't:
No quick fix for America’s war-torn economy, by Joseph Stiglitz, Project Syndicate: Some say there are two issues in the coming US elections: the Iraq war and the economy...; ...neither is faring well. In some sense, there is only one issue, and that is the war, which has worsened America’s economic problems. ...
It used to be thought that wars were good for the economy. After all, the Second World War is widely thought to have helped lift the global economy out of the Great Depression. But, at least since Keynes, we know how to stimulate the economy more effectively, and in ways that increase long-term productivity and enhance living standards.
This war, in particular, has not been good for the economy, for three reasons.
Sunday, August 17, 2008
- Drilling Offshore to Affect World Oil Prices... and Other Tales - Econbrowser
- McCain's Pitch for Safe Nuclear Power May Be Undercut by Leaks - Bloomberg
- Africa Needs More Funds to Deliver U.N.'s Goals - Scientific American
- Freddie Mac: My Chapter - Arnold Kling
- Adjusting Government Policies for Age Inflation - NBER
- What's a Recession, Anyway? - NBER
- Quantum Computing with Ions - Scientific American
- Testing Genes, Solving Little - Op-Ed - NYTimes.com
Saturday, August 16, 2008
Why lump-sum transfers are better than fuel subsidies:
How Fuel Subsidies Drag Down a Nation, by Robert H. Frank, Ecponomic View, NY Times: ...[M]any emerging economies employ subsidies that keep domestic fuel prices far below the world price. As a result, these countries consume far more fuel than they would otherwise.
By one estimate, countries with fuel subsidies accounted for virtually the entire increase in worldwide oil consumption last year. Without this artificial demand stimulus, world oil prices would have been significantly lower. ...
It would surely be unrealistic to expect other governments to abandon subsidies just so Americans who drive S.U.V.’s and live in big houses could benefit from lower world energy prices. But those governments might want to reconsider their policy in the light of overwhelming economic evidence that the subsidies create net losses even for their ostensible beneficiaries. ...
The problem is that when the price of a good is below its cost, people use it wastefully. In the case of a gallon of gasoline, the cost ... includes not just the price of buying the gallon in the world market — say, $4 — but also external costs, like dirtier air and increased congestion. The external costs are ... substantial. With reasonable estimates factored in for them, the true cost of using a gallon is clearly greater than $4. By contrast, the price of gasoline to users is simply the amount they pay at the pump. With a $2-a-gallon subsidy in effect, gasoline bought in the world market at $4 would sell for $2...
Consider how this difference might affect a trucker’s decision about whether to accept a hauling job. ... Suppose the job... requires 1,000 gallons of fuel, available at the subsidized price of $2 a gallon, for a total fuel outlay of $2,000. If the cost of the trucker’s time and equipment are, say, $1,000 for the trip, his narrow interests dictate accepting the job if the shipper is willing to pay at least $3,000. Suppose the shipper is willing to pay that amount but not more.
The problem is that if the trucker accepts the job at that price, the country as a whole will be worse off by more than $2,000. Although the $3,000 fee would cover his own costs, the government would end up paying $2,000 in additional subsidies for the 1,000 gallons consumed. On top of that, the trip would generate additional pollution and congestion costs. So the fact that the subsidy encouraged him to accept the job means that its net effect is equivalent to throwing more than $2,000 onto a bonfire.
Waste is always bad. ... Subsidy proponents cite the firestorm of political protest that would erupt if fuel were to sell at the international market price. That fuel subsidies are wasteful, however, implies that there must be less costly ways to keep the peace.
Consider again our trucker... Instead of paying $2,000 to subsidize his fuel, the government could give him a tax cut of, say, $1,000, and use the remaining $1,000 to help pay for public services. Because the trucker’s earnings from the hauling job were only enough to cover his costs at the subsidized fuel price, he would be $1,000 better off with the tax cut alone than with the fuel subsidy. The additional support for public services would augment this benefit. In short, a tax cut is always a better way to keep political protest at bay because ... it does not encourage shipments whose costs exceed their benefits.
If a United States president urged developing economies to eliminate fuel subsidies because they result in higher energy prices for Americans, the conversation would probably end very quickly. But this conversation might be reframed.
A good place to start would be to heed the same advice we’d like others to follow. Emerging economies are not the only ones in which prices at the pump substantially understate the true social cost of fuel. ... Adopting some variant of a tax on carbon ... would help eliminate this discrepancy.
That would set the stage for our next president to explain to other leaders why eliminating fuel subsidies would make the overall economic pie larger. Because the resulting efficiency gains can be redistributed so that everyone gets a bigger slice than before, the idea should be fairly easy to sell.
Will the rising price of oil reduce international trade as some have suggested? According to this research, which uses a gravity model of international trade to answer the question, the answer is no, "only protectionism would seriously threaten trade":
Globalisation and the costs of international trade from 1870 to the present, by David Jacks, Christopher M. Meissner, and Dennis Novy, Vox EU: Most countries trade more on international markets today than ever before – both in absolute terms and as a proportion of their national output. How can we explain this phenomenal increase in international trade over the past few decades? Will the recent rise in oil prices reverse this trend of globalisation?
History provides us with a natural comparison. Beginning in the nineteenth century, the world saw a remarkable rise in international trade that came to a grinding halt during World War I and later on in the wake of the Great Depression. This “first wave of globalisation” from about 1870 until 1913 led to a degree of international integration – measured by trade-to-output ratios – that many countries only achieved again in the mid-1990s.
Taking a comparative perspective, we juxtapose the first wave of globalisation from 1870 to 1913 and the second wave after World War II. We also study the retreat of world trade during the interwar period from 1921 to 1939. We are interested in the driving forces behind these trade booms and trade busts. Was it changes in global output or changes in trade costs that explain the evolution of international trade?
An editorial from the local paper on the new book smearing Obama with lies:
Return of the swift boater, Editorial, Register Guard: You’ve got to hand it to Jerome Corsi. Not only did he manage to debut in the No. 1 spot on The New York Times best-seller list with his book-length smear of Barack Obama, but he also has played the media like a Stradivarius.
Capitalizing on his success four years ago as a key figure in the swift boating of John Kerry, Corsi once again is capturing priceless political coverage that further propels book sales and keeps his grab bag of lies, innuendo and character assassination front and center in the presidential campaign. He has appeared on CNN’s “Larry King Live” and had major stories and editorials on his book published in dozens of leading U.S. and international newspapers.
Rarely does such obvious media manipulation succeed so effortlessly without promising exclusive photos of Brangelina’s new babies. We take the bait because we must. The media are obliged to vet the charges and countercharges that ping-pong through a presidential campaign.
As Obama has discovered painfully, deliberately repeated misinformation is difficult enough to combat with irrefutable evidence. Left unchallenged, it can undergo the Joseph Goebbels’ transformation — repeat a lie often enough and it becomes truth.
That’s why the Obama campaign wasted no time pushing back hard against Corsi’s book, “The Obama Nation,” a title that is a deliberate play on the word “abomination.”
Because of the virulent misinformation that has circulated on the Internet about Obama since his rapid rise to the top of the Democratic ticket, his campaign has developed a rumor-debunking Web page called “Fight the Smears.” On that page is a link to a 40-page rebuttal to Corsi’s 384-page book.
In addition, John Kerry’s political action committee has launched a new Web site called Truth Fights Back to “fight against the right-wing smear machine.” It devotes significant space to “making sure Jerome Corsi doesn’t get away with his lies unchallenged.”
Corsi shouldn’t get away with much of anything unchallenged. He’s a staff reporter for the hard-right World Net Daily, where the Web site features an item headlined “Astonishing photo claims: Dead Bigfoot stored on ice” and another that announces “Big Macs fund training for homosexual activists.”
Corsi is well-known for his intemperate remarks. He has referred to Arabs as “ragheads,” called Pope John Paul II senile and characterized Islam as “a worthless, dangerous Satanic religion.”
- U.S. May Ease Police Spy Rules - washingtonpost.com
- Rebalancing act - Economist.com
- Dr. Doom - NYTimes.com
- How About the Home Front? - Op-Ed - NYTimes.com
- Fedspeak: Evans on 'Three-Front' Economic Conflict - Real Time Economics
- War, international dynamics and chaos theory - A Fistful of Euros
- Inflated claims - Economist.com
Is housing near the bottom of the cycle?:
Home economics, The Economist: The American housing market has deteriorated so sharply in the past two years that it is easy to fall prey to profound pessimism. Recent weeks have brought yet more bad news. ...
Amid the despondency, however, supply and demand are moving towards balance. Sales of new homes, which had plunged nearly 60% from their average level of 2005, have been stable since March. Sales of existing homes stopped falling last autumn. ...[C]onstruction of homes built for sale, not counting units that already have a buyer, had dropped to 13% below the level of new-home sales in the first quarter... That is why the inventory of unsold homes, though still near recent highs relative to monthly sales, has fallen sharply in absolute terms.
By the standards of previous cycles, residential construction should be nearing the bottom. ... [H]ome prices have dropped about 18% from their mid-2006 peak ... and incomes have steadily grown, homes are returning to more typical levels of affordability in some regions. ...
There are numerous caveats, however. First, the scale of the housing boom means history is a flawed guide to how big a retrenchment is in store. ... David Seiders, chief economist at the National Association of Home Builders (NAHB)..., thinks that in normal times, 3.6% of America’s housing stock ... should be vacant. The figure is now 4.8%..., one reason Mr Seiders thinks construction is going to keep falling until the second quarter of next year.
Some believe that with banks and other lenders dumping huge numbers of foreclosed homes, prices could fall well below equilibrium. That is debatable. A recent paper by Charles Calomiris of Columbia University and Stanley Longhofer and William Miles, both of Wichita State University, argues that foreclosure sales will impact prices less than commonly thought. ...
Most serious is the prospect of a further squeeze on credit. The fate of the mortgage market has increasingly rested on the shoulders of Fannie Mae and Freddie Mac, as well as Ginnie Mae, their wholly government-owned counterpart. But they may not have much more staying power; last month, their issuance of mortgage-backed securities plunged by 41% from June... Even if Fannie and Freddie’s capital constraints do not stop them guaranteeing mortgages, they have tightened their underwriting terms. Banks, which lack capital themselves, are passing these tighter terms on to customers. ...
This has left both optimists and pessimists pinning hopes for a rebound on the federal government. Last month’s housing-rescue law offers up to $7,500 to first-time homebuyers... The law also made the government’s implicit backing of Fannie and Freddie explicit, if necessary by injecting capital into them. Ms Coronado admits her optimistic case goes out of the window if the two firms can no longer do their job. Which is why, she says, the government will ensure that they can.
I don't think we are there yet. Housing prices are still above historical trends, and the recovery from housing bubbles is notoriously slow.
Friday, August 15, 2008
Here is more evidence that there is no need for the Fed to panic about inflation (see Jim Hamilton's comments also). This research asks if monetary policy been successful at keeping inflation expectations well-anchored and finds that "long-run inflation expectations have remained relatively stable, while the measures of risk compensation have been more variable":
Treasury Bond Yields and Long-Run Inflation Expectations, by Jens Christensen, FRBSF Economic Letter: The mandate of the Federal Reserve in carrying out monetary policy is to pursue price stability and maximum employment; while not formally defined for U.S. monetary policy, price stability generally is assumed to imply a "low" and predictable rate of inflation over a period of time. One way to gauge the success of monetary policy in meeting the mandate regarding price stability is to look at expectations of inflation, which, as studies have shown, influence future inflation rates. If monetary policy is successful at keeping expectations well-anchored by maintaining credibility in its commitment to price stability, then, for example, financial market participants would tend to "look through" rises in inflation and not radically change expectations about the rate of inflation over the longer run. Given the elevated rate of overall inflation over the past year, a highly pertinent issue is whether market participants are "looking through" the recent numbers on inflation and still see Federal Reserve policy as being consistent with longer-run price stability.
To address that issue, in this Economic Letter I use data on nominal and real Treasury yields to extract the market-implied expected inflation and study its behavior since the beginning of 2007. In particular, I use a model of the term structure of interest rates that allows for a decomposition of the compensation for inflation in nominal Treasury yields into compensation for inflation risk and compensation for expected inflation. The analysis indicates that long-run inflation expectations have remained relatively stable, while the measures of risk compensation have been more variable.
Is the "second great age of globalization" about to end?:
The Great Illusion, by Paul Krugman, Commentary, NY Times: So far, the international economic consequences of the war in the Caucasus have been fairly minor, despite Georgia’s role as a major corridor for oil shipments. But as I was reading the latest bad news, I found myself wondering whether this war is an omen — a sign that the second great age of globalization may share the fate of the first.
If you’re wondering what I’m talking about,... our great-great grandfathers lived, as we do, in a world of large-scale international trade and investment... Writing in 1919,... John Maynard Keynes described the world economy ... on the eve of World War I. “The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth ... he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world.”
And Keynes’s Londoner “regarded this state of affairs as normal... The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions, and exclusion ... appeared to exercise almost no influence at all on ... internationalization ... which was nearly complete in practice.”
But then came three decades of war, revolution, political instability, depression and more war. By the end of World War II, the world was fragmented economically as well as politically. And it took a couple of generations to put it back together.
So, can things fall apart again? Yes, they can.
Consider ... the current food crisis. For years we were told that self-sufficiency was ... outmoded..., that it was safe to rely on world markets for food supplies. But when the prices of wheat, rice and corn soared, Keynes’s “projects and politics” of “restrictions and exclusion” made a comeback: many governments rushed to protect domestic consumers by banning or limiting exports, leaving food-importing countries in dire straits.
And now comes “militarism and imperialism.” ...[T]he war in Georgia ... mark[s] the end of the Pax Americana — the era in which the United States more or less maintained a monopoly on the use of military force. And that raises some real questions about the future of globalization.
Most obviously, Europe’s dependence on Russian energy, especially natural gas, now looks very dangerous... After all, Russia has already used gas as a weapon...
And if Russia is willing and able to use force to assert control over its self-declared sphere of influence, won’t others do the same? Just think about the global economic disruption that would follow if China ... were to forcibly assert its claim to Taiwan.
Some analysts tell us not to worry: global economic integration itself protects us against war,... successful trading economies won’t risk their prosperity by engaging in military adventurism. But this, too, raises unpleasant historical memories.
Shortly before World War I another British author, Norman Angell, published ... “The Great Illusion,” in which he argued that war had become obsolete, that in the modern industrial era even military victors lose far more than they gain. He was right — but wars kept happening anyway. ...
Most of us have proceeded on the belief that ... we can count on world trade continuing to flow freely simply because it’s so profitable. But that’s not a safe assumption.
Angell was right to describe the belief that conquest pays as a great illusion. But the belief that economic rationality always prevents war is an equally great illusion. And today’s high degree of global economic interdependence, which can be sustained only if all major governments act sensibly, is more fragile than we imagine.
Since "the U.S. economy is weak and our own bridges, roads and airports are in desperate need of repair," Linda Bilmes and Joseph Stiglitz want Iraq to pick up a greater share of the cost of its own reconstruction:
Is this any way to rebuild Iraq?, by Linda J. Bilmes and Joseph E. Stiglitz, Commentary, Financial Times: Across the Middle East, ... the dizzying rise in oil prices has fueled a construction and employment boom. Yet in Iraq, one-quarter of the population remains jobless, and Baghdad gets only 11 hours of electricity a day. Four million Iraqis have been displaced from their homes and are urgently in need of resettlement. After five years of war, the country is still desperately in need of rebuilding.
It's not that Iraq has failed to share in the oil windfall. ... A new report by the U.S. Government Accountability Office shows that Iraqi oil revenues will reach up to $85 billion this year, resulting in a budget surplus of as much as $50 billion. But despite all the money that is pouring in, Iraq is not taking responsibility for its own reconstruction.
Instead, the U.S. military is footing the reconstruction bill. Over the last two years, while Iraq has earned nearly $100 billion in oil revenues (and spent just $2 billion on capital investments such as roads, water and electricity), U.S. taxpayers have plowed $48 billion into reconstruction activities in Iraq. About half of that has gone to the oil and electricity infrastructures. The U.S. has also helped to renovate 3,000 schools, train 30,000 teachers, distribute 8 million textbooks and rebuild irrigation infrastructure for 400,000 people, as well as fund projects to improve drinking water, bridges, roads, sewage treatment, airports and, of course, oil pipelines and refineries.
True, it was the United States that invaded Iraq, and none of the work we've done there since is adequate compensation for the ... suffering that the Iraqi people have endured. But at a time when the U.S. economy is weak and our own bridges, roads and airports are in desperate need of repair, there is a real question of whether we can sustain subsidizing Iraq's rebuilding on this scale.
Adding insult to injury is the fact that Iraqis pay a heavily subsidized $1.35 for a gallon of gas..., while the U.S. military -- the largest single consumer of oil in the world -- is stuck paying world prices of $3.23... Kuwait, by contrast, offers U.S. forces a steep discount...
This means that even as the U.S. is bankrolling Iraq's reconstruction, it is ... transferring to the Iraqis extra money, which, it turns out, is being squirreled away in unproductive international bank accounts. The oil windfall is yet another example of the ongoing financial fallout of the war, which is costing the U.S. more than $13 billion a month (not counting the future costs of caring for war veterans and replenishing military equipment).
It is time for the newly solvent Iraqi government to begin helping financially (as well as militarily) to get the country back on its feet. And it is time for the U.S. to ... concentrate ... on helping the Iraqi government rebuild its capacity to undertake such projects on its own. ...
Whatever the specifics, it is important to move quickly. Elections are looming in Iraq and the U.S., and the two countries are trying to agree on America's future role. Iraq's future reconstruction program needs to be home grown -- both for the sake of Iraq and for the U.S. taxpayers who need relief from the endless cost of this foolish war.
Christian Broda and Jonathan Parker examine expenditures associated with the 2008 tax rebates and find that "the rebates are providing a substantial stimulus to the national economy":
The impact of the 2008 rebate, by Christian Broda and Jonathan A. Parker, Vox EU: Early in 2008, in response to slowing economic growth, the US federal government enacted an economic stimulus package consisting mainly of a $100 billion tax rebate program. By 1 July 2008, more than 70 million American households had received tax rebates of $950 on average. The hope of policymakers was that by putting money directly back into the hands of US households, they would increase spending levels and avoid (or at least mitigate) the severity of the slowdown.
Skeptics argued that households would not spend their tax rebates. People tend to dislike swings in their consumption levels, leading some to believe that the one-time stimulus payment would be spent only gradually over many years. This would imply that the spending effect of the rebate would be modest at best, rendering fiscal policy ineffective, as Martin Feldstein recently argued. Others argued that since the money to pay for fiscal programs has to be borrowed and paid back in taxes, it’s a wash for the economy as a whole, and thus using fiscal policy to get the economy going is “like taking a bucket of water from the deep end of a pool and dumping it into the shallow end.”
Studies of the 2001 US tax rebates showed a significant consumption effect1, so how effective has the 2008 economic stimulus program been at getting people to spend?
- Benign Deflation in a New Keynesian Model - Macro and Other Market Musings
- Why inflation? - Interfluidity
- Hope behind this statute - The Edge of the American West
- Rapid Growth Found in Oxygen-Starved Ocean ‘Dead Zones’ - NYTimes.com
- Oil and politics - Los Angeles Times
- Stern Sees Higher Unemployment, Lower Inflation - Real Time Economics
- Real-Time Data Set - Federal Reserve Bank of Philadelphia
Thursday, August 14, 2008
I think raising interest rates to combat inflation is unnecessary, the increase in prices behind the run-up in inflation is largely driven by real rather than monetary factors, and once the adjustment in relative prices has stabilized at a point that balances global commodity demands and supplies, and once the adjustments have passed through the system, prices will stabilize. In addition, at this point, there are no signs of a wage-price spiral. But I also think cutting interest rates (e.g.) would be a mistake as this would risk creating inflationary expectations that become self-fulfilling, i.e. it would potentially undermine the Fed's inflation fighting credentials and risk generating the wage-price inflation spiral we wish to avoid:
Why those ‘expectations’ matter, by Samuel Brittan, Commentary, Financial Times: The words “inflationary expectations” must by now be familiar to every newspaper reader... Yet a few years ago they were unknown outside specialist circles. ...
They appeared in academic debate as early as the 1970s and 1980s in relation to the so-called monetarist controversy. The key contention of the monetarists was not about the need for money supply targets, as technocrats assumed, but that monetary policy rather than direct intervention in wage or price setting was the right method of tackling inflation. Their opponents believed that this could only work by creating a slump in which millions would lose their jobs. The more thoughtful monetarists did not deny that there was a transitional cost in squeezing inflation out of the system. But the severity of that cost would depend on how credible the policy was. If the main economic actors believed that policymakers would stick to their guns, they would base their actions on the assumption of modest inflation and would frame their behaviour accordingly and settle for moderate increases in pay and prices. If on the other hand they expected the policy to be eventually abandoned, any monetary squeeze would indeed have its main effect in reduced output and employment.
These contentions have been the basis of policy in many countries, at least for the past decade and a half. ... Higher prices for energy, food and imports are pushing consumer price index inflation well above ... target and will continue to do so well into 2009 and thus exert a downward pressure on living standards and real wages. Yet “these increases in commodity prices cannot by themselves increase sustained inflation unless other prices begin to rise at a faster rate. And it is the task of the monetary policy committee to ensure that they do not.” If it succeeds, the reduction in living standards will be a one-off affair... What is surprising is not that inflationary expectations have increased after recent shocks, but that they have increased so little, especially for the medium term. ...
This is from Felix Salmon (if you are unfamiliar with rules based versus principles based regulation, see here):
Bringing Back Regulation's Good Name, by Felix Salmon: Jesse Eisinger's column this month is about the different regulatory structures in London and New York, and how they both failed. I asked him about it... His rather excellent response:
...Laissez-faire regulation on both sides of the Atlantic has clearly failed. I'm trying to understand why and think about how to fix things.
Here in the U.S. the Reaganite experiment of financial deregulation reached its apogee roughly in the 2004 to 2006 period. That wasn't supposed to happen. The pendulum was supposed to swing back to a more regulation in the aftermath of the stock market bubble, the accounting fraud pandemic and the Wall Street research scandals. Yet after SOX was passed and the Spitzer-inspired reforms, The Wall Street Journal edit page and the US Chamber of Commerce et al spent years railing about the regulatory overreach. Sarbanes-Oxley purportedly was having malign effects on American competitiveness and New York was threatened by London and Hong Kong. We were strangling technological innovation. The reality is that we were blowing another bubble, while the SEC and the Fed shirked their regulatory duties. I have no doubt that a concerted regulatory effort starting around 2004 or 2005 to regulate mortgage lending and to examine leverage in the system would have helped enormously, had the regulators been given the mandate. But the Bush-era SEC and a Greenspan-led Federal Reserve had no interest.
One point about London, which I think is underappreciated in the States, is that they were running an even purer laissez-faire financial experiment. I was puzzled how that happened, but the reason turns out to be fairly obvious: The FSA, the British super-regulator, was created when the financial services industry was strong. And the British economy is even more dependent on the financial services sector than the U.S.
What's interesting is that even though we have two different structures and two different approaches, we both got into very similar problems. We have a deeply overleveraged financial system and a bursting housing bubble. ...
I think "principle"-based regulation is pretty much a crock. But it's beside the point. The "principle" approach is a euphemism for being hands-off. As you see from my column, the FSA has virtually no enforcement staff or budget. So the British regulators couldn't enforce principles if they wanted to.
I think we should stick to rules. Principles are what firms need to adhere to themselves, by creating internal cultures that respect the rules, the regulator, and their customers. For instance, some firms have in-house risk management departments that are the "risk police" and some have risk management sitting at the table as a partner. At the Risk Police firms, you push deals you can get away with. That's bad for the firms and bad for the markets. Our regulators could try to find ways to encourage the creation of internal cultures that reward high principles as well..
Regulators need to enforce the rules. This is the problem. It's been exacerbated by our ridiculously Byzantine regulatory structure. It's obvious to most people that we need a radical overhaul of our regulatory structure, but if it's not back by a regulatory attitude change then it will be for naught. ...
[T]he main point of the column is that regulators have to regulate. We need to bring back regulation's good name. ...
Tough News from the Labor Market, by Andrew Samwick: This morning brought two pieces of news from the BLS. First, real earnings declined last month:
Real average weekly earnings fell by 0.8 percent from June to July after seasonal adjustment... A 0.3 percent increase in average hourly earnings was more than offset by a 0.3 percent decrease in average weekly hours and a 0.9 percent increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
Second, initial claims for unemployment insurance continue to be high:
In the week ending Aug. 9, the advance figure for seasonally adjusted initial claims was 450,000, a decrease of 10,000 from the previous week's revised figure of 460,000. The 4-week moving average was 440,500, an increase of 19,500 from the previous week's revised average of 421,000.
Here is a graph of that 4-week moving average over the last 30 years... Comparing the current episode to the last 20 years, which includes the recessions in the early 1990s and early 2000s, the level of claims was higher during those downturns than it is currently. But the level never got as high as it is now without going even higher.
I chose Andrew's summary because he led with the news on real wages:
Consumer prices took another sharp jump last month with high energy prices fueling a 0.8% monthly increase — nearly double analysts' predictions — and chalked up a 12-month inflation rate of 5.6%, the highest since 1991, the Labor Department reported today.
ZOMG! Inflation is out of control! Now, here's the seventh (i.e., nearly last) graf of the story:
Joel Naroff of Naroff Economic Advisors said that other economic indicators released today were equally worrisome. The Labor Department also reported that workers' average weekly earnings declined by 0.8% in July and 3.1% over the last year, even after adjusted for inflation.
Yawn. People are making less money than before. Whatevs.
Question for the folks who populate our newsrooms: Why is it that a 0.8% rise in inflation, the biggest since 1991, is huge, headline news, while a 0.8% decline in wages, the biggest since 1990, is only barely worth mentioning? In a newsroom with some connection to the normal world, wouldn't it be the other way around?
But I guess I should be grateful. The Wall Street Journal put the earnings news in the 15th paragraph of their story, the Washington Post relegated it to literally the very last paragraph of theirs, and the New York Times didn't bother to mention it at all. So on second thought, good job, LA Times. Yippee.
Update: Paul Krugman:
...A nasty inflation number today. But remember what the guide says: DON’T PANIC.
Basically, what we’re seeing is pure commodity price inflation, with not a hint of a wage-price spiral. And the commodity boom seems to be over. So inflation will be headed down soon.
I’m sure that Gentle Uncle Ben is under immense pressure to raise rates. But he shouldn’t.
Dean Baker reports:
Census Bureau Trashes Social Security Trustees Immigration Assumptions, Beat the Press: [Census Bureau Trashes Social Security Trustees Immigration Assumptions] could have been the headline of an article reporting on a new set of projections for immigration from the Census Bureau. According to the article, immigration will rise from its current rate of 1.3 million a year to more than 2 million a year by the middle of the century.
By contrast, the Social Security trustees intermediate scenario assumes that immigration will fall from its current rate to just over 1 million a year by the middle of the century. Even the low cost scenario assumes immigration of only 1.3 million a year by the middle of the century.
A more rapid pace of immigration improves the financial situation of Social Security. If the Census projections prove correct, then close to 30 percent of the projected Social Security shortfall would be eliminated. ...
Speaking of immigration:
Greenspan's Greater Foreign Fool Theory, by Paul Kedrosky: While I agree that it makes sense for the U.S. to increase immigration of skilled workers, I laughed out loud at ex-Fed chair Alan Greenspan's other rationale letting more people into the U.S.:
"The most effective initiative, though politically difficult, would be a major expansion in quotas for skilled immigrants." The only sustainable way to increase demand for vacant houses is to spur the formation of new households. Admitting more skilled immigrants, who tend to earn enough to buy homes, would accomplish that while paying other dividends to the U.S. economy.
He estimates the number of new households in the U.S. is increasing at an annual rate of about 800,000, of whom about one-third are immigrants. "Perhaps 150,000 of those are loosely classified as skilled," he says. "A double or tripling of this number would markedly accelerate the absorption of unsold housing inventory for sale -- and hence help stabilize prices."
Awesome. Why wait around for sovereign wealth funds to bail the U.S. out when you can simply invite foreigners in and suggest they buy real estate? Alan's soo-oooo clever. [via WSJ]
Wednesday, August 13, 2008
Greg Mankiw posts this graph under the title "The Obama Tax Plan":
Economists for Obama respond:
Obama's Tax Plan and Basic Honesty, by Jonah Gelbach: Greg Mankiw links to this attack on Obama's tax plan by Alex Brill and Alan Viard of AEI. Mankiw's post provides only a graph titled "Effective Marginal Tax Rates: Obama v. Current Law", offering the link so that readers can "Click through to the read the thousand words". From what I can tell, the Brill-Viard piece, titled "The Folly of Obama’s Tax Plan", is one of those screeds meant to confuse rather than inform.
Comments on this?:
The ’60s: Once Upon an Optimistic Time, by Barry Gewen, Book Review, NY Times: ...“The Liberal Hour” by G. Calvin Mackenzie and Robert Weisbrot ... [contends that t]oo many historians who write about the 1960s ... have focused on the decade’s very visible rebellions and disruptions — all that sex, all those drugs, all that rock ’n’ roll.
What is often ignored, they say, is the hard work of little-known politicians and bureaucrats who were methodically creating a ’60s revolution from within. ... Senators and congressmen ... were permanently transforming the country with a tsunami of social and economic legislation.
Granted, it’s more fun to read about Abbie Hoffman than about Edmund Muskie, but ... their overall argument is a valuable corrective to a lot of hackneyed thinking about the significance of the ’60s.
The “liberal hour” lasted only a few years, from 1963 to 1966, from the final days of John F. Kennedy’s presidency through the first three years of Lyndon B. Johnson’s, but in that brief period of time came two civil rights acts...; ...Medicare and Medicaid; pioneering environmental laws; education and immigration bills; stronger protections for consumers; a host of antipoverty programs, including food stamps and Head Start; new federal departments of transportation and housing and urban development; and other reform measures, literally hundreds. Washington hadn’t seen such legislative energy since the New Deal.
If it was poverty and want that drove the New Deal, it was prosperity that provided the momentum for the ’60s, and with it the confidence to take on any challenge. “In the early years of the 1960s,” Mr. Mackenzie and Mr. Weisbrot write, “national optimism reached epidemic levels.” Inspired by Kennedy’s rhetoric and Johnson’s acumen, hundreds of inside-the-Beltway role players set about to change their country and the world. ...
[I]t seemed that liberals would be on top for a very long time..., even a liberal century. Yet their moment quickly passed. ... What happened?
It’s not a question that lends itself to easy answers, but ... they come up with a powerful one: liberal overreaching. During the ’60s liberals were certain they could solve any problem — at home or abroad — with the right expertise, appropriate government policies, the application of reason and gobs of money.
“Do we have or can we develop a knowledge of human social relations that can serve as the basis of rational, ‘engineering’ control?” the eminent sociologist Talcott Parsons asked. “The answer is unequivocally affirmative.” Officials puffed up with a sense of their own omnipotence spoke of a “world New Deal.” Johnson himself exclaimed: “We’re the richest country in the world, the most powerful. We can do it all.”
Such arrogance led directly into the mire and jungles of Vietnam, the prime example of liberal overreaching... Suddenly, Americans were being called upon to make sacrifices, not only of money but also of blood, sacrifices that seemed endless.
It was little better at home. The legislation of the liberal hour was supposed to end poverty, heal racial divisions. Yet all at once, the cities were going up in flames. The primary beneficiaries of liberal largesse, it seemed, were ungrateful for the assistance, while Democratic leaders looked helpless in the face of riots and rising crime. Great Society solutions weren’t working, and so voters turned elsewhere.
“By 1966,” Mr. Mackenzie and Mr. Weisbrot report, “more than half of northern whites had come to believe that government was pushing too fast for integration.”
Johnson had come to grief because, to use Mr. Mackenzie and Mr. Weisbrot’s word, he had “overpromised.” Not every problem had a solution. Reasoning together didn’t work in the urban ghettos or the Mekong Delta. “The Liberal Hour” presents itself as a book about the brilliant legislative legacy of the ’60s, but by the end it has become a book about the legacy of the Johnson administration’s failings....
More optimistic than most of his optimistic countrymen, more confident and overbearing too, Johnson seemed incapable of understanding the virtues of skepticism and caution, the wisdom of pessimism. He never appreciated the limits of good intentions, especially his own. Like many a tragic hero, Johnson was brought down by hubris. And Democrats, Mr. Mackenzie and Mr. Weisbrot tell us, are still paying the price.
Have we just been through a period of "conservative overreaching"? Andrew Samwick quotes Warren Coats on the swing back to the left:
The Death of the Right?: As public sentiment swings back to the left what the public wants (domestically), I think, are largely free but better regulated markets and a better social safety net (health care and pensions). Those like me who think that too much regulation stifles beneficial market innovation and worry about the work incentive stiffing effects of excessive or poorly designed safety nets need to take note of these sentiments. The freedom for me to lead my life largely as I choose and to enjoy the fruits of my labor depends heavily on the willingness of my neighbors (fellow citizens and residents) to accept those rules of the game. Our society functions as it does because of a broad social consensus on the rules of public behavior. This consensus rests in part on each player’s confidence that if he fails there is a safety net that makes it worth his taking the risk of playing. We need to compromise what we consider first best for society (and Republicans and Democrats tend to differ on what this is) to the extent needed to preserve that broad consensus.
He goes on to say:
Congressman Barney Frank, Chairman of the House Financial Services Committee, epitomizes the best of the new left wing reaction to the Reagan Revolution. Frank is fully aware of the virtues of the market ... and the need to get the incentives right, but insists that market excesses and rough edges should be removed with limited and well focused regulation. His collaboration with Republican Treasury Secretary Henry Paulson to fashion a Housing Rescue and Foreclosure Prevention Law enjoyed sufficient bipartisan support to gain the President’s signature on July 30. The bill’s many provisions were generally sensitive to moral hazard problems and market incentives... There were things for both Republicans and Democrats to like and to dislike in this bill.
Frank is a pragmatist who is willing to sacrifice his version of “the best” for “the good.” He sees a major victory for his preference for limited, market friendly regulations in the Federal Reserve’s new rules (Regulation Z – Truth in Lending) to prohibit “unfair, abusive or deceptive home mortgage lending practices.” ... These are not the sentiments of a wild eyed socialist and this is not a return to the heavy handed economic (as apposed to prudential) regulations of the 50s and 60s when government regulated, e.g., capital flows and interest rates on bank deposits. When asked why congress refuses to pass the no brainer free trade treaty with Columbia, which Frank has visited several times, he replied that “it has nothing to do with Columbia, nor the failure to recognize the benefits of trade. No trade liberalization deal will be passed by this Congress until more attention is given to compensating the losers. And don’t forget that today when someone losses their job, they also loss their health insurance.”
For the next few years, maybe even a decade, until the next swing back in the political center, we can expect more regulation and more extensive safety nets. If we collaborate with market friendly Democrats like Frank, we can not only fix some of the genuine deficiencies with existing arrangements, but we can probably prevent some of the worst excesses of the over extension of government, until it is our turn again. ...
Would health care reform guaranteeing universal coverage be considered one of "the worst excesses of the over extension of government"? The "brilliant legislative legacy of the ’60s" produced important programs that are still with us today. If Obama wins the election, I'm not too worried about overreaching, I more worried about Democrats not reaching far enough.
- Mechanism for Credit Is Still Stuck - NYTimes.com
- An Effective Rebuttal - Capital Gains and Games
- Optimism in Evolution - Op-Ed - NYTimes.com
- The Tilting Yard - Thomas Frank - WSJ.com
- Disclosure Is the Best Kind Of Credit Regulation - WSJ.com
- The Fed and Authoritarian Capitalism - Robert Reich
- Trading Down (speculation?) - Ryan Avent
- An Endangered Act - Editorial - NYTimes.com
- Are OECD central banks too transparent? - Vox EU
Tuesday, August 12, 2008
Are you ready to embrace libertarian paternalism?
The dramatic effect of a firm nudge, by Cass Sunstein and Richard Thaler, Commentary, Financial Times: In the past three decades, psychologists and behavioural economists have learnt that people’s choices can be dramatically affected by subtle features of social situations. For example, inertia turns out to be a powerful force. If people’s magazine subscriptions are automatically renewed, they renew a lot more than if they have to send in a renewal form. Moreover, people are influenced by how problems are framed. If told that salami is “90 per cent fat-free” they are far more likely to buy salami than if they are told it is “10 per cent fat”.
Social norms matter a lot. If people think others are recycling, or paying their taxes, they are far more likely to recycle and to pay their taxes. The important message is that small details can induce large changes in behaviour.
Findings of this kind suggest that even when people have freedom of choice they are influenced, or nudged, by the context in which their decisions are made. This power gives business and governments opportunities. Automatically enrolling people in a savings plan dramatically increases participation, even though people retain the right to opt out. Informing citizens of how their energy use compares with that of neighbours can nudge energy hogs into adjusting their thermostats.
In this light, it is not surprising that policy teams for Barack Obama, the US Democratic presidential candidate, and David Cameron, the UK’s Conservative party leader, have shown an interest in nudge-like solutions to social problems..., ... an approach we call “libertarian paternalism”, by which governments try to move people in good directions without imposing penalties, mandates or bans.
The mounting international interest suggests the possibility of developing a genuine Third Way, one that accepts some of the progressive goals traditionally associated with the left, but insists on the market-friendly means traditionally associated with the right. Libertarian paternalists resist coercion. They think that freedom of choice is an important safeguard against the bias, confusion and self-interest of government. They also think that everyone can benefit from a friendly nudge.
Now that prominent leaders are showing an interest in the potential effects of nudges, a counter-reaction is starting to develop. One objection is that while we may be able to nudge litterers, for many of the most important problems, such as terrorism, nudges are not enough: they need to be solved with mandates or bans. ... We concede that in some contexts libertarian paternalism is not enough. .... That does not eliminate a role for nudging. ...
Mr Obama recently suggested that people can improve fuel economy by having the right air pressure in their tyres. Five minutes with an air hose can save 3 per cent or more on fuel bills. But the reaction of John McCain, the Republican presidential candidate, to this nudge was to mock it. ... Mr McCain’s critique is a good example of an anti-nudger’s mistake. No one suggests we can solve the world’s energy problems by correctly filling our tyres, but who in their right mind would reject a plan that could, at little cost, save millions of gallons of fuel? ...
No sensible person could argue that government action should be limited to nudges. But too often governments resort to coercion when gentler approaches, preserving freedom of choice, are at least as effective.
I don't like to feel as though I've been manipulated no matter how friendly the nudge, even for my own good, and I'm suspicious of other people deciding what is best for me, especially when I push these ideas to their logical limits. But I can see advantages to this as well, so I guess I'd be okay with it if those doing the nudging look me in the eye and say we have found that presenting the options in this way has this effect, so we are presenting the options as follows. So long as all the cards are on the table, so long as I know how I am being manipulated (okay, nudged), fine, but if it relies upon me being unaware of how I am being nudged, that would feel coercive and I'd rather not have someone else deciding how I should behave even if it is, in their opinion at least, for my own good.
Thomas Frank on "The Wrecking Crew":
...I think it's absolutely necessary to think clearly about what has gone wrong and what ought to change. One assessment might be that Mr Friedman's ideas were fundamentally flawed—that there never should have been such a substantial push for liberalisation. Another is that Mr Friedman was largely correct, but when his ideas were embraced and adopted, his followers found themselves at a loss as to how to respond. As a result, they continued to press for liberalisation, well beyond an "optimal" level, because it continued to be politically expedient. And still another is that Republicans embraced free marketeering as politically convenient but never gave it the rigourous policy support liberalisation deserved—the impure Bush theory.
Democrats, and economists generally, need to be clear about which of the above they believe or do not believe and why. They also need to be careful not to overpoliticise the issues, simply for the sake of electoral gain. It may be that some new regulatory practices are needed, and some new liberalisation is needed; in fact, that's almost certainly true. Democrats may reject that wishy-washy sounding diagnosis, however, in favour of the cleaner "making markets work" theme, which may ultimately correspond to a general walking back of liberalisation.
I have trouble with any ideological reading of the economics, because the two (ideology and economics) so rarely fit well together. I don't want to elect a free-market supporter or an interventionist. I want to elect someone who will carefully consider the issues and determine that here the government ought to assign pollution property rights, while here the government should reduce licensure, and so on. I want, in short, someone with enough intellectual heft to know the difference between good policy and good politics.
If the economists are unwilling to make these distinctions, I have little confidence that the candidates ever will.
Greg Anrig via Brad DeLong:
Greg Anrig on the GOP, by Brad DeLong: He smells a wind from out of the west:
McCain's Problem Isn't His Tactics. It's GOP Ideas.: At long last, the conservative juggernaut is cracking up. From the Reagan era until late 2005 or so, conservatives crushed progressives like me in debates as reliably as the Harlem Globetrotters owned the Washington Generals. The right would eloquently praise the virtues of free markets and the magic of the invisible hand. We would respond by stammering about the importance of regulation and a mixed economy, knowing even as the words came out that our audience was becoming bored.
Conservatives would get knowing laughs by mocking bureaucrats. We would drone on about how everyone can benefit from the experience and expertise of able civil servants. ... They offered tax cuts. We talked amorphously about taxes as the price of a civilized society. ...
But now, seemingly all of a sudden, conservatives are the ones who are tongue-tied, as demonstrated by Sen. John McCain's limping, message-free presidential campaign. McCain's ongoing difficulties in exciting voters aren't just a tactical problem; his woes stem largely from his long-standing adherence to a set of ideas that simply haven't worked in practice. The belief system and finely crafted policy pitches that enabled the right to dominate the war of ideas for the past 30 years have produced a relentless succession of governing failures, from Iraq to Katrina to the economy to the environment.
Largely as a consequence, the public's attitude toward government -- Ronald Reagan's bête noire -- has shifted. A recent Wall Street Journal/NBC News poll found that, by a 53-to-42 percent margin, Americans want government to "do more to solve problems"; a dozen years ago, respondents opposed government action by 2 to 1. Meanwhile, Republican constituency groups' long-standing determination to put aside their often significant differences and band together to support GOP candidates is fracturing: The libertarian darling Ron Paul and the evangelical Christian leader James C. Dobson are among the Republican bigwigs who haven't so far endorsed McCain. ...
As I listen to leading voices and thinkers on the right pondering the condition of their ideology, it is increasingly clear to me that they face a fundamental dilemma -- one that cannot be resolved anytime soon and that might well leave the conservative movement out to pasture for as long as we progressives have been powerlessly chewing grass. That choice is whether to stick with rhetoric and policies wedded to free markets, limited government and bellicose unilateralism, or to endorse a more robust role for the public sector at home while relying more on diplomacy and international institutions abroad. Either way, conservative Republicans seem destined to have a much harder time winning elections for the foreseeable future. Just ask McCain how much fun he's having.
The single theme that most animated the modern conservative movement was the conviction that government was the problem and market forces the solution. It was a simple, elegant, politically attractive idea, and the right applied it to virtually every major domestic challenge -- retirement security, health care, education, jobs, the environment and so on. Whatever the issue, conservatives proposed substituting market forces for government -- pushing the bureaucrats aside and letting private-sector competition work to everyone's benefit.
So they advocated creating health savings accounts, handing out school vouchers, privatizing Social Security, shifting government functions to private contractors, and curtailing regulations on public health, safety, the environment and more. And, of course, they pushed to cut taxes to further weaken the public sector by "starving the beast." President Bush has followed this playbook more closely than any previous president, including Reagan, notwithstanding today's desperate efforts by the right to distance itself from the deeply unpopular chief executive.
But in practice, those ideas have all failed to deliver...
Conservatives will contest that "President Bush has followed this playbook more closely than ... Reagan." They'll try to argue that the problem is the Bush administration, not conservative ideas. In fact, liberals make this argument too:
[T]he free-market, supply-side crowd... had behind them the authority of a vast academic establishment, ranging from Friedrich von Hayek to Milton Friedman to such contemporaries as Gary Becker and Robert Mundell... The academic economics of the 1970s lined up behind the right-wing politics of the 1980s for a reason. Reaganomics had a logic. ... Deregulation, above all, would substitute the invisible hand of the "efficient market" for the dead hand of bureaucracy.
The judicial coup of December 2000 that installed Bush and Cheney brought back some of Reagan's men and his most extreme policies - tax cuts for the wealthy, big increases in military spending, aggressive deregulation. But it didn't bring back the ideas. Instead, it became clear that Bush and Cheney had no real ideas, no larger public justification. They cut taxes to enrich their supporters. ... They were willing to have the government spend like a drunken sailor in 2003/4 to boost the economy before the election. ...
It was very interesting to me that some of the first to sense this loss of public purpose were the very conservatives who had swept in with Reagan. The nemeses of my youth, people like Bruce Bartlett, Paul Craig Roberts, the late Jude Wanniski, went over into hard opposition..., at the core they felt that Bush had no conservative convictions.
The free market rhetoric still has power even when it offers false hopes. In previous campaigns we heard how tax cuts would pay for themselves. Cut taxes and get the government out of the way, the argument goes, and output will grow so much that taxes will actually rise. That, of course, didn't happen. This campaign, it's offshore drilling. Offshore drilling won't lower oil prices, that's a false hope, yet the cry that government imposed environmental restrictions are causing higher prices has had some success. Let the market work, we hear, and it will solve the problem. There are other of signs that politicians are not yet ready to abandon the free-market message. When it comes to health care reform, the Obama campaign fears the word mandates for a reason, and prefers to push a plan that has "many private health insurance options." Talk of raising taxes and increasing the size of government is avoided, and Democrats step very lightly around free trade. The idea that the market works still has resonance.
So my instinct is different. Markets do what we expect them to do - they allocate resources efficiently - when they operate under the proper conditions. Those conditions include lack of market power among market participants, the lack of political influence, having the proper regulatory structure in place, and so on. Using anti-government ideology, conservatives have undermined rather than supported the market system, and that's the important message. Take deregulation as an example. There were certainly places where government overreached, and removing regulations in those cases was needed, but thoughtlessly stripping away any rule or regulation pertaining to business that you encounter is not the way to create a market system that functions optimally.
I want Democrats to make it clear that we aren't opposed to markets, not at all, and to say it forcefully. In fact, we like markets so much we want to fix the ones that are broken from so many years of neglect by Republican administrations. We want to make markets work for everyone, not just a few at the very top who are able to work the system to their advantage. We have a pretty good idea of what it takes for markets to function well, and it requires active government involvement to create the conditions and supporting institutions for markets to flourish. That type of government oversight has been absent under Republican administrations - see the financial meltdown - and it's up to Democrats to step up and fill the void.
The confusion here is simple, I think. Free markets - where free simply means minimal government involvement - are not necessarily the same as competitive markets. There is nothing that says what many interpret as freeing markets - lifting all government restrictions - will give us competitive markets, not at all. Government regulation (as well as laws, social norms, etc.) is often necessary to help markets approach competitive ideals. Environmental restrictions that force producers to internalize all costs of production make markets work better, not worse. Rules that require full disclosure or that impose accounting standards help to prevent asymmetric information and improve market outcomes. Breaking up firms that are too large prevents exploitation of monopoly power (or prevents them from becoming "too large to fail") which can distort resource flows and distort the distribution of income. Making sure that labor negotiations between workers and firms are on an equal footing doesn't move markets away from an optimal outcome, just the opposite, it helps to move us toward the efficient, competitive ideal, and it helps to ensure that labor is rewarded according to its productivity (unlike in recent years where real wages have lagged behind). There is example after example where government involvement of some sort helps to ensure markets work better by making sure they are as competitive as possible.
I don't think it's necessary to give up on the idea of the market system as the best means of allocating resources in most cases. But markets can and do fail and it's up to the government to provide the foundation markets need to perform well (or, in cases where market failures are substantial such as in health care and social security, to step in and take a more active role). That's what has been missing under Republican leadership, the understanding of how to provide the foundation needed for markets to work for everyone. Democrats need to stress how that will change under their leadership, how they will improve the ability of the economy to function in a way that serves the interests of all participants in the economy rather than favoring some groups over others.
- A Danish fix for the US mortgage crisis - Soros - FT
- The Empty Promise (of oil drilling) - Op-Ed - NYTimes.com
- Endangered Species Act Changes Give Agencies More Say - washingtonpost.com
- Slept Through Rice Age, Awoke to Commodity Bear - Caroline Baum
- A speculation tax is the obvious solution to rising oil prices - Dean Baker
- McCain Lifts Russia-Georgia Speech From Wikipedia - Open Left
- Birth during a recession raises risk of fatal cardiovascular disease at advanced age - EurekAlert
The Rapid Reversal, by Tim Duy: The rapid shift in financial markets over the past month caught me off guard. I have long been of the view the US economy was undergoing a fundamental adjustment to an unsustainable external imbalance. That adjustment required a lengthy period of relatively slow domestic demand growth to bring US consumption in line with productive capacities – a process that should reduce the magnitude of the US current account balance. Effectively, the US economy would ease into some new equilibrium characterized by a fresh constellation of exchange rates, interest rates, and prices.
The exact constellation of these nominal variables, however, was not predetermined and likely to be impacted by policy decisions. Excessive monetary and fiscal stimulus would interfere with this adjustment, overstimulating real activity and thus forcing prices higher and the value of the Dollar lower than would otherwise be the case (of course, the tradeoff would be lower unemployment). In essence, if the policy refused to allow the adjustment to occur, financial markets would force the adjusted via alternative channels. One consequence was the sharp rise in commodity prices, particularly energy.
I did not expect that oil would choke off US demand until prices closed in on $175 or higher, sending gas prices north of $5/gallon. As it turned out, $145 and $4 were the magic numbers at which households were forced to take as cold, hard look at their finances and start cutting expenses that would result in the least real reduction in living standards. Not surprisingly, Detroit suffered a grievous blow in the process, experiencing a sharp fall in sales:
Enrique Martinez-Garcia and Janet Koech of the Dallas Fed give the outlook for the international economy:
Challenging Times..., International Economic Update, by Enrique Martinez-Garcia and Janet Koech, FRB Dallas: Weakening Growth Global economic activity continues to expand, but at a slower pace (Chart 1). Sluggish growth in the advanced economies is expected to continue at least until the first half of 2009. The rapid growth in the emerging markets is likely to soften.
Monday, August 11, 2008
James Galbraith initiates a discussion of his new book, The Predator State:
What Is The Predator State?, TPMCafe Book Club, by James K. Galbraith: ...There is a tendency, seen in Jonathan Chait's book The Big Con and Paul Krugman's Conscience of a Liberal ... to treat the conservative revolution of the 1980s as a ... con game ... put over on a gullible public by the paid agents of corporate and plutocratic power. There is of course something to this story, but I never felt that it was the whole truth. As I got to know the free-market, supply-side crowd,... I did think - and do think - that they held their views in good faith. They were, by and large, willing to argue the merits of their ideas. And they had behind them the authority of a vast academic establishment, ranging from Friedrich von Hayek to Milton Friedman to such contemporaries as Gary Becker and Robert Mundell - all just as nutty in my view. (For those who would be amused by it, my 1990 debate with Friedman on his TV show, "Free to Choose" can be found here. ) ...
Democrats ... abetted the triumph of the right. They mostly stopped arguing over theory. "The age of big government is over!" Bill Clinton declared. Liberals accepted the virtue of balanced budgets, of low tax rates, and of deregulation in many spheres, of leaving the fight against inflation solely in the hands of the Federal Reserve. In alliance with big business, Democratic presidents became aggressive advocates of what they called "free trade" - though it was really just the use of diplomacy for political payola. Democrats and liberals won some policy battles and some elections, and they presided over a prosperous moment. But they did it by selling themselves as Reagan-lite...
The judicial coup of December 2000 that installed Bush and Cheney brought back some of Reagan's men and his most extreme policies - tax cuts for the wealthy, big increases in military spending, aggressive deregulation. But it didn't bring back the ideas. Instead, it became clear that Bush and Cheney had no real ideas, no larger public justification. They cut taxes to enrich their supporters. ... They were willing to have the government spend like a drunken sailor in 2003/4 to boost the economy before the election. They placed lobbyists in charge of the regulators, representing, in every case, the most extreme anti-regulation perspective. ... Under Bush and Cheney, oil and gas, drug companies and defense contractors, insurers and usurers control the government of the United States, and it does what they want. This is the predator state.
What are the chances that we'll actually get guaranteed health care for all?:
Can It Happen Here?, by Paul Krugman, Commentary, NY Times: The draft Democratic Party platform that was sent out last week puts health care reform front and center. “If one thing came through in the platform hearings,” says the document, “it was that Democrats are united around a commitment to provide every American access to affordable, comprehensive health care.”
Can Democrats deliver on that commitment? ... For one thing, we know that it’s economically feasible: every wealthy country except the United States already has some form of guaranteed health care. The ... risk of losing your insurance, the risk that you won’t be able to afford necessary care, the chance that you’ll be financially ruined by medical costs ... would be considered unthinkable in any other advanced nation.
The politics of guaranteed care are also easy, at least in one sense: if the Democrats do manage to establish a system of universal coverage, the nation will love it.
I know ... some pundits claim that the United States has a uniquely individualistic culture, and that Americans won’t accept any system that makes health care a collective responsibility. Those who say this, however, seem to forget that we already have ... Medicare. It’s a program that collects money from every worker’s paycheck and uses it to pay the medical bills of everyone 65 and older. And it’s immensely popular.
There’s every reason to believe that a program that extends universal coverage to the nonelderly would soon become equally popular. Consider ... Massachusetts, which passed a state-level plan for universal coverage two years ago.
The Massachusetts plan has come in for a lot of criticism. ... And its costs are ... higher than expected, mainly because ... there were more people without insurance than anyone realized.
Yet recent polls show overwhelming support for the plan — support that has grown stronger ... despite the new system’s teething troubles. Once a system of universal health coverage exists, it seems, people want to keep it.
So why be nervous about the prospects for reform? Because it’s hard to get universal care established in the first place. There are, I’d argue, three big hurdles.
First, the Democrats have to win the election ... by enough to face down Republicans, who are still, 42 years after Medicare went into operation, denouncing “socialized medicine.”
Second, they have to overcome the public’s fear of change.
Some health care reformers wanted the Democrats to endorse a single-payer, Medicare-type system for all. On the sheer economic merits, they’re right: single-payer would be more efficient than a system that preserves a role for private insurance companies.
But it’s better to have an imperfect universal health care plan than none at all — and the only way to get a universal health care plan ... is to inoculate it against Harry-and-Louise-type claims that people will be forced into plans “designed by government bureaucrats.” So the Democratic platform emphasizes ... that Americans “should have the option of keeping the coverage they have or choosing from a wide array of health insurance plans, including many private health insurance options and a public plan.” We’ll see if that’s enough.
The final hurdle facing health care reform is the risk that the next president and Congress will lose focus. There will be many problems crying out for solutions, from a weak economy to foreign policy crises. It will be easy and tempting to put health care on the back burner...— and then forget about it.
So I’m nervous. The history of the pursuit of universal health care in America is one of missed chances, of political opportunities frittered away. Let’s hope that this time is different. ...
Now that ten years have passed since the Asian financial crisis, what have we learned about capital account liberalization? Eswar Prasad and Raghuram Rajan look at research on this question:
Capital account liberalisation: New thoughts on an old topic, by Eswar Prasad and Raghuram Rajan, Vox EU: It was fashionable in the mid-1990s for mainstream economists of nearly all stripes to recommend capital account liberalisation as an essential step in the process of economic development. Indeed, in September 1997, the governing body of the International Monetary Fund sought to make “the liberalisation of capital movements one of the purposes of the IMF and extend, as needed, the IMF’s jurisdiction …regarding the liberalisation of such movements.” The East Asian financial crisis of the late 1990s, where even seemingly well-managed countries like South Korea were engulfed by massive capital outflows and tremendous currency volatility, raised questions about the wisdom of developing countries opening their capital accounts, and certainly ended all discussion about giving multilateral organisations more of a mandate to push for liberalisation.
Ten years have passed and it is worth re-examining the benefits of openness to international financial flows, now that time has quelled passions and intervening research can shed more light on the debate. Moreover, the increasing desire of investors to look beyond their national borders for higher returns and diversification, as well as the increasing asymmetry in cross-border trade flows, necessitating corresponding financing flows, suggest that this is a particularly apt time to reconsider the issue.
Sunday, August 10, 2008
Robert Shiller, like Alan Greenspan, says we need a "well-articulated policy" to manage the next financial crisis. In particular, we need to update our laws and institutions - he says bankruptcy law is good place to start - to handle the complexities inherent in modern financial markets, and to recognize systemic risk:
Crisis Averted. What of the Next One?, by Robert Shiller, Economic View, NY Times: ...Given the threats posed by the financial crisis, a better framework for dealing with systemic crises is urgently needed. The policies recently instituted by the Treasury and the Federal Reserve to deal with financial crises seem improvised, rather than part of a consistent, well-articulated policy.
There is still a risk that financial dominoes will begin to fall. ...[T]his ... is worth some careful thought. If the Bear Stearns crisis had such a potential for disaster, what will we do if a major hedge fund fails or if several crises happen at once? ... What if the next case is worse? No one in government seems to feel a responsibility for warning about such possibilities and formulating a detailed policy for dealing with them.
Bankruptcy law is a good place to start. After all, the dreaded financial meltdown would amount to a wave of bankruptcies.
Preventing Bear Stearns from becoming the responsibility of the bankruptcy courts was one reason the Fed felt that it had to act so quickly. Current bankruptcy law was not written with the perspective of systemic risk in mind. There is a big problem — a discontinuity in macroeconomic outcomes — when large financial institutions are at the margin between solvency and insolvency. The formal declaration that an important financial institution is insolvent could threaten the whole economy...