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Robert Skidelsky assesses Thatcherism:
Anatomy of Thatcherism, by Robert Skidelsky, Project Syndicate:
Thirty years ago this month, Margaret Thatcher came to power. Although
precipitated by local conditions, the Thatcher (or more broadly the
Thatcher-Reagan) revolution became an instantly recognizable global brand for a
set of ideas that inspired policies to free markets from government
interference. ... But 30 years of hindsight enable us to judge which elements of the
Thatcher revolution should be preserved, and which should be amended in the
light of today's global economic downturn. ...
[B]y the 1970s the pre-Thatcher political economy was in crisis. The
most notorious symptom of this was the emergence of "stagflation"... Something had gone wrong with
the system of economic management bequeathed by John Maynard Keynes. In addition, government spending was on the rise, labor unions were becoming
more militant, policies to control pay kept breaking down, and profit
expectations were falling. It seemed to many as though government's reach had come to exceed its grasp...
Thatcherism emerged as the most plausible alternative to state socialism. ... Yet, despite all the "supply side" reforms introduced by Thatcherite
governments, unemployment has been much higher since 1980 than in the 1950s and
What about inflation targeting? Here, too, the
record since 1980 has been patchy... Nor has Thatcherite policy succeeded in one of its chief aims ― to reduce the
share of government spending in national income. The most one can say is that it
halted the rise for a time. ...
In de-regulating financial markets worldwide, the Thatcher-Reagan revolution
brought about the corruption of money, without improving on the previous growth
of wealth ― except for the very wealthy. ... Furthermore, in unleashing the power of money, the Thatcherites, for all their
moralizing, contributed to the moral decay of the West.
Against these formidable minuses are three pluses. The first is privatization.
By returning most state-owned industries to private ownership, the Thatcher
revolution killed off state socialism. The British privatization program's
greatest influence was in the former communist states, to which it gave the
ideas and techniques needed to dismantle grossly inefficient command economies.
Thatcherism's second success was to weaken trade unions. Set up to protect the
weak against the strong, labor unions had become, by the 1970s, enemies of
economic progress, a massive force of social conservatism. It was right to
encourage a new economy to grow outside these congealed structures.
Finally, Thatcherism put paid to the policy of fixing prices and wages by
central diktat or by tripartite "bargains" between governments, employers, and
trade unions. These were the methods of fascism and communism, and they would,
in the end, have destroyed not just economic, but political, liberty.
Political pendulums often swing too far. In
rebuilding the shattered post-Thatcherite economy, we should be careful not to
revive the failed policies of the past. ...
As long as central government takes responsibility for maintaining a high and
stable level of employment, Keynes thought, most of the rest of economic life
can be left free of official interference. Building a proper division of
responsibility between state and market from this insight is today's main task.
Posted by Mark Thoma on Wednesday, May 20, 2009 at 09:17 PM in Economics, Regulation |
Fighting rather than facilitating structural change is counterproductive:
What Industrial Policy Should Be, by Robert Reich: ...Much of the
industrial Midwest desperately needs new technologies and industries to take the
place of the shrinking U.S. auto industry, and workers who have been (or are
about to be) laid off need help transitioning to those new jobs. Could chunks of
the old auto industry be adapted to producing high-speed rail or, more
generally, highly-efficient people-moving systems of the future or, even more
generally, green technologies that support such systems? Could some of the
billions now slated to fund new non-carbon based energy sources be targeted to
I don't know the answers but I worry no one is
asking these questions. Bailing out the auto companies while forcing them to lay
off tens of thousands of their workers, imposing higher fuel-economy targets on
them, and lending them billions more to meet those new targets seems oddly
unrelated to the large structural transformation the economy must go through. We
need a broader and more imaginative approach to industrial policy -- one that
integrates all the different ways government influences industry, and achieves
overarching public goals.
I find myself uncomfortable with all the talk of industrial policy recently, partly because I'm not always sure the degree to which people foresee the government actually directing industrial activity. The government should step in when there are significant market failures to overcome, and much of the work to combat climate change falls under this heading, including the research and development that is needed to set the stage for the needed transitions. To accomplish this, however, I prefer that the use of incentives to the use of government dictates about precisely how those goals should be attained and by whom. That is, I favor market-based interventions that use incentives to move behavior in the desired direction over the use of government dictates.
But in general - when there are no substantial market failures to worry about - the question is how best to facilitate structural change so as to minimize the cost of the transition without distorting the outcome. What makes it particularly hard this time is that the cyclical unemployment rate is extraordinarily high at the same time substantial structural change is occurring in some industries. That means that finding alternative jobs for workers displaced by the structural change - whether you move the workers to the jobs or the jobs to the workers - is much more difficult than it would be otherwise. I believe the government could do more than it has done in the past to insulate workers from the effects of structural change and to speed the transition, and that it shoul ddo more, but again I would be uncomfortable with the government intervening in a way that distorts the private sector outcome.
Posted by Mark Thoma on Wednesday, May 20, 2009 at 08:42 PM in Economics |
How do social norms form?:
Scholars Create Alliance to Foster Research on Sustainability, Strategy, and
Management, University of Michigan: ...Researchers ... gathered at the Ross
campus ... in the first Alliance for Research on Corporate Sustainability (ARCS)
The increasingly interdisciplinary nature of the
field makes the need for an annual gathering of leading scholars more relevant
today than ever, says Andy Hoffman... "Researchers in economics, strategy, and
public policy need to learn to speak each others' language," Hoffman says. ...
Hoffman cited one example of an Irish government
policy that neatly ties together how different lenses can be useful in studying
the policy and business effects of sustainability efforts. In 2002, the Irish
government tacked a 15-cent fee on plastic grocery bags. Within a year, plastic
grocery bag use dropped by 94 percent.
A straight economist's view could conclude that
pricing works. But Hoffman says there are other things to consider. "A price is
never socially inert," he says. "A social norm formed. One person said using a
plastic grocery bag is on par with wearing a fur coat or not cleaning up after
your dog. How does that norm form?"
A look at the culture of Ireland shows a relatively
young population, which typically makes for a good innovation test bed. There
were no domestic plastic bag manufacturers in Ireland, so there was little
political risk of imposing the fee. ... But unintended consequences arose. Some
consumers started buying plastic trash bags to carry groceries. And so the
research continues. ...
I will have to admit that if I was asked how to discourage the use of some
product, my response would be to find a way to increase its price, a tax or
surcharge, something like that, but I'm not sure I would think about - or even
know where to begin if I did - ways to change the social norm regarding the use
of the product. That's just another way to raise the price and hence discourage
the use of the product, it's a form of a tax, and it's
an interesting one because no money changes hands in the process. We simply have
to be programmed to care what other people think about us, even strangers,
something that seems to be built into our behavior.
At first I thought that might mean that social norms are preferred to taxes
since the desired result is achieved without any transfer of resources, and
because taxes can distort economic outcomes. But social norms can also distort
outcomes since they operate like taxes. For example, a social norm supporting
discrimination would lead to a less than optimal allocation of resources in an
economy and hence would be counterproductive. I can even imagine cases where
taxes could be used to try to offset damaging social norms, though I can't think
of any concrete examples.
But it would be useful to have a better understanding of how social norms and
taxes/fines interact. For example, suppose you want to discourage kids riding in
cars without seat belts. Legislators could pass a law - based upon research
showing its clear benefits - that imposes a fine for anyone caught allowing their kids
to ride in the car without being buckled in. That would certainly have some
effect on behavior, but probably not as much as if it became viewed as
unnecessary endangerment by society generally (perhaps abetted by a billboard
campaign, etc.). The change in the social norm would likely have a much larger
effect on people's behavior. Econometrically, it would look like the imposition
of the fine had a huge effect on seat belt use, but was it the fine itself
that generated the change in social norms, or would the social norms have changed anyway? If the behavior had never been made
illegal in the first place, would attitudes have changed as fast? Was it the change in the norm that caused the tax? When you are
looking at the effect of a tax on behavior, how do you sort all of this out?
Posted by Mark Thoma on Wednesday, May 20, 2009 at 11:17 AM in Economics, Taxes |
Sizing up cities:
Math and the City, by Steven Strogatz: ...The mathematics of cities was
launched in 1949 when George Zipf, a linguist working at Harvard,... noticed
that if you tabulate the biggest cities in a given country and rank them
according to their populations, the largest city is always about twice as big as
the second largest, and three times as big as the third largest, and so on. In
other words, the population of a city is, to a good approximation, inversely
proportional to its rank. Why this should be true, no one knows. ...
Given the different social conditions from country to
country, the different patterns of migration a century ago and many other
variables that you’d think would make a difference, the generality of Zipf’s law
Keep in mind that this pattern emerged on its own.
... Many inventive theorists working in disciplines ranging from economics to
physics have taken a whack at explaining Zipf’s law, but no one has completely
solved it. Paul Krugman ... wryly noted that
“the usual complaint about economic theory is that our models are oversimplified
— that they offer excessively neat views of complex, messy reality. [In the case
of Zipf’s law] the reverse is true: we have complex, messy models, yet reality
is startlingly neat and simple.” ...
Around 2006, scientists started
discovering new mathematical laws about cities that are nearly as stunning as
Zipf’s. ... For instance,... populous ... cities have more gas
stations than smaller ones (of course), but not nearly in direct proportion to
their size. The number of gas stations grows only in proportion to the 0.77
power of population. The crucial thing is that 0.77 is less than 1. This implies
that ... bigger cities enjoy economies of scale. In this sense, bigger is
The same pattern holds for other measures of
infrastructure. Whether you measure miles of roadway or length of electrical
cables, you find that all ... show an exponent between 0.7 and 0.9. Now comes the spooky part. The same law is true for
living things. That is, if you mentally replace cities by organisms and city
size by body weight, the mathematical pattern remains the same.
For example, suppose you measure how many calories
a mouse burns per day, compared to an elephant. ... The relevant law of
metabolism, called Kleiber’s law, states that the metabolic needs of a mammal
grow in proportion to its body weight raised to the 0.74 power.
This 0.74 power is uncannily close to the 0.77
observed for the law governing gas stations in cities. Coincidence? Maybe, but
probably not. There are theoretical grounds to expect a power close to 3/4.
Geoffrey West of the Santa Fe Institute and his colleagues Jim Brown and Brian
Enquist have argued that a 3/4-power law is exactly what you’d expect if natural
selection has evolved a transport system for conveying energy and nutrients as
efficiently and rapidly as possible to all points of a three-dimensional body,
using a fractal network built from a series of branching tubes — precisely the
architecture seen in the circulatory system and the airways of the lung, and not
too different from the roads and cables and pipes that keep a city alive.
These numerical coincidences seem to be telling us
something profound. It appears that Aristotle’s metaphor of a city as a living
thing is more than merely poetic. There may be deep laws of collective
organization at work here, the same laws for aggregates of people and cells. ...
[For more on city size, see:
Why Has Globalization Led to Bigger Cities?, by Edward Glaeser.]
Posted by Mark Thoma on Wednesday, May 20, 2009 at 01:37 AM in Economics |
Posted by Mark Thoma on Wednesday, May 20, 2009 at 12:06 AM in Economics, Links |
This is just for my records:
I also, on occasion, do the Mark Thoma show in Springfield, Illinois.
I've been wondering why most of the hosts who call me are named Mark, or even share my name completely, and if that's the main reason they call (it's definitely the reason I was called in one case). So I was glad when Paul Mann called me to do his show again.
Posted by Mark Thoma on Tuesday, May 19, 2009 at 08:31 PM in Economics, Media |
Michael Perelman discusses Paul Romer's new initiative:
Paul Romer’s Many Hong Kongs, by Michael Perelman: I just got this from
Stewart Brand, who organizes lectures at San Francisco’s Fort Mason. Romer is
suggesting that less developed countries contract with capitalist nations to set
up Hong Kong’s for them. What about the alternative, having capitalist nations
let us set up little socialist republics to demonstrate an alternative system.
This talk was the first public launch of an idea
that Romer has been working on for two years.
His economic theory of history explains phenomena
such as the constant improvement of the human standard of living by looking
primarily at just two forms of innovative ideas: technology and rules.
Technologies rearrange materials with ingenious
recipes and formulas. More people create more technologies, which in turn
generates more people. In recent decades technology has enabled the
“demographic transition” which lowers birthrates and raises income per person
even higher as population levels off.
Rules structure the interactions between people.
As population density increased, the idea of ownership became an important rule.
A supporting rule for managing violations replaced the old idea of deadly
vengeance with awarding damages instead: simply shifting value replaced
destroying value. For the idea of open science, recognition replaced
ownership as the main event, which means that whoever publishes first is most
rewarded, and that accelerates science.
Rules can amplify or stifle technological progress.
China was the world leader in inventing new technologies until about a thousand
years ago, when centralized dynastic rules slowed innovation almost to a stop.
Romer notes that business keeps evolving as new
companies introduce new rule sets. The good ideas are copied, and workers
migrate from failing companies to the new and old ones where the new rules are
working well. The same goes for countries. Starting about 1970,
China took some of the effective rules of Hong Kong (which was managed from afar
by England) and set up four special economic zones along the coast operating as
imitation Hong Kongs. They worked so well that China rolled out the scheme
for the whole country, and its Gross Domestic Product took off. “Hong Kong
was the most successful economic development program in history.”
Romer suggests that we rethink sovereignty (respect
borders, but maybe import administrative control); rethink citizenship (support
residency, but maybe import voice in political affairs); and rethink scale
(instead of focusing on nations, focus on cities—on city states like Hong Kong
Paul Romer proposes that developing countries could
invite instant Hong Kongs—new cities in new locations run by experienced
governments such as Canada or Finland. They would enrich the country where
they are built as special economic zones while also rewarding the distant
government that makes the investment of building the new city state and
installing a set of fair and productive rules. Over time, as with Hong
Kong, the new city is turned over to the host country.
The idea is getting some traction in the developing
world. This summer Romer is going public with a Bridge Cities Institute
website for further exploration and eventual application of the idea.
One miracle of cities is that they sometimes renew
themselves brilliantly. This could be a whole new form of that.
Posted by Mark Thoma on Tuesday, May 19, 2009 at 07:29 PM in Economics |
graph from latest
forecast from the San Francisco Fed. No surprise - they are not expecting a quick
recovery relative to past recessions:
As for the timing, they believe we are past the bottom, and headed back up - slowly - into positive growth by the end of the year:
That's for GDP. To me the forecast seems optimistic, but in any case, employment is unlikely to turn around until many months after output recovers. From the report:
In sum, we expect GDP growth to turn positive by the fourth quarter of this year.
However, we envision a much slower recovery than those of the past four
recessions. In fact, we only expect GDP growth to return to its trend level by
the end of 2010. ...We expect this persistent slack in the economy will result in a peak
unemployment rate of around 9.5 percent and a very slow decline in the rate
during 2010 and 2011.
And again, to me that seems optimistic. Let's hope the forecast is correct, or even understates the speed of recovery, but policymakers must take seriously the possibility that this forecast - as has been generally true for all the forecasts from various sources that have come before it - will have to be revised downward later.
Posted by Mark Thoma on Tuesday, May 19, 2009 at 04:45 PM in Economics |
Paul Krugman says:
Prodigal intellectuals: So I see
Richard Posner has decided that modern conservatism is intellectually
bankrupt. And Bruce Bartlett has a new book saying it’s time to let go of
At one level it’s good to see decent people showing
some intellectual flexibility (Bartlett, in particular, has always come across
as someone with whom one can have honest disagreements.) And yet — why, exactly,
should we listen to people who by their own admission completely missed
the story? I mean, anyone who actually listened to what Newt Gingrich and Dick
Armey were saying in 1994, let alone what passed for thought in the Bush
administration, should have realized long ago that if there ever was an
intellectual basis for modern conservatism, it was long gone.
And the truth is that the Reaganauts were a pretty
grotesque bunch too. Look for the golden age of conservative intellectualism in
America, and you keep going back, and back, and back — and eventually you run up
against William Buckley in the 1950s declaring that blacks weren’t advanced
enough to vote, and that Franco was the savior of Spanish civilization.
So the idea that we should pay any attention to
people who somehow failed to see all this until very late in the game — and, in
the case of Posner (not Bartlett), waited to express their doubts until
conservatism had lost power …
Bruce Bartlett emails:
says nice things about me.
I posted a comment that has not yet appeared saying
that Washington tends to enforce a foolish consistency. If you are someone of
some prominence whose views are known publicly, then everything you have ever
said in the past tends to be projected forward and everything you say today is
projected backward. Any discrepancy potentially brings charges of flip-flopping
or hypocrisy or selling-out or whatever. Certainly, these charges are valid in
many cases, but the simple possibility that circumstances have changed or that
experience or new evidence has caused one to change one’s mind seems never to be
seriously entertained. The result is to force people to stick with positions
they know are wrong because they less fear being foolishly consistent than being
attacked for flip-flopping.
Part of this is the clash of economic and social conservatism and the
inherent conflict between the two groups within the GOP. Social conservatives
are anything but anti-government no matter how much they might want you to think
Gary Becker highlights this:
Continue reading ""Foolish Consistency"" »
Posted by Mark Thoma on Tuesday, May 19, 2009 at 12:30 PM in Economics, Politics |
How will household deleveraging affect consumption? According to this Economic Letter by Reuven Glick and
Kevin Lansing of the San Francisco Fed, it "could
result in a substantial and prolonged slowdown in consumer spending."
The large increase in the leverage ratio for US households over the last ten years is shown in Figure 3. The question is how far the ratio will fall, and how long will it take for it to reach its new level. I believe the fall in this ratio will be slow, and this is one of the reasons I believe the recovery from the recession will be a long, drawn out process (another reason to expect a slow recovery is that unlike some recent recessions, this time the economy cannot go back to where it was prior to the recession, and the structural change that must occur to move resources out of housing and the financial sector and into other, productive uses will take time to bring about):
U.S. Household Deleveraging and Future Consumption Growth, by Reuven Glick and
Kevin J. Lansing, FRBSF Economic Letter: U.S. household leverage, as
measured by the ratio of debt to personal disposable income, increased modestly
from 55% in 1960 to 65% by the mid-1980s. Then, over the next two decades,
leverage proceeded to more than double, reaching an all-time high of 133% in
2007. That dramatic rise in debt was accompanied by a steady decline in the
personal saving rate. The combination of higher debt and lower saving enabled
personal consumption expenditures to grow faster than disposable income,
providing a significant boost to U.S. economic growth over the period.
In the long-run, however, consumption cannot grow faster than income because
there is an upper limit to how much debt households can service, based on their
incomes. For many U.S. households, current debt levels appear too high, as
evidenced by the sharp rise in delinquencies and foreclosures in recent years.
To achieve a sustainable level of debt relative to income, households may need
to undergo a prolonged period of deleveraging, whereby debt is reduced and
saving is increased. This Economic Letter discusses how a deleveraging
of the U.S. household sector might affect the growth rate of consumption going
Continue reading "FRBSF: U.S. Household Deleveraging and Future Consumption Growth " »
Posted by Mark Thoma on Tuesday, May 19, 2009 at 12:42 AM in Economics |
Health care reform legislation must include "a real Medicare-like public
Health Care Cave-In, by Robert Reich: "Don't make the perfect the enemy of
the better" is a favorite slogan in Washington because compromise is necessary
to get anything done. But the way things are going with health care, a better
admonition would be: "Don't give away the store."
Many experts have long agreed that a so-called
"single-payer" plan is the ideal... Not surprisingly, insurance and drug
companies have been dead-set against a single payer for years. And they've so
frightened the public into thinking that "single payer" means loss of choice of
doctor (that's wrong -- many single payer plans in other nations allow choices
of medical deliverers) that politicians no longer even mention it.
On the campaign trail, Barack Obama pushed a
compromise -- a universal health plan that would include a "public insurance
option" resembling Medicare, which individual members of the public and their
families could choose if they wished. This Medicare-like option would at least
be able to negotiate low rates and impose some discipline on private insurers.
But now the Medicare-like option is being taken off
the table. Insurance and drug companies have thrown their weight around the
Senate. And, sadly, the White House -- eager to get a bill enacted in 2009
rather than risk it during the mid-term election year of 2010 -- is signaling
it's open to other approaches. ...
It's still possible that the House could come up
with a real Medicare-like public option and that Senate Dems could pass it under
a reconciliation bill needing just 51 votes. But it won't happen without a great
deal of pressure from the White House and the public. Big Pharma, Big Insurance,
and the rest of Big Med are pushing hard in the opposite direction. And
Democrats are now giving away the store. As things are now going, we'll end up
with a universal health-care bill this year that politicians, including our
President, will claim as a big step forward when it's really a step sideways.
Posted by Mark Thoma on Monday, May 18, 2009 at 12:22 PM in Economics, Health Care |
Is the proposed climate change bill good enough to support, or have compromises watered it down so much that it would be better to hold out in the hopes of getting something better?:
The Perfect, The Good, The Planet, by Paul Krugman, Commentary, NY Times: In
a way, it was easy to take stands during the Bush years: the Bushies and their
allies in Congress were so determined to move the nation in the wrong direction
that one could, with a clear conscience, oppose all the administration’s
Now, however, a somewhat uneasy coalition of
progressives and centrists rules Washington, and staking out a position has
become much trickier. Policy tends to move things in a desirable direction, yet
to fall short of what you’d hoped to see. And the question becomes how many
compromises, how much watering down, one is willing to accept. ...
If we’re going to get real action on climate change
any time soon, it will be via some version of legislation proposed by
Representatives Henry Waxman and Edward Markey. Their bill would limit
greenhouse gases by requiring polluters to receive or buy emission permits, with
the number of available permits — the “cap” in “cap and trade” — gradually
falling over time.
It goes without saying that the usual suspects on
the right have denounced Waxman-Markey: global warming isn’t real, emission
limits will destroy the economy, yada yada. But the bill also faces opposition
from some environmentalists, who are balking at the compromises the sponsors
made to gain political support. ...
Al Gore has praised the bill... A number of
environmental organizations ... have also come out in strong support. But
Greenpeace has declared that it “cannot support this bill in its current state.”
And some influential environmental figures ... oppose the whole idea of cap and
trade, arguing for a carbon tax instead.
I’m with Mr. Gore. The legislation now on the table
isn’t the bill we’d ideally want, but it’s the bill we can get — and it’s vastly
better than no bill at all.
One objection — the claim that carbon taxes are
better than cap and trade — is, in my view, just wrong. In principle, emission
taxes and tradable emission permits are equally effective at limiting pollution.
In practice, cap and trade has some major advantages, especially for achieving
effective international cooperation.
Not to put too fine a point on it, think about how
hard it would be to verify whether China was really implementing a promise to
tax carbon emissions, as opposed to letting factory owners with the right
connections off the hook. By contrast, it would be fairly easy to determine
whether China was holding its total emissions below agreed-upon levels.
The more serious objection to Waxman-Markey is that
... in the first years of the program’s operation more than a third of the ...
emission permits would be handed over at no charge to the power industry.
Now, these handouts wouldn’t undermine the policy’s
effectiveness..., polluters ... still have an incentive to reduce their
emissions, so that they can sell their excess permits to someone else. ... But
handing out emission permits does, in effect, transfer wealth from taxpayers to
industry. So if you had your heart set on a clean program, without major
political payoffs, Waxman-Markey is a disappointment.
Still, the bill represents major action to limit
climate change. ... And by all accounts, this bill has a real chance of becoming
law in the near future. So opponents of the proposed legislation have to ask
themselves whether they’re making the perfect the enemy of the good. I think
After all the years of denial, after all the years
of inaction, we finally have a chance to do something major about climate
change. Waxman-Markey is imperfect, it’s disappointing in some respects, but
it’s action we can take now. And the planet won’t wait.
Posted by Mark Thoma on Monday, May 18, 2009 at 01:11 AM in Economics, Environment, Politics |
Why has women's happiness declined relative to men's?:
The Paradox of Declining Female Happiness, by Betsey Stevenson and
Justin Wolfers, NBER Working Paper No. 14969, May 2009 [open link]:
Abstract By many objective measures the lives of women in the United
States have improved over the past 35 years, yet we show that measures of
subjective well-being indicate that women’s happiness has declined both
absolutely and relative to men. The paradox of women’s declining relative
well-being is found across various datasets, measures of subjective well-being,
and is pervasive across demographic groups and industrialized countries.
Relative declines in female happiness have eroded a gender gap in happiness in
which women in the 1970s typically reported higher subjective well-being than
did men. These declines have continued and a new gender gap is emerging—one with
higher subjective well-being for men.
Posted by Mark Thoma on Monday, May 18, 2009 at 01:09 AM in Academic Papers, Economics |
Not a very flattering write-up of Tim Geithner's management skills:
At Geithner's Treasury, Key Decisions on Hold Many Advisers' Roles Are Undefined
And Others Still Awaiting Confirmation, by David Cho, Washington Post: Seven
weeks after the Treasury Department announced that it was ousting General Motors
chief G. Richard Wagoner Jr. in the federal bailout of the company, he is still
technically on GM's payroll.
Wagoner's removal has been held up because senior
Treasury officials have yet to decide whether he should get the $20 million
severance package that the company had promised him.
The delay is one of many hitches that have slowed a
host of important policy actions in the four months since Timothy F. Geithner
became Treasury secretary. While Geithner has taken dramatic steps to address
flashpoints in the economy, the work of carrying out those policies has bogged
down because critical decisions about how to do so aren't being made...
Government officials, inside the Treasury and out,
say the unresolved issues are piling up in part because of vacancies in the
department's top ranks. But some of the officials also cite the Treasury's
ad-hoc management, which is dominated by a small band of Geithner's counselors
who coordinate rescue initiatives but lack formal authority to make decisions.
Heavy involvement by the White House in Treasury affairs has further muddied the
picture of who is responsible for key issues, the officials add.
One of the department's signature initiatives,
considered vital for getting at the root of the financial crisis, aims at
relieving banks of their toxic assets. But to those familiar with the program,
it remains unclear who will decide some of the practical details, such as
whether foreign firms will be allowed to participate in the funds that buy the
assets. This uncertainty is slowing the rollout of the program, which in any
case has proven daunting to design. Announced in early February, it may not
launch until July, officials say. ...
And in the wake of the public firestorm over
bonuses paid by American International Group, senior Treasury officials have
been meeting several times a week all spring to review, one by one, the payments
to the company's executives. But the time-consuming discussions have never
resolved whether any of the executives should get paid.
Geithner said in interviews that some of the
department's internal difficulties result from the intense pressure on officials
to develop a raft of rescue initiatives in a very short time. ...
Still, some lawmakers and government officials said
Geithner needs to be a stronger manager. ...
Help could soon be on the way. Confirmation
hearings for Neal Wolin, the administration's pick for deputy Treasury
secretary, began a week ago. Treasury staff members have been impressed by the
management skills of former Fannie Mae chief executive Herbert M. Allison Jr.,
who awaits confirmation as Geithner's pick to lead the bailout operations. The
White House is also seeking to bolster the Treasury's ranks by adding former
Clinton press secretary Jake Siewert as counselor to Geithner.
Aside from getting officials into place, Geithner
still needs to define the roles of his senior counselors and delegate some
decisions to lower-ranking officials, several government officials said. ...
Geithner insists he has been tending to his staff,
reaching out across the department in a way his predecessor never did. ... "I
know everyone would like a little more clarity about who's going to be working
for whom, which we are trying to give them," he said. "But in the interim we are
just trying to get stuff done the best we can."
No toxic asset plan until July? I probably don't fully appreciate the
difficulties involved, but that's too long.
Update: Former Treasury official Brad DeLong:
...Let us be clear: until the Senate confirms an Assistant Secretary, there is
no Assistant Secretary to make decisions. Decisions have to go up to the
Secretary--in which case he has to ask one of his six roving counselors what
they think the lay of the land is. And these six counselors cannot by the nature
of their job have portfolios--you would need fifteen of them, and if there were
fifteen of them the Senate would be extremely jealous because they would
effectively be assistant secretaries.
The problem is not Tim. The problem is not Larry. The problem is not the NEC
or the White House. The problem is the Senate.
Posted by Mark Thoma on Monday, May 18, 2009 at 01:07 AM in Economics |
All of the recent discussion about establishing a new
world reserve currency (e.g.,
The Renminbi as the Reserve Currency? and this on the SDR as the Reserve Currency) made me think of this piece by Paul Krugman from many years ago:
Who's Afraid Of The Euro?, by Paul Krugman: I once
attended a conference at which a senior Japanese official made an impassioned
speech about the need to establish the yen as an international reserve currency.
When my turn came, I explained that this was silly; even if the yen did become a
reserve currency, it would make virtually no difference to Japan or to anyone
else. At the end of the session, the moderator thanked me for my
contribution--which, he said, emphasized once again the crucial importance of
the yen's role as a reserve currency. I never figured out whether this was a
case of the translator having trouble with my accent, or whether it was a polite
way of telling me I had said something unacceptable. But I do know that people
almost always attach far more importance to the issue of reserve currencies--the
role of the dollar and its rivals in international trade and finance- -than the
And so it was inevitable that the coming of the
euro --the common European currency that seems set to be introduced next year,
and that may eventually challenge the dollar's dominance--would inspire
irrational fear. Sure enough, a few weeks ago the intellectual fashion victims
at one of those other business magazines ran an editorial entitled "The euro
makes trade a new game." "Thanks to the dollar's role as reserve currency in
world financial markets," they opined, "the U.S. has been able to do what no
other country can-- consistently import more goods than it exports.... The U.S.
owes some $5 trillion to dollar holders abroad, thanks to three decades of trade
deficits." Gosh, what happens if those people switch to euros?
Well, not to worry. It just isn't true that
America's ability to import more than it exports is unique. Since 1980 the U.S.
current- account deficit (which includes services and investment income as well
as goods) has averaged 1.5% of GDP. That's about the same as Britain's average,
less than Canada's 2.2%, and nothing like Australia's 4.2%. These countries paid
for their excess imports the same way we did: by selling foreigners stocks,
bonds, real estate, and so on. The only difference is that because their
deficits were bigger, their debts are also bigger as a share of GDP. Ours, it
turns out, aren't that large--at least on a net basis. While it's true we owe
foreigners about $5 trillion, they owe us more than $4 trillion; the difference
is about $800 billion, or 10% of GDP.
But doesn't the dollar's special role give us some
advantage? Most of the international role of the dollar comes from its use as a
"unit of account"--the measuring stick for international business. When a
Japanese refiner buys Kuwaiti oil, say, the contracts are in dollars. This is a
testament to U.S. economic influence, but flattery aside, it's hard to see what
we get out of it.
What about our ability to borrow in dollars, to
sell dollar- denominated bonds to foreigners? Hey, other countries do that too.
But our debts are in our own currency! So? We still pay interest on them. True,
we could inflate away our foreign debt. But we won't--and if investors thought
we would, they would demand higher interest rates.
Well, then, you may say, surely the international
role of the dollar forces people out there to hold dollars for transaction
purposes. Yes, but not so you'd notice. When Daewoo repays a dollar loan from
Sanwa, it writes a check on its account with some international bank. True, that
bank itself surely maintains an account in New York, backed in part by
non-interest-bearing reserves held at the Fed. So the U.S. does in effect get a
zero-interest loan out of the dollar's international role--but it probably
amounts to only a few billion dollars, small change for an $8 trillion economy.
Where the U.S. does get a significant free ride is
from the willingness of foreigners to accept our currency--actual bills.
Foreigners hold more than $200 billion of American money. Guess what kind of
business requires payments of large sums in cash, by people unconstrained by
official restrictions on possession of foreign exchange? That's right: the
dollar is the world's premier medium of illicit exchange. Every year the U.S.
ships foreigners $15 billion in cash (about 0.2% of GDP), and gets real goods
and services in return. Better not ask what kind.
So the threat to the U.S. from the rise of the euro
is this: five years from now, when wise guys in Vladivostok make offers you
can't refuse, the payoffs may be in 100- euro notes instead of $100 bills. The
loss of such business might cost the U.S. economy as much as 0.1% of GDP.
Somehow, I think we can live with that.
I can't tell for sure what year this was
written, but the MIT page it is on was last changed in August, 1999 (It's April 27, 1998). I'd be interested to know to what extent, if any, his views have changed
since this was written.
Update: I should have also noted this recent Paul Krugman column: China’s Dollar Trap:
...Aside from a late, ill-considered plunge into equities (at the very top of
the market), the Chinese mainly accumulated very safe assets,... U.S. Treasury
bills... T-bills are as safe from default as anything on the planet... But ...
any future fall in the dollar would mean a big capital loss for China. Hence Mr.
Zhou’s proposal to move to a new reserve currency along the lines of the
S.D.R.’s, or special drawing rights, in which the International Monetary Fund
keeps its accounts. ...
S.D.R.’s aren’t real money. They’re accounting units whose value is set by a
basket of dollars, euros, Japanese yen and British pounds. And there’s nothing
to keep China from diversifying its reserves away from the dollar, indeed from
holding a reserve basket matching the composition of the S.D.R.’s — nothing,
that is, except for the fact that China now owns so many dollars that it can’t
sell them off without driving the dollar down and triggering the very capital
loss its leaders fear.
So what Mr. Zhou’s proposal actually amounts to is a plea that someone rescue
China from the consequences of its own investment mistakes. That’s not going to
Posted by Mark Thoma on Sunday, May 17, 2009 at 11:43 AM in Economics, International Finance |
Having made the same points about not pulling back on monetary and fiscal policy too soon, I can
hardly disagree with this call to "avoid a replay of the
policy disasters of 1936-37":
Time to Stop This Train, by Alan Blinder, Commentary, NY Times: Contrary to
what you may have heard from some doomsayers, 2009 is not 1930 redux. ... But
even if another depression is next to impossible, there is still the danger that
next year, or the year after, might turn into 1936. Let me explain.
From its bottom in 1933 to 1936, the G.D.P. climbed
spectacularly (albeit from a very low base), averaging gains of almost 11
percent a year. But then, both the Fed and the administration of Franklin D.
Roosevelt reversed course.
In the summer of 1936, the Fed looked at the large
volume of excess reserves piled up in the banking system, concluded that this
mountain of liquidity could be fodder for future inflation, and began to
withdraw it. This tightening of monetary policy continued into 1937, in a weak
economy that was ill-prepared for it.
About the same time, President Roosevelt looked at
what seemed to be enormous federal budget deficits, concluded that it was time
to put the nation’s fiscal house in order and started raising taxes and reducing
spending. This tightening of fiscal policy transformed the federal budget... — a
swing of four percentage points in a single year. (Today, a swing that large
would be almost $600 billion.)
Thus, both monetary and fiscal policies did an
abrupt about-face in 1936 and 1937, and the consequences were as predictable as
they were tragic. The United States economy, which had been rapidly climbing out
of the cellar from 1933 to 1936, was kicked rudely down the stairs again... The
moral of the story should be clear: Prematurely changing fiscal and monetary
policies ... can be hazardous to the economy’s health.
Wow, we’ve learned a lot since the ’30s, right?
Well, maybe not. For the echoes of 1936 are being heard right now, even before
the current recession hits bottom. If you’ve been paying attention, you know
that a number of critics of the Fed are sounding alarms over the huge stockpile
of excess reserves it has created... The clear inference is that some of it
should be withdrawn before it’s too late.
On the fiscal side, many of President Obama’s
critics are complaining vociferously about the huge federal budget deficits. Try
to ignore, if you can, the sheer hypocrisy of many Congressional Republicans...
But whatever the motives, the worries of today’s deficit hawks sound eerily
reminiscent of Roosevelt in 1936 and 1937.
Fortunately, Mr. Bernanke is a keen student of the
Great Depression who will not allow the Fed to repeat the errors of 1936-37. But
his critics, both inside and outside the Fed, are already branding his policies
as dangerously inflationary, and no Fed chairman wants to be called an
Similarly, I hope and believe that President Obama
will not transform himself from the spendthrift Roosevelt of 1933 to the
deficit-hawk Roosevelt of 1936 — at least not until the economy is back on solid
ground. That said, a growing flock of budget hawks are already showing their
talons. They will have their day — but please, not yet. To avoid a replay of the
policy disasters of 1936-37, both the Fed and our elected officials must stay
the course. ...
We'll see. I'm not as sure as he is that the desire to get health care reform passed this fall won't dominate the need to maintain stimulative policies. One of the big objections to health care reform is how we will pay for it (a preliminary CBO estimate suggests it will cost a little over 1 trillion). Suppose the economy continues to stay recessed and the choice becomes health care reform verus another stimulus package. What will be chosen? What should be chosen? (The answer is that one shouldn't be traded against the other, we should do both since they deal with different problems. One problem is to stabilize the economy in the short-run. The other is to provide health care universally and at the same time rein in health care costs to bring the budget into balance in the longer run. While each stands on its own merits, the politics would be unlikely to allow us to do both, and I'm guessing health care reform will be the administration's first priority.)
Posted by Mark Thoma on Saturday, May 16, 2009 at 02:22 PM in Economics, Fiscal Policy, Monetary Policy, Politics |
Posted by Mark Thoma on Saturday, May 16, 2009 at 12:01 AM in Economics, Links |
Jeff Sachs says the dominance of the dollar should end, and probably will end:
Rethink the Global Money Supply, by Jeffery Sachs, Scientific American: The
People’s Bank of China jolted the financial world in March with a proposal for a
new global monetary arrangement. The proposal ... has much to commend it. ...
President Richard Nixon delinked the
dollar from gold in 1971 (to offset the U.S.’s expansionary monetary policies in
the Vietnam era), and major currencies began to float against one another... But most global trade and financial transactions remained
dollar-denominated, as did most foreign exchange reserves held by the world’s
central banks. The exchange rates of many currencies also remained tightly tied
to the dollar.
This special role of the dollar in the
international monetary system has contributed to the global scale of the current
crisis, which is rooted in a combination of overly expansionary monetary
policies by the Federal Reserve and lax financial regulations. Easy money fed an
unprecedented surge in bank credits, first in the U.S. and then elsewhere, as
international banks funded themselves in the U.S. money markets. As bank loans
flowed into other economies, many foreign central banks intervened to maintain
currency stability with the dollar. The surge in the U.S. money supply was thus
matched by a surge in the money supplies of countries linked to the U.S. dollar.
The result was a temporary worldwide credit bubble...
China has now proposed that ...
nations peg their currencies to a representative basket of others rather than to
the dollar alone. ... U.S. monetary policy would
accordingly lose its excessive global influence...
The U.S. response to the Chinese
proposal was revealing. Treasury Secretary Timothy Geithner initially described
himself as open to exploring the idea; his candor quickly caused the dollar to
weaken in value—which it needs to do for the good of the U.S. economy. That
weakening, however, led Geithner to reverse himself...
Geithner’s first reaction was right.
The Chinese proposal requires study but seems consistent with the long-term
shift to a more balanced world economy in which the U.S. plays a monetary role
more coequal with Europe and Asia. No change of global monetary system will
happen abruptly... We will probably move over time to a world of greater
monetary cooperation within Asia, a rising role for the Chinese yuan, and
greater symmetry in overall world monetary and financial relations.
Posted by Mark Thoma on Friday, May 15, 2009 at 02:41 PM in Economics, International Finance |
Robert Shiller uses his ideas on the role of animal spirits in driving booms
and recessions to cast doubt on the idea that recent sightings of green shoots
portend quick recovery for the economy:
Story Time for the Economy, by Robert J. Shiller, Project Syndicate:
Since hitting bottom in early March, the world’s major stock markets have all
risen dramatically. ... Does this suggest that the world economic crisis is coming to an end? Could
it be that everyone becomes optimistic again at the same time, bringing a quick
end to all our problems?
Speculative booms are driven by psychological feedback. Rising stock prices
generate stories of smart investors getting rich. People become envious of
others’ successes, and begin to wonder if rising prices don’t portend further
increases. A temptation arises to get into the market, even among people who are
fundamentally doubtful that the boom will continue. So rising prices feed back
into more rising prices, and the cycle repeats again and again – for a while.
But one must ask what would sustain such a movement now. There seems to be no
dramatic fundamental news since March other than the price increases themselves.
... The only way world confidence can return dramatically is if our thinking
coordinates around some inspiring story beyond that of the price increases
In my 2009 book with George Akerlof, Animal
Spirits, we describe the ups and downs of a macroeconomy as being substantially
driven by stories. Such narratives, especially those fueled by accessible
human-interest stories, are the thought viruses whose contagion drives the
economy. The contagion rate of stories depends on their relation to feedback,
but plausible stories have to be there in the first place. ...
The stock markets’ rebound since March seems not to be built around any
inspirational story, but rather the mere absence of more really bad news and the
knowledge that all previous recessions have come to an end. At a time when the
newspapers are filled with pictures of foreclosure sales – and even of surplus
homes being demolished – it is hard to see any cause for the markets’ rebound
other than this “all recessions come to an end sooner or later” story.
Indeed, the “capitalists triumphant” story is tarnished, as is our faith in
international trade. So, here is the problem: there isn’t a plausible driver of
a dramatic recovery.
Starting an economic recovery is like launching a new movie: nobody knows how
people will react to it until people actually get to see it and talk about it
among themselves. Our efforts to stimulate the economy should be focused on
improving the script for those stories, making these stories believable again.
This means making capitalism work better, and making it clear that there is
no threat of protectionism. But the rationale must be to get the world economy
out of its current risky situation, not to propel us into yet another
Posted by Mark Thoma on Friday, May 15, 2009 at 01:44 PM in Economics |
Paul Krugman says that if we want to save the planet from global warming, China's participation will be required:
Empire of Carbon, by Paul Krugman, Commentary, NY Times: I have seen the
future, and it won’t work.
These should be hopeful times for
environmentalists. Junk science no longer rules in Washington. President Obama
has spoken forcefully about the need to take action on climate change; the
people I talk to are increasingly optimistic that Congress will soon establish a
cap-and-trade system... And once America acts, we can expect much of the world
to follow our lead.
But that still leaves the problem of China, where I
have been for most of the last week. Like every visitor to China, I was awed by
the scale of the country’s development. Even the annoying aspects — much of my
time was spent viewing the Great Wall of Traffic — are byproducts of the
nation’s economic success.
But China cannot continue along its current path
because the planet can’t handle the strain.
The scientific consensus on ... global warming has
become much more pessimistic over the last few years. ... Why? Because the rate
at which greenhouse gas emissions are rising is matching or exceeding the
worst-case scenarios. And the growth of emissions from China ... is one main
reason for this new pessimism.
China’s emissions, which come largely from its
coal-burning electricity plants, doubled between 1996 and 2006. ... And the
trend seems set to continue: In January, China announced that it plans to
continue its reliance on coal... That’s a decision that, all by itself, will
swamp any emission reductions elsewhere.
So what is to be done about the China problem?
Nothing, say the Chinese. Each time I raised the
issue..., I was met with outraged declarations that it was unfair to expect
China to limit its use of fossil fuels. After all, they declared, the West faced
no similar constraints during its development; while China may be the world’s
largest source of carbon-dioxide emissions, its per-capita emissions are still
far below American levels; and anyway, the great bulk of the global warming that
has already happened is due not to China but to the past carbon emissions of
today’s wealthy nations.
And they’re right. It is unfair to expect China to
live within constraints that we didn’t have to face when our own economy was on
its way up. But that unfairness doesn’t change ... that letting China match the
West’s past profligacy would doom the Earth as we know it.
Historical injustice aside, the ... climate-change
consequences of Chinese production have to be taken into account somewhere. And
anyway, the problem with China is not so much what it produces as how it
produces it. ...
The good news is that the very inefficiency of
China’s energy use offers huge scope for improvement. Given the right policies,
China could continue to grow rapidly without increasing its carbon emissions.
But first it has to realize that policy changes are necessary.
There are hints ... that the country’s policy
makers are starting to realize that their current position is unsustainable. But
I suspect that they don’t realize how quickly the whole game is about to change.
As the United States and other advanced countries
finally move to confront climate change, they will also be morally empowered to
confront those nations that refuse to act. Sooner than most people think,
countries that refuse to limit their greenhouse gas emissions will face
sanctions, probably in the form of taxes on their exports. They will complain
bitterly that this is protectionism, but so what? Globalization doesn’t do much
good if the globe itself becomes unlivable.
It’s time to save the planet. And like it or not,
China will have to do its part.
Posted by Mark Thoma on Friday, May 15, 2009 at 01:19 AM in China, Economics, Environment, Policy |
This shouldn't surprise anyone. The rising cost of health care, not Social Security, is the biggest budget problem:
Health Costs Are the Real Deficit Threat, by Peter Orszag, Commentary, WSJ:
This week confirmed two important facts -- that health-care costs are the key to
our fiscal future, and that even doctors and hospitals agree that substantial
efficiency improvements are possible in how medicine is practiced.
The numbers speak for themselves. The Medicare and
Social Security trustees' reports released this week show that health-care costs
drive our long-term entitlement problem. An example illustrates the point: If
costs per enrollee in Medicare and Medicaid grow at the same rate over the next
four decades as they have over the past four, those two programs will increase
from 5% of GDP today to 20% by 2050. Despite the attention often paid to Social
Security, spending on that program rises much more modestly -- from 5% to 6% of
GDP -- over the same time period. Over the long run, the deficit impact of every
other fiscal policy variable is swamped by the impact of health-care costs.
Spiraling health-care costs are not just some
future abstraction, however. Right now, families across America who have health
insurance are seeing their take-home pay reduced and their household budgets
strained by high costs and spiraling premiums. ... And the growing weight of health costs on state budgets
translates into an inability to make investments in areas such as education,
hindering our overall economic growth.
The good news is that there appear to be
significant opportunities to reduce health-care costs over time without
impairing the quality of care or outcomes. ...
For example, health-care costs vary substantially
across regions of the United States and across hospitals and doctors within a
region -- even for patients with a similar diagnosis. Medicare spending in 2006
varied more than threefold across U.S. regions... The kicker is that Medicare
enrollees in areas with higher spending do not appear to have better health
outcomes... Expenditures in the last six months of life have been shown to be
nearly twice as high for Medicare patients at certain leading academic medical
centers than at others -- again, with no better medical outcomes. Uwe Reinhardt ... put it best: "How can it be that 'the best
medical care in the world' costs twice as much as 'the best medical care in the
The answer is it shouldn't. If we can move our
nation toward the proven and successful practices adopted by lower-cost areas
and hospitals, some economists believe health-care costs could be reduced by 30%
-- or about $700 billion a year -- without compromising the quality of care.
This may all seem academic, but this week a
stunning thing happened: Representatives from some of the most important parts
of the health-care sector ... met with the president and pledged to take
aggressive steps to cut the currently projected growth rate of national
health-care spending by an average of 1.5 percentage points in each of the next
10 years. ...
Health-care costs are already so high and the power
of compound interest so strong that reducing the growth rate by 1.5 percentage
points per year would ... reduce national health
expenditures by more than $2 trillion over the next decade -- and could help to
put roughly $2,500 in the pockets of the average American family every year. ...
How can we move toward a high-quality, lower-cost
system? There are four key steps: 1) health information technology, because we
can't improve what we don't measure; 2) more research into what works and what
prevention and wellness, so that people ...
avoid costs associated with health risks such as smoking and obesity; and 4)
changes in financial incentives for providers so that they are incentivized
rather than penalized for delivering high-quality care.
Already, the administration has taken important
steps in all four of these areas. ... But more must be done ... to ... put the
nation on a sustainable fiscal path and build a new foundation for our economy
for generations to come.
Some people argue that we should solve the (relatively) easier problems first, if we can,
and hence that we should take on Social Security now. But solving problems is
not free, it costs political capital to take on a difficult issue, and that capital should be spent where the
marginal return per dollar spent is the highest. In addition, if using up all your political capital on health care
reform only takes you part to your goal, and hence still means that one more dollar of political capital spent on health care reform -
if you had it - would still yield a higher return than spending it on Social
Security reform, then Social Security reform should not enter the picture at
all. All of your effort should be devoted to health care reform where the return is the highest.
In any case, the political cost of reforming Social Security is very high and the returns are low (because the problem is not very big), so the highest return per dollar of political capital
spent is in health care reform, not reforming Social Security, and until that
changes health care reform is where our efforts ought to be.
[Note: In more wonkish terms, political capital should be spent where MU/P is
the highest, and we should continue to spend political capital on that type of reform until the
return from spending one more dollar falls below the return from spending it
somewhere else. In equilibrium, of course, MUA/PA = MUB/PB = ..., unless, as
above, we are at a corner solution and spend everything on one of the goods.]
Obama Says U.S. Long-Term Debt Load ‘Unsustainable’, by Roger Runningen and Hans
Nichols, Bloomberg: President Barack Obama, calling current deficit spending
“unsustainable,” warned of skyrocketing interest rates for consumers if the U.S.
continues to finance government by borrowing from other countries.
“We can’t keep on just borrowing from China,” Obama said at a town-hall
meeting ... outside Albuquerque. “We have to pay interest on that debt, and that
means we are mortgaging our children’s future with more and more debt.”
Holders of U.S. debt will eventually “get tired” of buying it, causing
interest rates on everything from auto loans to home mortgages to increase,
Obama said. “It will have a dampening effect on our economy.”
The president pledged to work with Congress to shore up entitlement programs
such as Social Security and Medicare and said he was confident that the House
and Senate would pass health-care overhaul bills by August.
“Most of what is driving us into debt is health care, so we have to drive
down costs,” he said. ...
Health Care Leaders Say Obama Overstated Their Promise to Control Costs: Health care leaders said they promised gradual spending cuts, not the $2 trillion over 10 years the president has cited.
Posted by Mark Thoma on Friday, May 15, 2009 at 12:32 AM in Economics, Health Care |
Here's an update on what's been happening to prices for commercial property:
MIT Commercial Property Price Index Continues Fall [also]: Transaction prices of
commercial property sold by major institutional investors fell by almost 6
percent in the first quarter of 2009, according to an index developed and
published by the MIT Center for Real Estate.
The 5.8 percent drop in the
transactions-based index (TBI) for the first quarter is the fourth consecutive
quarterly drop and the sixth in the past seven quarters. The index is now 21
percent below where it was a year ago and 26 percent below its mid-2007 peak —
comparable to the 27 percent drop the index experienced in the previous major
commercial property downturn in the late 1980s and early 1990s.
“It’s possible that the first quarter
of 2009 was the nadir in market sentiment” said Professor David Geltner,
director of research at the MIT Center for Real Estate. “Sales volume is down
almost to nothing, as reflected in our demand index that indicates the prices
buyers are willing to pay fell a record 12 percent in the first quarter and is
now 28 percent below a year ago and 39 percent below its mid-2007 peak,” Geltner
The MIT/CRE publishes not only the
price index based on closed deals, but also compiles indices that separately
gauge movements on the demand side and the supply side of the market that it
tracks. The demand-side index tracks the changes in prices that potential buyers
are willing to pay (sometimes called a “constant-liquidity” index of the market,
because it tracks how much prices would have to change to keep a constant
ability to sell as many properties at the same rate of trading volume). That
index has now fallen steadily for all of the past seven quarters. In contrast,
the supply-side index reflecting what deep-pocket institutional owners of
commercial properties are willing to sell for, actually rose slightly, by about
1 percent, in the first quarter. “This type of disconnect between the supply and
demand sides of the market, with demand-side sentiment plunging and property
owners refusing to sell into such losses, is greater than we have ever seen
before, and is very nearly removing every bit of liquidity from the market”,
said Geltner. ...
David Geltner Commentary on 1Q2009 TBI
Results: ...We have reached levels of
illiquidity in the institutional commercial property market that I would never
have imagined possible in the 21st century. ... However, the peak this time was
very high and sharp, and it remains to be seen whether commercial property
prices will fall down as low in absolute terms as they hit in the
early/mid-1990s. Even after adjusting for inflation, the TBI is currently down
only to its price level of early 2005, which as I recall seemed pretty high to
most of us at that time. ...
Posted by Mark Thoma on Thursday, May 14, 2009 at 01:27 PM in Economics |
We should waterboard Cheney to get the truth about what happened regarding the interrogations. He says it's not torture, there's no lasting damage, and it works, so what are we waiting for? I want the ad revenue from the live broadcast.
I can't believe we are allowing the torture debate to be redefined to be about whether it works, and who knew what when. No matter who knew about it, or when they knew about it, it was wrong and those responsible - Republican or Democrat, whomever - need to be held accountable. Actually, I can't believe we are debating torture at all. If you had told me prior to the Bush administration that we'd be debating the use of torture today, I would have laughed and thought you were nuts. The whole debate still feels surreal. Are people really arguing that torture is not torture, and that it works?
The truth, however ugly it might be, is the only way forward. Obama's refusal to release pictures and other information on the interrogations because it might lead to pressure on him to seek the truth and interfere with other items on his agenda, or whatever his reason is for this decision, is indefensible.
No matter how much I'd like to see Cheney on the waterboard telling us whatever we want to hear to make it stop, I grew up believing we were better than that, that even if torture did work the United States would never, ever do that. There was never any need to debate whether we had crossed the torture line because we were nowhere near it. I know we were never as pure as we believed, that we didn't always live up to our ideals, but this? We may not have always lived up to our view of ourselves, but we didn't abandon the underlying moral principles. What a disappointment.
Posted by Mark Thoma on Thursday, May 14, 2009 at 12:19 PM in Iraq and Afghanistan, Terrorism |
Tim Duy says "the green shoots story has been overplayed," and the Fed - despite its worries about inflation - is likely to pursue additional easing:
Not So Green Wednesday, by Tim Duy: Federal Reserve policymakers are working overtime to temper expectations of additional quantitative easing. From Bloomberg:
The Federal Reserve considers the recent jump in Treasury yields more as a reflection of a better economic outlook than a signal it needs to step up purchases of U.S. government debt, according to central bank officials who declined to be identified.
This follows Federal Reserve Chairman Ben Bernanke's efforts to discredit the idea that 3% is a magic number:
The move above 3% isn’t fundamentally important, [Bernanke] suggested. “We are not targeting a particular interest rate” with the long term Treasury note purchase program, he said.
The confusion over the Fed's policy intentions stems from the now familiar conflict between what the Fed defines as "credit easing" and what market participants define as "quantitative easing." The latter requires some quantitative goal, something the Fed acknowledges. But no such target has been defined, nor has the Fed committed to a 3% rate. This is something of a failure of Fed communications - they cannot adequately define their policy intentions to a group of market participants yearning for the simple target rates they have come to expect. But committing to a rate target would rob policymakers of a signal that the economy was improving. Former Fed Governor Lyle Gramley:
The situation poses a “dilemma” for the Fed, because if the rise in yields reflects “erroneous market views” about the economy, it will hold back growth, said former Fed Governor Lyle Gramley. “The Fed is probably scratching its head at the moment and will wait and not react until the smoke clears,” said Gramley, who is now a senior economic adviser with New York-based Soleil Securities Corp.
And no doubt there is still plenty of smoke. So much, in fact, that practitioners are extremely at odds over what signal we should get from the Taylor Rule. From Bloomberg:
Continue reading "Fed Watch: Not So Green Wednesday" »
Posted by Mark Thoma on Thursday, May 14, 2009 at 01:23 AM in Economics, Fed Watch, Monetary Policy |
Nouriel Roubini is worried that the dollar will lose its status as a reserve
currency if we don't change our ways:
Renminbi?, by Nouriel Roubini, Commentary, NY Times: ...While the dollar’s
status as the major reserve currency will not vanish overnight, we can no longer
take it for granted. Sooner than we think, the dollar may be challenged by other
currencies, most likely the Chinese renminbi. This would have serious costs for
America, as our ability to finance our budget and trade deficits cheaply would
The... downfall of the dollar may be only a matter of time. But what could replace it? The British pound, the
Japanese yen and the Swiss franc remain minor reserve currencies, as those
countries are not major powers. Gold is still a barbaric relic whose value rises
only when inflation is high. The euro is hobbled by concerns about the long-term
viability of the European Monetary Union. That leaves the renminbi. ...
At the moment,... the renminbi is far from
ready to achieve reserve currency status. China would first have to ease
restrictions on money entering and leaving the country, make its currency fully
convertible for such transactions, continue its domestic financial reforms and
make its bond markets more liquid. It would take a long time for the renminbi to
become a reserve currency, but it could happen. ...
We have reaped significant financial benefits from
having the dollar as the reserve currency. In particular, the strong market for
the dollar allows Americans to borrow at better rates. We have thus been able to
finance larger deficits for longer and at lower interest rates, as foreign
demand has kept Treasury yields low. We have been able to issue debt in our own
currency rather than a foreign one, thus shifting the losses of a fall in the
value of the dollar to our creditors. Having commodities priced in dollars has
also meant that a fall in the dollar’s value doesn’t lead to a rise in the price
of imports. ...
This decline of the dollar might take more than a
decade, but it could happen even sooner if we do not get our financial house in
order. ... For the last two decades America has been spending more than its
income, increasing its foreign liabilities and amassing debts that have become
unsustainable. A system where the dollar was the major global currency allowed
us to prolong reckless borrowing.
Now that the dollar’s position is no longer so
secure, we need to shift our priorities. This will entail investing in our
crumbling infrastructure, alternative and renewable resources and productive
human capital — rather than in unnecessary housing and toxic financial
innovation. This will be the only way to slow down the decline of the dollar,
and sustain our influence in global affairs.
Posted by Mark Thoma on Thursday, May 14, 2009 at 01:17 AM in Economics, International Finance |
William Easterly says Dani Rodrik has things backwards:
How ethnic profiling explains Dani Rodrik’s fondness for industrial policy, by
William Easterly: Airline passengers
recently ejected an innocent Muslim family from an airplane because they
were afraid the family were terrorists. Similar reasoning explains why Dani
Rodrik favors industrial policy as a key to success.
Before getting overly critical of Dani, whom I
admire a lot, let me confess I have frequently committed the same type of
reasoning error myself, and so does virtually everyone else. But it’s still
All of us are making the amazingly common mistake
of REVERSING CONDITIONAL PROBABILITIES. The airline passengers perceived from
media coverage that the probability that IF you are a terrorist, THEN you are a
Muslim is high. Unfortunately for the poor family, the passengers confused this
with the relevant probability, which is the chance that IF you are a Muslim,
THEN you are a terrorist (which is extremely low even if the first probability
really is high, because terrorists are very rare).
here is Dani Rodrik on success and industrial policy: “the countries that
have produced steady, long-term growth during the last six decades are those
that relied on a different strategy: promoting diversification into manufactured
… goods” (cited in
So Dani concludes, “What matters [for growth in
developing countries] is their output of modern industrial goods” and that
developing countries will have to get busy with “real industrial policies.”
Finally, “external policy actors (for example, the World Trade Organization)
will have to be more tolerant of these policies.”
Unfortunately, Dani is also REVERSING CONDITIONAL
PROBABILITIES. Dani’s evidence is based on what he believes is the high
probability that IF you have had steady growth for six decades, THEN you had
industrial policy. This is interesting, but this is not the right probability in
deciding whether to choose industrial policy, which is “IF you have industrial
policy, THEN what is your chance of steady growth for six decades?”
This second, correct, probability would seem to be
pretty low, since many other countries -- especially African and Latin American
-- extensively tried industrial policies over the past six decades with low and
erratic growth as a result. Attempts at forcing investments into
industrialization led to a huge pileup of debt in Latin America in the 1970s,
which erupted into a debt crisis in 1982 and subsequent lost decades, when the
productivity of the investments proved to be low. The more extreme results in
Africa include the Ajaokuta steel mill in Nigeria which went through $6 billion
but never produced a bar of steel, or Tanzanian manufacturing, which had
NEGATIVE growth of output per worker despite heavy capital investments. (For
more on this see
I am really going through a MAJOR
Kahneman phase about how economists (present company included) misinterpret
data. To all of you who I am tormenting with this stuff, I promise to move on to
something more constructive soon, like maybe another edition of our popular
Notes from the Field.
Update: Dani Rodrik responds. And Bill Easterly replies.
Posted by Mark Thoma on Thursday, May 14, 2009 at 12:45 AM in Economics |
Posted by Mark Thoma on Thursday, May 14, 2009 at 12:03 AM
Time is scarce today, so staying in pass through mode: Here's one more from Dani Rodrik. He argues that the biggest gains within the US
from further trade liberalization would come from liberalizing agricultural
trade, and expanding visa quotas for highly skilled foreign workers:
Where are the largest gains from trade liberalization?, by Dani Rodrik: ...A
society's gains from trade liberalization in different sectors depend on a lot
of things, but as a rule of thumb, it is useful to focus on three things. (Here
I will look at only U.S. policies, leaving aside the question of which
initiatives should be pursued abroad.)
First, how large is the trade restriction (or
subsidy) in question? Economic theory tells us that the gains from
removing a tax or subsidy rise with the square of the wedge. So sectors where
there are large policy interventions are particularly ripe for liberalization,
everything else held constant.
Second, what is the likelihood that the
liberalization will aggravate a pre-existing market imperfection? In the
case of the U.S., the main imperfection I would worry about is technological
externalities. These spillovers are likely to be associated with
activities that employ lots of highly-skilled workers. My rule of thumb
here would be that liberalization that results in the contraction of sectors
that employ such workers is unlikely to generate much gains, and may even be
Third, is the liberalization likely to worsen
income distribution at home? Many economists disregard distributional
concerns (either because they do not think these are important, or else because
they assume other policy instruments are available to deal with equity).
But I do not find this a tenable position. So I would argue that any
potential efficiency gains have to be traded off against potentially adverse
movements in income distribution.
How do these considerations inform the question at
hand, namely the nature of the initiatives the US should make a priority in its
trade policy agenda? ... I can think of two areas of liberalization where
existing barriers are high and do not face the objections that I have considered
First, agriculture. Subsidies and other
trade-distorting measures are rampant in agriculture, especially in crops like
cotton and sugar. It is hard to argue that these activities generate
externalities or that their contraction would be bad for income distribution as
a whole. So this is clearly an area of priority. (Note that I am not
considering the impacts on other countries, which is not my focus here.
The positive impacts abroad are typically
vastly exaggerated, but the domestic benefits are not in question.)
Second, visa restrictions on highly-skilled foreign
workers. The barriers here are large, since we know the visa quotas bind
severely. Allowing more foreign scientists and engineers in will reduce
incentives to outsource technologically-advanced operations abroad, and will
help expand sectors that are likely to generate positive spillovers. The
distributional effects are unlikely to be adverse, as it is the top of the labor
market that will be affected.
So the trade policy initiatives that deserve
priority in the U.S. are: liberalize agricultural trade, and expand visa quotas
for highly skilled foreign workers. Note that the U.S. can do both of these on its own,
and does not need Doha or action on the part of the rest of the world to reap
the gains from these reforms.
Posted by Mark Thoma on Wednesday, May 13, 2009 at 01:47 PM in Economics, International Trade |
Robert Reich reacts to yesterday's report on Social Security and Medicare
The Truth Behind the Social Security and Medicare Alarm Bells, by Robert Reich:
What are we to make of yesterday's report from the trustees of the Social
Security and Medicare trust funds that Social Security will run out of assets in
2037, four years sooner than previously forecast, and Medicare’s hospital fund
will be exhausted by 2017, two years earlier than predicted a year ago?
Reports of these two funds' demise are not new.
Fifteen years ago, when I was a trustee of the Social Security and the Medicare
trust funds ... both funds were supposedly in trouble. But as I learned, the
timing and magnitude of the trouble depended a great deal on what assumptions
the actuary used in his models. As I recall, he then assumed that the economy
would grow by about 2.6 percent a year over the next seventy-five years. But go
back into American history all the way to the Civil War -- including the Great
Depression and the severe depressions of the late 19th century -- and the
economy's average annual growth is closer to 3 percent. Use a 3 percent
assumption and Social Security is flush for the next seventy-five years. ...
Even if you assume Social Security is a problem,
it's ... a tiny problem, as
these things go. Medicare is entirely different. It's a monster. But
fixing it has everything to do with slowing the rate of growth of medical costs
-- including, let's not forget, having a public option when it comes to choosing
insurance plans under the emerging universal health insurance bill. With a
public option, the government can use its bargaining power with drug companies
and suppliers of medical services to reduce prices. And, as I've noted, keep
pressure on private insurers to trim costs yet provide effective medical
Don't be confused by these alarms from the Social
Security and Medicare trustees. Social Security is a tiny problem. Medicare is a
terrible one, but the problem is not really Medicare; it's quickly rising
health-care costs. Look more closely and the real problem isn't even health-care
costs; it's a system that pushes up costs by rewarding inefficiency, causing
unbelievable waste, pushing over-medication, providing inadequate prevention,
over-using emergency rooms because many uninsured people can't afford regular
doctor checkups, and spending billions on advertising and marketing seeking to
enroll healthy people and avoid sick ones.
Posted by Mark Thoma on Wednesday, May 13, 2009 at 10:02 AM in Economics, Health Care, Social Insurance, Social Security |
Dani Rodrik says growth in international trade is likely to slow down, but
that doesn't have to "spell doom for developing countries":
A De-Globalized World?, by Dani Rodrik, Project Syndicate:
It may take a few months or a couple of years, but one way or another the United
States and other advanced economies will eventually recover from today's crisis.
The world economy, however, is unlikely to look the same.
Even with the worst of the crisis over, we are
likely to find ourselves in a somewhat de-globalized world, one in which
international trade grows at a slower pace, there is less external finance, and
rich countries' appetite for running large current-account deficits is
significantly diminished. Will this spell doom for developing countries? Not
[I]t is no surprise that the countries that have
produced steady, long-term growth during the last six decades are those that
relied on ... promoting diversification into manufactured and other "modern"
goods. By capturing a growing share of world markets for
manufactures and other non-primary products, these countries increased their
domestic employment opportunities in high-productivity activities. ...
China exemplified this approach. Its growth was
fueled by an extraordinarily rapid structural transformation toward an
increasingly sophisticated set of industrial goods. In recent years, China also
got hooked on a large trade surplus vis-a-vis the U.S. ― the counterpart of its
undervalued currency. But it wasn't just China. ...
It is now part of conventional wisdom that large
external balances ― typified by the bilateral U.S.-China trade relationship ―
played a major contributing role in the great crash. Global macroeconomic
stability requires that we avoid such large current-account imbalances in the
But a return to high growth in developing countries
requires that they resume their push into tradable goods and services. In the
past, this push was accommodated by the willingness of the U.S. and a few other
developed nations to run large trade deficits. This is no longer a feasible
strategy for large or middle-income developing countries.
So, are the requirements of global macroeconomic
stability and of growth for developing countries at odds with each other? ... There is in fact no inherent conflict, once we
understand that what matters for growth in developing countries is not the size
of their trade surpluses, nor even the volume of their exports. What matters is
their output of modern industrial goods (and services), which can expand without
limit as long as domestic demand expands simultaneously.
Maintaining an undervalued currency has the upside
that it subsidizes the production of such goods; but it also has the downside
that it taxes domestic consumption ― which is why it generates a trade surplus.
By encouraging industrial production directly, it is possible to have the upside
without the downside.
There are many ways that this can be done,
including reducing the cost of domestic inputs and services through targeted
investments in infrastructure. Explicit industrial policies can be an even more
The key point is that developing countries that are
concerned about the competitiveness of their modern sectors can afford to allow
their currencies to appreciate (in real terms) as long as they have access to
alternative policies that promote industrial activities more directly.
So the good news is that developing countries ...
growth potential need not be severely affected as long as ... developing
countries ... substitute real industrial policies for those that operate through
the exchange rate. ...
Posted by Mark Thoma on Wednesday, May 13, 2009 at 02:33 AM in Development, Economics |
I, along with many others, have "suggested that the economic forecasts used
in the tests are not severe enough." (See also Breathing easier after bank stress tests? You shouldn't.) Here's an opposing view from Ken
Beauchemin and Brent Meyer of the Cleveland
How Realistic Were the Economic Forecasts Used in the Stress Tests?, by Ken
Beauchemin and Brent Meyer, FRB Cleveland: The results of the “stress tests”
came out last Thursday, and we can now see what three months of intense scrutiny
of 19 of the countries largest bank holding companies has revealed about the
amount of capital they are likely to need to withstand a worse-than-expected
recession. Since the April 24 release of the Federal Reserve white
paper describing the process, a number of observers have suggested that the
economic forecasts used in the tests are not severe enough, and may result in
insufficient capital requirements.
Regulators tested the banks against two sets of
assumptions for GDP, unemployment, and housing prices. The “baseline” scenario
averaged the February forecasts of real GDP and the unemployment rate from the
Blue Chip Survey, Consensus Forecasts, and the Survey of Professional
Forecasters. The assumptions for house prices followed a path implied by futures
on the Case-Shiller Housing Price Index. The second, “more adverse” scenario
represented a longer and deeper recession than the baseline scenario.
In the baseline case, real GDP falls by 2.0 percent
in 2009 before rebounding to 2.1 percent in 2010; the unemployment rate averages
8.4 percent in 2009 and 8.8 percent in 2010. House prices decline 14.0 percent
in 2009 and fall an additional 4.0 percent in 2010.
The more adverse (but not necessarily “worst-case”
scenario) assumes a sharp 3.3 percent real GDP contraction in 2009 followed by
scant 0.5 percent growth in 2010; the unemployment rate averages 8.9 percent in
2009 and 10.3 percent in 2010. House prices drop 22.0 percent in 2009 and 7.0
percent in 2010.
At the time the assumptions were determined, the
advance estimate on fourth-quarter 2009 real GDP growth was −3.8 percent
(annualized), and the February employment figures were not known. Subsequently,
the Bureau of Economic Analysis slashed the fourth-quarter growth estimate by a
stunning 2.5 percentage points, to −6.3 percent. Given the large downward GDP
revision, an exceptionally rapid deterioration in the labor market, and yet
another large GDP decline (in the first quarter), it is, of course, natural to
question the validity of the bank stress tests. It turns out, however, that the
most recent forecasts remain in line with the two stress-test scenarios.
First, the most recent GDP growth forecasts still
lie within the range covered by the stress-test scenarios. While both the Blue
Chip consensus and Macroeconomic Advisors forecasts dip below the
baseline-scenario projection for 2009 growth of −2.0 percent, they are quite
close to the 2010 baseline and remain firmly within the range between the
baseline and more adverse scenarios in both years. Furthermore, only the Blue
Chip pessimists’ forecast hits the lower bound of the stress-test scenarios in
2009, and it is 0.4 percentage point above the more adverse scenario for 2010.
Second, while rapid deterioration in the labor
market has led to a near-term path for the unemployment rate that will most
likely generate a 2009 average in excess of the 8.4 percent rate assumed by the
baseline scenario, both the most recent Macroeconomic Advisors and Blue Chip
forecasts predict an unemployment rate slightly lower than the 8.9 percent rate
assumed by the more adverse scenario. The forecasts for 2010 are also less dire
than assumed by the more adverse scenario. As the Federal Reserve noted in its
April 24 white paper, “Although the likelihood that unemployment could average
10.3 percent in 2010 is now higher than had been anticipated when the scenarios
were specified, that outcome still exceeds a more recent consensus projection by
professional forecasters for an average unemployment rate of 9.3 percent in
Continue reading ""How Realistic Were the Economic Forecasts Used in the Stress Tests?"" »
Posted by Mark Thoma on Wednesday, May 13, 2009 at 12:48 AM in Economics, Financial System, Regulation |
This is the Dallas Fed's Quarterly Energy Update:
Petroleum Products Rebound as Natural Gas Continues to Slide, by Jackson Thies
and Mine Yücel, FRB Dallas: Although demand for oil remains weak, prices
have rebounded from the lows of the first quarter (Chart 1). As of
early May, the spot price for West Texas Intermediate crude (WTI) was near $54
per barrel, over 25 percent higher than the first quarter average of $42.88. If
economic activity picks up in the latter half of the year, we can expect further
firming in oil prices.
Gasoline Prices Rising
Following oil prices, gasoline prices are off their recent lows on declining
refinery utilization and signs of stabilization in vehicle miles traveled (Chart
2). The onset of the summer driving season and increased travel will put
upward pressure on prices. As of early May, prices are slightly over $2.10 per
gallon, about 9.3 percent higher than the first quarter average, but over 40
percent below year-ago prices.
OPEC Production Held Steady
At the March 15 meeting, OPEC opted to hold production constant but encouraged
member countries to further adhere to quotas. The International Energy Agency
estimates compliance at 83 percent, and with the exception of Nigeria, all
producers exceeding their quotas trimmed production in March (Chart 3).
If OPEC reaches full compliance, it will trim an additional 700,000 barrels per
day from the market.
Continue reading "Energy Update " »
Posted by Mark Thoma on Wednesday, May 13, 2009 at 12:46 AM in Economics, Oil |
Posted by Mark Thoma on Wednesday, May 13, 2009 at 12:42 AM in Economics, Links |
Nothing here causes me to alter my
view that relying upon the goodwill of corporate America as a substitute for government intervention to resolve environmental, foreign
aid, and other problems is not going to work:
Straight Talk about Corporate Social Responsibility, by Robert Stavins:
Critical thinking about “corporate social responsibility” (CSR) is needed,
because there are few topics where discussions feature greater ratios of heat to
light. ... Much of what has been written on this question has
been both confused and confusing. Advocates, as well as academics, have
entangled what ought to be four distinct questions about corporate social
responsibility: may they, can they, should they, and do they.
First, may firms sacrifice profits in the
social interest - given their fiduciary responsibilities to shareholders?
Does management have a fiduciary duty to maximize corporate profits in the
interest of shareholders, or can it sacrifice profits by voluntarily exceeding
the requirements of environmental law? Einer Elhauge, a professor at
Harvard Law School, challenges the conventional wisdom that managers have a
simple legal duty to maximize corporate profits. ...
If a company’s managers decide, for example, to use
“green” inputs, devise cleaner production technologies, or dispose of their
waste more safely, courts will not stop them..., no matter how
disgruntled shareholders may be at such acts of public charity. The reason
is that for all a judge knows, such measures - particularly when they are well
publicized - will add to the firm’s bottom line in the long run by increasing
public goodwill. But this line of argument contradicts the very premise,
since it is based upon the notion that the actions are not sacrificing
profits, but contributing to them.
This leads directly to the second question.
Can firms sacrifice profits in the social interest on a sustainable
basis, or will the forces of a competitive market render such efforts transient
at best? Paul Portney, Dean of the Eller College of Management at the
University of Arizona, notes that for firms that enjoy monopoly positions or
produce products for well-defined niche markets, such extra costs can well be
passed on to customers. But for the majority of firms in competitive
industries - particularly firms that produce commodities - it is difficult or
impossible to pass on such voluntarily incurred costs to customers...,
suggesting that, in the face of competition, such behavior is not sustainable.
This leads to the third question of CSR: even
if firms may carry out such profit-sacrificing activities, and can do so,
should they - from society’s perspective? Is this likely to lead to
an efficient use of social resources? To be more specific, under what
conditions are firms’ CSR activities likely to be welfare-enhancing?
Portney finds that this is most likely to be the case if firms pursuing CSR
strategies are doing so because it is good business - that is, profitable.
Once again, a positive response violates the premise of the question. But
for more costly CSR investments, concern exists about the opportunity costs...
Further, in the case of companies that behave strategically with CSR to
anticipate and shape future regulations, welfare may be reduced if the result is
less stringent standards (that would have been justified).
Finally, do firms behave this way?
Do some firms reduce their earnings by voluntarily engaging in environmental
stewardship? Forest Reinhardt of the Harvard Business School addresses
this question by surveying the performance of a broad cross-section of firms,
and finds that only rarely does it pay to be green. That said, situations
do exist in which it does pay... - examples such as Patagonia and DuPont stand
out - but the empirical evidence does not support broad claims of pervasive
So, where does this leave us? May firms
engage in CSR, beyond the law? An affirmative though conditional answer seems
appropriate. Can firms do so on a sustainable basis? Outside of
monopolies and limited niche markets, the answer is probably negative. Should
they carry out such beyond-compliance efforts, even when doing so is not
profitable? Here - if the alternative is sound and effective government policy
- the answer may not be encouraging. And the last question - do firms
generally carry out such activities - seems to lead to a negative assessment, at
least if we restrict our attention to real cases of “sacrificing profits in the
But definitive answers to these questions await the
results of rigorous, empirical research. ...
Posted by Mark Thoma on Tuesday, May 12, 2009 at 09:36 AM in Economics, Environment |
Nicholas Gruen says that while the "collaborative web ... can’t be easily explained within economists’ standard
framework," Adam Smith "would have
Adam Smith and Web 2.0, by Nicholas Gruen: History plays tricks on us.
The real internet revolution picked up after the internet bubble had burst.
And the economist whose framework helps most in thinking about the internet
revolution is none other than Adam Smith, who kicked off economics more than
200 years ago.
The internet boom involved companies using the net to broadcast to
customers — like ads on TV — or to automate the sales process: for instance,
with customers booking their own airline tickets or ordering books. Today
Web 2.0, or collaborative web, is enabling armies of volunteers to build a
better world. Some are building and giving away public goods such as
open-source software (Linux and Firefox) and reference resources
(Wikipedia). Others provide expert analysis and commentary on blogs, often
surpassing professional journalists. Others, such as Facebook, connect
people with something in common.
These phenomena can’t be easily explained within economists’ standard
framework, in which economic decision-makers are reduced to the ideal type
known in the trade as homo economicus. Homo economicus is a pure,
calculating egoist optimising his profit or “utility” without regard for
others’ views or conduct (except where they’re useful to his ends).
Homo economicus might not explain which films we see or with
whom we socialise. But a theory’s job is to highlight some aspects of
reality — by leaving out others. When you make investments or haggle for a
car or house, you’re probably doing the best homo economicus
impression you can.
Even here, however, something’s seriously wrong. We’re socially
comparative beings. We care deeply about the conduct, opinions and values of
our peers, using comparisons with them to orient our own ideas about what we
need or value and how wealthy we want or need to be. As for the subtler
aspects of our economy, from the motivation of employees to those amazing
things Web 2.0 is bringing forth, well, homo economicus doesn’t
seem to get close to what’s going on.
Enter Adam Smith’s Theory of Moral Sentiments, published 250
years ago last month, a book he intended partly as a theoretical foundation
for his later economics. As Smith sees it, we
begin our lives as blobs of infantile egoism — infans economicus,
if you like. But from then on Smith sees the process that we now call
socialisation deepening and transforming us.
We learn from our immediate family, on whom we are utterly dependent,
that some things win their approval and admiration, others their disapproval
and even disgust. Our craving of approval and dread of disapproval and our
ability to understand others by imagining ourselves in their shoes draw us
into a lifelong dialectical social drama.
In modern economics, the attraction of great power, fame or wealth is
simple greed for more. Smith’s richer psychology offers a more plausible
explanation. “(T)o what purpose is all the toil and bustle of this world?”
Smith asks. What human drive lies behind avarice and ambition?
Is it to supply the necessities of nature?
The wages of the meanest labourer can supply them. To be observed, to be
attended to, to be taken notice of with sympathy, complacency, and
approbation, are all the advantages which we can propose to derive from it.
It is the vanity, not the ease or the pleasure, which interests us.
Smith was an advocate of self-interest in human affairs, but in a much
richer, more interesting way than is usually thought. In advocating a larger
role for self-interest, Smith identified the public goods that are
prerequisites for self-interest becoming socially constructive. Within
economics the invisible hand only works in a peaceful, lawful society, and
with strong, free competition.
Within society more generally, self-interest becomes a rich ethical meal,
not the morally anorectic egoism of homo economicus. Our natural
sociality enriches and educates our self-interest. Craving esteem and
imagining ourselves as others see us, we gain some objective appreciation of
our own moral worth. And this is ultimately a spur towards virtue as we
strive to be worthy of the esteem we crave (although, of course, as we are
mere mortals there is much stumbling on our journey).
Web 2.0 is scaling up the scope for human sociality and opening up new
vistas for the expression of self-interest. And yet profit-seeking is only a
small part of how that self-interest is manifesting itself.
The way we express our self-interest on Web 2.0 is something new, and
also as old as humanity itself. Why do millions of us blog? For the same
reason we talk and write emails, text messages, instant messages and letters
(remember them?). We do it to communicate feelings, ideas, needs and
experiences with others who might understand us. They might even write back!
Whether it’s the evolution of language itself or the evolution of culture
and social mores, people’s interaction like this builds communities of
shared meaning and understanding.
Even Smith’s description of a market was inherently social — he toyed
with the idea that the fundamental human drive behind bargaining was the
desire we each have to persuade others to see it our way. Smith would have
understood the foundational proposition of an early Web 2.0 credo, “the
cluetrain manifesto” — “Markets are conversations”.
As Web 2.0 burgeons, its denizens pursue their interests like the
merchants in Smith’s Wealth of Nations, posting and commenting on
blogs, making and exchanging programming code and mash-ups of each other’s
content, making connections based on social or practical needs. Some serve
practical needs — perhaps they need some software bug fixed. Others are
“know-alls” proving their superior knowledge. Some express their love of a
And just as the miracle of a healthy market enables the merchant’s
self-interest to serve the common good, so this new alchemy of the web
aggregates individual efforts into freely available public goods. Likewise
this unruly mix of motives gives us glimpses of our better selves. To use
Smith’s description of the psychology of ambition, it lures us on our quest
for an “easy empire over the affections of mankind”, which is a hint, a
tease calling us on a quest for a more distant and difficult destination —
Posted by Mark Thoma on Tuesday, May 12, 2009 at 01:20 AM in Economics, History of Thought, Weblogs |
Turning Which Corner, by Tim Duy: Is the economy turning a corner? And, if so, which corner is it turning? In my view, economic activity has been influenced by two separate trends since 2007. One is the structural response to an over-leveraged household sector that pushed the US economy into what was initially a mild recession. The second trend is the sharp cyclical recession that began in earnest in the second half of 2008 as the commodity price shock decimated already weakened households and the deepening credit crunch cut financing for a broad swath of firms. Excess capacity emerged throughout the economy, triggering the familiar phenomenon of rising unemployment. Difficult though they may be, the cyclical dynamics do not last indefinitely - generally speaking, output declines stop well short of zero GDP and unemployment will not rise to 100%. Market participants are rightly anticipating the economy is turning the corner on the cyclical trend. But I suspect we have a long path ahead of us on the structural challenge poised by overleveraged households - suggesting that the green shoots we hear so much about will yield little more than stunted growth. This is why Bernanke and Co. are more likely to fertilize the fields than plan for the next harvest.
If there is one picture that sums up the cyclical story of the past year, it is the path of real consumption:
Continue reading "Fed Watch: Turning Which Corner?" »
Posted by Mark Thoma on Monday, May 11, 2009 at 03:24 PM in Economics, Fed Watch, Monetary Policy |
When this value is high, and the overall level of unemployment is low, I think we can reasonably argue that it is a sign of a healthy, dynamic economy. No surprise, but right now the ratio is at its lowest value since 1980.
Posted by Mark Thoma on Monday, May 11, 2009 at 03:13 PM in Economics, Unemployment |
Mathew Yglesias explains that the importance of today's announcement that
major health organizations believe it possible to reduce the escalation in
health care costs is the effect the announcement may have on how the CBO scores
savings from the health care plan:
The Significance of Today’s Health Care Announcement, by Mathew Yglesias:
Jonathan Cohn wax enthusiastic about the news that representatives for the
nation’s major health care provider organizations ... will come to the White
House and announce that they believe it’s possible to achieve $2 trillion
in cost savings over ten years without compromising patient care. Ezra Klein is
more skeptical, worrying that these groups haven’t really made any firm
commitments to anything in particular.
But the real import of today’s event isn’t in its
signal for what industry insiders may do in the future, it’s for the
Congressional Budget Office. The main impediment to a health care deal, at this
point, is cost. The up-front costs are large. To cover these costs, the Obama
administration proposed several exceedingly reasonable tax changes, focused on
curbing deductions for high-income taxpayer. This is
the most economically efficient possible way of raising revenue, so
naturally congressional Democrats rejected it out of hand.
That means that to make the costs work, it’s going
to be necessary to rely on reform’s inherent potential to wring some of the
massive waste out of the system. The problem here is that the CBO has been
reluctant to “score” such savings in its official account of the bill. As Igor
Volsky emphasizes, this industry statement
an important challenge to that CBO reluctance:
Early reports indicate that the signers ... hope to contain costs by
implementing “aggressive efforts to prevent obesity, coordinate care, manage
chronic illnesses and curtail unnecessary tests and procedures; by standardizing
insurance claim forms; and by increasing the use of information technology, like
electronic medical records.”
The industry is suggesting that these cost containment measures — which don’t
score too well with the Congressional Budget Office — would in fact yield cost
savings and help finance health reform. The letter ...
takes on the
CBO, whose models are likely under-scoring the savings from reforms.
Whatever kind of backstabbing these industry groups
may or may not do in the future, they won’t be able to take back the fact that
once upon a time they stood beside the White House in agreeing that it’s
possible to achieve massive cost-savings without compromising patient care. That
argument may well prove hugely important, politically, to getting a package
The idea is to pay for reform in part through the CBO scoring procedure, but
if CBO won't recognize anticipated savings, then this strategy doesn't work and
reform would have to be paid for by raising taxes instead, something congress is
reluctant to do. The hope is that today's announcement from health industry
representatives that cost savings are possible will change the CBOs willingness
to score these cost savings. If the cost savings don't actually materialize
later, then some way of making up for the increased costs will have to be found,
but for the moment the focus is on getting a bill through congress (this is also
the motivation for the administration's recent announcement of the intent to
raise 210 billion over 10 years by changing the rules on the use of offshore tax
havens, the saving would be used to offset the cost of health care reform).
Update: Ezra Klein:
Is it All about the CBO?, by Ezra Klein: It's true that legislators are very
concerned that the Congressional Budget Office won't score likely savings. That
will mean the bill's total price tag is higher and the legislation is harder to
pay for. But this letter doesn't obviate that problem. It doesn't even change
it. The issue isn't that a CBO price tag is credible, and so you need another
credible price tag if you want to argue against it. It's that the CBO number is
one used by the budget committees, and so if health care is going to pass under
pay-go rules -- and my understanding is that it will -- then you have to find
revenues that match whatever CBO says the cost is. The revenues can't just match
what the industry says the cost is. For much more on the importance of
CBO and the price tag it selects, read
The other option here is something called "directed
scoring." Under this scenario, Congress would essentially order the CBO to score
health reform in a certain way. I know that some quarters are discussing this
possibility, but I don't think most people believe you can get very far with it.
More on this later.
Posted by Mark Thoma on Monday, May 11, 2009 at 10:03 AM in Economics, Health Care, Policy |
Paul Krugman is pleased with developments in health care reform:
Harry, Louise and Barack, by Paul Krugman, Commentary, NY Times: Is this the
end for Harry and Louise?
Harry and Louise were the fictional couple who appeared in advertisements run
by the insurance industry in 1993, fretting about what would happen if
“government bureaucrats” started making health care decisions. The ads helped
kill the Clinton health care plan, and have stood, ever since, as a symbol of
the ability of powerful special interests to block health care reform.
But ... this
time the medical-industrial complex ... is offering to be
helpful. Six major industry players ... sent a letter to President Obama sketching out a plan to control health care
costs. What’s more, the letter implicitly endorses much of what administration
officials have been saying about health economics.
Are there reasons to be suspicious about this gift? You bet... But
... on the face of it, this is tremendously
The signatories of the letter say that they’re developing proposals to help
the administration achieve its goal of shaving 1.5 percentage points off the
growth rate of health care spending. That may not sound like much, but ... that
... would save $2 trillion over the next decade.
How are costs to be contained? There are few details, but the industry has
clearly been reading Peter Orszag, the budget director.
In his previous job,... director of the Congressional Budget Office, Mr.
Orszag argued that America spends far too much on some types of health care with
little or no medical benefit, even as it spends too little on other types of
care, like prevention and treatment of chronic conditions. Putting these
together, he concluded that “substantial opportunities exist to reduce costs
without harming health over all.”
Sure enough, the health industry letter talks of “reducing over-use and
under-use of health care by aligning quality and efficiency incentives.” It also
picks up a related favorite Orszag theme, calling for “adherence to
evidence-based best practices and therapies.” All in all, it’s just what the
doctor, er, budget director ordered.
Before we start celebrating, however... Is
this gift a Trojan horse? After all, several of the organizations that sent that
letter have in the past been major villains when it comes to health care policy.
... Remember that what the rest of us call health care costs, they call
What’s presumably going on here is that key
interest groups have realized that health care reform is going to happen no
matter what they do, and that aligning themselves with the Party of No will just
deny them a seat at the table. ...
I would strongly urge the Obama administration to hang tough in the
bargaining ahead. In particular,... on cost control...: giving Americans the choice of buying into a public insurance plan as an
alternative to private insurers. The administration should not give in on this
But let me not be too negative. The fact that the medical-industrial complex
is trying to shape health care reform rather than block it is a tremendously
good omen. It looks as if America may finally get what every other advanced
country already has: a system that guarantees essential health care to all its
And serious cost control would change everything, not just for health care,
but for America’s fiscal future. As Mr. Orszag has emphasized, rising health
care costs are the main reason long-run budget projections look so grim. Slow
the rate at which those costs rise, and the future will look far brighter.
I still won’t count my health care chickens until they’re hatched. But this
is some of the best policy news I’ve heard in a long time.
Posted by Mark Thoma on Monday, May 11, 2009 at 12:50 AM in Economics, Health Care |
Susan Woodward and Robert Hall have advice for policymakers:
Financial policy: Looking forward, by Woodward and Hall: Washington is
turning its attention to the future, having put out most of the financial fires.
The crisis seems to be over, but questions remain about how to manage
under-capitalized banks and, especially, how to design a financial system for
the future that is more robust to adverse shocks. With fiscal stimulus in place
and no likelihood of more, financial policy by the Fed and the Treasury is the
only active possibility for further action to offset the recession.
The current state of the economy The stock
market thinks that the economy is turning around, and the financial press
greeted last Friday’s payroll report with a positive spin, for once. But the
news is not good. ...
Apart from the successful effort to prevent the
collapse of the financial system, the primary financial action to offset the
recession has been the Fed’s adoption of an interest-rate target for interbank
lending of essentially zero. Rates on short-term safe assets–Treasury
obligations and private instruments enjoying explicit or implicit government
guarantees–are close to zero. But, sadly, rates actually paid by most private
decision makers are almost as high, or in some cases higher, than before the
recession began. ...
The notion that monetary policy has been highly
expansionary–promoted by those looking only at safe government (Treasury)
interest rates and at the volume of bank reserves–is plainly incorrect. Rather,
higher interest rates are discouraging spending and production.
Continue reading ""Financial Policy: Looking Forward"" »
Posted by Mark Thoma on Monday, May 11, 2009 at 12:39 AM in Economics, Financial System, Policy |
This is a welcome change. I've long been an advocate of stepped up enforcement of antitrust law, mostly because of the economic consequences of monopoly power. But the financial crisis has caused me to realize how much political power comes with dominance in the marketplace, and that is another reason to take a more aggressive approach to antitrust enforcement:
Administration Plans to Strengthen Antitrust Rules, by Stephen Labaton, NY Times:
President Obama’s top antitrust official this week plans to restore an
aggressive enforcement policy against corporations that use their market
dominance to elbow out competitors or to keep them from gaining market share. The new enforcement policy would reverse the Bush
administration’s approach, which strongly favored defendants against antitrust
The head of the Justice Department’s antitrust
division, Christine A. Varney, is to announce the policy reversal in a speech
she will give on Monday... The administration is hoping to encourage smaller
companies in an array of industries to bring their complaints to the Justice
Department about potentially improper business practices by their larger rivals.
Some of the biggest antitrust cases were initiated by complaints taken to the
Ms. Varney is expected to say that the
administration rejects the impulse to go easy on antitrust enforcement during
weak economic times. She will assert instead that severe recessions can
provide dangerous incentives for large and dominating companies to engage in
predatory behavior that harms consumers and weakens competition.
announcement is aimed at making sure that no court or party to a lawsuit can
cite the Bush administration policy as the government’s official view in any
pending cases. ... Ms. Varney is expected to
explicitly warn judges and litigants in antitrust lawsuits not involving the
government to ignore the Bush administration’s policies...
During the Bush administration, the Justice
Department did not file a single case against a dominant firm for violating the
antimonopoly law. Many smaller companies complaining of abusive
practices by their larger rivals were so frustrated by the Bush administration’s
antitrust policy that they went to the European Commission and to Asian
Ms. Varney is expected to say that the Obama
administration will be guided by the view that it was a major mistake during the
outset of the Great Depression to relax antitrust enforcement, only to try to
catch up and become more vigorous later. She will say the mistake enabled many
large companies to engage in pricing, wage and collusive practices that harmed
consumers and took years to reverse.
While Ms. Varney is not expected to mention any
specific companies or industries..., she is aiming at agriculture, energy,
health care, technology and telecommunications companies. She may also be
reviewing the conduct of some in the financial services industry...
Signaling her intent to revive a moribund antitrust
program, she has recruited a collection of senior aides, many of whom are
seasoned antitrust litigators or worked in the Clinton administration and the
Federal Trade Commission and were involved in many prominent cases, including
the one against Microsoft. ...
Posted by Mark Thoma on Monday, May 11, 2009 at 12:35 AM in Economics, Market Failure, Regulation |
Gary Becker says the Republican Party needs to get rid of social conservatives who are
worried about "gays in the military, gay marriage, abortions, cell stem
research, and ... many other issues of this type," and "return to its roots of
skepticism toward governmental actions":
The Serious Conflict in the Modern Conservative Movement, Gary Becker: The
roots of conservatism go back to philosophers of the 17 and 18th centuries, such
as John Locke, David Hume, and Adam Smith. They opposed big government, and
favored private decision-making, primarily because they argued that individuals
were generally better able to protect their interests than could government
officials tied down by bureaucracy and special interests. They claimed further
that making decisions for oneself and suffering the consequences were usually
good for people, even when these decisions led to bad outcomes, because learning
from one's own mistakes helps improve future choices.
Modern conservatism is only partly built on these
roots. Its support of competition and private markets, and hostility to sizable
regulations, is a direct descendant of the classical liberal views, as espoused
for example in Smith's Wealth of Nations. ... To such
conservatives, the present US government's management of the American auto
industry is an invitation to disaster... It would be much better
to have allowed GM and Chrysler several months ago to be reorganized through
bankruptcy proceedings. Classical conservatism would recognize that the
intervention of the Fed and Treasury in the finance sector may be necessary,
given the crisis in that sector, but classical conservatives would look for this
involvement to end as soon as possible.
The other pillars of modern conservatism are
aggressive foreign policy to promote democracy in other countries, and
government actions to further various social goals, such as fewer abortions or
outlawing gay "marriage". These views fit less comfortably in the conservative
tradition that is hostile to big government and skeptical about the use of
government power to override individual decisions. Classical conservatives would
argue that governments are no more effective at interventions internationally or
on social issues than they are on economic matters. So governments should
usually not get involved in such issues, except when its intervention has enough
benefits to compensate for governmental inefficiency and ineffectiveness. This
usually is not the case. ...
The ... Republican Party under the
leadership of Eisenhower and Reagan had a more consistent classical conservative
philosophy... Neither Eisenhower nor Reagan was particularly religious, and they
did not have strong views about gays or abortion rights. The shift in the
attitudes of the Republican Party toward more interventionist views on social
issues, and to some extent also on military involvement to create more
democratic governments in other countries, has created this crisis in
conservatism. Better stated, it has created this crisis in the conservatism of
the Republican Party.
I believe that the best way to restore the
consistency and attractiveness of the conservative movement is for modern
conservatism to return to its roots of skepticism toward governmental actions.
... Such a shift in attitudes would require more flexible approaches toward
hot button issues like gays in the military, gay marriage, abortions, cell stem
research, and toward many other issues of this type. It will not be easy for the
Republican Party to emerge from the doldrums if it cannot embrace such a
consistently skeptical view of government.
Bruce Wilder says: While
Becker is purifying the Republican Party, economists ought to be
purifying the Economics Party, by kicking out Becker and his fellow
Becker's "classical liberalism" is out-dated politics, but, even
worse, it is an Economics of Stupid. The know-nothing Economics
expressed in the hostility of many of his fellow Chicagoans to the
Obama stimulus package ought to be their ticket out of the profession
and into a deserved obscurity.
The U.S. needs a healthy, intelligent conservative party, to
advocate from conservative viewpoints. Democracy needs that, to
function. And, there's no doubt that the Republican Party, at the
moment, is not healthy, and hasn't been for a long time.
But, Becker shouldn't be able to get away with blaming the social
conservatives, who saw very little of their agenda enacted in 30 years
of supporting the Reaganauts. The present collapse of Republican Power
has little to do with their anti-abortion agenda or Michelle Bachman's
craziness or stem cells or Terry Schiavo. It has to do with the abject
failure of Republican foreign policy and, most importantly, economic
The economic policy of Gary Becker's Republican Party has been an
on-going catastrophe for the country. And, that's why the Republican
Party is out of power, and, apparently, down for the count. I don't see
how anyone can blame the social conservatives for that.
Posted by Mark Thoma on Sunday, May 10, 2009 at 10:55 AM in Economics, Politics |