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Saturday, June 30, 2012

'Giving Health Care a Chance to Evolve'

Robert Frank discusses market failures in health insurance markets, and how the president's health care plan helps to overcome them:

Giving Health Care a Chance to Evolve, by Robert Frank, Commentary, NY Times: ...Nearly every economic analysis of the health care industry rests on the observation that individually purchased private insurance is not a viable business model...
The fundamental problem is that ... people ... with serious pre-existing conditions ... are likely to need expensive care. Any company that issued policies to such people at affordable rates would be driven into bankruptcy, its most profitable customers lured away by competitors offering lower rates made possible by selling only to healthy people.
Economists call this the adverse-selection problem. Because of it, unregulated private markets for individual insurance cannot accommodate the least healthy — those who most desperately need health insurance.
Many countries solve this problem by having the government provide health insurance for all. In some, like Britain, the government employs the care providers. Others, like France, reimburse private practitioners — as does the Medicare program for older Americans. ...
Modeled after proposals advanced by the Heritage Foundation, the American Enterprise Institute and other conservative research organizations in the 1990s, the main provisions of the president’s health care law were intended to eliminate the most salient problems associated with the current system. ...
It isn’t that people should buy health insurance because it would be good for them. Rather, failure to do so would cause significant harm to others. Society will always step in to provide care — though in much more costly and often delayed and ineffective forms — to the uninsured who fall ill. To claim the right not to buy health insurance is thus to assert a right to impose enormous costs on others. Many legal scholars insist that the Constitution guarantees no such right. ...
What’s important now is how ... the law will ... extend coverage to tens of millions who now lack it. In addition, new insurance exchanges will provide a broader array of care options. ... The point worth celebrating is that last week’s ruling will at last enable our distinctly dysfunctional health care system to evolve into something better.

[More on market failures in health insurance markets here and here.]

    Posted by on Saturday, June 30, 2012 at 02:34 PM in Economics, Health Care, Market Failure, Politics | Permalink  Comments (129) 

    'Macroeconomics and the Centrist Dodge'

    I think I've made this point repeatedly, though I tend to use the term ideological instead of political, but just in cast the message hasn't gotten through:

    Macroeconomics and the Centrist Dodge, by Paul Krugman: Simon Wren-Lewis says something quite similar to my own view about the trouble with macroeconomics: it’s mostly political. And although Wren-Lewis bends over backwards to avoid saying it too bluntly, most – not all, but most – of the problem comes from the right. ...
    By now, the centrist dodge ought to be familiar. A Very Serious, chin-stroking pundit argues that what we really need is a political leader willing to concede that while the economy needs short-run stimulus, we also need to address long-term deficits, and that addressing those long-term deficits will require both spending cuts and revenue increases. And then the pundit asserts that both parties are to blame for the absence of such leaders. What he absolutely won’t do is endanger his centrist credentials by admitting that the position he’s just outlined is exactly, exactly, the position of Barack Obama.
    The macroeconomics equivalent looks like this: a concerned writer or speaker on economics bemoans the state of the field and argues that what we really need are macroeconomists who are willing to approach the subject with an open mind and change their views if the evidence doesn’t support their model. He or she concludes by scolding the macroeconomics profession in general, which is a nice safe thing to do – but requires deliberately ignoring the real nature of the problem.
    For the fact is that it’s not hard to find open-minded macroeconomists willing to respond to the evidence. These days, they’re called Keynesians and/or saltwater macroeconomists. ...
    Would Keynesians have been willing to change their views drastically if the experience of the global financial crisis had warranted such a change? I’d like to think so – but we’ll never know for sure, because the basic Keynesian view has in fact worked very well in the crisis.
    But then there’s the other side – freshwater, equilibrium, more or less classical macro.
    Recent events have been one empirical debacle after another for that view of the world – on interest rates, on inflation, on the effects of fiscal contraction. But the truth is that freshwater macro has been failing empirical tests for decades. Everywhere you turn there are anomalies that should have had that side of the profession questioning its premises, from the absence of the technology shocks that were supposed to drive business cycles, to the evident effectiveness of monetary policy, to the near-perfect correlation of nominal and real exchange rates.
    But rather than questioning its premises, that side of the field essentially turned its back on evidence, calibrating its models rather than testing them, and refusing even to teach alternative views.
    So there’s the trouble with macro: it’s basically political, and it’s mainly – not entirely, but mainly – coming from one side. Yet this truth is precisely what the critics won’t acknowledge, because that would endanger their comfortable position of scolding everyone equally. It is, in short, the centrist dodge carried over to conflict within economics.
    Do we need better macroeconomics? Indeed we do. But we also need better critics, who are prepared to take the risk of actually taking sides for good economics and against dogmatism.

    Before adding a few comments, I want to be careful to distinguish the "Keynesianism" discussed above from the New Keynesian model. I'll end up rejecting the standard NK model, but in doing so I am not rejecting Keynesian concepts. As Krugman summarizes, these are things like "the concept of the liquidity trap..., acceptance ... that wages are downwardly rigid – and hence that the natural rate hypothesis breaks down at low inflation.

    Let me start by noting that one of the best examples of a  macroeconomic model being rejected that I know of is the New Classical model and its prediction that only unanticipated money matters for real variables such as employment and GDP. At first, Robert Barro and others thought the empirical evidence favored this model, but over time it became clear that both anticipated and unanticipated money matters. That is, the prediction was wrong and the model was rejected (it had other problems as well, e.g. explaining both the magnitude and duration of business cycles).

    However, the response has been interesting, and it proceeds along the political lines discussed above. Some economists just can't accept that money might matter, and therefore that the government (through the Fed) has an important role to play in managing the economy. And unfortunately, they have acted more like lawyers than scientists in their attempts to discredit New Keynesian and other models that have this implication. After all, markets work, and they work through movements in prices, so a sticky price NK model must be wrong. QED.

    Now, it turns out that the New Keynesian model probably is wrong, or at least incomplete, but that's a view based upon evidence rather than ideology. Prior to the crisis, I was a fan of the NK model. Despite what those who couldn't let go of the markets must work point of view argued, I believed this model was better than any other model we had at explaining macroeconomic data. But while the NK model did an adequate job of explaining aggregate fluctuations and how monetary policy will affect the economy in normal times with mild business cycle fluctuations, i.e. from the mid 1980s until recently, it did a downright lousy job of explaining the Great Recession. When it got pushed into new territory by the Great Recession, the Calvo type price stickiness driving fluctuations in the NK model had little to say about the problems we were having and how to fix them.

    Thus, from my point of view the Great Recession rejected the standard version of the NK model. Perhaps the model can be fixed by tacking on a financial sector and allowing financial intermediation breakdowns to impact the real economy -- there are models along these lines that people are working to improve -- we will have to see about that. A more general NK model that has one type of fluctuation in normal times -- the standard price stickiness effects -- and occasional large fluctuations from endogenous credit market breakdowns might do the trick (there were models of this type prior to the recession, but they weren't the standard in the profession, and they weren't well-integrated into the general NK structure). So we may be able to find a more general version of the model that can capture both normal and abnormal times. But, then again, we may not and, as I've said many times, we need to encourage the exploration of alternative theoretical structures.

    But no matter what happens, some economists just won't accept a model that implies the government can do good through either monetary of fiscal policy, and they work very hard to construct alternatives that don't allow for this. There is less resistance to monetary policy, the evidence is hard to deny so some of these economists will admit that monetary policy can affect the economy positively (so long as the Fed is an independent technocratic body). But fiscal policy is resisted no matter the theoretical and empirical evidence. They have their ideological/political views, and any model inconsistent with them must be wrong.

    Update: Noah Smith responds to Paul Krugman here.

      Posted by on Saturday, June 30, 2012 at 11:07 AM in Economics, Macroeconomics, Methodology | Permalink  Comments (61) 

      Have Blog, Will Travel

      Short travel day by train. Next stop: Lindau, Germany for this year's Lindau Nobel Laureate Meeting dedicated to Physics.

      Here's the program for the firsmorning:

      09.00 Plenary Lecture Main Hall
      Brian P. Schmidt: Observations, and the Standard Model of Cosmology
      09.30 Plenary Lecture Main Hall
      John C. Mather: Seeing Farther with New Telescopes
      10.00 Plenary Lecture Main Hall
      George F. Smoot: Mapping the Universe in Space and Time
      11.00 Plenary Lecture Main Hall
      Paul J. Crutzen: Atmospheric Chemistry and Climate in the Anthropocene
      Plenary Lecture
      Main Hall
      Mario J. Molina
      The Science and Policy of Climate Change
      12.00 Plenary Lecture Main Hall
      Ivar Giaever: The Strange Case of “Global Warming”
      12.30 Plenary Lecture Main Hall
      Hartmut Michel: Photosynthesis, Biomass, Biofuels: Conversion Efficiencies and Consequences

      I'm particularly interested in the sessions on climate change.


        Posted by on Saturday, June 30, 2012 at 04:05 AM in Economics, Environment, Travel, Weblogs | Permalink  Comments (16) 

        'Massive Balance Sheet Monetary Policy'

        Miles Kimball:

        Future Heroes of Humanity and Heroes of Japan, by Miles Kimball: ...massive balance sheet monetary policy on the part of the Bank of Japan could put to rest the idea that balance sheet monetary policy doesn’t work. The Bank of Japan has amazing legal authority to print money and buy a wide range of assets, and has the rest of the government actually pushing for easier monetary policy. So they could do it. They just need to buy assets chosen to have nominal interest rates as far as possible above zero in quantities something like 30% or more of annual Japanese GDP. ...
        I spent two weeks at the Bank of Japan in each of May 2008 and May 2009 precisely because I think there is no central bank in the world that could do more to help the world economy as a whole, as well as Japan’s, by improving its monetary policy. I know that some on the Bank of Japan’s monetary policy committee do not think that printing money and buying massive quantities of assets will work. But the value of experimentation in economic policy is vastly underrated: trying a policy of “print money and buy assets” on a massive scale such as 30% or more of the value of annual GDP is the way to find out. And there is no country in the world for which the possible side effect of permanently higher inflation would be more harmless. The Bank of Japan has officially set an inflation target at 1%, which is 1% higher than where Japan is at, and there would be nothing terrible about having a 2% inflation target, like the inflation targets for the Fed and the European Central Bank. So the Bank of Japan should do it. If the Bank of Japan shifts to such a decisive policy, those pushing for this approach on its monetary policy committee will ultimately go down in history as heroes of humanity as well as heroes of Japan. That statement is written with every ounce of seriousness and passion I am capable of.

          Posted by on Saturday, June 30, 2012 at 01:17 AM in Economics, Monetary Policy | Permalink  Comments (82) 

          Links for 06-30-2012

            Posted by on Saturday, June 30, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (48) 

            Friday, June 29, 2012

            'Science' without Falsification

            Bryan Caplan is tired of being sneered at by "high-status academic economists":

            The Curious Ethos of the Academic/Appointee, by Bryan Caplan: High-status academic economists often look down on economists who engage in blogging and punditry. Their view: If you can't "definitively prove" your claims, you should remain silent. 

            At the same time, though, high-status academic economists often receive top political appointments. Part of their job is to stand behind the administration's party line. They don't merely make claims they can't definitively prove; to keep their positions, appointees have to make claims they don't even believe! Yet high-status academic economists are proud to accept these jobs - and their colleagues admire them for doing so. ...

            Noah Smith has something to say about "definitive proof":

            "Science" without falsification is no science, by Noah Smith: Simon Wren-Lewis notes that although plenty of new macroeconomics has been added in response to the recent crisis/depression, nothing has been thrown out...

            Four years after a huge deflationary shock with no apparent shock to technology, asset-pricing papers and labor search papers and international finance papers and even some business-cycle papers continue to use models in which business cycles are driven by technology shocks. No theory seems to have been thrown out. And these are young economists writing these papers, so it's not a generational effect. ...

            If smart people don't agree, it may because they are waiting for new evidence or because they don't understand each other's math. But if enough time passes and people are still having the same arguments they had a hundred years ago - as is exactly the case in macro today - then we have to conclude that very little is being accomplished in the field. The creation of new theories does not represent scientific progress until it is matched by the rejection of failed alternative theories.

            The root problem here is that macroeconomics seems to have no commonly agreed-upon criteria for falsification of hypotheses. Time-series data - in other words, watching history go by and trying to pick out recurring patterns - does not seem to be persuasive enough to kill any existing theory. Nobody seems to believe in cross-country regressions. And there are basically no macro experiments. ...

            So as things stand, macro is mostly a "science" without falsification. In other words, it is barely a science at all. Microeconomists know this. The educated public knows this. And that is why the prestige of the macro field is falling. The solution is for macroeconomists to A) admit their ignorance more often (see this Mankiw article and this Cochrane article for good examples of how to do this), and B) search for better ways to falsify macro theories in a convincing way.

            I have a slightly different take on this. From a column last summer:

            What Caused the Financial Crisis? Don’t Ask An Economist, by Mark Thoma: What caused the financial crisis that is still reverberating through the global economy? Last week’s 4th Nobel Laureate Meeting in Lindau, Germany – a meeting that brings Nobel laureates in economics together with several hundred young economists from all over the world – illustrates how little agreement there is on the answer to this important question.
            Surprisingly, the financial crisis did not receive much attention at the conference. Many of the sessions on macroeconomics and finance didn’t mention it at all, and when it was finally discussed, the reasons cited for the financial meltdown were all over the map.
            It was the banks, the Fed, too much regulation, too little regulation, Fannie and Freddie, moral hazard from too-big-to-fail banks, bad and intentionally misleading accounting, irrational exuberance, faulty models, and the ratings agencies. In addition, factors I view as important contributors to the crisis, such as the conditions that allowed troublesome runs on the shadow banking system after regulators let Lehman fail, were hardly mentioned.
            Macroeconomic models have not fared well in recent years – the models didn’t predict the financial crisis and gave little guidance to policymakers, and I was anxious to hear the laureates discuss what macroeconomists need to do to fix them. So I found the lack of consensus on what caused the crisis distressing. If the very best economists in the profession cannot come to anything close to agreement about why the crisis happened almost four years after the recession began, how can we possibly address the problems? ...
            How can some of the best economists in the profession come to such different conclusions? A big part of the problem is that macroeconomists have not settled on a single model of the economy, and the various models often deliver very different, contradictory advice on how to solve economic problems. The basic problem is that economics is not an experimental science. We use historical data rather than experimental data, and it’s possible to construct more than one model that explains the historical data equally well. Time and more data may allow us to settle on a particular model someday – as new data arrives it may favor one model over the other – but as long as this problem is present, macroeconomists will continue to hold opposing views and give conflicting advice.
            This problem is not just of concern to macroeconomists; it has contributed to the dysfunction we are seeing in Washington as well. When Republicans need to find support for policies such as deregulation, they can enlist prominent economists – Nobel laureates perhaps – to back them up. Similarly, when Democrats need support for proposals to increase regulation, they can also count noted economists in their camp. If economists were largely unified, it would be harder for differences in Congress to persist, but unfortunately such unanimity is not generally present.
            This divide in the profession also increases the possibility that the public will be sold false or misleading ideas intended to promote an ideological or political agenda.  If the experts disagree, how is the public supposed to know what to believe? They often don’t have the expertise to analyze policy initiatives on their own, so they rely on experts to help them. But when the experts disagree at such a fundamental level, the public can no longer trust what it hears, and that leaves it vulnerable to people peddling all sorts of crazy ideas.
            When the recession began, I had high hopes that it would help us to sort between competing macroeconomic models. As noted above, it's difficult to choose one model over another because the models do equally well at explaining the past. But this recession is so unlike any event for which there is existing data that it pushes the models into new territory that tests their explanatory power (macroeconomic data does not exist prior to 1947 in most cases, so it does not include the Great Depression). But, disappointingly, even though I believe the data point clearly toward models that emphasize the demand side rather than the supply side as the source of our problems, the crisis has not propelled us toward a particular class of models as would be expected in a data-driven, scientific discipline. Instead, the two sides have dug in their heels and the differences – many of which have been aired in public – have become larger and more contentious than ever.

            Finally, on the usefulness of microeconomic models for macroeconomists -- what is known as microfoundations -- see here: The Macroeconomic Foundations of Microeconomics.

            Update: See here too: Why Economists Can't Agree, another column of mine from the past, and also Simon Wren-Lewis: What microeconomists think about macroeconomics.

              Posted by on Friday, June 29, 2012 at 07:20 AM in Economics, Macroeconomics, Methodology, Weblogs | Permalink  Comments (55) 

              More on the Economics of the Mandate

              In my discussion of the economics underlying the reason for the mandate (and the penalties needed to enforce it), I talked about the adverse selection problem, but I wish I would have talked about moral hazard as well since that is also part of the problem.

              Under adverse selection, relatively healthy people drop out of insurance pools because they expect their health costs to be less than they would have to pay for insurance. As the relatively healthy people drop out, it raises the average cost of covering people (since the relatively healthy are no longer in the pool), which causes more people to drop out (the ones with expected costs that are now less than the higher premiums), which raises the price again, which causes more people to drop out, and so on until the market breaks down entirely.

              But even healthy people have some chance of catastrophic illness, illness that could be deathly for example, so why wouldn't they purchase insurance in case this happens?

              People know we are a compassionate society, and if they come down with a life threatening disease we will take care of them even if they don't have insurance, i.e. even if moral hazard causes them to shirk the personal responsibility conservatives hold so dear. Thus, relatively healthy people can take a chance and go without insurance secure in the knowledge that they will be treated if something awful happens. Broken bones, catastrophic illness and so on will be covered. But covered by whom? In many cases, the individual will not have sufficient resources to pay for the medical care, it would bankrupt them, so there is no choice but for all of the rest of us to pick up the bill.

              A mandate stops this from happening. It forces those who would take a chance and go without care, those who are relying on all of the rest of us to insure them against large, unavoidable medical costs, to insure themselves against this. That is, it stops this moral hazard behavior. (Essentially, adverse selection is about the average or mean cost, moral hazard is about the variance -- loss of life, for example, can be viewed as a very bad draw that occurs with some probability and imposes very large, perhaps infinite costs.)

              Adverse selection and moral hazard are not mutually exclusive. As you can see, they work together -- people with expected costs lower than premiums drop out knowing they are covered by the rest of us against a bad draw. A mandate, or its equivalent, helps to overcome both of these problems.

                Posted by on Friday, June 29, 2012 at 07:11 AM in Economics, Health Care, Market Failure | Permalink  Comments (66) 

                Paul Krugman: The Real Winners

                The Supreme Court's decision on health care reform does not mark the end of the battle to improve health care in the US:

                The Real Winners, by Paul Krugman, Commentary, NY Times: So the Supreme Court — defying many expectations — upheld the Affordable Care Act, a k a Obamacare. There will, no doubt, be many headlines declaring this a big victory for President Obama, which it is. But the real winners are ordinary Americans...
                How many people are we talking about? You might say 30 million... But ... add in every American who currently works for a company that offers good health insurance but is at risk of losing that job...; every American who would have found health insurance unaffordable but will now receive crucial financial help; every American with a pre-existing condition who would have been flatly denied coverage in many states.
                In short,... the winners from that Supreme Court decision are your friends, your relatives, the people you work with — and, very likely, you. ...
                But what about the cost? Put it this way: the budget office’s estimate of the cost over the next decade ... is about only a third of the cost of the tax cuts, overwhelmingly favoring the wealthy, that Mitt Romney is proposing over the same period. ...
                It’s not perfect, by a long shot — it is, after all, originally a Republican plan... And there will be a long struggle to make it better... But it’s still a big step toward a better — and by that I mean morally better — society.
                Which brings us to the nature of the people who tried to kill health reform — and who will, of course, continue their efforts...
                At one level, the most striking thing about the campaign against reform was its dishonesty. ... And, rest assured, all the old lies and probably a bunch of new ones will be rolled out again...
                But what was and is really striking about the anti-reformers is their cruelty. It would be one thing if, at any point, they had offered any hint of an alternative proposal to help Americans with pre-existing conditions, Americans who simply can’t afford expensive individual insurance, Americans who lose coverage along with their jobs. But it has long been obvious that the opposition’s goal is simply to kill reform, never mind the human consequences. ...
                The point is that this isn’t over — not on health care, not on the broader shape of American society. The cruelty and ruthlessness that made this court decision such a nail-biter aren’t going away.
                But, for now, let’s celebrate. This was a big day, a victory for due process, decency and the American people.

                  Posted by on Friday, June 29, 2012 at 12:33 AM in Economics, Health Care, Politics | Permalink  Comments (63) 

                  Links for 06-29-2012

                    Posted by on Friday, June 29, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (44) 

                    Thursday, June 28, 2012

                    Gagnon: The Fed Shirks Its Duties

                    Joe Gagnon has a guest post at Econbrowser:

                    Guest Contribution: The Fed Shirks Its Duties, by Joseph E. Gagnon: On June 20, 2012, the Federal Reserve System’s Federal Open Market Committee extinguished the last shred of doubt as to whether it intends to achieve its mandated objectives. Despite a substantial markdown of an already inadequate forecast, the Fed did not take any actions that would make it possible to achieve either of its objectives over the foreseeable future. The action that was announced--additional purchases of longer-term Treasuries worth $267 billion--is estimated to reduce the 10-year Treasury yield by no more than 5 to 10 basis points. That is an amount that is lost in the daily fluctuations of the Treasury market and not enough, even in the Fed’s own models, to have an appreciable effect on the economy.
                    For more than two years, the Fed has dragged its feet and resisted the obvious need for more aggressive action. At this point it is not clear that the Fed has the tools it needs to get the best possible outcome without help from fiscal policy. Nevertheless, the Fed has considerable firepower remaining. It should aggressively push down mortgage interest rates and state clearly that it would welcome an inflation rate temporarily above its 2 percent target in order to make faster progress on its employment objective. These measures, discussed below, would substantially improve the economic outlook, even if there is disagreement about whether they are sufficient by themselves. ...

                      Posted by on Thursday, June 28, 2012 at 11:26 AM in Economics, Monetary Policy | Permalink  Comments (39) 

                      The economics of the SCOTUS health care decision

                      Here's my response to the Supreme Court's ruling on health care reform (at CBSNews.com):

                      Health care decision: Why the mandate, or its equivalent, was critical: The Supreme Court ruled today that the health care mandate is a tax, and hence constitutional. A majority of the Justices ruled that the penalty that must be paid if someone refuses to buy insurance is a form of tax that Congress can impose under its taxing power. That is, of course, good news for supporters of health care reform since a mandate, or something like it, is needed to stop health care markets from breaking down due to what economists call an "adverse selection" problem.

                      The intent of the mandate is to overcome this adverse selection problem. Adverse selection, a type of market failure, plagues insurance markets of all types, and health care is no exception. The problem is that providers of health insurance do not have as much information about the health of the people buying the insurance as they have about themselves. The health insurance companies try to overcome this informational disadvantage through check-ups prior to granting coverage, health histories, and other means, but even so individuals are better informed about their current health and their health histories than the insurance companies.

                      As I explained in more detail here, , this can cause health care markets to break down: Here's the core of the argument:

                      "If insurance is offered in this market at somewhere near the average cost of care for the group, people will use the superior information they have about their own health status to determine if this is a good deal for them. All of the people expecting to pay less for health care than the price the companies are asking for the insurance will drop out of the market (the young and healthy for the most part; all that is actually needed is that some people are willing to take a chance and go without insurance). With the relatively healthy people dropping out of the insurance pool, the price of insurance must go up, and when it does, more people drop out, the price goes up again, and this repeats until the market breaks down and nobody (or hardly anybody) can purchase insurance."

                      In order for these markets to work, health insurance must be distributed over a wide variety of people so that the average cost of care will be affordable, and to stop the markets from breaking down. One way to ensure that the pool is broad-based is to require that anyone who might need health care -- i.e. everyone -- purchase health insurance, i.e. through a mandate.

                      A mandate is not the only way to ensure that a broad swathe of the population purchases health insurance in a common pool. For example, subsidies can also encourage many people to enroll. If enough people enroll because of subsidies, it will function much like a mandate. But a mandate along with fines to enforce it is the most effective way to ensure that the pool is large enough, and includes enough people who do not expect significant health care expenditures, to keep the cost of insurance low.

                      Update: More here, on a different but related market failure in health care markets, moral hazard.

                        Posted by on Thursday, June 28, 2012 at 07:58 AM in Economics, Health Care | Permalink  Comments (172) 

                        'Three More Governance Questions for the Fed'

                        Simon Johnson continues his push against conflicts of interest within the Federal Reserve system:

                        Three More Governance Questions for the Fed, by Simon Johnson, Commentary, NY Times: Over the last several weeks on this blog, I have expressed ... concerns about governance arrangements at the Federal Reserve Bank of New York. I have made the specific case for Jamie Dimon, the chief executive of JPMorgan Chase, to step down from the New York Fed's board because of the large, unexpected losses in his bank's London proprietary trading operation - and the fact that these activities and their disclosure are now under investigation by the Fed. ...

                        In addition,... I have three substantive governance concerns for the New York Fed... First and most important, why didn't Mr. Dimon step down from the board of the New York Fed in March 2008, when JPMorgan Chase bought Bear Stearns with financial support provided, in part, by the Fed? ...

                        The authorities worked closely with JPMorgan Chase... JPMorgan's downside risk ... was limited. ... The precise terms of this arrangement were, appropriately, subject to detailed negotiation... How was it appropriate for Mr. Dimon to remain on the board of the New York Fed while this negotiation was going on? ...

                        Second, I would like to raise a question about Stephen Friedman, who was a Class C director of the New York Fed - and chairman during the intense financial crisis period, from January 2008 through early 2009. ...

                        According to the rules established by the Federal Reserve Board,... [there is a] fairly comprehensive ban on holding financial stock... But Mr. Friedman at that time was and still is a senior executive at Stone Point Capital, where ... he is involved in the fund's investment decisions. ... How was Mr. Friedman allowed to own these shares while being a Class C director? ...

                        Mr. Friedman bought Goldman Sachs stock after the company was effectively rescued by the Federal Reserve... I don't understand how a Class C director could have thought it was acceptable to buy any financial services company stock. ...

                        Third, I have a further question about the role of Lee C. Bollinger, the president of Columbia University, who is a Class C director and chairman of the Federal Reserve Bank of New York. ...

                        According to the Federal Reserve Act (Section 4.20): the chairman of a Federal Reserve Bank "shall be a person of tested banking experience." Mr. Bollinger ... does not have banking experience. ... Please explain to me how having Mr. Bollinger as chairman of the New York Fed is consistent with the Federal Reserve Act.

                        Taken together, these three questions raise a much bigger issue. If the intent and letter of the Federal Reserve Act are being followed in some ways and not in others - without proper notification to Congress or written rules available to the public explaining exemptions and exceptions - how exactly does this help maintain the legitimacy of the Federal Reserve System?

                          Posted by on Thursday, June 28, 2012 at 04:50 AM in Economics, Monetary Policy | Permalink  Comments (17) 

                          Links for 06-28-2012

                            Posted by on Thursday, June 28, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (89) 

                            Wednesday, June 27, 2012

                            'A Manifesto for Economic Sense'

                            Paul Krugman and Richard Layard:

                            A manifesto for economic sense, by Paul Krugman and Richard Layard, Commentary, Financial Times: More than four years after the financial crisis began, the world’s major advanced economies remain deeply depressed, in a scene all too reminiscent of the 1930s. The reason is simple: we are relying on the same ideas that governed policy during that decade. These ideas, long since disproved, involve profound errors both about the causes of the crisis, its nature and the appropriate response.
                            These ideas have taken root in the public consciousness, providing support for the excessive austerity of fiscal policies in many countries. ... As a result of their mistaken ideas, many western policy makers are inflicting massive suffering on their peoples. But the ideas they espouse about how to handle recessions were rejected by nearly all economists after the disasters of the 1930s. It is tragic that in recent years the old ideas have again taken root.
                            The best policies will differ between countries and will require debate. But they must be based on a correct analysis of the problem. We therefore urge all economists and others who agree with the broad thrust of this manifesto for economic sense to register their agreement online and to publicly argue the case for a sounder approach. The whole world suffers when men and women are silent about what they know is wrong.

                              Posted by on Wednesday, June 27, 2012 at 01:26 PM in Economics | Permalink  Comments (61) 

                              Laughing at People Who Say Tax Cuts from Present Levels Will/Might Increase Revenue

                              There are two responses to the post below this one on the Laffer curve:

                              Miles Kimball explains why tax cuts are unlikely to increase revenue. This is worth reading.

                              Dave Henderson: Where are we on the Laffer Curve. Henderson says:

                              Cutting marginal tax rates will somewhat increase taxable income. But the odds are very high that it wouldn't increase nearly enough to increase tax revenue.

                              That is, he is asserting we are to the left side of the peak, but he leaves himself wiggle room even though there's little reason to do so based upon the evidence ("odds are very high"). He then says:

                              the question is not whether the Laffer Curve is right. The question is where we are on the Laffer Curve.

                              But he's already answered this question, we're to the left of the peak, or at least "the odds are very high" that we are. I'd be curious to hear what he thinks those odds are, and if they are non-trivial what evidence it is based on. So to me the real question is trying to figure out what point he is trying to make. We're to the left of the peak, almost surely, but the real question is whether we're to the left or right of the peak? Huh? Saying it could be true that tax cuts will increase revenue -- leaving wiggle room -- when all the evidence points in the other direction just gives the politicians and others who say tax cuts from present rates will increase revenue something to hang on to in their ideological battle against taxes. Why give them this opening when the evidence says the opening isn't there?

                              Along the way he tries to take a swipe at me based on play on words in the title -- but his assertion that I deny the existence of a revenue curve, or that it has a peak, is silly. I don't think we are anywhere near the peak (based partly, but only partly, on recent research showing it's near a 70% rate), but where have I ever said no such peak exists? As I said in comments, what I am laughing at is people -- politicians in the GOP in particular -- who still say that if we cut taxes it will increase revenue (and I am disappointed with economists who abet that by saying it could be true, or that the real question is what side of the peak we're on even though, as Henderson admits, that's all but a settled question: "Not one economist surveyed agrees with this claim [that tax cuts will increase revenue within five years]. I don't either." He doesn't agree, but it just might be true? Hmm.).

                              Update: Bryan Caplan also responds: Did the IGM Reject Laffer Optimism or Old-School Keynesianism?

                                Posted by on Wednesday, June 27, 2012 at 08:19 AM in Budget Deficit, Economics, Taxes | Permalink  Comments (35) 

                                Laughing at the Laffer Curve

                                Via the IGM Forum:

                                Question B: A cut in federal income tax rates in the US right now would raise taxable income enough so that the annual total tax revenue would be higher within five years than without the tax cut.



                                Marianne Bertrand, Darrel Duffie, and Claudia Goldin are the disappointing "uncertain" votes out of the many responses to this question. They should listen to Ed Lazear:

                                This is the Laffer curve issue. There is little (if any) evidence that rates exceed revenue-maximizing levels. See Mankiw, Feldstein.

                                Or David Autor:

                                Not aware of any evidence in recent history where tax cuts actually raise revenue. Sorry, Laffer.

                                Or Michael Greenstone:

                                All evidence that I'm aware of suggest that cutting tax rates "marginally" from their current levels would DECREASE revenues, even 5 yrs out

                                Or Kenneth Judd:

                                That did not happen in the past. No reason to think it would happen now.

                                Or Anil Kashyup:

                                May look plausible on a cocktail napkin (or at a cocktail party), but not true empirically in the US.

                                Or Pete Klenow:

                                Not enough time for capital to respond much (physical, human, technology), so it would require implausibly large labor supply elasticities.

                                Or Robert Hall

                                See previous question. In addition, few studies suggest we are already at the max of the Laffer curve, though we may be close.

                                Or Austan Goolsbee:

                                Moon landing was real. Evolution exists. Tax cuts lose revenue. The reasearch has shown this a thousand times. Enough already.

                                There are many people who have an interest in making you believe otherwise, but tax cuts are inconsistent with deficit reduction  -- they make the deficit problem worse.

                                [Update here -- the post that follows this one.]

                                  Posted by on Wednesday, June 27, 2012 at 03:42 AM in Budget Deficit, Economics, Taxes | Permalink  Comments (56) 

                                  The Destructive, Ideological Push for Austerity

                                  Alan Blinder:

                                  Alan Blinder: Stimulus Isn't a Dirty Word, by Alan Blinder, Commentary, NY Times: A debate now rages in Europe over whether fiscal austerity—that is, higher taxes and less spending—helps or hinders growth. ... Events in Europe seem to have dashed that idea. But a similar debate rages here in the U.S.—with the lone exception that our pro-austerity crowd abhors tax increases. ...
                                  Many Democrats, including President Obama, want to help state and local governments maintain their spending, which has now dropped 6.4% since its 2008 peak—and is still falling. Most Republicans reject that idea, even when it saves the jobs of teachers, fire fighters and police officers.
                                  Many Democrats also want to build and repair more roads, bridges, tunnels and the like—taking advantage of the rare combination of historically low government borrowing rates and historically high unemployment among construction workers. Most Republicans reject that idea, too, even though the argument for more public capital is the same as the argument for more private capital—each promotes growth.
                                  Democrats also typically seek a growth strategy that boosts the incomes of the middle class, not just of the top 1%. Many Republicans counter that the most effective way to bolster middle-class incomes is via trickle-down from the rich—who start and grow businesses. ...
                                  Republicans often focus on lowering the top income tax rate. ... But the evidence is against the GOP on this one. ...
                                  Why in the world are we still arguing about this? ... If we are serious about an evidence-based program that spurs growth and improves the lots of average Americans, we should want a near-term jobs program, long-term deficit reduction, more spending on infrastructure, improvements in education, and a tax reform that clears out loopholes, returns to the 39.6% top rate, and protects the middle class.
                                  Which candidate does that remind you of?

                                  Too many members of the press aided and abetted the destructive push toward austerity without seeming to realize that the main driving force behind the austerity movement was ideological, not economics. -- a chance to move toward a reduction in the size of government. Never mind if it's critical services like education, fire, and police services. But the economists who led them to write these stories also deserve quite a bit of the blame (I'd assign all of the blame to the economists pushing for austerity and the harm that came with it, but journalists didn't have to listen to these voices, particularly since they have been largely wrong all along). Many of us were pushing for alternatives policies, aggressive jobs program, infrastructure spending, helping households to rebuild their balance sheets to name just a few (see the article for several more), but to no avail.

                                  Watching all of this happen has been soooo frustrating, far beyond anything I ever would have predicted before the crisis hit. We could have done so much better.

                                    Posted by on Wednesday, June 27, 2012 at 02:07 AM Permalink  Comments (33) 

                                    The Water Project at Ol Pejeta Conservatory

                                    During our visit to El Pajeta with the International Reporting Project, we visited a water collection cooperative. The co-op has 250 members, and they pool resources to purchase water collection kits for each household in the co-op. So far, 78 families have received a kit.

                                    The water collection kits allow households to capture and store rainwater during the rainy season, treat it to keep it safe, and then use the water during the dry season. One of the main causes of child mortality here is water borne illnesses, and the use of water collection devices along with water treatment has cut infant mortality substantially (there were no deaths the last year, which is a welcome change from the past when such deaths were common).

                                    We were being sold the idea the El Pajeta conservancy is doing wonders for the community by helping them purchase the water collection tanks -- the conservancy imposed many costs on these communities when it closed off land to preserve animals. The economics of this is a post in itself, I am not at all convinced that the communities are being anywhere near fully compensated for their losses, but setting that aside it was great to hear the mothers talk about how much the water co-op has done to change their lives (just little things like all the extra time they have to do other things instead of searching for water for hours each day). It also allows these communities to develop democratic instituitons. For example, which families in the co-op should get water first? And once the inswtitutions are in place, they can be used to address other important problems.

                                    This is a bridge, not a long-term solution to the water problem. In the longer run, what's really needed is the infrastructure to deliver water to the local communities. But, at least from what I saw, it does seem to be a relatively effective interim solution.

                                    This was our greeting when we arrived for our visit. I apologize for the video, part way through they made me dance (you can see them laughing at me) and the camera got a bit shaky.

                                    Once we sat down, we heard testimonials from co-op members about how this project has improved their lives  (they stressed that although it is green now -- the rainy season just ended -- in a month or so it will be bone dry, so having water that lasts a month or two, as the tanks do, is extremely helpful).

                                    Here is a small part of what we heard. I almost didn't post this, the wind interferes with the sound and the lighting wasn't great, but it will give you a pretty good idea of what we were told by the women in the co-op:

                                      Posted by on Wednesday, June 27, 2012 at 01:17 AM in Economics, Kenya | Permalink  Comments (7) 

                                      Links for 06-27-2012

                                        Posted by on Wednesday, June 27, 2012 at 12:06 AM Permalink  Comments (66) 

                                        Tuesday, June 26, 2012

                                        The True Meaning of Patriotism

                                        Robert Reich on the unpatriotic attitude of self-labeled "patriots":

                                        Excluding Outsiders or Coming Together for the Common Good: What’s the True Meaning of Patriotism?, by Robert Reich: Recently I publicly debated a regressive Republican who said Arizona and every other state should use whatever means necessary to keep out illegal immigrants. He also wants English to be spoken in every classroom in the nation, and the pledge of allegiance recited every morning. “We have to preserve and protect America,” he said. “That’s the meaning of patriotism.”
                                        To my debating partner and other regressives, patriotism is about securing the nation from outsiders eager to overrun us. ... Yet many of these same regressives have no interest in preserving or protecting our system of government. ... In fact, regressives in Congress have substituted partisanship for patriotism, placing party loyalty above loyalty to America.
                                        The GOP’s highest-ranking member of Congress has said his “number one aim” is to unseat President Obama. For more than three years congressional Republicans have marched in lockstep, determined to do just that. They have brooked no compromise. They couldn’t care less if they mangle our government in pursuit of their partisan aims...
                                        True patriots don’t hate the government of the United States. They’re proud of it. Generations of Americans have risked their lives to preserve it. They may not like everything it does, and they justifiably worry when special interests gain too much power... But true patriots work to improve the U.S. government, not destroy it.
                                        But regressive Republicans loathe the government – and are doing everything they can to paralyze it, starve it, and make the public so cynical about it that it’s no longer capable of doing much of anything. Tea Partiers are out to gut it entirely. ...
                                        When arguing against paying their fair share of taxes, wealthy regressives claim “it’s my money.” But it’s their nation, too. And unless they pay their share America can’t meet the basic needs of our people. True patriotism means paying for America.
                                        So when regressives talk about “preserving and protecting” the nation, be warned: They mean securing our borders, not securing our society. Within those borders, each of us is on our own. They don’t want a government that actively works for all our citizens.
                                        Their patriotism is not about coming together for the common good. It is about excluding outsiders who they see as our common adversaries.

                                          Posted by on Tuesday, June 26, 2012 at 03:33 AM Permalink  Comments (86) 

                                          The Political Empowerment of the Working Class is the Key to Better Employment Policy

                                          A recent column:

                                          The Political Empowerment of the Working Class is the Key to Better Employment Policy, by Mark Thoma: The high unemployment rate ought to be a national emergency. There are millions of people in need of jobs, the lost income as a result of the recession totals hundreds of billions of dollars annually, and the longer the problem persists, the more permanent the damage becomes.

                                          Why doesn’t the unemployment problem get more attention? Why have other worries such as inflation and debt reduction dominated the conversation instead? As I noted at the end of my last column, the increased concentration of political power at the top of the income distribution provides much of the explanation.

                                          Consider the Federal Reserve. Again and again we hear Federal Reserve officials say that an outbreak of inflation could undermine the Fed’s hard-earned credibility and threaten its independence from Congress. But why is the Fed only worried about inflation? Why aren’t officials at the Fed just as worried about Congress reducing the Fed’s independence because of high and persistent unemployment?

                                          Similar questions can be asked about fiscal policy. Why is most of the discussion in Congress focused on the national debt rather than the unemployed? Is it because the wealthy fear that they will be the ones asked to pay for monetary and fiscal policies that mostly benefit others, and since they have the most political power their interests – keeping inflation low, cutting spending, and lowering tax burdens – dominate policy discussions? There was, of course, a stimulus program at the beginning of Obama’s presidency, but it was much too small and relied far more on tax cuts than most people realize. The need to shape the package in a way that satisfied the politically powerful, especially the interests that have captured the Republican Party, made it far less effective than it might have been. In the end, it had no chance of fully meeting the challenge posed by such a severe recession, and when it became clear that additional help was needed, those same interests stood in the way of doing more.

                                          Republican policymakers give us all sorts of excuses for blocking further action to help the unemployed. We are told the problem is structural – there is a geographical or talent mismatch between labor availability and labor needs – and nothing can be done to help. But something can be done. We can help workers move to where the jobs are, encourage firms to locate in areas where workers are readily available, and help with job retraining. If mismatches are really the problem, why aren’t Republicans leading the charge on these policies? If they care about the unemployed rather than the tax burden of the wealthy, then why are they allowing community colleges – one of the best ways we have of providing job training for new and displaced workers – to be gutted with budget cuts?

                                          We are also told that the deficit is too large already, but there’s still plenty of room to do more for the unemployed so long as we have a plan to address the long-run debt problem. But even if the deficit is a problem, why won’t Republicans support one of the many balanced budget approaches to stimulating the economy? Could it be that these policies invariably require higher income households to give something up so that we can help the less fortunate? Tax cuts for the wealthy are always welcome among Republicans no matter how it impacts the debt, but creating job opportunities through, say, investing in infrastructure? Forget it. Even though the costs of many highly beneficial infrastructure projects are as low as they get, and even though investing in infrastructure now would save us from much larger costs down the road – it’s a budget saver not a budget buster – Republicans leaders in the House are balking at even modest attempts to provide needed job opportunities for the unemployed.

                                          The imbalance in political power, obstructionism from Republicans designed to improve their election chances, and attempts by Republicans to implement a small government ideology are a large part of the explanation for why the unemployed aren’t getting the help they deserve. But Democrats aren’t completely off the hook either. Centrist Democrats beholden to big money interests are definitely a problem, and Democrats in general have utterly failed to bring enough attention to the unemployment problem. Would these things happen if workers had more political power?

                                          When we talk about leveling the playing field, it is generally in terms of economic opportunity. However, leveling the political playing field is just as important, and in the past unions provided workers with a powerful voice in the political arena. But unions have largely faded from the scene leaving workers with very little organized power. Correcting the political imbalance this has created through the renewed political empowerment of the working class must be part of any attempt to improve our response to serious recessions.

                                            Posted by on Tuesday, June 26, 2012 at 02:43 AM in Economics, Fiscal Policy, Fiscal Times, Politics, Unemployment | Permalink  Comments (66) 

                                            Fed Watch: Running Silent

                                            Tim Duy:

                                            Running Silent, by Tim Duy: I will soon be boarding a flight on my way to a real vacation. "Real" is defined as the absence of an internet connection, which will be the case for the first part of the trip. Or so I am told by my wife who planned the trip, I suspect, by looking for locations without internet access. More evidence that she is smarter than me.

                                            This week the Federal Reserve will likely be overshadowed by the European summit and the expected Supreme Court ruling on health care, both of which I will miss in real time. Of course, if markets tank on European news and there is a sudden dollar shortage, we would expect the Fed to assist via expanded swap lines. For their part, the Europeans are reaching a critical moment in history. They still have time to walk back from the abyss, but they need to move quickly. Paul Krugman outlines three sensible proposals that offer the most near term hope - shared backing of the banking system, enable the ECB to act as lender of last resort to governments, and a higher inflation target. A real fiscal union is too much to hope for anytime soon.

                                            That said, while the Europeans have the capacity to move forward, the odds are all too high that they will choose to move backwards. At this point, I can't see the latter two proposals seeing the light of day. On the first point, today's comments by German Chancellor Angela Merkel seem pretty clear. Via Bloomberg:

                                            Merkel, speaking to a conference in Berlin today as Spain announced it would formally seek aid for its banks, dismissed “euro bonds, euro bills and European deposit insurance with joint liability and much more” as “economically wrong and counterproductive,” saying that they ran against the German constitution.

                                            The ball is in Germany's court, and they are dropping in it.

                                            In other news, Greece is losing its finance minister:

                                            Incoming Greek Finance Minister Vasilios Rapanos is going to resign after less than a week in office, according to the prime minister’s office.

                                            The cause wasn’t immediately known, although Rapanos was rushed to the hospital on Friday after suffering from abdominal pain. At the time, the hospital released a statement saying he was admitted “because of intense abdominal pains, dizziness, nausea, sweating and weakness.”

                                            Could be symptoms of extreme stress, which would hardly be surprising. Note that Prime Minister Antonis Samaras will also be missing this week's summit for health reasons. It is hard not to suspect that the new Greek government is trying to avoid their European counterparts after getting their hands on the books and realizing that they had no good news for the Troika. It is very possible that the Greek electoral drama over the past two months piled more almost-permanent damage on the Greek economy. Very discouraging; I still have trouble seeing how Greece stays in the Euro, except that there is no mechanism for exit.

                                            Bottom Line: I wish everyone the best managing in this difficult environment. Posting will now be intermittent, depending on internet connection.

                                              Posted by on Tuesday, June 26, 2012 at 02:34 AM Permalink  Comments (4) 

                                              Where is Poverty in the National Agenda?

                                              Daniel Little wonders why poverty isn't a more prominent concern:

                                              Where is poverty in the national agenda?, by Daniel Little: Our elected officials are charged to do their best to create legislation and policies that work best to secure the important life interests of all citizens. Can we take that as a shared assumption? This is how we want it to work, and we feel morally offended when legislators substitute their own wants and opinions for those of the public.

                                              If this is a fair description of the role obligations connected to elected office, then there are some important discrepancies that arise when we look at the actual work that legislators do, both nationally and at the state level. For example, a striking number of legislators bring their own personal and religious convictions into their work. Legislators all too often attempt to draft legislation that furthers their moral opinions on issues like stem cell research, gay marriage, abortion, and even birth control. But given that reasonable and morally grounded people disagree about these issues, how could they possibly be the legitimate object of legislation? Legislation needs to be designed to treat all citizens equally and fairly, so how can the personal moral or religious opinions of the legislator ever be a legitimate foundation for legislation? How is it any different from a legislator who tries to steer a highway project over a particular piece of land in order to favor his own business interests? In each case the legislator is substituting a personal interest for the public interest as a foundation for legislation.

                                              Or how about this puzzle: every state in the country has serious problems of poverty and discrimination. That means that every state has a percentage of its citizens who live under demeaning and impoverishing circumstances. And in many cases this current fact derives from a past history of segregation, discrimination, and unfair treatment. These problems are urgent and pressing. If the responsibility of legislators is to identify and address urgent, pressing problems, they ought to be intensely interested in poverty, discrimination, and racial disparities. So why is it that virtually all governors and state legislators continue to ignore these facts -- even when their own departments of human services are fully able to document the human results of these facts about poverty? Why is it virtually impossible for elected officials to address the facts of racial inequality in American cities? Can we imagine a legislature in Illinois, New York, Florida, or Michigan undertaking a serious debate to decide how best to address racial disparities in the state? And yet -- doesn't the fact that legislators are responsible for preserving and enhancing the quality of life of all citizens simply require honesty and action about these facts?

                                              There seem to be a couple of reasons why that kind of honest debate does not occur. One is the position of relative privilege from which elected officials are usually drawn. It is possible to lose sight of unpleasant truths about your own society when they don't really impinge on your own daily life. And it is possible to tell a story of "progress and problem solving" that succeeds in papering over the unpleasant truths.

                                              Another possible interpretation is a regrettable hard-heartedness that many people have in the face of poverty. "There is nothing to be done; the poor bring their deprivation upon themselves; the poor are different from the rest of us." These attitudes are all too common in our politics, and they often get intertwined with a long history of racialized thinking as well.

                                              I think there is another possibility as well that has more to do with "problem cognition". An honest politician may accurately perceive the human cost of persistent poverty, and he/she might also have a sincerely empathetic response to these perceptions. But this politician may be wedded to a particular theory of social change that leads him or her to discount the systemic features of the poverty he sees. For example, the "jobs, jobs, jobs" mantra may push out other more nuanced theories about how poverty and the inequalities of race can be addressed. If you think that the cause of poverty is simply the unemployment rate, then you may feel justified in ignoring race and paying attention to business growth. but this is a mistake. Racial disparities and inter-generational poverty are created by specific, durable institutions, and they can only be attacked on the basis of intelligent and specific strategies. Trickle-down economics doesn't work for specific segments of America's population.

                                              So how can disadvantaged Americans get the sustained attention of their legislators? How can poverty, segregation, and discrimination get the place on the public agenda they deserve to have? The classic answer offered by American politics is simple: mobilize, elect some legislators if your own, and find ways of challenging those legislators who continue to ignore your issues. There's just one problem with this: there isn't much history of success in the US for poor people's movements. I suppose specialists could offer some reasons for why that would be true -- poor people don't vote, poor people are distributed in small numbers over numerous districts, poor people can be misled by political rhetoric too -- but it's hard too think of parties or majorities who have paid serious attention to poor people's issues. (How much political influence does the homeless guy selling the homeless people's newspaper on Main Street really have?)

                                              So getting government and elected officials to place poverty on the action agenda is hard work, and the officials themselves are unlikely to lead the way. This implies -- to me anyway -- that anti-poverty, anti-racism organizations will need to take the lead. There are such organizations in every city. Are there ways for them to gain more influence?

                                                Posted by on Tuesday, June 26, 2012 at 01:17 AM in Economics, Income Distribution, Politics | Permalink  Comments (30) 

                                                Political Centralization in Africa

                                                 "Maybe Africa needs a different theory of political centralization":

                                                Roots of Political Centralization in Africa, by Daron Acemoglu and James Robinson: Seen from a wider perspective, the development of the strong central state we described in our previous post in Rwanda is anomalous in African history. Though states did form in pre-colonial Africa, for example around the Niger bend in the late middle ages, and in many parts of West, Central and East Central Africa after the 17th century, it is clear that these processes lagged those which took place in Eurasia. One can get some quantitative picture of this via the data coded by Louis Putterman and his collaborators (see this paper).
                                                The lagged development of political centralization in Africa is an important part of the puzzle about why Africa developed less slowly than the rest of the world (see also this paper and this paper).
                                                What can explain this retarded political centralization? Scholars of European political development, notably Charles Tilly in Coercion, Capital and the European State, have advanced several hypotheses which, they claim, can explain the development of European states. Tilly’s boldest claim was “states made war and war made states”. He argued that it was the intense inter-state warfare of Europe which led to political centralization. Other scholars have instead emphasized high population density and trade and commerce.
                                                A natural approach to explaining why political centralization lagged in Africa is therefore to argue that the factors that led to such centralization in Europe were absent in the African continent. Jeffrey Herbst in his book States and Power in Africa did exactly this, arguing that African had not developed powerful centralized states because it had low population density and inter-state warfare was absent.
                                                Is this the right answer to the puzzle? ...[continue reading]...

                                                They don't believe that it is (see the evidence in the graphs they present in the post).

                                                  Posted by on Tuesday, June 26, 2012 at 12:24 AM in Economics, Politics | Permalink  Comments (7) 

                                                  Links for 06-26-2012

                                                    Posted by on Tuesday, June 26, 2012 at 12:06 AM Permalink  Comments (35) 

                                                    Monday, June 25, 2012

                                                    Stiglitz: America is No Longer a Land of Opportunity

                                                    The inequality problem won't solve itself:

                                                    America is no longer a land of opportunity, by By Joseph Stiglitz, Commentary, FT: US inequality is at its highest point for nearly a century. ... One might feel better about inequality if there were a grain of truth in trickle-down economics. But the median income of Americans today is lower than it was a decade and a half ago... Meanwhile, those at the top have never had it so good. ...
                                                    Markets are shaped by the rules of the game. Our political system has written rules that benefit the rich at the expense of others. ... There is good news in this: by reducing rent-seeking ... and the distortions that give rise to so much of America’s inequality we can achieve a fairer society and a better-performing economy. ...
                                                    America used to be thought of as the land of opportunity. Today, a child’s life chances are more dependent on the income of his or her parents than in Europe, or any other of the advanced industrial countries for which there are data. ...
                                                    We can once again become a land of opportunity but it will not happen on its own... The country will have to make a choice: if it continues as it has in recent decades, the lack of opportunity will mean a more divided society, marked by lower growth and higher social, political and economic instability. Or it can recognize that the economy has lost its balance. The gilded age led to the progressive era, the excesses of the Roaring Twenties led to the Depression, which in turn led to the New Deal. Each time, the country saw the extremes to which it was going and pulled back. The question is, will it do so once again?

                                                      Posted by on Monday, June 25, 2012 at 02:47 PM in Economics, Income Distribution, Politics | Permalink  Comments (45) 

                                                      "We Certainly Don't Want to Divide Europe."

                                                      Could have fooled me:

                                                      German Finance Minister Wolfgang Schäuble says "We Certainly Don't Want to Divide Europe."

                                                        Posted by on Monday, June 25, 2012 at 08:37 AM in Economics | Permalink  Comments (52) 

                                                        Paul Krugman: The Great Abdication

                                                        Policymakers need to learn from the past:

                                                        The Great Abdication, by Paul Krugman, Commentary, NY Times: Among economists who know their history, the mere mention of certain years evokes shivers. For example, three years ago Christina Romer ... warned politicians not to re-enact 1937 — the year F.D.R. shifted, far too soon, from fiscal stimulus to austerity, plunging the recovering economy back into recession. Unfortunately, this advice was ignored.
                                                        But now I’m hearing more and more about an even more fateful year. Suddenly normally calm economists are talking about 1931, the year everything fell apart.
                                                        It started with a banking crisis in a small European country (Austria). Austria tried to step in with a bank rescue — but the ... rescue put the government’s own solvency in doubt. Austria’s troubles shouldn’t have been big enough to have large effects on the world economy, but in practice they created a panic that spread around the world. Sound familiar?
                                                        The really crucial lesson of 1931, however, was about the dangers of policy abdication. Stronger European governments could have helped... Central banks ... could have done much more to limit the damage. But [those] with the power to contain the crisis ... declared that it was someone else’s responsibility.
                                                        And it’s happening again... Yet let’s not ridicule the Europeans, since many of our own policy makers are acting just as irresponsibly. And I’m not just talking about Congressional Republicans, who often seem as if they are deliberately trying to sabotage the economy.
                                                        Let’s talk instead about the Federal Reserve. The Fed ... expects to fail on both parts of its mandate, with inflation below target and unemployment far above target for years to come. ...
                                                        So what does the Fed propose doing about the situation? Almost nothing. ... Why won’t the Fed act? My guess is that it’s intimidated by those Congressional Republicans, that it’s afraid to do anything that might be seen as providing political aid to President Obama, that is, anything that might help the economy. ...[T]he Fed, like the European Central Bank, like the U.S. Congress, like the government of Germany, has decided that avoiding economic disaster is somebody else’s responsibility.
                                                        None of this should be happening. As in 1931, Western nations have the resources they need to avoid catastrophe, and indeed to restore prosperity... But knowledge and resources do no good if those who possess them refuse to use them.
                                                        And that’s what seems to be happening. The fundamentals of the world economy aren’t, in themselves, all that scary; it’s the almost universal abdication of responsibility that fills me, and many other economists, with a growing sense of dread.

                                                          Posted by on Monday, June 25, 2012 at 02:34 AM in Economics, Financial System, Fiscal Policy, Monetary Policy | Permalink  Comments (80) 

                                                          Fed Watch: A Long Wait to The Next FOMC Meeting

                                                          Tim Duy:

                                                          A Long Wait to The Next FOMC Meeting, by Tim Duy: With the outcome of the June FOMC meeting settled, we can set our sights on the August meeting. And at this point, the outcome of that meeting is just as hazy as the last. There is once again a wide range of reasonable views, spanning from QE3 at the next meeting until early 2013, or not at all. Calculated Risk reviews the various opinions here. Interestingly, Goldman Sachs, who expected QE3 to be announced last week, has completely changed gears and is no longer expecting QE until next year. This after offering up the possibility of open-ended QE on the eve of the last FOMC meeting!

                                                          Goldman's view is that the extension of Operation Twist was substantive enough to keep the FOMC on the sidelines. CR takes the opposite bet, expecting QE at the August meeting, anticipating a low-bar for additional action. Still, CR makes an important point:

                                                          Perhaps an argument against a QE3 announcement on August 1st is there will not be much data released between now and the next FOMC meeting. For employment, the only major report will be the June employment report to be released on July 6th. Also the advance estimate for Q2 GDP will be released on July 27th.

                                                          I have tended to argue that the calendar is very important, especially when policymakers are genuinely uncertain of the next most. Absent major financial crisis, they need sufficient data to justify moving, and they just don't have it yet. That story fits with last week's Jon Hilsenrath analysis of Federal Reserve Chairman Ben Bernanke:

                                                          When he has lacked conviction, though, his moves have tended to be very deliberate and have unfolded in step-by-step fashion over months, not days. One reason is that he has had to build consensus on a policy-making committee with sharply divergent views. Another is that he appears to be trying to gather information and calibrate his response.

                                                          Presumably one FOMC member Bernanke would like to turn is Richmond Federal Reserve President Jeffrey Lacker, who explained his dissent:

                                                          “I dissented on this decision because I do not believe that further monetary stimulus would make a substantial difference for economic growth and employment without increasing inflation by more than would be desirable. While the outlook for economic growth has clearly weakened in recent weeks, the impediments to stronger growth appear to be beyond the capacity of monetary policy to offset. Inflation is currently close to 2 percent, which the Committee has identified as its inflation goal. A significant increase in inflation could threaten the Fed’s credibility and make it more difficult to achieve the Committee’s longer-run goals, including maximum employment. Should a substantial and persistent fall in inflation emerge, monetary stimulus may be appropriate to ensure the return of inflation toward the Committee’s 2 percent goal

                                                          No surprises here. In his view, monetary policy is out of bullets, leaving no benefits and only costs to additional action. I don't think Bernanke is going to change Lacker's mind very easily. Not that he has to - I still believe this "Bernake needs to build consensus" argument is fundamentally flawed. At best there are three or four true hawks in the room. Bernanke could achieve sufficient consensus if he really wanted it.

                                                          Speaking of hawks, St. Louis Federal Reserve President James Bullard was back on the speaking circuit with a Bloomberg interview:

                                                          Federal Reserve Bank of St. Louis President James Bullard said today a possible third round of quantitative easing would face a “pretty high hurdle.”

                                                          “We can do that and I think it would be effective,” Bullard said in a television interview on Bloomberg Surveillance with Tom Keene. “But we’d be taking a lot more risk on our balance sheet. We’d be going further into uncharted territory.”

                                                          I find this to be disturbing, because here Bullard explains the Fed still has firepower, but instead has chosen the certainty of high unemployment to some uncertain risk. I just don't understand how he sees this as an acceptable trade off.

                                                          Interestingly, Bullard starts to hit on a fundamental flaw with policy making with his remarks on the Operation Twist extension:

                                                          “It’s a continuation of the existing policy,” said Bullard, who doesn’t vote on the Fed’s monetary policy this year. “The committee felt that it was maybe a bit imprudent to end the twist program right at this particular juncture. The committee has kind of been haunted by having end dates on programs and it seems like the end dates never occur at the right moment.” Operation Twist was to have ended this month.

                                                          One would hope that Bullard follows this line of thought through to its logical conclusion: The end dates are arbitrary, have no economic relevance, and only create unnecessary uncertainty in the policy making process. Open-ended QE tied to macroeconomic objectives would eliminate this problem.

                                                          Bullard divulges that the FOMC still doesn't understand its job:

                                                          Bullard said that “Treasury yields have gone to extraordinarily low levels. That took some of the pressure off the FOMC since a lot of our policy actions would be trying to get exactly that result.”

                                                          The FOMC just cannot see that low interest rates are a sign of tight money, an expectation that the economy is facing headwinds and the Fed is not going to sufficiently offset the subsequent drag on growth. They need policy such that interest rates start to rise on the back of economic gains. That falling yields are a bad, not good sign, completely eludes them.

                                                          Bottom Line: The fundamental problem is that the Fed has failed to communicate the trigger point for additional policy. CR reads the tea leaves and concludes the bar is reasonably low; Bullard leaves the meeting thinking the bar is high. The reality is likely somewhere in between. I tend to think QE in August requires some pretty clear evidence that the labor market is moving in the wrong direction, and I am hesitant to think we will get enough such evident before then. The next employment report and the weekly initial claims reports will be critical.

                                                            Posted by on Monday, June 25, 2012 at 01:17 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (15) 

                                                            An Overview of VAR Modeling

                                                            Some of you might be interested in this:

                                                            An Overview of VAR Modelling, by Dave Giles: ...my various posts on different aspects of VAR modelling have been quite popular. Many followers of this blog will therefore be interested in a recent working paper by Helmut Luetkephol. The paper is simply titled, "Vector Autoregressive Models", and it provides an excellent overview by one of the leading figures in the field.
                                                            You can download the paper from here.

                                                              Posted by on Monday, June 25, 2012 at 01:11 AM in Econometrics, Economics, Methodology | Permalink  Comments (1) 

                                                              Links for 06-25-2012

                                                                Posted by on Monday, June 25, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (53) 

                                                                Sunday, June 24, 2012

                                                                "Reviving Real Estate Requires Collective Action"

                                                                Robert Shiller:

                                                                Reviving Real Estate Requires Collective Action, by Robert Shiller, Commentary, NY Times: Imagine that you are watching an outdoor theater production while sitting on the grass. You have difficulty seeing, so you prop yourself up on your knees. Soon everyone behind you does the same. Eventually, most people are kneeling or standing, yet they are less comfortable than they were before and have no better view. Everyone should sit down, and everyone knows it, but no one does.
                                                                This is a collective action problem, a phenomenon that is, unfortunately, all too common. At the moment, the trouble in our real estate markets and the drag these markets are placing on our entire economy may be understood as a collective action problem. In a nutshell, mortgage lenders need to write down the amounts owed by individual homeowners — that is, let everyone sit down and relax — but the different stakeholders have been unable to reach an agreement, even if it is in their common interest. ...
                                                                If such mortgage principal reductions could be applied on a large scale, there could be large neighborhood effects, raising a sense of optimism among homeowners and bolstering the value of all homes and, ultimately, the whole economy. But mortgage lenders in all their different forms lack a group strategy. ...

                                                                He goes on to suggest several solutions to this problem.

                                                                  Posted by on Sunday, June 24, 2012 at 02:34 AM in Economics, Housing, Market Failure | Permalink  Comments (52) 

                                                                  "The Age of Equality"

                                                                  The history of the "widely accepted compromise between aggregate prosperity and distributional equality":

                                                                  The Age of Equality, by Richard Pomfret, Vox EU: Economic reporting in the media frequently appears superficial since important economic processes may take decades for their consequences to work through, whereas media typically need fresh daily or weekly news. Economic history provides an antidote to this rush-to-judgement (e.g. Frindlay and O’Rourke 2008, Eichengreen and Irwin 2009).
                                                                  It is in this spirit that my new book, The Age of Equality, argues that we are still experiencing the long-term consequences of the industrial revolution of the 1700s, and that the current state of that process involves a widely accepted compromise between aggregate prosperity and distributional equality.
                                                                  Unlike political revolutions that can be dated to 1789 or 1917, the industrial revolution does not have a precise date. However, by the early 1800s it had clearly taken hold in parts of northwest Europe. The new industrial production involved factories with division of labour (exemplified by Adam Smith’s pin factory on the UK’s £20 banknotes) which employed increasingly capital-intensive techniques and applied the results of scientific, or at least casual empirical, observation. It was associated with risk-taking entrepreneurs and mobile workers, who responded to price incentives and were rewarded if they made the right decisions. The process was opposed by those enjoying privileges in the pre-industrial economy, e.g. inherited monarchs with absolute power, landowners with serfs or guild members.
                                                                  Countries adopting the new system enjoyed unprecedented long-term economic growth. They sought and won global markets for their products so that they could expand the division of labour and capital-intensity of their factories, and they established global empires. Success was no secret. The new system spread across Europe, regions settled by Europeans, and a few other places (notably Japan).
                                                                  Change was resisted by the ancien régime or by imperial rulers. The 1800s were an Age of Liberty because successful economies were those in which people enjoyed sufficient freedom to respond to economic incentives. The pressure to allow such freedom culminated in the 1910s, with the collapse of the great dynastic empires centred in Saint Petersburg, Vienna, Berlin, Constantinople and Peking.
                                                                  Opposition to unbridled capitalism
                                                                  Yet, even as living standards increased, opposition to unbridled capitalism strengthened. In all of the high-income countries there is evidence of income inequality peaking around the first decade of the twentieth century.
                                                                  • In the US, progressives pushed to reduce the power of the rich by antitrust legislation and to protect the poor by social policies.
                                                                  • In Europe, socialists’ challenge to capitalism was more fundamental.
                                                                  The great experiment of the twentieth century was a competition between economic systems over which could best balance prosperity and equality.
                                                                  The principal challenger was the Soviet centrally planned economy. The success of planning in mass-producing a standardised good was highlighted by the Red Army’s successes in 1938-9 against Japan and in the 1941-5 war against Germany. Central planning was also successful in mobilising resources for a specific goal (e.g. sputnik, the first man in space, or winning Olympic medals) and to satisfy basic needs (e.g. housing, education and healthcare).
                                                                  Central planning was less successful at continuously improving workplace productivity once the initial enthusiasm for Communism or wartime patriotism had ebbed, or in meeting diversified consumer wants once basic needs had been satisfied. Most of all the central planning was hopeless in allocating capital so that diminishing returns were offset by technical change. The clearest statistical indicator of economic failure is the increasing incremental capital-output ratio (i.e how much capital is needed to generate a one unit flow of output) in the Soviet Union from a normal 3-4 in the 1950s to 15 in the early 1980s. By then the economic failure of central planning was obvious to all.
                                                                  Capitalism’s mixed fortunes
                                                                  The market-based economies experienced mixed fortunes in the first half of the twentieth century. Memories were dominated by the depression of the 1930s, which fuelled demands for reduced inequality. However, Europe enjoyed economic growth over the years 1919-39, and for North America the 1920s were a period of prosperity and innovation.
                                                                  Henry Ford extended the productivity of the factory system by combining interchangeable parts with the assembly line, bringing down the price of a car to the extent that by 1929 over 23 million cars were in use in the US, for a population of 123 million. Ford, however, lost its premier position in the 1930s to General Motors, which adopted assembly line production and offered a choice of models and colours.
                                                                  The interwar period also saw the spread of vacuum cleaners, which required novel marketing to convince housewives of their value; of refrigerators, whose value was augmented by Clarence Birdseye patenting an effective frozen food technology, and of washing machines, whose use was increased by the innovation of laundromats. These durable consumer goods were all items that central planning was poor at producing in a range of attractive models accessible to a mass market.
                                                                  The 1989 watershed
                                                                  By 1989 the victory of market-based economic system was clear, but the winner was not pure capitalism. Governments intervened not just in the classic roles of supplying law and order and public goods, but also to provide greater equality of opportunity and outcome. In a market economy people are rewarded according to the value of their marginal product, but this is low for the old, the sick, or the handicapped People may lose their source of income for reasons beyond their control, and require time to search for the best new source of income. The children of rich parents get a better start in life through better nutrition, healthcare and education. In all of these areas, governments intervene. The relative focus on equality of outcome and equality of opportunity vary, but the desirability of intervention is no longer a matter of serious disagreement.
                                                                  On a global scale, the gross inequalities of the early 1900s have been eroded. In the mid-1900s empires were dissolved and modernising governments came to power. Influenced by Soviet success, most regimes adopted economic systems with a heavy state hand, which succeeded initially in mobilising resources, but whose limitations were clear by the 1970s. In the final quarter of the twentieth century, country after country adopted more market-based systems and integrated into the global economy. These emerging economies included some of the world’s most populous countries, i.e. China, Mexico, India, Brazil, Indonesia and many more.
                                                                  Emerging economies: Mixed models
                                                                  The emerging economies are clearly market-based, but none embraces pure capitalism. Even Hong Kong, the most capitalist economy even while a colony, provided efficient social services and universal public education and healthcare. By the early 2000s, the market economy, and associated pressures for liberty and equality, held undisputed status as the desirable economic system.
                                                                  This is not the end of history. Debates, rightly, rage in democratic market economies about the appropriate balance between market-driven prosperity and state-mediated equality. In the US the current focus is on healthcare, and in Europe and Australasia on funding for tertiary education. In all countries, aging populations and archaic pension rights pose serious challenges.
                                                                  At a global level, tensions between established and emerging powers, unlike in 1914-45, cannot be settled by total war. The presence of weapons of mass destruction, cross-border environmental issues and global warming, the responsibility to protect citizens from barbaric governments and the dangers of rogue states all point to the need for international cooperation. The WTO with its almost universally agreed, and abided by, rules for trade despite the lack of serious enforcement mechanisms is an example of imperfect, but functioning, mutually beneficial cooperation. Governance of other multilateral institutions established in the 1940s (the UN, IMF and World Bank) clearly requires reform, while some global and regional problems may require novel institutions. Initiatives like the Svalbard Global Seed Bank, which is supported by regimes as varied as Zimbabwe, North Korea and Syria, provide insurance against inadequate crop biodiversity. The twenty-first century will be the Age of Fraternity because cooperation will be required in the global economy, even though the process may be slow and uneven.
                                                                  What are the implications for the nearer future? Politicians who rail against socialism or the market always adopt a more moderate stance after they come into office – not because they are cowed by outside forces, but because this is what their electorates want. At any point in time, some voters will be animated by encroachments of the state or by market-generated excesses, but these cannot plausibly be seen as appeals for unfettered capitalism or central planning. The reality is of choices within a narrow band whose limits have been determined by a quarter millennium of economic history.
                                                                  Pomfret, Richard (2011). The Age of Equality: The Twentieth Century in Economic Perspective, Harvard University Press.
                                                                  Findlay, Ronald and Kevin H O’Rourke (2008), “Lessons from the history of trade and war”, VoxEU.org, 10 March.
                                                                  Eichengreen, Barry and Douglas Irwin (2009), “The protectionist temptation: Lessons from the Great Depression for today”, VoxEU.org, 17 March.

                                                                    Posted by on Sunday, June 24, 2012 at 02:07 AM in Economics, Equity, Income Distribution, Productivity | Permalink  Comments (46) 

                                                                    Elephant Underpass

                                                                    Elephant populations are becoming increasingly fragmented:

                                                                    Road to Recovery?, National Geographic: An African elephant approaches an underpass beneath the busy Nanyuki-Meru road in northern Kenya...

                                                                    Photograph courtesy Lewa Wildlife Conservancy

                                                                    The first of its kind for elephants, the underpass will ideally provide a safe corridor for the large mammals to move throughout the Mount Kenya region (map), where highways, fences, and farmlands have split elephant populations, according to Geoffrey Chege, chief conservation officer of the Lewa Wildlife Conservancy, a Kenya-based nonprofit.
                                                                    Without the underpass, animals that try to move between isolated areas often destroy fences and crops—leading to conflicts with people.
                                                                    Since its completion in late 2010, the underpass has been a "tremendous success"—hundreds of elephants have been spotted walking through the corridor...

                                                                    Photograph courtesy Lewa Wildlife Conservancy

                                                                    At first, only adult male elephants ventured through the underpass, and then only at night.
                                                                    But before long whole family groups were passing through during the day...

                                                                    Image courtesy Lewa Wildlife Conservancy

                                                                    Currently the region's elephant populations are divided into two isolated groups: 2,000 animals in Mount Kenya and 7,500 in the Samburu-Laikipia ecosystem, according to the Lewa Wildlife Conservancy.
                                                                    The elephant underpass ... could improve the genetic health of northern Kenya elephants, since more genes will mix as the animals move into various territories and find new mates.
                                                                    The corridor may also mean that elephants will move around more, reducing pressure on habitats—and possibly helping other species that use the same resources, such as the black rhinoceros, according to the conservancy. ...

                                                                      Posted by on Sunday, June 24, 2012 at 01:17 AM in Economics, Environment, Kenya, Travel | Permalink  Comments (14) 

                                                                      Links for 06-24-2012

                                                                        Posted by on Sunday, June 24, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (57) 

                                                                        Saturday, June 23, 2012

                                                                        Kenya's Ownership Society

                                                                        The community service workers we have met here in Kenya are very, very worried about social programs creating dependency on the government. Thus, whenever they talk about their social programs, they emphasize the importance of the individuals "taking ownership."

                                                                        Obama 050Recess

                                                                        For example, elementary schools are supposed to be free, but in practice they are not. Parents must buy school uniforms, they must pay teachers extra to get the "full curriculum," there can be development fees for buildings, and so on. In the end, though it's supposed to be free, a substantial number of students are excluded from basic education. The purchase of the school uniform seems to be the biggest barrier (and high school is very expensive for most families, there is tuition in addition to uniforms and other costs, so that most families of limited means cannot afford it).

                                                                        As another example, Ol Pejeta. the (privately owned) conservancy for endangered animals, helps the communities around it in order to create acceptance for the conservancy (which imposes many costs on the communities). But when they help students, they only pay the fees, they won't pay for uniforms or other costs because, they say, parents must take some degree of ownership (even though this attitude hurts substantial numbers of children who are excluded from the school system). Similar attitudes were applied to maternity care, parents must take some degree of ownership or be excluded, even when it might hurt unborn children.

                                                                        There are many other examples of this, and there are some examples where "taking ownership" has positive effects. When mosquito nets are given away for free, they end up being used as fishing nets, in chicken coops, all sorts of things that have nothing to do with the intended use. A token payment -- taking ownership -- helps to solve this problem.

                                                                        So I can understand the fear of dependency in a society such as this, and there is evidence that "taking ownership" can be helpful. But I cannot understand allowing children to be hurt because of it. Sure, there might be a benefit -- some parents will take more interest/ownership in the process. But there is also a cost, many children are excluded from school, and the people paying these costs, the children, are not the ones making the choices. To me, the costs of excluding so many children is far greater than whatever benefit might come from "ownership," and if it were up to me far more resources would be directed toward educating children. It's an investment in the future Kenya will not regret.

                                                                          Posted by on Saturday, June 23, 2012 at 09:27 AM in Economics, Kenya | Permalink  Comments (25) 

                                                                          Kenya's Mobile Money Transfer System

                                                                          Internet connectivity here in Kenya has been far better than I expected. The hotels have the usual set of problems, I could hardly connect at either one we've stayed at so far due to lack of adequate bandwidth to meet demand. But 3G access and coverage through Safaricom has been surprisingly good.

                                                                          Why is that? It probably has something to do with the electronic money transfer system here in Kenya, which appears to be more advanced than in other countries in Africa. Such a system requires a widespread, dependable network, and that gives widespread, dependable access to the internet more generally.

                                                                          But that brings up another question, why is electronic money used here more than in other countries?

                                                                          The answer begins with the fact that in most countries the financial sector is very powerful politically. Put that together with the fact that the development of electronic money eats into the profits of the traditional financial institutions, and it's easy to understand how and why existing financial institutions have used regulatory blocks to hinder the development of the electronic money system in most countries.

                                                                          If that's the case, why wasn't the financial sector as effective at blocking the development of this type of transactions system in Kenya? The government owns half of Safaricom, and that probably explains why attempts to use regulatory hurdles to impede the development of the system have been relatively ineffective (there are regulatory restrictions, e.g. Safaricom cannot pay interest on the currency balances it holds for people, but they haven't impeded the ability of Safaricom to establish substantial monopoly power).

                                                                          As I understand it, Safaricom took large losses as the infrastructure needed to support the system was being built. But now that it largely in place, Safaricom gets a fee on each and every financial transaction, and it appears to be doing better.

                                                                          I need to think about this more, but it this seems to be a case where government ownership is actually beneficial in overcoming the hurdles that stand in the way of building such a system (and the government is using devices such as exclusive contracts with dealers to make sure its monoploly power continues).  Of course, if government wasn't so corrupt, then it would be much harder to erect regulatory barriers and perhaps government ownership wouldn't be needed. But when it is corrupt, giving government a large stake in the outcome seems to make a difference.

                                                                            Posted by on Saturday, June 23, 2012 at 03:33 AM in Economics | Permalink  Comments (10) 

                                                                            Zingales: No Shareholders' Spring

                                                                            Luigi Zingales:

                                                                            No Shareholders’ Spring, by Luigi Zingales, Commentary, Project Syndicate: The ongoing global economic crisis is not only causing incumbent governments to lose elections; it is also shaking corporate boards. ... Frustrated by low returns, investors are much feistier.
                                                                            Shareholder activists can also claim other (at least partial) victories at Yahoo!, where a shareholder activist forced the newly appointed CEO to resign for falsifying his educational credentials.
                                                                            But many commentators’ hyperbolic depiction of a “shareholders’ spring,” with its resonance of ousted Arab dictators, is inappropriate for several reasons, not the least of which is the fact that the Arab Spring actually toppled regimes. At the moment, the current shareholders’ revolt is failing to achieve any significant result. ...

                                                                              Posted by on Saturday, June 23, 2012 at 03:15 AM in Economics | Permalink  Comments (7) 

                                                                              How Much Inequality?

                                                                              Dan Little:

                                                                              How much inequality?, UnderstandingSociety: How much inequality is too much? Answers range from Gracchus Babeuf (all inequalities are unjust) to Ayn Rand (there is no moral limit on the extent of inequalities a society can embody). Is there any reasoned basis for answering the question? What kinds of criteria might we use to try to answer this kind of question?

                                                                              John Rawls offered a fairly simple criterion of the extent of inequalities that a just society can tolerate in A Theory of Justice. His background assumption is that the wealth of a society is a joint product of all members of society. The rules of distribution create more or less inequality among citizens. Citizens are concerned to "protect" their interests in case they wind up being in the worst-off positions in society. So justice requires that institutions should create the least degree of inequalities subject to maximizing the position of the least-well-off position in society. (He also stipulated an equality of opportunity principle: positions need to be open to all through a fair system of competition.) If the empirical theory is true that economic inequalities sometimes create more wealth (through incentive effects), then it is just to increase inequalities up to the point where any further increase would leave the position of the least-well-off member of society unchanged. This is the least system of inequalities subject to maximizing the position of the least-well-off. Rawls justifies this principle (the difference principle) on the ground that it expresses an important sense of fairness: everyone is fairly treated when higher incomes are assigned to some individuals only when doing so benefits all individuals.

                                                                              By this principle, current inequalities in the United States and Great Britain are demonstrably unjust: it would obviously be possible to lower the incomes of the 1 percent without lowering the income of the bottom forty percent. So current inequalities are plainly more extensive than they need to be for the purpose of increasing overall output and improving the condition of the least-well-off.

                                                                              Joseph Stiglitz offers a different kind of theory of inequality in his recent The Price of Inequality: How Today's Divided Society Endangers Our Future. (Here is the anchor essay as it appeared in Vanity Fair; link.) His argument is a pragmatic one based on a theory of social stability. Essentially he argues that when inequalities become too extreme in a given society they breed social conflict and instability. This happens perhaps because of raw deprivation -- the bottom 40% really do have pretty desperate lives -- but more because of what Stiglitz identifies as erosion of the social contract. Here is how he puts the point in the Vanity Fair article:

                                                                              Of all the costs imposed on our society by the top 1 percent, perhaps the greatest is this: the erosion of our sense of identity, in which fair play, equality of opportunity, and a sense of community are so important. America has long prided itself on being a fair society, where everyone has an equal chance of getting ahead, but the statistics suggest otherwise: the chances of a poor citizen, or even a middle-class citizen, making it to the top in America are smaller than in many countries of Europe. The cards are stacked against them. It is this sense of an unjust system without opportunity that has given rise to the conflagrations in the Middle East: rising food prices and growing and persistent youth unemployment simply served as kindling. With youth unemployment in America at around 20 percent (and in some locations, and among some socio-demographic groups, at twice that); with one out of six Americans desiring a full-time job not able to get one; with one out of seven Americans on food stamps (and about the same number suffering from “food insecurity”)—given all this, there is ample evidence that something has blocked the vaunted “trickling down” from the top 1 percent to everyone else. All of this is having the predictable effect of creating alienation—voter turnout among those in their 20s in the last election stood at 21 percent, comparable to the unemployment rate.

                                                                              So for Stiglitz, inequality is not simply a moral issue, but is also an issue of social stability and cohesion.

                                                                              Here is another way of answering the question: perhaps extreme inequalities are actually bad for a population's health. There is one sense in which this is obviously true: extremely poor people have worse health outcomes than affluent people. But maybe the simple fact of inequalities is itself a toxic influence on public health, for poor and rich alike. This is the argument that Richard Wilkinson and Kate Pickett make in The Spirit Level: Why Greater Equality Makes Societies Stronger. Their argument is a complex one that suggests several causal explanations for why this might be the case; but their core idea is that great inequalities create widespread "stress" that is harmful to each individual's health. Wilkinson and Pickett are public health experts and their argument is a cross-national statistical one.

                                                                              So we might adapt their analysis into an answer to the question posed above: inequalities should be reduced until there is not measurable harm to public health. (These arguments are considered in earlier posts.)

                                                                              There is even a utilitarian argument for greater equality of income. If we accept the plausible point that income makes a diminishing marginal contribution to happiness as income rises (perhaps after some inflection point), then under many realistic circumstances a more equal society with lower GNP will have a higher level of happiness than a more unequal society with higher GNP. Lower-income people have more to gain from an additional $1000 of income than higher-income people. So if we think it is a good thing to maximize happiness, then we ought to regulate inequalities accordingly. Benjamin Page makes some of these arguments in an Institute for Research on Poverty position paper, "Utilitarian Arguments for Equality" (link).

                                                                              Are we forced to choose among these frameworks in order to conclude that our economy has generated vastly too wide a set of inequalities of wealth and income? No, we aren't, because these arguments are mutually supportive. A system of greater equality, regulated by a tax system designed for that purpose, would be more fair, more supportive of equality of opportunity, more harmonious, likely healthier, and likely happier. We have lots of good reasons for preferring greater equality of wealth and income and lots of good reasons to reject the "anything goes" philosophy that currently drives much of the political discourse on the right.

                                                                                Posted by on Saturday, June 23, 2012 at 02:43 AM in Economics, Income Distribution | Permalink  Comments (110) 

                                                                                Links for 06-23-2012

                                                                                  Posted by on Saturday, June 23, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (37) 

                                                                                  Friday, June 22, 2012

                                                                                  Paul Krugman: Prisons, Privatization, Patronage

                                                                                  What's really behind the push to privatize government services:

                                                                                  Prisons, Privatization, Patronage, by Paul Krugman, Commentary, NY Times: Over the past few days, The New York Times has published several terrifying reports about New Jersey’s system of halfway houses — privately run adjuncts to the regular system of prisons. ... The horrors described are part of a broader pattern in which essential functions of government are being both privatized and degraded. ...
                                                                                  It’s a terrible story. But ... you really need to see it in the broader context of a nationwide drive on the part of America’s right to privatize government functions... What’s behind this drive?
                                                                                  You might be tempted to say that it reflects conservative belief in the magic of the marketplace.... And that’s certainly the way right-wing politicians like to frame the issue.
                                                                                  But if you think about it even for a minute, you realize that the one thing the companies that make up the prison-industrial complex ... are definitely not doing is competing in a free market. They are, instead, living off government contracts. There isn’t any market here, and there is, therefore, no reason to expect any magical gains in efficiency.
                                                                                  And, sure enough, despite many promises that prison privatization will lead to big cost savings, such savings ... “have simply not materialized.” ...
                                                                                  So what’s really behind the drive to privatize prisons, and just about everything else?
                                                                                  One answer is that privatization can serve as a stealth form of government borrowing... We hear a lot about the hidden debts that states have incurred in the form of pension liabilities; we don’t hear much about the hidden debts now being accumulated in the form of long-term contracts with private companies hired to operate prisons, schools and more.
                                                                                  Another answer is that privatization is a way of getting rid of public employees, who do have a habit of unionizing and tend to lean Democratic in any case.
                                                                                  But the main answer, surely, is to follow the money. Never mind what privatization does or doesn’t do to state budgets; think instead of what it does for both the campaign coffers and the personal finances of politicians and their friends. ...
                                                                                  Now, someone will surely point out that nonprivatized government has its own problems of undue influence, that prison guards and teachers’ unions also have political clout, and this clout sometimes distorts public policy. Fair enough. But such influence tends to be relatively transparent. ...
                                                                                  The point, then, is that you shouldn’t imagine that what The Times discovered about prison privatization in New Jersey is an isolated instance of bad behavior. It is, instead, almost surely a glimpse of a pervasive and growing reality, of a corrupt nexus of privatization and patronage that is undermining government across much of our nation.

                                                                                    Posted by on Friday, June 22, 2012 at 02:07 AM in Economics, Politics | Permalink  Comments (68) 

                                                                                    Evaluating the Millennium Villages

                                                                                    I met with Gabriel Demombynes, a World Bank economist stationed here in Nairobi, this evening. Recently, he pointed out that there was a fundamental flaw in the way in which progress in the Villages is evaluated. Essentially, the evaluation looked at changes in measures of performance over time, but it did not make comparisons to any type of baseline. For example suppose an evaluation finds that the percentage of people engaging in a negative behavior falls from 20% to 10%. If the percentage of people doing this falls, that's a good thing, right? Yes, but it doesn't mean that the Villages should necessarily pat themselves on the back. To see why, suppose that in other comparative villages -- which are not Millennium Villages -- the percentage also falls from 20% to 10%, or perhaps even lower. Now things don't look as good. Measured against the baseline, performance has stayed the same, or even worsened.

                                                                                    That's essentially what Demombynes and his co-authors showed in their academic paper on this topic. The measures for Kisumu in the report are very highly correlated with measures at the national level. The response from Village supporters such as Jeff Sachs was to say that the evaluation wasn't the actual evaluation, and the real one would come soon. But when the second evaluation arrived, it's major finding that infant mortality had fallen significantly in the Villages, was subject to similar questions.

                                                                                    Gabriel, via an email, points to further discussions of these points:

                                                                                    Have a great time in Kisumu. An hour or so away is Sauri, the first Millennium Village. I've had a long back-and-forth with Jeff Sachs about the project's evaluation. Here's an early blog post I wrote about my visit to Sauri:
                                                                                     http://blogs.worldbank.org/africacan/evaluating-the-millennium-villages More recently I wrote this blog post which led to the MV project retracting its major finding in a paper in Lancet: : http://blogs.worldbank.org/impactevaluations/the-millennium-villages-project-impacts-on-child-mortality 
                                                                                    The retraction on the MVP website: http://www.millenniumvillages.org/field-notes/millennium-villages-project-corrects-lancet-paper 
                                                                                    The retraction in the Lancet: http://press.thelancet.com/MVP.pdf 
                                                                                    …from the Lancet editors…http://download.thelancet.com/flatcontentassets/pdfs/S0140673612607879.pdf my letter with others published in the Lancet: http://www.thelancet.com/journals/lancet/article/PIIS0140-6736%2812%2960848-4/fulltext 
                                                                                    Related: http://retractionwatch.wordpress.com/2012/05/31/millennium-villages-project-forced-to-correct-lancet-paper-on-foreign-aid-as-leader-leaves-team/ 

                                                                                    Being here emphasizes how big the problem is, and how important it is to get these measures correct.

                                                                                      Posted by on Friday, June 22, 2012 at 01:35 AM in Development, Economics | Permalink  Comments (11) 

                                                                                      Fed Watch: What Fiscal Union Means

                                                                                      Tim Duy:

                                                                                      What Fiscal Union Means, by Tim Duy: I was looking over FT Alphaville's recent summary of Nomura's Richard Koo's work on the root cause of imbalances in the Eurozone.  The main thrust of the thesis is that the ECB held interest rates low last decade to support Germany because Maastrict rules forbid a fiscal policy solution to Germany's woes.  But rates were excessively low for the periphery, triggering the emergence of bubbles and unsustainable imbalances. Basically, the root of the problem was a one-size-fits-all monetary policy worsened by an inflexible fiscal structure.  

                                                                                      So far so good.  What caught my eye was this quote from Koo:

                                                                                      Unfortunately there have been growing calls in the eurozone for fiscal union. But that would only make the problem worse by forcing the same fiscal policy on all countries, regardless of whether they were in a balance sheet recession.

                                                                                      This is true with regards to what is emerging as "fiscal union" in the Eurozone, largely a commitment to strict fiscal targets.  This, however, is not how I would define a fiscal union.  When I use the term fiscal union, I am thinking of a centralized budget authority capable of making automatic internal transfers.  

                                                                                      Paul Krugman has provided some very good examples of the importance of such internal transfers in the United States.  For example, see his discussion of Texas and the Savings and Loan crisis:

                                                                                      The cleanup from that crisis cost taxpayers about $125 billion (pdf), back when that was real money. As best I can tell, around 60 percent of the losses were in Texas (pdf). So that’s around $75 billion in aid — not loans, outright transfer.

                                                                                      Texas GDP was about $300 billion in 1987. So this was equivalent to giving — not lending, not even taking an equity stake — Spain 25 percent of its GDP to bail out its banks.

                                                                                      And in the US it wasn’t even treated as an interstate political issue.

                                                                                      Also, see his Florida example:

                                                                                      So as I read it, between falling tax payments without any corresponding fall in federal benefits, plus safety-net aid — not counting Medicaid, which would make the number even bigger — Florida received what amounted to an annual transfer from Washington of $31 billion plus, or more than 4 percent of state GDP. That’s a transfer, not a loan. And it’s very big.

                                                                                      These are examples of how assymetric shocks are cushioned within a fiscal union.  Transfers, not loans.  For the Eurozone to be successful, they need this kind of fiscal infrastructure.  Unfortunately, I think they are light-years away from such a union, and what they think is a fiscal union - strict deficit limits - is something very different, a union that as Koo says will make conditions worse, not better.  One of the many reasons I remain a Euroskeptic.

                                                                                        Posted by on Friday, June 22, 2012 at 12:33 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (20) 

                                                                                        Krugman and Wells: Getting Away with It

                                                                                        Robin Wells and Paul Krugman

                                                                                        Getting Away with It, by Robin Wells and Paul Krugman: In the spring of 2012 the Obama campaign decided to go after Mitt Romney’s record at Bain Capital, a private-equity firm that had specialized in taking over companies and extracting money for its investors—sometimes by promoting growth, but often at workers’ expense instead. Indeed, there were several cases in which Bain managed to profit even as it drove its takeover targets into bankruptcy.
                                                                                        So there was plenty of justification for an attack on Romney’s Bain record, and there were also clear political reasons to make that attack. For one thing, it had worked for Ted Kennedy, who used tales of workers injured by Bain to good effect against Romney in the 1994 Massachusetts Senate race. Also, to the extent that Romney had any real campaign theme to offer, it was his claim that as a successful businessman he could fix the economy where Obama had not. Pointing out both the many shadows in that business record and the extent to which what was good for Bain was definitely not good for America therefore made sense.
                                                                                        Yet as we were writing this review, two prominent Democratic politicians stepped up to undercut Obama’s message. First, Cory Booker, the mayor of Newark, described the attacks on private equity as “nauseating.” Then none other than Bill Clinton piped up to describe Romney’s record as “sterling,” adding, “I don’t think we ought to get into the position where we say ‘This is bad work. This is good work.’” (He later appeared with Obama and said that a Romney presidency would be “calamitous.”)
                                                                                        What was going on? The answer gets to the heart of the disappointments—political and economic—of the Obama years. ...[continue reading]...

                                                                                          Posted by on Friday, June 22, 2012 at 12:30 AM in Economics, Politics | Permalink  Comments (35) 

                                                                                          "McWages Around the World"

                                                                                          Tim Taylor:

                                                                                          McWages Around the World, by Tim Taylor: It's hard to compare wages in different countries, because the details of the job differ. A typical job in a manufacturing facility, for example, is a rather different experience in China, Germany, Michigan, or Brazil. But for about a decade, Orley Ashenfelter has been looking at one set of jobs that are extremely similar across countries--jobs at McDonald's restaurants. He discussed this research and a broader agenda of "Comparing Real Wage Rates" across countries in his Presidential Address last January to the American Economic Association meetings in Chicago. The talk has now been published in the April 2012 issue of the American Economic Review... But the talk is also freely available to the public here as Working Paper #570 from the Princeton's Industrial Relations Section.  ...

                                                                                          Ashenfelter has built up McWages data from about 60 countries. Here is a table of comparisons. The first column shows the hourly wage of a crew member at McDonald's, expressed in U.S. dollars (using the then-current exchange rate). The second column is the wage relative to the U.S. wage level, where the U.S. wage is 1.00. The third column is the price of a Big Mac in that country, again converted to U.S. dollars. And the fourth column is the McWage divided by the price of a Big Mac--as a rough-and-ready way of measuring the buying power of the wage.

                                                                                          Ashenfelter sums up this data, and I will put the last line in boldface type: "There are three obvious, dramatic conclusions... First, the developed countries, including the US, Canada, Japan, and Western Europe have quite similar wage rates, whether measured in dollars or in BMPH. In these countries a worker earned between 2 and 3 Big Macs per hour of work...  A second conclusion is that the vast majority of workers, including those in India, China, Latin America, and the Middle East earned about 10% as much as the workers in developed countries, although the BMPH comparison increases this ratio to about 15%, as would any purchasing-power-price adjustment. Finally, workers in Russia, Eastern Europe, and South Africa face wage rates about 25 to 35% of those in the developed countries, although again the BMPH comparison increases this ratio somewhat. In sum, the data in Table 3 provide transparent and credible evidence that workers doing the same tasks and producing the same output using identical technologies are paid vastly different wage rates." ...

                                                                                          Ashenfelter emphasizes in his remarks how real wages can be used to assess and compare the living standards of workers. I would add that these measures show that the most important factor determining wages for most of us is not our personal skills and human capital, or our effort and initiative, but whether we are using those skills and human capital in the context of a a high-productivity or a low-productivity economy.

                                                                                          There's also a lesson here about the high incomes of self-anointed "job creators" and innovators. Ideas alone are not enough -- it matters immensely where you live.

                                                                                            Posted by on Friday, June 22, 2012 at 12:24 AM in Economics | Permalink  Comments (33) 

                                                                                            Links for 06-22-2012

                                                                                              Posted by on Friday, June 22, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (84) 

                                                                                              Thursday, June 21, 2012

                                                                                              Economists Find Evidence for Famous Hypothesis of Comparative Advantage

                                                                                              Evidence for comparative advantage:

                                                                                              Economists find evidence for famous hypothesis of ‘comparative advantage’, MIT News: David Ricardo’s concept of “comparative advantage” is one of the most famous and venerable ideas in economics. Dating to 1817, Ricardo’s proposal is that countries will specialize in making the goods they can produce most efficiently — their areas of comparative advantage — and trade for goods they make less well, rather than making all kinds of products for themselves.

                                                                                              As a thought example, Ricardo proposed, consider cloth and wine production in England and Portugal. If English manufacturers are relatively better at making cloth than wine, and Portugal can produce wine more cheaply than England can, the two countries will specialize: England will concentrate on making cloth, Portugal will focus on making wine, and they will trade for the products they do not produce domestically.

                                                                                              Neat as this explanation may seem, it is by definition hard to prove. If England does not make wine, and Portugal does not make cloth, it is very hard to say how efficiently they could produce those goods. The same applies to any country not manufacturing any given product. So does Ricardo’s idea resemble reality?

                                                                                              A recent paper by MIT economists Arnaud Costinot and Dave Donaldson uses a novel approach to suggest that Ricardo’s hypothesis is buttressed by real-world evidence. ...
                                                                                              Why nations specialize

                                                                                              To arrive at this conclusion, Costinot and Donaldson identified a data source that let them quantify nations’ potential productivity: The Food and Agriculture Organization (FAO), an arm of the United Nations, analyzes farming conditions globally, estimating potential agricultural productivity based on factors such as soil type, climate and water availability.

                                                                                              Costinot and Donaldson looked at the numbers from an FAO model of yields of 17 crops on 1.6 million plots of land in 55 countries to examine whether countries specialize in the way Ricardo believed. That is, if a country’s terrain allows it to grow wheat more productively than grapes, comparative advantage suggests that specialization will occur. So Costinot and Donaldson compared the predicted output of crops in each of the 55 countries (based on the FAO data and on prevailing prices) with the actual output of those crops.

                                                                                              The numbers show that Ricardo was right — to an extent, anyway. Costinot and Donaldson analyzed the results so that if the real world worked just as Ricardo supposed, the correlation between productivity and output would be 1.000. Instead, the logarithmic correlation they found was 0.212, with a margin for error of 0.057.

                                                                                              “We found a positive and statistically significant correlation,” Costinot says.

                                                                                              The paper, “Ricardo’s Theory of Comparative Advantage: Old Idea, New Evidence,” was published in the May issue of the American Economic Review. ...

                                                                                              Caveats and future directions

                                                                                              That said, Antras suggests a couple of caveats to the paper. One is that agricultural productivity is not purely a function of environmental factors; technical know-how and the availability of equipment also influence which crops are grown where. Secondly, Antras notes, the less-than-total correlation indicates that additional factors affect international trade as well. “The results suggest the theory is validated, but it is also quite clear that there are many other things that drive trade patterns,” Antras says.

                                                                                              For their part, Costinot and Donaldson acknowledge these qualifications...And the MIT economists add a third caveat: The data consist of productivity estimates made by agronomists; if those estimates are a bit off, it would affect the bottom-line findings as well.

                                                                                              Still, Donaldson says, “I was surprised at how, even with all the complexity in the real world, there was still this positive correlation between the theory and reality.

                                                                                                Posted by on Thursday, June 21, 2012 at 08:28 AM in Economics, International Trade | Permalink  Comments (58) 

                                                                                                Mama Sarah Obama

                                                                                                We are visiting with Barack Obama's step-grandmather, Mama Sarah Obama, to talk about her work helping orphans and the elderly. If the iPhone video turned out, I may post a few of her repsonses to our questions.

                                                                                                Obama 096

                                                                                                Obama 075

                                                                                                Obama 077

                                                                                                  Posted by on Thursday, June 21, 2012 at 08:21 AM Permalink  Comments (6) 

                                                                                                  Why the Surge in Obesity?

                                                                                                  Lane Kenworthy:

                                                                                                  Why the surge in obesity?, by Lane Kenworthy: The Weight of the Nation is a four-part series on obesity in America by HBO Films and the Institute of Medicine, with assistance from the Centers for Disease Control (CDC) and the National Institutes of Health (NIH). It’s been showing on HBO and can be viewed online. Each of the four parts is well done and informative.
                                                                                                  Obesity is defined as having a body mass index (BMI) of 30 or more. For a person 6 feet tall, that means a weight of more than 220 pounds. For someone 5’6″, the threshold is 185 pounds. People who are obese tend to earn less and are more likely to be depressed. They are at greater risk of diabetes, heart disease, stroke, and some types of cancer, and they tend to die younger. The CDC estimates the direct and indirect medical care costs of obesity to be $150 billion a year, about 1% of our GDP.
                                                                                                  The chart below, which appears several times in The Weight of the Nation, shows the trend in obesity among American adults since 1960, the first year for which we have good data. The data are from the National Health and Nutrition Examination Survey (NHANES). They are collected from actual measurements of people’s height and weight, rather than from phone interviews, so they’re quite reliable. After holding constant at about 15% in the 1960s and 1970s, the adult obesity rate shot up beginning in the 1980s, reaching 35% in the mid-2000s.

                                                                                                  What caused the surge in obesity? The standard explanation is too much eating and too little physical activity, and The Weight of the Nation sticks with this story. But it shouldn’t, because the evidence suggests one of these two hypothesized culprits has been far more important than the other.
                                                                                                  Here is the trend in eating, measured as average calories in the food supply (adjusted for loss and spoilage) according to data from the Department of Agriculture. This chart too is from The Weight of the Nation. The timing of change matches that for obesity; the level is flat through the 1970s and then rises sharply beginning in the 1980s. An alternative series, measuring energy consumption per capita, goes back to 1950 (see figure 6, chart F here); it too shows little or no change until 1980, and then a sharp jump. The rise in food consumption correlates closely with the rise in obesity.

                                                                                                  That isn’t true of physical activity. We’re less active now than we were half a century ago, but the timing of the decline in activity doesn’t match up with the shift in obesity.
                                                                                                  We don’t have good historical data for a comprehensive measure of activity, such as calories expended, so we have to look instead at individual components. We can begin with the most-often-cited culprit: television. Here too The Weight of the Nation presents data, shown below, with the suggestion that TV watching is a significant cause of rising obesity. But the trend doesn’t support that inference. Time spent watching television has increased steadily since 1950. There was no sudden rise in the 1980s.

                                                                                                  What about video games, the internet, and smartphones? The internet and smartphones arrived on the scene too late to account for the rise in obesity in the 1980s and most of the 1990s. The timing doesn’t work for video games either; they’re played mostly by the young, beginning in the 1980s, but obesity rates rose sharply in the 1980s and 1990s among adults of all ages, even among the elderly (see table 2 here).

                                                                                                  More Americans now have sedentary jobs and drive to work. Yet as David Cutler, Edward Glaeser, and Jesse Shapiro noted in a paper published nearly a decade ago, these shifts have been going on for a long time, with no acceleration in the 1980s.

                                                                                                  “Between 1910 and 1970, the share of people employed in jobs that are highly active like farm workers and laborers fell from 68 to 49 percent. Since then, the change has been more modest. Between 1980 and 1990, the share of the population in highly active jobs declined by a mere 3 percentage points, from 45 to 42 percent. Occupation changes are not a major cause of the recent increase in obesity.

                                                                                                  “Changes in transportation to work are another possible source of reduced energy expenditure — driving a car instead of walking or using public transportation. Over the longer time period, cars have replaced walking and public transportation as a means of commuting. But this change had largely run its course by 1980. In 1980, 84 percent of people drove to work, 6 percent walked, and 6 percent used public transportation. In 2000, 87 percent drove to work, 3 percent walked, and 5 percent used public transportation. Changes of this minor magnitude are much too small to explain the trend in obesity.”

                                                                                                  Another reason to doubt the importance of declining physical activity is that the elderly probably have become more active over time, rather than less, and yet we observe a rise in obesity among the elderly too, similar in timing and magnitude to that of younger adults (again see table 2 here).

                                                                                                  In short, the evidence suggests that reduced physical activity has not been a key cause of the surge in obesity in America (more here, here, here, here, here).

                                                                                                  This doesn’t mean physical activity plays no role in determining which persons become obese. And it doesn’t mean an increase in activity won’t help reduce obesity’s prevalence. But it does suggest that a strategy focused on increasing activity — and The Weight of the Nation leans in this direction — may not get us as far as we’d like. To make serious progress in reducing obesity, we need to significantly reduce the number of calories many of us consume.

                                                                                                  [Lane has a follow-up post here: Is rising obesity a product of income inequality and economic insecurity?]

                                                                                                    Posted by on Thursday, June 21, 2012 at 02:07 AM in Economics | Permalink  Comments (77) 

                                                                                                    Hope for the History of Economic Thought?

                                                                                                    Via Open Economics, "An interview with Amartya Sen":

                                                                                                    ...The history of economic thought has been woefully neglected by the profession in the last decades. This has been one of the major mistakes of the profession. One of the earliest reminders that we are going in the wrong direction has come from Kenneth Arrow about 30 years ago when he said: These days, I get surprised when I find the students don’t seem to know any economics that was written 25 or 30 years ago.

                                                                                                    Is there any hope that this trend can be reversed?

                                                                                                    Yes, I’m quite optimistic in this regard. I get the impression that this seems to be getting corrected right now. I’m particularly delighted that the corrective has come to a great extent from student interest. I’m very struck by the fact that at the university where I teach – Harvard – the demand for more history of economic thought has mostly come from students. As a result there is a lot more attempt by the department of economics as well as history and government to look for the history of political economy. Last year, along with my wife Emma Rothschild, I offered a course on Adam Smith’s philosophy and political economy. It drew a lot of interest and we got some of the finest students at Harvard.

                                                                                                      Posted by on Thursday, June 21, 2012 at 01:17 AM in Economics, History of Thought | Permalink  Comments (21)