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July 31, 2005

July 2005

July 31, 2005

China Sends a Few Jobs Our Way as a Goodwill Gesture

Did you know that China is opening a refrigerator factory in Camden, S.C., and this isn’t the only place China is opening production facilities in the U.S.? This may be just the start, so I'm curious if you see the creation of jobs within the U.S. as China opens factories here as a positive development. As you read this, remember that the refrigerators could be produced at lower cost in China even with shipping costs, so this is more of a political move than an economic one from China’s perspective, though currency revaluation could change that calculation:

Fostering Goodwill With Jobs, By Evelyn Iritani, LA Times: This sleepy town of quaint colonial homes and Revolutionary War battle sites is an unlikely champion for China. It's the oldest inland city in South Carolina, a state devastated by competition from low-cost Chinese textiles. The state's most powerful politicians, including the late Republican Sen. Strom Thurmond, led the fight to keep out cheap goods from China and other countries. But Camden, population 6,700, is also the home of the first U.S. refrigerator factory for China's Haier Group, a fast-growing appliance maker known as the General Electric of China. The plant's 225 jobs, with promises of more, explain why people here view China with greater enthusiasm than do those in Washington, where a rising trade deficit and a Chinese bid to buy El Segundo-based oil company Unocal Corp. have sparked concerns that China is bent on supplanting America economically and politically.

After some initial missteps, Haier has earned a reputation here as a good employer whose workers make a decent living. … Chinese companies flush with cash and eager to get a foothold in the U.S. are primed to build or buy U.S. factories and companies. China's July 21 revaluation of its currency, the yuan, is expected to accelerate that trend by making American assets relatively cheaper for Chinese buyers. Their additional investments in America offer the potential to save or create thousands of jobs — building goodwill in the process. In Minnesota, an investment by a Chinese company in a shuttered iron mine resurrected 400 jobs, winning praise from residents and politicians. The positive feelings here toward Haier and the Chinese also illustrate a significant transformation underway in the Deep South. Although this state is often portrayed as a protectionist enclave, South Carolina has quietly transformed itself into one of the country's most international regions. Aside from Hawaii, South Carolina has the highest percentage of foreign investment per capita. Nearly one-third of Camden's manufacturers, including several textile plants, are owned by foreigners. … To be sure, emotions still run high here in textile country, as was evidenced by the fierce battle over the proposed Central American Free Trade Agreement, which critics said would lead to further losses of textile jobs. Southern politicians, like their constituents, were divided over that trade pact, which the House voted Wednesday to ratify.

Camden, like many small Southern towns, could easily have become a victim of its textile past. After surviving the Revolutionary and Civil wars, … Textile factories migrated from the North, attracted by the low wages. But under pressure to cut costs, textile companies such as Dupont, the town's leading employer, began shedding jobs by the hundreds … In the 1990s, the town found its savior in an unlikely place. Japanese automakers — faced with the threat of tariffs by the U.S. and armed with a strengthening yen — began setting up auto plants in the South. … "We had the politicians tell us, 'If you lose the textile mills, you've lost South Carolina,' " said Samuel Small, of First Palmetto Savings Bank. "But the politicians were holding us back." South Carolina Gov. Mark Sanford, an outspoken proponent of free trade, not only doesn't want to hold the state back — he has turned political tensions surrounding China's trade practices to the state's advantage. … "You can go to make an investment in Nebraska, but you really don't pick up a whole lot of political currency in that equation," Sanford said. "If you go to the epicenter, where the jobs have been lost — and we indeed have been the epicenter — it allows people in public policy to offer a counterpoint to those who want to raise the walls." … Haier could make its refrigerators in China and ship them across the Pacific for less than the cost of producing them in even the cheapest U.S. location, Vergnolle said. But, he said, the chief purpose of the U.S. factory was to boost China's image on the global stage. … "The Haier plant is in Camden to give the Chinese government a showpiece to demonstrate to the world that they can compete in a capitalist environment," Vergnolle said. "Money is not necessarily a motivating factor."… Surprisingly little anti-Chinese sentiment has surfaced, according to locals. Early on, someone called conservative commentator Rush Limbaugh and complained that the Chinese flag was flying higher than the American flag outside the Haier factory. "Of course, it wasn't," said the mayor.

Not that Haier's foray into America was problem-free. Like other foreign firms, Haier had a steep learning curve … Haier's chief executive was well-known in China for promoting a more Western-style of management in which workers were held responsible for their output and rewarded accordingly. At Haier's main factory in Qingdao, a daily tally was kept of each employee's mistakes, and the worst offenders were forced to repent, according to media reports. … the company's Chinese managers quickly discovered that their American workers would quit rather than be publicly humiliated. The situation improved dramatically after Haier brought in American managers. Haier no longer has any Chinese executives, and only a few Chinese technicians, at the Camden facility, according to Lindsay and others.

… Other Chinese forays into the U.S. economy have followed a similar pattern. Until the latest bids, the Chinese have avoided making the high-profile purchases that triggered resentment against Japan two decades ago, such as Sony Corp.'s 1989 purchase of Columbia Pictures. … Jobs are the trump card. Though textile factories continue to disappear, Camden officials have watched their unemployment rate creep downward.

    Posted by Mark Thoma on Sunday, July 31, 2005 at 12:33 PM in China, Economics, International Trade, Unemployment

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    Drafters of Iraqi Constitution Ask for More Time

    Here’s a follow-up to this post about the drafting of the Iraqi constitution. Those writing it want more time, but U.S. and Iraqi officials are pressuring them to meet the August 15 deadline:

    Iraq Panel Seeks Constitution Extension, By Qassim Abdul-Zahra, Associated Press: Key members of the committee writing the new Iraqi constitution said Sunday they need another month to finish the draft, threatening U.S. efforts to maintain political momentum to combat the insurgency. Later, President Jalal Talabani insisted the Aug. 15 deadline for parliamentary approval must be met, and the United States stepped up pressure on the Iraqis to stick by the timetable. ...

    Talabani demanded that maximum efforts be exerted to reach a national accord regarding the drafting of the constitution, the statement said. … major differences remain among the ethnic and religious groups represented on the committee, including disputes over such issues as federalism, dual nationality and the role of Islam. … Al-Araji said Kurdish delegates wanted a six-month delay but the Shiites and Sunni Arabs decided to ask for 30 more days. The United States had mounted considerable pressure on the Iraqis to meet the Aug. 15 deadline. U.S. officials believe a new Iraqi constitution will help calm the insurgency by encouraging the country's disaffected Sunni Arab community, which forms the core of the militants, to abandon the conflict and join the political process…

    I wonder how much of the pressure from the U.S. is driven by domestic politics rather than what is best for Iraq in the long-run. I am not an expert on Iraqi politics, but it seems to me that if giving the Sunnis thirty more days to get this right helps to assuage the Sunni community politically, and the Sunnis have asked for a 30 day extension, then why insist that the “trains runs on time?” How will a rushed constitution end the insurgency if it does not satisfy the Sunnis?

      Posted by Mark Thoma on Sunday, July 31, 2005 at 11:07 AM in Iraq

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      Sunday Reading

      MSNBC has a question:

      Me.

      On to China. Are you worried?

      Hello Mouseketeers:

      Speaking of which, seems like there’s been a lot of these stories lately:

      The economy chugs along struggling to pull labor up the hill:

      Meanwhile, back at the farm:

      Crime time

      Pointing fingers:

      Advice for Democrats from, ahem, Fox:

      Sunday mass

      If you like physics, I think you’ll like that one.

        Posted by Mark Thoma on Sunday, July 31, 2005 at 02:43 AM in Economics, Reading

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        Two Lines on a FuzzChart

        This NRO BuzzCharts quotes Abraham Lincoln. It reminds me of another quote from Lincoln:

        It is better to remain silent and be thought a fool than to open one's mouth and remove all doubt.

        BuzzCharts removes all doubt:

        Supply vs. Supply - To raise rates or not to raise rates?, By Jerry Bowyer, NRO BuzzCharts: … Supply-siders, as against other free-market types like the Austrians and monetarists, emphasize marketplace indicators of inflation and deflation. Supply-side economists tend to be practical people who are as often as not forecasters, investment advisors, and business consultants — as opposed to theoreticians. They recognize that it is simply impossible for any central planner to “count” the number of dollars in circulation. They therefore look to … gold prices, interest rates, and foreign exchange rates — as the most reliable guides...

        I assume the Fed is the central planner in this statement. Let’s see if we can get this straight once and for all. The Fed targets an interest rate, not the money supply. The form of the interest rate rule is debated, e.g. how to weight the inflation and output terms, but the target itself is not. The days are long past when a monetary target was implemented or seriously considered. One reason is precisely because it is difficult to define and measure the money supply, i.e. “to “count” the number of dollars in circulation.” The article seems to imply this makes an inflation target impractical, but what does that have to do with measuring inflation? It isn’t necessary to count the dollars in circulation to measure prices. If prices aren’t good “marketplace indicators,” and therefore do not properly direct the flow of resources, then why the faith in markets? This line of reasoning makes no sense.

        Finally, take a close look at the yellow line in the diagram. Pay no attention to the fact that it is uncorrelated with the other line in the diagram and don’t wonder why they are plotted together. Instead, note that it is described as flat. Not also that Luskin whined incessantly when Krugman described a half a percent increase over five years as flat. Will Luskin demand a retraction from Bowyer of Buzzcharts for using the word "flat?"

          Posted by Mark Thoma on Sunday, July 31, 2005 at 01:26 AM in Economics, Monetary Policy, Press

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          Organic Monetary Policy Lessons

          When you think about a subject long enough and hard enough, you begin to see it all around you. Tim Duy finds lessons for monetary policy in his garden as he observes the lag between the application of fertilizer and the growth of tomatoes in his organic garden. He also shares a trick for growing pumpkins suspended on a trellis. There comes a time in every pumpkins life when it can no longer hold onto the vine and the pumpkin security system involves a safety net that sustains pumpkins through their old age:

          For the interested gardener…

          When I returned to Oregon, I took up vegetable gardening as a hobby. Organic gardening, to be specific, which as far as I can tell means I am allowed to use deadly pesticides made by nature rather than Dow Chemical (yes, there is more to it).

          One of my experiments over the years has been to grow sugar pumpkins by training the vines to a trellis. It is an extremely efficient use of a small garden. For example, see this photo.

          What about the pumpkins? They need to be supported somehow – I use a plastic mesh as which you can see in the next two pictures.

          To see the effects of excessive nitrogen, just look at my tomatoes.

          They are six feet tall, but I think my yields will be low. Getting the nutrients right appears to be a challenge in intensive container gardening. Last year, I undershot the nitrogen; this year, I overshot.

          Not unlike monetary policy.

            Posted by Mark Thoma on Sunday, July 31, 2005 at 12:34 AM in Economics, Monetary Policy, Social Security

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            July 30, 2005

            A Matter of Priorities

            If you get a chance, take a look at the pork in this highway bill. There's a lot of oinking going on in House Ways and Means Committee member's home states. But I want to highlight a different aspect of this bill. Here’s a statement from House Ways and Means Committee Chairman Bill Thomas:

            U.S. Congress Approves $286.5 Bln Highway Legislation, Bloomberg: The U.S. Congress approved $286.5 billion for highway and transit projects, ending almost two years of disagreements as President George W. Bush persuaded lawmakers to accept lower spending than they were seeking…. ''The reason this bill was so difficult is there wasn't enough money to deal with the infrastructure needs of this country,'' said House Ways and Means Committee Chairman Bill Thomas, a California Republican…

            There’s enough money for massive tax cuts, the elimination of estate taxes, the folly in Iraq and so on, but when it comes to essentials like infrastructure and education, the money is gone. Apparently, it's much more important to give tax cuts to the wealthy than it is to attend to foundations of economic growth such as infrastructure and education.

              Posted by Mark Thoma on Saturday, July 30, 2005 at 09:00 AM in Budget Deficit, Economics

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              July 29, 2005

              No Nation Left Behind

              China is making a major investment in higher education, one that is already yielding large dividends. According to this article, Chinese officials estimate that by 2050 half of China’s high school grads, and that’s half of a pretty large number, will receive some form of higher education. Is the U.S. ready to meet this challenge with a commitment of its own to improving education at all levels?

              China goes to college - in a big way, By Amelia Newcomb, Christian Science Monitor: Several years ago, Chinese car manufacturer Geely grew concerned about a shortage of well-trained workers. Its solution: plunk down $800 million and start a private university… in 2000, the sprawling campus of Beijing Geely University, with its Stanford-inspired quad, opened on the outskirts of Beijing - one of some 1,300 private universities that have sprung up in recent years. This September, Geely will enroll about 20,000 students … As China continues to surge onto the global economic stage, it is undergoing one of the most ambitious higher education expansions in the world. … the country is prying open the doors of institutions that formerly served a narrow elite. It's pouring money into research, welcoming private ventures like Geely, and broadening the curriculum to ensure that its grads stay on top in a knowledge-based world economy. Like so much in China, the move is happening quickly - and in eye-popping dimensions. … Since 1998, when Jiang Zemin, then president of China, spoke on the 100th anniversary … overall college enrollment in China has roughly tripled. … By 2010, Chinese officials estimate, at least 20 percent of high school grads will be enrolled in some form of higher education; that number is expected to rise to 50 percent by 2050. …

              For new graduates, the most dramatic change may be that a bachelor's degree from an A-list school - once a guaranteed steppingstone to success - is now seen as simply a first step ... More are planning to get master's degrees and even doctorates. Indeed, China almost doubled the number of science and engineering PhDs between 1996 and 2001, to just over 8,000. Some observers say that within a decade, China is likely to boast some of the world's leading engineering schools. … Tsinghua … Known for several decades as the MIT of China, it is requiring more general education and allowing undergraduates to enroll in a dozen schools, from management to architecture. Most faculty have studied abroad. .... The source of their success, he argues, is a culture of innovation.

              That focus on thinking outside the box - as well as developing a young scholar who can sort through Plato as well as a software program - is helping to drive China's rethink. The country has long valued education, of course: The 2,500-year-old precepts of Confucius undergirded learning until just over a century ago. European and American influence helped build a rich university system in the 19th and early 20th centuries. But in 1949, the rules changed. "In the course of revolution, China destroyed one of the most promising areas of higher education outside Europe and North America," says William Kirby, dean of faculty at Harvard University and a China scholar. The tumultuous Cultural Revolution of the 1960s and '70s was particularly damaging: … "People really understand that [the Cultural Revolution] stopped China for several years and isolated it," says Dr. Shi. … "It's stunning the degree to which China has reemerged as one of the leaders in the developing world, and a leader in the global development of technical talent," says Dr. Kirby. The move toward international standards, however, poses one particularly sensitive challenge: how to handle more open discussion of politically touchy topics, as well as greater academic freedom that could lead some to challenge accepted authority. There has been progress. "What used to be delicate matters of history are more openly discussed by scholars," says Harvard's Kirby. "You can do serious research on [pre-1949] Nationalist rule, for example, and praise [then-leader] Chiang Kai-Shek as a patriot." But, he adds, "It's much easier to be open and frank as a foreign scholar." Still, there's little question that China has opened its classrooms in numerous ways. … "China has an enormous market of well-educated people who are primed to go to college," says Kirby. Now, he says, it is making an enormous investment in that talent.

                Posted by Mark Thoma on Friday, July 29, 2005 at 08:01 PM in China, Economics, Universities

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                Fed Watch: A Week of Data That Point to More Tightening…

                Tim Duy's latest Fed Watch:

                A number of critical reports came out this week, including 2Q GDP, 2Q ECI, June durable goods orders, and the Beige Book. When Greenspan & Co. gather on August 9 to decide the path of policy, the data will indicate to them to stay the course – the path of measured tightening is working, so don’t rock the boat.

                On the real side of the economy, I suspect that grins spread across the faces of Fed policymakers as they read this morning’s GDP release. To be sure, the headline figure looked a bit weak compared to Q1, and was a hair below expectations, but it is the details that matter in this case. The inventory drawdown is the first detail – it subtracted a whopping 2.32 percentage points from GDP. Consequently, a more useful indicator of demand is final sales of domestic product, which grew 5.8%, the highest rate since 3Q03. Make no mistake – this is a strong number. Fixed investment gained 9.3%, including a double digit gain in the equipment and software category. And net exports even made a positive contribution to GDP as exports gained and imports declined slightly. In short, this report will support the Fed’s contention that the economy is on solid footing.

                In fact, it is likely that the GDP report will lead Fed officials to anticipate an acceleration of growth in the back half of the year, contrary to the expectations (or at least concerns) of many commentators. The acceleration will be expected as firms rebuild inventories depleted in Q2. Yes, yes, I am aware of the concerns regarding expected production cuts in the US auto industry (see James Hamilton). Such concerns will not make too much headway among Fed policymakers. A key change has happened in the US auto industry in the past 25 years – the increase of non-US auto companies producing on US soil. For example, as Ford cuts production, Toyota expands. Best guess: The Fed will view the problems at GM and Ford as industry specific, not cyclical in nature.

                More evidence of strong growth will be found in the June durable goods order report. A key underlying component, nondefence, nonaircraft capital goods orders, gained 3.8%, suggesting confidence among firms and that the investment story in the 2Q GDP report will be sustained. This contention, as well as the inventory rebuilding story, find further support in today’s Chicago PMI release, which rose from 53.6 in June to 63.5 in July, the largest monthly gain since 1983.

                Most of the above data is also supported anecdotally in the Beige Book. From the summary:

                Reports from all twelve Federal Reserve Districts indicate that economic activity continued to expand in June and early July. Richmond and Dallas reported that the rate of economic growth increased, and Cleveland said economic growth was stronger and more balanced than in the spring. New York was the only District to report a slowing in the rate of economic growth. Among the other Districts, Atlanta, Minneapolis, Kansas City, and San Francisco characterized the pace of expansion as solid, while Chicago described the rate of economic growth as moderate. Boston, Philadelphia, and St. Louis did not characterize the overall pace of expansion, although Boston noted that locally-based retailers were not sharing in the expansion.

                And, if all of that is not enough for the Fed, they can also turn to incoming earnings reports. By my count, positive surprises outweigh the negative by 2.22 to 1.

                In short, while I am aware of the many more cautious economic outlooks and the calls for the Fed to pause in its tightening campaign (See Mark Thoma and James Hamilton), Greenspan & Co. have a mound of positive data on their plate that screams to them a continuation of existing policy.

                What about inflation? Isn’t it under control? Why raise rates further? To be sure, inflation looks to have moderated. From the Beige Book again:

                Despite generally tighter labor markets, nearly all Districts said overall wage pressures remained moderate.

                Overall price pressures either eased slightly or remained unchanged in most Districts, despite substantial increases in the costs of energy and some building materials.

                This anecdotal report is supported by the GDP report, which revealed a 1.8% gain in core-PCE, down from 2.4% the previous quarter. Moreover, the ECI report revealed that wages were under control, as compensation costs gained just 0.7% in Q2. Some will read these numbers and conclude that the inflation demon has vanquished, and Knight Greenspan can return to his castle on Constitution Ave.

                I doubt this will be the interpretation of Fed policy makers. Instead, they will summarize the current situation as follows: “Inflation remains under control even as growth remains strong and the unemployment rate approaches 5%. This goldilocks combination is the result of our tightening campaign, which sent a signal that kept inflation expectations under control. Considering that growth is poised to remain strong, and even accelerate, we need to maintain vigilance – which means continuing our policy of measured rate hikes to keep expectations in place.”

                Short story: Greenspan and Co. don’t know how much further they have to go on this trail, but they can’t see the crest of the Fed Funds mountain just yet. The crest won’t come until they see solid evidence of demand growth sputtering.

                  Posted by Mark Thoma on Friday, July 29, 2005 at 11:16 AM in Economics, Fed Watch, Monetary Policy

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                  Don’t Drink the Water

                  North Korea has big economic problems. Poverty is rampant and there is little to indicate that will change anytime soon. But the Dear Leader does provide magical water filled with the endless love of the people for his leadership:

                  The Dear Leader provides good drinking water, The International Herald Tribune, by Jas Gawronski: HUNGHAM, North Korea Yun Hyok's shaved head skims the ground as he turns and tries to get up. He's playing soccer on prosthetic limbs. His legs were severed two years ago, when he was only 5. It was not an accident, not a disease, but poverty. The legs got frozen in a house with no heating while Yun slept at -20 C. At the local hospital, with no technology, no surgical instruments or relevant expertise, doctors did not know what to do except to amputate the child's legs right below the knees. The hospital serves 3 million people, but it has only one old ambulance and no heating system. Here in Hungham, the second biggest city in North Korea after Pyongyang, amputation is a common alternative if a broken arm or a leg looks difficult to fix.

                  North Korea is a journey through poverty. Hungham is even poorer than Pyongyang, but there are no beggars in the streets, as in Rome or Paris. In a dictatorship, beggars disappear. Last February, the government of Kim Jong Il announced that North Korea had nuclear weapons. The claim was part of a strategy to acquire aid and to be taken seriously. … North Korea needs aid now more than ever. It produces 3 million tons of cereals a year, whereas at least 4 million are needed for survival. The income per head for a North Korean is 5 percent of what a South Korean makes. The official line is that this is entirely the fault of the West. ... “Our problems are caused by the hostility of the rest of the world, by the U.S. sanctions. South Korea has relationships with other countries, we are isolated."

                  Things do look better than before. … There are more cars in the streets, and some new stalls, restaurants and decent shops - apparently signs of private initiative and a social class with money to spend. A parallel economy is growing. Foreign investment is desperately needed. The deputy minister of foreign trade, Kim Young Jae, said foreign investors would enjoy special treatment. When I ask him how he would persuade them to come to North Korea instead of China, he replied: "The 21st century is the century of all Asia." In fact, North Korea does nothing to attract investments. Here, time stopped 60 years ago, with a cult of personality, a huge army and a huge bureaucracy - things the modern world cannot accept.

                  On an Air Koryo flight from Beijing to Pyongyang, flight attendants alternated standard safety instruction with messages such as, "The water you are drinking here is special for your health and longevity. Even if he's very busy, the Dear Leader, the benevolent father of our people, has studied in detail the problems of distribution in our country in order to give water to everybody. If you drink it, you will feel the sense of endless love of our people for the great leader Kim Jong Il."

                    Posted by Mark Thoma on Friday, July 29, 2005 at 09:09 AM in Economics

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                    July 28, 2005

                    Making The Sky Fall

                    This article by Gene Sperling details the cost of Bush’s Social Security proposal in terms of what we will have to give up in the future. It’s a lot:

                    Bush's Massive New Spending Plan Dwarfs Military, Gene Sperling, Bloomberg: Those who fear government spending is spiraling out of control might want to check a new Bush administration proposal that may eventually cost more than the budget of the U.S. Army. If you think I am referring to another hidden cost of the President's Medicare prescription drug plan, guess again. I'm referring to the annual interest that would be due on the new debt needed to support President George W. Bush's Social Security plan to offer private investment accounts. ...

                    A new study by Jim Horney and Richard Kogan at the Center for Budget and Policy Priorities (CBPP), a Washington-based research organization focused on fiscal and poverty issues, has found that the borrowing needed to fund President Bush's Social Security plan would cause the national debt to increase by a staggering 19.5 percent of gross domestic product by 2038. The borrowing doesn't represent a temporary transition cost, according to the study, and would lead to higher national debt until 2067…

                    [T]he harm this would cause is significant on two levels. First, we would be abandoning the goal of restoring generational responsibility by increasing national savings. Second, an explosion in our projected national debt creates increased financial risk at a time when we already have high federal budget deficits and record current-account deficits. … On July 27, economist Christian Weller and I released an analysis from the Washington-based Center for American Progress showing that the interest payments owed on new debt from the President's Social Security plan would cost $163 billion a year on average between 2011 and 2050. This estimate is adjusted for inflation and counts savings from Bush's plan to cut most workers' benefits through partial price indexing. … In the decade starting in 2031, the U.S. would spend more servicing debt from the Bush Social Security plan than on the U.S. Army, Navy or Air Force. Indeed, from 2011 to 2050, these interest payments would be more than the expected spending on all veteran benefits, child tax credits and the Earned Income Tax Credit combined, or more than three times the projected cost of homeland security -- assuming all these programs grow roughly in line with the economy. Some might argue that as long as these interest payments were directed back into consumption or investment in the U.S., the impact wouldn't be so dire. However, from 2001 to 2004, foreign lenders have been the source of more than 80 percent of our government borrowing. If these trends continue and the President's Social Security plan passes ... China alone would receive almost $1 trillion in additional interest payments. …Even the new plans offered by Senator Jim DeMint, of South Carolina, and Representative Jim McCrery, of Louisiana, both Republicans, have been found by the Social Security actuaries to increase the deficit and debt every year over the next century…

                    The administration has successfully sold a solvency crisis, but I didn’t think they would follow up by trying to enact policies to make the crisis happen. I have this image of Chicken Little blowing up the sky, then saying "I told you so."

                      Posted by Mark Thoma on Thursday, July 28, 2005 at 10:17 PM in Budget Deficit, Economics, Social Security

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                      Is the French Economy a Failure?

                      Krugman answers the question "Does Europe Want to Change?" in his column "French Family Values":

                      ...The point is that to the extent that the French have less income than we do, it's mainly a matter of choice. And to see the consequences of that choice, let's ask how the situation of a typical middle-class family in France compares with that of its American counterpart. The French family, without question, has lower disposable income. This translates into lower personal consumption: a smaller car, a smaller house, less eating out. But there are compensations for this lower level of consumption. Because French schools are good across the country, the French family doesn't have to worry as much about getting its children into a good school district. Nor does the French family, with guaranteed access to excellent health care, have to worry about losing health insurance or being driven into bankruptcy by medical bills. Perhaps even more important, however, the members of that French family are compensated for their lower income with much more time together. Fully employed French workers average about seven weeks of paid vacation a year. In America, that figure is less than four. So which society has made the better choice?... whatever else you may say about French economic policies, they seem extremely supportive of the family as an institution...

                        Posted by Mark Thoma on Thursday, July 28, 2005 at 09:36 PM in Economics, Income Distribution, Macroeconomics, Regulation

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                        Electronic Voting Goes Haywire

                        Problems with electronic voting machines in Japan lead to a nullified election:

                        Electronic voting, The Asahi Shimbun: Voters in Kani, Gifu Prefecture, will elect a new municipal assembly on Aug. 21. The election is actually a rerun of one held in July 2003. However, the results of that election were nullified by the Supreme Court because of problems concerning electronic voting machines. … Voting machines broke down at all 29 polling stations in the city. As a result, votes were not properly registered. Some people even voted twice. ... The malfunction continued for an hour, creating long lines outside polling stations. Some voters simply gave up and went home. The difference between the winner with the fewest votes and the top losing candidate was just 35 votes. With such a slim margin, the result could have gone the other way if the system had worked properly. … Kani's handling of the situation was really disastrous. When the voting machines overheated, municipal government officials tried to cool them down with uchiwa fans. But confused voters kept repeating voting procedures or left without finishing. It was impossible to determine if their votes were registered properly. … Voting machines don't leave a paper trail. ... One idea worth consideration is to print out votes so voters can verify their decisions on paper if trouble occurs. Kani's rerun election will use the traditional method of writing down the names of candidates on ballots…

                        Will someone please remind me what the problem is with using paper copies of ballots as backup? Voters could verify the paper copy and seal it in an envelope inside the booth, then drop the envelope into a lockbox on their way out of the polling place. That would allow random audits, etc. What is the problem with that? I must be missing something obvious.

                          Posted by Mark Thoma on Thursday, July 28, 2005 at 08:37 PM in Politics

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                          The View of Iraq from Amman

                          This editorial from the Jordan Times is interesting. It lists some of the problems Iraq faces as it tries to draft a constitution and decide whether to be a federal or unitary state. The editorial notes that Islam has passed from " ... "a" source for the constitution" to being " ... "the" source." It also notes that a leaked draft of the constitution states that "No law that contradicts with its rules (Islamic) can be promulgated.":

                          Difficult issues, Editorial, Jordan Times: ( Amman) The constitution drafting process in Iraq is passing through turbulent times not only because of the periodic boycott of the meeting of the Constitutional Committee by its Sunni members but also over the salient features of what is to be the organic law of the country. The Sunni members of the committee have been on and off in their involvement in the drafting process because of threats to their lives and the recent slaying of two of their colleagues. It is hard to imagine how the drafting of the constitution can be finalised by the mid-August deadline in the absence of a minimum-security environment. Still, the hurdles facing this process go beyond the security deficit.

                          Atop the host of difficult issues is the role of Islam in the new constitution. Will Islam be “a” source for the constitution as was initially proposed or “the” source, as now seems more probable? It appears that the consensus now emerging within the drafters of the constitution is to make Islam “the” source. Accordingly the leaked version of the draft constitution states that “Islam is the official religion of the state and is the main source of legislation.” The draft goes on to stipulate that: “No law that contradicts with its rules (Islamic) can be promulgated.”

                          In retrospect, there is no real problem with making Islam the principal source of the constitution. The issue is rather what interpretation of Islam would serve as the source for Iraqi legislation. After all, on one hand there is a liberal interpretation of Islam and the verses of the Holy Koran, and on the other there is a conservative reading. Of special concern are issues of gender equality and the rights of women, which stand at the centre of the enduring controversy between Muslim countries and international human rights norms.

                          Given the fact that there are several Muslim sects existing in Iraq, each holding to its own interpretation of Islam, one wonders how this side of the equation would be resolved in the end.

                          Another major hurdle facing the drafters is over the form of country that will emerge from the present chaos. Will Iraq be a federal state or a unitary state. The Shiites and Kurds of Iraq would prefer a federated Iraqi state for obvious reasons while the Sunnis opt for a unitary country for fear that federalism may indeed lead to the division of the country.

                          Accordingly, there is still much to be done and agreed upon by the committee members by the Aug. 15 deadline. As long as the Shiites, Sunnis and Kurds of Iraq are on talking terms with each other, the meeting of the minds between them on the various provisions of the constitution remains possible.

                            Posted by Mark Thoma on Thursday, July 28, 2005 at 07:27 PM in Iraq

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                            Bush’s Approval Ratings on Social Security and the Economy Continue to Decline

                            The public is not convinced that the economy is improving if approval ratings are the guide, and the president continues to lose ground on the Social Security reform issue:

                            Bush's Public Approval Slips on Economic, Terrorism Concerns, Bloomberg: President George W. Bush's standing with the public has dropped during the first six months of his second term, driven largely by a decline in public attitudes about the economy. … The president's standing on his signature second-term domestic issue, Social Security, also has diminished, according to the polls by CNN/USA Today/Gallup, NBC News/Wall Street Journal, New York Times/CBS News and ABC News/Washington Post. … Bush's overall job approval ratings in all four of the most recent polls dropped below 50 percent, with the change since January ranging from 7 percentage points in the Times/CBS poll to 4 percentage points in the Post/ABC survey. … Although government reports show the economy is expanding and adding jobs, the public doesn't give the president credit. CNN/USA Today/Gallup polls taken from January to June showed Bush's approval rating on the economy fell to 41 percent from 50 percent. Washington Post/ABC News polls conducted during the same period showed it declined to 40 percent from 46 percent. … Republican political strategist Ed Rollins said it's just a matter of time before Bush's approval ratings on the economy begin to improve, given recent reports showing low inflation, job growth, a strong housing market and more consumer spending. … ''Polling indicators on the economy are always the last things to turn,'' Rollins said. ''I would predict that if things continue to improve over the next few months, his numbers will get better.'' … On Social Security, the issue that Bush made the centerpiece of his second-term agenda, the president lost ground after a two- month cross-country campaign to promote his plan to overhaul the system. A quarter of the public said they approved of the way the president was dealing with Social Security in the Times/CBS poll, compared with 30 percent who approved when the question was asked in a March survey. … In the Post/ABC polls, Bush's approval rating on Social Security was at 34 percent in June, down from 38 percent in January. …

                              Posted by Mark Thoma on Thursday, July 28, 2005 at 06:57 AM in Economics, Politics

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                              July 27, 2005

                              Once Again, Luskin Dons the Clown Suit

                              It is laughable for Luskin to criticize Krugman’s knowledge of international trade and finance, absolutely ludicrous. I don’t think Krugman, a recognized and respected scholar in this area, should be expected to dumb things down enough for Luskin to understand. It’s not possible anyway.

                                Posted by Mark Thoma on Wednesday, July 27, 2005 at 06:30 PM in Economics, International Finance, International Trade, Press

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                                Rove Reveals Social Security Reform Agenda

                                Rove isn’t too busy with other matters to play a role in setting the agenda for an attempt at rescuing Social Security reform. He lets us know the House will go first in September, followed by the Senate. Once again, with gusto, they are not giving up. Not at all. Bush speaks as well and uses the opportunity to - surprise - blame the Democrats for his problems:

                                House first on Social Security, Rove says, By Patrick O'Connor, The Hill: Deputy White House Chief of Staff Karl Rove told a group of college students and lobbyists yesterday that the House will move a Social Security reform bill before the Senate will. Rove said the House would act in September and the Senate would follow soon thereafter. … Rove’s remarks contrast with a popular assumption on Capitol Hill that the Senate would act first on Social Security reform before House leaders would schedule a vote on the controversial measure. … Asked about his own timeline for Social Security reform, House Ways and Means Committee Chairman Bill Thomas (R-Calif.) told a group of reporters at the National Press Club last week that his committee would introduce some form of retirement-security legislation “probably in early September.” … Thomas has maintained that Social Security reform is just one component of a three-part retirement-security overhaul — the other two being pension and savings reform. … “We’re working constantly with Chairman Thomas,” House Speaker Dennis Hastert (R-Ill.) told The Hill yesterday after he was asked about what he knew of the Thomas plan. … Asked about the bill shortly after ... Hastert said, “It’s still a work in progress.” He added that leadership would likely determine its approach to Social Security reform when Congress reconvenes in the fall. … For his part, Bush joked with the 200 or so college students and lobbyists in attendance during his speech, the source said. The president told the assembled guests that “groups like MoveOn-dot-something” have been attending congressional town-hall meetings and “raising cane” about Social Security reform. Meanwhile, Bush said, “our folks have been working” on changing the entitlement system …

                                Rove's involvement in the reform effort and the indication that a coordinated strategy is developing is not good news. Also noted is Bush's willingness to make joint appearances with Rove which I take as an implicit demonstration of support.

                                  Posted by Mark Thoma on Wednesday, July 27, 2005 at 03:24 PM in Economics, Politics, Social Security

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                                  "Dear Red States..." A Letter From The Blue!

                                  My daughter, a Republican (she should meet PGL’s wife!) sent me this email that is making the rounds:

                                  Dear Red States...

                                  We've decided we're leaving. We intend to form our own country, and we're taking the other Blue States with us.

                                  In case you aren't aware, that includes Hawaii, Oregon, Washington, Minnesota, Wisconsin, Michigan, Illinois and all the Northeast. We believe this split will be beneficial to the nation, and especially to the people of the new country of New California.

                                  To sum up briefly: You get Texas, Oklahoma and all the slave states. We get stem cell research and the best beaches. We get Elliot Spitzer. You get Ken Lay.

                                  We get the Statue of Liberty. You get Dollywood. We get Intel and Microsoft. You get WorldCom. We get Harvard. You get Ole' Miss. We get 85 percent of America's venture capital and entrepreneurs. You get Alabama. We get two-thirds of the tax revenue, you get to make the red states pay their fair share.

                                  Since our aggregate divorce rate is 22 percent lower than the Christian Coalition's, we get a bunch of happy families. You get a bunch of single moms.

                                  Please be aware that Nuevo California will be pro-choice and anti-war, and we're going to want all our citizens back from Iraq at once. If you need people to fight, ask your evangelicals. They have kids they're apparently willing to send to their deaths for no purpose, and they don't care if you don't show pictures of their children's caskets coming home. We do wish you success in Iraq, and hope that the WMDs turn up, but we're not willing to spend our resources in Bush's Quagmire.

                                  With the Blue States in hand, we will have firm control of 80 percent of the country's fresh water, more than 90 percent of the pineapple and lettuce, 92 percent of the nation's fresh fruit, 95 percent of America's quality wines (you can serve French wines at state dinners) 90 percent of all cheese, 90 percent of the high tech industry, most of the U.S. low-sulfur coal, all living redwoods, sequoias and condors, all the Ivy and Seven Sister schools, plus Harvard, Yale, Stanford, Cal Tech and MIT.

                                  With the Red States, on the other hand, you will have to cope with 88 percent of all obese Americans (and their projected health care costs), 92 percent of all U.S. mosquitoes, nearly 100 percent of the tornadoes, 90 percent of the hurricanes, 99 percent of all Southern Baptists, virtually 100 percent of all televangelists, Rush Limbaugh, Bob Jones University, Clemson and the University of Georgia.

                                  We get Hollywood and Yosemite, thank you.

                                  Additionally, 38 percent of those in the Red states believe Jonah was actually swallowed by a whale, 62 percent believe life is sacred unless we're discussing the death penalty or gun laws, 44 percent say that evolution is only a theory, 53 percent that Saddam was involved in 9/11 and 61 percent of you crazy b*****ds believe you are people with higher morals then we lefties.

                                  By the way, we're taking the good pot, too. You can have that dirt weed they grow in Mexico.

                                  Peace out, Blue States

                                    Posted by Mark Thoma on Wednesday, July 27, 2005 at 01:53 PM in Politics

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                                    Bernanke Touts the Administration’s Economic Policy

                                    Bernanke explains how the administration’s economic policies have resulted in robust output and employment growth and a generally sound economy. But as noted here, Joseph Stiglitz sees the administration's economic policies a bit differently. Would Stiglitz say that Bernanke drank the administration Kool-Aid, especially after the last sentence that throws in all but the kitchen sink of administration policies? I hope Ben's reward is a shot at the short-list for Fed chair:

                                    The Goldilocks Economy, By Ben S. Bernanke, WSJ Commentary (subscription): … The recent strength of the U.S. economy makes it all too easy to forget how difficult the economic situation was just a few years ago. … Fortunately, good economic policies helped to turn the situation around. President Bush's tax cuts provided much needed and remarkably well-timed stimulus. ... The Federal Reserve cut short-term interest rates sharply and kept them low. Together, these policies jump-started the U.S. economic engine. … The economy today is thus on a far stronger footing than it was two or three years ago. Where will we go from here? To consider the short-term situation first, economists are divided about what to expect for Friday's GDP release. … Friday's initial estimate of second-quarter growth may come in below the 3.8% growth rate achieved in each of the last two quarters. The good news is that slimmer inventories should set the stage for stronger subsequent growth in production, and many economists consequently would expect strong growth in the third quarter.

                                    In the medium term, U.S. economic growth will depend primarily on two factors -- employment growth and productivity growth. .... So far this year the economy has created about 180,000 net new payroll jobs each month, well above the 130,000 to 140,000 jobs per month that economists estimate are necessary to absorb new entrants to the labor force. ... The amount of slack in the labor market is difficult, perhaps impossible, to measure with precision. The administration forecasts that job growth will remain elevated well into 2006 at least, supporting above-trend economic growth. … The faster productivity grows (the amount a worker produces in an hour), the faster the economy can grow without inflation. ... From 2001 through 2004, productivity growth in the U.S. averaged 3.7% per year, making this one of the strongest periods of productivity growth in modern U.S. history. Economists generally do not expect that very high rate to be maintained, with most forecasting a sustainable rate of productivity growth of about 2.5% per year. .... In the long run the most important issue isn't which experts are right about this week's estimates of economic growth. The U.S. economy is fundamentally strong. What's important is whether we continue to pursue good economic policies -- taking the actions necessary to increase the skills of the work force, keep our economy open to the world, increase our energy security, reduce the government deficit, keep taxes low, curb frivolous lawsuits, ease unduly burdensome regulations, and ensure that Social Security and other entitlement programs are placed on solid long-term footing.

                                      Posted by Mark Thoma on Wednesday, July 27, 2005 at 12:24 PM in Economics, Politics

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                                      July 26, 2005

                                      Stiglitz on China and Why U.S. Economic Advice is Discounted

                                      Joseph Stiglitz of Columbia University, winner of the Nobel Prize in economics in 2001, discusses why yuan revaluation will have little effect on the trade balance, why yuan revaluation could be bad for the U.S., why China wants a stable exchange rate, and why China has little reason to take economic advice from this administration:

                                      US has little to teach China about steady economy, By Joseph Stiglitz, FT: As excitement over China’s revaluation has died down ... it is time for a calmer assessment about what it does and does not mean for China, for the US and for the global economy. … whether this, or a succession of revaluations, eliminates China’s trade surplus will have little effect on the more important problem of global trade imbalances, and particularly on the US trade deficit. Much of China’s recent gains in textile sales … came at the expense of other developing countries. America will once again be buying from them, and so total imports will be little changed. … Unless domestic investment goes down or domestic savings go up, the trade deficit will persist, unabated. The trade deficit could diminish but if it does, it will not be a pretty picture. Domestic investment, for instance, could go down if we succeed in getting our wish and China’s trade surplus disappears; with China no longer using the money from its trade surplus to fund our huge fiscal deficit, medium- and long-term interest rates would rise. The economic downturn, and the decrease in investment, would be compounded if the increase in interest rates pricked the housing bubble. … There is a high cost to exchange rate volatility, and countries where governments have intervened judiciously to stabilise their exchange rate have, by and large, done better than those that have not. Exchange rate risks impose huge costs on companies; it is costly and often impossible to divest themselves of this risk, especially in developing countries. … The US economy is growing at a third the pace of China’s. Poverty is rising and median household incomes are, in real terms, declining. America’s total net savings are much less than China’s. China produces far more of the engineers and scientists that are necessary to compete in the global economy than the US, while America is cutting its expenditures on basic research as it increases military spending. Meanwhile, as America’s debt continues to balloon, its president wants to make tax cuts for the richest people permanent. With all this in mind, China’s leaders may not feel they need to seek advice from the US on how to manage either the exchange rate or the economy.

                                        Posted by Mark Thoma on Tuesday, July 26, 2005 at 06:30 PM in China, Economics, International Finance

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                                        Clarida Not on Short-List for Board of Governors

                                        The White House has drawn up a short-list for open seats on the Board of Governors. Can anyone fill us in on these people on the list (Buchholz, Kroszner, Warsh, and Dooley)? We would be most grateful. The one person I do know about, and support, is Richard Clarida. I am disappointed that Clarida did not make the short-list. I am waiting to learn more to make final judgments, but dropping Clarida, assuming it was the administration's choice and not a voluntary withdrawal, is not an encouraging sign:

                                        List of Fed board potentials grows, Reuters: Economist and author Todd Buchholz, an adviser to President George W. Bush during the 2004 presidential campaign, is being considered by the White House for a seat on the Federal Reserve Board, sources close to the administration said. Buchholz, who also served as a White House adviser under Bush's father, is under consideration for one of the two Fed seats the president will need to fill. University of Chicago economist Randall Kroszner, a member of Bush's Council of Economic Advisers from November 2001 to July 2003, is another candidate. … The White House has drawn up a short list for the seat vacated in June when Ben Bernanke left the Fed to become chairman of the CEA, sources have said. A second spot will open in August when Fed Gov. Edward Gramlich is to step down. Kroszner and Buchholz are among those who have been interviewed for the Washington-based board. Former Treasury Department official Richard Clarida has been mentioned as a possible contender, too, but two sources said he was not on the short list. BusinessWeek Online, which reported on Thursday that Buchholz was in the running, also said Kevin Warsh of Bush's National Economic Council was being considered. The Financial Times said yet another possible candidate was Michael Dooley, a professor at the University of California at Santa Cruz. … Buchholz has experience in Washington politics and finance. He was a co-founder of Enso Capital Management, a managing director of Tiger Management Fund and former president of the G7 Group, an advisory firm that tracks policies that impact financial markets. … Kroszner's expertise blends international finance and financial regulatory issues. … Dooley, editor of the International Journal of Finance and Economics, has expertise in international economics. … Dooley has argued the record U.S. current account deficit can likely be sustained for much longer than most economists had long thought. Warsh is an expert on financial regulatory matters, including oversight of mortgage market giants Fannie Mae and Freddie Mac…

                                          Posted by Mark Thoma on Tuesday, July 26, 2005 at 04:41 PM in Economics, Monetary Policy, Politics

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                                          Bad News for Opt-Out Accounts

                                          This is not good news for add-on, opt-out accounts. Younger workers, when forced to make a choice due to departure from a firm cash out their retirement saving plans in large numbers. This implies that, when faced with checking a box on a tax return, something that requires active participation, many may opt-out and those that do may be the workers most likely to benefit from such accounts in the long-run. Thus, the ability of these accounts to increase national saving and solve market failure problems in the retirement savings market is suspect if these statistics carry over to opt-out, add-on accounts:

                                          Cashing out their future gains, By Andrea Coombes, MarketWatch: Almost half of workers who switched jobs last year cashed out their 401(k) rather than maintain it in a retirement plan, according to a new survey, a move financial planers (sic) say can be costly in the long run. Forty-five percent of departing workers opted for a cash distribution, rather than leaving the money in the 401(k) or rolling it over to an IRA… The people most likely to cash out were younger, had a shorter tenure at the company or had a low 401(k) balance, the study found. Among workers in their 20s, 66% cashed out their plans compared with about 31% of workers in their 50s. … The propensity to cash out is even fairly common among slightly older workers: 42% of those in their 40s took the cash. … workers pay a steep price to pull the money out: An immediate 20% withholding (which will be adjusted up or down based on their marginal tax rate when they file their tax return), plus a 10% withdrawal penalty. … Higher balances cashed out less often. … Almost three-quarters of those with 401(k) balances less than $10,000 took the cash. That dropped to 8% among those with balances of $50,000 to $60,000. … the study looked at plans last year that allowed workers with low account balances to leave their money in the company plan, and the findings suggest even a "save the money" default won't change some workers' urge to cash out...

                                          One note on the statistics and their interpretation. The statistics appear to imply that if you can get workers to avoid taking out small balances, then they will leave the money in the accounts once the amount crosses some threshold. Be careful with that interpretation since those with large accounts are not a random sample. To have a large account, you have to avoid the temptation to withdraw balances when they are small. The experiment to run is to take workers who cashed out and increase the size of their accounts to see if behavior changes, but that experiment is not performed naturally by the market process.

                                            Posted by Mark Thoma on Tuesday, July 26, 2005 at 02:25 PM in Economics, Saving, Social Security

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                                            July 25, 2005

                                            Please Say Uncle

                                            I would like to write about something else (which explains these posts tonight). Will they ever give up on private accounts as part of Social Security reform? Grassley says they won’t. It appears they will abandon solvency first, the reason they gave for reform. They’re pretty good at justifying things ex-post though:

                                            Pension, Social Security Measure Possible in `05, Grassley Says, Bloomberg: A congressional session extending through Thanksgiving will give Republicans a chance to pass a pension-plan overhaul, an estate-tax compromise and possibly even some form of Social Security legislation, U.S. Senate Finance Committee Chairman Charles Grassley said. … He acknowledged that Republican infighting, Democratic opposition or disagreements with the House may derail any of the measures. … Grassley's comments ... contrast with those of Senator John Cornyn, a Texas Republican, who said yesterday ... that congressional approval of Social Security legislation was possible ''maybe next year.'' Grassley said he wasn't ready to abandon efforts to pass Social Security legislation -- President George W. Bush's top domestic priority -- though he acknowledged it would be an uphill battle. ''I'm not going to give up on personal accounts until the last minute,'' he said. Any legislation the House and Senate are likely to approve would include measures to ensure Social Security's solvency ... ''Congressman Thomas is committed to working on the solvency issue,'' he said. … A final bill would incorporate ''some small step toward personal accounts,'' Grassley said. Bush's proposal calls for diverting 4 percentage points of the 12.4 percent Social Security payroll tax into private accounts that could be invested in stocks and bonds. Grassley said he would settle for as little as 2 percentage points. Even that may not be achievable, he said, and the final measure may be similar to a proposal by Senator James DeMint, a South Carolina Republican, that calls for using Social Security's current surplus to seed the accounts. The easiest path for the bill may be through the House, which is more supportive of changes to Social Security, Grassley said…

                                            So the fallback position is the DeMint proposal? Not good.

                                              Posted by Mark Thoma on Monday, July 25, 2005 at 10:44 PM in Economics, Social Security

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                                              Should the Fed Pause and Catch Its Breath?

                                              Here’s another view of Fed policy from John Makin of AEI, but not one I fully agree with since it implies the Fed is focused on housing. The Fed has made it very clear that it does not intend to manage the housing sector, or any other sector in isolation.
                                              Nevertheless, it does give an answer to the question posed by Jim Hamilton at Econbrowser who is concerned about the housing and auto sectors (and the potential for problems to spread beyond those areas). Econbrowser asks why the Fed shouldn't pause and take a breath. Makin argues this could exacerbate the problem in his argument below. I’ve argued the Fed may want to pause and catch their breath at 3.5% so I would not object to a pause. I believe the Fed, given its credibility and its commitment and transparency objectives, can convey its intentions clearly and prevent a speculative outburst so that Makin's concerns are unlikely to materialize. If I put myself in the Fed’s shoes, I believe they see strong growth and the potential for inflation so, for now, rates are likely to increase. If the GDP growth data remain strong and other indicators support this view as new data arrive, I doubt they will move off the current path.

                                              Can the Fed Achieve a Goldilocks Tightening?, By John H. Makin, AEI: …For the economy to avoid recession, the Federal Reserve will need to pull off a “Goldilocks tightening” that just cools the housing sector without freezing it. ... Causing the increase in housing prices merely to slow and not drop requires a degree of policy precision that few at the Fed would claim they possess. In fact, the Fed may be required to overshoot in the tightening process. The reasoning is as follows. ... Were the Fed to hint at its next meeting that a 3.5 percent Fed funds rate represented the top, markets would quickly conclude that the next interest rate move would be downward and asset markets, especially the housing market, would experience another leg up. … a larger bubble would only increase subsequent instability.

                                              The Fed is forced to signal continued rate increases until it observes a marked slowdown in the housing sector and a leveling of price increases in the numerous “hot” real estate markets. Given the lags involved in collecting data on the housing sector and the lags involved in enacting monetary policy, it may be that by the time a slowdown in the housing sector is clearly obvious, the Fed will already have induced a sufficient housing decline to result in a sharp slowdown of the economy. … We need a “Goldilocks Tightening” that sets the temperature in the real estate sector just right: not too hot and not too cold.

                                                Posted by Mark Thoma on Monday, July 25, 2005 at 09:09 PM in Economics, Monetary Policy

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                                                Fed More Concerned with Inflation than GDP Growth

                                                I didn’t interpret the minutes as reflecting as strong a stance against inflation as John M. Berry of Bloomberg does, but I’m not far off, and I don’t disagree that the Fed is more concerned with inflation than with output growth currently. We’ll know more later this week when new data on GDP are released:

                                                Fed's More Concerned About Inflation Than Growth, John M. Berry, Bloomberg: Bloomberg: Federal Reserve officials are much more concerned that inflation may accelerate later this year than that the solid U.S. economic expansion might run out of gas. With the expansion having reduced the amount of slack in both labor and product markets, the officials believe such an inflation pickup might trigger an increase in inflation expectations that could require a costly dose of tight money to reverse. … In his testimony, Greenspan ticked off the reasons for the concern about inflation: rising energy prices, slowing productivity growth and rising unit labor costs. … among the FOMC participants, the minutes described the views at the meeting as ''mixed.'' ''Some participants expressed concern that, with policy still accommodative, the underlying pace of inflation might be in the process of stepping up, perhaps to a level that was at the upper end of the range that they view as compatible with the committee's price stability objective,'' the minutes said. … Another group was more optimistic, noting that recent core inflation figures had been ''relatively restrained'' while anecdotal reports of companies' pricing power at many firms ''remained quite limited.'' These officials also noted that prices of non-energy commodities and imports, ''which had surged for a time, were now moderating.'' And finally, to this group, there appeared to be shortages of workers for only a few, mostly skilled occupations, the minutes said. … The voting members of the committee ''concurred that at this point in the expansion, with margins of slack resources narrowing and inflation somewhat higher, the committee needed to be particularly alert to signs of a further increase in inflation. ''Such an increase could be particularly problematic because it might impart upward momentum to inflation expectations that would be costly to reverse,'' the minutes said...

                                                  Posted by Mark Thoma on Monday, July 25, 2005 at 08:01 PM in Economics, Monetary Policy

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                                                  Temperature Anisotropies Do not Support Inflationary Theory

                                                  This is about inflation, but not the kind you are used to (to get to economics posts, scroll past this post and the next). When theorists in economics find that the data do not support the theory, their first reaction is often to say there must be something wrong with the data. The theory has to be right. Physicists have the same tendency:

                                                  Is the Universe Out of Tune?, By Glenn D. Starkman and Dominik J. Schwarz, Scientific American (subscription): Imagine a fantastically large orchestra playing expansively for 14 billion years. At first, the strains sound harmonious. But listen more carefully: something is off key. Puzzlingly, the tuba and bass are softly playing a different song. So it is when scientists “listen” to the music of the cosmos played in the cosmic microwave background (CMB) radiation, our largest-scale window into the conditions of the early universe. ... The fluctuations were a lot like sound waves … and the “sound” ringing throughout the cosmos 14 billion years ago was imprinted on the CMB. … As with a sound wave, the CMB fluctuations can be analyzed by splitting them into their component harmonics …. Certain of those harmonics are playing more quietly than they should be. In addition, the harmonics are aligned in strange ways— they are playing the wrong tune. These bum notes mean that the otherwise very successful standard model of cosmology is flawed—or that something is amiss with the data.

                                                  Scientists have constructed and corroborated the standard model of cosmology over the past few decades. It accounts for an impressive array of the universe’s characteristics. … Called the inflationary lambda cold dark matter model, its name derives from its three most significant components: the process of inflation, a quantity called the cosmological constant symbolized by the Greek letter lambda, and invisible particles known as cold dark matter. According to this model, inflation was a period of tremendously accelerated growth that started in the first fraction of a second after the universe began and ended with a burst of radiation. Inflation explains why the universe is so big, so full of stuff and so close to being homogeneous. It also explains why the universe is not precisely homogeneous ... Despite the model’s great success … problems show up when astronomers measure the CMB’s temperature fluctuations. ... It is the most ancient of all light, originating only a few hundred thousand years after the big bang, when the rapidly expanding and cooling universe made the transition from dense opaque plasma to transparent gas. In transit for 14 billion years, the CMB thus reveals a picture of the early universe. Coming from the farthest reaches, that picture is also a snapshot of the universe at its largest size scale. Models such as the lambda cold dark matter model cannot calculate the exact pattern of the fluctuations. Yet they can predict their statistical properties … Some of these statistical features are predicted not only by the lambda cold dark matter model but also by numerous other simple inflationary models that physicists have considered at one time or another as possible alternatives. Because such properties arise in many different inflationary models, they are considered “generic” predictions of inflation; if inflation is true at all, these predictions hold irrespective of the finer details of the model. To falsify one of them would be to challenge the scenario of inflation in the most serious way a scientific theory can be challenged. That is what the anomalous CMB measurements may do.

                                                  … This mystery has three potential solutions. First, the unusual results may be just a meaningless statistical fluke. In particular, uncertainties in the data may be larger than have been estimated, which would make the observed results less improbable. Second, the correlations may be an observational artifact—an unexpected physical effect that has not been compensated for in the WMAP team’s analysis of its data. Finally, they may indicate a deeper problem with the theory. … Two explanations stand out as the most likely for the correlation ... The first is an error in the construction or understanding of the WMAP instruments or in the analysis of the WMAP data … A more probable explanation is that an unexpected source or absorber of microwave photons is contaminating the data. …At first glance, the discovery of a solar system contaminant in the CMB data might appear to solve the conundrum of weak large-scale fluctuations. Actually, however, it makes the problem even worse. … It looks like inflation is getting into a major jam. … Is there hope to resolve these questions? Yes, we expect more data from the WMAP satellite …

                                                    Posted by Mark Thoma on Monday, July 25, 2005 at 07:20 PM in Economics, Science

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                                                    Understanding Symbolic Relationships

                                                    This has only a loose connection to economics, but I thought it was interesting. When I finished reading the article, I found myself wondering when children first understand what money represents (I’ll trade you this shiny new penny for that ugly piece of wrinkled green paper ... ):

                                                    Mindful of Symbols, By Judy S. DeLoache, Scientific American (subscription): About 20 years ago I had one of those wonderful moments when research takes an unexpected but fruitful turn. I had been studying toddler memory ... For the project, I had built a model of a room … The real space was furnished like a standard living room ... The miniature items were as similar as possible to their larger counterparts... For the study, a child watched as we hid a miniature toy—a plastic dog we dubbed “Little Snoopy”—in the model … We then encouraged the child to find “Big Snoopy,” a large version of the toy “hiding in the same place in his big room.” … The three-year-olds were, as we had expected, very successful. After they observed the small toy being placed behind the miniature couch, they ran into the room and found the large toy behind the real couch. But the two-and-a-half-year olds, much to my and their parents’ surprise, failed abysmally. They cheerfully ran into the room to retrieve the large toy, but most of them had no idea where to look ... Their failure to use what they knew about the model to draw an inference about the room indicated that they did not appreciate the relation between the model and room. … What most distinguishes humans from other creatures is our ability to create and manipulate a wide variety of symbolic representations. This capacity enables us to transmit information from one generation to another, making culture possible, and to learn vast amounts without having direct experience—we all know about dinosaurs despite never having met one. …

                                                    The first type of symbolic object infants and young children master is pictures. No symbols seem simpler to adults, but … infants initially find pictures perplexing. The problem stems from the duality inherent in all symbolic objects: they are real in and of themselves and, at the same time, representations of something else. ... A few years ago I became intrigued by anecdotes suggesting that infants do not appreciate the dual nature of pictures. Every now and then, I would hear of a baby who tried to pick up a depicted apple or to fit a foot into a photograph of a shoe. … We began testing infants’ understanding of pictures in a very simple way. We put a book containing highly realistic color photographs of individual objects in front of nine-month-olds. To our surprise, every child in the initial study, and most in our subsequent studies, reached out to feel, rub, pat or scratch the pictures. Sometimes the infants even grasped at the depicted objects as if trying to pick them up off the page. … The confusion seems to be conceptual, not perceptual. Infants can perfectly well perceive the difference between objects and pictures. Given a choice between the two, infants choose the real thing. But they do not yet fully understand what pictures are and how they differ from the things depicted … some actually lean over and put their lips on the nipple in a photograph of a bottle … They only do so … when the depicted object is highly similar to the object it represents .... when depicted objects bear relatively little resemblance to the real thing—as in a line drawing—infants rarely explore them. By 18 months, babies have come to appreciate that a picture merely represents a real thing. Instead of manipulating the paper, they point to pictures and name objects or ask someone else for the name. … it takes several years for the nature of pictures to be completely understood. … until the age of four, many children think that turning a picture of a bowl of popcorn upside down will result in the depicted popcorn falling out of the bowl.

                                                    Pictures are not the only source of symbol confusion for very young children. … toddlers come into the lab and try to sit down on the tiny chair from the scale model—much to the astonishment of all present. … we decided to study them. We brought 18- to 30-month-old children into a room that contained … identical miniature versions. When the child returned, we did not comment on the switch and let him or her play spontaneously. … We then examined films of the children’s behavior for what we came to call scale errors: … Almost half the children committed one or more of these mistakes. ... Some sat down on the little chair …. Some children sat on the miniature slide and tried to ride down it … others attempted to climb the steps, causing the slide to tip over. … A few kids tried to get into the tiny car … often with remarkable persistence ... One little girl went so far as to take off her shoe in the apparent hope that her foot would then fit … When a child sees a miniature of a familiar object, visual information—the object’s shape, color, texture and so on—activates the child’s mental representation of its referent. Associated with that memory is the motor program for interacting with the large object and other similar objects. In half the children we studied, this motor program was presumably activated but then inhibited … But in the other half the motor routine was not inhibited. ... Some children, for instance, bent over the tiny chair and looked between their legs to precisely locate it; those trying to get into the miniature car first opened its door and then tried to shove their foot right in. … This dissociation in the use of visual information is consistent with influential theories of visual processing—ones positing that different regions of the brain handle object recognition and planning versus the execution and control of actions. Scale errors involve a failure of dual representation: children cannot maintain the distinction between a symbol and its referent. We know this because the confusion between referent and symbolic object does not happen when the demand for dual representation is eliminated—a discovery I made in 1997 when … [we] … convinced two-and-a-half-year-olds … that we had a device that could miniaturize everyday objects. ... If a child believes that a machine has shrunk an object or a room, then in the child’s mind the miniature is the thing itself. There is no symbolic relation between room and model, … The child and experimenter then decamped to another room to wait while the machine did its work. When they returned to the lab, a small tent sat where the big one had been. (One of the remarkable things about this study is the fact that the children did not find it at all surprising that a machine could miniaturize objects. Or that it might need privacy to do so.) When we asked the children to search for the toy, they immediately looked in the small tent. Believing the miniature to actually be the original tent after shrinking, they successfully retrieved the hidden toy. … they had no dual representation to master: the small tent was the same as the large tent, and thus the toy was where it should be…

                                                    Understanding the role of dual representation in how young children use symbols has important practical applications. One has to do with the practice of using dolls to interview young children in cases of suspected sexual abuse. … this assumption entails the … assumption that a young child will be able to think of this object as both a doll and a representation of himself or herself. These assumptions have been called into question ... In general, the children’s reports were more accurate when they were questioned without a doll, and they were more likely to falsely report genital touching when a doll was used. .. very young children might not be able to relate their own body to a doll. In a series of studies in my lab … Children between three and three-and-a-half usually placed the sticker correctly, but children younger than three were correct less than half the time.

                                                    The concept of dual representation has implications for educational practices as well. Teachers in preschool and elementary school classrooms around the world use “manipulatives”—blocks, rods and other objects designed to represent numerical quantity. … some research does suggest that children often have problems understanding and using manipulatives. … Using blocks designed to help teach math to young children, we taught six- and seven-year-olds to do subtraction problems that require borrowing … We taught a comparison group to do the same but using pencil and paper. Both groups learned to solve the problems equally well—but the group using the blocks took three times as long to do so. A girl who used the blocks offered us some advice after the study: “Have you ever thought of teaching kids to do these with paper and pencil? It’s a lot easier.” … As these various studies show, infants and young children are confused by many aspects of symbols that seem intuitively obvious to adults. They have to overcome hurdles on the way to achieving a mature conception of what symbols represent, and today many must master an ever expanding variety of symbols. Perhaps a deeper understanding of the various stages of becoming symbol-minded will enable researchers to identify and address learning problems that might stem from difficulty grasping the meanings of symbols.

                                                      Posted by Mark Thoma on Monday, July 25, 2005 at 06:30 PM in Science

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                                                      Bi-Partisan Support for Add-On Accounts Appears Possible

                                                      Given this post, it would be hard for me to object to these proposals to boost national saving:

                                                      Retirement Reservations - Low Savings Rate Worries Congress, By Jonathan Weisman, Washington Post: ... Out of the Social Security stalemate ... a separate, bipartisan push is emerging to address an issue that is arguably more pressing: the nation's abysmal savings rate, which most economists see as a broader threat to retirement security. A final House Ways and Means Committee bill on Social Security remains far off, but potential provisions aimed at bolstering the nation's anemic savings rate are coming into focus.

                                                      Many of those initiatives will have bipartisan appeal. House Democrats plan to unveil their own proposals this week to boost national savings, said Rep. Sander M. Levin (Mich.), the ranking Democrat on the Social Security subcommittee. … A savings package, which could move on its own or be wrapped into a bill next year to overhaul the tax code, could have significant economic consequences. ... National savings helps to keep interest rates low and to finance business investments that maintain economic growth. … The centerpiece policy of a new savings package, crafted by Republican tax lobbyist Richard Grafmeyer, is an enhanced tax credit to spur savings among low- and moderate-income workers. Grafmeyer's plan -- under serious consideration by the Ways and Means Committee -- would expand that participation greatly. Workers earning $50,000 or less would open a savings plan with their employer, a financial institution or even a tax preparer such as H&R Block. Those institutions would then match the deposits -- 50 cents on the dollar up to a maximum annual contribution of $2,000 -- and would receive a federal tax credit to cover the cost. By checking a box on their tax returns, these workers could direct their earned income tax credits or income tax refunds into the new accounts as well, under a plan under committee consideration, said Rep. Jim McCrery (R-La.), chairman of the House Ways and Means subcommittee on Social Security. … Another likely piece of the larger retirement security package being drafted by House Ways and Means Chairman Bill Thomas (R-Calif.) would help employers make enrollment in 401(k) plans automatic unless workers choose to opt out. … Virtually every one of these measures is mirrored by a similar Democratic proposal, said Rep. Rahm Emanuel (D-Ill.), a Ways and Means Committee member who has been pushing savings provisions for months. If Republicans are willing to break them out of a private accounts package, there is little doubt they would be approved overwhelmingly. "You could make progress on this in a New York minute," Emanuel said. "We're getting very close here." … Proponents of Social Security overhaul have not lost hope. …

                                                      The two sides may agree on add-on accounts to boost saving, but the long-run goals of the two sides are very different and there are politics in the background to be wary of. Keep an eye on this.

                                                        Posted by Mark Thoma on Monday, July 25, 2005 at 10:08 AM in Economics, Politics, Social Security

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                                                        July 24, 2005

                                                        The Insurance Value of Fixed-Rate Mortgages

                                                        This is the last automatic post. I want to comment a bit further on two issues because I’m guessing (probably wrongly) that they may generate comment. They are the insurance value of fixed-rate mortgages and the proposed regulation of Freddie Mac and Sallie Mae.
                                                        Let’s return, briefly, to the ARM vs. Fixed rate mortgage issue and which is cheaper. Greenspan’s assertion is that:

                                                        …Indeed, recent research within the Federal Reserve suggests that many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade…

                                                        I have not seen the research Greenspan is referring to, but the point I want to make is that insurance is always a bad deal ex-post if the insured event does not occur. If your house doesn't burn down, then ex-post (but not ex-ante) all the money spent on premiums was a bad deal. One could look back and talk about how much money would have been saved if one did not have the insurance, but that ignores the value of having insurance. People purchase insurance ex-ante because it makes them better off and looking back ex-post and calculating the money that would have been saved without the insurance is not a meaningful exercise.

                                                        The difference between the ARM and fixed-rate mortgage arrangements is in part insurance against the risk of higher payments down the road (giving up the chance for lower payments in the process). Homeowners have a degree of certainty concerning monthly outlays they would not have otherwise and are willing to pay a premium for this, some more so than others due to differences in tolerance for risk.

                                                        The tricky part here is how to assess the risk of inflation. It is not as simple as estimating a set of equations using historical data because the risk of inflation depends upon Fed behavior. How confident is an individual homeowner that inflation will not appear suddenly? It is only recently that I have become convinced that low and stable inflation is a firm commitment of the Fed. In 2004 when Greenspan made these comments referring to an even earlier time period, I am not at all convinced that homeowners were confident that another round of inflation like we saw in the 1970s couldn’t happen again. We should be careful not to use our confidence in the Fed’s commitment to inflation targeting now to evaluate perceptions of inflation risk then. Even now, when I state confidence in the Fed’s commitment to low inflation, there is disagreement (e.g. See Catallarchy).

                                                        So I am not so sure that the case is clear that the insurance from purchasing fixed-rate mortgages was a bad deal. It depends on the probabilities they plugged into the exercise concerning the perception of the Fed’s likelihood of allowing inflation to occur, and any estimates of people's expectations about future Fed behavior will be noisy. If you believed the Fed would not allow nominal interest rates to rise to high levels like we saw in the 1970s due to high inflation, then a variable rate was the better deal ex-ante. But for those homeowners who were worried about the risk of high monthly payments and were willing to pay relatively high premiums for certainty over a thirty year horizon, it is not at all clear to me that fixed rates were a bad deal for them.

                                                        The second issue I want to comment on is the proposal for tighter controls over Fannie Mae and Freddie Mac. I have been calling for the Fed to take regulatory action, or at least look into the possibilities, in order to reduce the potential risk of economic difficulties should the housing sector decline. Like Greenspan, I don’t know as much about the details of how Fannie Mae and Freddie Mac operate as I would like, but it does appear there is a substantial concentration of housing market risk in these two institutions. Limiting that exposure is a good step towards using regulatory action to reduce the exposure to risk from a housing market decline.

                                                          Posted by Mark Thoma on Sunday, July 24, 2005 at 02:07 PM in Economics, Housing, Monetary Policy

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                                                          Devaluation Pleases Japan

                                                          An editorial from the Asahi Shimbun expresses support for revaluation of the yuan:

                                                          EDITORIAL/ China's yuan revaluation: Although the rate is small, the move is welcomed. … The appreciation rate was also much smaller than market expectations. China has many state-owned enterprises facing difficulties. If the yuan was to appreciate significantly, China would lose export competitiveness, and its domestic industries would be severely hit. … Chinese authorities appear willing to let the yuan gradually appreciate, but no doubt international pressure to further loosen the currency will persist. … The effects upon the Japanese economy also cannot be ignored. The revaluation of the yuan is good news for Japanese companies suffering under the waves of imports from China, but it could hurt companies that have relocated factories to China to manufacture goods intended for the U.S. market… when Japan's economy was strengthening, there were also numerous phases when the yen was strong. From now, the true quality of China's economic power will be tested. -The Asahi Shimbun, July 22(IHT/Asahi: July 23,2005)

                                                            Posted by Mark Thoma on Sunday, July 24, 2005 at 08:01 AM in China, Economics, International Finance

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                                                            July 23, 2005

                                                            Congress to Propose Tighter Controls on Fannie and Freddie

                                                            Fannie Mae and Freddie Mac are targets of legislation to reduce their size. The goal is to reduce the chance problems with either agency will cause problems in the broader economy:

                                                            Stricter Bill Introduced For Fannie, Freddie - Rules May Have Problems With House, Democrats, By Annys Shin, Washington Post: Senate Banking Committee Chairman Richard C. Shelby (R-Ala.) yesterday released legislation that could force mortgage finance companies Fannie Mae and Freddie Mac to significantly reduce their combined $1.5 trillion investment portfolios. ... By proposing to give a new regulator broad discretion over the kinds of assets Fannie Mae and Freddie Mac can hold, Shelby has followed the course preferred by the Bush administration -- but set up a possible conflict with the House, where Financial Services Committee Chairman Michael G. Oxley (R-Ohio) supports a less strict set of rules. ... Shelby plans to bring his bill before the Banking Committee Thursday. … Congress is moving to toughen regulation of Fannie Mae and Freddie Mac after a series of accounting scandals raised concern about how the two companies were being managed and what would happen if they ran into financial trouble. Fannie Mae and Freddie Mac buy home mortgages from banks and other lenders, keeping the housing markets supplied with cash. Together, they help finance two-fifths to two-thirds of the home sales in the country each year. Typically, after buying mortgages, the companies repackage them and resell them to other investors. In recent years, however, they have held onto more and more of their investments -- a strategy critics say may boost company profit but has little to do with their government-chartered mission of supporting homeownership. … Shelby cited concern over the companies' investment portfolios when he came out against a proposal in the House bill that would require Fannie Mae and Freddie Mac to contribute a portion of their profit to fund the creation of low-income housing. He said such a fund would give the companies an incentive to expand their investment holdings to boost profit. Shelby did not include the proposed set-aside in the bill he released yesterday, making it less likely that Democrats will vote for it. …

                                                              Posted by Mark Thoma on Saturday, July 23, 2005 at 11:43 PM in Economics, Housing, Regulation

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                                                              The Endogenous Standard of Acceptable Behavior Under Bush

                                                              Under the Bush standard, even if convicted, there is an easily imagined possibility that Rove will not be fired until his case is appealed all the way to the Supreme Court. Helen Thomas fills us in:

                                                              Bush lowers bar for what's acceptable, By Helen Thomas, Seattle Post-Intellingencer: Although he's the nation's chief executive, President Bush apparently is going to have to wait for special prosecutor Patrick Fitzgerald to tell him about the involvement of key White House aides in the CIA-leak affair. Bush told reporters he doesn't "know all the facts," but he wants to. Of course, he could invite Karl Rove to an Oval Office meeting where the president could say, "Karl, what happened?" Or he could ask I. Lewis "Scooter" Libby, Vice President Dick Cheney's chief of staff, to come clean. … But Bush says he'll wait until Fitzgerald completes his investigation -- now in its second year. … Embedded in that expression … was a subtle redefinition of what is a firing offense in this White House. Bush had indicated previously that anyone involved in leaking information about the identity of the undercover CIA officer would be terminated. After it was revealed that Rove and Libby were involved, Bush changed the rule for unacceptable conduct. The new rule is that anyone who "committed a crime" would get pink-slipped. … If someone were convicted of a crime but appealed the verdict, the president could say: "If someone is convicted of a crime and the conviction is affirmed on appeal, they will no longer work in my administration." If the conviction were affirmed on appeal, the defendant could appeal to the Supreme Court. The possibilities are rich…

                                                              The bar for what’s acceptable fell into Rove’s gutter long ago.

                                                                Posted by Mark Thoma on Saturday, July 23, 2005 at 09:00 PM in Politics

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                                                                An Encyclo-what-ia?

                                                                This is a follow up to this post last weekend:

                                                                Kids and the Internet - it's a good thing, By Laura Matthews, Christian Science Monitor: We read a lot of alarmist commentary about the dangers of the Internet for youngsters. ... I'm the first to admit that there are risks … Yet, from what I've seen, the educational benefits of online access are worth it. … the Internet gives kids access to information in ways prior generations couldn't even have imagined. ...

                                                                Despite reports to the contrary, computer use doesn't have to be isolating. Our computer is in the family TV room, where my daughter has been known to converse with the family and laugh along with the TV even as she's instant messaging with friends, getting math help, researching a paper, and listening to music. … My daughter discovered online journals, or "blogs," when she was 16. After a lot of negotiating, she was allowed to start her blog on www.xanga.com Her "xanga" had to be accessible by me. She couldn't post her real name, photos of herself, or her location ... But in keeping an eye on her xanga, I also had access to her friends' xangas. Surprise - this opened me up to a whole new world of insight into today's teenager. These kids can write. To keep a blog going, you have to have the discipline to write daily. This puts today's young bloggers on the fast track to future Pulitzers. To keep your friends coming back, you have to be interesting, funny, intelligent, relevant. These kids are all that and more. Once I got past the immature spelling and punctuation (along with usual teen slang and vulgarity), I was treated to some of the best poetry I've ever read. All of their blogs together are a veritable anthropological study of high school life. One senior I know has, in four years, transformed from what seemed like functional illiteracy - incomplete sentences, poor spelling - into a blossoming philosopher headed for a major university. Aside from the keyboard and multitasking skills they've developed, the substance of what they're writing is way beyond what mine was at that age. Sure, their mechanics might be rough at first, but over time that rights itself. What's more important is they've got something to say, and the Internet gives them the means to say it. Don't be surprised if the rising generation of Internet users turn out to be the most articulate and best-informed generation in recent history. …

                                                                  Posted by Mark Thoma on Saturday, July 23, 2005 at 06:03 PM in Miscellaneous

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                                                                  Is There an Economist in the NRO House?

                                                                  Michael Darda does not understand Keynesian economics. When he says

                                                                  Those arguing that the labor market is weak insist the unemployment rate has dropped due to a declining labor force participation rate. ... Even if we accept this assertion (which is false), the Keynesian cure is worse than the supposed labor market disease. The neo-Keynesian elixir typically is a combination of higher tax rates on the entrepreneurial class (the rich), higher tariffs, and a devalued dollar…

                                                                  he proves it. To say the Keynesian prescription for lagging unemployment is higher taxes shows amazing ignorance about a subject taught in the most basic economics courses or a brazen willingness to mislead just to make a point. The NRO is good for laughs, but that’s about it. PGL at Angry Bear has more.

                                                                    Posted by Mark Thoma on Saturday, July 23, 2005 at 03:06 PM in Economics, Press

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                                                                    Pegged to an Old Idea

                                                                    With reference to this statement by Larry Kudlow, even Milton Friedman, the foremost advocate of currency stability, no longer believes this is true:

                                                                    The failure of the G-7 economic powers to generate greater currency stability is a glaring omission. Currency stability is a key building block of economic growth, while radical fluctuations of major currencies have been a detriment to growth. Just look at the stagnant economies of Japan and Western Europe. This subject is swept under the rug time and again at major economic summits, favoring economic failure rather than success. Free markets function best when the basic monetary unit of account is steady and predictable.

                                                                    Larry Kudlow is a better economist than Milton Friedman. Up is down. Black is white. Anything is possible in the fantasy land of the NRO.

                                                                      Posted by Mark Thoma on Saturday, July 23, 2005 at 03:06 PM in Economics, International Finance

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                                                                      The Social Security Terminator

                                                                      It's Baaack! Social Security Reform is not Dead Yet

                                                                      "Have you seen Sara Delano Roosevelt? She has a son named Frank."

                                                                      "Listen. And understand. That terminator is out there. It can't be bargained with. It can't be reasoned with. It doesn't feel pity, or remorse, or fear. And it absolutely will not stop, ever..."

                                                                        Posted by Mark Thoma on Saturday, July 23, 2005 at 12:33 PM in Economics, Social Security

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                                                                        Reunions Make Me Nervous

                                                                        I am off to my class reunion today (Class of ’75, Colusa High School). If all goes according to plan, new things ought to post automatically every few hours.

                                                                        I shoulda gotta haircurt. Oh well, time to go …

                                                                          Posted by Mark Thoma on Saturday, July 23, 2005 at 11:11 AM in Weblogs

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                                                                          July 22, 2005

                                                                          Bush Calls His Mommy for Help

                                                                          They are going to persevere. Bush made it clear that he is not about to give up the push for private accounts. He even called his mommy:

                                                                          Bush says not backing down on Social Security, Reuters: President George W. Bush refused on Friday to back down from his push to restructure Social Security … he said. "One thing that's not going to happen is me dropping the subject." Lending a hand to Bush -- and a dose of sympathy -- was his 80-year-old mother, Barbara, who credited her son for taking on an issue that is a "political nightmare."

                                                                          Bush Rallies for Social Security Overhaul, By Edwin Chen, LA Times: With an assist from his mother, President Bush used the bully pulpit today in hopes of reinvigorating his bid to revamp Social Security, holding his first public discussion of the retirement program in a month…Barbara Bush, the former first lady … said. "… he's got the guts to do it."

                                                                          Is Bush The Little Engine That Could?

                                                                          "I think I can," puffed the little locomotive, and put itself in front of the great heavy train. As is went on the little engine kept bravely puffing faster and faster, "I think I can, I think I can, I think I can."

                                                                          Stay vigilant. With the Supreme Court, Rove, Iraq, and who knows what else it will be difficult to stay focused on Social Security, but we cannot let the privateers outlast and outmaneuver us now that round two is beginning.

                                                                            Posted by Mark Thoma on Friday, July 22, 2005 at 09:45 PM in Economics, Social Security

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                                                                            Fed Governor Kohn Discusses Risk Premiums and Monetary Policy

                                                                            Federal Reserve Governor Kohn recently discussed how the Fed monitors and interprets risk premiums in financial markets and how that impacts monetary policy. I will present a few highlights, but the entire speech is worthwhile and extracting just a few paragraphs does not do it justice. Those of you interested in the conduct of monetary policy and the factors that go into monetary policy decisions will want to read Governor Kohn's remarks:

                                                                            Monetary Policy Perspectives on Risk Premiums in Financial Markets, Donald L. Kohn, July 21, 2005 : … I would like to take a few minutes today to broaden the discussion to encompass risk premiums in other markets and to highlight the connections between risk premiums and monetary policy. My goal is … to give you a sense of how estimates of risk premiums may influence our policy decisionmaking ... Among the risk premiums that we monitor regularly at the Federal Reserve are those on equity returns, equity volatility, corporate bonds, and Treasury securities. Each contains information about a different risk around a different expected outcome. … risk premiums are certainly relevant for monetary policy deliberations, and we do pay attention to our best estimates of them. … inferences about future economic conditions obtained from … those premiums. Neglecting or grossly misestimating risk premiums will lead to misperceptions of the market's outlook and thus potentially to market moves that we did not anticipate. Nothing better illustrates the need to properly account for risk premiums than the current interest rate environment: To what extent are long-term interest rates low because investors expect short-term rates to be low in the future due to some underlying softness in aggregate demand, and to what extent do low long rates reflect narrow term premiums, perhaps induced by well-anchored inflation expectations or low macroeconomic volatility? Clearly, the policy implications of these two alternative explanations are very different.

                                                                            … risk premiums … can also directly affect real economic activity. For example, the decline in term premiums in the Treasury market of late may have contributed to keeping long-term interest rates relatively low and, consequently, may have supported the housing sector and consumer spending more generally. Also, risk premiums may be, in part, a manifestation of investor sentiment, which in turn may be correlated with consumer and business sentiment. … Finally, risk premiums are also important tools for monitoring financial stability. ... Information that bears on investors' attitudes toward risk and on the functioning of financial markets and financial institutions is thus undoubtedly valuable.

                                                                            … As you can see, we read risk premiums in a variety of ways and for a variety of purposes. … we try first of all to develop a good understanding of the historical behavior of risk premiums.

                                                                            Click on Figure For Full-Size Version

                                                                            The top panel of the exhibit … shows crude estimates, put together by the Board's staff, of the risk premium on both equities and corporate bonds going back to 1920. … The configuration of risk premiums in the 1950s presents both similarities and contrasts to the behavior of risk premiums in current times. That earlier decade, like the present, was a time of low interest rates and low inflation, and the corporate bond risk premium was low, just as it is today. But our estimates suggest that the equity premium for that period was substantially higher than it appears to be today. …

                                                                            The other aspect of the chart that stands out is the apparent decline in risk measures since the late 1970s and early 1980s. … I am intrigued by efforts to separate the extent to which the decline in risk premiums in recent decades is due to a reduction in inflation versus a reduction in real output volatility. In that regard, does the fact that most of the decline occurred by the end of the 1980s suggest that inflation control played a more important role than the damping of business cycles, which might reveal itself more gradually over time?

                                                                            … Our first challenge is to determine when a movement is not just noise that will quickly reverse, but rather a signal of something important that we need to understand as we formulate policy. … To separate signal from noise, we try to look not only at the persistence of movements but also at their correlation across markets. Is there a widespread increase or decrease in risk aversion or in perceived risk that suggests a shift in underlying attitudes and expectations? If there is, the monetary authority may well need to adjust the stance of policy as the FOMC did in the fall of 1998.

                                                                            Disparate movements in risk premiums, such as those we witnessed in equity and fixed income markets recently and that are highlighted in the bottom panel of the exhibit, are not unusual and can occur for a number of reasons. … divergences in risk premiums are not necessarily unusual if looked at from a historical perspective. ... But an understanding of what caused the divergent movements could be important for policymakers. … it is important for policymakers to look at risk premiums in their entirety, rather than in isolation, before reaching policy conclusions. … I have mostly characterized policymakers as avid readers of risk perceptions across markets, but our actions could affect risk premiums as well. … our efforts in recent years to make the policymaking process more transparent may, almost by definition, have reduced uncertainty and thus compressed risk premiums. We have emphasized the conditional nature of our discussions of future policy to help market participants calibrate their assessments and price risk.

                                                                            The question of why volatility has declined is important, but we don’t yet know for sure what factors caused the volatility decline. I suspect it is from real factors such as better information management technology rather than better monetary policy, but the book is still open on this one.

                                                                              Posted by Mark Thoma on Friday, July 22, 2005 at 02:43 PM in Economics, Monetary Policy

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                                                                              A Tale of Two Greenspans

                                                                              Readers of blogs often make noteworthy contributions in the comments. This post is attributed to Movie Guy, who has been pointing readers to relevant and important information on a variety of topics (and thanks to everyone else who does this as well – I appreciate it a lot). In this case, he notes some stark differences between what Greenspan said about housing markets in 2004 and what he has said more recently:

                                                                              Understanding household debt obligations, Alan Greenspan, February 23, 2004: … The ability of lending institutions to manage the risks associated with mortgages that have high loan-to-value ratios seems to have improved markedly over the past decade, and thus the movement of renters into homeownership is generally to be applauded, even if it causes our measures of debt service of homeowners to rise somewhat. … One way homeowners attempt to manage their payment risk is to use fixed-rate mortgages ... Homeowners pay a lot of money for the right to refinance and for the insurance against increasing mortgage payments. ... Indeed, recent research within the Federal Reserve suggests that many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade… American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home.

                                                                              Greenspan is advocating the use of adjustable rate mortgages and the creation of a wide array of mortgage alternatives to the traditional fixed rate arrangement. He also suggests consumers are paying too much for the insurance provided by fixed rates. Homeowners who, upon hearing this, rushed to refinance or purchase a home with newly created financial instruments might be surprised to hear Greenspan’s more recent comments:

                                                                              …The apparent froth in housing markets appears to have interacted with evolving practices in mortgage markets. The increase in the prevalence of interest-only loans and the introduction of more-exotic forms of adjustable-rate mortgages are developments of particular concern. …

                                                                              Thanks Movie Guy!

                                                                                Posted by Mark Thoma on Friday, July 22, 2005 at 12:15 PM in Economics, Housing, Monetary Policy

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                                                                                Bush Takes Privatization Plan Back on the Road

                                                                                The death knell was premature. This isn’t over:

                                                                                Bush in town to discuss Social Security, Medicare, By Tom Baxter, The Atlanta Journal-Constitution: … Bush will begin a "conversation on senior security" with an invited audience shortly before noon at the Boisfeuillet Jones Atlanta Civic Center. … Bush is expected to talk about both his Social Security proposals and prescription drugs…

                                                                                An invited audience? I’m shocked!!! Given his track record, I wonder how many invitees, even after signing a pledge of allegiance to the privatization cult, will be convinced to oppose the president’s plan?

                                                                                  Posted by Mark Thoma on Friday, July 22, 2005 at 01:44 AM in Economics, Politics, Social Security

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                                                                                  The Value of Marginal Economics

                                                                                  W=P*MPL and r=P*MPK it ain’t:

                                                                                  … I have been trying to figure out some rhyme and maybe a little reason to how society allocates its rewards and obviously I have failed. I can't really find a correlation between the way society values things and the way society distributes money. And I guess that's why I'm too dumb to be an investment banker or a hedge fund manager…

                                                                                  Yep. To be fair, he’s referring to the pay of CEOs, but I couldn't resist.

                                                                                    Posted by Mark Thoma on Friday, July 22, 2005 at 01:26 AM in Economics, Press

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                                                                                    The Truth is Out There Somewhere

                                                                                    The truth is out there, but how will it get to us?

                                                                                    Without leaks, truth dries up, By Jack Nelson, LA Times: During the 32 years I covered Washington for the Los Angeles Times, I learned that leaks from anonymous sources are crucial to informing the public. … Without leaks, without anonymity for some sources, a free press loses its ability to act as a check and a balance against the power of government. The stories that have depended on confidential sources, and often on classified information, are legend: Watergate ... Iran/Contra ... the Monica Lewinsky scandal ... the Environmental Protection Agency's plan to ease up on mercury emissions, dissent within the CIA and the State Department over weapons of mass destruction in Iraq, and the alarming number of Army officers quitting after duty in Iraq. … All of this is especially important when it comes to the Bush administration, which is notoriously secretive. … the government has more than doubled the number of classified documents. Millions of additional documents have been marked "sensitive" or "for official use only." … President Bush rarely holds a news conference, further limiting the public's access to information. His administration, however, doesn't hesitate to leak classified information when it suits its purpose. The Valerie Plame case is Exhibit A. Her identity as a CIA agent was leaked in an obvious attempt to undermine her husband, Joe Wilson, who had written a New York Times Op-Ed article debunking Bush's claims that Iraq possessed weapons of mass destruction.

                                                                                    The pursuit of the Plame leaker will surely have a negative effect on the media's ability to inform Americans. The situation is complicated, of course, because it involves not just the release of classified information but a possible criminal offense of disclosing an CIA agent's identity. That may make the investigation justifiable, but it doesn't justify the hounding of reporters. … The conservative columnist who outed Plame, Robert Novak, is under no court order to testify, and he has refused to comment on the case. Certainly, journalists willing to do an administration's dirty work have no reason to worry about lost sources, the drying-up of information. But all of us should worry about the quality of that information. ...

                                                                                    Speaking of the truth, Molly Ivins has some questions about that:

                                                                                    Is the truth really in them?, Molly Ivins, Creators Syndicate: Now it's getting funnier and funnier. … The entire Republican Party is shocked (!) anyone would think that Karl Rove (!!) would leak a story to damage a political opponent. Oh, the horror. And Karl has always been such a sweet guy. Attacking an opponent's wife is standard operating procedure for Rove. Have Republicans actually convinced themselves that he wouldn't do such a thing? People, sometimes party loyalty asks too much. Actually, we are missing the point here. … former U.S. Ambassador Joseph Wilson is merely one of the many people who provided one of the by now innumerable pieces of evidence that the Bush administration lied about why we went to war in Iraq. When former Treasury Secretary Paul O'Neill wrote that President Bush planned to invade Iraq from the day he took office, the administration went after O'Neill. When Richard Clarke, the former White House counterterrorism chief, disclosed that the Bushies wanted to use Sept. 11, 2001, to go after Saddam Hussein from Sept. 12 on, they went after Clarke. They went after Gen. Anthony Zinni, they went after former Army Chief of Staff Gen. Eric Shinseki and everyone else who opposed the folly or told the truth about it. After they got done lying about weapons of mass destruction and about connections to Al Qaeda, they switched to the stomach-churning pretense that we had done it all for democracy. Urp.

                                                                                    ... what lies at the heart of Plamegate ... is lying in order to get this country into war. If the Washington press corps had a memory bank longer than 10 minutes, it could have exposed this years ago: The lies so often directly contradict one another. … The trouble with piling lies on top of lies is that we can't even agree on facts anymore. I read the right-wing commentators, and it's not that we're not on the same page--we're not even in the same library. They read the Downing Street memos and convince themselves they don't mean what they say. I really don't understand: Is it that hard to admit … that the invasion of Iraq has been a disaster? Isn't it self-evident? If you support someone politically, you are not required to believe they are perfect. Did I think Bill Clinton had a sleazy affair while he was president? Yes. I just didn't care. I didn't think it had anything to do with the way he was running the country. You can't dismiss this. You can't not care about lies and war. Not if you care about American soldiers.

                                                                                    Molly Ivins is shrill, but she is also right.

                                                                                      Posted by Mark Thoma on Friday, July 22, 2005 at 12:51 AM in Politics

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                                                                                      July 21, 2005

                                                                                      Job Loss: Causes, Consequences, and Policy Responses

                                                                                      A big thank you is due to New Economist for pointing us to this volume of the Chicago Fed’s Economic Perspectives (2005, 2nd Quarter) devoted to job loss in the U.S. The articles are from a November, 2004 Federal Reserve Bank of Chicago conference on "Job Loss: Causes, Consequences, and Policy Responses." Here are a few tidbits to whet your appetite:

                                                                                      Henry Farber of Princeton University on What do we know about job loss in the United States? Evidence from the Displaced Workers Survey 1984–2004: ... I find that more educated job losers have higher post-displacement employment rates and are more likely to be employed full-time. Those who are reemployed, even full-time and regardless of education level, suffer significant earnings declines relative to what they earned before they were displaced. In addition to the decline in earnings, foregone earnings growth is an important additional part of the cost of job loss. One striking finding is that, for reemployed job losers with education beyond high school, the earnings loss is dramatically larger in the 2001–2003 period than in any earlier period for which there are data.

                                                                                      Lisa Lynch of Tufts University on Job loss: Bridging the research and policy discussion: … Since the work force is aging, we might expect that this would reduce the size of the work force as a greater share of workers reach retirement age. However, the labor force participation rate of workers over the age of 55 actually rose about 4 percentage points from 2000 to 2004. ... Another possible explanation for slow job growth is … offshoring. Manufacturing jobs have moved overseas during the past two decades and this trend continues ... What has changed, however, is that service jobs, once thought immune to the offshoring threat, are now going abroad as well. This shift has important policy implications for the extension of trade adjustment assistance to service sector workers ... While I think that the impact of offshoring of service sector jobs will become increasingly important over time, I do not think it is sufficient to explain a major part of our current anemic job growth. A more likely explanation for the lackluster job growth is some combination of the good news of sustained productivity growth … and the dampening effect of geopolitical concerns, including the price of oil. However, before we conclude that concerns about the structure of the U.S. labor market have been misplaced, I would like to argue that there are quite sensible and rational reasons why people should be concerned about our policy responses in the context of trade and technological change and their impact on workers…

                                                                                      Steven Redfield of STRIVE on Understanding and addressing the challenges of job loss for low-wage workers: In this article, I review the statistics on job loss, showing that while short-tenured workers are actually the majority of those who experience job loss, little data are available about their economic circumstances or skill levels. I then describe the precarious economic status of these workers, the insufficiency of safety net programs for them, and the under-investment in training that might help them attain more reliably marketable skills…

                                                                                        Posted by Mark Thoma on Thursday, July 21, 2005 at 06:12 PM in Economics, Unemployment

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                                                                                        FOMC Minutes Reveal Few Surprises, Some Disagreement

                                                                                        FOMC Minutes Reveal Few Surprises, Some Disagreement

                                                                                        The FOMC Meeting Minutes are out. In this era of transparency, there are very few surprises. However, I did note several things as I read through the minutes.
                                                                                        First and foremost is that much more concern is expressed within the minutes about domestic fiscal imbalance and international trade imbalance than was expressed in Greenspan’s remarks before congress. Board members show more concern for the risk posed by these imbalances than Greenspan implied. Note in particular the statement that the recent increase in tax revenues is transitory and the budget deficit problem is expected to persist. Second, the Fed seems more optimistic on the output and employment fronts, and more pessimistic on the inflation front, than the general perception I have from other sources. However, there does appear to be disagreement over the degree to which inflation is a threat going forward, and I was surprised at the general agreement regarding developing strength in the labor market. Third, some members seem more concerned with the potential risks posed by the housing market than Greenspan implied in his remarks, and the statement that everything seems okay so far does not address potential problems that might occur with much higher interest rates or slower economic growth. It is not the present state of financial institutions that worries observers, it is what could happen under high interest rate low growth scenarios in the future. Fourth, the committee takes considerable care to say that further rate increases, though likely, will be data dependent. This indicates less certainty regarding the continuation of rate increases than in the previous minutes, but the committee is very clear that rates need to go up further. The disagreement is over how much further:

                                                                                        FOMC Minutes from June 29, 30 Meeting:… At this meeting the Committee reviewed and discussed staff presentations on the topic of housing valuations and monetary policy. Prices of houses in the United States had risen sharply in recent years, especially in certain areas of the country, to very high levels relative to incomes or rents. ... Meeting participants noted that the rise in house prices had been accompanied by a modest shift toward potentially riskier types of mortgages, including adjustable-rate and interest-only loans, which could pose challenges to both lenders and borrowers. Nonetheless, financial institutions generally remained in a comfortable capital position, such loans had performed well thus far …

                                                                                        The Committee also noted that recent data suggested that the solid pace of spending growth had slowed somewhat, partly in response to the earlier increases in energy prices, but that labor market conditions apparently continued to improve gradually. While pressures on inflation had picked up in recent months and pricing power was more evident, longer-term inflation expectations remained well contained. … In the staff forecast prepared for this meeting, the economy was seen as likely to expand this year and next at a rate just above its potential. ... The forecast for consumer price inflation was revised up, with inflation seen as somewhat higher this year than in 2004, reflecting in part higher import prices and the direct and indirect effects of higher energy prices, and only edging lower next year as these price pressures wane. … many meeting participants noted that incoming data had been reassuring about the strength of the expansion. ... In addition, labor market conditions continued to strengthen gradually. … In their comments about developments in key sectors of the economy, meeting participants noted that the fundamentals underlying household spending remained firm. ...

                                                                                        Several meeting participants expressed some concern about domestic and global imbalances. Large federal budget deficits were expected to persist despite an increase in tax receipts in recent months. These deficits were contributing to a low level of national saving that would, if not corrected over time, ultimately constrain investment and overall economic growth. Moreover, U.S. trade deficits were expected to remain large going forward, reflecting both the low level of U.S. saving and relatively slow growth in some of our trading partners. Uncertainties regarding the nature and timing of the potential correction of these imbalances complicated the assessment of the intermediate-term prospects for the U.S. economy.

                                                                                        In their discussion of developments in asset markets, the participants' comments focused on two related issues: the low level of long-term interest rates and the continued run-up in home prices ... It was agreed that considerable uncertainty attended the outlook for both long-term interest rates and home prices. With regard to any role for monetary policy in responding to possible imbalances in housing or bond markets, meeting participants stressed the importance of the pursuit of their core objectives of price stability and maximum sustainable economic growth. To the extent that an asset price movement threatened the achievement of those objectives, it would of course be taken into consideration in setting policy. However, given the unavoidable uncertainties associated with judgments regarding the appropriate level of and likely future movements in asset prices, a strategy of responding more directly to possible mispricing was seen as very unlikely to contribute, on balance, to the achievement of the Committee's objectives over time…

                                                                                        Participants' views on the inflation outlook were mixed. … While agreeing that inflation developments had to be watched carefully, other meeting participants emphasized that recent core inflation data had been relatively restrained, and anecdotal reports suggested that pricing power at many firms remained quite limited. …

                                                                                        In the Committee's discussion of monetary policy for this meeting, all members agreed on a 25 basis point increase in the target federal funds rate to 3-1/4 percent. Economic growth remained firm, while rising energy, and possibly labor, costs threatened to put upward pressure on inflation. Even with this action, the federal funds rate remained below the level members anticipated would prove necessary in the long run to contain inflation pressures and keep output near potential. However, the pace and extent of future policy moves would depend on incoming data.

                                                                                        In considering the statement to be released following this meeting, … Members also agreed that the statement language indicating that "policy accommodation can be removed at a pace that is likely to be measured" correctly characterized the outlook for policy for now. The members concurred that at this stage in the expansion, with margins of slack resources narrowing and inflation somewhat higher, the Committee needed to be particularly alert to signs of a further increase in inflation. … additional tightening would probably be necessary, but views differed on the amount of tightening that would likely be required to keep inflation contained and bring output in line with potential. However, members agreed that there was no need to make such an assessment at this time, and that the appropriate pace and degree of cumulative policy adjustment would depend on economic developments going forward. …

                                                                                          Posted by Mark Thoma on Thursday, July 21, 2005 at 04:32 PM in Economics, Monetary Policy

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                                                                                          Jobless Claims Fall, Growth Moderating

                                                                                          I’m in between meetings, so I’ll toss this up quickly with little comment. Hopefully someone can fill us in on the interpretation of the fall in the jobless claims and whether it is meaningful:

                                                                                          Leading Indicators Up, Jobless Claims Down, By Eileen Alt Powell, The Associated Press: An important gauge of future economic activity rose strongly in June and jobless benefit claims dropped last week by the greatest amount in more than 2 years, suggesting that the U.S. economy is continuing to grow. But many analysts believe the expansion has begun slowing from last year's torrid pace in response to Federal Reserve hikes in U.S. interest rates. The New York-based Conference Board said Thursday that its Composite Index of Leading Economic Indicators increased 0.9 percent in June … the largest since a 0.9 percent rise in December 2003 … In Washington, meanwhile, the Labor Department reported that the number of Americans filing new claims for unemployment benefits plunged last week by the largest amount in 2 1/2 years. The department said new benefit claims dropped 34,000 to a total of 303,000 as the labor market continued to strengthen. … Economists said the latest statistics show the economic expansion is continuing, though probably at a slower rate than last year… Gail D. Fosler, the board's chief economist, told reporters that this is consistent with weaker economic growth. "We believe the industrial economy is slowing down, that it is slowing down quite quickly," Fosler said. She added, however, that she did not believe a recession was in the offing, saying "we are way far away from anything that looks like a recession signal." Mark Vitner, senior economist at Wachovia Securities in Charlotte, N.C., also said the economy was slowing. "The stimulus from the tax cuts and low interest rates in place in 2003 have played out," Vitner said. "Now the economy is returning to a more-sustainable growth rate."…

                                                                                            Posted by Mark Thoma on Thursday, July 21, 2005 at 02:25 PM in Economics, Unemployment

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                                                                                            Greenspan Says Regulatory Authorities are Monitoring Housing Market

                                                                                            Following up on this post from yesterday on Greenspan's testimony, his testimony today offered a bit more encouragement that regulatory authorities are poised to react to excessive risk-taking behavior in housing markets:

                                                                                            Greenspan Concerned About Pension Issues, By Jeannine Aversa, The Associated Press: …Greenspan said Congress doesn't need to create new laws to govern risky interest-only mortgages and other exotic home loans that are increasing in popularity. Greenspan has issued several warnings about the potential perils these types of mortgages can pose to homeowners as well as lenders if home prices _ which are now surging _ suddenly fall, or if interest rates were to rapidly escalate. "We don't need any legislative remedy. This is totally under the regulatory authorities of the banking agencies," Greenspan said. The Fed chief said banking agencies are currently reviewing the situation. Banking authorities, he said, "are making decisions as to what, if any, guidance to the banking system we would endeavor to convey." With home prices soaring in many local markets, some home owners are turning to risky mortgages _ and stretching their finances _ to buy a home that they otherwise could not afford, analysts say. If interest rates jump, some borrowers could have trouble making their mortgage payments. In addition, a significant drop in the price of a house could leave some home owners with a mortgage that costs more than they could receive by selling their residence. That would leave them owing their mortgage lender money…

                                                                                            I'm pleased that regulatory authorities are monitoring the situation, but we shall see what regulations to reduce exposure to risk, if any, occur as a result. Warnings from the Fed chair may not be enough. My primary complaint was not that the regulators had failed to act in a particular way, but rather that they did not appear to be taking responsibility for mitigating risk. This is somewhat reassuring in that regard. Other than repeating his call for congress to limit the portfolio holdings of Fannie Mae and Freddie Mac, and comments on China's devaluation echoing sentiments he's expressed previously, there was little news over and above yesterday's testimony.

                                                                                              Posted by Mark Thoma on Thursday, July 21, 2005 at 01:08 PM in Economics, Housing, Monetary Policy

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                                                                                              China Drops Peg to Dollar

                                                                                              This surprised me, and according to Premier Wen Jiabao, it should have:

                                                                                              China Says It Will No Longer Peg Its Currency to the U.S. Dollar, Reuters: China bowed to months of market and political pressure on Thursday by revaluing the yuan by 2.1 percent and abandoning the currency's decade-old peg against the dollar. ... the central bank said the yuan's value from now on would be linked to a basket of currencies of China's main trading partners. … The central bank said the yuan, also known as the renminbi (RMB), would be allowed to move in a tight range of 0.3 percent up or down from the previous day's close in a continuation of the "managed float" policy in place 1994. … The big question for dealers was whether China would make use of the flexibility to let the yuan drift gradually higher. "It's just a gesture. The question now is whether there will be continuing speculation that China may revalue even more," said Ben Kwon, an analyst from KGI Asia in Hong Kong. China had long insisted that it would adopt a more flexible exchange rate system, but not until it was ready. In March Premier Wen Jiabao impishly said the timing of a move would be a surprise … Greenspan said a yuan revaluation would have minimal impact on the U.S. trade deficit but urged China to adopt a more flexible currency for its own sake...

                                                                                              The question now is, as the article notes, whether this is a mere gesture without substance or if the yuan will be revalued further in the near future. Thanks for the tip anne.

                                                                                                Posted by Mark Thoma on Thursday, July 21, 2005 at 06:57 AM in China, Economics, International Finance

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                                                                                                July 20, 2005

                                                                                                A Day Late and a Whole Lot of Dollars Short

                                                                                                Deroy Murdock should have read Bernanke’s comments yesterday before writing his column. Except for the blame the Democrats part, this proposal will not receive White House support. The DeMint deception makes the solvency problem worse and doesn't lock up anything. Typical NRO nonsense, but the in-fighting subtext does make it a bit more palatable than usual.

                                                                                                  Posted by Mark Thoma on Wednesday, July 20, 2005 at 09:00 PM in Economics, Social Security

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                                                                                                  How Will Tax Panel Pay for the Repeal of the AMT?

                                                                                                  The panel working on tax reform held its tenth meeting today and there is wide agreement among members that major reform of the AMT, and perhaps its complete elimination, is necessary. But how they will propose to pay for the trillion dollar loss of revenue over the ensuing ten years? Will they starve the beast, put it on a strict diet, or find another food source? We shall see. If they do decide to put it on a diet, let’s hope they don’t cut the beauty of the beast in the process:

                                                                                                  Tax panel leans toward AMT repeal, By William L. Watts, MarketWatch: Members of President Bush's advisory panel on tax reform largely agree that the individual alternative minimum tax, or AMT, should be fully repealed ... "I think the obvious consensus was on the AMT on the individual side. We didn't end up with a consensus on the corporate side, … " Chairman Connie Mack, a former Republican senator from Florida, told reporters … The AMT is a parallel tax system created in 1969; it was enacted after it was revealed that a handful of extremely wealthy Americans paid no income tax. But thresholds for the AMT were never indexed for inflation. As a result, it has encompassed or threatened a growing number of middle-income taxpayers over the years. … It's also become a substantial revenue source. Full repeal would reduce revenues by more than a trillion dollars over 10 years. … Mack replied that … the committee would have to make adjustments in order to maintain roughly the same tax burden on the upper quintile of earners that is now in place. The panel members agreed that changes to the corporate AMT would best be tackled as part of a broad corporate tax reform … Bush has set a number of ground rules ... The proposals must be revenue-neutral. …

                                                                                                  It’s encouraging that the repeal intends to maintain the same tax burden across income groups, but if the cuts to pay for the tax fall disproportionately on one group, say the middle class and the poor, then the overall burden of the change in the AMT after accounting for both tax and spending changes will move towards the disadvantaged. In addition, given the increasing tax burden the AMT has placed on non-wealthy households over time, even maintaining the existing distribution of burdens represents a redistribution of the tax burden away from higher income taxpayers.

                                                                                                    Posted by Mark Thoma on Wednesday, July 20, 2005 at 07:11 PM in Economics, Policy, Politics, Taxes

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                                                                                                    The Fed Should Take More Responsibility for the Housing "Bubble"

                                                                                                    I didn’t find much in Greenspan’s testimony over and above what has already been noted here previously. Rates are expected to rise but that is not news. He noted that inflation is in check, and he acknowledged recent data indicating some potential weakness by saying “While the incoming data highlighted some downside risks to the outlook for economic growth, the FOMC judged the balance of information as suggesting that the economy had not weakened fundamentally.”
                                                                                                    The acknowledgment that incoming data have indicated some downside risk is farily new. Elsewhere he states “"In our view, realizing this outcome will require the Federal Reserve to continue to remove monetary accommodation. This generally favorable outlook, however, is attended by some significant uncertainties that warrant careful scrutiny."” The uncertainties he's referring to are rising input costs, particularly labor and oil, and an increase in long-term interest rates and the potential problems that could cause in the housing market.

                                                                                                    It’s interesting to me that the Fed is not taking responsibility for the housing “bubble” even though monetary policy causing low interest rates had a hand in creating it. If, in fact, low interest rates have caused a misallocation of resources towards the housing sector such that there are now risks, and there's a case to be made that it has, then the Fed should be more active and forceful in dealing with and forestalling the potential consequences. That is, if Fed policy has enticed households to make decisions that put them at risk over the long-run, decisions they would not have made if the interest rate were at its natural level, then the Fed has a responsibility to do more than wash its hands of this sector of the economy and say its only role is to clean up after any crash that might occur.

                                                                                                    It would have also been nice to hear about the causes and consequences of budget deficits and how that impacts monetary policy and economic risks in the future, but those issues were not addressed.

                                                                                                    For more, see Angry Bear, Caroline Baum, The Washington Post, The New York Times, the Monetary Report to Congress, and Greenspan’s prepared remarks. If I can find the video or a transcript of the Q&A I will post them.

                                                                                                    Update #1: Clarifying a bit, I am ready to believe those who say there is no significant deviation from fundamentals and hence less to worry about than if it were a true bubble (except for some areas such as coastal regions), though there are risks and it is the Fed's hand in creating those risks that I am addressing. Nobody knows for sure how vulnerable this sector is so it is good policy to attenuate such risks to the extent possible. My complaint is the way in which the Fed has disassociated itself from any responsibility for creating the environment that caused risks to emerge. For example, the Fed could be more aggressive on the regulatory front in an attempt to ensure that low interest rates do not induce excessive risk taking by households, especially those living near the margin that will be most vulnerable to increases in interest rates. It's really nice to get people into houses - I'm all for that, one hundred percent - but not if it causes financial distress and years of cleanup afterward (there's that bankruptcy bill thing) as households are induced to assume more risk than they can handle. I suppose in the end we can say it's a free market and people should have known better, that they should have been more forward looking, but when prices are set below equilibrium in an attempt to stimulate the economy, market intervention to manipulate interest rates is present making the fundamentals themselves a result of policy intervention, and that has consequences.

                                                                                                    Update #2: I forgot to mention this. Whether you like policy under Greenspan or not, this is a really bad idea:

                                                                                                    One lawmaker, Rep. Brad Sherman, D-Calif., said he was introducing a bill that would allow Greenspan to serve for another five years, removing the current requirement that will force him off the Fed board next Jan. 31. "Does my wife have a vote on this?" Greenspan joked, referring to NBC News reporter Andrea Mitchell.

                                                                                                    This makes the Fed Chair much too sensitive to political considerations. What legislation will be passed if they don't like a Chair? There are good reasons for the Fed to be independent.

                                                                                                      Posted by Mark Thoma on Wednesday, July 20, 2005 at 01:08 PM in Economics, Housing, Monetary Policy

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                                                                                                      July 19, 2005

                                                                                                      Is the Social Security System in Need of Reform?

                                                                                                      Since solvency is now coming to the forefront in the Social Security debate, I am reposting something from the first day or two I started blogging in March. It was written a month or so before that as a potential Op-Ed for the local paper, but I submitted this one instead. I take issue with myself at the end:

                                                                                                      Is the Social Security System in need of reform?: Though the numbers reported in the press vary, a common figure reported based upon estimates by the Social Security Trustees is that in 2042 the system will be able to pay 73% of scheduled benefits, a number that will fall to 68% in 2078. The Congressional Budget Office also provides estimates, and its figures are more optimistic predicting that 81% of benefits will be available in 2053, and 71% will be available in 2100.

                                                                                                      These figures are reported as though they were known with 100% certainty. We hear repeatedly with the appropriate fist pounding that the system either is, or is not in serious trouble depending upon who is talking the loudest at the moment. We are told that if nothing is done we will most certainly (or most certainly will not) face calamity in the future. But do we know this for sure?

                                                                                                      Here’s one way to think about it. Given enough time, two lines that are not exactly parallel will grow arbitrarily far apart. Thus, if the distance between the lines represents a surplus or a deficit in Social Security, we can make the surplus or deficit arbitrarily large by simply moving far enough into the future. All that is required is that the initial growth rates be slightly different.

                                                                                                      In the Social Security funding debate, these two lines are population and GDP. Growth in population is a key factor determining the demand for benefits in the future and the growth in GDP represents the ability to supply those benefits. All projections regarding Social Security’s ability to pay future benefits depend critically upon estimates of these two growth rates. Very slight changes in these growth rates can have very large effects on projections when you allow those differences to compound over many decades.

                                                                                                      To get a sense of the degree of uncertainty, consider the most common estimate reported regarding benefits, the estimate for 2042. That projection was made forty years into the future. Go back forty years, to the mid 1960’s, and ask yourself how well people could have predicted the economy we have today. Or how about the figure that only 68% will be available in 2078? That is a seventy five year ahead projection. If we go back seventy five years from when the forecast was made, which is prior to 1929 and the onset of the Great Depression and several years before the creation of the Social Security system, how well would we have predicted GDP in 2005?

                                                                                                      I will leave it to demographers to comment upon uncertainty regarding population projections over the next fifty to one hundred years, but it seems safe to presume that some uncertainty exists. What I can talk about is the uncertainty regarding estimates of GDP growth. The problem economists face is the same as the problem faced by scientists trying to figure out if there is global warming based upon temperature and other data. In the global warming debate, the central problem is to sort cycles of cooling and warming from underlying changes in the trend temperature. If you see temperatures rising over time, is it just another warming-cooling cycle as have occurred repeatedly in the past, or does it represent a fundamental change in the underlying trend for temperatures?

                                                                                                      To answer this question, a very long series of temperature data is needed, and the longer the better. Economists must also sort out boom and bust cycles in GDP from the underlying trend to accurately project GDP in the future, and like those studying global warming, very long data series are needed to do this accurately. Unfortunately, since reliable data regarding the economy do not exist prior to 1947, there is considerable uncertainty regarding the division of GDP growth into trend growth and cycles around that trend, and hence considerable uncertainty regarding the underlying trend rate of growth in the economy. The two growing lines, one for population and one for GDP, have very uncertain trajectories and very uncertain implications for the ability to pay benefits in the future.

                                                                                                      I do not wish to imply that Social Security will definitely be solvent fifty or one hundred years from now. Similarly, I do not wish to imply that it won’t be. We just don’t know. Forecasts that far into the future are sufficiently uncertain so as to render any firm conclusions regarding the health of Social Security difficult to make. We should keep our radar up because some estimates indicate that there may be bumps in the road ahead. But whether there is sufficient basis to radically reform the system based upon these highly uncertain estimates regarding the magnitude of the problem is a question that is worth asking.

                                                                                                      One issue I have with what Mark has written is that he does not allow for the possibility that the two time-series, GDP and population, are co-integrated (tied together in the long-run so that they cannot drift apart over time), and that the co-integrating relationship is changing unfavorably from a solvency perspective over time. The other issue I have is that Mark does not deal with the productivity growth relative to GDP growth issue. But the point about going back 75 years and forecasting today's economy shows how much uncertainty there is in these estimates, and I agree with his conclusion.

                                                                                                      Your turn.

                                                                                                      [See also The New York Times: "A Question of Numbers" by Roger Lowenstein]

                                                                                                        Posted by Mark Thoma on Tuesday, July 19, 2005 at 07:02 PM in Economics, Social Security

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                                                                                                        Tyler Cowen Changes James Glassman’s Mind on Social Security

                                                                                                        Anytime you get your opponent, particularly one from AEI, to adopt your position after a debate, you ought to be declared the winner. By that standard, Tyler Cowen at Marginal Revolution won this debate over Social Security handily.
                                                                                                        According to Glassman, "innovative economist Tyler Cowen of George Mason University" convinced him to drop privatization and focus solely on solvency. Thus, Tyler convinced Glassman to disagree with Ben Bernanke and the White House who will insist that both solvency and privatization be part of any reform proposal. Glassman believes solvency is the primary issue and private accounts will emerge naturally as benefits are reduced to achieve solvency. Though I see the solvency issue as less pressing than the rhetoric surrounding reform implies, impressive win in the debate!

                                                                                                        How to save Social Security reform, By James K. Glassman, Scripps Howard News Service: Since his re-election, President Bush has pushed hard for reform of Social Security, but he's made little headway on his proposal to let Americans divert part of their payroll taxes to personal investment accounts. … It's time for a new approach. ... Personal accounts won't prevent Social Security's impending bankruptcy. Personal accounts are great for other reasons: they will encourage savings, provide a more comfortable retirement, give people a nest egg they can own and increase personal responsibility. But the accounts won't solve the insolvency problem. Bush should stop talking about these two issues — insolvency and personal accounts — as though they are connected. He needs to concentrate on one or the other to start. Which?

                                                                                                        You probably think I'll say "personal accounts." I might have, but a few months ago I took the administration's position in a debate in Reason magazine with innovative economist Tyler Cowen of George Mason University. Sometimes, you learn something from such an encounter. I now see that Tyler was right … I believe the president should focus on putting Social Security on a sound footing. The best way to do that is to adjust benefits by increasing the retirement age, cutting back payments further for those who choose to retire early and indexing the growth in benefits to the consumer price index (that is, inflation) rather than to wages. … Should we give up on personal accounts? Not at all. Those accounts will grow organically as Social Security withers. The inevitable result of benefit adjustments will be to reduce, slowly over time, the importance of Social Security in the overall retirement scheme. The system would become more of a safety net. Retirees would, very naturally, fill in the gap by saving more. The vehicle for those savings would be personal stock and bond accounts — which already exist! There are 401(k) plans, IRAs, Roth IRAs, Keoghs, 403(b) plans and other tax-advantaged accounts. ... My preference is a universal, unlimited IRA — income that you put into savings is not taxed at all. When you withdraw the money, at, say, age 60 or later, then you pay capital-gains taxes on it. ... we take steps to make Social Security solvent, personal investment accounts will blossom naturally, without the sorts of government rules and restrictions that would be inevitable under the plan envisioned by Bush. Investment firms will get on board, AARP will be disarmed and reform will actually happen. And not a moment too soon.

                                                                                                        I don’t share Glassman’s optimism that add-on type accounts will blossom naturally, a point addressed here. Government intervention of some sort appears necessary to overcome important market failures in the retirement saving market.

                                                                                                          Posted by Mark Thoma on Tuesday, July 19, 2005 at 04:05 PM in Economics, Social Security

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                                                                                                          Bernanke Says Social Security Reform Must Include Private Accounts and Ensure Solvency

                                                                                                          Lots of interesting comments here. First, Bernanke, speaking on behalf of the White House, has effectively ended any chance that the House plan will be enacted. He also appeared to oppose White House National Economic Council Director Allan Hubbard who supports the House plan as a first step in the reform process. Second, Bernanke says that the clawback of 3% may need to be reduced.
                                                                                                          According to Bernanke the White House will insist on a reform proposal that contains both solvency provisions and the creation of personal accounts. While this brings some rationality to the debate over and above what we’ve heard from DeMint and his ilk, and the intent appears to be to find a way to get reform moving again, this looks like it will stall things even further, particularly given the reactions from others in the GOP to Bernanke’s remarks. If so, then Bernanke's remarks give the White House the political cover to say they advocated both solvency and private accounts but congress could not deliver due to obstructionist Democrats:

                                                                                                          Aide Says Bush Wants Solvent Social Security, By Jonathan Weisman, Washington Post: The White House's top economic adviser said yesterday that President Bush will insist that any Social Security legislation include a fix to the program's long-term financing problems, undercutting House leaders' efforts to craft a compromise that ignores the solvency question. … Asked if a solvency fix was inviolable, Bernanke said yes. The comments are significant because House Republican leaders have sided with conservatives who say Congress should settle for a modest plan to establish small private investment accounts financed from Social Security's temporary cash surplus. … But Bernanke did not give them the green light. "The president is committed to two elements," Bernanke said. "One is restoring the solvency of the Social Security system, and the second is creating personal retirement accounts for individuals. The legislative process is a long and complicated one, and we will be working with Congress to see what comes out, but we would want to see both of those elements in a final program."

                                                                                                          Conservative economists were disappointed by the statement -- and somewhat skeptical. "I don't think the White House is drawing any lines in the sand, these comments notwithstanding," said Rep. Paul Ryan (R-Wis.), a Ways and Means Committee member and proponent of the accounts proposal. "If that's their position, they will be stubborn and this whole thing will go down," Lawrence A. Hunter, chief economist at the conservative Free Enterprise Fund, said of Bernanke's statements. "Solvency is dead on arrival." … White House National Economic Council Director Allan Hubbard appeared to accept that strategy last week on CNBC when he called the approach "a very important first step." … But Bernanke said firmly that he would recommend the president stick to his "basic principles" and oppose a plan that does not address the system's core problems.

                                                                                                          Bernanke ... did suggest the White House is open to one change in the Bush proposal. Under the president's personal accounts plan, a retiree's defined Social Security benefits would be reduced by one dollar for every dollar contributed to an account, plus an interest rate of 3 percent above inflation. ... Even some allies of Bush have suggested that is too high a hurdle. Bernanke appeared to agree. "With real interest rates quite low, the offset rate may unduly penalize personal accounts," he said. "And we may need to think about whether the offset rate should be adjusted somehow to market levels."

                                                                                                            Posted by Mark Thoma on Tuesday, July 19, 2005 at 01:26 PM in Economics, Social Security

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                                                                                                            Your Tax Dollars at Work

                                                                                                            The Great Society has room to improve, but government programs to reduce poverty are much more effective and far less expensive than you might have heard:

                                                                                                            In Defense Of Success - Government Really Can Lessen Poverty, By E. J. Dionne Jr., Washington Post: … the Center on Budget and Policy Priorities, the estimable liberal organization, will release a series of studies showing that programs aimed at lifting up Americans with low incomes actually do what they say they do. The reports reflect a growing recognition on the part of progressives that after years of playing defense against conservative claims, it is time to go on offense. The fact is that every year 27 million Americans are lifted from poverty by our system of public benefits. More than 80 million Americans receive health insurance through a government program -- Medicaid, Medicare or the State Children's Health Insurance Program, known as SCHIP. Without these programs, tens of millions would be unable to afford access to medical care. As the center notes, government programs reduce both the extent and the depth of poverty.

                                                                                                            Does all this cost a fortune? Not by any fair reckoning. Federal spending on Medicaid and SCHIP represents 1.5 percent of gross domestic product. Federal financing for the rest of the low-income programs consumes just 2.3 percent of GDP. For a sense of comparison, consider that defense spending consumes 4 percent of GDP and interest on the national debt gobbles up 1.5 percent. President Bush's tax cuts -- which go in large part to the wealthiest Americans -- will consume roughly 2 percent of GDP.

                                                                                                            And federal spending for the poor does a huge amount of good. Food stamps, the center notes, "help more than 25 million people with low incomes afford an adequate diet." The school lunch and breakfast programs provide free and reduced-price meals to 22 million schoolchildren from low-income families. The supplemental nutrition program for women, infants and children known as WIC helps about 8 million pregnant and postpartum women and their children under 5. One of its effects has been to reduce the incidence of low birth weight among infants. … Or take the earned-income tax credit, which supplements the incomes of the working poor. Census data show that in 2002 the EITC "lifted 4.9 million people out of poverty, including 2.7 million children." Without the EITC, the center notes, "the poverty rate among children would have been nearly one-third higher." The report cites conservative economist and Nobel Prize winner Gary Becker, who once wrote that the earned-income tax credit "rewards rather than penalizes poor families with working members." Yes, government programs can fight poverty while decreasing dependency… There is much more in these reports -- available at http://www.cbpp.org -- but the point is clear: Without government's exertions, many more Americans would be poor. This, in turn, means that Congress's efforts to pay for the Bush tax cuts by trimming some of these programs, particularly food stamps and Medicaid, are, in a word, unconscionable…

                                                                                                              Posted by Mark Thoma on Tuesday, July 19, 2005 at 02:34 AM in Economics, Policy

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                                                                                                              Greenspan Says Policy Not Intended to Prick Bubble

                                                                                                              Just say no to bubble-pricking:

                                                                                                              Housing Prices Aren't Fed Target, Greenspan Says, By Greg Ip, The Wall Street Journal (subscription): Recent warnings by bank regulators on risky housing-related lending aren't meant to rein in a potential bubble, Federal Reserve Chairman Alan Greenspan said. "The regulatory system is not designed to influence or control asset bubbles, but rather to ensure that bubbles, should they develop, do not lead to unsafe lending practices," Mr. Greenspan said in a letter to Rep. Jim Saxton (R., N.J.), chairman of the Joint Economic Committee of Congress. The remarks … show the Fed has rejected using either of its major tools -- monetary or regulatory policy -- to rein in housing prices. … Mr. Greenspan has long rejected the use of interest rates to tame asset bubbles, such as the stock bubble of the 1990s. He has argued that bubbles are difficult to identify in advance and reining them in may require interest rates so high that they do more damage than a burst bubble. Still, some have speculated the Fed might use its regulatory sway over banks to tamp down the mortgage lending … the Fed … warned lenders about interest-only home-equity loans, loans made with little or no documentation of the borrower's credit-worthiness, and higher loan-to-value and debt-to-income ratios. Similar guidance on mortgage loans is expected. But Mr. Greenspan said the guidance isn't a form of bubble-pricking. "It was a response to indications that some banks were not appropriately managing risks in the home-equity area," he wrote. The factors cited by regulators in May "have not necessarily had a material effect on housing prices. …

                                                                                                              For more on this, See David Altig, Prudent Investor, and Caroline Baum

                                                                                                                Posted by Mark Thoma on Tuesday, July 19, 2005 at 12:06 AM in Economics, Housing, Monetary Policy

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                                                                                                                July 18, 2005

                                                                                                                Fed Watch: On Track for More Tightening

                                                                                                                Tim Duy brings us another Fed Watch. I enjoy presenting these because it’s nice to get a perspective that sometimes differs from my own:
                                                                                                                For the time being, the US economy looks firm enough to trigger additional Fed tightening. The economy is growing moderately with subdued price pressures under a policy of measured rate hikes. Sounds like policy, then, is just about right. If it isn’t broke, don’t fix it.

                                                                                                                The recent spate of data has been anything but positive from a growth perspective. On the demand side, the retail sales report tells us that the American consumer remains in an acquisitive mood, even excluding autos. The ISM survey showed an uptick in manufacturing activity, silencing, at least temporarily, those analysts who noted that the Fed never hikes rates when the ISM falls below 50. And Friday, the Fed released a strong industrial production report for June, reporting a 0.9% increase in headline IP, a capex rate of 80%, and strong gains in business equipment production.

                                                                                                                Benign readings on inflation suggest that inflation has leveled off and may possibly be falling. This could be interpreted as a signal that the Fed’s job is almost done – vanquishing the inflation dragon is after all a monetary policy maker’s chief objective. An alternative view, and the one that I think will hold sway on Constitution Avenue, is that controlled price pressures is a signal that the Fed’s policy path is working.

                                                                                                                Indeed, Fedspeak, including today’s Greenspan comments, and comments by Fed Bank presidents (thanks to Mark Thoma and David Altig) suggest that policymakers are comfortable with economic activity and the path of policy. Indeed, altogether it is not surprising that the markets are looking for a Fed Funds rate of 3.75% by October. More could still be coming as well; the yield on the 10 year Treasury is up to 4.2%, reducing the risk of a yield curve inversion for the time being (Not that Greenspan appears particularly worried about it in any event. Perhaps he read David Altig’s piece.)

                                                                                                                For more on the underlying strength of the economy, see today’s Wall Street Journal for an article that partially attempts to dispel the myth of the declining US manufacturing sector (subscription). This article is sure to unsettle those who focus on the decline in manufacturing jobs (a trend that, as a share of total payrolls, began during WWII, long before most Americans could find China on the map). From the Fed’s perspective, however, I suspect it will be viewed as support for the notion that manufacturing payroll weakness is structural, not cyclical, and likely outside their purview.

                                                                                                                Which leads us into a growing criticism of Fed policy, the labor market. Many point to the relatively tepid job growth numbers and the drop in labor force participation rates, regardless of the unemployment rate, as evidence of a weak labor markets – weak enough that the Fed errs by continuing its tightening campaign. In Monday’s New York Times, Paul Krugman, following the research of Fed Boston economist Katherine Bradbury, suggests that there is considerable slack in the labor market. This slack, as much as 3.3 percentage points, is the result of persons not reentering the labor force as quickly as in past recoveries, and thus not counted as unemployed.

                                                                                                                Krugman acts as if some great mystery has been revealed to him. Perhaps he never gets to Table A-12 in the employment report, alternative measures of unemployment. This is not some hidden conspiracy; if you widen the definition of the labor force, you will increase the unemployment rate. You can narrow the definition as well, to only those unemployed 15 weeks or longer (a 1.6% unemployment rate). That the labor force participation rate has fallen, and thus measured unemployment has fallen, is simply not new news. I teach it multiple times a year.

                                                                                                                Krugman also implies that the decline in labor force participation is largely cyclical, and that Fed officials are dropping the ball by hiking rates. Bradbury herself is more cautious on the former point:

                                                                                                                “To the extent that explanations for this sub-normal participation are cyclical…”

                                                                                                                “Note that the analysis in this brief represents a simple descriptive exercise, not a modeling of participation behavior.”

                                                                                                                “…it seems likely that part of the below average participation rebound for women in this cycle reflects a secular downshift in women’s participation rather than a cyclical response…”

                                                                                                                In other words, secular and structural issues are at play. You may have chosen to participate in household production. And just because you may want a job, doesn’t mean you have the skills that current employers want.

                                                                                                                This latter part, the possibility of structural unemployment and withdrawal from the labor force, is what troubles me about the slackness in the labor market story. You may think you have available workers, but you really don’t. I suspect that Fed officials will be cautious in this regard as well (think again to structural unemployment in manufacturing). For example, in the course of my duties, I speak with executives from a wide swath of Oregon firms. I hear a common complaint – good workers are simply hard to come by. This in a state with a relatively high unemployment rate! One firm owner said his concerns are not simply finding someone who can swing a hammer, it is a lack of workers across the skill spectrum.

                                                                                                                What about the lower end of the labor market? Isn’t this a natural place for marginally attached workers to end up? Interestingly, a local temporary help agency reported to me that in a recent month, they rejected a stunning 90% of applicants for three reasons: 1.) Lack of previous employment experience (note here that Oregon has the second highest minimum wage in the nation), 2.) Felony conviction in the past 7 years, and 3.) Failure to pass a drug test (effectively required unless you want to see your worker comp rates shoot through the roof). You might want to work, but if no one wants you even when they need workers, you really aren’t available and do not represent slack.

                                                                                                                None of this is meant to detract form Katharine Bradbury’s dissection of the labor force participation rates. Instead, it is meant to imply that Fed officials will be much more cautious than Krugman in their interpretation of her work. There may be slackness in the labor market, but how much is an open question, and Fed officials will be wary of finding the answer by waiting for inflation to tell them.

                                                                                                                  Posted by Mark Thoma on Monday, July 18, 2005 at 04:05 PM in Economics, Fed Watch, Monetary Policy

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                                                                                                                  Real Business Cycle Theory

                                                                                                                  This just came in the Economics Research Network's NBER Working Papers series and it looked like something very much worth passing along, particularly since it's a relatively non-technical discussion:

                                                                                                                  Tavares Rebelo, Sergio, "Real Business Cycle Models: Past, Present, and Future" (June 2005). NBER Working Paper No. W11401. [Free version from author's website - March 2005].

                                                                                                                    Posted by Mark Thoma on Monday, July 18, 2005 at 03:06 PM in Academic Papers, Economics

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                                                                                                                    The Good Old Clinton Budget Days

                                                                                                                    Kevin Hassett of Bloomberg comments that as we argue over the wisdom of tax cuts, spending is continuing at a record pace. In the process, he comes down with a case of nostalgia:

                                                                                                                    Bring Back Clinton -- Just His Spending Habits: Kevin Hassett, Bloomberg: Bring back the Clinton administration. Well, maybe not all of it, but at least its spending habits. … Spending growth under George W. Bush has been almost four times as high as it was during the same period of Bill Clinton's presidency. No two-term president in post-war U.S. history has ever presided over a spending binge this monumental in his first six years in office. ... If Bush had vowed when he took office to never spend more than Clinton planned to, then the budget office would be projecting a 10-year surplus of about $3.6 trillion, even assuming that all of the Bush tax cuts are made permanent. Instead, based on Bush's proposed 2006 budget, we are looking at a 10-year deficit of $2.6 trillion. Tax cuts didn't cause the deficit. At best, they approximately paid for themselves. Spending is the true culprit. … From the education bill to the prescription drug benefit to the war on terror, spending has spun out of control. If we want to put our fiscal house in order, we need to stop arguing over taxes and bring back the Clinton spending.

                                                                                                                    I disagree with his demonstration that tax cuts paid for themselves and that therefore the deficit is attributable solely to spending, not to tax cuts. Nothing he says establishes a causal relationship, only an association, but the remarks on spending are notable. As he clearly shows, the "cut taxes and spend party" lives up to its name.

                                                                                                                      Posted by Mark Thoma on Monday, July 18, 2005 at 02:34 PM in Budget Deficit, Economics, Taxes

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                                                                                                                      Greenspan Expects Moderate Growth, Unconcerned with Yield Curve

                                                                                                                      GreenSpeak says the economy is set to expand at a moderate pace and the flattening of the yield curve does not change that assessment:

                                                                                                                      Greenspan says expect moderate growth, By Mark Felsenthal, Reuters: Although soaring oil prices have hampered U.S. economic growth, the economy is coping well and is set to expand at a moderate pace, Federal Reserve Chairman Alan Greenspan said in remarks released on Monday. Greenspan said Fed research found that the rise in oil prices since 2003 to above $60 a barrel is likely to shave about three-quarters of a percentage point from the U.S. gross domestic product this year. Rising energy costs sapped growth by a half-percentage point in 2004, he said in written responses to questions from Congressional Joint Economic Committee Chairman Jim Saxton, a New Jersey Republican. … The central bank head also said flat long-term interest rates, despite the Fed's short-term rate hikes, should not be interpreted as a clear sign of economic faltering. "A sharp flattening of the yield curve is not a foolproof indicator of economic weakness," he said. Greenspan said most statistical models that look at the yield curve -- different interest rates along the spectrum of Treasury debt maturities -- to forecast economic trends project moderate growth…

                                                                                                                      These remarks give little reason to believe that the Fed's short-term outlook has changed substantially, though the phrase "robust underlying growth" from the FOMC statement is now "set to expand at a moderate pace" indicating, perhaps, a change in view regarding the strength of economic growth. We'll know more after Greenspan's remarks to congress later this week.

                                                                                                                        Posted by Mark Thoma on Monday, July 18, 2005 at 01:26 PM in Economics, Monetary Policy

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                                                                                                                        Is U.S. Higher Education in Decline?

                                                                                                                        I don’t always agree with The Washington Times to say the least. But this time I do, sort of:

                                                                                                                        American science in decline, Editorial, The Washington Times: Is the American science and engineering dynamo slowing down? Indications have emerged in recent years that our comparative advantage over Europe and Asia is slipping. In an insightful paper published last month by the National Bureau of Economic Research, Harvard economist Richard B. Freeman compiled the evidence of the United States' relative decline from its position of unparalleled leadership in the second half of the 20th century. … One indication of the trend is that the share of papers U.S. scientists publish in major journals is falling. According to the National Science Foundation, American scientists published 31 percent of all scientific papers in 2001, down from 38 percent in 1988. The share of papers in the Chemical Abstract Service dropped precipitously, from 73 percent in 1980 to 40 percent in 2003. Meanwhile, the number of federal grants that younger scientists receive has plummeted, as has the United States' relative share of total doctoral students worldwide. Perhaps most tellingly, the proportion of science and engineering doctorates awarded in Asia and Europe is rising, but numbers in the United States are flatlining. …

                                                                                                                        I am far less worried about the spread of knowledge than the editorial, and I do not believe U.S. higher education is in any trouble. But more emphasis on education at all levels, which I believe is a fundamental source of economic growth and prosperity, wouldn’t hurt.

                                                                                                                        [Here’s a link to [what I believe is] the paper discussed in the editorial (NBER link, free download of earlier version).] From New Economist, a better reference. Thanks!

                                                                                                                          Posted by Mark Thoma on Monday, July 18, 2005 at 02:52 AM in Economics, Universities

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                                                                                                                          Social Security Reform Follies Becoming Farcical

                                                                                                                          The theme of this editorial in the New York TimesMore Social Security Follies” reminds me of a post I saw somewhere, perhaps this one from a week ago, “Social Security Reform Follies Not Yet Iced.” The theme is very similar too. The news here is the sinking feeling that Social Security reform may not be dead yet:

                                                                                                                          More Social Security Follies, Editorial, New York Times: .... Last May, [Representative Bill ] … Thomas held a hearing on ways to boost retirement savings, and some of the ideas put forth - such as matching funds rather than tax deductions for I.R.A.'s - could increase retirement security ... But now, under pressure from Republican leaders, Mr. Thomas is being drawn into the White House's single-minded drive for a privatization … Mr. Thomas is expected to get a euphemistically named "retirement security" bill to the House floor, perhaps by the end of the summer. The bill would include a proposal to establish private accounts, … Congress would need to borrow the money to establish the accounts. As a result, the proposal would increase the budget deficit by some $80 billion next year and about $1 trillion over 10 years, based on numbers from Social Security's chief actuary. As if that's not bad enough, the proposal omits the benefit cuts and tax increases that would be necessary to improve Social Security's finances in a fair way. … House Republicans are betting that their Social Security ploy will be smart tactics. If the Senate passed a Social Security reform bill - a big if - input from Senate Democrats would ensure that it would not include private accounts. But if the House and Senate pass different bills, they'll go to a conference controlled by the Republicans. In that forum, the leadership could force the House's private accounts into the legislation's final version. This all remains theoretical, but in the minds of Republican strategists it at least raises the possibility of enacting private accounts this year. In the real world, the Republicans may simply be hoping to set up a scenario in which they will be able to blame the Democrats for being obstructionist. …

                                                                                                                          Despite this editorial, and my posts in the link above and here also discussing attempts to extract a political price, I think the reform effort is over but also worry about Thomas. There are those who have not given up just yet, and we shall see if that assessment is accurate. I've been wondering what to turn to next now that Social Security reform is dead, labor issues and tax reform are among the possibilities, and I hope that problem persists.

                                                                                                                            Posted by Mark Thoma on Monday, July 18, 2005 at 01:26 AM in Economics, Politics, Social Security

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                                                                                                                            July 17, 2005

                                                                                                                            Optimizing Social Security through Poverty Insurance and Retirement Saving

                                                                                                                            If I were in charge of creating a Social Security system that optimized the outcomes for participants, what Social Security system would I put in place?

                                                                                                                            Let’s start by clearly distinguishing between two features of our Social Security system that cause confusion because they are mixed together. The savings and insurance aspects of Social Security perform separate but related functions. Poverty insurance is just what the name implies, insurance against abject poverty brought about by the inability to support oneself as age takes its inevitable toll. Retirement savings are funds available over and above the amount guaranteed under the poverty insurance provisions of the program.

                                                                                                                            Let’s begin with poverty insurance. Who should provide it? How generous should benefits be? Who should be eligible? How should poverty insurance be funded? I believe the government must provide poverty insurance. If left to the private sector, those most likely to need the insurance are those least likely to insure themselves in the private market due to moral hazard, financial constraints, and myopic behavior. There is market failure in this market and the solution is very similar to our current system, forced premiums from all (i.e. the payroll tax). In an ideal system, the premiums would match the probability of needing poverty insurance conditional upon a person’s current state, but I won’t go to that level of detail as this post is running long as it is. As an economist, means testing so that only those in poverty receive benefits is also attractive, but the politics of such a system worries me because of the ex-post income transfers that occur. If premiums are adjusted to reflect the probability of needing insurance such transfers are eliminated, but again the politics of a system with premiums linked to wealth levels are of concern to me.

                                                                                                                            How generous should poverty insurance be? That is a question we as a society must answer. Economics does not tell us what is acceptable. I am comfortable with a fairly generous level of poverty insurance, certainly more than Nassau Senior would advocate, but as noted in the retirement saving discussion below, this reduces the “deductible” that helps to overcome moral hazard problems in that market. Finally, on the funding aspect, I disagree with Greenspan and others regarding holding private sector assets. The government does not have a problem issuing debt to the private sector, and I see no reason why the government cannot invest Social Security funds, through financial intermediaries, in private sector assets rather than government bonds. The reasons for the government doing the investing rather than each individual are at least twofold. First, any risk around the poverty level can only be one-sided since outcomes below the poverty level will have to be augmented by the government. This causes a moral hazard problem since the downside risk is limited. Second, pooling the funds reduces the risk around the mean return. Each individual can receive the overall mean rather than some individuals doing better than average, others worse, with the same average return across individuals.

                                                                                                                            Retirement savings are the means by which individuals can enjoy a retirement above a poverty level. I believe there are fundamental market failures in this market such as adverse selection, moral hazard, and other problems as noted below. The adverse selection problem arises because individuals have better information about their health and longevity than insurance companies. When this happens, a classic "lemons market" emerges, and there is market failure. There are various solutions to this problem in general, but in this case the obvious solution is to require full disclosure of health information to insurance companies beyond what is currently considered acceptable. There are also questions about the extent to which we wish to link retirement insurance premiums to probabilities determined by information on genetic makeup. The existence of poverty insurance also brings about a moral hazard problem in the retirement saving market because it limits the downside risk, and there may be problems of myopic decision making among agents.

                                                                                                                            Another possibility is a wedge between social returns to investment and private returns. Investment improves productivity, and some of the productivity gains are captured by workers and other stakeholders through the bargaining process. Some of the productivity gains are collected by the government in taxes and this causes a substantial wedge to emerge. In any case, I have become convinced that there are market failures in the retirement saving market, so the question becomes how to create the incentives for individuals to attain the optimal level of retirement saving. One solution is to force people to save a particular percentage of their income, or some other forced saving scheme, other solutions give individuals the incentives to behave properly.

                                                                                                                            A common solution to the moral hazard problem is deductibles and co-payments that cause individual to share in the cost of a negative outcome. Two proposed solutions to market failure in retirement savings markets have this deductible feature. The first is well-known, opt-out, add-on accounts. These tend to work better when the default outcome is very unattractive, and the difference between the outcome with active participation and the outcome with passive participation can be viewed as the deductible the individual pays for behaving in a manner leading to sub-optimal outcomes. The other is a money match program where the government matches, say dollar for dollar but the exact ratio could vary, money put into retirement savings accounts. In designing a system, I would implement a combination such as an opt-out add-on accounts with the amount matched in some ratio by the government (and capped) unless one of my really smart economic advisers convinced me some other program would work better. The opt-out solution has the problem that short-run considerations may interfere with following the optimal long-run plan, and there is an argument for forced individual saving because of this. A family responding to the pressures of the moment may make decisions that, in retrospect, were not the best in the long-run, and forced saving overcomes the short-run temptations (IRAs have this feature). Forced retirement saving is not my preferred solution, but it needs to be mentioned, and, if the opt-out system appeared to allow sub-optimal behavior to emerge even with the incentives described above in place, I would consider dropping add-on accounts and adding forced retirement saving to the forced poverty insurance payment. That would result in a system resembling the current system in many ways.

                                                                                                                            The other source of retirement saving is employer provided programs. I have not devoted as much attention to this aspect of retirement saving. It is absolutely clear this leg is weakening and may collapse soon, but I hesitate to offer prescriptive solutions without more knowledge. However, to the extent that such programs are failing and may disappear, the necessity for add-on accounts with strong incentives or forced retirement saving becomes more important.

                                                                                                                            I believe our Social Security system has functioned well as a combination poverty insurance and retirement saving program, but it has not functioned very well in providing the incentives for individuals to take control of their own retirement and increase the accumulation of retirement assets. To the extent the system can be redesigned to provide better incentives for individuals to participate in retirement savings programs voluntarily, particularly those who are substantially above the poverty level, it will be a welcome improvement.

                                                                                                                              Posted by Mark Thoma on Sunday, July 17, 2005 at 02:25 PM in Economics, Policy, Social Security

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                                                                                                                              Seymour Hersh Reports Administration Manipulated Iraqi Vote

                                                                                                                              I wasn't surprised at all when I read this, and that's a bit unsettling. When the administration's public statements are at odds with actual policy, and there are hints the administration proceeded without the required congressional authority, we should be worried. But this passes with little notice, and that says a lot about how commonplace such behavior has become in this administration:

                                                                                                                              Plan Called for Covert Aid in Iraq Vote, By Douglas Jehl And David E. Sanger, NY Times: In the months before the Iraqi elections in January, President Bush approved a plan to provide covert support to certain Iraqi candidates and political parties, but rescinded the proposal because of Congressional opposition, current and former government officials said Saturday. … The article, by Seymour M. Hersh, reports that the administration proceeded with the covert plan over the Congressional objections. Several senior Bush administration officials disputed that, although they recalled renewed discussions within the administration last fall about how the United States might counter what was seen as extensive Iranian support to pro-Iranian Shiite parties. Any clandestine American effort to influence the Iraqi elections, or to provide particular support to candidates or parties seen as amenable to working with the United States, would have run counter to the Bush administration's assertions that the vote would be free and unfettered. Mr. Bush, in his public statements, has insisted that the United States will help promote conditions for democracy in the region but will live with whatever governments emerge in free elections. The article cites unidentified former military and intelligence officials who said the administration went ahead with covert election activities in Iraq that "were conducted by retired C.I.A. officers and other non-government personnel, and used funds that were not necessarily appropriated by Congress." But it does not provide details and says, "the methods and the scope of the covert effort have been hard to discern." … Despite the denials by some Bush administration officials on Saturday, others who took part in or were briefed on the discussion said they could not rule out the possibility that the United States and its allies might have provided secret aid to augment the broad overt support provided to Iraqi candidates … They said they were basing their comments primarily on the intensity of discussions within the administration about the potential adverse consequences of a victory by Iraqi parties hostile to the United States. … Time magazine first reported in October 2004 that the administration had encountered Congressional opposition over a plan to provide covert support to Iraqi candidates. The New Yorker account detailed more elements of that debate. The current and former officials interviewed Saturday amplified how Mr. Bush had initially approved the plan, and how the White House met objections as it notified Congressional leaders, as required by law. … Among those whom Time and The New Yorker cited as raising objections was Nancy Pelosi, the House Democratic leader. The Time report said Ms. Pelosi had had "strong words" with Condoleezza Rice, then the national security adviser. ..."

                                                                                                                              Whether the administration actually did this or not, and the door isn’t closed on that question, the formulation of the plan and the willingness to execute it speak loudly to the administration’s credibility when it said it would live with whatever government emerges in free elections. Condi’s “strong words” are telling. Democracy is only okay when it produces an outcome the administration agrees with. If the only purpose was to counter attempted manipulation from Iran, I could live with that. But it sounds like the Iran story is cover for an attempt at wider involvement and manipulation to produce the outcome the administration desired.

                                                                                                                                Posted by Mark Thoma on Sunday, July 17, 2005 at 10:53 AM in Iraq, Politics

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                                                                                                                                Social Security Reform Slipping Quietly Into the Night

                                                                                                                                In case you haven't heard, as noted by Brad DeLong in his post pointing to Whiskey Bar's comments and quotes from a story in the Washington Post, Social Security reform legislation is on hold until at least September. This is also when the panel working on tax reform legislation is scheduled to release its recommendations, and when the Supreme Court nomination is likely to heat up, so the agenda is likely to be crowded:

                                                                                                                                Social Security debate on hold, AP: Congressional action on Social Security legislation, President Bush's top domestic priority, may not come anytime soon. The chairman of the House Ways and Means Committee, who earlier predicted his panel would deal with a bill in early June, said Wednesday it may not get to it until September at the earliest. In the Senate, Republicans on the Finance Committee met Thursday morning to talk about Social Security but afterward it was unclear whether they were any closer to action. Rep. Bill Thomas, R-California … was quick to say about Social Security legislation: "There's no hang-up on contents. It's just how many days we got ..." … Rep. Roy Blunt of Missouri, the No. 3 Republican in the House, told reporters he doubted lawmakers would deal with the bill this month. That would delay the debate until fall, when the Senate is expected to be consumed with a Supreme Court confirmation battle. Sen. Charles Grassley, chairman of the Senate Finance Committee, told reporters Tuesday he was unsure when his committee would begin work on Social Security legislation…

                                                                                                                                I will note the free usage of the qualifier “may” in all the statements and reporting, but I don’t see this moving forward. I do believe Thomas will try and bring Social Security and tax reform into one comprehensive reform package this fall, though the political wisdom of such an attempt seems questionable and, if attempted, I don't believe it will be successful.

                                                                                                                                  Posted by Mark Thoma on Sunday, July 17, 2005 at 01:53 AM in Economics, Politics, Social Security, Taxes

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                                                                                                                                  While We Weren’t Looking

                                                                                                                                  While LeakyGate, Social Security reform, Supreme Court nominations, and other political struggles dominate our attention, a Chinese general speaks out on China's willingness to use nuclear weapons in a conflict with the U.S.:

                                                                                                                                  Top Chinese general warns US over attack, By Alexandra Harney in Beijing and Demetri Sevastopulo and Edward Alden, Financial Times: China is prepared to use nuclear weapons against the US if it is attacked by Washington during a confrontation over Taiwan, a Chinese general said on Thursday. “If the Americans draw their missiles and position-guided ammunition on to the target zone on China's territory, I think we will have to respond with nuclear weapons,” said General Zhu Chenghu. Gen Zhu was speaking at a function for foreign journalists organised, in part, by the Chinese government. He added that China's definition of its territory included warships and aircraft. … “We . . . will prepare ourselves for the destruction of all of the cities east of Xian. Of course the Americans will have to be prepared that hundreds . . . of cities will be destroyed by the Chinese.” Gen Zhu is a self-acknowledged “hawk” who has warned that China could strike the US with long-range missiles. But his threat to use nuclear weapons in a conflict over Taiwan is the most specific by a senior Chinese official in nearly a decade. … In recent months, a string of US officials, including Donald Rumsfeld, defence secretary, have raised concerns about China's military rise. The Pentagon on Thursday declined to comment on “hypothetical scenarios”…. Gen Zhu said his views did not represent official Chinese policy and he did not anticipate war with the US.

                                                                                                                                  We are not properly focused and I find that worrisome. We need to pay more attention to Bin Laden and associates. And we need more attention focused on North Korea, Iran, China, and other nuclear threats, something made far more difficult by the current demands on military resources.

                                                                                                                                  Update: A Sucker Bet, Nicholas D. Kristoff, NY Times discusses the nuclear threat posed by North Korea. There is also a multimedia presentation of the story.

                                                                                                                                    Posted by Mark Thoma on Sunday, July 17, 2005 at 01:44 AM in Iraq, Terrorism

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                                                                                                                                    Sunday Reading

                                                                                                                                    LeakyGate

                                                                                                                                    Live 8 Reverb

                                                                                                                                    Sunday Shopper

                                                                                                                                    Labor is laboring

                                                                                                                                    Does it seem warm in here to you?

                                                                                                                                    Threats

                                                                                                                                    Is it an animal, vegetable, or mineral?

                                                                                                                                      Posted by Mark Thoma on Sunday, July 17, 2005 at 01:35 AM in Economics, Reading

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                                                                                                                                      The Buzz on Birds and Bees

                                                                                                                                      Where Do Birds Come From?

                                                                                                                                      Predatory Dinosaurs Breathed Like Birds, Study Suggests, Sarah Graham, Scientific American: A new analysis suggests that theropod dinosaurs such as T. rex shared another characteristic with their modern day bird descendants: their mode of breathing. Although some scientists have posited that the extinct creatures would have had lungs similar to those of today's crocodiles and other reptiles, the results instead indicate that theropods used a more complex pulmonary system resembling that of living birds. Birds have a number of extra air sacs in their skeletons that supply their lungs with air and enhance their ability to exchange gases.

                                                                                                                                      PLeon P. A. M. Claessens of Harvard University …[said] "The pulmonary system of meat-eating dinosaurs such as T. rex in fact shares many structural similarities with that of modern birds, which, from an engineering point of view, may possess the most efficient respiratory system of any living vertebrate inhabiting the land or the sky," The results, published in today's issue of the journal Nature, indicate that the system that birds use for breathing developed before birds themselves evolved. This respiratory adaptation, the authors note, is consistent with the hypothesis that predatory dinosaurs had elevated metabolic rates.

                                                                                                                                      Busy, busy buzzing bees

                                                                                                                                      Why do bees buzz?, M. O'Malley, Newton, Mass. Scientific American: Gard Otis, a professor of environmental biology at the University of Guelph in Ontario, Canada, who studies bee behaviour, ecology and evolution, explains. Bees buzz for two reasons. First, the rapid wingbeats of many species create wind vibrations that people hear as buzzes. The larger the bee, the slower the wingbeat and the lower the pitch of the resulting buzz. … In addition some bees, most commonly bumblebees (genus Bombus), are capable of vibrating their wing muscles and thorax (the middle segment of their body) while visiting flowers. These vibrations shake the pollen off the flower's anthers and onto the bee's body. Some of that pollen then gets deposited on the next flower the bee visits, resulting in pollination. … When bumblebees vibrate flowers to release pollen, the corresponding buzz is quite loud. Honeybees (genus Apis) are incapable of buzz-pollination and are usually quiet when foraging on flowers. … some flowers are adapted to pollination by pollinators capable of "buzz-pollination." Tomatoes, green peppers and blueberries all have tubular anthers with the pollen inside the tube. … bumblebees pollinate these crops much more efficiently than honeybees do.

                                                                                                                                        Posted by Mark Thoma on Sunday, July 17, 2005 at 01:26 AM in Science

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                                                                                                                                        July 16, 2005

                                                                                                                                        A Welcome Change in Tune

                                                                                                                                        After having written this post criticizing a Christian Science Monitor editorial for taking the larger issue surrounding the Rove leak far too lightly, I very much appreciated this opening in their latest editorial on the same issue:

                                                                                                                                        Rove leak is just part of larger scandal, By Daniel Schorr, Christian Science Monitor: Let me remind you that the underlying issue in the Karl Rove controversy is not a leak, but a war and how America was misled into that war...

                                                                                                                                        Exactly.

                                                                                                                                          Posted by Mark Thoma on Saturday, July 16, 2005 at 02:43 AM in Politics

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                                                                                                                                          Infomania

                                                                                                                                          Does email make you dumber?

                                                                                                                                          Does E-mail Make You Dumber?, By Anne Casselman, Discover: … A recent study … found that British workers’ IQ test scores drop temporarily by an average of 10 points when juggling phones, e-mails, and other electronic messages—more of an IQ drop than occurs after smoking marijuana or losing a night’s sleep. “This is a very real and widespread phenomenon,” said Glenn Wilson of the Institute of Psychiatry at the University of London, who conducted the tests on some 1,100 volunteers. Just how long it takes to recover is unclear. The study found that modern-day communications have become addictive…

                                                                                                                                          Addictive? Dumber? That’s ridiculous. How can she say that? Oh, wait. I’m on the road, it’s almost 3:00 in the morning …

                                                                                                                                          Whether infomaniacs are less intelligent is another question. “It didn’t affect their IQ at all; it affected their performance on an IQ test,” says Bob Stickgold, a cognitive neuroscientist at Harvard University. “When you’re taking an IQ test, you probably want to be really focused. That’s the antithesis of the state you get into when you do a lot of multitasking.” The human brain has evolved different modes for concentrating on a single thing versus jumping from one thing to another. ... “There are basic brain-stem mechanisms that will cause you to shift and focus your attention on a change in stimulus.” Whether that change is a saber-toothed tiger popping out of the woods or a phone ringing suddenly, the consequences are the same. “The switch signal comes fast and powerfully. This system knows at a moment like this that what’s important is to shift your state quickly, and damn the cost. And the cost is that it takes several minutes to shift back,” says Stickgold. “That’s the way we’re wired.”

                                                                                                                                            Posted by Mark Thoma on Saturday, July 16, 2005 at 02:34 AM in Science

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                                                                                                                                            Unions Debate How to Reverse Declining Power

                                                                                                                                            I’m still on the road, so once again I’m posting things a bit quicker than usual. There is an internal debate among unions about how best to reverse the decline in union membership and influence. One view holds that political clout is the key to stemming the fall in membership and influence, and the single voice that comes with a federation of unions is the best means of attaining political power. Those advocating this point of view would maintain the same basic union structure as now and devote more effort towards trying to get politicians favorable to unions elected. The other view is that the focus should be on rebuilding membership and to do that, reorganization along lines such as large single industry unions is the key. Five unions advocating this point of view are threatening to leave the federation:

                                                                                                                                            Unions debate the place of politics, By Jill Lawrence, USA Today: …13 Democrats beat Republicans in Minnesota state House races last year - cutting a 28-seat deficit to two seats. It was the best showing of either party in state assembly and house races nationwide … Unions played a pivotal role. Yet union membership here is shrinking, and so is labor's political clout. … Minnesota is a microcosm of a national decline so dire that it threatens to rupture the 13 million-member AFL-CIO. Union leaders are so divided over how to recapture labor's glory days that five large unions are threatening to leave the federation. Leaders have put a premium on electing sympathetic politicians; the dissidents say salvation lies in organizing new members. … The AFL-CIO, led by John Sweeney for the past 10 years, has worked to elect pro-labor public officials. It's had some success at state and local levels, but the White House lately has been out of reach. The dissidents say politics should be secondary to building and streamlining a movement in which, for instance, health care workers belong to 30 different unions and 91% aren't unionized at all. Larger, stronger, single-industry unions are needed, the dissidents say, to bargain effectively with employers. They say organizing is also needed to ensure labor's survival as a political force. "We're verging on irrelevancy," says Andrew Stern, president of the 1.8 million-member Service Employees International Union (SEIU). … Some labor historians say unions would be better served if Sweeney stepped aside in favor of an aggressive organizer. It is "wrongheaded" to rely on politics to reverse labor's decline, says Clete Daniel of Cornell University in New York. ... The dissidents are making a "tactical misstep" by turning minor disagreements into a crisis, says Nelson Lichtenstein, director of the Center for the Study of Work, Labor and Democracy at the University of California at Santa Barbara. He and James Green at the University of Massachusetts say divisions could lead to wasted resources, fights over the same workers and a bad image for unions. "These things can turn ugly quickly," Green says…

                                                                                                                                              Posted by Mark Thoma on Saturday, July 16, 2005 at 02:25 AM in Economics, Unemployment

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                                                                                                                                              July 15, 2005

                                                                                                                                              Feldstein Comments on Social Security Reform

                                                                                                                                              I’ll be back on the road again soon, but anytime Martin Feldstein talks about Social Security, it’s worth taking note. I only gave this a quick reading so I may have missed some finer points. It advocates add-on opt-out accounts, something that I don’t object to on the surface, but do worry about the broader implications in terms of undermining political support for the system. Feldstein says this proposal isn’t about privatization, but I disagree with that. That is the long-run goal. Another problem with this is that it seems to imply incorrectly, that the DeMint proposal and others like it protect the Trust Fund surplus. In supporting the DeMint plan, this does indicate a willingness to adopt the administration line even when the economics does not support it and this makes me wary of Feldstein’s consideration for Fed chair a position that must be, in my opinion, as free as possible from such influence. But I’ll admit that I may be looking too hard for a way to oppose Feldstein for the Fed chair position. Here’s what he has to say so you can decide for yourself:

                                                                                                                                              Saving Social Security, By Martin Feldstein, Wall Street Journal (subscription): A recent proposal by House and Senate Republicans marks the start of the legislative process to implement President Bush's approach to Social Security reform. The fundamental principle is to supplement traditional pay-as-you-go Social Security with investment-based personal retirement accounts. Although the new congressional plan is not a complete solution to long-run problems, it's an excellent starting point. By using the Social Security surpluses that are projected between now and 2017, it lays the foundation for personal retirement accounts without diverting the payroll tax needed to fund current benefits.

                                                                                                                                              Adding voluntary savings through salary deductions to these personal retirement accounts would substantially strengthen this reform. ... The key to the success of such a voluntary add-on plan is to combine automatic enrollment with the ability of each individual to opt out if he or she does not want to participate. … The basic congressional Republican proposal should be modified to incorporate automatic enrollment in voluntary saving accounts. The ability to opt out would permit each employee to decide on a year-by-year basis whether he wanted to add to his personal retirement account or receive the income in cash. Once funds were committed to the account, they would remain until the individual reached retirement age. Those who die before retirement age would bequeath their accumulated balance to their spouse or other heirs.

                                                                                                                                              This is not about privatizing Social Security. The current Social Security tax rate would be unchanged and continue to finance traditional pay-as-you-go benefits. … The automatic enrollment feature would also increase national saving, a high priority in its own right. … Here's how the combination of the congressional Republican plan and the voluntary automatic enrollment accounts would work. Today's surplus Social Security dollars are transferred to the government's general budget and used to finance a whole range of other government activities. The proposal would stop this use of surplus dollars by putting them into personal retirement accounts. …

                                                                                                                                              Let me break in – that last statement is one I had trouble with. Continuing…

                                                                                                                                              Each employee, regardless of marital status, would have his or her own lifetime account. These funds would initially be invested in government bonds but after 2008 could be shifted into broadly diversified stock and bond mutual funds monitored by an independent government agency. The voluntary automatic enrollment plan would supplement these surplus funds and make personal retirement accounts a permanent feature of retirement income. … The Social Security Administration would then transfer the voluntary savings deposit together with the surplus fund amount into the individual's personal retirement account. …

                                                                                                                                                Posted by Mark Thoma on Friday, July 15, 2005 at 09:45 AM in Economics, Social Security

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                                                                                                                                                Did Jared Cause You to Eat at Subway?

                                                                                                                                                Long drive today and I'm glad it's over. Along the way, I stopped at Subway. This article made me wonder why. It's because, I suppose, I bought into the Subway low-fat claims. Did you? Are kids affected by such advertising? If they are, does that justify government intervention? Is the market failure here really a parenting failure, or does government have a role to play?

                                                                                                                                                TV Feeds Kids Fewer Food Ads, FTC Staff Study Finds, By Caroline E. Mayer, Washington Post: Children see significantly fewer television ads promoting food products today than they did 28 years ago, according to a new study by the staff of the Federal Trade Commission. Today, children watch about 13 food advertisements a day on television, down from more than 18 in 1977 … The new study was released yesterday at the start of a … workshop, sponsored by the FTC and the Department of Health and Human Services, to explore the effect of kids' marketing on obesity and the food advertising industry's efforts to self-regulate advertisements. The incidence of childhood obesity has more than doubled since 1970. … The decline in TV ads was proof that food marketers are not to blame for the steep rise in childhood obesity, said Wally Snyder, president of the American Advertising Federation, which represents manufacturers and advertising agencies. "Advertising is not the culprit, but lack of exercise and moderation in the diet are," Snyder said.

                                                                                                                                                Advertising critics, such as Susan Linn, a Harvard psychologist who is also founder of the Campaign for a Commercial-Free Childhood, attributed the drop to the fact that advertisers are promoting their products in many other ways, including packaging and on the Internet in online games. She added that the drop in TV ads also did not reflect the increasing use of popular characters such as SpongeBob SquarePants in food for kids, such as sugary cereal and fruit snacks. As a result, she said, the "SpongeBob SquarePants" show "becomes a whole commercial for tons and tons and tons of junk food." SpongeBob will soon also appear on bags of spinach and carrots.

                                                                                                                                                In opening the workshop, FTC Chairman Deborah Platt Majoras said it would be unwise and not viable for the agency to ban children's food advertising. However, she warned, it would also be "unwise for industry to maintain the status quo. Not only is downplaying the concerns of consumers bad business, but if industry fails to demonstrate a good-faith commitment to this issue and take positive steps, others may step in and act in its stead." … While food ads may be decreasing, the study … said that kids see far fewer ads for cereal, candy and toys -- the main items that were promoted in 1977 -- but more ads for restaurants and fast-food chains, movies, video games and DVDs, and for other kinds of food such as yogurt.

                                                                                                                                                I’m going to leave this one to the parents.

                                                                                                                                                  Posted by Mark Thoma on Friday, July 15, 2005 at 02:25 AM in Economics, Regulation

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                                                                                                                                                  July 14, 2005

                                                                                                                                                  A Quiz on Supply-Side Economics

                                                                                                                                                  As I noted in the next post, I'll be on the road for awhile, so here's another quick one that I wish I had time to say more about. It’s a quiz about supply-side economics:

                                                                                                                                                  Try This Quiz on Supply-Side Economics, By Gene Sperling, Bloomberg: Here's a multiple choice question:

                                                                                                                                                  What is the most absurd aspect of supply-siders' claim that the possible improvement in this year's budget deficit -- to an estimated $333 billion from more than $400 billion in February - -proves that deficit-exploding tax cuts are working and paying for themselves?

                                                                                                                                                  A) their failure to acknowledge the deep fiscal hole that President George W. Bush's policies have already put us in and the temporary nature of key factors that are contributing to this year's better-than-expected revenue; B) their ability to attribute to the Bush tax cuts only good economic news but never any disappointing job, wage or market data; or C) the lowering of standards that allows advocates of supply-side economics to brag about an administration that inherited four years of consecutive surpluses and now is looking at trillions of dollars of future deficits.

                                                                                                                                                  … The first pick is a strong contender. Supply-side cheerleaders suggest that we are now on a revenue trend that's likely soon to dramatically reduce the deficit. Everyone from Congressional Budget Office Director and former Bush administration official Douglas Holtz-Eakin to Goldman Sachs Group Inc. to Economy.com say temporary factors such as a one-time corporate tax holiday for repatriated profits and the end of the temporary depreciation bonus for equipment drove much of the rise in revenue. Far from moving toward a new era of surpluses, most experts who take into account the likely costs of Bush priorities are projecting $400 billion annual deficits as far as the eye can see. …

                                                                                                                                                  Try Option B: The selective attribution that is the heart of Option B also must be taken seriously. This option can be summed up as the idea that any bad economic news has nothing to do with Bush fiscal policies, but that any good news is due solely to the magic of tax cuts. When gross domestic product, investment or revenue estimates are better than expected, it's all thanks to the Bush tax cuts. ... There are other economic trends that have occurred in the aftermath of President Bush's decision to abandon fiscal discipline. Average real weekly wages were lower in June 2005 than they were both when the recession ended and since the dividend and capital gains tax cut of 2003. Job growth in the Bush recovery is the weakest of any recovery since the 1930s. … The S&P 500 monthly average was lower in June 2005 than it was four years ago, when the Bush tax cuts began. … While you can't blame this bad news solely on Bush fiscal policies, it is a bit much for his cheerleaders to claim that the impact of his policies is limited to only what is positive.

                                                                                                                                                  Option C may be the best choice: … As New York University economist Nouriel Roubini has documented, when one breaks down the weakening of our fiscal position, three-quarters of it is accounted for by a collapse in government revenues. Only one-quarter was the result of increased spending. While it is true that revenues as a share of GDP in the late 1990s were slightly higher than the historical average, these revenues were used to pay down the national debt to help prepare us for the baby-boom retirement. Nor did increased tax payments prevent after-tax income from rising across-the-board. When one compares the trillions in surpluses that were projected when President Bush took office with the current projections by independent analysts, we are looking at a 10-year fiscal projection that has deteriorated by $10 trillion.

                                                                                                                                                  If Al Gore had won in 2000 and racked up this fiscal record, I don't think the supply-siders would be pointing to the current deficit picture as proof that his policies were working. Perhaps I should have added another option: D) all of the above.

                                                                                                                                                    Posted by Mark Thoma on Thursday, July 14, 2005 at 01:35 PM in Economics, Taxes

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                                                                                                                                                    More on the Yield Curve Conundrum

                                                                                                                                                    I will be on the road for the next eight or nine hours, but I wanted to post this story about the yield curve conundrum. The theme is that low worldwide inflation, the Fed's reputation as an inflation fighter, and gobalization have undercut the Fed's ability to affect long-term rates. Apologies for the lack of comment on its content:

                                                                                                                                                    Old conundrum, new twist, By Katie Benner, CNN/Money: … the yield curve has been flattening. … Some experts even say there's a decent chance the curve may soon invert -- an event that has preceded the nation's last two recessions. … Federal Reserve Chairman Alan Greenspan is worried, too, calling the persistence of low long-term rates a conundrum. … Analysts said the Fed's power to influence long-term Treasury and mortgage rates has been clearly diminished by a number of factors -- most notably low inflation worldwide and the growing clout of foreign central banks on U.S. rates through their purchases of Treasury bonds. … One big reason long bond yields have stayed low is that inflation has remained remarkably quiet, even with strong economic growth and record high oil prices. … every time the Fed raises rates it enhances its reputation as an inflation fighter … Then there's another school of thought that says the march of globalization has eroded the Fed's influence over long-term rates. …

                                                                                                                                                      Posted by Mark Thoma on Thursday, July 14, 2005 at 01:17 PM in China, Economics, International Finance, Monetary Policy

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                                                                                                                                                      Time for a Change in Legislative Focus

                                                                                                                                                      This is why it’s time to stop using Social Security legislation as a vehicle for gaining political advantage and work on actual problems. Wages are not keeping up with productivity and while it’s typical for wages and employment to lag during a recovery, the lag in this recovery is atypically long. Congress appears outraged over many things currently, but the plight of workers and a weak labor market does not appear to be among them:

                                                                                                                                                      How Long Can Workers Tread Water?, By Eduardo Porter, New York Times: … The wages of typical workers are treading water, growing roughly at the same rate that inflation eats into their buying power. … Workers' wages may be barely keeping up, but Americans' average incomes are growing briskly - in part, because of growth in the overall number of jobs ... But it also reflects other forms of income, flowing mostly to the more affluent, which are fueling the consumer spending that has provided a crucial pillar of support for economic growth over the last three years. … Even as the average worker's wages are stuck in neutral, corporate profits, professionals' incomes, gains from investments and executive compensation - the kind that frequently comes in the form of stock options - are all surging, supporting healthy gains in the economy. … The skewed nature of the income growth comes as little surprise to most economists. Reeling from collapsing profits, businesses emerged from the economy's slump in 2001 with a pronounced aversion to part with money, instituting spending and hiring freezes and keeping them in place even as demand recovered. These cost controls helped propel a burst of productivity growth and profitability. … And what growth there has been in compensation for workers has mostly concentrated at the top. At the bottom end, income growth has mainly come from an increase in employment - not better wages. … economists are not too sanguine about the immediate prospects for income growth on the bottom rungs of the wage scale. "The job market is slowly tightening," said Jared Bernstein, a labor economist at the Economic Policy Institute. "We are wringing out the slack. But we're only six months into a process that could take a year and a half."

                                                                                                                                                      There are economic forces behind some of this and that is the usual defense, it’s the forces of globalization. But there are also policy induced changes behind the change in income distribution. For example, congress had no problem passing legislation to reduce taxes on the profit of take-home pay of business owners. What if that tax credit had been tied to hiring new workers, or to some other incentive to increase employment? If the goal is to help workers, there are much better ways to do this than to allow unions to be broken, to give tax breaks to the wealthy, to make education less accessible, and so on. It’s time for change. It’s time for congress to address problems that workers face in their daily struggle to do the best that they can for their families, or to face the unemployment rolls themselves.

                                                                                                                                                        Posted by Mark Thoma on Thursday, July 14, 2005 at 09:36 AM in Economics, Income Distribution, Unemployment

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                                                                                                                                                        July 13, 2005

                                                                                                                                                        Let's Hope This Isn't Garden Variety Editorial Analysis

                                                                                                                                                        Apologies for deviating from the usual macroeconomic topics, but after reading this editorial I felt motivated to respond. This isn’t the only editorial along these lines, and it’s offensive to treat this subject as though it were just another "garden variety" story about a leak in Washington:

                                                                                                                                                        The White House Rove Garden, The Monitor's View: Why couldn't this summer's Washington controversy over the outing of a CIA agent be nice and simple? … the public has to try to sort out complexities such as these: A New York Times reporter who goes to jail for refusing to reveal a source ... Meanwhile, the columnist who actually published the agent's name appears to be quietly waiting it out on the sidelines… the White House press secretary now refuses to comment because the case is under investigation (a defense that didn't stop him before), while the GOP chairman (after speaking with alleged White House leaker Karl Rove), is giving out talking points to defend him … Republicans and Democrats are battling over a case in which it's very difficult to prove wrongdoing … no one knows what the grand jury in this case knows, it doesn't look as if Mr. Rove has broken the law. But leak? Yes. And perhaps … that's the bottom line - the leaking. The question is why? If the motives were not in the nation's interests but to score political points, then leaking is an unsavory practice, and sadly, a typical one in Washington. You might even call it a garden variety.

                                                                                                                                                        Garden variety? Let’s recall the context. “The question is why?” the editorial asks. It's hard to believe this question is asked, the answer is well known, to destroy the credibility of Valerie Plame’s husband, Joe Wilson. To do so, national secrets were revealed and that cannot be excused with legal technicalities. Why destroy his credibility? Because he dared speak out about the evidence used to justify the war in Iraq. Men and women have died and this administration admits to attempting to destroy the credibility of someone who tried to question, correctly, the quality of the evidence used to justify those deaths. There will never, ever, ever be anything garden variety about that.

                                                                                                                                                        Update : So you understand, the war touched close to home today. The wife of the Navy SEAL in this story, Cindy, is the daughter of an old family friend and my parent's next-door neighbor for many, many years. My kids played with Cindy and her brother whenever I visited my parents. Her husband, Matt, is someone I've sat and talked to about our time, in different decades, at California State University-Chico. Cindy's mother grew up in the small town of Colusa, California, the town where my mother was born and the town where I also grew up so there are lots of connections.

                                                                                                                                                        I found out tonight that Cindy's husband Matt was killed in the helicopter crash you read about the other day. This is as close as it's come to me and it affected me a lot more than I expected. I will do everything I can to bring this to an end and to hold those who lied to justify this war accountable:

                                                                                                                                                        Missing SEAL's remains found - Cupertino Man's Body Recovered In Search After Afghan Ambush, By Elise Ackerman, Mercury News, July 12:

                                                                                                                                                        After searching for him since an ambush in Afghanistan last month, the Navy announced Monday that it had found the body of a third SEAL commando, Petty Officer 2nd Class Matthew Axelson, 29, of Cupertino.

                                                                                                                                                        Axelson's body was recovered Sunday in the Kuranwal Valley in the Kunar province, not far from the site where a helicopter, which had been sent to rescue the Monta Vista High graduate and three other commandos, crashed.

                                                                                                                                                        "It was his platoon mates that went out, were the ones that found him and the ones that brought him home,'' Rear Adm. Joseph Maguire, commander of Naval Special Warfare Command at Pearl Harbor, told the Associated Press.

                                                                                                                                                        Eight Navy SEALs and eight Army Night Stalkers died in the crash, bringing the death toll to 19 and making it the deadliest operation carried out by a Navy special-operations team since World War II, said Lt. Taylor Clark, a spokesman for the Naval Special Warfare Command.

                                                                                                                                                        Axelson was part of a four-man reconnaissance team that was searching for Taliban and Al-Qaida forces in the mountains in northeastern Afghanistan, the Navy said.

                                                                                                                                                        Only one member of the team survived after he was rescued by an Afghan shepherd. The Navy has not released his name.

                                                                                                                                                        Axelson grew up in Cupertino with his older brother, Jeff, and his parents, Cordell and Donna, and attended Monta Vista before going on to California State University-Chico.

                                                                                                                                                        "He was a gentle and thoughtful husband, son, brother and friend who stood for his principles, no matter the cost,'' Axelson's family said in a statement Monday evening.

                                                                                                                                                        Ray Garland, a neighbor who had known Axelson all his life, said he developed a "deep and abiding Christian faith'' while attending the First Baptist Church of Cupertino. "We believe that certainly served him well during his time in Afghanistan.''

                                                                                                                                                        Garland said Axelson was fulfilling a youthful dream when he joined the Navy in December 2000, after graduating from Chico with a degree in political science.

                                                                                                                                                        Trained as a sniper, Axelson joined the SEALs, the Navy's special operations Sea-Air-Land units, specializing in unconventional warfare. In December 2003, he married Cindy Ogi (sic) of Yuba City, whom he had met at college.

                                                                                                                                                        "Besides the love he had for his wife, Cindy, who has been his heart and soul, the love of golf, the taste of a good beer, the warm California sun,'' being a member of a special-operation team "was what he liked best,'' read a statement that was distributed at a memorial service Monday in Honolulu, where Axelson had been based.

                                                                                                                                                        Among the military honors Axelson has received is the Silver Star, the Purple Heart, the Navy and Marine Corps Commendation Medal and the Good Conduct Medal.

                                                                                                                                                        The service Monday included eulogies from fellow SEALs, a 21-gun salute, a flyover by four Black Hawk helicopters and ended with a bugler playing taps, according to the AP.

                                                                                                                                                        Fellow SEALs said Axelson was "an ideal sniper'' because of his calm and quiet demeanor. "He had the ability to remove stress from any situation,'' the memorial statement read.

                                                                                                                                                        A military official in Washington told the New York Times that the area where the body was found had previously been searched by U.S. forces. But they apparently missed the remains, which were well-hidden and not far from the site where the Chinook helicopter that was carrying reinforcements to the team went down after being hit by enemy fire.

                                                                                                                                                        "Our forces on the ground have located this body, are very confident that this individual was never in custody, and he was never defamed or disgraced by anybody or from enemy forces,'' Col. James Yonts told reporters Monday. "These claims by the Taliban spokesperson are truly incomprehensible to us.'' Mullah Latif Hakimi, a purported Taliban spokesman, said last week that the Taliban had killed a SEAL-team member, beheaded him and left his body in Kunar province.

                                                                                                                                                        "He was a gentle and thoughtful husband, son, brother and friend who stood for his principles, no matter the cost"

                                                                                                                                                        Update: I want to make two corrections. First, I should have said the death occured in events surrounding the helicopter crash, not in the crash itself. Second, Cindy's last name should be spelled "Oji," not "Ogi" as in the article.

                                                                                                                                                          Posted by Mark Thoma on Wednesday, July 13, 2005 at 08:46 PM in Iraq, Press

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                                                                                                                                                          Bush's Credibility Gap Expanding

                                                                                                                                                          Bush's lack of credibility is becoming transparent to more and more people:

                                                                                                                                                          Poll suggests drop in Bush's personal credibility, Reuters: President Bush's personal credibility appears to be eroding at a time when Iraq has become the top public priority and the White House is engulfed in controversy over senior Bush adviser Karl Rove. ... The NBC News/Wall Street Journal poll showed the percentage of Americans who believe Bush is "honest and straightforward" fell to 41 percent from 50 percent in January, while those who say they doubt his veracity climbed to 45 percent from 36 percent…

                                                                                                                                                          The acceptable level of credibility is surely higher than 41 percent. "George, did you chop down that cherry tree?" "We're in the midst of an ongoing investigation, and I will be more than happy to comment further once the investigation is completed..."

                                                                                                                                                          Update: Thanks to Carl at the Wall Street Journal for letting us know that "there's a free link available to the WSJ article about the poll, if you'd like to make it available to your readers who are nonsubscribers."

                                                                                                                                                            Posted by Mark Thoma on Wednesday, July 13, 2005 at 08:01 PM in Economics, Politics

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                                                                                                                                                            GOP Bickers over Timing of Vote on Social Security Reform

                                                                                                                                                            Republicans are beginning to bicker over bringing Social Security reform legislation to a vote:

                                                                                                                                                            Vote on U.S. Social Security revamp may be delayed, By Donna Smith, Reuters: Congressional action on … restructuring Social Security, will likely be delayed until later this year… Rep. Roy Blunt of Missouri, the third ranking House Republican, told reporters that other pressing matters including trade, highway and energy legislation will push back until at least September consideration of plans to establish private Social Security accounts. … Lawmakers had talked about voting … before lawmakers leave for the month of August. But Blunt said he thought the House would vote on Social Security legislation this year, possibly in September. … [House Ways and Means Committee Chairman Bill] Thomas … took issue with Blunt's assessment on timing of House action, curtly telling reporters that "some of us are capable of multi-tasking." … The dispute over the timing underscores the difficulty Republican leaders face in trying to restructure Social Security … Senate Republicans are also struggling to bring Social Security legislation to a vote. Senate Finance Committee Chairman Charles Grassley of Iowa plans a crucial meeting with his fellow Republicans on Thursday to decide whether a bill was possible...

                                                                                                                                                            See also Brad Delong's discussion of gridlock here.

                                                                                                                                                              Posted by Mark Thoma on Wednesday, July 13, 2005 at 07:20 PM in Economics, Politics, Social Security

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                                                                                                                                                              The Optimal Level of Unemployment Insurance

                                                                                                                                                              Another paper for the Academic Papers index:

                                                                                                                                                              "A General Formula for the Optimal Level of Social Insurance," by Nadarajan (Raj) Chetty, University of California, Berkeley and (NBER). NBER link, link to paper (NBER access required), link to version on author's website (free access).

                                                                                                                                                              Abstract

                                                                                                                                                              In an influential paper, Baily (1978) showed that the optimal level of unemployment insurance (UI) in a stylized static model depends on only three parameters: risk aversion, the consumption-smoothing benefit of UI, and the elasticity of unemployment durations with respect to the benefit rate. This paper examines the key economic assumptions under which these parameters determine the optimal level of social insurance. A Baily-type expression, with an adjustment for precautionary saving motives, holds in a very general class of dynamic models subject to weak regularity conditions. For example, the simple reduced-form formula derived here applies with arbitrary borrowing constraints, endogenous insurance markets, and search and leisure benefits of unemployment. A counterintuitive aspect of this result is that the optimal benefit rate appears not to depend on (1) any benefit of UI besides consumption-smoothing or (2) the relative magnitudes of income and substitution effects in the link between UI benefits and durations. However, these parameters enter implicitly in the optimal benefit calculation, and estimating them can be useful in testing whether the values of the primary inputs are consistent with observed behavior.

                                                                                                                                                                Posted by Mark Thoma on Wednesday, July 13, 2005 at 01:53 PM in Academic Papers, Economics, Social Security

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                                                                                                                                                                Fed's Santomero Endorses Continued Rate Increases

                                                                                                                                                                David Altig notes, in his Measured Pace Watch, comments by Philadelphia Fed president Anthony Santomero:

                                                                                                                                                                As noted ... earlier this week Jeff Lacker, the president of the Richmond Fed, seemingly endorsed the current market view of where the federal funds rate is headed in the immediate future. Today we add Philadelphia Fed president Anthony Santomero to the list...

                                                                                                                                                                ... I emphasize that it is incumbent upon the Federal Reserve to continue to take the steps necessary to keep price pressures well contained. Just about a year ago, we began the transition from an accommodative policy stance to a neutral one more conducive to sustaining noninflationary economic growth. That process continues. The task here is to move the interest rate back to a more neutral level without dampening growth in real output, but it is essential for us to ensure our goal of long-term price stability. If the economy evolves as I expect over the next year or so, it is likely we will continue to move the federal funds rate toward neutrality at what we have described as a measured pace.

                                                                                                                                                                I will add the reminder that the measured pace statements are data dependent.

                                                                                                                                                                  Posted by Mark Thoma on Wednesday, July 13, 2005 at 12:06 PM in Economics, Monetary Policy

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                                                                                                                                                                  Bernanke Cites AMT as High Priority in Tax Reform Effort

                                                                                                                                                                  Tax reform is next on the agenda. I expect it to be next year’s comeback attempt by the GOP after its failures this year in the domestic policy arena (and elsewhere). While our attention is diverted, a panel is quietly going about its business:

                                                                                                                                                                  AMT reform now a priority – Bernanke, Reuters: White House economic adviser Ben Bernanke said Tuesday fixing the alternative minimum tax is a "high priority" for the panel examining ways to change the U.S. tax code. The panel, appointed by the Bush administration in January, is due to report on Sept. 30 …

                                                                                                                                                                  The AMT needs to be fixed, but expect the reform attempt to be much larger than that. It is estimated that 20 billion of the current increase in revenues comes from the AMT, and that it will generate around 100 billion over five years, so reforming the AMT is not a budget neutral exercise.

                                                                                                                                                                  Maybe we should model tax reform after Social Security reform. Start with a flat tax where everyone pays the same rate. Then, spin the wheel of chance instead of investing in the stock market as with personal accounts. Some people will get unlucky and have to pay more, and it won't necessarily be the wealthy, and others will get a lucky spin and pay less, and it won't necessarily be the poor.

                                                                                                                                                                  If you find random taxes an odd system, isn't it equally odd to propose paying random Social Security benefits?

                                                                                                                                                                    Posted by Mark Thoma on Wednesday, July 13, 2005 at 09:27 AM in Budget Deficit, Economics, Taxes

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                                                                                                                                                                    String Theory Has a Problem

                                                                                                                                                                    Some of you may want to scroll by, but for those of you, like me, who can’t get enough of this stuff:

                                                                                                                                                                    String theory has a problem. It may be a theory of everything, but it may be vacuous, a theory of nothing. This article describes the various efforts to test of string theory in some detail, but I am interested in a different aspect the article. Physicists are grappling with what to do if the theory is untestable with today’s technology. If that turns out to be the case, is pure mathematics enough? This article implies that physicists are willing to settle for a purely mathematical proof. As it stands, none of the variety of expressions of string theory explains all the known facts. If the theoretical model can be shown to explain what we know about the universe, that is enough, the theory will be accepted.

                                                                                                                                                                    But is it enough? In the end, isn’t empirical validation necessary? I think it is, but I'm interested in other views since economics faces similar issues. Should we accept a theory because it can be parameterized to explain the statistical properties of U.S. data, or do we also require a second step, empirical verification through tests of falsifiable hypotheses?

                                                                                                                                                                    Testing String Theory, By Michio Kaku , Discover (subscription): In his classic book The Dragons of Eden, astronomer Carl Sagan tidily summarized the central challenge scientists face when they try to formulate grand new theories: “Remarkable claims require remarkable proof.” One of the most remarkable claims made in modern times comes from string theory, which holds that everything in the universe is composed of tiny vibrating strings of energy. In this view, every particle in your body, every speck of light that lets you read these words, and every packet of gravity that pushes you into your chair is just a variant of this one fundamental entity. Over the past three decades, string theory has increasingly captured the imagination of physicists. Hundreds of researchers around the world now hammer away at its equations every day, trying to make the different parts of the theory hang together. They, like me, consider it the greatest step forward in science since Albert Einstein and Max Planck introduced the key ideas of relativity and quantum mechanics about a century ago.

                                                                                                                                                                    Yet string theory, like all scientific theories, eventually must face the harsh test Sagan described. So far, it cannot stand up. To be brutally honest, there is no proof whatsoever that string theory is correct. … But any theory, no matter how grand, must be reproducible, and that is where testing string theory gets a little crazy. Each of the theory’s solutions represents an entire universe, so to test the theory fully, one would have to create a baby universe in a laboratory. State-of-the-art technology barely lets us escape the planet, never mind re-create another cosmos. … That could change soon. An array of new devices—including new atom smashers, gravity detectors, spaceborne satellites, and buried detectors—could provide significant evidence that would support string theory. The rub is that all this new evidence, no matter how compelling, will still provide only indirect proof…

                                                                                                                                                                    The following tests are then discussed in some detail

                                                                                                                                                                    GRAVITY-WAVE TEST PARTICLE-ACCELERATOR TEST LABORATORY GRAVITY TESTS DARK-MATTER SEARCHES

                                                                                                                                                                    But let’s move on to the final section on mathematical proof:

                                                                                                                                                                    PURE MATHEMATICS: Despite new ideas and experimental activity, it is possible that none of these tests will find any support for string theory. Perhaps the evidence emerges only at energies much greater than are possible with today’s technologies. Perhaps the only way to study strings directly is to run experiments at the so-called Planck energy, a level not seen since the first 10–43 second after the Big Bang.

                                                                                                                                                                    For those of us who want to know the answers before we die, this is a discouraging possibility. … Some theorists, myself among them, believe that the final verdict on string theory will not come from experiments at all. Rather, the answer may come from pure mathematics. The principal reason predictions of string theory are not well defined is that the theory is not finished. ... When it is, we may be able to put it to a mathematical test. If string theory is sound, it should allow us, mathematically, to compute basic properties of the universe from first principles. For instance, it should explain all the properties of familiar subatomic particles, including their charges, mass, and other quantum properties. The periodic table of elements that students learn in chemistry class should emerge from the theory, with all the properties of the elements precisely correct. If the computed properties do not fit the known features of the universe, string theory will immediately become a theory of nothing. But if the predictions accurately match reality, that would represent the most significant discovery in the history of science. Einstein once said that “the creative principle resides in mathematics. In a certain sense, therefore, I hold it true that pure thought can grasp reality, as the ancients dreamed.” If so, some enterprising physicist could vindicate string theory as early as tomorrow. The remarkable proof of the theory might not cost years of effort and billions of dollars. It might come instead from the most basic tools of science: paper, pencil, and a human brain.

                                                                                                                                                                    That is the first step, consistency with what we know about the world, but as noted above, I believe a second step is necessary as well, empirical verification.

                                                                                                                                                                      Posted by Mark Thoma on Wednesday, July 13, 2005 at 03:06 AM in Methodology, Science

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                                                                                                                                                                      The Blade Looks at Social Security Reform and Holds Its Nose

                                                                                                                                                                      The Blade of Toledo, Ohio looks at the latest Republican proposal for Social Security reform and realizes it stinks, but doesn’t ask why this proposal has support among Republicans:

                                                                                                                                                                      Double raid on Social Security, The Blade: Republicans in Congress have decided that it's better to be doing something - anything - about Social Security than nothing. But in their case, it's not true. The latest GOP plan … would … increase the federal budget deficit by more than $1 trillion over 10 years, without fixing Social Security's long-term solvency problem … Moreover, even though the GOP leadership's stated goal is to "stop the raid" on the Social Security surplus, the plan rests on a breathtakingly brazen accounting gimmick. … In addition, future benefits would have to be cut to make the plan work. All told, the House plan is even worse - if that is possible - than President Bush's proposal for simply borrowing to start private accounts. Despite his extensive travels around the country, Mr. Bush has been unable to sell his plan to the American people... Nothing in the House plan seems destined to allay that skepticism.

                                                                                                                                                                      Let me repeat, “…the House plan is even worse - if that is possible - than President Bush's proposal…” I’m not sure exactly what the president’s proposal is other than some vague indexing proposal and it’s not as though I haven’t been paying attention, but in any case there is no doubt Demint’s proposal is worse. This is an obvious political ploy to paint the Democrats as obstructionists. But as the editorial says, given the proposals so far, doing nothing is better than doing something. Any proposal from the Democrats would get ‘Roved’ immediately, so that avenue is not available despite what you hear in an attempt to scapegoat. It’s not obstruction when doing nothing is the best option available.

                                                                                                                                                                      The time and attention of congress is a limited and valuable commodity. It shouldn't be squandered trying to exact a political price. It's time to move on to real problems such as a weak labor market, and give up on problems invented to satisfy a political agenda.

                                                                                                                                                                        Posted by Mark Thoma on Wednesday, July 13, 2005 at 02:52 AM in Economics, Social Security

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                                                                                                                                                                        July 12, 2005

                                                                                                                                                                        News on Social Security Reform from Radio Iowa

                                                                                                                                                                        Radio Iowa has news on Social Security reform. According to Iowa Senator Chuck Grassley, the train is stalled on the tracks. The strategy of blaming Democrats is apparent in these statements:

                                                                                                                                                                        Grassley says Social Security reform stalled, by Matt Kelley, Radio Iowa: Republicans on the U.S. Senate Finance Committee can't agree on how to reform Social Security, and the panel's chairman, Iowa Senator Chuck Grassley, says they may be close to failure, though he says he's not giving up yet. Grassley, a Republican, says most Democrats agree Social Security is in sad shape, but he says no one's coming up with any better ideas on how to fix the program. Grassley says "There's no point in us doing anything until we get Democrats to the table and if we don't get Democrats to the table then we might not do anything because, right now, there hasn't been a single Democrat, either on the issues of solvency or personal accounts, come to the table to talk about anything." …

                                                                                                                                                                        I will be curious to see if the press goes along with this blatant attempt to extract a political cost from Democrats over the GOP's failure on this issue.

                                                                                                                                                                          Posted by Mark Thoma on Tuesday, July 12, 2005 at 08:01 PM in Economics, Politics, Social Security

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                                                                                                                                                                          David Altig Discusses the Yield Spread

                                                                                                                                                                          If you haven't had the pleasure already, David Altig at macroblog has an excellent discussion of the relationship between the yield spread and economic conditions, yield curve inversion, Fed overshooting, and other matters. Is The Yield Spread Too Low? Read David and find out!

                                                                                                                                                                            Posted by Mark Thoma on Tuesday, July 12, 2005 at 07:02 PM in Economics, Macroeconomics, Monetary Policy

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                                                                                                                                                                            Bernanke Discusses the Budget Deficit

                                                                                                                                                                            Ben Bernanke gives us the White House line on the budget deficit:

                                                                                                                                                                            White House aide sees improved U.S. budget picture, Reuters: In his first major speech as White House economic adviser, Ben Bernanke predicted on Tuesday that the 2005 U.S. budget deficit could come in "well below" previous estimates because of robust tax revenue. Estimates of wage and salary income have been lifted "substantially" and it is possible that the labor market is stronger than previously thought, said Bernanke. … "One consequence of the strong income growth we are enjoying is higher-than-expected levels of tax collections so far this year which, if maintained with spending controls, will reduce the government's budget deficit for this year well below its projected level," he told the American Enterprise Institute, a conservative think tank. … Bernanke and other White House officials have touted progress in the budget situation as a sign President George W. Bush's tax-cutting policies are working. However, some private economists have argued that at least part of the improvement is a temporary windfall from factors such as last year's buoyant stock market. Bernanke said the White House does not yet have the figures to provide a full breakdown of the revenue strength but said a good part came from Americans' fatter paychecks. …

                                                                                                                                                                            Calculated Risk has a nice take on this statement, “This is laughable. There is a small improvement in the deficit this year, due to one time events, but next year will be worse.” See here as well.

                                                                                                                                                                            Why am I not laughing?

                                                                                                                                                                              Posted by Mark Thoma on Tuesday, July 12, 2005 at 11:07 AM in Budget Deficit, Economics

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                                                                                                                                                                              And the Horse You Rode in On...

                                                                                                                                                                              Still nothing but the loud sounds of silence. Why hasn't Rove resigned? Does he think he will survive on some technicality about actually using the name? Why hasn't Bush fired him? What is he waiting for? Rove has already proven he can't be trusted with national secrets. What else has been compromised in the pursuit of power? Get rid of him now, not tomorrow. Then get rid of Bush and his gang of liars.

                                                                                                                                                                              Update: As kharris notes in comments, the White House broke its silence, not to show any signs of outrage, but rather to express their confidence in Rove, "They wouldn't be working here if they didn't have the president's confidence."

                                                                                                                                                                              Fool me once, then fool me again and again, eh Mr. president? I guess Bush has been assured by Rove, who has no credibility left at all, that he won't spill any more national secrets for political reasons unless it's really needed. I can't say it loudly enough. Get rid of them all, and do it now.

                                                                                                                                                                              Update: "Bush, at an Oval Office photo opportunity Tuesday, was asked directly whether he would fire Rove — in keeping with his pledge in June 2004 to dismiss any leakers in the case. The president did not respond." Fox News.

                                                                                                                                                                              Much like reading books to children or riding bicycles, the photo op was much more important than answering questions about why someone who leaked national security secrets retains the confidence of the administration.

                                                                                                                                                                                Posted by Mark Thoma on Tuesday, July 12, 2005 at 09:18 AM in Politics

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                                                                                                                                                                                July 11, 2005

                                                                                                                                                                                Fed's Lacker Says Rate Increases Likely to Continue

                                                                                                                                                                                Fed Speak signals more rate increases ahead:

                                                                                                                                                                                Fed's Lacker Says It's 'Early' to Stop Raising Rates (Update1), Bloomberg: It's too early to expect a pause in Federal Reserve interest rate increases, Fed Bank of Richmond President Jeffrey Lacker said today. … “I think it's still too early to be foreseeing a pause” in Fed rate increases ... “I'm comfortable with the measured pace characterization right now.” While “inflation expectations seem well contained,” economic growth appears “fairly solid,” … He said he is watching inflation data to see whether rising oil prices spur price increases for other goods and services. … “Oil prices always pose a bit of a concern to the extent that sharp increases pass through to core inflation,” he said. The inflationary effect of higher oil prices in recent years has been “fairly limited,” he said. “The more likely risk, although it is a small one at this point, is an acceleration of unit labor costs,” … “In recent months, we've had some core PCE numbers that have been higher than I would like to see sustained, but I like where we are on a year-over-year basis,” Lacker said. “The general anticipation is for the monthly numbers to settle back down in the second half of the year.” With the economy continuing to expand at a “fairly solid pace,” the Fed can keep up its campaign to prevent inflation from rising, he said. “In that kind of situation, following through is probably the order of the day,” he said. “It's going to be data driven. It's going to depend on how things unfold.”

                                                                                                                                                                                David Altig reports probabilities that agree with this assessment. However, the qualification at the end is worth noting. Full steam ahead until the data say otherwise.

                                                                                                                                                                                  Posted by Mark Thoma on Monday, July 11, 2005 at 10:17 PM in Economics, Monetary Policy

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                                                                                                                                                                                  The Sounds of Silence

                                                                                                                                                                                  Why are we hearing silence instead of outrage from this administration on Rove’s role in outing Valerie Plame? The Seattle-Post Intelligencer wants to know the same thing:

                                                                                                                                                                                  White House Leaks: A serious security matter, Seattle Post-Intelligencer Editorial Board: President Bush has plenty of evidence to begin acting on Karl Rove's involvement in the disclosure of a secret agent's name to exact political vengeance. The president's choice will say a lot … The president ought to be outraged that … one reporter has gone to jail for acting honestly while some in his administration continue to be free of consequences for revealing Valerie Plame's identity … For reasons that aren't clear but should cause great unease, Novak apparently faces no legal difficulty while New York Times reporter Judith Miller, who didn't write about the disclosure, sits in jail for rightly refusing to disclose her sources … Newsweek reports show that Rove, Bush's closest political adviser and currently deputy White House chief of staff, was one of the aides discussing Plame's work with reporters. And it was done in precisely the context everyone understood lay behind her outing: Rove was trying to discredit Wilson. … Rove's lawyer said his client did not use Plame's name in the conversation … That may be relevant in determining whether, under the law, Rove committed a crime ... It should hold little weight with the president.

                                                                                                                                                                                  Bush should first be outraged ... indirectly the imprisonment of Miller, has been done in his name. Rove has discredited the White House. In October 2003, White House spokesman Scott McClellan firmly assured the public that Rove had played no role in the leak. ... the president must live up to his early promises about dealing severely with the abusive leak of Plame's identity. … by firing Rove immediately. Whether or not Rove violated the law, his actions on behalf of the administration broke trust with the American people ... Minimally, enough is known that the president must suspend Rove and cease all contacts with Rove until the investigation is complete. Rove, it appears, cannot be trusted with the United States' secrets. Bush should also ask the prosecutor to seek the release of Miller from prison while the president urgently and personally renews his call for White House officials to help get to the bottom of the affair. … Rather than letting an innocent journalist be imprisoned to clear up a matter of White House misconduct, Bush should be cleaning out his administration.

                                                                                                                                                                                  Disgraceful. If instead of outing a CIA official, Rove had done something serious like had an affair with her, maybe we’d see some outrage. Fire Rove, let him exchange places with Miller, then fire Bush.

                                                                                                                                                                                    Posted by Mark Thoma on Monday, July 11, 2005 at 09:00 PM in Politics

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                                                                                                                                                                                    More FuzzCharts from the NRO

                                                                                                                                                                                    Someone (okay, it was PGL) said I should wander over to the NRO and look at their chart showing how much poorer the average Republican is as compared to the average Democrat. Instead of getting into just how silly these statistics are, I thought I’d point you to an actual analysis of how economic conditions are related to votes that appeared in The Economist’s Voice (there is also a version on Nordhaus' website that has free access):

                                                                                                                                                                                    William Nordhaus "The Profile of An Election, 2004: Outcomes and Fundamentals"

                                                                                                                                                                                    Waste your time on the NRO “FuzzChart” if you want, but Nordhaus is much better.

                                                                                                                                                                                      Posted by Mark Thoma on Monday, July 11, 2005 at 05:31 PM in Economics, Politics

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                                                                                                                                                                                      On the Road Again

                                                                                                                                                                                      I’m testing RSS category feeds so that gives me an excuse to post this from the JPL Mars Rover Site regarding one of their Energizer Bunnies:

                                                                                                                                                                                      OPPORTUNITY UPDATE: Pushing Away from Purgatory - sol 510-517, July 11, 2005:

                                                                                                                                                                                      This week Opportunity finished examining "Purgatory Dune" and started driving again. ... A new set of "rules of the road" have been developed and implemented to prevent the rover from getting bogged down again. ...

                                                                                                                                                                                        Posted by Mark Thoma on Monday, July 11, 2005 at 04:32 PM in Science

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                                                                                                                                                                                        The Political Price of Failed Social Security Reform

                                                                                                                                                                                        Will the GOP pay a political price over failed Social Security reform the way Bill Clinton paid a price for failed health care reform in midterm elections during his presidency? Would you be surprised to find out that the NRO doesn’t think so? Here’s Ramesh Ponnuru:

                                                                                                                                                                                        The Cost of Failure - On Social Security, it may turn out to be surprisingly low, Ramesh Ponnuru, NRO: The conventional wisdom … has been that President Bush would fail to get Social Security reform through Congress. … the conventional wisdom was right. … For a president to fail in his signature domestic initiative of his second term is no small thing. Yet the political impact of that failure may not be substantial. Democrats have hoped that they could make Republicans pay for broaching the issue, and Republicans that Democrats would pay for obstruction. But it's not clear that either party is going to pay. … Many Democrats have predicted that Social Security would be for Bush what health-care reform was for President Clinton: the issue that broke his majority. But the timing is very different. Clinton's health plan crashed and burned in the months just prior to the midterm elections. Bush's Social Security plan is dying with more than a year to go before elections. ... The failure of the Clintons' health-care plan took comprehensive health-care reform off the table in Washington for more than a decade. Republicans do not seem nearly so skittish about Social Security reform. If they pick up a few more Senate seats … there is no reason they cannot take up the issue again… The main thing the president has lost, meanwhile, is time. He'll never have the first few months of his second term again.

                                                                                                                                                                                        I appreciated that he did not jump on the bandwagon and try to hang a political price on the Democrats by blaming them for failed reform; instead this looks like an attempt to create self-fulfilling expectations of no political price for the GOP. Note also the assumption and explicit statement that reform is dead even though political games remain afoot. I've heard quite a bit lately about revisiting Social Security reform next year. But unless there are large changes in the political landscape, and more importantly in public opinion which in the end refused to be swayed by the administration's proposal, I wonder if that is wise. Another year bogged down in attempted Social Security reform may make it more difficult to pass other legislation such as tax reform initiatives currently in the works, and to the extent that is true perhaps my worries about this coming back to haunt us again next year are misplaced.

                                                                                                                                                                                          Posted by Mark Thoma on Monday, July 11, 2005 at 01:44 PM in Economics, Politics, Social Security

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                                                                                                                                                                                          Designing Optimal Opt-Out Retirement Saving Plans

                                                                                                                                                                                          This is for my records (papers on designing savings plans to maximize participation as discussed in the post below this one for the Academic Papers category I am building). These are all by James Choi at Yale (the link is to a Harvard page, the Yale page is here):

                                                                                                                                                                                          "Optimal Defaults and Active Decisions" (with David Laibson, Brigitte C. Madrian, and Andrew Metrick). December 2004.

                                                                                                                                                                                          "Saving for Retirement on the Path of Least Resistance" (with David Laibson, Brigitte C. Madrian, and Andrew Metrick). In Ed McCaffrey and Joel Slemrod, editors, Behavioral Public Finance, forthcoming.

                                                                                                                                                                                          "Plan Design and 401(k) Savings Outcomes" (with David Laibson and Brigitte C. Madrian). National Tax Journal 57, June 2004, pp. 275-298. Summarized in October 2004 NBER Digest

                                                                                                                                                                                          "Employees' Investment Decisions About Company Stock" (with David Laibson, Brigitte C. Madrian, and Andrew Metrick). In Olivia S. Mitchell and Stephen P. Utkus, editors, Pension Design and Decision-Making Under Uncertainty, forthcoming.

                                                                                                                                                                                          "Optimal Defaults" (with David Laibson, Brigitte C. Madrian, and Andrew Metrick). American Economic Review Papers and Proceedings 93, May 2003, pp. 180-185. "Passive Decisions and Potent Defaults" is a longer version of this paper.

                                                                                                                                                                                          "For Better or For Worse: Default Effects and 401(k) Savings Behavior" (with David Laibson, Brigitte C. Madrian, and Andrew Metrick). In David Wise, editor, Perspectives in the Economics of Aging, pp. 81-121. Chicago: University of Chicago Press, 2004. Summarized in April 2002 NBER Digest

                                                                                                                                                                                          "Defined Contribution Pensions: Plan Rules, Participant Decisions, and the Path of Least Resistance" (with David Laibson, Brigitte C. Madrian, and Andrew Metrick). In James Poterba, editor, Tax Policy and the Economy 16, 2002, pp. 67-114. Summarized in April 2002 NBER Digest

                                                                                                                                                                                            Posted by Mark Thoma on Monday, July 11, 2005 at 09:57 AM in Academic Papers, Economics, Saving, Social Security

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                                                                                                                                                                                            Framing the Add-On Accounts Problem to Maximize Participation

                                                                                                                                                                                            There has been considerable discussion concerning the use of opt-out add-on accounts as a means of increasing national saving. If one accepts that there are market failures in the retirement saving market, and I do, then the next step is to ask how to solve them. My preference is generally for market-based incentive regulation rather than government mandates. In this case, how the problem is structured can help workers make choices that overcome the inherent inefficiencies in the market. Of particular interest is the “deliberately bad default” which is used to motivate workers to actively participate and make choices consistent with their own preferences (essentially make the bad option more costly than the cost of participation). But I wonder how well the “deliberately bad default” works for the really lazy worker. The counter argument is given in the article, "There are no institutional choices that are neutral." True, but the distribution of costs is worth noting:

                                                                                                                                                                                            Why Do So Many Consumers Choose Frills When Plain-Old Will Do? Pure Laziness, By David Leonhardt, NY Times: When you cross over the Walt Whitman Bridge from New Jersey into Philadelphia, you are not likely to notice a big change in local driving habits. … Yet if you compare insurance-buying habits in the two states, Pennsylvania starts to look like one big demolition derby. More than half of the state's drivers buy something called a full-tort policy. It can cost hundreds of extra dollars a year. ... In New Jersey, only one of every 12 drivers signs up for full-tort insurance. Everyone else has a bargain limited-tort policy, which restricts potential damages. So what, if not driving habits, might explain the great difference? Basic human laziness. Pennsylvanians who do not sign a piece of paper saying they want the limited policy automatically receive the full-tort one. … This, in the land of social science, is called a framing problem. … the answer you get depends on the question you ask. … "People are extremely passive," James J. Choi, an economist at Yale, said. "They can be pushed around quite a bit, even when there are no formal restrictions on what they can do." At McDonald's, people buy the combo meal when they might rather just have a small order of fries with their Quarter Pounder. ... For their 401(k), many workers simply accept the contribution rate and the investment choices their company picks for them. In countries where being an organ donor is the default choice on driver's licenses, many more people are listed as organ donors. ...

                                                                                                                                                                                            [S]ome economists have begun making a novel argument. … [T]he more severe and the worse that a default option is, the better off people will be. Only then will they take matters into their own hands. In many cases, obviously, companies have no interest in changing consumers' behavior. … But a good number of framing problems are different. With car insurance, retirement savings and some other matters, government regulators and benevolent employers can help people make better decisions simply by changing the question that is being asked. … At companies where 401(k) enrollment is automatic, about 85 percent of workers sock away money for retirement in the plan ... When employees have to sign up for a 401(k), only about 33 percent sign up within six months. After three years, the portion rises to more than 60 percent, suggesting that most people do want to save. … But helping workers save … is not as simple as making it the default option. … This is where the deliberately bad default comes in. If a company set (sic) the fallback savings rate at 15 percent, surely most workers would take the time to make individual decisions about their retirement. A 15 percent bite out of the paycheck tends to focus the mind. ... But the thing about framing problems is that there is no escaping them. As Mr. Choi says, "There are no institutional choices that are neutral." No matter what the fallback is, it will attract people. So we might as well at least try to pick ones that maximize - or, at least initially, minimize - our well-being.

                                                                                                                                                                                              Posted by Mark Thoma on Monday, July 11, 2005 at 01:11 AM in Economics, Policy, Social Security

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                                                                                                                                                                                              July 10, 2005

                                                                                                                                                                                              Social Security Reform Follies Not Yet Iced

                                                                                                                                                                                              I thought I’d take a few minutes to bring you the latest I can find on Social Security reform. The only behind the scenes reporting I've discovered so far is this from The Washington Times. If this is accurate, the reform effort isn't dead yet:

                                                                                                                                                                                              Republicans retrench on Social Security fix, By Amy Fagan, The Washington Times: Six months after Republicans began selling Social Security reform, they all but acknowledge that wide-scale changes won't happen this year. But knowing they must do something, they are pushing a narrower Social Security proposal in the House. … Although some Republicans have said a solvency fix is still achievable in a final House package, it doesn't seem likely. … leaders couldn't achieve consensus in the House for a permanent Social Security fix, but they also couldn't face the 2006 electorate without acting on the president's wishes. Therefore … they combined private accounts, which most Republicans support, with the popular idea of stopping the government from raiding the Social Security surplus. … [Vice president and chief economist for the Free Enterprise Fund ] Mr. Hunter said that even if the new proposal fails in the Senate, it "inoculates" House Republicans from attacks on the issue in the 2006 elections. "If it works, you've got a great victory. If it fails [in the Senate], well you don't get hurt," he said. He warned against adding benefit changes or other solvency provisions proposed by House Ways and Means Committee Chairman Bill Thomas, California Republican. "There's a real chance he will undermine the whole effort and it will collapse," Mr. Hunter said. …

                                                                                                                                                                                              The clown show description fits better and better with each passing day. It looks like the strategy is to get something to a vote, anything, then blame Democrats for obstructing reform. If they think the public is so dumb that they can put out a hare-brained proposal that doesn’t even address the solvency crisis they invented to sell this thing, then blame others for obstructing their stupidity and somehow gain from that strategy, they are seriously underestimating the intelligence of the public. Somehow that doesn’t surprise me.

                                                                                                                                                                                                Posted by Mark Thoma on Sunday, July 10, 2005 at 05:28 PM in Economics, Social Security

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                                                                                                                                                                                                Sunday Reading

                                                                                                                                                                                                Here are some things to read.
                                                                                                                                                                                                This poor guy

                                                                                                                                                                                                Lots of employed business reporters

                                                                                                                                                                                                More labor issues

                                                                                                                                                                                                Everybody makes mistakes

                                                                                                                                                                                                Between this and medical marijuana, if you live in Oregon, state’s rights rings hollow

                                                                                                                                                                                                California has similar problems

                                                                                                                                                                                                This one’s Rich

                                                                                                                                                                                                Feel free to state your opinion

                                                                                                                                                                                                I remember seeing a very similar story

                                                                                                                                                                                                Economics potpourri! Mmmm.

                                                                                                                                                                                                Not much on Social Security, but the first story fills us in a bit

                                                                                                                                                                                                Not much on the Fed either

                                                                                                                                                                                                Animal and plant planet, and other stuff too

                                                                                                                                                                                                Courting our attention for awhile:

                                                                                                                                                                                                  Posted by Mark Thoma on Sunday, July 10, 2005 at 12:15 AM in Economics, Reading

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                                                                                                                                                                                                  July 09, 2005

                                                                                                                                                                                                  Some Simple Fiscal Arithmetic

                                                                                                                                                                                                  I keep hearing that because tax revenues are rising it proves that cutting taxes raises revenues (e.g. from the Washington Times, "The numbers are an eye-popping vindication of the Laffer curve..."). Let’s deal with this claim because it’s a case of correlation being interpreted as causation to prove a preconceived notion.

                                                                                                                                                                                                  For the purposes of illustration, assume an economy that naturally cycles from boom to trough to boom to trough, etc., independent of the level of taxes or government spending. This biases the model against rising revenues when taxes are cut. If revenues rise anyway, it can't be from the cut in taxes. Let the economy follow the pattern 80 – 90 – 100 – 110 – 120 -110 – 100 – 90 – 80 – 90 – 100 – 110 – 120 – 110 - etc. in a never ending pattern.

                                                                                                                                                                                                  Let’s start with a tax rate of 30% and begin in a trough. Then tax revenues are currently (.30)(80) = 24. In an attempt to stimulate the economy (even though it doesn’t actually do so in this economy, it doesn't matter why taxes are cut, it can be for political reasons as well) cut taxes to 25%. Revenues at the trough are now 20 so initially, right after the tax cut, the deficit will widen since revenues fall from 24 to 20.

                                                                                                                                                                                                  But what happens to revenues is subsequent periods? As the economy recovers independent of the tax cut, revenues begin rising. In the next period, when output is 90, revenues will be (.25)(90) = 22.50. In the period after that, revenues are (.25)(100) = 25. Note that revenues have risen relative to the value of 24 under the old tax rate at the trough. It is at this point you might begin to see stories in the news, as now, about how the tax cut caused so much stimulus that revenues increased. In subsequent periods, revenues increase further to 27.50 then 30 confirming this effect for those unwilling to look past simple correlations for the evidence they seek.

                                                                                                                                                                                                  Just because revenues rise after a tax cut does not mean that the tax cut caused the increase in revenues. To make such a determination requires separating changes in output into changes due to the tax cut and changes due to other factors. This is not an easy thing to do, but when attempts are made to do this properly, the evidence for tax cuts bringing about increased revenues is difficult to find.

                                                                                                                                                                                                  Don't be fooled by the rhetoric surrounding simple correlations. It is intended to support a particular preconceived point of view. But because it is nothing more than a simple correlation, it is not evidence that the point of view has any validity.

                                                                                                                                                                                                    Posted by Mark Thoma on Saturday, July 9, 2005 at 07:52 PM in Budget Deficit, Economics, Taxes

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                                                                                                                                                                                                    Graphs Gathered from Blogs (June 2005)

                                                                                                                                                                                                    The collection of graphs is at Optimetrica:

                                                                                                                                                                                                    Graphs Gathered from Blogs (June 2005).

                                                                                                                                                                                                    There is also a directory of links to graphs from other months.

                                                                                                                                                                                                      Posted by Mark Thoma on Saturday, July 9, 2005 at 12:27 PM in Economics, Graphs

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                                                                                                                                                                                                      July 08, 2005

                                                                                                                                                                                                      Will the Next Fed Chair Come From Business Instead of Academia?

                                                                                                                                                                                                      I really, really hope this is a case of “Why Oh Why Can’t We Have a Better Press Corps,” but I fear this may be all too accurate:

                                                                                                                                                                                                      W.House may want business experience for Fed chair, By Tim Ahmann, Reuters: The White House may want to look at the business community in its quest for someone to succeed Alan Greenspan … but analysts say it should take care not to shake market confidence. Cesar Conda, a former domestic policy adviser to Vice President Dick Cheney, said the Bush administration sees business experience as an important attribute and wants someone with "a real world sense" to take over when Greenspan steps down early next year. "Part of the thinking is that, at times, a Fed chairman might have to look beyond the economic theory and beyond some of the statistics in order to guide monetary policy," he said.

                                                                                                                                                                                                      The White House wants someone who, at times, will not use either data or theory as a guide? What will they use, guesses? Surprise policy is likely to have real effects, but not useful ones. But at least this statement is next:

                                                                                                                                                                                                      Business experience may be an asset, but some White House officials say the paramount consideration as the search gets under way is still knowledge of monetary policy. That should offer solace to economists who have bitter memories of the short and unsuccessful tenure of the last Fed chief to hail from the boardroom, former Textron Chief Executive G. William Miller, in the late-1970s. … [T]he heavily academic trio most often cited as his potential heirs: Bush adviser and ex-Fed Governor Ben Bernanke, former Bush adviser Glenn Hubbard and Harvard University economist Martin Feldstein. Economist Richard Yamarone of Argus Research said none of the three meets the "real world" test. "The most important thing you have to do is, you have to be flexible with your policy prescriptions and I think that that can't be done in an effective manner by an academic," he said. "You want someone who has a daily observation of the economy when they come into this office, and I don't know that any of those three have this detail-oriented observation of the economy that Greenspan has," Yamarone said … Discussion of a business-world successor leads many Fed observers to harken back uncomfortably to the runaway inflation of the late 1970s and Miller's brief Fed reign, which was widely seen as feckless at a time resolve was needed. … the White House would need to gingerly lay some groundwork if it was thinking of turning to a dark horse. … Former Fed Vice Chairman Alan Blinder said his biggest fear was that the White House might turn to "Mr. X." "… no matter who it is. That's unsettling enough," he said. "If the … reaction on Wall Street, [is] 'Who's that?,' then I think you're looking for trouble. "The name Feldstein, the name Hubbard, the name Bernanke will not elicit that reaction. The market will take comfort in that they're in some sense known quantities," Blinder said. … "They're all very able people," said Anna Schwartz, who co-authored a number of books with noted monetarist Milton Friedman, ..." Still, in her view, they all end up somewhat lacking. "That's what's so depressing; that there are so few names being raised," she said.

                                                                                                                                                                                                      I don't know of anyone from business who could possibly have a better sense of economic data than Bernanke and others. These statements show a serious misunderstanding of the monetary policy process and that is worrisome. I very much agree with Alan Blinder and, though I would be pleased with Bernanke, I also agree with Anna Schwartz to the extent that she means broadening the choice to include more names with solid theoretical and empirical foundations in the monetary policy area. But choosing Businessperson X in some misguided attempt to favor business or some other constituency would be a huge mistake. We don't need a Bolton or a Snow as Fed Chair.

                                                                                                                                                                                                        Posted by Mark Thoma on Friday, July 8, 2005 at 08:01 PM in Economics, Monetary Policy, Politics

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                                                                                                                                                                                                        Does Europe Want to Change?

                                                                                                                                                                                                        I do not have a problem with the idea that government can be too large and that government is less efficient than the private sector in the provision of goods. I have no problem with the idea that taxation should be done wisely so as to produce maximum growth and minimal distortions. But as I read this indictment of European economic systems a question comes to mind, one I’m not sure I know the answer to. Is the typical worker in Europe less happy, less secure, less well taken care of, have less access to education, less leisure, etc., than the typical worker in the United States? Do the Europeans want to change to become more like the United States? Are they simply unaware of what is best for their own welfare or, if they would like to change, unable to get there due to past decisions that predetermined the set of feasible paths as the article suggests (it actually says the elites know they need to change, but are not ready to do so)? Much of what I read seems to presume that Europe wants to become like the United States. Is that true? I am not endorsing the European system, just wondering if our indictments are consistent with their goals:

                                                                                                                                                                                                        Western Europe Is Cursed By Philosophy of Economy, By Steven Pearlstein, Washington Post: … The economies of Western Europe are cursed by self-defeating public attitudes about markets, wealth and work. After a two-week tour, what sticks is my mind is a meeting with union workers in Lyon who believe that despite rising unemployment, the new 35-hour workweek has created jobs and that a 20-hour workweek (with no cut in pay) would create even more. I recall the bright and articulate students at the University of Cologne who said they'd probably go to a talk by Bill Gates -- only to understand better how the capitalist "enemy" thinks. … I heard of the dozens of workers that Alitalia airlines must fly in from Rome each day because seniority rules prevent hiring local replacements. … I heard executive after executive complain of the chasm between university and corporate research because of the refusal of academics to get their hands sullied by commerce and corporate support. The … gap between every euro a company spends to employ a worker and the 40 cents that the worker actually takes home. The rest goes for taxes and social charges that pay for health care, pensions and unemployment insurance, along with an overstaffed public sector that justifies itself by perpetrating regulations that stifle competition, entrepreneurship and innovation. It is untrue that most Europeans are overpaid. What is true is that they've allowed the public sector to get so large, and government-dependent workers so numerous, that it is now politically impossible to reverse course. … [T]he widespread belief that the best way to "fix" the economy is for government to do it directly rather than create the right environment for a robust private sector. … The problem with that approach is not only that government-directed efforts are prone to failure. More significantly, by diverting so much money, energy and attention, the initiatives make it unlikely that the private sector will ever develop those capabilities on its own. It is these issues that Blair is determined to put on Europe's agenda, despite reluctance from Italy and Germany and the outright opposition of France. The reality in those countries is that while the economic crisis is real and acknowledged among the elites, things are not desperate enough to prompt a fundamental shift in attitudes and policies…

                                                                                                                                                                                                          Posted by Mark Thoma on Friday, July 8, 2005 at 04:11 PM in Economics

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                                                                                                                                                                                                          Will the Supreme Court Derail Bush’s Legislative Agenda?

                                                                                                                                                                                                          I have a question for your collective intelligence which I’ve learned is quite impressive. Does the lack of attention on Social Security due to the focus on the Supreme Court make it more or less likely that reform legislation will make it to a vote? It’s an opportunity to let reform die as attention moves elsewhere, but it's also an opportunity to proceed without much scrutiny, and there are probably lots of considerations I haven't noted. There have been very few stories recently. There’s also stem cells, flag-burning, immigration reform, asbestos lawsuits, gun liability legislation, and other legislation that may or may not have an easier time due to the lack of focus. This article leans towards the position that reform will be more difficult, and I am leaning in this direction as well. Thanks to Jonah of CardCarryingMemeber for passing this along:

                                                                                                                                                                                                          High court fight threatens to derail Bush's agenda, By Jill Zuckman, Chicago Tribune: President Bush finally has an opportunity to reshape the Supreme Court … But Bush's reward may come at a big cost, as his second-term legislative agenda … "Legislators have a limited attention span," said Darrell West, a Brown University political scientist. "They can deal with one big issue at a time, and the court battle is going to be so ferocious it's going to suck all the oxygen out of the system. There's not going to be room for discussion of anything else." One of the first casualties may be Bush's plan to overhaul Social Security--his top domestic priority. … Similarly, immigration reform, another pet issue for the president, is unlikely to emerge out of the Supreme Court thicket, partly because Republicans are split over how to address the issue. One faction is eager to liberalize the system to bring in people willing to take low-wage jobs, a position Bush supports, while the other side wants to crack down on illegal immigrants in the name of national security. … Republicans insist they have long prepared for a Supreme Court vacancy and expect to stick to a rigorous legislative schedule through the summer and fall. "I really do think the Senate ought to be able to walk and talk and chew gum at the same time," said Sen. John Cornyn (R-Texas), a Judiciary Committee member who is eager to move bills on limiting asbestos lawsuits and reforming immigration. … Eric Ueland, chief of staff for Senate Majority Leader Bill Frist (R-Tenn.), noted that the 109th Congress will last through the end of 2006, leaving plenty of time for both legislative and nomination work…. Ueland pointed out that the Judiciary Committee has finished work on an asbestos bill, and the full Senate is expected to take up embryonic stem cell legislation next week. Frist also hopes to take up a constitutional amendment prohibiting flag-burning, already approved by the House, as well as gun liability legislation. … And if it is not done this year, lawmakers may find it even more difficult to do in 2006 as they gear up to run for re-election, making them even less inclined to forge bipartisan compromise…

                                                                                                                                                                                                          Tom Bozzo at Marginal Utility, who has a keener eye than I do, points us to this article on Social Security reform from yesterday's Washington Post. This article discusses attempts to clearly define how the accounts would actually work, something unclear to this point. The administration is considering accounts where returns are tabulated only once a year to save on administrative costs (an important consideration given that the accounts could be as small as $588 per year in contributions) rather than on a monthly basis as with 401(k) plans. But there is worry such a plan, which could involve lag times as long as 15 months before earnings are credited to accounts, will not be palatable. I don't know if it will come to a vote, but this indicates efforts to move reform legislation forward are continuing:

                                                                                                                                                                                                          Cost, Speed at Crux of Social Security Debate, No-Frills Plan Would Save Money but Also Create Delays in Crediting Proposed Private Accounts, By Jonathan Weisman, Washington Post: Faced with a choice between low administrative costs and expensive 401(k)-like service, Bush administration officials indicated this week they may favor a no-frills system of Social Security personal accounts that could leave a long lag between when workers contribute and when those contributions are credited to an account. In public, the nuts-and-bolts issues of how private accounts would actually work have been lost in the debate over whether to establish such accounts at all. But Republican leaders in the House have raised the issue of administrative costs anew by embracing a proposal that would create the accounts but severely limit their size.

                                                                                                                                                                                                          Under this plan, accounts would be funded by only the surplus of cash that Social Security will be running over the next decade. Administrative costs would remain the same as with the larger accounts Bush has proposed, but they would eat into annual contributions that would be limited to as little as $588, even at the system's peak.

                                                                                                                                                                                                          "This is an important issue because people have been left with the impression that all this would operate like a 401(k)," said Lawrence H. Thompson, an Urban Institute economist and former senior official at the Social Security Administration. "And it would not."

                                                                                                                                                                                                          For policy administrators, personal accounts involve a trade-off between cost and speed. A low-cost system could mean contributions would not be credited to accounts for 18 months or more. When presented that choice, White House and Treasury officials emphasized their concern over cost and paperwork burdens.

                                                                                                                                                                                                          "Clearly we're very sensitive to the burden issue and the administrative cost issue," said Mark J. Warshawsky, assistant Treasury secretary for economic policy.

                                                                                                                                                                                                          Policy work has emphasized "keeping costs very low and administrative costs on employers down," said Trent Duffy, a White House spokesman.

                                                                                                                                                                                                          Stephen C. Goss, Social Security's chief actuary, said he expects that under any final Social Security plan, the SSA would calculate contributions based on final earnings data forwarded by the Treasury. That would leave an average lag time of 15 months from the withholding of contributions to the crediting of accounts.

                                                                                                                                                                                                          As congressional aides consider the details of personal accounts legislation, they must choose between starkly different approaches. Employers could be required to treat the accounts like 401(k) plans, separating employee contributions from Social Security taxes each paycheck, earmarking those contributions to reflect employee investment choices and sending them either to the government or directly to an investment manager each pay cycle. Or the system can be kept simple, with employers calculating account contributions only when they calculate individual tax payments, once a year with employees' W-2 forms.

                                                                                                                                                                                                          The first option was chosen by Chile and other Latin American countries when they established systems of personal accounts for their state pension systems beginning in the 1980s. It offers employees a strong sense of ownership and the gratification of watching their accounts grow with each paycheck, but it comes at a price -- paperwork for employers and administrative costs for employees. Last year, insurance and commission costs ate up 18.5 percent of contributions to Chilean accounts, according to Chilean pension data.

                                                                                                                                                                                                          The second option was adopted by Sweden for its private accounts system in 2000. At a cost of 0.7 percent of an average participant's assets, the administrative burdens are low, according to a recent analysis by three Swedish economists. But because contributions are tabulated only once a year, after tax data is sent to the government, contributions on average are not credited to accounts for 18 months.

                                                                                                                                                                                                          Some pension experts say such a delay may be politically unacceptable to Americans used to the nearly instant gratification of their 401(k)s. But the alternative administrative costs and paperwork burdens may be even worse. In public, the National Federation of Independent Business, a powerful small-business lobby, has strongly backed President Bush's Social Security push, but privately, members have expressed concern about the potential paperwork burden. A survey in 1998 found that 70 percent of small-business owners backed investing Social Security taxes in private stocks and bonds. But upon further questioning, half decided private accounts would be "a serious burden."

                                                                                                                                                                                                          "We've talked about it a lot," said William "Denny" Dennis Jr., an NFIB senior research fellow. "If this moves forward, this will be a key issue for us."

                                                                                                                                                                                                          Cost may also drive the decision. A 2001 Social Security Administration paper analyzed a no-frills plan and one with a higher level of service, finding start-up costs ranging from $1.2 billion to $2.3 billion, and annual operational costs at $700 million for the low-end plan and $3 billion for the more responsive system. Kelly A. Olsen, one of the study's authors, said those high-cost estimates probably understate the true price.

                                                                                                                                                                                                          The SSA study also estimated that the low-cost system would require 7,735 additional employees to operate it, while the high-cost version would take 33,630 new workers.

                                                                                                                                                                                                          Given financial constraints and the political clout of small businesses, Congress may have little choice in how accounts would be structured.

                                                                                                                                                                                                          "It's a given that we will collect [contribution data] once a year," Thompson said. "The employer community would go bananas if you told them they had to collect and disburse this money once a month."

                                                                                                                                                                                                          Large employers with established, electronic 401(k) systems could be allowed to piggyback personal accounts onto those private plans, suggested Dallas Salisbury, president of the Employee Benefit Research Institute. But more than 85 percent of the nation's 5.6 million small-business employers offer no such plans. That could lead to a two-tiered accounts system.

                                                                                                                                                                                                          "If you work for GM, in a matter of weeks, your contributions could be credited to your account," he said, "but for Joe Shoeshine Stand, it could be somewhere within two years."

                                                                                                                                                                                                          And that would raise new questions over equity and fairness, said Virginia P. Reno, vice president for income security policy at the National Academy of Social Insurance. "How do you achieve your [policy] purpose if the size of employer determines real eligibility?" she asked.

                                                                                                                                                                                                          Posted by Mark Thoma on Friday, July 8, 2005 at 09:26 AM in Economics, Politics, Social Security

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                                                                                                                                                                                                          Deep Sea Red-Light District

                                                                                                                                                                                                          It's never a good idea to become dazzled by the sparkling lights:

                                                                                                                                                                                                          Red Light-Flashing Jellyfish Lures Prey, By Randolph E. Schmid, AP: The first deep sea red-light district — glowing appendages on a newly discovered jellyfish relative — appear to flash their come-hither message to lure prey … the first deep ocean invertebrate known to use red fluorescent light … Three of the animals were found by scientists using a remote controlled research vehicle at depths of between 5,200 feet and 7,500 feet off the coast of California. … The animal, which has not yet been named, has tentacles with side branches that consist of stinging cells attached to a central stalk. The researchers said that inside the stalk are spots that produce blue-green light when immature and red light when mature. … There are not many fish at the depth where the specimens were found, but two of the Erennas had fish inside them. … researchers believe the red lights are being used to attract fish that can then be captured and eaten. …

                                                                                                                                                                                                          Click on top image for larger version

                                                                                                                                                                                                            Posted by Mark Thoma on Friday, July 8, 2005 at 01:26 AM in Science

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                                                                                                                                                                                                            Who Cares About Inflation? The Fed Cares

                                                                                                                                                                                                            I have to disagree with the spirit of this editorial and its claim that inflation is coming. I hear nothing but increased focus on inflation targeting and transparency from the Fed. The markets certainly do not appear to be expecting inflation in the future. In addition, please distinguish real shocks (e.g. productivity shocks, real shocks to oil supply and demand) from nominal shocks (e.g. changes in money growth) when talking about underlying inflationary trends. "Inflation is always and everywhere a monetary phenomenon" (see point 8 just before the conclusion, see also this 2003 JME paper by E. Nelson; free version here). Finally, I have to object a bit to the opening sentences. Politicians do not set monetary policy. The Fed is independent for good reason:

                                                                                                                                                                                                            Who Cares About Inflation?, Floyd Norris, New York Times: Inflation is coming. Politicians, while they may not actually want it, prefer it to the alternatives in both Europe and the United States. It was a quarter-century ago that inflation was widely viewed as a threat that needed to be vanquished, even if it brought recession and pain. … But with inflation having been quiet for years, political attention has shifted. Now other things, like growth and employment, seem far more important. … One economist who thinks inflation is on its way back is Larry Kantor, the head of research at Barclays Capital in New York. He ticks off the reasons that inflation fell in the 1980's and 1990's. For one, there was widespread acceptance of the Bundesbank religion … that ordered the European Central Bank to aim at inflation, not growth. There was also the declining price of oil, the productivity boom that came from improved information technology, and the emergence of cheap exports from China and India. By the mid-1980's, American fiscal policy was even getting tighter. Now oil prices are rising and fiscal discipline has vanished. The productivity boom is fading … The Fed began to back away from the old-time religion for central banks in the late 1990's, when Alan Greenspan chose not to worry about what would previously have been viewed as excessive growth. … So why is there not a general belief that inflation is coming back? In part it is because a lot of attention is put on the so-called core rate of inflation, which excludes changes in volatile food and energy prices. Ignoring energy prices now is a bit ridiculous. … "Inflation will continue to creep up," Mr. Kantor forecasts, "and the Fed will have to do more than it has." …

                                                                                                                                                                                                            It looks like Mr. Norris would like to see Jim Hamilton's son on the San Diego freeways learning to drive very fast.

                                                                                                                                                                                                              Posted by Mark Thoma on Friday, July 8, 2005 at 12:33 AM in Economics, Inflation, Monetary Policy, Press

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                                                                                                                                                                                                              Market Failure in the Provision of Social Insurance

                                                                                                                                                                                                              This link (RePEc) is for my records, pay it no mind unless you are interested in foundational technical papers on social insurance and market failure due to moral hazard and adverse selection:

                                                                                                                                                                                                              Pauly, Mark V., "Overinsurance and Public Provision of Insurance: The Roles of Moral Hazard and Adverse Selection," The Quarterly Journal of Economics, Vol. 88, No. 1. (Feb., 1974), pp. 44-62 (JSTOR).

                                                                                                                                                                                                              Link to copy of first few paragraphs.

                                                                                                                                                                                                                Posted by Mark Thoma on Friday, July 8, 2005 at 12:24 AM in Academic Papers, Economics, Social Security

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                                                                                                                                                                                                                July 07, 2005

                                                                                                                                                                                                                We Too Mourn with all Those Affected by This Horrid Act

                                                                                                                                                                                                                We also wish to express out condolences as we mourn with all those affected by this horrid act. We will do everything in our power to help to find those involved and to bring them to justice, though justice seems too soft a word to apply to the what those involved deserve.

                                                                                                                                                                                                                  Posted by Mark Thoma on Thursday, July 7, 2005 at 11:16 PM in Terrorism

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                                                                                                                                                                                                                  Bankruptcy Bill May Stifle Small Business Formation

                                                                                                                                                                                                                  Will the bankruptcy bill, which was based on faulty classifications of business and personal bankruptcies due to a computer programming error, stifle small business formation and employment growth? Here’s an argument that it will:

                                                                                                                                                                                                                  When Entrepreneurs Risk It All and Lose, By Louise Witt, NY Times: … A study … found that almost one in five Americans who filed for personal bankruptcy protection in recent years had operated businesses - small companies, home enterprises or start-ups - within two years of filing for bankruptcy. Many of them had incorrectly filled out their paperwork, so the government mistakenly counted them as individuals, not businesses. In many more instances, the study showed, they had been classified as individuals by a computer software oversight. The study's findings raise the possibility that the bankruptcy law President Bush … may have damaging ramifications for the nation's entrepreneurial culture. Instead of cracking down almost entirely on careless consumers who cannot pay credit card bills, the study indicates, the legislation threatens to hobble untold numbers of entrepreneurs and small-business owners caught in financial setbacks. … [T]he Kauffman study, written by Elizabeth Warren, a Harvard law professor, and Robert Lawless, a law professor at the University of Nevada, Las Vegas, concluded that if entrepreneurs and small-business owners had been properly classified, the rate of business bankruptcies in the United States would have remained steady at around 19 percent over the last two decades. … The Kauffman study discovered why the government had undercounted entrepreneurs to such a large degree: a computing error. … the most common software programs defaulted to individual settings. The error often went uncorrected. "The model that Congress used for writing the bankruptcy law - a growing number of consumers and a rapidly shrinking number of entrepreneurs and small-business owners - was simply wrong," said Professor Warren. "It's bad policy on lots of levels."

                                                                                                                                                                                                                  The new law will make it harder for all individuals who file for bankruptcy protection to discharge their debts and get a fresh start. ... "It's pretty draconian," said Harry Sommer, president of the National Association of Consumer Bankruptcy Attorneys. … Greg Jordan, a bankruptcy lawyer with Dykema Gossett Rooks Pitts in Chicago, spelled out the implications of the new law for people like the Ashtons. "It's not going to stop people from starting their first business. Entrepreneurs tend to believe that they will beat the odds," he said. "But it will stop them dead from starting a second one."

                                                                                                                                                                                                                  Let me jump in here for a moment. I cut these stories as this post is fairly long already, but the article gives many accounts of small businesses who, after one or two initial failed attempts to start a business, realize success. Because these subsequent attempts will be much harder under the new law, and such stories are not uncommon, the law has the potential to reduce small business formation. For example:

                                                                                                                                                                                                                  It probably would have stopped Tom Lange from getting back into the game. To escape the debt he held after he and his brother sold two funeral homes to a Canadian company for stock that later became worthless, Mr. Lange filed for Chapter 7 protection against creditors six years ago. With the debt written off, the move enabled him to start another funeral home, in Centerville, Iowa, in 2000. If he had been forced to pay off all his debts, Mr. Lange, 51, said he probably would have had to uproot his family to find work. Today he has a full-time funeral director and seven part-time employees, and his business is thriving. "If it wasn't for the bankruptcy law, I don't know what would have happened," he said. "I was able to clear off my debt and get back on my feet." …

                                                                                                                                                                                                                  Update: This is a question from a comment by CL on the post after this one, and it's an issue that I'd like to look into a little more, though I assume someone has done so already (???). Does anyone know the answer to this?:

                                                                                                                                                                                                                  "... small business reportedly accounts for much of employment growth ... " ... I hear this quoted all the time. Can you give me the source of this --small business creates most of the employment -- what numbers are used to drive this calculation? Or is it an urban legend?

                                                                                                                                                                                                                  Spencer, in a follow up coment to CL, gets us started with:

                                                                                                                                                                                                                  "Suposedly the source of the small business creating jobs stems from the Small Business Administration. I have always considered it suspect, but have never tried to prove or disprove it. A few years ago the issue was called into question, but I did not save any of the discussion..."

                                                                                                                                                                                                                  PGL adds:

                                                                                                                                                                                                                  "Per the claim of small business being the source of the most job growth - I have to wonder if this is gross job creation or NET (as in news jobs created minus jobs lost). If most of the net job creation came from small business and if this trend continued for long enough - wouldn't most of American production eventually be from small business? Of course, one could argue that labor productivity in small businesses are low, which means they create low paying jobs. Now is that a good thing?"

                                                                                                                                                                                                                    Posted by Mark Thoma on Thursday, July 7, 2005 at 10:38 AM in Economics, Unemployment

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                                                                                                                                                                                                                    The Non-Free Disposal of Information

                                                                                                                                                                                                                    I promise not to reveal my sources.

                                                                                                                                                                                                                    Update: Kyu Ho Youm holds the Jonathan Marshall First Amendment Chair at the University of Oregon School of Journalism and Communication.

                                                                                                                                                                                                                    Guest Viewpoint: Press isn't only loser in Miller ruling, By Kyu Ho Youm, Register Guard:

                                                                                                                                                                                                                    Reporter Judith Miller of The New York Times was sent to jail Wednesday. Along with Matthew Cooper of Time magazine, she has been held in contempt for refusing to testify about her confidential source or sources to a federal grand jury. Because Time has complied with the grand jury's subpoena by supplying Cooper's notes, and because Cooper has agreed to testify, he is likely off the hook. To many of us, however, our news media's high-profile legal confrontation with the government is a depressing story - especially when we celebrate our Independence Day this week. More than anything, it compels us to wonder whether our commitment to a robust and uninhibited press is still the defining character of our country.

                                                                                                                                                                                                                    Miller would never have imagined facing jail time in July 2004, when columnist Robert Novak "outed" a CIA operative, Valerie Plame. But all the courts, including the U.S. Supreme Court, have rejected Miller's claims that reporters have a right to protect confidential sources.

                                                                                                                                                                                                                    What's the scorecard for the news media's most serious legal battle with the government since the Supreme Court held in Branzburg vs. Hayes in 1972 that the First Amendment does not protect reporters from grand jury subpoenas?

                                                                                                                                                                                                                    A 4-0 victory for the government.

                                                                                                                                                                                                                    The Supreme Court refused last week to hear Miller's appeal from the District of Columbia Circuit Court, which upheld a federal district court's contempt findings against her.

                                                                                                                                                                                                                    Most dismaying, however, is the judicial obduracy in rebuffing the reporter's argument that courts should examine the post-Branzburg evolution of the journalistic privilege.

                                                                                                                                                                                                                    The Miller case is also revealing in that the judges are unnervingly cavalier and dismissive in rejecting the reporters' privilege as a matter of policy or principle. Few judges were willing to grant the press due credit as an institutional check on the government. In April, when the full D.C. Circuit Court declined to reconsider a three-judge panel's unanimous ruling against Miller, there was no dissent.

                                                                                                                                                                                                                    Likewise, the Supreme Court's decision against Miller was tellingly silent in sidestepping an overdue opportunity to clarify several significant constitutional and common-law issues raised in the case. Attorneys general from 34 states and the District of Columbia had asked the court for a more definitive position on the law. Yet none of the justices bothered to write his or her own opinion, concurring or dissenting, for the court's refusal to hear the case.

                                                                                                                                                                                                                    The Supreme Court was not swayed by a growing split among federal courts and by the divergence of federal law from the laws of 49 states, which recognize the reporter's privilege.

                                                                                                                                                                                                                    The news media's loss will likely exacerbate the legal quandary facing news reporters. It emboldens federal prosecutors and litigators demanding the identity of confidential sources.

                                                                                                                                                                                                                    But we don't have to lament the Miller case as just a futile exercise by the news media. If the post-Branzburg history serves as a guide, the case will act as a catalyst for the reporters' right to safeguard their sources' anonymity.

                                                                                                                                                                                                                    Indeed, it has already galvanized several senators and congressmen into action on a possible federal shield law. Bills on the reporters' privilege have been introduced to Congress. The Reporters Committee for Freedom of the Press and other media advocates are pushing for a federal shield law. Besides, a number of states are considering passing or amending shield laws.

                                                                                                                                                                                                                    On the other hand, the federal prosecutor's strong-arm pursuit of Miller's confidential source or sources, even though she did not write a story using the sources, is reverberating far beyond our borders.

                                                                                                                                                                                                                    Recently, the International Press Institute, the global network of news professionals based in Vienna, Austria, has noted "an alarming new pattern of assault" on press freedom in our country by judges and prosecutors.

                                                                                                                                                                                                                    We cannot afford this kind of fallout from the press-government conflict while trying to restore our tarnished reputation and influence in the post-Sept. 11 world.

                                                                                                                                                                                                                    Our courts' increasingly callous outlook on the reporters' privilege sends an unintended, misguided message to many countries that our reporters are coerced into serving as the government's investigatory arms. Hence, we should be rightly concerned about the negative global image of our country that might emanate from the Miller case.

                                                                                                                                                                                                                    Few of us will bear watching Miller being hauled into jail as a heavy price for doing her work as a committed journalist. What an unbecoming picture it presents of our nation's beleaguered press during the Fourth of July week.

                                                                                                                                                                                                                      Posted by Mark Thoma on Thursday, July 7, 2005 at 02:27 AM in Politics, Press

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                                                                                                                                                                                                                      Do Tax Cuts for Small Business Owners Stimulate Employment?

                                                                                                                                                                                                                      According to economist Robert Frank from Cornell, the answer is a resounding no. Tax cuts to small business owners do not stimulate employment. Here’s the argument. Suppose that a potential hire will produce 10 units of output per hour for a firm and the output will sell for $2. The worker can be hired for $15 per hour. Should the firm hire the worker?

                                                                                                                                                                                                                      Yes, hiring this worker will generate a $5 profit per hour for the employer. Let the tax rate on the owner’s income be 20%. Then the take home pay for the owner is $4 per hour.

                                                                                                                                                                                                                      Now increase the tax rate to 50%. Is it profitable to hire the worker? Yes, the worker still generates $5 in profit for the firm, but now the owner’s take home pay is $2.50.

                                                                                                                                                                                                                      Now let the tax rate be 80%. Is it profitable to hire the worker? Yes, the worker still generates $5 in profit for the firm, but take home pay for the owner is only $1 now (assuming this is still above zero economic profit for the owner).

                                                                                                                                                                                                                      Notice how the condition determining whether the worker is hired, a comparison of the wage paid to the value of the output the worker produces (W compared to P*MP from your principles courses), does not depend upon the tax rate paid by the owner. This editorial from the New York Times focuses on this issue in its evaluation of the Bush tax cuts:

                                                                                                                                                                                                                      Do Tax Cuts for the Wealthy Stimulate Employment?, By Robert H. Frank, New York Times: The centerpiece of the Bush administration's economic policy has been large federal income tax cuts aimed mainly at top earners. These tax cuts account for much of the $2 trillion increase in the national debt projected to occur during the Bush presidency. They prompted a large group of Nobel laureates in economics to issue a statement last year condemning the administration's "reckless and extreme course that endangers the long-term economic health of our nation." The question of whether to make the tax cuts permanent is still on the Congressional agenda. So it is an opportune moment to examine the president's argument in support of them. ... the president portrayed his tax cuts as the linchpin of his economic stimulus package. He argued that because most new jobs are created by small businesses, tax cuts to the owners of those businesses would stimulate robust employment growth. His policy thus rests implicitly on the premise that if business owners could afford to hire additional workers, they would. But ... [w]hat matters is whether hiring will increase their profits.

                                                                                                                                                                                                                      The basic hiring criterion, found in every introductory textbook (including those written by the president's own economic advisers), is straightforward: If the output of additional workers can be sold for at least enough to cover their salaries, they should be hired; otherwise not. ... The after-tax personal incomes of business owners are irrelevant for hiring decisions. … In brief, the president's claim that tax cuts to the owners of small businesses will stimulate them to hire more workers flies in the face of bedrock principles outlined in every introductory economics textbook.

                                                                                                                                                                                                                      But what about the increase in income? Won’t the owner spend more with $4 in profit than with, say, $2.50 in profit per hour thereby stimulating employment?

                                                                                                                                                                                                                      A second way the Bush tax cuts might have stimulated employment is by inducing the wealthy to spend more on consumption. But a large share of the tax windfalls received by the wealthy are not spent in the short run. … Had the dollars required to finance the president's tax cuts been used in other ways, they would have made a real difference. Larger tax cuts for middle- and low-income families, for example, would have stimulated immediate new spending because the savings rates for most of these families are low. … Grants to cash-starved state and local governments would have prevented layoffs of thousands of teachers and police officers. And many useful jobs could have been created directly. For instance, people could have been hired to scrutinize the cargo containers that currently enter the nation's ports uninspected. Economists from both sides of the political aisle argued from the beginning that tax cuts for the wealthy made no sense as a policy for stimulating new jobs. And experience has proved them right. Total private employment was actually lower in January 2005 than in January 2001, the first time since the Great Depression that employment has fallen during a president's term of office.

                                                                                                                                                                                                                      When we talk about lackluster employment figures and worry about why employment is lagging behind output during this recovery, perhaps we should quit debating whether interest rates should be 3.25% or 3.50% and get to the crux of the matter. I'll debate questions about monetary policy as long and passionately as anybody, but there are better policies than tax cuts for the wealthy to stimulate employment, and our time would be better spent bringing those issues to light rather than endlessly debating the potential for and necessity of another .25% rate increase.

                                                                                                                                                                                                                        Posted by Mark Thoma on Thursday, July 7, 2005 at 12:06 AM in Economics, Taxes, Unemployment

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                                                                                                                                                                                                                        July 06, 2005

                                                                                                                                                                                                                        William Poole and Milton Friedman on Inflation Targeting and the Post-Greenspan Fed

                                                                                                                                                                                                                        Interesting comments by St. Louis Federal Reserve Bank President William Poole on his support of inflation targeting, the transition to a new Fed chair and how that might affect the Fed’s credibility, his discomfort with language such as “measured,” and other matters. Comments by Milton Friedman in support of inflation targeting are also noteworthy given his long-standing advocacy of quantity targets:

                                                                                                                                                                                                                        Post-Greenspan Fed will face credibility test-Poole, By Alister Bull, Reuters: Federal Reserve Chairman Alan Greenspan's eventual successor faces a stiff credibility test from markets but could ease the transition by adopting a target for inflation, top U.S. economists said on Wednesday. St. Louis Federal Reserve Bank President William Poole said markets currently expect a period of low U.S. inflation to continue well after Greenspan departs office early next year, but warned that confidence would likely weaken somewhat. … "The Fed's inflation-fighting credibility may be somewhat more fragile over the next few years than it has been over the past few years." … Nobel-prize winning economist Milton Friedman, who joined Poole and other monetary experts to discuss how the Fed would fare after Greenspan, said the case for adopting inflation targets was clear. "Greenspan didn't need these rules...(but) what we need for the future is for the government to set inflation targets and to hold the officials responsible for them," he said. ... Friedman warned that without a target, the attraction of inflation may be hard to resist. … Greenspan has resisted adopting a formal target for inflation, which is the practice in Britain, the euro zone and a number of other industrialized countries, warning that this would limit Fed flexibility. Poole, a long-standing advocate of targeting, made plain that he did not see the merit in reflating the economy at the expense of the target in response to a severe economic shock. "I'd be pretty adamant myself of sticking to the inflation target," he said in answer to a question. … Poole said the Fed had made large strides toward policymaking transparency under Greenspan, contributing greatly to the central bank's success and the economy's health. However, Poole's remarks showed he remains uncomfortable with the Fed's recently adopted practice of providing forward guidance on the monetary policy path it expects to take. He said the "measured pace" language introduced by the Greenspan Fed to characterize its current monetary tightening cycle was an example of this untested "significant departure" that may eventually need to be reassessed. "I have been concerned ... that the Federal Reserve not make promises about the future setting of the federal funds rate that...it might not want to honor," Poole said. "I think it's a tricky business," he said. "If we can get across that these forward statements are our best guess, conditional on the information we have at the time we make them ...then I think that the forward statements may be constructive," he added.

                                                                                                                                                                                                                        I agree, particularly with the last statement. There is a danger of staying on a particular path too long simply because the market expects the Fed to continue along it based upon such language, and deviating from the predetermined course of action would upset markets. I believe the message that statements such as "measured" are data dependent is beginning to resonate in financial markets and more generally as well. If so, then signaling future intentions is a helpful development.

                                                                                                                                                                                                                        Update: Here is a copy of Poole's remarks. Thanks to SCSU Scholars for the link. William Polley says, "The speech isn't that long. As they say, read the whole thing." Also, this editorial in the CSM "When warnings become a scare" talks about how to optimally issue warnings for events like potential earthquakes and flu outbreaks and states "How should they warn about something that might never occur? Does talking about an uncertainty help - or simply raise unnecessary fears?" Interestingly, transparency is highlighted as essential to good policy.

                                                                                                                                                                                                                          Posted by Mark Thoma on Wednesday, July 6, 2005 at 04:50 PM in Economics, Monetary Policy

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                                                                                                                                                                                                                          The Asahi Shimbun Asks Someone, Anyone, to Explain the Need for Privatization

                                                                                                                                                                                                                          This editorial from Japan has a very familiar ring to it. I think it's safe to say this paper does not believe the U.S. has a monopoly on dumb legislators and administrations producing even dumber legislation:

                                                                                                                                                                                                                          Can someone explain the need for privatization?, The Asahi Shimbun (the paper, the second largest in Japan, is described here): The battle lines were drawn. Threats were issued. And countless hours were spent in heated debate before the postal privatization bills were passed Tuesday in the Lower House. But amid the brouhaha over the legislation, one fundamental question was left unanswered: Why is privatization needed in the first place? It is widely known that privatizing the postal system has been a pet project of Prime Minister Junichiro Koizumi for many years. Koizumi's dream seemed to be the impetus behind the privatization push. … [T]he questions posed by members of both the opposition parties and the ruling Liberal Democratic Party were often unrelated to the fundamental issues. For example, opposition Minshuto (Democratic Party of Japan) … took personal shots at Heizo Takenaka … LDP opponents of privatization did not do much better …[and]… touched upon superficial questions …

                                                                                                                                                                                                                            Posted by Mark Thoma on Wednesday, July 6, 2005 at 04:05 AM in Economics, Market Failure

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                                                                                                                                                                                                                            When Unions Compete, Do Workers Win?

                                                                                                                                                                                                                            Is competition the answer to the decline in unionization? This editorial answers in the affirmative:

                                                                                                                                                                                                                            Workers of the world ... disunite!, By Jonathan Cutler and Thaddeus Russell, Christian Science Monitor: The growing rift between insurgents in the AFL-CIO and the leadership of the labor federation looks increasingly like civil war. … The recent establishment of the Change to Win Coalition, which will probably be a rival federation to the AFL-CIO, could be the best thing to happen to the American labor movement in decades. Anyone who still cares about the labor movement agrees that it is in crisis. Unions today represent only 15.5 million - or 12.5 percent - of the nation's 124 million workers, the lowest percentage in decades … The AFL-CIO claims to have 13 million members. Most American workers have no experience with unions and those who do often complain that union leaders are not responsive to their demands. Indeed, these twin crises - dwindling numbers and bureaucratic inaccessibility - have plagued the labor movement since the merger that created the AFL-CIO in 1955. The new competition among unions will create more dynamic unions and will force labor leaders to be accountable to their constituents.

                                                                                                                                                                                                                            Following months of threats to disaffiliate from the AFL-CIO, five of the federation's largest member unions have now established the Change to Win Coalition and forcefully implied that if the AFL-CIO does not meet certain demands for restructuring, the coalition will offer a new, independent alternative ... Barring unexpected concessions by the AFL-CIO to the insurgents at the federation's convention July 25 to 28, it appears that we will soon have two competing labor federations in the United States for the first time in 50 years. The heyday of organized labor in America, from the split of the CIO from the AFL in 1935 until the merger in 1955, occurred during another civil war within the labor movement. These were the years when organized labor constituted a vibrant movement full of drama and passion that inspired a generation of labor activists. As unions battled for the allegiance of workers the rival federations grew exponentially, labor's story was headline news, and union membership reached its high point in American history. … Competition among unions leads not only to the creation of better options for the already organized rank and file, but also to the organization of new industries as unions animated by the rivalry generate enthusiasm among the unorganized. Employees participating in union representation elections have been far more likely to vote for union representation over "no union" when the election involves more than one union vying for workers. Rivalry has also forced down initiation fees and union dues. When unions compete, workers win…

                                                                                                                                                                                                                            I thought this an interesting contrast to the post below this one since Nassau Senior believed combinations [labor unions] would fight to maintain the notion that wages should reflect the needs of a family rather than the forces of supply and demand leaving markets in an unnatural state. This was one of the reasons he opposed unions. Quoting Senior (the cite is Three Lectures in the post below this one), the arrogance of the poor fostered by unions led to a situation where:

                                                                                                                                                                                                                            “rent, tithes, profit, and capital, are all eaten up , and pauperism produces what may be called its natural effects – or they are the effects which, if unchecked, it must ultimately produce – famine, pestilence, and civil war.”

                                                                                                                                                                                                                            If Senior were in my family, an uncle or brother in law or something, we’d argue on holidays. The next post explains why there would be plenty for us to argue about.

                                                                                                                                                                                                                              Posted by Mark Thoma on Wednesday, July 6, 2005 at 12:15 AM in Economics, Income Distribution, Unemployment

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                                                                                                                                                                                                                              Nassau Senior and the Poor Laws – Everything Old is New Again

                                                                                                                                                                                                                              Nassau Senior (1790-1864) was a lawyer with an interest in social, economic, and political issues. He was a friend of many of the more prominent members of the Whig party and he was the party’s general adviser on matters involving economic and social issues. In 1825 he was appointed to the first chair of political economy at Oxford University. In his early years, his main concern was the causes and consequences of poverty and the standard of living of the poor. Prior to 1830 Senior had considerable sympathy for the plight of the poor, and his concern appears to have been generally benevolent. He rejected Malthus’ population theory which implied long-run misery for the masses and instead believed that improvements in productivity would coincide with increases in moral character to lift the poor from their misery. He saw moral education as the only answer to poverty and actively promoted efforts to uplift intellectual and moral standards.

                                                                                                                                                                                                                              Conditions for the working class during this time were almost, if not surely sub-human. Exploitation and degradation were commonplace and there came a time in the 1820s and 1830s when labor began to organize and fight back. The result was widespread strikes, industrial sabotage, riots, and fires, all of which had a great influence on Senior. He changed. He particularly cited “the fires and insurrections which terrified the south of England in the frightful autumn of 1830” (Nassau Senior, Industrial Efficiency and Social Economy, 2 vols. (New York: Holt, 1928), 2:156). He came to believe that the poor laws and government’s dole to the poor and the unemployed were the principle causes and consequences of poverty and that this threatened to undermine the very existence of capitalism in England.

                                                                                                                                                                                                                              In 1830 Senior published Three lectures on the Rate of Wages (New York: Augustus M. Kelley, 1966). After the unrests in the autumn of 1830, he added a preface called “The Causes and Remedies of the Present Circumstances” the source of the famous wages fund doctrine. Setting aside all the finer details, the essence is that there is a fixed pool of income to divide among workers and the size of the pool is determined solely by labor productivity. Thus, to improve living conditions, labor productivity has to rise or the number of poor depending upon the fixed fund has to fall.

                                                                                                                                                                                                                              How to increase labor productivity? He advocated two solutions. First, the removal of all restrictions on free commerce and the accumulation of capital. Second, abolition of the poor laws which “made wages not a matter of contract between the master and the workman, but a right for one, and a tax on the other.” Senior was no longer worried about the misery caused by poverty. The events of 1830 led him to worry about the “threat of an arrogant laboring class, resorting to strikes, violence, and [unions], a threat to the foundation not merely of wealth but of existence itself.” Poor laws and dole led to a decreased incentive to work and created the arrogant attitude that workers and their families had a right to exist even if they could not or would not find work.

                                                                                                                                                                                                                              With his connections to the powerful Whig party, Senior was able to put some of his ideas into practice. In 1832 he was appointed to the Poor Law Inquiry Commission which was to study existing poor laws and methods of dealing with poverty and recommend reform. The report issued in 1834 was by all accounts largely Senior’s work. The new law stated:

                                                                                                                                                                                                                              1. Workers should accept any job the market offered, regardless of working conditions or pay. 2. Any person who would not or could not find work should be given just enough to prevent physical starvation. 3. The dole given to such a person should be substantially lower than the lowest wage offered on the market, and the workers general condition should be so miserable and should so stigmatize so as to motivate the search for employment irrespective of pay or conditions.

                                                                                                                                                                                                                              One historian, E.J. Hobsbawn (Industry and Empire: An Economic History of Britain since 1750, London: Weidenfeld & Nicolson, 1968) wrote about the poor law Senior was influential in creating and said the law was

                                                                                                                                                                                                                              …an engine of degradation and oppression more than a means of material relief. There have been few more inhuman statutes than the Poor Law of 1834, which made relief “less eligible” than the lowest wage outside, confined it to the jail-like workhouse, forcibly separated husbands, wives, and children in order to punish the poor for their destitution, and discourage them from the dangerous temptation of procreating further paupers.

                                                                                                                                                                                                                              With so much discussion of economic security today, it's hard not to be reminded of this time period in history. Whenever I go back and read about these times, the people, the policies, echoes of present day policy debates are everywhere. It is quite remarkable how little is truly new in this world. A close look at the principles underlying contemporary rules for Unemployment Compensation reveals strong echoes of Senior’s policies. Much of the rhetoric surrounding welfare reform, Social Security reform and so on can be found in the literature surrounding the birth of capitalism and its struggle against socialist ideas, ideas abounding during Senior’s time. As we embark upon another episode where these same ideas clash, are we fully aware of how this resolved itself in the past when societies struggled with the same issues?


                                                                                                                                                                                                                              *This dicussion follows E.K. Hunt's History of Economic Thought: A Critical Perspective, Wadsworth: Belmont, California, 1979 treatment of this topic.

                                                                                                                                                                                                                                Posted by Mark Thoma on Wednesday, July 6, 2005 at 12:06 AM in Economics, History of Thought, Social Security

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                                                                                                                                                                                                                                July 05, 2005

                                                                                                                                                                                                                                Latest Entries at Environmental Economics Blog

                                                                                                                                                                                                                                My two latest entries at the Environmental Economics blog are:

                                                                                                                                                                                                                                Another Environmental Report Altered for Political Expediency The Cost of Reducing Carbon Emissions: Lessons from Portland, Oregon

                                                                                                                                                                                                                                These links are primarily for my records, though I hope you are interested in these issues. But please visit the Environmental Economics site for the good stuff others are posting!

                                                                                                                                                                                                                                  Posted by Mark Thoma on Tuesday, July 5, 2005 at 04:49 PM in Economics, Environment, Politics

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                                                                                                                                                                                                                                  Reporting on Social Security Reform Gets Crowded Out

                                                                                                                                                                                                                                  I was hoping to update you on Social Security reform efforts this morning, but ever since the retirement of Supreme Court Justice Sandra Day O'Connor I haven’t been able to find any articles at all. Unless I missed the write-ups, and let me know if I did, it seems both stories are too much for news agencies to handle. That home detention has been hard for Martha Stewart is apparently much more important to report ("Martha says house arrest is 'hideous'"). There’s an editorial in the Washington Times, but it doesn’t say anything new. It begins with what I believe is a false assertion that voters place strengthening Social Security at the top of their list and concludes Democrats may pay a price for stalling reform. Same old rhetoric and Brad DeLong dealt with that argument effectively here. I will keep looking for news …

                                                                                                                                                                                                                                  Update: There is absolutely nothing new here either, but there is also an editorial in the WSJ by Allan B. Hubbard (Sub.) that tries to make the same old tired argument that progressive indexing is not a benefit cut. It is a benefit cut. And it really is that simple despite the obfuscation surrounding this issue. It also tries to paint Democrats as obstructionists (again, see Brad DeLong's post on this) which seems to be the strategy of the day.

                                                                                                                                                                                                                                    Posted by Mark Thoma on Tuesday, July 5, 2005 at 10:39 AM in Press, Social Security

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                                                                                                                                                                                                                                    The Talk Show Veterans for Truth

                                                                                                                                                                                                                                    Sadly, I think this speaks for itself. The Talk Show Veterans for Truth are headed to Iraq:

                                                                                                                                                                                                                                    Critics Call Radio Hosts' Trip Propaganda Mission, By Kelley Beaucar Vlahos, Fox News: A contingent of conservatives talk radio hosts is headed to Iraq this month on a mission to report "the truth" about the war: American troops are winning, despite headlines to the contrary. ... The "Truth Tour" has been pulled together by the conservative Web cast radio group Rightalk.com and Move America Forward, a non-profit conservative group backed by a Republican-linked public relations firm in California. "The reason why we are doing it is we are sick and tired of seeing and hearing headlines by the mainstream media about our defeat in Iraq," Melanie Morgan, a talk radio host for KSFO Radio in San Francisco and co-chair of Move America Forward said... She said the group is going to Iraq to support American troops, who see a disconnection with what they experience and what's being reported in the United States ... leading to "morale problems." But critics, including independent journalists who have reported from Iraq, say the trip is a propaganda mission for the U.S. military and the Bush administration and cannot be considered "journalism" by any standards.

                                                                                                                                                                                                                                    "This is the most pathetic thing I've heard in a long time. They should be ashamed of themselves," Peter Beinart, editor of left-leaning The New Republic magazine, said.

                                                                                                                                                                                                                                    "They have no idea what journalism is, and to pretend they are journalists is laughable," Beinart said. "You do not achieve victory by not facing reality. I think these are the kinds of people that will lead us to lose there."

                                                                                                                                                                                                                                    The delegation ... of seven to 10 conservatives will also include two writers from the Web site FrontPage Magazine, which is published by David Horowitz and the Center for the Study of Popular Culture. ... "I think they are going to discover very quickly that Iraq is an extremely dangerous place," Joe Conason, editor for American Prospect magazine and author of "Big Lies: The Right-Wing Propaganda Machine and How It Distorts the Truth," said. "The realities of the war zone are likely to intrude on whatever ideological disposition they have going in there." ...

                                                                                                                                                                                                                                    Mark Williams, talk show host for KFBK in Sacramento and a member of the delegation, said the group will report "what we see and what we are told," but their collective feeling is that there is mostly good. ... "We are Americans first and journalists second, as opposed to the crop of 'pinkos' that tell us on the news every night that America is going to hell in a hand basket," he said.

                                                                                                                                                                                                                                    Steve Rendall, senior analyst for Fairness & Accuracy in Reporting and author of "The Way Things Aren't: Rush Limbaugh's Reign of Error," said with an attitude like that, the trip will probably be useless in terms of real news-making. ... "If these talk show hosts are going over there to find good news no matter what, their trip is useless," he said. "It would be laughable if it wasn't as troubling as it is when they call it 'The Truth Tour.'" ...

                                                                                                                                                                                                                                    I was surprised to find this reported on Fox. I may have to stop calling them "Faux News" if they keep this up.

                                                                                                                                                                                                                                      Posted by Mark Thoma on Tuesday, July 5, 2005 at 01:52 AM in Politics, Press

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                                                                                                                                                                                                                                      July 04, 2005

                                                                                                                                                                                                                                      China Escalates the Rhetorical War over Unocal

                                                                                                                                                                                                                                      In the escalating rhetorical battle over the attempted takeover of Unocal, China plays the Adam Smith card:

                                                                                                                                                                                                                                      China Tells Congress To Back Off Businesses, By Peter S. Goodman, Washington Post: The Chinese government on Monday sharply criticized the United States for threatening to erect barriers aimed at preventing the attempted takeover of the American oil company Unocal Corp. … Four days after the House of Representatives overwhelmingly approved a resolution urging the Bush administration to block the proposed transaction as a threat to national security, China's Foreign Ministry excoriated Congress for injecting politics into what it characterized as a standard business matter. "We demand that the U.S. Congress correct its mistaken ways of politicizing economic and trade issues and stop interfering in the normal commercial exchanges between enterprises of the two countries," the Foreign Ministry said in a written statement. … Those words, the latest rhetorical volley in an escalating trade battle, officially elevated the takeover battle for Unocal into a bilateral issue involving Washington and Beijing, raising the stakes of the outcome. … some members of Congress have taken to portraying China's appetite for energy as a threat to U.S. interests. They are painting CNOOC's effort to capture Unocal as an attempt to siphon off energy that would otherwise land in the United States, a proposition that analysts call dubious because most of Unocal's outstanding contracts supply customers in Asia. …

                                                                                                                                                                                                                                      This statement puts it into perspective:

                                                                                                                                                                                                                                      But analysts say the issue has thus far produced little that could alter the relationship between the two governments, because Beijing has grown sophisticated at distinguishing between rhetoric from Capitol Hill -- where Thursday's resolution was nonbinding -- and policy from the White House, which has said little on the subject….

                                                                                                                                                                                                                                      And I found this quote, which implies China’s appetite for U.S. debt is waning and Unocal is the first in a long string of attempted acquisitions, interesting:

                                                                                                                                                                                                                                      … the quest for Unocal and other foreign companies is being construed by some as a sign of diversification. "We invest too much in U.S. federal bonds, and they don't make us much money," said Pan Rui, a professor at the Center for American Studies at Fudan University in Shanghai. "Now we're learning to invest more wisely, to try to invest in American companies and industries."

                                                                                                                                                                                                                                      For me, the Unocal issue comes down to the future strategic importance of China's proposed acquisition. National defense is a valid reason for protecting an industry. There are good reasons to maintain a steel industry or an auto industry that can be easily converted into the production of airplanes and tanks or other military necessities in the event of war. An island nation may wish to retain the ability to feed itself as insurance against embargoes even though its farms aren't as productive as those elsewhere. Does Unocal fit this profile? People whose views have earned my respect disagree on this one. Paul Krugman believes the strategic importance is sufficient to block the merger while others such as Alex Tabarrok hold the opposite view. For now, my mind remains open and I have yet to be convinced one way or the other. I need to spend some time sorting this out. But I do believe in free trade and that is my position until the evidence before me convinces me otherwise.

                                                                                                                                                                                                                                        Posted by Mark Thoma on Monday, July 4, 2005 at 08:41 PM in China, Economics

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                                                                                                                                                                                                                                        Deep Impact Fireworks

                                                                                                                                                                                                                                        Link to Video of CNN's Coverage of Deep Impact and spontaneous victory dances at the JPL. It's just a matter of time until scientists learn the entertainment value of "in your face other space agencies" showboating you might find in the NFL:

                                                                                                                                                                                                                                        CNN Video Coverage: Six months after it blasted off, the Deep Impact spacecraft met its cosmic fate today -- in a hyper-speed smashup with a comet. NASA scientists steered a probe about the size of a washing machine directly into the path of a comet about half the size of Manhattan. Scientists hope the collision -- and what comes out of it -- will unlock the inner workings of comets.

                                                                                                                                                                                                                                        Note: Click on image for larger version

                                                                                                                                                                                                                                          Posted by Mark Thoma on Monday, July 4, 2005 at 12:50 AM in Science, Video

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                                                                                                                                                                                                                                          July 03, 2005

                                                                                                                                                                                                                                          Liberal Bias in College Classrooms

                                                                                                                                                                                                                                          This editorial from the Christian Science Monitor raises, once again, the issue of liberal bias in college classrooms. I do my best to avoid bias, and this letter to the editor explains my view on this topic in 250 words or less. In addition to the letter, I'll add that if you examine the Op-Eds written by my colleagues in recent months, you will be hard pressed to label them as anything but conservative in their application of economic principles to local and national issues.

                                                                                                                                                                                                                                          Conversations with students and others who hold conservative views tell me that they are, at times, uncomfortable expressing those views in classroom discussions and around campus. There are a wide variety of reasons why this might be that range from a reluctance to express a minority view in public, something that’s tough at any age (and blogging makes that clear!) to true bias and fear of public redressing by the instructor. My experience is that true bias is far less common than is generally presumed, even in the often identified problem departments. But if we cannot ask the question, if we cannot take a look at ourselves and make sure that we are as free as we can be of bias, then we have not learned the lessons we strive to teach our students. If we can look at ourselves honestly and take corrective action if needed, then the solution in this editorial is a good one:

                                                                                                                                                                                                                                          Political Bias in College Classes, The Monitor's View: Debates on intellectual diversity, academic freedom, and support for pluralism routinely convulse college and university campuses like periodic tremors along a geologic fault line. This is a normal and healthy trait of higher education. But of late, the needle on the academic seismograph has been trembling more than usual from charges, many well founded, that over the past decade the ideological balance on campus has tipped too far leftward. Openly conservative students feel their grades are compromised by overly liberal professors - so much so that many state legislatures and the US Congress indicate they may take up the matter with legislation on an academic bill of rights. This would be disastrous. US higher education is the envy of the world and is fully capable of reforming itself. The open discussion of faculty bias already under way is sowing the seeds for its solution. A recent statement issued by a consortium of 27 higher-ed groups, entitled Academic Rights and Responsibilities, makes clear the reforms needed: No student or faculty member should be put at a disadvantage because of his or her political views; grading and degree granting should be based solely on matters academically relevant to the subject matter of a given course; those who feel they have been unfairly treated should have access to a grievance process. The modern university is grounded on the ideas that there is no human truth that cannot be challenged and no point of view that has a monopoly on wisdom. At a time when debate in Congress routinely reaches impasse, when media treat the term civility like a quaint Victorian sentiment, college students have a right to learn in a climate that fosters respect for all points of view.

                                                                                                                                                                                                                                          Update: I'll share part of the motivation for this. I always laugh to myself when I'm accused of intolerance. How this happened I'm not sure, but my oldest is

                                                                                                                                                                                                                                          Mark's Oldest Executive Director Monterey County Republican Party Salinas, CA 93901

                                                                                                                                                                                                                                          She is a recent graduate of UCLA and as I talked to her about this and how she felt in many of her classes, my position changed and I decided I needed to take a harder look at this issue. I am very happy her views were challenged in college, that's part of what an education is about, but still, when it's your daughter, it's different. So I may have my own biases.

                                                                                                                                                                                                                                          She tells me today is a busy day for Republicans. I waved Old Glory right back at her. My other two are devout liberals...

                                                                                                                                                                                                                                            Posted by Mark Thoma on Sunday, July 3, 2005 at 04:09 PM in Politics, Universities

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                                                                                                                                                                                                                                            Michael Mandel Misses Fundamental Points

                                                                                                                                                                                                                                            The title is in response to a post by Michael Mandel of BusinessWeek Online. I had hoped this would fade away and thus far my response to Michael Mandel’s posts has been muted (he responded initially to this post about a Robert Samuelson column discussed yesterday in the NY Times and later to this post I wrote commenting on a BusinessWeek Online article). I want to respond one last time to his latest post. This is similar to comments I wrote under PGL at Angry Bear’s post here. It would be best to read what PGL has to say first.

                                                                                                                                                                                                                                            The statement that economists ignore or dismiss technology is misinformed. Mandel is confusing stabilization of output around trend, which does not involve technology, and the determination of the trend itself which does. Until this distinction is clear to him, he will continue to think others miss points. The very latest macro models synthesize the RBC long-run model with short-run models of wage and price rigidities. In such models technology plays a role as do the other factors he cites such as tax rates and monetary policy. Monetary and fiscal policy as Mandel discusses them are stabilization tools. They should not be confused with policies designed to promote growth.

                                                                                                                                                                                                                                            Economists who specialize in stabilization issues do not talk about technology as much as other economists, that’s true. Economists who specialize in growth theory don’t talk very much about monetary policy, etc. They examine factors such as technology, human and physical capital accumulation, growth in the labor force, and so on. Does the focus on stabilization mean that some economists don’t care about growth? Of course not. This is simply specialization (Adam Smith would approve!). To use specialization as a means of saying some economists don’t care about growth misses how human capital, something Mandel is concerned with, builds over time. Specialization is essential in the accumulation of knowledge. Jack of all trades and master of none does not allow science to advance at the fastest possible rate. Mandel's human capital assertions are also puzzling given the prominence of human capital in the new endogenous growth literature.

                                                                                                                                                                                                                                            There are other issues to discuss surrounding Mandel's comments, and it has been provocative so far, but I see no need to carry this "debate" any further. Let's move on to important issues such as Social Security, taxation, budget deficits, trade deficits, wages lagging productivity, growth, education, and so on and drop whimsical and confusing distinctions such as"hairshirts and growth advocates" in favor of distinctions that inform these important issues.

                                                                                                                                                                                                                                              Posted by Mark Thoma on Sunday, July 3, 2005 at 01:17 PM in Economics, Macroeconomics, Press

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                                                                                                                                                                                                                                              Sunday Reading

                                                                                                                                                                                                                                              For all of you spending your 4th of July weekend roughing it at Camp Wireless, here are some newspaper articles to read with your camp coffee while the pancakes and bacon cook on your Outpost Stove:
                                                                                                                                                                                                                                              3D TV, Space Probes, when to show skin, i-IQ, and imploding tops Television That Leaps Off the Screen NASA readies space probe to blast comet NASA bombs a comet - for science Watch Deep Impact's Comet Collision Via Webcast Strange New World Unlike Any Other We're just not that fat Tattoos are showing up all over Test Seeks to Measure Students' Web IQ Lava Dome Top Falls Into St. Helens Crater

                                                                                                                                                                                                                                              Close to home A Livable Shade of Green

                                                                                                                                                                                                                                              To students, this is very old news, but if you haven’t heard Facebook an Internet Sensation on Campus

                                                                                                                                                                                                                                              A tale of privatization After Bail Out, Privatization, School District Starts Over

                                                                                                                                                                                                                                              Invasion of the wife-snatchers Estonians snatch world wife-carrying title again

                                                                                                                                                                                                                                              Plucky bird Zurita is the world's first single-mom penguin

                                                                                                                                                                                                                                              Hope you aren’t fed up with stories about the Fed The Fed's Measure of Consistency Fed Is Only Central Bank Raising Rates

                                                                                                                                                                                                                                              Is there a justice in this world? Conservative Groups Rally Against Gonzales as Justice Confirmation Battle in Senate Could Define Specter's Career Court Decision May Be Bush's Defining Moment Practical Voice in Partisan Times Justice O'Connor Retires; Court's Direction Unclear O'Connor's common sense Bush faces tough choice to fill Supreme Court vacancy O'Conner Steps Down

                                                                                                                                                                                                                                              Ups and Downs Were the Good Old Days That Good? Could a Few Hedge Funds Spoil the Party? Gauging Two Booms

                                                                                                                                                                                                                                              Who gets the cookies? In 2002, More Wealthy People Paid No Tax Economic Growth, Tax Help to Reduce Deficit No Need for States To Fear Estate Taxes

                                                                                                                                                                                                                                              Will they kiss and make up? Blair may 'snub' Bush on climate at G-8

                                                                                                                                                                                                                                              Laissez-faire is best: Political Bias in College Classes

                                                                                                                                                                                                                                              Views and news on Iraq Why Bush Won't Send More Troops Cut our losses in Iraq and get out Is it too early to say 'no more Iraqs'?

                                                                                                                                                                                                                                              Other places in the world China as World Finance Maverick -- Deal With It: Mark Gilbert How can the West help Africa? A global Q&A How Iran's reformers lost their political way Commentary: Play Fair -- And Insist That China Do The Same

                                                                                                                                                                                                                                              And one I need to take seriously Not too late to plan a vacation

                                                                                                                                                                                                                                                Posted by Mark Thoma on Sunday, July 3, 2005 at 02:52 AM in Economics, Reading

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                                                                                                                                                                                                                                                The Divergence of Wage Growth and Productivity Growth in Recent Years

                                                                                                                                                                                                                                                What is causing the change in the relationship between productivity growth and wage growth in recent years? Is this a temporary change, or has there been a permanent shift in the relationship? Importantly, is the change driven by economic fundamentals or is it due to changes in the tax structure, regulation, immigration policy, trade policy, and rules regarding unionization? Research is ongoing in these areas, but unfortunately it is too soon to answer some of these questions. Not enough time has passed since the changes became evident to make definitive statements in many areas. However, Robert Gordon at Northwestern University gives us an explanation of the driving force behind some of the changes, “Capital's share, he says, has increasingly found its way to upper-income families as stock options, dividends, special bonuses and the like.” He also notes "We had much less income inequality in the first couple of decades after World War II because of strong unions, restricted trade and a decline in immigration," ... "Then all three reversed, which means that the income from productivity falls to the bottom line and for the time being stays there." These quotes are from this article in The New York Times examining these and other issues:

                                                                                                                                                                                                                                                Were the Good Old Days That Good?, By Louis Uchitelle, NY Times: … most Americans in the first three decades after World War II, took a rising standard of living for granted. … can it be that living standards are actually slipping in America? No economist, demographer or historian would make that case. Living standards, after all, almost never go backward … But … the trajectory is no longer the steadily upward line ... Instead, the line appears to be climbing erratically. …

                                                                                                                                                                                                                                                "When you talk about living standards, you have to focus on people in the middle," said Robert Gordon, an economist at Northwestern University. "A lot of the goodies … have gone to the people at the top at the expense of the broad mass of Americans in the middle." Kevin Hassett, director of economic policy studies at the American Enterprise Institute, argues that … mainly the earned income tax credit [is] raising living standards for low-income families by more than many people realize. ... "… you have to look at their consumption, not their income, to gauge standard of living. And consumption has significantly outperformed income."

                                                                                                                                                                                                                                                While income and consumption are the chief measures of a nation's standard of living, other … indicators … are not doing so well. Life expectancy … while still rising, has fallen behind that in France, Germany and Japan. Home ownership is at a record high for the population as a whole, but it has dropped since the 1970's for some groups - working families with children ... 25 percent of the nation's families also worry all or most of time that they won't be able to pay their bills. ... And in many cases, public services are not holding their own. "Thirty years ago a lot of public goods were free, and now they are fee-based," said Michael Hout, a sociologist at the University of California, Berkeley. "Even the Grand Canyon charges, and many public schools are engaged in fund-raising. So public goods that contribute to living standards are more dependent today on family income."

                                                                                                                                                                                                                                                The good news for the nation is that productivity … is rising. When it goes up, … [i]n theory, some of that revenue feeds back into the income of the workers, financing improvements in their standard of living. ... From the late 1940's through 1973, productivity grew at an annual rate of nearly 3 percent, and incomes rose almost as briskly. Then came a horrific slowdown: productivity fell back to an annual growth rate of less than 1.5 percent from the mid-1970's to the mid-90's, and median income hardly rose at all. The revival that started in 1995 brought productivity growth back to its old rate of increase, and for five years incomes also rose smartly. What happened next is tough for economists to explain. The productivity growth rate has stayed strong - rising at an average annual rate of just under 3 percent since 1995 ... But starting in 2000, median income, adjusted for inflation, has grown more slowly every year - and this year the increase is almost imperceptible. "There is no question that a huge gap has opened up between productivity and living standards," said Jared Bernstein, a senior labor economist at the Economic Policy Institute. Not since World War II have productivity and income diverged so sharply …

                                                                                                                                                                                                                                                Productivity, as it rises, throws off more and more income, which is then distributed to capital in the form of profits, and to labor in higher wages, more paid hours and benefits. Labor's share, which has historically represented 60 to 65 percent of the total, has fallen in the last five years to the low end of that range. But for Mr. Gordon at Northwestern, that is only part of the story. … living standards cannot be truly rising if the improvement is so unevenly distributed; in addition, they say, earning a living has become increasingly stressful. Job security … has deteriorated. ... People approaching the age of 65 face a different uncertainty: smaller retirement incomes than their parents enjoyed. That is happening as the nation shifts from a system of fixed monthly pensions to 401(k)-type accounts ... In the process, retirement income is falling from 93 percent of preretirement pay for today's retirees to 80 percent, on average, for the next generation, according to an Urban Institute projection. … Some retirees cannot afford the pension hit, and they continue to work. … Choosing not to work is no longer an option for many families who need two incomes to pay what they consider basic expenses. Two of those expenses - health care and education - have risen faster than incomes … for education, the rising cost is mostly in the purchase of expensive homes in upscale areas known to have good public schools. … "The variation is extraordinary across school districts and even across schools in the same district," said Richard Murnane, an economist at Harvard's Graduate School of Education, "so when you ask about how good the schools are, the measure of central tendency is less interesting than the variation around the average."

                                                                                                                                                                                                                                                Health problems also undermine living standards. Life expectancy at birth is one symptom. ... Height, too, is no longer an American hallmark. … Obesity is now a distinguishing feature. … "Once you are sick, we are doing a better job in treatment," Dr. Thorpe said. "The pace of technological development has probably accelerated since 1980 more than in previous generations. That's the good news. The bad news is that we have larger shares of the population who are sick." For Dr. Thorpe, the much better treatment is clearly a big improvement in standard of living - offset, however, by the big increase in the incidence of illness. … “You can't have a rising standard of living," he said, "if you have people getting less healthy." ...

                                                                                                                                                                                                                                                Posted by Mark Thoma on Sunday, July 3, 2005 at 02:07 AM in Economics, Income Distribution

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                                                                                                                                                                                                                                                July 02, 2005

                                                                                                                                                                                                                                                Surprise Delivery from the New York Times

                                                                                                                                                                                                                                                This provided an unexpected, but pleasant surprise:

                                                                                                                                                                                                                                                Big Media's Power Plays, by Dan Mitchell, New York Times: ... THE SCIENCE SANS THE DISMAL Mark A. Thoma, a University of Oregon associate professor of economics, got some attention in the blogosphere last week on his blog Economist's View (economistsview.typepad.com/economistsview). In it, he took on Robert J. Samuelson, a political columnist for The Washington Post, who wrote a column, "Time to Toss the Textbooks," which seemed to argue that because macroeconomics is a huge, complex, amorphous area of study that is always subject to unpredictable variables, its basic principles are meaningless, and it's just too difficult to understand. The columns assertions included: "Economics textbooks once described the U.S. economy as mainly self-contained Globalization has shattered this model ... More industries face foreign competition or depend on foreign markets ... Savings and investment have also gone global ... All this alters the U.S. economy." Nonsense, Mr. Thoma wrote: "I hate to be the one to break it to him, but we've been adding terms like net exports to our models for a long time. Even principles books now routinely cover this, something that wasn't true 20 or more years ago. I'd guess that's somewhere around the age of the textbook he references when he writes his columns. If I thought it would help, I'd send him a new one."

                                                                                                                                                                                                                                                  Posted by Mark Thoma on Saturday, July 2, 2005 at 10:19 AM in Economics, Macroeconomics, Press, Technology

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                                                                                                                                                                                                                                                  Alfred Marshall’s Ideological Defense of Capitalism

                                                                                                                                                                                                                                                  Alfred Marshall's theory of the firm led him to the belief that, in general, large-scale firms are more efficient. But this created a problem for him because he also believed in the virtues of competition and large firms appeared inconsistent with the competitive model needed for markets to function properly. To reconcile this, Marshall appealed to a long-run evolutionary view of nature and applied it to the business world. (There are bigger issues here that relate to the utilitarian foundations of the invisible hand and Marshall's beliefs, “Marshall did not realize that the utilitarian social ethic was utterly incompatible with an evolutionary approach to economic theory,” E.K. Hunt, History of Economic Thought, Wadsworth, pg. 283, but I'll let Brad DeLong cover the consistency of various social philosophies with utilitarianism - see here, here, and here - Marshall's philosophy discriminates among pleasures and thus contradicts the intellectual foundations of utlitarianism). This quote from Alfred Marshall (1842-1924), Principles of Economics, Book IV, Chapter VIII (1890) illustrates his evolutionary defense of capitalism:

                                                                                                                                                                                                                                                  But here we may read a lesson from the young trees of the forest as they struggle upwards through the benumbing shade of their older rivals. Many succumb on the way, and a few only survive; those few become stronger with every year, they get a larger share of light and air with every increase of their height, and at last in their turn they tower above their neighbours, and seem as though they would grow on for ever, and for ever become stronger as they grow. But they do not. One tree will last longer in full vigour and attain a greater size than another; but sooner or later age tells on them all. Though the taller ones have a better access to light and air than their rivals, they gradually lose vitality; and one after another they give place to others, which, though of less material strength, have on their side the vigour of youth. And as with the growth of trees, so was it with the growth of businesses as a general rule before the great recent development of vast joint-stock companies, which often stagnate, but do not readily die. Now that rule is far from universal, but it still holds in many industries and trades. Nature still presses on the private business by limiting the length of the life of its original founders, and by limiting even more narrowly that part of their lives in which their faculties retain full vigour.

                                                                                                                                                                                                                                                  Competition will eventually topple even the tallest tree. Marshall came to mind as I read this article from the NY Times:

                                                                                                                                                                                                                                                  The Next Heavyweight Champion of Banks, by Julie Creswell, NY Times: This is a tale of two really, really big banks. Both are heavyweights in financial services with trillions of dollars in assets and billions in market capitalizations. Both offer a cornucopia of products and services to consumers and large corporate customers. Both have exhibited voracious appetites in recent years, gobbling up competitors to establish themselves as megabanks with coast-to-coast and even international reach. On the surface, the two financial giants, Citigroup and Bank of America, have business models that appear to be very similar. But there are significant differences. While Citigroup chased after the higher-fee businesses from corporations in the late 1990's, Bank of America focused on the more staid, boring business of serving retail customers. That bet seems to have paid off. ... While it is still the nation's largest bank with $1.48 trillion in assets and a $240 billion market value, Citigroup these days seems stuck. ... Bank of America, from its base in North Carolina, is acting like the Citigroup of old. ... Some on Wall Street are fascinated by the role reversal. "Citigroup has been so traumatized by the events of the last five years that it is no more the wild-eyed risk taker," said Richard X. Bove, an analyst at Punk Ziegel & Company. "We're seeing one company shrink while the other expands. It's only a matter of time before Bank of America is bigger than Citigroup." ...

                                                                                                                                                                                                                                                  I can remember when people worried about IBM taking over the business world, "People in ... business would talk of "IBM and the seven dwarfs" ... IBM's success in the mid-1960s led to inquiries as to IBM antitrust violations by the U.S. Department of Justice, which filed a complaint ... in ... 1969." Was Marshall right? My own view follows Keynes, "In the long-run we're all dead," and I would prefer more vigilance against market power in the short-run than is currently in vogue among regulators.

                                                                                                                                                                                                                                                    Posted by Mark Thoma on Saturday, July 2, 2005 at 02:34 AM in Economics, History of Thought

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                                                                                                                                                                                                                                                    July 01, 2005

                                                                                                                                                                                                                                                    Does the Market Know Something the Fed is Missing?

                                                                                                                                                                                                                                                    Michael E. Kanell of the Atlanta Journal-Constitution quotes a familiar voice:

                                                                                                                                                                                                                                                    Fed increases rates again, further flattens yield curve By Michael E. Kanell The Atlanta Journal-Constitution: ... Yet the Fed on Thursday offered no hint of an end to its rate-boost campaign. Because the Fed likes to warn markets about its intentions, that silence may mean the increases will continue for a while, argued economist and Fed watcher Tim Duy of the University of Oregon. "I am a bit surprised," he said. "If anything, they are a little more optimistic [about the economy] than I would have expected." The Fed's rate increases affect most home equity loans and credit card balances. As the short-term rate rises, so do many payments. However, the binge in home buying and refinancing is fueled by mortgage rates, which are in turn linked to long-term rates. Fed Chairman Alan Greenspan says he is puzzled by the stubborn refusal of long-term rates to rise. But that has not kept the Fed from raising short-term rates, even though some economists are concerned about the closing gap. "There is a lot of worry, and the Fed's statement does not reflect that," Duy said. "The question is, is the market telling us something that the Fed is missing?"

                                                                                                                                                                                                                                                      Posted by Mark Thoma on Friday, July 1, 2005 at 04:37 PM in Economics, Monetary Policy, Press

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                                                                                                                                                                                                                                                      The "Greenspan Put" and Excessive Risk Taking

                                                                                                                                                                                                                                                      This article argues that many people view the Fed as an insurance policy against financial market risk and believe that the Fed would not allow substantial asset devaluation. My own view is that people ascribe all sorts of motives to the Fed that aren’t there. The Fed is trying to tell us that it’s really simple (as are Kash at Angry Bear and Tim Duy in a Fed Watch). Watch output and inflation relative to target and adjust accordingly. We can argue about how to measure output, the target, and how to parameterize “accordingly” in the Taylor rule, but those are details, the essence is simple. The Fed’s behavior is explained very well with a Taylor rule and reinterpreting it as an insurance program or something else is an entertaining exercise, but we probably shouldn’t take it much beyond there.

                                                                                                                                                                                                                                                      However, the broader question of whether the perception that the Fed will protect asset markets is causing overconfidence and excessive risk taking among investors is an interesting issue. For some reason, I’ve been reminded lately of the overconfidence among policymakers in the early 1960s. After the discovery of the Phillip’s curve and the belief that it represented a permanent inflation-unemployment tradeoff, policymakers were very confident in their ability to pick a particular point on the Phillip’s curve and it was widely believed that the stabilization problem was largely solved. History teaches us that such overconfidence in any discipline is generally a bad idea, and the 1970s showed economists that humility is always a valuable trait. Has a run of good luck caused a misperception of the risk of losses so that such overconfidence has emerged again? This article argues there are reasons to believe it has:

                                                                                                                                                                                                                                                      Backstopping the Economy Too Well? - Some Experts Worry Greenspan's Success Bequeaths Risky Overconfidence, By Nell Henderson, Washington Post: In financial markets, they call it "the Greenspan put" -- a belief that if stock or bond prices fall too much, the Federal Reserve will help prop them up ... For many home buyers, it's the sense that house prices will keep going higher … thanks in part to Fed policies under Chairman Alan Greenspan. For many lenders, it's the assumption that borrowers … will have no trouble repaying increasingly risky home mortgage and home-equity loans. But according to some Fed observers, this confidence is … worrisome … Greenspan …and other Fed officials have expressed concern about increasingly risky financial behavior … The chairman even felt compelled to state recently that he cannot foresee the future and prevent all bad things from happening. … Investors have come to perceive the Fed's policies of recent years as "free insurance for aggressive risk-taking," said John H. Makin, an economist at the American Enterprise Institute. "Who doubts that a sharp drop in the market for housing or in the stock market would cause Fed [credit] tightening to stop or even to be reversed?" … People may be taking more financial risks because they reasonably expect the economic waters to remain calm, Greenspan suggested in his February report to Congress: "In the United States, only five quarters in the past 20 years exhibited declines in [economic output] and those declines were small. Thus, it is not altogether unexpected or irrational that participants in the world marketplace would project more of the same going forward." … Greenspan also said recently that the nation's housing boom is an unintended but acceptable side effect of the Fed's efforts to support the economy through difficult times. …

                                                                                                                                                                                                                                                      This article essentially asks if recent economic stability is due to good luck or good policy. If you are interested in explanations for the decline in GDP volatility since 1984 such as good luck, good policy, and better technology (inventory management), see Ramey and Vine (2004).

                                                                                                                                                                                                                                                        Posted by Mark Thoma on Friday, July 1, 2005 at 12:33 AM in Academic Papers, Economics, Monetary Policy

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