December 31, 2005
The Myth That Tax Cuts Pay for Themselves
Economic View A Bit of Doodling About a Tax-Cut Danger, by Daniel Altman, Economic Scene, New York Times: Early last month, without much fanfare, the Congressional Budget Office released a paper called "Analyzing the Economic and Budgetary Effects of a 10 Percent Cut in Income Tax Rates." ... [I]t may be one of the most important government publications in years. As Douglas J. Holtz-Eakin, the budget office's director, writes ..., most predictions of the effects of tax-rate changes "do not include the budgetary impact of any possible macroeconomic effects of tax policies." In other words, the predictions don't take into account how tax cuts could affect the overall size of the economy. It is this omission - one often cited by proponents of tax cuts, especially in the White House - that the paper tries to correct.
The author ..., Ben Page, estimates estimates how an across-the-board cut in income tax rates could generate higher levels of economic activity, potentially replacing lost tax revenue. ... Mr. Page's [results] vary widely depending on his assumptions ... But even within their range, the results answer the fundamental question posed by the Laffer Curve. ... One motivation for Mr. Reagan's tax cuts was a guess that the United States was on the right side of the curve - that is, that lowering rates would actually yield more tax revenue over all. Some recent statements by Joshua B. Bolten, President Bush's current budget director, seem to indicate that he still believes this to be true, though rates are much lower now than when Mr. Reagan took office in 1981. ...
The recent analysis by Mr. Page at the Congressional Budget Office dismisses the idea that tax cuts may actually improve the government's fiscal situation. Even in his most generous scenario, only 28 percent of lost tax revenue is recouped over a 10-year period. The United States, it seems, is firmly planted on the left side of the Laffer Curve. Recent experience corroborates this prediction. In the second quarter of 2001, just before the first of President Bush's tax cuts took effect, federal receipts from personal taxes accounted for 10.3 percent of the economy. By the end of the post-recession slump, receipts had dropped to 6.4 percent. But in the third quarter of 2005, with the economy booming, they were still under 7.5 percent - an enormous difference. In dollar terms, federal receipts from personal income taxes, at $802 billion in 2004, are still lower than they were in 1998 ($826 billion) and much lower than in 2001 ($994 billion). ...
Yield Curves and Interest Rate Spreads
There is another way to present these data in terms of spreads. Here for example the spread between the 10 year (120 month) and 3 month rates is 10% - 3% = 7% indicating an upward sloping yield curve between these two points. Similarly, the spread between the 5 year (60 month) and 3 month rates is 5% - 3% = 2% again indicating an upward sloping yield curve between those two points. A third spread can also be calculated between the 10 year and 5 year rates and this is 5% (the line connecting the 3 and 120 month rates is not shown but is easy to visualize).
The following graph presents the spreads between the federal funds rate, an overnight borrowing rate between banks, and the 3 month, 6 month, 1 year, 3 year, 5 year, 7 year, and 10 year Treasury rates. Again, recall that if the particular spread is negative, the yield curve drawn through these two points would be negatively sloped:
Two popular spreads (see here) are the difference between the 10 year and 3 month rates, and between the 10 year and 2 year rates. Here's a graph showing each:
As the graphs show, the spreads move in concert for the most part with the largest movements, as expected, for the largest spreads. The particular choice of a spread determines the level of the difference, with positive spreads more likely when the time to maturity is further apart, but the particular choice is somewhat arbitrary.
This brings up one more point. As many, including Jim Hamilton and Arturo Estrella have emphasized the yield curve should not be used in a binary fashion. That is, it should not be used to say all is fine until it has a negative slope, and once it has a negative slope, to say a recession is coming. One reason is that whether the spread is positive or negative in a given time period can depend upon the particular spread examined. Another is that the change in the chance of a recession is gradual, not binary. Historically, the narrower the spread between long and short rates, the slower is output growth on average, see Hamilton for more on this. There is not a sudden jump in the probability of a recession when one particular spread turns negative despite what recent news reports may have led you to believe. And as all who discuss this topic emphasize, the connection between the yield curve, interest rate spreads, and the probability of a recession is far from certain. A flatter yield curve does not gurantee slower growth.
The Price of Tax Cuts
Holiday surprise for the poor, by Clarence Page, Washington Times: ...[C]ongressional conferees have come up with a Grinch-style lump of coal for Americans who don't have a lot of political clout. ... Vice President Dick Cheney cast the tie-breaking vote on a budget that would trim federal spending, mostly from popular social programs. Senate Republican leaders were puffed up with pride over the trims they managed to impose ... on the growth of such programs as Medicare, Medicaid and student loans. Their ostensible purpose was to cut the deficit... But that savings probably will vanish like a drop in a barrel of red ink in the wake of President Bush's tax cuts, the most recent of which awards $70 billion in capital-gains tax cuts for mostly upper-income earners and investors. ...
[T]he ... bill does less to reduce the deficit than to shift its burden to poor and middle-class folks who, for example, need help paying for a nursing home or putting their kids through college. Yes, the biggest savings, $12.7 billion over five years, come from student loan programs. It would fix interest rates on student loans at 6.8 percent... The rate will be fixed, not adjustable, even if commercial rates are lower. Since student loan rates now stand at 5.375 percent, students who are thinking about consolidating their student loans to lock in a low rate for the life of their loans are strongly advised to consolidate immediately.
Note to young folks: Consider this your political payback for not voting in greater numbers. Not that older folks got much more respect ... Out-of-pocket costs for the poor people who rely on Medicare ... would go up by way of increased copayments and premiums for a net five-year savings of an estimated $6.4 billion. States also will be allowed to scale back some Medicaid benefits, while tightening eligibility for Medicaid nursing home reimbursement. Net five-year savings: $4.8 billion. ... Student loans are a true investment in enterprising students ... Nursing home aid has become a last-ditch help to many middle-class families. Yet, at a time of rising costs, Congress has put the budget-cutting knife to these very worthwhile and popular programs as if they fostered laziness...
Is Kimchi for the Birds?
Kimchi Sales Rise on Link to Possible Bird Flu Cure, by Elissa Silverman, Washington Post: Moon K. Yoon sensed something was up about two months ago when the 16-ounce jars of kimchi started moving quickly from the shelves ... in Fairfax, a sign that interest in the spicy cabbage dish had moved beyond the Korean customers who typically buy it by the gallon. ...[S]ales of ... freshly made kimchi have increased 55 percent, compared with a year ago ...
A sudden new joie d'epice in the American diet? Try avian flu. Blame it on the Internet ... publication of a minor study by a South Korean academic last spring has apparently triggered a minor run on kimchi, a daily staple of the Korean diet that the bland-of-palate are likely to avoid ... Which presents a potentially difficult choice given the work of Kang Sa-Ouk of Seoul National University, who took 13 chickens infected with avian flu virus and a couple of other diseases, fed them kimchi juice and found that 11 of the birds recovered.
Word of the study has been circulating on the Internet. ... [T]he National Institute of Allergy and Infectious Diseases, where callers have turned seeking validation of the idea that kimchi may ward off avian flu... said. "Although it certainly sounds interesting, NIAID, unfortunately, can't comment on the dish's effectiveness as we have not studied it," ...
Yoon and his fellow grocers have also gotten lots of questions about the dish's taste and its pungent smell. "It's hard for me to explain the taste," Yoon said. The most common preparation of kimchi for sale in markets begins with sliced Napa cabbage, which is salted, set aside for hours and then rinsed. Most traditional recipes add plenty of crushed garlic, as well as ginger, onion, sliced radish and fish sauce to the cabbage. And lots of hot pepper ... "We're selling more small jars," said Kei Kim, the manager of the Grand Mart in Seven Corners near Falls Church. "They are scared -- they try a little."
Posted by Mark Thoma on Saturday, December 31, 2005 at 01:03 AM in Economics
December 30, 2005
Measuring Progress in China: Going Beyond GDP Growth
Economist warns of excessive growth, China View: Beijing, Dec. 30 (Xinhuanet) -- Chinese economist Hu Angang suggested in one of his reports to be submitted to the central government that ... [t]he value of the gross domestic product (GDP) or its growth rate should not be used to evaluate the performance of local governments below the provincial level... As a substitute, Hu stressed public services, social administration and market supervision be taken as new standards to evaluate their performance. ... But provincial governments and the central government should still have their GDP statistics, Hu said in his report.
Hu, an expert on macroeconomics at China's prestigious Qinghua University in Beijing, ... [said] China targets to double its per capita GDP in 2010 from that of 2000, which means an annual GDP growth rare of 7.2 percent is enough for the country to realize the goal. But a large number of Chinese provincial governments have set their economic growth targets higher than 8 percent for the next five years, and lower governments have set their economic growth rates even higher. This will surely result in excessive economic growth at the expense of the environment and resources, said Hu.
Hu urges local governments to develop their local economies in a rational and scientific way in the next five-year period (2006-2010). In his report, the economist lists 30 obligatory indexes to evaluate the government's performance, including employment, energy consumption, control of environmental pollution, transfer of rural labor force, law and order situation, and coverage of social security. "All these indexes reflect the basic obligations of the government in managing society and offering services to the public under the market economy," said Hu...
Mammas Should Let Their Babies Grow Up To Use BioWillie?
His Car Smelling Like French Fries, Willie Nelson Sells Biodiesel, by Danny Hakim, NY Times: Willie Nelson drives a Mercedes. But do not lose faith, true believers. The exhaust from Mr. Nelson's diesel-powered Mercedes smells like peanuts, or French fries, or whatever alternative fuel happens to be in his tank. ... Willie Nelson has birthed his own brand of alternative fuel. It is called, fittingly enough, BioWillie. And in BioWillie, Mr. Nelson, 72, has blended two of his biggest concerns: his love of family farmers and disdain for the Iraq war. BioWillie is a type of biodiesel, a fuel that can be made from any number of crops and run in a normal diesel engine. ... The rationale is that it is a domestic fuel that can provide profit to farmers and that it will help the environment, though environmentalists are not universally enthusiastic about it...
Every alternative to oil ... has its drawbacks. Biodiesel would reduce most emissions of smog-forming pollutants and global warming gases, and it could be used instead of foreign oil. But some studies show that it increases emissions of one harmful pollutant, nitrogen oxide, and it could not be produced in vast enough quantities to supplant oil-based fuel, or come close to it, unless the nation starts turning the suburbs over to farmland. And as with ethanol, producing great quantities of biodiesel from corn or soybeans could drive up food prices.
Bill Reinert, Toyota's national manager for advanced technologies, said ... "I frankly don't see biodiesel being an early alt-fuel player across a wide swath of geography. It's a boutique fuel. There's not enough payoff and not enough people into it." Peter J. Bell, the chief executive of ... a distributor of biodiesel that is working with Mr. Nelson, said of the nation's nearly 200,000 gas stations, "650 carry biodiesel, so we have a job in front of us."...
Daniel Becker, the Sierra Club's top global warming expert, said ... "In order to grow soybeans, you need multiple passes over the field with diesel tractors, you need a lot of fertilizer that's energy intensive to produce and, at the end of the day, you have a product that is no boon for the environment." He went on: "If you're going to go to the trouble of using an alternative fuel, use a good alternative fuel. If you really want to listen to Willie Nelson, go buy one of his records and play it in a hybrid."...
Trimming to the Core of the Matter
New Economist, Measuring core inflation in US and Canada: How best can central banks measure core inflation? Two new central bank working papers shed some light. New York Fed Staff Report no. 236 by Robert Rich and Charles Steindel provides A Review of Core Inflation and an Evaluation of Its Measures. Based on the "desired attributes" of ease of design, accuracy in tracking trend inflation, and predictive content for future movements in aggregate inflation, they identify a number of possible core inflation measures. But no one measure is best:
We find that most of the candidate series, including the familiar ex-food and energy measure, demonstrate the ability to match the mean rate of aggregate inflation and track movements in its underlying trend. In the within-sample analysis, we find that core measures derived through exponential smoothing, in combination with simple measures of economic slack, have substantial explanatory content for changes in aggregate inflation several years in advance.
In the out-of-sample analysis, however, we find that no measure performs consistently well in forecasting inflation. Moreover, we document evidence of some parameter instability in the estimated forecasting models. Taken together, our findings lead us to conclude that there is no individual measure of core inflation that can be considered superior to other measures.
Meanwhile a Bank of Canada working paper by Frédérick Demers and Annie De Champlain, Forecasting Core Inflation in Canada: Should We Forecast the Aggregate or the Components?, concludes that "it remains difficult to properly model and forecast monthly core inflation in Canada" - although using disaggregate data helps.
Paul Krugman: Heck of a Job, Bushie
Heck of a Job, Bushie, by Paul Krugman, Commentary, NY Times: A year ago, everyone expected President Bush to get his way on Social Security. ... A year ago, everyone thought Congress would make Mr. Bush's tax cuts permanent, in spite of projections showing that doing so would lead to budget deficits ... But Congress hasn't acted... A year ago, Mr. Bush made many Americans feel safe, because they believed that he would be decisive and effective in an emergency. But Mr. Bush was apparently oblivious to the first major domestic emergency since 9/11. ... [A]ides ... finally decided, days after Hurricane Katrina struck, that they had to show him a DVD of TV newscasts to get him to appreciate the seriousness of the situation.
A year ago, before "Brownie, you're doing a heck of a job" became a national punch line, the rising tide of cronyism ... unqualified political appointees attracted hardly any national attention. A year ago, hardly anyone ... had heard of Jack Abramoff, and Tom DeLay's position as House majority leader seemed unassailable.
A year ago, Dick Cheney, who repeatedly cited discredited evidence linking Saddam to 9/11 ... was widely admired ... A year ago, Howard Dean - who was among the very few ... to question Colin Powell's prewar presentation to the United Nations, and who warned... that the occupation of Iraq would be much more difficult than the initial invasion - was considered flaky and unsound.
A year ago, it was clear that before the Iraq war, the administration suppressed information suggesting that Iraq was not, in fact, trying to build nuclear weapons. Yet few people in Washington or in the news media were willing to say that the nation was deliberately misled into war until polls showed that most Americans already believed it.
A year ago, the Washington establishment treated Ayad Allawi as if he were Nelson Mandela. ... But Mr. Allawi turned out to be another Ahmad Chalabi, a hero of Washington ... who had few supporters where it mattered, in Iraq. A year ago, when everyone respectable agreed that we must "stay the course," ... It would have been hard to imagine the top U.S. commander in Iraq saying, as Gen. George Casey recently did, that a smaller foreign force is better "because it doesn't feed the notion of occupation."
A year ago, Mr. Bush hadn't yet openly reneged on Scott McClellan's 2003 pledge that "if anyone in this administration was involved" in the leaking of Valerie Plame's identity, that person "would no longer be in this administration." ... A year ago, we didn't know that Mr. Bush was lying, or at least being deceptive, when he said at an April 2004 event promoting the Patriot Act that "a wiretap requires a court order. ...When we're ... chasing down terrorists, we're talking about getting a court order before we do so. ... constitutional guarantees are in place when it comes to doing what is necessary to protect our homeland, because we value the Constitution."
A year ago, most Americans thought Mr. Bush was honest.
A year ago, we didn't know for sure that almost all the politicians and pundits who thundered, during the Lewinsky affair, that even the president isn't above the law have changed their minds. But now we know when it comes to presidents who break the law, it's O.K. if you're a Republican.
Update: Full column.
Take Your Ball and Go Home
Called out at home, Editorial, LA Times: It has always seemed puzzling that Major League Baseball could have the chutzpah to call its annual tournament the World Series, given that nearly all its teams play in U.S. cities. Now, the league's effort to broaden its global reach has hit a roadblock put up ... by the Treasury Department. Shortly after Olympics officials decided to boot baseball from the Games after 2008, Major League Baseball announced it would start a global springtime tournament to be held every four years. Called the World Baseball Classic, it would pit American stars against the best players from other baseball-loving nations. It's a great idea ... if not for the United States' hysterical policies on Cuba — one of 16 nations selected for the March 2006 tournament.
Because a four-decade-old trade embargo prohibits Americans from entering into contracts by which Cuba may profit, Treasury officials have ruled that Cuba, which would earn at least 1% of the proceeds from the tournament, cannot participate. A proposal stipulating that the Cuban team would receive nothing more than free room and board is pending. Washington should accept it rather than hand Cuban leader Fidel Castro a propaganda victory.
Were the Cuban team to join the tournament, Castro would have more to fear than the U.S. After playing the Baltimore Orioles in an exhibition series six years ago, the Cuban team suffered a wave of defections. Castro was hesitant to let a team enter the tournament for fear that the players he uses as propaganda tools would follow suit. Now Washington has offered him a convenient excuse to pull out, and ... vilify the United States.
Treasury's decision seems particularly counterproductive given that Cuba plays U.S. teams in a number of international sporting events — the Olympics and the Pan American Games... — and that it's not difficult to prevent the Cuban government from profiting. During the Baltimore exhibition series, all proceeds went to American and Cuban charities that promote athletics. But the decision is in keeping with President Bush's Cuba policy, which has departed from the slight detente between the countries since the 1990s by severely tightening travel restrictions...
Let them play.
December 29, 2005
Market Power and Health Care Prices
Pay More, Get Less, by Ezra Klein, Tapped: A fair number of libertarian and conservative economists tend to claim that the high costs of care in America are a simple result of how much we pay for services. They, predictably, ascribe the impressive sums to the awesome technologies and complicated operations we deploy, a quality of care apparently inconceivable in any other country. But it's more structural than that. In their (damn good) paper on the variance between U.S. health spending and costs in other countries, Uwe Reinhardt, Peter Hussey, and Gerard Anderson explain:
Distribution of market power and prices. In a previous paper we argued that Americans pay much higher prices for the same health services than citizens in other countries pay. There are a number of reasons why this might be so.
First, the distribution of compensation in the United States is wider than in most of the other industrialized countries. The highly trained and highly talented health professionals employed in health care must be recruited from the same talent pool used by other industries offering high compensation, such as law and finance. Because health care is a labor-intensive industry, labor is one factor driving up the cost of producing health care in the United States.
Second, the highly fragmented organization of the financing of health care in the United States serves to allocate relatively greater market power to the supply side of the health system than to the demand side. As we have argued in previous papers, multiple purchasers of care allow U.S. prices to rise above the level attained in other industrialized countries that either endow the demand side of their health systems with strong, monopsonistic (single-buyer) market power (such as the Canadian provincial health plans) or allow multipayer systems to bargain collectively with the providers of health care, sometimes within government-set overall health care budgets (as, for example, in Germany).
So our system, due to the weird structural incentives and glorification of the supply-side, is inherently more expensive. But that doesn't prove we don't use more services and better technologies. For that, you turn to "It's The Prices, Stupid," written by the same team of researchers:
A study by the McKinsey Global Institute followed that more in-depth approach. The research team, which was advised by a number of prominent health economists, based its analysis on four tracer diseases: diabetes, cholelithiasis (gall stones), breast cancer, and lung cancer.31 Using PPP-adjusted U.S. dollars as the common yardstick, the McKinsey researchers found that in the study year of 1990 Americans spent about $1,000 (66 percent) more per capita on health care than Germans did. The researchers estimated that Americans paid 40 percent more per capita than Germans did but received 15 percent fewer real health care resources. A similar comparison revealed that the U.S. system used about 30 percent more inputs per capita than was used in the British system and spent about 75 percent more per capita on higher prices.
So, when tracking the utilization of resources for a variety of treatment-intensive diseases, we spend more and receive less than residents of other countries. It's not that we're offering more or better treatment, but that our "medical-industrial complex" charges exorbitantly for the same treatments available elsewhere.
Ujamaa, the Cooperative Economics of Hip-Hop
Kwanzaa was created to introduce and reinforce seven basic values of African culture ... These values are called the Nguzo Saba which in Swahili means the Seven Principles. ... the Nguzo Saba stand at the heart of the origin and meaning of Kwanzaa...
The fourth principle is Ujamaa:
Ujamaa (Cooperative Economics) To build and maintain our own stores, shops and other businesses and to profit from them together.
Here's a column that finds this principle in hip-hop:
Ujamaa, the cooperative economics of hip-hop, by Ladonna Redmond, Austin Weekly News: There is opportunity within black communities. The untapped economic and intellectual capacity of black communities is mind-numbing. Mainstream solutions that promote community economic stability often result in more nail shops, hair shops and liquor stores emerging in our community or a chain store, whose owners are not local. There is nothing wrong with any of these fine establishments. The only issue is ... [g]enerally, these stores are not owned by African Americans or local residents. ... Black communities cannot build wealth by being everyone else’s customer or patient. We must explore production and distribution in order to create wealth and economic stability in communities of color. If the cornerstone of personal wealth accumulation is home ownership, then the cornerstone of community economic stability is community business ownership.
The fourth Kwanzaa principle, Ujamaa, honors the value of cooperative economics. The definition of cooperative economics is "local people cooperating with each other to provide for the essentials of living." The essentials of living include food, clothes, housing, education, and entertainment. An interesting place to explore the principle of Ujamaa can be found within the hip-hop music industry. ...
I have been quite critical of the hip-hop culture. Images of predatory sexuality are disturbing. It seems that so much of what is honored in the music videos and song lyrics are images of hyper-consumption, fast money, guns and drug dealing. ... The objectification of women is never a good thing... It is well known that artists have sometimes been cheated—Little Richard comes to mind. Many blues artists were never properly compensated for music recorded by singers such as Elvis Presley. Even though their songs made Presley an international icon, he too, died broke. White men mostly owned the most powerful music companies until Berry Gordy, the founder of Motown Records, started his ascent to the highest rungs of the music industry. ...
[T]hose who are involved in the business end of hip-hop seem to be following in Gordy’s footsteps ... These present-day entrepreneurs are not just artists, they are part owners of the labels and they produce and create distribution deals that help them build and accumulate wealth. ... The real story is who these artists are and their ability to build viable, successful businesses with friends and family as supporters. The careers of Russell Simmons and Jay-Z illustrate this point. Each has started a small business that now includes recording labels, soft drink products, and clothing lines. Russell Simmons was president of Def Jam, perhaps the most well known if not most successful hip-hop label. Simmons is currently president of Rush communications. ... Simmons has sold off his interest in many of his companies for an estimated $400 million. It is said that Simmons is more successful than Barry Gordy was during his tenure in the music industry.
Simmons is also credited with creating the plan for business diversification that all hip—hop moguls have tried to emulate. None have followed in Simmons’ footsteps better than Jay-Z. Roc-A-Fella Records is one of the largest U.S. hip hop/rap record labels... The group could not secure a record deal for Jay-Z and began Roc-A-Fella out of frustration. The group began pressing records, selling them out of their trunks and requesting time on local radio. From that, Roc–A-Fella branched into other ventures, which included Rocawear clothing company; Roc4Kids, a community outreach program; and other ventures which include producing movies. Earlier this year, Jay-Z was named president and CEO of Def Jam Records and retained control of Roc-A-Fella. Jay-Z is one of the few African-American record label executives.
Ujamaa speaks to the ability to build and maintain our own stores, shops and other businesses and to profit from them together. A deeper exploration of Ujamaa teaches that within our immediate network of family and friends, someone has the ability to create businesses that will comfort, feed, clothe, entertain and house millions.
Is the success of hip-hop an example of Ujamaa at work? I am not sure this is the example I would have chosen to illustrate this principle. I am also not sure I fully understand the call to "profit from [shops and other businesses] together." Does this mean that successful people with roots in poor communities have more of an obligation to reinvest in those communities than others even if more profitable opportunities exist elsewhere? If an obligation exists, would it be different for a white owner of a factory that employs lower income individuals? Is this a principle of social insurance, of rewarding all those who helped with success, including the community, or a pure communal ethic? I agree with the principle of community business ownership expressed in the column as means of economic development in poor communities, and I believe the obligation to help is shared broadly across society and that government has a key role to play. But I am not sure I know the best way to increase the pace of economic development within these communities.
Having opened this topic up, I feel obligated to point to follow-up pieces as I come across them. Here's one I just stumbled across. Posting this does not imply I agree or disagree with the policies advocated:
A critique of liberal, black economics, by Corey Buckner, Renew America: ...Since the days of Marcus Garvey, there has been a push for Black Americans to separate from the global community and form our own, independent communities. This on the surface level sounds like a very positive and empowering task, but it is marred in its design. Closely examined ... it is easy to see how this idea, like Communism, will never succeed. Black community leaders such as Jesse Jackson and Luis Farrakhan are pushing this propaganda by using Jewish, Greek and Hispanic communities as the examples to be followed. Unfortunately they are negating to share with us that these are global communities, with sects in multiple countries and spanning several continents. The United States of America is not the hub for Jewish culture and Jewish commerce; they have an entire country to call their own.
The Jews are blessed to have an entire country that feeds finances and people into this global community. There are Jewish communities in Europe, Asia, as well as the United States that are all sharing a global community. ... The same is true of the Grecian communities, and even of the Hispanic communities. But the Black American communities are different, as in a global sense, the classification of "Black" means very little. It is not indicative of any community except in America, therefore it is nothing more than a description of a person's physical body. When Nigerians come to America they do not look for a Black community, they look for a Nigerian community. When Haitians come to America they do not look for Black communities, they look for Haitian communities.
For this reason there is no international commerce being pumped into the Black communities of the United States of America. These communities do not have relatives sending us money from overseas to assist us in establishing new commercial venues, or to comfortably finish our college degrees. The only money being pumped into Black American communities come from the earnings of those that live in the community. Even if we kept the ninety-seven percent that was leaving the community in it, we still do not make enough to compete in the global community because our demographics are too small.
Add into the fold that we are being encouraged to only hire from within our own communities, and only do business for and with our own communities. This is a terrible business model to follow, one that no other communities ... follow. Although Jewish communities have businesses that appear to exclusively service Jewish people, there are also businesses that service the non-Jewish communities. So not only are they servicing a global community of Jews, they are also servicing the global community at large. This, my friends is a model for success.
If we are ever going to see an improvement in the Black slums of America it is not going to happen by having a local community that is miniscule in comparison to the global community separating itself to empower itself. We have to become a part of that global community, and become a partner in sharing of its finances and resources. Ironically, leaders like Jesse Jackson are asking for federal money to be given to Black communities so that we can separate ourselves from the donors. ...
Instead of getting caught up in the double talk of these deceptive leaders we need to closely follow the model being given to us by the Hispanic community. Although they have strong family and cultural values, they do not limit their resources and services to their own community. ... I have a Hispanic friend who started his business with one truck and a lawnmower. Now he is making a living cutting the lawns of the global community. How successful do you think he would be had he only sought to cut the lawns of Hispanic people? ...
Gone are the days when whites hated blacks. Yes, racism still exists, but it is not the Willie Lynch system that some black leaders are trying to get you to believe in. Affirmative action is not necessary anymore because corporate America is regularly surpassing the quotas being set for them. If business on a whole were simply hiring just enough minorities than there would be a case for its continuance, but this is not the case. We live in a country where the market will always correct itself. In this global economy we live in, businesses can no longer afford to look past minority workers if they are the most qualified. In the society we live in, the most qualified will find a place, and any business not tapping into the best of the best will soon find themselves unable to compete and out of business.
Since Jesse Jackson is intent on making a higher minimum wage an issue for the Black community ... I would like to expose why it would be damaging to the American economy to keep raising the minimum wage. If Restaurant X charges $1.99 for an order of fries, and pays their fry maker $5.75 per hour, they can afford to hire two fry makers on the basis of their sales. If you raise minimum wage to $7.00 per hour the Restaurant then has to decide where this extra salary will come from. Restaurant X will have to either, fire one of the fry makers or raise the price of the fries. Raising the price of the fries would undoubtedly decrease sales, which would then decrease the need for the second fry maker, thus resulting in the loss of a job. ... Furthermore, is it fair to ask a mom and pop business to pay a sixteen-year-old with absolutely no work experience $7.00 per hour? ... Finally about the proposal of higher minimum wages, I believe that minimum wage jobs are best suited for teens and college students who have very little responsible. ... High wages for mediocre jobs does nothing to inspire members of our communities to accomplish more. If you start as a fry cook when you are sixteen, our current wage structure inspires you to progress. Therefore if you stay with the same company and you work hard, by the time you are thirty-five you will merit more than just a living wage. Where is the inspiration for me to succeed and work hard if I know that I can bounce around from job to job and wherever I land I will make a living wage?
The answer is for us at an early age to begin getting an education, developing a marketable skill, or getting marketable experience. We ... cannot keep letting underachieving adults steal entry-level jobs from upwardly mobile college students and young adults. ... Black Americans should resist following oppressive, class warfare-ensuing leaders down this road because it will be detrimental to all American communities. We have to achieve more, not ask for more. It is up to us to put ourselves in position for better employment, and not expect the Government to raid the Federal economy to help us underachieve.
If Blacks, as a race of people are ever going to truly progress, we need to stop isolating ourselves. ...don't get caught up in the rhetoric of people like Jesse Jackson and Luis Farrakhan, do your own research and examine why decisions are made. The Black American community cannot compete in the global community by itself. ... If we unite as ... brothers and sisters, we can import and export goods and finances into our communities, and we as a family can begin to see our communities all around the world improving. Let's keep our money in our community. ... I am calling on my black ... brothers and sisters to break free from the oppressive, racist, failing tactics of Jesse Jackson and other similar "preachers." ... As black Americans we cannot do it by ourselves, but as a unified .. body we can...
Will China Grow Fast Enough to Overtake the U.S.?
China's Booming Economy Will Never Surpass U.S., by John M. Berry, Bloomberg: China's economy is growing so fast that estimates of its long-term prowess are bordering on the absurd. After Chinese statisticians recently sharply revised up their estimate of economic output in 2004 ..., some analysts said that in 35 years it would overtake the U.S. economy. No way, no how. ... Even if China's GDP were to grow indefinitely at 11 percent a year -- 9 percent real growth plus 2 percent inflation -- and the U.S. experienced 5.5 percent growth -- 3.5 percent real and 2 percent inflation -- it would take the Chinese 40 years to catch up in terms of nominal GDP. Sustainable nominal GDP growth of 5.5 percent annually is well within the capability of the U.S. Eleven percent growth, about what Chinese authorities expect in 2006, isn't remotely possible in the long run. ...
Partly as the result of continued immigration, legal and illegal, U.S. population is increasing by 0.92 percent a year... With no net immigration and with its government's harsh rule of one child per family, China's population is expanding at a much smaller 0.58 percent rate. Surprisingly, given the enormous difference in current populations, Census Bureau projections show that between now and 2050, the U.S. population will rise by 124 million while the Chinese population will increase slightly less, by only 118 million. If those projections prove accurate, the Chinese likely would have no great advantage in terms of a burgeoning labor force as an ingredient for economic growth.
China does have an advantage in the rapid movement of workers from rural agriculture into higher productivity jobs in industry and services. On the other hand, it is a process that can only occur once, just as it was largely completed in the U.S. more than half a century ago.
The other principal source of China's economic growth is its extraordinarily high share of GDP going to investment. "China's investment-to-GDP ratio is still rising -- we estimate it at 47 percent in 2005 -- and this has resulted in a significant build-up of production capacity in many industries,'' Lehman Brothers economists told their clients ... "...there are symptoms of oversupply... "There is an urgent need to rebalance GDP from investment to consumption...'' ... [A]s Chinese incomes rise, so will consumption as a share of GDP, with a more or less corresponding decline in the investment share. ...
Aside from these reasons to question the sustainability of continued annual increases of 11 percent in Chinese nominal GDP, there is the overriding issue of authoritarian rule by the Chinese Communist Party. ... Prospects for U.S. growth generally look good, even though eventually the country is going to have to deal with its low savings rate and huge current account deficit. China will remain a formidable economic competitor. Nevertheless, of necessity its growth will slow before too many more years pass and the U.S. economy will remain the largest in the world.
I had to Walk Barefoot for Two Miles in the Snow to Buy a House
Twenty Years Later, Buying a House Is Less of a Bite, by David Leonhardt and Motoko Rich, NY Times: Despite a widespread sense that real estate has never been more expensive, families in the vast majority of the country can still buy a house for a smaller share of their income than they could have a generation ago. A sharp fall in mortgage rates since the early 1980's, a decline in mortgage fees and a rise in incomes have more than made up for rising house prices in almost every place outside of New York, Washington, Miami and along the coast in California. ... Nationwide, a family earning the median income - the exact middle of all incomes - would have to spend 22 percent of its pretax pay this year on mortgage payments to buy the median-priced house ... The share has increased since 1998, when it hit a low of 17 percent ... Although the overall level has reached its highest point since 1989, it remains well below the levels of the early 1980's, when it topped 30 percent. ... Beyond cost, many families who simply could not have bought a house 10 or 20 years ago find themselves able to do so, thanks to changes in the ways banks lend money. In the past, a home buyer often needed to make a down payment equal to 20 percent of a house's value to get a mortgage; today, little or no down payment is common...
For me, it wasn't the price that was the biggest hurdle to buying a house the first time, the payments would not have been much different than the rent I was paying. It was the 10-20% down payment that was the barrier. Going through the whole process is still no fun, but it's better than it used to be.
A Nobel Winner Can Help You Keep Your Resolutions, by Virginia Postrel, Economic Scene, NY Times: Why make New Year's resolutions? ... why wait until Jan. 1? Why not do it today? ... New Year's resolutions help people cope with some of the most difficult conflicts human beings face. So argues ... Thomas C. Schelling, who shared this year's Nobel in economic science ... Professor Schelling ... is famous for his work on conflicts between nation-states, particularly those with nuclear weapons.
One of his best-known ideas is "precommitment." One party in a conflict ... can often strengthen its strategic position by cutting off some of its options to make its threats more credible. An army that burns its bridges, making retreat impossible, is a classic military example. ... In the early 1980's, Professor Schelling applied similar analysis to individuals' internal struggles, seeking to develop what he called "strategic egonomics, consciously coping with one's own behavior, especially one's conscious behavior."
The problem, he suggested, is that pretty much everybody suffers from a split personality. One self desperately wants to lose weight or quit smoking or run two miles a day or get up early to work. The other wants dessert or a cigarette, hates exercise or loves sleep. Both selves are equally valid, and equally rational about pursuing their desires. But they do not exist at the same time.
"What I have in mind is an act or decision that a person takes ...[based upon] preferences [that] differ from what they were earlier..." he wrote ... "If the person could make the final decision about that action at the earlier time, precluding a later change in mind, he would make a different choice ..."
New Year's resolutions help the earlier self overrule the later one by raising the cost of straying. "More is threatened by failure than just the substance of the resolution: one's personal constitution is violated, confidence demoralized, and the whole year spoiled. At least one can try to make it so," ... As many a broken resolution demonstrates, those consequences often are not a big enough deterrent. To make success more likely, Professor Schelling's work suggests a few additional strategies. One is a mild precommitment: not keeping sweets or tobacco in the house, for instance. At the very least, this step forces you to delay indulgence ... and allows time to recover your resolve.
Another approach is to use bright-line rules, which make it harder to cheat through clever reinterpretation. That may explain why many people find it easier to eliminate whole categories of food, like carbohydrates, rather than simply to cut back on calories. "[Z]ero is a more enforceable limit on cigarettes or chewing gum than some flexible quantitative ration," Professor Schelling wrote. He once resolved to smoke "only after the 'evening meal.' " That rule "led to tortured reasoning Thanksgiving afternoon, or flying west across the Atlantic with perpetual afternoon, and it stimulated lots of token sandwiches on leaving the ski slopes to drive home."
For those who cannot face the prospect of an eternity without a favorite indulgence, there is the strategy of delay. ... you give yourself permission to smoke or drink or eat chocolate cake again within a specified time - say, three hours - after deciding to go off the wagon. Like having to go out to buy supplies, this strategy allows time once again to resolve not to indulge. ...
A slight variation allows a third "self" to mediate between the two in conflict by enforcing a prearranged deal: ... for instance ... a new dress in exchange for losing 10 pounds. This system works, however, only on two conditions. First, the incentives have to be strong enough. Then, ... "the 'someone' who wants to turn off his alarm with his eyes closed has to believe that another 'somebody' will later have the fortitude to administer the punishment or deny the reward, when 'they' are really all the same person."
Just do it tomorrow.
Posted by Mark Thoma on Thursday, December 29, 2005 at 01:16 AM in Economics
December 28, 2005
Adjustment Costs and Leap Seconds
Second Thoughts, SciAm Observations: Plenty of sources (for example, the BBC) are reporting on the leap second that will be tagged onto the end of 2005. Daniel Engber's helpful Explainer column at Slate discusses why the world's official timekeepers occasionally fiddle with the length of a day to help keep clocks more in sync with the actual period of the Earth's rotation. (Tidal forces, ice ages, massive earthquakes and even meteorological phenomena can all shift the balance of our planet's mass around its axis and thereby speed up or slow down its spin.) However, generally overlooked in all this coverage is the interesting point that such leap seconds are becoming sources of friction between astronomers and the telecommunications sector, and there is a proposal to eliminate them. Wendy M. Grossman revealed why in a news story in the November issue of Scientific American: randomly extending and shortening days throws a wrench into the GPS system, which relies on atomic clocks, not astronomical time. How much of a problem that really poses is open to discussion; I see, though, that according to RIA Novosti, the Russian military is saying that the 2005 leap second will not affect its Strategic Missile Force. So... thanks for the reassurance on that, I guess.
Here's more from the linked article be Wendy M. Grossman:
To illustrate the issue posed by leap seconds, Levine points to navigation. "Every time there's a leap second, the thing that's moving continues to move, but the clock stops," he explains. "So the people who deal with physical processes do not want leap seconds." ... To keep clocks from drifting too far from the day-night cycle, abolitionists would presumably need to add, say, several leap minutes every few hundred years. The existing ... system, Levine notes, ... sows confusion. For one, the leap second occurs in the middle of the day in Asia and Australia, causing a time hiccup during stock trading. For another, the more timescales there are, the easier it is for a programmer to make an error in calculations. Astronomers are deeply dismayed at the prospect, which would decouple time from the earth's rotation...
Central Bank Communication and Policy Effectiveness
Central Bank Communication and Policy Effectiveness, by Michael Woodford, NBER WP 11898, December 2005: Abstract A notable change in central banking over the past 15 years has been a world-wide movement toward increased communication by central banks about their policy decisions, the targets that they seek to achieve through those decisions, and the central bank's view of the economy's likely future evolution. This paper considers the role of such communication in the successful conduct of monetary policy, with a particular emphasis on an issue that remains controversial: to what extent is it desirable for central banks to comment on the likely path of short-term interest rates? After reviewing general arguments for and against central-bank transparency, the paper considers two specific contexts in which central banks have been forced to consider how much they are willing to say about the future path of interest rates. The first is the experiment with policy signaling by the FOMC in the U.S., using the statement released following each Committee meeting, since August 2003. The second is the need to make some assumption about future policy when producing the projections (for future inflation and other variables) that are central to inflation-forecast targeting procedures, of the kind used by the Bank of England, the Swedish Riksbank, the Reserve Bank of New Zealand, and others. In both cases, it is argued that increased willingness to share the central bank's own assumptions about future policy with the public has increased the predictability of policy, in ways that are likely to have improved central bank's ability to achieve their stabilization objectives. [Open link to version posted at the KC Fed.]
This doesn't follow directly since it's about explicit inflation targets rather than announcing an expected path for short-term rates, but it is related and I've been looking for a reason to talk about explicit inflation targets, commitment, and transparency further because I think there's a mistaken belief from some that commitment is only valuable if it substantially constrains flexibility. But as Mankiw explains in his intermediate level text, this need not be the case. There is value in announcing inflation targets even if it does not tie the hands of central bankers because it holds them accountable for their actions. They can still do mostly as they please, but it's easier to assess policy actions relative to announced goals. This is from Macroeconomics, 5th Ed., by N. Gregory Mankiw, Case Study, pg. 395:
Inflation Targeting: Rule or Constrained Discretion?
Since the late 1980s, many of the world's central banks-including those of Australia, Canada, Finland, Israel, New Zealand, Spain, Sweden, and the United Kingdom-have adopted some form of an inflation target. Sometimes inflation targeting takes the form of a central bank announcing its policy intentions. Other times it takes the form of a national law that spells out the goals of monetary policy. For example, the Reserve Bank of New Zealand Act of 1989 told the central bank "to formulate and implement monetary policy directed to the economic objective of achieving and maintaining. stability in the general level of prices." The act conspicuously omitted any mention of any other competing objective, such as stability in output, employment, interest rates, or exchange rates. ...
Should we interpret inflation targeting as a type of precommitment to a policy rule? Not completely. In all the countries that have adopted inflation targeting, central banks are left with a fair amount of discretion. Inflation targets are usually set as a range an inflation rate of 1 to 3 percent, for instance-rather than a particular number. Thus, the central bank can choose where in the range it wants to be. In addition, the central banks are sometimes allowed to adjust their targets for inflation, at least temporarily, if some exogenous event (such as an easily identified supply shock) pushes inflation outside of the range that was previously announced.
In light of this flexibility, what is the purpose of inflation targeting? Although inflation targeting does leave the central bank with some discretion, the policy does constrain how this discretion is used. When a central bank is told to "do the right thing," it is hard to hold the central bank accountable, because people can argue forever about what the right thing is in any specific circumstance. By contrast, when a central bank has announced an inflation target, the public can more easily judge whether the central bank is meeting that target. Thus, although inflation targeting does not tie the hands of the central bank, it does increase the transparency of monetary policy and, by doing so, makes central bankers more accountable for their actions.6
6 See Ben S. Bernanke and Frederic S. Mishkin, "Inflation Targeting: A New Framework for Monetary Policy?" Journal of Economic Perspectives 11 (Spring 1997): 97-116.
[JSTOR link to Bernanke and Mishkin paper.]
Yield Curve Inversions When Expected Inflation is Low
I am not worried. I believe there is a fundamental difference today versus recent decades. Up until now, I had no faith that monetary authorities were committed to fighting inflation first and foremost and I never would have dared risk a variable interest rate loan. Experience suggested that eventually inflation would return, or there was at least a substantial chance that it could return. Today I would be willing to bet, even for a decade or more, that inflation will remain in check and I would be willing to sign a variable rate contract to try and win that bet (this is not advice on mortgages as I am abstracting from lots of other differences in terms). Up until a year or so ago, I did not have such faith. But monetary authorities have convinced me they will not waiver in their commitment to price stability.
If I am not alone, if there has been a substantial change in long-run inflationary expectations regarding the risk of higher inflation, that flattens the "natural" yield curve. Due to liquidity concerns, long-term rates should still command a premium so the natural state is upward sloping, but I would argue it is fairly flat.
With a flattened "natural" yield curve, and variation around that natural state, it is more likely that an inversion will occur than in the past. But since the natural state of the yield curve is flatter than in the past, an inversion does not represent as much of a deviation from the natural state as it once did and hence does not bring as much consternation with it, at least from me.
Posted by Mark Thoma on Wednesday, December 28, 2005 at 09:38 AM in Economics
Weeding Out the Hacks
Dialing down hack TV shows, by Bruce Bartlett, Commentary, Washington Times: If there is one thing ... Republicans and Democrats all agree about these days it is that there is too much polarization in public discourse; too much name-calling and not enough civil discussion of the issues. A key reason for this, in my opinion, is the nature of cable news, which thrives on 5-minute debates between polar opposites. There are several reasons why this is destructive. First, few intelligent arguments can be made in such a short time. ... you may only have at most two 1-minute segments in which to make your case. ... Consequently, one is usually forced to jump straight to one's conclusion in a cable news debate and assert one's points without being able to develop them or provide essential facts or the logical steps that might convince the open-minded, ignorant or undecided on your issue.
Another problem is that almost everyone who appears on television is now trained to control the agenda when appearing on camera. They know that when the camera is on them they can pretty much say absolutely anything they want. Often this means rote recitation of talking points that may have nothing to do with the issue at hand ... It is also easy to make outrageous claims and cite bogus facts or statistics in support of one's position, knowing your opponent may not have time to correct you. And even if he does, it prevents him from making the points he wanted to make and forces him to argue on your terms. ...
Further degrading the usefulness of cable debates is the fact they are often mismatched in terms of stature. On one side, you might have a college professor or think tank scholar who is a recognized expert in his field. On the other, you might have some nobody with no real expertise from an organization that exists only as a cell phone number to a booker. The debate format tends to make people believe the two are of equal stature, downgrading the views of the true expert while elevating those of the hack.
For this reason, I now demand to know who I may be debating before agreeing to appear in a cable debate. If it is not someone I recognize as a competent peer, I won't do it. Many others in my position feel the same way, which is one reason you tend to see fewer and fewer real experts engaging in cable face-offs and more and more nobodies labeled as party "consultants" or "strategists."
This is also due to the fact genuine experts too often agree on basic points even if they come from contrasting philosophical perspectives. They will at least agree on the facts and the proper analytical framework. Their differences are usually over orders of magnitude, not fundamentals. This makes bad television from the cable news channels' viewpoint, which craves fireworks and sharp differences. Shouting matches are encouraged, agreement is discouraged. Unfortunately, this leaves viewers left thinking there is no real truth and everything is just a matter of opinion, leaving them free to choose whichever side is most conducive to their own personal beliefs, prejudices or preferences.
I would propose cutting back on contrived debates. Why not interview those with opposing views separately and give each more than a minute or two to make their point without having to respond to another person's debating tactics? And why not encourage interviewers to intervene when blatant errors or falsehoods are offered as facts? I think these reforms would raise the level of discourse and the quality of those willing to appear on cable programs by weeding out some of the hacks whose only knowledge on a subject comes from their party's talking points.
I agree that this is a problem, and that hosts, moderators, and so on need to take more responsibility for the presentation of information and the content and structure of debates. But I suspect that if we went to a system where those with opposing views were interviewed separately and the off topic "talking points" and other parts were edited out, the complaint would be over the editorial decisions on what to cut and what to include, something that is less of a problem in face to face "live" debates.
I think the key is to have a credible broker in the middle of the debate however it is constructed, a knowledgeable professional who can control the debate, someone willing to ask tough, pertinent, challenging questions of both sides, and willing to allow time for an informed response. As we weed out the hacks, we can start with the hosts. Is there anyone that both sides trust? There are some hosts in that category, but not many, and that's a reason why the left and the right get their news and opinion, in large part, from different outlets. I think the majority of people would like to see honest debate on economic and other issues, but they are not sure where to find it.
The Economics of Prestige
All That Glitters, by Louis Menand, The New Yorker: In 1987, “Paco’s Story,” by Larry Heinemann, won the National Book Award for Fiction. The acclaim that greeted this selection was less than universal, and the reason ... is that 1987 was also the year of Toni Morrison’s “Beloved.” Morrison’s novel ... had been widely regarded as the favorite. ...[Forty-eight] friends..., after “Beloved” also failed to win the National Book Critics Circle Award for Fiction..., published a statement in the Times Book Review. “Despite the international stature of Toni Morrison,” they complained, “she has yet to receive the national recognition that her five major works of fiction entirely deserve... We, the undersigned black critics and black writers, here assert ourselves against such oversight and harmful whimsy...” A few months later, “Beloved” won the Pulitzer Prize for fiction. Five years after that, Morrison was awarded the Nobel Prize.
James English has a lot to say about this episode in “The Economy of Prestige” (Harvard; $29.95), his ingenious analysis of the history and social function of cultural prizes and awards. He thinks that Morrison’s champions crossed a tacitly accepted and well-established line when they printed their protest in the Times. The transgression was not the complaint that the award had been given to the wrong writer. ... When you have prizes for art, you will always have people complaining that prizes are just politics, or that they reward in-group popularity or commercial success, or that they are pointless and offensive because art is not a competition. English believes that ... when people make these objections to the nature of prizes they are helping to sustain a collective belief that true art has nothing to do with things like politics, money, in-group tastes, and beating out the other guy. As long as we want to believe that ... a work of art is not just one more commodity seeking to aggrandize itself in the marketplace at the expense of other works of art, we need prizes so that we can complain about how stupid they are. ...
Since the nineteen-seventies, English says, there has been an explosion of new cultural prizes and awards. There are now more movie awards given out every year—about nine thousand—than there are new movies, and the number of literary prizes is climbing much faster than the number of books published. ... This doesn’t mean that everyone gets a ribbon. In the awards economy, the rich tend to get richer. Michael Jackson has been given more than two hundred and forty awards in his career. Steven Spielberg has ninety. ... English estimates that among poets John Ashbery is the leader, with at least forty-five prizes and awards. John Updike sets the pace for novelists, with thirty-nine.
English interprets the rise of the prize as part of the “struggle for power to produce value, which means power to confer value on that which does not intrinsically possess it.” ... A work of art has to circulate through a sub-economy of exchange operated by a large and growing class of middlemen: publishers, curators, producers, publicists, philanthropists, foundation officers, critics, professors, and so on. ... [W]e like to think that the recognition of artistic excellence is intuitive. We don’t like to think of cultural value as something that requires middlemen ... in order to emerge. ...
English speculates that this willingness to speak without embarrassment about the significance of prizes and awards, and about the whole economy of cultural production and consumption, may, paradoxically, signal the demise of the prize system. ... In English’s view, therefore, Morrison’s friends and admirers violated the protocols of prize-bashing not because they publicly criticized the choice of the National Book Award judges but because they acknowledged that the award really matters, that it ... helps to validate a book and establish its author. Their statement pointed out, in the frankest terms, that there is a literary marketplace, and that power and authority—“cultural capital,” ... accrue to those who succeed in it. ...
“Caxtons are mechanical birds with many wings,” says the Martian, about books, in Craig Raine’s famous poem, “and some are treasured for their markings.” The Martian doesn’t know why the markings between the covers labelled “Beloved” are more treasured, or represent more cultural capital, than the markings inside the covers labelled “Paco’s Story.” The Martian sees only that human beings attach high value to some of these otherwise identical and interchangeable objects and low value to others, and he/she attempts, by analyzing the system in which the objects are produced, circulated, and consumed, to figure out how this happens. From the Martian point of view, it certainly looks like a competition, because the value of “Beloved” is determined by all the things that make it different from “Paco’s Story.” It’s a relational system: the value of a cultural good is relative to the value of every other cultural good. That most of us on planet Earth deny that competition has anything to do with the esteem that we, as individuals, confer on a particular book or painting or song or movie does not mean that the Martian is wrong. Our denial is just one more thing that needs to be explained. ...
Literature is conventionally taught as a person-to-person aesthetic experience: the writer (or the poem) addressing the reader. Teachers cut out English’s middlemen, the people who got the poem from the writer to us, apparently confirming his point that we have to deny the economics of cultural value in order to preserve the aesthetics. But, once we’re outside the classroom, how rigidly are these conventions adhered to? How many people today really imagine “art” as a privileged category, exempt from the machinations of the marketplace? The literary marketplace has always been a theme of literature: “Tristram Shandy” reflects on its own status as a cultural good; Aristophanes’ “The Clouds” is a satire on literary competition. Since the nineteen-sixties, the constructed nature of the art experience has been one of advanced art’s principal preoccupations. Andy Warhol’s Campbell’s-soup-can paintings are all about art as commodity. ...
As a Martian, or dry economist, this does not seem mysterious. Of course the value of literature - just another commodity - depends upon competition in the marketplace and the forces of supply and demand, and of course we all value things differently. I hate pickles, but some people love them. Who knows why or how that came to be? Fortunately Martians don't need to worry about that too much, though many of us work on these questions. A good is valuable because it yields utility. Why people like art is an interesting question, I don't mean to imply otherwise, just as why people like a particular wine and the role of experts, price, etc. in the signaling process for value is similarly interesting, but we don't need to know why a good yields utility to determine its price. Martians do not need to know why "the markings between the covers labelled "Beloved” are more treasured, or represent more cultural capital, than the markings inside the covers labelled "Paco’s Story"" to determine their price in the marketplace. I have no idea why people like apples more or less than oranges or any other good, why one movie is a hit and another flops and the precise role of expert thumbs in the process, but I can still construct demand curves.
As a Martian, I see the decline in the value of awards from a different perspective. I think art is difficult to value, there is an information problem, and in such cases it pays to consult experts who can vouch for characteristics such as the artist, etc. that help to determine value. It's not as certain as, say, having gold assayed, but experts serve the same purpose. The proliferation of awards can be viewed as arising from the market failure due to imperfect information on quality. By creating false signals of quality - prizes and awards - there are gains to individuals in the short-run, but in the long-run this behavior across individuals undermines the value of the signal. However pure the motivations of suppliers in the artistic process are, and however demand is generated, once the good gets to market we have a pretty good idea about how the price will be set.
Posted by Mark Thoma on Wednesday, December 28, 2005 at 12:45 AM in Economics
December 27, 2005
Was the Cow Palace Built Leaning on Shovels?
Keeping the faith, by Gray Brechin, SFGate.com: Seventy-two years after it first emerged from President Franklin Roosevelt's post-inaugural Hundred Days of epochal legislation, the New Deal rises from the grave to haunt those who hoped they had buried it for good. Its eternal foes ironically resurrected "that man's" memory by attempting to privatize his most popular and enduring legacy. Social Security -- a program whose very name invokes the communitarian ethos that makes the New Deal satanic for those who would privatize risk along with everything else in the public domain -- still easily has enough voting friends that Republicans backed off tampering with it before next year's midterm elections.
But nothing did so much to freshen the fading memory of the New Deal as hurricanes Katrina and Rita. In their ruinous wake, liberal commentators called for similar federal activism to rebuild the South while reactionaries sought to tamp back its dreaded specter... Among the latter, New York Times columnist John Tierney predicted ("Losing the Faith," Sept. 24) that the "1930s nostalgia craze" would quickly founder on the rocks of a public cynicism ... Tierney related how he had lost faith in government after working with a federal antipoverty program in the 1970s. There, he witnessed bored teenagers paid to do little or nothing. ... The Bush administration's calamitous bungling of a natural catastrophe, according to conservatives such as Tierney, only buttressed their own ideological antipathy to the shared risks and responsibilities inherent in New Deal programs. A Louisiana laborer told the columnist that government's unresponsiveness taught him that "The lesson is to save money and be self-reliant." John Wayne rides again.
A 1939 Dorothea Lange photograph reminded me that Tierney's tale of redundant teens was as stale as those of FDR's enemies, who savaged the Works Progress Administration for useless make-work projects. Lange's camera captured a 1939 parade of WPA laborers in San Francisco protesting congressional funding cutbacks. One carried a sign asking, "Was the Cow Palace Built Leaning on Shovels?" (a reference to the city-owned exhibition building that has been paying dividends since it opened in 1941 by hosting everything from Republican Party conventions to Billy Graham revivals, rodeos and the Beatles). Few know that federal workers and grants built the Cow Palace, and that they did so with not a whiff of graft. As waves of corruption and mismanagement charges engulf the present administration, those who have lost faith in government cannot conceive of a regime notable for little scandal even as it employed millions of men and women on public-works projects.
For most Americans, the ubiquitous public landscape of the New Deal is as invisible as it is essential for the functioning of a modern nation. One of the New Deal's first alphabet soup agencies -- the Civil Works Administration -- lasted only for the dire winter of 1933-34. Within three weeks, CWA Director Harry Hopkins put 2 million people to work, a number that soon doubled as legions of laborers built or repaired more than 800 airports, 3,700 athletic fields and 255,000 miles of roads. ... the CWA built or modernized 4,000 school buildings, hired 50,000 teachers for rural schools, and controversially employed about 3,000 artists and writers who, Hopkins insisted, "had to eat, too."
In the coming years, Hopkins' CWA and the Public Works Administration (under "Honest" Harold Ickes) put millions more to work building a network of levees, roads, airports, military bases, schools, community colleges, civic auditoriums, water-delivery systems, sewers, hospitals, zoos and parks still in use today. New Deal workers restored the Statue of Liberty, the Washington Monument and San Francisco's Palace of Fine Arts, and they built the Triborough and San Francisco-Oakland Bay bridges, the Lincoln Tunnel, TVA dams, Treasure Island and the spectacular Timberline Lodge on Mount Hood. Without WPA flood-control projects, last winter's storms would have devastated Southern California at a cost of billions of dollars to taxpayers and insurance companies. Civilian Conservation Corps "boys" stationed in thousands of rural camps meanwhile reforested the nation and clocked in 6.5 million days fighting forest fires. They built 204 museums, restored almost 4,000 historic buildings and constructed 3,116 fire towers and more than 46,000 bridges. While saving families and individuals from destitution, the CCC made the nation's proliferating parklands so gracefully accessible that few who use them are aware of the peacetime "tree army's" heroic contributions to our collective well-being.
FDR called upon Americans to overcome their fear even as his works programs vastly enlarged the public domain ... Those who -- like Tierney -- have lost their faith in what government can accomplish for the common good have but to look around themselves to regain it. The evidence of intelligent design is everywhere; it bears the name of Roosevelt, and it points to the future we could have if we but remembered we once had it.
Robustly Optimal Monetary Policy with Near Rational Expectations
Robustly Optimal Monetary Policy with Near Rational Expectations, by Michael Woodford, NBER WP 11896, December 2005 Abstract The paper considers optimal monetary stabilization policy in a forward-looking model, when the central bank recognizes that private-sector expectations need not be precisely model-consistent, and wishes to choose a policy that will be as good as possible in the case of any beliefs that are close enough to model-consistency. ... The main qualitative conclusions of the rational-expectations analysis of optimal policy carry over to the weaker assumption of near-rational expectations. It is found that commitment continues to be important for optimal policy, that the optimal long-run inflation target is unaffected by the degree of potential distortion of beliefs, and that optimal policy is even more history-dependent than if rational expectations are assumed. ... Conclusion ... And, as in the RE analysis, a crucial feature of an optimal commitment is a guarantee that inflation will be low and fairly stable. The fact that private beliefs may be distorted does not provide any reason to aim for a higher average rate of inflation, while it does provide a reason for the central bank to resist even more firmly the inflationary consequences of "cost- push" shocks. [Open link from author web page.]
Best of Responses to NRO Financial 2005
Brad DeLong: Why Oh Why Can't We Have a Better Press Corps? (I've Got to Stop Saying "National Review Has Reached Its Nadir" Department): Wow! I've got to stop saying, "National Review has reached its nadir." This is worse than anything I've seen before, worse than I had imagined possible. ... But the point isn't to provide or critique economic analysis, is it? The point isn't to inform the readers of National Review, is it? The point is that Paul Volcker--chosen by Republican Richard Nixon's staff to be Undersecretary of the Treasury for Monetary Affairs, chosen by Republican Arthur Burns to be President of the Federal Reserve Bank of New York, chosen by Republican Ronald Reagan's staff to be Chairman of the Federal Reserve Board--has written something inconvenient for the Bushies inside the White House. And so National Review undertakes the mission of trying to murk the waters with clouds of ink. And in this squid-like task, actual knowledge of the economy or of economics is a positive hindrance. The less the writer knows, the better. Enter John Tamny. ...
Remember, this is part of their "Best of" list. You should see the "Worst of NRO Financial 2005." That aside, I want to highlight the statements:
But the point isn't to provide or critique economic analysis, is it? The point isn't to inform the readers of National Review, is it? ... The less the writer knows, the better.
NRO Financial has writers discussing economics who are not professional economists, many cannot even read the professional economic journals and have little idea of the theory or evidence pertaining to the issues they are writing on. Try to find Tamny's qualifications as an economic analyst on the NRO web site or anywhere else. The goal is generally to sell a point of view, or as Brad notes, to muddy the waters rather than present a position based upon a consistent theoretical structure and the corresponding econometric evidence.
Posted by Mark Thoma on Tuesday, December 27, 2005 at 02:05 AM in Economics
Wanted: Nonpartisan Congressional Budget Office Director
The Right Stuff, editorial, NY Times: As director of the Congressional Budget Office, Douglas Holtz-Eakin has been Congress's top economist, handpicked by the Republican leadership. Recently, he had some advice for lawmakers - mostly Republicans - who insist that more tax cuts will foster economic growth and raise tax revenue: "Don't even think about it." ... "You can't grow yourself out of this problem," said Mr. Holtz-Eakin. "It's just too big." That's startlingly straight talk, given that Republicans are determined to pass tens of billions in unpaid-for tax cuts come January. ... Mr. Holtz-Eakin ... has delivered nonpartisan, data-driven research on some of the most controversial issues. Often, what Mr. Holtz-Eakin said wasn't what his bosses wanted to hear. He went on record in 2003 saying that President Bush's tax and spending plans would do little or nothing for long-term economic growth. One report issued under his leadership showed that Mr. Bush's tax cuts heavily favored the wealthiest Americans. Another debunked the politically potent but false contention that the estate tax hurts farmers. By going where the facts and figures led, Mr. Holtz-Eakin also protected his agency, which may be the last bastion of neutral government analysis in Washington. To succeed him, Congressional leaders need a top economist who has a reputation to protect and is a superb number cruncher, fluent communicator of complex issues and good manager.
And willing to fiercely defend, as Holtz-Eakin has, the independence and neutrality of the Congressional Budget Office against political pressure. Here's a little more from the CBO web site:
...The Appointment of the Director: The Speaker of the House of Representatives and the President pro tempore of the Senate jointly appoint the CBO Director, after considering recommendations from the two budget committees. The term of office is four years, with no limit on the number of terms a Director may serve. Either House of Congress, however, may remove the Director by resolution. At the expiration of a term of office, the person serving as Director may continue in the position until a successor is appointed. CBO has had six Directors since its inception in 1975. Douglas Holtz-Eakin is the current Director; his term of office ends in January 2007. He was preceded by Dan L. Crippen, June E. O'Neill, Robert D. Reischauer, Rudolph G. Penner, and Alice M. Rivlin...
CBO's Staff:The Director appoints all CBO staff, including the Deputy Director, and all appointments are based solely on professional competence, without regard to political affiliation. ... CBO is composed primarily of economists and public policy analysts. About 70 percent of its professional staff hold advanced degrees in either economics or public policy...
Sachs: Time for Action on Poverty
It is time for words to give way to meaningful action, by Jeffrey Sachs, Financial Times: ...There was a lot of talk this year about ending extreme poverty; at the Gleneagles summit of the Group of Eight in July, the United Nations world summit in September and in a feast of concerts, television shows, books and articles around the world that raised public awareness and interest. But these words have yet to make a discernible difference for the hungry, destitute and dying. Action needs to proceed at every level, from the local to the national and the international. ... At the end of next year, each must be asked a single question: what did you do this year to end extreme poverty?
The key breakthrough in 2005 was the commitment of the European Union donors to achieve the vaunted target of 0.7 per cent of gross national product in official development aid by the year 2015. An intermediate benchmark of 0.56 per cent of GNP in aid as of 2010 was established. While Europe led, the Bush Administration sulked, refusing to be held to what it called an “artificial” standard. How cheeky of the world’s richest and most powerful country, one that devotes $500bn per year to the military, yet a pathetic $4bn per year to the hungry and dying of Africa (less than 4 cents for every $100 of US GNP). Most of that miserly aid to Africa is emergency food aid and US consultant salaries, rather than real development aid. ...
There must be increased resources to Africa. The point is not money per se, but what money can buy: bed nets and medicines to fight malaria, anti-retroviral medicines for Aids, fertilisers for replenishing soil nutrients, hardware and software for rural connectivity and countless other practical steps that could relieve hunger, disease and isolation. When practical measures have been undertaken backed by private philanthropy, as in the millennium villages of Kenya and Ethiopia, crop yields and food output have more than doubled in a single season. School attendance has soared in response to school feeding programmes and the elimination of user fees. Healthcare has been dramatically bolstered through the provision of local clinics and the mass distribution of long-lasting insecticide-treated bed nets to fight malaria. The successes are still on a small scale. It is time for the official donors to build on these results. ... The ... reality that matters is that millions of children are dying each year...
More Aggressive Antitrust Enforcement by European Authorities
A Crackdown on Cartels by European Regulators, by James Kanter, NY Times: It was the kind of smoking gun that antitrust investigators dream of: a note, handwritten by the president of France Télécom, the largest French cellphone operator, describing plans to carve up the market the same way wartime leaders carved up the Continent in 1945. "Unjustifiable," the French Competition Council ruled this month. ... Across Europe, formerly docile cartel authorities are cracking down on collusion in economically weighty sectors like telecommunications, construction and banking. ... The action against telecommunications operators in France mirrors similarly aggressive activities in Germany, Italy and Britain. The upswing comes as the European Commission gives more leeway to local authorities. With an enlarged European Union of 25 countries, the commission formally jettisoned some of its antitrust responsibilities last year, leaving it to national authorities to monitor their own markets while the European Union concentrates on catching bigger fish operating across national borders. Another factor behind the change, said Julian Joshua, a former top cartel enforcer at the commission, is pressure from Washington to stamp out overseas cartels that damage United States interests...
Der Spiegel Interviews ECB President Trichet
Interview with Der Spiegel, Interview with Jean-Claude Trichet, President of the European Central Bank, conducted by Thomas Tuma and Sven Afhüppe (Der Spiegel) on 19 December 2005 and published in the edition of Der Spiegel dated 23 December 2005:
SPIEGEL: ...at the beginning of December the ECB increased its key interest rate to its current level of 2.25 percent, the first increase in more than two years. Was that the first in a series of increases of the kind that has already taken place in the USA?
[Trichet:] As regards future monetary policy I reiterate what I said ... following our most recent decision: “We did not decide “ex ante” to engage in a series of interest rate increases. We will in the future take the decisions that will be necessary to deliver price stability, to be credible in delivering price stability over time and to preserve the solid anchoring of inflationary expectations at levels consistent with price stability”. ...
The EU Finance Minister Jean-Claude Juncker wasn’t as cautious as you. He called your interest rate increase a ‘hasty gesture’. He said that economic growth was more important than price stability.
I’m firmly convinced that the two go well together. Price stability is a prerequisite, a necessary condition, for sustainable growth and job creation. ...
Nevertheless, many Germans are still mourning their Deutschmark.
When we started out, we had to promise twelve nations that the new currency would be at least as good as their old ones. So the euro had to be at least as good as the best currency of all. At that time there were a few ‘best’ currencies, one of which was the Deutschmark. We’ve kept that promise. ... our long term market interest rates are at their lowest ever level since the establishment of the Bundesbank. I am proud that the euro is as trustworthy as the DM was.
The only problem is that you aren’t always understood. Politicians throughout the euro zone criticised your interest rate decision. If we disregard the exploding energy prices, the feared inflation really isn’t that bad.
I think we are well understood by the people of Europe. Our fellow citizens are very keen on having price stability. They understand that it is better to prevent than to cure. This applies in particular to second-round effects.
You mean the fact that as energy becomes more expensive, other things such as goods or wages follow suit?
This is a risk which in turn would affect inflation permanently in the future. If we waited until such effects materialised before making our decisions, it would already be too late. ...
Are you not afraid that the slight improvement in the European economy will get nipped in the bud?
No, on the contrary. Our decision, by stabilising inflationary expectations, preserves a financial environment which is favourable to sustainable growth and job creation. But monetary policy cannot solve all problems by itself. We also need bold structural reforms to elevate our growth potential.
Are further reforms the EU’s most important goal in 2006?
All in all, both the economy and society as a whole must be allowed – and indeed required to show - greater capacity to adapt to changes, greater flexibility. For the industrialised countries the three main challenges that are calling for permanent adaptation are the ageing population, globalisation and the development of science and technology. All three, incidentally, are the result of fantastic successes.
What’s supposed to be so great about our superannuated society? Or about the fact that globalisation is driving thousands of jobs from France, the UK or Germany to Eastern Europe?
The fact, that lifetime expectancies are becoming longer and longer, demonstrates the enormous medical advances that have been made. Globalisation shows that market economies have been adopted all over the world and has already led to fantastic advancements in what we used to call the Third World a few years ago. The successes of cutting-edge science and technologies speak for themselves. Each of these successes, precisely because it is very significant, is calling our societies to change ….
But Europe has to grow together first, unlike, say, the USA.
That’s right. We are profoundly transforming ourselves, we Europeans, both economically and politically. That’s the fourth challenge. And the fifth is the steady widening of our borders, the phenomenon of enlargement. Like the others those two additional challenges are stemming from the success of the concept of European Union itself.
Maybe this Europe is simply growing too fast.
I don’t think so. In any case, the Soviet Union has collapsed, partly because of the success of Western Europe, and history does not wait. We must tirelessly explain to the people of Europe, particularly in the founding fathers’ countries, like Germany, or Italy, or Benelux countries, or France, that the area at stake now is far, far larger than that of Charlemagne! ...
Public opinion in this country is rather gloomy.
And perhaps it tends to attach too much importance to the difficulties. At the same time, it underestimates the things that your country has already achieved. Of course, reunification was a huge task. But a great deal of positive progress has been made with it. Since the launching of the euro, moreover, the cost competitiveness of the German economy has improved significantly compared with the EU average. ... So there’s no reason why this improved economic situation would not at a certain moment materialise also in domestic demand and particularly in consumption.
Maybe it’s because we have a tendency to be pessimistic?
It’s human nature to have fears when confronted with difficult tasks. But perhaps this, in the present German culture, leads to a kind of ‘angst’ that goes beyond what would be justified! ...
What do you think is more dangerous? Too much pessimism, as in the Federal Republic? Or too much optimism of the kind chronically demonstrated by the USA?
You have to find a path between these two extremes. The optimism in the USA is systematic. There the glass is always half-full, while in the euro area and present German culture it is always half-empty. The fact is that our glass is both half-full and half-empty! We still have a massive amount of homework to do. But it can be done, because we already proved that we could. We Europeans simply have to believe in ourselves more.
The global economy is still dominated by the USA. How much of a threat is the American dual deficit?
There are two contrary trends. Firstly, the USA is highly flexible, which makes it more adaptable and more resilient. It is a very important asset of the US. They have also a big liability: a very low savings ratio, which leads to a big external deficit. On this side of the Atlantic, our problem is the reverse: much less flexibility in the economy which does not permit to take advantage of today’s opportunities, and, on the other hand a satisfactory level of savings ratio. ...
And all the while, a new competitor for us on the global markets – China - is emerging between the blocks. Do you see the People’s Republic primarily as an aggressor or a competitor? Does it represent an opportunity or a risk for Europe?
First of all, China’s story proves the success of market economics. Many people have already forgotten that not long ago, it still had a fully planned economy which was totally inefficient. Since the Second World War, furthermore, our goal has been for China, India and a number of other very poor countries to catch up with us gradually.
But at that speed?
That’s why I’m also saying that the speed of the changes in China and India is also a challenge – for our society and for the rest of the world... But we have to confront this task too. We don’t have any choice.
Is that your key message as Europe’s chief guardian of the currency?
...Imagine yourself now telling the founding fathers of Europe that well, we’re now 25 nations in the European Union with 459 million people and a parliament elected jointly by all the people of those countries. That we have a Court of Justice, which creates jurisprudence all over the Union and that we have a single currency for 311 million people! Jean Monnet would without a doubt be totally amazed! We have still a lot to do but in a historical perspective there is a lot to be proud of...
December 26, 2005
More on Paid Punditry
Bush Presses Editors on Security, by Howard Kurtz, Washington Post: ...Bought Off? The admission by two columnists that they accepted payments from indicted Washington lobbyist Jack Abramoff may be the tip of a large and rather dirty iceberg.
Copley News Service last week dropped Doug Bandow -- who also resigned as a Cato Institute scholar -- after he acknowledged taking as much as $2,000 a pop from Abramoff for up to two dozen columns favorable to the lobbyist's clients. ... Peter Ferrara of the Institute for Policy Innovation has acknowledged taking payments years ago from a half-dozen lobbyists, including Abramoff. Two of his papers, the Washington Times and Manchester (N.H.) Union Leader, have now dropped him. But Ferrara is unapologetic, saying: "There is nothing unethical about taking money from someone and writing an article."
Readers might disagree on grounds that they have no way of knowing about such undisclosed payments, which seem to be an increasingly common tactic for companies trying to influence public debate... When he was a Washington lawyer several years ago, says law professor Glenn Reynolds, a telecommunications carrier offered him a fat paycheck -- up to $20,000, he believes -- to write an opinion piece favorable to its position. He declined. In the case of Bandow's columns, says Reynolds, who now writes the InstaPundit blog, "one argument is, it's probably something he thought anyway, but it doesn't pass the smell test to me. I wouldn't necessarily call it criminal, but it seems wrong. People want to craft a rule, but what you really need is a sense of shame."
Jonathan Adler, an associate law professor and National Review contributor, wrote that when he worked at a think tank, "I was offered cash payments to write op-eds on particular topics by PR firms, lobbyists or corporations several times. They offered $1,000 or more for an op-ed," offers that Adler rejected. Blogger Rand Simberg writes that "I've also declined offers of money to write specific pieces, even though I agreed with the sentiment."...
Paul Krugman: Health Care Costs
Medicine: Who Decides?, by Paul Krugman, Commentary, NY Times: Health care seems to be heading back to the top of the political agenda, and not a moment too soon. Employer-based health insurance is unraveling ... and vast Medicare costs loom on the horizon. Something must be done. But to get health reform right, we'll have to overcome wrongheaded ideas as well as powerful special interests. For decades we've been lectured on the evils of big government and the glories of the private sector. Yet health reform is a job for the public sector, which already pays most of the bills directly or indirectly and sooner or later will have to make key decisions about medical treatment. ...
Consider what happens when a new drug or other therapy becomes available. Let's assume that the new therapy is more effective ... than existing therapies ... but that the advantage isn't overwhelming. On the other hand, it's a lot more expensive than current treatments. Who decides whether patients receive the new therapy? We've traditionally relied on doctors to make such decisions. But the rise of medical technology ... makes ... medicine ... in which doctors call for every procedure that might be of medical benefit, increasingly expensive.
Moreover, the high-technology nature of modern medical spending has given rise to a powerful medical-industrial complex that seeks to influence doctors' decisions. ...[D]rug companies in particular spend more marketing their products to doctors than they do developing those products ... They wouldn't do that if doctors were immune to persuasion.
So if costs are to be controlled, someone has to act as a referee on doctors' medical decisions. During the 1990's it seemed, briefly, as if private H.M.O.'s could play that role. But then there was a public backlash. It turns out that even in America, with its faith in the free market, people don't trust for-profit corporations to make decisions about their health.
Despite the failure ... to control costs with H.M.O.'s, conservatives continue to believe that the magic of the private sector will provide the answer. ... Their latest big idea is health savings accounts, which ... induce "cost sharing" - that is, individuals will ... pay a larger share of their medical costs out of pocket and make their own decisions about care. ...[I]s giving individuals responsibility for their own health spending really the answer to rising costs? No.
For one thing, insurance will always cover the really big expenses. We're not going to have a system in which people pay for heart surgery out of their health savings accounts and save money by choosing cheaper procedures. And that's not an unfair example. The Brookings study puts it this way: "Most health costs are incurred by a small proportion of the population whose expenses greatly exceed plausible limits on out-of-pocket spending."
Moreover, it's neither fair nor realistic to expect ordinary citizens to have enough medical expertise to make life-or-death decisions about their own treatment. A well-known experiment ... carried out by the RAND Corporation... found that when individuals pay a higher share of medical costs out of pocket, they cut back on necessary as well as unnecessary health spending.
So cost-sharing, like H.M.O.'s, is a detour from real health care reform. Eventually, we'll have to accept the fact that there's no magic in the private sector, and that health care - including the decision about what treatment is provided - is a public responsibility.
North Korean Counterfeiting
Seoul's U-Turn on N.Korean Counterfeiting Could Be Fatal, Editorial, Chosun.com: The National Intelligence Service, in a 1998 report ... said North Korea forges and circulates US$100 bank notes worth $15 million a year, and that the counterfeiting is carried out by a firm called February Silver Trading in the suburbs of Pyongyang. The NIS said in reports ... the same year and the next that the North operates three banknote forging agencies, and that more than $4.6 million in bogus dollar bills were uncovered in circulation on 13 occasions since 1994. "That North Korea is a dollar counterfeiting country was common knowledge among intelligence officials," said a former senior NIS official.
Yet suddenly, when the U.S. brings up the question of North Korea's counterfeiting activities, our government says there is insufficient evidence. That has prompted American officials to accuse our government of lying. The reason for the volte-face is that Seoul is afraid of antagonizing Pyongyang while six-party talks aimed at denuclearizing North Korea hang in the balance. But what if the shoe was on the other foot? If a country hostile to South Korea forged a huge number of our banknotes and circulated them around the world, what should our government do? And if an ostensible ally of ours defended that counterfeiting country, what would we think of that ally? ...
An expert with the U.S. Congressional Research Service said North Korea's attack on the dollar is a “fatal strategic mistake.” If the U.S.’ will to condemn North Korea measured 2 on a 10-point scale five years ago, it is now at 4, he warned. If that rises to 6 or 7, North Korea would find it “unbearable." Instead of appearing to act as a mouthpiece for North Korea and demanding “100-percent proof” from Washington, our government would be better advised to try and persuade the North just how serious the matter is.
Here's quite a bit more from the LA Times. The story says that North Korea is believed to make as much as $500 million per year from counterfeiting and other criminal activities, and that the U.S. is working aggressively to try and stop it. The story also notes that technically counterfeiting is an act of war.
December 25, 2005
Christmas classics, Editorial, LA Times: Biologists use the word "zeitgeber" to describe a physical stimulus that kicks the biological clock into gear. For example, light streaming through the window in the morning and birdsong are zeitgebers signaling that it's time to wake up. Scientists haven't devoted a lot of attention to the role of zeitgebers in stimulating holiday cheer, gift buying and goodwill toward men. In some climes, it's probably connected to frosty windowpanes and snowy rooftops. In L.A., it may be the first appearance of Santas in shopping malls, or those giant, flashy decorations they string across Hollywood Boulevard every year. But for people across the nation, a prime signal that the holidays are approaching is the reappearance of classic Christmas movies and TV shows, many of which we've enjoyed since childhood and have seen so many times we can recite the dialogue by heart.
Here are a few of our favorite snippets. May they stimulate peace, comfort, joy and a very Merry Christmas to all.
"Blackadder's Christmas Carol" (1988)
Lord Edmund Blackadder: I trust Christmas brings to you its traditional mix of good food and violent stomach cramp.
"A Charlie Brown Christmas" (1965)
(Sally Brown's letter to Santa)
Sally: Dear Santa Claus, how have you been? Did you have a nice summer? How is your wife? I have been extra good this year, so I have a long list of presents that I want. Please note the size and color of each item, and send as many as possible. If it seems too complicated, make it easy on yourself: Just send money. How about 10s and 20s?
Lucy: I know how you feel about all this Christmas business, getting depressed and all that. It happens to me every year. I never get what I really want. I always get a lot of stupid toys or a bicycle or clothes or something like that.
Charlie Brown: What is it you want?
Lucy: Real estate.
Jacob Marley: In life, my spirit never rose beyond the limits of our money-changing holes! Now I am doomed to wander without rest or peace, incessant torture and remorse!
Ebenezer: But it was only that you were a good man of business, Jacob!
Jacob Marley: Business? Mankind was my business! Their common welfare was my business! And it is at this time of the rolling year that I suffer most!
Spirit of Christmas Present: So! Is your heart still unmoved toward us, then?
Ebenezer: I'm too old and beyond hope! Go and redeem some younger, more promising creature, and leave me to keep Christmas in my own way!
Spirit of Christmas Present: Mortal! We Spirits of Christmas do not live only one day of our year. We live the whole 365. So is it true of the child born in Bethlehem. He does not live in men's hearts one day of the year, but in all days of the year. You have chosen not to seek him in your heart. Therefore, you will come with me and seek him in the hearts of men of goodwill.
Mrs. Dilber: Are you all right, Mr. Scrooge?
Ebenezer: [ecstatic] I … I don't know. I don't know anything. I never did know anything. (Starts laughing.) But now I know that I don't know anything!
"The Muppet Christmas Carol" (1992)
Gonzo: My name is Charles Dickens.
Rizzo the Rat: And my name is Rizzo the Rat … wait a second! You're not Charles Dickens!
Gonzo: I am too!
Rizzo the Rat: No! A blue furry Charles Dickens who hangs out with a rat?
Rizzo the Rat: Charles Dickens was a 19th century novelist! A genius!
Gonzo: Why, thank you.
"The Nightmare Before Christmas" (1993)
Jack Skellington: (singing) And on a dark cold night, when the moon is high, he flies into the air like a vulture in the sky! And they call him Sandy Claws!
"The Polar Express" (2004)
The Conductor: Seeing is believing … but sometimes the most real things in this world are the things we can't see.
"White Christmas" (1954)
Judy Haynes: We're booked for the holidays.
Phil Davis: Vermont, huh?
Judy Haynes: Oh, Vermont should be beautiful this time of year, with all that snow.
Phil Davis: Yeah, you know something … Vermont should be beautiful this time of year, with all that snow.
Judy Haynes: That's what I just said.
Phil Davis: We seem to be getting a little mixed up.
Judy Haynes: Maybe it's the music.
Phil Davis: Maybe it isn't only the music.
"L.A. Confidential" (1997)
Sid Hudgens: "It's Christmas Eve in the City of Angels and while decent citizens sleep the sleep of the righteous, hopheads prowl for marijuana not knowing that a man is coming to stop them! Celebrity crime-stopper Jack Vincennes, scourge of grasshoppers and dope fiends everywhere!" Ya' like it, Jackie-Boy?
Jack Vincennes: Yeah. Subtle.
"How the Grinch Stole Christmas" (1966)
Narrator: He puzzled and puzzled till his puzzler was sore. Then the Grinch thought of something he hadn't before. Maybe Christmas, he thought, doesn't come from a store. Maybe Christmas … perhaps … means a little bit more!
"Home Alone" (1990)
Kate McCallister: (to the Scranton ticket agent) This is Christmas. The season of perpetual hope. And I don't care if I have to get out on your runway and hitchhike. If it costs me everything I own, if I have to sell my soul to the devil himself, I am going to get home to my son.
Kevin McCallister: This is extremely important. Will you please tell Santa that instead of presents this year, I just want my family back. No toys, nothing but Peter, Kate, Buzz, Megan, Linnie and Jeff. And my aunt and my cousins. And if he has time, my Uncle Frank. OK?
"It's a Wonderful Life" (1946)
George Bailey: (praying) Clarence! Clarence! Help me, Clarence! Get me back! Get me back, I don't care what happens to me! Get me back to my wife and kids! Help me Clarence, please! Please! I wanna live again. I wanna live again. Please, God, let me live again.
Clarence: Strange, isn't it? Each man's life touches so many other lives. When he isn't around he leaves an awful hole, doesn't he?
"Miracle on 34th Street" (1947)
Kris Kringle: You see, Mrs. Walker, this is quite an opportunity for me. For the past 50 years or so I've been getting more and more worried about Christmas. Seems we're all so busy trying to beat the other fellow in making things go faster and look shinier and cost less that Christmas and I are sort of getting lost in the shuffle.
Fred Gailey: Your Honor, every one of these letters is addressed to Santa Claus. The Post Office has delivered them. Therefore the Post Office Department, a branch of the federal government, recognizes this man Kris Kringle to be the one and only Santa Claus.
Judge Henry X. Harper: Uh, since the United States government declares this man to be Santa Claus, this court will not dispute it. Case dismissed.
"A Christmas Story" (1983)
Goggles: I like Santa.
Narrator: Let's face it, most of us are scoffers. But moments before zero hour, it did not pay to take chances.
Posted by Mark Thoma on Sunday, December 25, 2005 at 10:30 AM in Miscellaneous
Dealing with Bliss Points
Maitre D: And finally, monsieur, a wafer-thin mint.
Mr Creosote: No.
Maitre D: Oh sir! It's only a tiny little thin one.
Mr Creosote: No.... I'm full...
Maitre D: Oh sir... it's only wafer thin.
Mr Creosote: Look - I couldn't eat another thing. I'm absolutely stuffed...
Maitre D: Oh sir, just... just one...
Mr Creosote: Oh all right. Just one. ...
The Secondary Market for Gift Cards
Capitalism at Work on Unwanted Gift Certificates, by Eric Dash, NY Times: ...Gift cards are expected to be among this season's most popular presents, generating about $18.48 billion in sales ... Still, roughly 8.5 percent of the dollars on those cards goes unspent. In response, a handful of Web sites have recently sprouted up, creating a little-known but vibrant secondary market. Analysts say it could be worth $1.5 billion or more. ...
So far, there are several different business models. ... On the one hand, gift cards are increasingly popping up at mainstream online marketplaces, like eBay and Craigslist. Earlier this week, for instance, eBay had auctions listed for more than 5,300 certificates from stores like Tiffany and T. J. Maxx. ... On the other hand, gift-card specific Web sites, like cardavenue.com and SwapAGift.com, tend to have only several hundred cards at a time but often facilitate a faster turnaround and a more focused search. ...
All of this generally comes at a price. Though it varies from site to site, users typically pay a registration fee ... or a transaction fee ... Many of the sites charge a combination of both. ... Still, a shrewd shopper can find savings. ... Most gift card exchange sites have more sellers than buyers at any given time. But during the first few weeks in January, that imbalance is exaggerated when the market is flooded with unwanted holiday gift cards. ... For buyers, that means a wider selection and prices that could be 5 percent to 10 percent lower than they are at other times during the year. For sellers, it may be a reason to wait. ...
From a buyer's perspective, the biggest bargains can be found at nationwide retailers like Sharper Image and Brookstone that have many unique gift items but none of them apparently things that anyone truly needs. ... From a seller's perspective, gift cards that command the most money are for big-box retailers and discount chains, like Sears, Target and Wal-Mart. Demand is also strong for any gift cards and voucher of Home Depot, Lowe's, Staples and other office supply stores. They all usually fetch at least 90 cents on the dollar. ...
I am told that buyer beware is good advice when using these markets.
Posted by Mark Thoma on Sunday, December 25, 2005 at 12:22 AM in Economics
Facts for the Holiday Season
The Holiday Season, U.S. Census Bureau: The holiday season, with its many traditions, family gatherings and general good feelings, will soon be upon us. To commemorate this time of year, the U.S. Census Bureau presents the following holiday-related facts and figures from its data collection.
1.9 billion Number of Christmas cards sent to friends and loved ones every year, making Christmas the largest card-sending occasion in the United States. The second largest is Valentine’s Day, with approximately 192 million cards being given.
20.8 million Number of Christmas trees cut around the country in 2002. These trees were located on 21,904 farms spread out across 447,000 acres.
6.5 million Number of Christmas trees cut in Oregon in 2002, making the Beaver State the nation’s leader. (There were 2.6 million trees cut in Clackamas County, Ore., alone.) Also topping the 1-million mark among states were Michigan, North Carolina, Pennsylvania, Washington and Wisconsin. Pennsylvania led the nation in the number of Christmas tree farms, with 2,164; Oregon was tops in acres devoted to Christmas tree production, with 67,800.
$506 million The amount of money the nation’s Christmas tree farmers received from tree sales in 2004. Oregon was the top state in tree sales ($143 million), followed by North Carolina, Washington and Michigan.
$561 million The value of U.S. imports of Christmas tree ornaments from China between January and August 2005. China was the leading country of origin for such items. Similarly, China was the leading foreign source of artificial Christmas trees shipped to the United States ($69 million worth) during the same period.
$80.2 million Value of shipments by U.S. manufacturers of article trees, including Christmas trees, in 2002.
1,162 Population of Christmas, Fla., an unincorporated town. Other places whose names are associated with the holiday season include North Pole, Alaska (population 1,659 in 2004); Santa Claus, Ind. (2,201); Santa Claus, Ga. (238); Noel, Mo. (1,476); and — if you know about reindeer — the village of Rudolph, Wis. (418). On top of that there is Snowflake, Ariz. (4,836); Dasher, Ga. (822); and a dozen places named Holly, including Holly Springs, Miss., and Mount Holly, N.C.
$291,085 The value of U.S. imports between January and August 2005 from Christmas Island, an Australian territory in the Pacific Ocean, south of Hawaii. Perhaps some of these were “Christmas gifts from Christmas Island.”
Holiday Shopping — The December Rush
The holiday season is critical for retailers. How critical? Well, here are some examples using the most recent Census Bureau data available. Note that the estimates that follow have not been adjusted to account for seasonal or pricing variations.
$31.9 billion Retail sales by the nation’s department stores (including leased departments) in December 2004. This represented a 54 percent jump from the previous month (when retail sales, many Christmas-related, registered $20.8 billion). No other month-to-month increase in department store sales last year was as large. Other U.S. retailers with sizable jumps in sales between November and December 2004 were clothing stores (48 percent); jewelry stores (170 percent); book stores (100 percent); sporting goods stores (63 percent); and radio, TV and other electronics stores (58 percent).
15 percent The proportion of total 2004 sales for department stores (including leased departments) that took place in December. For jewelry stores, the percentage was 24 percent.
24 percent The proportion of growth in inventories by our nation’s department stores (excluding leased departments) between the end of August and the end of November 2004. Thanks to the holiday crowds, inventories plummeted by 23 percent in the year’s final month.
1.8 million The number of people employed at department stores in December 2004. Retail employment typically swells during the holiday season, last year rising by 50,900 from November and 195,500 from October.
$21.5 billion The value of total retail e-commerce sales for the fourth quarter of 2004. This amount, represented 2.3 percent of total retail sales over the period and exceeded e-commerce sales for all other quarters of the year. E-commerce sales were up 24 percent from the fourth quarter of 2003.
32 percent The percentage of adults who shopped online in 2003, up from 2 percent in 1997. No doubt many of these customers were doing some holiday shopping at some point during the year.
Where are Christmas Gifts Made?
124 Number of establishments around the country that primarily manufactured dolls and stuffed toys in 2003; they employed 2,123 people. California led the nation with 19 such locations, and Vermont employed the most, 670.
733 The number of locations that primarily produced games, toys and children’s vehicles in 2003; they employed 16,996 workers. California led the nation with 118 establishments and in the number of people they employed, 2,581.
$3.9 billion Total value of shipments for dolls, toys and games by manufacturers in 2003.
$656 million The value of U.S. imports of stuffed toys (excluding dolls) from China between January and August 2005. China was the leading country of origin for stuffed toys coming into this country, as well as for a number of other popular holiday gifts that were imported. These include electric trains ($71 million); puzzles ($48 million); roller skates ($44 million); sports footwear ($204 million); golf equipment ($43 million); and basketballs ($26 million). Canada was the leading supplier of ice skates ($7 million).
Where Holiday Gifts are Purchased
16,049 The number of electronic shopping and mail-order houses in business in 2003. These businesses, which employed 264,868 workers, are a popular source of holiday gifts. Their sales: $131 billion, of which 31 percent were attributable to e-commerce. California led the nation in the number of these establishments and their employees, with 2,493 and 32,665, respectively. If you’re not sure where to do your shopping, choices of retail establishments abound: In 2003, there were 148,012 clothing and clothing accessories stores; 9,366 department stores; 10,274 hobby, toy and game shops; 34,287 gift, novelty and souvenir shops; 22,410 sporting goods stores; 28,527 jewelry stores; and 11,036 book stores.
47,835 The number of malls and shopping centers dotting the U.S. landscape as of 2004, a total that had increased by approximately 10,000 since 1990.
6.8 million The number of Americans who say they downhill-ski more than once a year. Other popular winter sports are cross-country skiing (1.9 million), ice hockey (1.8 million) and snowboarding (6.3 million).
It’s in the Mail ...
20 billion Number of letters, packages and cards delivered by the U.S. Postal Service between Thanksgiving and Christmas. The busiest mailing day this year is expected to be today (Dec. 19), with more than twice as many cards and letters being cancelled as on an average day.
About 1 million Number of packages delivered by the U.S. Postal Service every day through Christmas Eve. The busiest delivery day: Dec. 21.
[The source for each fact is given in the original document.]
December 24, 2005
Project Gutenberg's "Twas the Night Before Christmas"
*** START OF THIS PROJECT GUTENBERG EBOOK TWAS THE NIGHT BEFORE CHRISTMAS ***
Twas the Night Before Christmas
A Visit from St. Nicholas
By Clement C. Moore
With Pictures by Jessie Willcox Smith
Houghton Mifflin Company
Copyright © 1912 by Houghton Mifflin Company
All rights reserved. For information about permission to reproduce selections from this book, write to Permissions, Houghton Mifflin Company, 215 Park Avenue South, New York, New York 10003.
HC ISBN 0-395-06952-1 PA ISBN 0-395-64374-0
Printed in the United States of America
LBM 40 39 38 37 36
A mid the many celebrations last Christmas Eve, in various places by different persons, there was one, in New York City, not like any other anywhere. A company of men, women, and children went together just after the evening service in their church, and, standing around the tomb of the author of "A Visit from St. Nicholas," recited together the words of the poem which we all know so well and love so dearly.
Dr. Clement C. Moore, who wrote the poem, never expected that he would be remembered by it. If he expected to be famous at all as a writer, he thought it would be because of the Hebrew Dictionary that he wrote. He was born in a house near Chelsea Square, New York City, in 1781; and he lived there all his life. It was a great big house, with fireplaces in it;—just the house to be living in on Christmas Eve.
Dr. Moore had children. He liked writing poetry for them even more than he liked writing a Hebrew Dictionary. He wrote a whole book of poems for them. One year he wrote this poem, which we usually call "'Twas the Night before Christmas," to give to his children for a Christmas present. They read it just after they had hung up their stockings before one of the big fireplaces in their house. Afterward, they learned it, and sometimes recited it, just as other children learn it and recite it now.
It was printed in a newspaper. Then a magazine printed it, and after a time it was printed in the school readers. Later it was printed by itself, with pictures. Then it was translated into German, French, and many other languages. It was even made into "Braille"; which is the raised printing that blind children read with their fingers. But never has it been given to us in so attractive a form as in this book. It has happened that almost all the children in the world know this poem. How few of them know any Hebrew!
Every Christmas Eve the young men studying to be ministers at the General Theological Seminary, New York City, put a holly wreath around Dr. Moore's picture, which is on the wall of their dining-room. Why? Because he gave the ground on which the General Theological Seminary stands? Because he wrote a Hebrew Dictionary? No. They do it because he was the author of "A Visit from St. Nicholas."
Most of the children probably know the words of the poem. They are old. But the pictures that Miss Jessie Willcox Smith has painted for this edition of it are new. All the children, probably, have seen other pictures painted by Miss Smith, showing children at other seasons of the year. How much they will enjoy looking at these pictures, showing children on that night that all children like best,—Christmas Eve!
Twas the night before Christmas, when all through the house Not a creature was stirring, not even a mouse; The stockings were hung by the chimney with care In hopes that St. Nicholas soon would be there;
The children were nestled all snug in their beds, While visions of sugar-plums danced in their heads; And mamma in her kerchief, and I in my cap, Had just settled our brains for a long winter's nap,
When out on the lawn there arose such a clatter, I sprang from the bed to see what was the matter. Away to the window I flew like a flash, Tore open the shutters and threw up the sash.
The moon on the breast of the new-fallen snow Gave the lustre of mid-day to objects below, When, what to my wondering eyes should appear, But a miniature sleigh, and eight tiny reindeer,
With a little old driver, so lively and quick, I knew in a moment it must be St. Nick. More rapid than eagles his coursers they came, And he whistled, and shouted, and called them by name:
Now, Dasher! now, Dancer! now, Prancer and Vixen! On, Comet! on, Cupid! on, Donder and Blitzen! To the top of the porch! to the top of the wall! Now dash away! dash away! dash away all!"
As dry leaves that before the wild hurricane fly, When they meet with an obstacle, mount to the sky; So up to the house-top the coursers they flew, With the sleigh full of Toys, and St. Nicholas too.
And then, in a twinkling, I heard on the roof The prancing and pawing of each little hoof. As I drew in my head, and was turning around, Down the chimney St. Nicholas came with a bound.
He was dressed all in fur, from his head to his foot, And his clothes were all tarnished with ashes and soot; A bundle of Toys he had flung on his back, And he looked like a peddler just opening his pack.
His eyes—how they twinkled! his dimples how merry! His cheeks were like roses, his nose like a cherry! His droll little mouth was drawn up like a bow, And the beard of his chin was as white as the snow;
The stump of a pipe he held tight in his teeth, And the smoke it encircled his head like a wreath; He had a broad face and a little round belly, That shook when he laughed, like a bowlful of jelly.
He was chubby and plump, a right jolly old elf, And I laughed when I saw him, in spite of myself; A wink of his eye and a twist of his head, Soon gave me to know I had nothing to dread;
He spoke not a word, but went straight to his work, And filled all the stockings; then turned with a jerk, And laying his finger aside of his nose, And giving a nod, up the chimney he rose;
He sprang to his sleigh, to his team gave a whistle, And away they all flew like the down of a thistle. But I heard him exclaim, ere he drove out of sight, "Happy Christmas to all, and to all a good-night."
End of the Project Gutenberg EBook of Twas the Night before Christmas by Clement C. Moore *** END OF THIS PROJECT GUTENBERG EBOOK TWAS THE NIGHT BEFORE CHRISTMAS ***
Posted by Mark Thoma on Saturday, December 24, 2005 at 11:03 AM in Miscellaneous
Is There a Santa Clause?
Is there a Santa Claus? - a physicist view : Consider the following:
1) No known species of reindeer can fly. But there are 300,000 species of living organisms yet to be classified, and while most of these are insects and germs, this does not COMPLETELY rule out flying reindeer which only Santa has ever seen.
2) There are 2 billion children (persons under 18) in the world. BUT since Santa doesn't (appear) to handle the Muslim, Hindu, Jewish and Buddhist children, that reduces the workload to 15% of the total - 378 million according to Population Reference Bureau. At an average (census) rate of 3.5 children per household, that's 91.8 million homes. One presumes there's at least one good child in each.
3) Santa has 31 hours of Christmas to work with, thanks to the different time zones and the rotation of the earth, assuming he travels east to west (which seems logical).
This works out to 822.6 visits per second. This is to say that for each Christian household with good children, Santa has 1/1000th of a second to park, hop out of the sleigh, jump down the chimney, fill the stockings, distribute the remaining presents under the tree, eat whatever snacks have been left, get back up the chimney, get back into the sleigh and move on to the next house.
Assuming that each of these 91.8 million stops are evenly distributed around the earth (which, of course, we know to be false but for the purposes of our calculations we will accept), we are now talking about .78 miles per household, a total trip of 75-1/2 million miles, not counting stops to do what most of us must do at least once every 31 hours, plus feeding and etc.
This means that Santa's sleigh is moving at 650 miles per second, 3,000 times the speed of sound. For purposes of comparison, the fastest man- made vehicle on earth, the Ulysses space probe, moves at a poky 27.4 miles per second - a conventional reindeer can run, tops, 15 miles per hour.
4) The payload on the sleigh adds another interesting element. Assuming that each child gets nothing more than a medium-sized lego set (2 pounds), the sleigh is carrying 321,300 tons, not counting Santa, who is invariably described as overweight.
On land, conventional reindeer can pull no more than 300 pounds. Even granting that 'flying reindeer' (see point #1) could pull TEN TIMES the normal amount, we cannot do the job with eight, or even nine.
We need 214,200 reindeer. This increases the payload - not even counting the weight of the sleigh - to 353,430 tons. Again, for comparison - this is four times the weight of the Queen Elizabeth.
5) 353,000 tons traveling at 650 miles per second creates enormous air resistance - this will heat the reindeer up in the same fashion as spacecraft re-entering the earth's atmosphere. The lead pair of reindeer will absorb 14.3 QUINTILLION joules of energy. Per second. Each.
In short, they will burst into flame almost instantaneously, exposing the reindeer behind them, and create deafening sonic booms in their wake. The entire reindeer team will be vaporized within 4.26 thousandths of a second.
Santa, meanwhile, will be subjected to centrifugal forces 17,500.06 times greater than gravity. A 250-pound Santa (which seems ludicrously slim) would be pinned to the back of his sleigh by 4,315,015 pounds of force.> In conclusion - If Santa ever DID deliver presents on Christmas Eve, he's dead now.
(NOTE: This appeared in the SPY Magazine (January, 1990) )
Our Collective Challenges
Clinton: Where we stand one year later, by William Jefferson Clinton, International Herald Tribune: One year ago, ... the earth shook for eight terrifying minutes, unleashing a gigantic wave that struck 12 countries across the Indian Ocean. Over the next 24 hours, more than 230,000 people died, 2 million were displaced, and thousands of children were orphaned. The tsunami devastated over 5,000 miles of coastline, ruined 2,000 miles of roads, swept away 430,000 homes and damaged or destroyed over 100,000 fishing boats. ...
Recently I traveled to Aceh, Indonesia, and Trincomalee in northeastern Sri Lanka where I met with survivors who had lost everything ... I was reminded again of the pain that so many continue to endure. ... In both countries, I was struck by the survivors' spirited determination to rebuild their lives despite the unimaginable losses they have endured and the often desperate conditions in which they live. I was also encouraged by the many significant accomplishments over the last 12 months: Epidemics were prevented; many children are back in school; tens of thousands of survivors are employed and earning money once again; ongoing food assistance is being delivered; a common system of financial tracking is available online; and a regional tsunami warning system is expected to be in place next summer.
There is still a lot left to do. In Aceh and neighboring Nias alone, over 100,000 people still live in unacceptable conditions and with minimal access to job opportunities. ... there are pressing needs today to provide durable temporary shelters, upgrade existing transitional living centers and assist host families sheltering victims. The tsunami presents the international community with a critical challenge: Will we stay the course in the recovery process even after the world's attention has turned to other crises? ... This effort will take years, and we must see it through.
Now more than ever, I am convinced that recovery must be guided by a commitment to "build back better"... In 2006, I will focus on three priorities to make sure that we do build back better... First, we need to ensure that this uniquely well-resourced recovery effort keeps faith with the most vulnerable populations: the poorest of the poor, children, women, migrants and ethnic minorities. ...
Second, we need to ensure continued progress on disaster risk reduction in 2006. An Indian Ocean early warning system is a welcome development, but is only part of the answer. Less than one month after the tsunami struck, 168 countries came together in Japan and ... set strategic goals, priorities and concrete steps for governments to reduce disasters over the next ten years. These include national education campaigns to ensure that populations recognize the early signs of impending disaster, better planning for the use of land to avoid investments in disaster prone areas as well as agreement on standards for disaster resistant construction and restoration of essential environmental prevention like more grove trees. ...
Third, we cannot ignore the importance of political reconciliation, peace and good governance to successful recovery. In Aceh, the tsunami forced political leaders to recognize that the issues that fueled conflict in the country were far less compelling than the factors that united the Acehnese. The peace settlement has greatly enhanced prospects for reconstruction in Indonesia. Reconciliation in Sri Lanka would have a similar result. Across the region, political reforms will be critical components to sustainable recovery. ...
The tsunami and its aftermath demonstrated both the fragility of human life and the strength and generosity of the human spirit when we work together to begin again. One year ago, millions of ordinary people across the globe rallied to the immediate aid of communities devastated by the tsunami. Now our collective challenge is to finish the job...
Much of what is written here also applies to New Orleans, a commitment to build back better, keeping faith with the poorest of the poor, implementing better planning and education to avoid the potential for future disasters, the need for political reconciliation, the need for better temporary shelters during the transition, the need for help for families and regions housing those that were displaced, better warning systems, and so on. Now our collective challenge is to finish the job set forth by The Promiser in Chief.
Posted by Mark Thoma on Saturday, December 24, 2005 at 01:44 AM in Economics
Natural Disasters and Bankruptcy
Natural Disasters and Bankruptcy, A Perspective, by Elizabeth Warren, Boston Fed: ...When there is a series of major disruptions like the 2005 hurricane season, hundreds of thousands of middle class families may deplete their savings and turn to credit cards to supplement the aid they receive from charities and the government. Additionally, victims of natural disasters often return home to find that they have lost substantial assets. Insurance may cover some of the damage, but insurance companies’ liability is often limited. Every aspect of a family’s financial circumstances is exposed to the effects of a natural disaster.
Many disaster victims eventually turn to bankruptcy. It is possible to analyze bankruptcy filing data following hurricanes of the past 25 years, but limitations in the data make the tools blunt. The filings can be compared only year by year, not quarter by quarter. More important, the long-term data are available only on a state-by-state basis. To Robert Lawless, a professor at the University of Nevada at Las Vegas, that seemed problematic. A hurricane that hit Houston, for example, might have no effect on families and small businesses in El Paso, Dallas, or Austin. In order to detect a difference statistically, the regional effects would have to be large enough to change the bankruptcy filing numbers for the entire state. As a result, when Lawless decided to analyze the data, he expected to find no statistical correlations. ...
In fact, Professor Lawless discovered that in the three years following a hurricane, the growth in bankruptcy filings is about 50 percent higher in states that have suffered a direct hit. In the same time period, the growth in nearby states is about 20 percent higher. The data show that the location of the disaster also is significant. When the damage occurs in regions where there are many low-cost homes, FEMA payments are lower, and there is a corresponding increase in bankruptcy rates. The highest increase in bankruptcy filings in the past 25 years occurred when Hurricane Elena hit Mississippi in 1985, resulting in a 71.8 percent bankruptcy- filing increase in the following three years. ...
[M]any people are likely to seek bankruptcy relief in the wake of the hurricanes. Some may just put it off. Indeed, Lawless’s data show that the largest effects from past hurricanes are felt in the third year after storms hit, suggesting that many families will recover as best they can, and then confront their overall financial condition. ...
Selling Big Pharma
The Diffusion of Personal Computers across the U.S., FRBSF Economic Letter: For the last fifteen years or so, ... there can be little doubt that the growing use of IT contributed significantly to the economy's performance, especially in the latter half of the 1990s, when output grew rapidly, unemployment declined to 25-year lows, productivity surged, and the inflation rate actually fell. A key question about IT's role in this performance is how its use spreads or diffuses throughout the economy. This Economic Letter focuses on a particular part of this question, ... the diffusion of the personal computer across U.S. businesses from 1990 to 2002. ...
Economies progress by adopting new technologies and using them both to produce existing goods more efficiently and to produce new goods. Furthermore, as economies become more efficient, the average wages of the economies also increase. Technologies that have transformed the economy in significant ways include the steam engine, the internal combustion engine, and electrification. These are sometimes called "general purpose" technologies because they are used in many parts of the economy .... One of the most recent general purpose technologies is the computer, and more specifically, the personal computer.
Studies have shown that new technologies typically do not spread throughout the economy in an even, uniform manner. Instead, ... certain areas within a country embrace a new technology first, while other areas take up the technology much later. ... Doms and Lewis examine how the personal computer diffused throughout the U.S. economy from 1990 to 2002. Using a data set that reports technology use for hundreds of thousands of business establishments, the authors document the extent to which the intensity of use of personal computers (as measured by personal computers per 100 employees) varied across 160 metropolitan areas around the country. ...
The study found that in 1990, the San Francisco Bay Area was the most computer-intensive area in the country. Because the Bay Area is also home to many IT producers, this finding raises the question of whether one area may be more computer-intensive than another primarily because of the industries located in that area. For instance, the finance and high-tech industries are the most IT-intensive, regardless of location. Therefore, if an area has a large financial industry (like New York) or a high-tech center (like the Bay Area...), then that area might also be more computer-intensive than an area such as Hickory, N.C., where a larger share of the economy is based on furniture manufacturing (an industry that is not very IT-intensive).
The authors calculate computer-intensity measures that account for industry composition and still find very large and persistent differences across metropolitan areas in their computer usage in 1990 and again in 2002. Among others, the San Francisco Bay Area ranks very high, even after controlling for the industries located there.
Some of those results are highlighted in Figure 1. The figure shows how many computers are used per 100 workers in 1990 and in 2002 relative to the San Francisco Bay Area after controlling for the industry composition of each area. ... The relative positions of metropolitan areas were consistent over time... The results in Figure 1 raise the question of why San Francisco might be out in front of most regions while others are so far behind. ...[T]wo factors ... appear to be particularly important: the human capital of an area (as measured by education) and the degree to which the area is an IT center and therefore generates spillovers to other industries in the area.
Economists have frequently examined the role human capital plays in technology diffusion. Economies with highly educated workers may be more adept at learning about new technologies and may also be better able to put those technologies to productive use.
Doms and Lewis address the question of causation: Does computer adoption affect the education level of the workforce or does the education level of the workforce affect computer adoption? Using several approaches, Doms and Lewis find strong evidence that the education level of the workforce results in higher rates of computer adoption. ... As shown in Figure 2, cities with a higher share of the workforce that has completed 16 years or more of education ... in 1990 are also cities that had high rates of computer adoption by 2002.
Another reason for differences between metropolitan areas ... is that some benefit from the presence of a strong IT-producing sector... These benefits are called "spillover effects." For example, people who work in ... high-tech firms may move to low-tech firms nearby, taking knowledge about new technologies ... with them. Also, employees at low-tech firms may learn about the virtues of computers from interacting with community members who hold high-tech jobs. Spillover effects differ from industry effects because they increase computer use in all local industries... Doms and Lewis find evidence consistent with spillovers... However, the importance of these spillovers seems to be much less important in explaining cross-area differences in computer adoption than the overall level of education. ... [A]reas that successfully adopt technologies tend to have superior economic performance. Consistent with this, Doms and Lewis find that areas that were computer-intensive in 1990 were also areas that enjoyed faster real wage growth for college-educated workers, and, to a lesser degree, for workers with less than a college education. ...
The Decline of the Family Restaurant
Unhappy days for America’s family restaurants, by Paul Sullivan, Financial Times: Casual restaurants have supplanted family restaurants in terms of revenue for the first time since the US census started measuring this in the 1970s. The shift means the burger, fries and milkshake ideal evoked by the sitcom Happy Days is losing its hold on the American appetite. The restaurant data, which the 2002 census made available only this week, showed places that serve meals costing $10-$20 now make up 45 per cent of all dining dollars, up from 33.2 per cent in the last census in 1997. Those that serve meals costing less than $10 per person have fallen to 36.8 per cent from 49.6 per cent.
“I didn’t think that within a five-year timeframe we’d see family restaurants eclipsed by casual restaurants,” said Malcolm Knapp, a restaurant economist in New York who analysed the data and has been working with the Census Bureau since 1972. “Casual is now the dominant group in terms of sales ... and it’s not going back.”
Chains such as Ruby Tuesday, Olive Garden and Outback Steakhouse now win more dining dollars than such staples of 1950s and 60s America as Denny’s, Big Boy and the International House of Pancakes. ... “America keeps raising the standard of what normal living is. You can see that perfectly in the restaurants,” said Mr Knapp. People are “taking their kids to casual and themselves to casual plus”. ... All is not lost, though, for the family restaurant. While fewer people may eat dinner there, they still draw crowds for their good, cheap breakfasts.
I wonder what's driving this trend?
Posted by Mark Thoma on Saturday, December 24, 2005 at 01:16 AM in Economics
Fundamental Strength in Housing?
House Prices: The State of the Bubble, by Vikas Bajaj, NY Times: Richard A. Smith ..., chairman and chief executive of the ... real estate services division of the Cendant Corporation... discussed recently why he thinks - like most other real estate industry executives - that there is no national housing bubble.
Q. The question on everyone's mind is whether the housing market is slowing. What do you think? A. Every year for the past five years we have forecasts about this time that there will be a slowing next year. Everyone from Fannie Mae to us has forecast that. There are very early indications that there is a slowing of a very, very strong market.
Q. What do you say to people who contend home prices in many markets are unjustified and will fall drastically? A. It's an interesting topic for people that like to think that there is a new lion coming over the hill - that there is a new thing to be worried about. ... but it's not supported by fact. There have always been year-over-year increases in prices. There have been unit declines in recessions, but not year-over-year price depreciation. ... The facts don't support a national bubble. Are there local bubbles? Absolutely, there have always been. ...
Q. What is the primary driver of the soaring home prices in the last few years? A. It's driven by population growth, per capita income growth, the supply-and-demand issues and job growth. If ... those numbers are moving in the right direction it's very, very unlikely that you have a property value issue. Where you don't have those favorable trends, you are susceptible to a decline in property values.
Q. Can you describe some of the trends that support your views on the long-term growth prospects of the housing market? A. In the old days, the typical 50-year-old homeowner would downsize, sell the family home and buy something smaller. What is occurring now is that they are keeping the family home and buying the second and third home. The typical immigrant buys a home much faster than his or her historical counterpart. Thirty-five percent of the household formations forecasted for the next 10 years will be driven by Hispanics.
Q. The Justice Department's antitrust division has been looking into the practices of the real estate industry, specifically whether the industry is stifling competition. What do you think will come of the inquiry? A. The barrier to entry in this industry is, in my view, virtually nonexistent. We think competition is incredibly robust ...
Pretty much what you would expect to hear from an industry representative. Recent data on housing hint at a slowdown and many papers highlighted Friday's report of an 11.3% decline in new home sales and an increase in the inventory of unsold homes as a sign of the much anticipated slowdown in housing. However, Calculated Risk views the report as "still reasonably strong."
December 23, 2005
Paul Krugman: The Tax-Cut Zombies
The Tax-Cut Zombies, by Paul Krugman, NY Times Commentary: If you want someone to play Scrooge just before Christmas, Dick Cheney is your man. On Wednesday Mr. Cheney ... cast the tie-breaking vote in favor of legislation that increases the fees charged to Medicaid recipients, lets states cut Medicaid benefits, reduces enforcement funds for child support, and more. For all its cruelty, however, the legislation will make only a tiny dent in the budget deficit: the cuts total about $8 billion a year, or one-third of 1 percent of total federal spending. ...
Since the 1970's, conservatives have used two theories to justify cutting taxes. One theory, supply-side economics, has always been hokum for the yokels. Conservative insiders adopted the supply-siders as mascots because they were useful to the cause, but never took them seriously. The insiders' theory - what we might call the true tax-cut theory - was memorably described by David Stockman, Ronald Reagan's budget director, as "starving the beast." Proponents of this theory argue that conservatives should seek tax cuts ... because ... budget deficits will lead to spending cuts that will eventually achieve their true aim: shrinking the government's role back to what it was under Calvin Coolidge.
True to form, ... conservative heavyweights are using the budget deficit to call for cuts in key government programs. For example, in 2001 Alan Greenspan urged Congress to cut taxes to avoid running an excessively large budget surplus. Now he issues dire warnings about "fiscal instability." But rather than urging Congress to reverse the tax cuts he helped sell, he talks of the need to cut future Social Security and Medicare benefits.
Yet at this point starve-the-beast theory looks as silly as supply-side economics. Although a disciplined conservative movement has controlled Congress and the White House for five years - and presided over record deficits - public opposition has prevented any significant cuts in the big social-insurance programs that dominate domestic spending. ... Medicaid, whose recipients are less likely to vote than the average person getting Social Security or Medicare, is the softest target among major federal social-insurance programs. But even members of Congress, it seems, have consciences. (Well, some of them.) It took intense arm-twisting from the Republican leadership, and that tie-breaking vote by Mr. Cheney, to ram through even modest cuts in aid to the neediest.
In other words, the starve-the-beast theory - like missile defense - has been tested under the most favorable possible circumstances, and failed. So there is no longer any coherent justification for further tax cuts. Yet the cuts go on. In fact, even as Congressional leaders struggled to pass a tiny package of mean-spirited spending cuts, they pushed forward with a much larger package of tax cuts. The benefits of those cuts, as always, will go disproportionately to the wealthy.
Here's how I see it: Republicans have turned into tax-cut zombies. They can't remember why they originally wanted to cut taxes, they can't explain how they plan to make up for the lost revenue, and they don't care. Instead, they just keep shambling forward, always hungry for more.
Camouflaged Tank Ties
On Opinion Page, a Lobby's Hand Is Often Unseen, by Philip Shenon, Commentary, NY Times: Susan Finston of the Institute for Policy Innovation, a conservative research group based in Texas, is just the sort of opinion maker coveted by the drug industry. In an opinion article in The Financial Times on Oct. 25, she called for patent protection in poor countries for drugs and biotechnology products. In an article last month in the European edition of The Wall Street Journal, she called for efforts to block developing nations from violating patents on AIDS medicines and other drugs. Both articles identified her as a "research associate" at the institute. Neither mentioned that, as recently as August, Ms. Finston was registered as a lobbyist for the Pharmaceutical Research and Manufacturers of America, the drug industry's trade group. Nor was there mention of her work this fall in creating the American Bioindustry Alliance, a group underwritten largely by drug companies.
The institute says Ms. Finston's ties to industry should not have prevented her from writing about those issues. Nor is there a conflict, it says, in the work of Merrill Matthews Jr., who writes for major newspapers advocating policies promoted by the insurance industry even though he is a registered lobbyist for a separate group backed by it. "Lobbying is not a four-letter word," said the institute's president, Tom Giovanetti.
But organizations like the institute ... are facing new and uncomfortable scrutiny over their links to special interest groups after the disclosure this week that the Washington lobbyist Jack Abramoff had paid at least two outside writers for opinion articles promoting the work of his clients. ... Executives in the public relations and lobbying industries say that the hiring of outside commentators to promote special interests - typically by writing newspaper opinion articles or in radio and television interviews - does happen, although it is impossible to monitor since the payments do not have to be disclosed and can be disguised as speaking fees and other compensation.
While major newspapers and magazines usually insist that outside writers disclose conflicts of interest, editors do not routinely conduct background checks, especially for authors affiliated with credible research groups. Brian Groom, an editor at The Financial Times ... said he did not recall being told of Ms. Finston's ties to the drug and biotechnology industries before publishing the article. The editorial page editor of The Wall Street Journal, Paul Gigot, said in an interview that "we're absolutely convinced" the paper was not told of Ms. Finston's industry ties. The paper might still have run the article, he said, but with more information about her background.
David Rickey, chairman of the board of ethics of the Public Relations Society of America, ... said the industry opposed the use of outside writers to promote a client's interests unless the financial ties were fully acknowledged. ..."if there is a conflict of interest, it must be disclosed." In announcing the departure of Mr. Bandow last week, the Cato Institute said it required its writers to disclose all affiliations that might influence their work. Mr. Giovanetti of the Institute for Policy Innovation said that he, too, insisted that "anyone working with I.P.I. must disclose any pertinent lobbying relationships and conflicts of interest whenever they act on behalf of I.P.I., including published projects." ...
Here's Michael Kinsley in the Washington Post on the same issue:
Pundit Payola Money Talks. It Writes, Too., by Michael Kinsley, Washington Post: ...It came out last week that a couple of conservative pundits have been on the take from lobbyist extraordinaire Jack Abramoff. He would pay them up to $2,000 for columns and op-ed pieces that advanced the interests of his clients. ... But let's be a bit careful here. Many of us sell our opinions for a living. ... And even though casting stones is very close to a pundit's job definition, are we necessarily without sin? Sure, we like to think that ... our opinions themselves are not for sale. But the two miscreants exposed so far can make the same claim. Doug Bandow and Peter Ferrara are both principled conservatives. ... As far as we know, neither has published a single word that he actually disagrees with.
But there's a difference between paying people for the right to publish their work and paying people because someone else has published their work. What Abramoff was buying for clients was partly access to media real estate (op-ed pages) that he couldn't commandeer himself and partly the endorsement of conservative pundits who didn't necessarily disagree with the positions they took but probably would not have bothered except for the cash. Still, Pundit Payola is only a tiny step beyond what has become common practice in Washington. ...
In recent months we have learned that the Bush administration sees nothing wrong with paying for pro-American articles to be planted in Iraqi newspapers. ...[T]he administration has done the same thing, more or less, here at home, giving a fat grant to multimedia conservative Armstrong Williams for pushing administration policy ... And now it seems that a figure somewhat more influential than the president among the nation's legislators -- Abramoff -- has been doing the same thing. ...
I agree that full disclosure of all financial relationships and other affiliations is needed, but existing rules make these easy to obscure. If a particular donor gives to a think tank, and a writer receives a salary from the think tank, does the writer have to disclose the relationship to the donor, or just the think tank? Some of this requires investigation, and editors and others printing these opinion pieces could help by being more diligent about checking and disclosing the ties of outside writers who appear on their pages.
Using Prediction Markets to Identify Emerging Technology
Market, market, on the wall, The Economist: The technology industry loves a prediction, and keeps legions of forecasters and futurists in business. But many predictions are wrong, technologies often arrive late, and very few live up to the hype. Why, then, ... not ... harness the collective brainpower of employees by giving them virtual trading accounts and virtual money, and letting them buy and sell “shares” in such things as project schedules or next quarter's sales. What are, in effect, elaborate computer games might help tech firms spot trends and make more accurate forecasts. Yet, oddly, hardly anyone is using them in this way.
Hewlett-Packard and Intel pioneered the corporate use of prediction markets, but neither seems to be using them other than experimentally. ... Microsoft says [it] has run a dozen or so such markets, and that they quickly and cheaply capture employee sentiment on project deadlines or software quality more accurately than any other measure. Google recently said it is also using internal prediction markets. But such markets are typically used to predict internal matters, rather than to divine broader technology trends—which is, some argue, a missed opportunity. ...
But can prediction markets really spot broader industry trends? There have been some attempts to find out. Perhaps the oldest technology-oriented public prediction market is the Foresight Exchange (www.ideosphere.com), which launched in 1994. Ken Kittlitz, one of its co-founders, says it has an accuracy rate of about 70% on technology questions. ... Another prediction market, operated by NewsFutures, ran for a while on the website of Technology Review. [T]he market did make a few accurate predictions about technology trends... Even so, says Justin Wolfers, an economist at the Wharton School at the University of Pennsylvania, it is still unclear whether prediction markets really can spot tech trends. That is why he is among those closely watching the latest experiment, being carried out by Yahoo! ... in conjunction with O'Reilly & Associates...
In March, the two firms launched the Tech Buzz Game, “a fantasy prediction market for high-tech products, concepts and trends”. Users buy shares in technologies they think will do well; the share price of a technology depends on the frequency with which Yahoo! users perform web searches for it. Yahoo! hopes to use the answers to predict search trends that will be popular in future, so that it can sell advertising against them. O'Reilly wants an inside track on hot topics for future books and conferences. ...[T]he game has not yet been around long enough to assess its track record for longer-term prediction, says David Pennock, a senior researcher at Yahoo!
The most important thing about the Tech Buzz Game, says Mr Wolfers, may be that people are actually playing it, because it is so well designed. Encouraging employees to use prediction markets has always been a challenge. Mr Proebsting says he believes it is just a matter of time before Microsoft starts using predictive markets to predict external as well as internal events. Perhaps he could use the technology to estimate when.
December 22, 2005
Impatience and Savings
Impatience and Savings, NBER Reporter: Research Summary Fall 2005, by David Laibson: When making decisions with immediate consequences, economic actors typically display a high degree of impatience. Consumers choose immediate pleasures instead of waiting a few days for much larger rewards. Consumers want "instant gratification." However, people do not behave impatiently when they make decisions for the future. Few people plan to break their diets next week. Instead, people tend to splurge today and vow to exercise/diet/save tomorrow. From today's viewpoint, people prefer to act impatiently right now but to act patiently later.
Data from neuroscience experiments provide a potential explanation for these observations: short-run decisions engage different brain systems from long-run decisions. Using functional magnetic resonance imaging (fMRI), Samuel McClure, George Loewenstein, Jonathan D. Cohen, and I have shown that decisions that involve at least some short-run tradeoffs recruit both analytic and emotional brain systems, whereas decisions that only involve long-run tradeoffs primarily recruit analytic brain systems. These findings suggest that people pursue instant gratification because the emotional brain system - the limbic system - values immediate rewards but only weakly responds to delayed rewards.
Whatever the underlying biological mechanism, the taste for instant gratification can be incorporated into models of human behavior. Several strands of my work have attempted to do this. Chris Harris and I have proposed models in which actors place a special premium on immediate pleasures. I also have developed models that assume that people have biologically conditioned motivational states: when familiar cues are presented, consumers experience a drive to consume the goods that they consumed in the presence of those cues in the past. For example, a cigarette smoker will urgently want a smoke when he enters his favorite bar (where he has smoked before).
The drive for immediate gratification has many empirical consequences that my coauthors and I have studied. Marios Angeletos, Andrea Repetto, Jeremy Tobacman, Stephen Weinberg, and I have run computational simulations of consumers with a taste for instant gratification (specifically, we studied quasi-hyperbolic discount functions). We find that such consumers quickly spend whatever liquid wealth they have and are only able to save in illiquid assets. These consumers live from hand to mouth in their checking accounts, but hold large stocks of illiquid assets like home equity and defined contribution pension plans. When making long-run choices - for example, when deciding how to invest during flush times - these consumers buy illiquid assets that offer a high rate of return and pay out slowly over many decades. When making short-run decisions, however, these consumers are willing to pay a high price for immediate gratification.
Repetto, Tobacman, and I show that the taste for instant gratification explains why households hold illiquid assets and also frequently borrow with credit cards that involve relatively high interest rates. We also estimate the strength of the taste for immediate gratification. We find that consumers have a short-run discount rate of 30 percent and a long-run discount rate of 5 percent. In other words, delaying a reward by a year reduces its value by 30 percent, but delaying the same reward an additional year only generates an additional 5 percent devaluation.
Consumers with a taste for immediate gratification will avoid immediate disutility. Such consumers will repeatedly delay finishing unpleasant tasks like enrolling in a 401(k) plan. James J. Choi, Brigitte Madrian, Andrew Metrick, and I have found signs of procrastination in a survey of employees. Over two thirds of respondents say that they save too little, and none say that they save too much. Among the self-reported undersavers, over one third say that they plan to join the 401(k) plan or raise their savings rate in the next two months. Using administrative records, we find that almost none follow through in the next four months.
It is typically difficult to determine whether households save optimally. Even asking a respondent - as we did above - yields ambiguous evidence, since it is not clear what it means to say, "I save too little." But in some cases, savings incentives are strong enough to make very sharp predictions about optimal 401(k) contribution rates. Choi, Madrian and I have analyzed employees who receive employer-matching contributions in their 401(k) plan and are allowed to make discretionary, penalty-free, in-service withdrawals. For these employees, contributing below the match threshold is an unambiguous mistake. Nevertheless, half of employees with such clear-cut incentives do contribute below the match threshold, foregoing match payments that average 1.3 percent of their annual pay. In our sample, making this mistake correlates with other types of procrastination. Finally, providing these "undersavers" with specific information about the free lunch they are foregoing fails to raise contribution rates.
Such savings problems suggest that economists should think about the effectiveness of existing savings institutions. In particular, economists should ask why new employees take so long to enroll in 401(k) plans. Madrian and Dennis Shea started this literature by showing that defaults play a critical role. Their original paper shows that the typical employee sticks with the default option - whether the default is enrollment or non-enrollment - for years after joining a new firm. Follow up papers have replicated these findings in a large number of firms. ... Evidence on company stock also supports the conclusion that savers are remarkably passive. In 401(k) plans with the option to invest in company stock, nearly half of the assets are invested in company stock. ... The high allocation to company stock is linked to the fact that many employer-matching contributions are automatically invested in company stock. These matched contributions stay in employer stock, even when employees have the option to reallocate the money. In contrast, when an employer asks its employees to choose their own portfolio allocation, employees invest a much lower share in company stock.
Asking employees to make their own decisions - by discouraging reliance on a default action or removing the default altogether - also provides a good system for 401(k) enrollment. ... The power of defaults implies that policymakers and 401(k) plan designers should pick defaults very carefully, even though they are non-binding. ... My collaborators and I continue to study the foundations of instant gratification, the consequences for savings behavior, and the implications for the design of optimal savings institutions.
1. S. McClure, D. Laibson, G. Loewenstein, and J. D. Cohen, "Separate Neural Systems Value Immediate and Delayed Monetary Rewards," Science 306 (October 15, 2004), pp. 503-7.
2. D. Laibson, "Golden Eggs and Hyperbolic Discounting," Quarterly Journal of Economics, 62 (May 1997), pp. 443-77; C. J. Harris and D. Laibson, "Instantaneous Gratification," Harvard mimeo (2005); C.J. Harris and D. Laibson, "Hyperbolic Discounting and Consumption," in M. Dewatripont, L. P. Hansen, and S. Turnovsky, eds., Advances in Economics and Econometrics: Theory and Applications, Eighth World Congress, Volume 1 (2002), pp. 258-98; and C. J. Harris, and D. Laibson, "Dynamic Choices of Hyperbolic Consumers," Econometrica, 69(4) (July 2001), pp. 935-57.
3. D. Laibson, "A Cue-Theory of Consumption," Quarterly Journal of Economics, 66(1) (February 2001), pp. 81-120.
4. G. Angeletos, D. Laibson, A. Repetto, J. Tobacman, and S. Weinberg, "The Hyperbolic Consumption Model: Calibration, Simulation, and Empirical Evaluation" Journal of Economic Perspectives (August 2001), pp. 47-68.
5. D. Laibson, A. Repetto and J. Tobacman, "A Debt Puzzle," in P. Aghion, R. Frydman, J. Stiglitz, M. Woodford, eds., Knowledge, Information and Expectations in Modern Economics: In Honor of Edmund S. Phelps, Princeton: Princeton University Press (2003), pp. 228-66.
6. D. Laibson, A. Repetto and J. Tobacman, "Estimating Discount Functions with Consumption Choices over the Lifecycle," NBER Working Paper, forthcoming.
7. J. J. Choi, D. Laibson, B. Madrian, and A. Metrick, "Defined Contribution Pensions: Plan Rules, Participant Decisions, and the Path of Least Resistance" in J. M. Poterba, ed., Tax Policy and the Economy, 16 (2002), pp. 67-113.
8. J. J. Choi, D. Laibson, and B. Madrian, "$100 Bills on the Sidewalk: Failing to Save Optimally in 401(k) Plans," NBER Working Paper No. 11554, August 2005.
9. B. Madrian and D. Shea, "The Power of Suggestion: Intertia in 401(k) Participation and Savings Behavior," Quarterly Journal of Economics Vol. 116 (4) (2001), pp. 1149-87.
10. J. J. Choi, D. Laibson, B. Madrian, and A. Metrick, "Saving for Retirement on the Path of Least Resistance," in E. McCaffrey and J. Slemrod, eds., Behavioral Public Finance, 2005; J. J. Choi, D. Laibson, B. Madrian, and A. Metrick, "Plan Design and 401(k) Savings Outcomes," National Tax Journal, 57(2) (June 2004), pp. 275-98; J. Choi, D. Laibson, B. Madrian, and A. Metrick, "For Better or For Worse: Default Effects and 401(k) Savings Behavior" in D. Wise, ed., Perspectives in the Economics of Aging, Chicago, IL: University of Chicago Press (2004), pp. 81-121; and J. J. Choi, D. Laibson, B. Madrian, and A. Metrick, "Defined Contribution Pensions: Plan Rules, Participant Decisions, and the Path of Least Resistance."
11. J. J. Choi, D. Laibson, B. Madrian, and A. Metrick, "Saving for Retirement on the Path of Least Resistance"; J. J. Choi, D. Laibson, B. Madrian, and A. Metrick, "Defined Contribution Pensions: Plan Rules, Participant Decisions, and the Path of Least Resistance"; J. Choi, D. Laibson, and B. Madrian, "Are Empowerment and Education Enough? Under-Diversification in 401(k) Plans," NBER Working Paper, forthcoming.
12. J. J. Choi, D. Laibson, and B. Madrian, "Are Empowerment and Education Enough? Under-Diversification in 401(k) Plans."
13. J.J. Choi, D. Laibson, B. Madrian, and A. Metrick, "Active Decisions," NBER Working Paper No. 11074, January 2005.
14. See Cronqvist and Thaler, "Design Choices in Privatized Social-Security Systems: Learning from the Swedish Experience," American Economic Review, 94(2) (May 2004), pp. 424-28.
15. J. J. Choi, D. Laibson, B. Madrian, and A. Metrick, "Saving for Retirement on the Path of Least Resistance"; J.J. Choi, D. Laibson, B. Madrian, and A. Metrick, "Active Decisions"; J. J. Choi, D. Laibson, B. Madrian, and A. Metrick, "Optimal Defaults," American Economic Review Papers and Proceedings (May 2003), pp. 180-185.
Are Tax Cuts for the Wealthy Wasteful?
Tax Cuts for the Wealthy: Waste More, Want More, by Robert Frank, NY Times: With President Bush's proposed tax cuts for top earners struggling to get political traction in early 2001, Representative Tom Osborne, Republican of Nebraska, rose to the White House's defense on the House floor. "The bottom line is that it's your money," he said, "and you know how to spend it much better than anyone in Washington, D.C." In the years since, variations of this statement ... have kept opponents of high-end tax cuts consistently on the defensive. ... in part because it appeals to voters' common sense. After all, people have an obvious incentive to exercise care when spending their own hard-earned dollars. Why would a faceless bureaucrat in Washington, who is spending someone else's money, be nearly as careful? The "it's your money" line is also buttressed by widely reported examples ... Famously, the Pentagon once spent $640 for a single toilet seat and on another occasion paid $435 for an ordinary claw hammer.
But paying more than the market rate is just one form of wasteful spending. Another ... form is to pay a fair price for something that serves little purpose. This second form of waste is considerably more common in private spending than in public spending... A case in point is a decision on many minds at this time of year, that of how much to spend on a wristwatch. ... The most coveted among them are elaborate mechanical marvels with multiple "complications," special features that enhance their accuracy. ... The Grande Complication, by Jean Dunand, sells for more than $700,000, but lesser entries by Patek Philippe, Rolex and other manufacturers can be had for $5,000 to $100,000.
Unlike toilet seats and claw hammers, these watches are costly to produce, so buyers who pay high prices for them are not being ripped off. In another sense, however, their dollars go largely for naught. For despite their mechanical wizardry, none of these watches are as accurate as a battery-powered $30 Timex, whose quartz crystal mechanism is unaffected by gravity. ...[B]uyers of these watches [are] men from 30 to 50 who want "this 'power tool,' this instrument on their wrist that distinguishes them from the pack." The problem is that if a watch is to distinguish its owner, it must sell for more than the watches worn by members of the pack. So when the pack spends more, the price of distinguishing oneself also rises. And in the end, no one gains any more distinction than if all had spent less.
Other forms of high-end private spending are driven by similar forces. ... David H. Brooks, the chief executive of a company that supplies body armor to the American military in Iraq, invited 150 of his daughter's friends to the Rainbow Room atop Rockefeller Center in Manhattan, where they were serenaded by 50 Cent, Don Henley, Stevie Nicks and other luminaries during a birthday party reported to have cost $10 million. ...[T]he parents involved are not behaving abnormally. They are merely spending their own money ... to provide a special occasion for their daughters. For a party to be special, however, it must somehow stand out from other parties that define the norm. Here, too, the problem is that expensive birthday parties have become a growth industry. ... no matter how much parents spend, the number of parties that achieve special status will be no greater than when everyone spent much less.
On balance, then, there is little reason to expect large tax cuts for wealthy families to have resulted in a more efficient allocation of our nation's scarce resources. For one thing, not all of the dollars used to finance these tax cuts would have been spent wastefully by government. Most of the money recently cut from the food stamp program, for example, would have been spent by poor families to buy food at fair market prices. And even though government does buy some items at inflated prices - body armor whose price includes a profit margin large enough to finance a $10 million birthday party? - many of these items serve vital purposes. In contrast, most of the tax cuts financed by recent budget cuts will go to families that already have everything they might reasonably need. This money will be deployed in the quest for "something special." Yet because special is an elastic concept, the number of families that succeed in this quest will be little different from before.
I should note that it is not the pattern of spending that brings about an inefficiency, though the article leaves that impression. So long as the supply and demand for, say, lavish jewelry intersect in competitive markets, it is efficient in standard economic terms. However, the argument in the article is a bit more subtle. He is asserting a market failure in the spending of the wealthy - the fruitless race to achieve special status. When the wealthy attempt to achieve special status and all follow suit, in the end there is no value to the spending because status is not improved. And if no value is created over and above what a lower level of spending could have achieved in terms of status, it is wasteful. Therefore, taking a dollar from a rich person and giving it to a poor person to spend on necessities in the private sector can improve efficiency.
Do Fortuitous Economic Outcomes Cause People to Go to Church?
Wealth from worship, The Economist: At Christmas, many people do things they would never dream of the rest of the year... Some even go to church. Attendance soars, as millions of once-a-year worshippers fill the pews. ... Some of the occasional churchgoers must wonder whether they might benefit from turning up more often. If they did so, they could gain more than spiritual nourishment. Jonathan Gruber, an economist at the Massachusetts Institute of Technology, claims that regular religious participation leads to better education, higher income and a lower chance of divorce. His results ... imply that doubling church attendance raises someone's income by almost 10%.
The idea that religion can bring material advantages has a distinguished history. A century ago Max Weber argued that the Protestant work ethic lay behind Europe's prosperity. More recently Robert Barro, a professor at Harvard, has been examining the links between religion and economic growth ... At the microeconomic level, several studies have concluded that religious participation is associated with lower rates of crime, drug use and so forth. ...
Until recently, however, there was little quantitative research on whether religion affects income directly and if so, by how much. A big obstacle is the difficulty of disentangling cause and effect. That frequent churchgoers have higher incomes than non-churchgoers does not prove that religion made them richer. It might be that richer people are likelier to go to church. Or unrelated traits, such as greater ambition or personal discipline, could lead people both to go to church and also to succeed in their work.
To distinguish cause from coincidence, Mr Gruber uses information on the ethnic mix of neighbourhoods and congregations. ... Measuring the density of nationalities that share a religion in a particular city can ... be a good predictor of church attendance. But ... [s]tudies have found that people who live with lots of others of the same ethnic origin tend to be worse off than those who are not “ghettoised”. So Mr Gruber excludes an individual's own group from the measures, and instead calculates the density of “co-religionists”, the proportion of the population that shares your religion but not your race. According to Mr Gruber's calculations, a[n]... increase in the density of co-religionists leads to a... rise in churchgoing. Once he has controlled for other inter-city differences, Mr Gruber finds that a[n]... increase in the density of co-religionists leads to a ... rise in income...
Other economists, though they think Mr Gruber's approach is clever, are not sure that he has established a causal link between religious attendance and wealth. So how might churchgoing make you richer? Mr Gruber offers several possibilities. One plausible idea is that going to church yields “social capital”, a web of relationships that fosters trust. Economists think such ties can be valuable... Churchgoing may simply be an efficient way of creating them. Another possibility is that a church's members enjoy mutual emotional and (maybe) financial insurance. That allows them to recover more quickly from setbacks, such as the loss of a job... Or perhaps religion and wealth are linked through education. Mr Gruber's results suggest that higher church attendance leads to more years at school and less chance of dropping out of college. A vibrant church might also boost the number of religious schools, which in turn could raise academic achievement. Finally, religious faith itself might be the channel through which churchgoers become richer. Perhaps, Mr Gruber muses, the faithful may be “less stressed out” about life's daily travails and thus better equipped for success...
Are We There Yet?
The Economic Outlook for 2006, by Jeffrey M. Lacker, Richmond Fed President: It is a pleasure to ... discuss the economic outlook for 2006 and beyond... because the economic outlook is fairly encouraging. Growth is on a solid footing ... employment has resumed expanding at a healthy pace, consumer spending continues to grow briskly, and business investment spending is robust. Granted, housing activity seems to be softening, and at least some potential price level pressures remain, so it may be too soon to break out the eggnog. But inflation expectations remain contained, and we at the Fed are well-positioned to resist inflation pressures, should they emerge...
The really striking feature of the current outlook is the extent to which economic activity in general and consumer spending in particular has rebounded from the shock of the hurricane season. ... With healthy income growth ahead and a reasonably strong overall job market, the outlook for consumer spending looks good. Housing market activity has been very strong over the last several years. The historically low level of inflation-adjusted mortgage interest rates explains much of that strength. ... In recent months, we have received widespread anecdotal reports of ... "a return to normalcy" in several housing markets in our District. ... At the same time, the aggregate measures of housing activity have so far shown only limited pull-back from their peaks and remain at historically high levels. Still, ... I would expect housing price appreciation to flatten out next year and aggregate residential investment to stop growing or perhaps even decline.
The fundamentals for business investment in equipment and software look quite sound. ... Productivity has grown at surprisingly strong rates ... - 3.4 percent since the end of 2000 - despite significantly lower rates of capital formation. Gains in labor productivity ... ultimately pass through to real incomes. ... If productivity growth continues at or above trend, as seems likely, then we should see healthy growth in real income next year... Labor markets have recovered from the recession of 2001. Although employment was stagnant for a time following the downturn, hiring picked up in 2003...
The overall outlook therefore is for a healthy expansion next year. Real GDP should grow at about 3.5 percent. ... but naturally there is some uncertainty attached to it. Economic fundamentals could depart from their anticipated trajectories in any number of ways ... For example, spot oil prices - or other commodity prices for that matter - could well turn out either above or below the path embodied in futures prices. ... Commodity price surprises in either direction could alter aggregate supply conditions and either add or subtract from output growth.
On the demand side, there is some uncertainty regarding the rate at which housing activity is likely to cool in the coming year. Although I do not think that a sharp fall in housing investment is likely, a range of forecasts from flat to moderately declining seem reasonable. And ... it is difficult to foresee with any certainty the scale of investment that businesses will find profitable to undertake, so spending growth in this category could well deviate from expectations...
Core inflation has been low and relatively steady in the last several years. ... within the 1-to-2 percent range that I and others have proposed as an announced target. ... Monetary policy should respond to energy shocks by remaining focused on price stability. ... While the lack of an upsurge in the core PCE inflation figures for September and October is somewhat encouraging, I think it is too soon to declare that pass-through risk is entirely behind us. ... Thus far, market participants appear to believe that core inflation will remain contained. ... Measures of expected inflation derived from ... inflation-protected U.S. Treasury securities drifted up a bit this fall, but ... have returned to mid-summer levels. To maintain credibility for price stability, it is essential that monetary policy should respond vigorously to any visible erosion in inflation expectations.
Assuming output growth remains healthy, the Fed is waiting to see if core inflation does indeed continue to moderate, in which case it considers pausing, or if higher energy prices pass through and begin showing up in incoming data, in which case it meets the price hikes aggressively. The Fed needs to be convinced, and it isn't there quite yet, that pass through of energy prices to core inflation is not a problem.
Editorial/ Market forces in art, Herald Tribune/Asahi: An advisory panel on deregulation within the Cabinet Office says that the work to set up and display exhibits at national ... museums should be included in a "test of market forces." The reform panel argues that such work should ... be offered to competitive bidders to raise efficiency and service quality. ... In response, art leaders ... have come out in opposition to the idea. Their view is that the promotion of art and cultural activities is not compatible with efficiency and that such an idea will lead to a decline in Japan's standard of art and culture. The government's Agency for Cultural Affairs is also opposed to the idea of market-based exhibition work. The government's guiding principle for structural reform is to "leave to the private sector what can be done by the private sector." ... Museums, including fine art museums, collect and preserve cultural artifacts. They do research, plan how best to mount displays and undertake educational efforts to teach citizens of their cultural importance. The advisory panel says planning and setting up exhibitions and promoting cultural activities can be handled by the private sector. ... It also argues that museum management can be done by the private sector, as long as the transition of management is properly handled.
The Agency for Cultural Affairs opposes the panel's suggestion. It points out that governmental cultural affairs agencies handle very valuable art collections. ... The agency contends that maintaining such artworks is inseparable from research and cultural education. The international exchange of art with foreign museums, indispensable for large exhibitions in this country, will become difficult if the exhibitions are administered by private businesses. ... Another question is how quality of service should be evaluated in bids. While cost comparison is easy, quality cannot be measured numerically. No decision has been made on who will evaluate quality. ... The panel is unsatisfied with the performance of existing governmental museums agencies. And the public want more attractive exhibitions on a regular basis and greater dissemination of cultural knowledge to children and students. Art lovers also want museums to offer viewing hours that are more convenient for working people. The debate over whether to farm out some cultural work is a chance for national museums and art museums to take a fresh look at the quality of the job they have done to date.
The threat of privatization should make government agencies more efficient, but I wonder if it actually does.
Posted by Mark Thoma on Thursday, December 22, 2005 at 12:03 AM in Economics
December 21, 2005
Who Gets Credit or Blame for the Economy?
Presidential Prosperity Games, by Robert J. Samuelson, Washington Post: ...We Americans play the simplistic game of personalizing the economy's success or failure. The president is a hero or a bum. He creates or destroys prosperity. This, of course, is make-believe. ... Still, the game suits Republicans and Democrats, the press and the public. We constantly replay it, no matter how much ignorance and misinformation it generates. In the latest version, the White House wants you to believe that the economy's swell and that George Bush is responsible.
The pitch is half true. The economy is strong, but Bush isn't the cause... The White House's bubbly appraisal isn't just fluff. ... The trouble (for the White House, at least) is that many Americans don't seem impressed. ... Economic performance (now good) and economic psychology (now mediocre) have, to some extent, become disconnected. Why? ... Americans have developed perfectionist standards. We expect total prosperity and are disappointed by anything less. There should be no doubts or deficiencies. Today's include high energy prices, high health care costs, Hurricane Katrina's aftermath and a possible real estate "bubble."
Greater job insecurity also subverts Americans' sense of well-being. Since 1979 the research firm ISR has asked workers to react to this statement: "I am frequently concerned about being laid off." In 1982, when unemployment averaged 9.7 percent, 14 percent answered yes. ... This year (average unemployment: 5.1 percent), the anxiety level is 35 percent. Because workers feel more threatened, no given amount of income or wealth provides as much satisfaction as it once did. The explanation for this paradox ... is that corporate practices have changed. Twenty-five years ago, big companies fired career workers only as a last resort... Workers felt safe unless their company was desperate. Now executives routinely engage in "downsizing" and "outsourcing" to improve profitability. "They're more socially acceptable," ...
The White House's PR campaign ... doesn't deserve to succeed, because its main message is false. That message: Bush's tax cuts explain the economy's success. The 2001 and 2002 tax cuts probably cushioned the severity of the 2001 recession and its aftermath. But the White House is now arguing that its 2003 tax cut was critical in increasing economic growth. The centerpiece of that legislation was a cut in the maximum tax rate on corporate dividends to 15 percent. ... But a new study by staff economists at the Federal Reserve finds little independent effect of the dividend tax cut on stock prices.
Even economists who dispute the study think the White House exaggerates. "It's preposterous that the dividend tax cut created 4 million new jobs," says Kevin Hassett of the American Enterprise Institute. ... Every president seeks bragging rights for prosperity. If you substitute "deficit reduction" for "tax cuts," the Clinton administration made claims similar to the Bush administration's. "Deficit reduction" supposedly ignited spectacular economic growth. In truth, the economy's spectacular growth (and a surge in tax revenue) explained deficit reduction more than the reverse. ...
Presidents can't control the economy, because it's the complex consequence of the ambitions, hopes, fears, visions and talents of nearly 300 million people. ... To be sure, government policies matter, and presidents set some policies. But the long time lags from when presidents act to when the economy fully reacts often mean that the largest impact occurs after they've left office. On that score, the excessive federal spending and debt of the Bush years suggest a dubious legacy.
The next post argues that one aspect of worker insecurity, job tenure, has not changed much in recent decades contrary to what is often written in the press.
Trends in Long-Term Employment
The More Things Change, The More They Stay the Same: Trends in Long-term Employment in the United States, 1969-2002, by Ann Huff Stevens, NBER WP 11878, December 2005: Abstract This study considers whether there has been a decline in the attachment of workers and firms in the United States over the past several decades. Specifically, it compares snapshots of job tenure taken at the end of workers' careers from 1969 to 2002, using data from the Retirement History Survey, the National Longitudinal Survey of Older Men, and the Health and Retirement Study. The primary finding is one of stability in the prevalence of long-term employment relationships for men in the United States. In 1969, average tenure in the longest job for males aged 58-62 was 21.9 years. In 2002, the comparable figure was 21.4 years. Just over half of men ending their careers in 1969 had been with a single employer for at least 20 years; the same is true in 2002. This finding is robust to adjustments for minor differences in question details across data sources and for educational and retirement age changes over this time period.
From the beginning of the paper:
A great deal of attention has been paid in recent years to the issues of job stability and job security in the United States. Many studies have attempted to determine whether there has been deterioration in the prevalence of long-term, stable employment relationships in the United States during the period from roughly the mid-1970s to the present. Most of these studies have found either (1) no robust evidence of significant changes in various measures of job tenure, job stability or job security or (2) indications of relatively small increases in job turnover, particularly during the early 1990s. In contrast to the findings of these studies, there remains a powerful conventional wisdom that the U.S. has experienced widespread, substantial declines in expected job security or stability. ... Further, when asked directly, workers themselves appear to be more worried than in previous years about the risk of separating from their employers. (Schmidt, 2000). There is, however, a striking lack of solid empirical evidence to support these claims. Even in cases where careful studies have shown some decline in job tenure or increased turnover, the question remains whether the magnitude of documented changes can justify claims of major shifts in employment relationships often found in the popular press.
There is other research, e.g. see here, showing that measures of insecurity such as the variance of income have risen in recent years. Thus, even if these results hold up to further scrutiny, they do not prove that worker's perception of increasing economic insecurity is illusory.
Why Have University Presidents Fallen Silent?
Where are the voices of college presidents?, by John Merrow, CS Monitor: Here's a quiz for you. Name the presidents of any three of America's 4,000-plus colleges and universities. Odds are most readers flunked that quiz, but it wouldn't be fair to take points off anyone's grade. How could the public know the names of higher education leaders, who are largely silent on the great issues of the day? Today's presidents only get noticed if they say something outrageous (Harvard's Lawrence Summers's comments about women and science), live too lavishly (former American University President Benjamin Ladner), or make millions (Lynn University's Donald Ross).
It hasn't always been this way. Father Theodore Hesburgh of Notre Dame ... declared, "Anyone who refuses to speak out off campus does not deserve to be listened to on campus." Many 20th-century university presidents also served as ambassadors and heads of major national commissions. Think Clark Kerr of the University of California, Jill Kerr Conway of Smith, Kingman Brewster of Yale, and Robert Hutchins and Edward Levi of the University of Chicago. Reporters knew to call them for opinions on the burning issues of the day.
I spent much of the past three years reporting about higher education and didn't find their modern-day equivalents. Presidents I met said they devoted much of their time to fundraising, often to build dormitories with wi-fi, athletic facilities with climbing walls, and stadiums with luxury boxes. The Chronicle of Higher Education recently released its own survey of university presidents, and its results confirm that observation. Five of the six most pressing issues have to do with money, and the sixth - retaining students - is only marginally related to teaching and learning.
Perhaps because of their preoccupation with dollars, today's college presidents are not educating the rest of us on issues that matter. Take the issue of intelligent design. Only three university presidents have spoken out against treating intelligent design as science. ... [T]he overwhelming silence on this topic, among others, shows just how far higher education has slipped from its pedestal. Greater leadership in public debate on critical issues is what's needed to stop academia's declining prestige, not a fixation on the bottom dollar.
December 20, 2005
More From Krugman's Money Talks: Think Tank Conspiracy
Think Tank Transparency, Paul Krugman, Money Talks, NY Times: More reader response to Paul Krugman's Dec. 19 column, "Tankers on the Take": Janie Black Dog, Washington - Buying opinion pieces is just a tiny part of the unethical activities of these so-called think tanks. Every morning, they put on free breakfasts for members of congress and high up political appointees in the executive branch. Every evening there's wine and cheese and a little speech, which probably enhances the position of one of the tank's funders or their predetermined position on any subject. These so-called briefings, no doubt paid for by drug companies, oil pipeline companies, and perhaps foreign governments, give the know-nothing politicals the sound-bites they need to talk to the press and each other. Who pays for the croissants and fresh strawberries? I don't really know, but I can guess its the likes of Jack Abramoff and other K-Street lobbyists, who are also there, rubbing shoulders with the people who vote on legislation and make regulatory policy in a nice, safe environment, free of public scrutiny.
These cozy little tete-a-tetes are not transparent. Their guest lists are not available under the Freedom of Information Act. And .... the public and the press ... aren't there to watch what goes on. Remember what happened to Vice President Chaney when he met with oil execs ... in a government building? Everyone demanded to know who was present. Well, now he or his minions goes to a private think tank his wife works for one or used to and he doesn't have to worry... This is a great way to get alternative advice from people who you already agree with, rather than depending on the advice given by individuals who are paid by the U.S. government and not the oil and drug firms, or from bona fide experts who actually do research, rather than write popularized books and talk on CNN. ... There is a lot more to the cozy relationship between think tanks and their funders than a couple of cash and carry op-ed pieces. Their activities need to be exposed to the light. Think tanks are the handmaidens of K-Street lobbyists, not independent scholars as they would have us believe.
Cyclical and Long-Term Labor Force Participation Rate Changes by Gender, Age, and Education
Opting Out of Work: What’s Behind the Decline in Labor Force Participation?, by Helen McEwen, Pia Orrenius, and Mark Wynne, Federal Reserve Bank of Dallas, Southwest Economy, Issue 6, November/December 2005: The labor force participation rate ... has been declining in the United States in recent years. ... Barring other changes, a decline in the share of the population that is economically active translates into a lower rate of economic growth. Another worry is whether more-vulnerable groups are participating disproportionately in the decline. For middle- and high-income families, less attachment to the labor force may simply reflect a change in priorities or increasing wealth and may not have adverse consequences. For low-income families ... dropping out of the labor force can bring about financial distress, lower future earnings and a greater dependence on welfare programs. ... We focus on how gender, age and education groups have fared in the recent past and discuss the role of cyclical variation versus long-term trends in participation among these groups.
The Recent Decline in Labor Force Participation Chart 1 illustrates the recent decline in the labor force participation rate. The rate fell from its peak of 67.3 percent in first quarter 2000 to a low of 65.8 percent in first quarter 2005. Since then, participation has risen slightly, reaching 66.2 percent in the third quarter. ...
Table 1 breaks down this change in the overall labor force participation rate for gender, age and education categories. ... The total change is decomposed into two parts: (1) the difference in labor force participation that is due to an increase or decrease in the group’s share of the adult population, and (2) the difference due to a change in the group’s propensity to participate in the labor force. ...
Cyclical Factors by Group
Both cyclical (temporary) and long-term (permanent) factors influence the changes in labor force participation rates illustrated in Table 1. First, let us consider the cyclical component. ... To better illustrate each group’s sensitivity to the business cycle, Table 2 shows simple correlations of quarterly real gross domestic product (GDP) with leads and lags of the labor force participation rate. ... While employment is typically a coincident indicator, meaning it changes simultaneously with economic output, the unemployment rate is a lagging indicator, meaning it changes after output has changed. Given that labor force participation is a combination of employment and unemployment, we would expect it to be a slightly lagging indicator. ...
As seen in Table 2, workers who traditionally have had less attachment to the labor force—women, young workers, older workers and high school dropouts—have more volatile labor force participation in general. ... Table 2 ... suggests that participation rates are pro-cyclical—positively correlated with economic output—and that the strongest correlation for males and females is between GDP today and participation two and three quarters from today... Among the age groups, the highest correlations with economic output are among the young and prime-age workers. Interestingly, the participation behavior of older workers is essentially uncorrelated with GDP ... This suggests that structural or long-term factors, rather than cyclical or temporary changes, drive the work decisions of older people. ...
Participation by Age. Chart 2 shows labor force participation rates by age group since 1948. Declining participation rates among youth is a long-term trend, ongoing since the late 1980s. The decline has seemingly intensified in and around recession years, in 1990 and again post-2000, for example. The opposite trend holds for mature workers. .... Prime-age workers (ages 25 to 54) ... have experienced a leveling off in rates. ...
Some of the drop in youth participation stems from a decline in the share of students who work. Chart 3 shows how the drop-off in participation among youth who are enrolled in school began earlier and is much steeper than among youth who are not enrolled in school. Compounding the effect of this sharp decline in participation rates among students is an increase in the share of 16- to 24-year-olds who are students. Between 1985 and 2004, the share of 16- to 24-year-olds enrolled in school jumped from 36 percent to 51 percent.
Another striking change in Chart 2 is the upturn in market participation among the 55 and over group. The increase followed almost a decade of flat participation rates among this group. What caused it? Research suggests that the rise in the labor force participation rate of older workers is due to a combination of factors. These include longer-term changes such as healthier and longer life spans, the decline in defined-benefit pension plans, changes to Social Security benefit rules, and the increased cost of health care. ...
The decline in defined-benefit plans and rise in defined-contribution plans are also contributing to keeping older workers in the labor force. ... As Chart 4 shows, the share of workers covered by defined-benefit plans has been falling, while the incidence of defined-contribution plans, such as 401(k) plans, has been rising...
In addition, several changes to Social Security encourage the elderly to work longer. ... The need to cover higher out-of-pocket medical expenses and the desire for employer-based health insurance are two important factors tying older workers to the labor force to a greater extent than in the past.
Participation by Gender. Long-run changes in the prime-age population’s participation behavior have been primarily driven by dramatic changes in female labor force participation since the 1950s. ... [a]s Chart 5 illustrates...
The recent downturn in women’s labor force participation rate has surprised many. ... More than anything else, ... research seems to point to “unexplained factors” driving down female labor force participation in recent years. In other words, this phenomenon is not well understood.
Participation by Education Level. One concern with falling participation rates is that the trend may reflect reduced job market opportunity for vulnerable workers, such as those with lower education levels and hence, lower incomes and less wealth. The evidence does not seem consistent with an exodus of the least-skilled workers from the labor force (Chart 6 ). In fact, labor force participation rates have risen among individuals ages 25 to 64 who lack a high school diploma—from 58.3 percent in 1994 to 63.2 percent in 2004. All other education groups have experienced declines...
Over the past half century or so, labor force participation rates have tended to be pro-cyclical, with a slight lag. That is, labor force participation tends to increase following increases in economic activity. However, when we look at the cyclical behavior of participation rates by gender, age group and educational attainment, we see noticeable differences. For example, the participation rates of men tend to be less volatile and more pro-cyclical than the participation rates of women. Likewise, the participation rates of the young tend to be more volatile and pro-cyclical than those of the elderly.
Cyclical movements in participation rates occur against a backdrop of longer term trends. ... As more women have entered the labor force, men have tended to leave, with the net effect being that participation rates for prime-age workers have been rising for the past several decades, albeit at a slower rate over time. More recently, these increases have ceased altogether. Outside of the prime-age groups, participation rates have displayed different trends in recent decades, with younger workers dropping out of the labor force and older workers joining it. ... driven by longer term forces. Likely candidates are increased life expectancy and changes in pension arrangements
Krugman's Money Talks: Looking for Dirty Democrats
Art Quillo, Laguna Niguel, Calif.: If ... there isn't any Democratic equivalent of Jack Abramoff — that's what the public deserves to be told. The final sentence of that paragraph should have read: And if there is equivalent activity on the Democratic side, it should be thoroughly exposed as well.
W.D. Stanley, Burke, Va.: There is no doubt that it is a very questionable practice for a lobbyist to pay money to a member of any institute to have that person write an op-ed article ... But I do object to the very blatant suggestion that such practices are confined to persons inclined toward the right or conservative inclination. Surely you must also recognize that such practices occur in left wing institutes and think tanks as well — not to mention public and private universities where, although cash may not change hands, other items of value such as appointments, tenure and access certainly are conferred upon those who elect to expend time and energy writing op-eds about issues those audiences favor and value. While you may call it a slime attack to point out such matters, simple measures of fairness suggest you should point your sanctimony towards the equally abysmal, and very common practices, that happen not only in Washington but in universities all over this country
Paul Krugman: By all means, let's expose whatever is out there. But I'd be really surprised if there's anything equivalent. ... There's no reason to believe that Democrats and/or liberals are any less susceptible to monetary temptation than conservatives and Republicans. There is, however, every reason to believe that the opportunities for sin have been much smaller. First of all, there has only been one period over the last 25 years — the first two years of the Clinton administration — when Republicans didn't control at least one house of Congress or the White House. And even then, Democrats weren't a disciplined party. So Democrats have always been subject to checks and balances. Republicans, by contrast, have had complete, disciplined control of all three branches for five years. ..[P]eople with an interest in corrupting the process had very little interest in corrupting Democrats, but a lot of interest in corrupting Republicans. Second, the think tanks that get heard in the media are overwhelmingly conservative — aside from Brookings, it's hard to find a liberal think tank that gets air time. And Brookings is a very loose organization, with a real diversity of views, not at all like Heritage or Cato. ... there's probably nobody worth corrupting. Am I confident that no liberal commentator was ever paid to boost some cause? No. But it's just silly to approach this matter with the presumption that there must be equal sin on both sides. As a structural matter, that's highly unlikely.
And here's a follow up to his columns on health care:
Paul Krugman, Money Talks: One Reader's Inside View of the Crisis in Health Care: Cathy Creed, Roeland Park, Kan.: I deeply appreciate your editorials regarding health care. I am an R.N. working with Chronic Kidney Disease patients, many of whom are on dialysis. I would guess that about 75 percent of the patients that end up on dialysis are there due to either non-compliance or poor access to primary health care. I always wonder if Americans have any idea how expensive chronically ill kidney patients become once they are on dialysis. CKD/dialysis is one of those few diagnoses that is covered by Medicare at any age. Let me give you a good example of how affordable insurance, access to primary care and drug assistance could have prevented one of our younger patients from ending up on dialysis for the rest of his life: Jose (not his real name), age 31, was working in construction and received health insurance from his wife's employer. He ... has diabetes type II since age 18, and hypertension ... His wife was laid off and so he stopped buying his antihypertensive medication and decreased his oral diabetes medication. Within 18 months of losing his insurance coverage he was in full blown acute renal failure. He is now on dialysis three times per week at a cost of about $500 per treatment paid for by Medicare. As you can imagine there are many other costs associated with his renal failure, due to the multiple co-morbidities of kidney disease and diabetes. And of course it is very difficult for him to work now ... It would have been so much cheaper to provide this young man with affordable medication. ...
Blinder on Bernanke
Fed chief heir-apparent cuts the carbs, gets used to suits, by Ryan James Kim, The Princeton Packet, 12/13/2005: ...Ben Bernanke ... and longtime [Princeton] colleague Alan Blinder often weighed the costs and benefits of the Atkins diet together. "I've been on — and I'm still on — the low-fat diet, and Ben was on the high-fat, (low-carb) diet," said Professor Blinder... "We used to quip to one another that one of us was probably killing himself, but we didn't know which one it was." Professor Blinder painted a more personal picture of the man who may become one of the world's most powerful and influential on the economic scene. ... They were colleagues at the university until this past July, when Professor Bernanke resigned from the university after taking a three-year voluntary leave. "I was one of the people who were the most enthusiastic about getting Bernanke to come to Princeton" in 1985, Professor Blinder said. "I knew of his work and thought it was spectacularly good."
During Professor Bernanke's time as a professor, he was more likely to pick up a backpack than a briefcase. And rather than sporting the cool navy tie, pressed-collared shirt, and pitch-black suit he wore last month at his nomination announcement, Professor Blinder remembered Professor Bernanke wearing more casual clothing. A "prototypical" outfit would include a pair of khaki pants, a polo shirt and comfortable brown-leather shoes or sneakers, he recalled. Now, "he's taken to suits, which he never wore here," Professor Blinder said. "In fact, I don't think he owned a suit before he went to Washington. I certainly never saw him in one."
Professor Bernanke's clothing preferences as a professor fit with Professor Blinder's description of a soft-spoken man with a "wry, sardonic sense of humor." "He's not a domineering personality. He's not the sort of person that, when you sit around the table, feels obligated to dominate the conversation," Professor Blinder said. Especially "when it comes to jokes, Ben is much more of a one-liner, apropos of what's going on. Slips in a one-liner that makes you smile, often ironic."
Laid back or not, Professor Bernanke did a terrific job as the chairman of Princeton's economics department, said Professor Blinder, a position he himself held in the late-1980s. "Many people have said to me ... that being department chair is the worst position in a university's hierarchy ... and being the chairman of the economics department is the worst position of all the chairmanships," he said. "I don't have the firsthand experience with the rest of (the other chairmanships), but it's basically believable. There's a tremendous aggravation and a tremendous amount of work in this job."
But, he said, Professor Bernanke "is unflappable — never loses his temper or, if he does, he keeps it to himself, never visibly. (He) seems to let aggravating things roll off his back, better than most people can, and accomplished a great deal as chairman." Speaking to Professor Bernanke's potential at the Fed, Professor Blinder said he is confident that Professor Bernanke would continue to keep it out of politics. He said that despite recent media coverage harping on Professor Bernanke's inflation-targeting opinion differing from those of retiring Chairman Alan Greenspan, no earth-shattering policy changes are in store. "He's not the sort of person who walks in a room and sees a poker game in progress and tips over the table and knocks all the cards on the floor, saying, 'Well, let's start over again.' It's not his way," Professor Blinder said. "I'm sure he'll not do that at the Fed."
Prescott: 'Stop Messing With Federal Tax Rates'
'Stop Messing With Federal Tax Rates', by Edward C. Prescott, WSJ Commentary: ...That our current tax system is complicated and burdensome and absorbs unnecessary amounts of our limited resources is well accepted by most everyone, and this issue was a primary concern of the Advisory Panel on Federal Tax Reform ... This problem deserves to be seriously addressed, but we could take a big step in the right direction if we just stop messing with federal tax rates. Maybe Congress should take a cue from the Federal Reserve, which learned a long time ago that oversteering with its policy wreaks havoc... Just as the Federal Reserve has made it clear that it will strive to maintain low inflation, which has allowed businesses and consumers to invest and plan accordingly, Congress should establish good tax rates and walk away. The people will take it from there.
So what are good tax rates? It's useful to begin with ... a simple principle: Taxes distort behavior. ... Good tax rates... need be high enough to generate sufficient revenues, but not so high that they choke off growth and, perversely, decrease tax revenues. This, of course, is the tricky part, and brings us to the task at hand: Should Congress extend the 15% rate on capital gains and dividends? Wrong question. Should Congress make the 15% rate permanent? Yes. ... These taxes are particularly cumbersome because they hit a market economy right in its ... entrepreneurial and risk-taking spirit. What makes this country's economy so vibrant is its participants' willingness to take chances, innovate, acquire financing, hire new people and break old molds. Every increase in capital gains taxes and dividends is a direct tax on this vitality. ...
But shouldn't we worry about federal deficits? Isn't it true that we need to raise the capital gains and dividends rate to capture more revenue and thus help close the widening deficit maw? The plain fact is that last fiscal year the debt-to-GDP ratio (broadly defined) went up only 0.2%. If the forecasted deficits over the next five years are correct, it will begin declining. Tax revenues will rise as economic activity continues to grow -- indeed, this has been the case in 2005. Besides, to raise tax rates and thereby dampen economic activity seems a perverse way to improve our economic situation, including our level of tax receipts -- 15% of something is better than 20% of nothing. ... Let's not fall back into old patterns of oversteering and overtaxing. Let's not keep trying to trick our citizens into accepting one tax one day, and another tax the next. Let's not try to tax our way to prosperity...
I can go along with the idea that dividend and capital gains taxes are distortionary, and that highly uncertain tax rates make the distortions worse. There's evidence to support that position. But solutions to the deficit problem on the revenue side that do not involve dividend and capital gains taxes do not necessarily have the same properties. Prescott's argument does not imply that the only solutions to the budget problem are to cut programs or try and grow our way out of it.
Update: Brad DeLong, Daniel Gross, and MaxSpeak all come down hard on Prescott, and I have no quarrel with that. My point was different. I think you lose the argument if you start from the premise that the degree a tax distorts is off the table. We can argue over this evidence, I don't think it's completely solid or etched in stone or anything, but my read is that these two taxes in particular, dividend and capital gains, do produce large distortions in capital markets, more so when they are changed frequently, and arguing against that evidence may not be the best strategy to pursue. But this does not mean that all taxes produce large distortions - by replacing one tax with another there are potential gains to be made without sacrificing revenue or progressivity. I want to emphasize that I am not buying into the idea that these tax cuts will pay for themselves. I hope I've made that point abundantly clear over the last few months. I was pointing out that Prescott's argument that these taxes distort markets should not compel us to throw up our arms and say we cannot replace the capital gains and dividend taxes with another source of revenue.
Deposit Insurance Ceiling Likely To Increase
Bill Lifts Ceiling On U.S. Insurance Of Bank Accounts, by Michael Schroeder, WSJ: After years of lobbying, bankers won an increase in federal deposit insurance for retirement accounts as well as regular savings accounts. But smaller banks were disappointed because they had sought more deposit protection. The legislation will raise federal deposit insurance levels on retirement accounts to $250,000 from $100,000 and will gradually increase insurance ceilings on regular savings accounts from the current level of $100,000. The measure passed the House ... and the Senate ... It is expected to be sent to President Bush for his signature soon.
The final bill doesn't boost insurance as much as many lawmakers or community bankers wanted. The current limit of $100,000 for each basic deposit account will remain until April 1, 2010. At that time, the Federal Deposit Insurance Corp. will have the option of raising the ceiling by $10,000 and every five years thereafter based on inflation. Insurance covering retirement accounts will also be pegged to inflation. ... Community banks had lobbied for an immediate increase in the insurance on deposit accounts to $130,000, arguing that it would help them keep customers from taking their business to bigger interstate institutions. But ... most changes in the FDIC overhaul, the first in two decades, would benefit major banks, which have complained that they had been forced to pay more than their fair share into the bank-insurance fund. ...
December 19, 2005
The Economic Tide
Outlook: The Economic Tide, Washington Post: President John F. Kennedy popularized the phrase "a rising tide lifts all boats." But these days, the economic tide is rising while a lot of boats are running aground, Gene Sperling says in ... Sunday's Outlook section. The unspoken American economic compact -- promising a measure of economic security and advancement in return for hard work and study -- is in danger of being shredded, he adds. In his article, Sperling looks at why the expanding economy isn't spreading the wealth to all Americans and talks about how the nation ... might respond. Gene Sperling ... will be online Monday, Dec. 19, ... to discuss his Sunday Outlook piece...
Potomac, Md.: The intro says you believe, "The unspoken American economic compact ... is in danger of being shredded." Perhaps to your surprise, I agree with this. My question is why exactly this is a bad thing. My children are in private schools while children smarter but poorer flail about in inferior public and private schools. I use our family's long-standing resources to leverage favorable treatment for myself and my children. ... teachers think twice and three times before they give my children a B+. ... I profit handsomely from this war, yet there is no chance that my children will be suckered into it ... The lack of opportunity ensures we have a low-paid, stable workforce in our military and in the service professions. So, where exactly is the bad in this for me, and why would I question President Bush's resolute, strong leadership in these times?
Gene Sperling: ... I am hoping you question is tongue and cheek. If not, the reason I ask you to care is that while of course we all want what is best for our families, I believe we can do so while still encouraging our nation to reflect the American value we would like to teach our children: that we are a nation built on the values of justice, of fair chances for every child regardless of the accident of their birth ... that our lives and our nation should be about something larger than just our personal self-interests. ...
Chicago, Ill.: What can be expected to happen in the next decade to the current American teenager from a middle to lower socioeconomic background with only a high school education? Not everyone is equipped to be an engineer or inventor; what will happen to the traditional working class?
Gene Sperling: It is going to be tougher -- it already is -- to have just a high school degree, though ... there are always some ... who still go far. What we may be seeing is not so much that you can't get a skilled job without a college degree -- but that if you are going to just high school you are going to need to link up with a strong apprenticeship or certification program ... Key is that even the jobs that seemed more basic in the past -- still need a higher level of technical and technological skill than the past -- especially in manufacturing.
Bethesda, Md.: When you urge government actions to reduce health care costs born by U.S. business, what steps do you believe would have a material impact? ... Government funded insurance, for instance, just means that the burden is shifted away from favored companies to some other mix of productive assets within the current or future federal tax base, i.e., it is a zero-sum game, fundamentally.
Gene Sperling: ...One of the real changes in the policy dialogue is the degree that rising health care costs are becoming a jobs issue. Higher projected costs of health care do seem to be inhibiting permanent hires. ... The big issue for the future is whether or not we move away from employers being the providers of health care as part of some larger coverage movement. I don't have all the answers here yet, but it is worth studying ...
Laurel, Md.: ...The Republican majority consists of the business community (including agri-business) that wants to increase the return on capital at the expense of, among other things, the return on labor; and social conservatives who give them votes. Basically, the deal is "we'll support you on tax cuts for the rich, and you support us on gay marriage." The Democrats, meanwhile, suffer a splintered dichotomy between economic and cultural liberals. A flag-waving, gun owning, religious blue-collar worker doesn't feel at home with Jane Fonda and Al Sharpton. I get if you looked at who voted for Clinton and Bush the younger, "whites without college degrees" would describe them pretty well. How are the Democrats going to put a coalition together of those who want economic justice, but don't think belonging to a victimized demographic group ought to be a prerequisite?
Gene Sperling: ...[W]hile Democrats must and should always be the party that stands up for the poor and working poor and those who have lost jobs, we can't limit ourselves to that message: we also have to be the party of people's dreams and upward aspirations. I believe that we can craft policies that are both pro-growth and progressive ... One thing we should do is be for a broader social insurance for those who lose jobs, but also be stronger for ownership and savings and wealth creation that helps the overwhelming number of working families that are falling through the cracks.
Philadelphia, Pa.: Mr. Sperling, having lived off of savings, unemployment, part-time work, credit cards and the goodwill of family after being laid off from a highly-engaging technology position, I have a good idea of where I do not want to be when our economy lurches downward again. In hindsight, obtaining a degree whilst employed would have helped me get on my feet more quickly for two reasons: the extra education and knowledge ... AND the additional people in my personal/professional network. ... having an extra group of people with whom I can communicate about job opportunities is golden. Any system whether it is a government provided venue or otherwise which gets people communicating their skill sets out to those in need will be invaluable. ... One last point: in order to encourage our citizens to pursue additional training while working, something has to give in terms of the demands on their time. Currently, workers are putting in serious hours at the office or workplace and may even manage a family, too boot. Facilitating those workers ability to take classes through day/night care support, work-place sponsored blocks of training time, etc. will go a long way towards enabling positive training conditions. ...
Gene Sperling: ...[E]verything we do for workers threatened by change is AFTER one has lost their job. We need more "pre-emptive" ideas ... and one ... is giving people more encouragement to look at getting more education or even thinking about how to be entrepreneurial why they are still in their current job. A Flexible Education Account which would allow you to get a 50% credit on $15,000 of education a decade -- any time you thought it was best to use. Also, there has to be more quality, accountable on-line opportunities so that you can access such education while you are working and caring for kids -- pretty heavy load to be doing all that and traveling somewhere three nights a week for classes. ...
Lyme, Conn.: What are some of the potential long term consequences of this growing wealth imbalance when it comes time for today's young to retire? At that point, unless something changes, the imbalances are going to grow even more. Fewer jobs have promises of retirement and health care benefits, especially among lower paid professions. Aren't we headed towards a national economic disaster unless we can increase the economic viability of the lower economic classes?
Gene Sperling: ...This is a big worry for me. What really concerns me as well is that the current Administration is moving our tax system toward one that exacerbates -- not moderates -- wealth inequality and winner take all outcomes. By making the tax code less progressive and allowing well-off Americans to pay lower taxes on dividends and capital gains than hard-working moderate income families pay on their income, we are further moving toward division...
Annapolis, Md.: ...I agree with you that increased emphasis on education and our country's infrastructure are vital to our future security. But I believe you failed to include an important point: Iraq. We are currently spending one billion tax dollars each week on Iraq. Money being spent in Iraq cannot be spent on U.S. education or the U.S. infrastructure. Supporters of the war would argue that Iraq is worth every dime. Others see the war as sucking the oxygen from the American economy and U.S. foreign policy. It is conventional wisdom that inflation and the U.S. economic downturn in the 1970s was due, in part, to the vast sums spent on Vietnam. Do you think Iraq will impact the U.S. in a similar manner?
Gene Sperling: ...One thing for people on all sides of the war to remember is that at least in the gulf war, the senior President Bush had a coalition and because he had global support had huge cost-sharing by other nations. Our go it alone strategy has been costly in terms of our international image, but also in terms of our fiscal standing. Nonetheless, it is the long-term deficits caused by tax cuts -- particularly for the most well off -- that pose the most significant long term fiscal damage.
Washington, D.C.: ...Several of my friends have graduated from a very good college in the last couple of years, and find themselves without a job. The diploma doesn't seem to help. I can't imagine what it's like for someone who doesn't even have that. People now spend hundreds of thousands of dollars on college educations, and they don't seem to even get one into an interview any more. How can we have gotten to this place? What could/should the government do? ...
Gene Sperling: ...Your question is a big one ... The point is this: we need more and more people now to take risks on higher education so we have a higher skilled workforce. Yet, if people lose faith in our economic compact, they may decide it is not worth the risk, and settle for less ambitious jobs and educations. We could start by recognizing the problem and having national leadership that says we are going to put away these ideological agendas and look at how we create more incentives for job location here...
Washington, D.C.: ...In a story last week, The Washington Post detailed the impact of high U.S. tariffs on poor U.S. families. Are there any compelling social or economic reasons for U.S. tariffs? Or are tariffs just political pork?
Gene Sperling: Yes, there was a good article by Paul Blustein where he cites Ed Gresser of the Progressive Policy Institute. ... I am a global realist not a free trade purist. There are times where temporary tariffs can help respond to unfair trade practices or too quick a flood of imports that gives no one time to adjust. What ... has to be ... in the open ... is that lower-cost imports can have painful impacts on hard-pressed working families, but unfair tariffs can hurt the pocketbooks of lower-income families the hardest ... As a progressive, I believe we must be able to talk about these trade-offs openly. ...
Washington, D.C.: Have you ever considered that highly progressive tax rates penalize those of us who have relatively high/modest incomes (~$100k) but little wealth. Of course I should pay my share of income tax, but my income is the only way for me to fund my and my children's' needs: food, education, health care, retirement. ... I have a better ability to pay for my long-term needs, I don't need our grandchildren to pay for them. ...
Gene Sperling: ...I pay those higher progressive tax rates too -- and of course it is important to not go too high and hurt incentives or support for our system -- but I also would point out that all most of us on the progressive side have called for is returning to where things were in the 1990s ... Budgets reflect our values ...
Austin, Tex.: When is someone going to do something about the health insurance crisis? It seems to me that it has serious economic (apart from human) consequences. Two things spring to mind: 1. One hears of manufacturers opening plants in countries such as Canada rather than the U.S. despite higher taxes and stricter labor laws, simply because they don't have to face the health insurance issue. 2. It's always said that small business is the backbone of the economy. How many people are working in dead-end, paper-shuffling jobs rather than going out and starting businesses because they need health insurance for their families?
Gene Sperling: ... There questions are very compelling. It is true that Canada is the only major nation to see rising manufacturing jobs. It is hard to believe that the fact that they do not have to bear the health care costs is not at least a reason. Your question on small business is right on point as well. If we want to promote our entrepreneurial spirit, we need to make it easier for people to take risks and fear of losing health care costs I believe does inhibit such willingness to try a new, more productive job or business. My point as I said in an earlier reply today is that health care is becoming more of a jobs issue - for many of the reasons you are implying in your question. ...
Arlington, Va.: Maybe this is over-simplifying it, but even if everyone was to get an education, would that merely change the face of the poor. In other words, have a group people who are educated but unemployed ...
Gene Sperling: ... One thing to consider: if we have a more educated workforce it makes the United States a more attractive place to local high-value added jobs in an increasingly globally competitive labor market. That overall is a good thing.
Hartford, Conn.: It would seem the best way to pump the economy would be to give bigger tax cuts to the lowest tier of taxpayers or even to people getting earned income credits. These are the people that will take their checks out and immediately spend their new found money. ...
Gene Sperling: ... There are many good reason to have a strong Earned Income Tax credit: it provides work incentives, it encourages people to move into the formal, taxpaying economy, it provides economic dignity for the working poor. And as you mentioned, ... giving tax cuts to the working poor ... is pro-growth because as you mention they will spend a higher proportion -- so it will have a greater bang for the buck. ...
Scottsville, Va.: Your statistics about the lack of wage growth out of the recession, etc. gloomy, and yet your over all tone is optimistic. Would you comment?
Gene Sperling: ... The wage story was very positive in the second half of the 1990s, but has been very, very disappointing since then. ... I am in the "humility" party: willing to acknowledge that I do not have all the answers to where the economy is going, but who believes that things are worrisome enough that we should be taking all efforts to ensure we are not letting the middle class thin out or weaken. I remain an optimist ... but do not feel this Administration is taking these issues seriously.
Gene Sperling: To all the unanswered questioners: I am so sorry that I have to get a plane and cannot get to the rest of the questions. ... This just goes to show that one old-economy skill that is still important in the new economy is -- TYPING SPEED! I'll work on it for next time. Thanks for the great questions. The Washington Post Online always has the most thoughtful and well-informed questions. Thanks again, and Happy Holidays, Merry Christmas, or Happy Hannukah or whatever you find most agreeable.
Paul Krugman: Tanks on the Take
Tankers on the Take, by Paul Krugman, NY Times: Not long ago Peter Ferrara, a senior policy adviser at the Institute for Policy Innovation, seemed on the verge of becoming a conservative icon. Before the Bush administration's sales pitch for Social Security privatization fell flat, admiring articles about the Bush plan's genesis often gave Mr. Ferrara credit for starting the privatization movement back in 1979. Now Mr. Ferrara has become a different sort of icon. BusinessWeek Online reports that both Mr. Ferrara and Doug Bandow, a senior fellow at the Cato Institute, were paid by the ubiquitous Jack Abramoff to write "op-ed articles favorable to the positions of some of Abramoff's clients."
Now, I never had any illusions about intellectual integrity in the world of right-wing think tanks. It has been clear for a long time that so-called analysts at many of these think tanks are, in effect, paid to support selected policies and politicians. But it never occurred to me that the pay-for-play schemes were so blatant. In fact, most deals ... probably aren't that blatant. For the most part, people employed by right-wing think tanks don't have to be specifically paid to support certain positions, because they understand that supporting those positions comes with the job...
But it turns out that implicit deals ... are sometimes, perhaps often, supplemented with explicit payments for punditry. In return for Abramoff checks, Mr. Bandow and Mr. Ferrara wrote op-ed articles about such unlikely subjects as the entrepreneurial spirit of the Mississippi Choctaws and the free-market glories of the Northern Mariana Islands. ...
Mr. Bandow has confessed to a "lapse of judgment" and resigned from Cato. But neither Mr. Ferrara nor his employer believe that he did anything wrong. The president of Mr. Ferrara's institute told BusinessWeek Online that "I have a sense that there are a lot of people at think tanks who have similar arrangements." Alas, he's probably right. Let's hope that journalists ... track down those people with "similar arrangements," and that as they do, they don't fall into two ever-present temptations.
First, if the latest pay-for-punditry story starts to get traction, the usual suspects will claim that liberal think tanks and opinion writers are also on the take. (I'm getting my raincoat ready for the slime attack on my own ethics...) Reporters and editors will be tempted to give equal time to these accusations, however weak the evidence, in an effort to appear "balanced." They should resist the temptation. If ... there isn't any Democratic equivalent of Jack Abramoff - that's what the public deserves to be told.
Second, there will be the temptation to ... treat Mr. Abramoff as a rogue, unrepresentative actor. In fact ... Mr. Abramoff wasn't off on his own. He wasn't even a lobbyist in the traditional sense; he's better described as a bag man, running a slush fund for Tom DeLay and other Republican leaders. The point is that there really isn't much difference between Mr. Abramoff's paying Mr. Ferrara to praise the sweatshops of the Marianas and the Department of Education's paying Armstrong Williams to praise No Child Left Behind. In both cases, the ultimate paymaster was the Republican political machine.
And inquiring minds want to know: Who else is on the take? Or has the culture of corruption spread so far that the question is, Who isn't?
A. Yep. I'm not all that happy about it either. Bayesian Methods in Macroeconometrics by Frank Schorfheide prepared for the forthcoming edition of the New Palgrave Dictionary of Economics and Law is a good place to start. Thanks to New Economist for the pointer. This paper by Lubik and Schorfheide is a good example of a recent application. If you need a kick in the posterior to get going, let me know.
A Nice Benchmark to Rest On
The tightening of the federal funds rate begins in 2004 and is followed by a gentle decline in core inflation several months later. A substantial lag between the onset of tightening and the response of inflation is consistent with estimates such as Christiano and Eichenbaum where the peak effect on inflation is estimated to take around two years to unfold. Output effects also occur with a substantial lag according to these estimates. Because of this, the decision to continue raising the target federal funds rate or to pause must be forward looking. Given the lags in response to policy, and because of hints of recent trends in the data, more and more I am coming to the position that the time has come to pause and assess how the economy will react to the tightening that has occurred to date before proceeding further, particularly if the core inflation numbers continue to show improvement. I can go along with 4.50%, but after that, unless the numbers change and inflation is a clear worry, I begin to join the chorus of those nervous about over tightening.
December 18, 2005
Feldstein: Monetary Policy in a Changing International Environment
Monetary Policy in a Changing International Environment: The Role of Global Capital Flows, by Martin Feldstein, NBER WP 11856, December 2005, [Open link]: Abstract The Feldstein-Horioka study of 1980 found that OECD countries with high saving rates had high investment rates and vice versa, contrary to the traditional theory of global capital market integration. This capital market segmentation view, which has been verified in various studies..., has important implications for tax and monetary policy. More recently, Alan Greenspan and John Helliwell have shown that the link between domestic saving and domestic investment became substantially weaker after the mid-1990s. The research reported in the current paper suggests that this is true of the smaller OECD countries but not of the larger ones. When observations are weighted by each country's GDP, the savings-investment link (i.e., the savings retention coefficient) remains relatively high. ... Implications for Monetary Policy ...[W]ith this uncertainty about the current nature and the future persistence of international capital flows, it is important to ask how this ... might affect monetary policy. Consider first the response of monetary policy to excess demand. If the Federal Reserve perceives that demand pressures will produce inflation rates above its desired range, it will tighten monetary policy by raising the federal funds rate... How far it has to raise rates ... depends on how other financial variables – particularly long term interest rates and exchange rates – respond to the increase in the federal funds rate. In a ... highly segmented global capital market, the rise in the federal funds rate would cause longer term real rates to rise as well. ... But if OECD capital flows to the U.S. were highly elastic with respect to the U.S. long-term interest rate and if the Asian governments maintained the exchange values of their currencies relative to the dollar, the ... response ... of the long-term interest rate to the higher federal funds rate would be very limited. ... The net impact ... would be to make any given rise in the federal funds rate less contractionary. To achieve any desired reduction in demand and therefore in inflation, the Federal Reserve would have to raise the federal funds rate more than would be needed if global capital markets were more segmented. Now consider the opposite problem that the Federal Reserve could face: a slowing of aggregate demand ... [I]f long-term capital is very mobile among the OECD countries while the Asian countries prevent their currencies from rising against the dollar, these channels of influence would not work. ... The Federal Reserve would have to reduce the short-rate further than it would if long-rates and the dollar responded.
Robert Mundell taught us many years ago that, in a world of flexible exchange rates and integrated capital markets, an easy money policy would not lower interest rates but would nevertheless be expansionary by lowering the value of the currency. In contrast, with a fixed exchange rate, monetary policy is ineffective but fiscal policy can raise or lower aggregate demand. We may now be facing something of a hybrid situation in which the dollar is flexible against the euro and some other non-Asian currencies but not against the Chinese yuan and other Asian currencies. A reduction of the federal funds rate would have relatively little expansionary impact on longer term rates if funds would flow out to the euro area. ... In such a context, monetary policy would be relatively weak, suggesting that reductions in the federal funds rate would have to be greater to have a significant impact and that expansionary fiscal policy would be more effective than it would be if all currencies were flexible.
At this stage, we don’t know how much the previously segmented OECD capital market has become integrated. Has there been a general decline in capital market segmentation or is it limited to the smaller countries, as the estimates that I have presented suggest? Nor do we know how much of the capital flow to the U.S. is from Asian governments that will continue to pursue essentially fixed exchange rate policies, forcing any shift of the dollar to focus on the exchange rates with the euro and other non-Asian currencies. There is no doubt however that the current uncertainty about these potential changes in the international economic environment has complicated the task of monetary policy.
One solution to this uncertainty, one we seemed to have embarked upon, is to start tightening and see what happens. My reading of the response to the tightening so far, which has not had a large impact on long-term rates, favors the integrated capital markets view.
Even on an issue as seemingly "obvious" ... as the torture issue, I think the Bush administration .. is making some sort of case for its position. Take on that case and show us why it's wrong.
Here's my response (see here and here for reports of another case). As this article notes, Khaled El-Masri, a German citizen born in Lebanon, was a car salesman before he was detained in December 2003:
America kidnapped me, by Khaled El-Masri, LA Times: The U.S. policy of "extraordinary rendition" has a human face, and it is mine. I am still recovering from an experience that was completely beyond the pale, outside the bounds of any legal framework and unacceptable in any civilized society. Because I believe in the American system of justice, I sued George Tenet, the former CIA director, last week. What happened to me should never be allowed to happen again.
I was born in Kuwait and raised in Lebanon. In 1985, when Lebanon was being torn apart by civil war, I fled to Germany in search of a better life. There I became a citizen and started my own family. I have five children. On Dec. 31, 2003, I took a bus from Germany to Macedonia. When we arrived, my nightmare began. Macedonian agents confiscated my passport and detained me for 23 days. I was not allowed to contact anyone, including my wife.
At the end of that time, I was forced to record a video saying I had been treated well. Then I was handcuffed, blindfolded and taken to a building where I was severely beaten. My clothes were sliced from my body with a knife or scissors, and my underwear was forcibly removed. I was thrown to the floor, my hands pulled behind me, a boot placed on my back. I was humiliated.
Eventually my blindfold was removed, and I saw men dressed in black, wearing black ski masks. I did not know their nationality. I was put in a diaper, a belt with chains to my wrists and ankles, earmuffs, eye pads, a blindfold and a hood. I was thrown into a plane, and my legs and arms were spread-eagled and secured to the floor. I felt two injections and became nearly unconscious. I felt the plane take off, land and take off. I learned later that I had been taken to Afghanistan.
There, I was beaten again and left in a small, dirty, cold concrete cell. I was extremely thirsty, but there was only a bottle of putrid water in the cell. I was refused fresh water. That first night I was taken to an interrogation room where I saw men dressed in the same black clothing and ski masks as before. They stripped and photographed me, and took blood and urine samples. I was returned to the cell, where I would remain in solitary confinement for more than four months. The following night my interrogations began. They asked me if I knew why I had been detained. I said I did not. They told me that I was now in a country with no laws, and did I understand what that meant?
They asked me many times whether I knew the men who were responsible for the Sept. 11 attacks, if I had traveled to Afghanistan to train in camps and if I associated with certain people in my town of Ulm, Germany. I told the truth: that I had no connection to any terrorists, had never been in Afghanistan and had never been involved in any extremism. I asked repeatedly to meet with a representative of the German government, or a lawyer, or to be brought before a court. Always, my requests were ignored.
In desperation, I began a hunger strike. After 27 days without food, I was taken to meet with two Americans — the prison director and another man, referred to as "the Boss." I pleaded with them to release me or bring me before a court, but the prison director replied that he could not release me without permission from Washington. He also said that he believed I should not be detained in the prison. After 37 days without food, I was dragged to the interrogation room, where a feeding tube was forced through my nose into my stomach. I became extremely ill, suffering the worst pain of my life.
After three months, I was taken to meet an American who said he had traveled from Washington, D.C., and who promised I would soon be released. I was also visited by a German-speaking man who explained that I would be allowed to return home but warned that I was never to mention what had happened because the Americans were determined to keep the affair a secret.
On May 28, 2004, almost five months after I was first kidnapped, I was blindfolded, handcuffed and chained to an airplane seat. I was told we would land in a country other than Germany, because the Americans did not want to leave traces of their involvement, but that I would eventually get to Germany. After we landed I was driven into the mountains, still blindfolded. My captors removed my handcuffs and blindfold and told me to walk down a dark, deserted path and not to look back. I was afraid I would be shot in the back.
I turned a bend and encountered three men who asked why I was illegally in Albania. They took me to the airport, where I bought a ticket home (my wallet had been returned to me). Only after the plane took off did I believe I was actually going home. I had long hair, a beard and had lost 60 pounds. My wife and children had gone to Lebanon, believing I had abandoned them. Thankfully, now we are together again in Germany.
I still do not know why this happened to me. I have been told that the American secretary of State, Condoleezza Rice, confirmed in a meeting with the German chancellor that my case was a "mistake" — and that American officials later denied that she said this. I was not present at this meeting. No one from the American government has ever contacted me or offered me any explanation or apology for the pain they caused me.
Secretary Rice has stated publicly, during a discussion of my case, that "any policy will sometimes result in errors." But that is exactly why extraordinary rendition is so dangerous. As my interrogators made clear when they told me I was being held in a country with no laws, the very purpose of extraordinary rendition is to deny a person the protection of the law.
I begged my captors many times to bring me before a court, where I could explain to a judge that a mistake had been made. Every time, they refused. In this way, a "mistake" that could have been quickly corrected led to several months of cruel treatment and meaningless suffering, for me and my entire family. My captors would not bring me to court, so last week I brought them to court. Helped by the American Civil Liberties Union, I sued the U.S. government because I believe what happened to me was illegal and should not be done to others. And I believe the American people, when they hear my story, will agree.
How to Refloat These Boats, by Gene Sperling, Washington Post: No Democratic sound bite is quoted more often by Republican tax-cut advocates than President John F. Kennedy's line that "A rising tide lifts all boats." It might come as a surprise, then, that Kennedy first used the line in a speech ... after congressional approval of a giant dam project. His point was to justify greater spending on infrastructure, and there is not a single example in his presidential papers of his using the metaphor specifically to promote tax cuts. ... The tide of the American economy is still rising, but it is lifting fewer boats. Faced with international competition, technological advances and the outsourcing of jobs, managers and college graduates, as well as workers, are increasingly worried that their boats may be capsized by the fierce waves of globalization ... Many fear that jobs will flow only to those with the very highest skills and those whose physical presence is required -- such as barbers, construction workers, food service providers -- while large numbers of middle-class jobs will be lost or relegated to lower status (and pay). In other words, the rising tide will lift some boats, but others will run aground.
Our ability to address this question is hampered by an impoverished debate between a "sky is falling" camp, which believes it is possible to save the middle class by turning back the tide of globalization, and a "don't worry, be happy" camp, which assumes that any government response ... will be counterproductive. Both perspectives miss the mark. While members of the "sky is falling" camp are right to advocate stronger labor standards in low-wage countries and enforcement of the rules for fair trade, it is naive to think that these measures would significantly reduce the dislocating effects of technology and global competition. ... Throughout history, there have been dire predictions that stiffer competition would lead to the demise of the middle class ... But these fears have never been realized. Still, such figures and historical facts hardly support a don't-worry-be-happy approach. ... China and India represent a level of competition unlike anything [previously]. ... and thanks to the revolution of information technology, hundreds of millions of their citizens have entered the global workforce, competing on an unprecedented scale...
As China, India and other developing countries move up the skills ladder, job losses in the United States have begun to shred an unspoken economic compact. Generations of Americans have accepted that the right combination of education, hard work, integrity and risk-taking is a one-way ticket to economic security and a better life for their children. ... In the 1990s, when job turnover surged due to global competition, President Bill Clinton was able to assure people that our economic compact was not broken -- it simply had to be updated to include a college degree, lifelong learning and technological literacy. Recently, however, not just factory workers, but software engineers, travel agents, law clerks and even radiologists are watching their jobs move overseas. ... The exodus of highly skilled jobs has undermined faith in our economic compact ... it shakes the assumption that hard work and education guarantee upward mobility... Workers receiving pink slips who lament that "I played by the rules, I did everything I was supposed to do" seem to me to be expressing their belief that the unwritten economic covenant they had relied upon is broken.
Even with solid economic growth in recent years, there is evidence to back up these sentiments. Inflation-adjusted ... wages have actually declined since the recession ended in November 2001 ... Moreover, when U.S. workers suffer setbacks -- a health crisis or job loss -- the decline in their economic well-being is far steeper than it used to be. ... A higher education degree has become a less reliable insurance policy against such economic setbacks. ... Should we as a society simply acknowledge that America's economic compact is largely a thing of the past? I don't think so. ... We ... should be able to agree on:
Reducing the health care burden on employers. Encouraging companies to outsource their jobs to rural and urban parts of this country... (One consultant who advises firms on how to cut legal costs uses the phrase "Banga-tucky" to get them to look at Kentucky as the Bangalore of inexpensive legal work.) Replacing our fragmented and confusing programs for people who have lost their jobs with a simple, unified system ... Benefits should include health insurance while they're between jobs and wage insurance ... Giving workers more help before they lose jobs, by creating "flexible education accounts" with tax credits for education and training.
This may sound like another wonky policy list, but the idea behind the approach is essential. We must recognize both the limits and responsibilities of government. And that means a government that does things it can do -- boosting health and education -- and does not try to do the things it can't do, such as stopping globalization. One thing no government can do is to accurately pinpoint the middle-class opportunities that will replace the ones flowing to India, China and Mexico. Only 15 years ago, some analysts forecast that work as a travel agent would be one of the fast-growing job categories; it's down 38 percent since then. And no one predicted the number of jobs that would be associated with the Internet.
It is precisely because we lack a road map that it is so crucial to strengthen public investments in research and education, which have traditionally laid the foundation for discovering and exploiting previously unimaginable jobs and industries. ... Funding such efforts, while restoring fiscal discipline, would require a bipartisan fiscal deal that would both repeal tax cuts for the most fortunate and slow entitlement growth. Neither the undoing of trade agreements nor further cutting of the capital gains tax rate will ensure that we remain a nation able to fulfill its unwritten economic compact, and where all boats, not just the yachts, rise with the tide. Author's e-mail: email@example.com
Greg Mankiw's Top Ten List
TOP (EC) 10 By N. GREGORY MANKIW: Here are some of my favorite books, plays, movies, etc., roughly in the order in which I first experienced them:
- “Charlotte’s Web,” by E.B. White. I loved this book when I read it as a child, and I loved it when I read it to my own children.
- “The Music Man.” This is one of my favorite musicals, in part because as a child I had as small role in a summer-stock production.
- “Foundation Trilogy, by Isaac Asimov.” I was mesmerized by this science fiction classic when I read it in high school. I was drawn to Asimov’s fictional field of psychohistory, which now reminds me a lot of economics.
- “Manhattan,” by Woody Allen. It came out when I was in college, and seeing it repeatedly took too many hours away from studying.
- “Capitalism and Freedom,” by Milton Friedman. This is the best book ever written by an economist for the general public. If you want to hear the case for a political philosophy based on free markets and limited government, read this.
- “Ella Fitzgerald Sings Cole Porter.” My favorite album—now CD—of all time.
- “Les Miserables.” I have never read the book, but I love the musical. I have seen it about half a dozen times, and I look forward to seeing it again when it comes to Boston in a few months.
- “Six Feet Under.” The best television show of recent years. Sadly, its great run has ended.
- “The Nurture Assumption,” by Judith Rich Harris. A fascinating discussion of the psychology of why children turn out as they do.
- “To Gillian on Her 37th Birthday.” This is my favorite bad movie. I know it’s bad because I have never met anyone else who likes it. Maybe it appeals to me because it is about a neurotic college professor cavorting on a Nantucket beach with Michelle Pfeiffer. Everybody’s gotta have a dream.
Posted by Mark Thoma on Sunday, December 18, 2005 at 01:21 AM in Economics
Universal Health Care: Economics Easier Than the Politics
Health Care for All, Just a (Big) Step Away, by Eduardo Porter, NY Times, Economic View: You may find it shameful that some 45 million Americans lack health insurance. Well, by reallocating money already devoted to health insurance, the government could go along way toward solving the problem. But you may not like the solution. Next year, the federal government expects to provide about $130 billion for Americans to buy health insurance. ... about 11 percent of all federal income tax revenue... Nonetheless, this financing remains under the political radar because it is provided indirectly - ... as a tax break that allows workers to receive health insurance coverage from their employers without having to pay income taxes on whatever it costs. ...
Although subsidizing health insurance may seem a ... positive contribution to the goal of universal coverage, it is among the most inefficient spending in the nation's fiscal arsenal. "If you had $150 billion to play with, you could come very close to universal coverage," said David Cutler, an economics professor at Harvard. ... According to President Bush's advisory panel on tax reform, about half of the tax break ... accrues to families making more than $75,000 a year. More than a quarter goes to families making over $100,000. These families would surely hate to lose the subsidy. ... On a typical family policy costing $11,500 a year, that is equivalent to some $4,000. ...
[T]he fiscal incentive isn't helping many of the people who need it most. ... In addition to going to the wrong people, the subsidy ... promotes wasteful medical spending, encouraging the wealthy to buy more insurance and to use more health services than they need... And it may bolster premiums across the board. ... As part of a series of proposals to rejigger the tax code, the president's tax panel ... suggested capping the total ... pretax dollars at an amount equal to the average health insurance premium ... some $11,500 for a family.
But if the objective is to expand health care coverage, a bolder option is available: focusing the bulk of the money on the bottom end of the income distribution. Added to what is already spent on Medicaid, this ... would be roughly enough to make health insurance free for people earning up to three times the poverty level... said Jonathan Gruber, an economics professor at the Massachusetts Institute of Technology... To make insurance universal, ... some mechanism would be needed to pool groups of people and to avoid leaving higher-risk people to face enormous insurance costs. ... And to make it universal, a mandate would be needed to make people buy it.
This isn't communism. The changes could happen under a public health care system ... But the new regime could be run privately as well... The government could give tightly focused tax credits so that lower-income people could buy health insurance on the market. And it could organize pools ... Regina E. Herzlinger, a professor of business administration at Harvard Business School, notes that the Swiss have such a system .... This, she said, gives the Swiss top-notch health services, universal health insurance and a medical bill that tops out at 10 percent of the nation's output, compared with 15 percent in the United States. ...
This health care revolution, however, is unlikely to catch on ... anytime soon. For starters, losing the tax break ... would be tremendously disruptive for the millions of Americans who get their insurance through their jobs. Perhaps most important, it would force higher-income families to buy health care without the tax break; that idea is probably as politically suicidal as abolishing the mortgage tax deduction. "I don't think anybody would dispute the economics," Mr. Gruber said. "I think the dispute would be over the politics."
December 17, 2005
Alan Krueger: Civil Liberties and Terrorism
Murdercide, by Michael Shermer, SciAm Skeptic: ... The belief that suicide bombers [murdercide] are poor, uneducated, disaffected or disturbed is contradicted by science. Marc Sageman, a forensic psychiatrist at the Foreign Policy Research Institute, found in a study of 400 Al Qaeda members that three quarters of his sample came from the upper or middle class. Moreover, he noted, “the vast majority—90 percent— came from caring, intact families. Sixty-three percent had gone to college, as compared with the 5–6 percent that’s usual for the third world. These are the best and brightest of their societies in many ways.” Nor were they sans employment and familial duties. “Far from having no family or job responsibilities, 73 percent were married and the vast majority had children. . . . Three quarters were professionals or semiprofessionals. They are engineers, architects and civil engineers, mostly scientists. Very few humanities are represented, and quite surprisingly very few had any background in religion.” ...
[A] necessary condition for suicide is habituation to the fear about the pain involved in the act. How do terrorist organizations infuse this condition in their recruits? One way is through psychological reinforcement. ...[T]he celebration and commemoration of suicide bombings that began in the 1980s changed a culture into one that idolizes martyrdom and its hero. Today murderciders appear in posters like star athletes. Another method of control is “group dynamics.” Says Sageman: “The prospective terrorists joined the jihad through preexisting social bonds with people who were already terrorists or had decided to join as a group. In 65 percent of the cases, preexisting friendship bonds played an important role in this process.” Those personal connections help to override the natural inclination to avoid self immolation. “The suicide bombers in Spain are another perfect example. Seven terrorists sharing an apartment and one saying, ‘Tonight we’re all going to go, guys.’ You can’t betray your friends, and so you go along. Individually, they probably would not have done it.”
One method to attenuate murdercide, then, is to target dangerous groups that influence individuals, such as Al Qaeda. Another method, says Princeton University economist Alan B. Krueger, is to increase the civil liberties of the countries that breed terrorist groups. In an analysis of State Department data on terrorism, Krueger discovered that “countries like Saudi Arabia and Bahrain, which have spawned relatively many terrorists, are economically well off yet lacking in civil liberties. Poor countries with a tradition of protecting civil liberties are unlikely to spawn suicide terrorists. Evidently, the freedom to assemble and protest peacefully without interference from the government goes a long way to providing an alternative to terrorism.” ...
A Break in Our Regular Programming
Another mission accomplished, by Molly Ivins, Creator's Syndicate: As one on the liberal side of the chorus of moaners about the decline of civility in politics, I feel a certain responsibility when earnest, spaniel-eyed conservatives like David Brooks peer at us hopefully and say, "Well, yes, there was certainly a lot of misinformation about WMD before the war in Iraq, but ... you don't think they, he, actually lied, do you?" Draw I deep the breath of patience. ... "Of course not actually lie, per se, in the strict sense" -- and then I listen to another speech about Iraq by either the president or the vice president and find myself screaming, "Dammit, when will they quit lying?" I realize this is not helping the cause of civility. On the other hand, sanity has its claims, as well.
I have been listening with great attention to the series of speeches Present Bush has lately given on his newly revealed "Plan for Victory." Of course I was pleased to learn we have a plan for a victory, which consists, it turns out, of announcing: "We cannot and will not leave Iraq until victory is achieved. ... We will settle for nothing less than complete victory. ... We will never accept anything less than complete victory." Unfortunately, the White House claims it produced this once supposedly secret plan in 2003, when it is actually a public-relations paper written less than six months ago, which is pretty much the way things go credibility-wise these days. ...
Bush claimed in his Naval Academy speech that 80 Iraqi army and police battalions are fighting alongside American units, while another 40 are taking the lead in fighting. But last summer, military leaders told Congress that three of the 115 Iraqi battalions are capable of fighting without U.S. help, and in October Gen. George Casey, the American commander in Iraq, lowered that to one. ... I mean, we can define "complete victory" down as far as Bush wants, as far as I'm concerned, but this ain't exactly facing reality.
So as not to completely abandon my colleagues still yearning for civility, it is only fair to point out that Bush and even Cheney are making some progress. For one thing, they now acknowledge reconstruction is not going entirely smoothly.... Also, Bush now acknowledges we are fighting more than just terrorists. In fact, most of the people we're fighting are themselves Iraqis who don't like us being there. The fact that their government has asked us to leave is still politely passed over. ... The number of attacks on American and Iraqi troops per day, rather a clear indicator, simply grows steadily worse. Rep. Jack Murtha ... says insurgent incidents over the past year have increased from 150 per week to over 700 per week. Bush's claims on reconstruction are likewise mind-boggling. It's not "fits and starts" -- there are rampant overcharges, corruption, lack of oversight -- it is a zoo. ...
One night in mid-September, George W. stood in New Orleans' Jackson Square... He promised help for housing, education and job training: "The work that has begun in the Gulf Coast region will be one of the largest reconstruction efforts the world has ever seen. ... I also offer this pledge of the American people: Throughout the area hit by the hurricane, we will do what it takes, we will stay as long as it takes to help citizens rebuild their communities and their lives."
Hey, you know, another mission accomplished.
I've tried to maintain civility and not to be overly political here, and I've bitten my tongue more than once. But recent events leave me doing the equivalent of screaming "Dammit, when will they quit lying?" to which I now add Dammit, when will they quit spying? And the dammits about torture being an issue at all continue as well. Why is there even any question about that? I hate being put into this position. I can't even trust that an independent press corps exists anymore, not with all the recent revelations of how the administration is intertwined, tit for tat, with the reporters at major news agencies. I'd rather stick to economics, but with the latest reports I feel I have to speak up - our rights, our freedom, and the integrity of our government are too important to stay silent. Years ago, I never dreamed I'd be asking myself the questions about our government I ask today. I just hope it's not to late to find the answers and fix it.
Wikipedia or Britannica?
Wiki This, SciAm Observations: Wikipedia is not wrong. At least not much more so than Encyclopaedia Britannica according to a random survey of scientific topics by Nature. The enterprising editors there drew up a list of 50 topics--from a prehistoric tool-making tradition known as the Acheulean to West Nile virus--and sent out the entries from Wikipedia and Britannica to independent experts. ... The survey found that Wikipedia averaged around four inaccuracies per entry, whereas the heavyweight Britannica averaged three. Of course, in some cases, Britannica trounced Wikipedia--just eight errors for the Brits on Mendeleev compared to 19 for the online upstart... But in a number of instances Wikipedia had fewer errors than Britannica: entries on the basic chemistry of the aldol reaction, physics great Paul Dirac, and epitaxy, a process for layering single crystal films in computer-chip making, for instance. And in entries on astrophysicist (and Nobel laureate) Subrahmanyan Chandrasekhar, lipids (or fats) and quarks, Wiki garnered a perfect score compared to multiple errors for Britannica.
This points up one of the strengths of Wikipedia: immediate review. If you find any error in a Wikipedia entry, no matter how small, you can immediately correct it. For example, John Siegenthaler, who touched off the current consternation concerning Wikipedia's accuracy when he found his own entry implicated him in the assassination of Robert Kennedy, could simply have corrected the entry himself. ... New facts can be incorporated almost as soon as they are known: for example, dentist Martin Nweeia only yesterday revealed at a conference that the narwhal's unique tusk is actually a sensory organ. That fact is already incorporated into the Wikipedia entry. Can Britannica do the same? And anyone with an Internet connection can gain access to Wikipedia's 4 million or so entries in a multiplicity of languages, with more added everyday. You must pay for that pleasure at Britannica, with some exceptions.
In short, Wikipedia is the kind of peer-reviewed, information sharing that the scientifically-minded should enthusiastically support, no matter what its early quirks and flaws. But so far, according to Nature's survey of 1,000 or so authors only 10 percent update it even though more than 70 percent are aware of it. Do your part, the encyclopedia--and possibly the scientist--of tomorrow depend on it.
Economists aren't too fond of certain four letter words, for example the f-word .... free .... as in free lunch .... comes to mind. Part of the price of the Wikipedia lunch is to participate in updating the entries, but since the payment is voluntary, most don't pay. I should do my part and update entries, but I've been "free" riding while waiting to see if others will do it first.
Cato Senior Scholar Resigns Over Lobbyist Payments
Columnist Resigns His Post, Admitting Lobbyist Paid Him, by Anne E. Kornblut and Philip Shenon, NY Times (WaPo): A senior scholar at the Cato Institute ... has resigned after revelations that he took payments from the lobbyist Jack Abramoff in exchange for writing columns favorable to his clients. ... Doug Bandow, who wrote a column for the Copley News Service in addition to serving as a Cato fellow, acknowledged ... he had taken money from Mr. Abramoff after he was confronted about the payments by a reporter from BusinessWeek Online. ...
Mr. Bandow did not take government money, but the source of his payments - around $2,000 an article - is no less controversial. His sometime sponsor, Mr. Abramoff, is at the center of a far-reaching criminal corruption investigation involving several members of Congress, with prosecutors examining whether he sought to bribe lawmakers in exchange for legislative help. A second scholar, Peter Ferrara, of the Institute for Policy Innovation, acknowledged in the same BusinessWeek Online piece that he had also taken money from Mr. Abramoff in exchange for writing certain opinion articles. But Mr. Ferrara did not apologize for doing so. "I do that all the time," Mr. Ferrara was quoted as saying. ...
At Cato and similar institutions, adjunct scholars are not always prohibited from accepting outside consulting roles. But at Cato, ... and at the American Enterprise Institute ... rules require scholars to make public all their affiliations ... In one column in 2001, Mr. Bandow extolled the free-market system ... saying that fighting terrorism was no excuse for "economic meddling" - the same position that Mr. Abramoff was being paid to advance. ... In an earlier column, in 1997, Mr. Bandow defended the gambling enterprise of the Choctaws. "There's certainly no evidence that Indian gambling operations harm the local community," he wrote. Mr. Abramoff ... is suspected of misleading the tribes about the way he used tens of millions of dollars in payments. ...
FedStuff: Santomero to Step Down, Auto Parts, Education, and ATMs
Philadelphia Fed President to Leave Bank Next Year: Anthony M. Santomero, president of the Federal Reserve Bank of Philadelphia, announced that he will leave his position as president effective March 31, 2006 . Dr. Santomero has headed the Philadelphia Fed for nearly six years, and is completing his year as a voting member of the Federal Open Market Committee. “... The president’s choice of Ben Bernanke is an excellent one, and the Federal Reserve is in good hands. However, if I am to move on to one more new career, now is the opportune time to make the transition,” Santomero said. ...
And, as Bloomberg notes, Sanotmero was an advocate of explicit inflation targeting so his departure may change the degree of support for moving in this direction depending, of course, on the views of his replacement, and he is also relatively hawkish on inflation:
Santomero, Philadelphia Fed Bank President, to Step Down on March 31, Bloomberg: Federal Reserve Bank of Philadelphia President Anthony Santomero will leave his job March 31 ... The departure means Ben S. Bernanke ... will lose an ally in his effort to set a specific U.S. inflation target. ... "Santomero was an important supporter of inflation targeting,'' said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi in New York. ... Santomero stressed the need for the Fed to raise rates to contain inflation in speeches this year. "It is incumbent upon the Fed to make every effort to keep these price pressures well- contained,'' he said in June remarks in Washington. ... "He took a consistently hard stance against inflation,'' said Mark Vitner, a senior economist at Wachovia Corp. in Charlotte, North Carolina. ... Of the 12 regional Fed presidents, Santomero is among the six who support creating some form of a numerical description of the Fed's low-inflation mandate. Bernanke backs the idea ...
From the Chicago Fed:
Chicago Fed Letter A newsletter featuring an essay on economic policy issues of regional or national interest. January 2006
Competition and trade in the U.S. auto parts sector by Thomas H. Klier and James M. Rubenstein: Exports of U.S. made auto parts have stalled in recent years, while import levels of auto parts have continued to increase. The authors detail the magnitude and destination of U.S. imports and exports of specific auto parts in order to assess the challenges facing U.S. parts suppliers. (PDF,106KB)
Higher education and economic growth by Richard H. Mattoon: The future of higher education and its relationship to economic growth were the focus of a one-day conference at the Chicago Fed on November 2, 2005. Cosponsored by the bank, the Committee on Institutional Cooperation, and the Midwestern Higher Education Compact, the event brought together over 100 academic, business, and government leaders. (PDF,48KB)
Higher education and economic growth: A conference report by Richard H. Mattoon: This is an expanded summary of the conference on higher education that was held at the Federal Reserve Bank of Chicago on November 2, 2005. This edition is only available online. (PDF,69KB)
From the San Francisco Fed:
|Bank ATMs and ATM Surcharges This Letter reports on recent research into the proliferation of ATMs and the pricing schemes that accompany them, which sheds some light on how banks compete against each other in the current environment. — Gautam Gowrisankaran & John Krainer, Economic Letter 2005-36 (December 16)|
December 16, 2005
Are Monthly Data Releases Informative?
Nowcasting GDP and Inflation: The Real-Time Informational Content of Macroeconomic Data Releases, by Domenico Giannone, ECARES and European Central Bank, Lucrezia Reichlin, European Central Bank and CEPR, David Small, Board of Governors, Federal Reserve, September 2005: Abstract This paper formalizes the process of updating the nowcast and forecast on output and inflation as new releases of data become available. The marginal contribution of a particular release for the value of the signal and its precision is evaluated by computing "news" on the basis of an evolving conditioning information set. The marginal contribution is then split into what is due to timeliness of information and what is due to economic content. We find that the Federal Reserve Bank of Philadelphia surveys have a large marginal impact on the nowcast of both inflation variables and real variables and this effect is larger than that of the Employment Report. When we control for timeliness of the releases, the effect of hard data becomes sizeable. Prices and quantities affect the precision of the estimates of inflation while GDP is only affected by real variables and interest rates. [SSRN link, CEPR link]
Paul Krugman: Drugs, Devices, and Doctors
Drugs, Devices and Doctors, by Paul Krugman, NY Times: Merck, the pharmaceutical giant, is under siege. ... Merck stands accused of playing down evidence that Vioxx, a best-selling painkiller until it was withdrawn..., increases the risk of heart attacks. The most recent accusation of obscuring the evidence came from The New England Journal of Medicine, which discovered that the authors of a Merck-supported paper ... had removed data unfavorable to Vioxx. ... Dr. Eric Topol, a famed cardiologist at the Cleveland Clinic, has been warning about the dangers of Vioxx since 2001. In videotaped testimony at a recent federal Vioxx trial ..., he accused Merck of scientific misconduct...
Two days after that testimony, according to Dr. Topol, he was told ...[his] position of chief academic officer ... had been abolished. A [Cleveland] clinic spokeswoman denied that the abrupt elimination of this post had any link to his Vioxx testimony. A few days later, The Wall Street Journal reported on a web of financial connections between the Cleveland Clinic, its chief executive and AtriCure, a company selling a medical device used in a surgical procedure promoted by the clinic. Dr. Topol ... was "among those who questioned the ties," the newspaper said.
O.K., it's sounding complicated. ... The past quarter-century has seen the emergence of a vast medical-industrial complex, in which doctors, hospitals and research institutions have deep financial links with drug companies and equipment makers. Conflicts of interest aren't the exception - they're the norm.
The economic logic of the medical-industrial complex is straightforward. Prescription drugs and high-technology medical devices account for a growing share of medical spending. Both are ... expensive to develop but relatively cheap to make. So the profit from each additional unit sold is large, giving their makers a strong incentive to ... persuade doctors and hospitals to choose their products. The tools of persuasion go beyond hiring cheerleaders as sales representatives. There are also financial inducements, sometimes disguised, sometimes blatant. A few months ago, Reed Abelson of The New York Times reported on a practice in which device makers give surgeons who are in a position to choose their products ... lucrative consulting contracts...
Above all, the line between medical researcher and medical entrepreneur has been blurred. In her book "The Truth About the Drug Companies," Marcia Angell, a former editor of The New England Journal of Medicine, writes that small companies founded by university researchers now "ring the major academic research institutions ... hoping for lucrative deals with big drug companies." Usually, she says, "both academic researchers and their institutions own equity" in these companies, giving them a strong incentive to make the big drug companies happy.
The ... whiff of corruption in our medical system isn't emanating from a few bad apples. The whole system of incentives encourages doctors and researchers to serve the interests of the medical industry. The good news is that things don't have to be that way. Economic trends gave rise to the medical-industrial complex, but only because those trends interacted with bad policies, which can be fixed. In future columns I'll talk about how serious health reform can reduce the conflicts of interest that taint our current system.
[Update: Full column here.]
In Trade We Trust
Remarks by Chairman Alan Greenspan, Acceptance of honorary degree, New York University, New York, New York, December 14, 2005: ...I have had a front-row seat in observing the exceptional growth in world living standards. With all that exposure, it was inevitable that I would gain some useful insights into the role of open and competitive markets in engendering the wealth of nations. ... On average, world standards of living are rising, in large part because of the widening embrace of competitive free markets, especially by populous and growing China and India. ... Open and free markets ... rest not only on voluntary exchange but also on a necessary condition of voluntary exchange: trust in the word of those with whom we do business. To be sure, all market economies require a rule of law to function--laws of contracts, protection of property rights, ... Yet, if even a small fraction of legally binding transactions required adjudication, our court systems would be swamped and immobilized.
In ... virtually all our transactions, ... we rely on the word of those with whom we do business. If we could not do so, goods and services could not be exchanged efficiently. The trillions of dollars of assets that are priced and traded daily in our financial markets before legal confirmation illustrates the critical role of trust. ... Commerce is inhibited if we cannot trust ... commitments. ... This necessary condition for commerce was particularly evident in freewheeling nineteenth-century America, where reputation and trust became valued assets. Throughout much of that century, laissez-faire reigned ..., and caveat emptor was the prevailing prescription for... trading... A reputation for honest dealing was thus particularly valued. ... To be sure, the history of world business is strewn with Fisks, Goulds, and numerous others treading on, or over, the edge of legality. But they were a distinct minority. ...
Over the past half-century, societies have ... partially substituted government financial guarantees and implied certifications of integrity for business reputation. As a consequence, the value of trust so prominent in the nineteenth century seemed by the 1990s to be less necessary. Most analysts believe that the world is better off as a consequence of these governmental protections. But corporate scandals in the United States and elsewhere have clearly shown that the plethora of laws of the past century have not eliminated the less-savory side of human behavior.
We should not be surprised, then, to see a reemergence ... of the value placed by markets on trust and personal reputation in business practice. After the recent revelations of corporate malfeasance, the market punished the stock prices of those corporations whose behavior had cast doubt on the reliability of their reputations. There may be no better antidote for business and financial transgression. ... Our system works fundamentally on trust and individual fair dealing. We need only look around today’s world to appreciate the value of these traits and the consequences of their absence. While market economies have achieved much in this regard, more remains to be done.
Prejudice ... is unworthy of a society built on individual merit. A free-market capitalist system cannot operate effectively unless all participants in the economy have the opportunity to achieve their best. If we succeed in opening up opportunities to everyone, the affluence within our borders will almost surely become more equally distributed. ...
December 15, 2005
Where Did the Productivity Growth Go? Inflation Dynamics and the Distribution of Income
Where Did the Productivity Growth Go? Inflation Dynamics and the Distribution of Income, by Ian Dew-Becker and Robert J. Gordon, NBER WP 11842, December 2005: Abstract A basic tenet of economic science is that productivity growth is the source of growth in real income per capita. But our results raise doubts by creating a direct link between macro productivity growth and the micro evolution of the income distribution. We show that over the entire period 1966-2001, as well as over 1997-2001, only the top 10 percent of the income distribution enjoyed a growth rate of real wage and salary income equal to or above the average rate of economy-wide productivity growth. Growth in median real wage and salary income barely grew at all while average wage and salary income kept pace with productivity growth, because half of the income gains went to the top 10 percent of the income distribution, leaving little left over for the bottom 90 percent. Half of this inequality effect is attributable to gains of the 90th percentile over the 10th percentile; the other half is due to increased skewness within the top 10 percent.
In addition to its micro analysis, this paper also asks whether faster productivity growth reduces inflation, raises nominal wage growth, or raises profits. We find that an acceleration or deceleration of the productivity growth trend alters the inflation rate by at least one-for-one in the opposite direction. This paper revives research on wage adjustment and produces ... model of price and wage adjustment that explains movements of labor's share of income.
What caused rising income inequality? Economists have placed too much emphasis on "skill-biased technical change" and too little attention to the sources of increased skewness at the very top, within the top 1 percent of the income distribution. We distinguish two complementary explanations, the "economics of superstars," i.e., the pure rents earned by sports and entertainment stars, and the escalating compensation premia of CEOs and other top corporate officers. These sources of divergence at the top, combined with the role of deunionization, immigration, and free trade in pushing down incomes at the bottom, have led to the wide divergence between the growth rates of productivity, average compensation, and median compensation. [open links: Brookings, Author web site]
Vox Baby: Nonpartisan Social Security Reform Plan
Vox Baby: Nonpartisan Social Security Reform Plan: Along with Jeff Liebman of Harvard University and Maya MacGuineas of the New America Foundation, I am pleased to announce the "Nonpartisan Social Security Reform Plan." Jeff was a Special Assistant to President Clinton's National Economic Council, where he worked on Social Security, and Maya was a Social Security adviser to Senator McCain's 2000 presidential campaign. Combined with my experience on the staff of the CEA in the Bush administration, we cover the political spectrum of recent years.
We've all spent plenty of time worrying about the looming fiscal crisis associated with the demographic shift toward an aging population, of which Social Security is the tip of the iceberg. Push finally came to shove, and we bound ourselves together via months of conference calls, and this is the plan that emerged. It's not what any one of us would have come up with on our own, but those sorts of plans never become legislation anyway.
What is unique about the plan is that it is designed around the broad areas of likely compromise across the political landscape on how to restore solvency to the system. What makes the plan important is that the Office of the Chief Actuary has evaluated it and certified that it would "easily satisfy the criteria for attaining sustainable solvency."
The plan contains four primary elements: a gradual reduction in future benefits; an increase in the payroll tax cap; an increase in the retirement age; and the establishment of personal retirement accounts. The plan puts great emphasis on fiscal responsibility – there are no transfers from general revenues to achieve sustainable solvency. Specifically:
1) Pay-as-you-go benefits would be gradually reduced to keep the costs of the traditional system to what can be afforded by the 12.4 percent payroll tax. The cuts are structured such that cuts are larger for high earners than for low earners.
2) The plan would establish mandatory personal retirement accounts (PRA) in the amount of 3 percent of taxable payroll. The accounts would be funded by a combination of diverting 1.5 percent of taxable payroll from the Social Security trust fund and requiring workers to contribute an additional 1.5 percent of payroll into their PRAs.
3) The funds diverted from the trust fund would be replaced, once the Social Security surplus was not adequate, by raising the cap on earnings subject to the Social Security payroll tax so that 90 percent of earnings were taxed. Workers would receive no incremental benefits for paying these additional taxes.
4) The plan would gradually increase the normal retirement age (currently scheduled to reach 67 in 2017) to 68 and the earliest age at which retirees could collect Social Security benefits from its current 62 to 65. People would be able to tap into their PRA assets beginning at age 62.
5) In order to minimize risks and administrative costs, accounts would be tightly regulated and full annuitization of account balances would be required.
6) Total replacement rates from the remaining traditional benefits and the new PRAs are comparable for most workers to those promised but currently underfunded in present law.
I invite your comments and questions on the plan, and I will be blogging more about the plan in the days and weeks to come. It was a fascinating experiment--we were trying to walk the very thin line between compromising our principles, which serves no one, and the principle of compromise, which is essential to moving public policy forward. It is a plan that respects political differences but not entrenched political interests. We believe that we have staked out the center of the political spectrum--the challenge now is to capture enough of the people just left and right of center to build the necessary coalition to see it through.
I've undoubtedly missed some things, but here are a few questions and reactions to the proposal:
1. I would like to see a more thorough discussion of the degree of the problem we face. It seems as though this has been talked to death, and in many ways it has. But for the most part we have seen just one or two sets of estimates on solvency. There is a good deal of uncertainty surrounding these numbers, the models used, estimates of trends, and so on, and there is reason to believe that the productivity numbers in particular are overly pessimistic. But lots of smart people say there is a problem to worry about, so let's move on to the proposed solutions.
2. With respect to raising the retirement age, is it true that people are more capable, healthier, more able to do physical labor than in the past? Are they healthier at age 68 than they used to be, or do they just live longer because the last years have been extended through medical advances? What will be done for all those who do physical labor their whole lives and come to age 62 or 65 and simply cannot go on? Is it equitable to treat them the same as someone who does far less demanding labor? In any case, what of those who cannot work at their current employment until age 68 and cannot find employment elsewhere that pays the bills? I’m not sure we fully understand the implications of extending the retirement age on the distribution of benefits, etc.
3. Will tilting the benefits further cause an erosion of political support for the program in the future? This is a big worry. Will it increasingly be seen, because of the differential benefits by income class, as an income transfer program rather than a social insurance program and a program to help overcome market failures in retirement insurance markets? If the higher income groups benefit less, will they next ask why they don’t pay less? Raising the cap to 90% tilts the process even further. Is it possible to protect against an erosion of support in the future because of these changes?
4. Why not hold the risk from participating in financial markets centrally? What is gained by distributing the risk to individuals through personal accounts, especially those on the margin? Is it a philosophical objection to using the trust fund to purchase private sector assets? What are the costs of reducing individual risk by investing the funds centrally rather than individually, particularly since individual choice will be so limited to prevent excessive risk taking?
5. Finally, even if I believe there is a problem, and even if this proposal is written to overcome the biggest concerns, I do not have a lot of faith in the existing congress and I’m hesitant to open the reform door even a crack. I think of it like a car with funny noises that may have “long-run structural” problems. There are some people I would trust completely to get under the hood, diagnose the problem, and fix it. They would do what was needed, and nothing more. There are other people, however, who would love to get under the hood, who may even listen for funny noises to try and convince you to let them tinker (and if they are also dishonest, maybe even squirt a little oil here and there secretly to help make the case). But I wouldn’t let them anywhere near the car. Most of the time, they would do more harm than good, rip out the whole engine when a smaller repair is all that is needed, or add unnecessary repairs to the bill. It’s risky, but in such cases I’d rather try and make it, funny noises and all, down the road to the next repair shop where I have a little more faith in the outcome. For me, that is the biggest problem with signing on to anything at the present time.
Andrew, Jeff, and Maya would appreciate hearing your comments on this proposal. Me too.
Lake Internal-funds-be-gone: Where All The Investments Are Above Average
Hal Varian offers an explanation for why companies finance investment out of retained earnings more often than many financial models suggest they should:
What Can We Learn From How a Manager Invests His Own Money?, by Hal R. Varian, Economic Scene, NY Times: In the simplest textbook model of financial markets, companies pay cash dividends each year to their shareholders, who can then invest this money ... [in] its most profitable use. In reality, companies often retain earnings and invest them internally rather than distribute profits to their shareholders. Such behavior is generally considered detrimental for shareholders since it forces them to reinvest in the same company... Furthermore, these retained earnings can seriously distort corporate investment decisions. If a good investment arises that is too large to be financed out of existing cash reserves, companies may pass it up ... On the flip side, internal investments that are not particularly profitable may be financed just because there is a lot of cash on hand.
Why do companies retain earnings, if they reduce shareholder choice and lead to investment distortions? According to one theory, managers are overly sensitive to cash on hand because their interests are not fully aligned with shareholders. They would rather use retained earnings to buy corporate jets or walnut desks than pay more dividends. An alternative explanation rests on ... access to information: corporate insiders understand investment opportunities available to them better than the stock market, so they prefer to invest using internal funds rather than pay the higher financing costs associated with the stock or bond markets.
In the December 2005 issue of The Journal of Finance, Ulrike M. Malmendier of Stanford Business School and Geoffrey Tate of the Wharton School offer a new and provocative explanation ... They argue that this behavior is partly explained by the personality characteristics of the chief executive. The title says it all: "C.E.O. Overconfidence and Corporate Investment." Their explanation begins with the Lake Wobegon effect: we all tend to think that we are above average. ... Successful business executives are particularly susceptible to this affliction. An overconfident chief executive may well believe that he can value investments better than financial markets and thus decide that retaining and investing earnings is better for the shareholders than letting them invest the money themselves. Alternatively, whenever he does not have cash at hand, ... [b]eing overconfident, he feels that his company and his investment plans are undervalued by investors and bankers and, hence, finds that raising the equity or the debt to finance the project is too expensive.
One way to see whether executives may be overconfident in corporate investments is to look at their behavior in their personal investments. Top executives often receive large grants of options and stock as compensation. Having all your eggs in one basket is quite risky, and prudent investors diversify as soon as it makes economic sense. The authors determine a sensible policy for ... a chief executive and then identify those who depart from such a policy as "overconfident." They tend to be chief executives who exercise their options much later than would seem reasonable and hold more company stock than appears prudent.
The question is whether these executives ... also appear to be overconfident with respect to the corporate investments they control. ... They found ...[that] chief executives who appear to be overconfident in their personal investment practices seem to be particularly sensitive to cash flows in their corporate investment decisions. The authors also examine how other personal characteristics ... affect corporate investment decisions. Those with engineering or science backgrounds tend to be more sensitive to cash flow in making investments than those with a financial background. The chief executives who grew up in the Great Depression seem to be particularly influenced by cash on hand, perhaps because they developed a distrust of financial markets and a predilection for self-sufficiency.... A chief executive who sells shares may be signaling prudent investment behavior rather than pessimism about future prospects. Examining how a chief executive manages his own money may well signal how he will manage yours.
The Use of Monetary Aggregates as a Guide to Policy
Monetary analysis is essential, not old-fashioned, by Otmar Issing, Financial Times: ...Can any central bank afford to ignore ... monetary developments in formulating monetary policy? ... the answer is “no”. It is time to move on from the misguided question of whether analysis of monetary and credit data should play a role in monetary policymaking. ... The European Central Bank ... approach reflects the need for an encompassing assessment of the risks to price stability by cross-checking the indications coming from the economic analysis with those stemming from the monetary analysis. We have ... found that monetary analysis is pivotal in understanding the medium- to longer-term outlook for price stability. Using monetary developments to cross-check the economic analysis ... is crucial... Monetary analysis goes beyond focusing exclusively on developments in one particular aggregate – M3 in our case – to encompass a rich assessment of other measures of liquidity, as well as credit and financial flows and asset prices.
Developing such a rich monetary analysis ... creates communication challenges. ... [T]he ECB has always been transparent about the complexities involved. In our communication..., we strive to offer clear – but not simplistic – messages about the conclusions drawn from the monetary analysis... Confronting such challenges has produced [two] substantial rewards. ... First, our monetary analysis has delivered important signals about ... future price developments, especially at the medium to longer horizons most relevant for monetary policy decisions. Since 1999, the properties of money as an indicator of inflation ... compare very favourably with alternative frameworks.... Of course, the period of comparison is still relatively short.... Definitive conclusions cannot yet be drawn. ...
Second, the monetary analysis has provided a framework within which to identify, discuss and communicate in a timely way the growing challenges posed by financial imbalances and inflated asset prices. It has become widely recognised that, with consumer price inflation well anchored, overly accommodative monetary policies may lead to asset price inflation. ... Further research in this area is needed ... Nonetheless, taking seriously monetary analysis in a broad sense is an important step in this regard.
The ECB’s monetary analysis ... helps to lengthen the horizon of the policymaking discussion and provides a framework for considering asset price and financial imbalances. Indeed, other central banks are considering using a cross-check based on money, credit and asset market developments in their policy frameworks... We are told that assigning an important role to monetary analysis is old-fashioned. ... When price developments are benign, monetary analysis is likely to fall out of fashion. However, we should not wait for inflation to revive before recognising the importance of monetary developments for monetary policymaking.
I am not fully convinced. Monetary aggregates are difficult to measure due in part to the difficulty rapid financial innovation poses for defining consistent aggregates through time. Because of this, aggregates have the potential to give false readings, and they are certainly no replacement for other measures. But if it can be shown that aggregates provide useful information, I am certainly open-minded.
December 14, 2005
Productivity Growth and Unemployment
See an intriguing graph of the univariate trends in the rates of unemployment and productivity growth in the U.S., 1960 – 2000 (univariate trends computed using a low pass filter; source is “Prices, Wages and the U.S. NAIRU in the 1990s,” Ch. 1 in The Roaring Nineties, A. Krueger and R. Solow (eds.), Russell Sage Foundation/The Century Fund: New York (2001), 3 – 60 (with D. Staiger and M. Watson).
Paul Krugman: Costco versus Wal-Mart
Putting Pressure on Wal-Mart, by Paul Krugman, Money Talks: David Gross, Palo Alto, Calif.: I agree with you completely ["Big Box Balderdash"]. In addition, you could cite Costco, as a comparison, as a competing high-volume, deep-discount retailer which pays its employees well, with good benefits. In addition, its social posture is excellent, and quite unique in corporate America...
Paul Krugman: I didn't have space to get into comparisons between Wal-Mart and other big box employers. The contrast with Costco ... is telling. There is ... a counter-argument from Wal-Mart's defenders. Costco caters to a much higher-income clientele ..., so that Costco's customers may place a higher value on the intangible benefits ... from a workforce that is relatively content, and also more experienced because of lower turnover. It's probably true, given the relatively low income of its customers, ... that Wal-Mart's most profitable strategy is the one it has chosen: low wages, high turnover, and low prices at the expense of service.
But there are tradeoffs: if Wal-Mart were pressured into paying its workers better, the cost to the company would be much less than the added wages, because of all the factors that make treating workers decently profitable for Costco. What this means is that the corporate profitability case for low wages at Wal-Mart is true, but less compelling than ... the raw numbers might suggest. The message I take from this is that a pressure campaign against Wal-Mart has a good chance of succeeding. If public pressure makes a low-wage policy less attractive, Wal-Mart might well be persuaded to shift toward a more Costco-like wage structure.
Using Monetary Policy to Balance Inflation and Output Risks
The Dallas Fed Does Henry George
Henry George: Antiprotectionist Giant of American Economics, Economic Insights, Federal Reserve Bank of Dallas: Americans are again confronted, both domestically and internationally, with the clash of protectionist and free trade sentiment. ... Americans are torn between enjoying the benefits of globalization, with its increased consumer choices and lower prices, and worrying about the costs to the nation that some claim come with global free trade. There is nothing new about this clash of ideas ... they have been vigorously debated before, most notably during the late 19th century. In the center of that debate was one of this nation’s most famous economists—Henry George. Today, few Americans recognize his name, yet his Progress and Poverty is the best-selling economics book ever written and outsold all English-language books save the Bible in the late 1890s. He touched off a worldwide movement for major tax reform... Who was George? Why was he so influential? And what did he have to say about protectionism that we might profit from today? We offer this short biographical piece to answer these questions. — Richard W. Fisher President Federal Reserve Bank of Dallas
Henry George: Antiprotectionist Giant of American Economics
Today’s policy discussions are often argued as if the issue under consideration is unique to our time. Because we often forget—or never knew—the relevant history, we can fail to see that almost every policy argument has historical precedent. ... Although many believe them unique to our day, antiglobalization—with its concomitant protectionist sentiments—salts human history. Mercantilist doctrine, which is protectionist, dates to mid-17th century Europe. As international trade grew, so, too, did the demand for government intervention to protect domestic manufactures by discouraging imports and subsidizing exports. ... For over a century, the American government raised the majority of its tax revenue through the imposition of import tariffs. But protectionist economic policy has always had critics, one of the most thoroughgoing of whom was Henry George.
George was born in 1839 in Philadelphia. ... At 16, he shipped out on the Hindoo as a deckhand, voyaging from New York to Australia and India. After more than a year at sea, he returned to his family and entered the printing business. When that didn’t work out, he decided to emigrate to California ... George docked in San Francisco at age 19, another fortune seeker arriving ... a decade after the state’s famous gold discovery. San Francisco offering little in the way of employment, George accompanied a cousin to British Columbia to help him open a store for gold miners at the northern tip of the Fraser River. The work was hard, and after an argument with his cousin, George left the store’s employ. He was on the verge of taking up mining, but the discouraging stories ... sent him back to San Francisco instead in late 1858. Once there, he landed a typesetting job ...
The new job didn’t last, though, and George soon became a rice weigher in a local warehouse, studying and reading by night, a man with no friends and no money to go out, socialize and find any. When the warehouse closed ... He landed work setting type, but found himself unemployed shortly thereafter... It was then that he finally had a piece of good luck—meeting his future wife, Annie Corsina Fox. Their courtship and marriage coincided with the nation’s plunge into civil war and the young groom’s unpromising employment prospects. But ... the marriage was a wonderfully successful rock on which he and his wife built the remainder of their lives.
The war years were a time of bitter privation for the couple. They moved to Sacramento so Henry could set type, but that opportunity soon collapsed ... and they returned to San Francisco... When their second child was born and they were penniless, George was reduced to begging. Happily, he was able to get some money just by asking a stranger for it. Otherwise, he wrote in his journal, he would probably have killed the man to secure funds to feed his children. Hitting bottom, he outlined the steps he planned to take to improve himself and, he hoped, his family’s lot. The man who would write Progress and Poverty—the best-selling economics book in history—was no stranger to either.
George finally landed steady printing work and began writing pieces for area newspapers, his first foray into the public arena ... His formal education was limited, but that didn’t stop him from becoming self-educated in political economy. Having been a protectionist before (he wrote in his journal) engaging in “logical thought on the matter,” he quickly converted to the free trade position. In a debate in Sacramento (probably in 1868), he stated his position clearly through a telling rejoinder to the evening’s protectionist speaker. If the speaker were correct, George challenged, the remotest places on earth ought to be the best places to live since they would be the most prosperous. It was a simple yet thought-provoking reply that demonstrated the silliness of protectionist dogma. George further announced that at the beginning of the evening he had been a protectionist, but after listening to the speaker’s arguments, he was leaving the meeting a free trader because “protection was defensible only upon the theory that the separation of mankind into nations implied their industrial and commercial antagonism.”
Over the next 10 years, George edited two small newspapers and ran unsuccessfully for political office. He was appointed state inspector of gas meters in 1876, and dutifully worked to improve the safety of California’s natural gas infrastructure, often over the objections of gas-related business interests. His ideas concerning the relationship between land rents and poverty began to crystallize, and he often wrote pamphlets and editorials arguing his views. His ideas attracted a growing number of followers. On Sept. 18, 1877, in Sausalito—just north of San Francisco and his new home—George began writing a potential magazine article that would eventually become Progress and Poverty.
At that time, the nation was suffering a severe industrial depression, and anarchy and disorder reigned. The situation cost many lives, and vandalism by mobs of the newly unemployed caused millions in property damage. George’s friends convinced him to expand the article into a book. He labored for 17 months... Sales were slow initially but soon grew, as did George’s reputation.
He embarked for Europe to help spread his vision for ending poverty, which was set out in the book. He proposed a single tax on land to replace the taxes labor and capital owners paid, shifting the entire tax burden onto inelastically supplied land rent. ... (See the box titled "The Single Tax on Land.")
After a year in Europe debating some well-known opponents—among them, economists such as the great Alfred Marshall—George returned to America a famous man. It was time, he knew, to spread his vision at home. Low-cost editions of his writings sold very well... George had ignited a large social movement that demanded ... the so-called single tax on land.
In 1886, George ran for mayor of New York City. Backed by most unions, he presented a real threat to the Democratically controlled political machine, which offered him a Congressional seat if he would forgo the election. “Wanting to raise hell,” George declined the offer and accepted the United Labor Party’s draft to run for mayor. In retaliation, his campaign was subjected to dirty tricks and his reputation smeared. George did not win, but he did beat Theodore Roosevelt, the Republican candidate, by 8,000 of the 120,000 votes counted for both men. That tally was, of course, done by the Democrats and is undoubtedly inaccurate because George’s party had no poll watchers to help oversee the ballot count. Considering that his opponents portrayed him as a man whose followers were “anarchists, nihilists, communists and socialists” who would bring the French Revolution’s many excesses to New York, George’s showing was surprisingly strong. ...
George subsequently left politics to write and speak. He edited The Standard, a New York-based paper, and often wrote long pieces supporting his ideas for publication in its pages. He traveled widely ... He wrote more books... For a time, it seemed the entire nation was debating protectionism and free trade ...
George died in 1897 while again running for mayor of New York... The public reaction to George’s death was unlike that generated by the passing of any other economist. More than 100,000 people turned out to view his body ... His death was a major international news story...
Nobel economist Milton Friedman once said that of all the ways to tax, “In my opinion the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many years ago.” — Robert L. Formaini Senior Economist
The Single Tax on Land
After studying the classical political economists’ writings—including work by the French physiocrats, Adam Smith, David Ricardo, Thomas Robert Malthus and John Stuart Mill—George concluded that economic rent was an unproductive and unfair residual value that served only to enrich landowners while contributing nothing to the productive process itself. The amount of rent was determined solely by the collective demand for land. George’s basic idea, which he did not claim was original, was to tax away all land rent and abolish all other taxes. ... Many taxes of the sort George advocated exist today, including any property tax that distinguishes between raw land value and site improvements. A tax on land, a fixed-supply input, does not have the same supply-side disincentive effect as a tax on labor or capital. No one denies this basic contention of classical economics. Other objections, however, are valid, especially the observation that as total government expenditures rise, no tax on land alone can finance that spending. For his part, George believed that land tax revenues were the upper bound on appropriate, moral taxation. ...
Progress and Poverty was a big best-seller; it outsold all books in the English language save the Bible .... In some ways, the focus on the single-tax proposal has prevented a general appreciation of the totality of George’s work. His was a clear and powerful voice for free international trade, and he convinced even labor union members and many socialists of his day of free trade’s superiority. How much has changed! Because George believed that the only just tax was one applied to land rent, he opposed tariffs on goods traded across international borders. ...
What Is Prevented by Protection?
...What is it that protection by tariff prevents? It is trade. To speak more exactly, it is that part of trade which consists in bringing in from other countries commodities that might be produced at home. But trade ... is not, like flood, earthquake, or tornado, something that comes without human agency. Trade implies human action. There can be no need of preserving from or defending against trade, unless there are men who want to trade and try to trade. Who, then, are the men against whose efforts to trade “protection” preserves and defends us?
If I had been asked this question before I had come to think over the matter for myself, I should have said that the men against whom “protection” defends us are foreign producers who wish to sell their goods in our home markets. This is the assumption that runs through all protectionist arguments—the assumption that foreigners are constantly trying to force their products upon us... Yet a moment’s thought will show that ... the desire of one party, however strong it might be, cannot of itself bring about trade. To every trade there must be two parties who mutually desire to trade... No one can buy unless he can find some one willing to sell; and no one can sell unless there is some other one willing to buy. If Americans did not want to buy foreign goods, foreign goods could not be sold here even if there were no tariff. The efficient cause of the trade which our tariff aims to prevent is the desire of Americans to buy foreign goods, not the desire of foreign producers to sell them. Thus protection really prevents what the “protected” themselves want to do. It is not from foreigners that protection preserves and defends us; it is from ourselves. —Protection or Free Trade, 45–46
True Free Trade
...Free trade, in its true meaning, requires not merely the abolition of protection but the sweeping away of all tariffs—the abolition of all restrictions…on the bringing of things into a country or the carrying of things out of a country. But free trade cannot logically stop with the abolition of custom-houses. It applies as well to domestic as to foreign trade, and in its true sense requires the abolition of all internal taxes that fall on buying, selling, transporting or exchanging, on the making of any transaction or the carrying on of any business, save of course where the motive of the tax is public safety, health or morals. Thus the adoption of true free trade involves the abolition of all indirect taxation of whatever kind, and the resort to direct taxation for all public revenues. But this is not all. ... For the same reason ... that we ought not ... tax any one for adding to the wealth of a country by bringing valuable things into it, we ought not to tax any one for adding to the wealth of a country by producing within that country valuable things. Thus the principle of free trade requires that we should not merely abolish all indirect taxes, but that we should abolish as well all direct taxes on things that are the produce of labor ... by imposing no tax whatever upon the production, accumulation or possession of wealth (i.e., things produced by labor)... —Protection or Free Trade, 286–87 ...
How Is Free Trade Advocated?
Thus it is that free trade, narrowed to a mere fiscal reform, can appeal only to the lower and weaker motives—to motives that are inadequate to move men in masses. Take the current free trade literature. Its aim is to show the impolicy of protection, rather than its injustice; its appeal is to the pocket, not to the sympathies. Yet to begin and maintain great popular movements it is the moral sense rather than the intellect that must be appealed to, sympathy rather than self-interest. ... —Protection or Free Trade, 315–17
December 13, 2005
Rates Up 1/4 as Expected, Accommodative Gone, Measured Stays But is Reworded
My view prior to today's meeting was that if the Fed left both the measured and accommodative language in the press release, that meant they were willing to let financial markets lock into the expectation of one or two more rate increases. The implication would be that there was very little incoming data could do to alter the Fed's intent to tighten further, though of course if the situation changed dramatically they would reconsider.
By changing the language as they have, the Fed is signaling that further rate increases are very likely, but not certain. Strong growth and inflation worries showing up in incoming data will continue to bring about further tightening, but any signal that growth is abating or that inflation is firmly under control will give the Fed reason to pause and reconsider whether further increases are warranted. For now, they see solid growth, low core inflation, and long-term expectations that are contained and feel that further increases are likely necessary to balance the risks of price stability and falling growth. That is, currently they see the risk of inflation as higher than the risk of falling growth and feel a further rate hike is needed to bring these risks into balance. It will be interesting to see to what degree FedSpeak is used to set expectations as data arrive. In the following, the equivalent passages from the November 1 press release after the last FOMC meeting are in italics [Today's release, November 1 release]:
For immediate release
The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 4-1/4 percent.
The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 4 percent.
Despite elevated energy prices and hurricane-related disruptions, the expansion in economic activity appears solid. Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained. Nevertheless, possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures.
Elevated energy prices and hurricane-related disruptions in economic activity have temporarily depressed output and employment. However, monetary policy accommodation, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity that will likely be augmented by planned rebuilding in the hurricane-affected areas. The cumulative rise in energy and other costs has the potential to add to inflation pressures; however, core inflation has been relatively low in recent months and longer-term inflation expectations remain contained.
The Committee judges that some further measured policy firming is likely to be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives.
The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal. With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.
[Note: no substantive changes] Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.; Richard W. Fisher; Donald L. Kohn; Michael H. Moskow; Mark W. Olson; Anthony M. Santomero; and Gary H. Stern.
Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.; Richard W. Fisher; Donald L. Kohn; Michael H. Moskow; Mark W. Olson; Anthony M. Santomero; and Gary H. Stern.
[Note: no substantive changes] In a related action, the Board of Governors unanimously approved a 25-basis point increase in the discount rate to 5-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.
In a related action, the Board of Governors unanimously approved a 25-basis point increase in the discount rate to 5 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.
For more: NY Times, Washington Post, Bloomberg, Wall Street Journal, CNN/Money, Fed Breaks Pattern, Signals Replace Promises: John M. Berry, Bloomberg, Fed Wraps Holiday Statement in Shade of Neutral: Caroline Baum, Bloomberg
Chinese Government Struggles with Protests over Property Rights
As the economy booms, so does unrest, The Economist: It is hard to know what is most remarkable: the protest, the crackdown or the government response. A demonstration in a coastal settlement in a relatively rich province of southern China last week turned violent. Residents in Dongzhou took up spears, knives, pipe-bombs, petrol bombs and sticks of dynamite, first threatening to blow up a local power generation plant and then defying paramilitary police sent to impose order. The police, in gathering darkness and “in alarm”, responded by shooting dead at least three protesters and wounding several others. ... Reports gathered by journalists ... suggest that, in fact, many more were killed, perhaps 20 ... including bystanders. ...Amnesty International ... says this is the first time demonstrators in China have been killed by police fire since 1989 ... in Tiananmen Square...
Though protests are increasingly common in China, the violence in Dongzhou was uncommon. Rarer still was the reaction of the authorities. Rather than deny the police crackdown ... the government of Guangdong province at the weekend criticised the “wrong actions” of the commander... Civilian officials then detained him, an extraordinary response which suggests high-level concern that the incident was badly mishandled... There is every reason to expect more uprisings as China’s economy continues to boom. The farmers and fishermen who took part in the protest last week are not China’s poorest... Many of the homes in their settlement ... are modern and in good condition ... But locals are enraged that land was confiscated for use in a $700m development project to supply electricity to Shanwei, and little compensation was offered. This suggests ordinary Chinese are increasingly aware of their property rights and willing to defy authorities to protect them...
How China’s government handles such protests is now a burning question. ... Hardliners believe in tough measures, such as banning internet material that incites “illegal demonstrations” and deploying newly trained anti-riot and counter-terrorist units. These last two have been combined into a new “special police” force that is supposed to tackle any demonstration that turns “highly confrontational”. But if the ham-fisted performance at Dongzhou is a sign of it in action, there is reason to look for other responses. ... [W]here ... the root problem is access to land, officials could do more to respond to the grievances ... by ensuring that property rights are better respected. Tackling corruption would help too. Too often, compensation offered for confiscated land is pocketed by ... officials. ...
There are some signs that the government will not rely merely on repressive measures. The weekend arrest of the military officer responsible in Dongzhou was surprising and welcome. That suggests the highest authorities in the country ... who sits atop the China’s civilian, military and Communist party structures, have become involved and disapprove of the police violence. That journalists have been able to put together a picture of what happened in Dongzhou also reflects a limited freedom that did not exist a decade ago ... With many more protests to come, the calls for rights are sure to grow louder.
Signs that the government is striving to find less heavy-handed responses are encouraging. Measures such as more generous compensation, reducing corruption, and so on may reduce the problem, but hard feelings over land confiscation will never be entirely avoided. One wonders how hard officials work to avoid confiscating land for public projects and perhaps this is another area it could improve. A government used to asserting its authority without regard to individual rights may not think to try to find solutions that avoid such conflicts when planning projects if it requires additional effort or cost. Recognition that the government must work to avoid conflicts where possible at the planning stage could also help.
Stiglitz and Charlton: The Doha Trade Talks and Developing Countries
The Doha round is missing the point on poor countries, by Joseph Stiglitz and Andrew Charlton, Commentary, Financial times: ...[A] vast chorus of world leaders have warned that the possible failure of the Doha trade talks would be a ... lost opportunity to alleviate poverty in developing countries. However, as the parameters of a possible deal are hammered out ..., we should remember that the content of the agreement matters more than the agreement itself. As it stands, the Doha round is rushing headlong ... towards a conclusion that would do very little for the poorest countries.
The current log-jam centres on the European Union’s offer to reduce its agricultural tariffs on condition that developing countries agree to open their manufacturing and services sectors. ... Unfortunately this ... deal is ... wrongheaded ... For one thing, it is misleading to present European agricultural liberalisation as a concession to the developing countries. The Common Agricultural Policy is an unsustainable system that ... has been on the brink of collapsing under its own weight. ... it is surely too much ... to ask them to offer concessions in return. Second, it is inappropriate for the largest and richest countries to be demanding a quid pro quo from the poorest. The developing countries are in no position to bargain with the superpowers. ... [The] deal is also based on the assumption that poor countries should satisfy themselves with being agricultural suppliers to rich nations. It asks developing countries to expose their manufacturing industries to competition from more advanced and larger economies, potentially throwing those workers into unemployment, and it asks them to forgo attempts to promote their own service sector industries. ...
[M]any of the poorest countries actually have very little to gain from agricultural reform in the short run. ... most of the poorest nations are net food importers. Reductions in subsidies will increase the price they pay for imported commodities... Also, most ... are beneficiaries of special schemes granting them free market access to European and US markets. ... so tariff reductions would only benefit their competitors’ exports at their expense. ... There is much that could be done by the World Trade Organisation to promote development ... But few of those things are included in the emerging agenda. ...
There is much that could be done to reduce tariffs on industrial goods. The structure of rich countries’ tariffs is heavily biased against the goods exported by poor countries, particularly labour-intensive industrial goods and processed foods. ... There is also much that could be done to increase the mobility of workers. ... Finally, the Doha round needs to get serious about “aid for trade”. In recent years the EU and US have slashed tariffs to the poorest countries under special schemes granting them free market access. Yet ... we have witnessed almost no increase in the volume of exports from beneficiary countries. This experience belies the rhetoric of politicians who espouse the virtues of trade over aid. Market access is not enough. Without assistance to overcome gaps in infrastructure, boost product quality and connect to international supply chains, tariff cuts have little effect on trade from the poorest nations. In Doha in 2001, the developing countries were promised a “development round”, one that would redress the imbalances of the past and create opportunities for the future. But what has emerged since then clearly does not deserve that epithet. ...
It's the Price of Gas, Stupid!
How's Bush Doing? Just Check the Price of Gas, Paul Krugman, Money Talks: Ronald Hernandez, Saint Amant, La.: ... if the economy is doing so poorly for the average Mary or Joe, then why are the latest polls consistently showing that more and more people are feeling better about it? ... And, oh yes, I am from the Katrina area and am well aware of how the Bush machine is working on its latest portrait. They are in the process of painting a picture of unpreparedness and incompetence within Louisiana's state and local governments in reaction to the worst natural disaster ever in the United States.
Paul Krugman: The latest polls do show some improvement in peoples' perception of the economy, although it's still strongly negative. But there's no mystery there: it's all about gasoline prices. It turns out that there's a stunningly close relationship between short-term movements in Bush's approval rating and changes in the price of gasoline. You can see it for yourself at an interesting web site, Professor Pollkatz's Pool of Polls. (The site is very anti-Bush but provides interesting data analysis whatever your politics.) In fact, given the fall in gas prices back to pre-Katrina levels, the surprising thing is how little of a boost Bush and his economic performance ratings have received.
Our Decaying Infrastructure
It's Time to Rebuild America A Plan for Spending More -- and Wisely -- on Our Decaying Infrastructure, by Felix G. Rohatyn and Warren Rudman, Washington Post: Two recent, very different events ... serve as startling examples of our unwillingness to support needed public investment... On the Gulf Coast, the failure to invest adequately in the levees of New Orleans and to prepare for or manage the resulting disaster was obvious to the world. On the Pacific Coast, in the state of Washington... [t]he region's infrastructure had been outstripped by growth. But the new governor, Christine Gregoire, had the courage to impose a phased-in motor fuels tax to repair the state's dilapidated and congested roads and bridges. Her opposition tried to repeal the legislation with a ballot initiative, but thanks in part to the support of the state's most powerful business leaders, voters stood by her and supported the tax...
In many parts of the country, the population has outgrown its infrastructure. The resulting decline in quality of life is having a direct effect on the region's corporations as well as on its residents. Private investment has led U.S. economic growth for two centuries, but it could not have done so without a series of complementary public investments in canals, railroads, roads, the airspace system, water projects, public transportation, public schools and the like, which improve business productivity and our standard of living while generating significant increases in private-sector employment. But these investments have been badly neglected in recent years. ...
Americans may not want "big government," but they want as much government as is necessary to be safe and secure. Today state and local governments spend at least three times as much on infrastructure as the federal government does. In the 1960s the shares for both were even. Even so, increases in state spending have not been enough to check the decline in many of our public assets. ... There will no doubt be opposition to solving this problem. Advocates of "small government" will characteristically oppose government's performing its valid, historical role. ... The nation's infrastructure [is in] crisis ... A federal role is needed to fix it, but that role must be reconceived, redrawn and refinanced. Success will improve our quality of life, our standard of living and our competitiveness. That will require government big enough and smart enough to be effective...
Remember who Warren Rudman is? He's Mr. Deficit Reduction:
The Gramm-Hollings Deficit Reduction Act, passed in 1985 by the United States Senate: Senators Ernest Hollings ..., Warren Rudman ... and Phil Gramm ... were the chief sponsors. The Act was aimed at cutting the budget deficit, at the time the largest in history. Its official name was the Balanced Budget and Emergency Deficit Control Act of 1985. It required Congress to compensate tax cuts or spending with other revenue, and also provided for automatic spending cuts if Congress and the President failed to do so. This provision was found unconstitutional ... and a reworked version of the bill passed; however, it failed to prevent large budget deficits.
I agree with the call for more spending on infrastructure, it's needed. But, while there is a proposal in the article to provide federal financing, how the new infrastructure spending would be paid for is not addressed directly. Politics could easily turn this need into yet another excuse to cut taxes and social programs.
December 12, 2005
Tax Cuts, Output Cycles, and Growth
Now, let there be a tax cut at the point in time indicated in the following two graphs. Tax cuts have the potential to do two things. First, as shown in this diagram, a tax cut can stimulate a lagging economy helping it to recover faster:
In this diagram, after the tax cut, which stimulates the economy due to the deficit spending it causes, output rises faster. Thus, the data would show increasing output growth and rising tax collections. But these tax cuts do not "pay for themselves" in the sense that there is no change in the long-run growth rate of output, i.e. the underlying rate of growth in tax collections is unchanged. For that to happen, the trend rate of growth must change as shown in the next diagram:
Here, the tax cut has changed the rate of economic growth and thus will cause tax collections to grow faster as well. Most of the pro-growth people have this in mind when they think about tax cuts.
Which does the evidence suggests occurs after a tax cut? We're pretty sure tax cuts have the first type of effect of attenuating cycles, but the evidence that tax cuts affect the underlying growth rate is much more tenuous. And when you go further and ask if growth changes enough to pay for the tax cuts, the evidence is even thinner.
Anyone who says based upon a few months of data that they know which of the two scenarios is unfolding, an attenuation of cycles or a change in growth, is not telling you a straight story. Just because growth is higher and tax collections go up does not mean the second story is true. We don't know yet, and we won't know until a lot more data are available. Historically, there is reason to favor the first scenario - typically the effects are through deficit spending and the attenuation of cycles, not a change in the underlying trend rate of growth, but it is a possibility so it cannot be ruled out as implausible, and the two effects are not necessarily mutually exclusive.
If you remain unconvinced, think of it this way. Suppose the last month or two, or even the last few years, have been warmer than normal. Is this a change in the trend temperature (T*), i.e. is it global warming? Or is it just abnormally warm for other reasons, just a cycle producing higher than normal temperatures? There's really no way to tell - it takes a long series of temperatures to sort it out. The effects of tax cuts are no different. But what we do know from the data we have favors the first scenario.
Paul Krugman: Wal-Mart's Excuse
Big Box Balderdash, by Paul Krugman, NY Times: I think I've just seen the worst economic argument of 2005. ... The argument came in the course of the latest exchange between Wal-Mart and its critics. A union-supported group, Wake Up Wal-Mart, has released a TV ad accusing Wal-Mart of violating religious values, backed by a letter from religious leaders attacking the retail giant for paying low wages and offering poor benefits. The letter declares that "Jesus would not embrace Wal-Mart's values of greed and profits at any cost." You may think that this particular campaign - which has, inevitably, been dubbed "Where would Jesus shop?" - is a bit over the top. But it's clear why those concerned about the state of American workers focus their criticism on Wal-Mart. The company isn't just America's largest private employer. It's also a symbol of the state of our economy, which delivers rising G.D.P. but stagnant or falling living standards for working Americans. ... So how did Wal-Mart respond to this latest critique?
Wal-Mart can claim, with considerable justice, that its business practices make America as a whole richer. The fact is that ... its low prices aren't solely or even mainly the result of the low wages it pays. Wal-Mart has been able to reduce prices largely because it has brought genuine technological and organizational innovation to the retail business. It's harder for Wal-Mart to defend its pay and benefits policies. Still, the company could try to argue that ... it cannot defy the iron laws of supply and demand, which force it to pay low wages. (I disagree, but that's a subject for another column.) But instead of resting its case on these honest or at least defensible answers to criticism, Wal-Mart has decided to insult our intelligence by claiming to be, of all things, an engine of job creation. ...[T]he assertion that Wal-Mart "creates 100,000 jobs a year" is now the core of the company's public relations strategy. ...
But adding 100,000 people to Wal-Mart's work force doesn't mean adding 100,000 jobs to the economy. On the contrary, there's every reason to believe that as Wal-Mart expands, it destroys at least as many jobs as it creates, and drives down workers' wages in the process. Think about what happens when Wal-Mart opens a store ... The new store takes sales away from stores that are already in the area; these stores lay off workers or even go out of business. Because Wal-Mart's big-box stores employ fewer workers per dollar of sales than the smaller stores they replace, overall retail employment surely goes down, not up... And if the jobs lost come from employers who pay more generously than Wal-Mart does, overall wages will fall...
This isn't just speculation on my part. A recent study by David Neumark of the University of California at Irvine and two associates at the Public Policy Institute of California, "The Effects of Wal-Mart on Local Labor Markets," uses sophisticated statistical analysis to estimate the effects on jobs and wages as Wal-Mart spread out from its original center in Arkansas. The authors find that retail employment did, indeed, fall when Wal-Mart arrived in a new county. It's not clear ... whether overall employment ... rose or fell ... But it's clear that average wages fell: "residents of local labor markets," the study reports, "earn less following the opening of Wal-Mart stores." So Wal-Mart has chosen to defend itself with a really poor argument. If that's the best the company can come up with, it's going to keep losing the public relations war with its critics. Maybe it should consider an alternative strategy, such as paying higher wages.
No Lender Left Behind
Robbing Joe College to Pay Sallie Mae, by Anya Kamenetz, commentary, NY Times: ... The federal student aid system fails students, but it does a great job of delivering profits to private lenders... When it created the loan program, Congress assumed that banks would not lend to young people without extensive guarantees and incentives. So they guaranteed a certain rate of return on student loans, made up their losses on defaulters, created a secondary market for student loans by chartering ... Sallie Mae ... Student lending has grown into a highly profitable and low-default market, yet these special privileges persist. Sallie Mae, the private company that makes, buys and sells the most student loans, boasted the second-highest return on revenue in the 2005 Fortune 500.
Sallie Mae also happens to be the largest contributor, by far, to members of the House Education Committee. ...[T]he committee chairman alone, John Boehner of Ohio, received $172,000 ... in 2003 and 2004. It's thus no surprise that lawmakers are apt to protect lenders and not students. ...But ... why not cut off subsidies to banks and give that money to needy students? One way to do that is to expand a program ... in which the government makes loans directly. A recent Government Accountability Office report showed that direct loans cost the government one-fifth as much ... Mr. Boehner, however, kept the report under wraps for 30 days, and it was released just hours before the House committee vote. ... [T]he aid program could save $60 billion over the next decade by switching entirely to direct loans - enough for almost a 50 percent increase in Pell Grant money.
A group of students has also proposed a National Tuition Endowment, which would preserve an estimated $30 billion for need-based grants by cutting loan subsidies and finally closing an infamous loophole that has lenders collecting 9.5 percent interest from the government on certain loans. Yet Mr. Boehner is heading in a different direction. He told an audience of commercial student lenders earlier this month that "I've got enough rabbits up my sleeve" to make them happier with the bill. ...
There was a recent rule change allowing student loans to be collected from Social Security payments. If personal irresponsibility causes an individual to default on a student loan, and if fiscal irresponsibility causes the government to renege and reduce Social Security, health care, or other obligations by the same amount, what then? Shall we just call it even? More seriously, as the article notes in a part that was cut, a recent bill cut 14 billion from the student loan program over the next six years. The justification given was that it came from corporate subsidies, not loans. Two things, first, that shows how large the excess profits to lenders have been, and second, why not use the money gleaned from the rule change to increase the amount available for grants and loans? It's needed.
Fair and Balanced
Who Killed General Motors?, by Pat Buchanan, Creators Syndicate: Willys built the jeeps that carried Ike's armies across Europe. Ford built the Sherman tanks. Packard made the engines for JFK's PT boat ... Chevrolet built the engines for the Flying Boxcar, Buick for the B-24 Liberator, Oldsmobile for the B-25 Mitchell Col. "Jimmy" Doolittle flew in his "Thirty Seconds Over Tokyo" raid in 1942. ... But no company matched the contributions to victory of General Motors, the greatest company of them all. Now, most of those companies with the legendary names -- Packard, Hudson, Studebaker, Nash, Oldsmobile -- are gone. Of the "Big Three" that survive, Chrysler is German-owned, and Ford and GM are bleeding... Delphi, the auto-parts supplier for GM, just declared bankruptcy. Thanksgiving week ... GM announced the closing of nine more American plants and the dismissal of 30,000 more workers.
Many reasons are given for the decline of the U.S. auto industry. The Volkswagen "Beetle" that invaded America in the late 1950s, the Toyotas and Hondas that followed, the Korean Kias coming in today .... But there is a more basic reason for America's industrial decline. A sea change has taken place in the mindset of our elites. The economic patriotism of Hamilton and Henry Clay, of Lincoln and T.R. and, yes, of the Robber Barons of the Gilded Age, who forged America into the mightiest industrial machine the world had ever seen, is dead. To the economic patriots of the Old Republic, trade policy was to be designed to benefit, first, the American worker. They wanted American families to have the highest standard of living on earth and U.S. industry to be superior to that of any and all nations. If this meant favoring American manufacturers with privileged access to U.S. markets and keeping foreign goods out with high tariffs, so be it.
But... Economic patriotism is dead. ... If it's good for the Global Economy, it must be good for America. Theirs is a quasi-religious faith in that same free-trade ideology for which Hamilton, Clay, Lincoln and T.R. had only spitting contempt. And like Marxists who refuse to question their dogmas, despite manifest signs of failure, our free-traders believe that everything that is happening to America has to be happening for the best. That U.S. manufacturing that once employed a third of our labor force now employs perhaps 10 percent does not matter. That the most self-sufficient nation in history, which produced 96 percent of all that it consumed, now depends on foreigners for a fourth of its steel, half its autos and machine tools, two-thirds of its textiles and apparel, ... etc. does not matter. That tens of thousands of foreign workers are brought in each year ... to take high-tech jobs, that U.S. factories are shut down ... while opening in China, that professional work is being outsourced to India, that we borrow $2 billion a day to finance consumption of foreign goods -- none of this matters. The nation does not matter. ... For we are all now in a Global Economy.
And so, as the jobs and skills of U.S. manufacturing workers disappear, ... and the government goes deeper into debt to cover rising social costs corporations used to carry, other countries quietly observe. Fifty years ago, a trade deficit of 6 percent of GDP, a hemorrhaging of manufacturing jobs and a growing dependence on foreign nations for ... vital necessities ... would have been taken as signs of the decline and fall of a great nation. Our elites tell us ... we have entered a new era of interdependence, where democracy and free markets will flourish and usher us all into a golden age -- and we Americans will lead the way. If they are right, we are Cassandras. If they are wrong, they are fools who sold out the greatest country in all history for a mess of potage.
Besides disagreeing with the economics, I don't agree with his premise that the goal of the Robber Barons and their ilk was to have "...trade policy ... be designed to benefit, first, the American worker. They wanted American families to have the highest standard of living on earth..." and they put high tariffs in place to accomplish that goal.
I get the feeling Pat wishes he had grown up in the same building as Lucy, Ricky, Ethyl, and Fred with his parents June and Ward, his best friend Opie, his faithful dog Lassie, and that the world had never changed from his idyllic recollection. Oh wait, I forgot that Ricky Ricardo was a Cuban who took the job of some American guy by singing at the Tropicana. Never mind.
December 11, 2005
All the News That's Fit to Post
Still, there's something about a newspaper and I will miss the local paper once it's gone. Finding a business model that works for online news sites has been a challenge, so perhaps there's some life left in newspapers, but it's hard to imagine them surviving long-term:
San Francisco Chronicle Struggles as Internet Siphons Readers, Ads, by Joseph Menn, LA Times: When Jeffrey Zalles needed a new cashier for his coin laundry in the South of Market district, his help-wanted ad in the San Francisco Chronicle brought just four responses. So Zalles posted a notice on Craigslist, a San Francisco-based network of websites that specialize in classified advertising. His cyber-ad drew 400 applicants. Zalles found his cashier and hasn't relied on the Chronicle since, advertising instead on the Internet and the city's array of free papers. The venerable Chronicle is struggling, and defections by Zalles and other advertisers are a big reason. Classified ads are a big source of income for the Chronicle and the newspaper business as a whole... What's more, the Chronicle's circulation is plunging. The paper reported last month that sales fell 16% during the six-month period ended in September — by far the biggest drop among the nation's 20 largest newspapers. ...
The Chronicle's woes are being closely watched around the country as the newspaper finds itself on the front lines of the battle between old and new media. As more consumers get their news from electronic sources and advertising follows them, analysts warn that newspapers elsewhere — already losing an average of more than 2% of their subscribers yearly — might join the Chronicle in a steepening fall. ... The Chronicle's decline can't be blamed solely on the Internet. Other factors include tough competition from other Bay Area papers and a cosmopolitan audience that reads national publications such as the New York Times. ... Outsiders attribute a large part of the loss to the decline in classified advertising. "Newspaper finances are a three-legged stool: classifieds, display advertising and circulation," said Scott Rosenberg, a former writer at San Francisco's Examiner, who left a decade ago to co-found Salon. "The classified leg has been kicked out, so the stool falls." A study last year said Craigslist alone had by then cost Bay Area papers as much as $65 million in help-wanted ads.
As for the drop in circulation, Chronicle Publisher Frank Vega said that nearly all of it was deliberate, as the company curtailed deeply discounted copies and other money-losing efforts. Like other papers, the Chronicle is cutting circulation gimmicks such as "sponsored copies," in which a supermarket or other big advertiser underwrites freebies in a given neighborhood so that every home receives its ads. ... The overall weekday circulation of 392,000 is a far cry from the 1990 peak of 566,020, and that cumulative 31% drop is more than double the roughly 15% decline industrywide. ...
Bronstein, who ran the Examiner for Hearst before becoming Chronicle editor five years ago, plans online experiments such as running commentary or other reports from private citizens on his paper's SFGate.com website. ... SFGate drew 3.9 million users in October, according to Nielsen/NetRatings, about even with the site of the twice-as-large Los Angeles Times and trailing only the New York Times, USA Today and Washington Post among newspaper websites. Monthly readership at newspaper sites overall is up 11% in the last year to 39 million. ... Chronicle Publisher Vega, installed this year after leading the combined operations of two Detroit papers, said he wanted to increase SFGate's revenue by charging readers for whatever they value most. "What's our franchise? I've got to figure what that is," Vega said.
Many papers have tried similar experiments but retreated after readers defected. The Los Angeles Times tried charging nonsubscribers for entertainment features from August 2003 to May 2005. The New York Times recently began charging nonsubscribers for access to its archives and columnists, and a better-than-expected 135,000 of them have signed up. ... "I hate to read the obits because half of those people are our subscribers," Vega said. "But I think newspapers, if they're run properly, still have a lot of legs."
Promises, Promises... Governments Will Be Forced to Value and Report Future Retirement Benefits
The Next Retirement Time Bomb by Milt Freudenheim and Mary Williams Walsh, NY Times: Since 1983, the city of Duluth, Minn., has been promising free lifetime health care to all of its retired workers, their spouses and their children up to age 26. No one really knew how much it would cost. Three years ago, the city decided to find out. ... The total came to about $178 million, or more than double the city's operating budget. And the bill was growing. ... Mayor Herb Bergson [said]. "We can't pay for it," ...
Thousands of government bodies, including states, cities, towns, school districts and water authorities, are in for the same kind of shock in the next year or so. For years, governments have been promising generous medical benefits to millions of schoolteachers, firefighters and other employees when they retire, yet experts say that virtually none of these governments have kept track of the mounting price tag. The usual practice is to budget for health care a year at a time, and to leave the rest for the future. ... [N]ow the accounting rulemaker for the public sector, the Governmental Accounting Standards Board, says it is time for every government to ... come to grips with the total value of its promises, and to report it to their taxpayers and bondholders. The board has issued a new accounting rule that will take effect in less than two years. It has not yet drawn much attention ..., but it threatens to propel radical cutbacks for government retirees and to open the way for powerful economic and social repercussions. ... "It's not going to be pretty, and it's not the fault of the workers," said Mayor Bergson ...
In Duluth, Mayor Bergson said the city actually offered free retiree health care as a cost-cutting measure back in 1983. At the time, Duluth was trying to get rid of another ballooning obligation to city workers: the value of unused sick leave and vacation days. ... Compared with the big obligations the city had to book for that unused time, substituting free retiree health care seemed cheap. "Basically, they traded one problem for another," Mayor Bergson said. ... Frederick H. Nesbitt, executive director of the National Conference on Public Employee Retirement Systems, an advocacy group in Washington. Mr. Nesbitt pointed out that when the accounting rulemakers began requiring a similar change in financial reporting for companies in the 1990's, it was followed by a sharp decline in the retiree medical benefits provided by corporate America. Today, only one in 20 companies still offers retiree benefits.... The rate for large companies is less than one in three, down from more than 40 percent before the private-sector accounting change...
Max B. Sawicky, an economist at the Economic Policy Institute, a liberal research group in Washington, called the new requirement "another straw on the camel's back" for state and local governments already straining under their budget burdens. ... Attempts to balance the competing interests of retirees, active workers and taxpayers are building tension. Ross Eisenbrey, a former Clinton administration official who is now at the Economic Policy Institute... The problem is that people have counted on those benefits, and many have accepted lower salaries in exchange for better retirement benefits, said Teresa Ghilarducci, an economics professor at the University of Notre Dame. If they are close to retirement, ... it may well be too late for them to make up for the loss with their own savings. ...
December 10, 2005
The Ex-Post Real Federal Funds Rate and Inflation
Notice the policy response of the real federal funds rate in the early 1970s as it falls rapidly in response to deteriorating economic conditions brought about by oil price shocks. That didn't work out so well.
Hair of the Dog
Credit Card Offers Stacking Up at Homes of the Newly Bankrupt, by Timothy Egan, NY Times: ...If it seems odd ... that banks would want to lend money to the newly bankrupt, it is no mystery to the financial community, which charges some of the highest interest rates to these newly available customers. Under the new [bankruptcy] law, ... they may be even more attractive because it makes it harder for them to escape new credit card debt and extends to eight years from six the time before which they could liquidate their debts through bankruptcy again. "The theory is that people who have just declared bankruptcy are a good credit risk because their old debts are clean and now they won't be able to get a new discharge for eight years," said John D. Penn, president of the American Bankruptcy Institute... Credit card companies have long solicited bankrupt people, on a calculated risk that income from the higher interest rates and late fees paid by those who are trying to get their credit back will outweigh the losses from those who fail to make payments altogether. ... But the new law makes for an even better gamble for lenders... Bankers defend the practice of soliciting the newly bankrupt, saying it gives them a chance to build a new credit history. ... The credit card offers ... higher interest rates - 23 percent or more, which is typical for offers to the newly bankrupt... The study found that a third of low- and middle-income American households reported using credit cards for basic living expenses - rent, groceries and utilities - in any 4 of the last 12 months. ... "The people I'm seeing right now, they're mostly middle or lower middle class," said Jack Burtch, a bankruptcy lawyer in Washington State. "In a good many of the cases, credit cards are what got them into trouble. And I don't see how credit cards will get them out of it."
The incentives on both sides seem to encourage risky behavior, and I don't like seeing people on the edge given the opportunity to alleviate difficulties in the short-run by turning to easy, but high interest rate credit. But it's a free country, they're adults, and if people want to sign up for credit cards after bankruptcy, and if banks are willing, should the government stop them? So long as losses from failure to pay are confined to the borrower and lender and do not spill over as an externality to third parties, I see no reason to step in. But I would hope the risks and terms of such contracts, including the legal remedies that encourage firms to offer this risky credit, are absolutely clear to borrowers.
Happy to Help
Boomers' Burdens: Their Kids, Parents 'Sandwich' Demands Aside, Study Finds, the Generation Is Comfortable, by Darryl Fears, Washington Post: As they step closer to old age, baby boomers ... say they are reaching deeper into their pockets to care for elderly parents and offspring in their twenties who are struggling to launch their own lives... and a larger percentage than in the past are helping their parents and their adult children financially.
According to the study, ... More than half -- 55 percent -- said that they either "expect to live comfortably" in retirement or will be able to "meet expenses with a little left over," the study found. But before they reach that point, they will pay great sums of money to help parents through one of the most vulnerable phases of their lives, and children who have jobs but do not earn enough to cover student loans, rents, mortgages or even car insurance. ... [I]n general, baby boomers feel comfortable enough to take on a substantial amount of family responsibility. Well over half of the respondents in the Pew study said an elderly parent is living with them, and 66 percent said they paid for a child to attend college. Nearly three-quarters of boomers -- 71 percent -- have at least one living parent, the study found, up from 60 percent of people in the 41-59 age range in 1989. In addition to having a living parent, 83 percent of boomers have at least one child. ...
The government is not the only one providing economic and social security. I wouldn't have guessed that over half of the respondents would have an elderly parent living with them, particularly since only 71% have a living parent. That doesn't exactly conjure up the image of carefree retirees living it up on their Social Security checks from the government (average monthly benefit = $955).
Can You Track Me Now?
Live Tracking of Mobile Phones Prompts Court Fights on Privacy, by Matt Richtel, NY Times: Most Americans carry cellphones, but many may not know that government agencies can track their movements through the signals emanating from the handset... as a tool for easily and secretly monitoring the movements of suspects... But this kind of surveillance - which investigators have been able to conduct with easily obtained court orders - has now come under tougher legal scrutiny. In the last four months, three federal judges have denied prosecutors the right to get cellphone tracking information ... without first showing "probable cause" to believe that a crime has been or is being committed. That is the same standard applied to requests for search warrants. ... Cellular operators ... know, within about 300 yards, the location of their subscribers whenever a phone is turned on. Even if the phone is not in use it is communicating with cellphone tower sites, and the wireless provider keeps track of the phone's position as it travels. The operators have said that they turn over location information when presented with a court order to do so.
Prosecutors ... argue that the relevant standard is found in a 1994 amendment to the 1986 Stored Communications Act, a law that governs some aspects of cellphone surveillance. The standard calls for the government to show "specific and articulable facts" that demonstrate that the records sought are "relevant and material to an ongoing investigation" - a standard lower than the probable-cause hurdle. The magistrate judges, however, ruled that surveillance by cellphone - because it acts like an electronic tracking device that can follow people into ... personal spaces - must meet the same high legal standard required to obtain a search warrant to enter private places. ...
This may not be the best example, but I worry that, in the name of safety and security, our personal freedom and privacy is slowly being eroded away and once we lose each piece, we will never get them back. Never. The main argument I hear when I raise this is something like "Why should I care, I have nothing to hide, and it will catch the bad guys. That makes me more, not less free." I usually try to explain why they should care, and often get a look that says "Crime-loving liberal idiot." I am going to keep trying though because I think this is important, hence the post. [Update: Related.]
Posted by Mark Thoma on Saturday, December 10, 2005 at 10:17 AM in Miscellaneous
Guess Who's Coming to Town?
Data Revisions and Monetary Policy
FRBSF Economic Letter, Shifting Data: A Challenge for Monetary Policymakers, John Fernald & Stephanie Wang: A familiar old saw about ... monetary policy is that it's like trying to drive a car while looking only in the rearview mirror. The idea is that policymakers are trying to steer a course that will keep the economy close to full employment with low, stable inflation, while their only knowledge of the road ahead is based on data about the past. As if this situation weren't challenging enough, the rearview mirror sometimes gives a distorted reflection, in the sense that the data policymakers see at any one point in time are often later revised. ...
The Bureau of Economic Analysis (BEA) produces the national income and product accounts ... In establishing a schedule of data releases, the BEA can face some tension between timeliness and accuracy. Often the initial releases are based on highly incomplete or even nonexistent source data; later releases incorporate more complete source data, some of which ... are available only annually or even less often. Hence, over time, the BEA may revise earlier estimates to incorporate new source data and improved methodologies. ... Some revisions are larger than others. The most important are the annual revisions each July, when the BEA revises the most recent three years of national income and product data, and the so-called comprehensive or benchmark revisions, which occur about every five years and which may involve more major changes, for example, in definitions, classifications, or presentation.
The July 2005 annual revision In the July 2005 annual revision, the BEA revised its estimates of inflation and GDP for the period 2002-2004. Most notably, the growth rate of core PCE price inflation for 2004 was revised upward by about 0.6 percentage point from a rate of 1.6% to 2.2% ... Panel A of Figure 1 plots the 12-month change in core PCE price inflation, both before and after the annual revision. Panel B plots the 3-month change, which shows that, despite the large upward revision to recent history, inflation in the second quarter of 2005 had receded somewhat from its earlier peaks.
The bulk of the revisions to core PCE inflation occurred in its so-called nonmarket component. ... A good example of a nonmarket component is a financial service that commercial banks provide consumers, such as access to an ATM network. Bank depositors often do not pay direct fees for a service like this, so there is no observable transaction price. ... The majority of the July 2005 revisions in the nonmarket component occurred in two categories: "services furnished without payment by financial intermediaries except life insurance carriers" and "medical care and hospitalization insurance." ... In both cases, the revisions reflected newly available source data that indicated that the preliminary BEA estimates were inaccurate. ...
Implications for policy in 2004 When the Federal Open Market Committee met in May 2004, the BEA's best estimate of core PCE inflation was around 1-1/2%. ... The revised figures indicate that core PCE inflation was nearly 2-3/4% in the first quarter of 2004. How might the revised information have changed the course of policy? One way to answer this question is to invoke the Taylor rule. The FOMC does not set policy according to this rule, but the Taylor rule has served as a popular rule-of-thumb for how the Federal Reserve might set its target ... Normally, the Taylor rule is specified in terms of overall inflation, not core inflation. Conceptually, however, since core inflation was running higher than the Committee thought, this suggests that there was a larger positive "inflation gap" than the Committee perceived. The Taylor rule recommends responding to inflation more than one-for-one. Hence, other things equal, given that inflation was running higher than originally thought, it would have recommended a substantially higher setting for the federal funds rate.
Yogi Berra once said, "It's hard to make predictions, especially about the future." But it's also hard to predict how our views of the past will change as statistical agencies get new data ... How can policymakers mitigate the problems caused by inherently imperfect data? In assessing underlying inflationary trends, policymakers can look at a broader range of inflation indicators as well as at empirical relationships that might help predict inflation. This is the case even if policymakers care about an inflation gap defined narrowly in terms of core PCE inflation. The problem of data uncertainty is, of course, not limited to inflation. Policymakers also need ... timely and accurate measures of the output gap ... or the neutral rate of interest ..., two other key components for implementing a Taylor-type rule. These concerns again suggest looking broadly at indicators of the economy, in line with Greenspan's (2005) recommendation that policymakers seek to interpret "the full range of economic and financial data."
December 09, 2005
On Their Own in Battered New Orleans, by Peter Gosselin, Los Angeles Times: ..."There is no market solution to New Orleans," said Thomas C. Schelling ... who won this year's Nobel Memorial Prize in Economic Sciences for his analysis of the complicated bargaining behavior... "It essentially is a problem of coordinating expectations," Schelling said of the task ... "If we all expect each other to come back, we will. If we don't, we won't. But achieving this coordination in the circumstances of New Orleans,'' he said, "seems impossible." ... "There are classes of problems that free markets simply do not deal with well," Schelling said. "If ever there was an example, the rebuilding of New Orleans is it."
Though microeconomists generally acknowledge coordination failure can be a problem in individual markets, its importance to the macroeconomy is a point of division among macroeconomists. Leigh Tesfatsion explains:
Nonwalrasian Equilibriun: Illustrative Examples: 1. Introduction In previous lectures it was seen that market clearing constitutes an essential part of the definition of a Walrasian equilibrium. ... But must markets clear in order for economies to be in equilibrium, in the sense of an unchanging situation (rest point)? In particular, can an economy become stuck at a point where positive “involuntary” unemployment persists? Or do ... decentralized market economies..., assuming flexible prices, and absent government intervention, ... tend to converge over time to points where all markets clear?
This issue is at the heart of the debate between ... economists; see King (1993) and Mankiw (1993). In general, [the alternative view is] that decentralized market economies are inherently stable, tending naturally towards an equilibrium state in the sense of Walras, whereas new Keynesian economists do not believe this to be the case. More precisely, new Keynesians believe that a decentralized market economy might or might not tend towards an equilibrium state depending on its supporting institutional structure and circumstances. Moreover, the meaning of “equilibrium state” does not presuppose any optimality or efficiency properties. ...
New Keynesians also stress that, in general, a given economy can have multiple possible equilibrium states, some more socially desirable than others. A key factor affecting the ability of macroeconomies to coordinate on a socially desirable equilibrium state is whether agents are credibly able to signal their intended actions to each other. For example, if other market participants fail to signal (communicate) to agent A in a credible (believable) way what actions they intend to take, how can agent A rationally take these intended actions into account in planning his own actions? And if agent A cannot take these intended actions into account in his planned actions, what guarantees that his actions will be coordinated with the actions of these other market participants? For example, if agent A is a producer, and consumers do not credibly signal to him today their intended future purchases of his goods, how can he take these intended purchases into account when planning today for future production? And if he cannot take these intended purchases into account, what ensures that future demand for his goods will equal future supply? In summary, new Keynesians identify two basic types of signalling problems that can give rise to coordination problems among economic agents: Problem 1: Incomplete Signalling ... Problem 2: Signalling Not Credible...
In New Orleans, the problem is that agents cannot signal each other in a compete and credible way what their intentions are through the market process. When that happens, the market can breakdown into a suboptimal equilibrium. The solution in such a case is for somebody to coordinate expectations. Would you show up, for example, at a pickup baseball game if you didn't think anyone else would show up? Usually such games require a coordinator to set them up. In the case of New Orleans, it is up to government to set expectations so that everyone believes everyone else will "show up for the game" and hence are willing to show up themselves. Expecting such "pickup games" to occur spontaneously through the market process is often wishful thinking.
That is not to say the private sector can never solve these problems, a tradition might develop where everyone simply shows up a particular field at a particular time each week to play baseball. These often take time to develop, and such implicit agreements tend to break down over time without some sort of coordinator. It is the belief that others will show up if you do, the coordination of expectations, that makes it work, and this often requires centralized credible signaling through government action and commitment. We want to avoid, if we can, situations where everyone would love to play baseball, but no game occurs because nobody knows if others will show up to play. And, as with New Orleans where people may decide to live elsewhere due to lack of faith in the rebuilding effort, if you wait too long to start the coordination process, people may have already committed to other less desirable, but unchangeable plans.
Update: Tim Haab at Environmental Economics has more on the need for credible coordination efforts:
Who would you believe?, by Tim Haab: For people to make rational economic decision they must have accurate information on the expected consequences of their decision. Many times, such information is tough to get. Take for example the decision to return to New Orleans. Who would you believe? From Reuters:
State and federal officials gave the "all-clear" to residents and tourists, saying recent alarming reports by environmentalists about toxic sediment are unfounded. In fact, the state's chief environmental officer said the deluge that covered 80 percent of the city was no more polluted than typical floodwater. [...] In fact, McDaniel said neighboring Lake Pontchartrain's water quality is now "about as good as we've seen them," and is fit for swimming and harvesting seafood. Air quality actually is better than normal because of reduced industrial and vehicular activity, he said.
Environmentalists, led by the Natural Resources Defense Council, have released their own testing they said shows potentially dangerous levels of several contaminants in the dried sediment left behind by floodwaters. Environmental chemist Wilma Subra, working for the council and the Sierra Club said arsenic was a particular worry, but that sediment also contains chromium, lead, barium, cadmium, mercury and hydrocarbons. "The government has a legal obligation to begin the cleanup immediately," said Monique Hardin, co-director of the New Orleans-based Advocates for Environmental Human Rights. "People have a right to return to healthy homes and neighborhoods."
Government officials counter that residents can do so now. "We're not seeing anything out of the ordinary that we wouldn't normally see this time of year from the standpoint of upper respiratory illnesses," said Louisiana State Health Officer Dr. Jimmy Guidry. The two biggest health issues in post-Katrina New Orleans, Guidry said, are cleanup-related injuries and mold that has grown unabated in moist structures. "Mold is a major issue -- we do want people to be very careful with that," he said.
Now that you have the information, would you move back?
That Hissing Sound
Only Denmark and the Netherlands saw house prices increase faster in Q3 of 2005 as compared to Q3 of 2004.
A Measured Approach to Accommodating a Change in Fed Communication?
Fed Weighs Change to Vocabulary, by Greg Ip, WSJ: As the Federal Reserve prepares for a historic change in leadership, the ... strategy of unusually open communications also faces a crucial transition. At a meeting next week, Fed policy makers will almost certainly raise their short-term interest-rate target to 4.25% from 4% ... They also will weigh the biggest changes in the accompanying explanatory statement since June 2004 ... Since it began to raise rates ... in June 2004, that statement has described Fed policy as one of "monetary accommodation," meaning rates were below a "neutral" level that neither stimulates nor restrains growth. The statement has also said more "measured" increases were likely, which markets have interpreted as at least one or two more quarter-percentage-point increases...
Fed officials expect to drop or water down their previous language soon. Minutes of the Fed's Nov. 1 meeting ... showed that "the statement is currently a subject of discussion," Federal Reserve Bank of San Francisco President Janet Yellen said last week. "At issue" are the references to "accommodation" and "measured," she said. "...there obviously will come a time when these two phrases are no longer appropriate." ...
Dispensing with forward-looking language ... wouldn't mean the Fed is philosophically less committed to transparency. ... officials have always said the predictability of their rate actions in the past two years reflected unusual economic circumstances. As those circumstances change, the Fed could end up misleading markets if it were to telegraph intentions that it was less certain of... Even without the forward-looking language, the Fed could ... signal its inclinations by labeling either weaker growth or higher inflation as the greater threat to the economy.
Fed officials are weighing two options. The first option is the status quo: Wait until the Fed has stopped raising rates before removing the forward-looking language about "measured" increases. ... The second option is evolution: Replace the current language with less restrictive language that still conveys the likelihood that rates will continue to rise. That process could begin Tuesday, or in January. Adopting this tack before Mr. Bernanke takes office could give him more freedom in plotting monetary policy. ...
[F]or now officials appear undecided. Until recently, they preferred the status quo. The difficulty of getting all 17 policy makers on the Federal Open Market Committee to agree to an incremental change in the statement has biased the group in favor of no change at all until the Fed is finished raising rates. ... More recently, evolutionary change has gained some appeal. ... [M]ost Fed officials agree that a 4.25% funds rate would be in the range of neutral, so calling monetary policy "accommodative" would be increasingly untenable. "Measured" has also become problematic. Though officials agree the rate has to rise further, they aren't sure by how much. Markets currently expect the Fed to either raise the rate to 4.5% on Jan. 31, then stop, or to increase it to 4.75% on March 28 at Mr. Bernanke's first meeting as Fed chairman, and then stop. That closely matches officials' own split views. Recent economic data haven't clarified the Fed's job. Inflation excluding energy prices has been surprisingly benign ... But the overall economy has been growing faster than its long-term trend...
If Fed officials drop the forward-looking language Tuesday they will try to avoid markets interpreting it as signaling a halt to rate increases. Officials say the markets overreacted by interpreting the Nov. 1 minutes as signaling such a halt, and they may be reluctant to risk a similar overreaction ... On the other hand, the release of the minutes may also have primed the markets for a change in the language.
This is a good summary of the issues. One thing I might have emphasized more is the ability of FedSpeak to communicate in ways other than just the press release after FOMC meetings and the subsequent release of the minutes. Because the market pays such close attention to every word uttered by Fed officials, I'm not sure having the language in or not is a critical issue. The Fed retains the ability to signal its intentions in either case. And when the path ahead is sufficiently uncertain, the flexibility the Fed gains from not being bound be the pre-commitment inherent in forward looking language may be valuable. For now, the problem is how to change or remove the current language without having the market lock into a particular view of future policy. If the market anticipates a particular path as a result of changing or removing the language, say a pause in rate hikes, that would undermine the flexibility altering the language attempts to achieve.
Update: See William Polley for more.
Paul Krugman: The Promiser in Chief
The Promiser in Chief, by Paul Krugman, NY Times: Sometimes reconstruction delayed is reconstruction denied. A few months after the invasion of Iraq, President Bush promised to rebuild Iraq's infrastructure and economy. He - or, at any rate, his speechwriters - understood that reconstruction was important not just for its own sake, but as a way to deprive the growing insurgency of support. ... But for a long time, Iraqi reconstruction was more of a public relations exercise than a real effort. ... Both supporters and opponents of the war now argue that ... the Bush administration missed a crucial window of opportunity. By the time reconstruction spending began in earnest, it was in a losing race with a deteriorating security situation. As a result, the electricity and jobs that were supposed to make the killers desperate never arrived. ...
Now we're losing another window of opportunity for reconstruction. ... Two weeks after Hurricane Katrina, Mr. Bush made an elaborately staged appearance in New Orleans, where he promised big things. ... But Mr. Bush seems to have forgotten about his promise. More than three months after Katrina, a major reconstruction effort isn't even in the planning stage... "To an extent almost inconceivable a few months ago," a Los Angeles Times report ... says, "the only real actors in the rebuilding drama at the moment are the city's homeowners and business owners."
It's worth noting in passing that Mr. Bush hasn't even appointed a new team to fix the dysfunctional Federal Emergency Management Agency. .... One FEMA program has, however, been revamped. The Recovery Channel is a satellite and Internet network that used to provide practical information to disaster victims. Now it features public relations segments telling viewers what a great job FEMA and the Bush administration are doing. ...
By letting the gulf region languish, Mr. Bush is allowing a window of opportunity to close, just as he did in Iraq. ... The ... private sector can't rebuild the region on its own. The reason goes beyond the need for flood protection and basic infrastructure, which only the government can provide. Rebuilding is also blocked by a vicious circle of uncertainty. Business owners are reluctant to return to the gulf region because they aren't sure whether their customers and workers will return, too. And families are reluctant to return because they aren't sure whether businesses will be there to provide jobs and basic amenities.
A credible reconstruction plan could turn that vicious circle into a virtuous circle, in which everyone expects a regional recovery and, by acting on that expectation, helps that recovery come to pass. But as the months go by with no plan and no money, businesses and families will make permanent decisions to relocate elsewhere, and the loss of faith in a gulf region recovery will become a self-fulfilling prophecy.
Funny, isn't it? Back during the 2000 campaign Mr. Bush promised to avoid "nation building." And so he has. He failed to rebuild Iraq because he waited too long to get started. And now he's doing the same thing here at home.
[Update: Full column here.]
Tests of the New Keynesian Price Adjustment Model
How Well Does the New Keynesian Sticky-Price Model Fit the Data?, by John M. Roberts, BR Journals in Macroeconomics: Abstract A number of hypotheses have been proposed to account for the role of lagged inflation in the New Keynesian price-adjustment model: (1) In the aftermath of abrupt structural change, rational learning may appear adaptive. (2) The model may have a serially correlated error term. (3) Estimating the model conditional on labor costs may remove or reduce the need for lagged inflation. I address the empirical support for these hypotheses and find that none eliminates the need for lagged inflation. ... Conclusion On the other hand, to the extent that rule-of-thumb behavior or indexing are viewed as sensible extensions of the basic model, then the New Keynesian sticky-price model appears to work well. ... [Free earlier version]
Introduction and References in continuation frame
Introduction Models with nominal rigidities are central to monetary policymaking. However, there remains a great deal of uncertainty concerning the specification of such models. Fuhrer and Moore (1995) have argued that the simplest New Keynesian sticky-price models do not fit U.S. post-war data well under rational expectations. In particular, ... Fuhrer (1997) has shown that modifying the model so that the it includes lags of inflation not predicted by the standard model with rational expectations allows it to fit the data well. Additional inflation lags have also been found to be important in recent empirical dynamic stochastic general equilibrium models, such as Christiano, Eichenbaum, and Evans (CEE, 2005) and Smets and Wouters (2003).
Despite such empirical support for the role for additional lags of inflation, there is not, to date, a consensus concerning the empirical performance of the New Keynesian sticky-price model under rational expectations. For example, Ireland (2001, 2004) finds that by allowing for a serially correlated error term, the model fits U.S. data well without resort to additional lags of inflation. Sbordone (2002) and Gali and Gertler (1999) argue that estimating the model conditional on labor costs rather than aggregate economic activity can reduce substantially the importance of lagged inflation in the model. And Erceg and Levin (2003), drawing on earlier work by Ball (1995) and Lewis (1989), suggest that the significance of lagged inflation may reflect sluggish recognition of important shifts in monetary policy.
Resolving these issues matters, because the presence of lags can lead to very different monetary policy advice. Rotemberg and Woodford (1997) show that in a model with fully rational expectations and no additional lags of inflation, an optimized interest-rate rule for monetary policy ought to have a very large coefficient on the lagged interest rate and a small coefficient on deviations of output from its trend level. By contrast, Levin, Wieland, and Williams (1999) find that in a model with an important role for lagged inflation, the optimized interest rate rule has a much larger role for output deviations and a more-modest coefficient on the lagged interest rate.
I examine the evidence for these various hypotheses. The results generally favor models that include lagged inflation, with a coefficient generally in the range of 0.4 to 0.5. Allowing explicitly for serial correlation in the error term of the standard model does not replace the need for lags, nor does excluding a period with an important shift in monetary policy—1980 to 1983. The size of the coefficient on lagged inflation does not seem to be affected by whether labor’s share or aggregate real activity is used as a proxy for real marginal costs: With either specification, there is a similar-sized, statistically significant, coefficient on lagged inflation.
The sensitivity analysis of the paper led to a number of other notable results:
- While much empirical work has focused on the addition of a single lag of inflation to the New Keynesian model, I find that specifications with a four-quarter moving-average of past inflation fit considerably better.
- The results for the model conditional on labor costs are sensitive to the information used to estimate the model: When the model is estimated so as to match the effects of shocks to labor costs, estimated adjustment speeds were slower than when the model was estimated to match the effects of other shocks, such as to monetary policy. This result is consistent with the view that labor costs—in particular, wages—are measured with considerable error and so caution is required in using these data to draw inferences about inflation dynamics.
- When the model conditional on labor costs is extended to take account of procyclical labor productivity—by allowing for variable effort—the estimated parameters of the model are not consistent with the underlying theory. In particular, the estimated coefficient on effort is the opposite of the predicted value. This result, like the previous one, suggests that caution may be called for in drawing inferences from the model conditional on labor costs.
Amato, Jeffrey D. and Thomas Laubach (2004) “Implications of Habit Formation for Optimal Monetary Policy,” Journal of Monetary Economics 51, 305-25.
Ball, Laurence (1995) “Disinflation with Imperfect Credibility,” Journal of Monetary Economics 35, 5-23.
— —, N. Gregory Mankiw, and David Romer (1988) “New Keynesian Economics and the Output-Inflation Trade-Off,” Brookings Papers on Economic Activity 1988:1, 1-82.
Basu, Susanto, John G. Fernald, and Matthew D. Shapiro (2001) “Productivity Growth in the 1990s: Technology, Utilization, or Adjustment?” Carnegie-Rochester Conference Series on Public Policy 55, 117-65.
Blinder, Alan S., Elie Canetti, David E. Lebow, and Jeremy B. Rudd (1998) Asking about Prices, Russell Sage Foundation: New York.
Brayton, Flint, Eileen Mauskopf, David Reifschneider, Peter Tinsley, and John C. Williams (1997) “The Role of Expectations in the FRB/US Macroeconomic Model,” Federal Reserve Bulletin 83, 227-44.
Boivin, Jean and Marc Giannoni (2004) “Has Monetary Policy Become More Effective?” NBER Working Paper no. 9459 (January). Also, Review of Economics and Statistics, forthcoming.
Calvo, Guillermo A. (1983) “Staggered Contracts in a Utility-Maximizing Framework,” Journal of Monetary Economics 12, 383-98.
Christiano, Lawrence J., Martin Eichenbaum, and Charles L. Evans (1996) “Identification and the Effects of Monetary Policy Shocks,” in Mario I. Blejer, ed., Financial Factors in Economic Stability and Growth. Cambridge University Press, 36-74.
— —, — —, and — — (2005) “Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy,” Journal of Political Economy 113, 1-45.
Clarida, Richard, Jordi Gali, and Mark Gertler (2000) “Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory,” Quarterly Journal of Economics 115, 147-80.
Eichenbaum, Martin and Jonas Fisher (2004) “Evaluating the Calvo Model of Sticky Prices,” NBER working paper no. 10617.
Erceg, Christopher J. and Andrew T. Levin (2003) “Imperfect Credibility and Inflation Persistence,” Journal of Monetary Economics 50, 915-44.
Fuhrer, Jeffrey C. (1997) “The (Un)Importance of Forward-Looking Behavior in Price Specifications,” Journal of Money, Credit, and Banking 29, 338-50.
— — (2000) “Habit Formation in Consumption and its Implications for Monetary-Policy Models,” American Economic Review 90, 367-90.
— — and George R. Moore (1995) “Inflation Persistence,” Quarterly Journal of Economics 110, 127-59.
— — and Giovanni P. Olivei (2004) “Estimating Forward-Looking Euler Equations with GMM and Maximum-Likelihood Estimators: An Optimal Instruments Approach,” forthcoming in Jon Faust, Athanasios Orphanides, and David L. Reifschneider, eds., Models and Monetary Policy: Research in the Tradition of Dale Henderson, Dick Porter, and Peter Tinsley, Board of Governors of the Federal Reserve System.
Gali, Jordi and Mark Gertler (1999) “Inflation Dynamics: A Structural Econometric Analysis,” Journal of Monetary Economics 44, 195-222.
Ireland, Peter N. (2001) “Sticky-Price Models of the Business Cycle: Specification and Stability,” Journal of Monetary Economics 47, 3-18.
— — (2004) “Technology Shocks in the New Keynesian Model,” Review of Economics and Statistics 86, 923-36.
Kiley, Michael J. (2005) “A Quantitative Comparison of Sticky Price and Sticky Information Models of Price Setting,” working paper, Federal Reserve Board (August).
Klenow, Peter J. and Oleksiy Kryvtsov (2004) “State-Dependent or Time-Dependent Pricing: Does It Matter for Recent U.S. Inflation?” working paper, Stanford University (June).
Levin, Andrew, Volker Wieland, and John C. Williams (1999) “Robustness of Simple Monetary Policy Rules under Model Uncertainty,” in John B.
Taylor, ed., Monetary Policy Rules, University of Chicago Press, 263-318.
Lewis, Karen (1989) “Changing Beliefs and Systematic Rational Forecast Errors with Evidence from Foreign Exchange,” American Economic Review 79, 621-36.
Li, Hong (2004) “Testing Alternative Models of Price Adjustment,” working paper, Princeton University (April).
Roberts, John M. (1992) “Evidence on Price Adjustment Costs in U.S. Manufacturing Industry,” Economic Inquiry 30, 399-417.
— — (1995) “New Keynesian Economics and the Phillips Curve,” Journal of Money, Credit, and Banking 27, 975-84.
— — (1997) “Is Inflation Sticky?” Journal of Monetary Economics 39, 173-96.
— — (2001) “Estimates of the Productivity Trend Using Time-Varying Parameter Techniques,” Contributions to Macroeconomics 1, issue 1, article 3. http://www.bepress.com/bejm/contributions/vol1/iss1/art3/.
— — (2004) “Monetary Policy and Inflation Dynamics,” Federal Reserve Board FEDS working paper no. 2004-62 (October).
— —, David J. Stockton, and Charles S. Struckmeyer (1994) “Evidence on the Flexibility of Prices,” Review of Economics and Statistics 76, 142-50.
Romer, Christina D. and David H. Romer (2004) “Choosing the Federal Reserve Chair: Lessons from History,” Journal of Economic Perspectives 18, 129-62.
Rotemberg, Julio J. (1982) “Sticky Prices in the United States,” Journal of Political Economy 60, 1187-1211.
— — (1987) “The New Keynesian Microfoundations,” in Stanley Fischer, ed., NBER Macroeconomics Annual 1987, MIT Press, 69-104.
— — and Michael Woodford (1997) “An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy,” in Ben S. Bernanke and Julio J. Rotemberg, eds., NBER Macroeconomics Annual 1997, MIT Press, 297-346.
— — and — — (1999) “Interest Rate Rules in an Estimated Sticky Price Model,” in John B. Taylor, ed., Monetary Policy Rules, University of Chicago Press, 57-126.
Rudd, Jeremy and Karl Whelan (2001) “New Tests of the New Keynesian Phillips Curve,” Federal Reserve Board FEDS working paper no. 2001-30 (July).
Sbordone, Argia M. (2002) “Prices and Unit Labor Costs: A New Test of Price Stickiness,” Journal of Monetary Economics 49, 265-92.
Smets, Frank and Raf Wouters (2003) “An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area,” Journal of the European Economic Association 1, 1123-75.
Woodford, Michael (2003) Interest and Prices, Princeton University Press.
CBOT Fed Watch
CBOT Fed Watch: ...[T]he CBOT 30-Day Federal Funds futures contract for the December 2005 expiration is currently pricing in a 100 percent probability that the FOMC will increase the target rate by at least 25 basis points from 4 percent to 4-1/2 percent... In addition, the CBOT 30-Day Federal Funds futures contract is pricing in a 4 percent probability of a further 25-basis point increase in the target rate to 4-1/2 percent... Summary Table December 6: 97% +25 bps versus 3% for +50 bps. December 7: 96% +25 bps versus 4% for +50 bps. December 8: 96% +25 bps versus 4% for +50 bps. December 9: 97% +25 bps versus 3% for +50 bps.
[Note: The typo in the write-up is still there. The first 4-1/2 should be 4-1/4.]
[Updated to include 12/9].
Graphs Gathered from Blogs (November 2005)
There is also a directory of links to graphs from other months.
December 08, 2005
A New Deal for Auto Workers?
New Engine Plant Marks a New Deal For Auto Industry, by Amy Joyce, Washington Post: ...[T]he Global Engine Manufacturing Alliance, or GEMA, a joint venture among DaimlerChrysler AG, Hyundai Motor Co. and Mitsubishi Motors Corp. designed to be dramatically different from traditional auto and parts plants. Here, old labor rules that restricted workers to one -- and only one -- job, that designated work on either day or night shifts, and that required employees to plow through lines of management to fix a problem were tossed out like an old, rusty carburetor. ... GEMA, which opened in October, "is betting on cooperation with a union to succeed," said Harley Shaiken, a labor professor at the University of California at Berkeley. ...
A national agreement with DaimlerChrysler means that covered employees at GEMA receive the same pensions, wages and benefits as at other plants. Union leaders have bought into the need to change work rules. "We have to change with the times," said Nate Gooden, a UAW vice president. "My job is to try to catch up with Toyota. ...," ... "We cannot continue to continue like we did in the past," Gooden said. ...
GEMA wanted to make the engine for 50 percent less than other engines. In the six-year GEMA contract, teams of workers share responsibilities. They know one another's jobs and change duties throughout their shifts. That allows any team member to work on any part of the operation, "and all are fundamentally skilled," Coventry said ... "Anyone anywhere can do anything at any time." ... The employees are "really the key to running the business," he said. "It's a big cultural shift not only for us but for the industry." ...
UAW-represented employees at the plant, who earn $21 to $30 an hour, must have at least a two-year technical degree or similar experience, which David E. Cole, chairman of the Center for Automotive Research, said is becoming the norm in the industry. "The idea that you could be a third-grade dropout and earn a salary in manufacturing is no more," he said. Every team is made up of about six people, rather than the more typical 25, with one mechanical and one electrical engineer per team. In traditional manufacturing scenarios, engineers sat apart from the assembly line. Workers typically had to halt the line and wait for an engineer somewhere else in the plant to find and fix the problem. "We no longer have this boss-subordinate relationship," Ewasyshyn said. Gooden put it simply: "They work in groups. They do job rotations. It takes the boredom out of going to work every day doing the same job. It's something we should have done a long time ago." ...
Gooden said he had resistance to the new approach at GEMA from local unions that "thought everything was going to be the same" as at other plants. But he dismissed their balking as simply a refusal to change with the times. "I told them this was a new age and a new way of doing things. I said, 'Just be patient.' If the people who get hired there like it, it will trickle down to you, too."
I'm not sure I see how this labor reorganiation will contribute significantly to the desired 50% cost saving, but I hope it works.
A Bridge to Future Tax Burdens
Alaska Bridges Dead? Think Again: Margaret Carlson, by Margaret Carlson, Commentary, Bloomberg: Isn't it better to tax and spend, as Democrats are always accused of doing, than to just spend and spend, as Republicans are recklessly doing now? ... You ask how the Republicans, with all their fiscal tough talk, managed to drive us over this cliff? Look at what took place just after the catastrophe of Hurricane Katrina embarrassed the leadership into reconsidering what had become the signature piece of fiscal incontinence of our time -- hundreds of millions of dollars for two bridges to nowhere, championed by Alaska Senator Ted Stevens.
If you, like me, thought that after the huge hullabaloo those bridges to nowhere were going nowhere in Washington, you would be wrong. Just because you saw with your own eyes Congress taking away a $442 million earmark ... for the bridges doesn't mean Alaska doesn't get the money. ... Although the bill was always a disgraceful example of out- of-control spending, it didn't grab the public's attention until lawmakers went looking for money to help the desperate people hit by Katrina. They found two bridges proposed for sparsely populated areas of Alaska -- one to Gravina Island (population: 50) and another, to a rural port, dubbed Don Young's Way in honor of Alaska's one representative. .... Americans had donated $100 million to their fellow citizens in the devastated region. Couldn't Congress forgo a little pork? Tom Coburn, the new Republican senator from Oklahoma, got specific. The money earmarked for the infamous bridges to nowhere might be used to rebuild a bridge to somewhere, specifically the span across Lake Pontchartrain, the longest causeway in the country, connecting thousands of people in Jefferson Parrish to thousands in St. Tammany in Louisiana.
Stevens, a 37-year veteran of Congress who directs an unseemly amount of cash to his home state, would have none of it. He did everything but stamp his feet and hold his breath, vowing to filibuster Coburn's amendment, even if the strain meant he'd have to ''be taken out...on a stretcher.'' He promised to ''resign this body,'' adding how he doesn't kid about such things. ... By any standard, Stevens is a mean and ruthless player on the Hill, barking at anyone who disagrees with him, and wielding power over the purse strings, the most important kind. He doesn't hide his sympathy for certain corporate interests. When Big Oil executives were called before his Commerce Committee on Nov. 9 ..., he refused to require them to raise their right hands and swear to tell the whole truth, as others are routinely asked to do. ...
While Coburn's amendment failed -- only 15 Senators had the guts to vote against Stevens -- it still looked as if Congress, for once, would do the right thing. Even Republican strategist Frank Luntz, a Stevens friend, admitted the bridges had become a national joke. ... But what was real and what was Congressional Kabuki? Did Congress pretend to kill the bridges and Stevens pretend to be mad about it? The ''earmark'' was removed, but not the precise amount of money. That means Alaska still gets the $442 million but it doesn't, by law, have to be spent on the bridges unless the governor and legislature want it to be. Guess what? They do. I bet one will be named Stevens. ...
This, while programs for the poor are being cut. New bridges to sleep under are little consolation.
Bad Credit OK
Paying for Revenue Neutral Changes in the Alternative Minimum Tax
There Are Ways to Fix Alternative Minimum Tax, by Gene Sperling, Bloomberg: Procrastination in the face of a problem is nothing to be proud of. Knowing about a problem and making it worse is something to be ashamed of. Presidents Reagan, Bush 1 and Clinton did little to deal with the problem of the ever-expanding alternative minimum tax, or AMT. President George W. Bush broke the pattern, but not for the better. ... When Bush took office in 2001, the Joint Committee on Taxation estimated that the number of taxpayers affected by the AMT would rise to 17.5 million in 2010 from 1.5 million taxpayers in 2001. Many of those snared by the tax would be making $75,000 to $100,000 a year -- hardly the wealthy tax dodgers the AMT was designed to catch. The Bush administration could have done nothing -- not good, but not much worse than its predecessors. Instead, it constructed tax policies that more than doubled ... the number of Americans who would be affected by 2010. ...
As concerns about burdening the middle class force both parties to overhaul the AMT, hopefully some sense of equity and fiscal responsibility will sneak back into Washington. Policymakers should reject any calls to simply repeal the AMT without seeking to make up for the lost revenues. The president's own Tax Reform Panel estimates eliminating the AMT would cost $1.2 trillion in revenue over 10 years. To put this in perspective, that's enough to cover almost all Americans without health insurance or make Social Security solvent. ... Policymakers must ... focus on providing relief for those making $150,000 or less who the AMT was never intended to affect. It's hard to justify passing on hundreds of billions of dollars in debt to the next generation just to make sure that the AMT doesn't take a bite out of Bush's tax cuts for some high-income taxpayers. ...
Details, details. If it's revenue neutral and the burden is lifted from one group, other groups have to pay more. Who will benefit and who will pay more?
House leaders hope to win approval for their top priority this week: a $56 billion tax cut that would extend President Bush's tax cuts for stock dividends. House and Senate Republican leaders also edged closer ... toward an agreement to cut as much as $45 billion over the next five years from domestic programs like Medicaid, food stamps, student loans and child-support enforcement. ... The main focus on Wednesday was ... another one-year cut in the alternative minimum tax. ... The White House and House Republican leaders are pushing to extend that tax cut ... at a cost of $20 billion. ... The Senate's reconciliation bill includes $27 billion for a one-year reprieve from the alternative minimum tax...
Sometimes a Bumper Crop Is Too Much of a Good Thing, by Alexei Barrionuevo and Keith Bradsher, NY Times: ...This season's parched-earth conditions were supposed to spell doom ... for the Illinois corn crop. Instead, the country's second-biggest corn-growing state harvested 16 percent more per acre than expected, helping the United States produce its second-largest crop ever. ... Despite the worst Midwest drought in 17 years, seed technology allowed farmers to continue their relentless increase in production. ... Individually, farmers welcome the new varieties of grain. "As a grower I hate to admit it, but the people in the labs really helped us out this year," said Joe Zumwalt, a third-generation farmer here in western Illinois... "If it weren't for the seed genetics ... our yields and our outcome wouldn't have been nearly what they were." ... [U]niversity researchers and big seed companies [are] working feverishly to increase corn yields. The push the last 15 years has also been to make seeds able to retain more moisture so they can better withstand severe droughts. ... Here in western Illinois, Mr. Zumwalt had expected corn yields of 120 to 130 bushels an acre because of the drought, but he ended up averaging 175 bushels. ... While Mr. Zumwalt, 26, gives plenty of credit to advancements in seed genetics, he is a modern-day example of how farmers have also increased efficiency through use of better equipment and water-management practices. He uses combines that rely on a global-positioning system to map exactly how much corn each acre of land is yielding, giving him critical information on how much fertilizer, seed and chemicals are needed for the next harvest. Even with this year's Farm Belt drought, American corn yields have increased by 31 percent since 1995, and by 72 percent since 1975. In recent years, Europe, where much less corn is produced, has followed suit as the big companies have introduced newer seed varieties there as well. Lately the development of new seeds has accelerated considerably. After two severe droughts in the 1980's, companies began pouring billions of dollars into seed research, particularly in corn,.... The challenge was to create that tolerance without sacrificing yield. In the 1990's corn breeders also began directing genetic technology developed in the human health industry into plant breeding. Breeders can now use DNA markers to study individual contributions from pieces of chromosome in the seed, allowing them to leverage multiple years of data. ... The result is that seed companies today are doubling the rate of genetic yield improvement in corn every year. Most recently, Monsanto, for example, claims its genetically modified seeds that limit the amount of corn root worm, a common problem in Illinois, have added at least nine bushels an acre. "We don't see any signs that our ability to improve the yield of corn is diminishing," said Marlin Edwards, global head of breeding technology for Monsanto. ...
Productivity. My apologies for launching into a personal story here. I sold tractor, implement, and combine parts to farmers in the rice country of northern California starting while in high school in 1974 and I continued through college at a different dealership so perhaps this captures my interest for that reason. I remember when UC-Blackwelder introduced tomato harvesters:
UC Tomato Harvester Designated as Historic Landmark, UC Davis News: The legendary UC-Blackwelder tomato harvester, which arguably saved California's processed tomato industry in the 1960s and raised concerns that machines were depriving people of employment, was recently designated a historic landmark during ceremonies at the University of California, Davis. ...
I also remember when electric eyes were put onto tomato harvesters to sort tomatoes by color using mechanical "fingers" that would kick out any deemed too green. It displaced a lot of labor that would ride on the harvesters in the fields and sort the tomatoes by hand as they came down the conveyer belt. It was terrible work with the temperature commonly in the 100s during harvest, it was dirty and dusty, the hours were long and the conveyer belt relentless. One of my high school jobs was pulling a bankout wagon with a small tractor beside the harvester and loading the tomatoes into individual wooden bins as they came out off the harvester. Eight bins per load at Shimizu Farms. You would fill each bin by varying the speed of the tractor, signal the harvester driver, pull away, and the person behind you in the circle would take your place. There was quite a bit of spillage in the process and it was labor intensive. I lost my job to an innovation where bankout was performed by pulling semi-truck trailers through the field with large tractors. This saved several steps in the load out process and reduced spillage.
I remember wondering what would happen to all those people, around five per harvester across all those fields, plus bankout drivers like me, the people who loaded the empty bins onto the tractor trailers by hand, the forklift drivers who loaded full bins onto trucks, and so on, and thinking they would, in essence, end up at the factories making the electric eyes and tomato harvesters. I ended up on another farm moving sprinkler pipe in alfalfa fields, then cutting, turning, bailing, and loading it into the farmer's barn, but it didn't occur to me then how my being freed to work elsewhere increased overall output.
Money as Art
Swiss distressed over currency redesign, Bloomberg News: The Swiss are in an uproar over the possibility that their new money may feature images of embryos and blood cells. The proposed designs are "horrible, horrible, horrible," said Verena Graf, a retired bank archivist ... "I would rather keep the old ones with the people on them." The designs ... won a central bank competition last month. ... "The banknote is Switzerland's calling card," Jean-Christophe Ammann, 66, the former director of the Frankfurt Museum of Modern Art, who headed the jury, ... " The jury's choice, however, has not necessarily been the people's. The Neue Zürcher Zeitung, a newspaper that is required reading for any Swiss banker, said ... the new design lacked a sense of the "eroticism of money." ... Although the jury preferred Krebs's designs, it is not certain they will be used, The last time the bank decided on a new look for banknotes, in 1991, it chose the third-place design. ... "In theory, the notes should be Swiss, but the problem is that if there aren't people on them, what are we going to put on there - mountains and cheese?" said Thomas Bruehwiler, a Zurich- based computer programmer. ... The design for the new 10-franc note shows a planet on the front whose shape is mirrored by blood cells depicted on the back. The 100-franc note shows an embryo on the front and a map of the continents on its back, with a watermark in the shape of a brain. "In Switzerland, money has a special status," Ammann said. It is "a numbered, signed piece of graphic art." ...
December 07, 2005
CBOT Fed Watch
CBOT Fed Watch: Based upon the December 7 market close, the CBOT 30-Day Federal Funds futures contract for the December 2005 expiration is currently pricing in a 100 percent probability that the FOMC will increase the target rate by at least 25 basis points from 4 percent to 4-1/2 percent... In addition, the CBOT 30-Day Federal Funds futures contract is pricing in a 4 percent probability of a further 25-basis point increase in the target rate to 4-1/2 percent (versus a 96 percent probability of just a 25-basis point rate increase). Summary Table December 6: 97% +25 bps versus 3% for +50 bps. December 7: 96% +25 bps versus 4% for +50 bps.
[Note: There is a typo in the write-up from the Board of Trade. The first 4-1/2 should be 4-1/4.]
Alan Greenspan Answers Questions on the Neutral Real Rate, the Yield Curve, and Transparency
For anyone interested in the yield curve conundrum, it is discussed in some detail. Greenspan says that too much saving and too little investment is the cause of a flat yield curve. It does not appear the Fed believes that the yield curve provides information over and above what they learn from other sources and it gives unreliable signals about the future state of the economy. Therefore the yield curve does not have much impact on policy decisions. There is also a discussion at the beginning on the feasibility and desirability of using the real interest rate as a policy target, and a brief discussion of transparency at the end. Greenspan deos not believe that a strict real interest target is feasible, and he believes the current level of transparency is the correct level:
November 28, 2005
The Honorable Jim Saxton Chairman Joint Economic Committee Washington, D.C. 20510
Dear Mr. Chairman:
I am pleased to enclose my responses to the additional questions you forwarded in connection with the November 3 hearing.
I also wanted to thank you, and the other members of the committee, for your kind and generous comments at the hearing and in your letter. It has been a pleasure appearing before the Joint Economic Committee over the years.
Chairman Greenspan subsequently submitted the following to written questions received from Chairman Saxton in connection with the Joint Economic Committee hearing on November 3, 2005:
Q.1. Since the "neutral" rate is not observable, how do you know when you've reached the neutral rate? What variables do you monitor to make judgments as to how close to neutral the fed funds rate is? As the fed funds rate is ratcheted up, and given the lags that exist, does the possibility of raising it above a neutral level increase?
A.1. Although the concept of a "neutral interest rate" is a useful theoretical construct, difficulties in implementing it in practice limit its usefulness as a framework for monetary policymaking. For one thing, a variety of definitions of a neutral real interest rate are possible. For another, quantitative estimates of the level of such a rate are subject to considerable uncertainty. Also, such estimates can vary widely depending on the type of measure and the prevailing and projected economic conditions. In particular, all variables that contribute to making a macroeconomic forecast relevant for estimates of neutral interest rates, greatly complicating such assessments. Thus, it is impossible to know with any certainty when the neutral rate has been reached. Moreover, the use of neutral real rates in the formulation of monetary policy in not necessarily straightforward. For instance, in some circumstances, attaining a "neutral" federal funds rate would in principle be an appropriate objective for monetary p0licy, but in others--particularly when inflation is too high or too low--aiming for a neutral funds rate in the near term would not be appropriate. These uncertainties and complications suggest that reliance on a single summary measure such as a neutral real interest rate would be unwise as a strategy for formulating monetary policy. Rather, a full consideration of current and perspective economic developments, and of the risks to the outlook, is essential for the conduct of monetary policy.
Q.2. Over the last year and a half, the Federal Reserve has raised the federal funds rate by 3.0 percentage points and indicated that further increases are likely in order to check inflation. Yet long-term rates, including mortgages, are lower now than when the FOMC began tightening. In past comments, you have termed this situation a "conundrum" without recent precedent. What explains the low level of long-term interest rates?
A.2. As I noted in my monetary policy testimony before the Congress in July, two distinct but overlapping developments appear to be at work in explaining the low level of long-term interest rates: a longer-term trend decline in bond yields and an acceleration of that trend over the period since mid-2004. Both developments are particularly evident in the nominal interest rate applying to the one-year period ending ten years from today that can be inferred from the U.S. Treasury yield curve. In 1994, that so-called forward rate exceeded 8 percent. By mid-2004, it had declined to about 6-1/2 percent--an easing of about 15 basis points per year on average. Over the past year, that drop steepened, and the forward rate fell 130 basis points to less than 5 percent.
Some, but not all, of the decade-long trend decline in that forward yield can be ascribed to expectations of lower inflation, a reduced risk premium resulting from less inflation volatility, and a smaller real term premium that seems due to a moderation of the business cycle over the past few decades. As I noted in my testimony before the Joint Economic Committee in February, the effective productive capacity of the global economy has substantially increased, in part because of the breakup of the Soviet Union and the integration of China and India into the global marketplace. And this increase in capacity, in turn, has doubtless contributed to expectations of lower inflation and lower inflation-risk premiums.
In addition to these factors, the trend reduction worldwide in long-term yields surely reflects an excess of intended saving over intended investment. This configuration is equivalent to an excess of the supply of funds relative to the demand for investment. Because the intended capital investment is to some extent driven by forces independent of those governing intended saving, the gap between intended saving and investment can be quite wide and variable. It is real interest rates that bring actual capital investment worldwide and its means of financing, global saving, into equality. We can directly observe only the actual flows, not the saving and investment tendencies. As best we can judge, both high levels of intended saving and low levels of intended investment have combined to lower long-term interest rates over the past decade.
Q.3. I was intrigued by your response to my question relating to the yield curve and associated yield spread between the fed funds rate and the 10-year bond yield. In particular, your response to the spread question was as follows:
"...that used to be one of the...most accurate measures we used to have to indicate when a recession was about to occur and when a recovery was about to occur. It has lost its capability of doing so in recent years...it has significant financial impacts, it's no longer useful as a leading indicator to the extent that it was."
In pondering this comment, three considerations appear to be especially relevant: (1) First, the importance of a yield spread for monetary policy has long been recognized by classical economists. Both Henry Thornton and Knut Wicksell recognized that when the central-bank-controlled short-rate moves relative to a long-term market rate, relative prices, incentives, and behaviors change. (2) Second, the recent (2005) extensive review and summary of the literature pertaining to research on the yield spread (published by the Federal Reserve Bank of New York) concludes that the weight of the evidence supports the potency of the yield spread. (See Estrella, October 2005). (3) Third, the Conference Board includes a yield spread variable in its index of leading economic indicators. The Conference Board conducts an ongoing evaluation of these indicators and an especially thorough, major reevaluation of the composite was made last July. The bottom line is that the yield spread remains a key component of this composite.
In light of these considerations, what available evidence or other factors support the view that the yield spread is no longer especially useful? Has the Board staff assessed this relationship recently?
A.3. Although the slope of the yield curve remains an important financial indicator, it needs to be interpreted carefully. In particular, a flattening of the yield curve is a not a foolproof indicator of future weakness. For example, the yield curve narrowed sharply over the period 1992-1994 even as the economy was entering the longest sustained expansion of the postwar period.
Three basic factors affect the slope of the yield-curve--the current level of the real federal funds rate relative to the long-run level, the level of near-term inflation expectations relative to expected inflation at longer horizons, and the level of the near-term risk premiums relative to risk premiums at longer horizons.
Statistical analysis indicates that the first factor--the gap between the current and long-run levels of the real federal funds rate--is a key component from which the yield curve slope derives much of its predictive power for future GDP growth. When the level of the real federal funds rate is pushed well below its long-run level, economic stimulus is imparted and the yield curve steepens. The economic stimulus influences output growth with a lag; as a result, the steepening of the yield curve in this scenario is a predictor, albeit not the cause of, stronger economic activity ahead. Conversely, when the level of the real federal funds rate is pushed above its long-run level, economic restraint is imparted and the yield curve flattens. Once again, the economic restraint influences output growth with a lag, so the flattening (inversion) of the yield curve in this scenario would signal weaker economic growth ahead, but would not itself be the cause of the weakening.
The connection between future output growth and the other two factors affecting the slope of the yield curve--the gap between near-term and long-term inflation expectations and the difference between near-term and long-term risk premiums--is far less certain and likely to depend on economic circumstances. For example, a rise in near-term inflation expectations above long-term inflation expectations would tend to flatten the yield curve and might also signal a prospective weakening in aggregate demand. This configuration in inflation expectations might reflect adverse supply factors that have pushed up inflation in the near term but that are expected to dissipate over time. In this case, the flattening of the yield curve might well be a signal of an improving inflation picture that could also be accompanied by a favorite outlook for economic growth.
The connection between output growth and risk premiums is also quite uncertain. A fall in distant horizon risk premiums would flatten the yield curve and might signal a weakening in economic activity if, for example, the drop in risk premiums in fixed-income markets was associated with a "flight to safety" on the part of global investors seeking a safe haven from turbulence in equity markets and other risky assets. But it is also possible that a decline in distant horizon risk premiums could be a sign that investors are generally more willing to bear risk. In this case, a flattening of the yield curve stemming from this factor could be an indicator of an easing in financial conditions that would stimulate future economic activity.
In summary, many factors can affect the slope of the yield curve, and these factors do not all have the same implications for future output growth. In judging the indicator value of any particular change in the slope of the yield curve, it is critical to understand the underlying forces that may be affecting the yield curve at the moment. As the 1992-1994 episode attests, simply relying on an average statistical relationship estimated over a very long sample can be quite misleading.
Q.4. One of the strategies or institutional changes that you have supported in recent years relates to the increased transparency of the Federal reserve. This increase Federal Reserve transparency has, for the most part, been associated with more benefits than costs. Doesn't this increased transparency work to the benefit of both the Federal Reserve and the public?
A.4. Greater transparency with regard to Federal Reserve actions encourages public discussion and informed scrutiny, important aspects of accountability in a democratic society. Transparency also enables financial markets to better predict monetary policy decisions, which can contribute to improved policy outcomes. However, providing more complete information about policy decisions is not without cost. Transparency requires careful attention by policymakers, and so constrains the time they have for actually making decisions. More importantly, excessive transparency could inhibit policymakers, making them less spontaneous in their remarks and less willing to explore new ideas. Such an outcome would have adverse effects on policy decisions. The Federal Reserve's current practices strike a reasonable balance between transparency and the degree of confidentiality appropriate to support the policy process.
How the Discount Rate is Determined
From the Answer Desk: A Pot Pourri of Nonsense: Gopal asks: How is the discount rate determined for benefit cost analysis?
Throwing darts is a good description of how this is done. Just one small quibble. Should the darts be hitting the bull's-eye?
Greener Grass on the Other Side of the Border
Study: Illegal Immigrants Not Drawn by Jobs, by Darryl Fears, Washington Post: A majority of Mexican nationals who crossed into the United States illegally in the past two years left behind paying jobs that, in some cases, are similar to the agriculture, construction and manufacturing work they find north of the border, according to a study of Mexican immigrants released yesterday by the Pew Hispanic Center. The study seemed to explode widely held beliefs that Mexicans risk deadly trips across the Rio Grande and through broiling Arizona and New Mexico deserts solely to find work. But the Pew Center's director, Roberto Suro, said he could not say that definitively. "There's one very clear finding and that's that unemployment per se is not a very large factor in determining whether people migrate or not," Suro said. "This is not a flow of people without jobs. Unemployment is not pushing people out. . . . " More often, he said, the decision to migrate involve a variety of reasons, such "improvement of earnings" in Mexico, even though immigrants earn very low wages in the United States.
The study's author, Rakesh Kochhar, associate director of research for the center, said that, based on estimates, undocumented Mexican immigrants earn about twice as much in construction, manufacturing and hospitality jobs as they did working south of the border. Other factors that contributed to Mexican migration include rejoining families and improved working conditions, Suro and Kochhar said. ...
After arriving in the United States, 82 percent of the illegal immigrants lived with relatives. ... Unemployment is a fact of life in the transition from Mexico. A high percentage, 38, said they were unemployed for at least a month in the previous year. Women in particular, 48 percent, had trouble finding work, and 40 percent of people without a high-school education were jobless for a significant period. Forty-five percent eventually found jobs by "talking with people" in the United States... Others visited job sites, talked to people in Mexico or consulted want ads in U.S. newspapers. About half of illegal immigrants entered the same industries that employ most workers in Mexico. An additional 17 percent took jobs in the hospitality industry, according to the study.
Update: This just showed up in an email. It is from the NBER Digest:
The Mexican Workforce in the United States: The population of Mexican-born persons residing in the United States has increased at an unprecedented rate in recent decades. This increase can be attributed to both legal and illegal immigration. ... In The Evolution of the Mexican-Born Workforce in the United States (NBER Working Paper No. 11281), ... George Borjas and Lawrence Katz use data from 1900 through 2000 to document the evolution of the Mexican-born workforce in the U.S. labor market. While it is well known that there has been a rapid rise in Mexican immigration to the United States in recent years, they find that the share of Mexican immigrants in the U.S. workforce declined steadily after the 1920s before beginning to rise again in the 1960s. It was not until the 1970s that the relative number of Mexican immigrants in the U.S. workforce was back to the 1920s level. Analyzing the economic performance of these immigrants..., the authors find that Mexican immigrants have much less education than either native-born workers or non-Mexican immigrants. These differences in ... "human capital" account for nearly three-quarters of the very large wage disadvantage suffered by Mexican immigrants in recent decades. While the earnings of non-Mexican immigrants converge to approximate those of their native-born counterparts as the immigrants accumulate work experience in the U.S. labor market, the authors find that this wage convergence has been weaker on average for Mexican immigrants than for other immigrant groups. ... The authors also find that the large Mexican influx in recent decades has contributed to the widening of the U.S. wage structure by adversely affecting the earnings of less-educated native workers and improving the earnings of college graduates. These wage effects have, in turn, lowered the prices of non-traded goods and services that are low-skill labor intensive. There is little evidence that the influx of Mexican-born workers into the United States is slowing down ..., and there is also little evidence that the skill composition of the Mexican immigrants is changing from what it has been in the past. The continued migration of Mexican workers into the United States, and the inevitable rapid growth of the group of native-born workers of Mexican ancestry, suggest that the economic consequences of this migration influx are only beginning to be felt. --Les Picker
Ben Bernanke's Views Affected by Depression
Lessons of the '30s: Long Study of Great Depression Has Shaped Bernanke's Views, by Greg Ip, WSJ: In 1983, Mark Gertler asked his friend and fellow economist Ben Bernanke why he was starting his career by studying the Great Depression. "If you want to understand geology, study earthquakes," Mr. Bernanke replied, ... "If you want to understand economics, study the biggest calamity to hit the U.S. and world economies." Mr. Bernanke's fascination with the economic earthquake never abated. ... Mr. Bernanke's interest in the Depression, which dates back to his childhood, is a guide to the evolution of his thinking. In particular, his groundbreaking research on how mistakes by the Federal Reserve compounded the catastrophe is likely to influence how he steers the economy... The Depression, he contends, has taught the importance of avoiding both deflation ... and inflation. It has also shown the threat that falling asset prices -- such as ... in housing -- and weakened banks can pose. Most important, it shows the damage the Fed can do when it follows wrong-headed ideas. ...
Even as a child, Mr. Bernanke ... was intrigued by the Depression. As a child of six or seven, he visited his maternal grandmother ... and sat on her front porch as she described life as a young mother during the 1930s ... Mrs. Friedman, whose husband taught Hebrew and worked in a furniture store, was proud they could buy new shoes for their children each year. But many neighborhood children had to go to school in tattered shoes or barefoot. "Why didn't their parents just buy them new shoes?" young Ben asked. Because their fathers had lost their jobs when the shoe factories closed, she said. "Why did the factories close down?" She replied, "Because nobody had any money to buy shoes." The circularity of her logic, which he later recounted in a textbook, bothered him yet illustrated a key puzzle of the Depression: Why was there so much idle capacity when there were so many unmet needs?...
In "A Monetary History of the United States, 1867-1960," [Milton Friedman and Anna Jacobson Schwartz ] argued that the Depression was far from inevitable, but brought about by an "inept" Federal Reserve. ... Mr. Bernanke read the book as a graduate student at Massachusetts Institute of Technology in the 1970s. "I was hooked, and I have been a student of monetary economics and economic history ever since," ... In 1979, Mr. Bernanke went to Stanford to teach economics. ... The 1970s' high unemployment and inflation had diminished the Fed's reputation, and new economic theories of "rational expectations" and the "real business cycle" held that the central bank could do little to affect growth and jobs. Mr. Bernanke nonetheless threw himself into studying the role of monetary policy in the Depression. ... While the Friedman-Schwartz theory had revolutionized thinking about the Depression, it couldn't fully explain the downturn's length or depth. Theoretically, neither deflation nor inflation ought to affect long-run growth or employment. After a while, people and businesses get used to changing prices. ...
Mr. Bernanke published his first major paper on the Depression in 1983. ... "My theory seems capable, unlike the major alternatives, of explaining the unusual length and depth of the Great Depression." The statement reflected an intellectual boldness that verged on cockiness. Messrs. Bernanke and Gertler began a lengthy collaboration refining what became known as the "financial accelerator" because it explained how the financial system could compound an economic downturn. The two had complementary roles, with Mr. Bernanke usually pushing for a bold statement and Mr. Gertler, he recalls, "telling him what's wrong with the statement." ... Mr. Bernanke's Depression research soon found a U.S. role. Some analysts had called on the Fed to rein in the galloping stock market in the late 1990s. But, ... Mr. Bernanke and Mr. Gertler said the Fed should raise rates if rising asset prices fuel inflation, but not to prick a bubble. "A bubble, once pricked, can easily degenerate into a panic," they said. When the bubble eventually collapses on its own, the Fed should cut interest rates to limit the damage to the financial system and the broad economy. ... As Fed chairman, Mr. Bernanke probably will not be talking much about the Depression, but it is unlikely to be far from his mind. ...
The WSJ Jumps on Greenspan's Entitlement Cutting Bandwagon
What Greenspan Really Said, Editorial, WSJ: So has Alan Greenspan become a tax-raiser in the autumn of his chairmanship of the Federal Reserve? That's what much of the coverage of his speech Friday would have you believe. But actually reading the speech leaves a very different impression. ... [I]t was not the current $300 billion budget deficit he was mostly concerned about. It is the much larger problem of entitlements, specifically benefits promised under Social Security and Medicare. ... As Mr. Greenspan noted Friday, that means either raising taxes (a lot) or cutting spending (a lot). ...
"tax increases of sufficient dimension to deal with our looming fiscal problems arguably pose significant risks to economic growth and the revenue base." Those risks are great enough "to warrant aiming, if at all possible, to close the fiscal gap primarily, if not wholly, from the outlay side."
Translated from the Greenspan-ese: Cut spending. ... Our government has made promises it cannot meet. Without changes in Congressional spending or entitlement reform -- or both -- those promises will eventually be broken. It's a vital point, if only the media had covered it.
The recent post Greenspan: Social Security and Medicare Must Be Cut to Solve the Budget Deficit Problem agrees that Greenspan called for the deficit to be made up wholly with spending cuts if possible. The problem is, it's not possible (and more tax cuts won't help). There are places to make cuts in spending, but the idea that a shortfall of this magnitude can be made up by expenditure cuts alone is wishful thinking - it's not politically possible. And even if it were possible, it still isn't be the best approach to closing the budget gap.
Social Security has always been a diversion. Bringing medical costs under control is the real issue and this can be accomplished by reducing the number of people receiving benefits, reducing the average benefit level, or reducing the cost of the benefit (i.e. lowering medical costs leaving the level of service as is). I would much prefer we try to reduce the cost of providing care before further reducing the number of people receiving care or reducing the quality of care received. If our costs are higher and our care no better than other countries, we need to rethink out approach to this problem.
The economy can be divided into four sectors, households, businesses, government, and the foreign sector. This is what you hear:
- Households: Increasingly burdened with higher medical costs, coverage is falling.
- Businesses: Failing under the burden of high employee medical costs, losing competiveness.
- Government: Faced with the burden of high future Medicare costs.
- Foreign sector: Better medical care at a lower cost in many countries.
Yet how to provide universal medical coverage at a lower cost is not at the top of the national agenda or even a serious part of the political conversation.
Escape from Voice-Mail Jail
A blow for harried consumers, The Oregonian: ... "If you have a question about the way we calculate your bill, press 1. If you have a question about the length of the billing cycle, press 2. If you have a question about making a payment, press 3. ... " Still holding the phone? ... We daresay most consumers hate ... voice-mail menu barriers ... That's why it's been fun to observe the furor that's followed the publication of a cybergeek's cheat sheet for breaking out of such voicemail systems. The cheat sheet, at www.paulenglish.com/ivr, gives phone numbers and button-punching sequences that customers can use to escape the voice-mail menu and speak to a live operator. (For example, when you dial a particular airline, you need to say the word "agent" four times before the system will connect you to a human being. For a certain bank, you have to press 5, pause, then press 1 and 4.) ... [U]sers have ... provok[ed] at least one miffed response from a company that sells voice-mail systems. Angel.com initially posted a haughty why-voice-mail-is-good-for-you page ... but softened it later to highlight best practices of companies that use voice-mail systems (www.angel.com/ivrcheatsheet/index.jsp). ... When you reach an operator, be sure to say "Happy Holidays."
Posted by Mark Thoma on Wednesday, December 7, 2005 at 01:27 AM in Miscellaneous
Microsoft Loses Antitrust Ruling in South Korea
Microsoft Loses Antitrust Ruling in South Korea, Bloomberg: Microsoft Corp. ... was punished for breaching antitrust rules by South Korea, the first country to follow Europe in forcing the company to sell multiple versions of its operating system. Microsoft will have to offer consumers the choice of buying Windows without its media player and instant-messaging software and pay a 33 billion won ($32 million) fine... Microsoft will appeal... The verdict mirrors a March 2004 ruling by European regulators ... While Korea accounts for less than 1 percent of Microsoft's sales, the ruling may encourage companies to challenge Microsoft in other countries...
December 06, 2005
GM Responds to Its Critics
A Portrait of My Industry, by Rick Wagoner, Commentary, WSJ: ...Despite public perception, the answer is not that foreign auto makers are more productive or offer better-quality or more fuel-efficient vehicles. ... The fact is, we're building the best cars and trucks we've ever built at GM, our products are receiving excellent reviews, and we're running the business in a globally competitive manner. Outside of North America, we're setting sales records. In fact, for the first time in our history, we will sell more cars and trucks this year outside the United States than inside, aided in no small part by our market-leading performance in China.
So why, fundamentally, are GM and the U.S. auto industry struggling right now? Intense competition, for one. The global auto business grows tougher every year, and we accept that. ... we're fighting hard to stay on top. Beyond that, our performance in the marketplace has not been what we've wanted it to be. While we've been strong in truck sales, we've been weaker in cars, and, yes, the recent surge in gas prices hurt sales. While we've led in technologies like OnStar, we've lagged in others like hybrid vehicles. Rest assured, ... we are committed to doing a better job of designing, building and selling high-quality, high-value cars and trucks that consumers can't wait to buy. No excuses. We will step up our performance in this regard.
But competition and marketplace performance are not the whole story. ... There are those who ask if manufacturing is still relevant for America. My view: You bet it is! Manufacturing generates two-thirds of America's R&D investment, accounts for three-fourths of our exports, and creates about 15 million American jobs. And the auto industry is a big part of that... So what are the fundamental challenges facing American manufacturing? One is the spiraling cost of health care in the United States. Last year, GM spent ... a staggering $1,525 for every car and truck we produced. ... Foreign auto makers have just a fraction of these costs, because they have few, if any, U.S. retirees, and in their home countries their governments fund a much greater portion of employee and retiree health-care costs.
Some argue that we have no one but ourselves to blame for our disproportionately high health-care "legacy costs." That kind of observation reminds me of the saying that no good deed going unpunished. ... American manufacturers were once held up as good corporate citizens for providing these benefits. Today, we are maligned for our poor judgment in "giving away" such benefits 40 years ago.
Another factor beyond our control is lawsuit abuse. ... Another major concern is unfair trading practices, especially Japan's long-term initiatives to artificially weaken the yen. ... There are other issues, of course, but my point is this: We at GM have a number of tough challenges that we must and will address on our own -- but we also carry some huge costs that our foreign competitors do not share.
Some say we're looking for a bailout. Baloney -- we at GM do not want a bailout. What we want -- after we take the actions we are taking, in product, technology, cost and every area we're working in our business today -- is the chance to compete on a level playing field. It's critical that government leaders, supported by business, unions and all our citizens, forge policy solutions to the issues undercutting American manufacturing competitiveness. ...
Does he support national health care as a policy solution? It's interesting to contrast these remarks to those by James Womack linked above. As I read this, he identified increasing competition, rising medical costs, inferior production techniques, lawsuit abuse, and unfair trading practices as the source of GM's problems. One cannot deny that poor decisions by union leaders contributed to current problems, but the situation is not solely labor's fault at the hands of a benevolent corporation handing out benefit candy as portrayed in the article and management needs to take its share of the responsibility. I would add improving management to the list of ways to level the playing field. Wouldn't better players help as much as better equipment?
Update The WSJ reports: GM Makes Changes in Management:
General Motors Corp., facing its worst financial crisis in 15 years, named Frederick "Fritz" Henderson, head of its European operations, as vice chairman and chief financial officer as part of a wider management shuffle... In separate moves, GM shook up the chain of command in its North American labor relations ahead of difficult U.S. labor negotiations in 2007.
Yield Curve Inversions
Not as informative as I'd hoped for the questions I want to answer, but it does appear that yield curve inversions were more common prior to WWII when prices in the U.S. were stable.
Better data exist for Norway. This is from a Norges Bank publication and appears to be carefully done. These two graphs look at yields on 2-4 year and 20-60 year bonds. Construction of the two series is described in the article:
I don't know that much about historical Norwegian data, but it is evident from these graphs that prior to WWII yield curve inversions were much more common and could persist for a period of years (an inversion is when the blue line is higher than the red line). Here is 500 years of Norwegian price data to get some idea of inflation rates during the 1921-1979 period and the periods before and after:
Not sure what to make of this. In the part of the graph representing the sample period 1921-1979, prices rise, then fall, then rise again and continue rising through the end of the sample. I couldn't find any clear association between the recession periods discussed in the source for the price graph and yield curve inversions, but the comparison was not done with a careful statistical analysis. In any case, after seeing these graphs, and given the Fed's strong commitment to price stability, the possibility of an inverted yield curve does not seem as ominous.
Fed Governor Olson: Fed Unlikely to Tighten Rates Too Much
Olson Isn't Worried the Fed Will Raise Rates Too Much, Bloomberg: Federal Reserve Governor Mark Olson said he isn't concerned the Fed will raise its benchmark interest rate too much because the central bank can respond quickly to changes in the economy. ''I don't worry about that,'' Olson ... told reporters after a speech in Sioux Falls, South Dakota. ''The economy doesn't typically move so rapidly that it would get away from us.'' ... Olson said the Fed has ''an opportunity to look at the economy continually,'' including between policy meetings, and because of that ''we have the ability to respond very quickly.'' ... Olson said that price measure, also known as ''core'' inflation, ''remains muted.'' ''We need to be continually watchful,'' he told reporters. Olson... said the decision facing Fed policy makers at next week's meeting is the extent to which higher prices are ''passing through into core inflation, and the extent to which we may consider removing that accommodation,'' or continuing to raise the benchmark interest rate. ...
It sounds more and more as though Federal Reserve members believe that inflation is coming under control and they are waiting for confirmation of this from new data over the next few months before stopping the campaign of incremental rate hikes. But any signs of inflation will be met with hawkish eyes.
I want to question one thing in these remarks. There are considerable lags between the time a policy is put into place and the time the policy takes effect, e.g. as long as a year and a half before the peak impact of the policy is felt on GDP and the effects of policy shocks can persit for as long as three years. Recessions can occur much faster than this and the idea that the Fed can always respond in time to catch any downward movement in activity fails to recognize the length of these lags and the uncertainty we have about them (see Jim Hamilton at econbrowser for more on this). I find the attitude that 'The economy doesn't typically move so rapidly that it would get away from us,'' surprising from a Fed official.
Greg Mankiw: People are Confusing the Economy with Iraq
Bush Begins Effort to Allay Concerns on the Economy, Bloomberg: The war in Iraq also makes it tougher for Bush to reassure Americans, said Harvard economist Greg Mankiw, chairman of Bush's Council of Economic Advisers from 2003 to 2005. ''The perception that things are going badly in Iraq often makes people think that this economy is doing badly even when it's not true,'' he said.
So that's all it is. Just convince people that, rationally, the economy has nothing to do with how badly things are going in Iraq and they will gush at their economic good fortune. Good luck with that one.
December 05, 2005
Paul Krugman: The Joyless Economy
The Joyless Economy, by Paul Krugman, NY Times: Falling gasoline prices have led to some improvement in consumer confidence ... But the public remains deeply unhappy about the state of the economy. ... Yet by some measures, the economy is doing reasonably well. In particular, gross domestic product is rising at a pretty fast clip. So why aren't people pleased with the economy's performance? ... The Bush administration seems genuinely puzzled that it isn't getting more credit for what it thinks is a booming economy. So let me be helpful here and explain what's going on.
I could point out that the economic numbers, especially the job numbers, aren't as good as the Bush people imagine. ... But the main explanation for economic discontent is that it's hard to convince people that the economy is booming when they themselves have yet to see any benefits... Back in August the Census bureau released family income data for 2004. The report, which was overshadowed by Hurricane Katrina, showed a remarkable disconnect between overall economic growth and the economic fortunes of most American families. It should have been a good year for American families: the economy grew 4.2 percent ... Yet most families actually lost economic ground. Real median household income ... fell for the fifth year in a row. And one key source of economic insecurity got worse, as the number of Americans without health insurance continued to rise. ...
Behind the disconnect ... lies the extremely lopsided nature of the economic recovery... The growth in corporate profits has ... been spectacular. Even after adjusting for inflation, profits have risen more than 50 percent since the last quarter of 2001. But real wage and salary income is up less than 7 percent. There are some wealthy Americans who derive a large share of their income from dividends and capital gains on stocks... But ... the sluggish growth in wages is the real story. ... Average hourly earnings of nonsupervisory workers, adjusted for inflation, are lower now than when the recovery began.
So there you have it. Americans don't feel good about the economy because it hasn't been good for them. Never mind the G.D.P. numbers: most people are falling behind. It's much harder to explain why. The disconnect between G.D.P. growth and the economic fortunes of most American families can't be dismissed as a normal occurrence. Wages and median family income often lag behind profits in the early stages of an economic expansion, but not this far behind, and not for so long. Nor, I should say, is there any easy way to place more than a small fraction of the blame on Bush administration policies. At this point the joylessness of the economic expansion for most Americans is a mystery.
What's clear, however, is that advisers who believe that Mr. Bush can repair his political standing by making speeches telling the public how well the economy is doing have misunderstood the situation. The problem isn't that people don't understand how good things are. It's that they know, from personal experience, that things really aren't that good.
Fed Watch: Looking for a Reason to Worry…
I am not prone to excessive optimism or pessimism, but I think you have to go out of your way to belittle the economic data of the past week. Yes, if you dig into the details, you can find trends that are important and in some cases worrisome (see for example William Polley’s concerns about unemployment among teenage African Americans). But by in large, the economy looks to have shaken off the impact of this summer’s hurricanes, exhibiting a remarkable resilience in the process.
In my mind, the data clearly point to a continuation of the Fed’s measured pace policy – the headline GDP numbers alone would easily justify another two 25bp doses of tightening at this stage of the business cycle. Moreover, the economy has enough momentum that one would expect additional hikes on top of that.
But my thoughts on the latter are not unqualified; a few things are nagging at me. One is a few bits of anecdotal evidence I will talk about later. It appears consistent with a softening of the Fed statement to increase the emphasis on incoming data. Another is the stubborn refusal of long term rates to move higher – 4.5% rates on the ten year simply do not appear consistent with the growth outlook and the likely Fed response to that outlook. I strongly agree with David Altig on this point. Something doesn’t fit. Are Treasuries reading the anecdotal evidence as the important variable in the outlook? Or is it simply with inflation low, the Fed will find that pausing in the near term is the appropriate policy? Or both?
Note that growth accelerated by a full percentage point during a period in which the US faced what many would say was its worst environmental disaster. Accelerated during a disaster that many predicted would trigger the next recession. Without Katrina and Rita to erode consumer spending via higher energy costs, this number would almost certainly be even higher. The economy was hot in Q3, plain and simple.
And the fourth quarter is shaping up to be pretty solid as well. Data last week revealed that the beleaguered manufacturing sector looks pretty solid, suggesting that the travails of GM and Ford are industry specific. The ISM report held strong at 58.1. Durable goods orders posted a rebound. And looking beyond the headline numbers, nondefence, nonaircraft capital goods orders and shipments both rebounded from September’s loss. And unfilled orders continued to pile up, despite a drop in inventories. The jobs report even revealed a rare hiring gain in this sector. It sure seems that many of the nation’s factories are humming along.
Likewise, the November employment situation was solid. The economy added 215,000 jobs across a wide swath of industries. Wages continued to climb and stand 3.2% over a year ago, helping to support consumer spending in the months ahead. Manufacturing hours and overtime slipped, but the sector added workers as well – perhaps signaling that the nation’s factories are having trouble squeezing more work from the existing labor force. Sure, hiring over the past three months looks a bit tepid, but again you have to take this in context of the hurricane activity. The recovery in the affected areas will be slower going than many believed – see official attempts to lure residents back to New Orleans.
And, last but not least, even the imminent demise of the housing market looks in doubt. The 13% gain in new home sales in October offsets the more bearish existing home sales reports. Some have questioned the integrity of this data point, but until more data arrives, I have to agree with Calculate Risk’s assessment on this one.
So where can we turn for a bit of bearish news? As far as hard data is concerned, the consumer is looking a little spent. Yes, the GDP report showed an upward revision in consumer spending for Q3, but it is worth repeating that the gains were attributable to a surge in durable goods sales in July. Both August and September were down months, and October’s real gain was a paltry 0.1%. And the Wall Street Journal reports early signs of tepid spending this holiday season, despite falling gas prices and rising wages.
Of course, I am not ready to take this story too far just yet – many have fallen on their swords predicting the demise of the American consumer. Early reports might be a bit pessimistic. Analysts always fret about holiday sales. And it may be that households really, really want to purchase a new SUV, but know if they hold out a little longer, the incentives will be back (a solid bet). Still, three weak months in a row is something to note.
As far as housing in concerned, the Wall Street Journal offered a couple of cautionary tales last Tuesday, perhaps explaining some of the softness in spending. One describes the declining popularity of option ARMs, a shift that may force some marginal buyers out of the market, or at least down a notch. Higher short term rates should be squeezing this market, and limiting this source of consumer financing. Another article reports on tighter lending conditions in the market for condo construction loans. Note that these are tighter conditions for the builders, not the buyers. Still, if banks are worried about lending to builders, tighter conditions for buyers might not be far behind.
The Beige Book also points to a softening of consumer spending and housing. To be sure, there was plenty of strength reported in the Book, with overall activity expanding in most districts, including the manufacturing sectors, tightening labor markets, higher wages, and pressure to increase prices. Sounds like a recipe for higher interest rates. But consumer spending looked a bit tepid, seemingly in line with reports of cooling housing markets and mortgage activity.
What does all this translate into for the Fed? The strong data all point to additional hikes at the next two meetings. They paint the picture of a swiftly expanding economy with ongoing incipient inflationary pressures and appear to play into the more hawkish sentiments I opined on last week.
Still, the anecdotal and hard data on housing and consumer spending are sufficient to justify the concerns of many Fed officials that the statement needs to be modified (see last week’s post again). I still believe the Fed expects that their actions will work to slow the economy via housing and the consumer. There are indications that events are unfolding accordingly. Moreover, the incipient inflation pressures do not appears to be translating into actual inflation. This combines with the above to yield San Francisco Fed President Janet Yellen’s position that:
Two phrases in particular are at issue: "remove accommodation" and "at a measured pace." While it seems unlikely that the end of the current tightening phase is yet at hand, there obviously will come a time when these two phrases are no longer appropriate, and other changes to the statement may be needed as well.
On the other hand, Fed Chair Alan Greenspan himself briefly passed judgment on economic performance as he began his comments on the budget deficit:
The U.S. economy has delivered a solid performance thus far in 2005. And, despite the disruptions of Hurricanes Katrina, Rita, and Wilma, economic activity appears to be expanding at a reasonably good pace as we head into 2006.
This struck a chord with me. “Reasonably good pace” seems a bit understated given the data. Is Greenspan going soft? But a quick Google search brought me around - Greenspan has used identical language in the past. From this past February:
All told, the economy seems to have entered 2005 expanding at a reasonably good pace, with inflation and inflation expectations well anchored, ...
Apparently Greenspan sees 4+% growth as only reasonably good. Good enough that it justified a continuation of rate hike when inflation expectations were well contained. But Greenspan dropped the inflation praise this time around, despite a solid deceleration in core-PCE. Are we to conclude that the Big Man no longer believes that inflation is under control? I would have to say “yes,” and that at least he is not ready to shift to pull his foot off the brake just yet. Of course, one can read too much into a quick word by Greenspan. But he chooses his words carefully, and appears wary of sounding the all clear on inflation just yet. Not in his final months as Chairman.
In sum, tightening during at least the next two meetings will likely be required (from the perspective of Fed officials), but caution will be in order as well; the Fed does not want to overplay their hand, especially with so much tightening in the pipeline. This creates uncertainty about Bernanke’s first move. As I noted last week, data will be increasingly important – if the anecdotal data on consumer and housing pass through to the data and inflation stays tame, the implied message from the bond markets, Bernanke & Co. will feel comfortable standing pat in March. But if the data of recent weeks continues to mount, expect the new Chair to come to the table looking for another 25bp. [All Fed Watch posts.]
Who Pays for the Failure of Management?
Mr. Ford's Wrong Turn Why U.S. Automakers Can't Blame Japan, by James P. Womack, Washington Post: On Nov. 22 after a speech at the National Press Club, Ford Motor Co. Chairman Bill Ford told the media, with apparent earnestness, that his company "can compete with Toyota, but we can't compete with Japan." This is an old myth. Ford's competitive problem, according to its chief executive, is driven by the unfair advantages that the Japanese government allegedly bestows on its auto companies -- government-funded health care for workers, government support for the pension system and subsidies to develop the batteries needed for hybrid vehicles. What makes this claim so extraordinary is that Japanese companies, led by Toyota Motor Corp., are thrashing Ford by building vehicles in North American factories with North American-made parts and North American workers, who receive American-style wages and health benefits. And increasingly, these Japanese brand vehicles are engineered in America by Americans.
Consider a few facts about Toyota. About 65 percent of the vehicles the firm sells in North America it assembles in North America, and it would assemble a much higher proportion here if it could only keep up with its rapid sales growth. Toyota will open its seventh North American assembly line in Texas next summer and an eighth line in Ontario in 2008. It may start assembling vehicles at a Subaru plant in Indiana in 2009, and it is said to be looking for yet another assembly location. In addition, it has three engine manufacturing plants and is looking for a site for a fourth. By the end of the decade, Toyota will be able to assemble about as many cars as Chrysler does in North America, and it is closing in on the capacity Ford will have after plant closings that are widely expected to be announced in January.
In fact, thanks to hiring by Japanese, Korean and German auto makers, total employment in the U.S. motor vehicle industry over the past decade has held steady at about 1.1 million. So the problem is not Japan Inc. In fact, that country has been a striking industrial failure over the last 15 years. The latest firms to slide down the competitive slope are the big Japanese consumer electronics makers such as Sony Corp. and Panasonic, ... (In the video game wars, Sony is even getting beaten by an American company -- Microsoft Corp.) The electronics giants are following the downward path of most Japanese auto firms, which have either fallen into foreign hands (Nissan Motor Co. Ltd. and Mazda Motor Corp., the latter now controlled by Ford) or dramatically lost market share (Mitsubishi Motors and Isuzu Motors Ltd.). ...
There were two elements to the Detroit system. The mass production part, pioneered by Henry Ford in 1914, replaced craft workers with assembly lines. It was so successful that Ford was able to pay decent hourly wages and still dominate the U.S. auto industry, along with General Motors and Chrysler. ... On the labor side, the UAW held a monopoly. Thanks to rising demand for cars, there were plenty of profits to go around. Periodically the three vertically integrated companies and the union engaged in a bargaining ritual to determine how to split the loot. As long as improvements in mass-production offset the ever-higher wage rates by reducing the number of labor hours per vehicle, the cost of cars for consumers held stable.
The threat to this cozy arrangement came when foreign firms started investing in U.S. production facilities, beginning with Honda in Ohio in 1982, followed by Toyota in a joint venture with GM in California in 1984, and then Toyota again in its massive Georgetown, Ky., complex in 1986. ... The Japanese auto makers had an outlook different from that of the Big Three. The purveyors of the old Ford-GM-Chrysler-UAW system assumed that all production laborers in the industry, including workers making parts, should be paid the same rate. The corporate and union leaders further assumed that their position was impregnable and that they could promise to pay defined-benefit pensions and other benefits decades into the future. The architects of the new Toyota-Honda system assumed that production labor would be paid different rates... Final-assembly workers would receive a premium and less skilled employees of parts makers ... would work for prevailing market wages. These Japanese firms also assumed that ... no company could commit to benefits decades ahead. Better to base pensions on defined contributions made during work years rather than by guaranteeing payments in the far future. ...
This new Toyota system -- ... labeled "lean production" -- uses less human effort and less capital to design products faster and with fewer defects. What's more -- and this best describes Bill Ford's problems -- the leading Japanese car companies are making more money than their U.S. competitors not only because of lower costs, but because their lean design, production and purchasing system is turning out vehicles so desirable that Toyota and Honda can charge much higher prices for products in the same segment of the market. Indeed, these Japanese companies are giving wages and health packages to current workers in North America similar to those provided by their U.S. rivals, but they're selling vehicles today for $2,500 more than comparably equipped cars made by Ford and GM. This revenue difference, more than the production cost issue, lies at the real heart of Motown's problem.
Ford and GM have tried to embrace lean production methods, ... but the main way to do that under "life-time employment" union contracts has been to encourage early retirement. This has solved one problem -- too many active workers. But it created a second -- too many retired workers for the active workers to support. It's little wonder that money-losing Ford doesn't have the funds to invest in new technologies and is asking Washington for help. ...
The ... question is how to cope with the pension and health care commitments of U.S. companies on the road to financial ruin. ... One approach would be to stand back and let the auto companies fail. A bankruptcy judge could then explain that the promises made to retirees are much more extravagant than what most other Americans are getting. The judge could then call the deal off and pay out pension benefits at maybe 50 cents on the dollar. Another alternative would be to transfer the obligations to the government. This would ease the pain of a generation caught in a historic industrial transition. But how can the government take on such a burden when it is already saddled with war costs and budget deficits? ...
Another potential cost of fiscal irresponsibility. One thing I don't know that makes this hard to evaluate is how the total compensation package, wages and benefits combined, would change for a worker moving from a closed GM plant to a new Toyota plant. But the answer to that question does not alter the failure of the management of U.S. auto and other companies to respond adequately to competitive challenges.
When you hear talk about flexibility, there is perhaps a lesson here. Market power matters. When firms are allowed to attain a high degree of monoply power, there is a danger they will become complacent, less flexible, less able to respond to competitive challenges from within or from the foreign sector. As we continue to endorse free market principles in the name of flexibility and further remove government regulatory authority over markets, we should be careful we don't end up undermining flexibility by failing to challenge concentrations of market power as they arise. We can give it names like "creative destruction" that try to make the adjustment process sound better and even desirable, but in the end it is workers who pay the lion's share of the costs of failure.
December 04, 2005
A Pot of Gold
Posted by Mark Thoma on Sunday, December 4, 2005 at 01:47 PM in Miscellaneous
FRBSF Economic Letter: Credit Risk Transfer
Recent Policy Issues Regarding Credit Risk Transfer, FRBSF Economic Letter by Jose A. Lopez: Over the last decade, a variety of financial tools have been developed for transferring credit risk between financial institutions. Credit risk is defined as the risk that the value of a corporate loan (or debt obligation more generally) will decline due to a change in the borrower's ability to make payments, whether that change is an actual default or a change in the probability of default. Credit risk transfer (CRT) mechanisms range from outright selling of loans to credit derivatives that permit shifting credit risk without necessarily referencing specific loans. As new varieties of CRT mechanisms have developed, so has the volume of CRT transactions, and this has increased liquidity in the underlying bond and loan markets. In conjunction with this growth, the policy issues surrounding CRT transactions have changed in important ways. ... This Economic Letter provides a brief description of the common types of CRT mechanisms and reviews the policy issues surrounding their use, especially with respect to credit derivatives.
In originating a commercial loan, the lender acquires much information on the borrower's overall financial condition and prospects of repayment. Two key issues for designing CRT mechanisms emerge from this information-gathering process. The first involves protecting the valuable, ongoing relationship the lender has forged with the borrower... The second involves the information advantage that the original lender has over potential counterparties to the CRT transaction... This issue is known as "adverse selection."
Both issues arise in the simplest CRT mechanism, the loan sale, in which a lender sells all of its obligations and future payments from a commercial loan to a third party. Given the covenants in such loans, borrowers typically must be informed of the sale, which could have an impact on the business relationship. In addition, the adverse selection problem is most clearly visible in this type of transaction. In fact, Dahiya et al. (2003) found that half of the public corporations whose loans were sold from 1995 to 2000 filed for bankruptcy within three years.
Loan syndication, in contrast, addresses these two issues directly. In a typical syndication, the lead bank (or banks) and the borrower agree on the terms of the loan, and the lead bank then assembles a syndicate of lenders. Syndicates can take several forms... Unlike loan sales, syndication allows the lead bank both to reduce its credit exposure to a borrower without damaging its business relationship and to avoid many adverse selection issues. ...
Securitization is a third kind of CRT mechanism. Although more widely used for retail lending (such as through residential mortgage-backed securities), it is used increasingly for corporate lending. A traditional securitization involves transferring a pool of loans or other debt obligations to a third party, typically a corporate entity established just to own the loan pool, which then issues securities that are claims against the pool's interest and principal payments. ... Investors in these securities .. are protected from the adverse selection problem through a series of contractual obligations placed on the pool's administrator and often through oversight ...[T]he originating banks can, and often do, act as the servicer of the loan pool and hence can easily retain the lending relationship.
The fourth kind of CRT mechanism, and the most recently developed, is credit derivatives, which are financial instruments that transfer some or all of the credit risk of an underlying debt obligation or a borrower (or groups of obligations or borrowers) from one party to another without necessarily transferring the underlying asset... The two main types of credit derivatives are credit default swaps (CDS) and collateralized debt obligations (CDOs). In a CDS transaction, the buyer of credit protection makes regular payments in exchange for a contingent payment in case a defined credit event, such as bankruptcy of the original borrower, occurs. ... CDS transactions are more like standard insurance contracts that protect the purchaser from an adverse event. Some industry estimates suggest that CDS transactions based on individual corporate borrowers make up about 60% of total credit derivatives volume. Standard CDOs are structured much like debt securitizations: the lender transfers credit exposures to a specialized corporate entity ... The credit risk is then borne by the purchasers of the securities. ... Credit derivatives need not impact the relationship between a borrower and a lender, since they may be structured so that the borrower is neither a party to the transaction nor aware of it. ... In terms of adverse selection, issues remain, but credit derivatives address certain aspects...
The more traditional forms of CRT, such as loan sales and syndication, have been around for some time, and many issues are already addressed by supervisory rules and experience. ... However, the relatively new and rapidly expanding market for credit derivatives does give rise to some pressing supervisory policy issues. One such issue is whether a credit derivatives transaction establishes a complete credit risk transfer. ... Another key supervisory issue is the risks related to delays in processing the needed documentation. ...
Regardless of the supervisory challenges regarding CRT mechanisms, supervisors generally are able to monitor whether undue concentrations of credit risk are building within supervised institutions. The larger regulatory question is how to detect and respond to such concentrations of risk developing in the financial system as a whole. The Joint Forum (2005) report did not find evidence of such "hidden concentrations" of credit risk in specific sectors of the financial system. ...
- Board of Governors of the Federal Reserve System. 1999. "Interagency Guidance on Loans Held for Sale." Supervisory and Regulatory Letter 01-12.
- Counterparty Risk Management Policy Group II. 2005. "Toward Greater Financial Stability: A Private Sector Perspective." Manuscript.
- Dahiya, S., M. Puri, and A. Saunders. 2003. "Bank Borrowers and Loan Sales: New Evidence on the Uniqueness of Bank Loans." Journal of Business 76, pp. 563-582.
- Federal Reserve Bank of New York. 2005. "Statement Regarding Meeting on Credit Derivatives." Press release, September 15.
- Lopez, J.A. 2001. "Financial Instruments for Mitigating Credit Risk." FRBSF Economic Letter 2001-34 (November 23).
- The Joint Forum. 2005. "Credit Risk Transfer." Manuscript. Bank for International Settlements.
Does Monetary Economics Ignore Rust Belts?
Green then goes on to discuss concerns about monetary policy more generally, first that the distributional consequences of monetary policy, events such as rust belts where long-term harm is created are not given enough attention, a point I agree with. His second point is that there is not enough quality data going far enough back in time to resolve many important theoretical debates in monetary economics. This leaves the profession unable to resolve debates such as those framed by Woodford's book and leaves central banks with uncertainty about the correct course of policy:
Minneapolis Fed Interview with Edward Green, The Region: ...Region: In your recent Journal of Economic Literature review of [Columbia University economist] Michael Woodford's Interest and Prices, you write, “It's likely to be a bible for central bank economists.” But you also have reservations, expressed at some length in the 14-page review. Can you give us the gist of your views about Woodford's book?
Green: Woodford has shown that the methodological revolution in macroeconomics 30 years ago doesn't necessarily imply some policy conclusions drawn from the specific models studied then. That's very important. I was reviewing the book in a journal for economics researchers... Simply rehashing the author's exposition ... and saying “oh, yeah, that's the natural way to think about it” doesn't accomplish anything. So the fact that I spent much of the review discussing alternative frameworks that might be adopted is by no means an indication of lack of respect for, or even necessarily of dissent from, what the author is saying.
Rather than talking about concerns about the book specifically, I'd like to mention two concerns I have about monetary economics ... We've already discussed one of them. The point of view that's almost universally taken in monetary economics today is that ... as long as central bankers confine themselves to manipulating only a short-term interest rate ... they are doing something that can solely have efficiency implications but not distributive implications. I think it's true that what central bankers do today minimizes the distributive implications of monetary control, but my impression is that the distributive implications remain very significant. Think about the ... late 1970s. After Chairman Volcker took decisive measures in 1979 to bring it under control, a lot of people were badly hurt. The way economists talk about it, it was a short-term hurt. But it wasn't transient. The term “Rust Belt” originated to refer to what were basically abandoned industrial regions largely in the northeast United States. It may have been that longer-term trends were going to cause the decline of those industries anyway, but there's no question that monetary policy made the decline more sudden than it would have been otherwise. It caused layoffs of workers who, instead of gradually leaving those industries, were dumped en masse onto the labor market during a deep recession. It took most of them months or even years to find subsequent work, and perhaps they found less desirable subsequent work than they otherwise might have been able to had the Fed's disinflation policy been more gradual. Now, most people think Volcker's policy was exactly the right one. But you shouldn't pretend that it didn't hurt some people pretty badly. As I point out in the review, the fact that it hurt some people badly ... was an important constraint that the Fed had to deal with. ... By the way, ... let me mention a review that I once wrote for the Region of a book on rational expectations and inflation by Tom Sargent. ... His book is a wonderful and readable discussion of the issue.
The second concern I have is the thinness of the data about macroeconomics. Basically, we deal with about half a century of quarterly data on various aggregates, so that's 200 observations. ... spanning only a dozen or so business cycles... As a result, it's difficult to draw firm conclusions about some things. So there are disputes ... In particular, there are issues about the response lags of employment to money- or interest-policy changes that are a matter of dispute between the economists who base their work on purely competitive models of the economy, as, for instance, Bob Lucas and Ed Prescott do, versus Woodford and others who base their modeling on imperfectly competitive representations of the economy.
What I was trying to do in my review of Woodford's book was to say, Let's keep in mind that we don't have enough data for anyone to have the last word on these things. Consequently, we have to accept the situation where economists ... who begin with strongly held views one way or another, simply may not be persuaded on the basis of the facts we now know or are likely to know in the near future by statistical work done by people on the other side of the question. ... Meanwhile, central banks have to make policy decisions [even though] those two types of model tend to have divergent recommendations. ...
Paul Krugman Transcript from CNN's Reliable Sources
Is News Coverage of Iraq Undermining Bush?; Aired November 27, 2005 - 10:00, CNN's Reliable Sources: THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED. ...
KURTZ: Welcome to RELIABLE SOURCES... I'm Howard Kurtz. ...[B]ack in 1968, nearly all editorial pages and most columnists supported the war in Vietnam, which made it all the more shocking when CBS anchor Walter Cronkite returned from a trip there and told the country that things were not going well. (BEGIN VIDEO CLIP)
WALTER CRONKITE, FMR. CBS ANCHOR: To say that we are closer to victory today is to believe in the face of the evidence the optimists who have been wrong in the past. To suggest we are on the edge of defeat is to yield to unreasonable pessimism. To say that we are mired in stalemate seems the only realistic, if unsatisfactory, conclusion.
(END VIDEO CLIP) KURTZ: Even then it would take another year or two for elite media opinion to turn against the war, catching up with the growing public disillusionment over the rising death toll and lack of progress. Today, while plenty of editorial pages have criticized President Bush's handling of the war in Iraq, only a handful have supported a U.S. pullout. But a majority of Americans now oppose the war. Are the media again lagging behind public opinion? ... Paul Krugman, could there be a Cronkite moment today with a leading journalist turning against the war and moving public opinion? PAUL KRUGMAN...: We are not Walter Cronkite's country anymore. We are a much more polarized nation. There is no political center. People get their news from opposing sources. You look at the polls, people who voted for Bush in the last election just live in a different reality from people who voted for Kerry. And ... we've seen repeatedly not so much media figures, but policy figures [who] turn against Bush on the war, it doesn't matter who you are, it doesn't matter what... your record is. All of a sudden you're just another Michael Moore. So, no, I don't think we have a Walter Cronkite moment. KURTZ: I was going -- I was going to ask you about that, because you wrote recently about the ugly myth that the administration is patriotic while its critics are not. Now you happen to favor a U.S. pullout. Has anybody called you unpatriotic? KRUGMAN: Oh, I'm called unpatriotic all of the time on every issue. I've been called unpatriotic for ... criticizing our health care system. But no, ... this is a world in which -- a country in which -- look, I ... was the subject of a fairly major campaign calling me unpatriotic for criticizing Bush's handling of Katrina. So that's the kind of world we're in. If Walter Cronkite were ... on the news today, if a Walter Cronkite equivalent were on the news, he would -- immediately after that broadcast we just saw, he would have been called a traitor. ...
KURTZ: Paul Krugman, what accounts for the following? Fifty-two percent in the latest CNN poll want a U.S. pullout either now or within a year. And yet almost every editorial page in the country still supports the war. KRUGMAN: Partly, it's that editorial pages are very much trying to be responsible. And there is this feeling that ... we can't be responsible for defeat. You know, Pottery Barn, we broke it, we own it. And part of it is, there has been a lot of ... intimidation of the media. People are really afraid of being accused of undermining the troops. And particularly, a lot of people remember what happened in Vietnam, which was the public turned against the war, the media turned against the war, and the Democrats and liberals have been paying the price for having been right ever since. So nobody wants to be out in front on this. KURTZ: So you're suggesting that there is a certain amount of timidity involved in continuing to support the U.S. forces there in what remains obviously a difficult situation? KRUGMAN: Well, there's been enormous timidity. ...[L]ook at the question of whether we were misled into war. The evidence -- basically, all the evidence you're now hearing about that was available by the summer of 2003. But you did not get extensive media coverage of the evidence about aluminum tubes and all that ... until after a majority of the public had decided we were misled into war. And the same thing is happening on withdrawal... KURTZ: ...Paul Krugman, journalists, as you know, love to cover two sides: Republicans say this, Democrats say that. It's the fact that the Democratic Party has been -- has not staked out much of an alternative plan here. Even when Jack Murtha made his withdrawal argument, most of the party did not join in. Has that contributed to what some might call the one-sided coverage in the press about the political debate? KRUGMAN: Sure. I mean, I once said that if Bush said that the Earth was flat, the headline would read, "Views Differ on Shape of Earth," that you have this real, real reluctance to actually just state what the facts are. And here you can't even -- or until very recently you couldn't even do the he said-she said reporting. That's part of the reason why a lot of the coverage lagged behind public opinion. It was only when the public had turned against the war, when the public had decided we'd been misled into war, ... and then when some politicians began following the public lead, then we get the media coverage, which is not the way it ought to be. But that's the way it has actually turned out...
KURTZ: Paul Krugman, you wrote recently -- I want to read this quote -- "After 9/11, the media eagerly helped our political leaders build up a completely false picture of who they were. So the long nightmare won't really be over until journalists ask themselves, 'What did we know, when did we know it and why didn't we tell the public.'" Are you suggesting this was deliberate on the part of the press? KRUGMAN: I guess it depends on the meaning of the word "deliberate." Did people say, ooh, let's join in the vast right wing conspiracy? No. Did journalists say, you know, the public wants to hear good stuff about Bush, they want to hear that we have a great leader, they want to hear favorable things about the administration, and did they then hide what they knew was not favorable? Yes, there is a lot of that. I don't know how many times I've talked to ... professional journalists, major people, whose private views of what happened even ... beginning within days of 9/11, are completely at odds with what you could have read in a major newspaper or seen on TV until ... just about now. KURTZ: ...Paul Krugman, I've got probably about half a minute. Do you see signs that the press coverage is starting to turn on Iraq and that we are moving away from this period that you referred to as the media kind of building up the Bush administration? In fact, some would say it's the other way, that now it's open season on the Bush administration. KRUGMAN: There's -- there's clearly a lot of -- there was a lot of pent-up frustration. I mean, people..., you knew, I knew that Bush was politicizing, was exploiting 9/11, within days. You have to have known that. I certainly did. And ... no one would dare say it for four years. And now, yes, there is a certain sense of payback. Now we can finally tell the truth. KURTZ: ...Well, some other people would say he was rallying the country.
December 03, 2005
Clueless on the National Debt
Q Al, can I ask you one? I can't remember the last time the President spoke about the national debt, which is now over $8 trillion. Is that something you guys worry about?
DIRECTOR HUBBARD: Well, I don't know where your $8 trillion comes from, but we --
Q The public website.
DIRECTOR HUBBARD: Well, I guess it really depends on what you're including, but let me -- again, the President is most concerned about the economy and the budget. And a key component of that, as I have spoken earlier, is the budget deficit. And, you know, that's what contributes to the overall budget debt, the country's debt, and that's why it's so important to reduce the budget deficit and, hopefully, ultimately, eliminate the budget deficit.
Q Does the magnitude of the national debt disturb you?
DIRECTOR HUBBARD: Actually, again, I don't know what numbers you're using, but the current budget debt is not a problem, but we do not want it to grow as a percentage of the GDP. That's the way you want to look at it, is the debt as a percentage of GDP. And our budget debt is lower than many other developed countries. The President is committed to keeping it low; that's why he wants to cut the budget deficit in half by 2009. . . . .
Q Check the Bureau of Public Debt website, you'll see the number there.
DIRECTOR HUBBARD: Okay, thank you.
Is the ignorance here calculating -- i.e. Hubbard really knows what the national debt is but acts like he doesn't because it's embarrassing to talk about? Or is it genuine -- i.e. Hubbard really doesn't have any clue what the national debt is? (I vote for the latter.) In case, he's still looking, the link is right here. And the debt is actually now more than $8.1 trillion. Given that the debt limit is $8.184 trillion, we're only a few weeks from crashing through the limit yet again. Merry Christmas!
The choice of which programs to eliminate and to keep trying to reduce taxes appears to be driven by mostly ideological considerations, so it's not surprising to find confusion of this sort. [Update: Brad DeLong votes with Gross.]
AEI: How to Pay for Hurricane Relief
Hurricane Relief Spending - How Will We Pay for It?,by Veronique de Rugy and Roger Bate, American Enterprise Institute: Following the devastating hurricane and flooding in the Gulf region, President Bush sent Congress two separate requests in hurricane relief, which the House and the Senate passed without delay. They raise Katrina's cost to federal taxpayers to $62.3 billion so far. .... Now, members of Congress must ... cut low priority spending and wasteful programs ... to offset the new financial burden our nation faces. ... The president should request that the $62 billion be offset with equivalent spending cuts. The good news is that it shouldn't be too difficult...
Table 1. Proposed Spending Cuts to Offset Bush Hurricane Relief Request
(Figures are FY2006 outlays in $billions)
|All Farm Subsidies||$21.10|
|All Energy and Research Subsidies||$6.20|
|Vocational and Adult Education||$2.00|
|Community Development Block Grants||$6.50|
|Grants-in-Aid for Airports||$3.00|
|Air Traffic Organization||$6.70|
|Agency for International Development||$4.70|
|Other Foreign Economic Aid||$2.70|
|National Endowment for the Arts||$0.12|
|National Endowment for the Humanities||$0.14|
|Small Business Administration||$0.59|
|Corporation for Public Broadcasting||$0.39|
|Cut Half of NASA's Budget||$7.90|
|Total Proposed Spending Cuts||$62.45|
Source: de Rugy's calculation from the Budget of the U.S. Government, FY2006.
...[C]an we really justify billions going to Vocational and Adult Education when so many adults and children just lost everything they owned?... Like millions of Americans whom have made personal sacrifice to help the survivors of Katrina's devastations, the President and Congress should make a sacrifice of their own and cut low priority spending and wasteful programs ...
Why does cutting programs constitute "a sacrifice of their own" for the President and Congress? What are they sacrificing? If it costs them votes or money from supporters, they won't do it. And yes, cutting Vocational and Adult Education programs and other such services is surely the best way to deal with displaced families and unemployed workers while at the same time balancing the federal budget. And of course, farm subsidies, a full third of the total, won't be a problem at all to cut. No hard politics there.
I looked to see if this was dated April 1, but it's apparently meant to be serious. There is no reason to break out the spending on Katrina separately from the rest of the budget when looking for offsets, the problem is far larger than that. In fact, since most of the spending on Katrina is one-shot, not permanent, this spending is not a problem going forward, i.e. offsets are not needed next year for the spending on Katrina. Katrina is simply an excuse to cut programs like the NEA (a whopping .12 billion total) that have been on their hit list for years.
Bernanke Recuses Himself
Bernanke bows out of White House report, Reuters: A White House report forecasting ... economic growth rate for 2006 was prepared without the involvement of Council of Economic Advisers Chairman Ben Bernanke ... Bernanke recused himself "given his pending nomination to the Federal Reserve Board."
Biased Analysis of Clean Air Proposals by the EPA?
Report Accuses EPA of Slanting Analysis, by Juliet Eilperin, Washington Post: The Bush administration skewed its analysis of pending legislation on air pollution to favor its bill over two competing proposals, according to a new report by the Congressional Research Service.
The Environmental Protection Agency's Oct. 27 analysis of its plan -- along with those of Sens. Thomas R. Carper (D-Del.) and James M. Jeffords (I-Vt.) -- exaggerated the costs and underestimated the benefits of imposing more stringent pollution curbs, the independent, nonpartisan congressional researchers wrote ... The EPA issued its analysis ... in part to revive its proposal, which is stalled in the Senate. The administration's "Clear Skies" legislation aims to achieve a 70 percent cut in emissions of sulfur dioxide and nitrogen oxide after 2018, while Carper's and Jeffords's bills demand steeper and faster cuts and would also reduce emissions of carbon dioxide, which are linked to global warming. The Bush plan would also cut emissions of neurotoxic mercury by 70 percent, while Jeffords's bill reduces them by 90 percent.
"Although it represents a step toward understanding the impacts of legislative options, EPA's analysis is not as useful as one could hope," the Research Service report said. "The result is an analysis that some will argue is no longer sufficiently up-to-date to contribute substantially to congressional debate." The congressional report ... said the EPA analysis boosted its own proposal by overestimating the cost of controlling mercury and playing down the economic benefits of reducing premature deaths and illnesses linked to air pollution. ... "Clear Skies delivers dramatic health benefits across the nation without raising energy costs and does it with certainty and simplicity, instead of regulation and litigation," [EPA spokeswoman Eryn] Witcher said. "Because of our commitment to see this become a reality, EPA went above and beyond to provide the most comprehensive legislative analysis of air ever prepared by the agency, so it does a real disservice to this discussion to have a report that largely ignores and misinterprets our analysis." But aides to Carper and Jeffords said they felt vindicated by the congressional study. ... said Carper spokesman Bill Ghent. "The report clearly states that there's no reason to settle for the president's Clear Skies plan because the legislation doesn't clean the air much better than current law."
[Dual posted at Environmental Economics.]
I Hear You Knocking, But You Can't Come In
Imported Brains, Editorial, NY Times: On one side, there's the risk: one of the plotters in the first World Trade Center bombing was on a student visa. On the other, there's the benefit: last year, 565,039 foreign students contributed about $13.3 billion to the United States economy. For every 100 foreign students who got American Ph.D.'s in engineering or the physical sciences, ... the United States got 62 patent applications. [T]he students who returned home ... probably took with them warm feelings toward America, democracy and free enterprise. ... International students play an enormously important role in American science and business. That's why it is disturbing that for the second year in a row, the Institute of International Education has reported a drop in the number of foreign students on American campuses. Clearly, the tightening of security and visa rules since 9/11 is part of the problem. ... But difficulty in getting visas is not the whole story. The fact is that the competition for foreign students has become far more intense. ...American campuses ... have been steadily losing market share for years, especially to Canada, Australia and Europe. Now the European Union is considering offering citizenship to foreign students who complete their doctorates at European universities. That's a powerful incentive ... Indeed, the competition for brains and ideas is where the battle for global influence should be waged. ... Nobody denies the importance of barring entry to terrorists, but nobody should be oblivious to the danger of excluding another Einstein.
Friends in Need
Surviving Andersonville: The Benefits of Social Networks in POW Camps, by Dora L. Costa and Matthew E. Kahn, NBER WP 11825, December 2005: Abstract Twenty-seven percent of the Union Army prisoners captured July 1863 or later died in captivity. At Andersonville the death rate may have been as high as 40 percent. How did men survive such horrific conditions? Using two independent data sets we find that friends had a statistically significant positive effect on survival probabilities and that the closer the ties between friends as measured by such identifiers as ethnicity, kinship, and the same hometown the bigger the impact of friends on survival probabilities. [Free July 05, Sept 05 versions.]
Dallas Fed President Fisher on How Globalization Affects Monetary and Fiscal Policy
Here's Fisher's speech on how monetary and fiscal policy are affected by globalization. While Greenspan also talked about fiscal policy today, Fisher's remarks are more complete, more hard-hitting, and more connected to monetary policy. For example, he actually explains how bad fiscal policy can create bad monetary policy through pressures to monetize the debt, and how debt monetization is affected by globalization. I don't agree with everything he says, but I'm starting to like Fisher's willingness to say what he believes needs to be said:
Globalization and Government Policy, by Richard W. Fisher. Dallas Fed President: ...I wish George Shultz could be here. I’m sure many of you know him... He is a distinguished economist and public servant, who inside and outside government has been an advocate for fiscal sanity for decades. Shultz is now at Stanford University’s Hoover Institution. I spoke with him a few weeks ago and, sure enough, our conversation turned to one of his biggest concerns: our burgeoning structural fiscal deficits. He told me a story I want to share with you. When he was President Nixon’s budget director, Shultz became increasingly worried about the inability of Congress to cut spending. Sitting in his office at 2 in the morning, he turned to his venerable aide, Sam Cohen, and asked, “Sam, is there really any difference between Republicans and Democrats when it comes to spending?” After giving it some thought, Cohen replied, “They both spend money. The only difference is that Democrats enjoy it more.” It is no longer clear who enjoys it more, but it is crystal clear we need to have a little less enjoyment and a lot more fiscal rectitude. ... I am ... deeply concerned about the magnitude of deficits projected 20, 30 and 40 years into the future. Left unchecked, they will become a grave danger to our prosperity and run the risk of seriously undermining the progress we have made in taming inflation. That said, I believe the discussion of America’s fiscal deficits is not complete unless we take into account the forces of globalization...
Globalization describes the economic reality of our times. ... U.S. business leaders have come to grips with the inevitability of global competition. Now, our policymakers must prove they can do the same. I think monetary authorities around the world have gotten the message. They have achieved a new discipline, thanks in part to the competition created by globalization. Open financial markets allow investors to seek countries with stable money and shun those places where the value of their capital will be eroded. ... Has globalization brought a similar disciplining force to fiscal policy? It is hard for me to stand here today ... and tell you we are seeing better fiscal policies. Yet, I believe that globalization is having a beneficial impact on fiscal decisionmaking ... Let me first turn to the discipline imposed on fiscal policy by global forces.
Take taxes. In a world where capital moves across borders more freely than ever, globalization heightens tax competition among nations... Indeed, we are seeing the average tax rate come down in the world’s most open economies as nations compete for productive resources. ... One would think that globalization would lead to similar discipline on the spending side. ... But the deficit-reducing pressures anticipated by theory have yet to arrive in reality. ... Why is this? I will offer one suggestion... Other potential destinations for significant investment are actually doing worse than we are in terms of fiscal policy. ... In terms of investors looking to allocate their capital, and the impact they have on the price of money, you cannot think of U.S. fiscal policies in strict isolation from what is happening in other countries. Our long-term fiscal prospects may be daunting, but we do not suffer from the economic sclerosis that afflicts the Japanese and the major European powers.
Looking longer term—to the structural problems of Social Security and health care programs ... Syndicated columnist Scott Burns and Boston University Professor Laurence Kotlikoff describe the demographic challenge in catchy terms in their thought-provoking book, The Coming Generational Storm. They divide the nations of the world into four quadrants defined by two dimensions—life expectancy and birthrate. One quadrant is occupied by the major European economies, Japan and China, all of which share the characteristic of a long life expectancy and low birthrate. This group they label the “Decrepit Quarter.” Another, defined by low birthrate and short life expectancy, is morosely labeled “Postmodern Malthusian Hell.” It is occupied almost exclusively by Russia and other former Soviet states. The United States inhabits the quadrant Burns and Kotlikoff call the “Panglossian Balance.” In their view, we teeter on “the tattered edge of Panglossian balance,” with a population replacement rate that is dangerously close to being insufficient but still better than Europe’s, Japan’s and China’s and free of Russia’s unique pathology. From an investor’s viewpoint, one might reasonably assume that Panglossian Balance trumps the Decrepit Quarter and Postmodern Malthusian Hell—to say nothing of the fourth quadrant, occupied by high-birthrate, low life-expectancy Africa and labeled “Traditional Malthusian Hell.” ...
Compared with other nations, we look fairly handsome, or at least less ugly. That said, being better than the worst is cold comfort. ... It always comes back to globalization. A world of porous borders, for example, increases the ability of younger citizens to escape the taxes foisted upon them by the elderly. The young aren’t handcuffed to the old—at wage-earner-to-pensioner ratios of 10 to 1, 3 to 1, or whatever the demographic profile might be. Why should the productive, mobile youth of the 21st century, cyberpowered from birth and at home in an interconnected world, stay and subject themselves to high Social Security taxes when they can move somewhere else and keep much more of their pay? Globalization makes it harder to sustain a Social Security system based upon intergenerational transfers. ... If our fiscal authorities were to take this and other real world verities into account, it might just encourage better policies. And putting our fiscal house in order before our competitors do would further enhance our edge as an investment destination, securing the future of successive generations of Americans.
At face value, fiscal policy may not seem a concern for the Federal Reserve. Taxing and spending, after all, are not the Fed’s business. Congress holds the power of the purse. But the Fed cannot be an indifferent bystander to the overall thrust of fiscal policy. The reason is straightforward: Bad fiscal policy creates pressure for bad monetary policy. When fiscal policy gets out of whack, monetary authorities face pressures to monetize the debt, a cardinal sin in my mind. I do not believe the Fed or any other responsible central bank has total leeway to monetize deficits in a globalized world anyway. ... In a closed economy, the Federal Reserve might face political pressure to keep interest rates from rising, with an eye toward accommodating fiscal stimulus. ... Doing so would fuel inflation. In an open economy, however, the situation is different. When capital is free to move at the click of a computer mouse ... we cannot accommodate political pressures even if we were so disposed ... because of the added risk of capital flight to destinations where ... purchasing power ... is better preserved. It is the duty of the Fed to refrain from the slightest temptation to monetize deficits or embrace any other inflationary policy. ...
I think a city ordinance requires that all speakers taking a podium in Philadelphia quote Benjamin Franklin. This is easy for me because I always carry a few words from Franklin as a reminder of my obligation as an inflation fighter. In 1748, when we were a society of farmers and the crown was the colonies’ currency, Franklin said, “He that kills a breeding sow destroys all her offspring to the thousandth generation. He that murders a crown”—a dollar—“destroys all that it might have produced.” This was true in the agrarian world of Ben Franklin, and it holds as well in the cyber, nano, bio interconnected world of Ben Bernanke... Coddling inflation by monetizing deficits is not an option in a globalized world. It would erode our currency’s value and undermine our economy’s potential to grow and create jobs. ...
San Francisco Fed's Yellen on Prospects for Growth and Inflation in 2006
The U.S Economy: 2005 in Review and Prospects for 2006, By Janet L. Yellen, San Francisco Fed President: ...As 2005 draws to a close, it's a good time to take a look back at the year that has passed and to think about what may lie ahead for the U.S. economy in 2006. ...I'm going to organize my remarks around three broad topics. The first is employment and output growth. The second is inflation. ... My third and last topic is the conduct of monetary policy ...
Looking back at 2005, clearly one of the most dramatic events was the one-two punch of Hurricanes Katrina and Rita. ... Recent data suggest, however, that consumer spending has held up well so far. ... [F]or now, at least, it appears that the national economy has come through the twin shocks of the hurricanes and the year and a half long escalation in energy prices quite well. Concerns about downside risks to the economy seem much smaller than just a few months ago. This is definitely good news, but uncertainties do remain—especially during a period like this, when the stance of monetary policy is changing. It's inherently difficult to judge the exact magnitude and timing of the effects of removing policy accommodation. Therefore, it will be very important to monitor this situation in the months ahead, particularly if, as seems likely, there is cooling in the housing market and other interest-sensitive sectors. ...
[T]he Federal Reserve is ... keenly focused on maintaining price stability. ... [T]he so-called PCE price index. ... has jumped to 3.3 percent over the last twelve months, reflecting large increases in energy prices. However, ... so-called core inflation, which excludes the energy and food components. ... is up by a much more moderate 1.8 percent over the twelve months ending in October. I have previously enunciated that, in my view, core PCE inflation in a range of 1 to 2 percent constitutes an appropriate price stability objective for the Fed. Since 1.8 percent is in the upper portion of this comfort range, I'd be happier if this measure were somewhat lower. And, indeed, it is lower if we look over a shorter horizon. ... This suggests to me that core inflation has been essentially compatible with the Fed's price stability objective, even in the face of a rather large oil shock that started well before Katrina. Looking ahead, I'm generally fairly optimistic about the future for inflation, though I do think there are upside risks—mainly having to do with energy prices—that require vigilance ... With regard to energy, it's certainly a good sign that—so far—higher energy prices have not been passed through to ... core prices to a significant extent. I want to emphasize the "so far" part of that statement, because a any sign of a more significant pass-though would be a concern for monetary policy. One need only think of the 1970s to know what I'm referring to. ...
This brings me to my last point, the conduct of policy. Clearly, for monetary policymakers, the public's confidence in our commitment to price stability is a very helpful thing. ... [W]ell-anchored inflation expectations themselves are likely helping to contain the inflationary pressures ... How has the Committee established credibility? First, ... inflation has come down markedly over the past twenty-five years and stayed low for quite some time. ... In keeping with this strategy, at the November meeting, the Committee voted to continue its gradual removal of policy accommodation and raised the federal funds rate target to four percent. The objective of this policy action—as well as any future actions—is to position the economy on a trajectory characterized by "full employment" and price stability. ... In addition to actions such as this, I believe the Committee has reinforced its credibility with the public by becoming more transparent and focusing on communication. ... Transparency is helpful not only in building credibility, but it is also helpful in another important way. By letting everyone in on its current thinking, the Committee helps to align expectations, including those in financial markets, with its best estimate of where policy is likely to go. ...
I believe ... clarifications and signals about future actions help... avoid confusion about the Committee's perspective and contribute... to making policy more effective. [T]he sentences about where policy is likely to go reflect the Committee's best estimates. And best estimates, of course, are always subject to revision. So I want to emphasize that, in my view, the Committee must always have the flexibility to respond to changing circumstances. ... For example, in November, the statement said "the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability." If you look at the minutes from the November meeting, you will see that the statement is currently a subject of discussion. Two phrases in particular are at issue: "remove accommodation" and "at a measured pace." While it seems unlikely that the end of the current tightening phase is yet at hand, there obviously will come a time when these two phrases are no longer appropriate, and other changes to the statement may be needed as well. As the November minutes suggest, going forward, the Committee will pay close attention to incoming data and weigh options carefully in assessing the stance of policy and the wording of the statement. ... I believe that this public confidence has strengthened under Chairman Greenspan's leadership of the Fed... I'd like to close by saying that public confidence is also a very valuable thing—and like all valuable things, it is hard to win and easy to lose. For my part, this must mean ensuring—in both deeds and words—that ... our economy does not suffer from an unacceptable rise in inflation.
This speech gives the impression that Yellen is ready to stop increasing the target federal funds rate if incoming data indicate that core inflation is not being pushed upward by higher energy prices. However she also made it clear that any sign of inflation will be met aggressively.
Greenspan on International Imbalances
International imbalances, by Chairman Alan Greenspan: In November 2003, I noted that we saw little evidence of stress in funding the U.S. current account deficit ... Two years later, little has changed except that our current account deficit has grown still larger. Most policy makers marvel at the seeming ease with which the United States continues to finance its current account deficit. Of course, deficits that cumulate to ever-increasing net external debt, with its attendant rise in servicing costs, cannot persist indefinitely. At some point, foreign investors will balk at a growing concentration of claims against U.S. residents...
The rise of the U.S. current account deficit over the past decade appears to have coincided with a pronounced new phase of globalization that is characterized by a major acceleration in U.S. productivity growth and the decline in what economists call home bias. In brief, home bias is the parochial tendency of persons, though faced with comparable or superior foreign opportunities, to invest domestic savings in the home country. ... Home bias, of course, is only one of several factors that determine how much a nation actually saves and what part of that saving, or of foreign saving, is attracted to fund domestic investment. ... [T]he ... the current account balance ... is determined by the anticipated rate of return on foreign investments relative to domestic investments as well as the underlying propensity to save of one nation relative to that of other nations. ...
This afternoon, I should like to raise the hypothesis that the reason the historically large U.S. current account deficit has not been placing persistent pressure on the exchange rate of the U.S. dollar, at least to date, is that the deficit is a reflection of a far broader and long-standing financial development in the United States and elsewhere. ... The uptrend in unconsolidated deficits of individual U.S. economic entities relative to GDP has been evident for decades, possibly even emerging during the nineteenth century. For most of that period, those deficits were almost fully matched by surpluses of other U.S. economic entities. What is special about the past decade is that the decline in home bias, along with the rise in U.S. productivity growth and the rise in the dollar, has engendered a large increase by U.S. residents in purchases of goods and services from foreign producers. The increased purchases have been willingly financed by foreign investors with implications that are not as yet clear. ...
In simple terms, some U.S. domestic businesses previously purchasing components from domestic suppliers switched to foreign suppliers. These companies generally view domestic and foreign suppliers as competitive in the same way that they view domestic suppliers as competing with each other. Moving from a domestic to a foreign source altered international balance bookkeeping but arguably not economic stress.8 ...
Hard data documenting these global developments at the appropriate microlevel are regrettably sparse. Yet anecdotal, circumstantial, and some statistical evidence is suggestive that the historically large current account deficit of the United States ... is arguably more secular than cyclical. The secular updrift in deficits and debt doubtless has been gradual. However, ... our current account deficit--has increased from negligible in the early 1990s to more than 6 percent of our GDP today. The acceleration of U.S. productivity, which dates from the mid-1990s, was an important factor in this process.
Accordingly, it is tempting to conclude that the U.S. current account deficit is essentially a byproduct of long-term secular forces, and thus is largely benign. After all, we do seem to have been able to finance our international current account deficit with relative ease in recent years. But does the apparent continued rise in the deficits of U.S. individual households and nonfinancial businesses themselves reflect growing economic strain? (We do not think so.) And does it matter how those deficits of individual economic entities are being financed? Specifically, does the recent growing proportion of these deficits being financed, net, by foreigners matter? ...
Regrettably, we do not as yet have a firm grasp of the implications of cross-border financial imbalances. If we did, our forecasting record on the international adjustment process would have been better in recent years. I presume that with time we will learn. In the interim, whatever the significance and possible negative implications of the current account deficit, maintaining economic flexibility, as I have stressed before, may be the most effective initiative to counter such risks. ... If, however, the pernicious drift toward fiscal instability in the United States and elsewhere is not arrested and is compounded by a protectionist reversal of globalization, the adjustment process could be quite painful for the world economy.
December 02, 2005
Greenspan: Social Security and Medicare Must Be Cut to Solve the Budget Deficit Problem
Greenspan identifies the usual suspects as the cause of current and growing budget deficit problems, Social Security and Medicare, and discusses the usual solutions. First, while productivity growth will help, he does not think it will accelerate fast enough to solve the problem. The other two solutions are tax increases and cuts in spending. His view is that tax increases alone cannot solve the budget problem because the size of the tax increases required would severely curtail economic growth. Thus, cuts in spending will be necessary. He then takes this a step further and says the problems should be solved "primarily, if not wholly" with cuts in spending, and identifies Social Security and Medicare as the targets for the cuts. I disagree that cuts in spending alone can meet the challenge, just as Greenspan disagrees that tax increases alone can solve the problem. It seems he cannot admit that his call for tax cuts contributed to the budget problem and therefore cannot admit that at least a partial reversal of the tax cuts would be helpful.
Finally, he talks about the need to increase saving and says our ability to meet future budget challenges will be heightened if saving increases because it will fund increases in the capital stock and increase growth. I expected he would issue a call for private Social Security accounts at this point as a means of increasing saving, but he simply says that the current Social Security structure has not proven an effective vehicle for promoting saving leaving the call for private accounts implied rather than explicitly stated:
Budget Policy, by Chairman Alan Greenspan (videotaped remarks): The U.S. economy has delivered a solid performance thus far in 2005. ... However, the positive short-term economic outlook is playing out against a backdrop of concern about the prospects for the federal budget over the longer run. ...[T]he latest projections ... suggest our budget position will substantially worsen in the coming years unless major deficit-reducing actions are taken. As I recently testified, the necessary choices will be especially difficult to implement without the restoration of procedural restraints on the budget-making process. ... Reinstating a structure like the one formerly provided by the Budget Enforcement Act of 1990 would signal a renewed commitment to fiscal restraint and help restore discipline to the annual budgeting process. ... I do not mean to suggest that the nation's budget problems will be solved simply by adopting a new set of budgeting rules. The fundamental fiscal issue is the need to make difficult choices among budget priorities, and this need is becoming ever more pressing in light of the unprecedented number of individuals approaching retirement age. ...
To be sure, favorable productivity developments would help to alleviate the impending budgetary strains. But unless productivity growth far outstrips that embodied in current budget forecasts, it is unlikely to represent more than part of the answer. Higher productivity does, of course, buoy revenues. But ... because the long-range budget assumptions already make a reasonable allowance for future productivity growth, one cannot rule out the chance that productivity growth will fall short of projected future averages. ... [C]onsiderable uncertainty remains about the precise dimensions of the problem ... We already know a good deal about the size of the adult population in, say, 2030. ... Thus, forecasting the number of Social Security and Medicare beneficiaries is fairly straightforward. So, too, is projecting future Social Security benefits.... However, the uncertainty about future medical spending is daunting. We know very little about how rapidly medical technology will continue to advance and how those innovations will translate into future spending. ... As a result, the range of future possible outlays per recipient is extremely wide. ... These uncertainties ... suggest significant prudence when considering spending initiatives. ...
I fear that we may have already committed more physical resources to the baby-boom generation in its retirement years than our economy has the capacity to deliver. If existing promises need to be changed, those changes should be made sooner rather than later. ... Addressing the government's own imbalances will require scrutiny of both spending and taxes. However, tax increases of sufficient dimension to deal with our looming fiscal problems arguably pose significant risks to economic growth and the revenue base. ... [I]n my judgment, they are sufficiently worrisome to warrant aiming, if at all possible, to close the fiscal gap primarily, if not wholly, from the outlay side. In the end, I suspect that, unless we attain unprecedented increases in productivity, we will have to make significant structural adjustments in the nation's major retirement and health programs. ...
Raising national saving is an essential step if we are to build a capital stock that by, say, 2030 will be sufficiently large to produce goods and services adequate to meet the needs of retirees without unduly curbing the standard of living of our working-age population. Unfortunately, the current Social Security system has not proven a reliable vehicle for such saving. Indeed, although the trust funds have been running annual surpluses since the mid-1980s, one can credibly argue that they have served primarily to facilitate larger deficits ... and therefore have added little or nothing to national saving. ...
It falls to our elected representatives to determine how best to address the competing claims on our limited resources. In doing so, they will need to consider not only the distributional effects of policy changes but also the broader economic effects on labor supply, retirement behavior, and private saving. In the end, the consequences for the U.S. economy of doing nothing could be severe. But the benefits of taking sound, timely action could extend many decades into the future.
[Update: PGL at Angry Bear also comments].
The Laffer Curve for Government Spending
For example, consider an increase in government spending. This is, in part, self-financing, just like tax cuts are claimed to be. When government spending increases, output increases by some multiple of the increase in government spending through the expenditure multiplier, and this causes taxes to increase. Therefore, an increase in government spending raises taxes and helps to pay for itself. The correct type of spending on, for example, infrastructure might actually stimulate output so much that it increases revenues by more than the increase in government spending! I doubt that, but it's as easy to make this claim for government spending as it is for taxes through the Laffer curve.
Thus, the fact that revenue increases following a tax cut tells you nothing about tax cuts per se, it simply confirms that deficit spending is expansionary. Here's a graph to illustrate how an increase in government spending can increase revenue:
True or not, it's pretty easy to make these claims. Of course, we can trust the press to fact check such claims thoroughly rather than just report what they are told, can't we? Paul Krugman has something to say about that in the post that follows this one.
Paul Krugman: Bullet Points Over Baghdad
Bullet Points Over Baghdad, by Paul Krugman, Victory in Iraq Commentary, NY Times: The overthrow of Saddam Hussein was supposed to provide the world with a demonstration of American power. It didn't work out that way. But the Bush administration has come up with the next best thing: a demonstration of American PowerPoint. Bullets haven't subdued the insurgents in Iraq, but the administration hopes that bullet points will subdue the critics at home. The National Security Council document released this week under the grandiose title "National Strategy for Victory in Iraq" is neither an analytical report nor a policy statement. It's simply the same old talking points - "victory in Iraq is a vital U.S. interest"; "failure is not an option" - repackaged in the style of a slide presentation for a business meeting. It's an embarrassing piece of work. Yet it's also an important test for the news media. The Bush administration has lost none of its confidence that it can get away with fuzzy math and fuzzy facts - that it won't be called to account for obvious efforts to mislead the public. It's up to journalists to prove that confidence wrong.
Krugman gives several examples of misleading statements in the document. One involves an increase in Iraqi oil production where, conveniently, the baseline for assessing progress is a time that includes the invasion when oil production was shut down. When compared to prewar levels, the conclusion is quite different:
...we're not supposed to understand that the real story of Iraq's oil industry is one of unexpected failure: ...Iraqi production has rarely matched its prewar level, and has been on a downward trend for the past year.
He also looks at the security situation in Iraq, specifically the situation in Najaf and Samara, and shows that statements in the document regarding the degree of control of those cities do not accord with reports from other sources. For example, the document says that Samara is under the control of the Iraqi government, but:
...there, too, it's stretching things to say that the city is under Iraqi government control: according to The Associated Press, only 100 of the city's 700 policemen show up for work on most days.
Krugman concludes with:
There's a lot more like that in the document. Refuting some of the upbeat assertions about Iraq requires specialized knowledge, but many of them can be quickly debunked by anyone with an Internet connection. The point isn't just that the administration is trying, yet again, to deceive the public. It's the fact that this attempt at deception shows such contempt - contempt for the public, and especially contempt for the news media. And why not? The truth is that the level of misrepresentation in this new document is no worse than that in a typical speech by President Bush or Vice President Dick Cheney. Yet for much of the past five years, many major news organizations failed to provide the public with effective fact-checking.
So Mr. Bush's new public relations offensive on Iraq is a test. Are the news media still too cowed, too addicted to articles that contain little more than dueling quotes to tell the public when the administration is saying things that aren't true? Or has the worm finally turned? There have been encouraging signs, notably a thorough front-page fact-checking article - which even included charts showing the stagnation of oil production and electricity generation! - in USA Today. But the next few days will tell.
I too hope that the worm has finally turned. For more on this, see Krugman's Money Talks: Denial and Deception.
December 01, 2005
Central Bank Communication
- First, better information about policy improves outcomes under rational expectations.
- Second, it's harder to communicate clearly than is commonly appreciated.
- Third, communicating intentions to the public clearly requires that policy intentions be understood clearly internally and this is an often overlooked benefit of Fed communication with the public.
- Fourth, the main danger of communicating future intentions is that the Fed will get locked into an expected policy path and will find it difficult to deviate when data indicates it is necessary to do so. More importantly, deviating from the path that markets expect may undermine credibility which is very costly.
- Fifth, communication of conditionality is, therefore, key. Markets must understand that the statements made by the Fed are conditional upon incoming information.
I want to emphasize that the tricky part of conditionality is getting markets to understand how the Fed will respond to incoming data. It's one thing to say that policy is conditional, but that does not tell markets when or how data will alter the course of policy. For example, will today's favorable inflation report change future policy? Unless the market knows how the Fed will respond as incoming data arrive, merely announcing policy is conditional does not necessarily stabilize market reactions:
Communicating the Fed's Policy Stance, William Poole, St. Louis Fed president: ...My plan is to discuss some of the evolution that has led to policy concern over central bank communication. ... I’ll discuss two aspects of central bank communication. One aspect is “body-language” communication through increased regularity of policy actions and the second is written and oral communication through policy statements, speeches and testimony. ...
Communication through Policy Statements, Speeches, Etc. (8) A rational expectations equilibrium requires that the market have information about the Fed’s policy rule. The more accurate is that information, the more efficient will be economic outcomes. The market learns about the rule above all from what the Fed does. ... Regularities in pursuing policy have made policy more predictable, in the sense that conditional on new information the market has a good idea of the Fed’s response, if any, to the new information. Although predictable policy—the body language—is the most important feature of the current situation, improved policy communication has also played a significant role. Perhaps the most important step the FOMC has taken to improve policy communications was the release of the policy decision immediately following each FOMC meeting, starting in February 1994. Other steps, such as more timely release of minutes of FOMC meetings, have been helpful.(9) ...
As every central banker knows and has most likely experienced, communication is difficult because it is so easy to be misunderstood. Miscommunication adds uncertainty and creates market volatility. ... I know of no model in which adding [uncertainty] to the policy rule improves outcomes for inflation, employment and growth. Increased attention to communication has a benefit that is frequently overlooked—an improvement in the clarity of internal deliberations. In a committee context, explicit understanding of policy goals and agreement on policy direction must precede public communication. We need to know what we want to say before we try to say it. ...
The most important communications issue facing the FOMC currently is whether and how to continue to provide forward guidance on policy decisions. Starting in mid 2003, the policy statement at the conclusion of the FOMC meeting stated that “... policy accommodation can be maintained for a considerable period.” Later, the Committee said that it could be “patient in removing its policy accommodation.” Still later, the Committee said that it would remove accommodation at a “measured pace.”
Even when the federal funds rate was at 1 percent, unpredictable events could have occurred that would have led the Committee to depart from its forward guidance. The setting of policy must be conditional on information at hand, and when information changes sufficiently the policy setting must also change. Historically, the Federal Reserve has not provided forward guidance for fear that it would lock itself into a policy stance that might, under new information, no longer be appropriate. In principle, there is no reason why the Fed cannot explain the nature of the conditionality and convey the view that policy guidance depends on information available at the time guidance is offered. ...
[F]or me the issue is whether under normal and routine circumstances forward guidance will convey information or whether it will create additional uncertainty. If conditionality of policy is understood, then events that lead the FOMC to depart from previously stated forward guidance should not cause difficulty. The market will understand that guidance is not a promise that must be kept to retain credibility but instead a way of summarizing the Committee’s view of the probable direction of policy. Then, when unexpected events move policy a different way, markets will come to the same conclusion about the policy significance of an unexpected event as does the FOMC. ...
Is There a New Consensus in Macroeconomics?
Communicating the Fed's Policy Stance, William Poole, St. Louis Fed president: My short answer to the question posed ... is “yes.” The fundamental issues that created an enormous gulf between macroeconomists in the 1960s have been resolved. Of course, ... agreement on the most important fundamentals does not eliminate controversy about many important details.
In the U.S context, the most important single issue was that in 1965, say, economists conducted modeling and policy exercises in a control-theoretic framework. A changed view of expectations led to appreciation of the importance of the distinction between real and nominal interest rates and the view that in the long run the Phillips curve was vertical. Somewhat later but certainly by 1985, say, almost everyone believed that expectations of private agents about what policymakers would do had to be incorporated in models and policy analyses.
In 1965, expectations were almost uniformly modeled in a backward-looking way. As the rational expectations analysis took hold, the argument concerned the extent of rationality in formation of expectations. Were expectations rational in the sense of Muth (1961) or were they based on backward-looking and/or rules-of-thumb calculations? I would not claim that there is a consensus today on how to model expectations, but would claim that all serious macro economists believe that expectations cannot be adequately viewed as totally lacking in rational elements.(1) That is, markets do reflect efforts of private agents to look ahead, however imperfectly they may be able to do so.(2) And “looking ahead” certainly includes forming expectations as to what policymakers will do.
Poole continues the discussion of "looking ahead" to what policymakers will do as he talks about the Fed's communication strategy, a key concern of the Fed right now. I will post that part of his speech later today.
Job Hopping, Innovation, and Economic Security
Let me illustrate with, hopefully, a more intuitive model than the one used in the article. Suppose that innovation only happens if people with particular sets of skills are matched within the same firm. Start with the workers dispersed uniformly across firms. There will be some matches, but not as many as if workers are allowed to change jobs. Without job hopping, there will be no new innovation as no new matches will occur. But with job hopping, even random hopping with some stickiness after a match, more and more matches will be made as workers move around and there will be more innovation. Thus, the degree of optimal job hopping in an industry depends upon how innovations arise. If innovation arises from the internal research and development of a particular firm, then that knowledge will be protected and job hopping would be discouraged. But if it is a process of synergistic matches between workers, then job hopping will be more common. That is the basis for the tests discussed in this article:
In Silicon Valley, Job Hopping Contributes to Innovation, by Virginia Postrel: For four decades ... Silicon Valley has maintained an amazingly innovative business environment. ... What makes Silicon Valley special? Thanks to some new data, economists have finally been able to test statistically some popular explanations. In her influential 1994 book "Regional Advantage: Culture and Competition in Silicon Valley and Route 128" ..., AnnaLee Saxenian, an economic development scholar at the University of California, Berkeley, argued that Silicon Valley's innovative edge comes from two unusual characteristics. First, talented employees move easily and often to new employers, far more so than people elsewhere. "The joke is that you can change jobs and not change parking lots," one of her interview subjects said. Second, instead of vertically integrating, Silicon Valley computer makers rely on networks of suppliers. They also design open systems that can flexibly accommodate all sorts of new components. ... Many people, especially in Silicon Valley, found Professor Saxenian's argument convincing. But while her research was careful, it depended on interviews and had no large-scale statistical backing. ... After all, the argument that Silicon Valley's job hopping fosters innovation contradicts economists' common assumptions. "It didn't feel right to me," James B. Rebitzer, an economist at Case Western Reserve University ... When employees jump from company to company, they take their knowledge with them. "The innovation from one firm will tend to bleed over into other firms," ... For a given company, "it's hard to capture the returns on your innovation," ... "From an economics perspective, that should hamper innovation."
He found a possible answer to the puzzle in the work of two management scholars, Carliss Y. Baldwin and Kim B. Clark. ... [T]hey argued that when there is a lot of technological uncertainty, the fastest way to find the best solution is to permit lots of independent experiments. That requires modular designs rather than tightly integrated systems. ... Employee mobility may encourage productive innovation, as people quickly move to whichever company comes up with the best new technology. But you would not expect to find people moving around all the time in every industry, only those where technical uncertainty justifies spending lots of resources on experiments ... In a forthcoming article in The Review of Economics and Statistics, he and two economists at the Federal Reserve Board, Bruce C. Fallick and Charles A. Fleischman, empirically test the claim that Silicon Valley employees move more often than computer industry employees in other places. ([Link to] "Job Hopping in Silicon Valley," ... To Professor Rebitzer's surprise (though not his co-authors'), it turns out that Silicon Valley employees really do move around more often than other people. ... Computer industry employees in other California technology clusters also seem to switch jobs more often than those in other states. This result supports an argument made by Ronald J. Gilson, a law professor at Stanford and Columbia. In a 1999 article, he suggested that a 19th-century California law helped create Silicon Valley's hypermobility by prohibiting the enforcement of noncompete agreements. In other states, businesses use these agreements to keep employees from easily hopping to other companies in the same industry. (That article is available [here].) Finally, the economists test whether computer industry employees are more likely to move than employees in other industries, as the modularity hypothesis would predict. ... Looking at cities within California, they write: "We find no evidence that outside the computer industry, job changes are more likely within Silicon Valley. ..."
I hesitate to bring this up after yesterday, but can this work on an international level too? Does this argue that by closing our borders to IT workers and workers in other knowledge based industries, we lower the chances of beneficial skill matches and reduce innovation?
In this model workers have very little job security, e.g. if their skills wane when they are old, then they will be cast aside in favor of more productive younger workers. There is also the risk of foreign competition, structural change, and so on. Is the the risk arising from this job insecurity fully capitalized into the worker's wages, or is there some market imperfection that prevents this? This question is more general than just IT workers as it pertains to increasing job insecurity across all occupations. It is relatively easy to imagine ways in which employment security risk might not be fully insured and how government intervention to create the correct incentives in the market or to provide the insurance itself would lead to a better outcome. By optimally insuring against such risk, perhaps we can offset some of the loss from the erosion of the long-term social contract between workers and firms, a contract where firms provided loyal employees with health and economic security and retained them until retirement.
The Emperor Has Nice Clothes
Point of View, Hideki Nagane: Direct lineage would destabilize throne, The Asahi Shimbun: The Chrysanthemum throne is said to have been passed down over 125 generations, from the time of Emperor Jinmu. If Japan allows women and imperial family offspring of female lineage to become emperor, it would fundamentally change the history of imperial succession. ... Most European monarchies hand down the throne via direct lineage. The British royal family, which gives precedence to male heirs, ... values succession to members of direct lineage. By contrast, in the Japanese emperor system, when there are only women in the immediate family, the baton is passed to a male heir of a related family. ... [T]he succession method of esteeming the first Emperor Jinmu and ancestral accumulation ... is not direct lineage but male lineage. ... Changing the rules of succession ... is a very grave problem that must not be treated lightly. ... However, after meeting only 14 times since January, the advisory panel hastily came up with a recommendation to allow women to become emperor. The decision makes too light of a weighty matter. ... [A]ny argument that gives a higher order of succession to Princess Aiko than to Prince Akishino is problematic. ...
Posted by Mark Thoma on Thursday, December 1, 2005 at 01:17 AM in Miscellaneous
Uncertainty Rules for Monetary Policy
Uncertainty and Monetary Policy, by Richard Dennis, FRBSF Economic Letter: ... According to Alan Greenspan (2003), "Uncertainty is not just an important feature of the monetary policy landscape; it is the defining characteristic of that landscape." ... Uncertainty comes in many forms. One obvious form is simply ignorance about the shocks that will disturb the economy in the future... But other, perhaps more insidious, forms ... are data uncertainty, parameter uncertainty, and model uncertainty...
Data uncertainty One form of uncertainty that is ever present is data uncertainty. Consider the economy's real GDP. For each and every quarter of the year, three estimates of real GDP are released: an advance estimate, a preliminary estimate, and a final estimate. ...[S]ome imputation is involved even for the final GDP release. In fact the final GDP estimate is not final. Every year a benchmark revision occurs in which previous estimates of real GDP are revised, going back several years. ...[W]e can never know what the economy's real GDP actually is, or was. This is data uncertainty. Orphanides (2001) makes an in-depth study of data revisions, including those to real GDP... Orphanides shows that policy rules look very different when they are estimated on real-time data—that is on the data available at the time policy decisions were made—rather than on revised data. In particular, not using real-time data can give a very misleading impression of monetary policy's responsiveness to inflation. A separate issue is how real-time monetary policy should be conducted when the central bank acknowledges data uncertainty... Aoki (2003) ... obtains results that are reasonably intuitive: as the amount of measurement error, or data uncertainty, in a variable increases, the information content in that variable should be discounted. ... [D]ata uncertainty provides reason to ... attenuat[e] the response coefficients in an optimal policy rule.
Parameter uncertainty Distinct from data uncertainty is parameter uncertainty. Economists use models to understand how the economy might respond when stimulated in certain ways, and to create forecasts. These economic models contain parameters that govern the interactions that occur within the model... While economists can use statistical techniques to try to estimate these parameters, ultimately their values remain very much uncertain quantities. ... Brainard (1967)... argued that, in response to uncertainty about the parameter on a variable, policymakers should attenuate their policy response to movements in that variable. ... Unfortunately, Brainard's finding, however intuitive, has been shown not to be general: ... For example, ... [see] (Söderström 2002).
Some recent studies have found that parameter uncertainty is not such a big deal for policymakers. Rudebusch (2001) ... finds the effects of parameter uncertainty are essentially negligible, certainty less important than those of data uncertainty. But ... this is not to say that uncertainty about the goals and conduct of monetary policy is benign ... Orphanides and Williams (2005) and Gurkaynak, Sack, and Swanson (2005) show that better policy outcomes can be obtained when households and firms are more certain of the economy's long-run average rate of inflation, highlighting one reason why some countries may have adopted policy regimes with explicit inflation targets.
Model uncertainty and model averaging ...[A]ambiguity about the model could also be potentially important. ... [I]t is quite possible, indeed reasonable, to think that policymakers may have several models at their disposal, perhaps reflecting competing economic theories... A policy can be made "robust" to model uncertainty by designing it to perform well on average across all of the available fully specified models ... (McCallum 1988). This model-averaging approach is taken in Levin, Wieland, and Williams (2003)... The policy rule that they identify is one that contains a short-term forecast of future inflation, incorporates a large response to the output gap, and that involves considerable "gradualism," or interest rate smoothing. ...
Model uncertainty and robust control The model-averaging approach to model uncertainty is not possible when policymakers cannot articulate and specify the various models that they wish to be robust against and therefore cannot assign probabilities to each of the models. This situation is known as Knightian uncertainty (Knight 1921). In such environments, the robust control ... suggests that policymakers should formulate policy to guard against the worst form of model misspecification that is possible. ... [T]he intuition for robust control can be found in such common expressions as "expect the unexpected" and "hope for the best, but prepare for the worst." ... In an interesting application of robust control methods, Sargent (1999) studies a simple macro-policy model and shows that robustness, in the "robust control" sense, does not necessarily lead to policy attenuation. ... The intuition for this result is that, by pursuing a more aggressive policy, the central bank can prevent the economy from encountering situations where model misspecification might be especially damaging.
Conclusion ...While attenuation, the notion that incoming data should be discounted, is an intuitive reaction to uncertainty, it is not always appropriate. Unfortunately, when dealing with uncertainty, there do not seem to be any hard and fast guidelines for policymakers.
Aoki, Kosuke. 2003. On the Optimal Monetary Policy Response to Noisy Indicators. " Journal of Monetary Economics 50(3), pp. 501-523.
Brainard, William. 1967. "Uncertainty and the Effectiveness of Monetary Policy." American Economic Review 57(2), pp. 411-425.
Greenspan, Alan. 2003. Opening Remarks at "Monetary Policy under Uncertainty," symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming.
Gurkaynak, Refet, Brian Sack, and Eric Swanson. 2005. "The Sensitivity of Long-Term Interest Rates: Evidence and Implications for Macroeconomic Models." American Economic Review 95(1), pp. 425-436.
Knight, Frank. 1921. Risk, Uncertainty, and Profit. Boston: Houghton Mifflin Co.
Levin, Andrew, Volker Wieland, and John Williams. 2003. "The Performance of Forecast-Based Monetary Policy Rules under Model Uncertainty." American Economic Review 93(3), pp. 622-645
McCallum, Bennett. 1988. "Robustness Properties of a Rule for Monetary Policy." Carnegie-Rochester Conference Series on Public Policy 29, pp. 175-203.
Orphanides, Athanasios. 2001. ""Monetary Policy Rules Based on Real-Time Data." American Economic Review 91(4), pp. 964-985.
Orphanides, Athanasios, and John Williams. 2005. "Inflation Scares and Forecast-Based Monetary Policy." Review of Economic Dynamics 8(2), pp. 498-527.
Rudebusch, Glenn. 2001. "Is the Fed Too Timid? Monetary Policy in an Uncertain World." Review of Economics and Statistics 83(2), pp. 203-217
Sargent, Thomas. 1999. "Comment: Policy Rules for Open Economies." In Monetary Policy Rules, ed. John Taylor. Chicago: University of Chicago Press.
Söderström, Ulf. 2002. "Monetary Policy with Uncertain Parameters." Journal of Economics 104(1), pp. 125-145.