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February 28, 2010

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"We Can't Wish Away Climate Change"

Posted: 28 Feb 2010 01:17 AM PST

Al Gore says "a hubristic 'bubble' of market fundamentalism" tilted the political playing field against action on global warming:

We Can't Wish Away Climate Change, by Al Gore, Commentary, NY Times: It would be an enormous relief if the recent attacks on the science of global warming actually indicated that we do not face an unimaginable calamity requiring large-scale, preventive measures to protect human civilization as we know it. ... We would no longer have to worry that our grandchildren would one day look back on us as a criminal generation that had selfishly and blithely ignored clear warnings that their fate was in our hands. ...
I, for one, genuinely wish that the climate crisis were an illusion. But unfortunately, the reality of the danger we are courting has not been changed... In fact, the crisis is still growing...
January was seen as unusually cold in much of the United States. Yet from a global perspective, it was the second-hottest January since surface temperatures were first measured 130 years ago.
Similarly, even though climate deniers have speciously argued for several years that there has been no warming in the last decade, scientists confirmed last month that the last 10 years were the hottest decade since modern records have been kept.
The heavy snowfalls this month have been used as fodder for ridicule by those who argue that global warming is a myth, yet scientists have long pointed out that warmer global temperatures have been increasing the rate of evaporation from the oceans, putting significantly more moisture into the atmosphere — thus causing heavier downfalls of both rain and snow in particular regions, including the Northeastern United States. Just as it's important not to miss the forest for the trees, neither should we miss the climate for the snowstorm. ...
The political paralysis that is now so painfully evident in Washington has thus far prevented action by the Senate — not only on climate and energy legislation, but also on health care reform, financial regulatory reform and a host of other pressing issues. ...
The decisive victory of democratic capitalism over communism in the 1990s led to a period of philosophical dominance for market economics worldwide and the illusion of a unipolar world. It also led, in the United States, to a hubristic "bubble" of market fundamentalism that encouraged opponents of regulatory constraints to mount an aggressive effort to shift the internal boundary between the democracy sphere and the market sphere. Over time, markets would most efficiently solve most problems, they argued. Laws and regulations interfering with the operations of the market carried a faint odor of the discredited statist adversary we had just defeated.
This period of market triumphalism coincided with confirmation by scientists that earlier fears about global warming had been grossly understated. But by then, the political context in which this debate took form was tilted heavily toward the views of market fundamentalists, who fought to weaken existing constraints and scoffed at the possibility that global constraints would be needed to halt the dangerous dumping of global-warming pollution into the atmosphere.
Over the years, as the science has become clearer and clearer, some industries and companies whose business plans are dependent on unrestrained pollution of the atmospheric commons have become ever more entrenched. They are ferociously fighting against the mildest regulation — just as tobacco companies blocked constraints on the marketing of cigarettes for four decades after science confirmed the link of cigarettes to diseases of the lung and the heart.
Simultaneously, changes in America's political system — including the replacement of newspapers and magazines by television as the dominant medium of communication — conferred powerful advantages on wealthy advocates of unrestrained markets and weakened advocates of legal and regulatory reforms. Some news media organizations now present showmen masquerading as political thinkers who package hatred and divisiveness as entertainment. And as in times past, that has proved to be a potent drug in the veins of the body politic. Their most consistent theme is to label as "socialist" any proposal to reform exploitive behavior in the marketplace.
From the standpoint of governance, what is at stake is our ability to use the rule of law as an instrument of human redemption. After all has been said and so little done, the truth about the climate crisis — inconvenient as ever — must still be faced. ...
We have overcome existential threats before. Winston Churchill is widely quoted as having said, "Sometimes doing your best is not good enough. Sometimes, you must do what is required." Now is that time. Public officials must rise to this challenge by doing what is required; and the public must demand that they do so — or must replace them.

The financial crisis might help to dissuade people of the notion that the market can solve the climate change problem by itself, and that it's best to let it do so.

I suppose the financial crisis could also convince people that the market can't necessarily prevent big meltdowns by itself, and that government can't stop meltdowns either. And -- thinking, for example, of unemployment -- it could show that once the government wakes up to the fact that a crisis has started, it will do far short of what's needed to counteract the effects.

We're all doomed.

[Note: the original article is much longer; also, Thomas Friedman is far more hopeful about Republican participation in climate change legislation than I am.]

links for 2010-02-27

Posted: 27 Feb 2010 11:01 PM PST

Frustrations...

Posted: 27 Feb 2010 09:36 AM PST

Andrew Samwick is frustrated with his party:

Have Republicans Forgotten the Purpose of a Political Party?, by Andrew Samwick: Leave aside the broader health care reform debate and what the Democrats want out of this process.  Why are the Republicans not using their elected offices to advance policies that serve their own supporters?

Their main voting constituency is middle class (or higher) white families in the suburbs, particularly the husbands and fathers in that constituency.  They don't face the raft of problems that others do in our society.  But one big problem that they do face is that something beyond their control happens to someone in their family.  Medical catastrophes have to rank high on that list -- they certainly do for me.  If a member of my family were to be afflicted with an expensive medical condition, then I am financialy viable only for as long as I stay insured with my current employer.  Put simply, there are gaps in private insurance markets that leave such families exposed.  This is plain to see and should be the focus of Republican efforts on health care reform, along the lines that I have discussed over the past six months (most recently here).

 Paul Krugman  sums it up pretty well:

What really struck me about the meeting, however, was the inability of Republicans to explain how they propose dealing with the issue that, rightly, is at the emotional center of much health care debate: the plight of Americans who suffer from pre-existing medical conditions. In other advanced countries, everyone gets essential care whatever their medical history. But in America, a bout of cancer, an inherited genetic disorder, or even, in some states, having been a victim of domestic violence can make you uninsurable, and thus make adequate health care unaffordable.

You don't succeed as a political party by denying other political parties the opportunity to craft policy that serves their constituents.  You succeed as a political party when you craft policy that serves your constituents.  Even naked self-interest by the two political parties should be generating better results than what we are seeing.

Dean Baker is frustrated with the media (surprise):
Dean Baker, Open Mic: Fannie Mae lost another $15 billion in the last quarter. The media has done a truly horrible job reporting on this loss and the losses from its sister institution Freddie Mac.
Fannie and Freddie buy mortgages from banks. This is all they do. If they are losing money, this means that they paid too much money to the banks for these mortgages.
This is exactly what the original TARP program was designed to do. The large ongoing losses at Fannie and Freddie mean that the Treasury Department is effectively running TARP through Fannie and Freddie. However, it is doing this with a complete end-run around Congress. There are no restrictions whatsoever on the Fannie and Freddie TARP money. The Treasury can give as much money to Lloyd Blankfein, Jamie Dimon and the rest of the banker crew with no accountability whatsoever.
It is interesting to ask where the Tea Partiers are on this one. Apparently they have no problem with "big government" handing tens of billions of taxpayer dollars to rich Wall Street bankers. They only get upset when they think that some of their money might be used to provide poor people with health care. There's nothing like principles in politics.

John Quiggin is frustrated with zombies:

Invulnerable zombies: the Efficient Markets Hypothesis. by John Quiggin: Discussion on my last post on reanimated zombie ideas in economics touched on a lot of the themes I want to talk about in this one, about the efficient markets hypothesis and why this undead monster can never be laid to rest. (Warning: favorable references to Popper ahead!).
The ultimate zombie is one that is completely invulnerable. Neither special bullets nor hammer blows nor even decapitation can finally lay this undead being to rest. But dramatic logic requires that a zombie invulnerable to external threats must be subject to a subtle, but ultimately terminal, flaw that ends in its own destruction.
Ultimate zombies arise quite commonly in science and economics in the form of ideas that are immune from refutation. The classic examples arise from the popularized versions of Freudian psychology, centered on the Oedipus complex, named for the Greek tragic hero who unknowingly killed his father and married his mother. If a son hates his father, this is, obviously, evidence of the Oedipus complex. But, if he loves his father, this is explained as a repressed Oedipus complex. With rules like this, Freudian psychology can never be refuted.
But as a string of philosophers of science, being with the late Karl Popper, have shown, a theory that can't be refuted by any conceivable evidence isn't really a theory at all. All it says, in the end, is 'anything can happen, and probably will'.
The global financial crisis, along with the earlier dotcom crisis has shown that, on any ordinary understanding of its terms, the efficient markets hypothesis can't be right. Despite reaching a scale and sophistication unparalleled in history, global financial markets have shown themselves subject to the same manias, bubbles and busts that were seen in the Dutch tulip craze of the 17th century.
So supporters of the efficient markets hypothesis have sought a redefinition that would make it invulnerable to refutation. Their central argument is one that has already been discussed  - if it is possible to diagnose the existence of a bubble, then it is possible to make arbitrarily large profits betting against it. And if someone like Warren Buffett has in fact done this, that can be put down to luck. Only if everybody can make money betting against the market can the EMH be wrong. But of course, it's impossible for everyone to bet against the market – the market is just the aggregate of bets....
As far as macroeconomics is concerned, the experience of the Great Depression and of the current Global Financial Crisis ... is pretty strong evidence that neoliberalism is not the right policy, at least not for all occasions and not in the forms that prevailed in the 1920s or the 1990s.

But the ultimate response to this invulnerable zombie must be the same as Popper on Freudian psychology. If the Great Depression, the dotcom boom and bust and the current Global Financial Crisis are all consistent with the efficient markets hypothesis, the hypothesis can't tell us much of interest about anything. At most, it says that even when markets are way out of line with economic reality, it is hard to exploit this fact to make a profit. Most of us (me and Krugman at any rate) already knew that, and confined ourselves to getting out of stocks when they seemed absurdly overvalued. 

Update: Paul Krugman is also frustrated with the media:

You're So Vain, by Paul Krugman: Jonathan Chait and Robert Waldmann, in slightly different ways, highlight a crucial dynamic in American political debate: the extent to which public figures are punished for actually knowing what they're talking about.
It goes like this: Person A says "Black is white" — perhaps out of ignorance, although more often out of a deliberate effort to obfuscate. Person B says, "No, black isn't white — here are the facts."
And Person B is considered to have lost the exchange — you see, he came across as arrogant and condescending.
I had, I have to admit, hoped that the nation's experience with George W. Bush — who got within hanging-chad distance of the White House precisely because Al Gore was punished for actually knowing stuff — would have cured our discourse of this malady. But no. Why not?
Chait professes himself puzzled by the right's intellectual insecurity. Me, not so much. Here's how I see it: in our current political culture, the background noise is overwhelmingly one of conservative platitudes. People who have strong feelings about politics but are intellectually incurious tend to pick up those platitudes, and repeat them in the belief that this makes them sound smart. (Ezra Klein once described Dick Armey thus: "He's like a stupid person's idea of what a thoughtful person sounds like.")
Inevitably, then, such people react with rage when they're shown up on their facts or basic logic — it's an attack on their sense of self-worth.
The truly sad thing, though, is the way much news reporting goes along with the condescension meme. That's Waldmann's point. You really, really might have expected that the Bush experience would give reporters pause — that they might at least ask themselves, "Isn't it my job to ask whether a politician is right, as opposed to how he comes across?"
But NOOOO! [/Belushi]

I'm frustrated with, among other things, Congress. "Action from Congress to stimulate jobs has been woefully inadequate."

What are you frustrated about?

February 27, 2010

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February 26, 2010

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Paul Krugman: Afflicting the Afflicted

Posted: 26 Feb 2010 12:32 AM PST

Getting the last laugh is good for health:

Afflicting the Afflicted, by Paul Krugman, Commentary, NY Times: If we're lucky, Thursday's summit will turn out to have been the last act in the great health reform debate, the prologue to passage of an imperfect but nonetheless history-making bill. If so, the debate will have ended as it began: with Democrats offering moderate plans that draw heavily on past Republican ideas, and Republicans responding with slander and misdirection. ...
Republicans ... didn't bother making a case that could withstand even minimal fact-checking. It was obvious how things would go as soon as the first Republican speaker, Senator Lamar Alexander,... right off the bat ... delivered a whopper, asserting that under the Democratic plan, "for millions of Americans, premiums will go up."
Wow. I guess ... he wasn't technically lying, since the Congressional Budget Office analysis ... does say that average payments for insurance would go up. But ... this would happen only because people would buy more and better coverage. The "price of a given amount of insurance coverage" would fall, not rise — and the actual cost to many Americans would fall sharply thanks to federal aid.
His fib on premiums was quickly followed by a fib on process. Democrats ... plan to use a ... process known as reconciliation. Mr. Alexander declared that reconciliation has "never been used for something like this"..., but reconciliation has, in fact, been used for previous health reforms — and was used to push through both of the Bush tax cuts at a budget cost of $1.8 trillion, twice the bill for health reform.
What really struck me..., however, was the inability of Republicans to explain how they propose dealing with the issue that, rightly, is at the emotional center of much health care debate: the plight of Americans who suffer from pre-existing medical conditions. In other advanced countries, everyone gets essential care whatever their medical history. But in America, a bout of cancer, an inherited genetic disorder, or even, in some states, having been a victim of domestic violence can make you uninsurable, and thus make adequate health care unaffordable.
One of the great virtues of the Democratic plan is that it would finally put an end to this.. But what's the Republican answer? Mr. Alexander was strangely inarticulate on the matter... He offered no ... ideas...
House Republicans don't have anything to offer to Americans with troubled medical histories. On the contrary, their big idea — allowing unrestricted competition across state lines — would lead to a race to the bottom. The states with the weakest regulations — for example, those that allow insurance companies to deny coverage to victims of domestic violence — would set the standards for the nation... The result would be to afflict the afflicted, to make the lives of Americans with pre-existing conditions even harder.
Don't take my word for it. Look at the Congressional Budget Office analysis of the House G.O.P. plan. ... While some people would gain insurance, the people losing insurance would be those who need it most. Under the Republican plan, the American health care system would become even more brutal than it is now.
So what did we learn from the summit? What I took away was the arrogance that the success of things like the death-panel smear has obviously engendered in Republican politicians. At this point they obviously believe that they can blandly make utterly misleading assertions, saying things that can be easily refuted, and pay no price. And they may well be right.
But Democrats can have the last laugh. All they have to do — and they have the power to do it — is finish the job, and enact health reform.

"The High Road Procurement Policy"

Posted: 26 Feb 2010 12:27 AM PST

We hear about Wall Street and Main Street, but not as much about the streets where people live, at least not much beyond all the foreclosed houses. And with unemployment as high as it is, and Congress doing little more than than tossing a few bones at the problem now and again, it's no wonder those streets are feeling overlooked and neglected. Maybe that's part of the problem Tim Geithner describes:

The president says somehow we've managed to create a situation where there's a large portion of Americans that think we are running a pro-business, pro-Wall Street policy. But the business community and Wall Street think we are like a bunch of socialists.

Well, we have been socializing Wall Street's losses, but I don't think that's what they're complaining about. In any case, Wall street and the business community aren't going to like this:

Plan to Seek Use of U.S. Contracts as a Wage Lever, by Steven Greenhouse, NY Times: The Obama administration is planning to use the government's enormous buying power to prod private companies to improve wages and benefits for millions of workers, according to White House officials and several interest groups briefed on the plan.
By altering how it awards $500 billion in contracts each year, the government would disqualify more companies with labor, environmental or other violations and give an edge to companies that offer better levels of pay, health coverage, pensions and other benefits, the officials said.
Because nearly one in four workers is employed by companies that have contracts with the federal government, administration officials see the plan as a way to shape social policy and lift more families into the middle class. It would affect contracts like those awarded to make Army uniforms, clean federal buildings and mow lawns at military bases.
Although the details are still being worked out, the outline of the plan is drawing fierce opposition from business groups and Republican lawmakers. They see it as a gift to organized labor... Even as business groups press the administration for more details, they are denouncing the plan, tentatively named the High Road Procurement Policy. ...
One federal official said the proposed policy would encourage procurement officers to favor companies with better compensation packages only if choosing them did not add substantially to contract costs. As an example, he said, if two companies each bid $10 million for a contract, and one had considerably better wages and pensions than the other, that company would be favored. ...

"Did Woodstock Hippies Lead to US Financial Collapse?"

Posted: 26 Feb 2010 12:24 AM PST

For some conservatives, all the evil in the world can be traced to the "liberal permissiveness" of the 1960s. I hadn't heard this particular version of the story where the collapse of morals brought about the collapse of the financial system, but I should have known it was coming:

Did Woodstock hippies lead to US financial collapse?, by Mark Guarino, CSM: A new film is gaining traction among tea-party followers for suggesting that the collapse of the US financial system has roots dating back 40 years to the Summer of Love.
"Generation Zero," a film set to premiere in March, examines what producer David Bossie says is a "historic perspective on a generational change" that led to the September 2008 bank collapse. Mr. Bossie says generational narcissism, as represented by the 1969 Woodstock Festival, is responsible for the excessive spending, mortgage crisis, and recklessness on Wall Street. ...
Citizens United, Bossie's company, is no stranger to controversial topics that take aim at liberals or their causes. The company was at the center of a recent US Supreme Court case involving "Hillary: The Movie"... The high court overturned a provision of the McCain-Feingold law that barred the use of political advertisements created or paid for by independent parties. ...
Early this month, a screening of the film was warmly received at both the National Tea Party Convention and the Conservative Political Action Conference. From there, it was the subject of an hour-long special on FOX News hosted by Sean Hannity.
Bossie says the attention may mean an eventual theatrical release. ... The film, which features commentary from conservative pundits such as Charles Krauthammer, Newt Gingrich, and Dick Morris, offers no concluding message other than a plea to control government spending. ... "The political correctness of not wanting to say 'no' took hold not in 1999; it started in 1969," he says. ...

links for 2010-02-25

Posted: 25 Feb 2010 11:02 PM PST

Initial Weekly Claims for Unemployment Insurance Increase to 496,000

Posted: 25 Feb 2010 09:03 AM PST

In a recent MoneyWatch post I said:

The release last Thursday of initial weekly claims for unemployment insurance showing 473,000 claims, an increase of 31,000 over the 442,000 claims the previous week, hasn't received nearly enough attention. Claims have been essentially moving sideways for several weeks now, and they are still far above the break even point at approximately 400,000 claims per week. The economy will continue losing jobs so long as initial claims stay above 400,000 per week. ...
Claims will be released on Thursday of this week, and I'll be keeping a closer eye on them than usual. If they continue to move sideways, it's time to worry.

I'd be less worried if it looked like a meaningful job creation package was about to emerge from Congress, but the proposals under discussion don't do nearly enough, and what little that has been proposed isn't happening as fast as needed. ... And while it's good that health care reform is coming back onto the front burner, that means that a job creation bill is unlikely to be the main priority for Congress in the near future.

Update: Maybe they were listening. If this bill does eventually pass, it will still be far, far short of what is needed, and much later than needed, but it's something. A meager something, but something nonetheless.

Here is Calculated Risk on today's release:

The DOL reports on weekly unemployment insurance claims:
In the week ending Feb. 20, the advance figure for seasonally adjusted initial claims was 496,000, an increase of 22,000 from the previous week's revised figure of 474,000. The 4-week moving average was 473,750, an increase of 6,000 from the previous week's revised average of 467,750. ...

Click on graph for larger image in new window.
This graph shows the 4-week moving average of weekly claims since 1971. ...

The current level of 496,000 (and 4-week average of 473,750) are very high and suggest continuing job losses in February. This is the highest level since last November.

Action from Congress to stimulate jobs has been woefully inadequate. Voters will be right to blame politicians for failing to address this problem. Policymakers certainly had plenty of warning it was coming, but they chose to put their heads in the sand and ignore it, or to avoid the difficult politics of job creation policies by cherry picking the data in a way that convinced them that recovery was just around the corner.

[Also posted at MoneyWatch.]

February 25, 2010

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"Address Jobs Now and Deficits Later"

Posted: 25 Feb 2010 12:48 AM PST

This is from Lawrence Mishel, president of the Economic Policy Institute, and David Walker, president and CEO of the Peter G. Peterson Foundation:

Address jobs now and deficits later, by Lawrence Mishel and David M. Walker: President Barack Obama is in a difficult position when it comes to deficits. Today's high deficits will have to go even higher to help address unemployment. At the same time, many Americans are increasingly concerned about escalating deficits and debt. What's a president to do?
The answer, from a policy perspective, is not that hard: A focus on jobs now is consistent with addressing our deficit problems ahead. ...
As in every economic downturn, federal revenues have fallen steeply because individuals and corporations earn less in a recession. High unemployment also results in higher expenditures for safety net programs, like Medicaid, unemployment benefits and food stamps.
Not surprisingly then, a huge recession can yield a huge deficit. Efforts to put people back to work and help restore the economy ... can also increase short-term deficits.
Though a concern, most of the recent short-term rise in the deficit is understandable. Furthermore, public spending can help compensate for the fall in private spending, and help stem the pain of substantial job losses. With more than a fifth of the work force expected to be unemployed or underemployed in 2010, there is an economic and a moral imperative to take action. ...
That's why we agree that job creation must be a short-term priority. Job creation plans must be targeted... They must be timely... And they must be big enough to substantially fill the enormous jobs hole we're in. They must also be temporary — affecting the deficit only in the next couple of years, without exacerbating our large and growing structural deficits in later years. ...
But ... short-term deficits ... should not be confused with the primary deficit challenge facing our nation: structural deficits. These deficits are projected to exist in coming years — even when the country is at peace, even when the economy is growing, even when unemployment falls. ...
While we address our short-term unemployment challenges, we must also immediately establish a path to address our large, and growing, structural deficits. ... Over time, Medicare and Medicaid will be the key drivers of these structural deficits. This is primarily because these programs' costs tend to mirror overall cost increases for health care...
These structural deficits are too substantial to close the gap without addressing both sides of the ledger: spending and revenues. In doing so, it is important to distinguish critical and effective programs and tax policies from outdated and ineffective ones.
We must be careful to maintain the type of public investments that can help fuel broad-based economic growth while strengthening the safety net for our most vulnerable populations. And we should take into account growing retirement insecurity as employer pension systems erode and personal savings falter. People should be able to count on government benefits they are promised. ...
None of this will be easy... It will require hard choices, and an extraordinary process to engage the American people and to make recommendations to the Congress on budget controls, spending cuts and revenue increases. ... In the end, Congress must step up to the plate...
We must accept higher deficits in the short-term in order to put people back to work. At the same time, we must take immediate steps to agree on a path and a process for reducing the structural deficits that lie ahead. ...

I don't have any problems with this in principle, my concern is the call for immediate action on the long-term problem. I'm not sure that the short-term and long-term budget issues can be kept separate in the political and public debates. Attempts to deal with structural deficit problems -- even just plans for the future -- at a time when the economy is in a recession and needs to increase, not decrease the deficit makes effective policy responses harder. The time will come for an open, public debate about the long-run budget issues, but a time when increases in the deficit are needed to create jobs may not be the best time to take on the long-term budget challenge.

Health Care Reform: The Obama Compromise Proposal and the Likely Republican Response

Posted: 25 Feb 2010 12:24 AM PST

At MoneyWatch:

Health Care Reform: The Obama Compromise Proposal and the Likely Republican Response, by Mark Thoma: A discussion of the options for health care reform Democrats have before them, and the counter-proposals that Republicans are likely to offer. Many Republicans will oppose reform with little motivation beyond handing Democrats a loss, but some will be willing to offer their own ideas as counter-proposals to the administration's reform plan. Are the counter-proposals worth pursuing?

links for 2010-02-24

Posted: 24 Feb 2010 11:02 PM PST

"Physiological Evidence of Brain's Response to Inequality"

Posted: 24 Feb 2010 02:00 PM PST

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A quick post between classes -- the desire for equality appears to be hardwired:

Caltech scientists find first physiological evidence of brain's response to inequality, EurekAlert: The human brain is a big believer in equality—and a team of scientists from the California Institute of Technology (Caltech) and Trinity College in Dublin, Ireland, has become the first to gather the images to prove it.

Specifically, the team found that the reward centers in the human brain respond more strongly when a poor person receives a financial reward than when a rich person does. The surprising thing? This activity pattern holds true even if the brain being looked at is in the rich person's head, rather than the poor person's.

These conclusions, and the functional magnetic resonance imaging (fMRI) studies that led to them, are described in the February 25 issue of the journal Nature. ...

It's long been known that we humans don't like inequality, especially when it comes to money. Tell two people working the same job that their salaries are different, and there's going to be trouble, notes John O'Doherty, professor of psychology at Caltech...

But what was unknown was just how hardwired that dislike really is. "In this study, we're starting to get an idea of where this inequality aversion comes from," he says. "It's not just the application of a social rule or convention; there's really something about the basic processing of rewards in the brain that reflects these considerations."

The brain processes "rewards"—things like food, money, and even pleasant music, which create positive responses in the body—in areas such as the ventromedial prefrontal cortex (VMPFC) and ventral striatum.

In a series of experiments, former Caltech postdoctoral scholar Elizabeth Tricomi (now an assistant professor of psychology at Rutgers University)—along with O'Doherty, Camerer, and Antonio Rangel, associate professor of economics at Caltech—watched how the VMPFC and ventral striatum reacted in 40 volunteers who were presented with a series of potential money-transfer scenarios while lying in an fMRI machine.

For instance, a participant might be told that he could be given $50 while another person could be given $20; in a second scenario, the student might have a potential gain of only $5 and the other person, $50. The fMRI images allowed the researchers to see how each volunteer's brain responded to each proposed money allocation.

But there was a twist. Before the imaging began, each participant in a pair was randomly assigned to one of two conditions: One participant was given what the researchers called "a large monetary endowment" ($50) at the beginning of the experiment; the other participant started from scratch, with no money in his or her pocket.

As it turned out, the way the volunteers—or, to be more precise, the reward centers in the volunteers' brains—reacted to the various scenarios depended strongly upon whether they started the experiment with a financial advantage over their peers.

"People who started out poor had a stronger brain reaction to things that gave them money, and essentially no reaction to money going to another person," Camerer says. "By itself, that wasn't too surprising."

What was surprising was the other side of the coin. "In the experiment, people who started out rich had a stronger reaction to other people getting money than to themselves getting money," Camerer explains. "In other words, their brains liked it when others got money more than they liked it when they themselves got money."

"We now know that these areas are not just self-interested," adds O'Doherty. "They don't exclusively respond to the rewards that one gets as an individual, but also respond to the prospect of other individuals obtaining a reward."

What was especially interesting about the finding, he says, is that the brain responds "very differently to rewards obtained by others under conditions of disadvantageous inequality versus advantageous inequality. It shows that the basic reward structures in the human brain are sensitive to even subtle differences in social context."

This, O'Doherty notes, is somewhat contrary to the prevailing views about human nature. "As a psychologist and cognitive neuroscientist who works on reward and motivation, I very much view the brain as a device designed to maximize one's own self interest," says O'Doherty. "The fact that these basic brain structures appear to be so readily modulated in response to rewards obtained by others highlights the idea that even the basic reward structures in the human brain are not purely self-oriented."

Camerer, too, found the results thought provoking. "We economists have a widespread view that most people are basically self-interested, and won't try to help other people," he says. "But if that were true, you wouldn't see these sort of reactions to other people getting money."

Still, he says, it's likely that the reactions of the "rich" participants were at least partly motivated by self-interest—or a reduction of their own discomfort. "We think that, for the people who start out rich, seeing another person get money reduces their guilt over having more than the others."

Having watched the brain react to inequality, O'Doherty says, the next step is to "try to understand how these changes in valuation actually translate into changes in behavior. For example, the person who finds out they're being paid less than someone else for doing the same job might end up working less hard and being less motivated as a consequence. It will be interesting to try to understand the brain mechanisms that underlie such changes."

Ben Bernanke's Testimony before the House Financial Services Committee

Posted: 24 Feb 2010 11:11 AM PST

I have to go teach my classes, but in case you want to talk about Ben Bernanke's testimony before the House Financial Services Committee today, here are a few links (there's not much discussion of the testimony on blogs yet -- I won't be able to update this, so please feel free to add additional links in comments):

"Don't Save the Press"

Posted: 24 Feb 2010 11:10 AM PST

Should traditional media by saved by the government?:

Don't Save the Press, by Žiga Turk, Commentary, Project Syndicate: Throughout history, political leaders have supported existing communication technologies in order to defend the system in which they rule. Today, too, governments may be tempted to protect newspapers and public TV on the pretext of "saving democracy as we know it." But efforts to block technological change have been futile in the past, and they would be unwise today. ...
Faced with an existential crisis as new technologies lure away their readers and viewers, traditional news media ... are increasingly turning to governments for help. But, such is the undertone, their cause is nobler. The media are a cornerstone of democracy. Left to the blogs and tweets, without journalists to report the news, how can citizens decide what politics to support?
Such thinking reflects an age-old fear: as Plato put it, citizens would get "information without proper instruction and, in consequence, be thought very knowledgeable when they are for the most part quite ignorant." It is a fear that has echoed down through history ever since, from the Catholic Church cursing Gutenberg's movable type to the Victorian bourgeois complaining of the newly discovered freedom of the press.
Political rulers, too, have never liked new communication technology, because the political system in which they rule is adapted to the existing technology. Scarcity of parchment required all decision-making to be concentrated in a court consisting of a handful of people. When cheap paper and printing presses – the first true mass-communication technology – challenged this system, the Catholic Church and the monarchs defended the parchment-based monopoly. They failed.
Print, paper, and newspapers enabled the rise of new types of political systems based on expanded popular participation. The transition was not smooth, but those who understood the signs of the times early gained a historical head start. It is not a coincidence that Benjamin Franklin had a background in printing and newspaper publishing. The liberal-democratic political system that resulted from the American Revolution was well aligned with the emerging information technology of the time.
In the "scarce bandwidth" media of the past, in which space and time were limited, the media had to select stories worthy of reporting. Mass media could report few big stories in which a few big actors took center stage. In stories about politics, these big actors were political parties. ... This created a mutually reinforcing symbiosis between the old mass media and old mass political movements, one hostile to the entry of new players. ...
Unfortunately for both, their main strengths – transmitting information and connecting people – happen to be what the Internet does best. Blogs and social-networking platforms encourage ... the most efficient form of organization imaginable. ...
So it probably would not take much for politicians to be persuaded that the press is essential to democracy, and that its survival ... depends on government support. Advertising revenue would be replaced by government subsidies, raising predictable questions about the impact on content.
The alternative is to focus on what communication technology cannot do: create rather than transmit a good story or a good policy. There will always be a market for quality. The disruption caused by emerging communications technologies consists in the fact that the best pens may not be on the staffs of newspapers, and that policies need not be formulated only in the corridors of government.
In 1990s, Bill Gates said, "In the next century, leaders will be those who empower others." Deciding whom to empower, and whom to allow to participate, rather than deciding to save the existing media technology, will determine the future of political parties and the systems in which they govern.

February 24, 2010

Economist's View - 6 new articles

"Physiological Evidence of Brain's Response to Inequality"

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A quick post between classes -- the desire for equality appears to be hardwired:

Caltech scientists find first physiological evidence of brain's response to inequality, EurekAlert: The human brain is a big believer in equality—and a team of scientists from the California Institute of Technology (Caltech) and Trinity College in Dublin, Ireland, has become the first to gather the images to prove it.

Specifically, the team found that the reward centers in the human brain respond more strongly when a poor person receives a financial reward than when a rich person does. The surprising thing? This activity pattern holds true even if the brain being looked at is in the rich person's head, rather than the poor person's.

These conclusions, and the functional magnetic resonance imaging (fMRI) studies that led to them, are described in the February 25 issue of the journal Nature. ...

It's long been known that we humans don't like inequality, especially when it comes to money. Tell two people working the same job that their salaries are different, and there's going to be trouble, notes John O'Doherty, professor of psychology at Caltech...

But what was unknown was just how hardwired that dislike really is. "In this study, we're starting to get an idea of where this inequality aversion comes from," he says. "It's not just the application of a social rule or convention; there's really something about the basic processing of rewards in the brain that reflects these considerations."

The brain processes "rewards"—things like food, money, and even pleasant music, which create positive responses in the body—in areas such as the ventromedial prefrontal cortex (VMPFC) and ventral striatum.

In a series of experiments, former Caltech postdoctoral scholar Elizabeth Tricomi (now an assistant professor of psychology at Rutgers University)—along with O'Doherty, Camerer, and Antonio Rangel, associate professor of economics at Caltech—watched how the VMPFC and ventral striatum reacted in 40 volunteers who were presented with a series of potential money-transfer scenarios while lying in an fMRI machine.

For instance, a participant might be told that he could be given $50 while another person could be given $20; in a second scenario, the student might have a potential gain of only $5 and the other person, $50. The fMRI images allowed the researchers to see how each volunteer's brain responded to each proposed money allocation.

But there was a twist. Before the imaging began, each participant in a pair was randomly assigned to one of two conditions: One participant was given what the researchers called "a large monetary endowment" ($50) at the beginning of the experiment; the other participant started from scratch, with no money in his or her pocket.

As it turned out, the way the volunteers—or, to be more precise, the reward centers in the volunteers' brains—reacted to the various scenarios depended strongly upon whether they started the experiment with a financial advantage over their peers.

"People who started out poor had a stronger brain reaction to things that gave them money, and essentially no reaction to money going to another person," Camerer says. "By itself, that wasn't too surprising."

What was surprising was the other side of the coin. "In the experiment, people who started out rich had a stronger reaction to other people getting money than to themselves getting money," Camerer explains. "In other words, their brains liked it when others got money more than they liked it when they themselves got money."

"We now know that these areas are not just self-interested," adds O'Doherty. "They don't exclusively respond to the rewards that one gets as an individual, but also respond to the prospect of other individuals obtaining a reward."

What was especially interesting about the finding, he says, is that the brain responds "very differently to rewards obtained by others under conditions of disadvantageous inequality versus advantageous inequality. It shows that the basic reward structures in the human brain are sensitive to even subtle differences in social context."

This, O'Doherty notes, is somewhat contrary to the prevailing views about human nature. "As a psychologist and cognitive neuroscientist who works on reward and motivation, I very much view the brain as a device designed to maximize one's own self interest," says O'Doherty. "The fact that these basic brain structures appear to be so readily modulated in response to rewards obtained by others highlights the idea that even the basic reward structures in the human brain are not purely self-oriented."

Camerer, too, found the results thought provoking. "We economists have a widespread view that most people are basically self-interested, and won't try to help other people," he says. "But if that were true, you wouldn't see these sort of reactions to other people getting money."

Still, he says, it's likely that the reactions of the "rich" participants were at least partly motivated by self-interest—or a reduction of their own discomfort. "We think that, for the people who start out rich, seeing another person get money reduces their guilt over having more than the others."

Having watched the brain react to inequality, O'Doherty says, the next step is to "try to understand how these changes in valuation actually translate into changes in behavior. For example, the person who finds out they're being paid less than someone else for doing the same job might end up working less hard and being less motivated as a consequence. It will be interesting to try to understand the brain mechanisms that underlie such changes."



Ben Bernanke's Testimony before the House Financial Services Committee

I have to go teach my classes, but in case you want to talk about Ben Bernanke's testimony before the House Financial Services Committee today, here are a few links (there's not much discussion of the testimony on blogs yet -- I won't be able to update this, so please feel free to add additional links in comments):




"Don't Save the Press"

Should traditional media by saved by the government?:

Don't Save the Press, by Žiga Turk, Commentary, Project Syndicate: Throughout history, political leaders have supported existing communication technologies in order to defend the system in which they rule. Today, too, governments may be tempted to protect newspapers and public TV on the pretext of "saving democracy as we know it." But efforts to block technological change have been futile in the past, and they would be unwise today. ...
Faced with an existential crisis as new technologies lure away their readers and viewers, traditional news media ... are increasingly turning to governments for help. But, such is the undertone, their cause is nobler. The media are a cornerstone of democracy. Left to the blogs and tweets, without journalists to report the news, how can citizens decide what politics to support?
Such thinking reflects an age-old fear: as Plato put it, citizens would get "information without proper instruction and, in consequence, be thought very knowledgeable when they are for the most part quite ignorant." It is a fear that has echoed down through history ever since, from the Catholic Church cursing Gutenberg's movable type to the Victorian bourgeois complaining of the newly discovered freedom of the press.
Political rulers, too, have never liked new communication technology, because the political system in which they rule is adapted to the existing technology. Scarcity of parchment required all decision-making to be concentrated in a court consisting of a handful of people. When cheap paper and printing presses – the first true mass-communication technology – challenged this system, the Catholic Church and the monarchs defended the parchment-based monopoly. They failed.
Print, paper, and newspapers enabled the rise of new types of political systems based on expanded popular participation. The transition was not smooth, but those who understood the signs of the times early gained a historical head start. It is not a coincidence that Benjamin Franklin had a background in printing and newspaper publishing. The liberal-democratic political system that resulted from the American Revolution was well aligned with the emerging information technology of the time.
In the "scarce bandwidth" media of the past, in which space and time were limited, the media had to select stories worthy of reporting. Mass media could report few big stories in which a few big actors took center stage. In stories about politics, these big actors were political parties. ... This created a mutually reinforcing symbiosis between the old mass media and old mass political movements, one hostile to the entry of new players. ...
Unfortunately for both, their main strengths – transmitting information and connecting people – happen to be what the Internet does best. Blogs and social-networking platforms encourage ... the most efficient form of organization imaginable. ...
So it probably would not take much for politicians to be persuaded that the press is essential to democracy, and that its survival ... depends on government support. Advertising revenue would be replaced by government subsidies, raising predictable questions about the impact on content.
The alternative is to focus on what communication technology cannot do: create rather than transmit a good story or a good policy. There will always be a market for quality. The disruption caused by emerging communications technologies consists in the fact that the best pens may not be on the staffs of newspapers, and that policies need not be formulated only in the corridors of government.
In 1990s, Bill Gates said, "In the next century, leaders will be those who empower others." Deciding whom to empower, and whom to allow to participate, rather than deciding to save the existing media technology, will determine the future of political parties and the systems in which they govern.


Reich: Bust the Health Care Trusts

Health insurance markets are "highly concentrated," but that could change:

Bust the Health Care Trusts, by Robert Reich, Commentary, NY Times: My health insurer here in California is Anthem Blue Cross. So far, my group policy hasn't been affected by Anthem's planned rate increase of as much as 39 percent for its customers with individual policies — but the trend worries me, as it should everyone. Rates are soaring all over the country. Insurers have been seeking to raise premiums 24 percent in Connecticut, 23 percent in Maine, 20 percent in Oregon and a wallet-popping 56 percent in Michigan. How can insurers raise prices as much as they want without fear of losing customers?
Astonishingly, the health insurance industry is exempt from federal antitrust laws, which is why a handful of insurers have become so dominant in their markets that their customers simply have nowhere else to go. But that protection could soon end: President Obama on Tuesday announced his support of a House bill that would repeal health insurers' antitrust exemption, and Speaker Nancy Pelosi signaled that she would put it toward an immediate vote. This is promising news. ...
Health insurers ... are making boatloads of money. America's five largest health insurers made a total profit of $12.2 billion last year; that was 56 percent higher than in 2008... It's not as if health insurers have been inventing jazzy software or making jet airplanes. Basically, they just collect money from employers and individuals and give the money to providers. In most markets, consumers wouldn't pay this much for so little. We'd find a competitor that charged less and delivered more. What's stopping us? Not enough choice.
More than 90 percent of insurance markets in more than 300 metropolitan areas are "highly concentrated," as defined by the Federal Trade Commission... A 2008 survey by the Government Accountability Office found the five largest providers of small group insurance controlled 75 percent or more of the market in 34 states, and 90 percent or more in 23 of those states, a significant increase in concentration since the G.A.O.'s 2002 survey. ...
With size has come not only market power but political clout. Big for-profit insurers deploy enough campaign money and lobbyists to get their way with state legislators and insurance commissioners. ... These companies have even been known to press states to limit how many other health insurers they license.
And when they can't get their way, insurers go to court. In Maine — one state that aggressively regulates rates — WellPoint's Anthem subsidiary has sued the insurance superintendent for reducing its requested rate increase.
Political clout can be especially advantageous at the federal level, as the big Wall Street banks have so brazenly demonstrated. Over the past two and a half years, WellPoint's employees and associates have contributed more than $922,000 to federal political campaigns, and the company has spent $7.8 million lobbying Washington policymakers... It should not be surprising that WellPoint was one of the leading opponents of the public insurance option, which would have subjected it to competition even where it had sewn up the market.
Antitrust is no substitute for broader health care reform, but it's an important prerequisite. If a handful of giant health insurers are allowed to dominate the industry, many of the other aspects of reform (establishing insurance exchanges, requiring people to have insurance, even allowing consumers to buy insurance across state lines) won't bring down the price of insurance.
Regardless of what happens at the White House's health care meeting on Thursday, we've got to make sure health insurers compete for every one of our dollars. ...

The build up of excessive market power in some industries, and the failure of regulators to step in and do something about it based partly upon attitudes toward deregulation that began in the 1970s, has been frustrating to observe. But in financial, health care, and other markets that slowly seems to be changing.



"Is the Environmental Protection Agency Under-Pricing Carbon?"

If Congress cannot pass effective climate change legislation, many people hope that the EPA will step in and begin regulating carbon emissions. But given the EPA's estimates of the social costs of carbon emissions, would that do any good?:

Climate Change and the U.S.: Is the Environmental Protection Agency under-pricing carbon?, by Frank Ackerman: What will the US do about climate policy? The ongoing paralysis in Congress makes it clear that failure actually is an option. For those who long for success, the best hope may be EPA regulation of carbon emissions. Yet far from setting an ambitious new course, EPA may be ... effectively arguing, in opaquely technical language, that climate change isn't such a big deal, so the right policy is to do almost nothing.
The story began when several states and environmental groups filed a lawsuit, Massachusetts vs. EPA, to force EPA to regulate greenhouse gases. In 2007 the Supreme Court ruled for the states, ordering EPA to determine whether greenhouse gases harmed the environment and public health. The Bush EPA ran out the clock, saying almost nothing on the subject, but Obama's new EPA administrator, Lisa Jackson, swung rapidly into action. Last April, EPA declared greenhouse gases to be pollutants that endanger public health and welfare, qualifying them for regulation under the Clean Air Act. A proposal was published for comment in September... A final ruling is expected soon.
Buried in the 336-page EPA proposal is a short section on the "social cost of carbon" – the dollar value of all damages caused by emitting one ton of CO2. ... The higher the price, the more it's worth doing to avoid them. That's why the strength of US climate policy may depend on EPA's social cost of carbon.
Every $1 per ton of CO2 is about a penny per gallon of gasoline, so $5 per ton would be a trivial price incentive of 5 cents a gallon. At $50 per ton, or 50 cents a gallon, you'd start to notice. An increase of $500 per ton, or $5 per gallon, would put us in the realm of gas prices in many European countries where people buy smaller cars and use public transportation a lot more than we do.
$500, though, isn't in the running. In the September proposal, EPA offered a range of values from $5 to $56. It sounds to me like the high end was included to mollify critics, while the low end is what EPA's economists prefer.
How could US climate policy shrink down to a mere nickel per gallon of gas? There are three steps in the construction (or constriction) of EPA's social cost of carbon estimates; each of them draws on the narrowest and most dated version of climate economics. (For details, see my comments on the proposal.)
First, EPA only considers peer-reviewed economics articles – specifically, only the latest estimates from three simple models... The peer review criterion excludes the Stern Review, the massively researched, widely discussed study commissioned by the British government. Stern's social cost of carbon estimate was $85 per ton, well above EPA's recommendations. The focus on three models erroneously suggests that they represent the state of the art. In fact, each of the three contains hidden biases which serve to minimize climate damages...
Second, EPA considers discount rates of 3% and 5% for future damages. EPA's proposal quotes, but ignores, an Office of Management and Budget recommendation to consider discount rates below 3% for intergenerational analyses. EPA cites five academic sources..., four of which recommend or use rates of 2% or lower. The lower the discount rate, the greater the weight of future damages, and the higher the social cost of carbon will be.
Finally, EPA mentions but fails to incorporate recent research by Harvard economist Martin Weitzman on catastrophic climate risks. As Weitzman demonstrates, the value of reducing catastrophic risk can, technically speaking, be infinite...
Controlling climate change is an experiment that we only get to try once. To have a good chance at a happy outcome, we'll need to start with a much bigger number for the social cost of carbon.
[You can follow climate economics on Public Goods, the new blog just launched by my colleague Liz Stanton.]


links for 2010-02-23






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