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August 7, 2012

Latest Posts from Economist's View

Latest Posts from Economist's View

Posted: 22 Jun 2012 02:07 AM PDT
What's really behind the push to privatize government services:
Prisons, Privatization, Patronage, by Paul Krugman, Commentary, NY Times: Over the past few days, The New York Times has published several terrifying reports about New Jersey's system of halfway houses — privately run adjuncts to the regular system of prisons. ... The horrors described are part of a broader pattern in which essential functions of government are being both privatized and degraded. ...
It's a terrible story. But ... you really need to see it in the broader context of a nationwide drive on the part of America's right to privatize government functions... What's behind this drive?
You might be tempted to say that it reflects conservative belief in the magic of the marketplace.... And that's certainly the way right-wing politicians like to frame the issue.
But if you think about it even for a minute, you realize that the one thing the companies that make up the prison-industrial complex ... are definitely not doing is competing in a free market. They are, instead, living off government contracts. There isn't any market here, and there is, therefore, no reason to expect any magical gains in efficiency.
And, sure enough, despite many promises that prison privatization will lead to big cost savings, such savings ... "have simply not materialized." ...
So what's really behind the drive to privatize prisons, and just about everything else?
One answer is that privatization can serve as a stealth form of government borrowing... We hear a lot about the hidden debts that states have incurred in the form of pension liabilities; we don't hear much about the hidden debts now being accumulated in the form of long-term contracts with private companies hired to operate prisons, schools and more.
Another answer is that privatization is a way of getting rid of public employees, who do have a habit of unionizing and tend to lean Democratic in any case.
But the main answer, surely, is to follow the money. Never mind what privatization does or doesn't do to state budgets; think instead of what it does for both the campaign coffers and the personal finances of politicians and their friends. ...
Now, someone will surely point out that nonprivatized government has its own problems of undue influence, that prison guards and teachers' unions also have political clout, and this clout sometimes distorts public policy. Fair enough. But such influence tends to be relatively transparent. ...
The point, then, is that you shouldn't imagine that what The Times discovered about prison privatization in New Jersey is an isolated instance of bad behavior. It is, instead, almost surely a glimpse of a pervasive and growing reality, of a corrupt nexus of privatization and patronage that is undermining government across much of our nation.
Posted: 22 Jun 2012 01:35 AM PDT
I met with Gabriel Demombynes, a World Bank economist stationed here in Nairobi, this evening. Recently, he pointed out that there was a fundamental flaw in the way in which progress in the Villages is evaluated. Essentially, the evaluation looked at changes in measures of performance over time, but it did not make comparisons to any type of baseline. For example suppose an evaluation finds that the percentage of people engaging in a negative behavior falls from 20% to 10%. If the percentage of people doing this falls, that's a good thing, right? Yes, but it doesn't mean that the Villages should necessarily pat themselves on the back. To see why, suppose that in other comparative villages -- which are not Millennium Villages -- the percentage also falls from 20% to 10%, or perhaps even lower. Now things don't look as good. Measured against the baseline, performance has stayed the same, or even worsened.
That's essentially what Demombynes and his co-authors showed in their academic paper on this topic. The measures for Kisumu in the report are very highly correlated with measures at the national level. The response from Village supporters such as Jeff Sachs was to say that the evaluation wasn't the actual evaluation, and the real one would come soon. But when the second evaluation arrived, it's major finding that infant mortality had fallen significantly in the Villages, was subject to similar questions.
Gabriel, via an email, points to further discussions of these points:
Have a great time in Kisumu. An hour or so away is Sauri, the first Millennium Village. I've had a long back-and-forth with Jeff Sachs about the project's evaluation. Here's an early blog post I wrote about my visit to Sauri: More recently I wrote this blog post which led to the MV project retracting its major finding in a paper in Lancet: : 
The retraction on the MVP website: 
The retraction in the Lancet: 
…from the Lancet editors… my letter with others published in the Lancet: 
Being here emphasizes how big the problem is, and how important it is to get these measures correct.
Posted: 22 Jun 2012 12:33 AM PDT
Tim Duy:
What Fiscal Union Means, by Tim Duy: I was looking over FT Alphaville's recent summary of Nomura's Richard Koo's work on the root cause of imbalances in the Eurozone.  The main thrust of the thesis is that the ECB held interest rates low last decade to support Germany because Maastrict rules forbid a fiscal policy solution to Germany's woes.  But rates were excessively low for the periphery, triggering the emergence of bubbles and unsustainable imbalances. Basically, the root of the problem was a one-size-fits-all monetary policy worsened by an inflexible fiscal structure.
So far so good.  What caught my eye was this quote from Koo:
Unfortunately there have been growing calls in the eurozone for fiscal union. But that would only make the problem worse by forcing the same fiscal policy on all countries, regardless of whether they were in a balance sheet recession.
This is true with regards to what is emerging as "fiscal union" in the Eurozone, largely a commitment to strict fiscal targets.  This, however, is not how I would define a fiscal union.  When I use the term fiscal union, I am thinking of a centralized budget authority capable of making automatic internal transfers.
Paul Krugman has provided some very good examples of the importance of such internal transfers in the United States.  For example, see his discussion of Texas and the Savings and Loan crisis:
The cleanup from that crisis cost taxpayers about $125 billion (pdf), back when that was real money. As best I can tell, around 60 percent of the losses were in Texas (pdf). So that's around $75 billion in aid — not loans, outright transfer.
Texas GDP was about $300 billion in 1987. So this was equivalent to giving — not lending, not even taking an equity stake — Spain 25 percent of its GDP to bail out its banks.
And in the US it wasn't even treated as an interstate political issue.
Also, see his Florida example:
So as I read it, between falling tax payments without any corresponding fall in federal benefits, plus safety-net aid — not counting Medicaid, which would make the number even bigger — Florida received what amounted to an annual transfer from Washington of $31 billion plus, or more than 4 percent of state GDP. That's a transfer, not a loan. And it's very big.
These are examples of how assymetric shocks are cushioned within a fiscal union.  Transfers, not loans.  For the Eurozone to be successful, they need this kind of fiscal infrastructure.  Unfortunately, I think they are light-years away from such a union, and what they think is a fiscal union - strict deficit limits - is something very different, a union that as Koo says will make conditions worse, not better.  One of the many reasons I remain a Euroskeptic.
Posted: 22 Jun 2012 12:30 AM PDT
Robin Wells and Paul Krugman
Getting Away with It, by Robin Wells and Paul Krugman: In the spring of 2012 the Obama campaign decided to go after Mitt Romney's record at Bain Capital, a private-equity firm that had specialized in taking over companies and extracting money for its investors—sometimes by promoting growth, but often at workers' expense instead. Indeed, there were several cases in which Bain managed to profit even as it drove its takeover targets into bankruptcy.
So there was plenty of justification for an attack on Romney's Bain record, and there were also clear political reasons to make that attack. For one thing, it had worked for Ted Kennedy, who used tales of workers injured by Bain to good effect against Romney in the 1994 Massachusetts Senate race. Also, to the extent that Romney had any real campaign theme to offer, it was his claim that as a successful businessman he could fix the economy where Obama had not. Pointing out both the many shadows in that business record and the extent to which what was good for Bain was definitely not good for America therefore made sense.
Yet as we were writing this review, two prominent Democratic politicians stepped up to undercut Obama's message. First, Cory Booker, the mayor of Newark, described the attacks on private equity as "nauseating." Then none other than Bill Clinton piped up to describe Romney's record as "sterling," adding, "I don't think we ought to get into the position where we say 'This is bad work. This is good work.'" (He later appeared with Obama and said that a Romney presidency would be "calamitous.")
What was going on? The answer gets to the heart of the disappointments—political and economic—of the Obama years. ...[continue reading]...
Posted: 22 Jun 2012 12:24 AM PDT
Tim Taylor:
McWages Around the World, by Tim Taylor: It's hard to compare wages in different countries, because the details of the job differ. A typical job in a manufacturing facility, for example, is a rather different experience in China, Germany, Michigan, or Brazil. But for about a decade, Orley Ashenfelter has been looking at one set of jobs that are extremely similar across countries--jobs at McDonald's restaurants. He discussed this research and a broader agenda of "Comparing Real Wage Rates" across countries in his Presidential Address last January to the American Economic Association meetings in Chicago. The talk has now been published in the April 2012 issue of the American Economic Review... But the talk is also freely available to the public here as Working Paper #570 from the Princeton's Industrial Relations Section.  ...

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

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

Ashenfelter emphasizes in his remarks how real wages can be used to assess and compare the living standards of workers. I would add that these measures show that the most important factor determining wages for most of us is not our personal skills and human capital, or our effort and initiative, but whether we are using those skills and human capital in the context of a a high-productivity or a low-productivity economy.
There's also a lesson here about the high incomes of self-anointed "job creators" and innovators. Ideas alone are not enough -- it matters immensely where you live.
Posted: 22 Jun 2012 12:06 AM PDT
Posted: 21 Jun 2012 08:21 AM PDT
We are visiting with Barack Obama's step-grandmather, Mama Sarah Obama, to talk about her work helping orphans and the elderly. If the iPhone video turned out, I may post a few of her repsonses to our questions.
Obama 096
Obama 075
Obama 077

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