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August 7, 2012

Latest Posts from Economist's View


Latest Posts from Economist's View


Posted: 02 Aug 2012 12:33 AM PDT
Republicans tell us that tax cuts promote economic growth. But the evidence doesn't support this. As Paul Krugman says:
Remember how the economy tanked after Clinton raised taxes? Remember how great things were after Bush cut them? Oh, wait.
But the evidence is much more favorable to something the Democrats favor, increasing opportunity:
Equal Opportunity and Economic Growth,  by Tim Taylor: A half-century ago, white men dominated the high-skilled occupations in the U.S. economy, while women and minority groups were often barely seen. Unless one holds the antediluvian belief that, say, 95% of all the people who are well-suited to become doctors or lawyers are white men, this situation was an obvious misallocation of social talents. Thus, one might predict that as other groups had more equal opportunities to participate, it would provide a boost to economic growth. Pete Klenow reports the results of some calculations about these connections in "The Allocation of Talent and U.S. Economic Growth," a Policy Brief for the Stanford Institute for Economic Policy Research. ...
Klenow can ... estimate how much of U.S. growth over the last 50 years or so can be traced to greater equality of opportunity, which encouraged many in women and minority groups who had the underlying ability to view it as worthwhile to make a greater investment in human capital.
"How much of overall growth in income per worker between 1960 and 2008 in the U.S. can be explained by women and African Americans investing more in human capital and working more in high-skill occupations? Our answer is 15% to 20% ... White men arguably lost around 5% of their earnings, as a result, because they moved into lower skilled occupations than they otherwise would have. But their losses were swamped by the income gains reaped by women and blacks."
At least to me, it is remarkable to consider that 1/6 or 1/5 of total U.S. growth in income per worker may be due to greater economic opportunity. In short, reducing discriminatory barriers isn't just about justice and fairness to individuals; it's also about a stronger U.S. economy that makes better use of the underlying talents of all its members.
Posted: 02 Aug 2012 12:30 AM PDT
Mohamed El-Erian:
America's Constrained Choice, by Mohamed A. El-Erian, Commentary, Project Syndicate: The conventional wisdom about the November presidential election in the United States is only partly correct. Yes, economic issues will play a large role in determining the outcome. But ... whether President Barack Obama or Mitt Romney prevails in November, the next president will be constrained by the twin need for urgent economic stabilization and longer-term reforms. And, with headwinds from Europe and a synchronized global slowdown, the candidates will have no choice but to pursue, at least initially, similar economic policies to restore dynamic job creation and financial stability. ...
But this does not mean that there is no scope for differences..., each economic decision will be accompanied by the need for social judgment – whether explicit or, more likely, implicit – regarding its distributional impact. ...
This is not really an election about such hotly-debated issues as outsourcing, tax increases versus entitlement reforms, government control of production versus unfettered private sector activity, or job creators versus free riders. It is much more about the accompanying concepts of social fairness, entitlement, equality and, yes, standards of behavior for a rich and civilized society.
This is an election about social responsibility – a society's obligation to support those who are struggling, through no fault of their own, to find jobs and make ends meet. It is about protecting the most vulnerable segments of society, including by providing them access to proper health coverage. It is about reforming an education system that fails America's young people (and about providing appropriate retraining to those who need it). Among the numerous issues of fairness and equality, it is about the rich giving back to a system that has brought them unimaginable wealth.
It is here where the differences between Obama and Romney are important. The sooner the campaign debate pivots to this, the greater the probability that Americans will make a more informed choice...
I wish the election was really about these things (with war and civil liberties added to the list).
Posted: 02 Aug 2012 12:24 AM PDT
Jared Diamond says Mitt Romney "misrepresented my views" and "oversimplified the issue" of why some countries are rich and others are poor:
Romney Hasn't Done His Homework, by Jared Diamond, Commentary, NY Times: Mitt Romney's latest controversial remark, about the role of culture in explaining why some countries are rich and powerful while others are poor and weak, has attracted much comment. I was especially interested in his remark because he misrepresented my views and, in contrasting them with another scholar's arguments, oversimplified the issue.
It is not true that my book "Guns, Germs and Steel," as Mr. Romney described it in a speech in Jerusalem, "basically says the physical characteristics of the land account for the differences in the success of the people that live there. There is iron ore on the land and so forth."
That is so different from what my book actually says that I have to doubt whether Mr. Romney read it. ... (As I learned this week, Mr. Romney also mischaracterized my book in his memoir, "No Apology: Believe in America.")
That's not the worst part. Even scholars who emphasize social rather than geographic explanations — like the Harvard economist David S. Landes, whose book "The Wealth and Poverty of Nations" was mentioned favorably by Mr. Romney — would find Mr. Romney's statement that "culture makes all the difference" dangerously out of date. In fact, Mr. Landes analyzed multiple factors (including climate) in explaining why the industrial revolution first occurred in Europe and not elsewhere. ...
That is not to deny culture's significance. Some countries have political institutions and cultural practices — honest government, rule of law, opportunities to accumulate money — that reward hard work. Others don't. ... But institutions and culture aren't the whole answer...
Mitt Romney may become our next president. Will he continue to espouse one-factor explanations for multicausal problems, and fail to understand history and the modern world? ...
Acemoglu and Robinson disagree with Diamond about the origins of inequality and prosperity, see here and here, but they agree that Romney has this wrong.
Posted: 02 Aug 2012 12:06 AM PDT
Posted: 01 Aug 2012 05:31 PM PDT
One more from Tim Duy:
Manufacturing Update, by Tim Duy: This morning's ISM manufacturing report was a disappointment with the sector posting a second consecutive modest contraction:
Ism1
The new orders index stabilized:
Ism3
but the weight of the global slowdown remains evident in export orders, which extended June's decline:
Ism4
Slowing orders growth is having an impact on employment growth:
Ism2
Still, the employment index remains above 50; traditionally, readings below 50 are associated with a response from the Federal Reserve. This remains one of the indicators arguing for expecting the Fed will continue to stand pat on policy.
Notice that the new import orders index fell sharply:
Ism5
We are once again flirting with that expansion/contraction line. I interpret this as indicative that the external slowdown is increasingly feeding through to the domestic economy. Not enough yet to trigger a recession, but enough to keep a lid on growth. And that by itself is worrisome given existing anemic growth and the high level of unemployment.
Bottom Line: The global manufacturing slowdown is increasingly washing up on US shores, but obviously not enough to prompt the Fed into action. Unfortunately, the risks still seems to remain clearly on the downside, which means that when and if the Fed moves, they will certainly be behind the curve.
Posted: 01 Aug 2012 01:55 PM PDT
Tim Duy:
First Policy Disappointment of the Week, by Tim Duy: The Federal Reserve offered no additional easing at the conclusion of their two-day meeting, disappointing market participants who increasingly came to expect fresh monetary action. The Wall Street Journal is trying to keep hope alive:
The U.S. Federal Reserve signaled more strongly it will take new steps as needed to boost the economy, but held back from immediately starting a new round of bond buying or taking other actions on Wednesday.
Fed officials flagged intensifying concerns over the economic outlook and gave a stronger indication they are moving closer to taking further action as they continue to monitor the fragile recovery. A string of disappointing jobs reports, a sharp slowdown in second-quarter growth and a softening in inflation have fanned expectations that the Fed may step in later this year with new stimulus for the economy.
Maybe next meeting, maybe not. I get the sense that the WSJ's contacts are on the dovish side of late, given the frequent stories that suggest the Fed is about to do more, in contrast to actual Fed inaction. This dates back to at least the story of "sterilized" QE this spring. While in the past, I have said to ignore the hawks with regards to monetary policy, now I am thinking you need to ignore the doves as well. It seems that both camps are caught up in the short-run fluctuations, with the hawks gaining ground on the upswing, and the doves on the downswing, but neither camp can make any traction when year-over-year growth continues to track around 2%:
Gdp2
Of course, one can make the argument that even stable average growth is not enough, and demands more monetary attention. This seems to be the argument of the doves, although they do not appear to be making it as forcefully inside the Fed as they do in public venues. But neither hawks or doves matter much at this point. Federal Reserve Chairman Ben Bernanke is driving this train. He can bring the middle to the doves if he wanted to. But he doesn't want to; he is a center-hawk policymaker. You get the sense that although Bernanke says the Fed can do more, he really believes what they can do is largely ineffective at this point other than increasing inflation risks. And if they have any effect, they need to be reserved for a clear economic calamity.
As for September, it is data dependent. But we need to see some substantially weaker data. The last six months seems to have proved beyond a shadow of a doubt that the bar to more QE is much higher than could be inferred from the public comments of dovish policymakers.
Posted: 01 Aug 2012 12:26 PM PDT
Here's my reaction to the Fed's decision to leave policy unchanged:
The Fed is worried, but leaves policy on hold
Very disappointing.
Posted: 01 Aug 2012 10:34 AM PDT
Mitt Romney is finally admitting what he said about culture:
Mitt Romney caused a stir among Palestinians earlier this week when he suggested culture plays a role in the Palestinian Authority's economic shortfalls. ...[Palestinians called the remark ignorant and unfair, pointing out that Mr. Romney didn't address their lack of sovereignty and limitations enforced by Israeli military authorities]
He reversed course in an interview with Fox News Tuesday and denied making such a comment, saying, "I'm not speaking about it–did not speak about the Palestinian culture or the decisions made in their economy. That's an interesting topic that deserves scholarly analysis, but I actually didn't address that."
Well it appears Mr. Romney has changed his mind again because in an opinion piece in the conservative National Review Online, the Republican reversed course and owned up to the comments he made. ...
But while he may have owned up to the remarks, what he said is wrong:
Mitt, Jared and David, by Daron Acemoglu and James Robinson: ...Mitt Romney..., wading into the debate about the origins of inequality and prosperity around the world...:
I was thinking this morning..., you see the G.D.P. per capita, for instance, in Israel which is about $21,000, and compare that with the G.D.P. per capita just across the areas managed by the Palestinian Authority, which is more like $10,000 per capita, you notice such a dramatically stark difference in economic vitality.
He continues:
Culture makes all the difference. And as I come here and I look out over this city and consider the accomplishments of the people of this nation, I recognize the power of at least culture and a few other things. One, I recognize the hand of Providence in selecting this place. 
Mitt Romney also identifies the origins of his thinking as David Landes's The Wealth and Poverty of Nations and Jared Diamond's Guns, Germs and Steel (though presumably not the origin of his numbers, which are incorrect; the gap between per capita in Israel and West Bank and Gaza is about tenfold).
Well actually, Jared Diamond doesn't say much about culture. ... In fact his theory would predict that Israelis and Palestinians should have identical levels of prosperity. ... Mitt Romney is instead taking his cue from David Landes. But as we show in Why Nations Fail, cultural differences cannot explain differing levels of prosperity. ... This is surely the case between North and South Korea, for example. After all, does Mitt and David think that there were huge cultural differences between the north and the south of the 38th parallel before the separation of Korea into two?
Of course the difference between Israel and Palestine is not the same as the two Koreas. It was created by the migration of Jewish people, mostly after World War II. Many came from much more developed parts of the world... They brought more advanced technologies and high levels of human capital... As Maristella Botticini and Zvi Eckstein point out in their book The Chosen Few: How Education Shaped Jewish History, the origins of these very high human capital levels are in the historical adoption of institutions in Jewish society. This is where the roots of Isreal's current prosperity lie. They have further been strengthened by Israel's integration into the world economy...
Why hasn't this prosperity spilled over to the Palestinians since the British left in 1948? A definitive answer would need to be based on much more research, but a plausible one comes from the reaction of Saeb Erekat, an aide to President Mahmoud Abbas of the Palestinian Authority, to Mitt´s remarks:
this man doesn't realize that the Palestinian economy cannot reach its potential because there is an Israeli occupation.
It seems to us that Mr. Erekat, not Mitt Romney, has the right idea.
We end this by agreeing with what Sandeep Baliga and Jeff Ely say on their blog. Mitt should do some more reading.

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