Vox Baby

Moving to Capital Gains and Games

2008-03-24T09:31:00.004-04:00

After several years of blogging on my own at Vox Baby, I am joining Stan Collender and Pete Davis over at the newly redesigned Capital Gains and Games blog. Stan and Pete are two of the sharpest people writing about fiscal policy and financial matters, and so you should expect triple the fun at half the price.

The new feed is http://www.capitalgainsandgames.com/rss.xml, so set your bookmarks and feed readers accordingly.

Vox Baby will remain intact, so there's no need to change any links.

See you over at Capital Gains and Games.

Pass the Spittoon, Mortgage Meltdown Edition

2008-03-22T13:51:00.000-04:00

I confess: I get annoyed beyond measure when I read articles like this one from Alan Zibel and J.W. Elphinstone of the Associated Press, which ran in my local paper this week. It manufactures drama where none is warranted. Here's the hook:

Just when consumers and the U.S. economy need banks to lend more freely, the mortgage industry is making it harder to borrow — even for those with good credit.

Mortgage insurers, whose backing is required for borrowers who can't afford the traditional 20 percent down payment on a home, have already flagged nearly a quarter of the nation's ZIP codes where they refuse to insure some home loans.

I'm already annoyed in three ways, and it's just two sentences in:

Consumers and the U.S. economy do NOT need banks to lend more freely. Banks lending too freely is what got us into the current mess.
The traditional 20 percent down payment for a home exists in part because mortgages are nonrecourse loans--the property is the only security the lender has in the transaction. While some reductions of that number may be appropriate, it was the abandonment of sensible lending standards that got us into the current mess.
The word "some" in the last sentence smuggles in quite a lot. If the meaning of "some" were made plain early in the article, we would stop reading and disregard the article as not worth our time.

We do find out what "some" means later on in the article:

In recent weeks, mortgage insurers have flagged more than 9,600 ZIP codes in at least 34 states where they won't insure certain types of home loans — those for investment properties or second homes, those with riskier adjustable-rate or interest-only mortgages, or for buyers making down payments of less than 3 percent.

"Some" home loans are now revealed to be loans that are extremely risky--loans whose pervasive use are what got us into the current mess--in areas where house prices are declining the most. So a shorter version of the article is that mortgage insurers are now not willing to insure loans that they shouldn't have been insuring earlier. That this is a good thing has completely escaped the notice of the two authors.

If This Meltdown Were a Movie

2008-03-18T11:36:00.000-04:00

Ben Bernanke would be played by Harvey Keitel, reprising his role as Winston Wolf if we're lucky or Victor the Cleaner if we're not.

The responsibility for this financial meltdown does not rest with him. It was his predecessor, Alan Greenspan, whose stewardship of monetary policy set the stage for the debt-laced consumption rampage of the American consumer and the leverage-soaked financial carnival of mortgage lenders and investment bankers. (If you're keeping score at home, Greenspan still doesn't get it.) Based on his performance so far, I'm nominating Ben Bernanke to the All-Madden team of central bankers.

Bernanke has two broad categories of options:

1) Damned if He Doesn't

Bear Stearns just collapsed--it cannot pay its creditors. What was a liability to Bear Stearns was an asset to some other investor. That asset now has no value. If the other investor was also a financial institution, then it has fewer assets relative to its liabilities and is now less solvent. It may not be able to pay all of its creditors. And so on, all through the leveraged financial sector.

The Fed can act to prevent or mitigate this cascade. Looking at the prospect of contagion, the Fed has acted on two fronts. It has lowered short-term interest rates to prop of asset values across the economy. As discounting for risk has increased, discounting for time has decreased. The Fed has also intervened in specific episodes, directly backstopping private actors like JP Morgan who have stepped in to assume the liabilities of the likes of Bear Stearns.

Bernanke can't sit idly while large financial institutions crumble. There is a perception, if not the reality, of too much collateral damage in the process.

2) Damned if He Does

The Fed is supposed to be the economy's lender of last resort. If a solvent but illiquid bank needs short-term cash and cannot find it on the private market, the Fed should make credit available. Without this backstop, financial institutions would be less willing to take leveraged positions in support of beneficial economic activity.

But sometimes financial institutions take these leveraged positions in support of exceedingly risky activities. This is particularly true when they hold a put option to sell the activity to someone else if its value falls. Any intervention by the Fed extends that put option to would-be speculators, if not today, then certainly in the future.

You can call this Samwick's Law if you like:

If an institution is deemed too big to fail, then it is only a matter of time before it finds a way to get big and fail.

When you provide insurance against outcomes that a financial institution cannot control, you distort incentives on the activities it can control. Specifically, they take on more risk. To address the immediate problem, Bernanke invites the next one. Snotty bloggers two or five or ten years from now may be hanging the next crisis--runaway inflation, a persistent liquidity trap, even more spectacular bubbles in financial markets--around Ben's neck.

The task of finding the least worst way to do the wrong thing is a thankless one, but Bernanke is persevering admirably. Let's see what he does at 2:15 today.

Life is unfair, and so is the bailout

2008-03-17T19:36:00.001-04:00

My commentary on the Bear Stearns bailout aired on NPR's Marketplace this evening. Here's the teaser:

The collapse of Bear Stearns prompted the Fed to once again cut interest rates. Commentator and economist Andrew Samwick says whether you call it a bailout or a rescue, all Americans have a stake in the outcome.

And here's an excerpt:

Two questions immediately come to mind: Is this fair, and should we care? The question of fairness is easier to answer -- of course it isn't fair. Bear Stearns' fall from grace was its own fault. It was the high-wire act in a leverage-soaked financial carnival.

And yet those in the corridors of power have intervened on the perpetrators' behalf. Some people call this "socialism for the rich." Even that's too generous -- under socialism, the rich would be paying higher taxes during the boom times. No, "fairness" is not a word that describes this bailout.

So life is unfair... Does that mean we should care?

Enjoy!

Samwick Media Watch

2008-03-17T15:12:00.000-04:00

I'll be on NPR's Marketplace this evening, putting in my 1% of a share of Bear Stearns stock on the goings-on in financial markets. The theme--is this fair and why should you care?

Find your local station here.

Gaps and Redundancies

2008-03-16T09:44:00.000-04:00

There is some irony to be found in the title of Tamar Levin's excellent article in Friday's edition of The New York Times, "Report Urges Changes in Teaching Math." To do anything other than what the report recommends would hardly qualify as teaching math. Here's the crux of the matter:

Closely tracking an influential 2006 report by the National Council of Teachers of Mathematics, the panel recommended that math curriculum should include fewer topics, spending enough time to make sure each is learned in enough depth that it need not be revisited in later grades. That is the approach used in most top-performing nations, and since the 2006 report, many states have been revising their standards to cover fewer topics in greater depth.

It was the frequent revisiting of earlier topics in later grades, with little increase in the sophistication of the approach, that drove me crazy in primary and secondary school. And it wasn't just math--it was virtually every subject. And despite this revisiting in later grades, students' achievements lag those in other countries. So much redundancy in instruction, and yet so many gaps in knowledge. That's strong evidence of the possibility of making gains in outcomes without additional resources.

There is more of interest in the article, particularly in this passage:

After hearing testimony and comments from hundreds of organizations and individuals, and sifting through a broad array of 16,000 research publications, the panelists shaped their report around recent research on how children learn.

For example, the report found it is important for students to master their basic math facts well enough that their recall becomes automatic, stored in their long-term memory, leaving room in their working memory to take in new math processes.

“For all content areas, practice allows students to achieve automaticity of basic skills — the fast, accurate and effortless processing of content information — which frees up working memory for more complex aspects of problem solving,” the report said.

Dr. Faulkner, a former president of the University of Texas at Austin, said the panel “buys the notion from cognitive science that kids have to know the facts.”

We needed cognitive science to figure that out? There was some competing notion, masquerading as an educational philosophy, that suggested that kids did not have to know the facts? The recommended approach all sounds very familiar, if not widely utilized.

Read the whole thing.

Bair 1, Abernathy 0

2008-03-15T09:37:00.001-04:00

We'll give FDIC Chairman Sheila Bair credit for this bit of lonely prudence in a financial sector gone mad:

"There are significant uncertainties regarding our projections, and given the challenges facing the banking industry and the likelihood of more bank failures, I believe preparedness should be our overriding concern," said Sheila C. Bair, FDIC Chairman. "Because we are anticipating more difficult times, it would be prudent to continue to build the deposit insurance fund at the pace allowed by the current rates and the remaining credits. As we build up the insurance fund, banks and thrifts should be taking steps to bolster their capital and reserves.

This was her very sensible justification of the FDIC's board's decision to keep the assessment rates charged to insured banks and savings associations unchanged for 2008. And into the fray jumps Wayne Abernathy, now the executive vice president at the American Bankers Association, who is quoted as follows:

The decision today could mean that as much as $20 billion or more of bank services will now not be available to invest in new jobs and new businesses this year, precisely when new jobs and new business investments are most needed.

So, according to this logic, it makes sense to blame the FDIC for its prudence rather than the worst offenders represented by the ABA for their recklessness for the absence of $20 billion dollars from the banking system in the near term.

It is amazing what a change of employer and address can do.

Are We in a Recession?

2008-03-14T12:11:00.000-04:00

The honest answer is that we cannot provide an answer in real time.

The rule of thumb is that a recession is two or more consecutive quarters of negative growth in real GDP. The latest estimate of 4th quarter GDP was 0.6%. Not negative, but certainly not great. So to say that we are in a recession, according to this rule of thumb, is to say that we have knowledge that the current quarter's growth rate is negative and either or both of the following:

4th quarter GDP growth from 2007 will be revised below zero when the next estimate is released on March 27.
2nd quarter GDP growth from 2008 will be negative.

I don't see how anyone could be sure of this. The starting point for 2nd quarter GDP itself is not known and will not be officially estimated in advance form until late April. There is already considerable monetary and fiscal stimulus in the pipeline that will begin to have an impact over the second quarter.

Then NBER has a broader defintion of a recession than the rule of thumb:

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion.

So to assert that we are in a recession is a claim that a peak has occurred, that the subsequent decline is significant, that the decline will last more than a few months, and that the decline will be evident in many if not all of the indicators listed in the definition. What do the indicators say?

The Real GDP growth has been positive thus far according to official estimates (as noted above).
Real personal income less current transfers, with data available through January, peaked in September 2007 (see Table 1 for income and transfers and Table 9 for the price deflator) but has fallen only 0.3% since then. We get February data on March 28.
Employment peaked in December 2007 and has fallen by less than 0.1% over the subsequent two months.
Industrial production fell from September to October 2007 and then rebounded to achieve the same index value in January as it had in September. We'll learn about the February value on Monday.
Wholesale-retail sales. Wholesale trade fell slightly between November and December but more than made up the decline in January. (February data are released on April 9.) Retail sales fell between January and February.

Each of these indicators seems to be some version of flat. It is premature to be making pronouncements like this these, from Congressman Frank and Senator Dodd:

“We are in a recession now that has an unusual cause. It is not your usual cyclical problem… This is a structurally caused recession,” Mr. Frank told reporters at a press conference. Mr. Dodd, also appearing at the press conference, had an even gloomier take.
“This is the worst housing crisis in our lifetime. We are in a recession. People want to talk about ‘Are we?’ — we’re in one. The question is: how deep is this going to go? How long lasting will it be? The underlying economic conditions in our country are not good for resolving this. Almost every other recession we can talk about lasted eight months. When you’ve got deficits running as high as they are — The value of the dollar… inflation going up, unemployment going up, these are not great underlying economic circumstances to respond to the situation.”

They are right that the present period is different from past recessions--first, because we cannot assert that it is a recession, and second, because we have already stretched our policy responses just about as far as they will go.

Governor Spitzer, We Hardly Knew You

2008-03-12T14:15:00.001-04:00

My first reaction to the news of Eliot Spitzer's demise was that I felt bad for his three daughters, for reasons discussed here. My second reaction was that I felt bad for his wife for having to stand there and face the public glare as well. I presume that she did that for her daughters if not for her husband. It is the adultery embedded in the transaction, particularly by a father of teenage daughters in the public eye, that most disturbs me.

But that's a personal judgment and a matter that may be relevant in a divorce proceeding. It doesn't necessarily have to guide public policy. What of the transaction itself, if it did not involve adultery? For a public official, the big danger is that Spitzer's desire to keep the activity secret would subject him to blackmail by those in on the secret. With the secret out in the open, there's no longer any danger in that happening, even if he hadn't resigned. Perhaps we need a disclosure policy for elected officials?

What of the transaction itself, if it did not involve adultery or a public official? Now we get to find out whether I'm a libertarian or not, I suppose. Here is a libertarian's case in defense of legalized prostitution. Here's another defense of legalized prostitution based on strengthening the legal status of women who currently engage in illegal prostitution.

What does the economist in me say? Despite the rather high price paid by Governor Spitzer ($4300 per hour), prostitution--particularly if legalized--lowers the cost to the man of obtaining more and more varied sexual activity from women. Who is made better off by this change in price?

Men who partake of prostitutes (buyers).
Women who engage voluntarily in prostitution but not other types of sex (sellers).
Men who do not partake of prostitutes but who face less competition in finding sexual partners from the men who are now content with prostitutes (buyers of substitutes).

Who is made worse off?

Women who do not engage in prostitution (sellers of substitutes)

The last one is a pecuniary externality. Though not a threat to economic efficiency, I'm not enough of a libertarian to ignore it.

Gridlock on Electric Highways

2008-03-11T08:58:00.000-04:00

When I suggested the need for a capital budget, these were the sort of problems I wanted to avoid (this one in my own backyard):

CONCORD, N.H.—Northern New England is turning to the sun, wind and waste wood for clean, renewable power, but there's a serious problem: the threat of gridlock on electricity "highways."

A prime example is New Hampshire's northern Coos County, where there are proposals to build renewable energy plants with roughly 460 megawatts of capacity -- two-thirds of the proposed renewable projects in the state -- to run over a transmission line that can only handle 100 megawatts.

The bottleneck is in Whitefield, the end of a transmission loop that runs through Berlin and Lost Nation.

Projects are approved on a first-come, first-served basis, and the first in line, Noble Environmental Power, stands ready to claim the entire 100 megawatts in 2009 for a wind park. That will leave the other proposals to wither and die if investors, electricity consumers or the government don't spend $200 million to upgrade 100 miles of line.

Even if the money were available now, the upgrade could take six years to complete, presenting investors with another hurdle -- time.

Last month, backers of a proposed 70-megawatt biomass plant in Groveton announced they had had enough, at least for now. Joshua Levine, project developer for Tamarack Energy, a partner in North Country Renewable Energy's plant, said the project is on hold despite the $1 million already spent on it.

The plant would burn wood chips, low-grade wood from logging operations and other clean wood readily available in the economically stressed region.

If we intend to bring new sources on line, we need to upgrade capacity. It's crazy to have $150 billion for economic stimulus on things we don't need and yet be cash starved on projects for which we've articulated a need.

Don't Blame this on Math

2008-03-10T11:40:00.001-04:00

In yesterday's New York Times, we are told "Math Suggests College Frenzy Will Soon Ease." Actually, I don't get the math in a couple of places. Let's start here:

Projections show that by next year or the year after, the annual number of high school graduates in the United States will peak at about 2.9 million after a 15-year climb. The number is then expected to decline until about 2015. Most universities expect this to translate into fewer applications and less selectivity, with most students probably finding it easier to get into college.

The article cites projections from the Western Interstate Commission for Higher Education. How can there only be 2.9 million high school graduates per year?

We know from the American Community Survey that in 2006, there were 17.5 million students enrolled in high school and that enrollment rates for those under age 17 are 95% or higher. We also know that only 7% of teens 16-19 are classified as high school dropouts. So we are looking at a graduation number that's in the neighborhood of 17.5*(1/4)*(0.93) = 4.1 million.

So I don't trust the WICHE projections, but it is worth considering the simple population movements. Here is a graph of the number of 18-year olds by year, based on Census projections:

So there is a dip coming up in the population of 18-year olds that will turn back the clock by about 10 years.

Is that a lot or a little? As one example, for the Class of 2010 at Dartmouth, there were 13,938 applicants, of whom 2,186 or 15.7% were admitted. If this were the peak, and we applied the changes in the projections (a drop to 90.7% of the peak), that would boost the admit rate to 15.7/0.907 = 16.9% before it began to fall again. I don't think we'll notice any easing in the frenzy here in Hanover.

CEO Succession

2008-03-09T11:09:00.001-04:00

I was surprised to learn in Good to Great that outside CEOs were not associated with the transition from good companies to great companies. Harvard Business School Professor Joseph Bower picks up on this theme in his recent Marketplace commentary:

What companies really need is what I call in my new book, The CEO Within, an "inside outsider" -- that is, an outstanding inside performer who has retained his or her objectivity. They have energy, ambition and intellectual integrity. They see the magnitude of change needed, and because they are insiders they can move quickly with a real chance of success because they know the people, systems, culture and assets of the company.

Why aren't there more candidates like this available? To begin, a surprising number of companies don't have a real succession process. They treat succession as an uncomfortable event. Managing the development of leaders inside the company requires investment in every aspect of the way the firm is managed: who is recruited, how businesses are organized, how executives are paid and promoted, and how operations are planned and resources allocated. The process requires years, not days, of preparation. Companies need to change their ways on CEO succession or pay a price that goes far beyond the new CEO's compensation package.

At Dartmouth, the Board of Trustees are gearing up for a search for a successor to Jim Wright as the College's president. I wonder if this will have any bearing on the selection of Dartmouth's next president.

No LUV, or Maybe Too Much, from the FAA

2008-03-08T18:13:00.000-05:00

As a longtime flyer of Southwest Airlines, this was not welcome news:

WASHINGTON – The Federal Aviation Administration said Thursday it would fine Southwest Airlines Co. $10.2 million for safety violations that included knowingly flying more than three dozen jets without mandatory inspections for structural damage.

Southwest, which found cracks in the bodies of six of its jets during belated inspections, said safety was never jeopardized.

The fine would be the largest ever levied against an airline, the FAA said.

When Southwest belatedly conducted the inspections, it found cracks in the bodies of six Boeing 737-300s, with the largest measuring 4 inches. Serious fractures can depressurize an aircraft and in 1988 caused an Aloha Airlines jet to rip apart, killing a flight attendant.

The FAA announced the fine a week before congressional investigators were to disclose findings from their own inquiry into Southwest's failure to meet airworthiness directives. That investigation was prompted by information provided by Dallas-based FAA inspectors who said their supervisors allowed the planes to keep flying even after Southwest reported its failure to make the scheduled inspections.

The FAA doesn't come out looking too good, either. Regulatory capture, anyone?

Good Jobs at Good Wages

2008-03-07T13:02:00.001-05:00

I know, the employment report has no good news in it, but this front page story in The New York Times is sure to get some attention. The concept:

Would six-figure salaries attract better teachers?

A New York City charter school set to open in 2009 in Washington Heights will test one of the most fundamental questions in education: Whether significantly higher pay for teachers is the key to improving schools.

The school, which will run from fifth to eighth grades, is promising to pay teachers $125,000, plus a potential bonus based on schoolwide performance. That is nearly twice as much as the average New York City public school teacher earns, roughly two and a half times the national average teacher salary and higher than the base salary of all but the most senior teachers in the most generous districts nationwide.

The school’s creator and first principal, Zeke M. Vanderhoek, contends that high salaries will lure the best teachers. He says he wants to put into practice the conclusion reached by a growing body of research: that teacher quality — not star principals, laptop computers or abundant electives — is the crucial ingredient for success.

“I would much rather put a phenomenal, great teacher in a field with 30 kids and nothing else than take the mediocre teacher and give them half the number of students and give them all the technology in the world,” said Mr. Vanderhoek, 31, a Yale graduate and former middle school teacher who built a test preparation company that pays its tutors far more than the competition.

I would much rather see that, too. At this school, teachers will be paid so well that they'll make more than the principal, an inversion which generated this:

Ernest A. Logan, president of the city principals’ union, called the notion of paying the principal less than the teachers “the craziest thing I’ve ever heard.”

“It’s nice to have a first violinist, a first tuba, but you’ve got to have someone who brings them all together,” Mr. Logan said. “If you cheapen the role of the school leader, you’re going to have anarchy and chaos.”

Randi Weingarten, president of the United Federation of Teachers, called the hefty salaries “a good experiment.” But she said that when teachers were not unionized, and most charter school teachers are not, their performance can be hampered by a lack of power in dealing with the principal. “What happens the first time a teacher says something like, ‘I don’t agree with you?’ ”

Presumably, the principal listens to what the teacher has to say and then makes a decision, which may or may not accommodate the teacher's disagreement. Millions of businesses, and even some educational institutions, operate on this principle. Those that operate in competitive markets don't prosper by ignoring good advice or treating talented employees as if they are inconsequential. And the teacher is not an indentured servant here--"nothing" prevents a teacher dissatisfied with a principal from starting a rival school with better policies.

The Age of Friedman is not dead yet.

The Drop in Labor Force Participation

2008-03-06T09:03:00.000-05:00

Following a comment on yesterday's post, here is an article from the the St. Paul Pioneer Press two years ago discussing voluntary withdrawal from the labor market. The key paragraphs:

So who is dropping out, and why?

Primarily the declines since 2001 are among younger workers ages 16 to 24 and women ages 25 to 45. Proportionally, since the teens account for a small number of workers in the state, women dropouts are mainly driving the changes.

The change with young workers can be more easily explained. Most don’t have to work. When jobs are flush and pay well, more take jobs. If jobs are slim and pay tight, homework and hanging out win out. “If jobs aren’t readily available they are not going to be searching for them and calling themselves in the labor market,” Stinson said.

The reasons why women are leaving are more elusive.

Julie Hotchkiss, a research economist and policy adviser with the Federal Reserve Bank in Atlanta, has studied why women leave the work force.

She found that women with college degrees were less likely to participate in the labor force in 2005 than they were just five years earlier. Women were still getting college degrees at the same rate but the degrees were less of a pull into the labor market.

The increase in Hispanic women, who traditionally are less likely to be in the labor force, is another factor, as is the increase in women with children under age 6. Still, “unobserved” factors that couldn’t be explained, more than anything else, contributed to the reasons why women are dropping out, she said.

Read the whole thing.

What the Unemployment Rate Misses

2008-03-05T18:05:00.001-05:00

In his Economic Scene column in today's New York Times, David Leonhardt discusses the challenges of measuring unemployment and using the unemployment rate to assess the state of the labor market. In a nutshell, we have a fairly low official unemployment rate and yet many people not working. In this excerpt, he focuses on a distinction that his colleague Paul Krugman once glossed over (to much fanfare in my first month of blogging):

There are only two possible explanations for this bizarre combination of a falling employment rate and a falling unemployment rate. The first is that there has been a big increase in the number of people not working purely by their own choice. You can think of them as the self-unemployed. They include retirees, as well as stay-at-home parents, people caring for aging parents and others doing unpaid work.

If growth in this group were the reason for the confusing statistics, we wouldn’t need to worry. It would be perfectly fair to say that unemployment was historically low.

The second possible explanation — a jump in the number of people who aren’t working, who aren’t actively looking but who would, in fact, like to find a good job — is less comforting. It also appears to be the more accurate explanation.

As we discussed briefly then, the BLS does collect measures of unemployment that progressively relax the condition that individuals have to be actively looking for work. Leonhardt characterizes them as "broader but not especially useful." I don't think they should be dismissed so readily. They are found in Table A-12 of the monthly employment report. You can get the historical data here. Let's go to the picture.

The 4 curves are as follows:

Blue: The conventionally measured unemployment rate, currently at 5 percent and low by historical standards. This is the number unemployed divided by the total number in the labor force (employed plus unemployed).

Red: Add people classified as discouraged workers--those who have given a job-market related reason for not currently looking for a job--to the unemployed. The increase is very slight--historically between 0.1 and 0.4 percentage points.

Yellow: Add people classified as marginally attached (beyond being discouraged)--those who currently are not looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. This currently adds 0.8 percentage points to the unemployment rate, which is typical of the full 14 year time period.

Green: Add people classified as employed part time for economic reasons--those who want and are available for full-time work but have had to settle for a part-time schedule. This number is currently 9 percentage points of the labor force (augmented to include those marginally attached or employed part time for economic reasons).

The last measure seems to be a pretty good measure of labor underutilization. What does it tell us about what the conventional unemployment rate misses? In April 2006, the gap between the two shrank to 3.4 percentage points, compared to 4.1 percent today. The latter figure is about the size of the gap that prevailed around the recent peak in the unemployment rate in 2003. The gap was greater than 4.1 percent in most of the months shown prior to 1997. The gap was as narrow as 3 percentage points as the unemployment rate reached its lowest values in 2000.

The more comprehensive measures of labor underutilization are available and are consistent with the story being told in the article, though you have to get to "employed part time for economic reasons" to get much of a gap. I think they would be more "useful" to journalists if journalists chose to report them.

Barry Ritholtz also comments on the story and refers back to a measure of the "augmented unemployment rate," which doesn't include the economic part timers but also doesn't require that those who want a job have actually looked for one. (This information can be calculated from Table A-1 of the monthly employment report.) At present, there are about 5 million who "want a job" among the roughly 80 million who are not in the labor force, or about 6.25 percent. This proportion has stayed around 6 percent for several years.

Grassroots Leaders Like Me

2008-03-05T00:43:00.000-05:00

My latest letter from Tim Morgan began like this:

Dear Friend,

I don't want to believe you've abandoned the Republican Party, but I have to ask . . . Have you given up?

Our records show that we have not yet received your Republican National Committee membership renewal for the critical 2008 presidential election year.

As the Treasurer of the RNC, I know our Party's success depends directly on grassroots leaders like you.

So I am surprised and concerned especially because I know how generously you supported President Bush and the RNC in the past. You helped to advance our vision for America and elect Republicans at all levels of government.

I know other things come up, and perhaps you've just been delayed in renewing your membership. If that's the case, I understand.

But we've not heard from you this year -- and I hope you haven't deserted our Party.

Call me crazy, but I don't think "Have you given up?" is ready to stand toe-to-toe with "Yes We Can" in the general election. To paraphrase Ronald Reagan, I didn't desert the Republican Party, ...

Krugman's Keys to a Landslide Victory

2008-03-03T09:22:00.001-05:00

The phrase "Obama Derangement Syndrome" has entered public usage. It seems to have two strains. The first is adulation for Senator Obama beyond what can be linked to his accomplishments in public office. The second is the more usual strain, irrational dislike, which has to date infected a number of Democrats, but none more publicly than Paul Krugman. He continues his quest to be the poster boy for ODS in his New York Times column today, "Deliverance or Diversion." Stay with this excerpt until the punchline:

But Mr. Obama, instead of emphasizing the harm done by the other party’s rule, likes to blame both sides for our sorry political state. And in his speeches he promises not a rejection of Republicanism but an era of postpartisan unity.

That — along with his adoption of conservative talking points on the crucial issue of health care — is why Mr. Obama’s rise has caused such division among progressive activists, the very people one might have expected to be unified and energized by the prospect of finally ending the long era of Republican political dominance.

Some progressives are appalled by the direction their party seems to have taken: they wanted another F.D.R., yet feel that they’re getting an oratorically upgraded version of Michael Bloomberg instead.

Others, however, insist that Mr. Obama’s message of hope and his personal charisma will yield an overwhelming electoral victory, and that he will implement a dramatically progressive agenda.

The trouble is that faith in Mr. Obama’s transformational ability rests on surprisingly little evidence.

Mr. Obama’s ability to attract wildly enthusiastic crowds to rallies is a good omen for the general election; so is his ability to raise large sums. But neither necessarily points to a landslide victory.

So, in this installment of Krugman's anti-Obama screed, Democrats are supposed to be concerned about Senator Obama winning the nomination because it is not clear that he can secure a landslide victory in the general election. And if they believed him, and thought twice about voting for Senator Obama in the remaining primaries, they would instead vote for Senator Clinton.

Going first to personalities, is it really Krugman's contention that the odds of a Democratic landslide victory are higher with Senator Clinton than with Senator Obama as the nominee? Going next to tactics, is it really Krugman's contention that the odds of a Democratic landslide victory are higher with Senator Obama campaigning to the political left of where he is now? Or that they are higher if he makes partisan rhetoric a more central part of his campaign? If he holds any of these views, then he's got precious little company among rational people in holding them.

I don't doubt that Krugman and many others would be happier if they could implement a more so-called progressive agenda as a result of the 2008 election. But this group does not comprise a majority of the voting public, to say nothing of a landslide majority. Absent that majority, the candidate needs to have appeal beyond the political left.

And, yes, many people -- myself included -- do fault the Republicans of the last several years for the poor state of public policy today. They've had the presidency since 2001 and majorities in Congress over much of that time. To not hold them responsible would be ridiculous. But that does not mean that we would opt for government by a 51% majority in the opposite direction if there is a possibility of something based more on a broad-based, politically centrist consensus. People seeking that consensus will be voting for Senator McCain or Senator Obama.

Bogus Art

2008-03-02T09:09:00.000-05:00

The Los Angeles Times has a story this morning about the revenue loss to the Treasury from overvalued donations of works of art:

An alleged tax-fraud scheme involving donations of overvalued art to four local museums is part of a larger, unchecked problem with inflated art appraisals that has cost the federal government untold millions, a Times analysis has found.

Each year, the Internal Revenue Service audits donations claimed on only a handful of the 100,000 or more tax returns that allow art donors to reap nearly $1 billion in tax write-offs. Half of the donations checked over the last 20 years had been appraised at nearly double their actual value.

The crux of the public policy problem is the infrequency with which appraisals are checked. It makes all other remedies less effective:

A 2006 law tightened standards and increased penalties on bad appraisals. For donors, it lowered the threshold on what the law considers a bloated appraisal, from 200% overvalue to 150%. It also increased oversight of and fines for appraisers. But because the IRS checks so few appraisals, some believe that overvaluations will continue.

This is not a hard problem to solve. Every significant donation should have its appraisal checked by the IRS, and the donor should bear the cost of that process, not the government. There would be fewer small donations of art, but for major pieces, this cost of checking the appraisal would be small relative to the value of the tax deduction.

Ethics Reform in Louisiana

2008-02-28T06:38:00.003-05:00

The most interesting excerpt of a very interesting tale of Louisiana politics in today's New York Times:

In a town where legislators have been known to proclaim paid-for meals a principal draw to public service, this was an especially unpopular move. Last week, State Representative Charmaine L. Marchand of the Lower Ninth Ward in New Orleans said the limit would force her and her colleagues to dine at Taco Bell, and urged that it be pushed to $75 per person, to give them “wiggle room.”

No public groundswell took up her cause, and the $50 limit held.

Read the whole thing, and hope for more good things from Governor Jindal.

Workaholics Are Us

2008-02-27T13:55:00.000-05:00

Here is the abstract from a new article by Dan Hamermesh and Joel Slemrod:

A large literature examines the addictive properties of such behaviors as smoking, drinking alcohol, gambling and eating. We argue that for some people addictive behavior may apply to a much more central aspect of economic life: working. Although workaholism raises some of the same health-related concerns as other addictions, compared to most of the more familiar addictions it is more likely to be a problem of higher-income individuals and is more likely to generate negative spillovers onto individuals around the workaholic. Using the Retirement History Survey and the Panel Study of Income Dynamics, we show that high-income, highly educated people exhibit behavior that is consistent with workaholism with regard to retiring–they are more likely to postpone earlier plans for retirement. The theory and evidence suggest that the presence of workaholism calls for a more progressive income tax system than otherwise, although other more targeted policies may be part of optimal policy.

The full paper is here. The reference to negative spillovers and a progressive income tax reminded me of this earlier discussion.

Nickel and Dimed at Dartmouth

2008-02-26T11:41:00.001-05:00

Last evening, the Ethics Institute and the Dartmouth Centers Forum hosted a public lecture by Barbara Ehrenreich, "Working for Change," based on her book, Nickel and Dimed: On (Not) Getting By in America.

She's a compelling story teller. Here's an example of something that I had not previously appreciated--paying rent. For the working poor, the monthly payment isn't the only or even the main challenge. Coming up with the first and last month's payments is more than most can manage. So this puts them into a different type of housing--the residential motel, which is less cost effective but allows more of a day-to-day payment. These facilities often lack a refrigerator and a microwave, which in turn means that nutrition suffers as well, with fast food taking the place of better meals. Problems cascade, and keeping it all together becomes more of a struggle, to say nothing of actually getting ahead. The Dartmouth has more of a recap of her talk.

She's also an occasional blogger. Here's her rather unconventional take on the economic stimulus plan, from a month ago.

Ferraro on Superdelegates

2008-02-25T09:52:00.001-05:00

Geraldine Ferraro owns up to having created the superdelegate process in 1982 when she was the vice chairwoman of the House Democratic Caucus. The first part of this New York Times op-ed is a reasonable historical retelling. But then she falters, as do all justifications of this system. Here's the key excerpt:

Today, with the possibility that Hillary Clinton and Barack Obama will end up with about the same number of delegates after all 50 states have held their primaries and caucuses, the pundits and many others are saying that superdelegates should not decide who the nominee will be. That decision, they say, should rest with the rank-and-file Democrats who went to the polls and voted.

But the superdelegates were created to lead, not to follow. They were, and are, expected to determine what is best for our party and best for the country. I would hope that is why many superdelegates have already chosen a candidate to support.

Besides, the delegate totals from primaries and caucuses do not necessarily reflect the will of rank-and-file Democrats. Most Democrats have not been heard from at the polls. We have all been impressed by the turnout for this year’s primaries — clearly both candidates have excited and engaged the party’s membership — but, even so, turnout for primaries and caucuses is notoriously low. It would be shocking if 30 percent of registered Democrats have participated.

If that is the case, we could end up with a nominee who has been actively supported by, at most, 15 percent of registered Democrats. That’s hardly a grassroots mandate.

More important, although many states like New York have closed primaries in which only enrolled Democrats are allowed to vote, in many other states Republicans and independents can make the difference by voting in Democratic primaries or caucuses.

Whatever its imperfections, whether genuine (low turnout) or alleged (open primaries), the nominating process is not improved by resolving a close race for pledged delegates with backroom deals for superdelegates. Read the rest of the op-ed, where her partisan interests become evident.

Take Your Plan Administrator to Court

2008-02-21T10:38:00.003-05:00

Carrie Johnson reports in today's Washington Post on the Supreme Court's latest pension ruling:

The Supreme Court handed workers a major victory yesterday by allowing them to sue over mismanagement of their 401(k) retirement accounts, in which more than 50 million employees have invested nearly $3 trillion.

The unanimous holding reverses a lower court decision that had barred individuals from suing over losses related to mistakes and misconduct, and thus had insulated employers from lawsuits even as more U.S. workers came to rely on the savings accounts to help fund their retirements.

[...]

Yesterday's decision will allow James LaRue to proceed with a case against his former employer, DeWolff, Boberg & Associates, over $150,000 in losses he claims he suffered after the Texas management consultancy failed to act on instructions to shift his retirement savings when the stock market hit turbulence more than six years ago.

In a telephone interview, LaRue, 47, criticized his former company for being "nonresponsive" when he asked to transfer his money from stocks into cash as the Internet bubble burst and the market plunged after the Sept. 11, 2001, terror attacks. LaRue, now a self-employed consultant to manufacturing and telecommunications companies, said his former colleagues at DeWolff Boberg were "hiding under the law."

Seems like a reasonable step forward--LaRue should get his day in court. The reaction from businesses are predictable:

Business advocates predicted the ruling would unleash a raft of lawsuits by employees, particularly as stock market volatility once again is causing havoc with investment accounts.

"Ultimately, employers aren't going to sponsor plans if they're going to be sued every time they make an innocent mistake," said Thomas Gies, a Washington lawyer who defended the consulting firm, which denies any wrongdoing.

Even innocent mistakes have consequences, and the entity that makes the mistake should pay to fix it. If an employer cannot sponsor a plan without making multiple innocent mistakes, then that employer should not sponsor a plan. The defense against lawsuits is to have clear procedures and to stick to them.

Coming Soon to a Sky Near You

2008-02-20T10:40:00.001-05:00

The U.S. Naval Observatory has a lunar eclipse computer that you can use to get the viewing times and locations in your town this evening.

Some helpful concepts here.

Enjoy!

Scrambling Your Nest Egg

2008-02-20T10:05:00.000-05:00

J.W. Elphinstone reports on a growing number of people taking loans and withdrawals from their retirement accounts to cover their expenses:

Trent Charlton knew the risks when he borrowed $10,000 from his 401(k) and cut his retirement savings in half.
But Charlton, a 40-year-old account executive at an Irvine, Calif., trucking company, said he had little choice because he and his wife could not keep up with monthly expenses after American Express reduced the limits on three credit cards.
As home prices fall and banks tighten lending standards, more people are doing the same thing: raiding their retirement savings just to get by and spending their nest eggs to gas up SUVs, pay mortgages or put food on the table.
But dipping into 401(k) accounts can carry risks because defaulted loans and hardship withdrawals are taxed as income and are subject to a 10 percent penalty if the worker is under 59 1/2 years old.
That means if the trend grows, many Americans will risk coming up short on retirement savings or may have to rely on an overburdened Social Security system.
"People who take out a loan or withdrawal are adding to a looming retirement crisis over the next 30 to 40 years," said Eric Levy, a partner at global consulting firm Mercer. "And what implications will that have (for) our economy?"
Some of the nation's largest retirement plan administrators, such as Great-West Retirement Services and Fidelity Investments, are seeing double-digit spikes in hardship withdrawals and increases in loan requests, a sharp departure from levels that traditionally varied little.
Administrators say consumers are using retirement savings to pay for unmanageable mortgages, maxed-out credit cards, and costly utilities and groceries.
Charlton and his wife used the retirement money and $7,000 from savings to pay down their credit card debt. They also cut monthly expenses by pawning a diamond ring and selling camera equipment he owed money on. And he's looking for someone to take over his $550 monthly payment on a gray BMW 335i he leased last April.
Charlton said his goal is to pay off the 401(k) loan in two years. He has not decided whether he will contribute to the plan during that time.

If I may be indelicate here, Trent's problem is that he thought a $550 monthly car lease payment and maxed out credit cards were appropriate expenditures for a 40-year old worker with only $20,000 in a 401(k), even before the credit crunch hit. If that's his attitude toward money, he is going to have a lifetime of financial worries.

Read the whole thing for more about the procedures for loans and withdrawals and more information on how this trend is evolving.

Priorities on Capitol Hill

2008-02-19T19:27:00.001-05:00

Take a look at Dwight Howard's Superman dunk. I suppose he'll now have to testify to Congress about it.

I Have Been Outflanked

2008-02-18T09:58:00.003-05:00

By A Red Mind in a Blue State:

As I posted before, if we are going to insist on burdening our children and grandchildren with more debt, the least we could do is build or repair some roads, or bridges, or help end our dependency on foreign oil by building more refineries or by slapping solar panels on every flat roof in America-- something that will help the next generation.

Anyone receiving this check should know what it is-- a welfare check drawn on our children's checking account.

Read the whole thing.

A Capital Idea

2008-02-16T10:38:00.000-05:00

Thinking more about how to use fiscal policy as economic stimulus, I hold forth in the current issue of the Ripon Forum. Here's a teaser:

The agreement reached by the House and White House in January addressed two problems that the United States does not have.

First, the nation does not have an underconsumption problem. The personal saving rate hovers around zero. The government’s budget has been in surplus in only four of the last 35 years. The nation has run current account deficits with the rest of the world for the last 15 years. If we are looking for additional economic activity, consumption is a poor choice.

Second, we do not have an underinvestment problem in the private sector. Interest rates have been very low by historical standards, and the Federal Reserve intervened immediately to lower them even further. With or without additional tax-based incentives, corporations have plenty of access to cheap credit to expand their capital stocks.

Where our country does have an underinvestment problem is in our public infrastructure. The failed levees of New Orleans. The collapsed bridge in Minneapolis. Those are but two recent examples of an area where the federal government is falling down on the job. Regrettably, they are not the only examples. In 2005, the American Society of Civil Engineers released a report card in which it estimated that $1.6 trillion would be required over a five-year period to restore the nation’s physical infrastructure to good condition.

Because infrastructure projects are in many cases public goods or natural monopolies that can be provided more efficiently with government regulation or implementation, the government should bear responsibility for them. Looking ahead, the country faces potential bottlenecks in network infrastructures in broadband and alternative energy that could be added to the ASCE report’s recommendations.

Read the whole thing.

Delegates that Steal?

2008-02-15T16:45:00.002-05:00

Thomas Mann and Norman Ornstein step up to the plate to argue for a positive role that superdelegates can play in the Democratic nominating process in their New York Times op-ed, "Delegates of Steel." To put it charitably, they whiff. Their thesis:

But a review of the history of superdelegates suggests they are likely to play a constructive role in resolving the nomination before the convention and in unifying the party for the general election campaign.

Strike One. Either the superdelegates vote to support the candidate who received more pledged delegates, in which case they are irrelevant, or they vote to support the candidate who did not receive more pledged delegates, in which case they overturn the democratic process.

Working up to their big finish, the authors claim:

In 2008, where two strong and capable candidates are fighting it out on every front, where the difficult issues of race and sex are on the table and where the gap between the two in total votes and pledged delegates is likely to be small, the potential for an explosive convention, where in the end half the delegates (and half the party) feels they have been cheated, is real.

Strike Two. If the candidate with slightly more pledged delegates receives the nomination, then half the delegates (and half the party) will feel like they lost a close contest to a worthy rival. Small problem. If the candidate with more pledged delegates does not receive the nomination, then half the delegates (and half the party) will feel like they have been cheated. Big problem.

And that big finish:

In this case, the nomination could come down to a difficult and complex credentials battle over whether to seat delegates from Michigan and Florida. To have a nomination settled in this way is a bit like having an election settled by a 5-4 vote of the Supreme Court. Averting this kind of disaster is just what superdelegates are supposed to do.

Strike Three. It is the substitution of the views of the (bought and paid for) superdelegates for those of the voting citizenry that makes the nomination a bit like having an election settled by a 5-4 vote of the Supreme Court. There need not be a difficult and complex credentials battle. If the DNC wants to allow Michigan and Florida to have a voice in selecting the nominee, then it should schedule contested primaries in both states near the end of the primary season to choose those delegates. If it does not, based on its prior decisions, then the delegates don't get seated.

The current system is not perfect. Introducing superdelegates makes it further from perfect.

Insurance for the Nation's Health

2008-02-13T14:40:00.001-05:00

Mark McClellan will be on campus tomorrow to deliver the Rockefeller Center's first lecture in a series commemorating the 100th birthday of Nelson Rockefeller. (Read more here.) Mark's will lecture on "Universal Health Care," a topic that Governor Rockefeller championed more than four decades ago and that remains a leading policy issue today.

In doing some research for the event, I came across this Nixon-era article in Time magazine from May 11, 1970. Here's the big finish:

While every American may be entitled to at least adequate health care, he is not getting it, and will not, until a momentous national debate reaches election-year levels of acrimony and is somehow resolved.

The issue has already been injected into this year's elections by Democrat Theodore C. Sorensen, campaigning for the U.S. Senate from New York, who last week announced his own plan for "universal health insurance." Apart from such standpatters as the A.M.A. and its arch-conservative Republican allies, there is a growing consensus that some national insurance blanket must be thrown over the ailing body of health care.

It may prove to be more of a patchwork quilt, with multicolored squares for sections covered by contracts with a variety of private insurers. If administration is not made too cumbersome, that would be far better than the present non-system with its huge gaps. Walter McNerney, president of the Blue Cross Association and head of a task force soon to report to the President on the nation's health needs, believes that a monolithic system operated by HEW would be wildly inflationary—and not sufficiently innovative. He wants a flexible, pluralistic plan.

But when? The principal difference between proponents of progress is over whether to put the cart of medical-care delivery before the horse of manpower resources, and let the resources catch up with the overburdened cart—or to take the time to breed more medical horses. That means waiting years for the country's health education system to produce many thousands more doctors and tens of thousands more paramedical personnel. Secretary [of Health, Education, and Welfare Robert H.] Finch sincerely believes that the modest expansions of federal health programs that he has submitted to Congress are important steps in the right direction, but will not commit himself to true national insurance. His chief assistant for health affairs, Under Secretary Roger O. Egeberg, thinks that some such plan may very well evolve in "six to seven years." His prognosis is as good as any.

Read the whole thing, to get an idea of what has changed and what has remained the same in this debate, and be sure to stop by Mark's talk tomorrow evening if you are on or near campus.

Overheard in Washington

2008-02-12T06:47:00.000-05:00

Another take on fiscal stimulus:

Wii-bates

Super Delegates

2008-02-10T17:33:00.000-05:00

Matthew Mosk and Paul Kane, writing in today's Washington Post, show just how sleazy the courtship of super delegates has become. This is a train wreck waiting to happen. If the choices of the super delegates overturn the choices of the directly elected delegates, this will not end well for the Democratic Party.

There Goes the Neighborhood

2008-02-09T06:44:00.000-05:00

The New York Times writes us up as a second-home haven in its real estate section.

In Praise of Senator Bob Corker (R-TN)

2008-02-08T11:36:00.000-05:00

It's nice to have some company in my anti-stimulus writings. Here is the Senator's op-ed:

The Political Stimulus Package
Op-ed by U.S. Sen. Bob Corker
February 6, 2008

Today, in classrooms and homes across our state, Tennessee children are looking to the adults in their lives — their parents, teachers, coaches and Sunday school teachers — to teach them life principles and help prepare them for the future.

I hope, at times, the adults these children look up to are their elected officials in Washington, but I hope they aren't looking this week.

Because instead of dealing with the fundamental issues that have led to our country's current economic ills, the U.S. Congress is on a fast track to pass a so-called economic stimulus package to be paid for — entirely — by those same schoolchildren, and their children.

Don't get me wrong, I'm happy for Tennesseans who will receive checks if the stimulus package becomes law, but our citizens should know that this is not an economic stimulus package — it's a political stimulus package designed to generate election-year public favor. I think our citizens are more intelligent than that. I will not support it.

My heart goes out to people who find themselves in financial situations that in many cases are beyond their control.

And I'm always happy when I see Americans receive refunds from the federal government, but I find something extremely inappropriate about a deficit-ridden federal government borrowing money from our grandchildren and sprinkling it across the country for a short-term fix that will do little, if anything, to jump-start our troubled economy.

I think all of us know our country has been fiscally reckless over the past several years and that generations after us will be dealing with the brunt of our actions.

I'm a strong believer in low taxes and creating a structure that people can count on to move ahead and to make investments, but in support of these policies we must get spending under control. My generation will never pay the $150 billion cost of this package. Our children and grandchildren will.

Our country would be better served if we took the time to discuss and debate solutions that positively impact and help grow our economy over the long haul — creating more and better-paying jobs here in the United States. Unfortunately, folks may take their refunds and buy products that are in large part made overseas, and the money borrowed to finance this political stimulus package in many cases will be loaned to us by foreign countries. It just doesn't add up.

In Washington, we always seem to find an excuse to spend money we don't have. Correcting this means being honest about our future obligations and having the courage to make difficult decisions that may not be politically convenient.
Our country has been built on sacrifice. It's been built on generations before us making tough decisions and sacrifices to benefit future generations. I hope in the very near future Congress will have the courage to do the same and act in the best long-term interest of our country.

For those of you who are wondering, this is what a fiscal conservative sounds like in elected office. He should have more company on Capitol Hill. The Senate passed the political stimulus bill by a vote of 81 - 16.

Public Infrastructure and Fiscal Stimulus

2008-02-08T09:27:00.000-05:00

It doesn't happen very often, but I agree with much of what Paul Krugman writes in his column today, "A Long Story." Here's the key part:

Meanwhile, Congress and the Bush administration have reached agreement on a much-hyped stimulus package. But the package, while probably better than nothing, is unlikely to make a noticeable dent in the problem — in part because the insistence of the administration and Senate Republicans on blocking precisely the measures, such as expanded unemployment insurance and food stamps, that are most likely to be effective.

Still, by January the White House will have a new occupant. If the slump is still going on, which is likely, this will offer a chance to consider other, more effective measures.

In particular, now would be a good time to think about the possibility of going beyond tax cuts and rebate checks, and stimulating the economy with some much-needed public investment — say, in repairing the country’s crumbling infrastructure.

The usual rap against public spending as a form of economic stimulus is that it takes too long to get going — that by the time the money starts flowing, the recession is already over. But if this turns out to be a prolonged slump, which seems likely, that won’t be a problem.

On the radio show yesterday, I argued that one month of job loss and an unemployment rate of 5 percent was a little early for extended unemployment insurance benefits. Initial UI claims have jumped in the past few weeks--we've got several months before that wave of entrants will exhaust their benefits. And these benefits can be made available as needed.

Krugman's last paragraph is a good counterpoint to those who argue that public infrastructure projects are not feasible for stimulus, if his thesis about the length of the downturn is correct. But as I argued in The Washington Post last month, the reason to do the infrastructure projects is that they are needed. The reason to accelerate their timing is that in an economic downturn, we can do them more cheaply. Quoting from that op-ed:

The federal government has a critical role in maintaining and developing public infrastructure, whether in transportation, telecommunications or energy transmission projects. A sensible capital budget would include a prioritized list of projects that need attention. Some would be slated for this year, some for 2009 and so on, over the useful lives of the projects. When economic growth falters, the government would be in a position to move some of the projects from later years into the present year.

This approach to counter-cyclical fiscal policy has several advantages. Perhaps most obvious is that it forces the government to establish priorities for capital projects. It reduces overall expenditures by doing more of the work in times of economic slack, when costs are lower. It also abides by pay-go rules, since projects moved up to 2008 need not be done in 2009.

I've got another column in the works that maps this out in more detail. See Mark Thoma for additional commentary.

Debt in the White House

2008-02-08T06:42:00.000-05:00

Greg Mankiw posts an e-mail from a colleague in the White House regarding "Debt and the Real Threat." Some elements are correct (like the need to scale debt or deficit figures by GDP and the challenges presented by future entitlement programs). One element is not correct, and it is reflected in a couple of instances regarding whether it is appropriate to include the Treasury bonds in the Social Security trust fund in the measure of total indebtedness or whether the right deficit measure is the unified deficit (which includes the Social Security surplus) or the on-budget deficit (which excludes it). Here's the key excerpt:

2. gross debt vs. debt held by the public - (this is the hard part) What we care about is how much the US Government owes to the American public and the rest of the world (meaning to those who buy Treasury bonds). This is commonly known as "debt held by the public". To this amount, the Chairman adds debt that one part
of the government owes to another part of the government, to get what budgeters call "gross federal debt". If you use funds from your savings account to pay down a credit card, you have decreased your "debt held by the public". For comparison, if you borrow from your savings account and put it into your checking account, and leave in your savings account an IOU from you to you, Chairman Conrad's metric would say that you have "increased your gross debt." This is economically meaningless.

Not so fast. The difference between Total Debt and Debt held by the Public is the bonds held in the Social Security trust fund. Those bonds represent a claim on future tax revenues just like bonds held directly by the public. The taxpayers in 2025 will not care whether the additional income taxes they are paying are to pay off an American citizen who holds a Treasury bond or the Social Security beneficiaries who have presented a bond from the trust fund to the Treasury for redemption so that they can collect benefits. It's the same to them--it should be the same to us.

The only way the trust fund is equivalent to "using funds from your savings account to pay down a credit card" is if the Social Security surplus is used to repurchase Debt from the Public as an equivalent amount of special issue debt is placed in the trust fund. Debt held by the Public should go down, but Total Debt should stay constant if we are operating the trust fund as it was intended.

In 2025, we get the reverse. As beneficiaries make their claims, bonds come out of the trust fund. Either taxes go up, or new debt must be issued to the public to generate funds to pay off those bonds. Debt held by the Public goes up, but Total Debt stays the same. In both cases, it is Total Debt that is telling you accurately about the size of the liabilities being passed on to future generations. Debt not currently held by the public will eventually be held by the public.

The honest budget policy is to target the on-budget deficit or Total Debt/GDP. Anything else leaves you open to the charge that you are spending the Social Security surplus, raiding the Social Security trust fund, etc. You can ignore the debt held in the trust fund only if you don't intend to honor its redemption. Let's not go there.

For more on these issues, see these earlier posts: "Chairman Ben and the Long-Term Budget" and "Which Budget Deficit to Target?"

Governor Romney Takes His Leave

2008-02-07T18:23:00.000-05:00

At today's CPAC conference, Mitt Romney departed the Republican primary field. Given the way he campaigned, I am not sorry to see him go. I was sorry to see the way he campaigned.

I have two grievances about his New Hampshire campaign. First, he just didn't show up. I direct a Public Policy Center at a college in New Hampshire. I didn't meet him. I met Senator McCain, Governor Huckabee, Congressman Paul, Congressman Tancredo, and unfortunately missed Congressman Hunter's event on campus. I saw the Mitt-mobile around town once or twice and was introduced to one of Governor Romney's sons by a student trying to bring Governor Romney to campus for a public lecture. What was he doing that he didn't have time to hit one of the few major colleges in the state?

Second, I know what he was doing with some of that time--spending his own money to saturate the primetime televsion hours with superficial, cynical, negative television ads. That's a fast way to alienate New Hampshire voters. It's one of the virtues of having the first primary here. The New Hampshire primary is designed for what McCain did--a rampage of townhall meetings where he took Q&A from the audience until they were satisfied he had heard and understood their concerns. And don't get me started again about Romney in Michigan.

Here's the irony. Based on his record and his personal resources, Governor Romney could have had the nomination in a walk. A Republican president in 2009 would have to work with a Democratically controlled legislature and would face a number of tough challenges. Maybe Governor Romney hasn't been keeping up with current events, but he actually faced an even more extreme version of that scenario in Massachusetts and had a reasonable record to show for it. All he had to do was to make the case that he worked with the Democrats to deliver results for the citizens of his state while holding the line on conservative issues. The problem with Senator McCain's record is that he has not held the line on conservative principles in his commendable efforts in the Senate to work with Democrats to deliver results. (Campaign finance and immigration are two prime examples.) An honest and positive campaign on that issue, without the free-lunch, supply-side economic rhetoric and the negative ads, would have generated a lot of support.

Samwick Media Watch

2008-02-07T10:55:00.000-05:00

I've been invited to be a guest on Warren Olney's "To the Point" show today on Public Radio International. Here's the teaser:

The Public, the Economy and the Federal 'Fiscal Stimulus'

With the stock market falling as they went to the polls, Super Tuesday voters were thinking about the economy. But those rebates many Americans may be counting on are now tied up in Congress. Thursday, on To the Point, will the rebates be fair? Will the "fiscal stimulus" come in time to help avoid a recession?

You can listen online or on one of these fine stations.

UPDATE: A fun show, until I stumbled my way through this line of reasoning. Jason Furman was also on the segment, and he made his points very well.

Two Ideas for the Primary System

2008-02-05T21:54:00.000-05:00

Having watched the primary season unfold from a very nice vantage point, I think that the nomination processes would have been better served by approval voting. From a potentially long list of candidates, voters simply vote for as many of them as they find acceptable. The candidate with the most votes wins.

The main advantage of approval voting is that it allows voters the opportunity to express a preference for more than one candidate. The drawback to approval voting is that it does not provide voters with the opportunity to rank candidates within the set that they find acceptable. With approval voting, we wouldn't see primary voters having to worry about "wasting a vote" in expressing a preference for a candidate who has little chance of achieving a plurality. There would be less pressure on candidates to drop out of the race if they don't "win" one of the early states. This is particularly important given how much weight the early primaries seem to have.

I also find it odd that the national parties award delegates in proportion to a state's total population rather than some other measure that considers the distribution of voters across the two main parties. Consider the case of New York. There is almost no chance that it will go for the Republican candidate in the general election, regardless of the nominees from the two parties. So Senator Clinton's victory there tells us nothing about whether she is a more viable Democratic candidate in the electoral college than is Senator Obama. Ditto for Senator McCain.

It seems like a party could get a more viable candidate by awarding more delegates to states that are expected to be more competitive in the general election and fewer delegates to states that are expected to be less competitive in the general election. There is a limit to how much downweighting could be done in a state in which the party is strong--that would encourage state party leaders to discourage turnout, which is unhealthy to say the very least. But some movement in this direction could be helpful.

Your Essential Budget Reading

2008-02-05T10:53:00.000-05:00

If you read only one thing about President Bush's FY 2009 budget, read this post by Brad DeLong and heed its conclusion:

We want to run a budget that is in surplus during boom, in deficit during recession, that borrows in order to fund investments that benefit the future, and that runs surpluses and pays down debt in order to fund future expenditures that benefit today's taxpayers. The Bushies have not done that.

Some day, there will be enough of a critical mass of people both inside and outside Washington to make sure that elected officials adhere to this. But that day is sadly not close, even with a change in the Administration next year.

But don't read just one post. Bookmark Stan Collender's blog for a free education on the way the government spends its money. This post points out a number of "off-the-wall" assumptions that were made in order to get the talking point, "surplus by 2012."

Your next stop is the Committee for a Responsible Federal Budget. They've released a first look on the budget and some projections based on a more realistic alternative baseline for the budget.

I posted about most of these issues last week based on the State of the Union Address.

Storehouses of Ideas

2008-02-04T14:56:00.000-05:00

I hadn't realized that Chris DeMuth is stepping down as the president of the American Enterprise Institute. Here is an essay he wrote reflecting on the nature and role of think tanks. I thought the following excerpt was interesting:

I have tried to explain it to people who have been setting up liberal and leftist think tanks in recent years, advising them that the secret of success is to go away and spend thirty years in the political wilderness. They have thought I was joking. Let me try again here.

Every one of the right-of-center think tanks was founded in a spirit of opposition to the established order of things. Opposition is the natural proclivity of the intellectual (it's what leads some smart people to become intellectuals rather than computer programmers), and is of course prerequisite to criticism and devotion to reform. And for conservatives, opposition lasted a very long time--in domestic policy, from the New Deal through 1980.

It's been more than half that period of time since 1980, and the conservative think tanks are now part of the status quo and not the political wilderness. Maybe the Lefties aren't the only ones who could benefit from a few day hikes.

Read the whole thing.

Your Pre-Super-Bowl Reading

2008-02-02T21:54:00.000-05:00

From around the web:

Via Brad DeLong, James Fallows follows the money in U.S./China trade, so you can, too.

Greg Mankiw lets New Hampshire Senate candidate Jay Buckey into the Pigou Club for proposing a gas tax of roughly 7 cents per gallon at current prices. Read about the National Security Levy here. It's as good a place as any for an aspiring politician to start.

Closer to home, Dartmouth's president, Jim Wright, will receive the Semper Fidelis Award from the Marine Corps Scholarship Foundation for his work on behalf of wounded veterans. Read more here.

The Conservative Car on the Obama Express

2008-02-01T19:24:00.000-05:00

That's where Dartmouth Professor of English Emeritus Jeffrey Hart is sitting, according to this article in today's local Valley News. There's no questioning his conservative bona fides. Here's his reasoning about Senator Obama's candidacy:

And so it is that Jeffrey Hart counts himself a member of Obama's “new American majority” -- a group of voters the Illinois senator says are fed up with the partisan excesses and wrangling of the last two decades and eager for a practical, cooperative approach to the issues that have divided Washington.

“It turns out that these political parties are not always either liberal or conservative, Democratic or Republican,” Hart, a 77-year-old with thick white hair who lives in Lyme, said in an interview at his home yesterday. “The Democrat, under certain conditions, can be the conservative.”

Hart's estrangement from George W. Bush's brand of conservatism -- which Hart describes as “radicalism,” citing an expansion of federal spending and aggressive foreign policy -- began some time ago. After voting for Bush in 2000, Hart says he supported Sen. John Kerry in 2004. In the 2006 Congressional elections, Hart cast a ballot for Democrat Paul Hodes -- not Charlie Bass, the Republican whom Hart had voted for six times — out of frustration over the Iraq War, which he says has been mishandled.

“It's all wrong,” Hart said. “It's not going to be a beacon of liberty. There's no indication that Bush or Wolfowitz or Cheney looked at Iraq and said, ‘What are the problems here?' It’s as if Eisenhower did D-Day not knowing whether they had a cliff or a swamp on the other side.”

There are other problems with today's Republicans, according to Hart. He said his erstwhile party allied itself too closely with activist evangelical Christians. Perhaps more significantly, Hart said, the party has failed to adapt in order to address urgent domestic issues such as healthcare policy and the future of Social Security, thus forgetting Burke's famous caveat to conservatives: “A state without the means of some change is without the means of its conservation.”

The current Republican field does nothing to raise Hart's hopes. He said McCain is “candid and authentic” but too committed to keeping up the U.S. military presence in Iraq; former Massachusetts Gov. Mitt Romney, Hart said, “would say anything to get the nomination.”

In Obama, by contrast, Hart sees a Great Communicator in the mold of Reagan, John F. Kennedy and Franklin D. Roosevelt, a leader who can inspire Americans to work together on the problems of the 21st Century.

By the end of the line, that train car might be very crowded.

Read the whole thing.

The January Employment Report

2008-02-01T10:09:00.000-05:00

The headline number from today's employment report was a decline of 17,000 jobs in January. (Permanent link likely here.) This number is not significantly different from zero, so the BLS calls it "essentially unchanged." However, the point estimate at this point is the first negative number since August 2003, and that will likely dominate the news.

The January report is also where we see some revisions for calendar year 2007, and these are worth considering when trying to get a fix on where we are in the business cycle. Year-end nonfarm payroll employment was revised downward by 376,000 jobs relative to prior estimates. Very little of this revision pertained to the 4th quarter. Factoring in the January number, employment growth has averaged 66,000 over the last 4 months. That's weak growth in anybody's book.

Looking at the household survey, the unemployment rate was also "essentially unchanged" with a 0.1 percentage point decline. Digging a little deeper, the two alternative measures of unemployment that incorporate marginally attached workers (and in one, those employed part-time for economic reasons) ticked up by 0.2 percentage points. These numbers are presented in Table A-12 of the report.

For more on the details, read Barry Ritholz at The Big Picture.

They Found Their Happy Place

2008-02-01T07:04:00.000-05:00

What a difference a day makes. With only two candidates remaining for the Democratic Party's nomination, the tone of last night's debate was far more congenial than the Republicans the night before or any prior debate among the Democrats. With all the nastiness in the recent campaign, both candidates needed to present this sort of an image (well, maybe not literally the image above). That doesn't mean it was an effective debate, in terms of helping a voter decide between the two candidates. Best line of the night goes to Senator Obama:

The reason that this is important, again, is that Senator Clinton, I think, fairly, has claimed that she's got the experience on day one. And part of the argument that I'm making in this campaign is that, it is important to be right on day one.

Super Tuesday's results will not likely be enough to decide between the two, and so there will be plenty of time for other strategies to be played.

Read the full transcript here.

An Unseemly Republican Debate

2008-01-31T07:20:00.000-05:00

I had the same reaction to last night's Republican debate as Governor Romney in the picture below.

I have over the last few months noted my displeasure with Governor Romney's negative campaign tactics and appreciation for Senator McCain's willingness to show up and be straightforward in his rhetoric. Last night's debate was a step in the opposite direction.

It is utterly incomprehensible that McCain would continue to push this "timetable as buzzword" mischaracterization of Romney's remarks on resolving the war in Iraq. I actually started to feel sympathy for Romney, despite the fact that he's been doing similar things to McCain for months. I would have thought that the lesson McCain would have drawn from this, given that he and not Romney has the momentum, is that it is a tactic that doesn't work.

If Romney actually ran honestly on the detailed record of things he did in office and in the business sector, rather than on cheap slogans about them, he would have had a much better chance to have gotten my vote in the New Hampshire primary. As a Republican governor facing a Democratic legislature, he managed to hold the line on conservative issues and work with the legislature to pass reforms on things like health care that his citizens wanted. That's a similar environment to what he would face and a reasonable outcome to expect if he were elected President in 2008.

The Whiner of First Resort

2008-01-30T23:17:00.000-05:00

Via Mark Thoma, this piece in the Financial Times by Ricardo Hausmann is quite good. Here's the big finish:

The US should face its need for adjustment with courage and reason, not fear. It should stop behaving as the whiner of first resort, ready to waste all its dry powder on a short-sighted attempt to prevent a 2008 recession. Many poorer countries with weaker markets and institutions have survived and benefited from an adjustment that involves a year of negative growth. Faster bank recapitalisation, fiscal investment stimulus and international co-ordination should be first on the policy agenda.

Read the whole thing.

A Real "Natural Experiment"

2008-01-30T12:20:00.000-05:00

Evolutionary biologist Olivia Judson provides a fascinating description of how we can learn about evolution from geographic separations in "The Repeater" at The Wild Side, her newly resumed blog at The New York Times.

Her writing is lively and fascinating. Add her to your bookmarks, and think about this book of hers, just in time for Valentine's Day.

Why I Am Not Looking Forward to Tonight's Debate

2008-01-30T08:21:00.000-05:00

David Brooks draws some lessons from the McCain victory in Florida's Republican primary. Then he discusses some things he's still figuring out:

First, how desperate is Romney? The Wednesday debate is his last shot at turning this around. If he is truly frantic, he will hit McCain hard on the temperament issue and hope McCain blows up on national TV. It will be an ugly assault, but the mark of a man who is willing to try anything. If Romney’s not willing to get that ugly, he’ll just use the same arguments he tried in Florida.

In a word, I think it will be vicious. More from Brooks:

Second, what does delegate hunting look like? For decades, presidential primaries have been settled by momentum. That is unlikely to happen on the Democratic side. Super-Duper-Looper Tuesday will almost certainly not settle the Democratic race because each side will emerge with many delegates. But how do you campaign in this environment? Do you try to win states? Do you focus on Congressional Districts with high turnouts, which sometimes get rewarded? Do you care about the national aggregate numbers next Tuesday? Almost nobody now living has done this before. And the challenge for us journalists is that we will have no clue next Tuesday how to make sense of the hundreds of different sorts of results that will come in.

Yes, pity the poor journalists. Here's a suggestion. Listen to your readers.Look what it turned up at Andrew Sullivan's blog.

Enjoying Winter in New Hampshire

2008-01-29T17:43:00.001-05:00

Budget Policy in the SOTU

2008-01-29T07:23:00.000-05:00

Let's continue with the budget policy theme, but let's also move on from the discussion of the $150 billion of new deficit spending that the House leaders and the President proposed last week. In the text of the State of the Union address, the word "budget" appears only in the following paragraph:

Just as we trust Americans with their own money, we need to earn their trust by spending their tax dollars wisely. Next week, I'll send you a budget that terminates or substantially reduces 151 wasteful or bloated programs, totaling more than $18 billion. The budget that I will submit will keep America on track for a surplus in 2012. American families have to balance their budgets; so should their government.

I had three reactions, none of them particularly favorable.

1) While I'm likely to be pleased at the details of the $18 billion in expenditure reductions, let's not confuse that with significant spending reduction. Total (defense and nondefense) discretionary outlays in 2008 are $1,089 billion. [See Table 3-7 here and keep the file open.] So even if Social Security, Medicare, and Medicaid (the bulk of the mandatory outlays, see Table 3-3 above) are held harmless, this is a reduction of 18/1089 = 1.7%.

2) While I would be happier in 2012 with a surplus than without one, this is another one of those incredibly weak budget targets. (The earlier one was to "cut the deficit in half in 5 years.") First, it includes the Social Security surplus in 2012, projected by CBO to be about $45 billion in that year. (See Tables 4-5 and 3-3 above.) An honest budget--one that would not be "raiding" the Social Security Trust Fund--would exclude the off-budget surplus and have the entitlement programs in long-term balance. Second, the economic forecast on which this projection is based assumes positive annual growth in real GDP between now and then. [See Table 2-4 above.] So if we are experiencing positive economic growth over this period, why is it that only in 2012 do we reach the number zero? Should we not be running surpluses in every year in which growth is above its long-term average? See this earlier post for further discussion of these points.

3) I can't be 100% sure on this one, but it appears from Slide 11 in these slides accompanying CBO Director Peter Orszag's testimony on the budget outlook from January 23 that if modifications to the baseline are made which are consistent with other things the President has said, we don't come anywhere close to budget balance in 2012. The modifications made are: to exented all expiring tax provisions, make reforms to the alternative minimum tax, to assume that the number of military personnel in the war on terrorism falls to 75,000 by 2013, and to assume regular appropriations grow at the rate of nominal GDP. The first one is critical, since the President also insisted that "Unless Congress acts, most of the tax relief we've delivered over the past seven years will be taken away." So the projections for surplus in 2012 are inconsistent with other policy statements the President would has made.

This Is Rich

2008-01-27T17:39:00.000-05:00

From the Real Time Economics Blog:

Huckabee and Paulson Spar over Stimulus Plan
Republican presidential hopeful Mike Huckabee accused President Bush and the House of Representatives of missing the point with their new emergency anti-recession plan, including $100 billion in payments to individuals and $50 billion in tax breaks to get businesses to invest.

“The problem I have is that what we are really doing is borrowing about $150 billion from the Chinese, which is where this money has got to end up coming from,” Huckabee said on CNN’s “Late Edition” Sunday.

“Then we’re going to give rebates to taxpayers, and that’s great. - I’m glad,” Huckabee continued. “But what will most of them do with it? They’re going to buy things that were imported from China.”

“So I have to ask,” he added, “whose economy is being stimulated the most?”

The former Arkansas governor said a better plan would be to provide an infusion of federal dollars to repair and replace crumbling bridges, airports and other infrastructure.

Huckabee has a reasonable argument, to a point. If the purpose of the stimulus package is to prevent GDP growth from turning negative by boosting consumption, then the import share of the incremental consumption (relative to total consumption) has to be considered. And as I've argued before, he is right in noting that this deficit spending on simple consumption when public infrastructure might be a more sensible addition to the budget.

A Better Way to Deal With Downturns

2008-01-26T09:41:00.000-05:00

A wise man in Washington once told me that in politics, you can't beat something with nothing. In that spirit, I continue the anti-fiscal-stimulus rant with a Sunday op-ed in The Washington Post, available a day early online. Welcome to Washington Post readers. For those new to the blog, please take a look at some of the other posts categorized in the sidebar on the right side of the page when you are done with this post.

The constructive idea in the op-ed is to consider the backlog of public infrastructure projects needing attention, prioritize them, schedule them in over a multiyear horizon, include their costs in budget projections, and then move them forward in time if the economy weakens and prices go down to make them cheaper to do sooner rather than later. Note well the parts I put in bold.

The imperative to enact a fiscal stimulus bill (the motives for which I discuss in the op-ed) kicked up such an election year hurricane that even the usual watchdogs seemed to get swept up in it. Consider:

1) Fed Chairman Ben Bernanke's testimony to the House Budget Committee on January 17. The last two paragraphs address the topic of fiscal stimulus. He provides the right context and the usual warnings, but the Representatives could have interpreted all of this as a yellow light. The red light would have been if he said, "It would be unwise and imprudent to enact a fiscal stimulus bill until we get some data on whether the large monetary stimulus has had the intended effect." On Capitol Hill, yellow lights mean speed up, not slow down.

2) The Blue Dog Democrats. Here's how it looked on January 15, and then hardly a whimper out of them in the following week.

3) Policy Experts. The buzzwords of "timely, targeted, and temporary" were spoon fed to the policy makers by Doug Elmendorf and Jason Furman earlier this month with this primer from the Hamilton Project. I don't fault them for doing it, either. Once the battle over whether we should "do something" was lost, it was very reassuring to have focused the debate around these three principles. I just hope that policy makers work as hard on the conclusion of that report --Building a Better Long-run Policy--as they did on the short-term recommendations.

4) Think Tanks. Consider this statement from the Committee for a Responsible Federal Budget, released January 22 as the stimulus package was about to be announced. It says:

If a stimulus package were paid for in the out-years, we would certainly be pleased. However, we believe that such a requirement is likely to derail the process of trying to assemble an effective stimulus package.

That's a flashing yellow light. And, unfortunately, this part of the next paragraph is likely to be ignored:

Although the Committee would accept using increased deficits as a tool to spur the economy in the short-run, we urge the President and the Congress to take the next important step: A long-term budget plan that addresses entitlements, tax reform, and spending restraint.

We would all like to see that. We could get it, too, if we made a commitment to hold our elected officials accountable for it.

It's Not a Stimulus, It's Deficit Spending

2008-01-25T19:06:00.000-05:00

Commentary based on this recent post aired this evening on NPR's marketplace. The teaser:

The proposal for the $150 billion stimulus package has Washington basking in bipartisanship. But commentator Andrew Samwick says the pricetag for all that collegiality might be too high.

Enjoy!

The Splurge

2008-01-24T19:21:00.000-05:00

Tom Toles "says" it very well.

What Capitalism Doesn't Need

2008-01-24T13:38:00.000-05:00

Adjectives like "creative" to modify it.

From the Wall Street Journal today:

In a speech at the World Economic Forum in Davos, Switzerland, the software tycoon plans to call for a "creative capitalism" that uses market forces to address poor-country needs that he feels are being ignored.

"We have to find a way to make the aspects of capitalism that serve wealthier people serve poorer people as well," Mr. Gates will tell world leaders at the forum, according to a copy of the speech seen by The Wall Street Journal.

Capitalism is by its nature creative. Ask a capitalist.

If Bill wants to put an adjective in front of "capitalism," then perhaps he should consider "universal" and challenge the attendees at Davos to help establish the institutions in poor countries that will make that adjective redundant as well. That way, the billions of people living in poverty in these areas will have access to the one economic system that can meaningfully improve their plight.

Obama and the Clintons

2008-01-23T16:37:00.000-05:00

Some links from around the blogosphere on the nasty turn the Democratic contest has taken:

Enjoy?

Len Burman Pokes a Finger in the Eye of the Stimulus

2008-01-23T12:36:00.000-05:00

I enjoyed Len Burman's op-ed in today's New York Times for reaching this conclusion, in "Make the Tax Cuts Work:"

There’s bipartisan agreement that something along these lines should be done, but the president has also argued for an extension of his tax cuts, now scheduled to expire at the end of 2010. This idea has met with less support. It would accomplish nothing in the short run, and most of the benefits would go to the very rich — the group least likely to spend a tax windfall.

But if they were repealed in a year, the Bush tax cuts could spur a burst of economic activity in 2008. If people knew that their tax rates were going up next year, they’d work to make sure that more of their income is taxed at this year’s lower rates. Investors would likewise have a giant incentive to cash out their capital gains now to avoid paying higher taxes later. In 1986, stock sales doubled as taxpayers rushed to avoid the capital gains tax rate increase scheduled for 1987. If people pour their stock gains into yachts and fast cars, that’s pure fiscal stimulus.

The money involved could be considerable. Capital gains in 2007 were something like $700 billion, representing well over $1 trillion in asset sales. It looks as if gains will be much lower in 2008, but a looming tax increase could easily spur an additional $500 billion in sales. If only 20 percent of that translated into extra spending, we’d have as much or more short-term stimulus as we could get from the package Congress and the president are considering.

Best of all, this is one stimulus proposal that would reduce the deficit — the single largest threat to the economy’s long-term health. And that long-term benefit wouldn’t depend on our getting the timing and amount of stimulus right, something policymakers are notoriously inept at.

UPDATE: Len responds to some of his fan mail at the TaxVox blog.

The Fish Within Us

2008-01-23T08:17:00.001-05:00

That title belongs to a fascinating article in Newsweek by Jeneen Interlandi on some parts of the history and the current state of human genetic evolution. Focusing on the work of Neil Shubin:

But while world headlines marveled at the idea that our own hands were somehow descended from these fish fingers, Shubin began exploring the anatomical vestiges of our previous lives. If we evolved from fish, he reasoned, our body design should look more convoluted than rational. Over the next few years, he found ample evidence to support his claim: our veins meander inefficiently, our knees give out easily under the weight of bodies they were not designed to support and our brains are clumsy upgrades from earlier models.

I suppose that proponents of "intelligent design" must now confront the unintelligent parts of our makeup. (There are earlier discussions of this problem in, for example, The Blind Watchmaker.)

Shifting to the work of Henry Harpending, the article then considers the pace of evolution today:

The findings have turned some traditional assumptions on their heads. For decades, biologists believed that human evolution had ground to a halt about 10,000 years ago, when the dawn of agriculture and technology gave us unprecedented control over our environments and made us masters of our own destiny. But rather than slow evolution down, those advances, Harpending says, enabled humanity to hit the accelerator. With better technology, our ranks have swelled from millions to billions. This has driven us to colonize more and different regions of the globe. More people mean more mutations, and more environments mean more things to adapt to. Migration into the Northern Hemisphere, for example, has favored adaptation to cold weather and less skin pigmentation for better sunlight absorption.

Enjoy!

The Mayhem in Myrtle Beach

2008-01-22T21:01:00.000-05:00

That's how this feature at Salon described the Democratic candidates debate in South Carolina last evening. It also noted:

It was about as nasty a debate as we have seen in this presidential cycle — and Mitt Romney was not even in the state.

I'm guessing that the tone of the campaign has changed because the Democratic candidates really do believe that their biggest competition is each other for the nomination, rather than the Republicans in the general election.

McQ at QandO has a thorough compilation of reactions to the debate. This one is particularly good, courtesy of the Carpetbagger Report:

[T]his probably isn’t the direction that actually benefits Obama. Clinton doesn’t mind getting into a good ol’ fashioned brawl; she’s quick, smart, and quite adept in these scuffles. Just as importantly, she’s not afraid to throw dirt — Clinton said last night of Obama, “The facts are that he has said in the last week that he really liked the ideas of the Republicans over the last 10 to 15 years.” That’s patently false, but it didn’t seem to matter.

The problem for Obama is getting dragged into the mud when he wants to aim higher.

I never thought that an Obama-Clinton ticket made sense--if he bests her in the primaries, then he doesn't need anything she can offer in the electoral college. And a Clinton-Obama ticket really doesn't make sense either--she already has problems being upstaged by her husband, so why would she want that from her running mate as well? But it seemed like bridges were burned last evening, and there's no going back (at least until the Republicans start replaying the most acrimonious exchanges during the general election campaign in the fall).

Ben Bernanke Waves a Handkerchief

2008-01-22T09:39:00.000-05:00

As the old saying goes, when America sneezes, the rest of the world catches a cold. A second day of selloffs in overseas markets prompted the Fed to cut 75 basis point cuts in both the discount rate and the federal funds rate. From The New York Times this morning:

The Federal Reserve, responding to an international stock sell-off and the likelihood of a sharp drop in America on Tuesday morning, cut its benchmark interest rate by three-quarters of a percentage point.

The Federal Open Market Committee lowered its target for the federal funds rate on overnight loans between banks to 3.5 percent, from 4.25 percent.

In a statement, the Fed said: “The committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households.”

“Moreover,” the statement continued, “incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.”

In a related action, the Fed approved a 75 basis-point decrease in the discount rate, to 4 percent.

Within minutes after the announcement, trading in stock-index futures, which had been presaging a deep slide on American stock exchanges Tuesday, retraced much of their earlier declines, which had been driven by a second sour day in Asia and Europe.

The reaction of the overseas markets is what strikes me as excessive. Conditional on that, a rate reduction of some magnitude (if not 0.75 percentage points) is not much of a surprise. It should make for an interesting week in the financial markets.

Happy MLK Day

2008-01-21T11:18:00.000-05:00

Listening to the radio this morning, I heard a quote from Martin Luther King Jr. that I think captures his legacy very well, particularly for students and young people observing the day:

Our lives begin to end the day we become silent about things that matter.

More quotes here. Dartmouth's schedule of events here.

Econophysics

2008-01-20T10:05:00.000-05:00

Picking up on the theme of the post on neuroeconomics, another field attempting to build bridges to economics is physics, in the form of Econophysics. Quoting from its Wikipedia page, econophysics applies ...

theories and methods originally developed by physicists in order to solve problems in economics, usually those including uncertainty or stochastic elements and nonlinear dynamics. Its application to the study of financial markets has also been termed statistical finance referring to its roots in statistical physics.

For more background, see this site or this blog. The payoff would be similar to the case of neuroeconomics--if you can link the economic problem to an analogous problem in the natural sciences that has been more thoroughly investigated, then the results of those investigations can be brought to bear in the economic problem as well. It may not be the most promising avenue of research, but academia thrives on experimentation and risk-taking in the realm of ideas.

The January 2008 issue of the Journal of Economic Dynamics and Control is a special issue on "Applications of Statistical Physics in Economics and Finance." In their introduction, J. Doyne Farmer and Thomas Lux discuss some of the reasons why the field has been slow to catch on among "mainstream" economists:

The contact between econophysics and economics has, however, been hampered by several factors. The very different culture of scientific publishing in physics and economics has generally prevented publications from econophysics in economics journals. This is partly a matter of style of presentation, but it also reflects fundamental differences in the epistemology of the two fields, in particular different views about the objectives of science. Physicists have a very different view about how work should be presented, and in particular about mathematical rigor (which they generally disdain). In addition, physics has a laissez-faire attitude about publication, believing that it is better to err on the side of letting as many new ideas in as possible, and to let the market eventually decide what is good and what is bad through a Darwinian process that selects what is useful and forgets what is not. As a result there are many econophysics papers of poor quality, which shocks economists. When combined with the fact that the best econophysics papers are published in journals that most economists never read, this body of work remains almost unknown outside the sphere of econophysics.

Communication between physicists and economists has been poor. Physicists are perhaps the only group of scientific professionals who are even more arrogant than economists, and in many cases the arrogance and emotions of both sides have been strongly on display. Many physicists have given the impression that they think that economists know little or nothing about their business, at the same time that they are asking for admission into their club. Many economists have reacted with apprehension to what they view as an attempted invasion by aliens, and have scornfully rejected any work by physicists out of hand, without bothering to have even a passing familiarity with it.

There seems to be a lot of truth in that assessment, and perhaps some of it is also applicable to the field of neuroeconomics as well. If you are interested in the links between economics and the sciences, the first article in that special issue, "Classical Thermodynamics and Economic General Equilibrium Theory," by Eric Smith and Duncan K. Foley, seems to make progress on establishing the parallels across economics and the relevant natural science. (See this working paper if you cannot access the journal directly.)

Tasty Clones

2008-01-19T10:47:00.000-05:00

Speaking of unnecessary stimulus, cloning in the food supply was brought back to the fore this week, as the F.D.A. made a pronouncement on the safety of meat and milk from cloned animals. From Wednesday's New York Times:

After years of debate, the Food and Drug Administration on Tuesday declared that food from cloned animals and their progeny is safe to eat, clearing the way for milk and meat derived from genetic copies of prized dairy cows, steers and hogs to be sold at the grocery store.

There was a predictable response from consumer watchdogs:

Consumer groups immediately lambasted the F.D.A.’s report, saying that the science remains inadequate and that many consumers oppose cloning for religious or ethical reasons. Some members of Congress had sought to delay a decision until further studies were completed.

“It flies in the face of Congress’s wishes. It flies in the face of consumer wishes,” said Michael Hansen, a senior scientist at Consumers Union, the advocacy group that publishes Consumer Reports.

I don't share the same apprehensions about safety in genetic cloning as I do in genetic modification or doping. With cloning, it seems that the breeders obtain an animal that has desirable characteristics and then simply make more copies of it without modifying it. The principal advantage of cloning is summed up by this expert, who must have fun giving out his business card:

“When you buy a box of Cheerios in New York and one in Champaign, Illinois, you know they are going to be the same,” said Jon Fisher, president and owner of Prairie State Semen in Illinois. “By shortening the genetic pool using clones, you can do a similar thing.”

“It could improve the quality of meat in the supermarket,” Mr. Fisher added. “It depends if customers allow it.”

It will likely do that in areas where the quality of meat is poor. But I'm not in one of those areas, and so if I should decide that I don't want to eat meat or drink milk from cloned animals, I should have that option, too. From the article again:

The F.D.A.’s approval extends to cloned cows, pigs and goats but not other farm animals like sheep; the agency cited insufficient data on cloned sheep. The F.D.A. said meat and milk from cloned animals and their offspring would not be labeled because it was the same as conventional food and did not pose a safety risk.

However, Representative Rosa DeLauro, Democrat of Connecticut, has introduced legislation to require labels on cloned products, and consumer groups suggested that labeling would be a battleground in the near future.

As with other food production processes, I am in favor of allowing producers who do not use a particular technology to label their products as such, regardless of whether the F.D.A. requires those who do use the technology to label their products as such.

Fiscal Stimulus? We Don't Need No ...

2008-01-18T15:45:00.000-05:00

All of the recent discussion of fiscal stimulus is very disappointing to an economist and deficit hawk like me. I'll ask two questions in this post and highlight them in bold.

Over the past few years, cheap credit and imprudent lending policies by some bad actors generated excessive consumption and investment in the real estate sector. This boosted economic activity beyond the level that would have prevailed with policies that we now wish, with hindsight, had been in place. That level of economic activity is the starting point for discussion of a recession, defined as two consecutive quarters of negative growth in real GDP. If we acknowledge that bad loans fueled the activity, why is it now a widely shared policy objective to maintain that level of activity?

The buzzwords for the stimulus discussion are that whatever the government does, it should be "timely, targeted, and temporary." Much of the discussion centers on a tax rebate, which would primarily boost consumption. Treasury Secretary Paulson is quoted as follows:

Asked if tax rebates to individuals - reportedly one of the cornerstones to the stimulus plan - is an effective course, Paulson said, “the evidence from [the] 2001 [rebate] was that people spent between a third and two-thirds of the money and spent it quickly, so the lesson here is we need to move quickly and do something in enough size.”

Forget the "stimulus" label, this is merely additional deficit spending. There is no discussion of repaying the money through higher taxes in the near term. Based on the President's remarks this morning, the deficit bill will be for about $150 billion. So this proposal is just another $150 billion of some future generations' resources that we will be using for our own consumption today. Why are we entitled to pass them this additional debt?

My views of how the government should conduct fiscal policy are presented here. We should expect some cyclical widening of the deficit with no change in policy. But if we have no intention of balancing the budget over the business cycle (i.e., of running an additional $150 billion surplus when the economy turns around), then we have no business pushing this deficit bill forward now.

UPDATE: Bruce Bartlett provides some background on tax rebates at the WSJ online and concludes:

A new rebate probably won't do much harm. But anyone who thinks it will prevent a recession -- if one is actually in the pipeline, which is not at all certain -- is dreaming. It's an insult to Keynes even to call a tax rebate Keynesian economics. It should be called "feel good economics" because its only real effect is to make politicians feel good about themselves and buy re-election with the public purse.

In Defense of (Some) Neuroeconomics

2008-01-18T08:05:00.000-05:00

Earlier this week, Alex Tabarrok was not too impressed by a recent neuroeconomics paper that examined the neural responses to typical marketing actions for consumed goods. In this case, the authors showed that telling subjects that a wine was expensive changed the way the brain processed the experience. (Here's a popular press article on the paper. Alex provides a link to the published paper.)

I saw one of the paper's authors, Antonio Rangel, present the paper at Econopalooza this month. I had a similar reaction to Alex--this is probably not the most critical use of fMRI technology to enhance our understanding of economic behavior. However, I should also point out that there are hundreds of sessions to attend at the ASSA meetings, and two of the ones I chose to attend were the ones on neuroeconomics that featured Antonio and David Laibson. They are two of the most creative and insightful researchers in our profession, and I would make similar choices about which sessions to attend given the same menu next year.

Seeing a number of papers presented, I think David's work on hyperbolic discounting provides a better illustration of how the new technology can enhance the field of economics. In several theoretical and empirical papers over the last decade, David and his co-authors have investigated the tendency of people to act as if they have very high discount rates for choices in the near future, such as a preference for $1 today versus $1.20 tomorrow, but fairly low discount rates for choices in the more distant future, such as a preference for $1.05 in 11 years versus $1 in 10 years. This introduces a time-inconsistency problem, since what I will actually do in year 10 changes when it arrives. This is a departure from the classical model of consumer behavior. (I think the most important consequence is that it makes illiquidity a feature, not a bug, of a long-term savings account like a 401(k)). David has argued his case very persuasively, and his research is having a large impact on the way academics and policy makers think about saving.

Can neuroeconomics help him make the case? In this article in Science, he and his co-authors show:

When humans are offered the choice between rewards available at different points in time, the relative values of the options are discounted according to their expected delays until delivery. Using functional magnetic resonance imaging, we examined the neural correlates of time discounting while subjects made a series of choices between monetary reward options that varied by delay to delivery. We demonstrate that two separate systems are involved in such decisions. Parts of the limbic system associated with the midbrain dopamine system, including paralimbic cortex, are preferentially activated by decisions involving immediately available rewards. In contrast, regions of the lateral prefrontal cortex and posterior parietal cortex are engaged uniformly by intertemporal choices irrespective of delay. Furthermore, the relative engagement of the two systems is directly associated with subjects’ choices, with greater relative fronto-parietal activity when subjects choose longer term options.

The research shows that two different neural systems, which evolved for very different purposes in the human brain, deal with the two decisions. When a part of the brain is activated during a particular decision, we can infer that the decision is similar to other choices or behaviors that activate that part of the brain. The more primitive part of the brain is activated with the near-term choice. This is what gives Laibson's argument credibility. We have already learned from observation of individual choices that behavior departed from the classical model. Without the brain imaging, there could have been a number of competing theories for why this is so, many of which would not cause us to dramatically rethink the underlying model. With the brain imaging, we give substantially greater weight to the theories like Laibson's that are predicated on different decision frameworks for different types of intertemporal choices.

Health Care 2008

2008-01-17T13:49:00.000-05:00

This new page at HealthCentral compares the Presidential candidates' positions on health care, including reform, the uninsured, drug prices, prevention, technology, and stem cells. It also has an interesting graphical representation of the candidates, where you can plot your own views.

Enjoy!

More on the Florida Financing Fiasco

2008-01-16T10:32:00.000-05:00

Some e-mail feedback on the last post reveals that David Evans and co-authors at Bloomberg Markets Magazine have been on the case for months. This is very good investigative reporting of the subprime meltdown in financial markets and the case of Florida in particular. Put these on your required reading list:

I warn you--if you go into anaphylactic shock at the sight of the words "declined to comment," have your Epi-Pen ready. Our justice system should make a point of getting involved to clean up this mess.

A Surprising Place for a Run

2008-01-15T13:43:00.000-05:00

I have from time to time had the pleasure of commenting on the reporting of Mary Williams Walsh of The New York Times, where she covers pensions, state and local governments, and some other topics. Over the holiday, I read her excellent article, written jointly with Kirk Semple, on the burden that poor investments by the state of Florida have had on local communities. The opening paragraphs:

PORT ST. LUCIE, Fla. — On Nov. 28, Marcia L. Dedert, finance director of this rapidly growing city, called the administrators of Florida’s state-run investment pool to ask whether it was still safe to park her city’s money there. She was hearing talk of urgent withdrawals by others worried about the pool’s investments in debt related to subprime mortgages.

After the pool’s manager told her the money would be all right, Ms. Dedert recalled, she deposited $135 million in bond proceeds. But less than 24 hours later, the administrators froze the pool and blocked withdrawals to halt a full-blown run.

Now the city cannot touch the money. And rest of the $371 million it has in the pool is also off-limits unless the city pays a 2 percent penalty.

Port St. Lucie is among hundreds of local governments in Florida that were drawn to the pool by its air of reliability and the promise of higher returns than banks offered. They now find themselves grappling with the consequences of having their money frozen.

Some have had to borrow money to meet day-to-day obligations. Others have had to shift money around for the time being or consider postponing long-planned projects.

For Port St. Lucie, the timing of the freeze could not have been worse. The city is trying to recreate itself as a center of the biotech industry and had just issued $155 million worth of bonds to lay roads, water pipes and sewer lines in a planned “jobs corridor,” where it hopes to house the companies it is courting from out of state.

I question why localities actually need this service from the state. Given investment amounts in the hundreds of millions, there are any number of banks and financial service companies with whom they could contract directly. People with accounts as small as 0.1% of Port St. Lucie's account get treated very well by financial service companies. Why tie up your money with a state fund that thinks it's doing you a favor instead of going to the professionals who would actively compete for your business?

Why Stop There?

2008-01-11T11:41:00.000-05:00

PGL at Angry Bear, reacting to the previous post, asks why stop with criticizing Governor Romney for his pandering? It's a reasonable question, but it has the standard economic answer--diminishing marginal returns to blogging about other people's mistakes.

Thinking a bit more about it, candidates deserve less slack when they make statements that are at odds with the personas they project in the campaign. Governor Romney campaigns specifically on his experience in the private sector and its contribution to economic growth. When he panders based on moving government resources to the aid of one particular constituency, that should be identified for what it is.

PGL then takes Governor Huckabee to task for, in the context of a question about lagging economic growth, advocating energy independence without acknowledging that any path to energy independence (e.g., a carbon tax) will reduce economic well-being in the near term. PGL is absolutely right. It's another answer that doesn't add up. But lots of people say silly things about energy independence, and this one didn't grab my attention.

McCain's answer to the question was better (some reasonably straight talk about the jobs not coming back and the need for retraining opportunities). Giuliani's was awful. Thompson's answer defended Giuliani's awful answer. Ron Paul's was probably the best. Read the whole transcript here--this is the first question to each candidate. What I liked about Paul's answer was that, in the course of his rambling answer, he said:

The recession has been predictable. We just don't know exactly when it will come.

If you do the wrong thing, it's going to last for a long time. The boom period comes when they just pour out easy credit and it teaches people to do the wrong things. There's a lot of malinvestment, debt that goes in the wrong direction, consumers who do the wrong things, and businessmen who do the wrong thing.

So we have to attack this and understand the importance of Austrian theory of the business cycle. If you don't, we're going to continue to do this and the longer you delay the recession, the worse the recession is, and we've delayed a serious recession for a long time.

The housing market's already in depression and a lot of people are hurt and the standing of living in this country is going down. Look at what's happening to the dollar.

And what is being offered by the Federal Reserve and Treasury and everybody in Washington? Lower interest rates. Well, lower interest rates is the problem. Artificially low interest rates is the artificial stimulus which causes the bubble, which allows the inevitable recession to come.

So what we need to do is deal with monetary policy and not pretend that artificial stimulus by more spending is going to help. That won't do you one bit of good.

It isn't perfect, but it's pretty good. To be clear, more government spending will mechanically prop up the rate of GDP growth. As PGL notes, given the way we do budgeting in this country, that means our kids will be paying (through a higher government debt burden) for our desire to avoid a slowdown in GDP growth. Why are we entitled to their money to clean up our housing mess?

Romney Targets Michigan

2008-01-10T19:49:00.000-05:00

The Pander-fest moves from New Hampshire to Michigan, with Mitt Romney leading the way. Quoting from Glen Johnson of the Associated Press:

"How Michigan is doing, how the manufacturing sector, how the domestic auto manufacturing sector is doing, really is a pretty good bellwether of what the future holds for this nation," he said.

Accusing Michigan Gov. Jennifer Granholm, a Democrat, of presiding over a "one-state recession," Romney added: "If anyone wants to know what the nation would be like under Hillary Clinton or Barack Obama, they can just look at what Michigan is like under Jennifer Granholm."

Romney pledged research funds to help revitalize the state, as well as trade reforms and efforts to help the auto industry transition to more fuel-efficient vehicles.

"Measure me not by what I say, but what I do," he said, with unusual passion. "I will fight for Michigan. I will commit to you that if I'm president of the United States, I will not rest if Michigan is in a one-state recession. If I'm president, the one-state recession is over."

(I am going to speculate that these talking points did not receive the Greg Mankiw seal of approval.) Judging by Romney's campaign tactics in New Hampshire, I'm going to guess that his near-term anti-recession strategy for Michigan is to spend obscene amounts of his own money on misleading attack ads against Huckabee and McCain.

Back from the Voting Booth

2008-01-08T14:53:00.000-05:00

The VoxWife and I cast our ballots this morning. There was one vote for Senator McCain and one vote for Senator Obama. It seems like that's where a lot of people are today. Consider the end of this article in The New York Times today:

In the Republican ranks, Mr. McCain, 71, is a curious bookend to Mr. Obama. He is the oldest candidate in either party besides Ron Paul, another Republican, who is 72. Yet he draws hundreds of young people at some events.

Mr. McCain drew many hundreds when he spoke at Dartmouth, a number exceeded only by the 2,000 students who showed up for Mr. Obama.

“He is seen as Washington but not in it,” said Ronald G. Shaiko, an associate director of the Nelson A. Rockefeller Center at Dartmouth who works with focus groups. “They think he’ll upset the apple cart.”

Mr. McCain admits to admiring Mr. Obama’s appeal as a “wonderful thing” and has taken to borrowing a line or three. He has been channeling Mr. Obama, calling on Americans to “serve a cause greater than their self-interest,” a theme from his campaign in 2000.

At forums, he may hand the microphone to a young man with ONE, a group dedicated to eradicating what it calls “stupid poverty” and disease. The group has more than 17,000 members in New Hampshire.

At Dartmouth, Emily Goodell, 18, sat astride a strange fence, contemplating a vote for Mr. McCain or Mr. Obama.

“It is kind of a strange thing since they have different views on many of the issues,” Ms. Goodell said. “They come across as genuine. I trust them.”

Nearly as striking is the absence of young people on the trail traveled by Mitt Romney and Rudolph W. Giuliani. Mr. Romney visited Dartmouth, but the earth did not shake.

“He went straight to the medical school,” Professor Shaiko said. “He wanted to talk to adults. He has no presence here.”

Still, the youth vote has an uncertain mojo. For the moment, Mr. Obama is like catnip for many people younger than 30. Less certain is if his “it moment” will be sustained.

The results of the Rockefeller Center focus group before the Democratic debate in September at Dartmouth may be instructive. Mr. Obama’s stock dropped after he stood shoulder to shoulder with more experienced rivals.

“His talking about his work in the state legislature while another candidate is talking about negotiating with the North Koreans was a turnoff,” Professor Shaiko said. “They found him coming up short on experience.”

It has been an interesting turnaround for Senator Obama in those three months, and it has been equally interesting to see this aura emerge around him and Senator McCain. It does not seem to have much to do with the two parties, either. The longest line at the polling place was still the one to change affiliations back to undeclared.

Perhaps a Microcosm of the Democratic Contest

2008-01-06T10:25:00.000-05:00

I was unable to watch the candidate debates last evening, but Greg Mankiw provides what may be a microcosm of the contest on the Democratic side. The candidates were asked the following:

Al Gore favors a carbon tax. None of you have favored a carbon tax. Is it a bad
idea? Or is it just so politically unpalatable that you guys don't want to
propose it?

Greg diagnoses the responses of Governor Richardson as ignorant or disingenuous, those of Senator Obama as clear and honest (and correct), and those of Senator Clinton as vacuous. (Senator Clinton's response was so off topic that by the time the questioning got to Senator Edwards, the discussion had moved on to something else.) For Clinton's response, I might have chosen evasive, to link this to a broader theme.

I think that this exchange, which is a stark example of differences that over the past year have been more subtle, gives an indication of why Senator Obama may have appeal that crosses over the political center. I can respect his answer but not the other two.

And if clarity, honesty, and accuracy are important criteria in determining my vote, then I fully acknowledge that the Republican field doesn't go any deeper than Senator McCain. If he doesn't secure the nomination, then I may be looking for more options across the aisle come November.

Econopalooza Blogging

2008-01-05T11:29:00.001-05:00

I am in New Orleans for the ASSA meetings, or what my wife calls "Econopalooza." I am not on Dartmouth's recruiting committee, so I am soaking up as much as I can from the sessions on neuroeconomics and matching theory, two interesting fields where I've got a lot to learn.

This is my first trip to post-Katrina New Orleans. Compared to the last time I was here, it feels quite empty.

Thank You Iowa

2008-01-04T00:14:00.000-05:00

Nice.

Twice.

Because the Iowa caucuses didn't reinforce the positions of the presumptive nominees (Clinton for the Democrats and any of Romney-Giuliani-McCain for the Republicans), the contest continues and becomes more interesting. I think that's good for the process.

Harvard's Financial Aid Reforms

2007-12-30T00:58:00.000-05:00

Much has been made in the last three weeks about Harvard's decision to reduce the financial cost of attending for students from families with incomes up to $180,000 per year. Consider this article in yesterday's New York Times and a typical reaction in a Dartmouth-focused blog. I think most of the hype is overblown, particularly if it is just Harvard making this switch.

Suppose that Harvard's changes to its financial aid policies don't change the pool of applicants it receives. Then the policy simply amounts to a transfer from Harvard to some upper middle class families who send their children there, and there is no reason for any other college to change its behavior. So the impact of the policy is in the change it induces in the applicant pool to Harvard and the improvements that allows Harvard to make in its incoming class.

Who are these additional applicants? Upper middle class students who previously didn't apply to Harvard because, even if they got in, they lacked the financial resources (or the desire to spend them) to attend but who would attend under the new financial aid policies.

I'll conjecture that very few of these students are now applying to, say, Dartmouth. Compared to Harvard, Dartmouth has about the same cost, a financial aid policy that is no more generous than the Harvard's old policy, and an academic reputation that is no better than Harvard's. If financial costs were a barrier at Harvard, then they were a barrier at Dartmouth as well. So if Dartmouth chose not to match Harvard's new policy, I don't see why it would lose students out of its current applicant pool. And what's true of Dartmouth is true of colleges that are presently even less competitive with Harvard, making the opening to the New York Times article about Dickinson College a bit far-fetched. The article does identify the colleges that will see their applicant pools change:

In the competitive scramble for prestige and rankings, numerous colleges already try to lure some top students away from the Ivy League by showering them with “merit aid” even if they are well off and can afford full tuition.

The price of buying a better class just went up, so these colleges will have to modify their behavior if they still want to compete in this way. Let's assume that the higher prices discourage some (even if not all) of this behavior, generating a better applicant pool at Harvard. The better applicant pool, in turn, means a better set of applicants who do not get into Harvard. Some of the students induced to apply will get the spots that would have otherwise gone to other applicants, presumably of all financial backgrounds given Harvard's need-blind admissions policy.

And where will these newly denied applicants go? To their second-choice schools, which will include Dartmouth in some cases. So one impact of Harvard's change in financial aid on colleges like Dartmouth is that it allows them to also be more selective, even without changing their own financial aid policies.

This impact is offset to the extent that there are students admitted to both Harvard and Dartmouth that would choose Dartmouth if both cost the same but Harvard under its new financial aid policies. If it's just Harvard, then I'll conjecture again that this is a small number of students. If other colleges, very few of whom are more competitive with Harvard than is Dartmouth, follow Harvard's lead, then the set of admitted students who might be lost to their second-choice colleges will go up to the point that it would be difficult to maintain a higher price and the same quality of matriculating student.

So it is not Harvard's behavior that is important--it is the behavior of the large number of colleges that consider themselves competitors to Harvard.

Time for a Road Trip

2007-12-29T20:45:00.000-05:00

Apparently, President Bush is persona non grata in the otherwise friendly and welcoming town of Brattleboro, Vermont. From this morning's Associated Press, courtesy of The New York Times:

A group in Brattleboro is petitioning to put on the agenda of a town meeting in March a measure that would make Mr. Bush and Vice President Dick Cheney subject to arrest and indictment if they ever visit the community. As president, Mr. Bush has been to every state except Vermont.

The town meeting, an annual exercise in which residents gather to vote on things like fire department budgets and municipal policy, requires about 1,000 signatures to place a binding item on the agenda.

The measure asks, “Shall the Selectboard instruct the town attorney to draft indictments against President Bush and Vice President Cheney for crimes against our Constitution, and publish said indictment for consideration by other municipalities?”

That's appalling--there is so much worth seeing in Vermont that there is no excuse for not visiting. I suggest that the President and Vice-President make a public appearance in Brattleboro. Perhaps they could invite the petitioners out for lunch. Even better, do gourmet take-out from the legendary Vermont Country Deli.

Caucus Nuances

2007-12-27T10:03:00.001-05:00

I had no idea how important vote trading could be in the Iowa caucus next week. Read this story for details.

Immigration and Globalization

2007-12-19T17:56:00.000-05:00

Frequent commenter ishmaelabroad asks for a reaction to this exchange between Andrew Leonard at Salon and George Borjas on his blog. Keeping in mind that this is a reaction to a comment on an analogy, here goes.

Borjas makes a reasonable point that journalists, more than many other professional occupations, should understand the impact of an influx of competitors with low reservation wages on the prevailing wage level. Leonard accepts this point, but then suggests his own analogy between globalization and the futility of erecting barriers to illegal immigration:

To think that one can turn back the tide of competition unleashed by the Net is a lot like thinking that in a globalized world one can ameliorate the wage impact of illegal immigration by building a border fence or by passing laws imposing strict sanctions against employers who hire illegal immigrants. The work forces of China and India and eastern Europe and of course Mexico have joined the world economy just like bloggers have joined the media universe. In both cases, technology has played a huge enabling role, and, unless the world experiences a truly massive and unprecedented energy crisis, that technologically-midwifed change is not going back in the bottle. In a globalized world, massive disparities between the living standards of individual nations will create more pressure than ever before for some kind of equalization,
whether that means workers finding their way from the developing to the developed world, or capital headed in the other direction.

I think he's right insofar as he notes that there will be "some kind of equalization." I think that he's concluding prematurely that immigration will play, needs to play, or should play a large role in that equalization.

The current Wikipedia entry for globalization points to economic integration in four types of markets: goods and services, capital, technology, and labor. I'm an economist with libertarian views, so I am all for greater opportunities to exchange the first three across national borders, provided that property rights are protected. I'll further assert that if those opportunities were enhanced, there could be less pressure for labor to move across national borders. (See this earlier post.)

The difference between labor and the other three markets is that a laborer is a person, and people have rights unrelated to their economic lives. As I've said before, I don't believe in guest-worker programs that authorize a second-class citizenry. So if people have immigrated, they have the right to vote, and their votes may move policies away from those that would otherwise prevail. As another example, they have the right to make claims against a social welfare system, and their claims may outweigh their contributions through the tax system. I'm sure others could come up with more examples.

So immigration, as distinct from other forms of globalization, imposes a distribution of costs and benefits on the rest of society that is intermediated through the political system. A citizen of the U.S., even one who embraces the other three types of globalization, could reasonably conclude that the costs of immigration imposed through the political system outweigh the economic benefits. This is particularly true if the benefits to the immigrants themselves are excluded. (See the distinction between being generous and being fair to would-be immigrants in this recent post.)

There are obviously many citizens of this country who have come to a different conclusion about these political costs net of economic benefits, and so they are naturally advocating for a more permissive immigration policy. However, if a citizen had come to that conclusion, then the next question is whether the costs of deterring illegal immigration are sufficiently smaller than these political costs net of economic benefits. Leonard (if he is asking this question) seems to believe that the ability to deter (e.g., through a border fence or employer sanctions) is so low or that the costs of deterrence are so high that the answer to this question would almost always be "no." I'm not so sure.

Let Me Not Rephrase That

2007-12-18T09:43:00.000-05:00

From the preface to the second (1996) edition of The Blind Watchmaker by Richard Dawkins, with my highlighting:

Authors naturally hope that their books will have lasting rather than ephemeral impact. But any advocate, in addition to putting the timeless part of his case, must also respond to contemporary advocates of opposing, or apparently opposing, points of view. There is a risk that some of these arguments, however hotly they may rage today, will seem terribly dated in decades to come. The paradox has often been noted that the first edition of The Origin of Species makes a better case than the sixth. This is because Darwin felt obliged, in his later editions, to respond to contemporary criticisms of his first edition, criticisms which now seem so dated that the replies to them merely get in the way, and in places even mislead. Nevertheless, the temptation to ignore fashionable contemporary criticisms that one suspects of being nine days' wonders is a temptation that should not be indulged, for reasons of courtesy not just to the critics but to their otherwise confused readers. Though I have my own private ideas on which chapters of my book will eventually prove ephemeral for this reason, the reader--and time--must judge.

Sometimes, your first argument is your best argument, and rephrasing it in response to a confused question, comment, or critique only weakens it.

Yes, Mikey, It Really Is About Illegal Immigration

2007-12-08T00:01:00.000-05:00

Mark Thoma directs us to Michael Kinsley's commentary in Time arguing that "legal vs. illegal immigration isn't the real issue." I take the bait. Here is one of Kinsley's key paragraphs:

Another question: Why are you so upset about this particular form of lawbreaking? After all, there are lots of laws, not all of them enforced with vigor. The suspicion naturally arises that the illegality is not what bothers you. What bothers you is the immigration. There is an easy way to test this. Reducing illegal immigration is hard, but increasing legal immigration would be easy. If your view is that legal immigration is good and illegal immigration is bad, how about increasing legal immigration? How about doubling it? Any takers? So in the end, this is not really a debate about illegal immigration. This is a debate about immigration.

That's not a good test, unless Kinsley is arguing that a politician's desired amount of legal immigration should not depend (negatively) on the number of illegal immigrants who are already here. One does not have to argue that there are no differences between illegal and legal immigrants (for example, in their economic or fiscal impact) to assert that the key distinction of legality is relevant for public policy.

Additionally, why does Kinsley develop his article by excluding the possibility that a politician believes that the number of legally authorized immigrants each year is the appropriate one and wants to reduce total immigration to that target which emerged out of the democratic process? Later in the article, he suggests this is possible:

There is some number of immigrants that is too many. I don't believe we're past that point, but maybe we are. In any event, a democracy has the right to decide that it has reached such a point. There is no obligation to be fair to foreigners.

But let's not kid ourselves that all we care about is obeying the law and all we are asking illegals to do is go home and get in line like everybody else. We know perfectly well that the line is too long, and we are basically telling people to go home and not come back.

But he should have written, "no obligation to be generous to foreigners." This is an important distinction. Telling the ones here illegally "to go home and not come back" is the way to be fair to "foreigners," particularly the ones near the front of that very long line.

He should also have written that we have no obligation to cede our decisions about who enters the country to the "foreigners." Insisting on a distinction between legal and illegal immigration is a way to keep control of that process. Why should we give up that prerogative? To be generous to some and unfair to others? I'm going to need a better reason than that.

And while we are on the topic of obligations, we should clarify what our obligations are to those who are here illegally. We are obligated to protect their basic human rights. We are not obligated beyond that to ease the considerable burdens they face in being here illegally, whether through issuing them drivers' licenses or providing a path to citizenship that recognizes their illegal tenure here. We may choose to do so, but we are certainly not obligated to do so.

And, referring back to the first excerpt, we are not obligated to ensure that immigration laws are "enforced with vigor" against those who have managed to enter illegally if the cost of enforcement is perceived to be too high or the consequences too disruptive. That in no way undermines our authority to enforce them with vigor against those who would seek to enter illegally in the future to prevent them from doing so. That seems to be where most of the Republican candidates are, and on this issue, that's where I am, too.

Don't Drink While You Read the WSJ

2007-12-07T19:28:00.000-05:00

See what I mean?

CBO Joins the Blogosphere

2007-12-06T12:38:00.000-05:00

As if being a CBO Director weren't time consuming enough, Peter Orszag has joined the blogosphere:

What are you likely to read on this blog? First, you will learn more about CBO — the types of work we do, how we do it, and more about the outstanding analysts we have. For example, when we come out with a new report or important cost estimate, I may write a bit about the analytical substance and also introduce you to the key staff who took the lead in the analysis. Second, CBO’s research and cost estimates are often discussed extensively in the media and elsewhere — and not surprisingly, from time to time misunderstandings or misinterpretations arise about some analysis we have done. In those kinds of situations, I will use the blog to further explain our work and address possible or potential misunderstanding. Finally, when it seems appropriate, I will use the blog to link our work to relevant outside research from academic or other institutions that may shed additional light on the challenging issues the Congress is working to address.

CBO's website was already very helpful. This makes it even better. Bookmark it today.

Mystery Solved

2007-12-05T13:20:00.001-05:00

Happy Chanukah!

The Samwick Family Fund

2007-12-04T13:33:00.000-05:00

Last year at this time, I was scrambling to make charitable donations to all manner of local and national organizations. The year-end scramble comes from the desire to claim the tax deduction for 2007 instead of 2008--the year of delay would reduce the present value of the deduction.

Earlier this year, we made our first gift of appreciated securities to a charitable organization. The VoxWife is having a college reunion next year, and we decided to make a bigger gift than we normally do to commemorate that. Giving appreciated securities generates the same deduction on the individual tax form we file in April as would a gift of cash, but it also eliminates the capital gains tax that we would eventually pay on the sale of those securities. I had a particular stock in my portfolio that I thought was overvalued at the time, and so I would have looked to sell it anyway. So this was a real tax saving.

I thought at the time that it would be nice to have the same opportunity to lessen capital gains tax liability via all of the usual year-end giving, except that the year-end giving tends to be a lot of small donations to a number of organizations. For example, it is time consuming and sometimes infeasible to make a gift of appreciated securities for the few hundred bucks that we send to the United Way each year.

Earlier this fall, I discovered the Fidelity Charitable Gift Fund, and so now that's a possibility. In a nutshell, the CGF is itself a charitable organization, so an irrevocable gift of appreciated securities to it is tax-deductible and avoids the capital gains tax that would occur on a sale. The CGF then allows us to disburse the proceeds in our account to the charitable organizations we like in amounts as small as $100. The CGF invests in Fidelity mutual funds, so the giving capacity continues to grow along with the market.

There are a number of advantages to this setup. It avoids the year-end scramble--we can make one gift to the CGF equal to roughly the total that we want for all of the charities, and then direct the CGF to give to the individual charities at our convenience. It saves on some of the record-keeping for tax purposes--it is just the one gift that we need to track, since the subsequent disbursements from the CGF are not relevant to our tax form. For another summary and some illustrative examples, see this recent story on donor-advised funds from USA Today.

Dan Zanes and the Toddler Mosh Pit

2007-12-02T15:43:00.000-05:00

Today marked the return of musician Dan Zanes to the Upper Valley, with two performances at the Lebanon Opera House. He's one of the best musicians for the under 6 crowd that you can find. Here was the scene earlier today:

We've got plenty of his CDs around the house. They make for great gifts.

We've also got plenty of kids music by They Might Be Giants, whose Here Come the ABCs is getting a lot of airtime lately.

Money Talks

2007-11-28T14:08:00.000-05:00

Apparently, some folks in Ireland are dismayed by how much money hedge funds have made with short positions in their nation's stock market:

A HIGHLY secretive coterie of London and New York-based hedge funds has made hundreds of millions in profits from driving down Irish share prices.

Last week, Anglo Irish Bank boss, David Drumm, criticised hedge funds which were shorting Anglo shares, adding that it had been hugely damaging to the bank, which has shed almost half its value since June.

For the first time, the Sunday Independent can reveal the identities of the principal hedge funds targeting the Irish market.

We should take a moment to be clear about what's happening here and how grownups settle these sorts of disputes. The hedge funds made profits not because they drove down Irish share prices. They made profits because they sold Irish shares, ... and then the prices of those shares went down. The hedge funds cannot make the shares go down and stay down simply by betting that they will--other traders need to agree with them.

If Mr. Drumm has a different opinion about the appropriate price of his bank's stock, then he should be thanking the hedge funds for offering him a cheap opportunity to buy it back.

Vote for Me, I Blow Bubbles

2007-11-27T13:12:00.000-05:00

Do we think it would have been appropriate, in making comparisons of public's perception of the economy in 1998 to its perception today, to note that we were then in the midst of a stock market bubble?

Childish

2007-11-25T16:29:00.000-05:00

www.biden08.com

The Play's the Thing

2007-11-20T23:24:00.000-05:00

Why am I not surprised by this?

Harry Potter, James Patterson and Oprah Winfrey’s book club aside, Americans — particularly young Americans — appear to be reading less for fun, and as that happens, their reading test scores are declining. At the same time, performance in other academic disciplines like math and science is dipping for students whose access to books is limited, and employers are rating workers deficient in basic writing skills.

That is the message of a new report being released today by the National Endowment for the Arts, based on an analysis of data from about two dozen studies from the federal Education and Labor Departments and the Census Bureau as well as other academic, foundation and business surveys. After its 2004 report, “Reading at Risk,” which found that fewer than half of Americans over 18 read novels, short stories, plays or poetry, the endowment sought to collect more comprehensive data to build a picture of the role of all reading, including nonfiction.

Despite the problem of establishing the direction of causation, I am inclined to believe that it is the reduction in reading for pleasure that has caused the deterioration in reading and writing competency. It is so much easier to teach young people to do something when they get to take some ownership of and responsibility for what they are learning. Within some loose constraints regarding length and degree of difficulty, students should simply be encouraged and expected to read, with adults leading by example. As I've blogged before, force-feeding students a steady diet of stuff that doesn't interest them is a losing strategy. And, sadly, there can be a vicious cycle here: loss of interest leads to more regimentation; more regimentation further erodes interest; and on it goes.

I came across the article linked above shortly after reading this story in the Sunday paper, from which the following is an excerpt:

As Richard [Louv] notes in "Last Child in the Woods," the obesity epidemic coincides with a record-high increase in organized sports for kids. How does that correlate with the need for more outdoor play?

[Martha] Erickson: Obesity relates not only to activity level but also to the type and quantity of food we eat. That said, in organized sports, kids often have little actual playtime. But watch a group of children in a wooded area, and you'll see them running, climbing over things, then dashing over to whatever captures their attention next.

[Tedd] Mitchell: Last summer, my sons built a fort out of storage pallets and hay at our ranch. That project took them all weekend. They were like beavers, constantly moving back and forth between our barn and the woods. Sports are more about following directions to the letter. They're great for discipline -- and can have mental and physical benefits -- but they don't leave room for the imagination. Kids get bored so easily because they don't have the amount of time we did, when we were young, to just play.

Again, there could be reverse causality, but I am inclined to think that the organized sports, when they come at the expense of disorganized play, are the critical factor here. If there is no imagination involved, we don't get the full body and mind involved, and we don't get the long-term benefits.

Krugman on Obama on Social Security

2007-11-18T22:47:00.000-05:00

Senator Obama's decision to make Social Security's long-term financial health an issue in last week's debate has generated some discussion among economists and pundits. As usual, Paul Krugman gets us going, claiming that Obama has been played for a "sucker:"

But the “everyone” who knows that Social Security is doomed doesn’t include anyone who actually understands the numbers. In fact, the whole Beltway obsession with the fiscal burden of an aging population is misguided.

As Peter Orszag, the director of the Congressional Budget Office, put it in a recent article co-authored with senior analyst Philip Ellis: “The long-term fiscal condition of the United States has been largely misdiagnosed. Despite all the attention paid to demographic challenges, such as the coming retirement of the baby-boom generation, our country’s financial health will in fact be determined primarily by the growth rate of per capita health care costs.”

How has conventional wisdom gotten this so wrong? Well, in large part it’s the result of decades of scare-mongering about Social Security’s future from conservative ideologues, whose ultimate goal is to undermine the program.

For the record, Obama has not said that our country's financial health won't be determined primarily by the growth rate of per capita health care costs. He is merely not using that as an excuse to ignore the challenges to Social Security's long-term financial health.

Greg Mankiw takes Krugman to task for ignoring a few people who have pointed out Social Security's long-term financial challenges who would hardly qualify as conservative ideologues. We might also point out that Peter Orszag, who is quoted so approvingly by Krugman, is the co-author of the Diamond-Orszag plan for "Saving Social Security." Conservatives like myself who do understand the numbers readily praise the plan as one that Democrats should have proposed years ago.

Krugman concludes:

But Social Security isn’t a big problem that demands a solution; it’s a small problem, way down the list of major issues facing America, that has nonetheless become an obsession of Beltway insiders. And on Social Security, as on many other issues, what Washington means by bipartisanship is mainly that everyone should come together to give conservatives what they want.

We all wish that American politics weren’t so bitter and partisan. But if you try to find common ground where none exists — which is the case for many issues today — you end up being played for a fool. And that’s what has just happened to Mr. Obama.

I will agree with Krugman that there have been some cases where that's what bipartisanship has meant, substituting "President Bush" for "conservatives." Medicare Part D is the leading example. However, I have not met the conservative who wants what Obama has proposed: raising the maximum taxable earnings level and doing nothing else. Conservatives want something like this, which makes all of the adjustments on the benefit side. Conservatives will settle for something like this, which includes Obama's proposal plus some other changes, like gradual reductions in future benefits, small increases to the payroll tax and retirement ages, and personal accounts to absorb any new revenues to make sure they are saved rather than spent.

What is frustrating about Krugman's column is that he's given up on finding common ground and mocks those like Obama who haven't. There may be no common ground at the moment on the issues Paul thinks are relevant, and the President is as much to blame for that as anyone, but that doesn't mean that there can be none after the next election. Krugman seems to be looking for his turn to be in the majority of 50.1%. I'm looking for something better and something different.

Read more commentary from PGL at Econospeak, Don Boudreaux at Cafe Hayek, and Tom Redburn in the New York Times, who quotes some non-conservative, non-ideologues about the size of Social Security's financing problems.

Senator McCain Visits Dartmouth

2007-11-18T09:28:00.000-05:00

Senator McCain included Dartmouth on this weekend's slate of town hall meetings, speaking to a capacity crowd in Alumni Hall last evening. I may not agree with him on some issues, but there's no arguing that he's an authentic statesman with a record in public service that does merit presidential consideration. That experience puts him in select company in this campaign. It was nice to see so many students at the event. Several of them asked good questions.

The event focused on two topics, the war in Iraq and federal spending. On both of these topics, McCain began with a sincere acknowledgement that it has been Republicans in the majority who have made major mistakes. On the war, McCain pinned the blame on Rumsfeld and insisted that the "surge" strategy was working. In response to a question by a student, however, I think McCain stumbled a bit in trying to describe how the war would eventually come to an end. Is it nothing more than we leave and declare victory when the troops are home? I don't think the Republicans, even the authentic ones, will have much chance for electoral success until they can paint a picture of a successful end to the war.

On federal spending, McCain linked runaway spending to corruption and the jail time now being served by former members of Congress. He sounds really good when he's talking about this, but he showed no signs of addressing my big frustration with federal spending. Does he really think we can close the budget deficit only by eliminating pork barrel projects? If so, then he must think that a big chunk of the defense budget is pork. He must think that plenty of health-related and entitlement spending is pork. And if that's the case, then he shouldn't tell me about a $233 million bridge to nowhere. He should be telling me about $233 billion (or more) in cuts that he's willing to make. And, of course, he cannot combine silence on that with the combination of "not wanting to raise your taxes" and "needing to spend more on defense." I've heard worse, but I still would have liked a bit more "straight talk" on the budget. If he were saying that, I'd be working for him.

Overall, a great event. As John Gregg wrote in his recent "Primary Sources" column for The Valley News, the Republican candidates have passed through this area, but they haven't had much of a presence. So it was particularly nice to see one stand up and answer direct questions.

UPDATE: An article from the student paper on the event.

Score One for Monsanto

2007-11-14T09:26:00.000-05:00

I thought I was reading The Onion when I happened upon this AP story, which was also carried by my local paper today:

HARRISBURG, Pa. (AP) — Pennsylvania is stopping dairies from stamping milk containers with hormone-free labels in a precedent-setting decision being closely watched by the industry.

Synthetic hormones have been used to improve milk production in cows for more than a decade. The chemical has not been detected in milk, so there is no way to test for its use, but a growing number of retailers have been selling and promoting hormone-free products in response to consumer demand.

State Agriculture Secretary Dennis C. Wolff said advertising one brand of milk as free from artificial hormones implies that competitors' milk is not safe, and it often comes with what he said is an unjustified higher price.

"It's kind of like a nuclear arms race," Wolff said. "One dairy does it and the next tries to outdo them. It's absolutely crazy."

I think I am well within my rights to declare Mr. Wolff's office a "Microeconomics Free Zone." I wouldn't use the word "crazy" to describe producers' desire to compete with each other to offer the consumers a product they might like better. Whether the hormone has been shown to affect the milk is irrelevant here. If the statement is true about the production process, the producers should be allowed to label their product as such.

Citigroup, Yeah, Right

2007-11-11T19:10:00.000-05:00

It's been quiet of late on the pension front, as the parade of stupid ideas for how to further erode workers' retirement security seemed to be over. Interrupting the silence are the events in this recent article by Jonathan Peterson of the Los Angeles Times with the inviting title, "Pensions May Be Outsourced." It begins as follows:

WASHINGTON -- Would you feel comfortable if your company sold off your pension plan to a big bank?

This month, Citigroup Inc. got the green light from the Federal Reserve for an unusual deal to take over the $400-million retirement plan of a British newspaper company.

In exchange for getting its hands on all that cash, Citigroup will run the pension plan -- investing the money, paying the benefits and taking on the liability previously borne by Thomson Regional Newspapers. And it's eyeing similar moves stateside.

Let's not mince words here. There is no upside for the workers and retirees. Federal regulators should put a stop to this immediately. If Citigroup (yes, this one) can convince the plan sponsor that it can provide financial management services in the most efficient manner, then the plan sponsor should be allowed to employ Citigroup for its investment management. However, the plan sponsor must still be the entity that guarantees the pension payments to the plan participants. The plan participants should always have recourse to the plan sponsor. That should not be outsourced.

Read the whole article. If you are like me, you will roll your eyes, possibly to the point of permanent damage, when you get to this part:

Ari Jacobs, head of the Retirement Benefits Advisory Group at Citigroup in New York, said American employers seemed "very interested in opportunities to reduce or eliminate the risks associated with their pension plans." He added: "We in the U.S. are looking at a similar model" as the British deal."

A lot of these companies -- including some that are our clients -- are asking, 'What are our alternatives now that we've frozen the pension plan?'" said Scott Macey, senior vice president and director of government affairs for Aon Consulting.

Until now, the alternatives have been to pay off workers with cash or to buy annuities from insurance companies, which then continue to pay the benefits.

But now, financial companies such as Citigroup say they could do the job more cheaply than insurance companies -- and with greater expertise at managing risk. Insurance companies, for example, face costly state-by-state regulation that pushes up the price of annuities.

"As a financial institution, we believe we're better at managing financial risk than anybody else," Citigroup's Jacobs said. "That's our core business."

(Yes, that Jacobs fellow seems to be talking about the risk management virtues of this Citigroup.) If the plan is frozen, then the plan sponsor can simply prefund the present value of expected payouts with purchases of government bonds and eliminate interest rate risk by duration matching the bonds to the expected payouts. That's all that needs to be done if what is being done is purely in the interests of the plan participants, and any number of financial services or insurance companies could be contracted to do it.

The reason plan sponsors perceive there to be risk is that they feel like they should be using the pension fund to invest in stocks, so that they can claim the risk premium in the present value calculations of their obligations and prefund them with less money today. That sleight of hand is what generates almost all of the problems in pension regulation.

And where there are investors looking to get something for nothing, there will be investment firms willing to give them nothing for something. Normally, I'd say they are a perfect match for each other, except that in this instance, they are playing with the pensions of workers and retirees.

Narrowing, Widening, and Polarizing

2007-11-07T10:13:00.000-05:00

This new NBER working paper by Claudia Goldin and Larry Katz just made it to the top of the must-read pile. The title and abstract (with my emphasis added):

Long-Run Changes in the U.S. Wage Structure: Narrowing, Widening, Polarizing

The U.S. wage structure evolved across the last century: narrowing from 1910 to 1950, fairly stable in the 1950s and 1960s, widening rapidly during the 1980s, and “polarizing” since the late 1980s. We document the spectacular rise of U.S. wage inequality after 1980 and place recent changes into a century-long historical perspective to understand the sources of change. The majority of the increase in wage inequality since 1980 can be accounted for by rising educational wage differentials, just as a substantial part of the decrease in wage inequality in the earlier era can be accounted for by decreasing educational wage differentials.

Although skill-biased technological change has generated rapid growth in the relative demand for more-educated workers for at least the past century, increases in the supply of skills, from rising educational attainment of the U.S. work force, more than kept pace for most of the twentieth century. Since 1980, however, a sharp decline in skill supply growth driven by a slowdown in the rise of educational attainment of successive U.S. born cohorts has been a major factor in the surge in educational wage differentials. Polarization set in during the late 1980s with employment shifts into high- and low-wage jobs at the expense of the middle leading to rapidly rising upper tail wage inequality but modestly falling lower tail wage inequality.

The sentences that I have highlighted seem directly relevant to this earlier discussion in August 2006 about whether Paul Krugman was right to accuse Treasury Secretary Paulson of "falsely implying that rising inequality is mainly a story about rising wages for the highly educated." (See follow up posts here and here.)

I'll look forward to reading the paper and revisiting the broader issue.

Speaking Volumes

2007-11-04T09:36:00.000-05:00

If you read carefully, you can learn quite a bit about Senator Clinton's presidential campaign from a recent interview with her in the local Valley News. Here are the opening paragraphs:

West Lebanon -- U.S. Sen. Hillary Clinton yesterday rejected suggestions that she is running a scripted presidential campaign that is avoiding substantive answers, saying she is the most experienced Democrat in the field to take on Republicans.

“I want to govern as a progressive Democrat, but I'm going to run a disciplined campaign that is a winning campaign, and part of that means staying on message, so that's what I do, day in and day out,” Clinton said yesterday in a meeting with Valley News editors and reporters.

Someone will have to explain to me how she can simultaneously "stay on message" while rejecting suggestions that "she is running a scripted presidential campaign."

And what's this about being the most experienced Democrat? The article suggests an answer:

The former first lady, who recently turned 60, said her political activism dating back to the 1960s, and vast exposure to the national spotlight, leave her “better prepared to take on what needs to be done in Washington.” And she said her experience as first lady in the turbulent Clinton White House, and in running for Senate in her adopted state of New York, have steeled her to take on a general election campaign for the presidency.

“Speaking from experience, until you've been through it, you have no way of knowing how you are going to react. It is not an intellectual exercise; it is visceral,” Clinton said. “At the end of the day, I think I'm in the best position to win.”

So the experience in question is not experience in governing. It's experience in campaigning. Although it may not seem like it today, that campaign will end. Then what? More from the article:

“It's not just what I say on a stage in a debate, and what point I score and whether my opponents attack me, or whatever,” she said. “I try to think responsibly about, OK, when I'm president and I actually want to do this, how am I going to do it, and how am I going to avoid having said something during the campaign that will come back and undermine what I think my responsibility is, which is actually to get something done.”

She would apparently not want to be constrained in what she will do based on what she has said she will do. And, of course, we are supposed to cast our votes for her to "get something done," when we are not told in advance what that something will be.

The Wisconsin Naming Partnership

2007-10-30T21:26:00.000-04:00

This is a brilliant idea:

Alumni Give $85 Million to Name Wisconsin School of Business
The Wisconsin School of Business at the University of Wisconsin-Madison has received an unprecedented gift totaling $85 million from a small group of alumni who have formed the “Wisconsin Naming Partnership” to support the school’s mission.

This innovative partnership provides a naming gift that will preserve the Wisconsin name for at least 20 years. During that time, the school will not be named for a single donor or entity. This unprecedented naming partnership will uphold tradition and greatly enhance the value of the school to students, the campus and the state.

The Wisconsin naming gift is the first of its kind received by a U.S. business school. Conventional business school naming gifts adopt the name of a single donor in perpetuity. By preserving the Wisconsin name for 20 years, this gift leaves open the option of future naming gifts.

UW-Madison Chancellor John D. Wiley calls the gift “a creative act of philanthropy and a major milestone for our university.”

Why would a school want to keep open the opportunity to name itself? The answer seems to be that the price tags for naming business schools are going up faster than just about anything, including the returns to university-managed endowments. Perhaps this is because naming schools is the province of the ultra-rich, who get where they are because they can build wealth faster than conventionally managed funds. So if the school sells the name today and invests the money, it gives up the opportunity to sell the name for a higher current value later on. Wisconsin's solution is to rent the name for 20 years. It allows the school to use a large gift today, without foreclosing the possibility of a much larger naming gift in the future. To really determine how much value it adds, we would have to make assumptions about what the giving behavior of the members of the partnership would have been over that period in the absence of this gift (with or without a conventional naming gift).

The Milwaukee Journal Sentinel reports on it here, including a list of other large gifts to business schools in past years.

Obama v. Clinton?

2007-10-29T09:39:00.000-04:00

Last month, after seeing the "Duel at Dartmouth," I openly wondered whether Senator Obama was still campaigning for the top spot, given his lackluster performance. A story in Sunday's New York Times would have us believe that business is about to pick up, with a headline of "Obama Promises a Forceful Stand Against Clinton." He summarizes his frustrations as:

“I don’t think people know what her agenda exactly is,” Mr. Obama continued, citing Social Security, Iraq and Iran as issues on which he said she had not been fully forthcoming. “Now it’s been very deft politically, but one of the things that I firmly believe is that we’ve got to be clear with the American people right now about the important choices that we’re going to need to make in order to get a mandate for change, not to try to obfuscate and avoid being a target in the general election and then find yourself governing without any support for any bold propositions.”

With regard to the New Hampshire primary, I keep thinking to myself, "Why would we want a Clinton when we can have an Obama?" I conjecture that the White House and Cabinet department staffing would be almost the same or better with Obama--who would work for her but not for him if asked? So all of the major policy processes would be very similar. And with Obama, there's just no extra baggage from the 1990s (or earlier) to get in the way of the political negotiations that have to happen to get deals done on key issues like Iraq and entitlement reform.

In Obama's words:

“There is a legacy that is both an enormous advantage to her in a Democratic primary, but also a disadvantage to her in a general election,” he said. “I don’t think anybody would claim that Senator Clinton is going to inspire a horde of new voters,” he said. “I don’t think it’s realistic that she is going to get a whole bunch of Republicans to think differently about her.”

It's pretty clear that I'm one of those Republicans who will not think differently about her and who is unlikely to vote for her under any reasonable circumstances. I haven't come to that conclusion for Senator Obama and some other Democrats. Senator Obama is at once wonkish, charismatic, and unencumbered by years in Washington. He should put those characteristics on display use them every time he speaks, and particularly when he is on stage with Senator Clinton.

If he can't put it all together, he will likely be the one "inspir[ing] a horde of new voters," from the #2 spot on the ticket.

In Praise of the Capitol Steps

2007-10-28T09:58:00.000-04:00

On Friday, the Rockefeller Center and the Hopkins Center at Dartmouth presented The Capitol Steps, a political comedy troupe that tries to be "more ridiculous than whatever's in the news" and "put the mock in democracy." It's a tall order, but I think they managed just fine and provided welcome relief from the stress of primaries.

Here's a sampling of their work, on their YouTube page. Take a look at their website for more, particularly "Lirty Dies," which will sit your splides. You can also pick up their CDsat Amazon.

I haven't laughed that hard at something other than "what the kids just did" in a long time.

UPDATE: A contrary point of view in the student newspaper. Evidence of a generation gap?