And so it begins...

Most economists, even on the left, are not going to be happy about the "Buy America" provisions within the new stimulus package.  

Proponents naturally argue that the only way to create American jobs is to ensure that the money gets spent on American goods and services. Simple enough, right?

Opponents of the provision counter with two main arguments. The first is the threat of a trade war. In the 1930s, the Hoover administration, mired in the beginning of the Great Depression, signed into law the Smoot-Hawley Act, significantly raising American tariffs. Europe, similarly dealing with the economic downturn, enacted their own tariffs. In the end, everyone got poorer. 

The second argument is that it simply won't work, for a variety of reasons having to do with the dynamics of international trade and capital mobility. As Nick Rowe explains:

"A 'buy domestic' policy will not shift demand towards domestic goods. If it did, so that imports fell and net exports increased, the current account surplus would merely cause the exchange rate to appreciate so that net exports fell to their original level. The current account must stay the same, because the capital account stays the same, because the interest rate differential stays the same, because interest rates stay the same."

Brad DeLong adds:

"If there's little excess capacity in the U.S. steel industry--so that the price of steel is high enough to induce people to look outside for suppliers--then a stimulus won't be much needed. If there's a lot of excess capacity so that a stimulus is needed, then steel customers should be able to bargain prices down to marginal cost--in which case foreign producers will have an extremely difficult time competing on price given that steel is heavy and distances are great. "Buy American" seems mostly designed to allow the steel producers to collude and push their profits up--at the expense of American taxpayers." (emphasis added)

Much has been made about the Obama administration's attempts to keep the stimulus package pork-free. But trade restrictions benefit well connected constituencies and are politically popular (usually); it's hard to think we were going to get a an $800 billion stimulus package without pork. As Russ Roberts says, you're better off hoping for a ham sandwich without pork.

Getting mugged by a girl named Apple

There must be something about being famous that compels parents to give their children stupid names. These crazy celebrity offspring appellations range from place names (like David and Victoria Beckham's child "Brooklyn") to fake-profession titles (Jason Lee's child "Pilot Inspektor") to the obviously drug-induced (Bob Geldof's child "Fifi Trixibell").

Are stupid baby names a problem? According a new study from two economists at Shippensberg University in Pennsylvania, these oddly-named children are more likely to commit crimes than those of us with boring names, like John or Dan. The authors find that:

"The distribution of first names in the state’s population is different from the names of juvenile delinquents. Our results show that unpopular names are positively correlated with juvenile delinquency for both blacks and whites."

The authors note that it is unlikely that having an unpopular name causes juvenile delinquency, but rather that unpopular names are "correlated with factors that increase the tendency toward juvenile delinquency, such as a disadvantaged home environment and residence in a county with low socioeconomic status." This seems strange to me. Why would they embark on a study to show that something correlated with factors that increase crime also are linked with more crime? It seems a little roundabout.

Further, Steven Levitt critiques the questionable methods used in this paper:

"The authors first compute criminality for each name by taking the ratio of the number of juvenile delinquents with that name and dividing it by the number of children total with that name. The higher that ratio, the more criminal the name. But then the authors take the log of that ratio. The problem is that the log of zero is equal to negative infinity, so any name for which that ratio is equal to zero gets dropped from the analysis.

The kinds of names that will have a ratio of zero are uncommon names for which no one with that name is a juvenile delinquent.

If I understand correctly what they are doing, if exactly one person has a particular name, the only way that the observation for that name will be included in their sample is if that person is a juvenile delinquent! This leads to a powerful bias toward mistakenly concluding that people with uncommon names are more likely to be criminals."

Quantitative research is fraught with pitfalls that can bias your results. It seems weird to me that they would have missed something like that, but then again, this study makes little sense to begin with.

Since the success of Malcom Gladwell's "The Tipping Point" and Levitt's "Freakonomics", there has been a tendency for researchers to look for novel and completely unexpected relationships in data. But if you look hard enough (and use certain methods) you can find almost anything. It's really important to ground this sort of research in some sort of theory that one is trying to prove.

The good news is that we don't have to fear the wave of kids with unusual names eminating out of Hollywood.

Can we get a little objectivity, please?

Is economic analysis driven by science or by ideology? That seems to be a hot topic this week.

In the New York Times today, Paul Krugman claims that many anti-stimulus arguments are not made in "good faith":

"Some of these arguments are obvious cheap shots. John Boehner, the House minority leader, has already made headlines with one such shot: looking at an $825 billion plan to rebuild infrastructure, sustain essential services and more, he derided a minor provision that would expand Medicaid family-planning services — and called it a plan to 'spend hundreds of millions of dollars on contraceptives.'"

On the opposite end of the ideological spectrum, Russ Roberts argues that economists' positions on the stimulus have less to do with their reading of the empirical data than their feelings about markets in general:

"As far as I know, no prominent market-oriented economist has come out in favor of a trillion dollar increase in government spending as a way to improve the economy. Every market-skeptical economist that I have heard is in favor of it on the grounds that it will improve the economy. Each side claims to have empirical support for its position."*

Additionally, the focus of this week's episode of EconTalk, Robert's weekly economics podcast, is the role of empirical evidence in economics.

How pervasive is the issue of bias within economics? Nate Silver over at FiveThirtyEight.com has some evidence on the subject. Looking at the Wall Street Journal's monthly economic forecasting survey, Silver produces the following chart of growth forcasts by economists in different sectors, including finance, consulting and academia:



It's a small sample (55 economists), but it illustrates the point. The most optimistic growth forecasts come from economists in the financial sector, who perhaps have institutional incentives pushing them toward optimism, while the most pessimistic forecasts come from academia. Typical liberal academics, some might say!

This is not entirely new. In 2006, David Lereah, former Chief Economist for the National Association of Realtors, wrote "Why the Real Estate Boom Will Not Go Bust - And How You Can Profit From It". This was hardly an unbiased work. An economist representing the interests of realtors has a strong incentive to promote the real estate industry. Of course, less then a year after the book was published, the market started to go south and... well, you know the rest.

It's entirely likely that ideology clouds the minds of even the best economists. But is it just economists who suffer from a lack of objectivity? A recent survey of scientists' views on global warming suggests not:

"In analyzing responses by sub-groups, Doran found that climatologists who are active in research showed the strongest consensus on the causes of global warming, with 97 percent agreeing humans play a role. Petroleum geologists and meteorologists were among the biggest doubters, with only 47 and 64 percent respectively believing in human involvement." (emphasis added)

Scientists and economists are people too. People are affected by biases in subtle and unconscious ways. This, however, does not mean that there is no objectivity out there. The peer review process, for example, is designed for just this purpose: to reanalyze and replicate results and to ferret out unsubstantiated claims. As long as everyone gets to look at the same data, we should be able to find some areas of common understanding.

That being said, it's wise to listen to more than one expert and more than one perspective.

____________________________________________________________
*It should be noted that Martin Feldstein, a prominent center-right economist at Harvard, has come out in favor of fiscal stimulus.

Is Fair Trade Really Fair?

Fair Trade coffee is a great example of the moral and ethical crisis we as citizens and consumers face on a daily basis. Let's fly to the Nic for a moment.

Marlon is the leader of his remote jungle community in Nicaragua. A gentle-hearted 35 year old who has two children of his own and cares for another teen who lost her parents in recent conflicts.



He has organized the coffee farmers in several of the surrounding areas in a cooperative so that they may share knowledge, shipping costs, and the price of purchasing Fair Trade certification. The great thing about Fair Trade certification is that it allows for this small cooperative to make a reasonable wage for their produce which they would be unable to without both the organic and fair trade stamps on their coffee which sells for a premium in the US.

The idea is that this certification allows for the protection of workers' collective rights and to sooth consumers' anxieties for a fixed cost.

Now the pickle here is that this is a certification that protects the rights of the collective workers rather than the individual farmers and is being dictated by consumers rather than big government.

"I don't know if we're going to be able to comply with the regulations this year," explains Marlon.

"You see, our kids have school only twice a week because it is so far away. The rest of the time they work picking coffee."

"This year, they are demanding that no child under the age of 16 works in the fields. There are 16 year old here with wives and homes already. How are they suppose to manage? Our children help pick the coffee during harvest. We cannot afford to hire workers like the large plantation. How are we suppose to manage?"

Child labor is a human rights violation, we can all agree on that. The idea with this regulation is to protect the collective rights of children, but it comes at the expense of individuals like Marlon and the members of his communities. Continuing on this path, Fair Trade coffee will drive his community in a helpless situation where they will have to work on someone else's farm to survive.

Is Fair Trade better than not? Probably. But as long as it is a system dictated by Western consumers presupposing other people's plights and transposing Western standards of development without the support to protect the individuals, that coffee should taste just as bitter as any other mass-produced gruel.

Also sprach the market

Financial journalists must have telepathic powers. Otherwise, you'd never see articles like this:

Obama spending plan worries US markets

While a large fraction of the economics profession has jumped on-board the fiscal stimulus bandwagon, apparently some investors are less sanguine:

Sinking bond prices are "a reflection of the massive stimulus plan in effect and the likelihood that there is more coming down the road, and the concerns how we will pay for all of this," Kim Rupert, fixed income analyst at Action Economics, told CNN Money.

So there we go. Fiscal stimulus will be bad for the economy, says the market. Or so I thought, until I read this:

Stocks tumble on fresh worries about banks

According to this article:

"At this stage, markets in general and bank investors specifically are really looking to government as the way out," said Jack Ablin, chief investment officer at Harris Private Bank. "Certainly, of just about all of inaugurations that I can recall today's event probably has the not only the symbolic importance but really tangible importance to the stock market." (emphasis added)

So who's right? Financial markets are not monolithic entities, but the product of millions of individual decisions. They are affected by many factors and it's easy (but usually wrong) to construct an ex-post explanation of the day's events.

It seems unlikely that the stimulus plan had much to do with today's events in the market. Obama was sworn in today, but we've known for weeks that fiscal stimulus is coming fast. And it seems equally unlikely that financial markets are suddenly spooked by government debt, particularly with near-zero interest rates allowing the Treasury to borrow virtually for free.

If the market is up tomorrow, what will the headline be?

The change we can realistically expect

Today is a proud and profound moment in American history.

But shortly after being sworn in, Barack Obama will go from "the change we've been waiting for" to "the change we expect right now". Ed Glaeser has some wise words on what we can and should expect from the new president:

"Americans cannot afford to treat the president as their personal ideological champion, or to judge him on economic conditions that he cannot control. Let’s hope that this president is as competent as he seems, and let’s judge him on that competence."

There is a strong tendency to give presidents too much credit (or blame) for economic conditions. Glaeser cites research suggesting that people tend to base their votes on the economic growth performance of the president's first three years--I assume this refers to economic conditions in general, not that people are pouring over GDP data while waiting in line to vote.

Politicians promise more than they can deliver and people expect it. But there is real danger in that. One of President Bush's failings was being overly ambitious, taking on the democratization of the Middle East and overhauling Social Security at the same time, ultimately not accomplishing either. Hopefully the Obama administration will avoid this pitfall. Their task is to set a realistic and attainable agenda and look for the places where government action is the most effective.

Obama is a smart, thoughtful, and capable person. He has the chance to be a great president. But there's only so much even a great president can accomplish.

Forget Tim Geithner, we need Suze Orman at Treasury!

Robert Shiller thinks that some of the stimulus package should go to improving financial literacy in the US:

Many errors in personal finance can be prevented. But first, people need to understand what they ought to do. The government’s various bailout plans need to take this into account — by starting a major program to subsidize personal financial advice for everyone.

A number of government agencies already have begun small-scale financial literacy programs. For example, the Treasury announced the creation of an Office of Financial Education in 2002, and President Bush started an Advisory Council on Financial Literacy a year ago. These initiatives are involved in outreach to schools with suggested curricula, and online financial tips. But a much more ambitious effort is needed.

Clearly, many financial errors were made over the past few years (interest only loan, how can I lose?). According to Shiller, this stems from a simple lack of financial knowledge:

A paper by Kris Gerardi of the Federal Reserve Bank of Atlanta, Lorenz Goette of the University of Geneva and Stephan Meier of Columbia University asked a battery of simple financial literacy questions of recent homebuyers. Many of the respondents could not correctly answer even simple questions, like this one: What will a $300 item cost after it goes on a “50 percent off” sale? (The answer is $150.) They found that people who scored poorly on the financial literacy test also tended to make serious investment mistakes, like borrowing too much, and failing to collect information and shop for a mortgage.

Improving financial literacy is a low-cost, potentially high-benefit government program. Strangely, it's not discussed that often. But consider this letter to the Wall Street Journal from Duquesne University economist, Antony Davies (HT: Cafe Hayek):

In the article "Big Slide in 401(k)s Spurs Calls for Change" (page one, Jan. 8), 35-year-old project manager Kristine Gardner says in response to the 44% drop in her 401(k) last year: "There's just no guarantee that when you're ready to retire you're going to have the money." Newsflash: Higher returns are the compensation for incurring risk, and lower returns are the price of safety. Ms. Gardner's 401(k) would have been completely safe had she shifted her investment allocations into money markets. As money markets yield a paltry 1%, Ms. Gardner's real complaint isn't that 401(k)s are unsafe, but rather that financial markets require her to incur risk in exchange for being compensated for incurring risk.

Retirement consultant Robyn Credico claims that "This is the biggest test that the 401(k) plan has seen . . . and it has failed." Au contraire, 401(k) plans have worked exactly as designed. It is the workers (and their retirement consultants) who have failed. There is only one reason why the average person close to retirement should have lost 50% of his 401(k): incompetence. Most workers at that age should have long since shifted the bulk of their 401(k)s into bonds and money markets. The 401(k) is a powerful investment tool but can be dangerous when abused.

If you aren't willing to put forth the effort to learn the principles of investing, that's your choice. But don't hobble the rest of us by asking for government regulation of a tool that works perfectly well just so that you can be spared the effort of figuring out how to use it.

Shiller is much more diplomatic, but the point is the same. A market system is one of profit and loss. You can't have one without the other.

Many, if not most, of the mistakes made over the past few years could have been tempered by better financial education. This does not explain the baffling decisions made on Wall Street and it does not excuse predatory lending practices or government regulators asleep at the wheel. But it's definitely part of the puzzle.

Madame Secretary, your first address to the people:

Monopoly Money

This week's issue of Rolling Stone features an open letter from Paul Krugman to Barack Obama. In it, Krugman outlines the case for a mammoth stimulus package:

How much spending are we talking about? You might want to be seated before you read this. OK, here goes: "Full employment" means a jobless rate of five percent at most, and probably less. Meanwhile, we're currently on a trajectory that will push the unemployment rate to nine percent or more. Even the most optimistic estimates suggest that it takes at least $200 billion a year in government spending to cut the unemployment rate by one percentage point. Do the math: You probably have to spend $800 billion a year to achieve a full economic recovery. Anything less than $500 billion a year will be much too little to produce an economic turnaround.

Krugman advises sitting down before listening to the price tag; I had to go get a beer.

No one can really visualize the vast sums of money currently being discussed. Our brains didn't evolve to deal with numbers larger than hundreds, or maybe thousands. But public spending is orders of magnitude higher. So how much is the nearly $1 trillion package Krugman suggests? According to Barbara Kiviat, a stack of 1 trillion dollar bills would reach a quarter of the way to the moon.

And yet, Krugman articulates a compelling case for such a large stimulus package and helps put the gargantuan sums into perspective:

It's possible that reviving the economy might cost as much as a trillion dollars over the course of your first term. But the Bush administration wasted at least twice that much on an unnecessary war and tax cuts for the wealthiest; the recovery plan will be intense but temporary, and won't place all that much burden on future budgets. Put it this way: With long-term federal debt paying the lowest interest rates in half a century, the interest costs on a trillion dollars in new debt will amount to only $30 billion a year, about 1.2 percent of the current federal budget.

In fact, Krugman is being conservative with his estimate on the war in Iraq.  Joseph Stiglitz puts the total cost of the war (including indirect costs) at $3 trillion.  I don't know that that completely alleviates my sticker shock, but it helps.   

Time to relax in the Cowboy State

According to NPR, many residents of Wyoming are anxious about the ensuing Obama Presidency. The state's mining and coal industries worry about new environmental legislation, while ranchers worry about wildlife protection laws, which protect the grey wolves that stalk cattle herds.  But at least one worry can be put to rest:

Across the table, rancher Scott Sims says he worries the Obama administration will raise the estate tax. He says that could make it tough or impossible for ranchers to pass their land down to their children.

"We don't need more government, we need less government," Sims says. "We don't need more taxes or the redistribution of wealth."

Conservatives tend to get apoplectic about the estate tax.  But what is Obama really planning on doing? Daniel Hamermesh explains:

Under current law (passed in 2001), the tax is scheduled to disappear next year (but come back with a very low exemption in 2011). President-elect Obama will quickly push to abolish the repeal and instead freeze the exemption at $7 million for a couple, with a marginal tax rate of 45 percent on estates above that.

I doubt we'll see any raises above the current rate.  Rather, the estate tax will remain rather than expire.  But the real question is: how many people in Wyoming will actually be effected by the estate tax? According to the Census Bureau, 1.5% of Wyoming families have an income greater than $200,000.  So it seems unlikely that too many families will have to pay estate taxes, given the $7 million dollar exemption.

Hopefully the people of Wyoming will sleep easier knowing this.

Who's really overpayed?

While many commentators have blamed the Big Three's recent troubles on high salaries for manufacturing workers, Dean Baker points out that that's not the only important salary issue:

"The Post has virtually ignored the much larger gap between executive compensation at the Big Three and at the transplants. While top executives at Japanese manufacturers like Toyota only earn around $2 million a year, executives at the Big Three can earn 10 times this amount.This would seem to be a reasonable focus for those concerned about making the U.S. industry competitive."

When you break down the salary differentials between unionized GM workers and non-unionized Toyota and Honda workers in the US, you find that the former makes about 1.2 times the latter ($55 versus $45 per hour, including benefits). This is nowhere near the difference in executive pay.

As I've written before, the wage difference is probably a very small part of Detroit's problems. Similarly, even if GM pays it's executives $18 million more than their Japanese counterparts, this is still relatively small when compared to the billions of dollars in revenue and costs for these companies. Then again, you can't possibly argue that the Big Three's executives have been worth their salaries.

Enhancing Child Safety and Online Technologies

As promised, here are the links to the Harvard study on the risks faced by minors on the internet. The executive summary is here and the full study is here.

Page 75 of the full study PDF discusses the evidence regarding sexual solicitation online.

Safer than we thought

As I've written recently, many parents and child advocates view social networking sites as online swamps full of lurking sexual predators, kind of like this:



But a new study from researchers at Harvard's Berkman Center for Internet and Society suggests that may be more the product of media hype and parental fears than reality. According to the New York Times (who received a draft version of the report due out tomorrow*):

"The report criticized previous findings that one in five or one in seven minors are sexually propositioned online, saying that in a strong majority of those situations, a child’s peers are responsible for the proposition, which typically amounts to an act of harassment or teasing."

Further, the authors of the study note that in most cases of online sexual predation, "teenagers are typically willing participants and are at risk in other ways (with poor home environments, depression or substance abuse, for example)."

It's doubtful that a study like this will have much impact in the psyche of parents. The dangers of online behavior have been greatly exaggerated for years and empirical evidence is usually overwhelmed by an anecdote or 10 minutes of "To Catch a Predator". But the research supports the conclusion that while the internet provides a new medium for social interaction, people are still people. As John Cardillo--chief executive of Sentinel Tech Holding, which maintains a sex offender database and was a member of the task force--is quoted saying:

“Social networks are very much like real-world communities that are comprised mostly of good people who are there for the right reasons.”

*I'll be sure to post the link as soon as the study is available online.

Ed Glaeser on "Libertarian Progressivism"

Is it possible to be in favor of small-government and be pro-egalitarian at the same time? Ed Glaeser thinks so:

"The supposedly more progressive side wants the stimulus package to take the form of government spending, while their opponents want bigger tax cuts for businesses and more prosperous Americans.

The missing movement, small-government egalitarianism, would favor tax cuts, but only if they were aimed at ordinary Americans.

Libertarian progressivism distrusts big increases in government spending because that spending is likely to favor the privileged. Was the Interstate highway system such a boon for the urban poor? Has rebuilding New Orleans done much for the displaced and disadvantaged of that city? Small-government egalitarianism suggests that direct transfers of federal money to the less fortunate offer a surer path toward a fairer America."

I struggle to reconcile the libertarian and big-government/egalitarian sides of my brain, so I find Glaeser's argument appealing. While the public works projects favored by many liberals may very well stimulate the economy, they aren't necessarily egalitarian. Much of the benefits of infrastructure spending will accrue to the owners of contracting firms and higher-skill workers like engineers, architects, welders and the like; they will also create jobs for low-skill individuals, but in no less of a trickle-down fashion than business tax cuts aimed at encouraging hiring.

Glaeser favors direct cash transfers to low-income individuals and removing regulations that negatively impact the poor. Certain provisions in the Obama team's proposed stimulus plan fit this bill, particularly cuts in the payroll tax.

Glaeser's concept of "libertarian progressivism" can help square the circle for anyone who is pro-egalitarian, but also tends to favor smaller government (or at least government that is no larger than it has to be). Maybe it will catch on. If nothing else, people like me will find it cathartic.

It's all relative

When a movie is referred to as the "highest grossing of all time", the figure is never adjusted for inflation.  That's why roughly half the films on the list of the highest grossing movies were made after 2000, and why the top ten includes such cinema classics as Shrek 2 and Pirates of the Caribbean.  It's hard to make the comparison when movies are $10 a ticket today and were 25 cents half a century ago.

But it's not just movies.  That's why when job reports come out, it's useful to have some reliable historical data for comparison.  Courtesy of the Minneapolis Federal Reserve Bank, here are some charts that show the current recession relative to past ones:

As you can see, the level of job loss has just reached that of the median post World War II recession.  However, the trend is clearly downward and many economists believe that job losses will continue for months.  The good news is that were still well above where we would be were we 11 months into one of the harshest recessions.

So when you read articles claiming the US economy lost more jobs last month that at any time since 1945, remember that that is a gross number, not adjusted for the larger size of the economy today.  It's bad out there, but it's good to keep some perspective.

Making a deal with our future selves.

Alan Kreuger points out two separate challenges that must be solved at once: first is the "paradox of thrift", in which jobs are lost, causing people to cut back on spending, which causes more businesses to close, which causes more jobs to be lost, which causes... well you get the picture. The second is that the US long-term budget outlook is downright scary.  Stimulating the economy will likely help the first problem, but will greatly exacerbate the second problem. Conversely, cutting spending in an attempt to balance the budget might just send the economy off a cliff.  Fortunately, Kreuger has an idea:

"Here is a suggestion to address both the short-run and long-run problems. I pose it only as a suggestion for serious discussion; I’m not sure it is the best way to go. But here goes: Why not pass a 5 percent consumption tax to take effect two years from now?

...In the short run, the anticipation of a consumption tax would encourage households to spend money now, rather than after the tax is in place. Along with the rest of the economic recovery package, this would help jump-start spending in the economy and thereby increase production and employment.

In the long run, a 5 percent consumption tax would raise approximately $500 billion a year, and fill a considerable hole in the budget outlook. In addition, a consumption tax would encourage more saving in the long run. Many economists consider a consumption tax an efficient way of raising tax revenue, especially in a global economy. The prospect of greater revenue flowing into federal coffers would probably help lower long-term interest rates because the government would need to borrow less down the road, and further bolster the economy."

There's certainly something to this plan.  My main concern would be whether the government could credibly commit to a future tax increase.  It's like promising yourself you'll go on a diet starting tomorrow...err the next day.  Unless consumers really believe that a consumption tax is coming in a few years, they won't change their spending behavior.

It would be interesting if Congress could put a stipulation on a bill like this that any amendments would require a 2/3 majority vote, or some other provision that would make it more likely that the law would actually stand when it comes time to pay up.

Where do we go from here?

MIT economist (and 2005 John Bates Clark medal winner) Daron Acemoglu just published an essay on what the economic crisis means for economists and economic theory. It's a terrific piece in both its insight and honesty. In particular, I think two points are worth highlighting. First, Acemoglu writes:

"Our second too-quickly-accepted notion is that the capitalist economy lives in an institutional-less vacuum, where markets miraculously monitor opportunistic behavior. Forgetting the institutional foundations of markets, we mistakenly equated free markets with unregulated markets. Although we understand that even unfettered competitive markets are based on a set of laws and institutions that secure property rights, ensure enforcement of contracts, and regulate firm behavior and product and service quality, we increasingly abstracted from the role of institutions and regulations supporting market transactions in our conceptualization of markets."

It's easy to forget the institutional context of economics, particularly in the developed world.  But one lesson from this crisis is that we cannot simply take institutions for granted.  "Free markets" require institutions to work, including formal institutions (the courts) and informal ones (norms governing business practice).  It's good to think that moving forward we'll pay more attention to these factors.

Second, Acemoglu writes:

"In my opinion, however, the greater danger from an expectational trap and a deep recession lies elsewhere. We may see consumers and policymakers start believing that free markets are responsible for the economic ills of today and shift their support away from the market economy. We would then see the pendulum swing too far, taking us to an era of heavy government involvement rather than the needed foundational regulation of free markets. I believe that such a swing and the anti-market policies that it would bring would be the real threat to the future growth prospects of the global economy. Restrictions on trade in goods and services would be a first step. Industrial policy that stymies reallocation and innovation would be a second equally damaging step. When the talk is of bailing out and protecting selected sectors, more systematic proposals on trade restrictions and industrial policy may be around the corner."

Again, this highlights the difference between "free" and "unregulated" markets.  Any response to this crisis will inevitably result in a larger role for government in the economy.  This is not necessarily a bad thing.  A renewed commitment to proper regulation can strengthen our economic system.  At the same time, interfering with the "free" aspect of the economy--that is, the decentralized system of allocating resources--can reduce prosperity for all.  

The process of economic change can be painful, and certainly there is a role for government in helping to reduce individual suffering by providing social insurance and opportunities for education and retraining.  But it's also the process that creates wealth in society.  The government, by sheer force of will, can keep jobs in Detroit or any other area of the economy.  But it can't make inefficient industries viable again.  It can kick the can down the road, but eventually we'll all be paying for our mistakes.

Capitalism has taken a bit of a beating in the past year.  But we should separate out what we did badly from what we do well.  Let's not throw the baby out with the bath water.

This just in: 18 year olds talk about sex!

If you want to frighten parents and educators, mention "MySpace". The social networking site has become public enemy number one in the fight against teenage vice. Now, even the medical community is getting involved. According to a study published in the Archives of Pediatrics & Adolescent Medicine, "54 percent of teens talk about behaviors such as sex, alcohol use, and violence on the social networking giant MySpace".

Actually, that quote is a bit misleading. A few paragraphs down, we find out:

The study looked at MySpace profiles of 500 people who identified themselves as 18-year-old males and females in the United States. References to risky behaviors included both words and photos, the authors said.

So this means that 54% of 18-year-olds on MySpace reference sex or drugs (there's no mention of "rock-n-roll" in the study) in their profiles. Let's put aside for a moment the fact that 18-year-olds are legal adults. Studies of the sexual behavior of Ameircan teens reveal that 58% of 18-year-olds in this country have had sex. If you believe these statistics, MySpace users are actually less likely to have sex than the general population.

You may be wondering why anyone would be interested in this (I know I was). Accodring to one of the authors:

Even if teens have not actually engaged in risky behaviors but merely brag about them online, this can still affect their future behavior, said study co-author Dr. Dimitri Christakis, professor of pediatrics at the University of Washington and director of the Center for Child Health, Behavior and Development at Seattle Children's Hospital.

Those who lie about the behaviors to show off may receive positive feedback from others -- comments such as "that's great" or "I do the same thing" -- that encourage them to actually try out the behaviors, he said.

So the danger here is not MySpace, per se, but rather peer pressure--pressure that results from essentially any contact with peers.  That means that if MySpace is dangerous, then so are cell phones, or any other communication device.  If MySpace is dangerous, so is talking.

Interestingly, one of the researchers makes this point, though it is buried in the article:

"It's really not that MySpace is bad or good. I think the lesson is that it's a tool, and how you use it determines the kinds of outcome you're going to get," Moreno said.

Technology changes, but people typically stay the same.  Teenagers--in this case, young adults--think about, and talk about, sex.  It's easier to see that now that social networking sites have gained popularity.  But just because it's more apparent, doesn't mean it's new.  

It is (sometimes) easy being green

President-elect Obama is facing many tough challenges, not the least of which is how to spend a roughly $700 billion stimulus package. Yes, it's harder than it seems.

On a basic level, anything that spurs the economy is worthwhile. The government could buy $700 billion worth of Hannah Montana merchandise or buy every US citizen a haircut. But many people want to see the money spent to further other long-term policy goals. In particular, there has been a strong push to use the stimulus to jump-start "green" industries through the creation of "green-collar jobs". We can call it "green stimulus".

The appeal of green stimulus is understandable: we need to create jobs and we need to become more energy efficient. Why not use this as an opportunity to do both?

Unfortunately, it's not that simple, especially in the case of subsidizing green energy production. As John Whitehead, writing at Environmental Economics, says:

Unless consumers decide to increase their overall use of energy products (and they might ...) then the demand for brown energy (i.e., coal and oil) will decrease resulting in a decrease in price and a decrease in quantity (see the second figure to the right). The number of brown jobs in the energy sector falls as a result of the reduction in quantity produced and consumed.

When we talk about the jobs created from green energy production, we forget the jobs lost at coal plants. In the long-term, technological changes in green technology will likely create new jobs. But in the short-term, stimulus spending on green energy will likely just change the composition of jobs, not create new ones. Of course, spending on green energy is still good for the environment and should be justifiably on those grounds alone.

The good news is that there are some ways for green stimulus to work. In particular, the Obama administration has been talking about using stimulus money to make homes more energy efficient, and Congress added $250 million to the budget in October to weatherize 140,000 houses. This plan has several advantages. First, rather than subsidize the energy usage of low-income individuals, this strategy will reduce energy consumption. Second, weatherizing 140,000 homes would create 8,000 new jobs at a cost-effective $31,250 per job. The Obama administration wants to expand the program to 1,000,000 houses, which will create 78,000 jobs.

So there you have it. With the right policies, it can be easy being green.

Civic action - now available online?

Eat your vegetables, save the environment, help your neighbor -- 'tis the season for setting lofty goals to improve self and society. 

But lately, the line between action and advocacy has been blurred by the ease in which one can avow contribution online - forward to a friend, join a Facebook cause or digitally sign a petition. These actions provide an instant gratification of aligning oneself with a trendy cause, say community gardening, without all the hassle of actually getting your hands muddy. So does the all the blogging and online network action actually translate offline? 

One group of online advocates that appears determined to continue its record-level engagement online is Obama supporters. A recent study from Pew Internet and American Life Project found that 62% of Obama voters plan to be online advocates for his administrative policies once he takes office. For this support, they are expecting continued communication from Obama in return. Will our next president maintain this unique online fan club? Or will all this Obamania result in a civic engagement beyond mere words? Time will tell...