theory 2 life

Is U.S. inequality special?

2011-11-15T20:30:00.000-08:00

In this post, Greg Mankiw argues that the U.S. is not the only country to see an increase in inequality over the past 40 years. Referring to a plot of the top income shares in the U.K., Mankiw notes:

“The figure suggests that the explanation of growing inequality over the past several decades cannot be U.S.-specific but must have broader applicability... You find a similar U-shaped pattern in Australia, Canada, Ireland, and New Zealand but much less so in France, Germany, Japan, and Sweden.”

Mankiw uses the impressive “Top Incomes Database,” compiled by (among others) Thomas Piketty and Emmanuel Saez. It is a fantastic resource; it enables you to plot data on income shares and inequality for a wide-range of countries over more than one-hundred years. Perusing the data, one finds that, in fact, many countries have seen an increase in inequality. But Mankiw seems to be implying that, since this is a global phenomenon, that shifts in U.S. policy aren’t driving the increase in inequality.

Using the database, I generated the following graphs: (1) comparing the U.S. with other rich English-speaking countries; and (2) comparing the U.S. with rich, but non-English speaking countries. I chose the countries Mankiw cites as examples in his post. The data covers the period between 1950 and 2007:*

As Mankiw notes, the changes in the top share of incomes for other rich English-speaking countries largely track those of the U.S. It is worth noting the discontinuous jump in the U.S. series in the mid-1980s, coinciding with the reform of the tax system during the Reagan administration.

In contrast, the rich non-English-speaking countries do not see much of a change in their top income shares. For example, the share of the top 1% in France was 8.98% in 1950 and 8.94% in 2007. The corresponding numbers for the U.S. are 11.60% and 18.29%. It takes a lot of motivated reasoning to detect an upward trend in the non-English-speaking countries.

To explain the difference between the two groups, Mankiw offers the following idea:

“Might the rising share of the top 1 percent be related to the increasing use of English as a global language?”

I’m not exactly sure what this means or what the causal mechanism here would be. I would suggest a simpler explanation: English-speaking countries have tended to follow an economic model (often referred to as the “Anglo-Saxon Model”) that is more market-driven and relies on a smaller welfare state than the rest of Europe. Thus one should expect those countries to have higher levels of market-income inequality. Further, like the U.S., these countries have reformed their tax systems and de-regulated much of their economy, leading to even greater inequality. So while it’s true that increased inequality is not solely a U.S. phenomenon, it does not follow that policy changes aren’t an important part of the explanation. In fact, countries that have followed similar policies to the U.S. have seen increases in inequality, while those that haven’t, well, haven’t.

*I chose the years based on data-availability. I encourage people to play around with the database if they are curious about other countries, years or variables.

It is also worth mentioning that the data presented here is pre-tax gross income. Given that other countries have more progressive tax/transfer systems than the U.S., this is likely an underestimate of the difference in inequality between the U.S. and the rest of the rich world.

The other 33 percent*

2011-10-12T05:32:00.000-07:00

Last month, the New York Times article that looked at the cost of junk food as compared with healthy food - pointed out the difference between the two dining options was more often time and convenience than money. The conclusion was dangerous close to "poor fat people are fat because they are lazy."
As Ezra Klein pointed out yesterday, there is a very recent study that amends this slightly. The new study concludes "fat people are lazy because they have poor impulse control and are worse at delaying gratification." It essentially found that the heavyset set has gotten heavier but many of the 67% of Americans that are not obese have stayed trim. This is because the obese crowd relies on foods that can be eaten quickly rather than making meals from scratch.
What struck me about these findings was how a culture so laden with cooking shows was not producing even more at-home cooking. Perhaps we should abandon the "Ace of Cakes" or Paula Dean for a 21st century Julia Child who's focus is more on frugality and DIY meals rather then peddling pre-made foods or indulging in the rich foods for everyday occasions.
Still, as a social worker friend of mine pointed out, often extreme eating problems are related to emotional eating. I think rather then pointing to low self-esteem, our culture's current food problems point to a culture of entitlement. The belief that we each deserve everything we want and we deserve to get it in the quickest, easiest way possible is rampant. It's effected our waistlines, our personal debt and deeply impacted achievement in our school (see: give every child a blue ribbon, since mine deserves to feel like a winner rather than competing for an actual rank).

*According to the CDC in 2011 33.8 % of adult Americans are obese.

The power of oops

2011-10-10T17:48:00.000-07:00

More and more companies are learning the power of straightforward PR tone. Netflix was the latest to adopt this approach today when announcing that due to the public outcry they were not going to spin off a DVD mail service called Quikster.

I attribute the power of the oops to the same trend that spawned transparency groups such as WikiLeaks and FactCheck.org. Information is too immediate, prevalent and accessible to be overly controlled with your message, especially when it comes to crisis management. Many people in the world have access to news from whatever source they want.

During the BP oil spill, the company tried to use the "honest oops" but it didn't work to save their image. Here are some tips on how to pull off a successful corporate oops.

Don't wait to address the issue - make a statement as soon as you can

Offer action or a change that will effect those effected by your mistake

Send the "oops" message from the very top person in your company

Comedy aside: Eddie Izzard has a bit about the Queen of England on this topic not being able to communicate in this way when managing the news of Diana's death. It's a bit dated but hilarious.

Art & Infrastructure Mash-up

2011-10-09T06:14:00.000-07:00

There is power from keeping ones voice soft and calm during an argument. Being quiet but holding your ground causes the other person to feel a bit ridiculous shouting at you and often they run out of steam. According to this article, Caracas, Venezuela got a similar result when using mimes as traffic cops. Apparently, the silence professionals are making an impact by injecting the unexpected as well as modeling quiet on the busy streets.

So here are some more suggestions on other ways to inject art into our societal infrastructures:

Playgroup meets courthouse: Would our trials go smoother if everyone started the session with some cookies and juice, wore name tags and had the freedom to pull down a nap mat from the wall if they got tired or cranky? All "it's mine" toy disputes are still decided by the judge.

Tax paperwork meets photojournalism: Similar to a nonprofit appeal, tax payers would get vivid and real photographs of the public spaces and families that are going to benefit from their tax money.

Opera meets utilities: Could mournful arias play anytime you used water or electricity in excess as a reminder of the dwindling resources? You could even add some triumphant fanfare when the offending appliance was turned off. The only downside is it could make showers even longer...

Punch & Judy meets political debates: Why no one has thought of this yet I do not know.

Comic strips meet public policy: All new bills and laws must also be rendered in comic strip form and distributed to everyone effected by them.

That used to be you

2011-09-07T21:09:00.000-07:00

This evening, I attended a talk through the Hudson Union Society given by Thomas Friedman and Michael Mandelbaum about their recent book That used to be us: How America fell behind in the world it invented and how we can come back.

Those of you who read Friedman’s New York Times column, may be familiar with some if the main points of the book. Namely that there is a global trend towards overpopulation, increased communication and dwindling resources. And that while many predict China may be on the rise to power and the US has mismanaged its economy and slowed on innovation, America should look back at its successes in the past and return to the policy that made it strong while keeping up with communication and green technology.

The book ends with Freidman and Mandelbaum’s ideal 2012 presidential platform. They are advocating that an independent candidate take up issues of investment in infrastructure and education, spending cuts to Medicare and Social Security and tax increases – perferably related to fuel usage.

Of course in a situation like this, topdown change often has the greatest impact. However, I would like to take one of the major questions of the evening and apply it to the individual, in particular the 9.1% of Americans that are unemployed. The question to ask is “What were you doing in the past that worked?” When you think about the good things you’ve done it can focus your energy towards repeating those habits and outcomes. There is something very powerful about putting a positive spin on your assessment of the past. Understanding what you have done well can help you make decisions on where you can add the most benefit. Yes, top down change is going to be necessary to change the direction the US is headed, but bottom-up change and a need for individual innovation and reinvigoration is also going to be crucial to our recovery. This isn’t about glossing over what may have gone wrong – but if you’ve had success in the past chances are you can pinpoint what went right and harness that into more future success.

Of monkeys and men

2011-08-17T13:09:00.000-07:00

A recent study coming out of Japan, got me thinking about executive functions. Tetsuro Matsuzawa and team found that although human and chimp prefrontal cortexes start out a similar size in infancy, humans' prefrontal cortexes grow faster beginning at a very young age.

So, what has your frontal lobe done for you lately? It's the portion of our brains' credited with your long-term self image, personality and impulse control. It helps us predict future consequences of our current actions.

Unfortunately, not every outcome is predictable - as seen in the Rise of the Planet of the Apes trailer:

"Multi-tasking is a lie"

2011-08-16T14:47:00.000-07:00

For a little while, the above phrase was my mantra. It's hard not to be tempted to try and cram more into a work day by trying to do two or three things at once. But the result (unless it is walking and chewing gum) is nearly always unimpressive results or failure.

Thanks to a recent study from the Proceedings of the National Academy of Sciences, we finally have proof in the form of fMRI images that doing two tasks at once decreases decision-making and perception. Read Wired's coverage here.

If you prefer your information in chart form - and frankly - who doesn't? Here is the first in my "You can graph anything" series.

Multi-tasking is a lie

(where x=number of activities you attempt at once)

Is there another office software more worthy of championship?

2011-08-05T13:51:00.000-07:00

A bit of odd news caught my eye today, UK student Rebecca Rickwood beat 228,000 global competitors to win a global competition to find the best user of Microsoft's Excel software.

While the contents sounds a bit like a publicity stunt for the technology giant, I'll be the first to admit that once you start using Macros Excel can get pretty complicated. I've built spreadsheets that I thought were worthy of some kind of trophy (preferably made of chocolate).

Here are additional software contests I'd like to see:

Make a Powerpoint deck that actually balances information and entertainment (the use of sound effects and motions are strictly prohibited)
Make a consistently formatted text file with embedded charts that your co-workers can edit without destroying all the formatting
Air brush a photo of yourself you are happy with in 10 minutes or less with the photo software of your choice

What's your software challenge of choice?

A handy checklist

2011-03-25T11:43:00.000-07:00

Brandon Scott Gorrell at Thoughtcatalog posted an incredible graphic earlier this month about how to have a rational discussion. I've shared it below...I suggest you have it handy on your smartphone in case you run into any zealots on the street.

An end to self-contained news?

2011-03-17T13:40:00.000-07:00

I was inspired by Felix Salmon's recent comparison of blog writing to traditional journalism to consider whether the shift is aiding or hindering our ability to stay informed about the news.
From Salmon's blog:

Traditional media outlets, by contrast [to blogs], generally have an incomprehensible love affair with Microsoft Word... It’s generally more difficult to insert links, especially when I’m dealing with people who edit for print first and who then just put that edited copy up online. The pieces have to be much more self-contained, and you have to be much more careful about assuming any kind of expertise on the part of your readers: if they’re reading your stuff on paper, then it’s much harder for them to Google anything they don’t understand.

Increasingly we're seeing the major news outlets embrace the blogger approach to the news, using social media tools to harness. The most recent example is today's New York Times decision to structure its pay wall so that shared links on Facebook and Twitter will still be accessible. One of my favorite mainstream uses of social media is the BBC World Service which uses its Have your Say forum as a way to get first-person accounts of global events and varying political and religious opinions which it then sites and uses in its news, radio and television coverage. It's a modern extension of a news tip hotline but due to the global nature of its audience has an amazing reach that spans its 24-hour news cycle. A third example of just how ubiquitous social media and blogs have become to news reporting is the launch of Google Realtime and the search engine's use of blog posts and Twitter feeds next to larger media sources.

Do we give anything up by using a mass of often anonymous or unveiled sources to get the latest information? Though I have heard several arguments against crowd-sourcing its benefits outweigh any concerns of misinformation or libel. Namely this is because in addition to the ability of accessing ongoing updates to any issue from all over the globe, the depth of any story or issue that becomes available is phenomenal. As Salmon points out on the web one can instantly search for more information or explore related links.

Today's social media world is a bit like Orwell's Animal Farm, all sources are equal but some are more equal than others. Big publishing names, trusted bloggers and the recommended links from your friends are the the winning sources.

So what's next for social news reporting? So if news sites are now custom serving content, using anonymous web sources and choosing their headliners based on what's most popular - where do we go from here in terms of crowd-sourcing? More importantly, when it comes to information is it ok to give the people only what they want? There's arguably a 10:1 ratio of Charlie Sheen articles to those on sustainable agriculture. How do we maintain the balance between interesting information and useful information? In the future will every story come with a litany of opinion, reaction, re-reaction and YouTube parodies?

Has Google found the algorithm for good management?

2011-03-12T20:11:00.000-08:00

Not yet. Google has spent the last two years analyzing performance reviews, feedback surveys and nominations for top-manager awards in order to identify the most significant phrases of praise or complaints.

According to the New York Times, "Google executives say they aren’t crunching all this data to develop some algorithm of successful management."

It did however, identify 8 core principles of good management. The results are not shocking: managers who take time to communicate, who respect their employees, who do not micromanage all do best.

What is new here is the idea that a company can use data to garner what makes an effective manager. Will these Google characteristics become the norm because they are "verifiable" through data? Will the company continue to segment its results by department type or employee characteristics? While it's interesting to read the results of studies like this and no one can deny the importance of a good manager in a work environment I can't help but think that bringing too much data in to this is overkill.

What has promise to succeed?

2011-03-11T14:40:00.000-08:00

This week The Wall Street Journal ranked what it thought were the top US venture-backed companies with promise to succeed.

Some of the trends in what they chose are a bit telling about where our future is headed. Half of the companies were related to media, web or communications technology. Meanwhile 20% of the companies were healthcare related either bio-tech or healthcare management.

Most telling, was that 32% of the companies dealt with issues of data protection, data processing and security. As every individual has access to the internet and the ability to create and publish content of their own (damn those pesky bloggers!) the data generated is overwhelming. Interestingly when you combine the need for organized, actionable data with trends of personalizations and communication you get something like Yammer - one of my favorite companies on the list. Yammer is a new tool that creates a corporate or organizational social network aimed at allowing people to connect and transfer information quickly and securely. In office environments where more people are on the go, working from home or collaborating with people in other offices all over the world--- it's important to get the productive communication flow right.

There were some glaring category omissions from the list, namely companies aimed at improving education and the environment. These are two categories that could use new ideas and innovation and the support of venture funds and the Washington Post. I did not note any companies on the list that were aimed at improving education. There were three that improve the environment. The last, again a personal favorite, is a bit of stretch in terms of how environmentally friendly it is. Etsy is an online vintage and homemade marketplace. The rationale being that reusing vintage items or valuing handmade goods will eventually reduce our consumption and manufacturing of new goods that require new resources. Like I said, it's stretch!

Which company from the list get your vote? What areas do you think we need more development and investment to improve our future?

Metaphor: Is there any other way to talk science?

2011-02-23T12:23:00.000-08:00

I was struck today by New York Times' reporter Dennis Overbye's use of metaphor to report scientists' pursuit on other planets for the origin of life on Earth. His piece evokes Eden as a metaphor for the hot primordial gunk where the first particles meshed to create living organisms. The metaphor instantly calls to mind the dawn of existence, a bountiful variety that subsequently sprung from its many mutations and a specific location outside of the Earth we know today.

In fact, most of our scientific understanding is neatly described through common or allegorical metaphors. Atoms are building blocks that operate like orbiting planetary systems. The Internet is a web of information, your browser accesses a series of packets to load a web page. String theory is built on the metaphor of electrons and quarks as strings. In physics gravity pulls us, in immunology microbes carry bacteria and in chemistry molecules bounce while heat flows.

Metaphor is a cognitive coping mechanism that helps us contemplate and understand phenomena that we can't see. Taken too literally, scientific metaphors can prevent us from truly observing all of the important details or attributes of a phenomenon and prevent further scientific discovery. What metaphors do you rely on to talk about science?

In the Heights of NYC culture

2011-01-04T11:16:00.000-08:00

Just in time for the end of its Broadway run, I saw Tony-winning musical In the Heights, last evening. It was fantastic - if you haven't seen it or even if you have corre, don't walk, to catch it before it closes January 9.

What struck me most was how the "NYC-ness" of the show goes beyond merely being set in Washington Heights. Unlike Rent or West Side Story, the show does not hesitate to get very inside baseball with its references to the GWB, the 9 train and ConEdison's ineptitude. Three overarching themes in particular:

A textured city. Whether it's lead and lyricist Lin-Manuel Miranda's urban wordsmithing, the ethnic diversity of cast and characters, the bilingual songs and dialogue, the gritty set or the cacophonous medley of musical genres, the chaos, depth and multiculturalism scream through each minute of the show.

You hate it but its home. Main character Usnavi is not enamored with New York. In fact no one in the play is. But it is comfortable, and when you consider leaving you begin to realize what and who you will miss. This has also been my experience over the last 4 years that I've lived here. We all live here because there are jobs and things to do - but we deride the noise, the smell and the crowds. When I leave these are the very things I notice are missing.

"If I can make it there…" Things in NYC do not often come easy. With more jobs, come more job applicants and the standard of long workdays. With more cultural experiences, come the crowds, the prices and the burden of choice. And with more neighborhoods come the multi-lingual street signs and maze of train and bus routes. While good things happen in the play and you do leave with a warm and fuzzy feeling - there's something very gratifying about the fact that not every major conflict has been wrapped up neatly in a bow.

Good art is always a cultural signifier and in an increasingly global community it becomes even more important that communities get as specific as possible with their depictions in order to capture the idiosyncrasies of a society that's becoming increasing homogenous.

Creationism: You cost America a healthy economy

2010-12-02T11:14:00.001-08:00

While I try to be a tolerant and respectful atheist, it's difficult not to cringe when I see headlines about creationism being passed off as science in public schools or other buildings. Today's news from Kentucky caused such a reaction. It's unimaginable to spend $37.5 M public funds on a creationist theme park and I shudder to think that families might visit when it open in 2014 seeking an educational experience.

Beyond the utter insanity and obstinate ignorance that it requires to assert the Earth was created in six days, just 6,000 years ago, and that at one time, man and velociraptor co-existed peacefully, creationism perpetuates a departure from investigation, curiosity and experimentation that is crippling our nation's scientific development.

Is it fair to make the leap from bad science in our schools to failed businesses across our country? Yes. Schools that ask students to take things on faith, that do not teach the scientific method, that deny decades of evidence, teach students to accept what they are told by authority. How can we expect these same students to develop the technology and theories that will break the cycle of fossil fuel dependence, reduce federal debt and revitalize our economy? How can we expect these students to question their political leaders and their banks to plan for a stable future not driven by greed or based on short-term economics? Perhaps if we pray on it...

It's been estimated that nearly 20 % of high school science teachers teach and believe in creationism. An additional 15% present evolution and creationism as equal "theories" of life. This misuse of public money must stop. The US public school system was initially built to train model factory employees at the turn of the 20th century. Today our school system has a larger burden - namely training the future scientists, business leaders and innovators for our culture.

Zadie Smith takes on Facebook

2010-12-01T09:13:00.000-08:00

Author Zadie Smith questioned the impact of Facebook on our society in a recent New York Books Review piece. She aptly points out that the service was designed "by a Harvard sophomore with a Harvard sophomore’s preoccupations." An explanation for the shallow, straightforward and consumer-centric lists, declaration of status and "show me" onus of photos. This perpetuates an attitude of what Smith calls reduced personhood. She sees it infiltrating the web...and all pop media.

I am dreaming of a Web that caters to a kind of person who no longer exists. A private person, a person who is a mystery, to the world and—which is more important—to herself. Person as mystery: this idea of personhood is certainly changing, perhaps has already changed.

So why is Facebook so popular? Smith briefly points out, it's due to the advertisers. "To the advertisers, we are our capacity to buy, attached to a few personal, irrelevant photos," she says. The idea recalls Marshall McLuhan's theory - asserting that reality itself, not just the message, is morphing to fit the medium. Leaving us with the question - are we merely what we say we are? Or as Smith suggests, is the depth of human individuality more complex than status updates can project?

You say "Potato"

2010-11-30T21:13:00.000-08:00

Chris Voigt, executive director of the Washington State Potato Commission, has just wrapped up his experiment of eating only potatoes for the last 60 days. Despite being hilarious and a clear PR stint for his organization -- the event is also a case study in the odd psychology behind single-food diet obsessions.

Whether its grapefruits or sardine and avocado sandwiches -- eating the same thing day after day establishes a rigorous pattern that inevitably deprives the body of some vitamins and calories and does occasionally result in weight-loss. Over short time frames, dieters see beneficial results often because of the cognitive impact of eating a certain food.

Cognitive psychology is based on the concept that the way you think affects how you feel and what you do. Cognitive therapy, then, helps you identify your self-defeating thinking and helps you respond to it so you can feel better and behave in helpful ways. However, long-term one-food diets are impractical and dangerous. While folks my get a good short term confidence boost from one-food wonders, the crash after the fact may leave you more despondent than before. Best to think positive about a more realistic diet and exercise regime. But cognitive theory to work on a plan that has more potential to remain sustainable.

The games people play

2010-11-29T09:38:00.000-08:00

Do the board games families and children play really say anything about our society as a whole? The Washington Post seems to think so. Earlier this month, the newspaper reported that Settlers of Catan was training this decade's entrepreneurs - including Mark Zuckerberg.

As a novice player of the game, I have to admit there is some truth to the idea that Settlers requires more innovative thinking than a more traditional board game. Having an entirely new board laid out by random requires one to access the landscape and adjust your strategy from game to game. One could say that this recreational way to practice a transitional strategy builds out the cognitive functions associated with accessing and adapting to change.

There is also a rule that you can trade resources with your competition whenever they are willing to make the deal you offer. There is a lot of friendly negotiation and maneuvering with players that may then punish you when the dice rolls a 7 in their favor. A 2008 article about frenemy competition in Fast Company, touches on this necessity in business. If you play to "shake using a right hand while plotting your prey's demise with your left," just know you aren't the only one who might be preparing a sneak attack.

Settlers cannot be the only game on the market today that is training the leaders of tomorrow. As for my childhood favorites I credit Pick-up Sticks with my ability to persevere with a detail-driven task, Balderdash with my ability to bluff convincingly and CandyLand with my crippling sweet tooth. What games shaped your personality?

Ensemble TV casts still leave something to be desired

2010-07-08T21:03:00.000-07:00

Looking down the recently released list of Emmy nominees, I noticed the popularity of ensemble casts in comedy series have increased in recent years. The tactic of having an entire village to raise some laughter is notably credited with the success of long-running animated hit The Simpsons where it is perhaps the most exaggerated.This year the approach is topping the Emmy charts with live-action comedy nominees Glee, 30 Rock and Modern Family. One reason I think that a mob cast does so well in today’s media mix is that there is someone for everyone. Large casts are able to reflect the diversity of the viewers. And while it’s all too common place to have characters of every shade, creed and orientation on the screen; I have to pause to ask whether this diversification has done anything to fight stereotypes, particularly when it comes to feminist ideals and counteracting standard gender roles. The three nominated shows I mention each fall short of truly breaking down tired clichés. I should say that I’m a fan of all three of them, but it’s worth pointing out that we still have a long way to go before mainstream media truly reflects a diverse population.

Let's start with a show that is rife with tired cultural memes – Glee is set in a high school and it takes the predictable: popular and slutty cheerleaders, jock, attractive bad boy, flamboyant gay student, female drama nerd and goth chick; and changes them just enough not to matter: one of the cheerleaders is pregnant and thus gets nicer by the end of season 1, the jock has a dead father which makes him a bit more sensitive, the drama nerd has two gay fathers which actually makes her even more of a drama queen and the goth chick is Asian (yay diversity!) But wait – there are more unpredictable and truly unique characters…we’ve got a cheerleader with down syndrome, a singer in a wheelchair, a husky black singer who specializes in soul and is sassy with her friends…oh wait, this is all starting to sound familiar again. Well, while it’s very heart-warming to see this diverse group getting along and paying nice for the sake of musical theater, more disturbing is that the underlying goal of just about every woman and man on the show is to impress the opposite sex. Perhaps that’s just high school – but when both teachers and students worry about their sex appeal regardless of whether they are getting plenty, strong and self-possessed or clinically neurotic – the theme of neediness and insecurity takes center stage.

The next show has tried very hard to breakdown barriers – Modern family takes themes same sex partnership and child-rearing, intergenerational, step-families and bi-racial marriage and puts it all on display. This show is a stepping stone for more progressive programming to come down the pipe. Its major flaw is that the values and storylines are so aggressively conservative. The two most nontraditional family units on the show make the most conservative pro-family choices almost as a way to over normalize their cultural uniqueness.

Last but not least is 30 Rock, and while I have to give kudos to the show’s balance of diverse values and back stories for a number of the fringe characters: wealthy Irish Catholic New Englander, poor Southern workaholic, adopted Canadian, only child of an alcoholic single mother, black man at an Ivy League – it’s not enough to overcome the show’s glaring anachronism. Liz Lemon is the worst kind of feminist – needy, insecure, unhappy with her body image and love, yet judgmental, preachy and at times even angry on the behavior of others, particularly when it comes to sexual or financial freedom.

Compared to 10 years ago, the mainstream media TV on today is pushing at some stereotypes but I think it’s important to remember that just because a group is represented on a show does not mean that they have been represented fairly.

Dissecting the video game

2010-07-07T07:15:00.000-07:00

Author Tom Bissell (Extra Lives: Why video games matter) is on a mission to find depth in first-person shooter games beyond blood spatters, big guns and scenic mazes. His latest book argues for more developed storytelling in video games – for example testing the medium and using it to create literate and complex masterpieces.

I’m somewhere between the Ebert “videogame illiterate” and a legitimate gamer. The playing I do is merely social and often does not get me past the second level (Read: I’m terrible.) But where I am not a novice is in literary and media criticism…the idea that the video game channel may open up a new type of narrative style is fascinating to me. I spend the most time around video games watching them played – so I’m fairly familiar with the plotlines of the majors (Tony Hawk, Modern Warfare, Halo, Left4Dead) as seen from the observer’s point of view. But Bissell would say that I am seeing a game that is co-created by game player and game creator. In fact the consumer of the game, making the decisions and navigating the environment, has much more agency in the tale than in more traditional storytelling mediums: TV, movies, books, etc.

So perhaps the reason video games have become so popular (and recession-proof) in an Internet age is that they so mirrors what is also possible in Web 2.0 media --- collaboration, interaction and manipulation between the originator and the consumer. Will this style of consumer agency also shape the future of blog lit and other Web 2.0 interactions?

Chaos Theory

2010-05-17T20:49:00.000-07:00

Chaos Theory - A branch of mathematics studying dynamic systems in which small changes in initial conditions have large impacts on future outcomes.

Just remember: you had the roast beef!

I think we need a Fox News to English dictionary

2010-04-19T21:02:00.000-07:00

Dick Cheney famously said that, "deficits don't matter". Well Fox News has taught us that definitions don't matter. First, they merged the words "socialism" and "fascism" together and carelessly defined them as any government intervention in the economy, no matter what. Now, it seems that "secularism" and "paganism" have been conflated:

Of course, if religious belief is important to economic growth than that relationship should hold within Europe, as well as between Europe and the US. Is there any evidence for this? Not that I've seen. Northern Europe is more secular than Southern Europe, and is also more prosperous. Nor does this hold outside of Europe. East Asia, despite being relatively secular, has seen enormous economic growth over the past 40 years. In the Middle East, Iran was quite rich until theocratic rule took over in 1979; but then again, the Fox News crew might call Iran a "fascist state", or complain that only Christianity is good for economic growth.

I could go on, but this conversation doesn't warrant serious engagement. These commentators have abused words to the point where debate simply cannot happen. Secularism is not paganism and environmentalism is not "worshiping the Earth". Just saying these things doesn't make them true.

And by smaller government we mean...

2010-03-28T08:30:00.000-07:00

I'm trying really hard not to dismiss the Tea Party out of hand. I think it's reductionist and unfair to regard its members as simply motivated by racism (though perhaps some are) or suggest that the whole movement is part of some fell funded Republican campaign (though some of it is). That being said, I'm having a tough time buying the argument that the Tea Party really wants smaller government. Take this recent New York Times profile of recently unemployed supporters of the movement:

"When Tom Grimes lost his job as a financial consultant 15 months ago, he called his congressman, a Democrat, for help getting government health care. Then he found a new full-time occupation: Tea Party activist...

Mr. Grimes, who receives Social Security, has filled the back seat of his Mercury Grand Marquis with the literature of the movement, including Glenn Beck’s 'Arguing With Idiots' and Frederic Bastiat’s 'The Law,' which denounces public benefits as 'false philanthropy.' 'If you quit giving people that stuff, they would figure out how to do it on their own,' Mr. Grimes said...

He blames the government for his unemployment. 'Government is absolutely responsible, not because of what they did recently with the car companies, but what they’ve done since the 1980s,' he said. 'The government has allowed free trade and never set up any rules.' He and others do not see any contradictions in their arguments for smaller government even as they argue that it should do more to prevent job loss or cuts to Medicare. After a year of angry debate, emotion outweighs fact."

Obviously smaller government would have less trade restrictions and fewer retraining programs for workers. In fact, one of history's most vocal supporters of free trade is Bastiat, who is required reading for libertarians. These are not small contradictions.

Of course these are just one person's views. But polls of Tea Party supporters seem to suggest similar inconsistencies. For example, a recent Bloomberg poll found that while 90% of Tea Party supporters fret that the US is moving toward "socialism", 70% favor the federal government fostering job creation. Further, half of those polled favored government restrictions on Wall Street salaries and their views were mixed about privatizing Medicare and other federal programs.

In fact the real gripe may not be the size of government, per se, but the perceived bias in policy. A CBS News/New York Times poll found that Tea Party supporters were more likely than other Americans to feel that "President Obama is working mainly on behalf of the poor, and not the middle class."

These polls pose interesting questions about the future of the Tea Party and what its impact on policy will ultimately be. Will the movement maintain its relevance when unemployment falls below 7%? Will deficit concerns impact legislation that largely benefits the middle class? (Note, that the 2003 passage of Medicare Part D, the hugely expensive but unfunded expansion of Medicare, met with no opposition from anti-deficit campaigners.)

Personally, I think the Tea Party will fizzle as the economy improves. While Americans in general are less amenable to large government than Europeans, the views expressed by Tea Party supporters don't indicate any large ideological shift. People are angry because times are tough and they feel neglected. But that doesn't mean we're headed toward some small-government Randian utopia.

A New Way to Measure Poverty

2010-03-03T21:08:00.000-08:00

The official federal poverty measure, designed in the 1960s, is the most commonly used indicator of economic hardship in America. Unfortunately, it provides no guidance on pressing questions like the role of regional price variations on poverty or the impact of Food Stamps.

Researchers have been aware of these deficiencies for some time. Now the Census Bureau will begin reporting supplemental poverty measures based on recommendations from the National Academy of Sciences. These new measures will take into account the impact of taxation, in-kind public assistance and medical out-of-pocket costs, and will use more realistic poverty thresholds.

While this is a new step at the federal level, the City of New York has been working on alternative poverty measures since 2008. The efforts of New York City's Center for Economic Opportunity are described here in today's New York Times. A copy of CEO's new report is available on CEO's website for download. It describes the development of the measure as well as poverty trends in NYC between 2005 and 2008.

Department of Really Unintended Consequences

2010-02-09T09:30:00.001-08:00

One important factor that set the stage for last year's financial crisis was the "global savings glut". Massive savings accumulated around the world, particularly in East Asia, which needed to be invested somewhere--that "somewhere" ended up being the US housing market*. Paul Krugman explains:

"The speech, titled 'The Global Saving Glut and the U.S. Current Account Deficit,' offered a novel explanation for the rapid rise of the U.S. trade deficit in the early 21st century. The causes, argued Mr. Bernanke, lay not in America but in Asia.
In the mid-1990s, he pointed out, the emerging economies of Asia had been major importers of capital, borrowing abroad to finance their development. But after the Asian financial crisis of 1997-98 (which seemed like a big deal at the time but looks trivial compared with what’s happening now), these countries began protecting themselves by amassing huge war chests of foreign assets, in effect exporting capital to the rest of the world."

The Chinese, in particular, provided a lot of capital. This begs the question, "why do the Chinese save so much?" Shang-Jin Wei, writing in VoxEU, has an answer:

"In my recent research paper with Xiaobo Zhang (Wei and Zhang 2009), we hypothesised that a social phenomenon is the primary driver of the high savings rate. For the last few decades China has experienced a significant rise in the imbalance between the number of male and female children born to its citizens.

There are approximately 122 boys born for every 100 girls today, a ratio that means about one in five Chinese men will be cut out of the marriage market when this generation of children grows up. A variety of factors conspire to produce the imbalance. For example, Chinese parents often prefer sons. Ultra-sound makes it easy for parents to detect the gender of a foetus and abort the child that’s not the 'right' sex for them, especially as China’s stringent family-planning policy allows most couples to have only one or two children.

Our study compared savings data across regions and in households with sons versus those with daughters. We found that not only did households with sons save more than households with daughters on average, but that households with sons tend to raise their savings rate if they also happen to live in a region with a more skewed gender ratio. Even those not competing in the marriage market must compete to buy housing and make other significant purchases, pushing up the savings rate for all households."

His thesis makes intuitive sense: if the relative supply of women decreases, they can demand more on the marriage market. Why settle for a man of modest wealth if a wealthier man is just around the corner? So families with male sons have to amass more wealth if they want to marry those sons off.

Unintended consequences are a reality for policymakers. I wonder if the Chinese officials who first devised the "one-child policy" ever thought it would have an impact on the country's savings rate, let alone global financial markets?

__________________________________________________________________
* This is not intended to "blame" East Asians for the financial crisis. They did not force anyone to make bad loans or underestimate the risks in the housing market. East Asian savings merely provided the capital necessary for the investment boom.

Keynes vs Hayek: the rap showdown

2010-01-25T16:04:00.001-08:00

Russ Roberts' long awaited (by me at least) new music video is here. Roberts, an economist by trade, wrote the lyrics for a rap battle between John Maynard Keynes and F. A. Hayek on the nature of the business cycle:

Keynes and Hayek were certainly ideological opponents during their lives. Hayek was a central figure in the Austrian school of economics, whose focus on voluntary contracts between individuals and the organizing power of the price system saw little role for the government in the economy (or anywhere else). Keynes, on the other hand, argued that markets (capital markets in particular) can fail on their own; when they do, government has a crucial role to play in stabilizing the economy.

Roberts, himself an adherent of the Austrian school, is better positioned to argue Hayek's side (he blogs at "Cafe Hayek"). While Keynes' basic ideas are laid out in the video, much of the nuance is missing (as is probably to be expected in a 6 minute rap-debate on the subject). In particular, I felt Keynes' views on savings were somewhat misrepresented.

In the video, the Keynes character explains his "paradox of thrift" idea: people save money, which is good for them, but it reduces the amount that they spend, which in turns lowers other people's incomes, causing them to save more; this reduces the income of others, perpetuating the cycle. Thus an individually beneficial action (saving) has negative consequences if everyone does it.

Some take the paradox of thrift to mean that "Keynes opposed savings", but this interpretation is simply untrue. James Hamilton explains the distinction:

"...aren't I delighted that consumers are now, finally, saving more? Well, no. It is one thing to identify a higher national saving rate as the long-term goal, and quite another thing to try to get there overnight in the form of a sudden drop in consumption spending. Here I am very much taking the side of Brad DeLong ([1],[2]) and Arnold Kling and against Eugene Fama ([1], [2]) and John Cochrane. The relevant question is whether, in response to an abrupt decrease in consumption spending such as we're now experiencing, some of the other variables (most importantly, Y) might adjust in response as well. It is certainly true that in a very simple economic setting-- for example, an economy that consists of a single farm producing only one good-- the decision to save more of your income (leave some of your wheat unconsumed) is necessarily identical to the decision to invest more (save the wheat for later). And one can write down more complicated models in which economic actors and markets adjust in a way to see through the veil of production and exchange and make sure it is I + X that adjusts in response to a higher saving rate, and not Y."

Much of Keynes' theory had to do with the translation of savings into investment. The classical economic perspective was that savings, by definition, equals investment. Thus, if people save more, then they invest more, leaving GDP unchanged. But Keynes argued that when people were fearful about the future, they would hoard money (e.g. stuff money in the mattress), diverting savings from investment. This means that sudden shifts in savings (for example, in response to a financial crisis that hurts household portfolios) can result in an economic contraction. In Keynes' mind, this was where government should enter with stimulus, to counter the drop in spending and soften the blow to the economy.

Is the paradox of thrift real? Not everyone would agree, but Paul Krugman provides some compelling evidence for it.

The point here is that one of the main differences between Keynes and Hayek (indeed between Keynes and most of the economists who came before him) had to do with the nature of the savings/investment relationship. Keynes was not advocating profligate spending for the sake of spending. Rather, he postulated that markets could fail and that government could play a role in mitigating the business cycle.

That being said, I thought the video was great; it was entertaining and provides a wonderful introduction to a major debate in the history of economic thought.

Social Norms and Strategic Defaults

2010-01-24T10:40:00.000-08:00

Richard Thaler has some interesting analysis of why more underwater homeowners don't simply default on their mortgages. As I've written before, social norms play a large role. This was particularly interesting:

The morality argument is especially weak in a state like California or Arizona, where mortgages are so-called nonrecourse loans. That means the mortgage is secured by the home itself; in a default, the lender has no claim on a borrower’s other possessions. Nonrecourse mortgages may be viewed as financial transactions in which the borrower has the explicit option of giving the lender the keys to the house and walking away. Under these circumstances, deciding whether to default might be no more controversial than deciding whether to claim insurance after your house burns down.

In fact, borrowers in nonrecourse states pay extra for the right to default without recourse. In a report prepared for the Department of Housing and Urban Development, Susan Woodward, an economist, estimated that home buyers in such states paid an extra $800 in closing costs for each $100,000 they borrowed. These fees are not made explicit to the borrower, but if they were, more people might be willing to default, figuring that they had paid for the right to do so.

Of course, if people were more likely to default, then the implicit costs would be higher than the $800 estimated by Susan Woodward. Still, many homeowners are continuing to make mortgage payments at a loss, and it would be interesting to see how they behaved if they felt they already paid fees to cover the risk of default.

Now That's What I Call Progress!

2010-01-21T10:28:00.001-08:00

Gail Collins reminds us that things are always getting better:

"There was a time when, if people got worried about the way things were going, they would throw a virgin off the side of a cliff. Now they just kill a politician. And only metaphorically! Is this a great country, or what?"

Some Unhelpful Advice for Haiti

2010-01-21T10:26:00.001-08:00

New York Times columnist David Brooks has an uncanny ability for sounding so reasonable in one column and sounding so crazy in the next. Last week, he managed to do both in the same piece.

Brooks began by correctly observing that the devastation from Haiti's earthquake was so great because the country is so poor. Disasters of similar scales in richer countries come with vastly smaller death tolls. However, while growth is the key to mitigating such tragedies, Brooks also (correctly) points out some unfortunate shortcomings in development knowledge:

"In the recent anthology 'What Works in Development?,' a group of economists try to sort out what we've learned. The picture is grim. There are no policy levers that consistently correlate to increased growth. There is nearly zero correlation between how a developing economy does one decade and how it does the next. There is no consistently proven way to reduce corruption. Even improving governing institutions doesn't seem to produce the expected results.

The chastened tone of these essays is captured by the economist Abhijit Banerjee: 'It is not clear to us that the best way to get growth is to do growth policy of any form. Perhaps making growth happen is ultimately beyond our control.'"

At this point, however, the wheels come off the bus. He argues that there are some uncomfortable truths that we must acknowledge about Haiti:

"...it is time to put the thorny issue of culture at the center of efforts to tackle global poverty. Why is Haiti so poor? Well, it has a history of oppression, slavery and colonialism. But so does Barbados, and Barbados is doing pretty well. Haiti has endured ruthless dictators, corruption and foreign invasions. But so has the Dominican Republic, and the D.R. is in much better shape. Haiti and the Dominican Republic share the same island and the same basic environment, yet the border between the two societies offers one of the starkest contrasts on earth — with trees and progress on one side, and deforestation and poverty and early death on the other.

As Lawrence E. Harrison explained in his book "The Central Liberal Truth," Haiti, like most of the world's poorest nations, suffers from a complex web of progress-resistant cultural influences. There is the influence of the voodoo religion, which spreads the message that life is capricious and planning futile. There are high levels of social mistrust. Responsibility is often not internalized. Child-rearing practices often involve neglect in the early years and harsh retribution when kids hit 9 or 10.

We're all supposed to politely respect each other's cultures. But some cultures are more progress-resistant than others, and a horrible tragedy was just exacerbated by one of them."

As I've written before, I'm skeptical of these types of cultural explanations of poverty. While they can be excellent rationalizations of current facts, they seem to have little predictive value. As the previous link highlights, German, Japanese and Korean cultures were all viewed as hostile to capitalism and progress... that is, until each of these countries rapidly developed, at which point their cultures were viewed as promoting hard work and innovation.

Further, while Brooks highlights the aspects of Voodoo culture that stifle economic progress, he neglects to mention that certain aspects of Christianity (at least on paper) similarly discourage investment and growth. Many Americans believe in the Rapture. They believe that at any moment, they will be brought up to Heaven to observe the Tribulation and Apocalypse on Earth. Seems like that sort of mindset might impede a small business owner deciding on whether or not to expand. And yet, America is the richest country in the world.

Worse still, is Brooks' suggestion for changing the undesirable aspects of Haitian culture:

"...it's time to promote locally led paternalism. In this country, we first tried to tackle poverty by throwing money at it, just as we did abroad. Then we tried microcommunity efforts, just as we did abroad. But the programs that really work involve intrusive paternalism.

These programs, like the Harlem Children's Zone and the No Excuses schools, are led by people who figure they don't understand all the factors that have contributed to poverty, but they don't care. They are going to replace parts of the local culture with a highly demanding, highly intensive culture of achievement — involving everything from new child-rearing practices to stricter schools to better job performance.

It's time to take that approach abroad, too. It's time to find self-confident local leaders who will create No Excuses countercultures in places like Haiti, surrounding people — maybe just in a neighborhood or a school — with middle-class assumptions, an achievement ethos and tough, measurable demands."

I'm not really sure what this even means. There are many complex reasons for Haiti's poverty, but I'm not sure how creating the international development version of "Kitchen Nightmares" is going to solve it. Unlike with the Harlem Children's Zone, we don't have the authority to install "no-nonsense" leaders in another country. And when we've tried it, it hasn't worked out so well.

In the short-run, Haiti will need a lot of humanitarian relief to recover from this disaster, something even aid skeptics agree on. The long-run question of how to help Haiti (and other poor countries) develop is a more complicated one and we don't have a complete answer. I don't think, however, that naive appeals to "no excuses" paternalism is going to help.

(for a vastly snarkier critique of Brook's argument, read this piece)

Should we hold homeowners to a higher moral standard than businesses?

2010-01-08T13:51:00.000-08:00

In the wake of the collapse of the housing bubble, nearly 11 million American families are "underwater", meaning that they owe more money on their mortgage than their house is currently worth. Some of these families simply can't afford to make the mortgage payments. Others can make the payments, but have decided to walk away from what is clearly a losing financial proposition. By pursuing "strategic default", these families allow banks or other lenders to foreclose on their homes and eat the loss. This allows them to seek other housing options and re-build their financial lives. While this is often a good individual financial move, not everyone agrees that it is the (morally) correct thing to do. Roger Lowenstein's interesting piece in the New York Times Magazine highlights this point:

"John Courson, president and C.E.O. of the Mortgage Bankers Association, recently told The Wall Street Journal that homeowners who default on their mortgages should think about the 'message' they will send to 'their family and their kids and their friends.' Courson was implying that homeowners — record numbers of whom continue to default — have a responsibility to make good."

Mortgage bankers aren't the only ones who feel this way. The US government similarly discourages strategic default:

"The moral suasion has continued under President Obama, who has urged that homeowners follow the 'responsible' course. Indeed, HUD-approved housing counselors are supposed to counsel people against foreclosure."

None of this should surprise anyone. Lenders want to avoid defaults because they want to get paid back. And the government is desperate to stem the tide of financial losses and prop-up the housing sector. Further, defaults create a sort of externality: if I default, I can depress the value of the houses in my neighborhood, weakening the financial position of my neighbors.

However, in many cases default is the best financial option for individual homeowners. As Lowenstein points out, businesses use strategic default in the same sort of situations. Recently, Morgan Stanley walked away from buildings it owned in San Francisco, without incurring moral outrage. In their case, it was simply business.

While it's understandable that policymakers are unhappy with strategic default, it makes no sense to hold individuals to a higher moral standard than corporations. Any coercion from government to try and get people to keep paying their mortgage is essentially a transfer of wealth from homeowners to lenders. That is not, in and of itself, a worthy policy goal.

Rather, if the government is truly concerned with the strategic default, it could try a suggestion put forth by economist Dean Baker. Baker has advocated for "The Right to Rent Plan", which would grant homeowners facing foreclosure the right to rent their home for a period of 5-10 years from the lender at the fair market rental rate. Such a policy would give borrowers and lenders an extended period to work out mortgage modifications, which would prevent the externalities imposed on communities by foreclosures. It provides a better deal for the lender (who gets revenue from the rental fees) and the borrowers (who avoid the credit impact of foreclosure). Further, this would not require government revenue, nor would it unduly reward reckless borrowers or lenders.

We all have an interest in preventing future foreclosures, but guilt is probably not the most effective policy tool to achieve this goal.

How I learned to stop worrying and love the deficit

2009-12-06T11:34:00.000-08:00

Large deficits can elicit emotional reactions (see Tea Party Movement). But Robert Frank gives some good reasons not to be too worried about our current fiscal situation:

"...when total spending falls well below the level required for full employment, the economy won’t recover quickly on its own. Consumers won’t lead the way, because even those who still have jobs are fearful they might lose them. And most businesses won’t invest, since they already have more capacity than they need. Only government, Mr. Keynes concluded, has both the motive and opportunity to increase spending significantly during deep downturns.

Of course, if the government borrows to do so, the debt must eventually be repaid (or the interest on it must be paid forever). That fact has provoked strident protests about government “bankrupting our grandchildren.” It’s an absurd complaint. Failure to stimulate the economy would mean a longer downturn. That, in turn, would mean longer stretches of reduced tax receipts, increased unemployment insurance payouts, and depressed private investment. The net result? Higher total public borrowing and a permanent decline in productivity compared with what we would have had under effective economic stimulus. Once the economy is back on its feet, deficit logic changes. At full employment, extra borrowing often compromises future prosperity, just as critics say. On President George W. Bush’s watch, for example, the national debt rose from $5 trillion to $10 trillion. Some of that borrowing paid for an expansion of prescription coverage and a financial bailout a year ago, but most went for a war in Iraq and tax cuts that largely just allowed for additional consumption. Our grandchildren will be forever poorer as a result.

But the reverse would be true if government borrowing were used for productive investments. After decades of neglect of the nation’s infrastructure, attractive public investment opportunities abound. It’s been estimated, for example, that eliminating bottlenecks on the Northeast rail corridor would generate $12 billion in benefits at a cost of only $6 billion. These are present value estimates. When government undertakes such investments, our grandchildren become richer, not poorer...

In the meantime, however, such commentary continues to render intelligent political decisions about deficits less likely. For example, 58 percent of respondents in a recent NBC News-Wall Street Journal poll said the president and Congress should worry less about bolstering the economy than keeping the deficit down, while only 35 percent said economic recovery was a higher priority. If we really want to bankrupt our grandchildren, that poll charts a promising course."

Much of Frank's argument is basic Keyensian economics: in a recession, government spending is needed to offset the decline in private spending. But whatever your feelings about Keynes' theories, Frank's basic point is quite intuitive. The vast majority of the deficit has been caused by a collapse in tax receipts, which were caused by the recession. That means that anything that will cause output to grow faster will reduce the long-term deficit by increasing tax receipts. That means that spending today won't necessarily "bankrupt our grandchildren".

The politics of deficit reduction are all too predictable: when a party is out of power, they seem to find that old religion. But that doesn't mean we can't have a rational discussion about budgets.

Debating the Keynesian Multiplier

2009-10-02T11:37:00.001-07:00

The old joke about economists is that if you laid them all together from head to toe they still wouldn't reach a conclusion. While there are many areas where economists broadly agree, the virtues of economic stimulus is not one.

The latest salvo in this rather un-gentlemanly (and gentlewomanly) debate comes via Harvard's Robert Barro, writing in the Wall Street Journal:

"The bottom line is this: The available empirical evidence does not support the idea that spending multipliers typically exceed one, and thus spending stimulus programs will likely raise GDP by less than the increase in government spending. Defense-spending multipliers exceeding one likely apply only at very high unemployment rates, and nondefense multipliers are probably smaller. However, there is empirical support for the proposition that tax rate reductions will increase real GDP."

Barro is summarizing his research into the size and impact of multipliers, in which he analyzed US GDP and changes in government spending data over time. Increases in government spending, according to Barro, haven't led to proportionally larger increases in GDP, as Keynesian analysis might suggest.

Mark Thoma chastens Barro for essentially re-cycling an op-ed (compare his new piece to this article from January) and, in response, re-posts some of the criticisms made at the time by people like Paul Krugman, Brad DeLong and Christina Romer.

For as important an issue as fiscal stimulus is, there is surprisingly scant research into its effectiveness. The best work is by David and Christina Romer, but they look at tax cuts as opposed to government spending.

Fortunately, Ethan Ilzetzki, Enrique G. Mendoza and Carlos A.Vegh have just published some new research, which looks at the impact government spending on GDP for a panel of 45 countries (20 developed, 25 developing). Their conclusions include:

In developing countries, the response of output to increases in government spending is smaller on impact and considerably less persistent than in high income countries.
The degree of exchange rate flexibility is a critical determinant of the size of fiscal multipliers. Economies operating under predetermined exchange rate regimes have long-run multipliers of around 1.5, but economies with flexible exchange rate regimes have essentially zero multipliers.
The degree of openness to trade (measured as exports plus imports as a proportion of GDP) is another critical determinant. Relatively closed economies have long-run multipliers of around 1.6, but relatively open economies have very small or zero multipliers.
In highly-indebted countries, the output response to increases in government spending is short-lived and much less persistent than in countries with a low debt to GDP ratio.
The multipliers for the US in the post-1980 period are rather small (in the range 0.3-0.4) both in the short and long-run. On the other hand, multipliers for government investment are large (around 2).

While far from the last word on the issue, the Ilzetzki, Mendoza and Vegh (IMV) work provides us with a much more subtle analysis of the nature of the Keynesian multiplier. It suggests that developed countries can use fiscal stimulus to boost employment in recessions, particularly if the spending takes the form of government investment. Interestingly, IMV's conclusions support Keynes' original claims. I'm currently reading Keynes' "The General Theory" and stumbled upon these passages:

Fiscal stimulus in rich vs. poor countries:

"Thus whilst the multiplier is larger in a poor community, the effect on employment will be much greater in a wealthy community, assuming that in the latter current investment represents a larger proportion of current output." (p126)

Trade openess and fiscal stimulus:

"In an open system with foreign trade relations, some part of the multiplier of the increased investment will accrue to the benefit of employment in foreign countries... so that if we consider only the effect on domestic employment as distinct from world employment, we must diminish the full figure of the multiplier." (p120)

It seems that Keynes, writing in 1935, predicted findings (1) and (3) in IMV.

Finally, as one might expect, Paul Krugman weights in, yet again:

"On a happier note, this piece by Ilzetzki et al is interesting, and offers a wide range of multipliers depending on a country's situation. The question for the United States is which estimate is most relevant.

I'd say it's the fixed exchange rate estimate. Yes, I know, we have a floating rate. But they explain the relatively high fixed-rate number by pointing to Mundell-Fleming, which says that fiscal policy is effective under fixed rates because it doesn't drive up interest rates (capital flows in). We're in a similar position for a different reason: fiscal expansion doesn't drive up rates because we're at the zero bound.

Oh, we're also relatively closed.

The thing is that both the fixed rate and closed multipliers are around 1.5 — which so happens to be just about the number assumed by Christina Romer in her analysis for the Obama administration. Just saying."

Ha Joon Chang on Culture and Economic Development

2009-09-25T10:29:00.001-07:00

Ha-Joon Chang, Cambridge University Professor of Economics makes an eloquent argument for why differences in culture don't explain differences in income:

"...in the early days of capitalism when most economically successful countries happened to be Protestant Christian, many people argued that Protestantism was uniquely suited to economic development. When Catholic France, Italy, Austria, and Southern Germany developed rapidly, particularly after the Second World War, Christianity, rather than Protestantism, became the magic culture. Until Japan became rich, many people thought East Asia had not develop because of Confucianism. But when Japan succeeded, this thesis was revised to say that Japan was developing so fast because its unique form of Confucianism emphasised cooperation over individual edification, which the Chinese and Korean versions allegedly valued more highly. And then Hong Kong, Singapore, Taiwan, and Korea also started doing well, so this judgment about the different varieties of Confucianism was forgotten. Indeed Confucianism as a whole suddenly became the best culture for development because it emphasised hard work, saving, education, and submission to authority. Today, when we now see Muslim Malaysia and Indonesia, Buddhist Thailand, and even Hindu India doing economically well, we can soon expect to encounter new theories that will trumpet how uniquely all these cultures are suited for economic development (and how their authors have known about it all along)."

Culture has a certain appeal on both the left and the right as a determinant of a country's politics and economics. But cultural arguments are often subject to a winner's bias: since rich countries will typically have high levels of education and entrepreneurial spirit, we can look for teachings within a given culture that promote those values. But we're looking the wrong way. As Chang argues:

Culture is the result, as well as the cause, of economic development. It would be far more accurate to say that countries become “hardworking” and “disciplined” (and acquire other “good” cultural traits) because of economic development, rather than the other way around.

This is from a chapter in Chang's book "Bad Samaritans", a critical look at global trade. It's definitely worth a look.

The trouble with tariffs

2009-09-14T08:13:00.001-07:00

The stated logic behind tariffs is that they protect domestic jobs against international competition. That's the justification behind the recent tariffs on Chinese tire imports imposed by the Obama administration. Many people think this is a laudable goal; but is it worth the cost? As Brad DeLong explains, probably not:

"Let's see... 250 million cars in America... need 4 tires per car... need new tires every 2.5 years. 400 million tires a year... $1.4 billion dollars a year... 10,000 worker jobs saved... $140,000 dollars per worker-job per year.

Looks like we could (a) let the Chinese sell us tires, (b) tax each tire by $2.50, (c) pay each tire worker who loses his or her job $100K a year, and we come out ahead: American households have more money to spend on other things, China has more jobs to help what is still a very poor country grow, and tire workers have higher incomes and more leisure as well.

But, you say, it would be stupid to impose a $2 a tire tax and use the money to pay each laid-off tire worker $100K a year.

That's the point: when the policy you are adopting is worse for everybody than a policy you agree is stupid, the policy you are adopting is best characterized as really stupid."

We should not ignore or diminish all concerns about free trade. But the trouble with tariffs is that they usually cost more than they're worth in terms of protecting domestic jobs*.

Some have suggested that this tariff is designed to boost support for healthcare reform among labor groups. In that case, the cost/benefit calculation changes depending on the desirability of the proposed legislation. However, the point is that tariffs are rarely justified by their overall economic impact.

*Not everyone would agree that protecting domestic jobs is a worthwhile public policy goal. Assuming that it is, however, we need to consider whether it's a cost-effective policy.

Why care about inequality?

2009-08-22T09:56:00.001-07:00

This is a follow-up post to a previous discussion about economic inequality.

Emmanuel Saez, the UC Berkeley economist, recently produced a fascinating chart on income distribution in the US, depicting the share of national income held by the top 10% of Americans over time:

As you can see, the top 10% of families accounted for roughly 50% of national income in 2007, a level not seen since the time of Jay Gatsby. Though this is only one of numerous measures of income inequality, it clearly shows that the distribution of income in America is more skewed now than at any point since before the Great Depression.

Why should we care about this? There are good economic reasons for discounting measures of inequality. First, economics is not, in general, a zero-sum game. We can all do better even if some gain more than others. And conversely, while some poor societies are highly equal, equal poverty is no great virtue.

Second, there are good reasons why some people make more than others. People who make great innovations (eg the founders of Google) or who have specialized skills (eg neurosurgeons) have every right to be compensated for what they do, since they provide value for society. Bill Gates is enormously wealthy, but he didn't get that way by stealing from others; he became wealthy by providing valuable products to society, making everyone better off (Vista notwithstanding). The carrot of great individual wealth has done much to improve human welfare.

However, there are equally good economic reasons to care about inequality. First, sometimes inequality does result from zero-sum interactions. As Harvard labor economist Larry Katz notes,

"Much of the growth of high-end incomes stemmed from market forces, like technological innovation... But a significant amount also stemmed from the wealthy’s newfound ability to win favorable government contracts, low tax rates and weak financial regulation".

If government is captured by narrow interests, then we are likely to see the growth of policies that privilege one group and do nothing to help (or sometimes even hurt) other groups. A less regressive tax code, for example, helps the wealthy but can hurt the poor.

We should also care about changes in inequality because it can indicate how well the economy is functioning for different groups in society. For this reason it is important to understand what is driving inequality. For example, Katz and co-author Claudia Goldin have argued that inequality has increased because of a decline in the relative supply of highly skilled workers. This suggests that increasing college enrollment (and completion rates) for lower-income groups would stem the growth in inequality and increase incomes for poorer Americans.

On the other hand, Arnold Kling and others have argued that inequality has been driven by changes in technology and the growth of "winner take all" markets, as well as changes in family structure. People today are more likely to marry someone of a similar economic and educational background than they were 50 years ago. This re-enforces inequality among now and in the future, as successful, highly educated parents are likely to have successful, highly educated children. If these are the causes, Kling argues, then there is little government policy to can do to stop them, since we are obviously not going to put restrictions on technological progress or prevent wealthy people from marrying each other.

Inequality is not something that the government can directly set, like interest rates or the budget deficit. It is the product, of complex economic, political and social forces. It is important to recognize that inequality has many causes and that by understanding those causes, we can understand fundamental structures in the economy. We should care about inequality because we should care about an economy that satisfies the needs of everyone in society. By understanding what causes inequality, we can better understand how to get there.

On the other hand...

2009-08-17T17:04:00.000-07:00

Maybe President Obama doesn't have plans to euthanize the elderly and disabled.

Last week Iowa Senator Chuck Grassely seemed to agree with Sarah Palin's "death panel" accusation, saying:

"There is some fear because in the House bill, there is counseling for end-of-life... And from that standpoint, you have every right to fear. You shouldn't have counseling at the end of life. You ought to have counseling 20 years before you're going to die. You ought to plan these things out. And I don't have any problem with things like living wills. But they ought to be done within the family. We should not have a government program that determines if you're going to pull the plug on grandma"

Due to the outrage caused by Palin's asinine comment, Congress is no longer considering end-of-life counseling as part of the health care bill. But now that the faux controversy is over, Grassely can re-acquaint himself with reality:

"Grassley says he opposes that counseling as written in the House version of the bill, but a spokesman said the senator does not think the House provision would in fact give the government such authority in deciding when and how people die. The House bill allows patients to decide for themselves if they would like such counseling."

If someone proposed an bill covering end-of-life counseling in a different context (were we not debating health care reform), it would be overwhelmingly popular. Too bad.

Usually when people make comments as dumb as Grassely's, I'm left asking myself whether they are stupid, crazy or disingenuous. Fortunately, Grassely answered the question for us.

The way we count stuff matters

2009-08-06T09:08:00.001-07:00

NYU Law professor Anthony Thompson points out an interesting quirk in the way the census works: prison inmates are counted as living in the same county as their prision, even if they will be released within a year or two. Why does this matter? It has a direct impact on how federal and state congressional districts are drawn and how government money is channeled:

"...the district of State Senator Elizabeth O'C. Little, a Republican in upstate New York, has 13 prisons, adding approximately 13,500 incarcerated "residents." Without the inmate population, Ms. Little would face an uncertain future. Her district would probably have to be redrawn because it wouldn't have enough residents to justify a Senate seat.

The residence rule raises two fundamental issues:

First, inmates in nearly all states aren't allowed to vote, yet their presence affects electoral representation in places where they do not live permanently.

Second, a disproportionate number of state prison inmates are from urban areas. Most state prisons, however, are in rural areas. As a result, resources and electoral authority are transferred from inner cities to rural jurisdictions.

The effects are plain to see. Cities lose out on funds that could be used both for crime prevention and prisoner rehabilitation; rural areas do their best to thwart reform because they don't want to lose the benefits that prisons confer on them."

As I've written before, most American live in what the Census classifies as urban areas. So the residence rule will skew public funds in an inefficient and non-representative way.

Conducting a census presents myriad conceptual issues, and no strategy is perfect. But there's something fundmentally wrong with counting incarcerated citizens who are legally barred from voting towards a district's population total. This will ultimately give voters in those districts disproportionate voting power and will result in policy choices that do not reflect the will of the majority.

Prices also ration goods and services

2009-07-18T13:58:00.000-07:00

Princeton bioethicist Peter Singer has an interesting piece in the NT Times Magazine about rationing health care. On the general point of "rationing", Singer says:

"There’s no doubt that it’s tough — politically, emotionally and ethically — to make a decision that means that someone will die sooner than they would have if the decision had gone the other way. But if the stories of Bruce Hardy and Jack Rosser lead us to think badly of the British system of rationing health care, we should remind ourselves that the U.S. system also results in people going without life-saving treatment — it just does so less visibly. Pharmaceutical manufacturers often charge much more for drugs in the United States than they charge for the same drugs in Britain, where they know that a higher price would put the drug outside the cost-effectiveness limits set by NICE. American patients, even if they are covered by Medicare or Medicaid, often cannot afford the copayments for drugs. That’s rationing too, by ability to pay."

While it seems painfully obvious, the point needs repeating: prices are used to ration goods. So the American healthcare system, which is largely based on individual ability to pay, rations healthcare in this way. Yes, most medical costs are payed by insurers, but insurance is expensive for individuals to buy and employer provided benefits are more generous for higher-payed workers.

No American should oppose any public health plan on the basis that it will ration care. Rather, we should judge policies based on how efficiently and ethically that care is rationed.

A little competition never hurt anyone

2009-07-14T16:20:00.000-07:00

Robert Cringely had a strange editorial in the NY Times last week -- strange because its central thesis seemed to disregard 400 years of economic thought. Referring to the recent competition between Microsoft and Google, Cringely writes:

"This is all heady stuff and good for lots of press, but in the end none of this is likely to make a real difference for either company or, indeed, for consumers. It’s just noise — a form of mutually assured destruction intended to keep each company in check."

According to Cringely, competition between Microsoft and Google is more about posturing --Microsoft showing that it can compete in the search engine market and Google showing it can compete in the operating system market--than about innovation.

This begs the question, 'what's the difference?' Modern economics is largely founded on the idea that competition improves social welfare. So we should expect that Microsoft's new search engine Bing will push Google to make its search engine better and Google's Chrome OS should push Microsoft to make Windows better.

Of course, that's just theory. What does the empirical evidence say? According to the Atlantic Monthly, we're already seeing the fruits of competition:

"...Microsoft is hoping to launch a cheap, online version of its Office suite that doesn't include all the features of the paid-for version, to keep companies buying that product. But the company still claims that its software will provide "fuller service" than Google Apps, the free suite of online applications with about 15 million users. In short, Microsoft is trying to thread the needle here by creating a free online Office version with enough features to displace Google Docs, but not enough features to encourage companies to give up their lucrative Office purchases. That strikes me as a pretty significant challenge."

I seriously doubt that Microsoft the monopolist would launch an online version of its Office software; Microsoft the competitor, on the other hand, feels the need to answer Google's challenge. What will Google do to counter Microsoft? We consumers can only wait excitedly for the next innovation out of Mountain View, CA.

The point is simple: competition is good, monopoly is bad. If Microsoft had no competition, then they'd still be selling copies of Windows Vista, rather than working feverishly on Windows 7 -- and that's good for all of us.

Thoughts on the Waxman-Markey Bill

2009-07-05T19:00:00.001-07:00

The Waxman-Markey bill is the US's first major attempt to control the emissions linked to global warming. As you might expect, it has elicited a fury of views from economists.

Greg Mankiw points out the bill's major shortcoming: that most of the emissions permits are given away for free. These permits were projected to bring in $1 trillion in revenue over the next ten years, money that could be used to pay down the debt or help fund healthcare reform; instead, the bulk of this value will simply be given away to business interests.

In spite of the shortcomings, however, Dean Baker and Paul Krugman support the bill because the cost of doing nothing is higher than the cost of a bad bill:

"Temperature increases on the scale predicted by the M.I.T. researchers and others would create huge disruptions in our lives and our economy. As a recent authoritative U.S. government report points out, by the end of this century New Hampshire may well have the climate of North Carolina today, Illinois may have the climate of East Texas, and across the country extreme, deadly heat waves — the kind that traditionally occur only once in a generation — may become annual or biannual events.In other words, we’re facing a clear and present danger to our way of life, perhaps even to civilization itself. How can anyone justify failing to act?"

Provocatively, Krugman calls failure to act against the "existential threat" of Global Warming treasonous.

Don Boudreaux takes issue with Krugman's accusation:

"It's more accurate to say that Mr. Krugman is committing treason against reasoned debate. One of the most compelling arguments against climate-change regulation is not that global warming isn't occurring but, rather, that the dangers of further regulation far outweigh its likely benefits. Government regulation inevitably is a political animal; it's never guided purely, or even largely, by disinterested science.

Is it treasonous to worry about the influence of interest-groups on regulation? Is it treasonous to fear that centralizing more power in Washington will result in unforeseen negative consequences? Is it treasonous to believe that the threat to our well-being posed by further constraints upon markets is worse than is the threat posed by higher temperatures?"

The interchange between Krugman and Boudreaux highlights the major ideological conflict surrounding attempts to curb Global Warming. Putting science aside for a moment, we are talking about the correct response to a market externality (carbon emissions). For Krugman, externalities can be dealt with through policy intervention, such as a tax (or a cap-and-trade bill, which has the same desired intent). Boudreaux, on the other hand, is a firm adherent of Public Choice Theory, and worries about interest groups capturing the policy process and stifling individual liberty. Theirs is a conversation that would be substantively the same if we were talking about subsidizing research, overfishing or any other commonly cited externality. Krugman is more worried about the externality and Boudreaux is more worried about the intervention.

Like anything else, we economists can easily boil the issues of our time down to the basics of "government vs. the market."

Failed States Index

2009-06-30T14:17:00.000-07:00

Foreign Policy Magazine has released its 2009 Failed States Index. The Index takes into account a dozen different potential vulnerabilities a country faces from demographics to economics, security to human rights. While the rankings are obviously partially subjective, the methodology is very well done.

The top ten failed states remain almost unchanged from last year with only a few states swapping places with each other. The top five are all African states with Somalia (thank you pirates, parallel governments, and Islamic militants!), once again claiming the top spot. Note also, this is not an index about which states are potentially the most dangerous to global stability (as such North Korea is 17 and Iran is 38, rather than both being in the top five). Nevertheless, it is worth noting that Pakistan's failures (it's ranked 10th), in the areas measured by the Index have in turn greatly helped to push the country towards the destabilization Islamabad is now trying to deal with. And, in this case, Pakistan's constant chaos politically, economically, socially, and militarily, does sincerely threaten global stability, arguably more so than any other country in the world.

http://www.foreignpolicy.com/articles/2009/06/22/2009_failed_states_index_interactive_map_and_rankings

Where can we find the money?

2009-06-24T09:53:00.001-07:00

Here's a terrific Letter to the Editor from today's New York Times, courtesy of an economist from the US Air Force Academy:

To the Editor:

Re "Lettuce From the Garden, With Worms" (column, June 21):

Nicholas D. Kristof makes a compelling case for the link between how our food is produced and our health. He doesn't mention that agricultural subsidies (on sugar and corn, for instance) are one reason Twinkies are cheaper than broccoli. Here's a suggestion for how to pay for health care reform: Eliminate all agricultural subsidies.

Kate Silz-Carson
Colorado Springs, June 22, 2009

I couldn't have said it better myself.

Potential Good in a Sad Fraud

2009-06-16T14:52:00.000-07:00

Why an Ahmadinejad Victory is a Net Positive for U.S. Foreign Policy

As the Guardian Council agrees to recount votes (thanks to a partial about face from Iranian leader Ayatollah Ali Khamanei), the question begs to be asked in greater depth than it has been, whether the U.S. is actually better off if Mir Hossein Mousavi manages to somehow find a way to emerge victorious over Mahmoud Ahmadinejad?

At first glance it is easy to see why support of Mousavi would seem to be in the interest of the United States. Mousavi is more willing to engage in the broader international community, he has the experience to deal with the economic woes currently plaguing Iran, and domestically he is without doubt more likely to push to increase freedoms of speech and press, access to universities, and advocate reforms for women.

However, in the theocracy that is Iran, the domestic values and freedoms Mousavi supports are unlikely to be translated from campaign rhetoric into laws granting increased liberties to the Iranian people. By 2004, the middle of President Khatami’s second term, many of his early reforms were rolled back, and new one’s were not even proposed in the Majlis (the Iranian Parliament), due to a certainty of rejection. Today, the Majlis is even more conservative, thanks in large part to the dismissal of thousands of so called reformist candidates from the ballots in 2008. Even if Mousavi was able to entice the Majlis to pass the domestic reforms he desired, they would have to then be approved by the Guardian Council and ultimately accepted by Khamanei, reducing their chance of coming to fruition even more.

And so, what would likely be left of a Mousavi victory in the years to come would be a failed domestic agenda, and stagnation on the international front, a positive for Iran but not for the U.S. A Mousavi victory would be a tremendous boon for Iranian nuclear development allowing Tehran to use negotiations to buy time to continue advancing their program, with virtually no potential for obtaining an agreement from Mousavi to cease it. In fact, Mousavi stated explicitly throughout the campaign that he will reject any proposal to halt Iranian nuclear development for peaceful energy purposes. While he says the issue of weaponizing is negotiable, the reality is that Iran’s so called peaceful nuclear program is at best a dual program to achieve weaponization and at worst simply a cover for it.

On this issue, one need only look at Mousavi’s domestic political situation to believe he means what he says. The Iranian people have consistently supported nuclear development for energy purposes and even the pro-Mousavi under thirty-five crowd, are resentful over what they see as international hypocrisy in not allowing Iran access to nuclear programs. Any varying by Mousavi on this issue as President (especially after being unlikely to deliver on promised domestic reforms), and he would permanently and irreparably damage his reputation in Iran, almost certainly precluding his re-election in 2013.

And yet, there is no doubt that with a Mousavi win, the U.S., backed by the EU, will be forced to spend at least one to three years negotiating with Iran over its nuclear program. Even if the U.S. reaches the point after a year or so, of declaring negotiations to have failed and desiring to take the next logical step of economic sanctions, it may find such a step extremely difficult if not impossible to achieve. Mousavi acting publicly as a “moderate” has a can’t lose prospect, by being able to then ask for further negotiations even after months or years of failed ones. In such a case, Russia, which has signed multiple deals with Iran on nuclear development, would be likely if not definite to veto any economic sanctions proposed at the UN Security Council. Regardless of what China did, European desire to find a negotiated settlement is so over whelming, that the bigger fear in such a situation is seeing France give cover to Russia by vetoing as well. Further, even if the U.S. managed to convince Russia, China, France, etc. to support or abstain and economic sanctions were passed, it would likely result in a painful long term ramification. Mousavi’s base of support, the moderate city dwellers and youth, would likely blame the U.S. for worsening, through sanctions, Iranian economic conditions, regardless of their actual impact.

An Ahmadinejad victory however, produces the opposite result. For one thing, negotiations are much less likely to last nearly as long as they would under a Mousavi Presidency, given Ahmadinejad’s horrible international reputation, viewed by most of the West as a less than serious partner for negotiations. In turn, economic sanctions are much more likely come to fruition sooner. The French would be very unlikely to veto, with the Russians (and to a lesser extent the Chinese), probably requiring some sort of trade with the U.S. for their vote or abstention. But any deal would inevitably come at a much lower price than if Mousavi were President given Ahmadinejad’s lack of global credibility. In contrast to a Mousavi Presidency, the moderates and under thirty-five populace, while partially blaming the U.S. and EU for worsening economic conditions resulting from sanctions, would likely place greater blame on Ahmadinejad, seeing sanctions as a penalty further incurred as a result of his embarrassing, unnecessary, and counter productive behavior on the international stage.

In the end, it is important to remember that it is Khamanei, not the President who will ultimately decide what happens with regard to any negotiations over Iran’s nuclear development. But as it stands now, an Ahmadinejad second term might just be more beneficial for U.S. foreign policy than a Mousavi first term, for one main reason: timing. A Mousavi victory increases the likelihood of Iranian nuclear weapons coming to fruition under the cloak of negotiations due to the almost certain longevity of such negotiations. Thus, if President Obama truly meant it when he said during the campaign that, “Iran's development of a nuclear weapon, I believe, is unacceptable…,” then it is better to have Ahmadinejad back in office. For a second term by the current Iranian President will result in either President Obama’s gifted team being able to somehow manage a break through or having to determine that the next step of economic sanctions is necessary. But one way or the other at least there will be some sort of clarity and completion before Iran’s nuclear weapons are fully developed and operational.

I champion and cherish free and fair elections as much as anyone and I sincerely hope that the truth somehow manages to emerge. If the result is a run off or a Mousavi victory then I will be extremely heartened to see democratic ideals winning out over theocratic desires. But anyone believing that a Mousavi presidency will be a dream come true for U.S. and general Western interests is likely misguided. Rather, a Mousavi presidency might just end up being our worst nightmare.

Poverty and income inequality over time

2009-06-15T13:55:00.001-07:00

Justin Wolfers posted this graph at Freakonomics, showing income growth by quintile since the 1970s:

His analysis was that economic growth has done little for the poor, accruing mostly (almost entirely) to the upper incomes.

Russ Roberts, however, takes issue with this analysis. In two separate posts (here and here), he criticizes Wolfers' interpretation:

"This alas, is a meaningless chart. It tells you nothing about who got the gains of the last 35 years. Why? Because they're not the same people in the quintiles. Starting in 1973, and it's not a coincidence, the divorce rate in the United States began to rise. The number of families increased dramatically simply because of divorce. There was also an increase in the number of families headed by single women with children. The quintile breaks-points changed, not because the economy was growing or shrinking but simply because of changes in the types of families."

In a sense, Roberts is not wrong. Looking at static graphs of quintiles does not account for differences in composition. If people move up the income ladder, then we will mistake static income growth among the groups for static income growth among individuals. The key here is the degree of social mobility. Basically, what are the odds that a person who is poor today will be poor next year, or in ten years?

Emmanuel Saez, the most recent winner of the John Bates Clark Medal, looks at this question in depth. Using Social Security data, Seaz tracked individuals over time to assess income growth and social mobility in the US over time. He concludes:

"We found that changes in short-term mobility have not substantially aﬀected the evolution of inequality, so that annual snapshots of the distribution provide a good approximation of the evolution of the longer term measures of inequality. In particular, we ﬁnd that increases in annual earnings inequality are driven almost entirely by increases in permanent earnings inequality with much more modest changes in the variability of transitory earnings. However, our key ﬁnding is that while the overall measures of mobility are fairly stable, they hide heterogeneity by gender groups. Inequality and mobility among male workers has worsened along almost any dimension since the 1950s: our series display sharp increases in annual earnings inequality, slight reductions in short-term mobility, large increases in long-term inequality with slight reduction or stability of long-term mobility.

Against those developments stand the very large earning gains achieved by women since the 1950s, due to increases in labor force attachment as well as increases in earnings conditional on working. Those gains have been so great that they have substantially reduced long-term inequality in recent decades among all workers, and actually almost exactly compensate for the increase in inequality for males."

Certainly, some longitudinal studies have found larger amounts of social mobility, but the bulk of the literature has not found the degree of mobility that Roberts implies.

So while the graph posted by Wolfers is static, there is evidence that it is a good approximation of reality. Income growth has accrued largely to wealthier individuals and families over the past 30 years, and it has not been sufficiently counterbalanced by social mobility.

Curiously, Roberts says that liberals lack a causal mechanism for changes in inequality and stagnant incomes among the poor. However, Wolfers was explicitly citing one of the most powerful arguments for this phenomenon, namely "skill-biased technological change". As Harvard's Larry Katz and Claudia Goldin explain, technological change has raised the productivity of skilled workers relative to less skilled workers, causing changes in relative incomes. In manufacturing, for example, advanced machinery has decreased demand for assembly line workers, but increased demand for engineers and mechnical operators. At the same time, the supply of educated workers has not kept up, resulting in large income gains in the upper half of the income distribution and much lower gains at the bottom.

Roberts is correct, however, in asserting that there is a difference between income inequality and absolute well-being. A rising tide can lift all boats, even while it lifts some faster than others. But it's important not to minimize slow income growth among lower income Americans; they may be better off than they were 30 years ago, but they are still struggling.

In a follow-up post, I'll delve more into the measurement, economics and politics of inequality.

Time to fix the answer key

2009-06-11T17:36:00.000-07:00

A lot of unusual things have happened in our economy over the past year, and sometimes it feels like the old rules don't apply anymore. The people who write the questions for the Foreign Service Exam, however, haven't seemed to notice (via NPR's Planet Money):

I recently bought the foreign service exam study guide since I am taking the test this Friday. The test consists of, among other things, basic economics questions. I was so amused by one of the sample questions that I just had to share:
All of the following are examples of United States products that would typically fail to be produced to optimal output without government intervention EXCEPT:
A. national defense products.
B. light provided by lighthouses.
C. new automobiles.
D. new highways.

And in the answer section:

C. This is the correct answer. Automobiles are not a public good. Optimal production of automobiles is related to the demand for them by individual consumers.

We've been spending for a long time

2009-06-10T19:01:00.000-07:00

David Leonhardt has a great piece in today's Times about where our tremendous deficit came from (here's the article and here's the accompanying Economix post). As he shows, the $1.22 trillion deficit for 2009 has many components:

"...we were [sic] able to construct a time series, showing how budget estimates for 2009-12 have changed over time. Because the C.B.O. attributes the changes in its estimates to specific causes — namely, changes in the economy and new legislation — we were then able to create four different categories to explain how the $846 billion annual surpluses that were forecast in 2001 for 2009-12 have turned into $1.22 trillion annual estimated deficits. Those four categories are: economic changes, which I refer to as the business cycle in my column; Bush administration legislation; Bush-era policies that are scheduled to expire but that Mr. Obama is extending; and new Obama administration policies."

While many are apoplectic about our current fiscal situation, it's important to distinguish between long-term and short-term deficits. Many, if not most, economists agree that it's a good idea to run short-term deficits during recessions. These deficits stem from a decline in tax revenue and from expansionary policy (eg the stimulus). Amazingly, the stimulus plan accounts for only 7% of our current deficit.

On the other hand, longer term deficit policies are a bigger concern. While the economy will recover and the stimulus will expire, spending on upper-income tax cuts (if made permanent) and long-horizon wars may haunt the government for years to come.

Governments run deficits all the time, so why worry now? The chief concern is that our creditors (countries like China and other foreign investors) may come to question our ability or willingness to pay them back. This could lead to sharply increased interest rates (which will hamper the economy) or necessitate the Fed to print money (which will cause a significant rise in inflation). UC Berkeley economist Alan Auerbach cites recent increases in interest rates on 5-year Treasury bills (a sign that investors worry about getting their money back) as evidence that this is already starting.

Like most American's, the US government will have to start tightening its belt sooner or later. What spending gets cut will likely be contentious. Some spending, such as universal healthcare, may be popular enough to maintain traction. Others, like extending the Bush tax cuts or some proposed Obama programs may not. It will be interesting to see our political system if it finally acknowledges we can't have it all.

Finding common ground between liberals and libertarians

2009-05-30T10:52:00.001-07:00

Despite similar sounding names, liberals and libertarians are often at odds with each other. While the former favors a large welfare state and government intervention in the economy, the latter are loath to acknowledge any legitimate role for government. But as Bruce Bartlett points out, there may be more common ground than most think:

"On the surface, there would appear to be potential for an alliance. Libertarians tend to be liberal on social issues, favoring such things as gay marriage and drug legalization; and also liberal on defense and foreign policy, opposing the wars in Iraq and Afghanistan, and opposing torture and restrictions on civil liberties in the name of national security.

But libertarians are conservative on economic policy--favoring a free market with virtually no government intervention except the enforcement of contracts, and no government spending or taxes except those to pay for a very minimal police force and military.

Libertarians' views on social policy and national defense make them sympathetic to the Democrats, while their views on economic policy tend to align them with the Republicans. If one views social, defense and economic policy as having roughly equal weight, it would seem, therefore, that most libertarians should be Democrats. In fact, almost none are. Those that don't belong to the dysfunctional Libertarian Party are, by and large, Republicans."

Of course, Bartlett shows that these three areas do not have equal weight, as libertarians tend to emphasize economic freedom over all else.

For Bartlett, the dialogue between liberals and libertarians should involve each side conceding a little ground to the other:

"...many of the liberals persuasively argued that the pool of freedom isn't fixed such that if government takes more, then there is necessarily less for the people. Many government interventions expand freedom. A good example would be the Civil Rights Act of 1964. It was opposed by libertarians like Barry Goldwater as an unconstitutional infringement on states' rights. Yet it was obvious that African Americans were suffering tremendously at the hands of state and local governments. If the federal government didn't step in to redress these crimes, who else would?

...In return, liberals can learn something important about economics from libertarians. Liberals often turn to government to solve social problems simply because that is their default position. But often, there are private-sector alternatives that may in fact be superior. The rich diversity of America's states and localities shows there are many different ways of dealing with social problems that don't necessarily require more government."

"Liberalism", very broadly defined, is about promoting individual liberty and equality. But there are large differences within the philosophy. For modern American liberals, "equality" means a narrower distribution of incomes; for libertarians, "equality" means that everyone is free to pursue their economic interest, accepting a wide variation in individual outcomes.

Personally, I often find myself torn between these political views. I do favor a limited scope for government intervention, focused on expanding freedom rather than promoting traditional cultural institutions or engaging in social engineering.

Government should play a robust role in helping to alleviate freedom-reducing inequities in society; but we should also willingly acknowledge when government interventions in the economy privilege the few over the many, including regressive tax policies such as the mortgage interest deduction or the tax exemption on employer-provided health insurance. This is akin to Ed Glaeser's "libertarian progressivism", which is skeptical of certain government interventions because they favor the privileged over the poor.

Perhaps the key is avoiding falling in love with one's ideology. A dialogue between liberals and libertarians would involve the former admitting their great protagonist (government) is not always the best tool to enhance freedom, while the latter would admit that their great antagonist (government) sometimes is the best tool for enhancing freedom.

(HT: Mark Thoma)

Some perspective on and from Sotomayor

2009-05-26T19:26:00.000-07:00

According to today's New York Times coverage, upon joining the Federal District Court in Manhattan in 1992, the newly nominated Supreme Court Judge Sonia Sotomayor reportedly told journalists, "The cases that shake the world don’t come along every day. But the world of the litigants is shaken by the existence of their case, and I don’t lose sight of that, either."

This sound byte comforts me, as it indicates Sotomayer's capacity for constructive empathy. Psychologist Carl Rogers defines empathy as "To perceive the internal frame of reference of another with accuracy and with the emotional components and meanings which pertain thereto as if one were the person, but without ever losing the 'as if' condition." [source]

Taking the idea of empathy - and its importance as a quality in a good, constructive judge - one step further is anthropologist Edward Twitchell Hall Jr. who explains that there is a individual perception that colors every experience: "experience as it is perceived through one set of culturally patterned sensory screens is quite different from experience perceived through another." [source] Therefore suggesting that only one that is empathetic enough to consider the perspective of the litigants will be capable of understanding the experiences, choices and decisions of the parties as well. I look forward to seeing Sotomayer put this sense into practice in the country's highest court.

Lat-Chino Culture in Nicaragua

2009-05-25T10:12:00.000-07:00

“Comidas Rapidas China,” the sign reads. Chinese Fast Food.

The restaurant is situated across the street from various foods stalls and eateries specializing in local Nicaraguan fare: nacatamal, mondongo, pupusas, gallopinto.The Chinese restaurant in the city of Masaya, Nicaragua is yet another example of Chinese influences in this Latin American country.

As the Western hemisphere’s second poorest nation, Nicaragua is a prime location for selling affordable goods– the type China has the capacity to produce en masse.

This is more more than an importation of goods, there is a cultural component, a reframing of what “Chinese” means to Nicaraguans. Another example of this is found in these plantains.

This common Latin American snack was produced in Nicaragua, but is branded as Cantonese rather than as their Latin roots.

Just as “Made in America” is synonymous with high quality and dependable, “Made in China” is coming to mean affordable and familiar. Rather than the perceived imperialistic commercial (and political) practices of the United States throughout the history of Nicaragua, China is branding itself as a culturally-sensitive commercial partner.

It’s hard to say all that from a bag of chips. One last example of this Chinese remarketing is the Asian Cultural Center. This recently built institution is yet another of the cultural exchange between China and Nicaragua. The murals surrounding the facility incorparate iconography from both countries as further evidence of the growing Lat-Chino relations and culture.

Got a light? Ask the FDA...

2009-05-23T06:04:00.000-07:00

It's pretty difficult for me to muster any compassion for the tobacco industry, so I welcomed the news this week that Congress has announced pending plans to regulate the manufacturing of cigarettes and other tobacco products as well as prohibit tobacco companies from marketing "light" cigarettes.

Followers of this issue will know that the marketing of light cigarettes has been under legal scrutiny since a 2006 decision that banned labels such as "low tar" and "light.” Yesterday, Washington DC's Court of Appeals upheld that ’06 ruling, but protests from Altria, the parent company of Philip Morris, British American Tobacco, Lorillard Tobacco, RJ Reynolds Tobacco, and Brown & Williamson Tobacco may see the issue resurface in the Supreme Court.

Over the last 50 years the percentage of adults in our country who smoke has more than halved (About 20% of the US adult population continues to smoke), smoking has been banned from most public places across the country and cigarette manufacturers have been mandated to donate money to anti-smoking campaigns and cessation aids. It’s not difficult to see the momentum behind regulating marketing and allowing the Food and Drug Administration to rule on what can truly be called ‘light.’

But there is a larger, stickier issue that has yet to be addressed as directly and it faces me each time I go to the grocery store. There are hundreds of other products that are labeled or marketed as “light” or “eco-friendly” that have minimal or no regulatory oversight. Should the government test which sour cream is better for me and stick a government label on the package?

It begs the question where does rhetoric and marketing end and regulation and consumer protection begin? Some claims are more scrutinized than others in out culture. Diet aids, over-the-counter medicines and vitamin supplements must do as they say on the label. However, no one is policing the fact that nearly every diner in New York was recently voted the best or that cereal types have been “Kid-tested, mother-approved.” What does that really mean?

As advertisements infiltrate our search engine results, blogs, movies and TV shows and daily speech, every buyer needs to...well, caveat emptor.

Should we welcome the new climate bill?

2009-05-18T19:18:00.000-07:00

After years of denial and feet-dragging, the US Congress may finally begin to deal with climate change. The Waxman-Markey bill now before Congress calls for a cap on carbon emissions, with tradable emissions permits distributed to industry. More energy efficient firms can sell their permits to less efficient firms, producing a financial incentive to reduce emissions.

"Cap and Trade" is not the only policy option out there. Many scholars have advocated a simple tax on carbon emissions.

On the surface, there's no theoretical reason for a carbon tax to be any better or worse than a cap and trade system. Both systems put a price on carbon emissions, which should lead to lower carbon emissions. But some people are worried about the process of permit distribution, which opens the door to political bribes, or as economists call it "rent seeking". Greg Mankiw puts it like this:

"Economists recognize that a cap-and-trade system is equivalent to a tax on carbon emissions with the tax revenue rebated to existing carbon emitters, such as energy companies. That is, 'Cap-and-trade = Carbon tax + Corporate welfare'."

However, not everyone is so down on the cap and trade plan. For Paul Krugman, cap and trade is a workable second-best strategy, which is more politically palatable to powerful groups weary of climate change legislation:

"...handing out emission permits does, in effect, transfer wealth from taxpayers to industry. So if you had your heart set on a clean program, without major political payoffs, Waxman-Markey is a disappointment.
Still, the bill represents major action to limit climate change. As the Center for American Progress has pointed out, by 2020 the legislation would have the same effect on global warming as taking 500 million cars off the road. And by all accounts, this bill has a real chance of becoming law in the near future.
So opponents of the proposed legislation have to ask themselves whether they’re making the perfect the enemy of the good. I think they are."

In my mind, the real debate is over which is worse: the dangers from climate change or the dangers from political corruption. If the only way to get a climate change bill passed is to risk some rent-seeking, then it may be worth the cost. If, however, your biggest concern is economic efficiency, then the downside risk of the Waxman-Markey bill is more than you're willing to pay.

Lies, damn lies, refuted by statistics

2009-05-16T16:29:00.001-07:00

According to the early reviews, Selena Robert's new book paints a rather unflattering picture of Yankees' third-baseman Alex Rodriguez. Aside from accusing A-Rod of having taken steroids since high school, Roberts alleges that Rodriguez and other opposing players tipped pitches during blow-outs; knowing what pitches were coming, they could improve their statistics.

Unfortunately, Roberts has little more than anonymous sources to support her story. So baseball statisticians had to delve into past seasons in order to find evidence of A-Rod's malfeasance. The stats cast doubt on Robert's allegations:

"If a tipping conspiracy were in place, one would expect that Rodriguez and rival middle infielders in games he played to have hit better in low-leverage situations than in high-leverage ones. Using a fairly loose definition of high leverage as a L.I. above 1.5 and low leverage as below 0.7, the data provide a resounding answer: either no tipping was going on or it was pathetically ineffective.

Contrary to his reputation as a choker, Rodriguez was actually at his best when the game was on the line as a Ranger. According to data compiled by Sean Forman of Baseball-Reference.com, his combined on-base and slugging percentages (O.P.S.) from 2001 to 2003 was 1.076 in high-leverage situations, compared with 1.017 for medium leverage and .982 in low leverage. Opposing second basemen and shortstops showed the same pattern. They registered an .899 O.P.S. when leverage was high, .825 when it was middling, and .817 when it was low. Unless Rodriguez’s behavior was even more nefarious — tipping only when it mattered most — the numbers give no reason to believe he was involved.

Using a more stringent definition of blowouts yields the same result. In plate appearances in which the teams were separated by seven runs or more, Rodriguez mustered just a .851 O.P.S., compared with 1.021 when the margin was six or fewer runs. His middle infield counterparts compiled a .744 mark in the laughers and .840 the rest of the time."

Of course, we should not mistake absence of evidence for evidence of absence. It is possible that A-Rod tipped pitches on rare occasions; rare enough that one or two extra home-runs wouldn't show up in this kind of analysis. But this does provide strong evidence against the possibility that this kind of behavior was widespread. That conclusion may not restore our collective innocence, but it's nice to know.

The buck stops somewhere else (try Treasury... or the Fed)

2009-05-10T19:30:00.000-07:00

Tyler Cowen says that Congress has opted out of much of the economic crisis. That might not be a bad move on their part:

While Congressional leaders are consulted on the major policies, Congress is keeping its distance, perhaps to minimize voter outrage. This way, Congress can claim credit if a recovery comes, but deny responsibility if the price tag ends up higher than advertised or if banks seem to be receiving unfair benefits from the government.

Of course, while this may be a smart decision for Congress, it might have serious consequences for economic policy in the future:

A Congress that won’t accept much responsibility for the financial bailouts, for example, is unlikely to rise to the occasion when the time comes to make tough decisions on the budget...

On any single policy, the abdication of Congressional responsibility may not be a problem. Sometimes it is good to let the technocrats have their way. In the longer run, though, the United States requires a Congress courageous enough to accept responsibility for potentially unpopular policies. We are moving further away from that every day.

Most economic models typically assume that government will follow some optimal policy. But in reality government is subject to incentives, and in this case Congress doesn't have much reason to get too involved in this crisis. This is why the Federal Reserve (and much of the bureaucracy) is insulated from political pressure: there are tough decisions to be made and no one up for re-election wants to make them.

As Cowen points out, the danger comes about when the elected body doesn't have to make the tough decisions. When the time comes and they have to address the budget deficit--or whether to nationalize part of the banking sector--they won't have built up political capital by leveling with the public about what needs to be done and what can be done.

It may be time for Congress to bite the bullet and, well, actually do something.

Trying not to oversell it

2009-05-01T17:43:00.000-07:00

Wouldn't it be great if "green jobs" could simultaneously end the recession and prevent global warming? Of course it would. But before you sit down to your free lunch, Paul Krugman reminds us that it's not quite that simple:

"...limiting emissions would have its costs. As a card-carrying economist, I cringe when 'green economy' enthusiasts insist that protecting the environment would be all gain, no pain."

UCLA economist Matthew Kahn explains why most economists feel this way:

"Many of these ideas are very much worth pursuing for environmental reasons. But it’s doubtful they offer a double dividend of helping to jump-start the economy. For one thing, the global financial crisis is fundamentally about different issues: the popping of housing and credit bubbles from St. Petersburg to San Francisco, the associated implosion of a highly leveraged international banking sector, and the resulting fallout on real economies. These pressing problems won’t be solved by switching to hydrogen-powered cars or installing solar panels on every roof.

Second, let’s be honest: Anti-carbon regulations will simultaneously create and destroy jobs. Take the United States: Given the country’s current reliance on cheap, coal-fired power plants, carbon caps will translate into higher electricity prices. (How much higher remains an open question.) Older manufacturing firms—especially in energy-intensive industries such as petroleum and coal products, paper, cement, and primary metals—will face higher costs of doing business, and this may lead them to shut down or seek international locations where electricity prices are lower and carbon regulation is less stringent.

In the long run, a little creative destruction will likely be a good thing. The same regulations that might kill jobs in smokestack industries will act to stimulate a host of new manufacturing opportunities, ranging from energy-efficient household appliances to solar panels to energy-efficient vehicles. Even former U.S. Vice President Dick Cheney might consider buying a fuel-efficient vehicle if gas prices rose enough.

But don’t count on clean technology to pull us out of the doldrums. The green revolution won’t happen overnight."

The obvious, but important lesson to remember here is that tradeoffs are everywhere. A "green revolution" is a long-term project, and in the mean time investments in alternative energy divert investment from other projects.

But it's not all bad news. Just because green policies aren't free, we can still afford them:

"Even with stringent limits, says the M.I.T. group, Americans would consume only 2 percent less in 2050 than they would have in the absence of emission limits. That would still leave room for a large rise in the standard of living, shaving only one-twentieth of a percentage point off the average annual growth rate."

So while there are no free lunches in life, there are some cheap meals, if you know where to look.

Putting things in perspective (or trying, at least)

2009-04-28T11:09:00.001-07:00

I came across this article from CNN on the current swine flu outbreak. Trying to contextualize the possibility of an influenza pandemic, the author wrote:

"In 1968, a 'Hong Kong' flu pandemic killed about 1 million people worldwide. And in 1918, a 'Spanish' flu pandemic killed as many as 100 million people. Putting those figures into perspective about 36,000 people die from flu-related symptoms each year in the United States, according to the Centers for Disease Control and Prevention."

The first two numbers are world-wide totals, while the third figure is US-specific. Since the US has roughly 5% of the world's population, the yearly world death toll from the seasonal flu would be about 750,000. That would put it close to the 1968 Hong Kong flu and far below the Spanish flu. If you read the paragraph quickly, however you come away with the impression that the 1968 pandemic was significantly worse than the average flu season, while the 1918 pandemic was exponentially worse; in reality, only the latter is true.

Clearly, not all pandemics are equal, ranging from catastrophic to roughly equivalent to a seasonal flu. Either way, if you're going to provide context, it's good to put everything on the same scale.

Let my rich people go!

2009-04-28T07:47:00.001-07:00

Ed Glaeser wonders if the new, higher marginal tax rates in New York State will lead to an exodus of the rich:

The problem with a tax on millionaires is that the economic success of a region is closely tied to its ability to attract highly skilled workers. The figure shows that a 10 percent increase in the share of a metropolitan area’s adult population with college degrees in 1980 is associated with a 7 percent increase in that area’s income between 1980 and 2000.

Any policy that makes a place less attractive for workers with high skill and education levels, including millionaire’s taxes, carries risks since localities that are dependent on skilled workers for long-run economic success. If all states simultaneously taxed the rich, then this would be essentially a national policy with little geographic consequences, but if some states raise taxes more than others, then economic activity will respond to those taxes.

All else being equal, people will seek to live in states with lower tax rates. Of course, all else is not equal. Many northeastern states have higher tax rates (New York, New Jersey, Massachusetts), but they also have other amenities that attract highly educated and productive workers. People are attracted to the culture, vibrancy and dynamism of cities like New York and Boston, and probably wouldn't choose Fort Lauderdale just because of the tax rate.

However, as Glaeser points out, if there are lower cost alternatives within commuting distance (such as Greenwich, Conn in the case of New York City), then high income workers may choose to relocate. Given the fact that the rich are more able to afford moving, this is a completely plausible story.

It's a tough spot for cash-strapped states, but they may face situations where raising tax rates will actually lower tax revenues (yes, in very rare cases, supply-side economics does work!). However, if there are no lower tax alternatives within communiting distance, then states might be able to tax the rich without creating an exodus. If Colorado raised its income taxes, high skilled workers in Denver or Boulder will probably not move to Wyoming just to take advantage of the tax break.

What, me worry?

2009-04-27T18:16:00.000-07:00

Most economists--most people, in fact-- think that one of the roles of government is to provide public goods, such as infrastructure, defense and public health provisioning. So of all the things in the stimulus to criticize, these should have been deemed acceptable to Republicans (via Paul Krugman):

"So Bobby Jindal makes fun of 'volcano monitoring', and soon afterwards Mt. Redoubt erupts. Susan Collins makes sure that funds for pandemic protection are stripped from the stimulus bill, and the swine quickly attack."

While Europe and East Asia are well equipped to manufacture vaccines in the event of a flu outbreak, the US is behind the curve--there's only one factory in the entire country capable of production. No, government is not always the answer; but sometimes it is.

Playing by the book (and winning!)

2009-04-24T12:19:00.001-07:00

Macroeconomics has taken a real beating, recently.

In defense of the discipline, Dani Rodrik--Harvard economist and author of "One Economics, Many Recipes"--found a real-world example where textbook macroeconomics worked:

"Until the current crisis hit, Chile's economy was booming, fueled in part by high world prices for copper, its leading export. The government's coffers were flush with cash. (Chile's main copper company is state-owned, which may be a surprise to those who think Chile runs on a free-market model!) Students demanded more money for education, civil servants higher salaries, and politicians clamored for more spending on all kinds of social programs.

Being fully aware of Latin America's commodity boom-and-bust-cycles and recognizing that high copper prices were temporary, Velasco stood his ground and decided to do what any good macroeconomist would do: smooth intertemporal consumption by saving most of the copper surplus. He ran up the largest fiscal surpluses Chile has seen in modern times.

This didn't make Velasco very popular. Last November, public sector workers marched in downtown Santiago, burning an effigy of Velasco.

But by the time the financial crisis hit Chile, Velasco (and the Central Bank governor Jose de Gregorio, another fine macroeconomist) had accumulated a war chest equal to a stupendous 30% of GDP.

The price of copper plummeted 52 percent from Sept. 30 to year-end, and Velasco dusted off his checkbook. In the first week of January, he and Bachelet unveiled a $4 billion package of tax cuts and subsidies... Velasco’s stimulus spending, includ[ed] 40,000-peso ($68.41) handouts to 1.7 million poor families...

The surpluses accumulated during the good years has given the Chilean government unusual latitude in responding to the crisis. As a result, the economy is doing much better than its peers. As Bloomberg reports, 'the country’s economy is expected to grow 0.1 percent in 2009, as the region contracts 1.5 percent, according to the International Monetary Fund.'"

Double standards on taxes

2009-04-19T20:27:00.000-07:00

Last post on Tea Parties, I promise.

Former Reagan official and economist Bruce Bartlett has some wise words on debt and deficits:

...many protesters implicitly assume that that the deficit has increased solely as a result of Barack Obama's policies. But in fact, the Congressional Budget Office was projecting a deficit of more than $1 trillion this year back in January, before any of Obama's policies had been enacted, and a cumulative deficit of $4.3 trillion through 2019. (CBO made no assumptions about what his policies might be in making its projection.)

It's true that projected deficits have gotten larger since January. But much of this resulted from deteriorating economic conditions that would have occurred even if John McCain were president. Moreover, it is absurd to assume that McCain would not have enacted any stimulus programs had he been elected.

More than likely, McCain would have proposed a stimulus plan of roughly the same size as that proposed by Obama. No doubt, it would have had a different composition--heavier on tax cuts, different kinds of tax cuts, less spending, different spending--but it wouldn't have been all that different from Obama's package given large Democratic majorities in the House and Senate and the pressure to act quickly.

I strongly suspect that many of those that loudly denounced the Obama stimulus package for its impact on the deficit would have cheered the McCain stimulus package even though it would have increased the deficit by about the same amount.

Proof of this proposition is that there were no tea parties during the years when George W. Bush was turning the surpluses of the Clinton years into massive deficits. Indeed, if concerns about deficits are the primary motivation for this week's tax protests, then these same people should have been holding demonstrations of support for Bill Clinton in 2000 when the federal government ran a budget surplus of 2.4% of the gross domestic product--equivalent to a surplus of $336 billion this year.

The truth is that the greatest addition to national indebtedness occurred in 2003 when Bush rammed through the Republican Congress a massive expansion of Medicare to provide drug benefits even though the system was already broke. According to the latest report from Medicare's trustees, the drug benefit added $7.9 trillion to the nation's indebtedness. This should have led to massive tax protests on April 15, 2004. But, of course, there weren't any. Those protesting this week were only protesting because it is a Democrat who has increased the deficit. When a Republican did worse, it's like Emily Litella used to say, "Never mind."

I'm not saying that because a Republican ran up debt, it's OK for Democrats to do it as well. But I think there are some serious misconceptions about how much the Obama administration's policies change the debt situation. First, much of the current increase in the deficit is the result of decreased tax revenues, which are the result of a bad economy. Second, the Bush administration bequeathed a number of policies that would increase the debt far enough after he left office.

We do need to get serious about government debt. But that means getting serious about health care reform, since Medicare will be the biggest cause of rising debt in the future. The current conversations are largely a diversion.

Read the whole Bartlett piece, especially his conclusion:

People should remember that while they have the right to their opinion, they are not entitled to be taken seriously. That only comes from having credibility gained by the correct presentation of facts and analysis and a willingness to be even-handed--criticizing one's own side when it is wrong and not only speaking up when the other party does the same thing.

If you don't know what a word means, you probably shouldn't use it

2009-04-19T17:08:00.000-07:00

First he was a socialist. Now he's a fascist. And Obama has only been president for three months.

Fascism seemed to be the metaphor of choice at last week's Tea Party Protests. Consider this guy:

Or this guy:

As always, we can consult the Concise Encyclopedia of Economics to find out what a term like "fascism" actually means:

"Under fascism, the state, through official cartels, controlled all aspects of manufacturing, commerce, finance, and agriculture. Planning boards set product lines, production levels, prices, wages, working conditions, and the size of firms. Licensing was ubiquitous; no economic activity could be undertaken without government permission. Levels of consumption were dictated by the state, and 'excess' incomes had to be surrendered as taxes or 'loans.' The consequent burdening of manufacturers gave advantages to foreign firms wishing to export. But since government policy aimed at autarky, or national self-sufficiency, protectionism was necessary: imports were barred or strictly controlled, leaving foreign conquest as the only avenue for access to resources unavailable domestically. Fascism was thus incompatible with peace and the international division of labor—hallmarks of liberalism."

Of course, this is a terrible and inane metaphor for current policy. There are no plans to cartelize the economy, to set production goals or to dictate wages. The government is not going to take-over large segments of the economy. In fact, the Obama administration has consistently resisted bank nationalization, and has continued the "receivership" status of AIG--a particularly strange piece of legal gymnastics, which allows the government to own 80% of the company, but completely abdicate ownership rights.

The government is increasing expenditures to combat a recession, and is propping up the banks in order to combat a financial crisis. These may or may not be the right policies (I think the Obama administration has been a mixed-bag up to this point). But these policies in no way resemble fascism. Again, from the Concise Encyclopedia:

"Fascism is to be distinguished from interventionism, or the mixed economy. Interventionism seeks to guide the market process, not eliminate it, as fascism did. Minimum-wage and antitrust laws, though they regulate the free market, are a far cry from multiyear plans from the Ministry of Economics."

We are seeing an increase in government intervention in the economy. We are not seeing fascism and we are not seeing socialism. If you look at the definitions of the words, you can see that.

On a side note, it was sad to see the word "fascism" used not only by fringe protesters, but by anchors on Fox News. As a Jew, I think that comparisons to Nazi Germany should be treated with respect. Yes, you may not like the current administration's tax policies. But they are not comparable to the Holocaust. I think conservatives and libertarians would be wise to distance themselves from people who don't get that obvious distinction.

Just so you know, that's not what the kids are calling it these days

2009-04-11T09:40:00.000-07:00

People don't like paying taxes. I get that. I don't like paying taxes either. And it drives me crazy when the government uses its revenue for things other than public goods and providing a social safety net (ie agricultural subsidies). But I think we're going to look back in 20 years and realize that we're not undergoing the kind of radical change that some people fear.

This is all by way of saying that if you do feel that Obama's new tax proposals are onerous and a substantial and unprecedented violation of your liberty, you're not alone. Hundreds, if not multiple hundreds, of people across the country are holding gatherings in the spirit of the Boston Tea Party to let the government know how they feel:

Visit msnbc.com for Breaking News, World News, and News about the Economy

In case you didn't know, "teabagging" refers to a sexual act. If you don't want people to make fun of you, don't call your get-togethers "teabagging parties". Some people may get the wrong idea.

Making gay marriage count

2009-04-10T19:51:00.000-07:00

With Iowa becoming the fourth state in the US to legalize gay marriage, it would seem reasonable to assume that the number of married couples (both heterosexual and homosexual) would increase. Unfortunately, when it does, the federal government won't (officially) take notice. The reason for this, is that the Census Bureau--the government's statistical agency--can't legally count these couples as married:

The federal law banning gay marriage bars the agency from counting same-sex marriages, the Census Bureau says, even though they are legal in Massachusetts, Connecticut, and, most recently, Vermont and Iowa.

Last summer, census officials announced that legally married same-sex couples would be reported as unmarried, same-sex partners.

The 1996 Defense of Marriage Act allows states to refuse recognition of gay marriages from other states, and bars the federal government from recognizing gay couples as "married". This means that when legally married gay couples are surveyed by the Census Bureau, their answers to questions pertaining to marital status will be recoded by Census Bureau statisticians.

It's not all that uncommon for research to be subject to political pressures. But the purpose of the Census Bureau is to be the nation's "leading source of quality data about the nation's people and economy". It's hard to fulfill this role when you're legally bound to deny reality.

And it's not as if this issue is going away anytime soon. According to polling and statistics expert Nate Silver, a majority of states could oppose gay marriage bans by 2012. Momentum is on the side of greater freedom and equality and if the Census Bureau wants to accurately measure marriage rates in the US, they will have to count gay married couples sooner or later.

Fortunately, New York Mayor Mike Bloomberg and City Council Speaker Christine Quinn are advocating for equality and for sanity:

"Although we understand that federal law may not recognize same-sex marriages for the purposes of administration of federal benefits programs," they wrote, "we do not believe it prevents the Census Bureau from reporting statistics from the forms of self-identifying same-sex couples married under state law, like all married couples."

Shameless promotions

2009-04-08T14:09:00.000-07:00

I'd like to pose a question to the room, in an economy where more and more jobless flood the market: what's the right blend of networking and promotion for your colleagues, friends and loved ones? As the world becomes increasingly digital and increasing 'linked in' -- I find myself a) struggling to keep up with what everyone I've known since kindergarten is doing and b) finding the time to actually connect the dots between the many worlds I inhabit.

That being said, there are still plenty of occasions when it's easy to shine some light in the direction of someone you know, who is coincidently also doing some pretty cool things. THis week, I've got two fresh bloggers to endorse:

A new voice in True Crime 'Violet'

Fashion advice I can actually stand to read

Who owns orphans?

2009-04-05T12:13:00.000-07:00

I was relieved to see a lengthy New York Times article today about media groups addressing Google's ongoing plan to claim rights to books and content that have expired copyrights (or orphans) and distribute them online. While the parties contesting Google's right to sole ownership to the material have an immediate interest in protecting their claim to the "up-for-grabs" content -- it's undeniable that for a worldwide readership there is a very tangible benefit to the digital and searchable content of a worldwide library Google Books has proposed (provided it remains affordable).

However, there is a larger debate at stake, more fundamental to a question most Internet publishers are battling with: who owns content? And more importantly, who should be allowed to profit from it? Typically, publishers have been the largest profiteers on content. Afterall they are the ones who have invested in reproducing, publicizing and distributing work. The originators and editors also get a cut, of course. Advertisers and liscensees pay fees to be alligned or become secondary distrubitors of the content.

However, online media models have told a very different story. Most originators and publishers are providing the content for free or remarkably low cost. Thus content has become devalued. Meanwhile, Google and other content aggregators, play a critical role in directing new readers to content but also stand to benefit equally or more from advertising dollars using the content they have not orginated. The market rewards parties that are bring the most use to a system. While content aggregrators are playing an important and monetizable role online, it is only one side of the equation. If we continue to operate an online marketplace that does not reward the people with the most upfront costs - the system will no longer be abe to support itself.

And the debate goes on...

2009-04-05T11:21:00.000-07:00

Hopefully, for my sake, economists will not suffer the same fate as the dinosaurs:

(HT: Greg Mankiw)

Confusion about the New Deal

2009-03-24T20:53:00.001-07:00

Steven Colbert interviews Jonathan Chait of the New Republic about the New Deal:

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People tend to talk about the "New Deal" as if it were one policy, when in reality it was a hodgepodge policies, regulations, and spending - some of which worked, some of which didn't. Many of the regulations did create serious market distortions, which impeded recovery, as Harold Cole and Lee Ohanian note:

"The most damaging policies were those at the heart of the recovery plan, including The National Industrial Recovery Act (NIRA), which tossed aside the nation's antitrust acts and permitted industries to collusively raise prices provided that they shared their newfound monopoly rents with workers by substantially raising wages well above underlying productivity growth. The NIRA covered over 500 industries, ranging from autos and steel, to ladies hosiery and poultry production. Each industry created a code of "fair competition" which spelled out what producers could and could not do, and which were designed to eliminate "excessive competition" that FDR believed to be the source of the Depression.

These codes distorted the economy by artificially raising wages and prices, restricting output, and reducing productive capacity by placing quotas on industry investment in new plants and equipment. Following government approval of each industry code, industry prices and wages increased substantially, while prices and wages in sectors that weren't covered by the NIRA, such as agriculture, did not. We have calculated that manufacturing wages were as much as 25% above the level that would have prevailed without the New Deal. And while the artificially high wages created by the NIRA benefited the few that were fortunate to have a job in those industries, they significantly depressed production and employment, as the growth in wage costs far exceeded productivity growth."

Further, economist Robert Higgs provides evidence that the uncertainty created by the Roosevelt administration spooked businessmen, stifling investment.

Of course, that's not what the commentators in the clip are harping on. Their concern is the spending in the new stimulus plan; and on that, they have things mixed up. Both George Will and Sean Hannity are shown arguing that it was World War II, not the New Deal, that brought us out of the Depression. But how could a war bring the country out of the Depression? Through large-scale expansion of government spending! Bruce Bartlett explains:

"The [Great Depression] didn't really end until both monetary and fiscal policy became expansive with the onset of World War II. At that point, no one worried any more about budget deficits, and the Fed pegged interest rates to ensure that they stayed low, increasing the money supply as necessary to achieve this goal.

It was then and only then that the Great Depression truly ended. As a consequence, economists concluded that an expansive monetary and fiscal policy, which had been advocated by economist John Maynard Keynes throughout the 1930s, was the key to getting out of a depression."

So if you're arguing against the stimulus, you don't want to say that the War got us out of the Depression; if you do, you'll kind of undermine your entire argument.

An ode to Paul Krugman

2009-03-24T19:51:00.001-07:00

I just started a new job, so I haven't had a lot of time to post. But this definitely caught my attention:

For what it's worth, I think Tim Geithner is a very nice looking man.

Conservatives have a lot of Galt

2009-03-13T09:24:00.001-07:00

John Galt, that is.

As Stephen Colbert explains, wealthy Americans are turning to Ayn Rand's "Atlas Shrugged" in response to the Obama administration's recent taxation and spending plans:

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Galt's character, disgusted by a government that heavily taxes the wealth producers in society only to waste their money on "moochers", calls for a general strike on behalf of the rich and talented.

Of course, it's tempting to draw comparisons to today. Barack "spread the wealth around" Obama is planning on increasing marginal tax rates on the wealthiest 2% in order to fund more generous social welfare programs and public goods.

But will this plan lead us to a Galtian world where the rich go on strike? In a word: no. Labor economists look at a measure known as the "labor supply elasticity of income", which is simply how much more people are willing to work if their income goes up (and conversely, how much less people are willing to work if their income goes down). The argument espoused by Michelle Malkin, Sean Hannity and other conservative pundits shown in the Colbert clip, is that this elasticity is high - if you increase taxes on the rich, they will decrease their labor by a lot, which will hurt us all. If high wage workers deprive the economy of their labor, then who will create wealth?

Empirically, this case is tenuous. For example, economist Robert Frank cites work by Fran Blau and Larry Kahn, who find that:

"the labor supply curve for men has been essentially vertical [which means a low elasticity] for many decades. The clear implication is that higher taxes on top earners, most of whom are men, will not significantly reduce work effort."

Similarly, Bruce Kaufman and Julie Hotchkiss, in their widely read text book The Economics of Labor Markets, survey the research and conclude that changes in tax rates during the 1980s did not cause large changes in labor supply, despite the theoretical evidence that it might.

Rand's novel is something of a libertarian version of The Communist Manifesto. The idea that high-wage workers will withdraw from society and form their own utopia is no less fanciful than the idea that low-wage workers will unite and create a socialist paradise.

Further, Atlas Shrugged may not be the best metaphor for our current situation. The popping of a $6-trillion housing bubble showed us that a great deal of wealth "created" by the John Galts on Wall Street was nothing more than an illusion. When financial assets were over-valued, so were the value of people who produce those products.

Ultimately, the lesson here should be one of humility. Consider what Will Wilkinson takes from the book:

"In the individual case, “going Galt” smacks of a kind self-aggrandizement in the same way that climate smuggery does. Because, really, your marginal contribution doesn’t matter that much...

By the way, Atlas buffs, the point of Atlas Shrugged is not that you are John Galt. The point is that you are not John Galt. The point is that you are, at your best, Eddie Willers. You’re smart, hardworking, productive, and true. But you’re no creative genius and you take innovation — John Galt — for granted. You don’t even know who he is! And this eventually leaves you weeping on abandoned train tracks."

Then again, if Michelle Malkin and Sean Hannity go on strike, you won't hear me complaining.

Michelle Obama's got two tickets to the gun show

2009-03-11T09:42:00.000-07:00

Sometimes it's hard to believe how asinine the news media really is. Take the recent kerfuffle over Michelle Obama's affinity for sleeveless tops, which brandish her pythons, "Lady" and "Liberty" (those may not be their actual names).

Fortunately Kristen Schaal is there to guide us through these heady times:

The Daily Show With Jon StewartM - Th 11p / 10c

The First First Lady Fashion Show

Daily Show Full Episodes
Important Things With Demetri Martin

Political Humor
Economic Crisis

Are there more important things to talk about? You bet. But there's also the danger of reducing a strong female public figure into a department store mannequin. Then again, the media was never good with issues of gender... or race, or economics, or well, you get the point.

Stuck in the middle

2009-03-11T08:49:00.000-07:00

Harold Mayerson is a Washington Post columnist and an actual, real-live socialist. Russ Roberts is a George Mason University economist and an actual, real-live libertarian. These two recently took part in a discussion on the use and abuse of the term "socialist" in politics today (here's the Windows Media Player file and here's the Real Player file).

Many interesting points come out of this talk, but here's the takeaway:

Despite all the talk about socialism, the Obama administration is committed to private ownership of industry (see their resistance to nationalizing/re-privatizing the banks)
Despite all the talk about free markets, George W. Bush was not a libertarian (see his steel tariffs, budget expansion, Medicare Part D, No Child Left Behind, etc)

Other democracies around the world support multitudes of parties (Israel, a country of 5 million people has 12 different parties currently represented in the Knesset. Another 21 ran but didn't meet the electoral threshold). This often means that a wide range of opinions are represented in government. Most European countries have socialist (and even communist) parties in governing coalitions. By contrast, American politics is mostly about the center right vs. the center left. Real socialist ideas, like government ownership of major industries, are not really on the table; neither, for that matter are real libertarian ideas, like privatizing schools.

For better or for worse, our politics is stuck in the middle. If you want real socialists (or real libertarians) in the mainstream, go somewhere else.

What does the income distribution really look like?

2009-03-08T07:38:00.000-07:00

This great animation shows what it looks like to earn $100,000,000 - as opposed to, say $45,000 per year, which is the median US income:

It's from the election season and it's biased toward the Democrats. But when we talk about increasing taxes on the richest 1%, it's hard to wrap you head around some of the income figures being thrown around. This is what they would look like in 3 dimensions.

Who are you calling Socialist?

2009-03-06T11:10:00.000-08:00

If I didn't watch Fox News, I'd have no idea that we were in the midst of an American-version of the Russian Revolution. Didn't you hear? The new administration is looking to turn our country into a worker's paradise! As Mike Huckabee lamented to the Conservative Political Action Conference, “Lenin and Stalin would love this stuff.”

In the interest of fairness, moderate conservative David Brooks gave the Obama administration space to respond to these accusations. Here's Brooks' recap of what they said:

"In the first place, they do not see themselves as a group of liberal crusaders. They see themselves as pragmatists who inherited a government and an economy that have been thrown out of whack. They’re not engaged in an ideological project to overturn the Reagan Revolution, a fight that was over long ago. They’re trying to restore balance: nurture an economy so that productivity gains are shared by the middle class and correct the irresponsible habits that developed during the Bush era.
The budget, they continue, isn’t some grand transformation of America. It raises taxes on energy and offsets them with tax cuts for the middle class. It raises taxes on the rich to a level slightly above where they were in the Clinton years and then uses the money as a down payment on health care reform. That’s what the budget does. It’s not the Russian Revolution.
Second, they argue, the Obama administration will not usher in an era of big government. Federal spending over the last generation has been about 20 percent of G.D.P. This year, it has surged to about 27 percent. But they aim to bring spending down to 22 percent of G.D.P. in a few years. And most of the increase, they insist, is caused by the aging of the population and the rise of mandatory entitlement spending. It’s not caused by big increases in the welfare state."

I think it's time for conservatives to take a deep breath. Whether or not you like the Obama economic agenda, this is hardly a revolution. If the budget projections are correct, we'll soon be back to levels of government spending, budget deficits and marginal tax rates in line with the past 30 years.

Of course, there has been a lot of hand-wringing over the plan to raise the top marginal tax rate. But people forget that as recently as the Reagan presidency, the top marginal rate was 50%, 10 percentage points higher than what Obama is proposing. We've come a long way on taxes, baby.

What can you buy at a 99 cent store?

2009-03-05T10:07:00.000-08:00

Stock, apparently:

"Citigroup shares dip below $1"

Did math fail us?

2009-03-05T07:15:00.001-08:00

By and large, mainstream economists didn't expect the events of the past 6 months. Many missed the housing bubble; many thought the losses would be contained. In diagnosing this failure, some have focused on the role of "simplistic" or "unrealistic" mathematical models used by economists and financiers to understand how markets work. This month's issue of Wired Magazine, for example, talks about David Li's "Gaussian Copula" function, ominously described as "The Formula That Killed Wall Street":

"His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched—and was making people so much money—that warnings about its limitations were largely ignored.

Then the model fell apart. Cracks started appearing early on, when financial markets began behaving in ways that users of Li's formula hadn't expected. The cracks became full-fledged canyons in 2008—when ruptures in the financial system's foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril.

David X. Li, it's safe to say, won't be getting that Nobel anytime soon. One result of the collapse has been the end of financial economics as something to be celebrated rather than feared. And Li's Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees."

But was it really the math that let us down? While there are many reasons to doubt the usefulness of the Gaussian Copla, the real failing was one of implementation. After all, math--as used in economics--is just a tool, to be used or misused as people see fit.

Mario Livio, the noted astrophysicist and author of "Is G-d a Mathematician?", argues that while not everything in economics can be successfully modeled with math, there is no reason to stop using it altogether:

"One major reason for the difficulty in making predictions in economics is the fact that many variables of the world of economics — the psychology of the masses, to name one — do not naturally lend themselves to quantitative analysis. Consequently, some crucial aspects cannot be, at least at present, adequately represented in any model.
A second problem arises from the fact that the predictive value of any theory relies on the constancy of the underlying relationships among the different variables. In other words, one needs some assurance that under repeated, completely specified states of, say, consumers, employers, banks, trade unions and so on, the same probability for a given outcome is guaranteed to follow. In the absence of such guarantees, as one critic of mathematical economics has put it, "resembling a science is different from being a science."
Does this mean that we should give up on mathematical economics? In my very humble opinion, absolutely not. Recall that physics, also, was not considered mathematical in Aristotle's time. Yet physics advanced to the point where mathematics is at its very core. The fact that at the moment success in economic forecasts is limited should not impede research in mathematical economics any more than the failure to predict the precise number of spots on the skin of a person with measles should limit medical research into vaccines."

Mathematical models provide useful abstractions that help isolate the effect of specific variables. These models can help clarify our thinking about economic phenomena and provides the field with a consistent vocabulary for debating important questions.

The real story, suggested toward the end of the Wired article, is that when we have a lack of respect for what the models can and can't tell us--when we confuse the model with reality--the whole thing can blow up in our faces.

And that's why they call them "marginal" tax rates

2009-03-03T10:29:00.000-08:00

Media Matters highlights a baffling bit of nonsense in an ABC News report on Obama's plan to raise taxes on individuals making over $250,000:

"According to ABC, one attorney "plans to cut back on her business to get her annual income under the quarter million mark should the Obama tax plan be passed by Congress and become law." According to the attorney: "We are going to try to figure out how to make our income $249,999.00." ABC also quotes a dentist who is trying to figure out how to reduce her income.

This is stunningly wrong.

The ABC article is based on the premise that an individual's entire income is taxed at the same rate. If that were the case, it would be possible for a family earning $249,999 to have a higher after-tax income than a family earning $255,000, because the family earning $249,999 would pay a lower tax rate.

But that isn't actually how income tax works.

In reality, a family earning $255,000 will pay the higher tax rate only on its last $5,001 in income; the first $249,999 will continue to be taxed at the old rate. So intentionally lowering your income from $255,000 to $249,999 is counter-productive; it will result in a lower after-tax income.

The people ABC quoted don't seem to understand that. Worse, ABC doesn't seem to understand it, either."

According to standard economic theory (in fact, it's principle #3), people make decisions at the margins. So if the marginal income tax rate goes up for income above $250,000, I might decide that it's not worth it for me to work an extra hour if my wage for that hour is taxed beyond a certain point. But if all the other marginal rates stay the same, why would I try to bring my income down below the threshold?

I think the real question is how people this dumb can make $250,000 per year?

(HT: Paul Krugman)

Keynesian questioning of the stimulus

2009-03-02T09:12:00.000-08:00

Arnold Kling has a terrific essay on the stimulus bill. The essay provides background on the different traditions in macroeconomics (Classical, Keynesian, Monetarist) and how they view the current crisis. He also gives some reasons why Keynesians themselves might not like the stimulus bill as is:

"Another group of skeptics is concerned about the timing of the fiscal stimulus. Even some economists on the left, including Alice Rivlin and Jeffrey Sachs, have made the point that the long-term spending in the stimulus bill is inappropriate and even counterproductive from a stimulus perspective. I share this concern. President Obama said that his goal is to have 75 percent of the stimulus take effect before the end of 2010. Instead, I would argue that we should have 100 percent take effect by then, and 75 percent take effect by the end of 2009...

Textbook Keynesian economics says that a spending increase will stimulate more powerfully than a tax cut, because part of a tax cut will be saved rather than spent. However, this same textbook analysis says that a stimulus now is more powerful than a stimulus that kicks in two years from now. Even though the multiplier for a spending increase may be higher than that for a tax cut that is enacted at the same time, we can be certain that the “multiplier” for a tax cut in 2009 is greater than the multiplier for a spending increase in 2011."

There's an old joke about how using government spending to stimulate the economy is like notifying the Fire Department of a fire via the mail. It's really hard to spend that much money that quickly and it's even harder to spend it well. Kling notes that there are other ways to do fiscal stimulus beyond digging ditches:

"A traditional stimulus proposal, going back to the 1960s, is a temporary investment tax credit. With such a credit, the government in effect provides matching funds for firms that undertake investment while the tax credit is in effect (say, through March of 2010). This would lead to spending increases that are a multiple of what the government contributes.

Another proposal, which George Mason University’s Bryan Caplan has suggested, is a cut in the employer portion of the payroll tax. The extra kicker here is that it reduces the employer’s cost of labor, thereby stimulating hiring. I think an additional kicker is that this would restore profitability in the nonfinancial sector, helping to boost investment."

I personally agree with the need for government provided fiscal stimulus. I think many parts of the stimulus bill are good and worthwhile--unlike Louisiana governor Bobby Jindal, I think that volcano monitoring is a legitimate government function. But if more stimulus is needed--and many people think that it will be--something like Caplan's payroll tax cut is worth trying. The payroll tax is a 13% tax shared by employers and employees. If you cut the employer portion, you make firms more profitable and encourage hiring by making labor less expensive; if you cut the employee portion, you have substantial a tax cut on a regressive tax paid by all working Americans, no matter how poor. If you cut both, you can support employment and consumer spending.

Where I disagree with Kling is on his dislike for aid to state and local governments. While he is right to argue that the private sector has seen much more layoffs than the public sector, I don't think that means that money spent on the public sector is wasted. First, aid to state and local governments will prevent layoffs, and jobs saved are good no matter what sector they're in; and second, the aid will help support Medicaid, food stamps and other programs for the poor.

Gluttonous Americans?

2009-03-02T07:14:00.000-08:00

Paul Krugman has an interesting column today looking at the roots of the financial crisis.

The simple story is that people borrowed too much: to buy big houses, fancy electronics and other entrapments of the American dream. But why would people all of a sudden start borrowing so much? The answer is a global savings glut:

"In the mid-1990s... the emerging economies of Asia had been major importers of capital, borrowing abroad to finance their development. But after the Asian financial crisis of 1997-98 (which seemed like a big deal at the time but looks trivial compared with what’s happening now), these countries began protecting themselves by amassing huge war chests of foreign assets, in effect exporting capital to the rest of the world.

The result was a world awash in cheap money, looking for somewhere to go."

Currency crises like the one in Asia are frightening experiences, and governments who have gone through them are concerned about having enough cash on hand in case something goes wrong. So these East Asian countries took the money they earned by selling exports and amassed it in case of a rainy day. But, of course, that money had to go somewhere, so it went into the US and other economies and fueled an era of cheap borrowing.

This is not a wholly unique story. In the 1970s, oil exporting countries were awash with cash as the price of oil spiked. That money had to go somewhere and it ended up going to projects in Latin American, which helped cause their debt crisis in the 1980s.

The simple answer for our current predicament is that American consumerism compelled people to borrow more. But something real had to happen in order to set this off, like lots of cheap cash flowing into the country.

Is Robert Shiller writing for 30 Rock?

2009-03-01T09:05:00.000-08:00

In his new book Animal Spirits, Yale economist and noted behavioral finance expert Robert Shiller looks at the role of human psychology in driving financial markets. Clearly someone at "30 Rock" has read his work:

This is a terrific episode that takes a satirical look at how a financial panic can spread--in this case, by the semi-literate, profoundly crazy character Tracy Jordan.

I recently attended a panel discussion with Shiller at the New School for Social Research, which focused on the current crisis and the degree to which markets became "irrational". Shiller has been challenging the efficiency of financial markets for most of his career, and is likely to gain more prominence in the coming years.

For a non-fictional (but still entertaining) account of the current financial crisis, check out this PBS Frontline documentary posted at Freakonomics.

Why everyone should know pre-calculus

2009-02-27T16:29:00.000-08:00

I overheard someone today talking about how much better one thing was than another. "It's logarithmically better", the person said. Of course he meant "exponentially better". We can see the difference graphically. Logarithmic increases look like this:

and exponential increases look like this:

Maybe he meant that it was getting better at a smaller and smaller rate. Probably not, though.

Taking on the Oligarchs

2009-02-26T12:21:00.000-08:00

As the former chief economist at the International Monetary Fund, Simon Johnson has seen his share of crony capitalism in places like Russia and Indonesia. So when he starts warning about the unchecked influence of the financial lobby on the US government, we should all listen.

Given the mistakes made on Wall Street and the sheer size of the financial losses, one would think that Congress would take a tough line on the banks: wipeout shareholders, remove incompetent management and close down the zombies. But as Paul Krugman laments, this is not what the government is doing:

"...what they’re actually doing is underestimating the problem, doing too little too late, and not being open and honest in trying to assess the true cost. The actual plan seems to be to keep the banks semi-alive by implicitly guaranteeing their liabilities and dribbling in money as necessary, all the while proclaiming that they’re adequately capitalized — and hope that things turn up. It’s Japan all over again.

And the result will probably be a deeper, long-lasting crisis."

I don't think there's some vast conspiracy of financial managers seeking to control the government. Rather, the influence of the financial industry on the government is more of an emergent phenomenon, the result of the frequent exchange of talent from Wall Street to Capital Hill and back. I don't think Tim Geithner or anyone else is being insincere in their plans for fixing the banks; unfortunately, that doesn't mitigate the result.

Ed Glaeser, sacred cow-slayer

2009-02-24T13:03:00.001-08:00

In the wake of $6 trillion of lost American housing wealth, now is certainly a good time for smart ideas on housing policy. One idea, courtesy of Harvard's Ed Glaeser, is getting rid of the mortgage interest deduction. It won't be easy, though. As Glaeser notes, this policy is a political "sacred cow".

With respect to the current crisis, the mortgage interest deduction encouraged Americans to leverage their houses as much as possible:

"Subsidizing interest payments encourages people to leverage themselves to the hilt to bet on housing markets. The size of the tax benefit is proportional to your debt. The deduction essentially encourages us to make leveraged bets on the swings of the housing market. That leverage means that housing price swings can easily wipe people out. We are currently experiencing the consequences of subsidizing gambles on housing."

But outside of the current situation, there are plenty of reasons to get rid of this deduction. The most important in my mind is that it is "wildly regressive", yielding proportionally greater savings for higher income earners than for lower income earners.

Glaeser advocates phasing out the mortgage deduction as part of his larger "libertarian progrssive" view: the view that large government is often used to privilege the privileged. The mortgage interest deduction is only available to people who itemize their taxes, virtually all of whom are well off. Indeed if you did want to support home ownership among the poor, a tax credit would be much more useful. This is probably a better use of taxpayer money than subsidizing million dollar houses for upper-middle class professionals.

I knew it all along!

2009-02-24T11:51:00.000-08:00

Virtually every American college student has played "beer pong" or one of its many variants. The marriage of inebriation, boredom and impaired hand-eye coordination was seemingly made in Heaven. But can beer pong kill? No, but it can make you sick.

If you miss one of your opponents' cups, the ball falls on the floor and rolls behind a couch. And don't give me that nonsense about cleaning the ball in the cup of water; it's a cesspool!

28 Business Days Later*

2009-02-23T08:43:00.001-08:00

NPR has a good primer on the term "zombie banks", which are banks that are essentially insolvent, but wonder the financial world living off the flesh--er, guarantee--of the government.

These banks represent a huge threat to our financial system, but it's unclear what to do about them. As one of the commentators says, "there's no cure for zombeism".

*Alternate titles:
Night of the Living Banks
Dawn of the TED
Resident Financial
Weekend at Bernie Madoff's (not really a zombie movie, but who cares?)

Change of heart

2009-02-18T08:42:00.000-08:00

Add Alan Greenspan to the list of economists favoring some form of temporary bank nationalization. Greenspan was once a disciple of Ayn Rand, Goddess of individualism and libertarianism. Desperate times, I suppose.

(HT: Paul Krugman)

Semantics we can believe in

2009-02-17T07:17:00.001-08:00

You know things are bad when a libertarian economist like Alex Tabarrok is warming to the idea of large-scale government intervention into the banking sector. Just one thing: don't call it "nationalization":

"Notice how the term nationalization confuses the issue. First, it suggests government ownership of the banks, which would indeed be a disaster. People in favor of free markets will rightly want to avoid any such outcome but ironically it's the current situation of "wait and see," and "protect the banker," which is likely to lead to an anemic recovery and eventual government ownership. Second, it confuses people on the left who think that nationalization is a way to insure that taxpayers get something on the upside. That idea is a joke - there is no upside. Taxpayers are going to have to pay through the nose but the critical point is that the taxpayers must pay the depositors whom they have guaranteed not the banks.

The debate so far has been framed between a "bailout" and "nationalization." But the public rightly sees the bailout as a way to protect bankers and thus we get pressure for government ownership, which has already happened in part through government control over banker wages. Bankruptcy in contrast is a normal free market procedure, it emphasizes that the firm has failed and current management should be removed. Framing the issue in this way, for example, makes it clear that only the depositors should be protected and under reorganization there should be no control over wages on future management (wages are going to have to be high to get anyone to take on the task). Finally the idea of bankruptcy makes it clear that the goal is to get banks solvent, under new management, and back under private control as quickly as possible."

Like Tabarrok, I generally oppose nationalization efforts in which government operates specific industries. If you think the government could run a car company, for example, try driving around in this:

But what Tabarrok is describing is very different. Since the government already has a stake in the banking sector (through the FDIC, it is the main bank insurer), government-facilitated bankruptcy is much more "free-market" than keeping insolvent, but politically connected banks on life-support. Tabarrok explains:

"What would a private insurance firm do in this situation? Would it pander to the current bank management and carry the zombie banks on its books, hoping and waiting for a miracle? Or would it step in, remove current management, pay off the depositors, reorganize and then sell the banks to recoup its losses? I believe a private insurer would follow the second path, the fact that the government is not yet ready to do this indicates how powerful bankers are in Washington. Thus, given deposit insurance the procedure most consistent with free market principles is bankruptcy, preferably a speed bankruptcy procedure under the auspices of the FDIC which has significant expertise in this field."

Despite the soon to be signed $800 billion stimulus package, the economy will not recover without a functioning banking sector. Bankruptcy won't be pretty, but it's better than being overrun by zombies.

If you want guys* to be romantic, make them a graph

2009-02-13T13:18:00.000-08:00

*Guys like me, that is.

Courtesy of Flowing Data, the terrific blog on data visualization, the following chart shows what kind of gift you should get your wife/girlfriend/friend-with-benefits/chick whose bed you woke up in for Valentine's Day:

I fall under the "You've been fishing with her Dad" and "Barista/Assistant Regional Manager" categories, so I'm on the hook for a Tiffany bracelet. I got my fiancee an iPod, so I guess that will do.

"Buy American" debate

2009-02-12T08:47:00.000-08:00

Over at the New York Times "Room for Debate" blog, a number of commentators take up the "Buy American" provision in the stimulus. There are some interesting points on both sides:

Jagdish Bhagwati: "The buy-American provisions unravel previous trade agreements unilaterally and in violation to the concessions we made."
Ha-Joon Chang: "Some people worry that this will lead to a 1930s-style all-out trade war. But in the short run, there is actually no danger of that. Now we have the World Trade Organization, the European Union and many other regional trade agreements that limit protectionism. Of course, in the longer run, if veiled protectionism continues, we run the risk of making a mockery of these agreements and destroying the global trading system....the solution to this problem should not be an adherence to the principle of free trade, which is not workable in practice anyway, but instead to establish a new international agreement that allows a transparent, forward-looking and time-bound protectionism as well as more infant-industry protection for developing countries. In other words, by allowing more protectionism now in a controlled way, we will be able to preserve the international trading system better in the longer run."
Anne Krueger: "The buy-American measure in the stimulus package would do little, in part because few imports are used in construction projects. But the signal that it would send to other countries would invite protective measures to the detriment of American exports and employment. Once protectionist measures are adopted, they are difficult to remove. In the long run, choking off through protection the integration of the world economy reduces productivity and prospects for future growth of all economies. It does not make any sense to sacrifice longer term growth prospects for measures that, even in the short run, offer very little prospect except for the very few at the cost of many others."
Robert E. Scott: "When the government buys steel for a bridge, for example, it has several objectives. Minimizing costs is one, but when the economy is in recession, there is added incentive to stimulate domestic employment. And when steel is purchased from a domestic producer the workers’ wages generate further spending, which supports yet more jobs in the domestic economy."

Bhagwati and Kreuger are ardent free trade supporters, while Chang and Scott support selective protectionism, particularly for developing countries.

I agree with Kreuger that this won't have a huge economic impact and I agree with Chang that this probably won't cause a trade war, given our international institutional structure. Chang is also right about the dangers of "veiled protectionism", but I disagree that infant industry protection is the right solution.

Scott's argument breaks down if there's a big difference between domestic and foreign components. As I've said before, if we pay a lot more for inputs to construction projects, we can't do as many projects and can't hire as many workers. My feeling is that this is a gift to domestic steel producers. It could ultimately end up costing jobs and impeding the stimulus.

Be careful what you wish for

2009-02-08T08:41:00.001-08:00

In his column in the New York Times, Harvard economist Gregory Mankiw points out that China's accused currency manipulation is more complicated than our new Treasury Secretary has made it seem:

"Just before his confirmation as Treasury secretary, Timothy F. Geithner turned up the heat on the Chinese regarding the dollar-yuan exchange rate. President Obama, he said, 'believes that China is manipulating its currency. Countries like China cannot continue to get a free pass for undermining fair-trade principles'...

Critics of China say it is keeping the yuan undervalued to gain an advantage in the international marketplace. A cheaper yuan makes Chinese goods less expensive in the United States and American goods more expensive in China. As a result, American producers find it harder to compete with Chinese imports in the United States and to sell their own exports in China.

There is, however, another side to the story. The loss to American producers comes with a gain to the many millions of American consumers who prefer to pay less for the goods they buy...

Mr. Geithner and other China critics might also want to ponder how the Chinese keep the yuan undervalued. The essence of the policy is supplying yuan and demanding dollars on foreign-exchange markets. The dollars that China accumulates in these transactions are then invested in United States Treasury securities.

So when the Treasury secretary complains about the undervalued yuan, his message to the Chinese boils down to this: Stop lending us money."

The stimulus package just passed by the Senate will cost a lot of money; money that will be raised through the sale of Treasury bills to, among others, the Chinese government. A sudden change of heart by our foreign creditors could cause a currency crisis larger than any we've seen in the past. Antagonizing the Chinese is good politics, but bad economics.

If we're really interested in raising the value of the Chinese currency relative to ours, we might want to consider cutting our debt so we don't need so many countries buying our dollars. Until we do that, we might want to get off our high horse.

The long road down

2009-02-06T14:13:00.000-08:00

The January jobs report was released this week. As David Leonhardt explains, it's not filled with good news:

The government said that 385,000 more jobs were lost last year than it had initially estimated. That brings the total loss since December 2007 to 3.6 million jobs. To put that in some perspective, here are the worst employment losses, as a share of the work force, over the last 40 years:

1981-82: 3.1 percent
1974-75: 2.8 percent
Current (2007-09): 2.6 percent

Keep in mind that the numbers for those earlier recessions describe the absolute low point of the job market. The losses in this recession aren’t yet over — and may, in fact, be a long way from over.

That last part is important. Right now, we're still doing better than in the early 1980s (and much better than the 1930s), but the real question is: where are we going? Many economists think we've got a long way to go.

Things certainly have changed over the past 16 years:

(HT: Paul Krugman)

Capping corporate compensation: cathartic, but not efficient

2009-02-06T07:55:00.000-08:00

Former Merrill Lynch CEO John Thain probably isn't getting invited to too many parties these days. While his company collapsed and was ultimately bought out by Bank of American a few months ago, Thain contended that he deserved a bonus--a $10 million bonus, that is. Yes, after public outcry he withdrew his request. But his grandiose sense of entitlement has rubbed a recession-addled economy the wrong way.

Executive pay is a hot topic now. With so many people losing their jobs and seeing their savings melt away, the salaries of corporate heads (especially those in the financial industry) seem obscene; so much so, that President Obama has advocated capping executive pay for companies receiving bailout money, and has generally decried the level of corporate compensation.

It's hard to argue with the emotional appeal of corporate salary cuts. Do people really deserve to make tens (or hundreds) of millions of dollars a year? But the economic case for these cuts are not so straight forward. Reed Hastings, CEO of NetFlix, advocates a "tax, not shame policy" towards executive compensation:

"The reality is that the boards of public companies hate overpaying for anything, including executives. But picking the wrong chief executive is an enormous disaster, so boards are willing to pay an arm and a leg for already proven talent. Putting limits on the salaries at public companies, or trying to shame them into coming down, won’t stop this costly competition for talent.
Of course, it’s galling when a chief executive fails and is still handsomely rewarded. But with the concept of “tax, not shame,” a shocking $20 million severance package would generate $10 million for the government. That’s a far better solution than what we have today, not least because it works with the market rather than against it."

Economists generally favor taxes over price caps on the basis of efficiency. Surely some CEO's are worth a lot of money and companies should be allowed to spend extra to attract them. In fact, there is evidence that CEO salaries are tied to improvements in their company's market capitalization, implying that companies (at least sometimes) are getting what they're paying for. This, however, does not explain why US managers do so wel l relative to their European and Japanese counterparts.

But the larger fallacy in the pay cap argument is that the distribution of gains is between CEOs and shareholders, not CEOs and workers. Capping management salaries will simply put more money in the hands of the corporate board. This may be desierable in and of itself; but it won't do much for the average worker.

The "tax, not shame" policy would certianly do more for the budget deficit than a cap on pay. According to E.J. McMahon, a senior fellow at the (admittedly conservative) Manhattan Institute:

"From a New York perspective, it’s ironic that the Obama administration chose to reveal its bailout compensation cap on the same day that Sheldon Silver, the speaker of our state Assembly, moved closer to endorsing a bigger new “millionaire tax” to help close Albany’s $13 billion budget gap.
If New York’s weakest financial institutions (and who knows what future bailout recipients in other industries) are forced to hold pay to $500,000, Mr. Silver and his colleagues will have fewer million-dollar incomes to tax. This is the sort of unintended consequence that could almost persuade a free-market conservative to embrace the president’s policy. Almost."

As I've written before, the second fundamental welfare theorem says we can use lump-sum transfers (e.g. progressive taxation) to reach a desirable allocation of income. It's a lot less galling to think these gigantic salaries are funding "our soldiers, schools and security".

Statistics Humor

2009-02-05T08:18:00.001-08:00

For anyone who thinks it can't be done:

(HT: Andrew Gelman)

Lawrence Lindsey on the Daily Show

2009-02-03T08:29:00.000-08:00

Lawrence Lindsey, former Chief of the President's Council of Economic Advisers, stopped by the Daily Show last night to talk about the stimulus package:

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Lawrence Lindsey

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Lindsey brings up several interesting points during this interview. First, he warns against grandstanding politicians harping on symbolic, but ultimately minor points. We all might cringe at the sight of the CEOs from the Big Three traveling to Washington via private jets to ask for a handout; but as an economic issue, it's minor and a waste for Congress to focus so intently on it at the expense of actual issues facing the economy.

Second, Lindsey advocates for providing tax relief via the payroll tax, a policy that is gaining support among economists. While not everyone pays income tax, all workers pay payroll taxes. According to Lindsey, we can temporarily cut this tax and put $1,500 in every working American's pocket over the next year.

The new Fab Four

2009-02-02T08:32:00.000-08:00

Famed photographer Annie Leibovitz photographs the Obama team in the March 2009 issue of Vanity Fair. Here's her shot of the people charged with averting economic disaster:

(Left to Right: Lawrence Summers, director, National Economic Council; Peter Orszag, director, Office of Management and Budget; Timothy Geithner, Secretary of the Treasury; Christina Romer, chair, Council of Economic Advisers)

Let's hope that they, too, are bigger than Jesus.

The case for protectionism (sort of)

2009-02-02T08:11:00.001-08:00

Paul Krugman adds some nuance to our recent discussion on protectionism and the stimulus:

"...one part of the problem facing the world is that there are major policy externalities. My fiscal stimulus helps your economy, by increasing your exports — but you don’t share in my addition to government debt. As I explained a while back, this means that the bang per buck on stimulus for any one country is less than it is for the world as a whole.

And this in turn means that if macro policy isn’t coordinated internationally — and it isn’t — we’ll tend to end up with too little fiscal stimulus, everywhere.
Now ask, how would this change if each country adopted protectionist measures that “contained” the effects of fiscal expansion within its domestic economy? Then everyone would adopt a more expansionary policy — and the world would get closer to full employment than it would have otherwise. Yes, trade would be more distorted, which is a cost; but the distortion caused by a severely underemployed world economy would be reduced. And as the late James Tobin liked to say, it takes a lot of Harberger triangles to fill an Okun gap."

Krugman is quick to point out that this is not an argument in favor of long-term protectionism or even that protectionism is the best possible policy. The crux of his argument is the last sentence of the quote: the negative effect of a tax (like an import quota) is smaller than the negative effect of unemployment due to reduced total output.

Do some countries free ride on the fiscal stimulus of their partners? Probably. So in that sense, anything that encourages coordinated stimulus is a good thing. The clear downside is the risk of a trade war. Hopefully, we now have the global regulatory structure in place (such as the WTO) to prevent things from devolving into a situation like we saw in the 1930s.

I'm more pessimistic than Krugman about the potential for a trade war; but then again, he just won a Nobel Prize for his work on trade theory.

Getting more bang for the buck

2009-02-01T13:02:00.001-08:00

Following up on the "Buy American" provisions in the stimulus package, Douglas Irwin points out of the pitfalls of lacing stimulus with protectionism:

"In rebuilding the San Francisco-Oakland Bay Bridge in the 1990s, the California transit authority complied with state rules mandating the use of domestic steel unless it was at least 25 percent more expensive than imported steel. A domestic bid came in at 23 percent above the foreign bid, and so the more expensive American steel had to be used. Because of the large amount of steel used in the project, California taxpayers had to pay a whopping $400 million more for the bridge. While this is a windfall for a lucky steel company, steel production is capital intensive, and the rule makes less money available for other construction projects that can employ many more workers."

The more money we pay for inputs, the less money we have for infrastructure projects that will hopefully create jobs, and lay the foundation for future growth, to steal a phrase from the President. We can't do that if the steel industry (or any other industry for that matter) uses the stimulus bill to buffer their profits to the detriment of American welfare.

A lot of Americans are employed using steel. But if the price of steel goes up, fewer of these people will keep their jobs. It's that simple.

More meat less sex?

2009-02-01T10:54:00.000-08:00

A sexy PETA ad featuring scantily-clad models fondling crudites was banned from the Super Bowl by NBC:

'Veggie Love': PETA's Banned Super Bowl Ad

While this may seem like a defeat for pro-vegetarian groups, Freakonomics suspects that, at $30 million for a 30-second Super Bowl ad spot, PETA got exactly what it wanted:

"Maybe G.M. should try the same ad strategy as People for the Ethical Treatment of Animals (PETA): get your commercial banned from the Super Bowl. PETA made a sexually explicit commercial that NBC wasn’t comfortable with — one that, just maybe, PETA knew NBC wouldn’t be comfortable with? — and got lots of press without having to actually run the ad."

But what about PETA's central claim, that vegetarians have better sex? New York Magazine looks at some of the evidence:

"Beyond the overenthusiastic veggie love and flagrant sexism in the banned PETA Super Bowl ad, we were also dubious of the notion that vegetarians have better sex. Slate allays our fears with facts: “Vegetarian diets tend to correlate with higher rates of zinc deficiency, which is closely associated with lower testosterone levels and depressed sex drives. Vegetarian women are also more likely to develop amenorrhea (loss of periods), a condition that's usually accompanied by low testosterone, vaginal dryness, and poor libido.” Not so sexy. The cornerstone of PETA’s argument is that eating meat makes you “fat, sick,” and therefore “boring in bed.” There’s some truth to vegetarians weighing less, on average, but the “journal Obstetrics & Gynecology shows that overweight women might, in fact, be slightly more [sexually] active,” Slate notes. If PETA is claiming that vegetarians make better sex partners because they're hotter than meat-eaters, we’d like to point out that Victoria's Secret models like Gisele enjoy a little meat. According to Churrascaria waiter Marcio Lorenzi, they're partial to chicken hearts."

I guess that's one theory we can put to bed.

Who's going to spend the money?

2009-02-01T07:16:00.000-08:00

As I've written before, one of the big debates in the stimulus is whether tax cuts or government spending are more effective for boosting short-term demand. Paul Krugman weighs in:

"...one way to explain why government spending is better than tax cuts as a stimulus is to say that temporary tax cuts aren’t effective at increasing demand, but temporary spending increases are.

Here’s the logic (which follows directly from Milton Friedman’s permanent income hypothesis, by the way): suppose that the government introduces a new program that will cause it to spend $100 billion a year every year from now on. To pay for this, it will have to raise taxes by $100 billion a year, permanently — and if consumers take this into account, they might well cut their spending enough to offset the increase in government purchases.

But suppose the government introduces a one-time, $100 billion program to repair bridges over the next year. The government will have to issue debt to pay for this, and will have to service that debt, requiring higher taxes — say, $5 billion a year. That’s a much smaller impact on consumers’ future after-tax income than the permanent program. So much less of the spending rise will be offset by a fall in consumer demand. (I’m not considering the effect of the spending in raising income, which would probably cause consumer demand to rise rather than fall.)

So economic theory — Milton Friedman’s theory! — says that spending is a more effective form of stimulus than tax cuts."

According to Friedman's "Permanent Income Hypothesis" spending decisions are not based on transitory income gains (windfalls, such as tax rebates), but by a person's real wealth. This is why tax rebates tend to get put in the bank, rather than spent.

Tax rebates were ineffective as fiscal stimulus in 2007 for exactly the reasons Friedman's theory would have predicted. Of course Friedman would not have been in favor of large government spending, either. But it's interesting to consider the full implications of a theory.

And so it begins...

2009-01-31T09:48:00.000-08:00

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

2009-01-29T09:45:00.000-08:00

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?

2009-01-26T06:46:00.000-08:00

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.