A Question: Kieran Healy writes: ...the horrors of Stalin don’t invalidate the fundamental insights of Marxists... which reminds me of a question I have long wanted to ask: Just what are the fundamental (valid) insights of Marxism? I ask as someone who is. I think, closer to "Marxism" than almost everybody else on the Berkeley campus. That is, I believe that in the process of going about the business of making, using, and consuming the things people need and want to continue their daily lives, humans enter into social and economic arrangements of production, association, exploitation, and exchange that form patterns and have consequences that none of them have willed, and that these arrangements of production, association, exploitation, and exchange--these "modes of production, as it were"--form the base, the soil in which the rest of society is rooted and out of which it grows. That is what Marx believed, and if I'm not the closest one to that position on the Berkeley campus today, people who are closer are very scarce on the ground. But what valid analytical insights does Marxism draw and develop from this starting point? The "dictatorship of the proletariat" stuff is the worst political idea in...

Simon of Simon's World reads the Economist: Simon World: The downside of growing up, China version: The Economist has a full court press (pun intended) of articles on China this week. The general theme is that China's rapid growth in the past 25 years has seen immense wealth creation and a rise out of poverty for hundreds of millions. It has also seen the creation of a middle class and a population that is learning to deal with both wealth and the greater reliance on themselves rather than the state. There is, however, a cost and the magazine looks at two of them in detail: the collapse of health care and the threat of pollution. The collapse of health care seems overblown: for many in China, especially in more rural areas, there is no health care to collapse. What is more likely is the state is stepping out of providing it and the private sector is rushing in. It is typically chaotic, like much of China's economic transformation, but it is not at a crisis point. In fact the article itself points out that last year's SARS scare, combined with the growing threat of AIDS, is making China's health authorities...

I never wrote my review of James Surowiecki (2004), The Wisdom of Crowds: Why the Many Are Smarter than the Few and How Collective Wisdom Shapes Business, Economies, Societies, and Nations (New York: Doubleday: 0385503865). So let me refer you to Daniel Davies's review instead: Crooked Timber: The Wisdom of Sticks : Finally, with the Google IPO pricing way below expectations and with a serious arbitrage1 showing up on the Iowa Electronic Markets, I get round to reviewing James Surowiecki’s “The Wisdom of Crowds”. I’ll save the suspense; it’s a cracking read and well worth buying.......

Our oil shock continues: WSJ.com - Crude-Oil Prices Near $49 As Supply Fears Continue: Crude-oil futures in New York continued to surge Thursday, with the front-month contract surging past $48 a barrel for the first time on persisting worries about Iraqi oil supplies.... Investors paid little attention even as U.S. Treasury Secretary John Snow tried to reassure markets. The current run-up in oil prices probably is temporary, he said, and is the result of a number of geopolitical concerns rather than supply-and-demand fundamentals. "A number of factors has created uncertainty in the market," Mr. Snow told reporters following a speech. "I don't think the fundamentals justify prices at these levels." Violence continued in the Iraqi city of Najaf, where radical Shiite cleric Muqtada al Sadr has apparently rejected a government ultimatum to disarm his militia or risk a massive offensive. An aide to the cleric said the ultimatum proved the government "wants only war," Al Jazeera reported. Iraqi Prime Minister Ayad Allawi issued a "final call" to Mr. Sadr's militia to disarm and vacate the main shrine in Najaf, threatening a military crackdown. Two weeks of fighting in Najaf have already shut down a key export pipeline. With a new...

Kevin Drum reminds me that I should read Andrew Tobias more often. If I were a better person, I would read Andrew Tobias more regularly. And if I read Andrew Tobias more regularly, that would make me a better person--smarter, wiser, better-informed, more knowledgeable*, and witter. *Can this possibly be how you spell "knowledgeable"?...

Kieran Healy goes to see Paul Krugman, and likes what he sees: Paul Krugman and Fernando Cardoso were the final plenary speakers yesterday evening at the American Sociological Association Meetings in San Francisco. The topic under discussion was “The Future of Neoliberalism,” and both of them did a pretty good job.... [M]oderat[er]... Juliet Schor... spoke for twenty-odd minutes at the beginning... reluctant to give up the mike.... I hadn’t seen Krugman speak before. He was refreshingly nerdy. His detractors work incessantly to make the “shrill” label stick, but in person he comes off more like Woody Allen’s accountant brother. Krugman... argu[ed] that “neoliberalism” could and should be decomposed into policies that ought to be evaluated independently. So whereas free-trade and export-led growth has clearly gotten much better results than tariffs and import-substitution, the benefits of unrestricted capital mobility or gung-ho privatization aren’t as well established. He emphasized the complexity of the problems at issue and the dangers of hubris.... He came across, in other words, like a theoretically-driven social scientist determined to learn from the data and looking for the answer to the question “How can we make as many people as possible better-off?” All of which made some of...

This thing that crossed my desk yesterday is not a tremendously constructive contribution to the economic debate.... Martin Feldstein praises George W. Bush's Social Security plan, which he says involves (a) no increase in Social Security taxes, (b) no cut in expected Social Security benefits, and (c) voluntary accounts for everybody; and Feldstein criticizes John Kerry for trying to face up to the gap between projected Social Security revenues and projected expenditures WSJ.com - Fact vs. Fancy: The Skinny On Social Security: George Bush laid out an approach to maintaining Social Security retirement income without raising taxes. He repeated that proposal in his State of the Union address and in a speech just last week. The basic Bush strategy is to permit individuals to augment their traditional tax-financed Social Security benefits with funds accumulated in an investment-based personal retirement account (PRA). In adopting such a mixed plan, the U.S. would follow investment-based strategies of several countries including Australia, Britain and Sweden. The PRA assets would be invested in a mixture of broad-based stock and bond mutual funds. When the individual retires, the PRA assets could be used to purchase an annuity. The combination of those annuity payments and the traditional...

Mike Pridmore believes that the SEC took a dive in not holding Cheney responsible for Halliburton's accounting malfeasance. I see no way to disagree: Daily Kos || : From MSNBC: Halliburton settles SEC charges.... The U.S. Securities and Exchange Commission did not charge Cheney, but brought charges against the Houston-based oil services company, former Chief Financial Officer Gary Morris and former Controller Robert Muchmore. The SEC said its action focused on Halliburton's failure to disclose a 1998 change in accounting practices that caused its profit statement for that year and and 1999 to be misleading. Why not Cheney?  He has been one target of a lawsuit based on the same accounting practices.  But, as noted here, he (through a surrogate) tried to pass the buck... As chief executive, Mr. Cheney had final responsibility for Halliburton's books. But the company's chief financial officer, Doug Foshee, said yesterday that he could not imagine that Mr. Cheney had specifically approved the change, which he called a routine decision dictated by a shift in Halliburton's business mix. Mr. Cheney declined to comment yesterday. Andersen, which was fired as Halliburton's auditor last month, referred all questions to the company. Mr. Foshee said he was certain...

Kautilyan alerts us to Michael France of Business Week and his opinion of Cheney: Kautilyan: Business Week on Cheney: Business Week's Michael France is one of the few mainstream reporters that has has the courage to tell the truth about what the Halliburton accounting scandal says about Dick Cheney (See Billmon for a first rate analysis). As I said in a recent post just imagine if this was Al Gore when he was the sitting Veep. Here's an excerpt from BW: The second most important political executive in our country claims to be ignorant of one of the key business decisions his company made during his tenure as CEO. It may well be that an underling was willing to make such an important call without telling Cheney, but make no mistake: This type of scenario would be very rare, even in pre-Sarbanes-Oxley Corporate America. "The thing executives care the most about is how they look in terms of the numbers," says University of Texas School of Law securities expert Henry T.C. Hu. "An accounting decision that is going to affect performance by nearly half is usually the type of thing the CFO would discuss with the head of the company."...

Marty Weitzman is smarter than I am: This paper attempts to shed light on the equity-premium, risk-free-rate, and excess-volatility puzzles by rooting all three issues together deeply into the core structure of Bayesian statistical inference. The basic idea of the paper is that a seemingly innocuous change in the specification of uncertainty from classical to Bayesian can have very powerful effects on this family of risk aversion issues because it is capable of fattening critically the tails of the posterior distribution of future growth rates. The paper shows how a transition from a model based on stochastic uncertainty to a model based on statistical uncertainty can increase significantly the properly-calculated value of the equity premium while simultaneously decreasing significantly the value of the properly-calculated risk-free interest rate. To convey the essential statistical insights as sharply as possible, the simplest imaginable specfication.... two time periods... pure endowment-exchange economy... lognormal future endowments... single utility function... isolelastic.... The most striking result... as the modeler makes a simple continuous transition... from stochastic Gaussian towards statistical Bayesian... the equity premium increases without bound, while the risk-free rate simultaneously decreases, also without limit... the basic insights have broader application... Martin Weitzman (2004), "The Bayesian Equity Premium"...

Barry Ritholz directs us to: Displaced workers’ earnings at new jobs, MLR: The Editor's Desk: Of the 3.2 million reemployed displaced workers who lost full-time wage and salary jobs during the 2001-03 period, 2.6 million were working in such jobs in January 2004. (The remaining reemployed workers had part-time wage and salary jobs or were self-employed or unpaid family workers.) Of the reemployed full-time wage and salary workers, 43 percent were earning as much or more in their new jobs as they had earned on the job they lost. About one-sixth experienced an increase in earnings of 20 percent or more. Fifty-seven percent of workers who were displaced from full-time wage and salary jobs and who were reemployed in such jobs had earnings that were lower than those on the lost job. About one-third experienced earnings losses of 20 percent or more. These data come from the Current Population Survey (CPS). To learn more about displaced workers, see “Worker Displacement, 2001-03,” USDL 04-1381. Displaced workers are defined as persons 20 years of age and older who lost or left jobs because their plant or company closed or moved, there was insufficient work for them to do, or their position or...

Greg Mankiw (or someone good enough to spoof an originating address from inside the Executive Office of the President's class-C network: 198.137.240.x) emails: "Since I know you aim for honest, unbiased commentary on your blog, I know you will be interested in this new study from factcheck.org": Kerry's Dubious Economics : He says new jobs are paying $9,000 less than the old ones. That's not a fact. In his acceptance speech at the Democratic National Convention July 29 Kerry repeated a claim that the economy is creating jobs that pay $9,000 a year less than those they replace. He bases that on disputed analysis from a liberal think tank. In fact, economists disagree.... Even some Democratic economists say the economic numbers are simply too rough and contradictory.... And when Kerry said the "middle class is shrinking," he was referring to what happened in the recession of 2001 and the initially slow recovery of 2002. But the economy has picked up considerably in the 19 months since, so what was true then may be untrue when phrased in present tense.... Kerry bases his claim on an analysis of Bureau of Labor Statistics data by the Economic Policy Institute. But the EPI figures don't support what Kerry said, because they...

Greg Ip of the Wall Street Journal reports that American productivity growth in the second quarter was still 2.9% per year: WSJ.com - Worker Productivity Rate Slows But Remains Robust: Productivity growth in the U.S. slowed... but continued at a relatively robust clip... rose at a 2.9% annual rate in the second quarter in the business sector outside agriculture.... At the same time, rapid compensation growth pushed up the cost, in wages and benefits, of producing each unit of output by 1.9% at an annual rate, the fastest in two years. Rising unit-labor costs are one reason the U.S. Federal Reserve has been anxious to raise interest rates from current low levels, although weak job growth may weaken its case a bit.... Productivity grew at just 1.5% a year from 1973 to 1995, then sped up to 2.6% between 1996 and 2000, an acceleration many observers attributed to the spread of information technology. It then accelerated even further to 4% from 2001 to 2004. That astonishing performance seemed the result of firms trying especially hard to meet growing sales without adding to payrolls, and most economists expected it to slow sharply once businesses became confident enough to hire again.... However,...

WSJ.com - Free-Trade Worriers: By DOUGLAS A. IRWIN August 9, 2004; Page A12 If there is one truth about the public debate over trade policy, it is that free trade is always under fire.... But recent free trade critics* are content to beat up on the idea of free trade and stop there, seemingly afraid to go the next step and embrace protectionism. Messrs. Schumer and Roberts state that "old-fashioned protectionist measures are not the answer," and Mr. Cassidy concedes that "economists are right when they say that protectionism isn't the answer to outsourcing."... So why are the recent critics so hostile to free trade while ruling out protectionist solutions? To hide the fact that they have no solutions to offer. The poverty of free-trade critics is that they fail to bring anything constructive to the table.... Many of the free-trade critics raise legitimate and important issues about wages and job creation in the United States. One would think the debate would focus on strengthening the economy or empowering workers in a difficult labor market. Workers can be empowered by allowing them to have portable retirement accounts rather than pensions tied to a particular employer. The portability of health-care benefits should be examined,...

Paul Krugman writes about the employment situation: Spin the Payrolls: By PAUL KRUGMAN Published: August 10, 2004 When Friday's dismal job report was released, traders in the Chicago pit began chanting, "Kerry, Kerry." But apologists for President Bush's economic policies are frantically spinning the bad news. Here's a guide to their techniques. First, they talk about recent increases in the number of jobs, not the fact that payroll employment is still far below its previous peak.... Because job growth has finally turned positive, some economists (who probably know better) claim that prosperity has returned.... But job growth... can be higher in a bad year than a good year... there was rapid nonfarm job growth (8.1 percent) in 1934, a year of mass unemployment and widespread misery - but that year was slightly less terrible than 1933.... The job situation might have improved somewhat in the past year, but it's still not good. Second... give numbers without context. President Bush boasts about 1.5 million new jobs over the past 11 months... barely enough to keep up with population growth, and it's worse than any 11-month stretch during the Clinton years. Third, they cherry-pick any good numbers they can find... because July's...

Abiola Lapite is somewhat nonplussed to find himself agreeing with John Quiggin: Foreign Dispatches: Something on Which We Agree: I rarely agree with John Quiggin on political matters, so when such an instance does arise, it's worth commenting on. Today he makes an excellent case against the Australia-USA "Free Trade" Agreement, which turns out to be little more than an excuse for America to foist harsh intellectual property laws on the Australians. I know that “Trade agreement said harmful to small faraway country” is the stereotype of a boring newspaper story, but this one is really important to Americans as well as Australians, and to anyone interested in health policy. If you ever hope to see affordable health care in the US, you’d better hope that (against all the odds) this agreement falls at the final hurdle. Although it’s called a Free Trade Agreement, it’s nothing of the kind. Australia has hardly any trade barriers to speak of, and the US has given very little ground on its barriers and subsidies. The important bits of the agreement are those relating to intellectual property and (closely related) pharmaceuticals. In both areas, the Americans have pushed Australia to adopt the strong IP...

Edward Hugh writes that morale in Germany appears to be low: A Fistful of Euros: Watch Your Piggy Bank!: by Edward Hugh: Interesting piece in the FT today about the imagined consequences of the new German “Hartz IV” laws. These laws will among other things reduce non-means-tested unemployment benefits to one year’s duration. The measure forms part of the package of labour market ’structural reforms’, and personally I see little to argue with here. The interesting part relates to the perceived consequences: Last week in the east Berlin suburb of Hellersdorf a man forced three youngsters at gunpoint to take off their clothes, burn them, and dance around an improvised bonfire. The incident may have looked perplexing, but local reaction quickly blamed the usual suspect: the reform of Germany’s unemployment laws. “When the new rules about unemployment benefits take effect, incidents like this will multiply,” a resident told the Berliner Zeitung daily. “I’ll have to get a pit-bull.” Now as the article quickly goes on to point out, there is no reason whatsoever to imagine that the two events (the Hartz laws and the “bonfire of the vanities”) are in any way related, what is interesting is to note that...

Robert Skidelsky, John Maynard Keynes: Hopes Betrayed and The Economist as Saviour J. Bradford DeLong delong@econ.berkeley.edu http://www.j-bradford-delong.net/ Robert Skidelsky (1983), John Maynard Keynes: Hopes Betrayed (London: Macmillan: 033357379x). Robert Skidelsky (1992), John Maynard Keynes: The Economist as Saviour (London: Macmillan: 0333584996). Sitting next to Lord Skidelsky in the Sala Maggioranza of the Italian Treasury (after they turned off the air conditioning, I took off my tie when he took off his jacket) impelled me to reread his Keynes biography. And, after rereading, I find that I cannot improve on what I wrote about them three years ago: my thoughts then were totally enthusiastic and totally adulatory. And my thoughts are the same now. (I haven't yet reread volume three). In his first two volumes, Skidelsky gives us John Maynard Keynes's life, entire. And he does so with wit, charm, control, scope, and enthusiasm. You read these books and you know Keynes--who he was, what he did, and why it was so important. The place to start is with Skidelsky's observation that John Maynard Keynes appeared to live more lives than any of the rest of us are granted. Keynes was an academic, but also a popular author. His books were...

A correspondent tells me to look again at Henry Blodget's advice about how to think about the Google IPO, because Blodget gets it wrong. And indeed he does. Blodget writes: Gambling on Google - Slate bids on Wall Street's hottest IPO. By Henry Blodget: In formulating our own bids, we need to think through several issues: 1) what price the market will place on Google shares (which may or may not bear a resemblance to the company's "intrinsic value"); 2) what price other IPO-bidders will conclude the market will place on Google shares (a function of others' perceptions of others' perceptions); and, 3) what price other IPO-bidders will bid in light of the foregoing (how others will "play" their perceptions of others' perceptions) Blodget's (2) and (3) are completely irrelevant to the problem of figuring out what someone should bid for Google's shares. The right strategy is to estimate the market value of Google in the following way: you need (a) to estimate the intrinsic value of Google's shares--what they would be worth to a buy-and-hold investor, (b) bump up that value by an allowance for the possibility that the market will become irrationally exuberant about Google and the stock...

Matthew Yglesias reads the op-ed published under the name "George Schultz" in the New York Times this morning and is an unhappy camper: matthew: Gee...: ...it strikes me as a bit misleading to construct a chart plotting change in GDP versus time and then discuss it as thought it were a chart of GDP versus time. The way Shultz has done it, the second Clinton administration looks like a period of plateau, albeit at a decent level, whereas mapping the second set of data points would reveal that it was, in fact, an era of rapid improvement in living standards. One could go on... Matthew identifies the trick of pretending that a graph of changes is a graph of levels: the graph of detrended levels is too favorable to Clinton, and by graphing changes you can pretend that a slowing of the rate of increase is a decline. But there are two other big problems here--problems that George Shultz's staff should have caught: First, Shultz's graphs show GDP rising throughout the first half of 2001--the first GDP decline in the third quarter of 2001. The first employment declines come in the third and fourth quarters of 2001 depending on the...

Slate commissions Henry Blodget to analyze the Google IPO. He sneers at those who--like me--have been warning that Google will very likely be grossly overvalued: Gambling on Google - Slate bids on Wall Street's hottest IPO. By Henry Blodget: [Purchasers of Google IPO shares have] the best odds of winning (making money, not just getting shares) if most potential bidders are so terrified of losing that they don't bid: This will allow us to aim low, get stock, and then benefit when the great prudent majority—which refrained from bidding on the auction—piles on in the aftermarket. To maximize our chances, therefore, we should preach (preferably on national television) that participating in the auction is a terrible idea. In the months since Google announced the auction, scores of experts have done this. Many of them are probably now formulating bids. Am I correct in thinking that Amazon--a company that has done very, very well indeed over the past five years or so--is now selling for 1/10 of what Blodget predicted for his clients? UPDATE: No, it appears I am not correct. Amazon is currently selling for 56% of Blodget's valuation, not 10%....

John Cassidy in the New Yorker writes about outsourcing. He ultimately gets to an entirely reasonable place, but it takes him quite a while: [the United States] will have to insure that its scientists are the most creative, its business leaders the most innovative, and its workers the most highly skilled.... A truly enlightened trade policy would involve increasing federal support for science at all levels of the education system; creating financial incentives for firms to pursue technological innovation; building up pre-school and mentoring initiatives to reduce dropout rates; expanding scholarships and visas to attract able foreign students and entrepreneurs to these shores; and encouraging the development of the arts. In short, insuring our prosperity involves investing in our human, social, and cultural capital. But don't expect to see that slogan on a campaign bumper sticker anytime soon. The only bone I have to pick with the final paragraph is that you do see this--not on bumper stickers but in the Democratic platform. All of it (with the exception of greater arts funding) is what you hear in standard Democratic speeches on dealing with globalization. This was, for example, Robert Reich's wish-list program when he was Secretary of Labor--but there...

Ah. Must make sure this revised date gets onto the revised calendar: Date: Tue, 20 Jul 2004 10:59:28 -0700 (Pacific Standard Time) From: Emil Schissel <emil@econ.Berkeley.EDU> To: <defac@econ.Berkeley.EDU> Subject: Correction--Spring 2005 Hitchcock Lecture X-X-Sender: emil@econ.berkeley.edu Status: Please note on your schedule of upcoming campus lectures for next Fall/Spring: Amartya Sen's Hitchcock Lecture should be on March 2&3, Spring 2005 *not* February 2&3. Emil...

Ah. Things become clear. The people whom I was negotiating with over the internet in order to get cheaper hotel rooms in Rome are based in... Bangkok. No wonder they can offer such good rates: the Italian hotels are crafting the rates they offer the brokers for Asian tourists, and the brokers' labor costs are very very low indeed. I must admit that this is something I did not expect--not so soon....

Travelling around Europe when $1 = EURO 1.25 is extremely relaxing. Travelling around Europe when $1 = EURO 0.80 is extremely nervewracking....

Paul Kedrosky writes: Infectious Greed: Fund Managers Under-performance: You would expect that, on average, the fund industry would underperform the market roughly by the amount of their administration fees. They do that - and more, according to a new report cited in the Telegraph: An astonishing 94 per cent of equity fund managers have failed to deliver above-average returns in each of the past five years, according to shocking new figures. Figures calculated for the Telegraph by Citywire, the financial analyst, show that only 11 of the 175 fund managers with a track record of at least five years have beaten the average performance in their sector over the period. Index funds. Unless you are *certain* that your fund manager is close enough to the center of the information flow and smart enough to process it, put your money into low-fee index funds. (Or else choose a dart-throwing chimpanzee to pick your (properly diversified) stock portfolio: chimpanzees are much cheaper to feed and house than are active mutual fund portfolio managers.)...

The Economist's Buttonwood Tree is worried that markets think the future is more predictable than it is: Economist.com | Volatility: "THERE are few beasts in the financial jungle more curious than the market in uncertainty. Traders buy and sell uncertainty as readily as if it were something tangible, like pork bellies or Treasury bonds. Strange though it may seem, it is no exaggeration to say that the price of just about every risky asset in the world depends in part on investors' perceptions about the price of uncertainty. It is precisely because investors appear so certain about the future that the prices of so many assets are now so high. The opposite holds too, of course. If investors became less certain, those prices would fall. In financial markets, uncertainty goes under the name of volatility—how much asset prices are moving around. One popular measure of stockmarket volatility, the Chicago Board Options Exchange's VIX index, has fallen to its lowest since 1996 (see chart). In August 2002, it soared to 45; this year it has mostly traded between 14 and 16. Interest-rate volatility has also fallen sharply, though not as far. What most concerns traders and investors is not how much...

The Crooked Timber people are attacking the efficient markets hypothesis from at least three different directions. Given their different orientations, I think that they are hitting each other as much as the target, but it is all definitely worth reading. It is, however, somewhat frustrating: I want an integrated theory of market *and* government *and* regulatory failure to use to tackle this Gordian knot of issues: Kieran Healy: Markets, Firms and Planning : Some threads of the ongoing discussion about the Efficient Markets Hypothesis have begun to address the contrast between markets and planning, with the state as the prospective planner. As is often the case in such discussions, the implicit contrast is between a Hayekian information-processing ideal and, say, North Korea. To break down this assumption a bit, it’s worth drawing a link to a related debate in the economics and sociology of organizations about the existence of the firm. A long time ago, Ronald Coase asked why, if markets are so great, are there so many firms?... John Quiggin: Why does the efficient markets hypothesis matter ? : Reading the discussion of earlier posts about the efficient markets hypothesis, it seems that the significance of the issue is...

Three Quotes from Keynes's 1931 Harris Lectures in Chicago: John Maynard Keynes, The General Theory and After: Part I, Preparation, Collected Writings of John Maynard Keynes, vol. 13, pt. 1, Donald Moggridge, ed., (Cambridge, U.K.: Cambridge University Press. John Maynard Keynes, “An Economic Analysis of Unemployment” (University of Chicago: 1931 Harris Foundation lectures). While some part of the investment which was going on in the world at large was doubtless ill judged and unfruitful, there can, I think, be no doubt that the world was enormously enriched by the constructions of the quinquennium from 1925 to 1929; its wealth increased in these five years by as much as in any other ten or twenty years of its history. (p. 347) Doubtless, as was inevitable in a period of such rapid changes, the rate of growth of some individual commodities could not always be in just the appropriate relation to that of others. But, on the whole, I see little sign of any serious want of balance such as is alleged by some authorities. The rates of growth [of different sectors]…seem to me, looking back, to have been in as good a balance as one could have expected them to...

One thing I said at the Reinventing Bretton Woods 60th Anniversary Conference, Rome, July 2004: Voltaire is famously supposed to have said: "I disagree with what you say, but I will defend to the death your right to say it." When I hear the great and good say that "crises are overwhelmingly domestic in origin" I find that have an opposite reaction: I agree with what they say, but I am averse to hearing people in their institutional and institutional positions say it. If domestic policies were perfect--if domestic policies were good--if they left no significant vulnerabilities uncovered--there would be no crises. For example, the Mexican government in 1994 undertook a six-month liquidity goosing of the economy in the runup to its presidential election. The Mexican government also undertook to boost its long-run credibility by offering its creditors the infamous Tesebonos--peso-denominated but dollar-indexed bonds. These two policy missteps produced the Mexican crisis of 1994-5--a crisis that was bad, and that without Camdessus's, Fischer's, Clinton's, and Rubin's willingness to stick their necks *way* out on very short notice would have been horrible. What this seems to me to miss is that policy is *never* perfect, and I at least certainly did...

Simon in Hong Kong channels Disraeli, who had his characters talk of: The Two Nations: '"....Well society may be in its infancy," said Egremont... "but say what you like, our Queen rules over the greatest nation that ever existed." "Which nation?" asked the young stranger, "for she reigns over two... Two nations; between whom there is no intercourse and no sympathy: who are as ignorant of each other's habits, thoughts, and feelings, as if they were dwellers in different zones, or inhabitants of different planets; who are formed by a different breeding, are fed by a different food, are ordered by different manners, and are not governed by the same laws." '"You speak of -", said Egremont, hesitatingly. '"THE RICH AND THE POOR."' But Simon is talking about China, and the two nations are the coasts--the land of export manufacturing--and the interior--the land of two-acre dry wheat farms: Simon World: A tale of two countries: Many people think of China as potentially two countries: the People's Republic on the Mainland and the Republic of China in Taiwan. However there's a far more important split with the Mainland's populace. China's economic boom of the past twenty years has primarily benefited those...

From Laurence H. Meyer (2004), A Term at the Fed: An Insider's View (New York: Harper Business: 0060542705): pp. 20-21: After the meeting [with President Clinton], I returned to Laura Tyson's office to say goodbye.... She suggested that I... sit... for a while... and see what the day would bring.... Throughout the several hours of waiting, I was on the phone to my family. The [White House] staff... [brought] me two full lunches.... I recall a conversation with my son Ken in the midafternoon. 'I've been surfing the Web,' Ken told me. 'It looks like the press conference is set for 4 PM. Did you know that Alice Rivlin is the other nominee and she will be the Vice Chair?' Wow, I said, you're way ahead of me. Ken responded: 'Dad, I don't like to give you advice, but when they come to let you know that you are being nominated today, act surprised.' p. 166: As we raised interest rates from mid-1999 through mid-2000, I was frequently singled out as the chief instigator.... "the most feared governor, Laurence 'the Rate Hammer' Meyer." I had been aiming at MVP, not the most feared, but I've always wanted a snappy nickname.......

James Harkin of the Financial Times writes about Paul Krugman in the... Arts and Weekend section? Paul Krugman's terse opening transparency on the overhead projector looks more like a private aide-memoire than material for a public address: "Like Basil Fawlty, don't mention the war. Talk instead about political economy." Krugman has been invited to the London School of Economics, a bastion of liberal Americans abroad, to deliver a lecture entitled, "Whither America?" A small, bearded man with a glint in his eye, he is dwarfed by the imposing lectern on the stage of the LSE's Old Theatre. In front of him, undergraduates in sweatshirts and trainers sit alongside middle-aged men in pinstriped suits who have just arrived from the office.... After September 11, Krugman's column in The New York Times was one of the first to poke its head above the parapet and lay into the conduct of the Bush administration's "war on terror". Since then, the left has elevated Krugman to hero, an eloquent and apparently unimpeachable critic of Bush's tax-cutting and of his stewardship of the American economy. He begins diligently, all graphs and bar charts. The Bush administration's series of tax cuts, he announces, are not a...

We have purchased a Super-Sweet Dulcinea PureHeart Seedless Personal Watermelon. "I don't know if I can bear to eat it: I want to adopt it," says Ann Marie. Visit www.dulcinea.com for more about this ultimate produce eating experience: ..:: Dulcinea ::..: Welcome to Dulcinea Farms, the fresh foods company that brings you uniquely-delicious DULCINEA™ brand produce. In Cervantes' novel and in the musical "Man of La Mancha, " Dulcinea was Don Quixote's vision of female perfection. True to its namesake, DULCINEA™ produce is the "Fruit of Legendary Perfection." All of Dulcinea Farms' produce is premium-quality, field-grown, and vine-ripened, to provide consumers with the "ultimate produce eating experience" consistently and all year-around. We invite you inside to learn more of Dulcinea Farms, our miniature, super-sweet DULCINEA™ PureHeart™ Seedless Watermelon, our full-flavored, juicy DULCINEA™ Extra Sweet Tuscan Style™ Cantaloupe, and our incredibly delicious DULCINEA™ Sweet & Juicy Golden Honeydew. Discover how our innovative, fully-integrated produce value chain gets our products to you in peak eating condition. Ultimately, to know us is to experience our value-added produce and judge for yourself. We think you'll agree that DULCINEA™ brand produce delivers the "ultimate produce eating experience." "Perfect for eating alone!" was the sign over...

Abiola Lapite muses on global warming: Foreign Dispatches: Global Warming - Some Clarifications: My previous post might leave doubts in some minds as to what exactly I believe to be the case with respect to global warming. My own personal inclination is to believe that the phenomenon is real, and not something to be waved away on ideological grounds, as so many libertarians seem inclined to do. We all need to take the science seriously, not just the advocates but also the skeptics, which means acknowledging the existence of information that doesn't gibe with our preferred worldviews. If, as I suspect to be the case, global warming is as important a phenomenon as many think it to be, we then must also come to terms with dealing with what would be the single biggest negative externality known yet to mankind, and that just might mean contemplating measures which any self-respecting libertarian would reflexively recoil from.   That said, I also think that those who are already convinced beyond doubt that global warming is real and likely to have a major impact must also seriously wrestle with two notions they'll find discomfiting: That global warming is likely to bring not only drawbacks but also...

The employment-to-population ratio: At least the labor market situation is no longer deteriorating. That's good news. It is hard to stress enough the extraordinary contrast in this business cycle between the (lousy) labor market situation and the (good) output growth situation and the (fantastic) productivity growth situation....

Very interesting. McKinnon and Hagarty in the Wall Street Journal: WSJ.com - Fannie, Freddie May Get Limits: "The Bush administration has obtained from the Justice Department a legal opinion that says the Treasury Department has authority to limit future debt issuance by Fannie Mae and Freddie Mac -- a big step toward curbing the spectacular growth of the mortgage giants. Though the Treasury Department is unlikely to exercise its authority soon, Bush administration officials hope the opinion will pressure the congressionally chartered, shareholder-owned companies to negotiate a deal over long-stalled legislation to toughen their oversight. Administration officials also are pushing other initiatives, including an increase in the percentage of business that Fannie and Freddie reserve for low-income and moderate-income borrowers, which the companies say is excessive. A Treasury move to use its authority to limit Fannie's or Freddie's debt could impede the companies' strategy of aggressively borrowing to finance rapid expansion. That tactic -- and mounting debt -- has stirred fears among government officials, competitors and Wall Street watchers that Fannie Mae and Freddie Mac pose growing risks to the financial system. The legal opinion, requested by Treasury several months ago and delivered in the past few days, says the...

David Shoemaker wonders whether he is (a) an ethical person and (b) in conformity with his university's human experimentation guidelines. I don't know about (a), I'm pretty sure that the answer to (b) is "no" (at least as your average dean's assistant would interpret it), but I also think that David Shoemaker is almost surely a good teacher: PEA Soup: Teaching or Experimentation?: One of our hopes in creating PEA Soup was to provide a forum for discussion about certain issues that may crop up in teaching moral philosophy. I suppose, then, that this is the first post on that topic. For several years now, when introducing Hobbes to students, I run a version of the Hobbes Game, which I believe was created by John Immermahr and published in Teaching Philosophy over ten years ago. The idea is to introduce the Prisoner's Dilemma (an interpretation of one aspect of Hobbes' state of nature) to students in a dramatic way, one that forces students to really figure out for themselves what it's individually rational to do in cases of strategic interaction. So this is how I present the game. At the beginning of the class period I say that 10% of...

The Economist's Buttonwood Tree has become a stock-market bear. Is that allowed? Economist.com: Even after this latest tumble, the price-to-earnings (p/e) ratio on Nasdaq is around 60, a level that could be justified only if you thought that profits would continue to climb at a vertiginous rate. The question, of course, given that the broader stockmarket is scarcely a giveaway—the S&P 500 trades at a p/e ratio of about 21, far above its historic average—is whether the treatment meted out to tech stocks foreshadows something nasty for the stockmarket as a whole. Corporate America, you might have noticed, is fantastically profitable. Indeed, pre-tax profits are at their highest for 38 years, says Mark Precious, a global strategist at UBS, and after-tax profits at their highest for 50 years. And they are likely to have grown by a fifth or more in the second quarter, which is only the fifth time in the past 50 years that profits have grown that much for that long, according to Mike Thompson of Thomson Financial.... On two of the previous occasions when profits had risen this fast for this long, stocks rose thereafter; and on two they fell. There are many reasons to plump...

Marc Andreesen points Alex Tabarrok to the Los Angeles Times and Davan Maharaj reporting from the Congo: Marginal Revolution: Living on Pennies: Here is a heart-breaking series of stories about living in poverty in the third world. The Congo is so poor there are no jobs just "se debrouiller — French for getting by, or eking a living out of nothing." Sweatshops in these countries would be a blessing but corruption, war and violence keep foreign investment away. Even the corruption, however, is sadly understandable. The government has no money and so pays its workers with the opportunity to take bribes. And thus the country is trapped. The corruption tax prevents the people from starting businesses and accumulating capital, corruption can't be fought without funds to pay workers but there are no funds because corruption prevents the earning of income. But even a society living on the edge needs civil servants. Men with government seals, such as Pancrace Rwiyereka, a grandfatherly former schoolteacher who runs Goma's Division of Work, engage in their own version of se debrouiller. They don't bring home an actual salary, but the majority still show up for work every day. A government job gives them the...

Tyler Cowen praises Gordon Tullock: Marginal Revolution: Gordon Tullock triumphant: My colleague Gordon Tullock, along with Thomas Schelling, is one of the most deserving scholars never to have received a Nobel Prize... Let me add my own kudos. He is a genius, a madman, and always fascinating. It seemed to me at the time a great pity (and it seems to me now a great pity) that James Buchanan's "Public Choice" Nobel Memorial Prize in Economic Science was awarded to Buchanan alone, and not to James Buchanan + Gordon Tullock + Mancur Olson....

Ah. Here it is... Fed should go easy on interest rates By Brad DeLong Published: July 12 2004 18:29 | Last Updated: July 12 2004 18:29 The fear that the US economy will never generate another net job ever again is over. The hope that the American recovery will now be "normal" is strong. The Federal Reserve has started to raise interest rates - and the belief that the Fed needs to raise interest rates far and fast is strong too. Yet I do not really understand why this belief is so strong. If you ask proponents of aggressive tightening of American monetary policy why it is both desirable and necessary, the answer you will probably get will point to two things: high bond prices and high property prices. The unparalleled and extraordinary easing of monetary policy in response to the collapse of the dotcom bubble and the dreadful terrorist attack on the World Trade Center has pushed long-term bond prices up to very high levels (and interest rates to low levels) and has pushed American property prices up as well. Homeowners are taking advantage of higher valuations to increase their mortgages and spend the money on home improvements and...

Alan Murray comes out in favor of a strict criminal liability standard for corporate executives: WSJ.com - Political Capital: CEO Responsibility Might Be Right Cure For Corporate World: Ken Lay should go to jail. That isn't a legal judgment. The legal case against Mr. Lay isn't a slam dunk. Mr. Lay spent more time schmoozing with politicians and picking fabric swatches for his Gulfstream V corporate jet than studying special-purpose enterprises. As a result, his footprints inside the energy company are shallow, and his fingerprints few. Conviction will be difficult. It also isn't a repudiation of the principle, plaintively repeated by Mr. Lay last Thursday, that "everybody should be innocent until proven guilty." In the case of Enron, we already know a giant financial fraud lay at the heart of the enterprise. The convictions of former Chief Financial Officer Andrew Fastow and former Treasurer Ben Glisan established that. At stake in the Lay case isn't whether fraud was committed but whether the chief executive should be held responsible. For the sake of American capitalism, he should. The Enron scandal -- and those at WorldCom, Tyco, Adelphia and others -- exposed a glaring flaw in the oversight of America's top executives....

Are there no sunlamps? Are there no greenhouses? Why can't we get winter tomatoes--costing arms and legs to be sure, but still getting them--as good as our fresh summer tomatoes? It's not as though are grocery stores are short of vegetable space....

A correspondent asks: I would appreciate recommendations on reading material.... My focus is finding out about investments and rudimentary money management. I am trying to learn about this for both my sake and to pass on info to my sons who are college age. I am not asking for investment advice, etc. Just some suggested reading material (books, magazines, web sites) to better educate myself and my sons on the basics and so I can better prepare myself for retirement. I don't think I'm qualified to give investment advice, so I don't. But if I did think I were qualified to give advice, I would say: Large house--a bit larger than you think normal--financed by a fixed-rate mortgage. (Unless you are in New York, DC, SF, or LA, where things are weird right now.) 401Ks--as much money as you can put into them and other tax-shielded vehicles. Additional savings--automatic, and a few steps more than you are comfortable with: the future if very uncertain, and there may well come a point where you will want to have more money than you thought you might possibly need. Vanguard, I say. Put your money in one of the equity-heavy Vanguard index funds,...

Virginia Postrel writes about writing about productivity: Dynamist Blog: THE BIG (ECONOMIC) STORY: I look at one piece of that very big story: the spreading use of operations research techniques once confined to theory. (What's operations research? The story explains that too, or tries to without using any math, graphs, or jargon about optimizing subject to constraints or finding interior solutions. For more on the field, see the INFORMS site.) Of course, very few general-interest publications would let a writer spend nearly 2,000 words writing about operations research--or, for that matter, rising productivity. Brad is exactly right that journalists aren't covering this story, but he doesn't offer any reasons why. As a journalist, let me suggest a few: 1) The productivity story is boring. It isn't really, but editors think it is. There's no obvious conflict, no scandal, no little guy getting hurt (unless you portray rising productivity as throwing people out of work, which is the most common angle). The improvements that drive productivity increases are incremental--hence, not dramatic--and often technical. 2) The productivity story isn't political. Neither George Bush nor Bill Clinton deserves any credit, except for not getting in the way. Not getting in the way is...

As the coach pulled by four night-black horses labored up the road to the Borgo Pass, the fog gathered, and the children of the night howled outside, I used the coach's wifi connection to surf to the Economist's website. There I found that the Buttonwood Tree was shaking its branches in alarm, dropping leaves like rain, as it contemplated the prices of Romanian and Bulgarian government bonds: Economist.com: ...Buttonwood had another of those I-can’t-believe-what-I’m-seeing moments on Monday morning when idly perusing a piece of research by Credit Suisse First Boston (CSFB). Bonds issued by Bulgaria and Romania, according to a chart in the report, have rallied so fast in recent months that they now yield scarcely a percentage point over the rate at which the healthiest western banks lend to one another, also known as the swap rate. In a spirit of honesty, Buttonwood confesses to not having known that these two countries issued international bonds, let alone that such things were written about in serious terms by investment bankers. Well, that is his loss, for bonds issued by both countries have performed wonderfully this past year. Spreads over swaps have halved. After wobbling in April, along with just about...

Cory Doctorow writes about high-tech oven mitts: Boing Boing: A Directory of Wonderful Things: High tech oven-mitts This month's "Play" section in Wired reviews three super-sexy high-tech oven mitts -- a synthetic rubber one, a translucent silicone one, and a kevlar-and-nomex fingered glove adapted from a welder's glove. It's a sweet application of new materials science to housewares. Let me, for one, be the first to welcome our modern materials science-based protectors of our hands from extreme heat....

"Mwuhahahahaha! You have come in after closing! Now you must pay! You must take a bag of... free bagels!" Of all the things one does not expect to hear upon entering a bagel store, that must rank among the very highest. A truly Monty Python moment. The bagel store has new owners, one of whom volunteered at our local school and ran a math enrichment program that the Eleven-Year-Old enjoyed a lot. The new owners are trying to grapple with the fact that each bagel that will be sold before closing is worth sixty cents, while each bagel unsold at closing is worth zero. (The old owners grappled with this problem by trying to be completely out of bagels at the moment of closing--with interesting consequences for the varieties available during the previous hour. Not an optimal strategy.) Moreover, they cannot find any alternative use for the unsold, next-to-worthless bagels: food banks don't think the calories are worth the twenty minutes of someone's time it would take to pick them up--our food banks are not short of calories or grains. Feeding them to the local goats has made the local goats morbidly obese. So they have decided to force bags...

The Wall Street Journal's Dan Bilefsky reports on the shifting international division of labor from Timosoara, in Transylvania. A very nice article. Companies seeking lower costs head east (while trying to stay on the right side of the moving socio-economic frontier where property rights are respected and productive efficiency is attainable) while people with skills seeking better lives head west (while trying not to become desperately lonely and alienated). Romanians--speaking a Latin language--may well have an easier time heading west than many Poles or Czechs or Hungarians: WSJ.com - European City Wins Jobs -- and Looks Over Its Shoulder: Timisoara, Romania, Struggles To Keep Outsourcing Boom; Engineers Seek Higher Pay Joining EU Could Blunt Edge by DAN BILEFSKY, Staff Reporter of THE WALL STREET JOURNAL, July 8, 2004; Page A1 TIMISOARA, Romania.... dozens of young software engineers sit hunched over computers in a neighborhood still pocked with bullet holes... beneficiaries of this city's decade-long drive to transform itself into a high-tech center. But Mircea Stoinescu, a 22-year-old software-engineering student... would trade in Timisoara's war-scarred offices for Silicon Valley in an instant. "Why would I want to wait around here 20 years for wages to rise when I can get what I want tomorrow?"...

The Bush administration decides to make China and Vietnam a little bit poorer: Prepare for jumbo shrimp prices Carolyn Said, Chronicle Staff Writer Wednesday, July 7, 2004 ...On Tuesday, the Commerce Department announced preliminary tariffs on shrimp imported from China and Vietnam. Tariffs on sales from Thailand, Brazil, Ecuador and India may be imposed by the end of the month. Those six countries account for the lion's share of imported shrimp. Of the 1 billion pounds of shrimp consumed annually in the United States, about 87 percent is imported, according to the U.S. International Trade Commission.... "It will translate into higher prices for shrimp in the very near future, " said Wally Stevens, president of the American Seafood Distributors Association, which represents importers, cold-storage warehouses, freight forwarders, truckers, restaurants and retailers.... While tariffs for Chinese companies range from nothing to 112 percent, the average tariff will be 49 percent; Vietnamese company tariffs will range from 12 to 93 percent, with an average rate of 16 percent.... "It certainly is not going to make shrimp less expensive for the consumer, that is for certain," said Tom Elliott, vice president and general manager in San Francisco at Slade Gorton & Co., which...

American banks are ready for rising interest rates. Aren't they? From the Economist: Economist.com | Interest rates and American banks: WHO gained most from the bursting of the technology bubble four years ago? Arguably, America's banks did. As the Federal Reserve shaved interest rates again and again, banks lent enthusiastically, especially to American households eager to remortgage their homes at cheaper rates. The rewards have been ample. According to the Federal Deposit Insurance Corporation, which guarantees deposits at American banks and savings institutions, the profits of the companies it oversees reached $31.9 billion in the first quarter of this year, the fifth quarterly record in a row. Financial firms now account for over a third of all American companies' domestic profits, according to Smithers & Co, a consultancy. So a certain nervousness has surrounded bank shares in anticipation of this week's increase in interest rates. The jitters have been most obvious at Washington Mutual (WaMu), one of America's three leading mortgage lenders.... Will the industry as a whole suffer? Broadly speaking, banks make money in two ways. They are paid for taking on risk—mainly, the risk of movements in interest rates and the risk that borrowers fail to repay loans....

A normal person, reading Jonathan Weisman in the Washington Post on June 8, would conclude (i) that Steven Moore is an economist, and (ii) that Kevin Hassett, Eric Engen, Glenn Hubbard, Greg Mankiw, and many other economists are "reevaluating" the view that budget deficits are a significant minus for the economy, believe that "the argument against deficits is more about self-righteous moralism than economics," and broadly agree with Richard Cheney's declaration that "deficits don't matter": Economic Legacy: Reagan Policies Gave Green Light to Red Ink : The line is not likely to make this week's eulogies to Ronald Reagan, but when Vice President Cheney allegedly declared, "Reagan proved deficits don't matter," he summed up an enduring argument from the former president's economic legacy.... It wasn't that Reagan's policies proved that government borrowing had no impact on the economy. But his administration's record -- particularly with some years of hindsight -- did give reason to question traditional thinking.... "The lesson we should have learned [from those years] is that deficits have little or no short-term economic impacts," said William A. Niskanen, a member of Reagan's Council of Economic Advisers.... [Deficits] appeared to have no impact politically, said Stephen Moore, a conservative...

Jacob Levy alerts us to Tyler Cowen's desire to join the ranks of the shrill: Marginal Revolution: I've had enough: Here is our latest foreign policy initiative: New US curbs on travel to communist-ruled Cuba went into effect on Wednesday, with opponents decrying them as an attack on family and the Bush administration arguing they will hasten the fall of Cuban President Fidel Castro. Cuban Americans may now visit relatives on the island once every three years instead of annually and they may go only to see close family members rather than more distant relatives, among other restrictions aimed at toughening the four-decade-old US economic embargo on Cuba. "It's unimaginable, abusive," said Raquel Chaviano, one of hundreds waiting at Havana airport on Tuesday for one of the last flights back to Miami before the rules went into force. "The family is the main thing in life, and it has nothing to do with politics," said Chaviano, who left the Caribbean island in 1980, leaving behind her daughter and siblings. Here is the full, sad story. Here are more details about the human costs of the policy. Here is some material on America's failed use of sanctions against Cuba. What do...

*Sigh.* It's the first day of the new quarter, so it's time for me to take on my share of intellectual cockroach control. It's a dirty, unpleasant job. But it needs to be done, and I should do my share. So: Don Luskin criticizes Larry Summers and Paul Krugman for having in the early 1980s forecast a decline in the value of the dollar: The chart below shows the real exchange rate of the US dollar for a decade before the 1982 memo, and then through the end of the Reagan presidency. It did drift slightly lower for the first couple of years after the memo. But then it took off to new highs -- nothing resembling anything like a "return to approximately their historical levels." But there is something important that Luskin does not know that you need to know. In this chart, "highs" does not mean what Luskin thinks it means. Luskin has constructed a chart not of the value of the dollar but of the price of foreign currency in dollars: when the value of the dollar falls, the price of foreign currency in dollars rises. Luskin's "taking off to new highs" after early 1985 is Krugman's...

*Sigh.* It's the first day of the new quarter, so it's time for me to take on my share of intellectual cockroach control. It's a dirty, unpleasant job. But it needs to be done, and I should do my share. So: When Don Luskin criticizes Larry Summers and Paul Krugman for having in the early 1980s forecast a decline in the value of the dollar: The chart below shows the real exchange rate of the US dollar for a decade before the 1982 memo, and then through the end of the Reagan presidency. It did drift slightly lower for the first couple of years after the memo. But then it took off to new highs -- nothing resembling anything like a "return to approximately their historical levels." But there is something important that Luskin does not know that you need to know. In this chart, "highs" does not mean what Luskin thinks it means. Luskin has constructed a chart not of the value of the dollar but of the price of foreign currency in dollars: when the value of the dollar falls, the price of foreign currency in dollars rises. Luskin's "taking off to new highs" is Krugman's prediction of...

The Wall Street Journal's David Wessel blows his virtual referee's whistle: WSJ.com - Capital: Tweet! Time out.... Each campaign's assertion is factually defensible. Here are four more meaningful ones. The economy is doing better. But it's not yet good. The U.S. economy -- finally -- seems to be firing on all cylinders. Employers -- finally -- are hiring again. It is hard to chart an economic indicator that hasn't turned up. That is why the Federal Reserve yesterday began raising interest rates from half-century lows. It is easier for Americans to find work than it was six months ago, but not yet easy. Employers added about 950,000 jobs in the past three months. But that is still 1.3 million shy of the March 2001 peak -- and not nearly enough jobs to absorb the 3.4 million people who have joined the labor force since then.... Democrats make a strong point when they say different tax cuts and spending have produced more jobs sooner -- and ask who will pick up the check for borrowing done on Mr. Bush's watch.... The most encouraging economic development in the U.S. is the persistence of strong growth in productivity, the amount of goods and...

Via Elephant's Trunk, Max Sawicky lightens his Karmic burden by encountering a law professor who makes a mistake--a mistake that is mademuch too-often made by those who have taken too few courses in welfare economics, and also attended too many seminars sponsored by the Olin Foundation: Elephantstrunk: Max Sawicky called a Prof. Bainbridge on a rather tasteless criticism of social democracy. Prof Bainbridge responds with: I find the GNP data useful because I start with an assumption that social wealth maximization is the appropriate goal of public policy. This position was developed by Judge Richard Posner*, among other founders of law and economics, who argue that society should look to wealth maximization rather than utility maximization. The difficulty of making interpersonal comparisons of utilities, among other drawbacks of pure utility analysis, requires that we monetize preferences in order to say anything meaningful. Why Prof. Bainbridge thinks that he has a right to a simple theory I don’t know. However his wonderful frankness makes the decisions made clear. He, and apparently others, have chosen a theory that they can work with over one that has meaning, they would rather say true things that may have no meaning than things that might...

Daniel Drezner worries about American mercantilism: TNR Online | Trade Off (print): Between 1999 and 2004, public support for free trade declined across the board. The most dramatic shift in opinion came from Americans making more than $100,000 a year, among whom support for promoting trade dropped from 57 percent to 28 percent. These kinds of attitudes create a powerful constraint for policymakers at a delicate moment in global trade negotiations. Efforts to restart the Doha trade round after the disaster in Cancun will require concessions by U.S. trade negotiators on contentious political issues like farm subsidies. If public opinion is increasingly hostile to trade liberalization, the Bush administration might choose not to invest significant political capital in the process.... Americans are stone cold mercantilists. That is, they view trade as a zero-sum game, in which one country's gain is another country's loss. There is reason to believe that all the good economic news in the world will not alter that fact.... Americans are mercantilists in the sense that they support trade liberalization only when they believe it will improve export opportunities with no threat of increasing imports. Given the widespread support among economists for trade liberalization, are Americans just...

Of all the things in modern monetary policy that I did not expect beforehand, perhaps the one that I did not expect the most was the degree in which Federal Reserve policymaking has shifted from a "Keynesian" and a "monetarist" framework to a "Wicksellian" one. Talk to Federal Reserve people these days, and it will in all likelihood become pretty clear that perhaps the key to the FOMC's thinking is the relationship between the current Federal Funds interest rate and what the call the "neutral short-term real rate of interest." This "neutral short-term real rate of interest" is, of course, nothing but Knut Wicksell's "natural rate of interest," as he set it out in Knut Wicksell (1898), Geldzins und Güterpreise (Jena: Gustav Fischer). I don't know whether to be discouraged or encouraged by the fact that one of our key analytical tools for making monetary policy is 106 years old....

Someone, somewhere, sometime has to pay for government spending--whether through normal taxes or through the extraordinarily disruptive and inefficient "inflation tax." It's for this reason that the press lies every time it refers to George W. Bush's fiscal policies as "tax cuts" instead of as what they really are: "tax shifts"--tax shifts onto tomorrow's taxpayers. Gale, Orszag, and Shapiro make this point in something that now goes straight to the top of the pile: DISTRIBUTIONAL EFFECTS OF THE 2001 AND 2003 TAX CUTS AND THEIR FINANCING William G. Gale, Peter Orszag and Isaac Shapiro June 3, 2004 Tax cuts are not free; they must be financed with some combination of tax increases or spending cuts. The central goal of this paper is to apply this standard insight from public finance to the analysis of the distributional effects of making the 2001 and 2003 tax cuts permanent. We estimate not only who benefits directly from the tax cuts, but also who benefits and who loses once the financing of the tax cuts is considered. We consider two scenarios: one in which each household pays an equal dollar amount to finance the tax cuts and one where each household pays the same...

The very sharp and usually incisive Jake Schlesinger fails to distinguish between levels and rates of change: WASHINGTON -- With the economy now growing at a rapid clip, and employers finally hiring again in industrial Midwest battleground states, Democrats are losing a pillar of their 2004 campaign argument: that a weak recovery is making it unusually hard for Americans to find work... That the labor market is finally improving--that it is no longer becoming harder and harder month by month to find jobs--does not mean that the labor market is good. A few months of employment gains are good news: they mean that it is a little less bad out there in the labor market than it used to be. But don't confuse rates of change with levels: there are still perhaps 4 million people either unemployed or out of the labor force who would have jobs if we had a labor market in equilibrium. (And there are 6 million who would have jobs if we were in a boom like the late 1990s.) It's still unusually hard for Americans to find work--just not as unusually hard as it was six months ago. But I already said this yesterday:...

Eugene Volokh reads Will Saletan's "Kerryisms" and has a "Huh?" moment: The Volokh Conspiracy - Archives 2004-06-15 - 2004-06-21: Huh? Kerry was asked: Is the support for Roe v. Wade a critical point, a litmus test, for any court appointee you would make? Kerry answered: To the Supreme Court of the United States, yes. The Kerryism edited version, which I assume is supposed to be equivalent to Kerryism's original point but better put (remember their original charter, which is "translat[ing]" Kerry's words "into plain English," by removing "caveats and pointless embellishments") is: Yes. But that's not what Kerry wanted to say! It would be a stupid thing to say, both from a policy perspective (even if he firmly supports constitutional abortion rights, why should he turn it into a litmus test for district court judges?) and from a political perspective (if he does set up such a broad litmus test even for district court judges, he'd look like a fanatic). What exactly is the point of the Kerryisms? At first, I thought -- based on the column's introductory installment -- the Kerryisms were meant to show that Kerry throws in lots of unnecessary verbiage. But here, this was a necessary...

Billmon finds an interesting story at Bloomberg: Whiskey Bar: It's the Wages, Stupid: Art Pine - a solid economics reporter, lately of the LA Times, now with Bloomberg News - grabs hold of the major obstacle standing in the way of the Bush campaign's frantic efforts to convince the voters the economy is booming: Wages in U.S. Lag Inflation May Blunt Bush Gains From New Jobs A 2.2 percent rise in wages in the 12 months through May has been more than offset by a 3.1 percent gain in consumer prices. It's unlikely that employees will get raises that outpace inflation over the next five to 10 years, said William A. Niskanen, former acting chairman of the President's Council of Economic Advisors during the Ronald Reagan administration. "I don't see any substantial increase in average real wages for some time,'' said Niskanen, who is now chairman of the Cato Institute, a Washington research group. Niskanen and other economists cite global competition, which forces companies to keep costs down, shrinking union clout and continuing slack in a labor market with an unemployment rate of 5.6 percent, up from 4.2 percent when the last recession began in March 2001. But... but... but...

UCLA's Ed Leamer says that we are in a housing bubble. But this article annoys me. This article annoys me because (a) I can't find anything accessible in which Leamer gives his views at greater length, and (b) two crucial points seem to me to be left out: He compares house prices to rentals on a 2000 sq ft apartment. Houses are growing bigger (and better) over time. How fast are they growing bigger (and better)? How much of a time trend does this impart to his numbers? P/E ratios--of all kinds--should be high when interest rates are low now and are expected to be low in the future. Interest rates are very low now. Long-term interest rates tell us that short term rates are not expected to rise that much. How should we expect house prices to react to low interest rates? Given that interest rates are so low, is there good reason to think that housing prices are too high outside LA, SF, and New York? It's not that I'm sure we're not in a housing bubble. But I want to see the full argument. (Personally, I think we are in an interest rate bubble--and that high housing...

You know, given two weeks, I could probably become a pretty good Assembler-of-Ping-Pong-Tables. With a power screwdriver, an awareness of what parts of the assembly process require extra care and precision, a system for tightening bolts in the right order, and some creative though to figure out how to reconcile the claim at the start of the instructions that "two adults are required" with the warning before the antipenultimate step that "IT IS STRONGLY RECOMMENDED THAT FOUR ADULTS PARTICIPATE IN THIS STEP"--with that and two weeks of practice, I could be a crackerjack Assembler-of-Ping-Pong-Tables. But, alas, I have only one to assemble......

Now this is an experience that must not have been much fun... R. Bin Wong writes, on p. ix of his R. Bin Wong (1997), China Transformed: Historical Change and the Limits of European Experience (Ithaca, NY: Cornell University Press: 0801483271), that his "interest in economic history, political development, and social conflicts goes back many years... In graduate school at Harvard University in the mid-1970s, I was unable to answer a question posed by David Landes about what he, as a historian of Europe, could learn by studying China--a failure I remember quite vividly because it occurred on my Ph.D. oral examination. This book is a belated response." (Somehow, however, I, even after reading R. Bin Wong's book, still don't grasp the answer to R. Bin Wong's question. The differences between pre-industrial China and pre-industrial Europe are pronounced yet subtle, and I find it hard to see how what happens in one does much to illuminate what happens in the other.)...

Matthew Yglesias finds that Robert Pear's article about the CBO's new Social Security estimates is remarkably uninformative: TAPPED: June 2004 Archives: SECURITY CRISIS NOT SO CRITICAL? A new study from the Congressional Budget Office suggests that Social Security is not in such dire straights as an early report from the program's trustees had indicated. Robert Pear's coverage in The New York Times manages to not explain the source of the difference at all, but if you look here you'll see that underlying pronouncements like "the Bush administration said the Social Security trust fund would be exhausted in 2042" whereas "the Congressional Budget Office said it would not be depleted until 2052" is nothing more than a relatively small disagreement about future productivity growth trends. Hence, the difference of opinion here tells us less about Social Security than about the uncertainty of long-term economic forecasting. Under either set of projections, the same basic story emerges. Over the next several decades the ratio of retirees to working people will be rising, meaning that at some point there's going to need to be either tax increases or benefit cuts (or some combination) to bring the two into balance. The exact scale of the...

Daniel Drezner writes about the Council on Foreign Relations meeting: danieldrezner.com :: Daniel W. Drezner :: Impressions from the Council on Foreign Relations national meeting: CFR meetings operate by Chatham House Rules, so I'm forbidden to attribute any statements made over the past few days to anyone in particular... These rules are, IMHO, a good reason not to like the CFR. Most of the people there are intellectuals. And they're scared of their own words? In fact, they are scared of their own words--scared that they'll say something, that some High Politician will take umbrage, and that their future Undersecretaryships will vanish. We have a free country with an open and vigorous political debate. We shouldn't be drawing our foreign policy Undersecretaries from people who are scared of being attached to their own words. Dan goes on: However, a few impressions came through loud and clear from the flotsam and jetsam of corridor conversations: 1) There is a broad bipartisan coalition of people pissed off at the administration. This is not limited to those involved in this petition (some of whom were at the conference). Those on the liberal side are upset about Bush going into Iraq in the first...

Kevin Drum bangs his head against the wall: The Washington Monthly: POLICY WONKERY....Atrios: "I've declared 'the age of wonk' has been over for some time. There's little point in having serious policy debates about anything." I happen to love policy wonkery, but I feel the same way. More and more, it just feels like intellectual masturbation. I mean, I keep doing it because I can hardly bear to admit that it doesn't make any difference anymore, but as near as I can tell nobody in power cares two cents about actual policy these days. It doesn't matter whether something actually works better or worse than some other thing, only whether or not it helps your own team. But hell, I suppose the reality is that it's always been like that. Rose colored hindsight can be a bitch. No. It has not always been like that. It was not like that in the Clinton administration. It was not like that as far as foreign policy was concerned in the Bush I administration when Brent Scowcroft ran the National Security Council. It was not like that in the Ford administration. And, even today, policy wonkery is still absolutely vital within the Democratic-Independent...

Kevin Drum writes: The Washington Monthly: ESTATE TAXES....Matt Yglesias spent his high school years at the rather tony Dalton School (before spending his college years at the rather tony Harvard University). Last night he went to his five-year high school reunion and has this to say:One further observation would simply be that talking to a room full of Dalton alumni is pretty much the best case that can be made for the estate tax. On a more serious note....Actually, this is about the most serious argument imaginable about the estate tax. For those who didn't attend, a little imagination should tell you why an evening spent with callow 20-something heirs to great wealth ought to convince you that far from being eliminated, the estate tax ought to be increased to, oh, approximately 100%. Let 'em earn their own way....

Is this a new low in New York Times coverage of global economic issues? Perhaps. Not a word about benefits from ending the Multifiber Agreement for American consumers. Not a word on poor people in developing countries who have been kept in poverty because of artificial blocks to their ability to sell textiles to the United States. Not a word of explanation of why no developing-country governments want the MFA question reopened at the WTO. And no sense that the New York Times has any clue that it should have a reporter who knows the issue write this story. The New York Times: White House Shuns Role on Textile Quotas: By ELIZABETH BECKER. WASHINGTON, June 9 - More than 130 Republican and Democratic members of Congress asked President Bush on Wednesday to persuade the World Trade Organization to delay the phase-out of a global quota system on textiles and garments. The administration swiftly rejected the request, which would mean breaking a 10-year-old global agreement to end the quotas on Jan. 1, 2005. Ending the quotas could lead to a wide-ranging realignment of the industry and spell disaster for textile and apparel industries in dozens of nations, including those in...

Draft: For Nightly Business Report, to be broadcast Monday June 21, 2004 We do live in amazing times. Since the first quarter of 1995, the real productivity--nonfarm business--of America's workers has risen by 30.1%. The average American worker in the first quarter of 2004 produced 30.1% more goods and services per hour than his or her counterpart in the first quarter of 1995. At that pace of growth, America's real economic productivity would double in only 26.4 years: each generation would live twice as well as its parents. But the bright silver clouds conceal a dark lining. Since the first quarter of 2001--the last business cycle peak--the productivity of America's workers has risen by 14.1%. But real GDP has risen by only 8.4%. And workers' real wages and salaries have risen by only 0.5%. Real wage and salary income per capita has, so far, fallen by 3.5% over the Bush administration. This is a remarkable disconnect between the extraordinary rapid growth of the productive potential of the American economy and the loss of income on the part of the bulk of Americans--who are wage and salary workers, not coupon clippers. The tide is rising: the productivity tide is rising at...

Doug Peacock's Cotton Times website: LANCASHIRE, England. Welcome to the land where the Industrial Revolution began, two and a half centuries ago......

Ah. Another book arrived in the mail today. This one goes straight to the top of the Pile: James Surowiecki (2004), The Wisdom of Crowds: Why the Many Are Smarter than the Few and How Collective Wisdom Shapes Business, Economies, Societies, and Nations (New York: Doubleday: 0385503865)....

The highly intelligent and thoughtful Greg Goelzhauser has some very well-put comments on the law and economics of predatory pricing: Greg Goelzhauser: Professor DeLong's point is one that has led to the virtual nullification of predatory pricing post Matsushita and Brooke. Relying on neoclassical microeconomics, the Chicago School led the charge against predatory pricing. Their suggestion was that successful predatory pricing would be most improbable and that therefore it bordered on irrational for firms to attempt to carry through such a strategy. Many of the arguments put forth by Chicago School theorists were advanced by John McGee in his seminal article examining the alleged predatory practices of Standard Oil: Predatory Price Cutting: The Standard Oil (N.J.) Case, 1 Journal of Law & Economics 137 (1958). In that article, McGee suggested that there was little evidence pointing to predatory pricing by Standard Oil. He also suggested that such practices would be irrational in the sense that Standard Oil--being a much larger firm than its competitiors--would have to lower prices over a very large market share. Realizing that a predatory pricing scheme could not be enforced ad infinitum, smaller firms were not likely to exit the market. "Ah," you say, "but the...

One of the big problem with being on the big bus that is the global left is that one occasionally finds oneself seated next to destructive lunatic fools like George Monbiot. Where to begin? By pointing out that those who attend India's universities are, in India, an incredibly rich and privileged class, and that to denounce "privatization" and "user fees" to fund universities is to say that India's poor taxpayers should pay to further enrich India's rich university graduates? By pointing out that the Indian government has huge trouble collecting taxes, and that recouping some hospital fees from those who have money eases pressure on government budgets? By pointing out that India feeds itself, and that a principal task of Indian economic growth is to move workers from low-productivity agriculture to higher-productivity urban occupations, and that to demand that nobody move from the country to the city is to condemn India to poverty forever? Should one point out that the best estimates of poverty trends in India we have--those of Deaton of Princeton and of Sundaram and Tendulkar of Delhi--find a 22% reduction in Indian poverty during the six years from 1993-1994 to 1999-2000, not an increase? And that...

Alex Baker of the Century Foundation writes that: FYI, The Century Foundation has released two new issue briefs in its 'Reality Check' series: Bernard Wasow analyzes the unequal distribution of recent gains in income and wealth in "The New American Economy: A Rising Tide that Lifts Only Yachts"; and Rick Kahlenberg points out why the No Child Left Behind Act won't get very far towards solving America's public education problems in "Can Separate Be Equal: The Overlooked Flaw at the Center of No Child Left Behind." You can find PDFs of both reports here: http://www.tcf.org/4L/4LMain.asp?SubjectID=1&ArticleID=441. About 'Reality Check': Throughout the 2004 campaign, The Century Foundation is publishing a series of short, easy-to-read publications that use graphs and tables to correct widespread misperceptions about crucial issues confronting the country....

A correspondent writes: For those upset by our hedonistic existence and all the spending it takes to maintain it, I recommend reading a great bit of economic history, "The Pursuit of Happiness," by Stanley Lebergott, once a professor of mine at Wesleyan. Stan traces the history of consumer spending decade by decade through most of the 20th Century. His account is replete with telling statistics, such as how many tons of coal a typical housewife carried into the house from the coal shed in the backyard each year at the beginning of the century.... [In] Johnson City, TN... in 1950... half the homes in the county of 50,000 still used outhouses, though the proportion in the town was much smaller. We've come a long way, baby--thank goodness....

Now come Roger Sandilands and Jim Boughton before the bar of history, pleading the innocence of Harry Dexter White (and Laughlin Currie) of charges that they were spies for Joseph Vissarionovich Djugashvili. Let me focus on White. Up until recently the public evidence that White was a spy for Stalin was that Whittaker Chambers said so. But Whittaker Chambers was a very strange man--someone who sees no essential difference between Marx and Keynes; someone who said that Khrushchev's 1956 denunciation of Stalin's terror made Communism not less but more dangerous; and someone who rewrote Theodore White's dispatches from WWII China to make Chiang Kai-Shek appear to be the noble, competent, and democratic Hope of China. As either a liar, a loon, or both, Chambers's unsupported statements have little credibility. It strongly looks as though he was right about Hiss (but I am told that in Blind Ambition Dean says that Nixon said that Hiss was framed), but about what else? But the public release of the VENONA decryption effort told us of the following message to Moscow in August of 1944. If true, the message is absolutely devastating: As regards the technique of further work with us[,] [White] [2 groups...

Atrios writes: Eschaton: For anyone who's in the mood for a bit of long reading, this paper by DeLong and Eichengreen is an excellent overview of the Marshall Plan. It is one of the best things I've ever written. But the real kudos go to Paul Hoffman, Dean Acheson, George Marshall, Harry Truman, and company. We certainly do not see their like today....

Dubner and Levitt write about Paul F.'s business: selling bagels without using a cash register: The New York Times > Magazine > What the Bagel Man Saw: In the real world, Paul F. learned to settle for less than 95 percent. Now he considers companies ''honest'' if the payment is 90 percent or more. ''Averages between 80 percent and 90 percent are annoying but tolerable,'' he says. ''Below 80 percent, we really have to grit our teeth to continue.''... He expends a great deal of energy hectoring his low-paying customers, often in the form of a typewritten note. ''The cost of bagels has gone up dramatically since the beginning of the year,'' reads one. ''Unfortunately, the number of bagels and doughnuts that disappear without being paid for has also gone up. Don't let that continue. I don't imagine that you would teach your children to cheat, so why do it yourselves?'' Dressed in jeans and sneakers, with busy eyes and a wavy fringe of gray hair, he awoke this Friday at 3 a.m. Working out of his garage, he first loaded 50 cardboard trays of doughnuts -- a local bakery delivered them overnight -- into the back of his van....

A correspondent writes: At the end of Mickey Kaus' love note (http://slate.msn.com/id/2101504/) to Reagan is this paragraph: Reagan's 1981 breaking of the air traffic controllers' strike also seems a crucial part of the late-twentieth century boom. Union power was the mainspring of the 1970s wage-price spiral, as unions leapfrogged each other trying to stay a step ahead of the rising prices their hefty wage hikes then helped ensure. The air controllers provided the cautionary example of a labor organization that went on an ill-advised strike, was defeated, and ceased to exist. With the public's support! Big Labor hasn't been the same since--and, not coincidentally, neither has inflation. As a fan of your site, I thought I'd bring it to your attention. Do with it what you will. Thus <sarcasm> crack economist</sarcasm> Mickey Kaus draws on his <sarcasm>deep expertise in monetary economics</sarcasm> to refute Milton Friedman, who argues that inflation is a monetary phenomenon: the result of the central bank's allowing the money stock--the economy's stock of liquid assets--to expand too fast. It is true that in the 1950s, 1960s, and 1970s you heard some on the right saying that inflation was the fault of Big Labor pushing up wages, and...

More interesting than Chun's willingness to make contrary-to-fact implicit assertions about the cost structure of the retail gasoline market is the subtext of his critique of Alex Tabarrok. Let me bring this subtext to the forefront: Chun the Unavoidable: The statists at [Marginal Revolution]... being rich economics professors.... Economics professors are among the highest paid in the academy. I've never met a non-economics professor who didn't think this was absurd... gross injustice... "market forces," which, if you try to figure out what they are, you have to ask an economist. It's a good racket, and I'd admire them for it if they all weren't shills for insurance companies and Microsoft... The envy and loathing is palpable, and greatly warps Chun's discourse out of shape. I can safely assert that this is the first time Alex Tabarrok has been called a "statist." Perhaps it is meant ironically (irony doesn't travel well through packet networks). Perhaps Chun does not know what a "statist" is. I can also safely assert that few economists are shills for insurance companies, and fewer are shills for Microsoft. Alex is not one of them: he calls 'em like he sees 'em, all the time. And the reasons...

Alex Tabarrok has the standard economist's reaction to Minnesota's (and Maryland's) minimum-gas-price laws: he bangs his head against the wall: Marginal Revolution: How to lower gas prices: Minnesota's Commerce Department has fined a number of gas stations, often attached to Wal-Marts, for selling gas too cheaply. "The state adopted a law in 2001 that bars gas stations from selling gas without taking a minimum profit. These days, stations must charge at least eight cents per gallon more than they paid. The Commerce Department is now issuing its first fines for breaking the law." At which point "related field" Ph.D. candidate Chun enters the lists in defense of the Minnesota (and Maryland) legislatures by making the standard argument made by non-economist social scientists who have never taken a course in industrial organization: Chun the Unavoidable: Fining Wal-Mart for Underselling Gas: Perhaps they, being rich economics professors, won't mind when Wal-Mart is the only entity you can buy gas from, at $12/gallon. Though since this act of creative consolidation would probably spur unknown technological advances, of a likely nano-nature, I should probably just go to my local Supercenter and be thankful I don't live under socialism. Microsoft could successfully follow the strategy...

Paul Kedrosky tells us that: Infectious Greed: Bluffer's Guide to Foreign Exchange Lingo: The FT has an amusing bluffer's guide to foreign exchange (and options) lingo in a supplement today. Here are some highlights -- the best of which is Vega:The Greeks. Uniquely, both novices and those who have mastered options can claim "this is all Greek to me," because the Greek alphabet plays an unfeasibly large role. At least this ensures the language is not Spartan.Delta. A dry start, despite its name, to our ramble through ancient Greece. Delta measures the sensitivity of an option price to changes in the price of the underlying commodity. Also known as the hedge ratio by non-classicists, although that is a prickly subject.Gamma. It hardly needs spelling out but gamma measures how fast delta changes given a unit change in the underlying asset. Kid's stuff really. A lower gamma makes an option easier to hedge.Theta. The change in the option premium for a given change in the period to expiry. Also known as time decay. This can be even more painful than tooth decay as the value of your option melts before your eyes.Vega. Those still paying attention will have spotted this is not...

John Quiggin is annoyed at Bjorn Lomborg and company. He interprets the real meaning of their "Copenhagen Consensus" project as being, "Greatly expanding development aid would do much more good for the world than spending the same amount of money fighting global warming, so let's do neither." Lomborg, of course, would reject this characterization of his position. But I think that it is at least half-true....

We have returned from China with surprisingly-large quantities of Lung Ching ("Dragon Well") tea. And now I'm scared that I'm not enough of a tea connoisseur to appreciate it. Kind of like feeding Diamond Creek Cabernet Sauvignon to someone used to Boone's Farm Strawberry Ripple. How can I educate my tea-drinking palate so that I can feel justified in drinking this stuff?...

The London Economist's take on the oil market: Economist.com | OPEC’s meeting in Beirut: ...the 11 oil producers of OPEC agreed to raise their production quota of 23.5m barrels per day (bpd) by 2m bpd next month; they may increase it by a further 500,000 bpd in August. The oil markets had been told to expect such a deal, and many traders and consumers had let themselves hope for even more, such as the wholesale suspension of all production caps. The benchmark price for crude oil began the day a whisker under $40 per barrel. It remained thereabouts after the deal was announced. Indeed, raising the quotas by 2m bpd may not boost the flow of oil at all. OPEC members are already producing about 2.3m bpd more than their quotas allow. The Beirut deal simply gives sight to the blind eye OPEC had turned to this cheating. What has constrained this cheating thus far is not the artificial limits on production imposed by the cartel, but the physical constraints imposed by the oil world’s overstretched wells, pipes and refineries. The industry is trying to feed the fastest world economic growth for 20 years (according to Morgan Stanley) with the...

Me at Nieman Watchdog II: Nieman Watchdog > Ask This > Questions About Bush’s Policies: By Brad DeLong jbdelong@uclink.berkeley.edu Q. How much bang for the buck did Bush’s tax cuts actually have? How many jobs were created, versus how much did the deficit grow? Q. How did the Bush administration decide that these tax cuts were the right stimulus package to put forward? Q. What have representative people who received big hunks of money from the Bush tax cuts done with it? Q. What do those inside the Bush administration now think of their economic policy moves over the past four years? The press needs to be asking about the making of Bush administration economic policy – and examining the results. So far in the twenty-first century the underlying structural basis of the American economy has gotten rapidly, surprisingly stronger: the productive potential of the economy has grown at an extraordinarily rapid pace. But the short-term performance of the economy – the part that government has powerful tools to affect in the short run – has been abysmal. Two million jobs have been lost. The gap between real Gross Domestic Product and the economy's productive potential is larger than seen...

Me at Nieman Watchdog I: Nieman Watchdog > Ask This > Missing the Story of Structural Change: jbdelong@uclink.berkeley.edu Q. In what businesses are people working much harder than they did five years ago, and what’s making them work so much harder? Q. In what businesses are people working much smarter than they did five years ago, and what’s letting them work so much smarter? Q. In what businesses are productivity gains due primarily to people figuring out how to use all the computers they bought in the late 1990s, and how are people using computers and related gear to boost worker productivity? Q. As the price of information technology capital continues to fall, are there any signs of another boom in information technology investments that will greatly boost the productivity of IT-using industries yet further? Q. What new jobs or industries are being created because of the falling price of information technology? The press needs to be asking questions about the underlying structural changes in the economy under George W. Bush. By structural, we mean the things that change over the long-term: labor, capital and technology. These are the things that ultimately determine America’s standard of living (as opposed to...

EPI's Josh Bivens writes: When do workers get their share?: Corporate profits have risen 62.2% since the peak, compared to average growth of 13.9% at the same point in the last eight recoveries that have lasted as long as the current one. This is the fastest rate of profit growth in a recovery since World War II. Total labor compensation has also turned in a historic performance: growing only 2.8%, the slowest growth in any recovery since World War II and well under the historical average of 9.9%. Most of this growth in total labor compensation has been accounted for by rising non-wage payments, like health care and pension benefits. Rapidly rising health care costs and pension funding requirements imply that these higher benefit payments are not translating into increased living standards for workers, but are rather just covering the higher costs of health care and pension funding. Growth in total wage and salary income, the primary source of take-home pay for workers, has actually been negative for private-sector workers: -0.6%, versus the 7.2% gain that is the average increase in private wage and salary income at this point in a recovery. These are ominous signs, suggesting a new march toward...

Mark Kleiman goes to the Law and Society meetings: Mark A. R. Kleiman: What I've learned so far at the Law & Society meetings: What I've learned so far at the Law & Society meetings 1. According to Benito Arrunada of the Universitat Pompeu Fabra in Barcelona, the World Bank, with the support of the Fujimori regime, dumped a whole bunch of money into creating a modern system of land-title registration and transfer for Peru. According to Hernando de Soto's theories, this was supposed to give ordinary folks access to the capital markets by allowing them to mortgage their houses, thus setting off a storm of entrepreneurship and prosperity. Actual effect: almost zero. Reason: Even with a good set of land titles, mortgage lending only works if backed by the threat of foreclosure. Peruvian judges, hostile to market transactions, simply wouldn't process foreclosures. Ergo, no mortages. So we still don't know whether the promised economic miracle would appear if someone could provide not only land titles but courts that would turn them over to lenders when borrowers default. Arrunada suggested that community responsibilty for default, after the fashion of micro-lending initiatives, was a more promising approach. Update: A reader...

In rural Shaanxi, the goatherds herd their goats in the scrub by the side of the road. They watch the goats attentively. The goats amble along, grazing. Typically, there are only three or so goats: the greatest number we counted was six. Goats are herd animals: that is why they were domesticated in the first place. Goats are easy to manage in groups. Yet there they are: one farmer, and three goats. Why have each farmer manage his goats individually? Why not also watch your neighbors' goats, trading off in some simple rotation? Why has there not developed a market for goat-herding services in rural Shaanxi, so that farmers with less or easier land can earn some extra money by herding the goats of those who have more or harder land to work? Ronald Coase must be spinning in his grave fast enough to generate 100 megawatts. Three goats is not goat-herding, it is goat-walking. Why don't the farmers band together in a local cooperative to obtain some of the economies of scale in goat-herding that were the reason we tamed the goat in the first place? Oh. You say they've been there, done that? And you say they're...

Ted Winslow quotes John Maynard Keynes on Leon Trotsky: [Trotsky] assumes that the moral and intellectual problems of the transformation of society have already been solved - that a plan exists, and that nothing remains except to put it into operation. He assumes further that society is divided into two parts - the proletariat who are converted to the plan, and the rest who for purely selfish reasons oppose it. He does not understand that no plan could win until it had first convinced many people, and that, if there really were a plan, it would draw support from many different quarters. He is so much occupied with means that he forgets to tell us what it is all for. ... We lack more than usual a coherent scheme of progress, a tangible ideal. ... It is not necessary to debate the subtleties of what justifies a man in promoting his gospel by force; for no one has a gospel. The next move is with the head, and fists must wait. (Collected Writings, vol. X, pp. 66-7)...

The more I think about the Kerry health care proposals, the more impressed I am. Many of them really are very clever, and likely to (somewhat) work. It is indeed very nice to see a serious policy process once again. I have spent many months of my professional life sinking into the Pit of Despond and the Slough of Despair. But the deepest I ever sunk was in 1993-1994, when I was working (part time) on the Clinton health care reform effort. We needed to find a way to provide both patients and doctors with powerful incentives to reduce the roughly one-third of medical spending that went for unnecessary and inappropriate care. That meant--in the managed-care Enthoven Jackson Hole-group framework the task force had adopted--finding some way to bring the hard incentives of the market system inside health-care decisions. But that proved remarkably hard to do--without producing a cure worse than the original cost-overrun disease. The first problem is what hard market incentives threatened to do--and, in the past decade, have done--to HMOs and insurance companies. Only one in 250 of those filing private insurance claims file for more than $50,000 a year. But these one-in-250 account for 20% of...

From Wu Han, "Hai Rui Dismissed From Office," one of the axes on which twentieth century Chinese history turned: You say the common people are tyrannized, but do you know the gentry injures them? Much is made at court of the gentry's oppression, but do you know of the poverty endured by the common people? You pay lip service to the principle that the people are the roots of the state. But officials still oppress the masses while pretending to be virtuous men. They act wildly as tigers and deceive the emperor. If your conscience bothers you you know no peace by day or night. You see, Hai Rui = Peng Dehuai, the People's Liberation Army general whose corps led the breakout that began the Long March, and whose armies in Korea inflicted the worst battlefield defeat on the U.S. army since the days of Robert E. Lee. The emperor Hai Rui reprimands = Mao Zedong. Just as Hai Rui had reprimanded his Ming Dynasty emperor, so, at the Chinese Communist Party's Lu Mountain Plenary Meeting, Peng Dehuai warned Mao of the disastrous consequences of the Great Leap Forward and of the scale of the resulting famine: Grain available to...

Chin has stood up, but after you stand you need to walk, and after you walk you need to run: there are women harvesting wheat by hand with sickles beneath the flight paths of the 767s on final approach to Xian Airport. They use steel sickles. Their ancestors of 3000 years ago used bronze ones. And their ancestors of 3000 years ago had bigger farms--much bigger farms, for the population of Shaanxi then could not have been more than 20% of what it is now....

Let me just say that the nighttime river view from the upper stories of the Pudong Shangri-La Hotel is one of the greatest views in the world. (It even rivals the view of the Golden Gate from my office window.)...

Annals of the division of labor. A sign seen on an about-to-open building in Beijing: Hotel equipment superstore: your one-stop shopping solution for hotel equipment....

Lance Knobel marks the death of William Hinton: Davos Newbies : Davos Newbies Home: Return to Long Bow: For the politically interested of a certain generation, reading Fanshen was one of the rites of passage. I haven't a clue how William Hinton's book would stand up to a rereading in light of what we all now know about the tyranny of the Mao years in China. But Hinton's life story, as recounted in The Guardian's obituary, certainly bears the telling. Here's Hinton in rural China in 1947: "Over the course of the next year, he gathered a thousand pages of notes, packed with earthy detail, on the struggle against landlords -- and between different strata of peasants -- in the village of Long Bow. Much later, he would recall 'the lice, the fleas and all the hardships, and eating that terrible gruel out of an unwashed bowl while a young girl lay dying of tuberculosis'."... In the end, I think Hinton has to be classified with those like Joan Robinson and Jan Myrdal whose writings about Maoist China diminished rather than added to our knowledge of what was really going on. Fanshen was very good. But Shenfan--and his later works--seemed...

THE SUMMER PALACE, BEIJING--Ah. This is where the Dowager Empress Cixi kept her son, the Guangxu Emperor, prisoner after the countercoup that ended the Hundred Days' Reform Movement of 1898. Things might have been very different had China managed to have its equivalent of the Meiji Restoration. But this is something I know next to nothing about, and wish that I knew more. My "knowledge" of this is a very strange and partial one--derived largely from science-fiction writer Walter Jon Williams's contribution to War of the Worlds: Global Dispatches, in which a Martian invasion gives the Guangxu Emperor a second chance....

Is everybody about to build up a strategic petroleum reserve? WSJ.com - Oil-Thirsty China Begins to Build Reserve Facilities:Beijing's industry czar said the country has started building tanks and other facilities for a strategic petroleum reserve but hasn't begun stockpiling fuel. The comments by Zhang Guobao, vice chairman of China's National Development and Reform Commission, to reporters on Sunday represented some of China's most detailed statements on its widely watched plans for a strategic oil reserve. China had said it planned to create a stockpile but offered few details. Oil traders have been eager to know whether such stockpiling is partly behind surging Chinese demand for oil, which has helped drive petroleum prices to their highest levels in two decades. The fact that China isn't stockpiling yet means China's economy is fueling the market demand -- and that once the reserve purchases begin, Chinese oil purchases could grow. Mr. Zhang stressed that China will build its reserves slowly so as not to disrupt markets. He provided no indication regarding when oil purchases might begin. In the longer term, the reserve is likely to be a stabilizing influence on the world economy, by giving China's manufacturing sector a buffer in the...

And now we're blocking imports of color TVs from China. Truly, truly an act of idiocy....

How much of China's investment today is being undertaken with borrowed money--money borrowed from people who have no idea of how risky are the projects that it is ultimately being used for? I cannot help but feel that a much more equity-heavy financing structure would be better......

Air conditioners are sprouting on the sides of the older apartment buildings of Beijing. Not on the sides of the newer buildings with integrated heating and cooling systems, but the outsides of the older apartment buildings--60s through 80s vintage--are sprouting large single-apartment units, as one by one the apartment dwellers decide that they are rich enough to be not hot through the summer. It doesn't look very efficient--what economies of scale are being sacrificed? It looks like installing an outside-the-apartment air conditioner on an eighth floor apartment is an exciting experience. But it is happening now. China is indeed standing up....

What does one say to a newly-minted Ph.D. in Economics immediately after graduation? One says this: "Congratulations. You've done it. Take a deep breath and be proud of yourself. You've not only done it, you've landed a tenure-track job. You've not only landed a tenure-track job, but the fact that you had more than one offer means that over the next several years you'll not only be much better paid but you'll also teach less than you have in the years just past. "But don't think your life will be easy. In six years your university will send out for letters, asking outsiders whether you should be given tenure. What the letter-writers will say about you in year six depends on the articles of yours that they have read in year five. Since nobody reads the journals cover to cover anymore, they will read in year five only those articles published in year four that others have told them are worth reading. To get an article published in year four, you must submit the final draft to the journal after year two. Thus you need, for the next two years, to work harder than you have ever worked in your...

I protest. The New York Times's John Markoff writes: The New York Times > Technology > Google Moves Toward Clash With Microsoft: There is a rich history of less-than-successful attempts to create information search tools for personal computers. In the 1980's, for example, Mitchell Kapor's On Technology developed On Location for retrieving information on Macintosh computers and Bill Gross, a prominent software developer, led a group of programmers to create Lotus Magellan for the PC. But both OnLocation and Lotus Magellan were brilliant programs--completely successful. The fact that the companies could not find a profitable way to distribute and maintain them should take nothing away from the programming achievement. In a better world than this one we would have found a way to keep these extremely useful programs up-to-date and in our software toolkits. It's not a less-than-successful attempt to create information search tools. It's a less-than-successful ability to finance the maintenance of excellent and wonderful programs....

Dr. Boyle does not like the health care market that he now faces, in which HMOs use their substantial local market power to drive down their costs by driving down the amount they pay doctors, nurses, and other service suppliers: CodeBlueBlog: ...the HMO chimera we now face. Positioned as middlemen – with profits their sole motivation-- HMO’s are driving down reimbursements to the point where it is no longer economically possible for reputable physicians to... balance the books. I don't like the current health care market either--although I would focus on HMOs' and insurance companies' incentives to avoid covering people who are going to get seriously, expensively sick. So does Dr. Boyle want to replace the invisible hand of private HMOs telling how much they will pay by the strong hand of government regulation? Uh-uh: CodeBlueBlog: New medications are a critical component of health care, yet patients in many European Union countries have to wait years before they become available. In most European countries, pharmaceutical companies must not only get approval from the national departments of health, but must also obtain pricing and reimbursement approvals before they can introduce a new drug into the market. Because this can result in...

This LA Times story about an American family with an annual household income of $45,000 a year. Note that this family has the median household income: half of all American households are poorer. (Los Angeles is a relatively expensive place to live, but it's also a nice place to live: there are compensations.) The median Hispanic household in America earns $34,000 a year. The median African-American household earns $30,000 a year. Yahoo! News: By Geoffrey Mohan Times Staff Writer | The scrapbook tucked under the bookshelf in Rudy Basurto's living room isn't full of family portraits — just photos of cabinets. The one with the opaque windowpane doors is the pantry he built for Jamie Lee Curtis. The Mission-style one, in mahogany, is in Bruce Willis' place in Malibu. Basurto is 48 years old. He makes about $20 an hour building cabinets but can't afford to buy a home in his Highland Park neighborhood. He has bartered his labor to put his three teenage children through Catholic school. They're on their own for college. Basurto's family is far from poor, by the official measure. The federal poverty level for a family of five is $21,959. Last year, Rudy and his...

Dan Froomkin writes about the symbolic politics of employment: washingtonpost.com: Bush Backdrop Turns Sour: When President Bush visited a Timken Co. ball-bearing plant in Canton, Ohio, a year ago, he told workers that their optimism about the future of their company inspired his optimism about the future of the economy. A photo from his talk at Timken leads the White House Web site's "Building America's Economy Photo Essay." It shows Bush standing in front of a glorious red, white and blue "Jobs and Growth" banner. As he said at the time, the "greatest strength of the American economy is found right here, right in this room, found in the pride and skill of the American work force." Last week, Timken announced that the folks right there in that room are getting fired. Timken, the world's largest industrial bearings maker, whose chairman is a major donor and fundraiser for the Republican Party, plans to shut down three factories in Canton and eliminate 1,300 jobs.... Mark Naymik writes in the Cleveland Plain Dealer: "When President Bush needed a factory floor to serve as a prop for an economic speech last year, Canton-based Timken Co. opened its doors. But the maker of bearings...

Fallout from rising oil prices: WSJ.com - Glut of SUVs Prompts Round Of Discounts: ...buyers can now get up to $5,000 in cash rebates on the extended versions of the GMC Yukon XL, Yukon XL Denali and Chevrolet Suburban. In pickup trucks, Ford boosted incentives on its F-150 models by $500, bringing cash rebate on the 4-door Supercrew to $1,500 and incentives on other body styles to $2,000. An April drop in SUV sales has claimed victims among several hot sellers, including GM's Hummer H2, Ford's Expedition, and the Chevrolet Suburban. Inventories of midsize and large sport utilities at the end of April were enough to last for more than 100 days at April's sales pace, according to Autodata Corp. figures. That's substantially more than the 60 to 65 days' supply the industry prefers. Do they know that Denali is not in the Yukon? I wonder......

Miraculous to see: it looks like the best man for the job is going to be india's Prime Minister: The Agonist: Gandhi Tells Backers She Will Not Be India's Prime Minister: On the day she was to stake her claim to lead India, Sonia Gandhi instead told party members and allies that she would not become prime minister. News reports said she would support Dr. Manmohan Singh, a former finance minister, as prime minister. A Sikh, he would be India's first minority prime minister....

Henny Sender of the Wall Street Journal writes about the potential for systemic risk when interest rates rise. He focuses on hedge funds--but that's the wrong category to look at. He needs to figure out who (a) is highly leveraged and (b) has placed big bets that interest rates will remain low and smooth. There's where the danger will come from. LTCM was not a typical hedge fund: WSJ.com - Interest-Rate Jolt Might Cause Sparks At Hedge Funds: ...how Wall Street deals with a rising-rate environment has become a pressing question. Nervous analysts wonder if the Fed's move to increase short-term rates, no matter how well telegraphed, will catch risk-hungry and yield-seeking investors off-guard.... Hedge funds play a bigger role than ever in terms of global capital flows. More than 7,000 hedge funds of varying size now prowl global markets in search of investments. And these private investment partnerships, which often copy one another's strategies.... One sign of difficulties ahead: Emerging-market bond yields are starting to rise far more rapidly than U.S. Treasury bonds, increasing the gap in yields between the two as investors lose their appetite for riskier assets.... Early May has been even more treacherous for riskier investments,...

Tyler Cowen alerts me to a charge of economic treason. But what surprises me most is the quote attributed to Neal van Alfen, Dean of the College of Agricultural and Environmental Sciences at UC-Davis. Is van Alfen qualified to hold his job? If Paul Blustein's story below is correct, then the answer is clearly "No," and UC Davis's Chancellor Vanderhoef badly needs to choose a different dean, and choose one soon: washingtonpost.com: In U.S., Cotton Cries Betrayal: ...Sumner, an agricultural economist at the University of California at Davis, played a key role in an international trade case that is shaping up as one of the most significant defeats the United States has ever suffered on the trade front. An analysis that he wrote helped frame a preliminary decision issued two weeks ago by a World Trade Organization panel, which held that the federal subsidies paid to U.S. cotton farmers violate WTO rules because they cause overproduction, drive down world prices and impoverish farmers in developing countries. Since Sumner served as a paid consultant for Brazil, which brought the case against Washington, he is being reviled as a traitor by some U.S. farmers. Leaders of some farm groups, furious at Sumner...

Paul Markille writes that E-Commerce and the E-conomy are here after all: A Perfect Market: ...So e-commerce is already very big, and it is going to get much bigger. But the actual value of transactions currently concluded online is dwarfed by the extraordinary influence the internet is exerting over purchases carried out in the offline world. That influence is becoming an integral part of e-commerce. To start with, the internet is profoundly changing consumer behaviour. One in five customers walking into a Sears department store in America to buy an electrical appliance will have researched their purchase online—and most will know down to a dime what they intend to pay. More surprisingly, three out of four Americans start shopping for new cars online, even though most end up buying them from traditional dealers. The difference is that these customers come to the showroom armed with information about the car and the best available deals. Sometimes they even have computer print-outs identifying the particular vehicle from the dealer's stock that they want to buy. Half of the 60m consumers in Europe who have an internet connection bought products offline after having investigated prices and details online, according to a study by...

No, I am not making this up: The New York Times > New York Region > Rabbis' Rules and Indian Wigs Stir Crisis in Orthodox Brooklyn: For thousands of Orthodox women, one of the most fundamental practices of daily life — adhering to the code of modesty that prohibits a public display of their hair after marriage — was thrown into turmoil this week by a ruling from a distant authority. More than 5,700 miles away in Israel, several rabbis issued a ban on wigs made in India from human hair, which is used to make many of the wigs sold in Brooklyn. The rabbis said the hair may have been used in Hindu religious ceremonies, which like other pantheistic practices are considered idolatrous in Orthodox teaching. As a result, many of the women felt obliged to put aside their costly wigs, flocking instead to stores that sold acceptable replacements. "You have to hope whatever you have is good, otherwise you put a thousand dollars in the garbage," said a woman named Mindy, who declined to give her last name for fear of what her father-in-law would think... Do we need to convene a WTO panel to assess whether under...

Its economy is finally large enough to have important impacts on the world as a whole: Chinese Oil Demand Puzzles Market By BHUSHAN BAHREE, Staff Reporter of THE WALL STREET JOURNAL, May 14, 2004 China's exploding demand for oil -- one factor that helped drive petroleum prices above $40 a barrel this week -- has put energy markets at increased risk of disruptive price spikes and crashes, according to a study by an influential forecasting group.... China's growing thirst for oil -- plus strong demand for gasoline in the U.S. and fears of supply disruptions in the Persian Gulf -- has driven oil prices to their highest levels since oil futures started trading on the New York Mercantile Exchange in 1983. The price for U.S. benchmark oil for June delivery settled at $41.08 Thursday, up 31 cents from Wednesday. Iraq hasn't yet repaired a sabotaged pipeline feeding its two offshore oil-export terminals, missing a target set by the country's oil minister this week. The attack has cut Iraqi exports by 600,000 barrels a day, or almost a third. Saudi Arabia, de-facto leader of the Organization of Petroleum Exporting Countries, is quietly asking ship brokers for extra tankers in the...

A long time ago Marty Weitzman taught me that markets work best when at least one of the demand and supply curves was relatively flat: big quantity responses to small price signals were where markets shined the brightest. Here we have Paul Krugman worrying that in oil both supply and demand curves today are very steep: The New York Times > Opinion > Op-Ed Columnist: A Crude Shock: The oil crises of the 1970's began with big supply disruptions: the Arab oil embargo after the 1973 Israeli-Arab war and the 1979 Iranian revolution. This time, despite the chaos in Iraq, nothing comparable has happened — yet. Nonetheless, because of rising demand that is led by soaring Chinese consumption, the world oil market is already stretched tight as a drum, and crude oil prices are $12 a barrel higher than they were a year ago. What if something really does go wrong? Let me put it a bit differently: the last time oil prices were this high, on the eve of the 1991 gulf war, there was a lot of spare capacity in the world, so there was room to cope with a major supply disruption if it happened. This time...

And Barry Ritholtz bangs his head against the wall as he reads in the _New York Times_ that Wendy Gramm--she of the Enron Board and the Enron Audit Committee--thinks, based on her experience, that boards of directors work just fine: a href="http://bigpicture.typepad.com/comments/2004/05/cojones_grande.html">The Big Picture: : "Mr. Donaldson's efforts are frustrating to those who expected that the Bush administration would roll back regulation. The proposal received a D- average grade from Wendy Gramm, director of the regulatory studies program at George Mason University. "The S.E.C. offered no evidence that existing solutions to poorly performing boards do not work," wrote Ms. Gramm, a former Enron director." Seriously, how big a set of balls must you have to say something like that if you are Wendy Gramm? She is now the director of the regulatory studies program at the Mercatus Center at George Mason University -- which means this school has zero academic credibility -- and seems to be against most regulation of Boards of Directors. This from the woman who: 1) enabled Enron's off balance sheet financial shenanigans; 2) Sat on the B of D of a public company while her husband was a Senator who -- surprise! -- recieved donations...

Outsourcing continues: Google steps into Bangalore: The Hindu | Friday, May 07, 2004 | Google to open R&D centre in Bangalore BANGALORE, MAY 6. The popular web search engine maker Google Inc's first research and development centre outside the U.S. has been approved by the Software Technology Parks of India (STPI), officials said. The centre, Google Online, is registered as a unit with the STPI, which provides satellite-linked datacom services to IT firms. The new centre "was given approval towards the end of April,'' said Ramali R, an official with the new registrations division of the STPI. Google has taken space on two floors in one of the commercial buildings in the central business area of Bangalore, which would be ready `soon,' engineers on site said. In time, the centre is expected to house some 100 engineers. It will be headed by a three-member team, including Krishna Bharat, Google's principal scientist, and Antoine Colaco, a manager from the company headquarters at Mountain View, California in the U.S. The engineers at the Bangalore centre would work on data mining, data warehousing, business intelligence and knowledge management. "We just want more really great engineers,'' senior Google executive, Wayne Rosing, had told...

Lance Knobel meets Martin Wolf returning, unshod, from Mt. Sinai: Davos Newbies : Davos Newbies Home: "Martin Wolf has a new book out, Why Globalization Works. The Financial Times is serialising parts (and as is its wont, hiding the material behind a subscription firewall -- a great way to encourage book purchases, not). Today's instalment includes his ten commandments of globalisation. They aren't as pithy as the original ten, but as always with Wolf, they make great good sense:   1. The market economy is the only arrangement capable of generating sustained increases in prosperity, providing the underpinnings of liberal democracy and giving individual human beings the opportunity to strive for what they desire in life.   2. Individual states remain the locus of political debate and legitimacy. Supranational institutions gain their legitimacy and authority from the states that belong to them.   3. It is in the interest of both states and their citizens to participate in international treaty- based regimes and institutions that deliver global public goods, including open markets, environmental protection, health and international security.   4. Such regimes need to be specific and focused. But they also need means of enforcement.   5. The World Trade...

Aristodemos: The U.S. trade deficit is the largest the world has ever seen, and U.S. nominal interest rates are lower than euro rates. Can anybody come up with another example of a case in which a country with a 5% of GDP current-account deficit had lower nominal interest rates than its trading partners? Sophia: Well, it certainly makes it very hard to teach the international macro pieces of Econ 1. Dikepolis: Can you say "exhorbitant privilege"? The East Asian financial crisis persuaded a lot of central banks that they needed to hold lots more dollar-denominated assets for system stability purposes--even if those assets had low yields. And the supply of dollar-denominated assets in foreign hands has not yet caught up. Aristodemos: But it must be catching up, mustn't it? $500 billion a year of net capital inflow in a world that has less than $40 trillion of annual GDP... Studentios: So what should U.S. long-term interest rates be? Aristodemos: On the international side, to reduce an unsustainable 5% of GDP trade deficit down to a sustainable 2% of GDP trade deficit requires--according to standard rules of thumb--a 30% decline in the trade-weighted value of the dollar. That should take...

From Paul Bergin, Reuven Glick, and Alan Taylor (2004), "Productivity, Tradability, and The Great Divergence" (Davis: U.C. Davis xerox). The strength of the relationship between high levels of GDP per capita on the one hand and appreciated real exchange rates on the other. Alan's main point is that the relationship was much weaker back before the 1960s--and shows signs of growing weaker once again. This may be important: the fact that poor countries have relatively depreciated exchange rates--and thus that a large chunk of national output is needed to purchase a relatively small quantity of imports from the industrial core--has been a powerful obstacle to development over the past generation and a half....

Lord love-a-duck: things in the mail this Monday morning that I *must* read. (The first I must read before 2:00 PM): Paul Bergin, Reuven Glick, and Alan Taylor (2004), "Productivity, Tradability, and The Great Divergence" (Davis: U.C. Davis xerox). Frank Levy and Richard Murnane (2004), The New Division of Labor: How Computers Are Creating the Next Job Market (New York: Russell Sage: 0691119724). Timur Kuran (2004), Islam and Mammon: The Economic Predicaments of Islamism (Princeton: Princeton University Press: 0691115109). Mary Walton (1997), Car: A Drama of the American Workplace (New York: Norton: 0393040801). Harold James (2003), Europe Reborn: A History: 1914-2000 (Princeton: Princeton University Press: 0582215331). A considerable amount of this is the fault of Princeton University Press, which is publishing many more books that I *must* read than I can possibly find time to read. I've either got to narrow the scope of things I claim to have an informed opinion on, clone myself, acquire a staff, or give up sleep....

With his first breath after his receipt of tenure, the always-interesting Edward Castronova howls into the ether: Terra Nova: Free: ...this job also marks my entry into tenured status. That means intellectual freedom and job security, two things that remain scarce despite the onward march of technology and civilization. Here's what I would like to say with my first breath of free air: MATH IS BORING AND STUPID AND HAS ONLY A LIMITED PLACE IN THE DISCUSSION OF HUMAN AFFAIRS. PEOPLE ARE NOT NEUTRONS. HUMAN RATIONALITY IS AN EVOLUTIONARY AFTERTHOUGHT, SOMETHING THAT DOES LITTLE MORE THAN OCCASIONALLY MODIFY BEHAVIORS THAT STEM FROM UNCONSCIOUS AND ALOGICAL IMPULSES. THE TIME I SPENT LEARNING ALL THOSE MATHEMATICAL/ECONOMIC MODELS OF HUMAN BEHAVIOR HAS HAD SUCH A LOW PAYOFF IN TERMS OF GENERAL UNDERSTANDING THAT, WELL, UNTIL I GET A REFUND, I AM GOING TO REMAIN PISSED OFF. Whew! That felt great. I've been wanting to say that since the second day of grad school, back in August 1986. OK, look, I'm into games and human behavior; I thought economics was cool because it offered these simple abstractions that aided communication of ideas. But that's basically Economics and Game Theory 101; the cathedral of weirdness...

From the Bureau of Labor Statistics. The productivity growth miracle continues: The seasonally adjusted annual rates of productivity change in the first quarter were: 4.5 percent in the business sector and 3.5 percent in the nonfarm business sector. In both the business and nonfarm business sectors, productivity and output increased more in the first quarter than they had in the fourth quarter of 2003 (as revised) while the hours of all persons grew more slowly. Thus the long-run news about the American economy continues to be excellent....

Lerxst worries about what happens when interest rates rise, and quotes extensively from the Wall Street Journal: Kautilyan: Systemic Risk?: I've pointed to the potential dangers of the shifting interest rate environment. One of the specific worries is the fact that there are only a handful of players who are now taking on all the risk of higher interest rates. The Wall Street Journal explains: There won't necessarily be trouble this time, but "if you look back at history, whenever the Federal Reserve starts a cycle of raising interest rates, somebody blows up," says Michael Cheah, portfolio manager at AIG SunAmerica Asset Management in Jersey City, N.J. "We always learn something new."... Mr. Cheah and other trouble hunters are focused on the private market for trading interest-rate derivatives, the financial instruments that sophisticated investors use to reduce their exposure to big moves in interest rates. That market is dominated by large banks such as J.P. Morgan Chase & Co. and Bank of America, which have sharply increased their sales of such instruments in recent years, particularly to mortgage giants Fannie Mae and Freddie Mac. Some analysts are now concerned that the combination of massive demands from Fannie and Freddie and...

Paul Musgrave is a fan of Norman Angell as well. I think Musgrave goes too far when he claims that Angell's The Great Illusion was "not a farcical claim of war's impossibility because of the wisdom of Edwardian Man... [but] a tragic prophecy of the course of the twentieth century." Angell did not think that the twentieth century would be an abattoir because he did have optimistic confidence in the rationality of states, and in their ability to draw the appropriate conclusions from the fact that modern war is an enormously negative-sum game. Paul Musgrave Dot Com: The Vilification of Norman Angell: Norman Angell... his pre-World War I book The Great Illusion is often cited in textbooks and vulgarizations[2] of history, often to debunk Angell's claim that because of the stunning growth of international trade and finance before the Great War, war was impossible. This is a ridiculous notion--but its very ridiculousness urges us to question the meme further, because Angell was no crank, and his ideas received serious attention. Surely they can't have been that absurd. As his Nobel Peace Prize biography recounts, The Great Illusion sold more than two million copies, and it was only the most successful...

A plea from an undergrad: will Berkeley ever teach an undergraduate "Economics and Philosophy" class? I can see which way this is going: I'm going to wind up running a reading course. What should be on an "Economics and Philosophy" reading list? Jacques Le Goff, Your Money or Your Life: Economy and Religion in the Middle Ages. Thomas Hobbes, Leviathan, selections. John Locke, Second Treatise of Government. Adam Smith, The Theory of Moral Sentiments. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations. Jeremy Bentham, Principles of Morals and Legislation. John Stuart Mill, On Liberty. Hal Varian, Intermediate Microeconomics (chs. 29-35). Friedrich Hayek, The Constitution of Liberty. Robert Nozick, Anarchy, State, and Utopia. James Buchanan and Gordon Tullock, The Calculus of Consent. John Rawls, "Justice as Fairness." Kenneth Arrow, Social Choice and Individual Values. Amartya Sen, Development as Freedom. David Gauthier, “The Social Contract as Ideology”, Philosophy and Public Affairs. Jon Elster, “The Market and the Forum: Three Varieties of Political Theory”, in Elster and Hylland, eds., Foundations of Social Choice Theory. Bernard Williams, “The Idea of Equality”, Philosophy , Politics and Society 2nd Series. Amartya Sen, Equality of What?. Steven Shavell, Economic Analysis of...

Seth Goldstein wonders if Google will do what Hambrecht failed to do to IPO commissions: Transparent Bundles: Google vs Wall Street: One of the husbands works for CSFB and I congratulated him on the coup of being named the lead on the Google IPO. Whereas I expected a little gloating, instead he bit his tongue and complained about the greed of Google and how little money CSFB was going to make (including its not insignificant banking fees). I think the point he was trying to make was that by going the way of the auction, that Google was trying to take every single penny off the table that they can. Seeing his genuine anger, I didn't have the heart to remind him that this was a good thin overall, namely that companies were going to start to benefit fully from the intersection of buyers and sellers of their stock, not the marketmakers per se. Instead what I saw was the end of a certain kind of investment banking innocence. No, the outsized commissions are not your divine right. No, you can't control the allocation of underpriced shares to your best clients. Yes you will be paid, but it will be...

The Economist likes Jagdish Bhagwati's In Defense of Globalization: Economist.com | Hitting back: ONE thing people in today's rapidly globalising world economy no longer need, you might think, is another book exploring the implications of the rapid globalisation of the world economy. Publishers have churned them out by the dozen in recent years. Can there really be room for yet another? Certainly—and especially so in the case of this new work from the prolific Jagdish Bhagwati of Columbia University. Up to now, anti-globalist works have had too much the upper hand. They heavily outnumber books advocating or celebrating globalisation. Multiply titles by sales, and their preponderance is overwhelming. Also, one cannot say that globalists have had the lead in quality, at least, or even (as you might suppose) in authors' academic credentials. Many pro-globalisation books are so badly argued, so keen to deploy anecdote not evidence, that they discredit their cause. So far as credentials go, note that anti-globalists would regard Joseph Stiglitz's bestselling “Globalisation and its Discontents”, published in 2002 (and none too kindly reviewed in The Economist of June 6th that year), as mostly taking their side—and Mr Stiglitz, a Nobel prize-winner, is an undisputed star in the...

Martin Wolf of the Financial Times calls (correctly) for fewer farms and more houses in southeast England: The biggest economic distortion in the British economy is, beyond doubt, created by the tight restrictions on the use of land. That, in turn, is the principal explanation for the low rate of housebuilding and the high cost of housing. Expensive houses are a source of pleasure to homeowners, but of woe to young people trying to start out in life. Big differences in house prices across regions are also an obstacle to mobility and economic flexibility. The case for letting the property market work more freely is overwhelming.... In 2003, according to the final report on housing supply from Kate Barker of the Bank of England's monetary policy committee, land in residential use in the south-east of England was over 300 times more valuable than agricultural land - at £2.76m per hectare against a mere £9,122*. This negligible value for agricultural land is not surprising. Even at inflated market prices, farming generates only 1 per cent of gross domestic product. At world prices, its contribution cannot be much more than half that. Yet 68 per cent of the UK's total land...

Ask virtually any international macroeconomist about the likely future course of the dollar, and they will tell you that it will lose value--considerable value. The experience of the 1980s tells us that a 10% decline in the value of the dollar eventually (after four years or so) produces a 1% of GDP reduction in the U.S. trade deficit. The current more than 5% of GDP U.S. trade deficit is not sustainable--foreigners won't be willing to hold the steadily-growing volume of dollar-denominated assets at current exchange rates forever. To shrink the U.S. trade deficit back to a sustainable 2% of GDP will require a fall in the value of the dollar of about 30%--about 13% of which has already happened. That means that people holding dollar-denominated assets should look forward to a substantial capital loss over the next five years or so. And so they should--by all of our economists' theories--be demanding a healthy interest rate premium to hold dollar-denominated bonds rather than other assets. But they are not. U.S. interest rates are low relative to those of other major countries (save Japan). Where is my uncovered interest parity?...

Today's macro seminar: changes in the persistence of demand shocks: Valerie A. Ramey and Daniel J. Vine (2004), "Tracking the Source of the Decline in GDP Volatility: An Analysis of the Automobile Industr"y (Cambridge: NBER Working Paper No. w10384). Abstract: Recent papers by Kim and Nelson (1999) and McConnell and Perez-Quiros (2000) uncover a dramatic decline in the volatility of U.S. GDP growth beginning in 1984. Determining whether the source is good luck, good policy or better inventory management has since developed into an active area of research. This paper seeks to shed light on the source of the decline in volatility by studying the behavior of the U.S. automobile industry, where the changes in volatility have mirrored those of the aggregate data. We find that changes in the relative volatility of sales and output, which have been interpreted by some as evidence of improved inventory management, are in fact the result of changes in the process driving automobile sales. We first show that the autocorrelation of sales dropped during the 1980s, and that the behavior of interest rates may be the force behind the change in sales persistence. A simulation of the assembly plants' cost function illustrates that the...

Chris Hanes is coming from SUNY-Binghampton to give an economic history seminar on Monday: Christoper Hanes (2004), "The Rise of Open-Mouth Operations and the Disappearance of the 'Borrowing Function' in the United States": Since the late 1980s the Federal Reserve has implemented monetary policy much as it did in the 1970s, choosing a "target" or "intended" value for the overnight federal funds rate and manipulating the Fed's tools--open-market operations, regulations governing banks' reserve balances, and the terms of bank borrowing from the Fed--to keep the market overnight rate centered on the target. The "liquidity effect" of changes in reserve supply is often described as the most important of the Fed's techniques.... Hamilton (1997)... concludes that "the liquidity effect is real: additional reserves lower the interest rate. This effect allows the Federal Reserve to target the federal funds rate on a daily basis." In recent years, however, the Fed... appears to steer overnight interest rates through an "announcement effect" of "open-mouth operations": "when the FOMC publicly announces changes in the funds rate target, the market reacts very quickly and sometimes without anny immediate open market purchases or sales by the Trading Desk to alter the supply of Fed balances" (Taylor,...

As expected, a good GDP growth number: Gross Domestic Product News Release: Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 4.2 percent in the first quarter of 2004, according to advance estimates released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 4.1 percent. The Bureau emphasized that the first-quarter "advance" estimates are based on source data that are incomplete or subject to further revision by the source agency (see the box on page 4). The first-quarter "preliminary" estimates, based on more comprehensive data, will be released on May 27, 2004. The major contributors to the increase in real GDP in the first quarter were personal consumption expenditures (PCE), equipment and software, government spending, exports, and private inventory investment. Imports, which are a subtraction in the calculation of GDP, increased. That the U.S. economy's output can grow at 4.2% per year without providing any upward pressure on the employment-to-population ratio is remarkable, a result of the amazing underlying productivity growth of our economy....

Dan Hon wonders: ext|circ: City CarShare: ...if City CarShare would work in London: Car-sharing allows you to use a car when you need it without incurring the fixed costs of ownership. City CarShare provides a network of vehicles parked in neighborhoods throughout San Francisco, the East Bay, and the Peninsula. Cars are available to members on a per-use basis. You pay based on how much you drive: $4.00 per hour (half off between 10pm and 10am) and 44 cents a mile. The fees include gas, insurance, maintenance, everything! Last night we were driving up Dwight Way in Berkeley, and came across a green CarShare car--a Volkswagon bug. Someone was pathetically trying to parallel park the car, and pathetically failing. It wasn't that the spot was small: the spot was large. It wasn't that the car was large: if you cannot parallel park a Volkswagon bug, you might as well just hang it up completely. The CarShare car had a dent on its right side. CarShare cars may be cars that are (a) driven a lot of miles by (b) people none of whom really remember how to drive very well. I fear for them....

John Quiggin writes that Google is (a) an enormous engine creative mammoth consumer surplus (b) for which most of those who benefit from it do not pay a cent, and hence he (c) cannot imagine how it could have a fair market value of $20 billion: Crooked Timber: How much is Google worth? : According to this report, the widely-predicted Google IPO is likely to value the equity in Google at more than $20 billion - others suggest $25 billion. I immediately wondered whether Google was really worth $25 billion. I started on a standard financial analysis. Although, as a private company, Google doesn’t have to publish annual reports, it’s been estimated that Google has annual revenues of $500 million and profits of $125 million so that the return on equity is about 0.5 per cent. We can expect that to grow reasonably fast in the next few years, but the scope for expansion in Google’s core business is far from limitless. Most people in the developed world are already online and most of the heavy users already use Google (Eszter might have more to say on this). Moreover, there’s no strong reason to suppose that Google will be around...

Kash of Angry Bear looks forward to some real excitement: Angry Bear: We have one interesting piece of economic data to look forward to later this week. The advance estimates of first quarter GDP growth will come out on Thursday. The consensus forecast seems to be for a big, big positive number, with perhaps around 5.0% annualized growth. This release takes on added significance because the Fed’s Open Market Committee meets the following Tuesday (May 4) to decide whether a change in interest rates is called for. The proportion of Fed-watchers expecting an interest rate increase next week is small (most seem to expect an interest rate increase sometime over the summer, which this informal poll also indicates), but it could grow somewhat with a blowout number on Thursday. Stay tuned for all the excitement… Kash p.s. Yes, you know you’re an economist when this stuff classifies as “excitement”… Me, I think the Fed's decision making goes the other way: a high GDP growth number conditional on what we know about first-quarter employment is a signal that productivity growth is even more rapid than we had thought, and that monetary policy needs to stay more expansionary for longer in order...

A correspondent complains: Variety vs. Price: : Virginia Postrel strikes again. "Shopping is Great!" (Go consumption, go consumerism, go materialism. Everything else will fix itself.) "Consumer consumption and multiplicity of choice is as important as anything I could possibly choose to write about!" (yeah, write a few more stories about how because we now have items a,b,and c life is so much better - for everybody - and all we need to do is keep expanding consumer choice.) Why does Brad keep boosting her? If we have learned one thing over the twentieth century, it is that our "needs" are more than 100 square feet of apartment living space per person, four pairs of identical overalls, 2500 calories of bland nutritious food, and a streetcar pass. Our "needs" are much greater than that, and require that we have and that we successfully exercise choice--a great deal of choice--as we pick out those items that we use to amplify our powers and support our style of life. If we are ever to cross the narrow horizon of bourgeois right and inscribe on our banners the true slogans of utopia, we are going to have to figure out how to give to...

The shifting distribution of income, from Lee Price of the Economic Policy Institute: Lopsided trends in profits and wages threaten to topple growth: The rise in the stock market over the last year reflects spectacular growth in profits but not a generally healthy economy nor sustainable growth.  Profits have never fared better, nor wage and salary income so poorly for this period of the business cycle.  Since the last expansion ended in the first quarter of 2001, corporate profits in the United States have expanded by 57.5%.  Meanwhile, private wage and salary income has contracted by 1.7% and total labor compensation has increased by a meager 1.5%.... Corporate profits grew from $635 billion in the first quarter of 2001 to exactly $1.0 trillion in the latest quarter of available data (the fourth quarter of 2003).  In the eleven quarters after the peak of the previous eight business cycles (going back to 1948), profits rose by an average of 14% and never more than 21% (see Figure 1).  Had profits grown at the average pace of the past, they would have been $278 billion lower....

Daniel Davies is in unspeakable torment because Thomas Friedman is neither some fantasy construct nor the inhabitant of a parallel universe, but somebody who lives in the same world as Daniel Davies and whose writings Davies must confront every single week: Crooked Timber: Industrial policy for me but not for thee : I realise that this is about the fourth time I’ve had a hit-and-run shot at an Airmiles column, while crying off doing the proper Globollocks analysis for lack of time. I am a bit short of time at the moment, but the real reason is thatit’s so dispiriting; the general miasma of Globollocks overwhelms any specific instance. Check out today’s example. Friedman believes that it would be a danger to the USA on a par with global terrorism if someone in India working for a US-owned firm were to invent something useful. Think I’m joking? Read the bugger. He actually uses the phrase “war for innovation”. Apparently the USA isn’t bringing through enough research scientists. What’s the solution? Presumably the rush to global competition of the free market. Nope, sorry, wrong, the solution is massive amounts of government money. In the Airmiles world, agricultural subsidies are terrible, awful...

Virginia Postrel writes about Eric Brynjolffson's finding that the internet is more important as an improvement in consumer choice than as a reduction in consumer cost: The New York Times Economic Scene: Choice Trumps Price on the Internet: But when [Brynjolffson] thought about how people actually shop online, and what they find valuable, he realized that low prices are not the big story. Selection is. The Internet offers variety that is simply impossible in traditional stores.... Online shoppers are not just buying the same stuff for less money. They are buying different stuff. And they are much more likely to be getting exactly what they want than are off-line shoppers. Wal-Mart has low prices, but Walmart.com carries six times as many items as the largest Wal-Mart store, the article says. "Amazon's slogan is world's biggest selection, not world's cheapest prices," said Professor Brynjolfsson, who has done pioneering research on information technology and productivity....You are not only more likely to find what you are looking for online. You are more likely to discover something you like that you did not already know about, Professor Brynjolfsson said.... "In effect, the emergence of online retailers places a specialty store and a personalized shopping...

Max Sawicky weeds the garden, pulling up the itchy plants of misinformation. It's usually a thankless task, so I want to thank Max for taking the time to do it: MaxSpeak, You Listen!: Steve Antler of Roosevelt U, a.k.a. Econopundit, claims to have data showing the Bush tax cuts did not disproportionally benefit the rich.... There are two rather big pieces of this puzzle missing.... First is that tax shares are not tax burdens. Your tax share -- the percent of total tax revenues collected by the Gov attributable to you, or to a group -- says nothing about who gains and who loses from a tax cut. Example: your income is $100 and your tax is $1. Bill Gates's income is $1 zillion and his tax is four percent of a zillion. You and BG are the only two taxpayers. Bill's friend George passes a tax cut. Your tax is cut by $1. Bill's tax is cut by half; now he only pays two percent of a zillion. Result: your tax share is now zero, Bill's is now 100%. Who benefited more from the tax cut? Bill's after-tax income is up by 2.1 (98/96) percent of his gross....

*Sigh*. Yet another thing I need to read: Brink Lindsey on outsourcing: http://www.freetrade.org/pubs/briefs/tbp-019.pdf I am confident, however, that I will like it--when it rises to the top of the pile....

Part II of an unfinished paper, "After the Bubble." The paper currently lacks Parts I, III, IV, V, and VI. I am supposed to talk about this paper (thank God, internally only) on April 29, 2004. Inspiration had better strike soon, that's all I'm sayin'. II. Aggressively Expansionary Monetary Policy and Macroeconomic Vulnerabilities Let us begin with a passage from Mussa (2004), "Global Economic Prospects: Bright for 2004 but with Questions Thereafter" (Washington: Institute for International Economics: April 1), in which Michael Mussa writes about global financial imbalances: Michael Mussa: ... Policy interest rates are exceptionally low in most industrial countries: zero in Japan and Switzerland, 1 percent in the United States, 2 percent in the euro area, and at or near historic lows in the United Kingdom and Canada.... The very low level of policy interest rates is an imbalance (relative to normal conditions) that reflects exceptionally easy monetary policies to combat economic weakness. This policy imbalance poses an important challenge for the future conduct of monetary policy. Situations of low policy interest rates and low inflation tend to be associated with unusual inertia in the processes of general price inflation, which makes traditional indicators of rising inflationary pressures...

People are asking me why I think that in the end Paul O'Neill was in favor of the 2001 summer Argentina bailout. Let me run and find out... Aha. I appear to be basing my view on chapter 5 of Ron Suskind, _The Price of Loyalty_, as well as on various things that Larry Lindsey and Glenn Hubbard have said to various people. Here's Suskind: O'Neill generally opposed bailouts, but he wasn't dogmatic.... To O'Neill, decisions that affected the livelihood of millions in the developing world deserved a case-by-case approach rather than rigid prescriptions. Argentina's specific request in the summer of 2001 was relatively technical.... O'Neill joined fiscal conservatives in opposing the deal. But then he wanted to explain the reasons.... O'Neill was quoted in the _Economist_ saying... tha tthe country's economic problems were, in large part, of its own making.... Senior officials of the administration responded anonymously to the _Economist_ quote, affirming that, this time, O'Neill had gone too far. President Bush placed a phone call to placate Argentine president Fernando de la Rua.In a meeting with O'Neill, Bush said that he understood what his Treasury Secretary was saying to the Argentinians, even if it was a little sharp-edged....

We know that the expectations theory of the term structure fails statistical tests. But we continue to use it anyway. What is it telling us right now? The U.S. Yield Curve, April 20, 2004 Maturity Yield 3 month 0.99% 6 month 1.16% 2 year 2.14% 3 year 2.61% 5 year 3.51% 10 year 4.45% 30 year 5.26% The market is expecting an 0.25% point increase in the Federal Funds rate come mid-August 2004, and Federal Funds rates above 3% by the spring of 2006, and above 4% by the spring of 2007. Looking at the fiscal outlook, I have to say that either (a) George W. Bush is about to have a Road to Damascus moment and become a deficit hawk Real Soon Now, or (b) long-term U.S. Treasury bonds are overpriced--even with my belief that the inflation risk premia of the 1980s and 1990s have finally been wrung out of the bond market....

Aha! Welcome to NAFTALAW.ORG (a.k.a. NAFTACLAIMS.COM), a web site where you can obtain some information about NAFTA investor-state dispute settlement; obtain copies of recent NAFTA Claim documents; and contact someone to learn more about bringing a NAFTA investor-state claim. My name is Todd Weiler.  I am an attorney, called to the Bar of Ontario, who has been involved as counsel on a number of the earliest NAFTA claims.  I remain involved as expert counsel in ongoing claims against all three NAFTA Parties.   I am retained both by lawyers to assist them in representing their clients, and by individuals who require my assistance in putting their legal teams together....

A very strange article in the New York Times by Adam Liptak this morning. The fact pattern appears to be as follows: Prominent Mississippi family sues prominent Canadian family in contract dispute: Nafta Tribunals Stir U.S. Worries: The Mississippi case arose from an exchange of companies between a Canadian concern, the Loewen Group, and companies owned by a Mississippi family, the O'Keefes. The O'Keefe family, contending that the Loewen Group did not live up to its obligations, sued for breach of contract and fraud. The Mississippi courts take a serious dive and put their whole body on the scale on the side of the O'Keefes: "The whole trial and its resultant verdict... were clearly improper and discreditable and cannot be squared with minimum standards of international law and equitable treatment." Although the tribunal found that the businesses were worth no more than $8 million, a jury in Jackson, Miss., awarded the family $500 million in 1995. Loewen settled the case the next year, for $175 million.... [T]he [NAFTA] tribunal called the Mississippi trial "a disgrace" and "the antithesis of due process" .... [T]he tribunal had faulted Judge James E. Graves Jr. of Circuit Court in Jackson for allowing lawyers for...

David Vines and Christopher Gilbert (2004), The IMF and Its Critics: Reform of the Global Financial Architecture (Cambridge: Cambridge University Press: 0521821541).The book contains a version of Mussa's superb "Argentina and the Fund"--alas, not an updated version. This is too bad: I would really like to know Mike's view of what has happened in Argentina since the crash.Of course, anything by Michael Mussa is worth reading. Where else do you find references to the IMF's Three Monkeys Doctrine on how to deal with failures by IMF debtor countries to meet their policy commitments: "see no evil, hear no evil, speak no evil"? I find myself wondering what's in Ron Suskind's Treasury Document Archive on Argentina. Paul O'Neill's advocacy of massive further aid to Argentina in the summer of 2001 seems to me to be one of the very few times that Paul O'Neill was not wearing the white hat (OK, the dark grey hat) and the rest of the Bush administration the black hat. Yet it was one of the few policy debates that Paul O'Neill won. I want to know more about how and why....

Alan Greenspan defends his monetary policy during the .com bubble: from Alan Greenspan (2004), "Risk and Uncertainty in Monetary Policy" (Speech to the American Economic Association): FRB: Speech, Greenspan--Risk and Uncertainty in Monetary Policy--January 3, 2004: Perhaps the greatest irony of the past decade is that the gradually unfolding success against inflation may well have contributed to the stock price bubble of the latter part of the 1990s.4 Looking back on those years, it is evident that technology-driven increases in productivity growth imparted significant upward momentum to expectations of earnings growth and, accordingly, to stock prices.5 At the same time, an environment of increasing macroeconomic stability reduced perceptions of risk. In any event, Fed policymakers were confronted with forces that none of us had previously encountered. Aside from the then-recent experience of Japan, only remote historical episodes gave us clues to the appropriate stance for policy under such conditions. The sharp rise in stock prices and their subsequent fall were, thus, an especial challenge to the Federal Reserve.It is far from obvious that bubbles, even if identified early, can be preempted at lower cost than a substantial economic contraction and possible financial destabilization--the very outcomes we would be seeking to...

M.B. Williams reads Reuters: Wampum: Ouch!:Industrial Output Unexpectedly Drops in March By REUTERS Published: April 16, 2004WASHINGTON (Reuters) - U.S. industrial production unexpectedly fell in March, dragged lower by softer demand seen at utilities and factories, a Federal Reserve report on Friday showed.Output dipped 0.2 percent in March, after an upwardly revised 0.8 percent rise seen in February. The Fed attributed a 2.3 percent decline in utilities output to "unseasonably warm weather." Factory output, which accounts for more than 80 percent of overall industrial production, was flat.The Fed said the drop in March utilities production was the biggest since March 2003.Capacity in use at factories, utilities and mines also slipped in March, dropping to 76.5 percent from 76.7 percent in February. Wall Street had expected utilization to rise to 76.8 percent and output to show a 0.3 percent rise.This is not pleasant to hear. It's not a very big piece of bad news--none of the monthly numbers are important in themselves--but it was bad news I did not expect....

Michael Mussa writes about global financial imbalances: Michael Mussa: Presentation: Global Economic Prospects: Bright for 2004 but with Questions Thereafter: ...while global economic prospects look quite bright through 2004, there are important imbalances in the global economy that raise concerns for the longer term. It is useful to reflect briefly on these concerns before turning to a region-by-region assessment of near-term prospects. Policy interest rates are exceptionally low in most industrial countries: zero in Japan and Switzerland, 1 percent in the United States, 2 percent in the euro area, and at or near historic lows in the United Kingdom and Canada. Inflation rates also are generally very low in the industrial countries, but, even taking this into account, short-term real interest rates are very low. (Realized short-term real rates went negative during some periods of rapidly rising inflation in the 1970s, but this was an anomaly that is not comparable to the present situation of low anticipated real interest rates.) The very low level of policy interest rates is an imbalance (relative to normal conditions) that reflects exceptionally easy monetary policies to combat economic weakness. This policy imbalance poses an important challenge for the future conduct of monetary policy....

Richard Berner of Morgan Stanley believes that America's productivity boom is overwhelmingly real economic fact rather than measurement error fiction: Morgan Stanley: The spectacular surge in labor productivity over the past two years may now be slowing as job growth improves.  That 4.8% annualized upswing in output per hour was the largest since 1962.  Was it too good to be true?  The answer matters, and not just for economic historians:  If the data have prompted investors and policymakers to overestimate long-term productivity growth and correspondingly to underestimate the trend in unit labor costs, then a booming economy may be narrowing margins of economic slack and promoting inflation more quickly than previously thought. In my view, recent productivity data do substantially overstate the trend, but not because the data are seriously flawed.  Rather, I believe that much of the productivity improvement in the past two years was cyclical.... I think that trend productivity growth is 2½-3%...[which] implies that up to 4% real growth and low inflation can coexist over time.... At first blush, the recent productivity acceleration seems to defy logic... increased security costs post 9/11 would stymie productivity... [t]he swing in the regulatory pendulum following the corporate governance scandals...

Industrial succession in the nineteenth century: Stephen N. Broadberry and Douglas A. Irwin (2004), "Labor Productivity in Britain and America During the Nineteenth Century" (Cambridge: NBER Working Paper No. w10364): A number of writers have recently questioned whether labor productivity or per capita incomes were ever higher in the United Kingdom than in the United States. We show that although the United States already had a substantial labor productivity lead in industry as early as 1840, especially in manufacturing, labor productivity was broadly equal in the two countries in agriculture, while the United Kingdom was ahead in services. Hence aggregate labor productivity was higher in the United Kingdom, particularly since the United States had a larger share of the labor force in low value-added agriculture. U.S. overtaking occurred decisively only during the 1890s, as labor productivity pulled ahead in services and the share of agricultural employment declined substantially. Labor force participation was lower in the United States, so that the United Kingdom's labor productivity advantage in the mid-nineteenth century translated into a larger per capita income lead.Is American agriculture really "low value added"? I know it is in the national income statistics guesstimates. But by and large Americans working in...

The Euro at Five (Note: not open because of Fed security concerns. See BRIE for invitations.) Tuesday, April 27th 2004 8.30 am - 1.30 pm at the Federal Reserve Bank of San Francisco 101 Market Street San Francisco, CA 94105Continental Breakfast 8.30WELCOME AND INTRODUCTION: George Scalise, Chairman, Federal Reserve Bank of San Francisco"The Euro as an Economic Instrument to Political Ends": Stephen Cohen, Professor & Co-Director, BRIE, University of California, Berkeley 9.00THE EURO INSIDE EUROPEAlberto Giovannini, Juergen Kroeger, Gérard Roland, Andrew Rose, John Zysman Creating the Euro European capital markets European growth Productivity, employment, and stability Convergence and enlargement 9.15 THE EURO OUTSIDE EUROPEHervé Carré, Stephen Cohen, J. Bradford DeLong, Reuven Glick, Pierre-Olivier Gourinchas, Federico Rampini Euro as a reserve currency: risks, opportunities US/Europe economic relations The Euro/the Dollar and the Asian currencies Exchange rates 11.00LUNCH: Introduction: Robert T. Parry, President, Federal Reserve Bank of San FranciscoLuncheon Speech: "Five Years of the Euro: Past Achievements and Future Challenges": Lucas Papademos, Vice President, European Central Bank 12.15...

Is this really a good idea? The project was designed to incorporate wireless technology into large classrooms to address the "chronic problems" of large lecture classes--impersonality, isolation, and difficulties in engaging students intellectually. I agree that there are parts of my lectures during which students would rather have the options of using IM technology to flirt with each other and of surfing the web. But are they good judges? Is this a capability we really want to give them?...

A new intellectual party, promising lots of refreshments: TAKING HAYEK SERIOUSLY: The Home of Hayek Scholarship on the World Wide Web. The Road to Serfdom | Individualism and Economic Order | The Constitution of Liberty. The only worrisome sign is their apparent belief that the "Krugman Truth Squad" is worth linking to: inaccuracy and unintelligence in the sites you link to is a sign of low quality....

Kevin Drum prepares for the end of the housing bubble: HOUSING BUBBLE....Housing prices in LA continue to rise meteorically:Home values in Los Angeles County posted the biggest year-over-year increase in at least 15 years in March as frenetic buying activity pushed the median sale price up 29%, to a record $375,000, according to data released Monday.Confounding predictions by the experts, sales were surprisingly strong, jumping 12% from a year ago to 10,875 new and resold houses and condos. Analysts and brokers said the heavy demand was driven by anxious consumers, many of whom are paying more than the asking price to get in the housing market before interest rates rise and supplies thin further.I don't care what anyone says, including the happy talk analysts quoted farther down in the story: this kind of panic buying is a sign of a late-stage bubble. It's true that bubbles usually last longer than skeptics think they will, but this one has been firing on all cylinders for a while now. I doubt there's more than a few months or a year left before it bursts.The problem will come not if housing prices decline, but if the decline in housing prices makes rich homeowning...

Andrew Rose believes that Europe's currency union--the euro--will be a really big deal indeed: Andrew Rose (2004), "A Meta-Analysis of the Effect of Common Currencies on International Trade" (Cambridge: NBER Working Paper No. w10373): Thirty-four recent studies have investigated the effect of currency union on trade, resulting in 754 point estimates of the effect. This paper is a quantitative attempt to summarize the current state of debate; meta-analysis is used to combine the disparate estimates. The chief findings are that: a) the hypothesis that there is no effect of currency union on trade can be rejected at standard significance levels; b) the combined estimate implies that a bilateral currency union increase trade by between 30% and 90%; and c) the estimates are heterogeneous and not consistently tied to most features of the studies. What are the real GDP and real wealth effects of increasing intra-European trade by between 30% and 90%?...

Gary Farber takes time out from working on his time machine to tell me to go read James Suriowecki's excellent article praising the government's economic and social measurement bureaucrats, CMS actuary Richard Foster, and Uncle Simon Kuznets--the inventor of the idea of "national income." It's a truly excellent article: The New Yorker: The Talk of the Town: in 1933, when a small staff of government researchers, led by an economist named Simon Kuznets, came up with a new statistic, which they called “national income.” Though crude by modern standards, it was the first reliable measure of national economic performance in American history....

Terry Lynn Karl (1997), The Paradox of Plenty: Oil Booms and Petro-States (Berkeley: University of California Press: 0520207726): "...two massive oil booms in the 1970s, why did oil-exporting governments as different as Venezuela, Iran, Nigeria, Algeria, and Indonesia choose common development paths and suffer similarly disappointing outcomes?" A good book, even though section headings like "Examining the Structuration of Choice" make me break out in hives. It's worth pointing out that Jean-Philippe Stijns has done a good job arguing that most of the time a mild degree of natural resource-abundance is a blessing rather than a curse. It seems likely to me that there is a threshold effect going on here--and also an institutional-stability effect: certainly oil wealth has not crippled Britain, or Norway, or Texas. (For Louisiana, however cf. Robert Penn Warren, All the King's Men....

Income inequality in the United States: Thomas Piketty and Emmanuel Saez (2001) "Income Inequality in the United States, 1913-1998 (series updated to 2000 available)" (Cambridge: NBER Working Paper No. w8467): This paper presents new homogeneous series on top shares of income and wages from 1913 to 1998 in the US using individual tax returns data. Top income and wages shares display a U-shaped pattern over the century. Our series suggest that the 'technical change' view of inequality dynamics cannot fully account for the observed facts. The large shocks that capital owners experienced during the Great Depression and World War II seem to have had a permanent effect: top capital incomes are still lower in the late 1990s than before World War I. A plausible explanation is that steep progressive taxation, by reducing drastically the rate of wealth accumulation at the top of the distribution, has prevented large fortunes to recover fully yet from these shocks. The evidence on wage inequality shows that top wage shares were flat before WWII and dropped precipitously during the war. Top wage shares have started recovering from this shock since the 1960s-1970s and are now higher than before WWII. We emphasize the role of social...

Alan Auerbach points out that the U.S. government is already implicitly long the stock market to a honking huge amount--some $10 trillion or so. This has implications for the idea that the U.S. government ought to invest the Social Security Trust Fund in equities as well: Alan Auerbach (2004), "How Much Equity Does the Government Hold?" (Cambridge: NBER Working Paper No. w10291): A central point in the recent debate about Social Security in the United States has been the extent to which the federal government should take significant positions in the equity market. But, as this paper shows, the government already has a much more significant, if implicit position in the U.S. equity market through its claim to future tax revenues. Using estimates of the sensitivity of federal tax revenues to stock market returns, I calculate the implicit equity position of the federal government, defined as the equity position that would be as sensitive to the stock market as the present value of federal revenues. Although standard errors are large, point estimates indicate that the implicit federal equity position exceeds the size of the stock market itself, a result that is consistent with the fact that revenues from all sources,...

Dani Rodrik and Arvind Subramanian try to understand the sources of India's growth acceleration: Dani Rodrik and Arvind Subramanian (2004), "From "Hindu Growth" to Productivity Surge: The Mystery of the Indian Growth Transition" (Cambridge: NBER Working Paper No. w10376): Most conventional accounts of India's recent economic performance associate the pick-up in economic growth with the liberalization of 1991. This paper demonstrates that the transition to high growth occured around 1980, a full decade before economic liberalization. We investigate a number of hypotheses about the causes of this growth favorable external environment, fiscal stimulus, trade liberalization, internal liberalization, the green revolution, public investment and find them wanting. We argue that growth was triggered by an attitudinal shift on the part of the national government towards a pro-business (as opposed to pro-liberalization) approach. We provide some evidence that is consistent with this argument. We also find that registered manufacturing built up in previous decades played an important role in influencing the pattern of growth across the Indian states....

The mighty engine of technological progress lurches forward. Hooray for the grape tomato! From Virginia Postrel: Dynamist Blog: TOMATOES AND PROGRESS: If progress is so obvious, why do tomatoes taste so bad? For as long as I can remember, the contrast between delicious tomatoes out of the garden and the rubbery, tasteless variety in supermarkets was Exhibit A in the case against large-scale agriculture. In the early '90s, a biotech company tried to genetically engineer a good tomato. They attracted a lot of hostility from the likes of Jeremy Rifkin but ultimately failed in their quest. Over the last couple of years, however, delicious tomatoes have hit the supermarkets--in miniature form. Where did these grape tomatoes come from? And could anything that tastes so good actually be low in calories? As I was wolfing some down like candy last night, I wondered about these questions and, using Google, found the story behind them, a long feature by Carole Sugarman of the WaPost. I suspect no one read it at the time (check the date) but it's well worth a read now. The story has all the elements of a contemporary business yarn--globalization, intellectual property disputes, secretive business deals--but no new-fangled...

Nathan Sussman and Yishay Yafeh (2004), "Constitutions and Commitment: Evidence on the Relation between Economic Growth and the Cost of Capital." Nathan Sussman comes to Berkeley with a paper he has written with Yishay Yafeh about the Glorious Revolution of 1688. He argues that the Glorious Revolution was bad for economic growth and development: it created huge political uncertainty--would the Stuarts return?--that dwarfed whatever additional security of property and confidence in debt was created by the shift of power from king to parliament with the Glorious Revolution. The implicit argument is that the post-Stuart British fiscal-military state--with its impressive revenue raising apparatus and its staggering war-driven debt load--slowed rather than accelerated British development and industrialization in the eighteenth century. Nathan makes a very strong case indeed....

U.C. Berkeley Economic History Seminar Spring 2004 Evans Hall 639 Monday 2-3:30 Brad DeLong delong@econ.berkeley.edu 510-643-4027 Sibani Michael Bose smbose@econ.berkeley.edu 510-643-4027 Mon January 26: Organizational Meeting Mon February 2: Dora Costa and Matthew Kahn (MIT), "Shame and Ostracism: Union Army Cowards Leave Home" Mon February 9: Drew Keeling (Berkeley), "Ocean Shipping Before WWI" Mon February 16: Presidents' Day: HOLIDAY Fri February 27: Paul Glimcher (NYU), joint with departmental seminar Wed March 10: Caroline Hoxby (Harvard), joint with departmental seminar Mon March 15: Chris Meissner (Cambridge), TBA Wed March 17: Roland Benabou (Princeton), joint with departmental seminar Mon March 22: Spring Vacation: HOLIDAY Wed March 31: Tom Lemieux (UBC), joint with departmental seminar Mon April 5: David Khoudour-Castera (Scienes-Po): "International Adjustment and the Classical Gold Standard: The Migration Nexus" Mon April 12: Nathan Sussman, "Constitutions and Commitment: Evidence on the Relation between Economic Growth and the Cost of Capital" Wed April 21: Rohini Pande (Yale, Wednesday), joint with departmental seminar Mon April 26: No Meeting--or TBA Mon May 3: Chris Hanes, TBA Mon May 10: Alan Taylor (Davis): TBA [tentative]...

Raj Arunachalam has cancelled his appointment with me tomorrow: he's flying to George Mason to interview James Buchanan and Gordon Tullock. I have owned seven copies of Buchanan and Tullock's (1962) The Calculus of Consent: Logical Foundations of Constitutional Democracy in my life. I keep loaning my copy out to graduate students: "You haven't read this? You must read this!" They keep liking it so much they don't return it. So I go and buy another one....

The Economist and the IMF are worried about what will happen to financial markets overseas when the Federal Reserve starts raising interest rates: Economist.com | World markets: ...Flat yields in mature markets make emerging markets look good. But there is more to it than that. The ample liquidity sloshing around in the rich world is also an invitation to enter into the so-called “carry trade”. Carry traders borrow at low, short-term rates. They then invest the proceeds in higher-yield assets. Some simply buy long-dated American bonds. But the more adventurous look further afield, betting on richer-yielding emerging-market bonds with money borrowed at cheap rates in mature markets. The problem is those cheap rates may not last much longer. Interest rates in Britain have already started rising. On Thursday April 8th, the Bank of England held rates steady at 4%, but it is expected to raise them another notch next month. When the Federal Reserve follows suit, the liquidity that lubricates the carry trade may dry up. A warning shot came late last week: America’s monthly jobs report was surprisingly strong—308,000 workers were added to the payrolls in March. That was followed up on Thursday by the news that the number...

I agree with Stephen Roach that there is much more to worry about in the U.S. macroeconomy than the Federal Reserve says--at least than it says in public. But I still do not understand his thought. Roach says that the Fed should raise interest rates. Grant that everything Roach says is true. But why in God's Holy Name would raising interest rates now help? Roach says that the Fed should "always make certain there is plenty [of room] left to [cut interest rates to] deal with the unexpected." OK. Grant that you should never cut interest rates below 3% because something bad and unexpected might happen and you want to have ammunition in reserve. But what is the point of having all that monetary policy ammunition if you are forbidden ever to use it? Morgan Stanley: ...In a recent speech, Governor Kohn offered a stirring defense of Fed strategy, taking aim at those who believe that the current stance of US monetary policy is far too stimulative.... My thoughts are directed less at Don Kohn and more at the institutional mind-set he now personifies. He, along with Fed Chairman Alan Greenspan and Governor Ben Bernanke, have taken the lead in...

Of all the surprising things to have happened on this weblog, the comment reaction to what I saw as an innocuous post quoting Jared Bernstein on outsourcing was the most surprising. The assertion that outsourcing was more benign if it put downward pressure on the incomes of the yuppie rich than if it put downward pressure on the incomes of the working class drew the most fire.But I think I'm right. And here's why: A Finger Exercise:Let's try a finger exercise to evaluate the effects of expanded international trade via "outsourcing" on an economy. We'll set up a simple model--not a realistic model, an unrealistic model, a model that has only the features we absolutely need to understand the principal impacts of expanded trade on an economy.Begin with the assumption that the economy has two kinds of people in it--workers and yuppies. Workers make things, or transport things, or provide services like gardening of hairdressing. All workers are alike, and let's assume that each of them earns a fixed amount of 40,000 thalers a year. Yuppies are doctors, investment advisors, lawyers, moviemakers, et cetera. The population is made up of 75% workers and 25% yuppies.Both workers and yuppies spend half...

Given the restrictions on supply--the unwillingness of San Francisco or Cambridge neighborhoods to look more like the Upper West Side or Newbury Street, the unwillingness of Berkeley and Lexington neighborhoods to look more like San Francisco or Cambridge, et cetera--the only evidence that's convincing is the price/rental ratio. And even there the price/rental ratio ought to respond to interest rate changes by an amount proportional to the duration of housing as an asset--if Alan Greenspan is correct in his beliefs that the inflation risk premium has been permanently wrung out of interest rates, that cheap computers mean a higher capital-output ratio and may mean a lower marginal product of financial capital, et cetera. Assessing whether our current housing price bubble is a little deal or a big deal depends on what the likely future path of real interest rates is, and that is a very hard problem to solve: "There Goes the Neighborhood" by Benjamin Wallace-Wells: ...in most of the country there's no housing bubble. Perhaps the crucial ratio from which economists determine whether housing markets are out of whack is the ratio of home prices to annual income. In most of the country, it is modest, 2.4:1 in Wisconsin,...

Over the past decade, Joe Stiglitz, Jeffrey Sachs, and others have heavily critiqued IMF advice to countries in crisis to raise real interest rates and establish budget surpluses as likely to have counterproductive and perverse consequences. Now comes Olivier Blanchard to argue that these critiques are half right in the case of Brazil in 2002-2003: tighter monetary policy would have worsened the situation (but tighter fiscal policy would have--and did--help matters.) Fiscal Dominance and Inflation Targeting: Lessons from Brazil, by Olivier Blanchard. NBER Working Paper No. w10389. Issued in March 2004 Abstract: A standard proposition in open-economy macroeconomics is that a central-bank-engineered increase in the real interest rate makes domestic government debt more attractive and leads to a real appreciation. If, however, the increase in the real interest rate also increases the probability of default on the debt, the effect may be instead to make domestic government debt less attractive, and to lead to a real depreciation. That outcome is more likely the higher the initial level of debt, the higher the proportion of foreign-currency-denominated debt, and the higher the price of risk. Under that outcome, inflation targeting can clearly have perverse effects: An increase in the real interest in...

The latest word on American wealth concentration from Kopczuk and Saez. It's not the Second Gilded Age--yet: Top Wealth Shares in the United States: 1916-2000: Evidence from Estate Tax Returns by Wojciech Kopczuk and Emmanuel Saez. NBER Working Paper No. w10399. Issued in March 2004 Abstract: This paper presents new homogeneous series on top wealth shares from 1916 to 2000 in the United States using estate tax return data. Top wealth shares were very high at the beginning of the period but have been hit sharply by the Great Depression, the New Deal, and World War II shocks. Those shocks have had permanent effects. Following a decline in the 1970s, top wealth shares recovered in the early 1980s, but they are still much lower in 2000 than in the early decades of the century. Most of the changes we document are concentrated among the very top wealth holders with much smaller movements for groups below the top 0.1%. Consistent with the Survey of Consumer Finances results, top wealth shares estimated from Estate Tax Returns display no significant increase since 1995. Evidence from the Forbes 400 richest Americans suggests that only the super-rich have experienced significant gains relative to the...

In response to me evangel, Tyler Cowen throws down the gauntlet: Marginal Revolution: Brad DeLong tries to convert me: Finally, I'll offer Brad a deal. I will refuse to vote for the Presidential candidate he specifies (guess who that might be), if he will write in his blog, with no subsequent irony or repudiation the following: "The classical liberal recipe of increased immigration is superior to strengthening the welfare state. I just don't think it will or can happen, so I will advocate the next best thing." As a pure freebie, I will in advance volunteer the concession that most tax systems should be mildly progressive rather than flat or regressive. I can deal with the no irony or repudiation part, but there do have to be three clarifying footnotes: Footnote 1: As Robert Waldmann has pointed out, you can't be an economist without asking "how much?" How much immigration does an extra unit of social insurance crowd out? Marginal rates of transformation matter. If the answer is "almost zero," the implications for public policy are very different from what they are if the answer is "a lot." This is an empirical question on which there is some (but...

Tyler Cowen attempts to explain why he thinks that he is not a liberal: The Volokh Conspiracy: I can think of a few reasons why I am not a liberal, but here is arguably the most fundamental.... Immigration is a better anti-poverty program than is welfare spending. At the relevant margins, I would rather devote public sector resources to coping with additional immigrants rather than funding more domestic transfers. Unlike many libertarians, I don't believe that we can do without welfare spending. Welfare, at the very least, contributes to political stability. So we need some welfare spending to keep the gears of capitalism in motion. That being said, I don't see the egalitarian case for increasing welfare spending above this basic level. People in other countries are much needier. Furthermore immigration is the best anti-poverty institution we have. A rural Mexican earns $1 a day; in Houston he earns $10 an hour (admittedly his rent goes up too). The next generation does even better, and legal immigrants do better yet. How many government programs bring that much value added? To draw another contrast with (some) libertarians, I don't believe that additional immigration is necessarily a win-win game at all margins....

Seven years ago Kevin Drum wrote a very nice review of Joel Garreau's excellent Edge City: DrumNet - Edge City: ... [Joel] Garreau provides five concrete prerequisites for an area to be called an edge city, but the most important one by far is this: an edge city must have 5 million square feet of leasable office space. This fundamentally distinguishes an edge city from a simple residential suburb and makes it into a place where people live, work, and shop, just like a traditional downtown. Or sorta like, anyway. In fact, the conflict between edge cities and densely populated downtown cities (or CBDs--Central Business Districts--as he calls them) runs throughout this book and forms one of the core dilemmas of urban planning in America for the past 50 years. The dilemma looks something like this: 1. Edge cities are sterile and lifeless. 2. To give them more flavor and a better sense of community (i.e., more like an old-time CBD), you need lots of funky shops, used bookstores, ethnic restaurants, mass transit, etc. 3. None of those things make economic sense until a certain density level is reached. 4. However, Americans appear, on a massive level, to dislike the...

Stephen Cohen and I have a first rough cut on what we think about outsourcing... Our Outsourced FutureStephen S. Cohen and J. Bradford DeLong Draft 1.3 Politically, today's fears about job losses and international trade got their start last summer; they will heat up during the campaign and cool off in a year or so. Economically, they are just starting, and are likely to develop over the next years into serious questions of economic theory and policy. In 2001, 2002, and 2003 the Bush administration used concerns about recession and stagnant employment to fuel its successful effort to pass tax cuts that did little to cure the recession or stimulate employment. The big and, critically, permanent tax cuts for the $300,000+ a year crowd, the cut in dividend taxes--these were things that powerful factions within the Bush administration wanted but that would do next to nothing to cure a sick macroeconomy. The Bush administration placed a bet. It believed that it was very likely that the labor market would strengthen and employment would grow on its own. So why bother with a real employment stimulus package? They gambled, and the rest of us--America--lost.So come the summer of 2003 the Bush...

The Wall Street Journal's David Wessel has a very nice article about outsourcing this morning: WSJ.com - The Future of Jobs: New Ones Arise, Wage Gap Widens: ...two different kinds of jobs are likely to flourish amid outsourcing and computerization. One sort requires physical contact -- nursing-home aides, janitors, gardeners, dentists. Foreign-born workers may do them, but they'll have to move to the U.S. A 2000 survey found that the average starting salary of graduates of community-college dental-hygiene programs was $41,900. A hot program at many community colleges these days is massage therapy. Springfield Technical Community College in western Massachusetts gets nearly 50 applications each year for the 20 slots in its six-year-old program, nearly all of them from women. Graduates earn an associate's degree and haven't had any trouble finding work, says Bernadette Della Bitta Nicholson, who runs the program. About a third go to work for local spas, which give therapists half of the $80-an-hour charge for a massage. Another third find work at local health-care facilities and the remainder go into business for themselves. The other sort of jobs destined to remain here are high-end jobs. Some require exchanging information in ways that e-mail and teleconferencing don't...

Speaking at Brookings, David Cutler looks forward to a better health care system: "We can do this for about one-half to two-thirds of the cost of the Bush tax cuts," Cutler said. He called for a transition to a "pay-for-performance" system that would add five percent to Medicare payments through a "quality improvement fund." Doctors would be assigned points for meeting quality standards and would lose points for failing to meet such standards. Funds would be awarded based on a doctor's point accumulation. Cutler conceded that the system's future would require sacrifice by citizens and clear-thinking by politicians. "If we want to afford more medical programs, we just need to say that we're willing to do that," Cutler said...." Not all panelists agreed with Cutler, however. "I don't share David's optimism about the political process," said Leonard E. Burman, a senior fellow at the Urban Institute. "Universal health coverage would have to be based on tax credits, but it's hard to think of Congress agreeing to $7,000 refund credits per family." President Bush's plan calls for a $3,000 credit per family only for insurance purchased separately from employer-based programs, a measure that Burman said would "undermine employment-based health insurance while...

Jared Bernstein has a good and thought-provoking piece on "Outsourcing," from The American Prospect: ... The topic was the role of education in a "knowledge economy." Greenspan's testimony offered eloquent, if conventional, wisdom leading to this punch line: "As history clearly shows, our economy is best served by full and vigorous engagement in the global economy. Consequently, we need to increase our efforts to ensure that as many of our citizens as possible have the opportunity to capture the benefits that flow from that engagement… one critical element in creating that opportunity is the provision of rigorous education and ongoing training to all members of our society." True. Education is surely critical. It's just not the only policy solution to our short- and long-term challenges -- and sometimes not even a particularly useful one. First, the collapse of job creation in this recovery cannot plausibly be blamed on the supposed educational or skills shortcomings of our workforce. The problem isn't the lack of skilled workers; it's the lack of jobs. Don't blame the supply side for the failure of the demand side. Our most highly educated workers are having a historically tough time in the current job market. In fact,...

Ted Miguel and Michael Kremer cast a jaundiced eye on the idea of "financial sustainability" in a development context, as they write: The Illusion of Sustainability: While sustainability is certainly a desirable goal, it may be difficult to achieve. Teaching people to fish rather than providing fish is great if it works, but this method works only if the donor knows more about fishing in the local area than the people who live there, and only if the donor can transfer this knowledge. Yet it is difficult for outsiders to understand how institutions, politics and societies function, let alone how to influence them in a way that does not create unforeseen consequences. Even if a hypothetical planner could target foreign assistance so as to change communities and institutions for the better, the principal-agent problems involved in foreign assistance make it hard to do this in practice. It is difficult enough to monitor aid workers handing out fish, since they are not subject to market pressures, nor held democratically accountable to the people who they are charged with serving. However, at least one can determine whether fish have reached the intended recipients, and presume that if so, the recipients are better...

David Wessel comes out swinging with a very good column praising imports: WSJ.com - Capital: Let us now praise the virtues of imports. Consider the clothes Americans buy for the four million babies born each year in the U.S. The typical family with a young child spends about $500 a year on those cute T-shirts, blue jeans and tiny socks. That's $2 billion a year. Not so long ago, the U.S. had a ceiling on imports of baby clothes. That limit was lifted for most countries in 1998, and for China at the beginning of 2003. Imports of baby clothes more than doubled between 1997 and 2003, notes Ed Gresser, who labors to make the case for free trade for the centrist Democrats' Progressive Policy Institute. Wholesale prices at the ports dropped 28%. Consumers saved. In the same years, the consumer-price index for all items rose 15%. But the retail price of infant and toddler apparel of all sorts fell 5.2%. Had the price of baby clothes increased as much as the price of everything else, parents would have had to spend about $400 million more to buy as many baby T-shirts, blue jeans and socks as they did last...

Daniel Drezner writes about outsourcing for Foreign Affairs: Foreign Affairs: ...Should Americans be concerned about the economic effects of outsourcing? Not particularly. Most of the numbers thrown around are vague, overhyped estimates. What hard data exist suggest that gross job losses due to offshore outsourcing have been minimal when compared to the size of the entire U.S. economy. The outsourcing phenomenon has shown that globalization can affect white-collar professions, heretofore immune to foreign competition, in the same way that it has affected manufacturing jobs for years. But Mankiw's statements on outsourcing are absolutely correct; the law of comparative advantage does not stop working just because 401(k) plans are involved. The creation of new jobs overseas will eventually lead to more jobs and higher incomes in the United States. Because the economy -- and especially job growth -- is sluggish at the moment, commentators are attempting to draw a connection between offshore outsourcing and high unemployment. But believing that offshore outsourcing causes unemployment is the economic equivalent of believing that the sun revolves around the earth: intuitively compelling but clearly wrong. Should Americans be concerned about the political backlash to outsourcing? Absolutely. Anecdotes of workers affected by outsourcing are politically powerful,...

In an extraordinary lapse of judgment, the Wall Street Journal's news pages pretend that we do not know whether the end of textile export quotas will put upward or downward pressure on garment prices in the U.S.: WSJ.com - Apparel's Loose Thread: With End of Trade Quotas, Will Clothes Cost More, Less? One Safe Bet: China Will Gain: ...Mr. Yau, a middleman who buys clothes directly for Retail Brand Alliance Inc.'s Casual Corner and Brooks Brothers stores, among other company brands, believes some of the merchandise he buys will be cheaper next year. That's when decades-old quotas governing the world garment trade are set to expire. Others, though say prices consumers pay for clothes may not fall, and even could rise temporarily. Either way, the removal of the quota system is likely to reverberate across the garment industry world-wide for some time to come, causing big shifts in how multinational clothing companies do business and sell clothes to shoppers.... The quota system was created in the 1960s by developed countries including the U.S. and those in the European Union to protect their own textile manufacturers from cheap foreign competitors. In the U.S., the government sets strict limits on the...

Or, if you do skip breakfast and go to Costco, recognize in advance that there will be an amazing number of things for which, "We could buy this and freeze it until we want to eat it!" sounds like a really good idea. And recognize in advance that you will emerge $400 poorer. And then there is the problem of fitting all the things bought-to-be-frozen into a freezer of limited space......

Morgan Stanley's Stephen Roach thinks that if the U.S. moved too aggressively into high-tech IT, Europe has moved much too slowly into that industry segment--both as a producer and as a user: Morgan Stanley: ...And there can be no mistaking Europe's lagging performance....  Eric Chaney was quick to concede that IT production of hardware and software combined currently accounts for only about 3% of Euroland GDP — less than one-third the roughly 10% share in the US.  He also notes that Europe is behind the US in IT usage....  Nor is there any encouragement on the productivity front: Labor productivity in Europe went from 2% in the 1980s to 1% since the mid-1990s — precisely the opposite of the stunning acceleration in US productivity over the same period. Notwithstanding my own critique of America's IT excesses, I would be the first to concede that the adaptability to new technologies is the essence of economic flexibility.  The US might have gone too far down this road in the bubbly late 1990s, but IT-enabled transformation has now become a way of life in America.  This also shows up in global offshoring trends.  Our Indian economist, Chetan Ahya, points out that India's IT-enabled...

Tyler Cowen notes an extremely interesting comparison: while health has declined steeply in Russia in the past fifteen years, it has improved markedly in Poland: Marginal Revolution: Why has Russian health collapsed?: The health care collapse in the former Soviet Union is old news, less well known is the contrast between Russia and Poland: "...another Slavic nation with a traditional affection for vodka -- Poland -- is experiencing one of the greatest improvements in health ever known. The difference tells a story of how democracy has transformed the center of Europe in the past 15 years -- and how it has failed in Russia. Start with the figures. In the early 1980s life expectancies in Soviet Russia and Communist Poland were roughly similar, and both were starting to get worse. Cancer and cardiovascular disease were beginning a rapid rise, in lock step with their prime causes: smoking and alcoholism. "Two decades later, Poland's life expectancy for men, at 70, has risen by four years since the collapse of communism and now is more than 10 years longer than that of Russian men. In Poland, cardiovascular disease has fallen by 20 percent in a decade, while in Russia, it has risen...

Alex Tabarrok seeks to defend the Council of Economic Advisers against Paul Krugman: Marginal Revolution: Krugman vs the CEA: Paul Krugman goes beyond the bounds of decency and evidence when he accuses the Council of Economic Advisors of corruption.... [T]he CEA has in essence been predicting a return to trend. Obviously, the CEA has been wrong, employment has not returned to trend, but that surely tells us more about the peculiar nature of this recession than it does about corruption at the CEA. But the CEA's (and the Treasury's, and the OMB's, and it was approved by the NEC, and George W. Bush signed it, and it provides the underlying economic assumptions for the administration's budget proposals) forecast was not just overoptimistic, it was internally inconsistent. The forecast printed in the 2004 Economic Report of the President projected that starting in November 2003 payroll employment would grow like a rocket: at a pace of 320,000 net new jobs each month over the fourteen months from November 2003 to December 2004, a rate of payroll job growth of 3% per year (a full percentage point higher than the Fed's forecast, and 1 1/2 percentage points higher than the median private blue-chip...

The Wall Street Journal's Greg Ip outlines the three schools of thought within the Fed about when and how to start raising interest rates: WSJ.com - Fed Looks at Several Approaches It Can Take When Raising Rates: 'Baby Steps' Fed governor Martha Seger once referred to Mr. Greenspan's preference for many quarter-percentage-point interest-rate moves over long stretches as "baby steps." Of the 36 rate changes in his first seven years as chairman, all but six were less than half a percentage point. "Gradualism," as Fed officials label this, dates back at least to 1967, when Yale University economist William Brainard argued that when a central bank isn't sure about the economy, it should take small steps so that it can change course if its assumptions prove wrong. Mr. Brainard's work is referenced in many Fed staff studies with names such as "Is the Fed too timid?"... Smaller moves would require the Fed to start raising rates sooner, because it would take longer to get the federal funds interest rate back to neutral. That means the Fed would begin tightening before the economy has used up its slack, consistent with the Fed's traditional aim of "pre-empting" any increase in inflation.... The...

What I want to figure out some way of convincingly saying in my interventions into the current political debate is this: "It's not offshoring that's responsible for our current lousy labor market performance, it's (i) primarily that the economy was hit by big shocks and (ii) that the Federal Reserve ran out of running room, and (iii) secondarily that the Bush administration kept pretending that dividend tax cuts and other favors to the $300,000+ a year crowd were jobs-creating programs."...

Andrei Shleifer and Dan Treisman argue that we should not be that disappointed with the course of Russian reform--at least not yet. There's a lot wrong with Russia still, but fifteen years ago there was a lot more wrong with Russia. What was wrong with Russia then was extremely abnormal. What's wrong with Russia now is "normal," in that similar things are wrong with lots of middle-income countries: Andrei Shleifer and Daniel Treisman, "A Normal Country," Foreign Affairs March/April 2004:During the last 15 years, Russia has undergone an extraordinary transformation. It has changed from a communist dictatorship to a multiparty democracy in which officials are chosen in regular elections. Its centrally planned economy has been reshaped into a capitalist order based on markets and private property. Its army has withdrawn peacefully from both eastern Europe and the other former Soviet republics.... In place of a belligerent adversary with thousands of nuclear missiles pointed at it, the West finds a partner ready to cooperate on disarmament, fighting terrorism, and containing civil wars.Russia's reinvention would seem cause for celebration. Twenty years ago, only the most naive idealist could have imagined such a metamorphosis. Yet the mood among Western observers has been anything...

Ed Andrews of the New York Times tries to figure out why Alan Greenspan--although still very scared of deficits and mounting governmental debt--is nevertheless less scared of mounting debt, whether personal, national, and governmental, than he was a decade ago. Greenspan Shifts View on Deficits: Mr. Greenspan's last big idea came 10 years ago, when he correctly perceived that American productivity was growing much faster than official statistics suggested and that the country could grow much more rapidly without inflation than most experts believed at the time. But after having reduced the federal funds rate on overnight loans to just 1 percent, the lowest level in 46 years, Mr. Greenspan has presided over an explosion in home buying, mortgage refinancing and consumer spending fed by cheap money. Mortgage debt soared by more than one-third from $4.9 trillion in 2000 to $6.8 trillion in 2003. And though many people borrowed against their houses to pay down more expensive debt from credit cards, nonmortgage consumer credit climbed by $300 billion, or about 15 percent. In a Feb. 23 speech to the Credit Union National Association, Mr. Greenspan made it clear that consumer borrowing cannot keep that pace indefinitely. But he said the...

J. Ernesto Lopez-Cordova and Christopher Meissner (2004), "Globalization and Democracy, 1870-2000" (Cambridge: Cambridge University). Abstract: We study whether international trade fosters democracy. The likely endogeneity between democracy and trade is addressed via the gravity model of trade, allowing us to obtain a measure of natural openness. This serves as our instrumental variable for actual trade openness a la Frankel and Romer (1989). We use this powerful instrument to obtain consistent estimates of the causal impact of openness on democratization. The positive impact of openness on democracy is apparent from about 1895 onward. Late nineteenth century globalization may have helped to generate the "first wave" of democratization. Between 1920 and 1938 countries more exposed to international trade were less likely to become authoritarian. Finally, our post-World War II results suggest that a one standard deviation increase in trade with other countries could bring countries like Indonesia, Russia, or Venezuela to be as democratic as the U.S., Great Britain, or France. We also see some variation of the impact of openness by region and note that commodity exporters and petroleum producers do not seem to become more democratic by exporting more of such items....

A correspondent writes:...Anyhow, my question:Like millions of Americans, my wife and I refinanced our house last year. Weknocked 10 years off the term of our mortgage, but kept the same payments. Others turned in the remainder of their old 30-year mortgage for a new one, butwith much lower monthly payments.So, millions of us essentially found a big sack of gold in our respectivehouses last year. Where did this money come from, and who ultimately pays forit, and how? I'm no economist, but I don't believe in a free lunch any morethan I believe in the Tooth Fairy.On one level, the answer is that by its decisions over the past four years to change interest rates the Federal Reserve has twisted the entire structure of relative prices in the economy, making things in the future much more valuable and things in the present cheaper. You own an asset--your house--which extends far into the future: people are going to be living in it, enjoying it, and deriving utiolity from it for the next fifty years at least. Your pile of money is the result of the fact that the house you own is a large piece of the future which has been...

After a substantial amount of sniffing around, I have come to the conclusion that Joe Stiglitz's account of this is much more likely to be true than Michel Camdessus's, and that what Camdessus says is unreliable. Hence Stiglitz's critiques of the IMF's implementation of its policies during the East Asian crisis as being overly punitive have somewhat more force than I had previously believed. That also means that I need to revise this and this to be fair to Stiglitz......

The Economist.com | Global economic inequality summarizes “Measuring Poverty in a Growing World (or Measuring Growth in a Poor World)”, revised February 2004, by Angus Deaton....

The Economist says that things are much better than they used to be in North Korea: Economist.com | North Korea: ...There are some encouraging stories. In Pukchang, a small industrial town 70km (40 miles) north-east of Pyongyang, Concern, an Irish aid group, has been replacing ancient, leaking and broken-down water pipes and pumps, and modernising the purification system. This has pushed the amount of clean water available per person per day from 80 to 300 litres. Kim Chae Sun is a manager at the filtration plant, which is now more efficient. Before July 2002 she earned 80 won a month. Afterwards she earned 3,000 won. Now she earns 3,500. As Mrs Kim speaks, three giant chimneys belch smoke from the power station that dominates the town. All workers have been told they can earn more if they work harder, but certain groups have been told they will get even more money than everyone else. In energy-starved North Korea these include miners and power workers. Mrs Kim says her husband, who works in the power plant, earns an average of 12,000 won a month. Her rent has gone up from eight to 102 won a month, and in a year, she...

Fred Bergsten writes a very good how-to manual for the Treasury Secretary and the Under Secretary of the Treasury for International Affairs.One of the many, many things that the Clown Show that is the current administration appears incapable of learning is that our soft power is a great deal harder and more powerful than our hard power. If China is a partner rather than an adversary in fifty years, it will not be because of the 82nd Airborne Division, it will be because the economic, social, and cultural links between the U.S. and China are so strong that its politics will have reshaped themselves to some degree in our image and its people will see how much they have to gain from peace and how much we all have to lose from confrontation.But the current administration cannot grasp an idea that Fred Bergsten grasps very well: that it was George Marshall's economic aid plan, and not John Pershing's or Dwight Eisenhower's armies, that made and keeps western European countries our allies and partners. They see trade as a source of weakness: as a way of creating potentially traitorous interest groups inside the U.S. that will block attempts to "get tough."And...

COMMENT ON MONTEK AHLUWALIA, "LESSONS FROM INDIAN DEVELOPMENT"WORLD BANK "PRACTITIONERS OF DEVELOPMENT" LECTURE SERIES; MARCH 10, 2004AS PREPARED FOR DELIVERYStill More Lessons--But This Time for the Already DevelopedJ. Bradford DeLong1518 WordsLet me start by complimenting Montek Ahluwalia for his paper--his admirable overview of the waves of broadly and remarkably good news about development that have been coming out of India for nearly two decades. The remarkable boost to Indian growth in response to the (relatively gradualist) reform program, to what extent were (as Dani Rodrik argues in his attempt to create space for social democracy in a neoliberal world) many of the seeds of the past two decades' rapid growth sown by previous investments in social capital and infrastructure, whether reforms were properly sequenced, whether reforms were properly paced, and what remains to be done, both in politics and in economic policy, to build on the successes of the past two decades--these are the kinds of questions that the "Practitioners of Development" lecture series should address and needs to address. Dr. Ahluwalia has demonstrated that he is a perfect choice, both because of his skills as an economic analyst and his skills and experience as a policy maker, to speak...

The Decembrist fears that American businesses have developed an allergy to hiring:The Decembrist: The Economy Summed Up: Pay Any Price, Bear Any Burden, to Avoid Creating Jobs: ...The political analyst Charlie Cook's weekly column, available by e-mail subscription here is a real treasure, and usually offers much more than just the horserace. There's a single paragraph in today's column that I think sums up what we need to know about the economy and jobs better than anything I've read:In December, the CEO of a California-based high tech firm told me that "there is no amount of overtime that we will not pay, there is no level of temporary services that we will not use, there is no level of outsourcing or offshoring that we will not do, in order to prevent us from having to hire one new, permanent worker in the U.S." As I travel around the country, meeting with business leaders, I hear similar, though less succinct thoughts in almost every sector and every part of the country. U.S. wages, health care, and other benefit costs have gotten so high -- and the press by investors for high stock prices is so great -- that the premium is...

I'm reminded of a snippet from a comment I gave three years ago: Back when I started out as an economist there were several years during which it seemed that most of the articles I wanted to write had, I discovered, already been written in the previous decade by Barry Eichengreen. He reports that when he started out he found himself subject to the same phenomenon--only with respect to Charlie Kindleberger. So I spent part of last weekend rereading Kindleberger's absolutely (1978) Manias, Panics, and Crashes, looking for places where Kindleberger had already said what I think before I thought it, and had expressed it better than I can. I found a number of such places: Kindleberger's declaration that in the last analysis the making of economic policy under such circumstances "is an art" and that that "says nothing--and everything." And there was Kindleberger's summary that the rescuer of the system, the "lender of last resort", "should exist... but his presence should be doubted.... This is a neat trick: always come to the rescue in order to prevent needless deflation, but always leave it uncertain whether rescue will arrive in time or at all, so as to instill caution in...

The Economist's Buttonwood Tree quotes extensively from Warren Buffett, and is alarmed at the amount of money that junk-bond issuers are able to borrow: Economist.com | The Buttonwood column: ...It is not just the ugliest end of the junk spectrum that investors now think has a great personality. An index of overall junk-debt spreads, compiled by Standard & Poor’s, has more than halved since it reached its high. Trouble, though, is brewing, says Diane Vazza, a managing director at the rating agency. Although defaults are falling, this is largely because the economy is benign and interest rates very low. The resultant demand for yield “allows the most speculative grade of issuers access to the capital markets”. Thus has the number of first-time issuers in the junk market surged: there have been 21 so far this year, and twice as many came to the market last year as the year before. Thanks to all these debuts, credit quality has fallen. In January and February, 45% and 47% respectively of new junk issues carried a rating of B- or lower. Last year as a whole, the figure was 31%. “When the share of lower-grade issuance (particularly at the B- level or lower)...

Kash at Angry Bear takes a look at the detailed pattern of employment change by industry: Job Creation and Destruction in Service Industries: Given the continued lousy state of the labor market, I wanted to know which industries are growing (in terms of numbers of workers) and which are shrinking.... My reading of the figures is that they illustrate that the weak labor market is indeed explained by the combination of technologically-based productivity improvements with weak demand. Industries with slow job growth (or job losses) seem to be those that have been intensively adopting lots of labor-saving IT in recent years, such as wholesale and retail trade, transportation, and telecoms. For obvious reasons, education and health has seen the least replacement of labor with IT, and so seeing lots of job growth in those industries is not surprising. Somewhat less obviously (at least to me), professional and business services (this category includes things like legal, engineering, administrative, advertising, management, consulting, IT and accounting services for businesses) has also been adding jobs at a rapid rate.......

Robert Waldmann notes that I used the anomalously-large equity return premium as a springboard from which to say the S-word a long time ago: fifteen... no, it was eighteen years ago: robert's random thoughts: More on the $2.4 trillion sure thing. Brad notes that John Quiggen says the S-word. Actually Brad et al. said the S-word a while ago [fifteen--no, it was eighteen years ago that I wrote those paragraphs] in discussing [the possible desirability of large-scale] open-market operations in the stock market (in J. Bradford De Long, Andrei Shleifer, Lawrence H. Summers, and Robert J. Waldmann (1989) "The Size and Incidence of the Losses From Noise Trading," Journal of Finance vol. 44 pp. 681-96 (July 1989)). Now one problem with the S[ocial ]S[ecurity ]T[rust ]F[und] making a killing investing in stocks is that massive purchases would drive up prices, eliminating the puzzling equity premium--that is, driving the expected equity return premium down to a reasonable level for a representative agent or a deep-pockets long-lived agent like the S[ocial ]S[ecurity ]T[rust ]F[und]. In particular, jumps in stock prices when the plan is unsecretly discussed, proposed, and passed by congress would give windfall capital gains to investors. Uncertainty about the plan's...

Ed Hugh of Bonobo Land directs us to Blame India Watch....

One possible explanation of the high equity return premium over the past century is that private finanial markets do a very lousy job of mobilizing society's risk-bearing resources, and that as a result the market system gets incentives wrong and delivers us an economy with a much lower capital intensity and a much lower investment share than would be optimal. John Quiggin points out on Crooked Timber (and John Quiggin and Simon Grant have pointed out in the American Economic Review and Econometrica that the natural solution to all this is the S-Word: Socialism: public ownership of the means of production. Indeed, the U.S. Treasury did this in the 1980s, taking part ownership of Chrysler at a time when the private financial markets found it much too risky to touch. Robert Rafuse spent the best part of a decade as Deputy Assistant Secretary of the Treasury for Chrysler. Made the Treasury a *huge* bundle of money too... Crooked Timber: Stocks, bonds and social security : ...The alternative explanation is that capital markets don’t do a very good job of spreading risk. For example it’s very hard to get insurance against recession-induced unemployment or business failure, even though standard models imply...

Eldred v. Ashcroft lawyer Larry Lessig bangs his head against the wall because he has concluded that he is a bad person because he did not persuade the Supreme Court to strike down the Sonny Bono copyright extension act, and release lots of stuff into the public domain: Legal Affairs: My anger with the conservative [justices] quickly yielded to anger with myself. For I had let a view of the law that I liked interfere with my view of the law as it is. Most lawyers and law professors have little patience for idealism about courts in general and this Supreme Court in particular. Most have a much more pragmatic view. As I read back over the transcript from that argument in October, I can see a hundred places where the answers could have taken the conversation in different directions, where the truth about the harm that this unchecked power will cause could have been made clear to this court. Kennedy in good faith wanted to be shown. I, idiotically, corrected his question. Souter in good faith wanted to be shown the First Amendment harms. I, like a math teacher, reframed the question to make the logical point. I had...

Alan Krueger writes about the California workers' comp mess: Economic Scene: Alan Krueger: ...The central problem in California now is that the costs paid by employers are the highest in the country, while the benefits received by workers are about average - in part because many cases are disputed, which wastes resources. Total costs for California employers increased to $29 billion in 2003 - eight times the gross domestic product of Haiti - from $11 billion in 1998. By one estimate, the average employer in California pays 5.2 percent of payroll for workers' compensation insurance, more than twice the average of other states. Rates are much higher in hazardous occupations: 43 percent for loggers, 33 percent for roofers, 22 percent for carpenters and 18 percent for truck drivers. The governor maintains that these high costs are the main reason jobs are leaving the state. But this confuses who writes the check (employers) with who bears the burden of the program (employees). Research has found that most workers' compensation costs are shifted to workers in the form of lower wages over time, so the effect on jobs is probably minimal. Nonetheless, reducing inefficiency and administrative costs is to everyone's benefit. The...

I should praise the wonderful Economagic as a wonderful one-stop shopping place for economic data....

PEIS READING LIST MEMORANDUMTo: PEIS Majors and Other Interested Parties From: Brad DeLong, Chair, PEIS Subject: Things Worth Reading Date: March 1, 2004Just a short note about some things that I have seen recently that are (I think) potentially very interesting to (many, if not most) PEIS majors:First comes Catherine Mann's very optimistic take on "outsourcing," from the Institute for International Economics website: "The Globalization of IT Services and White Collar Jobs" http://www.iie.com/publications/pb/pb03-11.pdfSecond comes a selection from Ronald Suskind's recent book, _The Price of Loyalty_. It is (most of a) shorthand description of a meeting on November 26, 2002 between George W. Bush and his chief political and economic advisors at which major decisions about Bush economic policy were made. I find it very interesting in its inside look into the quality of argument and organization inside the Bush White House: http://www.j-bradford-delong.net/movable_type/2004_archives/000018.htmlThird comes a piece by George Packer in the _New Yorker_ on what he thinks the Democratic Party should be doing in foreign policy: "A Democratic World" http://www.newyorker.com/printable/?fact/040216fa_fact1. Worth reading as well is a brief critique by a Middle Eastern Studies professor who calls himself Abu Aardvark: http://abuaardvark.typepad.com/abuaardvark/2004/02/a_packer_foreig.html.The last two pieces are much more PACSy than they are PEISy,...

The Monetarist Counterrevolution J. Bradford DeLong delong@econ.berkeley.edu http://www.j-bradford-delong.net/ April 2001; slightly revised February 2004I. Keynesian Monetarists and Monetarist Keynesians In 2000 I wrote an essay (DeLong, 2000) arguing that modern Keynesians are really monetarists. Even if they--we--do not really like to admit it, most of the key elements in how modern "new Keynesian" economists view the world are derived from or heavily influenced by the work of Milton Friedman. But that essay left me unsatisfied, for it was only half of the story. Just as modern Keynesians are (in many respects) monetarists, so modern monetarists are really Keynesians--even though they like to admit it even less. They are Keynesians in the sense that they have the same profound and deep distrust in the laissez-faire market economy's ability to deliver macroeconomic stability. Moreover, they share the confidence John Maynard Keynes had that limited and strategic government interventions and policies could produce macroeconomic stability while still leaving enormous space for the operation of the market. Thus there are no believers in true laissez-faire left, at least not as far as academic macroeconomics is concerned. The rhetoric of post-World War II monetarism held that it was a return to laissez-faire in macroeconomics. All...

Harry Holzer tries to make sense of Greenspan two decades ago and Greenspan now: The Fed Chief's Terse Talk (washingtonpost.com): Does Alan Greenspan have amnesia ["Fed Chief Urges Cut in Social Security," front page, Feb. 26]? More than 20 years ago he co-chaired a commission to ensure the solvency of Social Security. That commission recommended stiff increases in the payroll tax to create a surplus that would help fund the retirement of baby boomers down the road. The higher payroll taxes, which put a heavy burden on lower-to-middle income taxpayers, were signed into law and remain in effect to this day. But in 2001 Mr. Greenspan endorsed a fiscally irresponsible income tax cut that effectively gives away the Social Security surplus he created primarily to high-income taxpayers. Now he suggests that those tax cuts be made permanent, while we reduce the enormous deficits that they've created only through cuts in spending, especially on Social Security. Of course, Mr. Greenspan is right that we have tough choices to make on Social Security and Medicare. But he seems oblivious to the inconsistencies in his own position and to the huge inequities that these tax policies have created. The positive effects of tax...

The Economist is worried about the sustainability of the U.S. expansion: Economist.com | The American economy: WHEN The Economist sounded the alarm about America's bubble economy in the late 1990s, what concerned us most was that share prices were no longer just a mirror that reflected the underlying economy, they had become its major driving force: soaring share prices encouraged a borrowing and spending binge. Although the stockmarket is lower today, in some respects the “economic bubble” has still not burst. The value of households' total wealth (in financial assets and homes) is well above its level before share prices started to slide in early 2000—and the American economy is more dependent than ever on asset appreciation. America's economy has survived the bursting of the bubble better than had been expected largely because policy-makers have pursued what is possibly the biggest fiscal and monetary stimulus in history. This week, even Alan Greenspan, chairman of the Federal Reserve, expressed concern about spiralling deficits. Tax cuts have given consumers more to spend. More importantly, historically low interest rates have inflated the prices of homes (and more recently shares again), encouraging households to pile up more debt. This has allowed consumers to keep...

People are asking me what I think about Paul Sweezy... What do I think about Paul Sweezy? I think... Well, first I think it's annoying to have to spend time figuring out whether a paragraph Sweezy writes is (a) what Sweezy believed, (b) what Sweezy thought would be good for the Movement to believe, or (c) what Sweezy did not believe and did not think it would be good for the Movement to believe but that he felt he had to pretend to believe because it was the Party Line. Going roughly in chronological order... I think that the _Theory of Capitalist Development_ (1942) is mostly what Sweezy thought. He's still young enough, convinced enough, and bold enough to (largely) say what he thinks. It is clear that--for example--when he argues that after World War II ends those nations that wind up in the socialist camp will develop much more rapidly and successfully than those that wind up in the capitalist camp, this is something he really believes.But even in _TCD_ there are some passages that I, at least, find it hard to believe that Sweezy believed them. For example, on p. 191 there is Sweezy's dismissal of Marx's "The...

Robert Waldmann responds to my thoughts about saving Social Security and about the hellish task of having to brief George W. Bush on a complicated issue. He tries to think through some of the issues: robert's random thoughts: Now for something completely different. Do I (partly) agree with Martin Feldstein, Larry Lindsey, and George W. Bush ?It seems that Bush was not dishonest when he suggested that private social security accounts could be part of a plan to save Social Security. He really believed something like that because Larry Lindsey told him and Lindsey got the idea from his old prof. Martin Feldstein (and co-author [Andrew Samwick]). The idea was so crazy that it went nowhere in the Bush administration (and that is saying something). However, I am not sure I am totally convinced it is crazy.Brad DeLong notes correctly that it doesn't really have anything to do with Social Security. The idea is that there is a multi-trillion dollar sure thing for the US Treasury -- issue Treasury bonds and buy corporate bonds and stock. Some of the huge profits from this deal were to be used to save Social Security and others to give people who wanted private...

Ron Suskind has added a new document to his online collection of documents that crossed Paul O'Neill's desk while he was Treasury Secretary. Today's document is an October 2001 NEC/CEA draft briefing "memo" for Bush on Social Security, a fax cover sheet on which CEA chair Glenn Hubbard asks to talk to O'Neill, and a two-page memo from then-Treasury Social Security expert Kent Smetters (a very smart and good guy) on the issues and the bureaucratic process. The most remarkable thing is the form of the "memo" that is being drafted for Bush: it is a seven-page Powerpoint presentation plus nine pages of charts. 659 text words total. That's one text word for every ten billion dollars that is going to be spent on Social Security over the next decade, and one word for every hundred billion dollars that is going to be spent on Social Security over the next half century. Hell is briefing someone like George W. Bush on a complicated issue like Social Security reform. (The 2004 Economic Report of the President's discussion of Social Security reform is about 7,000 words, and it just skims the surface of the issues itself.) Kent Smetters's two-page cover memo asks...

How Strong a Supporter of International Capital Mobility Can I Still Be? J. Bradford DeLong U.C. BerkeleyFebruary 27, 2004; draft 2.0; 1843 wordsFifteen years ago, I at least found that was easy to be in favor of international capital mobility. It was easy to preach for an end to the systems of controls on capital that hindered the flow of investment financing from one country to another. Capital controls created large-scale opportunities for corruption. Whoever got the scarce permissions to borrow abroad had a good chance of becoming rich, and somehow those who got the scarce permissions to borrow abroad often turned out to be married to the niece of the vice-minister of finance. A highly corrupt society is one in which tax rates are idiosyncratically and randomly high, and cannot be a productive society. Eliminating capital controls seemed likely to be a great help in the general anti-corruption drive.Capital controls kept the level of investment in peripheral developing countries down. This seemed to be a very bad thing. Higher investment boosts the capital stock and so directly raises labor productivity and wages. It also acts as a carrier for those important parts of technological advance that are embodied in...

Paul Krugman writes that if there are "effective job creation measures and a strong domestic social safety net" then even a union-funded Democrat can be for free trade. Conversely, an administration that focuses on tax cuts for the rich and thinks that the poor are poor for a reason will find itself under heavy pressure to impose voluntary export restraints on other countries and hike tariffs: "there's a reason why the two U.S. presidents who did the most to promote growth in world trade were Franklin Roosevelt and Harry Truman, while the two most protectionist presidents of the last 70 years have been Ronald Reagan and, yes, George W. Bush." But I can and do blame Democratic politicians for not resisting temptation: every day that Americans are told that trade destroys jobs--rather than that it shifts jobs from one industry to another, hopefully from lower-paying to higher-paying--is a day that makes it harder to pursue good policies to enrich America. Blame Bush for failing to take out the obvious insurance against a slack job market--for pursuing tax cuts for the upper class rather than fiscal policies that would provide an effective stimulus to demand and employment. But don't you dare...

Virginia Postrel channels my former student Kris Mitchener on income convergence within the United States. I wish he (and she) had been a little more explicit about linkages: The fact that the south has caught up to the rest of the country is part of the reason that the north has grown. Rich customers and productive suppliers are (usually) a benefit and not a hindrance to prosperity. Economic Scene: U.S. Is a Case Study in Free Trade: "In 1880 the United States was poised to overtake Britain as the most efficient industrial economy and become the century-long benchmark against which all other economies' productivity performance would be compared. Yet in that year, labor productivity in the least productive state (North Carolina) was a mere 18 percent of the most productive (Nevada)," wrote Professor Mitchener and Professor McLean of the University of Adelaide in Australia in a more recent study in The Journal of Economic Growth. That extraordinary difference cannot be attributed to Nevada's mining efficiency alone. North Carolina's productivity was only about 24 percent of California's or New York's. These gaps are comparable to the difference between the United States and Thailand or Morocco today.Today, North Carolina is still poorer...

Robert Samuelson was a real journalist once. But I see little evidence of that these days: A Phony Jobs Debate (washingtonpost.com): Facing a weak economy, a government can do three things: cut interest rates; run a budget deficit; and allow -- or cause -- its currency to depreciate. The first two promote borrowing and spending; the last makes a country's exports cheaper and its imports costlier. All these weapons have been deployed. Bush's policies are mostly standard economics; based on past patterns, these policies should have produced stronger job growth. Did Robert Samuelson completely miss the fact that the effect of the 2003 (and 2001) Bush tax cuts was to enlarge the budget deficit in a relatively un-job creating way? It is as if they were designed to reduce national savings as much as possible in the long run while providing little short-run boost to demand. Was he asleep all of last winter when this debate was held--and when the Bush administration falsely asserted that its dividend tax cut was a powerful short-run stimulus to employment? As best as we can track the thinking of the Bush administration, they decided to claim that large tax cuts for the $300,000+ a...

Martin Wolf contemplates the rise of protectionism in the United States--from the Bush-Cheney steel tariff, to John Snow's "blame China for manufacturing unemployment" campaign last summer, to the current Kerry-Edwards-Hastert attacks on "outsourcing." And he bangs his head against the wall: Suppose the politicians did succeed in halting offshoring. Would that save the jobs of programmers or call centre operators? In all probability, no. Both are vulnerable to technology in any case. All it would do is raise costs to users and slow economic advance. What is depressing about the debate is not just the blaming of foreigners but also its irrelevance to the challenges confronting the US. The most immediate of these is to create sustained growth in demand. Equally, the US confronts significant structural challenges. If its people are to gain from the emerging division of labour, they need high-quality education, as Alan Greenspan, chairman of the Federal Reserve, argued last Friday. In addition, a case can be made for subsidising the wages of the unskilled. What must be avoided are policies that undermine increases in living standards, threaten the US commitment to liberal trade and, not least, attack the nascent exports of a poor and gigantic democracy...

Ah. This book goes to the very top of The Pile: David M. Cutler (2004), Your Money or Your Life: Strong Medicine for America's Health Care System (Oxford: Oxford University Press: 0195160428)....

Another example of breathtaking stupidity from National Review: Thomas E. Nugent and Warren Mosler on Trade Deficits on NRO Financial: ...Fortunately, the truth is far from the mythology. To expose these myths, all that's needed is a closer look at what's really happening. First it's the U.S. consumer who is funding foreign savings, and not foreign savings that is funding the consumer.... When the consumer borrows to buy the car... the bank makes a loan to the consumer... After the car is paid for, the German car company has the new bank deposit. Note that consumer borrowing increased total bank deposits and funded foreign deposits (savings) of U.S. dollars. The widely held causal myth is that foreigners are funding U.S. consumers.... Understanding that government deficits add to savings and that U.S. consumers fund the desires of foreigners to save is a good way to start seeing through the media's economic mythology. In the English language, the entity that lends the money is the one that does the saving--the funding--holds the asset. The German car company makes a deposit--that is, lending to the bank. The bank, a financial intermediary, lends the money to the consumer. The German car company has thus...

BRAD DELONG; ATLANTIC MONTHLY TOWN HALL; 7-8 PM TUESDAY FEBRUARY 24; WHEELER AUDITORIUM, U.C. BERKELEY CAMPUS, BERKELEY, CA.Draft 2.0/as prepared for delivery:What's Going on with the Economy?In the mid-1990s labor productivity growth in America accelerated from 1.2% to 3.0% per year. At a rate of labor productivity growth of 1.2% per year, America is a land of diminished expectations: it takes 60 years for incomes to double, and lots of good things that we would want to accomplish seem far outside our private and public budgets. At a rate of labor productivity growth of 3% per year, America is a land of infinite promise: incomes double every 25 years, and our public--and private--resources seem ample, are ample.We economists debate whether 1/6 (Greg Mankiw's estimate), 1/3, or 1/2 (my estimate) of the acceleration in productivity growth is due to better policies by the coalition that marched under Bill Clinton's banner, and how much by good luck with ongoing technological revolutions. We economists debate how long the boom in productivity growth will last--five more years? A decade? A generation? Longer? But I don't want to go there. I want to say that today America's productive potential is growing very rapidly, and America...

The Enron cleanup continues: AP Wire | 02/19/2004 | Former Enron CEO Skilling pleads innocent: Deputy Attorney General James Comey, who heads the Justice Department's corporate fraud task force, said Skilling and other executives were responsible for a "massive, complex scheme to give shareholders and the investing public the false appearance of financial strength and security at a time when Enron was, in fact, failing." "The indictment of Enron's CEO shows that we will follow the evidence wherever it leads - even to the top of the corporate ladder," Assistant Attorney General Christopher Wray said. The indictment unsealed Thursday also mentions former chief financial officer Andrew Fastow, who pleaded guilty and is cooperating with federal prosecutors, and former treasurer Ben Glisan, who pleaded guilty to conspiracy and became the first former Enron executive put behind bars. The indictment makes no mention of Skilling's former boss, former Enron chairman Kenneth Lay, either by name or by title. Lay, who served as CEO before Skilling, has maintained his innocence of any wrongdoing related to Enron's failure. Skilling, flanked by a pair of attorneys, turned himself in at the Houston FBI offices just before daybreak. About 15 minutes later, his hands behind him...

Ron Suskind has been posting documents that crossed ex-Treasury Secretary Paul O'Neill's desk in 2001 and 2002. In the latest batch, I get to observe Treasury Undersecretary Peter Fisher doing a highly skilled and professional job of walking on eggshells. The latest batch on the Ron Suskind The Price of Loyalty website consists of three sets of new documents: "How to Beat the Press," "Corporate Reform: No New Lawsuits," and "Not to be Publicized": Treasury's Corporate Reform Plan."I find the most interesting document to be the second: a memo from Treasury Undersecretary Peter Fisher to Treasury Secretary Paul O'Neill reporting on an Oval Office meeting on corporate control and corporate regulation reform that Fisher had just attended, plus a supporting NEC document by Marc Sumerlin. Fisher's memo (along with Sumerlin's) makes it a lot clearer to me exactly why it was that the Bush-Cheney administration's reaction to the corporate governance scandals was so feeble: MEMORANDUM To: Secretary O'Neill From: Peter Fisher Date: March 5, 2002 Subject: Discussion of Corporate Disclosure IssuesThis morning I attended a meeting with the President and Vice President and White House staff in the Oval Office to discuss the attached memorandum as the basis for a...

Reply to Jeff Faux I find it hard to disagree with my esteemed semi-adversary Mr. Faux. He says so many reasonable and intelligent things.However, let me pick a nit. Mr. Faux writes: Some deficit reduction was reasonable. After all, a fiscal deficit that was rising faster than income is ultimately unsustainable. But the Clinton/Rubin buy-in to a nineteenth-century Republican economic agenda was clearly over the top.To those of us who did buy into the go-for-a-surplus agenda, it was not a nineteenth-century Republican economic agenda that we thought we were buying into. It was a twenty first-century Democratic economic agenda. We were looking forward to 2020 or so, when the baby boom generation retires, and when Social Security, Medicare, and Medicaid expenditures start to rise rapidly as shares of GDP. To pay down the federal debt--run surpluses--now so that the country would find itself with the debt capacity to finance these forthcoming rise in baby boomer-retirement social-insurance expenditures seemed to us to be wise policy. The alternative--to merely stabilize the debt-to-GDP ratio and make no special provision for the generational future--seemed to us likely to create a situation in which (a) the elderly programs eat the rest of the social insurance...

My notes from my Berkeley Economic Growth Lunch talk about the very strange Bush administration employment and productivity forecast....

From Friday's Wall Street Journal: Bush Plays Down Outsourcing Praise By JACKIE CALMES Staff Reporter of THE WALL STREET JOURNAL: BUSH SEEKS distance from his economist's praise for outsourcing jobs.: At an economic forum in Harrisburg, Pa., Thursday, he complains, "There are still some people looking for work because jobs have gone overseas, and we need to act in this country." Still, Democrats keep up attacks on Mankiw's remarks that sending service jobs overseas is "a plus" over time for the economy. As I said, it's to Greg Mankiw's credit that he's out front on free trade given how "wet" George W. Bush, Richard Cheney, and the rest of the administration are on the issue....

Glaukon: Your old friend Martin Feldstein's article certainly did not cover itself in glory this morning.Thrasymakhos: How so?Glaukon: The Wall Street Journal? On its benighted and ever-mendacious editorial page? "Here are the facts.... it would be wrong to respond now with a tax increase.... the CBO report provides the building blocks for realistic projections. These estimates imply that even if all of the personal tax cuts are extended, a major reform of the Alternative Minimum Tax is enacted to remove most middle-income taxpayers from the AMT, and discretionary spending keeps pace with inflation, the fiscal deficit will decline from 4.2% of GDP in 2004 to 2.7% in 2009 and 2.6% in 2014. Such is the power of moderate growth and a tight control on discretionary spending"?Thrasymakhos: Ah. But you said that the article did not cover itself in glory. You've said nothing about what the article really says.Glaukon: Huh?Thrasymakhos: Read closely. Listen carefully. What does the article whisper to you?Glaukon: Huh?Thrasymakhos: The article says "a major reform of the Alternative Minimum Tax... to remove most middle-income taxpayers from the AMT." A major reform that would remove all middle-income taxpayers from the AMT would cost an extra 0.3% of GDP, wouldn't...

The Wall Street Journal's Bob Davis spends the day on the phone, rounding up Democratic economists willing to say that Greg Mankiw is correct when he says that "outsourcing" is, for America as a whole, more of an opportunity than a threat (even though it looks like Greg could use some of the lessons about talking to reporters that were beaten into me by people like Jack DeVore and Gene Sperling). Who does he succeed in rounding up? Former CEA Chair Janet Yellen... former CEA Chair and NEC Head Laura D'Andrea Tyson... former Labor Secretary Bob Reich (I think Reich hits the exact right note when he criticizes the Bush administration for failing to make "a serious attempt to deal with the profound structural problems of an economy in transition as it affects middle-class jobs"; working-class jobs too; it is certainly true that the Bush administration is much more concerned with the problems of CEOs suffering under SEC overreach than it is with the problems of regular people who have lost their jobs)... and former Treasury lowly worm-analyst Brad DeLong. Very nice company to be in. However: note to self: be less colorful when talking to Wall Street Journal reporters!...

With the assumptions about the changing share of nonfarm business as a share of total output and with the assumption (as reported) that the administration labor productivity growth in 2004 will be 1.4% per year and with a jumping-off point for the forecast of last October's labor market data, I can almost get to the 132.7 million projection of average nonfarm payrolls for 2004: I'm at 132.3 million. So assuming that 1.4% is the administration's forecast of labor productivity growth in 2004 (rising to 2.3% over 1996-1999), I took this forecast to the Berkeley economic growth lunch and asked how one might arrive at it. I reached three conclusions: You can get the 2.3% labor productivity forecast for 2006-2009 if you throw out the 2001-2003 period as anomalous, use a production function approach calibrated to the late 1990s, and assume that investment as a share of GDP never again reaches its bubble levels. [But won't continuing falls in computer prices continue to raise the real investment share substantially? Even if nominal investment doesn't exceed bubble-period shares, real investment will.] To get down from 2.3% to 1.4% over the next year or two for your projection of labor productivity growth, you...

Alan Greenspan calls for help to deal with the budget deficit and bring sanity to America's fiscal policy. He wants someone to put a choke chain on the our current rulers: "...As I have noted before, the debate over budget priorities appears to be between those advocating additional tax cuts and those advocating increased spending..." And he warns the congressmen that even though the budget deficit is a problem for the long run, in economics the role played by financial markets means that the long run can arrive with terrifying speed. Where are all the grownup Republicans? WSJ.com - Text of Greenspan's Testimony: ...The outlook for the federal budget deficit is another critical issue for policymakers in assessing our intermediate- and long-run growth prospects and the risks to those prospects. As you are well aware, after a brief period of unified budget surpluses around the beginning of this decade, the federal budget has reverted to deficits. The unified deficit swelled to $375 billion in fiscal 2003 and appears to be widening considerably further in the current fiscal year. In part, these deficits are a result of the economic downturn and the period of slower growth that we recently experienced, as...

I'm sorry. I can't let this pass. You ask any of the recent Chairs of the Council of Economic Advisers--Mankiw, Hubbard, Baily, Yellen, Stiglitz, Tyson, Boskin, Feldstein, Weidenbau, Schultze, Greenspan--of either party, and they will say that politicians who link trade and jobs and reporters who enable them do America no good service at all. Increasing trade does not create or destroy jobs in aggregate. The level of employment in the United States is determined by how good a job the Federal Reserve does in offsetting shocks to domestic demand, in setting monetary policy to hit the sweet spot where there is neither high unemployment nor rising inflation (with a secondary assist or hobbling by fiscal policy). What trade does is to shift jobs, shift the composition of American employment: people in import-competing industries lose jobs, while people in export industries (or, with the capital inflow, construction and investment goods industries) gain jobs. Economists have lots of good reasons for believing that the jobs gained are better jobs than the jobs lost, and that there are more and bigger winners from expanded international trade than there are losers. But does thePost note that Greg Mankiw is simply saying what every...

Ah. The Financial Times--a superior newspaper--comes through: Critics attack White House's upbeat forecast By Alan Beattie in Washington Published: February 9 2004 20:06 | Last Updated: February 10 2004 19:14: The White House's senior economic advisers delivered an upbeat message on the US economy on Monday, predicting steady economic growth and rapid employment gains in 2004. But their forecast for strong job growth next year was immediately attacked by the administration's critics, who said it was overly optimistic and at odds with the rest of the forecast. The forecast, which used data available in early December before figures were released showing disappointing jobs growth at the end of the year, envisaged the average level of payroll jobs rising 2.6m in 2004 to 132.7m. That target has been affected by the weak figures released since, but White House staff admitted their forecast implied job growth averaging about 325,000 a month this year - well in excess of recent rates. The annual Economic Report of the President from the White House Council of Economic Advisers forecast economic growth at 4 per cent in 2004, around the average for independent forecasts. But the rise in productivity, or output per hour, was predicted to...

It looks like Larry Lindsey is really, really fond of Oracle. I've never seen anyone blame the crash of the NASDAQ on U.S. v. Microsoft before: The White House's senior economic advisers delivered an upbeat message on the US economy on Monday, predicting steady economic growth and rapid employment gains in 2004. WSJ.com - How to Sink the Tech Comeback: By LAWRENCE B. LINDSEY Now that the Nasdaq has closed consistently back above 2000 it appears that much of the healing process from the collapse of the 1990s technology bubble is finally behind us. Sound macroeconomic policy prevented the resulting wealth destruction from producing a downward economic spiral like that of the '30s. Going forward we must adhere to sound microeconomic policy as well if America is to retain its global leadership in technology. After the initial speculative frenzy and its collapse, the successful financing of new industries over the longer term requires a more stable environment. Clearly, competitive pressures are intense both within the existing market and from even newer technologies. But an equally important risk comes from public policy that is subject to a variety of political pressures to control the emerging market environment. As a result, bad...

Nonfarm payroll estimates since January 2000: seasonally adjusted and not seasonally adjusted: See what a difference? Essentially we go through a full-sized business cycle every year as far as employment is concerned, with the peaks coming in the late spring and in the Christmas season, and a little trough in the summer and a big trough just after Christmas....

Remember the text of last year's "economists' letter" supporting George W. Bush's then budget proposals? The support was: Enthusiastic. Supporters were confident that the proposals: Were fiscally responsible. Would create more employment. Would create more economic growth. Would create more opportunities for all Americans Moreover, the proposals would: Improve corporate accountability. Strengthen the nation's international competitiveness. I called for any of the signers of last year's letter to write to me if they still believed, and were willing to sign a similar letter today. (It should be straightforward: this year's policies are almost entirely last year's policies moved ahead one year in time, after all.) So far I have had 0 takers. Letter Text and Signature List: We enthusiastically endorse your economic growth and jobs proposal. It is fiscally responsible and it will create more employment, economic growth, and opportunities for all Americans. Moreover, it will improve corporate accountability and strengthen the nation's international competitiveness....

From the Economic Policy Institute. Extraordinary and terrifying: Wage and salary income yet to share in growth: In the 25 months since the recession ended, total [real] wage and salary income is up only 0.4%.* It should be emphasized that this is growth after the recession ended and does not include income losses incurred while the economy was contracting. This is the slowest wage and salary growth of any recession since 1959, the first year in which monthly data on total wage and salary income is consistently available. If you'd asked me three years ago, I would not have believed that this could happen--that the labor market could remain this bad for that long so that this would happen. *Real "supplements to wages and salaries" are up roughly 10%; total real compensation is up roughly 2.4%. The distribution of "supplements to wages and salaries" is heavily weighted toward the richer salary earners......

When last we glanced at this ring of the clown show, George W. Bush was saying that HHS Secretary "Tommy" Thompson and Treasury Secretary John Snow had kept the administration 's internal cost estimates of the Medicare Reform bill from him. George W. Bush was lying: if he had been telling the truth, then there was no way that Snow and Thompson would still have their jobs. Now the Congressional Budget Office writes a letter to Representative Nussle explaining why the administration's estimates are higher than CBO's. There are a lot of differences, and I'm not qualified to have an opinion on any of them: Letter to the Honorable Jim Nussle regarding a comparison of CBO and Administration estimates of the effect of H.R. 1 on direct spending: The Administration's estimate of $534 billion in outlays through 2013 is $139 billion higher than CBO's $395 billion estimate.Almost all of that difference is attributable to our estimates of the Part D drug benefit and the Medicare Advantage program. PART D drug benefit: The Administration's estimate is about $100 billion higher (2004-2013) Basic benefits account for about $32 billion (about 7 percent higher than CBO estimates). The Administration assumes a higher participation...

The Center on Budget and Policy Priorities turns out to be a very good prophet of what is in the Bush administration's proposed budget: DEFICIT PICTURE GRIMMER By Richard Kogan, David Kamin, and Joel Friedman: Enactment of the 2001, 2002, and 2003 tax cuts has filled the tax code with tax reduction measures that are scheduled to expire between 2004 and 2010. If Congress makes all expiring tax cuts permanent -- and there will be strong pressure to do so -- ...the projected ten-year deficits will increase by $2.2 trillion (including the added interest payments on the debt). In addition, while three million tax filers will be subject to the Alternative Minimum Tax in 2004, that figure is set to explode in coming years unless current AMT relief -- which expires at the end of 2004 -- is continued. Continuation of that relief -- a near-certain event -- would increase the ten-year deficit by at least another $658 billion.... [T]he baseline understates defense and international costs.... [T]he baseline funding levels fail to cover fully the costs of the Administration's own Future-Year Defense Plan.... According to CBO's estimates, fully funding the AdministrationÕs Future-Year Defense Plan and the war on terrorism...

One interesting thing is that most of corporate expenditure on "organizational capital" doesn't show up as investment in its accounts. Yet it is a huge chunk of what companies are doing to prepare for the future: New Economy: Technology and Worker Efficiency: ...Much of organization capital is expressed in terms of work practices - how things are done in a company. When blended with technology investments, certain work practices yield the biggest gains, said Erik Brynjolfsson, a professor at the Massachusetts Institute of Technology. The companies that perform best, he said, use teams more often than their rivals. They decentralize work that requires local knowledge and interpersonal skills like product design, sales and on-the-fly adjustments on the factory floor, and they centralize and computerize work that is easily quantified, like accounts payable systems and obtaining the lowest airline fares for routine travel. Investments in technology alone, Mr. Brynjolfsson said, bring little or no benefit. But he says that technology and organization capital are complements, reinforcing each other when used wisely together. "When you put organization capital into the model, it goes a long way to explaining the productivity surge we've seen," Mr. Brynjolfsson said. "It's not so much of a...

It does not appear as if increasing numbers of self-employed workers can do much to account for the discrepancy between household survey and payroll survey trends over the past three years:...

Being reminded of Robert Nozick's "Tale of the Slave" in his Anarchy, State, and Utopia makes me remember that it is just one of many passages in ASU that made me conclude that Nozick was vastly, vastly overrated: Consider the following sequence of cases... and imagine it is about you. There is a slave completely at the mercy of his brutal master's whims. He often is cruelly beaten, called out in the middle of the night, and so on. The master is kindlier and beats the slave only for stated infractions of his rules (not fulfilling the work quota, and so on). He gives the slave some free time. The master has a group of slaves, and he decides how things are to be allocated among them on nice grounds, taking into account their needs, merit, and so on. The master allows his slaves four days on their own and requires them to work only three days a week on his land. The rest of the time is their own. The master allows his slaves to go off and work in the city (or anywhere they wish) for wages. He requires only that they send back to him three- sevenths...

Virginia Postrel appeals to us to spread the word about Catherine Mann's IIE high-tech outsourcing study and to make Charles Schumer pay a healthy political price for his protectionist rantings in alliance with Paul "Slaves were happy! Really happy! Much happier than those of us who have to fill out our Schedule Cs!" Craig Roberts. Gladly. Catherine Mann does very good work. And Charles Schumer does need to be whapped on the nose for three reasons: first, for advocating protectionist policies to slow the growth of the American economy without having any positive effect on distribution; second, for advocating policies to slow the growth of China and India, because fifty years from now I want my grandchildren to live in a world in which Indian and Chinese schools teach that Americans did all they could to help the world develop, and not that Americans did all they could to keep the world poor and barefoot as long as possible; and, third, for making a political alliance with a racist wacko who not only doesn't want an administration that looks like America, but doesn't want an America that looks like America. But how does one put the fear of God...

Via Atrios. And this is a very, very bipartisan complaint. 86 senators who voted for this idiocy. And we need a better press corps as well. The lead should be, "The Senate, acting with rare election-year concord, voted to reduce by $96 billion the payments companies will make into their pension plans this year and next. This will boost the companies' stock prices, increase the gap between the pension promises the companies have made and the resources committed to funding pensions, and increase the chances that workers will find at retirement that the pensions they were counting on just aren't there": Yahoo! News - Senate Passes Pension Relief Bill: The Senate, acting with rare election-year concord, passed a bill Wednesday to reduce by $96 billion the payments companies will have to make into their pension plans this year and next. Sponsors said the measure, passed 86-9, will help preserve pension benefits for millions of workers by discouraging financially strapped companies from terminating plans as no longer affordable. "Our pension plans are being battered by a perfect storm of declining interest rates, stock market declines and a weak economy," said Sen. Edward Kennedy, D-Mass. The bill, he said, "will help the...

Unit labor costs are falling at 2% per year. Core Personal Consumption Expenditure inflation is down to 1% per year--and falling. Core GDP inflation is down to 0% per year--and falling. The household survey employment-to-population survey is way below its last peak. The payroll survey non-farm employment number is 2.3 million below its last peak. And the Economist wants the Federal Reserve to raise interest rates? Truly this is a marvelous world we live in. Economist.com | American interest rates: Is America’s Federal Reserve running risks with inflation?... Although many economists do not expect the Fed to increase interest rates until next year, others argue America is now growing at such a clip that the Fed needs to touch the brakes to prevent inflation taking off again.... Booming commodity prices and a weakening dollar (which could push up import prices) also argue for a pre-emptive rise in interest rates.... [C]oncerns that inflation is about to pick up are probably overdone. For one thing, inflation is currently too low... the Fed would be happy if inflation rose a bit. On present trends inflation could even fall further. Inflation is not driven by the rate of growth, but by the amount of...

Tyler Cowen likes Perry Mehrling. So do I: Marginal Revolution: A readable treatment of current macroeconomics: Is there a new consensus about macroeconomics? Read this recent essay by Perry Mehrling. Mehrling makes the following points: 1. Macroeconomists are more optimistic than before, in part due to the 1990s extended, low-inflation boom. 2. Monetary policy has replaced fiscal policy as the preferred instrument of stabilization. 3. The current consensus would look remarkably familiar to many of the pre-Keynesian monetary theorists, such as Ralph Hawtrey. 4. The more concerned we are with price stabilization, the more our economies take on properties of commodity money standards. Money is moving again toward the notion of a "promise to pay." One quibble. I would not say Ralph Hawtrey so much as Knut Wicksell, or the John Maynard Keynes of the Tract on Monetary Reform (which is Keynes at his most high monetarist, and is a great, great book). Since discretionary fiscal policy has proven to be an incredibly blunt instrument, and since charts for monetary navigation based on liquidity growth rules have run many a central banker onto a deadly shoal, we have gone back to talking about equilibrium real interest rates and the extent...

The roads must roll! Justin Fox writes in Fortune about the Interstate Highway System: Justin Fox: But in the process of laying 42,793 miles of limited-access pavement, the Interstate builders changed America in ways few could have imagined in 1939 or even 1956. The Interstate system was sold as a savior for both rural America and declining urban cores; instead it speeded the trend toward suburbanization at the expense of both city and country. It was heralded as an antidote to traffic jams; instead it brought ever more congestion. It was seen as a shining example of progress and good government; by the 1970s it had helped sour Americans on the very idea of progress and good government. And who would have thought that better highways would help make us all so fat? For American businesses, the Interstates literally and figuratively transformed the landscape in which they operated. Some of the changes were foreseeable: No one should have been surprised that construction-equipment maker Caterpillar did spectacularly well during the big years of building in the 1960s, or that railroads struggled. And in the 1950s America was already becoming a nation of chain restaurants, chain hotels, chain stores, chain everything--although the...

Kieran Healy writes about Doug Henwood's After the New Economy. (It's quite a good book: it's the best single new economy book to read; it's great as a debunking volume, it's not so good as a Roadmap to Utopia.) Healy promises that other contributors to Crooked Timber will also do so, but as is so often the case mere "moral incentives" prove insufficient to elicit sufficient effort. So let me do my part: I'll buy the first Crooked Timber poster to respond to Kieran Healy a book of their choice from amazon.com or powells.com (of up to $30 value) or three books by Andrei Shleifer (The Grabbing Hand, Inefficient Markets, and Without a Map), whichever they prefer. But as with all books that debunk, it in turn contains bunk and in its own turn needs to be debunked as we pursue the critique of critical criticism to its logical end. Kieran writes about how After the New Economy shows that: ...the rapid increase in measured productivity since the late 1990s... is largely explained by large changes within high-tech sector that are not reflected in other industries. He is also skeptical of the productivity numbers... [t]he appropriateness of the “hedonic pricing”...

The Economist's Buttonwood Tree sounds remarkably contrarian--for something that is a tree, not Stephen Roach, that is: Some 140 companies in the S&P 500 are due to announce their results this week... those that have already done so have beaten analysts’ expectations by some 6%.... But then they will need to be good, so high are investors’ expectations. Stockmarkets have already climbed... the S&P is up by 44%, and Nasdaq by 69%; and... investors expect more of the same.... But how much will profits have to grow...? And how sustainable is this surge in profits?... Buttonwood has said it before and he will say it again: if things can’t get better, they can only get worse.... Last week’s column looked at the astonishing profitability of American financial firms. Citigroup, to take one example, made more money last year than any company has ever made, and financial firms make up about a third of corporate profits, which is unsustainable. A bigger question is whether profits for non-financial firms are also being temporarily flattered, to which the answer is: most probably. Profitability, it is true, seems to have been boosted by cost-cutting.... There are, however, limits as to how much cost-cutting can...

David Wessel gives a much more favorable review to Gregg Easterbrook's The Progress Paradox than David Leonhardt does. See it athttp://www.washingtonmonthly.com/features/2003/0311.wessel.html: Gregg Easterbrook is frustrated. He is certain that life is getting better for Americans and many others. He knows that we are living better than our grandparents did, and better than our great-grandparents imagined. (He's right.) He believes, and sought to demonstrate in his 1995 book, A Moment on Earth, that environmentalists have succeeded and that the world is getting cleaner, though they won't admit it. (The green crowd wasn't swayed.)But people aren't convinced. Why aren't we happier, he wonders? Why, even before September 11, did so many Americans tell pollsters that the country was going downhill? Why is depression an increasingly common affliction? What are we so stressed out about? In his sixth book, Easterbrook sets out to answer a question posed by sociologist Alan Wolfe: "Why do capitalism and liberal democracy, both of which justify themselves on the grounds that they produce the greatest happiness for the greatest number, leave so much dissatisfaction in their wake?"It is a very good question. Easterbrook--who writes forThe New Republic, The Atlantic Monthly, and this magazine, among others--wanders through Western philosophy...

On Friday, January 30, the Commerce Department's Bureau of Economic Analysis will release its first "advance" estimate of real GDP growth in the first quarter. We all expect that it will report that seasonally-adjusted real GDP grew in the 4th quarter of 2003 at roughly a 5% annual rate. We already know, roughly, what happened to hours worked in the fourth quarter. Seasonally-adjusted hours worked in the nonfarm-business sector grew at an annual rate of 2% in the fourth quarter. This means that productivity growth in the fourth quarter is likely to come in at something like a 3% annual growth rate pace. That's not as high as we have seen in the past three years. But it's still much higher than we had become used to in the Ford, the Carter, the Reagan, the Bush I, or the first two Clinton years. It's more evidence that the "new economy" is real--that the pace at which our economy's productive capacity is expanding is much faster than it was in the generation before 1995. [Posted with ecto]...

Oh no! Not again! The Weekly Standard needs to replace Irving Stelzer with a different--and competent--economics writer, and the sooner the better: The Book of Jobs: In the past year, employers reported a net loss of over 70,000 jobs, while households reported a net gain of over two million. Believe the second figure... Stelzer has not done his own homework, and his simply cribbed his numbers straight out of a recent (and blatantly incorrect) Robert Barro Business Week column. So let me just repeat myself: Bad Barro! Bad Barro! No bone for you!: In his most recent Business Week column, Robert Barro says a number of things that... well, to put it politely, are not as true as he appears to think they are. But the most untrue of all are his claims that: ...over the past year... household [employment] grew by two million.... Let's look at the numbers, most easily found in the CEA-JEC's monthly publication Economic Indicators: Status of the Labor Force (Household Survey) Date Adult Non-Institutional Population Civilian Labor Force Civilian Employment 2002:Dec 218.74 145.15 136.44 2003:Jan3 219.90 145.84 137.54 2003:Feb3 220.11 145.86 137.41 2003:Mar 220.32 145.79 137.35 2003:Apr 220.54 146.47 137.69 2003:May 220.77 146.48 137.49 2003:Jun...

The New York Times's David Leonhardt slams Gregg Easterbrook: Economic View: Time to Slay the Inequality Myth? Not So Fast: In recent weeks, a new book has challenged this conventional wisdom, calling it a statistical mirage, and its striking claim has begun to receive national attention. Among native-born Americans, lower- and middle-income families have actually received proportionately bigger raises than the wealthy, according to "The Progress Paradox" (Random House), written by Gregg Easterbrook, a Washington journalist. Only a great influx of immigrants - many of them poor, but richer than they were in their home countries - has made inequality appear to widen in the statistics, Mr. Easterbrook says. "Factor out immigration," he writes, "and the rise in American inequality disappears." The idea has echoed from the book into the pages of the Washington Post, The Chicago Sun-Times, The San Diego Union-Tribune, The Times of London and Business Week magazine, among other publications. It seems like one of those facts that could rewrite conventional wisdom about the American economy. It happens, however, not to be true. The millions of immigrants who have entered the country in recent decades have indeed made inequality look larger than it otherwise would. But even...

For background, take a look at http://www.epinet.org/content.cfm/briefingpapers_bp148. It's quite good on all these issues. Then go to http://www.gpoaccess.gov/indicators/browse.html, and download some recent issues of Economic Indicators. What is going on is roughly as follows: The BLS just reported that it estimated from its Household Survey that in December of 2003 there were (a seasonally adjusted) 138,479,000 people employed. (Economic Indicators p. 11). The BLS just reported that it estimated from its Business ("Establishment", "Payroll") Survey that in December of 2003 there were (a seasonally adjusted) 130,124,000 people on nonfarm payrolls. (Economic Indicators p. 14). The BLS reported three years ago that it estimated from its Household Survey that in January of 2001 there were (a seasonally adjusted) 135,999,000 people employed. (Economic Indicators p. 11). The BLS reported three years ago that it estimated from its Business ("Establishment", "Payroll") Survey that in January of 2001 there were (a seasonally adjusted) 132,428,000 people on nonfarm payrolls. (Economic Indicators p. 14). Subtract from today's nonfarm payroll number that of January 2001 and you get -2.3 million jobs. Subtract from today's household-survey number that of January 2001 and you get... well, you can't do that. The BLS says not to do that. The BLS,...

Jeff Faux of the Economic Policy Institute asks some questions about the Clinton administration's understanding of what the effects of NAFTA would be: Jeff: Clinton's mantra [on NAFTA] was "jobs-jobs-jobs." But I have always doubted that the... [administration] economists... believed that NAFTA was going to be an important job stimulus to the US economy. Me: I think we in the Clinton administration did produce a small "200,000 net jobs" number--or I have the memory that Sherman Robinson and I did, although I forget whether it ever got approved at higher levels. The argument was that NAFTA would lead to a somewhat stronger peso as foreign capital became more willing to invest in Mexico in response, and that as a result the with-NAFTA scenario had more U.S. net exports and a short-run Keynesian boost to employment of 200,000 or so relative to the no-NAFTA scenario. The argument was then hedged with the qualifiers that (a) NAFTA had to actually work as a device generating an inflow of capital to Mexico, and (b) that this was a short-run immediate post-recession gain only: that in the long run the level of employment is set by the Federal Reserve in the Eccles Building, and...

James Surowiecki asks what the time series of after-tax business profits as a share of national income looks like. It looks like this: The most interesting long-run features are (i) the runup of profits in the 1950s and 1960s, (ii) the sharp fall in the business profit share in the mid-1970s with the oil shocks and the coming of the productivity slowdown, and (iii) the up-and-down-and-up of the profit share in the last decade....

How much damage are the Bush II deficits doing to the American economy? At the moment, none at all. The labor market certainly has the most slack in it and a greater share of the economy's productive capability is idle now than at any time since 1992, and possibly since 1982. (There are important, puzzling, and unresolved issues in estimating the current output gap--the gap between current production and the economy's potential.) At the moment, more spending is better, and the deficit means more spending. (Of course, this particular deficit is, as deficits go, remarkably bad considered as a short-term stimulus program, and it is remarkably bad as a stimulus program by the Bush administration's design: we ought to be getting a lot more stimulus bang out of our current deficit bucks than we are.) But two, four, seven, and ten years from now, when the economy has recovered and is much closer to full employment, the path of deficits that Bush II has put us on will do serious harm to the American economy. How much serious harm? Doug Elmendorf and Greg Mankiw have consensus and very reasonable but also very rough rules-of-thumb about the economic costs of...

It's a really good time to be an American corporation. Look at the graph below, of inflation-adjusted after-tax corporate profits since 1990: If you were an investor riding or envying those who rode the high-tech stock-market bubble, you would have thought that the late-1990s were a great time to be a corporation. But real corporate profits peaked in 1997. The late 1990s were an asset-price bubble, an economic boom, a boom in employment and in rapidly-rising wages and salaries due to the tight labor market. But corporate profits were squeezed after 1997. But with the end of the recession in late 2001,* corporate profits jumped enormously. And they have continued to rise as the lousy labor market has dragged down wages and salaries while greatly-increased productivity has driven value added per worker way, way up. It is indeed an excellent time to be an American corporation. *No, I don't have any special insight into the tremendous jump in profits in the fourth--the October-December--quarter of 2001....

Well-regarded pygmy chimpanzee Michael Carroll believes that the Economist has joined the ranks of the shrill Paul Krugman-lovers as it stares at the approaching fiscal train wreck that the Bush administration is generating: BonoboLand • To Put it Plainly...: Not a lot of material there but this snippet leads me to think that the Economist gets the gist of the potential crisis: If Mr. Bush were to win, his second term would end on the verge of the baby boomers' retirement. It would be a last, last chance to solve the great problem of American domestic politics: reform of the entitlement programmes of Social Security and health care. That may be the unspoken subject of the 2004 campaign. Eventually, the dice will stop rolling and this hybrid Keynesian/Supply-side, U.S. fiscal gamble will reveal its payoff. I certainly think it would be to the benefit of the U.S. and the world if the subject was spoken on and spoken on loudly. I’m not hopeful however. To my European friends: I’m hoping you can keep a watch on Cheney at the economic forum next week. For those people who believe he is the real power behind the throne (I don’t exactly), his...

The Economist's Buttonwood Tree thinks (using decentralized distributed computation in its leaves, no doubt) that U.S. banks' earnings and stock prices have peaked: Economist.com | The Buttonwood column: But if banks have been more stable, the environment has also undoubtedly been much kinder to them of late. The fact that hardly any banks have gone bust in recent years (just two went under last year, neither big), even after the popping of one of the biggest stockmarket bubbles in history, is not just a matter of skill. Credit risk has been of fairly minor concern because few borrowers have gone bust. Although a few big, well-known companies folded after the stockmarket fell, banks have in fact had to write off very few bad loans. Charge-offs for corporate lending, for example, peaked in December 2001 at just over $6 billion and have halved since then. They are likely to continue falling, partly because corporate profits have soared, but also because of a renewed surge in investors’ appetite for risk, which has kept many a rocky company afloat. Moreover, consumers have kept spending, which has kept the economy buoyant and problem loans low. For that, thanks goes mostly to Alan Greenspan and...

Matthew Yglesias reports on the latest act in the clown show that is Bush administration fiscal policymaking: TAPPED: January 2004 Archives: WAIT 'TILL NEXT YEAR. Reuters reports that we're seeing some more cost overruns in Iraq: President Bush may seek an additional $40 billion or more for military operations in Iraq and Afghanistan next year -- on top of the $400 billion military budget he will send to Congress next month, congressional sources and budget analysts said on Wednesday. The American people aren't going to be happy to hear about that. But wait -- there's a plan: But Bush is unlikely to send the request to Congress until after the November presidential election, minimizing any political damage, the sources said. Needless to say, this basic M.O. of implementing policies whose deleterious consequences won't come until after the voting is done also typifies the administration's approach to such things as the budget, Medicare, and education reform. It's a really good way to minimize political damage, but as an approach to policy it leaves something to be desired....

The Wall Street Journal's David Wessel writes an excellent piece about my ex-boss Alicia Munnell's forthcoming book on how to make 401(k)s (and other analogous retirement-savings vehicles) a good thing: WSJ.com - Capital: A 401(k) plan can be a better deal than an old-style pension. A worker who contributes steadily and retires at 62 with a $52,650 salary could have 8% a year more in retirement, or $4,200 a year, than one with a typical defined-benefit pension, figures Alicia Munnell, a Boston College economist and co-author of a forthcoming book on 401(k)s, "Coming Up Short." But that isn't typical. "People make mistakes at every step along the way," she says. A Clinton administration alumna, Ms. Munnell is among those who want to shore up Social Security without private accounts. But her review of 401(k)s, written with Annika Sunden, offers compelling advice to those who favor private accounts -- either because they would, as Mr. Bush said, make Social Security "a source of ownership" for Americans or because they are a way to make Americans save more for retirement without raising Social Security taxes to the same end. Here are the rubs: Too many people -- one out of every four...

The Green Apron Monkey discovers Moe's wonderful, wonderful used book store: green apron monkey: January 2004 Archives: Kylee has shown me Moe's books in Berkeley. It's several stories of fantastic used book store. It had been so long since I had seen an economics section full of books that I really wanted to read. I talked myself out of Mankiw & Co. seminal work on Macroeconomics . . .and Bhagwati's slim pamphlet on protectionism. I did pick up some cheaper fare; Capitalism and Freedom, David Warsh's book on economic complexity, part Skidelsky's (mysteriously retitled) Keynes biography and Fareed Zakaria' s book on American empire. Maybe I'll start enjoying doing economics again. He should have picked up Bhagwati: it's great. And I thought that Skidelsky's retitling of volume III of his Keynes biography was well understood. The subtext of the British subtitle, "Fighting for Britain" was "Fighting Against the United States." Not the message you want to send with your subtitle if you want to sell books in the North American market. "Fighting for Freedom" is much better....

Oh God! Another piece of misinformation introduced into the stream of popular economic discourse! In his most recent Business Week column, Robert Barro says a number of things that... well, to put it politely, are not as true as he appears to think they are. But the most untrue of all are his claims that: ...over the past year... household [employment] grew by two million.... In the past year, the increase in the labor force by 1.7 million represented 1.2% growth--close to the annual growth rate of 1.4% seen since 1980. So there is no validity to the argument that the labor force behaved in an unusual way in 2003. Let's look at the numbers, most easily found in the CEA-JEC's monthly publication Economic Indicators: Status of the Labor Force (Household Survey) Date Adult Non-Institutional Population Civilian Labor Force Civilian Employment 2002:Dec 218.74 145.15 136.44 2003:Jan3 219.90 145.84 137.54 2003:Feb3 220.11 145.86 137.41 2003:Mar 220.32 145.79 137.35 2003:Apr 220.54 146.47 137.69 2003:May 220.77 146.48 137.49 2003:Jun 221.01 147.10 137.74 2003:Jul 221.25 146.54 137.48 2003:Aug 221.51 146.53 137.63 2003:Sep 221.78 146.54 137.57 2003:Oct 222.04 146.89 138.09 2003:Nov 222.28 147.19 138.53 2003:Dec 222.54 146.87 138.48 3Not strictly comparable with earlier data... an...

UPDATED AND REVISED: Another graph that is currently freaking me out is no longer freaking me out nearly as much now that--after prodding from Max Sawicky--I have figured out that the denominator of the earlier version included and the numerator omitted the large and variable statistical discrepancy between national income and national product, and thus that the earlier graph was showing a recent fall in relative worker compensation about 1.7 times as large as it should: Take total compensation paid to workers, and divide it by GDP. That's the blue line. Between 1990 and 1997 this worker compensation share fell from 65.5% to 63.7% or so. Between 1997 and 2001 this worker compensation share rocketed upward, peaking in 2001 at 66.8%. And since then it has fallen like a stone, to a level lower than in 1997 and in fact lower that at any time since the 1960s. And it is headed further downwards, in all probability: in the 1990s the worker compensation share of national income did not start to rise until the unemployment rate fell below 5 percent, and if you believe studies like Autor and Duggan today's labor market becomes as "tight" as it was in 1997...

The Whiskey Bar writes about how the New York Times can't even report its own polls straight:

Bush will claim that his plan will save Social Security. It will allow individuals to reap higher returns on their retirement assets in the stock market, maintain benefit levels for present and future recipients of Social Security (SS), restore solvency to the SS trust fund (as it stands the SS trust fund will run out of money in 2042) – all without increasing SS payroll taxes by one cent. Oh, and it also slices, dices, does basic home repairs, and builds bases on the moon.

Wow, people will say. It’s MAGIC! George Bush is a magician.

No, it’s not magic. It’s just deceptive.

Why do I expect Bush to make such deceptive claims? Because a) he has a proven track record of presenting proposals that magically cure all manner of ills while concealing any downsides (e.g. tax cuts, war in Iraq); and b) because that is what all recent privatization proposals have claimed recently.

Via Obsidian Wings, a bold new approach to the origin of species:

Nick Confessore writes about the real state of union: not very good.

The Future of the Economy: The Next Year--and the Next Decade J. Bradford DeLong What will the future bring for the world economy? What will happen to production in the developing world, and in the rich industrial--no, we dare not call it that anymore: it is post-industrial, for the developing portions of the world have or will rapidly have as great a share of their population working in "industry"--core? Only fools, it is said, make a forecast in which they give both numbers and dates. So let me wave my hands in the air and talk mostly about things that I am reasonably sure will happen, but have no idea when they will happen. In the United States the fears of nine months ago that the U.S. economy might (never would) succumb to deflation have been dispelled. What remains is a sense of tremendous waste of opportunity. Since George W. Bush took office, American real GDP has grown at 2.3% per year--a pace of growth that would have been acclaimed as normal and as satisfactory for the American economy back when George W. Bush's father or Ronald Reagan was president. But it is clear that the American economy could have...

The Economist puzzles over the--surprisingly low, IMHO anyway--yields on ten-year U.S. Treasury bonds: Wrong-Footed: Why Have Treasury Bond Yields Fallen?: ...in the past week the price of bonds has jumped, taking the yield on the benchmark ten-year bond to a sniff under 4%—and lower than it was at the beginning of last year. This is odd. The ten-year bond yield is, in essence, America's and the world's long-term risk-free interest rate. A year ago, economists and investors were fretting about anaemic growth and deflation in America. Since then, growth and the appetite for risk have soared. So, at first, did yields on ten-year bonds. Now they are falling again sharply. Why? The latest fall in yields was sparked by a report on January 9th which showed that far fewer jobs are being created—only 1,000 in December—than economists had expected, and raised renewed fears about an unsustainable “jobless” recovery. A parade of Fed officials said again that interest rates might have to stay low for a “considerable period”. Although pessimism on jobs may be overdone, markets seem to believe the talk of interest rates remaining low. At the peak last September, the futures market was predicting that short-term interest rates would...

Quotes from the Elmendorf-Mankiw "Debt Fairy" paper: Douglas Elmendorf and N. Gregory Mankiw (1998), "Government Debt" (Washington: Board of Governors of the Federal Reserve), pp. 25-26.This paper was prepared for the Handbook of Macroeconomics. We are grateful to Michael Dotsey, Richard Johnson, David Wilcox, and Michael Woodford for helpful comments. The views expressed in this paper are our own and not necessarily those of any institution with which we are affiliated.Abstract: This paper surveys the literature on the macroeconomic effects of government debt. It begins by discussing the data on debt and deficits, including the historical time series, measurement issues, and projections of future fiscal policy. The paper then presents the conventional theory of government debt, which emphasizes aggregate demand in the short runand crowding out in the long run. It next examines the theoretical and empirical debate over the theory of debt neutrality called Ricardian equivalence. Finally, the paper considers the various normative perspectives about how the government should use its ability to borrow. p. 1: The debt of the U.S. federal government rose from 26 percent of GDP in 1980 to 50 percent of GDP in 1997.... In the past, such large increases in government debt occurred only...

The N. Gregory Mankiw Fiscal Policy Quotes File Deficits And Economic Priorities (washingtonpost.com): The administration's budget update, released yesterday, shows the economic recovery is picking up steam. It also shows a budget deficit for 2004 of $475 billion.... [U]nder the president's proposals, the deficit will shrink from 4.2 percent of gross domestic product in 2004 to 1.7 percent in 2008. The key to achieving this is more-rapid economic growth, which will bring in more tax revenue, together with restraint in the growth of government spending. Because the deficit is shrinking, the accumulated level of national debt is not expected to become problematic...The corporate income tax is popular in part because it appears to be paid by rich corporations. Yet those who bear the ultimate burden of the tax--the customers and workers of corporations--are often not rich. If the true incidence of the corporate tax were more widely known, this tax might be less popular among voters. (p. 255, Principles of Economics, N. Gregory Mankiw, The Dryden Press/Harcourt Brace, 1998) So this tax cannot impede investment and economic growth, insofar as such investment and growth is due to corporations. They should be indifferent to the tax, and they are wasting a...