THE DOLLAR DIVE GETS SERIOUS

So, it is not just that the US dollar has hit an all time low against the euro, but it has hit parity against the long-derided Canadian dollar (aka "looney") for the first time in over 30 years, and much more significantly, for the first time in 50 years, the Saudis are considering unpegging their riyal from the US dollar, frustrated at the inflationary pressure arising from the rising cost of imported food as their currency declines with the dollar. The upshot is a very real danger of a full-blown plunge of the dollar internationally, in the wake of the interest rate cuts by the Fed, in their efforts to stem the tide of housing price declines and failures in the sub-prime mortgate industry that have been filtering out into the global financial markets. But, with the unprecedented and humongous net international indebtedness of the US, combined with ongoing and large-scale current account deficits, this is indeed a very dangerous situation (especially for someone like me about to travel to Europe, :-)).

Delong Smacks Lucas Down!

Check it out. I went to grad school during the heyday of Lucas/Sargent/Wallace/Barro "policy-ineffectiveness" theology. The picture of how the macroeconomy works that this gang flacked has turned out to be utterly, utterly wrong. The idea that the business cycle is caused by "unanticipated money" shocks - so that an economy where the Fed acted in predictable ways would be cycle-free: this is, and was, intellectual rubbish! Why have these people paid no price for being so wrong, I wonder? Like the liberal war-bloggers, their eminence is undiminished.

A Comment on Senator Obama’s Tax Proposal from a Bear Inflicted by Deficit Dementia

While I have been a big fan of what Max Sawicky started in Blogland a few years back, he and this ProGrowthLiberal (if you are thinking another Gene Sperling type – you are close) did not entirely agree 100% on how to express our views on things like fiscal policy. After all, someone who has been signing onto the Angrybear blog (before our cave got too crowded with all sorts of Bears – some of which I worry have been visiting Dick Cheney’s cave) as PGL, it is fair criticism that I’m in the Rubinomics camp at least when it comes to trying to restore national savings. I can try to defend my DeLong-ish deficit hawk view on things by appealing to the Solow growth model and all, but I know this crowd will rightfully fire back with things like the benefits of public investment, the importance of distributional equity, and even the need to stay close to full employment. No argument here, so let me get to my first politically framed post with an economist twist by pointing to a recent Angrybear post:

I see the Republicans topping the modest tax cuts that Senator Obama is proposing by promsing larger tax cuts for everyone. But that’s the problem. The GOP is all about Spend&Spend and Borrow&Borrow, which simply means deferring the tax bite. I don’t want Democrats promising voters that money grows on trees.

OK, you may say this Bear really has Deficit Dementia so badly that he has no clue as to how to play the DC games with the reprehensible GOP types. Fair enough but as I try to distance myself just a bit from Kevin Drum, I do need to step back and realize that Kevin is also afflicted with both Deficit Dementia and a desire to be slightly right of MoveOn. But that should not stop either one of us for calling on the next President for insisting on a more progressive tax code.

Which leads me to where I think Senator Obama must have been reading MaxSpeak, You Listen. Over at Angrybear, I had two habits: (1) complaining a lot about how multinationals manipulated transfer pricing and got away with it; and (2) stealing choice phrases from Max. These were not mutually exclusive activities as Max has some of the best commentaries on how transfer pricing manipulations would cheat the US Treasury.

So my first post is less on the issue of fiscal policy and more a promise to say more on this issue of how the next President – be that Senator Obama or one of the other good choices from the Democratic side (please don’t get me started on Rudy McRomney) – can gather at least a few morsels from effectively enforcing section 482, which should be the domain of economists even if we let the tax attorneys trample all over us.

Of course, if one of these responsible GOP types dusts off Social Security deform, expect this Bear to reject the notion that prefunding is jive. But I don’t want to go down that road just yet as I remain thankful that Max has given me the right to post here.

Update: Did I predict that the Republicans would up the ante on tax cuts? Ramesh Ponnunu proves me right! He wants everyone to get a tax cut. And I thought Ramesh was the sole smart one at the National Review. For why this is another nitwit rant, see Mark Thoma. Shall we just call the GOP, the “money grows on trees” party?

Prices as Intellectual Property

The magic of the marketplace that Hayek proposed works because prices covey the information necessary to make efficient decisions. I never believed Hayek, but I never supported intellectual property either. Here we have Harvard's bookstore acting as if its retail prices were intellectual property to prevent students from buying "efficiently."

http://www.boingboing.net/2007/09/19/harvard-bookstore-ou.html

"The Coop, Harvard's Barnes-and-Noble-run bookstore, has begun to throw out students who "take a lot of notes" about book pricing, stating that their prices are "intellectual property." Apparently, no one with a Harvard Law degree is involved in formulating this notion, as factual matters (such as pricing) are not copyrightable."

"Coop President Jerry P. Murphy '73 said that while there is no Coop policy against individual students copying down book information, "we discourage people who are taking down a lot of notes." The apparent new policy could be a response to efforts by Crimsonreading.org -- an online database that allows students to find the books they need for each course at discounted prices from several online booksellers -- from writing down the ISBN identification numbers for books at the Coop and then using that information for their Web site. Murphy said the Coop considers that information the Coop's intellectual property."

Greenspan on the futility of Economic Forecasting

Dufour, Jeff and Patrick Gavin. 2007. "Alan Greenspan's a Pessimist on Economists." Yeas & Nays (11 September). http://www.examiner.com/blogs/Yeas_and_Nays/2007/9/11/Alan-Greenspans-a-pessimist-on-economists

When you gather together three Nobel prize winners, four former members of the White House's Council of Economic Advisers, a Congressional Budget Office head and a former treasury secretary, you sure don't expect them to be told that, well, their life's work has all been for naught. But, at a private dinner Friday held at the Washington Club to honor Brookings Institution economist George Perry and Yale's Bill Brainard (both the retiring editors of the renowned Brookings Panel on Economic Activity), former Federal Reserve Chairman Alan Greenspan told the audience that economists don't really know anything.

"The one thing that struck me is that, despite the extraordinary sets of articles, insights and analysis by the people in this room and the other colleagues in BPEA, our ability to forecast the business cycle has not improved one iota," Greenspan said. "The best models don't work all that well."

Ouch.

But don't cry just yet, wonks: Greenspan was actually asked by BPEA to discuss the inherent difficulties in economic forecasts (economists are gluttons for punishment, don't you know) and Greenspan -- in the type of English only he can employ -- said the uselessness of their jobs actually creates usefulness!

"It doesn't, however, induce us to then conclude that, if the model doesn't forecast -- which implies that it has not captured the appropriate structure -- we nonetheless tend to use the structure of the model to do analysis and draw significant conclusions about how the inner workings of relationships occur even though the coefficients which we're employing clearly don't forecast anything worthwhile."

Exactly. What he said.

Thanks to Doug Henwood who posted this to the LBO mailing list.

more on Liberals vs. Conservatives

This one makes more sense to me than the one about conservatives being "rigid" and liberals being "flexible," which seemed tautological. Whereas that article really couldn't say anything about non-liberal, non-conservative people like Marxists (who I guess would be both rigid and flexible simultaneously), this one might: Marxists might be saying that the five different moral principles that Haidt posits have been ripped apart by the rise of modern capitalist society and that this alienation needs to end, to find harmony among them. -- Jim

from the Science section of the NY TIMES, 9/18/07: >>“Imagine visiting a town,” Dr. Haidt writes, “where people wear no clothes, never bathe, have sex ‘doggie style’ in public, and eat raw meat by biting off pieces directly from the carcass.”

>> He sees the disgust evoked by such a scene as allied to notions of physical and religious purity. Purity is, in his view, a moral system that promotes the goals of controlling selfish desires and acting in a religiously approved way.

>> Notions of disgust and purity are widespread outside Western cultures. “Educated liberals are the only group to say, ‘I find that disgusting but that doesn’t make it wrong,’ ” Dr. Haidt said.

>> Working with a graduate student, Jesse Graham, Dr. Haidt has detected a striking political dimension to morality. He and Mr. Graham asked people to identify their position on a liberal-conservative spectrum and then complete a questionnaire that assessed the importance attached to each of the five moral systems. (The test, called the moral foundations questionnaire, can be taken online, at www.YourMorals.org.)

>> They found that people who identified themselves as liberals attached great weight to the two moral systems protective of individuals — those of not harming others and of doing as you would be done by. But liberals assigned much less importance to the three moral systems that protect the group, those of loyalty, respect for authority and purity.

>> Conservatives placed value on all five moral systems but they assigned less weight than liberals to the moralities protective of individuals.

>> Dr. Haidt believes that many political disagreements between liberals and conservatives may reflect the different emphasis each places on the five moral categories.

>> Take attitudes to contemporary art and music. Conservatives fear that subversive art will undermine authority, violate the in-group’s traditions and offend canons of purity and sanctity. Liberals, on the other hand, see contemporary art as protecting equality by assailing the establishment, especially if the art is by oppressed groups.

>> Extreme liberals, Dr. Haidt argues, attach almost no importance to the moral systems that protect the group. Because conservatives do give some weight to individual protections, they often have a better understanding of liberal views than liberals do of conservative attitudes, in his view. [what about the "extreme conservatives"?]

>> Dr. Haidt, who describes himself as a moderate liberal, says that societies need people with both types of personality. “A liberal morality will encourage much greater creativity but will weaken social structure and deplete social capital,” he said. “I am really glad we have New York and San Francisco — most of our creativity comes out of cities like these. But a nation that was just New York and San Francisco could not survive very long. Conservatives give more to charity and tend to be more supportive of essential institutions like the military and law enforcement.”<<

GETTING KERRY'D AWAY

by the Sandwichman

Democracy is unruly. Can't have that.

The jazzy sounds of Alan Greenspan

It's not news that AG spent some time playing clarinet in the Herbert Jerome band. In the memoir, so the grey lady informs me this morning, he recalls, during down-time, band-members clouded in tobacco and marijuana smoke in one room, while he sits alone in the next ensconced in an economics tome, or - I'm imagining,- some of the texts that pre-figure his inauguration into the Rand cult . I picture the standard jazz repertoire filtered through his green-eye-shaded, Objectivist sensibility:


"How High The Prime."
"I'm Growing Sentimental Over Me."
"In A Rationally Exuberant Mood."
"Tea For Two - With Separate Checks, Please."
"I Concentrate On Me."
"I've Got Liquidity - Who Could Ask For Anything More?"
"Concerto For Kooky (For Ayn)."
"In The Wee Smaa Structures Of The Minimal State."


---and that's just the first set!

National Bureau of Economic Research. 3

The third article, continues the downward spiral. There, Alexander Dyck, Adair Morse, and Luigi Zingales in "Who Blows the Whistle on Corporate Fraud?" suggest that government regulators are not very effective in rooting out corporate fraud, and, what is worse, rational expectations of investors are not very active either. The authors recommend giving more incentives to whistleblowers. This recommendation certainly must be wrong. What corporation needs such meddling? The decline in the standards of economics generally upheld by the National Bureau of Economic Research must be reversed.

http://www.nber.org/digest/aug07/w12885.html

National Bureau of Economic Research. 2

The second National Bureau of Economic Research article must have slipped in by mistake. There, Pinelopi Koujianou Goldberg and Nina Pavcnik in the article entitled "Distributional Effects of Globalization in Developing Countries." In what must be a horrendous blunder, they come to the conclusion, "the evidence has provided little support for the conventional wisdom that trade openness in developing countries would favor the less fortunate." After all, everyone knows that the purpose of expanding trade is an act of generosity, intended only to help the poor.

National Bureau of Economic Research. 1

I'm just looking over the August NBER digest. It covers five NBER articles, of which three may be mildly interesting. The first has the scary title, Public Insurance Expansions Crowd Out Private Health Insurance by Jonathan Gruber and Kosali Simon. We learn that: For every 100 children who are enrolled in public insurance, 60 children lose private insurance." Thank God that George Bush had the courage to stand up to the radicals and threatened to veto an expansion of child health coverage. Otherwise, they might lose their private insurance.

http://www.nber.org/digest/aug07/w12858.html

It's About the Oil Money

The web is ablaze with talk about Iraq, oil and the latest passing comment from Alan Greenspan. Let’s be clear:

The Iraq war is not about controlling oil. There is a global market in the gunk, and if the US or anyone else has difficulty getting it from country A it can always turn to country B. Also, no otherwise poor country would ever, ever refuse to sell oil for any prolonged period of time. It’s the difference between being important and having some leverage, and being a nobody. Quite aside from whatever you think about Hugo Chavez’ policies, where would he be if he stopped pumping and selling oil? So, no, there is no threat that any oil producing country will cause chaos by dismantling its industry or even reshuffling its sales contracts.



It could be about setting OPEC quotas, maybe. The countries the US hates and tries to undermine tend to be OPEC hawks (Iran and Venezuela). But it is not clear that those who set US priorities are so in favor of cheap oil either. There are also less expensive ways to influence OPEC.

Then what’s it about? The oil money. It’s big, one of the primary forces in the global economy. If Everett Dirksen had been a sheik, he might have said, “a few hundred billion here, a few hundred billion there, and soon you’re talking about real money.” Who gets this moolah and what they do with it is what it’s all about.

Washington has two overriding imperatives. First, the money should not be used to fund political movements the US opposes. This includes Chavismo, Islamicism or any other attack on liberal capitalism from the left or right. Second, the money should be recycled to banks with the appropriate dollar and euro portfolios, lest financial imbalances lead to a run on the hegemonic currencies. (OK, maybe there is no alternative if you have to put an unimaginably large sum somewhere, but it remains an imperative.) The blog folk wisdom about “the war was because Saddam wanted to price oil in euros” is technically wrong but gropes after the right answer: those who are allowed to rake in the oil billions must be counted on to send them back to the proper address.

Follow the money.

How to Blunt Competition

In a world with massive overcapacity, firms need to blunt competition. Here is a case in which one company buys out another, just to eliminate a competitor.Hansell, Saul. 2007. "Seagate: Missed the IPod but Selling to Lots of Snoops." New York Times On Line (10 September).

http://bits.blogs.nytimes.com/2007/09/10/seagate-missed-the-ipod-but-selling-to-lots-of-snoops/#more-423"

In 2006, there was a cutthroat battle for market share set off in part by Seagate's acquisition of Maxtor. This year, competition has eased and Seagate's gross margin has expanded to 24 percent. "The industry can't sustain two years of price wars, Mr. Watkins said, referring to rival drive makers. "People decided to stop losing money." When Seagate bought Maxtor in 2005, it kept hardly any of that company's technology or employees. The $1.9 billion deal was simply about removing a competitor. Seagate was No. 1 in the market; then Western Digital followed by Maxtor. While it kept the Maxtor brand, Seagate makes all its drives in what had been Seagate facilities using Seagate's technology. The company figures it lost half of Maxtor's market share. But the other half, plus the benefits of reduced competition, make the deal worth while, Mr. Pope said."

Mankiw on Carbon Taxes

The drumbeat for carbon taxes has begun in earnest, and if we don’t pay attention we may wake up one morning a year from now and find the issue has been settled and a rare opportunity has been lost.

Mankiw has a piece in today’s New York Times that says the intellectual battles are over, and now it’s time for a grand coalition to put a tax on carbon. He gives these arguments:



1. Carbon taxes use a tried-and-true method for curtailing something we don’t like, in this case pumping carbon into the atmosphere.

2. We can use the revenue to cut other taxes, like the income tax. The taxes we cut have harmful effects on the economy, so we reap a double bonus: less bad stuff (carbon emissions), more good stuff (economic growth).

3. The only alternative to taxes is cap-and-trade. This opens the door to giving away carbon permits (bad), and if we somehow manage to auction them the result is identical to a carbon tax.

4. Each nation can set its own carbon tax, so we don’t have to worry about coordination. A global permit system would enable polluters in the US to buy carbon offsets in China.

In each case Mankiw is wrong, in some a little, in others a lot. It all adds up to a questionable sell job.

1. Yes, putting taxes on things we want to discourage is an old, time-tested idea. (Incidentally, it long predates Pigou. Do you remember a harbor fracas just before the American Revolution?) But so is issuing permits. We have permits for hunting and fishing, also for marriage. (One to a customer.) Neither involves reinventing the wheel.

2. Mankiw makes this argument because he believes that income, corporate profit and other taxes prevent the economy from reaching the free-market bliss it could otherwise attain, He knows government has to raise money, but he thinks it causes wicked distortions when it siphons off some of the earnings stream. This is faith-based economics, however. There is no systematic evidence that the income tax leads people to work less, and even if it did, it may just be the case that many of us should work less. If Mankiw’s travels take him to Cornell, he should have a Frank discussion on this topic.

But relying on carbon taxes is also a terrible way to finance the government. We are talking about half a trillion dollars or so in revenue, so the percentage of financing would be quite large. Income fluctuates, and that is a problem, but the spending on a particular set of items, like fossil fuels, has the potential to fluctuate even more. Example: suppose we really are facing an oil production peak, and scarcity causes the price to spike? Every 10% rise in oil prices will tend to cause something like a 5% reduction in long run demand (I’m rounding here – and thanks to Gar Lipow for his valuable work in collating the evidence), but this also means less carbon tax revenue, potentially a lot less. This is a serious problem, one that the green taxers have not really confronted.

3. Cap-and-trade and cap-and-auction are two entirely different animals. The first gives away the permits to historic polluters, the second asserts the public’s ownership of the commons and charges a price for its use. It is true that the dominance of wealth over our political system often leads to giveaways like cap-and-trade, but that’s a fight we can’t avoid in any case.

The real wonder here is that Mankiw could make such an elementary economics error as to suggest that taxes and cap-and-auction are “effectively” the same. In an uncertain world this is false. From a conventional benefit-cost perspective, Weitzman showed long ago that there were important differences depending on the slope of the marginal benefit and cost functions. Translated into common English, if we are uncertain about the long run relationship between the price of carbon emissions and the amount of emission – and we very much are – and if the risk of allowing too much climate change is greater than the risk of economic indigestion from trying to be too green – which seems pretty clear to me – then permits are the right choice. By controlling the number of permits we control our most important impact on the earth’s carbon budget, but allow prices to wander. By setting a tax we control the price but allow the amount of pollution to wander. That’s a big difference: you might say, given the gravity of what is at stake, that it’s the difference between ecological responsibility and irresponsibility.

4. Both taxes and permits create the same problem. If one country takes stringent action of either sort and another doesn’t, producers in the less-green country get a competitive advantage. If you have a permit system, they don’t have to pay for the permits; if you have a tax system, they don’t have to pay the tax. What to do? There have been mumblings from Europe about a green tariff to offset these differences, which makes sense to me. This is a discussion we need to have no matter what system we put into place.

Mankiw doesn’t seem to have paid attention to the global debate about climate equity. In the long run, there is no defensible argument against allotting each of the planet’s residents the same carbon “space”. In the short run, the rich countries start out with more because they can’t cut back to the sustainable level immediately without causing themselves and everyone else grave harm. But they also have an obligation to take action first and more aggressively since it is the accumulation of carbon in the atmosphere that causes the problem, and us industrialized types have been adding to this accumulation for a hundred years or more. Kyoto was a bumbling attempt to implement this ethical framework; hopefully we will do it better in the future.

The reason we need global action is that it is a global problem. Countries that fail to act free ride off of those that do. This points to the need for a stronger climate treaty, but no such treaty would try to tell countries what methods they should use, only what results they should be held to. So Mankiw’s discussion of taxes vs permits in the global context is confused and, in the end, irrelevant.

Bottom lines: (1) Although we still have (soon to be extinct) dinosaurs blocking the path, there is now a general consensus behind aggressive action to forestall the most extreme climate change. If Mankiw had published this article five years ago I would have welcomed it. Today, however, the question is what to do about the problem, and I would strongly encourage those who put ecological responsibility and social justice first to stick to their guns. We should have permits because they put the planet first, and we should auction them and distribute the revenues on a per capita basis because it is fair and economically sound. (2) It is a mistake to get drawn into a debate over how high to set carbon taxes. No one wants to pay taxes. The result will be a half-hearted effort riddled with safety-valves and loopholes. Perhaps this is why the big money is behind a tax approach: they know they will be let off the hook. When we talk about how many permits to issue, on the other hand, the debate is over how much carbon accumulation, and therefore how large a risk of catastrophic climate change, we are willing to accept. That’s the conversation we need to have.

A French Lesson

Laissez-faire refers to pro-market policies (though in practice, they help big business and the rich). It is not the same as laisser faire, which means a feckless and unconsidered attitude in the application of any policy. Somehow the George W. Bush administration combined both laissez faire and laisser faire.
Jim