Apologies to John Dingell

Doug Henwood tells me that Charles Komanoff and
the folks at the Carbon Tax Center report that
Rep. Dingell's carbon tax bill is both good and,
in their words, "terrific."  Here is a link for the bill.


http://www.carbontax.org

Unexpected Roads Happily Traveled

Robert C. Merton, winner of The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1997 (sometimes incorrectly known as the Nobel Prize in Economics wrote with what in retrospect might have an ironic ring:
"It was deliciously intense and exciting to have been a part of creating LTCM (Long-Term Capital Management). For making it possible, I will never be able to adequately express my indebtedness to my extraordinarily talented LTCM colleagues. The distinctive LTCM experience from the beginning to the present characterizes the theme of the productive interaction of finance theory and finance practice. Indeed, in a twist on the more familiar version of that theme, the major investment magazine, Institutional Investor characterized the remarkable collection of people at LTCM as "The best finance faculty in the world." In long retrospect, unexpected roads happily traveled"."

http://nobelprize.org/nobel_prizes/economics/laureates/1997/merton-autobio.html

Economists vs. Politicians

Peter recently posted something about Mankiw's New York Time piece supporting carbon taxes.

http://econospeak.blogspot.com/2007/09/mankiw-on-carbon-taxes.html

It isn't often that we can find examples of the economics profession behaving well, but the Wall Street Journal has chimed in reporting that economists as a whole agree that carbon taxes are the way to limit global warming, yet politicians are just as adamant in supporting the cap and trade. Nobody wants to get blamed for raising taxes. Rep. John Dingell (Dem, GM; i.e. General Motors) is still supposed to introduce a carbon just to prove how unpopular such a tax might be. Here is the link for the article:

http://online.wsj.com/article/SB118955082446224332.html?mod=todays_us_page_one

Health Care: Are Greg Mankiw and Dick Morris Trying to Help Senator Clinton?

Better question – why is Greg relying on Dick Morris for economic policy discussions? I refuse to suggest that Mr. Morris is going to bother to truthfully inform us on any issue preferring to quote Greg:

His one-third figures seem a bit high to me, but he is right that 47 million substantially overestimates the magnitude of the problem. A serious estimate would take out both illegal immigrants and those who are eligible for Medicaid but have not applied. Those eligible for Medicaid can always enroll once they need significant medical care. In addition, I would exclude those who were offered employer-provided health insurance but declined coverage, and those that are healthy and making more than, say, $50,000 a year. These two groups are choosing to roll the dice. According to estimates I have seen, they make up more than a quarter of the uninsured.

Let’s think this through – if the problem of uninsured is not as large as what Senator Clinton has suggested, then the budgetary costs of addressing this problem wouldn’t be as large either. The usual rightwing criticism of Clinton’s proposal is that it would raise taxes a lot. I guess Dick Morris was trying to help the Senator out by deflating this rightwing argument. Thanks Dick! Thanks Greg!

Moral hazard fundamentalism

Thoma and Delong both linked to Summers' FT column with this title yesterday. Summers has in mind the trade-off between stability and moral hazard that a lender of last resortmust negotiate. Fundamentalists look at the moral hazard costs of such policies (people take inefficiently high risks, knowing that they will be bailed out) and ignore the benefits of insuring that solvent debtors are not brought down in a panic: they see no trade-off at all. It's as if, he says, we argued that because the presence of a fire-house down the street makes us somewhat more likely to smoke in bed, that therefore there should be no firehouses!

This fundamentalism is indeed pervasive. Here is another example: State policies that compress the income distribution - progressive taxes, safety nets, etc- clearly increase moral hazard and lead to less effort- the incentive to take actions that increase pre-tax income is dulled to some extent. That's enough to condemn such policies for the fundamentalists. But this is to ignore the huge benefits that such policies create by spreading risk more efficiently. Due to adverse selection, generalized income insurance is not a paying proposition for private insurers. Social welfare states, by making everyone join the pool, substitute for this missing market. There is a trade-off here, as in the LLR case, and it is a tradeoff not (or not just) between efficiency and equity, but between two sources of efficiency: lower moral hazard and more risk-spreading both increase "certainty-equivalent" income. Policies that increase income security are not wimply interferences with efficiency: they are part and parcel of what efficiency requires. The thorough-going "ownership society" - the end-point of moral hazard fundamentalism in this context,-by failing to see the trade-off involved, is an inefficent society, where certainty-equivalent income is lower than it could be. It's no different form the society that foregoes fire-houses due to the moral hazard of increased smoking in bed.

Not Sure I’d Let This “Economist” Cook for Me

Mark Thoma emails me a gift calling Economics For Dummies the “economics of a dummy”. Ralph R. Reiland (the 3 R’s) says he is an associate professor of economics at Robert Morris University and a local restaurateur. I have no clue what the quality of instruction is at Robert Morris University but I sure hope the cooks at his restaurant are better at the culinary arts than Mr. Reiland is at understanding macroeconomics. He confused the aggregate demand effects of the 1964 tax cut supported by easy monetary policy with the supply-side insanity of Jude Wanniski and Arthur Laffer. He also wrote this old chestnut:

Additionally, inflation fell from double digits in 1980 to 1.9 percent in 1986, federal revenues increased by nearly half a trillion dollars over their 1980 levels by the end of Reagan's second term, the federal budget deficit fell from 6.3 percent of GDP in 1983 to 2.9 percent in 1989, and unemployment dropped from 7.1 percent in 1980 to 5.3 percent in 1989.

I would hope his students know that part of the reason inflation fell was that massive 1982 recession brought on by the Federal Reserve’s zeal to offset the aggregate demand effects from the 1981 tax cut. I would also hope his students are aware that real per capita Federal income taxes were barely higher in 1992 than they were in 1980. Can I suggest to Robert Morris that they not let such foolish ideas come before their students?

Using Markets to Fight Global Warming

Here is a remarkable step forward in fighting global warming here on the Left Coast. "The State energy commissioners on Thursday unanimously adopted a proposal that would financially reward or punish California's largest utilities for their performance on energy-efficiency programs. Members of the California Public Utilities Commission voted to award up to $450 million over three years to Pacific Gas and Electric Co., Southern California Edison, San Diego Gas & Electric and Southern California Gas Co. if they meet specific goals to trim energy consumption. While the money would come from approved rate increases, said Commissioner Dian Grueneich, who co-wrote the proposal, the increases would be more than offset by up to $4 billion in reduced energy costs for consumers." Follow the dancing money.
http://www.sacbee.com/103/story/390798.html

How to Do Chicago Economics

Here are two discussions about how Chicago teaches economists to do economics. Both Reder and McCloskey say that when the evidence contradicts ideology, stick with the ideology.

McCloskey, Donald N. 1985. The Rhetoric of Economics (Madison: The University of Wisconsin Press).

140: "In seminars in economics it is common for the speaker to present a statistical result, apparently irrefutable by the rules of positive economics, yet to be met by choruses of "I can't believe it" or "It doesn't make sense." Milton Friedman's own Money Workshop at Chicago in the late 1960s and the early 1970s was a case in point."

And

Reder, Melvin W. 1982. "Chicago Economics: Permanence and Change." Journal of Economic Literature, 20: 1 (March): pp. 1-38.

13: "Any apparent inconsistency of empirical findings with implications of the theory, or report of behavior not implied by the theory, is interpreted as anomalous and requiring one of the following actions: (i) re-examination of the data to reverse the anomalous finding; (ii) redefinition and/or augmentation of the variables in the model...; (iii) alteration of the theory to accommodate behavior inconsistent with the postulates of rationality... (iv) placing the finding on the research agenda as a researchability anomaly." Chicago tends to shun iii.

13: It is customary to confront theory with evidence. By contrast, "Chicago economists tend strongly to appraise their own research and that of others by a standard that requires [inter alia] that the findings of empirical research by consistent with the implications of standard price theory."

18: The major objective is to convert non economists to their way of thinking.

19: "However imaginative, answers that violate any maintained hypothesis of the paradigm, are penalized as evincing failure to absorb training."

20: ""Explanation" means either a demonstration that the phenomenon is compatible with the underlying theory, or the provision of such extensions of the theory as may be required."

25: Friedman combined economic research with advocacy of specific proposals. All involved an increased use of price system instead of public production .... This is a normative stance. Friedman said to advocate regardless of political practicality. Stigler thought that once could convince a beneficent government to adopt reforms with sufficient political support. He eliminates the normative.

WHY DOES IT TAKE SO LONG TO HEAR FROM ECONOMICS JOURNALS ABOUT SUBMITTED PAPERS?

As editor of an economics journal, I regularly hear authors complain about long lags for referee reports. I am very sympathetic with these complaints and frustrated myself. What is especially frustrating is that I know that these lags are much shorter in many other disciplines, especially the hard sciences. Physicists and others are simply shocked at the lags in economics refereeing and publishing, and this has led to much of the recently emerged econophysics literature being published in physics journals like Physica A and European Physical Journal B, which are not indexed in the Journal of Economic Literature, and hence not read and not even known about by most economists.

Ofer Azar has argued in a paper in Economic Inquiry this year ("The slowdown in first response times of economics journals: can it be beneficial?" 45(1), 179-187) that indeed the increasing lag of authors hearing back from journals could be a good thing, maybe even optimal. This is because people need to pay a cost for sending papers to journals that are too far above them and in which they have no chance of publishing. Hence, they will get the signal if they have to wait a long time and just get rejected and send their papers to appropriate outlets. Azar argues (in a paper forthcoming in JEBO, which I edit) that the shorter response times in physics reflect that their papers are shorter on average than those in economics. This latter point is correct, but I think that what has happened is that a bad social norm has evolved in economics where referees simply assume that they can sit on papers from economics journals for a long time and just put them aside, fearing that if they get their reports back quickly, they will simply be punished by having more papers sent to them to referee, given that the average response times are so long. I dislike this social norm, but it is very hard to overcome (and the Berkeley Electronic Press's effort to shorten refereeing times has so far resulted in published articles that barely get cited in other papers).

Hapy Birthday

John Coltrane, born September 23,1926. Go listen to "Alabama" - and think about Louisiana.

Does the Washington Post Think the U.S. Exports Oil?

Dean Baker has some fun with an article written by Steven Mufson on the supposed effect of Federal Reserve policy on oil prices:

Let's try to write this so even a reporter can understand it. Oil is bought and sold in a huge market. The unit of account happens to be the dollar. This means that if the value of oil against all other commodities remains fixed, and the value of the dollar falls against other currencies, then the price of oil will be higher measured in dollars, and essentially unchanged in other currencies (there are some secondary effects - if oil is more expensive in dollars, people in the U.S. will buy less, which can make the price of oil somewhat cheaper measured in other currencies). The same would be true if oil were priced in euros, yen, bushels of corn, or gallons of peanut butter. There is no special importance to the fact that oil happens to be priced in dollars. So, let's get the story straight and stop confusing readers.

Dean Baker’s point is that currency of denomination is not the issue. But let’s take a look at what Mr. Mufson wrote:

Federal Reserve Chairman Ben S. Bernanke may have cooled off the credit crisis by cutting interest rates, but he may also have heated up oil prices this week. For seven consecutive business days, crude oil prices have hit new highs. Even after dropping slightly yesterday, crude oil on the New York Mercantile Exchange finished the week at $81.62 a barrel, up a third since Jan. 1 and not far short of the inflation-adjusted peak set in January 1981 … Lower interest rates have also undercut an already weakened dollar, which reached $1.41 against the euro. Since crude oil is priced in dollars, a weak dollar makes oil cheaper abroad and high prices in dollars more sustainable.

Mufson has the charts to demonstrate oil prices have risen and cites several factors that led to the increase in the market price besides the reduction in the Federal Funds rate. He then notes:

"In spite of the high [gasoline] prices, we have still seen growth in the United States," said Rob Routs, executive director of downstream at Royal Dutch Shell. He said that the United States has been importing about 1 million barrels a day of refined products

I guess Mr. Mufson knew we were a net importer of oil and not a net exporter. And I thought a dollar devaluation was supposed to increase world demand for our exports as it discouraged our demand for imports. The devaluation does matter as it impacts relative prices – but I think Mr. Mufson has his story a wee bit backwards.

Greg Mankiw Asks the Democrats a Good Question on Fiscal Policy

I think Greg Mankiw has a point here:

Okay, you want to raise taxes on the rich. I get that. But what do you want to do with the money? At different times, it seems, you want to: (1) Fund universal health care: (2) Give a tax cut to the middle class; (3) Reduce the long-term fiscal gap. Which is it? … No one really thinks you can achieve all three of the above goals in any significant degree and pay for them with only tax hikes on the rich. When it comes down to choosing among the three goals, which one would you pick?

Fair enough but when is Greg going to ask Mitt Romney the same type of questions. Mitt is acting a lot like Rudy Giuliani:

But eliminating the AMT would be extremely expensive, costing $100 billion in 2010 alone. Giuliani told the 700-member audience of the Northern Virginia Technology Council that he wants to cap the tax, and perhaps eventually eliminate it altogether. "Over time we can figure out how to eliminate it. ... If we were going to eliminate it, though, we'd have to balance it with additional tax cuts," Giuliani said, leaving confused expressions on his audience. "That might be by making the Bush tax cuts permanent."

Kevin Drum calls Rudy a buffoon:

Even a local Democrat who heard the speech was willing to give Rudy the benefit of the doubt on this: "I do think he may have misspoke," said Gerry Connolly, the chairman of Fairfax County's Board of Supervisors. Please. Just for once, can we hold this guy responsible for what he says? Sure, he misspoke, but he misspoke because he doesn't have a clue what he's talking about and blurted out the first thing that came to mind: namely that reducing taxes is the answer to every question. Nobody with even the vaguest idea of what it meant to eliminate the AMT would say that it had to be balanced by reducing other taxes.

Kevin is right. But he’s no less of a buffoon than Mitt Romney. It’s fine for Greg to ask his question to Democrats but when is he going to do the same to the candidate he seems to support?

Bubblicious

There is a useful piece by Floyd Norris in this morning’s NY Times about the Fed’s response to the housing bubble. It echoes the larger debate, which has flared up again with his PR blitz, over whether Greenspan was fiddling while Roman property values went through the roof.

Let’s step back for a moment and consider the larger context. The US has been running a very large current account deficit. Here are the quarterly data since 1990 courtesy of the BEA:

US Current Account Balance as a Percent of GDP

If this were the total story, the US economy would have been moribund since the late 1990s when the deficit really took off. This fraction represents income that leaves the country rather than making purchases that would support domestic employment.

But this is only half the picture. The other half is the return of this money via the capital account, in the form of purchases of debt, like treasury bonds, and assets. This return flow not only finances the current account deficit, propping up the dollar, but also makes possible continued US economic growth. For instance, the willingness of foreign central banks to accumulate treasuries means that the Bush crowd can borrow freely to finance the federal government deficit without fear of pressure on interest rates. (This is not to say that the fiscal deficit is too high in any general sense, which it isn’t.) The infusion of foreign finance also sustains asset prices, like stock values, above what they would otherwise be. This generates capital gains for those who have positions in these markets and also encourages borrowing against paper wealth.

The housing bubble could be seen as a bit of both of these. Foreign purchases of mortgage-backed securities injected large amounts of money into the housing market, so that the demand for loans, no matter how outlandish, never exceeded the supply. This in turn fueled a bubble in the existing housing stock. Now that the bubble is bursting, there are fears of a general financial crunch.

Perhaps, but there is still one more river to cross. If the central banks and oil funds that currently finance the US external deficit continue their willingness to hold dollar assets, the money will simply have to go somewhere else. It can finance government and corporate debt, driving down interest rates. It can go into purchases of US companies, goosing the stock market. As long is it has to go somewhere it will.

The risk, of course, is that at some point the sovereign entities on the receiving end of the massive dollar flow will decide that enough is enough. Perhaps the extent of losses they will suffer due to the mortgage meltdown will force them to pull back. Maybe a private sector stampede, sparked by further bad news about defaults, will overwhelm the ability of CBs to stem the tide and sustain US financial markets.

The larger story, however, is that, as long as the US economy chugs along in a temporary equilibrium of massive external borrowing, bubbles of one sort or another are inevitable. That’s why it’s an equilibrium and also why it’s temporary.

I Bet Lou Dobbs Is Not Happy With Mattel

Thomas A. Debrowski is Mattel's executive vice president for worldwide operations. After a meeting with Chinese product safety chief Li Changjiang, Mr. Debrowski decided his company should take a lot of the responsibility for the recent product recalls:

"Our reputation has been damaged lately by these recalls," Debrowski told Li in
a meeting at Li's office at which reporters were allowed to be present. " And Mattel takes full responsibility for these recalls and apologizes personally to you, the Chinese people, and all of our customers who received the toys," Debrowski said … The recalls have prompted complaints from China that manufacturers were being blamed for design faults introduced by Mattel. On Friday, Debrowski acknowledged that "vast majority of those products that were recalled were the result of a design flaw in Mattel's design, not through a manufacturing flaw in China's manufacturers." Lead-tainted toys accounted for only a small percentage of all toys recalled, he said, adding that: "We understand and appreciate deeply the issues that this has caused for the reputation of Chinese manufacturers." In a statement issued by the company, Mattel said its lead-related recalls were "overly inclusive, including toys that may not have had lead in paint in excess of the U.S. standards. "The follow-up inspections also confirmed that part of the recalled toys complied with the U.S. standards," the statement said. Li reminded Debrowski that "a large part of your annual profit... comes from your factories in China. "This shows that our cooperation is in the interests of Mattel, and both parties should value our cooperation. I really hope that Mattel can learn lessons and gain experience from these incidents," Li said, adding that Mattel should "improve their control measures."

I mention Lou Dobbs as his show has been on a tirade of China bashing as if we should stop importing goods from this trading partner. The reality is that most of the toys purchased by American households are made in China. During 2006, we imported $22.2 billion worth of toys from China according to this source. Mattel sales were $5.65 billion during 2006 and its operating margin was just shy of 13 percent. Mattel’s 10-K filing notes:

The foreign countries in which most of Mattel’s products are manufactured (principally China, Indonesia, Thailand, Malaysia and Mexico) all enjoy permanent “normal trade relations” (“NTR”) status under US tariff laws, which provides a favorable category of US import duties. China’s NTR status became permanent in 2002, following enactment of a bill authorizing such status upon the country’s accession to the World Trade Organization (“WTO”), which occurred in 2001. Membership in the WTO substantially reduces the possibility of China losing its NTR status, which would result in increased costs for Mattel and others in the toy industry. All US duties on toys were completely eliminated upon implementation of the Uruguay Round WTO agreement in 1995. The European Union, Japan and Canada eliminated their tariffs on most toy categories through staged reductions that were completed by January 1, 2004. The primary toy tariffs still maintained by these countries are European Union and Japanese tariffs on dolls of 4.7% and 3.9%, respectively, and a Canadian tariff of 8.0% on children’s wheeled vehicles.

I realize that the Lou Dobbs crowd is pushing hard for higher tariffs on imports from China, but such tariffs are not exactly the right incentive structure to promote better quality control in terms of toy production. Mattel and the Chinese government both have incentives not to wreck the flow of Mattel profits and Chinese jobs that would come American parents not trusting the products they produce. Sure – there are incentives to cut production costs and maybe the lower cost of lead paints may have been part of the problem here – as argued by this Angrybear. But as Mr. Debrowski notes, one can overemphasize this one aspect of the incentive structure.

I say this because Mattel and other companies that design and distribute toys with production outsourced to third party Chinese manufacturers have established the type of Hong Kong sourcing companies that I discussed here. OK, my Angrybear post from over a one ago was complaining that the IRS allows too much transfer pricing manipulation. But as one digs into the facts about these sourcing companies, one sees that these subsidiaries of companies like Mattel hire a lot a quality control personal. Are they spending enough on quality control? Perhaps not, but let’s see if the toy industry learns a valuable economic lesson from these product recalls.

Men at Work

As you can see we're trying to improve the template of this blog. Mistakes will be made. Please bear with us.

Go ahead, attack me for the colors I've picked. I can take it.

This is the rest of yourpost you'll see when following the "Read more" link. Continue the restof your very long post here. Blah, blah and blah.