Sustainability Is Us

Dani Rodrik wonders whether econ blogging is sustainable. We have the answer.

Rodrik cites Mankiw, who thinks his blog is eating up too much of his time and concludes:

So if economists with high opportunity costs of time start to get out, shall we have a lemons problem on our hands? Will eventually the only prolific bloggers remain the ones that are not worth reading?

Now there is the obvious point that some of the big names in economics (not Dani thankfully) are a bit lemonish themselves, but we won’t go there. No, we will just point out that a shared blog like this one is the sustainable solution. I can’t speak for my co-conspirators, but I can barely find the time to write even short, minimal content posts like this one. If I had to do this every day I wouldn’t. But we have a team to pick up the slack.

The McGovern-Clinton Demogrant

John Hinderaker thought this idea was awful:

McGovern ran on a far-left platform that included a proposal that at the time was deemed risible - the "demogrant." The demogrant program was simple: the federal government would write a check for $1,000 to every American … But the demogrant has returned! Today, Hillary Clinton unveiled her own demogrant proposal: every newborn American baby will get a birthday present from the federal government in the form of a $5,000 check … It occurred to Scott that Hillary's proposal is basically a demogrant, adjusted for inflation. Out of curiosity, he went here and did the math. The result was striking. McGovern's $1,000 in 1972 was worth, in 2006 dollars, $4808.90. Add a few bucks for 2007, and Hillary's baby present is a dead ringer for the demogrant proposal that was laughed off the stage in 1972!

Guess which conservative economist gave this idea some support?



Greg Mankiw directs us to a paper by Jon Gruber and Emmanuel Saez entitled The Elasticity Of Taxable Income: Evidence And Implications. Greg emphasized this portion of their paper:

the optimal system for most redistributional preferences consists of a large demogrant that is rapidly taxed away for low income taxpayers, with lower marginal rates at higher income levels.

He adds:

If I were a redistributionist, here is what I might propose: A large fixed payment to every citizen, paid at the beginning of every month, financed by a proportional tax on consumption, such as a value-added tax.

When Senator Clinton floated her demogrant, Greg wrote:

The big problem with U.S. fiscal policy is that, over the years, politicians of both parties have voted for unfunded entitlements for the elderly, which will (unless scaled back) result in substantially higher taxes on future generations … How might this be funded? There are only three groups that could be asked to pay for the new entitlement with higher taxes (or lower benefits): the current elderly, those currently of working age, or the same future generations who are getting the new benefit and are slated to pay for existing unfunded entitlements. Which group do you think Senator Clinton has in mind?

It’s a fair question – but it does seem, the demogrant is not such a crazy idea if it is done in a fiscally neutral way. Of course, fiscal neutrality never stopped the GOP candidates for President from advocating tax cuts.

Social Security: U.S. Treasury Declares Trust Fund Reserves Not To Exist

Mark Thoma reads the latest from the Treasury Department so we don’t have to:

To the extent, however, that Social Security surpluses result in higher deficits in the non-Social Security portion of the budget, then government saving is not increased by higher Social Security surpluses. In that case, future Social Security benefits that would have been financed with higher issuance of publicly held debt will instead have to be financed with reductions in non-Social Security spending or increases in non-Social Security taxes.

Is it that easy for the Republican thieves in the White House? This line was put in context by Kent Smetters as I discussed here.



Check this out:

Today's deficit estimate release by the Congressional Budget Office is good news for American taxpayers. Like the estimates put forward by the Office of Management and Budget, it shows that our government is on a path to meeting the goal I set forth of putting the budget into surplus by 2012.

James Hamilton (exuse me: Jim's capable sidekick - Menzie Chinn) challenges this happy talk and Mark Thoma has more. Both note that the surge in tax revenues may be over so the deficit might not continue to fall. But notice that President Bush is talking about the unified deficit. As noted here, the general fund deficit remains quite large.

Yet George W. Bush and those in the GOP who wish to replace him as President have no intention to either scale down our defense spending (after all, our stupid invasion of Iraq is their priority) or reverse that tax “cuts”. Translation –they wish to squander those Trust Fund surpluses on the Iraq War and income tax cuts for the rich. And now his Treasury Department admits he has looted the Lock Box. Besides ending our stupid invasion of Iraq, the issue during the 2008 campaign should be whether the Lock Box will be honored.

US-INDIA NUKE DEAL REPORTEDLY GOING DOWN

By Barkley Rosser

A front page story in WaPo today reports that the proposed agreement between the US and India for the US to assist in providing fuel for civilian nuclear power plants in India may be going down due to opposition from leftist parties in India to India becoming "too close" to the US, although the right-wing BJP has also joined in opposing this agreement (the leftists are in the coalition government, the BJP is not). This is true on the surface, but the report leaves out important details. One is that the US has been pressing India not to build a natural gas pipeline to Iran, long an ally (neither is too fond of Pakistan), which feeds the complaints of the opposition. Also, there has been opposition in the US over India violating the Non-Proliferation Treaty by actually building nuclear weapons, with vague US pressure on that issue also raising hackles in India.

The further wiggle on this not covered in the story is that many nuclear scientists in India also oppose the plan because they see it bringing to an end India's efforts to develop an alternative, independent, cheaper, and safer nuclear technology, thorium reactors, while putting India into a dependent position on the US for nuclear fuel. Beyond this, failure of this agreement may well make far more difficult any meaningful effort to restrain global carbon emissions over the next few decades. The thorium tech is not really ready to go. India will be massively increasing its electricity production potential over the next couple of decades, no matter what anybody says. Given its poverty, they are only going to go for the cheapest available "off the shelf techs." The hard bottom line is that those alternatives for India in a serious way are coal or nukes (although natural gas from Iran might help a bit). Failure of this agreement may mean that they will go with coal, and that will be that, too bad for the world with respect to global warming.

Conduitry: A Blast from the Past?

It appears that the conduit consortium is simply an extra layer of securitization. It reminds me of the way the lender of last resort function was implemented, sort of, with several noticeable failures, in the era preceding the creation of the Fed. It has the potential to further concentrate risk, like an Army Corps flood control project that can withstand a category 3 but not 4 storm—if there are any buyers.

From an equity standpoint, I think James Hamilton has it right:

In my opinion, part of what created the current problem was the perception that participants were too big and too many to fail. If the government won't let Citigroup fail, could it allow a superconduit to go down?

I am skeptical of any claims for a feel-good, this-will-solve-all-the-problems fix. The reality is that someone must absorb a huge capital loss. The question we should be asking from the point of view of public policy is, Who should that someone be?

My answer is: the shareholders of Citigroup.

PREDICTION MARKETS AND THE ECONOMICS NOBEL: OOOOPS!

One of the more innovative of the George Masonites is Robin Hanson, who runs the philosophy of science-oriented blog, overcoming bias. He is a big fan of the accuracy of prediction markets. But the various betting markets on the Sveriges Riksbank Prize for Economics in Memory of Alfred Nobel, such as intrade.com, were just way off. The top bets as of yesterday were in order, Fama, Barro, Tullokck, Helpmann, Grossman, Dixit, and Tirole. None of the actual winners: Hurwicz, Maskin, or Myerson, was even in the betting pool. Oooops!

I think what we see here is the hand of the Committee Chair, Juergen Weibull, a game theorist. I had heard scuttlebutt that Myerson and Maskin would be the winners of "the next Nobel in game theory," but figured that was a ways off because of that being it two years ago. So, Weibull figured out to give it to game theory for an application, in this case, mechanism design. A question arises if this is his last gasp before stepping off the committee, or if he is a new Assar Lindbeck, a dominating figure who will be around for years. In any case, for those who are not aware of it, Hurwicz's approach to mechanism design looks an awful lot like a an effort to figure out how to do central planning right.

stock options

Krugman has beat me to the punch on this, but Floyd Norris' article in the Friday Times is interesting. He summarizes a paper looking at the effect of stock options on CEO risk-taking. The paper finds that there is a tendency to take inefficient levels of risk associated with being paid with options. This is what would be predicted by simple theory, but I haven't seen it tested before. Here is an example I use with my classes:

Suppose a CEO has option with exercise prices equal to the current market price of the stock, $20. She has two directions she might take the company in. In one, earnings and therefore the stock price, will more or less certainly increase by 20% over the next year (the "therefore" depending on the heroic assumption that the stock market is efficient). With the other direction, earnings have equal chances of doubling or being cut in half. Unless the owners are insanely risk-loving, the second direction is one they would never take; it has both higher variance and lower (actually zero) expected return. The CEO, on the other hand, makes an expected return of $4 per share taking the first direction, compared to 1/2($20) = $10 taking the second. The point is that, for the CEO, the 2nd direction constitutes a one-sided gamble. If the price doubles he exrecises the option and makes $20 per share. If the pice tanks, the option is worthless - the CEO neither gains not loses: heads, she wins; tails, the stockholders lose. Norris notes that in-the-money options would take away these perverse incentives - then the CEO would lose something if the stock price fell. (Hmm: is this last point destined to emerge as part of an apologia for back-dating options!)

Savings: The Consequence, not the Cause, of Current Account Imbalances

You write stuff and hope people read it. Clearly the recent discussion on this blog and elsewhere of whether there is a savings glut over there or a savings shortage over here ignores completely the argument I made this year in Challenge. Was my case really that weak?

If Manufacturing Creates a Middle Class, What Does a Service Economy Create?

Dani Rodrik thinks about the Chinese billionaires and has this insight:

I think because incomes from real estate are based on scarcity rents: you buy the right property at the right time, and you get rich very quick. No-one can dissipate your rents. But if you are in manufacturing, you have to compete not only with your international competitors, but also with copycats and imitators at home. So the rents from successful ideas get dissipated quickly. It's not that the overall gains are not large, and even larger than in successful property investments. It's that the innovators can hold on just to a small share. So real estate creates billionaires; manufacturing creates a middle class.

The U.S. is seeing its manufacturing sector decline as job creation seems to be in the service-producing sector rather than the goods producing-sector. This source notes the total nonfarm employment rose from 121.232 million in January 1997 to 138.265 million last month. But the goods-producing sector fell from 23.619 million in January 1997 to 22.324 million last month, while the service-producing sector saw employment rise from 97.613 million in January 1997 to 115.914 million last month. Over this period, we have also seen an increase in income inequality. When I think of the service economy, I think in terms of bimodal distributions:

Bimodality of the distribution in a sample is often a strong indication that the distribution of the variable in population is not normal. Bimodality of the distribution may provide important information about the nature of the investigated variable (i.e., the measured quality). For example, if the variable represents a reported preference or attitude, then bimodality may indicate a polarization of opinions. Often however, the bimodality may indicate that the sample is not homogenous and the observations come in fact from two or more "overlapping" distributions.

Some service sector jobs require few skills and have intense competition. Think of burger flippers and those who clean hotel rooms. Some service sector jobs require an advanced degree and have all sorts of barriers to entry. Think of doctors and lawyers. So how much of the increase in income inequality comes for the U.S. moving from a manufacturing economy to a service economy?

Government, Corporations, Corruption, Money, Power, and Skirting the Law

I was stuck by three stories today in which the Government, Politicians, and Business used their influence for nefarious purposes.

The Washington Post reports that court documents unsealed in Denver this week suggest that the indictment of former Qwest chief executive Joseph P. Nacchio, who was convicted in April of 19 counts of insider trading, may have not have been guilty. The documents suggest that because Qwest refused to go along with illegal wiretapping, the government retaliated by yanking a lucrative contract that threw the company into turmoil. He is using the allegation to try to show why his stock sale should not have been considered improper.

http://www.washingtonpost.com/wp-dyn/content/article/2007/10/12/AR2007101202485.html?hpid=topnews

At the same time, Congressman Jefferson argues that his case should be dismissed because such an act is technically closer to influence-peddling than bribery.
http://www.washingtonpost.com/wp-dyn/content/article/2007/10/12/AR2007101202217.html?hpid=sec-politics

Finally, Kathleen Brown of Goldman Sachs, who is also a miserably failed Democratic for Governor of California and who is also the sister and daughter of other governors of the state, was the person who first broached the idea that Governor Arny lease the state lottery to a private company. Arny is proposing that the proceeds from the lease will help to finance his health care proposal.

The New York Times also estimates if "privatization plans now being considered in four large states -- California, Illinois, Texas and Florida -- were to go through, Wall Street could conservatively reap a minimum of $250 million in fees alone.
http://www.nytimes.com/2007/10/14/business/14private.html?pagewanted=1&hp

Sucking Up the World Savings Glut

If the world has been through a savings glut, Michael raises a very good question as to why wages are not being bid up. Some of us, however, have wondered whether we have gone through a global investment deficiency. To some Americans, the notion of a savings glut sounds foreign as our graphs show that the nation’s “gross savings” as a share of GDP fell from around 14 percent to just over 10 percent – in part because of the Bush spend but do not tax policies. Net national savings, which is gross savings minus depreciation, has barely been above zero. We are thus running a repeat of what happened in the 1980’s when Ronald Reagan’s “save and invest” translated into less of each.

But notice something - the fall in U.S. savings did not translate into a one-for-one decline in investment. At first, U.S. exports declined but have recently returned to the same level of GDP as we saw in 2000. Also, imports as a share of GDP have increased so our current account deficit is doing as much as one nation seems to be able to suck up whatever world savings glut it can. But maybe this is the whole idea behind GOP fiscal policy – less saving means capital-shallowing rather than capital-deepening. Which of course as Michael notes – translates into less long-term wage growth.

Savings Glut Conundrum

If there is a global savings glut, why does capital get such a big share of the pie? If finance is so abundant, why is there not great competition for labor, bidding up wages?

Does Greg Mankiw Think the Long-run Budget Constraint is “Cute”?

In the comment box of this post, Greg Mankiw may have been the first to call this Angrybear cute. Why thank you! The point of Greg’s post is that the Federal income tax is quite progressive. My point is that talking about a subset of taxes is a bit disingenuous. Kevin Drum and the conservative Tax Foundation prefer to look at total taxes. My only complaint with their analyzes is that they did not factor in those deferred tax liability from George W. Bush’s fiscal irresponsibility. But then how could? This Administration is not telling us who will pay these deferred taxes. In their view, no one will.

Update: Greg took his graph from Chris Edwards who claimed:

The Bush tax cuts substantially reduced tax rates for people in every income group. Indeed, those at the bottom had the largest relative reductions in their tax rates … I’m for lower taxes for everyone, but I wish people would look at the actual data first before carping about the rich supposedly being specially favored by recent tax cuts.

So much malarkey, so little time. Chris and Greg know the following two things are true: (1) the long-run government budget constraint holds; and (2) Federal spending rose even as a share of GDP since George W. Bush took office. The implications are clear: George W. Bush has raised – not lowered – the tax bite. But Greg pretended he did not get my “cute” point at first. I find this truly amazing. After all – economists have been talking about deferred taxation ever since the 2001 tax deferral was signed into law.

Irony Alert: Stock Market Punishes American Airline for NOT Going Bankrupt

"During the industry downturn after the September 11, 2001, terrorist attacks, American was one of the most frugal spenders and, in some areas, aggressive cost-cutters as Mr. Arpey avoided the easier path taken by rivals in bankruptcy-court proceedings. Now, investments to improve operations for the long haul, including better customer service and new aircraft interiors, are adding to the carrier's high costs. "They have a lot more work ahead of them than other names because of the fact that they haven't been through bankruptcy," said Standard & Poor's airline equity analyst Jim Corridore, who has a "hold" recommendation on the stock."

Whatever Happened to the Efficient Market Hypothesis?

The Wall Street Journal has a front page story today about the lack of transparency in securities. Remember, one of the great accomplishments of the market is to provide accurate information to allow for something akin to perfect efficiency. Milton Friedman would tell us that there will be inefficient speculators, but the market will ruthlessly purged them, leaving only the great ones who can guide the economy efficiently.

Financialization and securitization was supposed to distribute risk even more efficiently. Unlike most fairytales, I suspect this one will not have a happy ending. Well, here is the article:


Pulliam, Susan, Randall Smith and Michael Siconolfi. 2007. "U.S. Investors Face An Age of Murky Pricing: Values of Securities Tougher to Pin Down." Wall Street Journal (12 October): p. A 1.

"Since the invention of the ticker tape 140 years ago, America has been able to boast of having the world's most transparent financial markets. The tape and its electronic descendants ensured that crystal-clear prices for stocks and many other securities were readily available to everyone, encouraging millions to entrust their money to the markets. These days, after a decade of frantic growth in mortgage-backed securities and other complex investments traded off exchanges, that clarity is gone. Large parts of American financial markets have become a hall of mirrors."

"The hazards of this new age of uncertainty became clear at Dillon Read in March, when rising defaults by homeowners were hammering the value of mortgage securities. John Niblo, a hedge-fund manager at the firm, acted fast. He twice slashed his fund's valuation of securities tied to "subprime" mortgages, knocking them down by about 20%, or nearly $100 million, say traders familiar with the matter. But managers at UBS AG, Dillon Read's parent company, were irate. The Swiss banking giant was carrying similar securities on its books at a far higher price, the traders say. In conference calls, the UBS managers grilled Mr. Niblo on his move. "I'm marking to where I could reasonably sell them," Mr. Niblo responded during one call, according to the traders familiar with the conversations."

"Today, "way less than half" of all securities trade on exchanges with readily available price information, according to Goldman Sachs Group Inc. analyst Daniel Harris. More and more securities are priced by dealers who don't publish quotes. As a result, money managers can no longer gauge with certainty the value of some assets in mutual funds, hedge funds and other investment vehicles -- a process known as marking to market. An official at the Securities and Exchange Commission said recently that some bond mutual funds might be using outdated or unrealistic prices to value their portfolios."

"Billionaire investor Warren Buffett advocates more transparency in pricing. "Some marks can be pretty imaginative," he says. "They call it 'marking to market,' but it's really marking to myth." He says that before funds publish financial statements, they should sell 5% of hard-to-value positions to gauge values."

"Some Wall Streeters have a motive to inflate marks: Their bonuses often are tied to the value of their holdings. A Lipper & Co. hedge-fund manager, Edward Strafaci, earned bonuses of $3.9 million between 1998 and 2001 based on improperly marked convertible bonds, according to the SEC. Mr. Strafaci overstated the value of the bonds he managed, despite warnings from his traders, according to a civil complaint charging securities fraud. The value of a $722 million Lipper hedge fund later was cut in half, and Mr. Strafaci pleaded guilty to criminal securities fraud."