Minimum Wage Debate: Should We Always Assume Perfect Competition?

Milton Friedman certainly did not like the minimum wage but in this oft noted discussion, Dr. Friedman does not assume that labor markets are perfectly competitive:

You almost always when you have bad programs have an unholy coalition of the do-gooders on the one hand and the special interests on the other. The minimum wage law is as clear a case as you could want. The special interests are, of course, the trade unions, the monopolistic craft trade unions in particular. The do-gooders believe that by passing a law saying that nobody shall get less than $2 an hour or $2.50 an hour, or whatever the minimum wage is, you are helping poor people who need the money. You are doing nothing of the kind. What you are doing is to assure that people whose skills are not sufficient to justify that kind of a wage will be unemployed.

Dr. Friedman did not consider market power on the other side of the employment equation in this discussion and Amit Varma must have never heard of monopsony power.




Amit and Don Boudreaux heart something that Congressman Bill Sali said in opposition to raising the minimum wage:

Mr. Speaker, a number of my colleagues have pointed out the problems with raising the minimum wage; that it is an unfunded mandate on small business, will likely result in the loss of over 1 million jobs for low wage earners, that it will eliminate entry level jobs and actually hurt the poor more than it helps them. The negative impacts will result naturally from the rules and principles of the free market. In my college courses, I learned that the rules and principles of free markets are the rules and principles that every business and worker are subject to in every transaction, every negotiation and every new idea. That is, those negative effects of this bill are unavoidable with its passage. In spite of the negative effects, this bill does seem destined to pass.

The Congressman from Idaho offers no empirical evidence that increases in the minimum wage leads to massive employment losses. Many labor economists would argue that it does not reduce employment by nearly that much. Most labor economists also recognize the possibility that there may be sectors where monopsony power does not exist. I would hope Don Boudreaux would one day catch up with what most labor economists have known for years.

Social Security: Don Boudreaux Should Read Dean Baker More Often

Don is unhappy with Paul Krugman:

The only evidence that Krugman presents to support his case against the proposition that Social Security is headed for insolvency (unless it undergoes big changes) is simply that Medicare and Medicaid are headed for insolvency that's even worse.

Oh good grief – try reading the excellent coverage of this issue presented by Dean Baker . Don really put his foot in his mouth with this analogy:

So Krugman's case that Social Security presents no real problems to worry about is like, say, a lawyer advising client Jones that the grand-larceny charges against Jones are really nothing to worry about because client Smith is facing the more serious charge of murder.

Don should check this out if he’s curious why I’m laughing at his analogy.

Capital Punishment: More Con from Econometrics

Mark Thoma and I are both opposed to capital punishment. Mark points to some new ”evidence” that capital punishment deters murder:

According to roughly a dozen recent studies, executions save lives. For each inmate put to death, the studies say, 3 to 18 murders are prevented.

To paraphrase John Edwards, we’ve seen this movie before.



Jeffrey Fagan of Columbia Law School offered some interesting testimony a couple of years ago:

Recent studies claiming that executions reduce murders have fueled the revival of deterrence as a rationale to expand the use of capital punishment. Such strong claims are not unusual in either the social or natural sciences, but like nearly all claims of strong causal effects from any social or legal intervention, the claims of a “new deterrence” fall apart under close scrutiny. These new studies are fraught with technical and conceptual errors: inappropriate methods of statistical analysis, failures to consider all the relevant factors that drive murder rates, missing data on key variables in key states, the tyranny of a few outlier states and years, and the absence of any direct test of deterrence. These studies fail to reach the demanding standards of social science to make such strong claims, standards such as replication and basic comparisons with other scenarios. Some simple examples and contrasts, including a careful analysis of the experience in New York State compared to others, lead to a rejection of the idea that either death sentences or executions deter murder … In 1975, Professor Isaac Ehrlich published an influential article saying that during the 1950s and 1960s, each execution averted eight murders. Although Ehrlich’s research was a highly technical article prepared for an audience of economists, its influence went well beyond the economics profession … Over the next two decades, economists and other social scientists attempted (mostly without success) to replicate Ehrlich's results using different data, alternative statistical methods, and other twists that tried to address glaring errors in Ehrlich’s techniques and data. The accumulated scientific evidence from these later studies also weighed heavily against the claim that executions deter murders.

Dr.Fagan calls this research junk science but where have I heard of Ehrlich's results. Could it be when Ed Leamer was presenting his Let’s Take the Con Out of Econometrics? Mark says:

This is easy for me. It doesn't matter whether the research on the issue is valid or not. I'm against the death penalty.

Dr. Fagan would likely add that this new research is likely no more valid that the rest of the junk science we have seen.

Maybe Obama Isn’t a Sucker But Fred Thompson Endorses Grand Larceny

It seems that our gracious administrator fears I’ve gone to the Dark Side favoring some LMS plan over a more liberal plan to make sure Social Security is solvent for a long, long time. Maybe I was too harsh on Senator Obama as it’s possible that he’s not a sucker. When I need a little help expressing what my real concern is, Dean Baker often provides the light.

Senator Thompson's plan provides for cuts in benefits that increase through time. Twenty years after it is implemented, benefits would be 20 percent below currently scheduled levels, after forty years benefits would be 35 percent lower, and after 60 years they would be 48 percent lower. While these cuts in benefits would be far more than enough to put the program in surplus over its seventy five year planning horizon, the Post still isn't happy. It complains "but he neglects to make clear that fully half of that solution would come from transferring general revenue funds to the Social Security system." Mr. Thompson probably "neglects" to make this point clear because it isn't true. We can see this with simple arithmetic. The SS shortfall is equal to 1.9 percent of projected payroll according to the SS trustees. The non-partisan Congressional Budget Office puts the shortfall somewhat lower. If we add this to the 12.4 percent payroll tax, this implies a shortfall that averages 13.3 percent of benefits (1.9 percent divided by 14.3 percent). The Thompson plan achieves this level of benefit reduction after 14 years, with the cuts growing further over the 75-year planning horizon. (Thompson's cuts apply to new beneficiaries, but I have ignored the $2 trillion accumulated surplus in the trust fund and the revenue from taxing SS benefits in this calculation.)

Where does the WaPo and Dean diverge on their math? Dean takes the current Trust Fund reserves and the surpluses that will continue BIG TIME over the next several years to be part of – well the Trust Fund. WaPo and Fred Thompson, however, would rather count those payroll “contributions” that we’ve paid for the last 25 years and will pay for the next decade plus as really employment taxes to fund things like the Iraq War, the Prescription Drug Benefit, and Bush’s tax cuts on capital income.

Let’s be real. Raising employment taxes to cut capital income taxes has been the GOP agenda for sometime and their means is accounting fraud with the Federal budget. Paul Krugman, Dean Baker, and I make this silly assumption that those Trust Fund surpluses are in some hypothetical “lock box” with a clear accounting for the dedicated payroll tax as Paul likes to call it. But the GOP is working with another accounting standard called the unified budget. It is sort of like when Dick Cheney asked some Andersen accounting partner to alter the books for Halliburton but forgot to tell his shareholders. Maybe silly old Fred Thompson just slipped up and let the world know about this accounting fraud.

Now if Senator Obama is smart enough not to be fooled with the GOP accounting fraud, let me be the first to applaud him. Maybe there are a few Republicans who as honest and Andrew Samwick about this issue, but again – let’s be real and recognize that the honest Republicans are not the ones in political leadership roles. Senator Obama appears to be willing to work with honest Republicans on this issue. But outside of Ron Paul – can you name me one Republican candidate who is being honest on this particular issue and does not wish to convert our past payroll contributions to employment taxes to bail out the General Fund fiasco? I certainly cannot.

As far as the long-run solvency of the Social Security system, I’m willing to wait until we have a Democrat in the White House as there is no urgency on this issue. Our gracious administrator correctly states that Clinton has not made any proposal. I sense he doesn’t trust her on this one and I have no reason to do so either. My only point – which I think she is taking – is that we should debate the Republican thieves on more urgent issues such as this insane war and the General Fund fiasco. Doing what is right on these issues can be political winners. The first order of business is getting a real President in the White House. Early 2009 will be soon enough to have the great Social Security debate.

David Dreier’s Plan to Pay for the Iraq War: Just Call it a Mistake

Hat tip to Brad DeLong for pointing us to Hilzoy who listens to David Dreier so we don’t have to. Hilzoy catches Congressman Dreier offering yet another excuse to trash pay-as-you-go.



The Washington Post article notes this is over how to fix the AMT mess:

The House yesterday narrowly approved a $73.8 billion measure to protect millions of families from the alternative minimum tax and offer new tax breaks to middle-income homeowners and low-income parents, offset by tax increases that would land primarily on wealthy Wall Street financiers. The 216 to 193 vote came after a fiery debate that divided Democrats and energized Republicans, who assailed proposed tax increases that Rep. Sam Johnson (R-Tex.) called "an assault on free enterprise." Democrats countered that they were only closing tax loopholes on super-rich private-equity and hedge fund managers in order to live by a pledge of fiscal responsibility.

The New York Times article caught Dreier giving a preview of Bush’s Saturday radio address:

But anti-tax Republicans said the AMT was a mistake and thus offsets were unneeded. "What absolute lunacy," said Rep. David Dreier, R-Calif., "paying for a tax that was never intended."

As Hilroy notes:

For this, they are being excoriated by Republicans. David Dreier thinks that PAYGO rules shouldn't apply to "mistakes" … What a fascinating principle: you don't have to pay for costs you incur by mistake. I wonder if our creditors will go for that? And why not extend it to other things as well? The Iraq war, for instance, was never expected to last this long: why should we bother to come up with the billions and billions of dollars we are still paying for it? If it comes to that, why not just throw fiscal responsibility out the window?

One should note that President Bush ditched pay-as-you-go over six years ago. In his radio address this morning, he had two themes. First, he said he would veto any bill that actually paid for the AMT fix with an offsetting tax increase. His second message was to chastise Congress for not passing more Iraq War spending. As Hilroy notes – this war was a mistake so by Bush’s and Dreier’s “logic”, we don’t have to pay for that either. And who is to blame for all of this? President Bush was blaming the Democrats. After all, the Gramm-Rudman-Hollings Balanced Budget Act is just irresponsible in the minds of our current GOP leaders.

Really Fictitious Debt

Business Week had an interesting article about companies that buy and sell debt that has been discharged in bankruptcy -- meaning that there is no debt. But the companies that buy the debt use unscrupulous methods to pressure people to repay the discharged debt that they no longer owe.


Berner, Robert and Brian Grow. 2007. "Prisoners of Debt." Business Week (12 November): pp. 44-51.

46: "In the 1990s, businesses adept at tracking and trading consumer debt expanded their reach to dabble in accounts enmeshed in bankruptcy. That dabbling has grown into a robust market. Some of the trade in so-called bankruptcy paper involves debts that remain collectible. What's troubling is that the market now also includes billions in discharged debts, which ought to have no dollar value. Owners of canceled liabilities can revive their value in two main ways: by directly pressuring consumers to cough up cash or by gaming the credit system."

46: "Consumer lawyers and even some longtime players in the bankruptcy-paper market say they're worried that the trading of canceled debt encourages unsavory efforts to collect on discharged debt. "What you are highlighting is a significant abuse in the industry," acknowledges William Weinstein, a former chief executive of B-Line and a pioneer in the debt-buying business. Speaking generally and not about his former company, he confirms that some lenders and debt buyers simply hound consumers to pay debts that have been canceled, while others refrain from informing consumer credit bureaus when debts are eliminated. "The failure to accurately update credit reporting has allowed unscrupulous activity to prosper," says Weinstein."

48: "William R. Sawyer, a U.S. bankruptcy judge in Montgomery, Ala., says that in the past two years he has seen a surge in cases alleging that lenders and debt buyers have purposefully neglected to report the discharge of debt to credit bureaus. The ploy, he says, is an "indirect means" of pushing consumers to pay debts they no longer really owe. "Creditors and collectors are skating as close as they can to the law and really trying to diminish its value"."

50: "One large bank is planning a bulk sale of Chapter 7 debt this fall with a face value of $3 billion."

50: "Increased competition recently in the bankruptcy-paper market has driven up the price of discharged debt -- from 1/20th of a cent on the dollar to 3/20ths, or higher -- and that has helped spur more aggressive collection tactics."

VLWC QUIZ

by the Sandwichman

True or false?:

Nowhere is the Left's influence more obvious than in the media, both here and in the USA. With the exception of a handful of journalists the media is now overwhelmingly anti-conservative. What can we expect when the vast majority of journalists would describe themselves as left-wing. With journalists parroting what amounts to the 'party line', is it any wonder newspapers largely read the same.

Elsewhere, the same self-styled "economics editor" writes,

Economic logic tells us quite forcefully that so long as human wants go unsatisfied and the means of satisfying them are available there will never be a shortage of work.

So how do high levels of persistent unemployment emerge? Because labour has been priced out of work. When labour’s gross wage (wages plus oncosts) exceeds the value of its services then part of the labour supply will be rendered unemployed.

True or false?

Essay question: How does the "economic logic" described in the second citation explain the perceived pervasive influence of the Left in the media?

Social Security and Raising Taxes on the Rich: Clinton v. Obama

For me – the highlight of the debate was when one woman framed a question on fiscal responsibility in terms of some alleged Social Security and Medicare financing crisis. Obama tried this spin:

This is the kind of thing that I would expect from Mitt Romney or Rudy Giuliani, playing with numbers to make a point.

Paul Krugman says Obama has been played for a sucker. I don’t get the logic of his proposed tax increase.



Paul writes:

Mr. Obama wanted a way to distinguish himself from Hillary Clinton - and for Mr. Obama, who has said that the reason “we can’t tackle the big problems that demand solutions” is that “politics has become so bitter and partisan,” joining in the attack on Senator Clinton’s Social Security position must have seemed like a golden opportunity to sound forceful yet bipartisan. But Social Security isn’t a big problem that demands a solution; it’s a small problem, way down the list of major issues facing America, that has nonetheless become an obsession of Beltway insiders. And on Social Security, as on many other issues, what Washington means by bipartisanship is mainly that everyone should come together to give conservatives what they want. We all wish that American politics weren’t so bitter and partisan. But if you try to find common ground where none exists - which is the case for many issues today - you end up being played for a fool. And that’s what has just happened to Mr. Obama.

Maybe Obama needed to read one of Paul’s columns explaining the actual numbers involved with the future financing of the Social Security problem. Clinton’s answer was much closer to the facts than Obama’a answer – which is likely why the audience booed Obama.

Ed Kilgore approvingly notes Obama’s tax increase proposal:

With another Democratic candidate debate on tap in Nevada later today, you can bet Barack Obama is going to get questions about his proposal for modifying the cap on income subject to Social Security payroll taxes. But it's important to understand why this is such a big deal for a lot of progressive Democrats. His proposal isn't the controversial thing (though it certainly would be in a general election campaign, where it would be hammered by Republicans as a tax increase); it's his decision to raise the subject at all, and particularly his use of the word "crisis" to describe the status of the Social Security system.

I hope Ed listened to the debate when Obama criticized Clinton for not wanting to raise taxes on the rich. Obama seemed to suggest raising employment taxes is the way to sock it to high income individuals. Clinton appears to want to raise income tax rates, which would tax both labor income and capital income. Given the degree of wealth inequality, one would think that raising income tax rates is a better way of restoring a progressive tax system than raising employment taxes. This simple fact seems to be lost on Obama.

Update: Greg Mankiw chastises Paul Krugman for that criticism of Senator Obama. But I don’t get what Greg is trying to say here. OK, back in 1998 we may have been forecasting that the Trust Fund reserves would be depleted by 2029. But I hope Greg has kept up with the revised forecasts that Paul was mentioning today. And Greg should know that what President Clinton was saying in 1998 is a far cry from the rightwing spin that Paul noted. Seriously – if one wants to attack Paul Krugman for something he said, one should be more accurate with what the argument was. And one should also realize to use updated forecasts – and not some forecast from a decade ago.

Retribution, Complex Financialization, and the Law

A wonderful Ohio judge seems to have stopped foreclosure in Ohio because the investors in mortgage securities pools lack legal standing to foreclose because they cannot show proof ownership. After all, nobody knows who owns what.



Morgenson, Gretchen. 2007. "Foreclosures Hit a Snag for Lenders." New York Times (15 November).

"A federal judge in Ohio has ruled against a longstanding foreclosure practice, potentially creating an obstacle for lenders trying to reclaim properties from troubled borrowers and raising questions about the legal standing of investors in mortgage securities pools. Judge Christopher A. Boyko of Federal District Court in Cleveland dismissed 14 foreclosure cases brought on behalf of mortgage investors, ruling that they had failed to prove that they owned the properties they were trying to seize."

"The pooling of home loans into securities has been practiced for decades and helped propel real estate prices in recent years as investors sought the higher yields that such mortgage trusts could provide. Some $6.5 trillion of securitized mortgage debt was outstanding at the end of 2006."

"But as foreclosures have surged, the complex structure and disparate ownership of mortgage securities have made it harder for borrowers to work out troubled loans, in part because they cannot identify who holds the mortgage notes, consumer advocates say. Now, the Ohio ruling indicates that the intricacies of the mortgage pools are starting to create problems for lenders as well. Lawyers for troubled homeowners are expected to seize upon the district judge’s opinion as a way to impede foreclosures across the country or force investors to settle with homeowners. And it may encourage judges in other courts to demand more documentation of ownership from lenders trying to foreclose."

Moral Hazard Fundamentalism Redux

I posted somewhat infelicitously (or even more infelicitously than usual!) a while back on this topic . I have a neat example to make my point, now.

Imagine a society where everyone has the same opportunities for producing income. Working with high effort, they make $144 with probability 2/3 and $0 with probability 1/3. Working with low effort - slacking- they have equal probability of making $144 or $0. Utility is the square root of income, minus 1/2 if they work hard, or minus 0 if they slack off. People maximize expected utility. In one society - let's call it the ownership society - the state is a night watchman state and does no redistribution. Everyone works hard in this society, since this gives utility of 2/3(12) -1/2 = 6.5, while slacking gives utility of 1/2(12) = 6. Another society - let's call it Slackerland - practices complete egalitarianism, redistributing all income. Of course, with incentives dulled, everyone slacks off in Slackerland - the bums! If they are large enough in number, each will enjoy a certain income of $72 (compared to an average income of $96 in THE OWNERSHIP SOCIETY, the wonder of the world, where incentives are as sharp as tacks and moral hazard dare not appear). But oh my, the Slackers enjoy utility of of 8.48, the square root of 72 - more than the 6.5 utils the citizens of the ownership society enjoy*!

Moral hazard fundamentalists ignore the fact that moral hazard is often an inescapable byproduct of doing something good, namely spreading risk. The welfare state dulls incentives: therefore it is bad. Bad welfare state! Get down!

*I am assuming that private income insurance is unavailable - due to adverse selection (I'd need, obviously, to heterogenize my people and their opportunities and the numbers in my example would be the averages.)

Rebecca Moves from Sunnybrook Farm to the New York Times!

Below, New York Times economics writer David Leonhart gives us the upside of down. My comments are in brackets.

The New York Times / November 14, 2007

Economic Scene Good News: Housing's Down, Market's Off, Oil's Up
By DAVID LEONHARDT

Until yesterday's rally on Wall Street, the news on the business pages has sounded pretty grim lately. Stocks are still down 6 percent from their peak this year, and oil is near a record high. The dollar, incredibly, is worth only 96 Canadian cents. And house prices will be falling for a long time to come.

So in an effort to cheer everyone up before Thanksgiving, this column is going to focus today on some good news. Here it is:

Stocks are still down 6 percent from their peak, and oil is near a record high. The dollar, incredibly, is worth only 96 Canadian cents. And house prices will be falling for a long time to come.

Seriously.

[I truly admire this willingness to be contrarian! There's no reason to accept any
version conventional wisdom at face value. -- JD]

As long as the financial system doesn't have a major meltdown, none of these developments will turn out to be as bad as you think. Some of them are downright welcome.

[This "as long as the financial system doesn't have a major meltdown..." is quite a clause! (a veritable Santa Clause!) Can we rely on the Fed to prevent such a meltdown? do they have the power to do or will they have to mobilize the big banks to save the day? (can the big banks afford to do so?) will the taxpayers foot the bill, as with the bail-out of the Savings & Loan industry? or is the financial mess smaller and milder than most think? there are no answers in this article.]

Too often, we think about the economy without nuance. We treat it as a local sports team that is either winning or losing, up or down. We're always supposed to be rooting for stocks and homes to become more valuable and for oil and overseas vacations to become more affordable.

But that's not quite right. There are real downsides to an economy full of expensive assets and inexpensive resources. There are also a lot of people who are better off because of the recent turmoil. You may well be one of them.

The best place to start is the stock market, because it's the most counterintuitive. The notion that anybody but a sophisticated Wall Street short-seller should be hoping that stocks fall sounds, frankly, bizarre. But it's true: a huge chunk of the population -- including most people under the age of 50 -- has benefited from this year's market drop.

My favorite explanation of this idea is still a column that Peter Coy of Business Week wrote in 1999, during the dot-com mania. He said he was thinking of forming a club called Stockholders Who Wish the Stock Market Would Stop Going Up So Fast. It would be meant for people who were at least two decades from retirement and who weren't active investors. They instead owned 401(k)'s and individual retirement accounts.

They were, in other words, typical. Only 21 percent of families owned stocks outright in 2004, the most recent year for which the Federal Reserve has released data. Almost 50 percent of families owned a retirement account, by contrast. The typical retirement account (median value of $35,200) was also a lot bigger than the typical stock holding ($15,000).

These long-term, buy-and-hold investors, as Mr. Coy pointed out, are actually hurt by a market that rises too quickly. When stocks get so expensive, returns over the next few decades are usually mediocre. And only a small chunk of a typical person's investments will have been made before the run-up.

It would be much better -- tens or even hundreds of thousands of dollars better -- if the market rose more steadily and the bulk of the 401(k) contributions could then rise along with it. Buy low and sell high, right?

[Alas, a lot of people don't get this. I still remember friends asking me for advice when they were leaping into the stock market in the late 1990s. My advice that they "stay out until prices fall" wasn't acceptable.]

A true crash would take care of this problem. But the market's big fall from 2000 through 2002 doesn't fit the definition, because it didn't come close to erasing the effects of the bubble. Stocks are still more expensive today, relative to corporate earnings over the previous decade, than at any time besides the late 1920s and the dot-com boom.

So unless you're about to retire or sell stock for some other reason, you shouldn't get too upset about the market's fall. As long as you are planning on more buying than selling over the next decade or two, a market correction is your friend.

[The problem with this is that a "true crash" creates other problems. Suddenly the ability to use stocks as collateral for loans is severely undermined. If you are already heavily indebted, perhaps if you borrowed to put money into stocks, falling asset values represent a serious problem. It can drive you into bankruptcy.

Further, the wealth effect of a true stock market crash depresses consumer spending, especially that of stock-owners (mostly, the rich). Corporations have a harder time raising funds to finance real (fixed) investment by selling new stock. Expectations of future profitability are hurt. All of these spell recession, all else constant. This usually hurts corporate dividends and returns, and the stock market.]

It's also likely to improve the nation's long-term economic prospects. The bull market of 1990s, combined with the housing boom, fooled many people into thinking they didn't need to save money. They evidently figured that their existing assets would continue to soar in value and could serve as their nest egg. Last year, Americans saved only 0.4 percent of their disposable income, down from 7 percent in 1990.

This decline in personal savings has set the stage for all kinds of problems. The biggest may be that less savings, by definition, equals a smaller pool of capital available for overall investment. Less investment -- be it in medical technology or software -- will mean slower economic growth and lower standards of living down the road.

[This is illusion. As Keynes pointed out, it's not saving that drives investment. Increased saving, all else equal, encourages a _fall_ in total spending on GDP, i.e., recession. A recession -- or even a slow-down in the economy -- can, via the famous accelerator effect, _stop_ private fixed investment (the real stuff, not the financial investment in the stock market).

In any event, domestic saving is not needed to finance real investment. Funds can -- and have been -- coming from outside the country. This is where many people get upset: an inflow of funds is the same thing as a trade deficit (or, more accurately, a current-account deficit), where the country is spending more on foreign goods and services than it sells exports.

But there is nothing wrong with that kind of deficit if the funds go to pay for productive investment. The US did very well during most of the 19th century
despite trade deficits, since it used the borrowed funds to build up industry
and rise toward the top of the pack.

The problem is that nowadays these imported funds (capital inflows) go to pay
for wasteful activities, such as tax cuts for the rich and the war in Iraq. They are mostly going to current consumption and unproductive purposes rather than to fixed investment (broadly defined, to included education and the like).

In sum, it's fixed investment that deserves our attention, not saving.]

Fortunately, the savings rate has begun to climb, especially since the housing market turned. So far this year, Americans have saved 0.8 percent of their income, and the number should continue to rise. As Joe Davis, an economist at the Vanguard Group, the investment company, said, "This will be a slow-moving and ongoing process, but I think a welcome one."

[Yes, if we want a recession. Now, it _is_ true that rising (net) exports due to the falling dollar can help avoid a recession. But that falling dollar imposes a loss of real living standards on all of us who import or rely on others to import -- i.e., all people in the US. It also encourages inflation, for example in oil prices (in US dollar terms).

It is also true that a rising government deficit can avoid recession. But, as
mentioned, currently that's going mostly as rewards to Bush's rich supporters
or down the sink holes of Iraq and Afghanistan. That hardly helps the economic
health of the Average American!]

The other ostensible pieces of bad news have their own silver linings. As the cost of gas has soared to $3 a gallon [and significantly higher in places like California, where I live -- JD], from an inflation-adjusted low of about $1.20 in 1999, Americans have finally started buying more efficient cars and trucks. For the first time since the mid-1980s, the fuel economy of new vehicles has increased for two straight years, the Environment Protection Agency recently reported. This will slow global warming and make life a little less comfortable for oil-rich autocrats (though not nearly as much as a carbon tax would).

[Yes, but the rising oil price also creates an inflationary impulse that prevents the Fed from using monetary policy to moderate recession and/or solve the big financial mess that Wall Street faces. Not that the Fed is normally all-powerful, able to "fine tune" the economy and avoid recessions, inflation, and the like. But the inflationary shock makes its tasks even harder.]

The fall of the dollar, meanwhile, may be precisely what the world economy needs right now, as James Paulsen of Wells Capital Management points out. It provides a lift to the sagging American economy, by allowing companies in the United States to export more, while encouraging consumers to spend less on imports and save more.

[See above.]

It's not even clear that falling house prices are such a bad thing. They don't really matter for families who aren't planning to move. They don't even matter much for families moving to a similar house in a similar market. The house they are buying will have gotten cheaper, too.

Families hoping to buy their first house, on the other hand, clearly benefit. (Easy for me to say, though. As my boss pointed out when he heard about this column, I'm a renter and still decades from retirement.)

There is no question that people have gotten hurt this year. Many families have struggled to pay their bills. Others have had to delay retirement, and thousands have lost their homes to foreclosure. In an ideal world, the imbalances in the economy would never have become so extreme.

[Note that the housing crunch, like a "true" stock market crash, encourages recession by dampening consumer spending -- and also by hurting fixed investment in the housing industry (and related, like Home Depot).]

But once they did, what, really, was the alternative to the recent turmoil? An ever-higher stock market, ever-cheaper oil or an ever more insane mortgage market wouldn't have solved the problems of the American economy. It would have made them worse.

Copyright 2007 The New York Times Company

[This shows a total lack of perspective. Since the end of the Keynesian age (in the 1970s) we've seen a return to the business cycle pattern that prevailed in the 1920s and before. There are speculative booms in GDP like that of the late 1990s, followed by speculative crashes as in 2001 (moderated by the Fed). The boom creates the conditions that create the crash, which then creates the next speculative boom. Just as then, the self-generating cycle is changed by the US involvement in wars (World War I back then, the Gulf War I and II now), which stimulate the economy.

The only complication is that nowadays (unlike under the gold standard) the Fed moderates (or tries to moderate) the fluctuations. Sometimes, it seems, it creates the basis for new speculative booms, as with the currently-ended housing bubble.

Using perfect 19th century logic, Leonhardt is arguing that because of the speculative boom, we need the speculative crash. But what about changing the policy regime? The government could increase the role of the automatic stabilizers as it did starting in the 1930s, while increasing the amount of investment in (needed!) infrastructure, basic research & development, education, and public health. It could actually make an effort to clean up the aftermath of Katrina. That would get us back to the 1950s & 1960s. Of course there would be problems, but that's another topic.

Another problem with the pre-1950s cycle -- and with Leonhardt's logic -- is that the economy can spin off its normal up-and-down path. This is what happened back in 1929-33. I don't think Leonhardt wants to contemplate this possibility.]

[by Jim Devine]

API Commissions CRA to Write Macroeconomic Nonsense

Karen Matusic and Robert Dodge of API, which is the national trade association that represents all aspects of America’s oil and natural gas industry, boosts:

Energy legislation pending in Congress likely would have significant adverse effects on the economy and consumers – including nearly 5 million lost jobs and $1 trillion in lost economic output, according to a report released today by API. The study, prepared by CRA International and commissioned by API, found that the combined effect of seven legislative proposals would restrict the supply of energy available to the U.S. economy and would likely increase the cost of energy supplies to consumers and businesses.

The CRA report goes well beyond this by claiming that by 2030, the effect of this bill would be to: (1) reduce aggregate employment by 4.9 million relative to baseline; (2) reduce GDP by 4 percent of $1 trillion relative to baseline; and (3) lead to reductions in both consumption and investment.



Who knew CRA was in the business of macroeconomic modeling? I did find this presentation. NEEM seems to rely on CRA’s expertise in the energy sector whereas MRN focuses on the macroeconomic impacts of some policy change. The MRN stands for Multi-Regional National Model. The designer of MNR appears to be Thomas F. Rutherford who appears to be a professor of “Environmental and Resource Economics” and not a macroeconomist. So maybe we can forgive him and CRA for not understanding that the aggregate demand effects of policy changes are not generally believed to last for a couple of decades even in the most Keynesian of models.

It would appear that the API and CRA have put forth a rather nonsensical analysis to trick us into believer that changes in energy policies will lead to a prolonged recession.

Social Security: Obama and Russert

Mark Weisbrot watches Meet the Press so we don’t have to:

Obama told Russert: "Now, we've got 78 million baby boomers that are going to be retiring, and every expert that looks at this problem says 'There's going to be a gap, and we're going to have more money going out than we have coming in unless we make some adjustments now.'"

Had Russert said this, I would have thought that this was his usual stupidity on this issue. But to hear Senator Obama says this was sad. Mark offers this explanation of why these GOP talking points miss the boat:

In fact, the first cohort of baby boomers (those born in 1946) will begin retiring in just a couple of months, since many people take their Social Security at age 62 (with a correspondingly reduced benefit). Our Y2K moment is upon us, and nothing will happen - because the baby boomers' retirement has already been financed. Back in 1983, when Social Security really was running out of money, with just a few months of payments on hand, Congress raised the payroll tax substantially. This was done deliberately in order to pile up a surplus to finance the baby boomers' retirement. And so it did: that accumulated surplus stands at more than two trillion dollars today, and is increasing at a rate of $190 billion annually. As a result of this surplus, all the baby boomers' will have retired before Social Security runs into a projected shortfall in 2041. That is according to the Social Security's (mostly Republican-appointed) Trustees. According to the non-partisan Congressional Budget Office, Social Security can pay all promised benefits even longer, until 2046. By either date, most baby boomers will be dead, and almost all of the rest retired, before there is a problem.

Senator Obama is beginning to sound like Fred Thompson, which has me wondering: is he running for the Democratic or the Republican nomination?

The Corporatization of the University

"Presidents at 12 private universities received more than $1 million in the 2005-6 school year, the most recent period for which data on private institutions is available, up from seven a year earlier, according to an annual survey of presidential pay to be released today by The Chronicle of Higher Education. The number of private college presidents earning more than $500,000 reached 81, up from 70 a year earlier and just three a decade ago. The survey also found that the number of public university presidents making $700,000 or more rose to eight in 2006-7, the reporting period for public institutions. Only two public university presidents made $700,000 in the previous period. The survey did not include E. Gordon Gee, who took over at Ohio State University earlier this year and whose $1 million pay package, before bonuses, is probably the highest of any public institution."
"John W. Curtis, director of research and public policy at the American Association of University Professors, said rising pay to presidents was consistent with a “corporate mindset” at colleges."



Glater, Jonathan D. 2007. "Increased Compensation Puts More College Presidents in the Million-Dollar Club." (New York Times (12 November).

In the Long Run We’re All Hung Over from the Short Run

One of fundamentals of contemporary economic wisdom is that short run fluctuations only affect short run output; in the long run it’s all about growth. Textbooks have dropped their chapters on business cycles and replaced them with fancy growth models. The short run is for speculators; the long run is for serious policy analysts. But what if it’s all wrong?



A recent paper by Cerra and Saxena, two economists at the Bank for International Settlements, argues that the economic costs of recessions and more serious crises tend to be permanent. According to their analysis, post-recession recovery does not generally return an economy to its pre-recession growth trend, but shifts the trend line down a notch. That is, periods of negative growth are not usually followed by periods of above-trend growth. Poor countries may be poor not because their growth rates during healthy periods are lower, but because they have more and deeper disruptions.

I am not in position to adjudicate, except to notice (1) most economists simply assume that recovery returns an economy to trend, (2) the issue is of enormous importance, and (3) if Cerra and Saxena are right, we need to rewrite the macro textbooks (again).

UPDATE: DeLong endorses the view that short run effects don't last:

Which side am I on? I tell my undergraduates:

At a time horizon of 0-3 years, be a Keynesian: the most important things are the fluctuations in unemployment, in real demand, and in capacity utilization.

At a time horizon of 3-8 years, be a demand-side monetarist: you can assume (provisionally) that fluctuations in employment, real demand, and capacity utilization die out; the most important things are the fluctuations in the composition of real demand (investment vs. consumption vs. government vs. net exports) and in inflation- and deflation-causing nominal demand assuming (provisionally) stable growth of the economy's productive capacity.

At a time horizon of 8 years or greater, be a sane supply-sider: the most important things are the processes of investment in physical, human, and organizational capital that raise the economy's productive capacity