Happy Bloomsday from Econospeak

This is June 16th, the day recounted in Joyce's Ulysses. I named my daughter Molly after the fictional Molly Bloom. Happy Bloomsday, Molly!

CGE Challenge Reloaded

It’s been two weeks since I put out a challenge to proponents and practitioners of computable general equilibrium (CGE) models. As you may recall (or if your short-term memory falters, reread), I pointed out that, in light of well-known issues in general equilibrium theory, and after 30 years of experience, the time had come for those who believe in CGE to step forward with performance data. Is there any evidence that predicted CGE results hold in the real world, or that CGE methods are seen as useful in the marketplace? Or is this simply a self-perpetuating enterprise, feeding off academic and government contracts in a world where results don’t matter?

In addition to its thunderous presence on EconoSpeak, my challenge was mirrored in several other venues. Thanks to the magic of Google, I was able to monitor the comments posted around the blogosphere, and here is what I got: nada. Oh, I read several lame arguments that it is in the nature or purpose of CGE that real-world performance data are impossible to come by or that they wouldn’t matter anyway, but no one had even a shred of evidence to offer.

So here we go again, and I will be more explicit. Unless anyone can demonstrate otherwise, I suggest that CGE is an academic bubble whose intellectual value is grossly inflated, and which will crash to earth once the idea dawns that conjectures are no substitute for results. Those who currently buy this sort of analysis, not to mention those who make the career decision to invest years in learning its technical arcana, are throwing away their time and money. There’s no there there. Show me why I’m wrong.

More Trade Nonsense from the New York Times

There is a lot I could jump on in Roger Lowenstein’s witless diatribe in today’s New York Times Sunday Magazine, but let’s keep it simple. Lowenstein, claiming to paraphrase Gary Hufbauer of the Peterson Institute (who should either sue for libelous misrepresentation or go into a different line of work), writes: “Thanks to the cheap dollar, U.S. exports are booming; trade is now the economy’s strong suit.” Now read that last clause again: “trade is now the economy’s strong suit.” Um, no. Have I mentioned that we have numbers on that?

News From the Disaster Front

Some of you may have seen the news about the huge California wildfires. One of the biggest started just outside of Chico, but has been moving up toward Paradise, about 10 miles away. 5000 homes are at risk and much of the city has been evacuated. It is also very close to the junior college. As of this morning, the fire is only 10% contained. The expected shift in the winds will blow the fire up the canyons causing enormous damage. Part of the problem is the inadequate rainfall we have had. Maybe we could make a trade with the midwest.



35 miles an hour winds kept much of the smoke away until this morning. Visibility is now very bad. I do not know how many pack-of-cigarettes-equivalents I am getting from breathing the air.

On Sunday morning, I will be on my NAFTA tour, giving a talk in Mexico City and then attending the History of Economic Society meetings in Toronto.

Defending Jason Furman on Social Security

An article in the LA Times accuses newly appointed economic policy director for Obama, Jason Furman, of having supported privatizing social security. There are a number of issues on which most progressive economists would differ with Furman, but this claim that he supported privatizing social security is simply an outright lie as pointed out on both brad delong and ecnomists view. Instead, he was one of the firmest and most effective critics of the Bush plan to gut social security.

One place he did that was from a perch as a co-blogger on the predecessor to this blog, the much-missed Maxspeak, formerly run by Max Sawicky. During the period of the battle over the Bush attack on social security, Dean Baker was also a co-blogger there, and it was command central for those opposing the Bush plan (with people like Bruce Webb and I also making a lot of noise there). It was from Maxspeak as transmitted through Brad Delong to Paul Krugman, the NY Times, and then the broader media that the most effective anti-Bush-plan arguments were promulgated, transmitted, and then brought to bear. Whatever one thinks of his views on Wal-Mart and other matters, Jason Furman played an important role in this successful effort to preserve social security as it is.

Johnson and Gramm and the Selectively Howling Monkeys of the Media

Obama is taking flack for his appointment of Jim Johnson, former head of FNMA and recipient of a loan from Countrywide, to vet VP candidates. Fine, this is a mistake. The media howl, especially the cable news.

But where was the howling several weeks back when it emerged that the egregious Phil Gramm was formulating McCain's policy proposal for handling the sub-prime mess - the one that would do nothing for home-owners- while still working as a lobbyist for USB, whose portfolio is full of sub-prime junk.

Just sayin'.

FOR THE RECORD

by the Sandwichman

There is strong circumstantial evidence for my contention that the shorter work time fallacy meme in economics textbooks was dictated by the propaganda bureau of the National Association of Manufacturers. I will be detailing that documentation in a future post or posts. Meanwhile, I've discovered that "most of NAM's pre-1935 records were destroyed" before the Association's archives were sent to the Hagley Museum and Library where they now reside.

How... "inconvenient".

Is the US Becoming a Marshall-Lerner Renegade?

It is a commonplace of international economics that virtually all economies obey the Marshall-Lerner conditions, which must be met if a change in the exchange rate is to have the “proper” effect on net exports. It’s just possible, however, that this no longer applies to the US. When the dollar falls, US exports rise and non-oil imports fall by enough to otherwise satisfy M-L. But much of the rise in oil prices, as experienced in the US, is also attributable to the decline of the dollar, and our demand for brown goo is (so far) highly inelastic. As reported in Brad Setser’s invaluable blog, this explains why the US trade deficit increased in April despite deteriorating domestic demand. So: has the US left the predictable world of M-L? It depends. How much of the price spike in petroleum is traceable to the fading dollar? How do we parcel out the role of declining domestic demand from that of dollar depreciation on the trade balance? I’m too involved in other things to figure this out, so I place it in your laps, estimable readers.

Japan's De-deindustrialization?

BusinessWeek published an intriguing article about Japanese automakers boosting domestic investment to expand production in Japan, even though the Japanese market is declining. The Japanese plants will have a competitive edge because they are more flexible and have fewer defects. German companies are also ramping up Japanese production, presumably for similar reasons.

What US companies are following a similar strategy rather than adopting a race-to-be-bottom approach?

Rowley, Ian. 2008. "Facing an Auto Slump, Japan Lifts Capacity: Carmakers Are Expanding at Home, Where Nimble, High-Tech Plants Offer More Flexibility." Business Week (29 May): p. 64.

http://www.businessweek.com/print/magazine/content/08_23/b4087064205041.htm

"In the midst of a dramatic earnings slump, Toyota, Nissan, and Honda are ramping up production fast. Not in the U.S., their most profitable market, but back in Japan, where domestic auto sales just hit a 25-year low. Every major Japanese automaker is building plants at home or adding capacity to existing ones. A Toyota subsidiary is constructing a 120,000-car plant in Miyagi, north of Tokyo. It's Toyota's first such plant in Japan since 1993. Nissan, which not so long ago was slashing production in the country, is expanding capacity by 22% at its Kyushu factory. Honda is spending $1.5 billion on a new factory and engine plant in Saitama, just outside Tokyo. "The time has come for our Japan operations to once again take the initiative," Honda President Takeo Fukui told reporters on May 21."

"Why all the outlays? After all, Japan's carmakers have long had a policy of opening plants in overseas markets to avoid import duties and to hedge against currency gyrations. Japan remains an expensive place to make cars, with wages 10 times higher than in China. A shrinking population is causing labor shortages. The yen's recent 15% surge against the dollar makes Japan-made cars even pricier. Throw in contracting domestic sales, and the moves seem to defy business logic."

"One explanation is the flexibility that the investment brings. Japan's high-tech plants excel at switching production from one model to another. That's especially useful when auto demand is sinking or flat in mature markets but surging in the Middle East, Russia, China, and India. Nissan's Kyushu plant, for example, exports to 160 markets and produces eight different models on a single production line."

"Anxiety over quality is another factor in the increase of production back home. In recent years, Toyota has had to issue numerous recalls, while Nissan's Canton (Miss.) plant became notorious for its defects during a production speedup. Executives are loath to admit that one plant is better than another, but Japanese makers' domestic factories score higher on quality than equivalent plants overseas."

"Japanese engineers and workers, while more expensive than their counterparts in developing markets, are still a good deal. One reason is that Japan's wage levels, after barely rising in a decade, are not as high as they once were relative to other developed countries. According to consultant AlixPartners, Japanese industrial workers in 2006 made around $22 an hour, just two-thirds the level in Germany. Moreover, it's still rare in Japan for workers to switch from one automaker to another, so a well-trained, seasoned workforce is a given. "It's not so expensive in Japan, and when you consider the quality, motivation, and diligence with which people work, the value-for-money is unbeatable," says Markus Schädlich, president of Karmann Japan. In December, Karmann, a German company that makes convertibles under contract for Audi, Mercedes, and Nissan, will begin production at a factory in Japan."

"The notion of mother plants, which test new technologies that later filter out to plants worldwide, remains strong. Fukui predicts Honda's Saitama plant will set an example for its plants globally. Labor productivity is expected to be 20% higher than in existing plants, thanks to greater automation and advances in welding and painting. Honda aims to cut the amount of energy used to produce each car by more than 30%. Honda and its Japanese rivals are not abandoning their plan to make cars around the world. But they are strengthening Japan's role as the essential benchmark."

LIFE, melancholy and the American Way

by the Sandwichman

In "The Gospel of Consumption," Jeffrey Kaplan channels the Sandwichman, arguing that if we want to save the earth we can start by sharing the work and the wealth. Kaplan borrows liberally from Ben Hunnicutt's books (Kellogg's Six Hour Day and Work Without End: Abandoning Shorter Hours for the Right to Work) and about the triumph of consumer culture over working less and also features a discussion of the anti-New Deal "American Way" publicity campaign conducted by the National Association of Manufacturers.



Co-incidentally, in my own research on the NAM, I kept stumbling across an article by John Tagg, titled "Melancholy Realism: Walker Evans's Resistance to Meaning". This morning I discovered that I had access to an online version of the article.

Tagg frames his discussion of the NAM American Way campaign with a discussion of the famous LIFE magazine photo by Margaret Bourke-White showing a breadline of African-American flood refugees in front of one of the 60,000 American Way billboards, this one proclaiming the "world's highest standard of living." Later in the article, he goes on to contrast Bourke-White's rhetorical clarity with the melancholic "unreadability" of Walker Evans's photography. In the process, Tagg touches on several of the images that are dear to the Sandwichman's thought.

One of those image in particular binds Kaplan's discussion of the Gospel of Consumption much tighter to the shorter work time movement. It is a leaflet promoting the American Way billboards, which included one proudly proclaiming "World's Shortest Working Hours!" This from an organization that cranked out a steady stream of literature denouncing the "disastrous effects" and "real problem" of the "dangerous fallacy" of shorter working time.



I guess it just goes to show, there's no way like the American Way!

Bubblicious: Some Evidence

I just got around to reading an important paper, “Current Account Patterns and National Real Estate Markets” by Joshua Aizenman and Yothin Jinjarak. Looking at a sample of developing and developed countries over the period 1990-2005, they find the current account deficits are the main explanatory factor for real estate appreciation. (It would be clumsier but more accurate to say real real estate appreciation, since prices are deflated by the GDP deflator.) Their work is careful, and their empirical model accounts for 70% of the variation they study. Running a current account deficit results in higher real estate values, especially in countries with more developed credit markets, but this effect is somewhat reduced where there is less country risk. The authors control for the appropriate confounders, such as interest rates. In fact, external balances play a bigger role than interest rates in real estate markets, a surprising result.

This is consistent with the position that I’ve taken on this blog, that the inflow of funds to finance our current account deficit renders the US susceptible to asset price bubbles, and that the runup in housing values was just one (but a very big) manifestation of this. If I’m right, and if the housing channel is being shut down, some other bubble is indicated.

A Proposal for Obama

Problem: McCain will define himself as tough and resolute in foreign policy, committed to defending us vulnerable Americans from the wolves near and far. Implicitly, and perhaps explicitly, this will paint Obama as weak, confused and incapable of assuring our safety. This is a matter of images, not reality, of course, but that’s how elections work.

Analysis: Obama’s counter-image is that he will restore America to respect around the world, rebuilding alliances and replacing bellicosity with diplomacy. Against this backdrop, McCain’s foreign policy would take on the hue of Bush, continued. One challenge Obama faces is how to convey this impression visually and viscerally. Fear and retaliation are easier to package than cooperation.

Solution: Obama should undertake a foreign campaign trip this summer, publicly appealing to American voters overseas, including both civilians and military expats. He could explain that America is itself now globalized, with its citizens scattered across the continents. His trip could then be portrayed as a campaign swing like any other. But holding enthusiastic mass rallies across Europe and Asia especially, Obama could deliver exactly the we-are-the-world images that would give emotional resonance to his political stance. Honestly, I don’t see what McCain could do to diminish the power of this strategy.

Supply-Side Econ rides again!

after knocking McCain's gas-tax holiday proposal, hot-shot economist and former Mitt Romney guru, Greg Mankiw wrote:
... Lost in this hubbub, however, is a bigger idea that Mr. McCain and his economic team have put forward: a cut in the corporate tax rate, to 25 percent from 35 percent. It is perhaps the best simple recipe for promoting long-run growth in American living standards.

Cutting corporate taxes is not the kind of idea that normally pops up in presidential campaigns. After all, voters aren't corporations. Why promise goodies for those who can't put you in office?

In fact, a corporate rate cut would help a lot of voters, though they might not know it. The most basic lesson about corporate taxes is this: A corporation is not really a taxpayer at all. It is more like a tax collector.

The ultimate payers of the corporate tax are those individuals who have some stake in the company on which the tax is levied. If you own corporate equities, if you work for a corporation or if you buy goods and services from a corporation, you pay part of the corporate income tax. The corporate tax leads to lower returns on capital, lower wages or higher prices — and, most likely, a combination of all three.

my comments in boldface, while his original column is light-weight:
I don't believe that the corporate tax really affects the return on corporate equities, except in very special situations and in the short run. The fact is that those who buy US corporate equities can always buy them in places where corporate income is not taxed -- or can buy the stocks of US companies that don't pay any corporate taxes at all. That bids up the return on the taxed assets, so that after-tax rates of return are equalized.

The main case where I can see the corporate tax actually lowering returns on equity would be that where the companies reap large raw-material scarcity rents. But those companies often (usually) get "depletion allowances" and the like, more than compensating them for their loss. As discussed below, I do think the corporate tax affects returns on stock prices in the short run.

In other words, in the long haul (about a year or so) I see the corporate income tax as mostly being reflected in higher consumer prices and/or lower wages. Since that tax isn't very large these days, I don't see this as being very important.

A cut in the corporate tax as Mr. McCain proposes would initially give a boost to after-tax profits and stock prices,

Initially stock prices would rise, but the arbitrage I describe in my first paragraph above would cause this to end in the long haul (even a period as short as a week). Then the corporations and the stockholders would hunger for a new tax cut to get another transitory boost in returns. This seeking of a short-term fix is an important reason why the corporate tax keeps on being lowered (even though in the longer haul, the owners don't really pay the tax). It's a bit like a drug addiction: the stockholders want transitory pleasure. Because it doesn't last, they want it again & again.

but the results would not end there. A stronger stock market would lead to more capital investment.

This connection between stock prices and corporate investment is very weak and likely non-existent, as Doug Henwood and others have pointed out. It's amazing that Mankiw so blithely assumes that this connection is automatic. It is especially weak given the way in which the SM fluctuates so wildly and the way in which arbitrage would get rid of the extra return pretty quickly.

More investment would lead to greater productivity.

This assumes that the investment is real, rather than purely financial, like buying up other companies. It assumes that it's in actually producing some commodity rather than in marketing and the like. It assumes that the investment is done inside the US.

Greater productivity would lead to higher wages for workers and lower prices for customers.

Greater productivity leads to higher wages? since when? it hasn't worked that way for about 30 years. Real wages of nonsupervisory employees have generally stagnated since the early 1980s, even though labor productivity has soared (though not as much as it soared in earlier decades). Most of the productivity gains have gone to stock-owners and CEOs. For Mankiw's story to work, the one-sided class war would have to end. He isn't calling for an end of the war. Instead, he has instead tried to provide ideological ammunition to the other side.

Consumer prices might fall (assuming US productivity rises) but only relative to existing inflation. And given all of the weak links in the chain above, that wouldn't be a big thing.

Populist critics [who shall be slammed but unnamed, of course] deride this train of logic as "trickle-down economics." But it is more accurate to call it textbook economics. Students in introductory economics courses learn that the burden of a tax does not necessarily stay where the Congress chooses to put it. That lesson is especially relevant when thinking about the corporate tax.

has Mankiw ever contemplated why "trickle down" has such a bad rep? maybe because it hasn't worked within recent memory?? (Maybe it worked during the 1960s, but the US political economy was completely different from nowadays.) I'll ignore the cheap rhetoric of the rest of this paragraph.

In a 2006 study, the economist William C. Randolph of the Congressional Budget Office estimated who wins and who loses from this tax. He concluded that "domestic labor bears slightly more than 70 percent of the burden."

Mr. Randolph's analysis stresses the role of international capital mobility. With savings sloshing around the world in search of the highest returns, he says, "the domestic owners of capital can escape most of the corporate income tax burden when capital is reallocated abroad in response to the tax." When capital leaves a country, the workers left behind suffer. (According to Mr. Randolph, however, some workers do benefit from the American corporate tax: those abroad who earn higher wages from the inflow of capital.)

A similar result was found in a recent Oxford University study by Wiji Arulampalam, Michael P. Devereux and Giorgia Maffini. After examining data on more than 50,000 companies in nine European countries, they concluded that "a substantial part of the corporation income tax is passed on to the labor force in the form of lower wages," adding that "in the long-run a $1 increase in the tax bill tends to reduce real wages at the median by 92 cents."

It's quite possible, if not likely, that all else equal US corporate taxes make corporate fixed investment in the US more expensive, so that it goes elsewhere. Thus, all else equal, wages have to be depressed to compensate companies doing fixed investment in the US. Or environmental laws have to be weakened to provide this sop. Taxes, wages, environmental laws (along with labor productivity, the availability of infrastructure, access to markets, etc.) are important parts of the corporate decision about investment location. That's a key reason why we see international competition among governments to attract corporate investment. (It's worse among states of the US union.) That's a key reason why we see the international creep to the bottom, the downward harmonization of labor and environmental standards. (This "creep" is a major reason why the current political economy is so different from that of the 1960s.)

Mankiw ignores this context in order to propose a corporate tax be cut to draw investment in from other countries. But that simply encourages the creep toward the bottom, along with lowering wages and paring government regulations.

Despite these findings, a corporate tax cut as a way to help workers may strike some people as needlessly indirect. Why not just pass an income tax cut aimed squarely at working families, as Senator Barack Obama proposes?

The answer is that while most taxes distort incentives and shrink the economic pie, they do not do so equally. Compared with other ways of funding the government, the corporate tax is particularly hard on economic growth. A C.B.O. report in 2005 concluded that the "distortions that the corporate income tax induces are large compared with the revenues that the tax generates." Reducing these distortions would lead to better-paying jobs.

I'd like to see the assumptions behind that report. Mankiw also seems to be saying that Obama's proposal would "distort incentives and shrink the economic pie." How would that happen, Greg? It would promote aggregate demand (all else constant) which would raise the size of the economic pie that's realized as actual sales, something that seems needed in the midst of a recession. I don't know the details of Obama's plan, but I'd like to hear more about how it would undermine workers' incentive to work. In hard times, facing bills rising relative to income, most people want to work as much as possible, trying to moonlight with two or even three jobs if they can. The problem is not the incentive to work but the availability of jobs.

Of course, a corporate tax cut would affect the federal budget. And any change in tax policy has to be made against a background of a looming fiscal crisis, which threatens to unfold as baby boomers retire and start collecting Social Security and Medicare.

There must be a typo here: Mankiw must be smart enough to know that there is no "looming fiscal crisis" associated with Social Security, so it's wrong to unite it with Medicare in a single package.

In 2007, corporate taxes brought in $370 billion, representing 14 percent of federal revenue. Cutting the rate to 25 percent would seem to cost the Treasury about $100 billion a year.

Part of that revenue loss, however, would be recouped through other taxes. To the extent that shareholders would benefit, they would pay higher taxes on dividends, capital gains and withdrawals from their retirement accounts.

this won't happen if taxes are cut again on dividends, capital gains, and IRA withdrawals, as Mankiw would likely advocate.

To the extent that workers would benefit, they would pay higher payroll and income taxes. Increased economic growth would tend to raise tax revenue from all sources.

this assumes that Mankiw's cock-and-bull story about the wonderful effect of cutting corporate taxes actually works. Calling Dr. Laffer...

SOME economists think that these effects are strong enough to make a corporate rate cut self-financing. A recent study by Alex Brill and Kevin A. Hassett of the American Enterprise Institute [a very objective source, natch], looking at countries in the Organization for Economic Cooperation and Development, supports exactly that conclusion. But even if that turns out to be too optimistic, both theory and evidence make it reasonable to expect a significant discount from the sticker price. In the end, the net budgetary cost of the tax cut might be, say, $50 billion a year.

Great, a totally worthless guesstimate!

Senator McCain wants to fill that hole in the budget by restraining spending. If he can stop bloated legislation like the recent $300 billion farm bill from becoming law, more power to him.

How about ending the $3 Trillion war before it gets even more expensive? how about avoiding the renewal of the Bush tax cut for his rich friends? even better, how about a Bill Clinton-type tax hike for them? These guys haven't been running the economy very well of late. Why reward them for poor behavior?

But in case that quest proves quixotic, I have a back-up plan for him: increase the gasoline tax. With Americans consuming about 140 billion gallons of gasoline a year, a gas-tax increase of about 40 cents a gallon could fund a corporate rate cut, fostering economic growth and reducing a variety of driving-related problems.

Indeed, if we increased the tax on gasoline to the level that many experts consider optimal, we could raise enough revenue to eliminate the corporate income tax. And the price at the pump would still be far lower in the United States than in much of Europe.

I'm all in favor of raising the gas-tax. I notice, however, that Mankiw elided the usual addition to gas-tax hikes, i.e., a tax cut or credit for those at the bottom of the income distribution. That would hurt his ability to earn thousands of dollars doing public speaking for business groups, of course.

Don't laugh. I'm serious.

I can't laugh. He's too stupid.

Jim Devine

New radio interview regarding The Confiscation of American Prosperity

Yesterday, I had a very nice radio interview with Alan Ruff on WORT, a community radio station in Madison, Wisconsin.

http://www.archive.org/details/Interview-WORT-8June2008

Sex and Race in American Politics: Post Mortem on Hillary vs Obama

I should probably let sleeping dogs lie on the day Hillary is (finally) graciously conceding and supporting Obama for president. However, I am bothered by the ongoing whining by embittered Hillary supporters who declare that they are "not willing to shake hands" and claim that Hillary lost due to sexism in the media and the public at large, as well as some blog commentaries. I do think Hillary faced sexism and much of the liberal media supported Obama over her, with Matthews and Shuster on MSNBC making unacceptable remarks. It is also true that sexist remarks have been made in the blogosphere about Hillary. However, I think that Obama beat her because of people being for him, with those against her more due to her link with Bill Clinton and the scandals of his administration than her gender. Some may say blaming her for her husband's problems is sexist, but I do not buy that as he would certainly have been around big time if she had become president, and she began with high negatives (over 40%) widely reported to be due mostly to that connection. I happen to know a couple of politically independent (white) women here in Harrisonburg who supported nobody, but were very anti-Hillary on those grounds.

More fundamentally, those making this sexism argument somehow do not notice that Obama faced a racism hurdle. It looks to me that the racism against Obama was a much more serious electoral hurdle than the sexism against Hillary. For one thing, there are more women than men, and a lot more white women than African-Americans, and we know that Hillary got lots of votes from women supporting her, even if there were some men voting against her on sexist grounds. I see several things here that show it. One is the behavior of the candidates themselves. The only thing I am aware of that Obama was accused of being sexist for doing was holding a chair for Hillary during a debate. She, however, bragged late in the campaign of her appeal to "white voters." Obama supporters in Pennsylvania were beaten up by people calling them "N..... lovers," I am unaware of anything comparable happening to Hillary supporters.

Finally, there is a bottom line, the voting behavior of two groups, especially in the later stages of the campaign: white men and African-American women. White men increasingly supported Hillary over Obama; African American women increasingly went the other way. That last one is the real key, as they are the group that experiences both sexism and racism. Their support for Obama pretty much says which has been more salient in US politics recently, a country that fought its bloodiest war over the slavery of African-descended people.