New Video Stream Now on Youtube

Sorry about the confusion. I redid the talk on Youtube, which got rushed as I neared my 15 minute limit.

http://www.youtube.com/watch?v=2hNt_qc-RvM

Redoing Last Night's Video

My apologies. For some reason, my video did not record after 19 seconds. I'm sorry for the inconvenience for those of you who sat through the Budweiser commercial only to find nothing more than 19 seconds. I'll try to redo my talk this afternoon.

Here is the url for my latest video stream

http://www.ustream.tv/recorded/9009602

My Video Stream This Week

I will be posting a new talk this evening. I intend to explain how the combination of competition and new technological economies of scale overaccumulation, which led to both deindustrialization and financialization, which, in turn, led to the current crisis. I will start at 6:00 and will finish before 6:30.

http://www.ustream.tv/channel/unsettling-economics

How Big is the Federal Deficit?

Kevin G. Hall and Robert A. Rankin want us to be very worried about the Federal deficit:

The national debt is rising to levels that have never been seen in the United States during peacetime … This year's federal budget deficit alone is expected to close the fiscal year Sept. 30 in a range between a staggering $1.3 trillion and $1.42 trillion. That's about six times President Ronald Reagan's biggest deficit, and he was blasted as a dangerous budget-buster.

OK, the nominal deficit for this year will be about 6 times the nominal deficit in 1986 but might we also point out that nominal GDP is about 3 times what it was almost 25 years ago?

In Memoriam

One of the tallest trees in the forest of jazz has fallen: Abbey Lincoln passed away on Saturday. If you've never heard her, you must: you can see a magnificent performance of "First Song" (music, Charlie Haden; words, Abbey) on YouTube.

There are many recordings to choose from, but my own favorite is The World is Falling Down from 1990. Listen to her utterly distinctive version of "How High The Moon," from that album: you will never hear any other version again without comparing it unfavorably to this one. (Jackie McClean, whose sound on the alto sax seems to be what the word "keening" was invented to describe, is a brilliant accompanist here.) A close second is from early in her career, the album That's Him, featuring the saxophone colossus Sonny Rollins and Max Roach, Abbey's husband-to-be, on drums.

RIP, Abbey.

Why are some pharmaceuticals so expensive?

Brian Palmer tries to answer his question without ever writing the term patent protection. I find this amazing and I can’t wait for Dean Baker to address this piece. Mr. Palmer uses as an example the drug Avastin which costs $8000 for a month’s supply and writes:

Manufacturing costs play a role in pricing decisions, although a small one. Avastin belongs to a category of drugs called biologics, which are large molecules that usually have to be manufactured by DNA manipulation. Biologics cost more to make than traditional drugs, which usually are generated through cheaper chemical reactions. Still, manufacturing costs normally don't exceed a few percentage points of sales revenue.

The cost of manufacturing pharmaceuticals is often a small percentage of sales which is why they can be so profitable for their makers even though an extensive amount of money is often spent on promoting patented drugs. Mr. Palmer also dredges out this excuse:

You hear a lot about how expensive it is to bring a drug to market.

Credit, however, goes to Mr. Palmer for at least emphasizing the lack of competition for certain drugs. It is true that this sector incurs substantial R&D expenses and the risk that the R&D may generate several dry holes. But do we really need a patent system in order to discover new treatments?

Harvey Friedman's Proposal For Public Refereeing Of Papers

An odd spinoff of the ongoing debate over at http://rjlipton.wordpress.com is a proposal that the genius logician Harvey Friedman (first taught as a prof at Stanford in philosophy at age 18, a world record for youthful professoring) has put forward in the middle of it for refereeing papers at journals, obviously inspired by the ongoing, now many hundreds of entries long, debate over the proposed proof by Vinay Deolalikar that P does not equal NP in computational complexity theory (current consensus: current proof flawed, but argument might still be right, or more likely, proof strategy may be very productive for lesser results).

So, the proposal is that an author is offered the option of public refereeing rather than the standard secretive double-blind type usually done. This public refereeing involves the journal putting the paper up on a website where anybody can publicly critique it. The author can respond and put up new revised versions (and can criticize the editorial board of the journal as well). When the author is satisfied with what has transpired out of the process, s/he can propose that the ed board consider it for publication. They then decide either to publish or not to publish. If it is not published, the last version can either remain up "hanging" on the website or be taken down.

Screwing Bondholders: Ending Bondage

The biased legal system lets bondholders make extortionate demands against workers, poor countries, .... President-elect Clinton learned how bond markets can even intimidate the government from exercising reasonable policies. So, with a bit of schadenfreude, I am glad to learn that Blackstone has the right to screw bondolders. Why should Blackstone have more rights than ordinary people? Why can't we organize to put some limits on the untrammeled power of financial markets, including that of Blackstone?

Here is the story:

Denning, Liam. 2010. "Blackstone Might Rewire Dynegy's Balance Sheet." Wall Street Journal (16 August).
http://online.wsj.com/article/SB10001424052748704868604575433722961359484.html?mod=WSJ_Markets_section_Heard

"It isn't often a 62% premium offers reason for grumbling. Blackstone Group's takeover offer for Dynegy effectively gives it two-thirds of the company's generation capacity plus cash for no money down. That is because NRG Energy has simultaneously agreed to buy about a third of Dynegy's megawatts for $1.36 billion, or about $800 million more than the price tag for Dynegy's equity."

"Why didn't Dynegy sell the assets to NRG and keep the money itself? Probably because it did this a year ago for no discernible gain. In August 2009, Dynegy sold about a quarter of its capacity to LS Power to boost liquidity. That didn't stop the stock dropping from about $10 then to less than $3 before Blackstone showed up.
If shareholders are miffed, it is Dynegy's bondholders that have real reason to worry. Should Blackstone decide to dividend the entire proceeds of the NRG deal back to itself, Dynegy will be left carrying its existing debt load on a smaller stream of profits. That would raise the company's already high credit risk. But then Blackstone, sitting on a potential $800 million instant profit and with no other shareholders to protect, need not worry too much about that."

"Alternatively, Blackstone could use some of that profit to buy in some of those bonds. Doing so would reduce Dynegy's debt burden and, possibly, its cash interest costs, potentially boosting Blackstone's return when it sells the company down the road. This likely would only make sense, however, if Blackstone bought the bonds below even today's market values of between 60 and 80 cents on the dollar. Shareholders might wish they got a higher premium. Bondholders may end up scrambling to limit their losses."

Social Security's 75th Anniversary

Mark Thoma at http://economistsview.typepad.com links to Paul Krugman's latest defense of social security on its 75th anniversary, and Dean Baker has been beating the drums too. I have nothing really original to add to this, but as defending social security against misrepresenting critics has been a core activity of this blog and its predecessor, Maxspeak, from early on, I feel the duty to add to the beating of the drum. "Bipartisan" deficit commission after bipartisan deficit commission seems to find their agreement on doing stuff to social security in the name of deficit reduction, even though social security is the part of the federal budget in better shape than pretty much any other. I think it is the thing that brings together these Washington "experts," who, even if they are not being directly paid by the Wall Street firms that are drooling for the billions from a privatization, they are under the influence of those who have been for so long that those who should know better seem to either forget it or ignore it.

As it is, for this go-around they are pushing for a 70-year retirement age, which Krugman accurately points out seriously hits the poorer groups in the US whose life expectancy is not rising (and, indeed, is falling for some groups, particularly poorer women). The bottom line argument continues to be "cut future benefits now, because, eeek!, if we don't future benefits now, we may need to be cut them in the future,eeek!" meh, feh, gah!

What needs cutting or slowing is the rate of increase of medical costs. Ezra Klein pointed out over the weekend in WaPo that the Repubs are now fighting against the cost control board (IPAB) set up by the Obama health reform, even as they support its spending subsidies, no cuts in defense spending, and the continuation of tax cuts for the rich, all the while playing to the anti-deficit tea partiers, although they do seem to be shying away from Paul Ryan's plan to voucherize social security. And people are whining that the Congressional Dems have nothing to run on this fall?

Burying X-Efficiency: Chicago Economics vs. the World

I am asking for some help. I am ready to send my article for publication. I have already followed instructions to tone way down my critique of Chicago. Anything that can make the story stronger would be appreciated.

http://michaelperelman.files.wordpress.com/2010/08/x2-new.pdf

Clawbacks from economists?

This review is not particularly in itself. It is worth skimming to get the flavor. Once you feel comfortable with what you have read, search for the word "ugly." The idea is that these mostly neoliberal economists claim to have created enormous value for the economy. I assume that the essays were composed before the crash, but the editor claims that our profession deserves extra funding for all the value it created. Could the public demand a clawback to penalize these economists for the harm they have done?

Better Living through Economics
Author:
Siegfried, John J.
Reviewer:
Vedder, Richard

Published by EH.NET (August 2010)



John J. Siegfried, editor, Better Living through Economics. Cambridge, MA: Harvard University Press, 2010. viii + 315 pp. $45 (hardcover), ISBN: 978-0-674-03618-5.

Reviewed for EH.Net by Richard Vedder, Department of Economics, Ohio University.



This volume of essays advances the proposition that economic theory and economic research can and has been harnessed to promote human welfare in many different ways, materially improving the quality of our lives and arguably our incomes. Not unusual for compilations of essays, this book contains the good, the bad, and, unfortunately, the ugly. Fortunately, “the good” dominates, and I would say two-thirds of the volume successfully achieves its mission.


John Siegfried, Vanderbilt professor and Secretary-Treasurer of the American Economic Association, seems to be the prime mover on getting this volume published. As Richard Caves states in a cover blurb, many of the “essays are concise, clear and consistently written at a level within the reach of undergraduate economics students.” Good examples include Thomas Tietenberg’s excellent treatment of the evolution of emissions trading to more efficiently deal with restricting environmentally undesirable practices, Elizabeth Bailey’s nice narrative about the benefits of transportation deregulation beginning in the late 1970s, Robert Moffitt’s clear and well balanced discussion of the evolution of the Earned Income Tax Credit, Michael Boskin’s discussion of improvements in measuring inflation, Lawrence White’s analysis of changing views on anti-trust regulation over time, and the Asch, Miller and Warner’s discussion of how the military draft was ended and subsequent issues arising from that. Each of these authors shows that basic propositions taught in any good principles of economics course can be harnessed to make the world work better and more efficiently. Generally speaking, the discipline and self-correcting properties of markets are stronger and more effective in allocating resources than rules-based command decisions made through the political process. Also, aligning incentives with socially desirable objectives pays.

Anne Krueger’s essay stands out in several respects. First, she very convincingly demonstrates that the move away from protectionist/import substitution policies in the 1950s and 1960s harnessed the spirit of enterprise and brought about enormous improvements in the standard of living for literally billions of people. And she appropriately notes that the underlying theory was not discovered by an National Science Foundation grant revealing huge insights, but essentially by the work of Adam Smith and David Ricardo a couple of centuries ago.

This gets to a problem. Economists sometimes get overwhelmed with their own self importance and claim more than they should. John Taylor writes a generally solid essay arguing that reductions in macroeconomic stability in modern times reflects in large part a move to a more intelligent understanding on the role of monetary variables in the economy. Taylor believes the evolution of new economic modeling in recent decades that combine rational expectations with some allowance for price stickiness has brought about enormous policy improvements. Maybe, but I side with commenter Laurence H. Meyer (himself a former Federal Reserve Governor) whose views are “the shifts in monetary policy ... are due more to the rediscovery of classical monetary theory than to advances of modern macroeconomic theory. ... classical monetary theorists had the story basically right” (p. 165). The work of Milton Friedman outlined a half century ago -- itself informed by still earlier work of quantity theorists and neglected practitioners like Clark Warburton -- was far more important than modern-day theoretical refinements.

The less good essays stray a good deal from the stated mission of offering clear, concise explanations of using economics to deal with problems in a language an undergraduate student can understand. Alvin Roth’s paper on deferred-acceptance algorithms is filled with jargon, is exceedingly hard to follow, and deals, frankly, with a far less dramatic advancement in modern economics than improving price indices, promoting the power of comparative advantage, or the gains from transport deregulation. Modest Roth is not -- he cites nearly thirty papers he authored or coauthored in the bibliography. The McAfee, McMillan and Wilkie piece on auctioning spectrum licenses deals with a moderately more important topic, but again gets into too many details of alternative bidding possibilities to be of interest to all but the most gung ho specialists.

Alas, I must come to the “ugly” part of this book. This appears to be not simply a volume of essays to promote the practical dimensions of modern advances in economics, but more an effort to increase the income and prestige of economists relative to other scholars. On page one John Siegfried assets, without a scintilla of supporting evidence, that “the value of the improved policies documented in this volume is likely hundreds of billions of dollars.” His agenda becomes clearer very shortly: “Interestingly ... only a few of the contributions outlined here have been financed or promoted through the private sector” (p. 3). In other words, NSF economics grants have a huge payoff. Charles Plott even goes further: “the social value of the contributions of economics compares well with the contributions of basic research in any field of science.” (p. 6). This, of course, is a normative judgment without a scintilla of rigorous proof, measuring, for example, the rate of return on research in physics or biological sciences with that in economics or psychology (a point that even the NSF’s Daniel Newlon gently takes him to task on).

All and all, this reinforces my own feelings about our profession. For many, Physics Envy is a big cross to bear -- the unwillingness to accept that economics is not considered as respectable as many of the so-called hard sciences. This volume promotes the good economists have done, ignoring the policy disasters that economists have contributed to, for example, the stagflation of the 1970s, or, arguably, even the financial crisis of 2008 -- where were economists in warning about subprime lending, excessive use of untried to financial instruments, etc? Where are we today in opposing stimulus packages that historical experience and economic theory alike say do not work?

But above all, the volume is all about rent-seeking -- a plea to get more economics funding for the NSF and related agencies. It is amazing how much Adam Smith, David Ricardo, A.C. Pigou, Irving Fisher and Milton Friedman contributed to the advancement of human welfare without NSF funds. As Austen Goolsbee notes in a recent NBER working paper, more government grant funding inevitably increases economic rents because of the inherent short-term limits on the supply of good talent. If the authors had stuck to presenting the evidence without its obvious and overplayed commercial message, this would have been a far better volume.

Arnold Zellner, RIP

The leading Bayesian econometrician in the world died last night, Arnold Zellner. A very feisty and provocative individual, he will be missed. I knew him and always found him to be lots of fun and very interesting to talk to. He was one of the first of the econometricians to be hired at the University of Wisconsin around 1960, to be followed shortly by Arthur Goldberger, moving that department from being a near zero in that area to the top ranks, although Zellner did not stay around all that long, moving on to the University of Chicago. However, he was originally attracted to Wisconsin by Bayesians and good time series people in the Statistics Department, such as George Box, who in turn had been attracted by the strong biometricians in the genetics department, the most prominent of whom was the late Sewall Wright, one of the three founders of the neo-Darwinian synthesis in the 1930s, and who invented path coefficients in the teens while co-discovering the identification problem with his economist father in the 1920s while studying corn-hog cycles and other agricultural economics questions.

Anyway, Zellner was a great econometrician and a great guy, and I think that in the long run, we will all become Bayesians, or at least a lot of us.

Reinhart and Rogoff: There’s No There There

Here’s the core problem with Reinhart and Rogoff’s claim that public debt levels above 90% of GDP cause reduced growth: it’s all correlation and no mechanism. It epitomizes the worst aspects of empirical economics, searching tirelessly for statistical regularities, but not the mechanisms that might underlie them. Because economic contexts are highly diverse, often singular, it’s the processes at work, not generalizations about outcomes, that economics has the power to elucidate.

Sorry to be so abstract.

The R&R dataset, as the authors proudly explain, encompasses 44 countries over two centuries. We’ve got Finland, Spain, Japan and the US, Thailand, Mexico and Colombia. We’ve got the aftermath of the American Revolution against England and WWII, banking crises under the gold standard, the third world debt crisis of 1982. It’s all there in one hopper, ready to be crunched. I would convert to Rosicrucianism before I would embrace the belief that a single statistical relationship captures all these places and times.

Paul Krugman has highlighted two cases in particular, the US demobilization following WWII and the Japanese lost decades (still lost). Yes, he says, there is a correlation between public debt and slow growth, but in the US episode it’s spurious (war gave us the debt, demobilization the slow growth), and in Japan the causation runs from slow growth to high debt.

Just scanning the R&R list, I see lots of countries that have battled external deficits, a condition that weakens growth and puts governments in the position of running deficits in order to delay adjustment. And what about price shocks that cripple countries with a narrow export base or particular import dependencies? The R&R list is thick with these cases too. Given these interrelationships, it is revealing that, under “Debt and growth causality”, R&R consider only “Growth-to-debt” and “Debt-to-growth”, without the vast third category of “joint causation by other factors”.

Which gets us back to mechanisms. What are the forces, economic, political or otherwise, that cause runups of public debt? Under what circumstances does debt feed back to these other factors? What mechanisms govern the expansion and contraction of fiscal space? These are the kinds of things we need to know.

R&R have it backwards: they are looking for broad generalizations that might be identified over large samples but have uncertain application to any particular case. A better kind of economics would be one that identified processes that, while they generate diverse outcomes with no discernible central tendency over large samples, can be applied precisely to individual cases.

Like, for instance, ours.

A Keyhole View of the Banking/Real Estate Crisis

The press has been discussing that banks are holding onto a great deal of real estate rather than completing the foreclosure process. I asked a prominent real estate figure in Chico about how large this phenomenon was. He replied that although no public data exists, he could show me houses that have ceased payments more than 18 months ago. He said that the banks are even paying the taxes on the properties rather than booking a write-down.