I just uploaded another YouTube talk on the overview of economic crises.
http://www.youtube.com/watch?v=6h9xpmM14BU
Saturday, October 16, 2010
Thursday, October 14, 2010
Why Greg Mankiw's taxes must be increased!
In the Sunday Times, Mankiw whines about how Obama's desire to let the Bush tax cuts for the rich expire reduces his incentives to take on extra work - such as, presumably writing obnoxious right-wing op-ed pieces in the Sunday Times. What is the down-side: more revenue and less drivel!
Wednesday, October 13, 2010
The tip of the Diamond iceberg
I have long thought that Diamond deserved a Nobel. His work, though, is wide-ranging and is not at all confined to what he was cited for - search theory and the labor market. His 1965 paper, "National Debt in a Neo-Classical Growth Model" is a wonderful paper, absolutely canonical. He adds capital to Samuelson's Pure Consumption Loans model (the Overlapping Generations model). Even in the area of labor markets, one of his papers - sorry I don't have the cite to hand - uses search theory and the idea of what have come to be called thick-market externalities to build a macro model with multiple Pareto-ranked real equilibria- a very important paper in that branch of the "new Keynesian" literature - unfortunately the less well-known branch- that did not focus on "sticky prices" as the root of all macroeconomic evil.
Tuesday, October 12, 2010
Social Security Freeze?
Matt Sedensky seems to think the government has decided to reduce the real value of Social Security checks given his title “Senior citizens brace for Social Security freeze”:
Seniors prepared to cut back on everything from food to charitable donations to whiskey as word spread Monday that they will have to wait until at least 2012 to see their Social Security checks increase. The government is expected to announce this week that more than 58 million Social Security recipients will go through a second straight year without an increase in monthly benefits. This year was the first without an increase since automatic adjustments for inflation started in 1975."I think it's disgusting," said Paul McNeil, 69, a retired state worker from Warwick, R.I., who said his food and utility costs have gone up, but his income has not. He lamented decisions by lawmakers that he said do not favor seniors.
There has been no recent decision by lawmakers to freeze nominal Social Security benefits. As our graph shows, the consumer price index for August 2010 is actually lower than it was in July 2008. So if CPI properly measures the cost of living – then seniors have received a slight increase in real income. Some prices may have increased while others have decreased. And perhaps food and utility for some seniors carry a higher weight in their own budgets than the typical consumer. But if that is the argument that Mr. Sedensky wants to make – then he should make that case well before the end of his article:
Advocates for seniors argue the Consumer Price Index doesn't adequately weigh the costs that most affect older adults, particularly medical care and housing. "The existing COLA formula does not account for the economic reality of the true costs that most seniors faced," said Fernando Torres-Gil, director of UCLA's Center for Policy Research on Aging and the first person appointed to the governmental post of assistant secretary for aging, during the Clinton administration.
Even here – I have a problem with what Mr. Sedensky writes. According to the Bureau of Labor Statistics, energy prices have dropped dramatically over this period. It is true that the food price index has increased slightly. Over the same period, the housing price index has declined slightly. The medical price index, however, has increased by 6.8 percent. OK, seniors who budgets are heavily weighted towards the cost of medicine may have to make cutbacks.
Update: Thanks to Econospeak reader JWMason who asks us to check the CPI-E, which is discussed here:
The Bureau of Labor Statistics (BLS) also calculates an experimental price index for Americans 62 years of age or older (often called the CPI-E). This article reviews price changes seen in the experimental CPI-E from December 1997 through December 2009 and reiterates the methods, sources of data, and limitations of the experimental index described in earlier articles. Over the 12-year period from December 1997 through December 2009, the experimental CPI-E rose 36.1 percent. This compares to increases of 33.9 and 33.8 percent for the CPI-U and CPI-W, respectively … The relative importance data for the CPI-E and the CPI-U and CPI-W populations show that older Americans devote a substantially larger share of their total budgets to medical care (see Table 1). In addition, for each population group, medical care prices rose more rapidly than the overall (all items) index during each of the eight years studied. For this reason, the medical care component accounts for a significant portion of the difference between the higher rate of increase measured for the CPI-E relative to the two official population groups during the 1998-2009 period … The CPI-E, reweighted to incorporate the spending patterns of older consumers, behaved more like the CPI-U than the CPI-W. This was expected, because the CPI-U includes the expenditures of all urban consumers, including those 62 years of age and over. The CPI-W, however, is limited to the spending patterns of wage-earner and clerical families and, therefore, specifically excludes the experience of families whose primary source of income is from retirement pensions. Finally, the medical care component of the CPI has a substantially larger relative weight in the experimental population compared to the CPI-U or CPI-W. As a result, the medical care component tends to have a larger effect on the elderly population than it does on the other two indexes. Other differences also play an important role, however, such as the greater weight of homeownership in the CPI-E.
So why not index on CPI-E rather than CPI-W?
Excessive Executive Compensation?
U.S. Supreme Court, Rogers v. Hill, 289 U.S. 582 (1933), Rogers v. Hill, No. 732, 289 U.S. 582
http://supreme.justia.com/us/289/582/case.html
"While the amounts produced by the application of the prescribed percentages give rise to no inference of actual or constructive fraud, the payments under the bylaw have by reason of increase of profits become so large as to warrant investigation in equity in the interest of the company. Much weight is to be given to the action of the stockholders, and the bylaw is supported by the presumption of regularity and continuity. But the rule prescribed by it cannot, against the protest of a shareholder, be used to justify payments of sums as salaries so large as in substance and effect to amount to spoliation or waste of corporate property."
http://supreme.justia.com/us/289/582/case.html
"While the amounts produced by the application of the prescribed percentages give rise to no inference of actual or constructive fraud, the payments under the bylaw have by reason of increase of profits become so large as to warrant investigation in equity in the interest of the company. Much weight is to be given to the action of the stockholders, and the bylaw is supported by the presumption of regularity and continuity. But the rule prescribed by it cannot, against the protest of a shareholder, be used to justify payments of sums as salaries so large as in substance and effect to amount to spoliation or waste of corporate property."
Monday, October 11, 2010
Greenspan Thinks Stimulus is a Dangerous Game
Bloomberg has Alan Greenspan’s remarks on tape as he compares US fiscal policy to that of Greece. Does the former FED chairman know how modest interest rates are? Let alone the current amount of economic slack in the US economy. Of course, that will not stop the Party of No from citing Greenspan as the all-time expert on the US macroeconomy.
Search Theory Gets a “Nobel”
The “Nobel” economics prize has just been awarded to the trio of Diamond-Mortensen-Pissarides (DMP) for their work on search theory, the most influential theoretical trend in labor economics. (The quotes around “Nobel” signify the non-Nobelian history of this prize.)
Others are far more qualified than I am to discuss the larger significance of their work. I’ve been interested in one aspect: its implications for the concept of full employment. In the days before search theory, one standard story went like this:
The labor market is like other markets in the sense that market-clearing occurs when there is neither excess supply nor excess demand. The difference is that there is great heterogeneity of jobs and workers, and information is often murky. The result is that, at any moment, there are many jobs looking for appropriate workers and many workers looking for appropriate jobs. Taken together, these reflect structural and frictional unemployment.
It can all be viewed in terms of a Beveridge Curve, with the number of unfilled jobs (vacancies) on the vertical axis and the number of unemployed workers on the horizontal axis:
The 45º line represents equal numbers of vacancies and unemployed workers, therefore no excess demand or supply in the aggregate. Its intersection with the B-Curve determines the level of unemployment that should be viewed as “full employment” for any particular economy. This full employment level can be lowered by making the labor market more efficient, through job training programs (to reduce structural unemployment) and information and referral systems (to reduce frictional unemployment).
A very different story, about inflation and the “natural rate” of unemployment, largely displaced this one, but I won’t go there now.
So back to the B-Curve. Along came D-M-P, and especially M-P, and we got a new definition of full employment. The 45º line, we were told, is arbitrary. Why should equal levels of vacancies and unemployed workers signify labor market equilibrium? On the contrary, we should pay more attention to the microstructure of labor markets. Two factors in particular intrude, the relative flows of workers and jobs into the market and the relative ability of workers and employers to locate a suitable match. Equilibrium occurs, it was asserted, at the ratio of vacancies to unemployed workers which, given these factors, will be stationary over time, ceteris paribus.
Consider a different B-Curve:
Unlike the other, this one isn’t symmetrical. Its shape suggests that the economy is “biased” toward higher unemployment; this can be because the “steady-state” flow of workers exceeds the corresponding flow of job openings, or because workers are less efficient at finding jobs than employers are at finding workers. A flatter line, at an angle significantly less than 45º, represents a ratio of vacancies to unemployed workers less than one-to-one; this ratio will remain constant given the underlying determinants of the B-Curve. Its intersection with the curve gives us the true level of full employment.
I never got it. (a) Why should a steady-state criterion represent either equilibrium or a normative goal for labor market performance? This would make sense if we lived in a steady-state world, but we don’t. The analysis is simply a snapshot, and what would be impossible if we had to sustain it for all eternity can be entirely possible if it occurs for only a few quarters. In particular, I would want to see worker and employer behavioral response functions that could be estimated with real-world data before I would draw any conclusions about what point on the B-Curve should be viewed as an equilibrium. (This goes for the “naive” 45º line story too.) Here, for instance, is where efficiency wage theory would come in. (b) The flows highlighted by search theory are themselves sensitive to cyclical influences. Workers are responding to today’s dismal labor market, for instance, by withdrawing from search and, in some cases, by choosing non-work alternatives, like more education (good) or giving up on personal ambition (bad). Over time, there is hysteresis. Job flows are influenced not only by immediate demand considerations, but also by delayed or discarded investment plans, another form of hysteresis. This may not affect the positive side of the story (equilibrium), but it should definitely change the normative spin we give to it.
As for myself, I remain agnostic. I accept the critique of the 45º line, and I don’t assume that the goal of macropolicy should be to equalize labor and job offers. I don’t think search theory has given us an adequate replacement, either. Maybe the best we can do at the moment is to benchmark our current performance against recent time periods when labor markets were in more acceptable shape—for instance, the late 1990s. By any reasonable standard, a greater than five-to-one ratio of unemployed workers to job vacancies is simply abysmal and refutes the claim that it is the position of the B-Curve (structural unemployment) that ails us rather than our position out at the far southeastern tail (deficient demand).
Others are far more qualified than I am to discuss the larger significance of their work. I’ve been interested in one aspect: its implications for the concept of full employment. In the days before search theory, one standard story went like this:
The labor market is like other markets in the sense that market-clearing occurs when there is neither excess supply nor excess demand. The difference is that there is great heterogeneity of jobs and workers, and information is often murky. The result is that, at any moment, there are many jobs looking for appropriate workers and many workers looking for appropriate jobs. Taken together, these reflect structural and frictional unemployment.
It can all be viewed in terms of a Beveridge Curve, with the number of unfilled jobs (vacancies) on the vertical axis and the number of unemployed workers on the horizontal axis:
The 45º line represents equal numbers of vacancies and unemployed workers, therefore no excess demand or supply in the aggregate. Its intersection with the B-Curve determines the level of unemployment that should be viewed as “full employment” for any particular economy. This full employment level can be lowered by making the labor market more efficient, through job training programs (to reduce structural unemployment) and information and referral systems (to reduce frictional unemployment).
A very different story, about inflation and the “natural rate” of unemployment, largely displaced this one, but I won’t go there now.
So back to the B-Curve. Along came D-M-P, and especially M-P, and we got a new definition of full employment. The 45º line, we were told, is arbitrary. Why should equal levels of vacancies and unemployed workers signify labor market equilibrium? On the contrary, we should pay more attention to the microstructure of labor markets. Two factors in particular intrude, the relative flows of workers and jobs into the market and the relative ability of workers and employers to locate a suitable match. Equilibrium occurs, it was asserted, at the ratio of vacancies to unemployed workers which, given these factors, will be stationary over time, ceteris paribus.
Consider a different B-Curve:
Unlike the other, this one isn’t symmetrical. Its shape suggests that the economy is “biased” toward higher unemployment; this can be because the “steady-state” flow of workers exceeds the corresponding flow of job openings, or because workers are less efficient at finding jobs than employers are at finding workers. A flatter line, at an angle significantly less than 45º, represents a ratio of vacancies to unemployed workers less than one-to-one; this ratio will remain constant given the underlying determinants of the B-Curve. Its intersection with the curve gives us the true level of full employment.
I never got it. (a) Why should a steady-state criterion represent either equilibrium or a normative goal for labor market performance? This would make sense if we lived in a steady-state world, but we don’t. The analysis is simply a snapshot, and what would be impossible if we had to sustain it for all eternity can be entirely possible if it occurs for only a few quarters. In particular, I would want to see worker and employer behavioral response functions that could be estimated with real-world data before I would draw any conclusions about what point on the B-Curve should be viewed as an equilibrium. (This goes for the “naive” 45º line story too.) Here, for instance, is where efficiency wage theory would come in. (b) The flows highlighted by search theory are themselves sensitive to cyclical influences. Workers are responding to today’s dismal labor market, for instance, by withdrawing from search and, in some cases, by choosing non-work alternatives, like more education (good) or giving up on personal ambition (bad). Over time, there is hysteresis. Job flows are influenced not only by immediate demand considerations, but also by delayed or discarded investment plans, another form of hysteresis. This may not affect the positive side of the story (equilibrium), but it should definitely change the normative spin we give to it.
As for myself, I remain agnostic. I accept the critique of the 45º line, and I don’t assume that the goal of macropolicy should be to equalize labor and job offers. I don’t think search theory has given us an adequate replacement, either. Maybe the best we can do at the moment is to benchmark our current performance against recent time periods when labor markets were in more acceptable shape—for instance, the late 1990s. By any reasonable standard, a greater than five-to-one ratio of unemployed workers to job vacancies is simply abysmal and refutes the claim that it is the position of the B-Curve (structural unemployment) that ails us rather than our position out at the far southeastern tail (deficient demand).
Saturday, October 9, 2010
Michael Perelman's Analytical Biography Updated
Many of you told me that I should reedit this. See if you like this better.
http://michaelperelman.wordpress.com/an-ideological-biography/
http://michaelperelman.wordpress.com/an-ideological-biography/
Thursday, October 7, 2010
Economics, Ethics, and the Good Life
I just gave this lecture regarding the decoding of economics. The subject matter was different from any other I have given. I describe how the subject mutated with the changing needs of the ruling classes. The audience included the public at large, students of economics, philosophy, and other subject. The first couple sentences were directed at the way that I was introduced.
http://www.archive.org/details/EconomicsEthicsAndTheGoodLife_690
http://www.archive.org/details/EconomicsEthicsAndTheGoodLife_690
Climate Science: Prepare for Increasing Uncertainty
Environment 360, a very useful online magazine, has a new article by Fred Pearce that explains why the next IPCC assessment (AR5) will tell us that the consequences of living with climate change will be even more uncertain than they predicted back in ‘07. Part of this is due to external pressure on IPCC to express uncertainty more honestly than they have in the past, and part is the result of including more feedback processes whose magnitude, and even direction, is not well understood.
Pearce worries about the political fallout from this trend: how will the public respond to the argument that, the more science advances in this field, the less confidence there can be in any particular prediction? I agree, and I think economists are going to have to rethink how they represent the economics of climate change. Point estimates of damages (expected benefits of mitigation) become less relevant to policy as error bars widen; rather quickly, as Weitzman and others have argued, the uncertainty itself becomes the story. Mitigation needs to be seen not as an investment, justified on cost-benefit grounds, but as insurance. What price are we willing to pay to reduce the extreme risks that the next report will include as within the realm of possibility?
Pearce worries about the political fallout from this trend: how will the public respond to the argument that, the more science advances in this field, the less confidence there can be in any particular prediction? I agree, and I think economists are going to have to rethink how they represent the economics of climate change. Point estimates of damages (expected benefits of mitigation) become less relevant to policy as error bars widen; rather quickly, as Weitzman and others have argued, the uncertainty itself becomes the story. Mitigation needs to be seen not as an investment, justified on cost-benefit grounds, but as insurance. What price are we willing to pay to reduce the extreme risks that the next report will include as within the realm of possibility?
Wednesday, October 6, 2010
Cuccinelli's Baaaack!: Witch Hunt, Part Two
"Witch Hunt, Part Two" is the title of the lead editorial in today's Washington Post, regarding the report that Virginia Attorney General, Ken Cuccinelli is not taking "no" for an answer in his effort to hound climate science researcher, Michael Mann, for his 1998 "hockey stick" paper, along with the University of Virginia. Following up on the narrow window of opportunity left by the court, he is investigating Mann again for the one grant he got from the Commonwealth of Virginia, supposedly to detect fraud, which Mann got for a study on "the interaction of the land, atmosphere, and vegetation in the African savannah," which has nothing to do with his hockey stick paper (which was cited in the grant application, giving Cuccinelli his thin shred of opportunity).
Beyond the earlier subpoenas to U.Va. (which is resisting all this), Cuccinelli now wants in addition all emails between Mann and 39 other scientists. The sign of what he is really after is that none of these include the two co-applicants on the grant in question. This is even a worse fishing expedition than the previous one, given that both the National Academy of Sciences and Penn State (Mann's current location) have absolved him of any wrongdoing, even though there are debates over how good his statistical methodology in the original 1998 paper was (which he has changed in subsequent research anyway). I also note that so far, U.Va. has spent $214,700 defending itself from Cuccinelli's earlier investigation, while Cuccinelli has himself spent $350,000 so far on this, with more to come during a period of supposed budget austerity. Of course, supposedly Cuccinelli is the legal defender of the University of Virginia, hack, cough.
There is a lot more I could say here, but I suspect my position on all this is obvious and well known, given that I have blogged on this matter previously. However, I fully agree with all the broader arguments the WaPo editorial brings up regarding this totally appalling matter.
Beyond the earlier subpoenas to U.Va. (which is resisting all this), Cuccinelli now wants in addition all emails between Mann and 39 other scientists. The sign of what he is really after is that none of these include the two co-applicants on the grant in question. This is even a worse fishing expedition than the previous one, given that both the National Academy of Sciences and Penn State (Mann's current location) have absolved him of any wrongdoing, even though there are debates over how good his statistical methodology in the original 1998 paper was (which he has changed in subsequent research anyway). I also note that so far, U.Va. has spent $214,700 defending itself from Cuccinelli's earlier investigation, while Cuccinelli has himself spent $350,000 so far on this, with more to come during a period of supposed budget austerity. Of course, supposedly Cuccinelli is the legal defender of the University of Virginia, hack, cough.
There is a lot more I could say here, but I suspect my position on all this is obvious and well known, given that I have blogged on this matter previously. However, I fully agree with all the broader arguments the WaPo editorial brings up regarding this totally appalling matter.
Tuesday, October 5, 2010
Feldstein and the President Publicly Clash Over Ending Tax Breaks for the Wealthy
John McKinnon reports on a public debate between the President and two of his outside advisors – Martin Feldstein and William Donaldson – over the President’s proposal to let the Bush tax cuts for the wealthy expire:
The President needs better advisors than this. Donaldson’s argument that business uncertainty is retarding economic recovery strikes me as Tea Party propaganda but then Donaldson is not an economist. Feldstein is. The difference between the President’s and Feldstein’s policy positions centers on whether we should extend the tax cut for the wealthy for another two years. Does Dr. Feldstein really believe that a temporary tax cut for the wealthy significantly increases consumption demand? I’m sure most of his students at Harvard have heard of the life-cycle model of consumption and the Barro-Ricardian equivalence proposition!
When Harvard professor Martin Feldstein’s turn came to talk, he suggested continuing the current tax rates for two years for everybody, then ending them. He said that course would bolster demand at a time when the economy is weak, and also would reduce the long-term federal debt that Obama projects. When Harvard professor Martin Feldstein’s turn came to talk, he suggested continuing the current tax rates for two years for everybody, then ending them. He said that course would bolster demand at a time when the economy is weak, and also would reduce the long-term federal debt that Obama projects. William Donaldson, a former chairman of the Securities and Exchange Commission, then offered similar suggestions, saying that confusion over future tax policy is adding to business uncertainty.
The President needs better advisors than this. Donaldson’s argument that business uncertainty is retarding economic recovery strikes me as Tea Party propaganda but then Donaldson is not an economist. Feldstein is. The difference between the President’s and Feldstein’s policy positions centers on whether we should extend the tax cut for the wealthy for another two years. Does Dr. Feldstein really believe that a temporary tax cut for the wealthy significantly increases consumption demand? I’m sure most of his students at Harvard have heard of the life-cycle model of consumption and the Barro-Ricardian equivalence proposition!
Sunday, October 3, 2010
Finance Capital vs. a Productive Economy
To celebrate the closure of TARP, I just posted a video on finance capital versus a productive economy. Any comments will be appreciated. I apologize that did not feel very spontaneous in my presentation.
http://www.youtube.com/watch?v=3w6hRP6oiYE
http://www.youtube.com/watch?v=3w6hRP6oiYE
Saturday, October 2, 2010
The Wonders of Private Equity
No comment needed
Creswell, Julie and Peter Lattman. 2010. “Private Equity Thrives Again, but Dark Shadows Loom.” New York Times (29 September) Dealbook Special Section: p. 1.
http://dealbook.blogs.nytimes.com/2010/09/29/private-equity-thrives-again-but-dark-shadows-loom/?ref=business
“This summer, executives from the New York-based private equity firm SK Capital traveled to Houston to celebrate the first anniversary of their acquisition of a nylon manufacturing business. Soon they will have a bigger reason to uncork the Champagne. The nylon manufacturer has announced plans to issue about $1 billion in debt, of which $922 million will be used to pay a dividend to SK. For SK, which paid $50 million in cash for the business, that is an astonishing almost 18-fold return in a little more than a year.”
Creswell, Julie and Peter Lattman. 2010. “Private Equity Thrives Again, but Dark Shadows Loom.” New York Times (29 September) Dealbook Special Section: p. 1.
http://dealbook.blogs.nytimes.com/2010/09/29/private-equity-thrives-again-but-dark-shadows-loom/?ref=business
“This summer, executives from the New York-based private equity firm SK Capital traveled to Houston to celebrate the first anniversary of their acquisition of a nylon manufacturing business. Soon they will have a bigger reason to uncork the Champagne. The nylon manufacturer has announced plans to issue about $1 billion in debt, of which $922 million will be used to pay a dividend to SK. For SK, which paid $50 million in cash for the business, that is an astonishing almost 18-fold return in a little more than a year.”
Friday, October 1, 2010
Michael Perelman's Analytical Biography
It probably needs some polishing. Suggestions welcome.
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