One Small Reason Why it Would Be Better if Romney Lost

If Obama is re-elected, we might since a continued prosecution of the culpable in the LIBOR scandal.  If Romney wins, very unlikely.

Will ObamaCare Make Us Fat?

Miles Kimball reports on a paper co-authored by Isaac Ehrlich entitled The Problem of the Uninsured—Implications for Health Insurance:

Sam Peltzman’s argument that requiring people to wear seat belts would make them feel safer, and therefore lead them to drive faster. This is now called the Peltzman effect, and I will refer you to Greg Mankiw’s post on “The Peltzman Effect” for a discussion of it. In his presentation, Isaac points out that there will be the same kind of effect if you require people to have health insurance. They will feel safer in relation to their health, and so will take more risks. For example, a young person who has to pay full price for the visit to the doctor for antiobiotics to treat an STD may be more careful to use or insist on a condom. He and his coauthor Yong Yin have a theoretical model showing that such effects can be substantial in size. Notice that it should be possible to get good empirical evidence on such effects.

In other words, Ehrlich is claiming now that the poor have health insurance, they will work out less and will eat more junk food. Isaac Ehrlich – where have we heard this name before? His 1975 publication The Deterrent Effect of Capital Punishment is often cited by advocates of capital punishment but be mindful of the various critiques of Ehrlich’s alleged evidence, which we noted here. Miles notes that this paper is not readily available yet and admits it is only a theoretical argument. I just hope that those who decide to do empirical work are mindful of what Ed Leamer wrote years ago.

Economics, an Almost Social Science (or, the Foundations of Liberal Ideology in Second Order Conditions)

This is the title of the paper I presented in Paris last month.  It was written in one day, unfortunately, due to other, competing deadlines.  But it's not too bad, and it does a better job of saying in more-or-less plain language what I've been trying to say for years about what I see as a central blindness in mainstream economics.  I apologize for the lack of references; if it looks like there's an appropriate venue for this piece, I'll throw a few in.

Read and enjoy.

Bad Lieutenants

Somebody should do a long piece about the atrocities committed by police under the command of liberal Democratic mayors.  Every political convention features such hijinks, and will again.  Over the past year we have the numerous crimes of violence committed by police against the Occupy people.  Just today I'm reading about the use of "stinger balls" in L.A. against dangerous chalk artists.  (Hola, Mayor 

Antonio Villaraigosa! How's the family?)

Curiosity got the best of me. What in the world are stinger balls? The answer is, if you like rubber bullets, you'll love rubber pellet grenades.  For when you really don't care who the hell you assault.  They are supposed to be non-lethal, though the outfit selling them cautions:

"IMPROPER USE OF THE STINGER GRENADE CAN RESULT IN DEATH OR SERIOUS BODILY INJURY

"WARNING: This product is to be used only by authorized and trained Law Enforcement, Correction, or Military Personnel. This product may cause serious injury or death to you or others. This product may cause serious damage to property. Handle, store and use with extreme care and caution. Use only as instructed."

Liberal Dems always seem to get a pass on this bullshit. Oddly, or ironically, the best work on full-spectrum police criminality is coming from libertarian Radley Balko. He has a book in the works.

I've seen worse

Greetings, EconoSpeakers. As a special bonus for your devoted attention to this blog, you have the privilege of enduring me for the next few days.  Who am I?  Don't ask.  Those who tell don't know, those who know don't tell.  Of course for many it will be perfectly bleeding obvious, just STFU about it, okay?

We've all heard of the Great Recession and more recently, the Little Depression.  These days I'm reading Hyman Minsky, so I'm inclined to think neither phrase is appropriate.  More apt would be "Business as usual."  By Minsky, the sort of collapse we are currently experiencing is not a bug, it's a feature of unregulated capitalism.  If you doubt the ubiquity of such events, you should consult "This Time It's Different," by Reinhart and Rogoff.  In the most basic sense, this is normal.  It sucks, it's worse now than usual, but it's normal.  Deal with it.

R&R do not mention Minsky -- theirs is an exhaustive empirical work with some theoretical b.s. included, and little in the way of policy remedies.  In theoretical terms it is shallow.  Minsky is deep.  He gets into the pores of the financial system, long neglected in macroeconomic theory.  I hope to have more to say about him in due course.

Time for breakfast . . .

adventures in teaching principles

I put a parabolic Marginal benefit of a wing schedule up, first rising and then falling. The MC of a wing is horizontal and starts above MB and intersects the latter twice, at 5 and 15 wings, respectively. The area between MC and MB from 0 to 5 wings is clearly less than the area between MB and MC from 5 to 15 wings. OK, class how many wings shall I eat if I want maximize net benefits?

Response: Don't eat the first 5!!

Economy: Lives of Quiet Desperation

This is a short post to celebrate the birthday (12th July) of writer Henry David Thoreau who was born in Concord Massachusetts USA in 1817.

An economics blog appears to be an appropriate forum for referring to Thoreau's first chapter in his book  'Walden'.  It is titled 'Economy' and explores concepts related to how time, life endeavours and objects are valued.  What is essential to life versus what is frivolous:

"Most men lead lives of quiet desperation..."
"At the present day, and in this country, as I find by my own experience, a few implements, a knife, an axe, a spade, a wheelbarrow, etc., and for the studious, lamplight, stationery and access to a few books, rank next to necessaries, and can all be obtained at a trifling cost.  Yet some, not wise, go to the other side of the globe, to barbarous and unhealthy regions, and devote themselves to trade for ten or twenty years, in order that they themselves may live, - that is, keep comfortably warm - and die in New England at last....Most of the luxuries, and many of the so-called comforts of life, are not only not indispensable, but positive hindrances to the elevation of mankind..."

Economists could read this book and it would be time well spent  ;-)

Pay for Oppression: Do Workers in Fairer or Safer Jobs Make Less Money?

The debate over worker rights on the job has taken an interesting turn with Tyler Cowen’s defense of the compensating wage differential argument.  This, for those who have not run into it before, says that workers, whether through bargaining or the labor market, get a certain amount of utility.  They can take that utility in money or in better working conditions, but the sum has to add up the same.  This means that workers in safe jobs, all other things being equal, will make less than workers in dangerous ones; workers subject to bosses’ sexual advances will make more than those in more respectful organizations; and so on.  There are four conclusions you would draw from this if it were true:

1. Dangerous or demeaning work is not a problem per se.  The workers in those jobs are just as well off as they would be in a better setting.  Don’t worry about them.

2. Employers have a financial incentive to make jobs better—safer, fairer, etc.  That way they have to shell out less cash.  In fact, they have just the right incentive, the amount of money workers are willing to give up in order to get better treatment.

3. Regulation can’t make anything better, but it can make things worse by taking away an option that would otherwise be available to workers.  Some workers would rather have the money and put up with the dangers and indignities of a crummy workplace.

4. You can measure the monetary value of such intangibles as the value of life, the value of not being harassed, of being able to pee when you want, etc.  It’s simply the difference in wages between jobs that offer more versus less, scaled by how much change in risk, harassment or whatever the worker is being compensated for.

Now it happens that this is a topic I know something about.  In fact, I wrote the book on it.  (OK, a book.)  For the full story, read the book.  Here I will make a few brief comments about the evidence.

I agree that fringe benefits that are essentially monetary in character, such as pensions and insurance, are subject to this sort of process.  Workers really do trade money in one form for money in another, and unions bargain explicitly over this.  It is also true that public insurance, like workers comp, is largely financed out of wages too, no matter how the laws are written.

It is not true that nonmonetary costs and benefits of work are compensated—not fully at any rate, and sometimes not at all.  For an empirical demonstration, see this old study I wrote with Paul Hagstrom that has, to my knowledge, never been rebutted.  Tyler links to a slightly less old Viscusi/Aldy lit review that cherry-picks shamelessly, not only in its selection of what counts as a valid study, but (especially) in which results of the authors they choose to report.

For those who don’t want to go to the sources, here are the two fundamental empirical problems with studies that claim to show wage compensation for things like occupational safety: (1) They use industry-based measures of which jobs are risky, but they ignore all the other industry-level determinants of wages, like concentration, capital intensity and percent unionized (usually).  (2) They show signs of potential publication bias, where specifications are selected that yield the “right” result.  What signs?  They don’t provide summary data on the full range of specifications tested (“taking the con out of econometrics”), so that the reader can determine whether the reported specifications are outliers or not, and the results are hardly ever tested on subsamples.  Think for a moment about this last point: if there are compensating wage differentials for women exposed to sexual harassment, this should apply to black women and white women, unionized women and nonunion women, women in blue collar jobs, white collar and pink collar, and other plausible breakouts.  If not, you would need to have a story to explain why some get it and not others.  (Or why some subsamples even have exacerbating differentials, which I found with occupational safety—the “sweatshop effect”.)  There is a small literature on subsamples in wage-risk regressions, and they are all over the map.

Note that the Joni Hersch study Tyler links to is vulnerable on all these counts.  It doesn’t consider interindustry differentials.  There is only one specification reported.  No subsamples.  Not convincing.

The bottom line is that skeptics have every reason to remain skeptical.  Actually, a world of compensating wage differentials would be better than the one we live in.  Some jobs are unavoidably difficult, dangerous or unpleasant, and they should pay more.  But there are also human rights, like freedom from abuse and freedom of expression, that shouldn’t be for sale, even when you’re on the clock.

Egypt's Economy Creates Power Vacuum

This week Bloomberg's Businessweek reports on how 'Egypt's power vacuum threatens the economy'. [1]  The author of this article, Alaa Shahine, quotes a number of economists who make the claim that it is the ensuing power struggle between political factions and doubt over the new president's ability to govern that may herald a 'disorderly devaluation' and big problems with Egypt's economy in general.


However, the basic question of how anyone could govern Egypt in its current economic context which is:
*  soaring and unsustainable borrowing costs, now at 16%
*  capital flight along with the abrupt disappearance of more than half of Egypt's foreign reserves
*  denial/delay of an IMF loan
*  massive privatisation of public assets
*  inflation of global food prices 


is never asked.


Egypt, alone, cannot stabilise its economy.   High levels of financial and commercial integration exist between it and the rest of the world.  It cannot, for example, choose its interest rate.  Egypt appears to have no means to enjoy a stable exchange rate and this nation also holds very little protection from capital flight by foreign investors.


An astute observer might say that it is the very structure of Egypt's economy that has created the basis for the power vacuum that exists there now.  Not the other way around, as this Bloomberg article asserts.


REFERENCE:
[1]  Egypt’s Power Vacuum Threatens the Economy

Bloomberg Businessweek, 2^nd-8^th July 2012.  Pages 37-39

Yet Again, Robert J. Samuelson Proves He Is No Economist

In today's Washington Post, the regularly execrable Robert J. Samuelson yet again proves that the only reason anybody thinks he is able to write anything intelligent about economics is because they mistakenly think he is related to the late Paul A. Samuelson.  He blames economic advisers of JFK in the 60s, one of whom unofficially was in fact the better Samuelson, for our economic problems today, pretty much all of them in fact, although in particular our high debt/GDP ratio and supposedly resulting inability to get our economy going again. It was those darned neo-Keynesians back in the 60s whispering in JFK's ears all their heresies about deficit spending being OK!

Now, our old friend Dean Baker does an excellent takedown of this remarkably silly column at http://www.cepr.net/index.php/blogs/beat-the-press/robert-samuelson-blames-the-60s-again .  Among other things he points out that the debt/GDP ratio continued to decline for more than a decade after JFK's tax cuts, and that it was with the Reagan presidency that it began to rise.  Also, it declined under Clinton, but rose again afterwards under Bush, Jr. and now Obama, although RJS somehow never mentions the names of either Reagan or Bush, Jr.  They are missing actors in his tragicomedy.

So, I want to pile on more, mostly by just pointing out some further absurdities in the column.  The first is that he does not recognize that those advising JFK were never of the "deficits don't matter" school.  They always argued that one should watch the debt/GDP ratio and the costs of servicing the debt as well.  They also tended to be of the "balance the budget over the business cycle" view, and indeed the column itself shows evidence of this.  It is in the citing of LBJ's income tax surcharge that came into effect in 1969, motivated by a desire to restrain emerging inflationary pressures, which led to a budget surplus that year.  This clearly reflected the views of this old group of neo-Keynesians who argued that one should use short-term fiscal fine tuning to control aggregate demand. 

There were two clear problems with this outdated view.  One was that people do not respond nearly as strongly to policies announced to be short term than to ones announced to be long term, particularly involving tax changes in either direction, although they do respond somewhat.  The other is that there is a political asymmetry regarding fiscal policy that has only gotten more extreme over time: it is much easier to engage in expansionary fiscal policy than to do the opposite.  That LBJ made his income tax increase a temporary surcharge was an early sign of this, which is now much more fully entrenched with the Grover Norquist-enforced total GOP opposition to any tax increases.

This shows up further in RJS's sneering remarks about the surpluses during the Clinton years of 1997-2001.  He says they only occurred because of high economic growth and were unexpected.  There is some truth to this, but it is way over-exaggerated and ignores the enormous efforts that Clinton made to move the budget towards balance.  His economists were projecting reaching a balanced budget by around the end of his presidency, which RJS should recognize, and that the balance did better and went into surplus was indeed due to high growth.  But, the cost of Clinton's efforts were that the GOP took control of Congress in 1993 after not a single one of them voted for the tax increases that Clinton implemented in order to undo the wild deficits of the Reagan era, with most of them loudly forecasting a major recession, which most certainly never happened, although none of them have ever admitted how totally wrong they were.

In any case, none of this is noted by RJS, and he certainly does not mention how we fell from the period of Clintonian surpluses into our current condition of a rapidly rising debt/GDP ratio.  It was the Bush wars and tax cuts, followed by our plunge into the worst recession since the 1930s, also somehow not mentioned by our wise columnist.  I remember the Bush team citing Reagan and his claims that tax cuts pay for themselves (although Cheney more honestly declared that "deficits do not matter"), not the long lost neo-Keynesian advisers of JFK.  Maybe today Obama is harking back to them a bit, but he has indeed inherited an awful situation, and saying that the fiscal problems he faces are due to JFK and his advisers rather than Reagan and Bush, Jr. and their advisers is really a scandalous distortion of history.

When Did the Great Recession Start?

Rick Gorka as spokesperson for the Romney campaign claimed:

Under this President, unemployment has risen to 8.2% and his administration has been unable to propose any new ideas that can turn around our economy. As President, Mitt Romney will reform our tax code, cut bloated government spending and promote pro-growth policies that will create jobs for middle class families.

Really? Our graph does show that the unemployment rate was 8.2% as of July 2012 but it also shows how its surge began well before Barack Obama became President. The President passed an initial stimulus that was too little and has turned unfortunately to austerity in part because Congress has not followed up on any of the other stimulus proposals from the White House. We can and should complain that this President has not pushed Congress harder but I’ve yet to hear anything from Team Romney other than the usual Republican spin, which alas in Gorka’s own words is a push for more austerity. So why does Team Romney continue with this spin? Maybe because they know the press isn’t going to call them on it.

Freedom and the Workplace

There has been a pas de deux going on between Crooked Timber and Marginal Revolution over whether libertarianism has a coherent and morally acceptable response to the problem of employer tyranny over workers.  My take is that there are a lot of complicated issues in ethical theory, but this is not one of them, at least not at a high level of abstraction.  The matter is subject to a universal cost-benefit test, one which libertarians, incidentally, are not well placed to make.  (But neither are doctrinaire socialists of the workers-should-be-in-charge-of-everything camp.)

In an interactive social setting, like a workplace, perfect liberty for everyone is impossible.  More liberty for some means more constraints for others.  There is no alternative to some sort of political process that balances the benefits of affording more liberty to A against the costs to B.

Start with a useful, paradigmatic case, sexual harassment.  In the absence of any constraint on employers, they are free to demand sex in return for the worker not being fired.  This infringes on the freedom of workers.  But a rule against sexual harassment also infringes on the freedom of the boss.  In some cases this could be unfortunate: there must be circumstances in which the lost freedom to try to start a sexual relationship is valuable.  (A useful sexual harassment rule cannot require an explicit threat, of course, so it will make some advances at least potentially illegal.)  But adding it all up, and considering the massive social problem of women in particular having to face unacceptable choices around sex and work, a rule against sexual harassment is amply justified.

A similar story can be told about racial discrimination.  America has a long history of vicious discrimination at work and just about everywhere else, and the Civil Rights Act was a victory for elementary justice.  Nevertheless, there is a cost.  Suppose I have a company and Fred applies for a job.  I despise Fred and consider him deceitful, unreliable and just real bad karma.  But if Fred is black, it is much more difficult for me to prevent him from being hired.  If the law permits a robust Fred defense, then actual racists will use it to keep any and all blacks out.  On balance, in a society with such a history of racism, the benefits of civil rights statutes outweigh their costs.

Peeing?  My instant response is that it is very painful, especially for some people, to have to wait to pee, and so the cost of allowing employers to set peeing rules unilaterally is great, much greater than the cost to the enterprise under most circumstances.  But should airplane pilots have to wait to pee until a copilot can take over?  I hope so.  There the calculus comes out differently.

And so on down the line.  There is no general principle about who should have the freedom to do whatever they want in a social situation; it depends on a balancing test.  The problem in the US is that labor is so institutionally weak in most parts of the economy that a massive invisible thumb weighs down the employer’s side of the scale.

The only plausible libertarian position I can see is this one: the employment relationship is voluntary, so there can be no such thing as employer tyranny in principle.  Rather than argue against it (which I would be happy to do), I think it is enough to ask, so what about the sex-or-you’re-fired business?  If employment is a truly, completely voluntary relationship, getting fired is no big deal.  If you want the job enough to sleep with the boss, that’s your decision.  And the same goes for dangerous work, long hours, child labor, the whole nine yards.  That’s consistent.  But once you allow for an infringement, like rules against sexual harassment or racial discrimination, you have to explain why the rule doesn’t always hold.  And then, like it or not, you are in the world of balancing.

Hat tip to John Dewey.

Postscript: It’s important to remember that, when freedom for some goes up against freedom for others, the costs to those whose freedom ends up being diminished does not cancel out.  It remains and should be acknowledged.  In my mind there is no contradiction whatsoever between being in favor of a freedom-reallocating rule, like the ban on sexual harassment, and sympathizing with those who have lost something that, in some way, diminishes our world.  Social theory should be generous.  (This is also in Dewey.)

Lack Of Market Reaction To SCOTUS Ruling On Obamacare Sends Opponents Into Frenzy

The day before yesterday, former Obama advisor Austan Goolsbee published a column in the Wall Street Journal entitled "The Supreme Court Rules, The Market Yawns," noting only a small drop in the stock market (about 26 points on the DJIA) on June 28, 2012, the day the SCOTUS ruled most of the ACA to be constitutional.  A nice link can be found on Economists View for "Links for 07-05-2012" at http://economistsview.typepad.com/ .  Commentary on Mark Thoma's link was limited and restrained, mostly discussing fine points of mandates versus taxes and how long the new system might last (which I have many criticisms of, for the record, not my first choice for a reform).

OTOH, when Tyler Cowen made the same link without almost no commentary at http://marginalrevolution.com/marginalrevolution/2012/07/from-austan-goolsbee.html , many of his commenters simply went bananas.  Besides the name-calling and usual ranting, the substantive point argued was that the market did fall in the immediate aftermath of the announcement (which overturned the strong forecast on intrade, much revered by readers of MR), only to rally later in the day after positive news about European bonds (and to be followed by major gains the following day, supposedly on the bond news as well).  Certainly there were hysterians who think Obamneycare is the end of the world who sold immediately, but it did not take much for others to leap in and start buying and move right on past the decision.  One individual denouncing Goolsbee provided a link, but this one rather sensibly noted that stocks in the healthcare sector went in different directions, with hospital ones generally going up and health insurance ones generally going down.

While Goolsbee perhaps should have noted the initial market drop after the announcement, he was basically right.  There really is no sound basis for thinking that Obamneycare is going to tank the economy.  Many critics say it increases uncertainty, but in fact a negative decision would have increased uncertainty as many would be losing new gains from the law (children under 26 on their health insurance to name one) without knowing what might come next.  That the GOP continues to oppose the law means that there remains uncertainty, although those ranting about uncertainty somehow never notice that their opposition to the law is aggravating this uncertainty "problem."

As it is, the best evidence we have on how the law might work is to look at its predecessor in Massachusetts, RomneyCare implemented in 2006.  According to a January article in Forbes (not  a left wing publication at all), http://www.forbes.com/sites/kerapoza/2012/01/romney-care-massachusetts-healthcare-reform , not only is 99% of the population now with health insurance, but the law is so popular that no Massachusetts Republicans are remotely talking about repealing it.  Small business people were quoted as supporting it, the group supposedly most likely to suffer under Obamacare (aside from those who expect to get free medical care from emergency rooms even if they have never paid a cent for any kind of health insurance or care).  The current issue in MA is that there are efforts to reduce the costs of the program, but no movement at all to repeal it.  It is a clear success, even if its prime author now opposes its nationwide application.

I cannot resist posing a point that has bothered me for some time.  Much has been made of the fact that the individual mandate was originally proposed by a Republican think tank in 1989, the Heritage Foundation.  It was supported by numerous GOP pols since then, with the implementation by a Republican in MA, Romney, simply the obvious highwater mark of this.  This support only came to an end the minute Obama came out for it (rather than single payer) in an open attempt to have a bipartisan bill.  Of course, in the end, not a single Republican in Congress voted for it, not one, without a single one professing the slightest embarrassment about jumping from supporting it to denouncing it as "unconstitutional socialism" not to mention even greater idiocies such as opponents shrieking in town hall meetings about "death panels" that went on for some time (where are those anyway?).

So, it is my observation that this is the biggest mass shift of the views of a political party on a major issue since the US Communist Party did so regarding Hitler in 1939 and back again the other way in 1941.  I have asked numerous people to name any other shift by any US party on any issue since then that beats or even matches this one by the GOP.  Nobody has come up with one. 

My final observation on this is that at least back in 1939 there were enough members of the CPUSA who had principles and honor to resign from the party when it made its pro-Hitler shift in the wake of the Mototov-von Ribbentrop Pact.   I have seen not a single member of the recent US Republican Party about whom the same could be said, and the public repudiations of their own views by Stuart Butler of Heritage and Mitt Romney are astoundingly pathetic by comparison.

How the global financial system operates now

"Insolvent central banks are lending money to insolvent banks who buy government debt from insolvent governments who lend money to the IMF which then lends it to insolvent governments to pay back insolvent banks."

A beautiful summation given by 'Escritor' today as the British Telegraph reports on the Bank of England (BOE) boosting the supply of pounds by 50 billion in its latest round of quantitative easing (QE).  The BOE "owns 40% of [British] Government debt".  One irony is that QE is expected to impact on pension and annuity rates by lowering them, and this in turn could cancel out at least part (if not all) of the stimulus effect on the British economy.

Hundreds of billions of pounds are printed that appear to be staying completely within the financial sector of the economy rather than being translated into forms of real wealth and production.

Austerity – French Style

Steven Erlanger reports on the fiscal proposals of the new French government:

France’s new Socialist government announced on Wednesday billions of euros in tax increases and new taxes, to be borne by businesses and the wealthy, in a revision of the 2012 budget designed to meet promised deficit targets in a period of nearly stagnant growth. The government needs to make up a gap of 6 billion to 10 billion euros, or $7.5 billion to $12.5 billion, this year to bring the budget deficit down to 4.5 percent of gross domestic product, according to the national audit office, the Cour des Comptes. To meet a 3 percent target in 2013, an additional $41.2 billion in tax revenue and spending cuts will have to be found, the auditors said. For this year alone, the government announced about $9 billion in higher taxes, with about $7.6 billion more to come next year. A freeze on government spending is expected to save $1.8 billion ... The auditors urged the government to cut spending more than raise taxes, because the latter hurts economic growth, but the prime minister, Jean-Marc Ayrault, insisted that the key to growth was investment, not austerity. Still, spending cuts would seem to be inevitable to meet the 2013 target.

Ayrault’s general statement that investment not austerity was the key to growth is simply good Keynesian economics. Which is why he should have just ignored these auditors. Imposing taxes on the well to do is likely to have the least damage to aggregate demand but wouldn’t a temporary increase in government spending been an ever better policy for restoring full employment? But I guess for some reason – even this socialist government has to obey the auditors and ignore the economists. Ahem!