Greg Mankiw on the Losses From Trade Protection: Is Government Spending Worthless?

Did Greg Mankiw simply slip up with the following passage?

Chapter 9 of my favorite textbook presents the standard analysis of a tariff (a tax on imports) and shows that it reduces economic welfare as measured by the sum of producer surplus, consumer surplus, and tax revenue. Even though the tariff makes domestic producers better off and raises some revenue for the government, these gains are more than offset by losses to consumers, leading to a deadweight loss.

Most economists would recognize the consumer surplus loss as a reduction in economic welfare. The difference between what domestic producers gain and what consumers lose is this “producer surplus” loss so no disagreement there either. Consumer losses also include the extra funds that go into tariff revenues but most economists see government spending as having at least some value. So to include all of the tariff revenue as part of the reduction in economic welfare is either sloppy analysis or just a minor slip up on the part of Dr. Mankiw. But then his quiz on the effects of a Chinese export tariff included this question:

What happens to total welfare in China, as measured by the sum of consumer surplus, producer surplus, and tax revenue?

Alfred Chandler and the ghostwriters' unappreciated contribution

A while ago, I posted some material regarding how well-placed academics rely on low-paid researchers to do their work for them, leading them to produce shoddy and sometimes plagiarized work.

An interesting counter example is the ghostwriter, John McDonald, who wrote Alfred P. Sloan's My Years with General Motors. In this case, the ghostwriter was superior to the purported author.

The book was not published for years, until McDonald sued the company to allow the manuscript to be published. McDonald's wrote a very interesting book about his role and the reason for General Motors's fears about its publication:

McDonald, John. 2002. A Ghost's Memoir: The Making of Alfred P. Sloan's "My Years with General Motors." (Cambridge and London: The MIT Press).

1: On March 4, 1959 Sloan called McDonald to say that General Motors did not want the book published because its lawyers feared it would "destroy the company."

75-6: "Hugh Cox, who was chief trial counsel for the Du Ponts during the many years of the government suit against Du Pont/General Motors .... was pleased with the book as American history, and could not see what Cravath had against it, except possibly one line in the Product Policy of 1921: "A monopoly is not planned."

48: Their specific objection was the detailing of the 1921 Product Policy drafted by Sloan. Even though the policy specified, "a monopoly is not planned," the lawyers feared the government would still interpret the document as monopolistic since Sloan wanted GM to "cover the market for all grades of automobiles."

Later, I found that the story became more interesting. McDonald, a writer for Fortune, had already published a very popular book on game theory. I had seen the book around for years, but never opened it and never associated it with Sloan's book.

It turns out that it was McDonald who infused Sloan's book with its highly praised explanation of corporate strategy. In addition, McDonald hired a young research assistant, Alfred Chandler. According to the article cited below, McDonald was instrumental in setting Chandler on a course of appreciating the importance of strategy. Although Chandler won extensive accolades for this work, until recently, McDonald's role had gone unnoticed.

Here are some extracts from the article. I hope you enjoyed this much as I did.

Mckenna, Christopher D. 2006. "Writing the Ghost-Writer Back In: Alfred Sloan, Alfred Chandler, John McDonald and the Intellectual Origins Of Corporate Strategy." Management & Organizational History, 2: 1, pp. 107-26.

109-10: "For historians of management thought, there are few books that can surpass the influence of Chandler's classic Strategy and Structure or Sloan's epic My Years with General Motors. Both books, published in the early 1960s, achieved iconic stature within a short period of their publication, and both books still remain in print more than 40 years later. In 2002, however, John McDonald's book A Ghost's Memoir shattered most academics' unexamined presumption that Alfred Sloan himself had written (with perhaps a bit of editorial help) the management classic My Years with General Motors. Indeed, as journalist Dan Seligman explained in his foreword to John McDonald's memoir, even the publishers of Sloan's book had forgotten McDonald's involvement, despite McDonald's equal share of the royalties, when Currency/Doubleday decided to release a new edition of My Years with General Motors in 1990. Upset by the largely contrived history that Peter Drucker wrote for a new introduction to the book, John McDonald decided to set the record straight by writing his own, firsthand account of the `making' of Sloan's famous book. McDonald's account would blow the lid off the hidden history, exposing in the process just why the various accounts of General Motors' historical evolution, written by multiple people in the 1950s and 1960s, appeared to fit together so precisely."

113: "it seems likely that Chandler was also strongly influenced by McDonald's views on strategy given that he had, according to Sloan's preface to My Years with General Motors, `given his [Chandler's] good mind to reviewing successive drafts of the manuscript'." (Sloan, My Years with General Motors, xiv).

114: "... it was John McDonald's particular interest in `strategy', reconfigured by Alfred Chandler's historical perspective, which would come to dominate the terminology of the emerging discipline of corporate strategy."

114: "we should also consider what Alfred Chandler wrote in the second sentence of his acknowledgements in Strategy and Structure: `First of all, I want to thank John McDonald and Catharine Stevens, with whom I started to learn about the workings of big business and to think about the historical development of corporate structure and strategy.'" Chandler, Strategy and Structure, i.

114: "Thus it is only with our subsequent knowledge of John McDonald's ongoing struggle with General Motors' lawyers to release My Years with General Motors that the following disclaimer in Chandler's preface to Strategy and Structure from 1962 becomes intelligible: `[T]he General Motors story ultimately came to be based on information and materials which had been in the public domain before the summer of 1956. Yet I am confident that should information not yet in the public domain become available, it would not substantially alter the history presented here." In other words, having done substantial research in the archives of General Motors, which had subsequently been suppressed by the corporate lawyers from Cravath, Swaine, and Moore, who were working for the automotive giant." Chandler, Strategy and Structure, ii

115: "Alfred Chandler had no doubt learned a painful lesson while working for Sloan and McDonald -- it was best to stay away from the issue of antitrust in the shaping of corporate strategy during the 1950s or risk losing years of academic research to lawsuits and shuttered corporate archives."

116: "Yet it could be argued that Chandler's own historical analysis of both General Motors and DuPont was also circular because both of the corporate case studies were eventually supported by scholarly biographies of Alfred Sloan and Pierre du Pont that were researched and written by Chandler himself. This is not the only instance where Chandler's `predictions' and subsequent `outcomes' have become intertwined, for Chandler's expectation that the multidivisional form would continue to spread would be predicated on the support that Chandler's account offered to the management consultants from McKinsey & Company who used Strategy and Structure to sell the novel organizational form to their international clients. In retrospect, it was almost impossible for scholars to separate Chandler's theoretical analysis from his historical evidence because he was so active in the collection, production and distribution of both the archival input and the theoretical output."

More Health Care Outrages

As if the health care situation were not bad enough, Business Week has an very good report showing how medical providers are signing unwitting patients up to transfer their bills onto credit cards that charge unconscionable rates. How much further can this crap go?

36: "... hospitals and clinics are bringing in more sophisticated help. They are transferring patient accounts wholesale to finance experts, banks, credit-card companies, and even private equity firms. Many of these third parties use credit scores and risk-analysis software to price the debt and impose interest rates as high as 27% on past-due bills."

36: "A host of nimble firms like CompleteCare in North Little Rock, Ark., began exploring this terrain years ago. Bigger players have jumped in more recently, although the market remains fragmented and reliable market share information isn't available. U.S. Bank, a U.S. Bancorp unit, finances about $2 million in patient debt per month through a medical-benefit firm, charging most customers annual interest of 13.5%, and as much as 24% on late bills. General Electric's powerful financial arm markets its CareCredit card to dentists, plastic surgeons, and some hospitals, with loan volume expected to hit $5 billion this year, up 40% from 2006. Citigroup and Capital One now offer similar cards. "Everybody is saying [medical finance] is the next horizon -- whether it is lines of credit or credit cards," says June St. John, a senior vice-president at Wachovia, which is exploring the business. Whetting all these appetites is the $250 billion consumers pay in medical expenses out of their pockets, an amount that doesn't include insurance premiums. That's an estimate for 2005 from the consulting firm McKinsey & Co. The figure could hit $420 billion by 2015."

36: "Many patients say they don't realize their debts are being shifted to such interest-charging middlemen as GE Money Bank, the unit that issues the CareCredit card."

39: "CompleteCare, the small Arkansas firm ... says it works with 40 hospitals and more than 400 physician practices across the country. Addressing potential health-industry clients, the company boasts on its Web site that it "pioneered the concept that patients become consumers the minute they walk out of your facility"."

39: Patients can sign an admission-consent forms that include a small-print section authorizing the hospital to turn over her account.

Grow, Brian and Robert Berner. 2007. "Fresh Pain for the Uninsured." Business Week (3 December): pp. 34-41.
http://www.businessweek.com/magazine/content/07_49/b4061001.htm

Leon Walras and the Nobel Peace Prize

Kissinger's nauseating Nobel Peace Prize award might deflate some of the interest in beyond Leon Walras's nomination. Walras wrote his own nomination and had some colleagues submit it.

The basis of his nomination was his work in mathematical economics. Although he wrote almost about free trade, his claim was that his work had produced a scientific basis for free trade and free trade would be certain to establish a regime world peace. Unfortunately, the nomination went to the great advocate of peace, Theodore Roosevelt.

See Sandmo, Agnar. 2007. "Retrospectives: Léon Walras and the Nobel Peace Prize." Journal of Economic Perspectives, Vol. 21, No. 4 (Fall): pp. 217-28.

Holiday Reading

I am currently reading Charles Taylor's A Secular Age. It is making me crazy. I love Taylor - his Sources of the Self was hugely important to my intellectual odyssey (I understand this is not any kind of recommendation!). The theism that was not explicit in Sources is in full force in this new book. What I first learned from Taylor is the what I'll call the autonomy of the normative and the inadequacy, as a a consequence, of naturalistic explanation in the social sciences. Norms have "authority" and part of the explanation of a person's action in accordance with a norm is, I think, the correctness of the norm - just as the explanation of a person's holding a belief is often the truth of that belief - often, not always. I think we can't make sense of science itself without a notion of objective norms (Cf, inter alia, Jean Hampton's The Authority of Reason). But anyway, does a commitment to the autonomy of the normative commit me to theism, as Taylor's later work more and more seems to imply?! Because then I have a major dilemma on my hands, given my long-standing atheism.

Oh well, Happy New Year, everyone!

Economists for Edwards

Sometime today in Iowa the Edwards campaign will release its official list of Economists for Edwards. The leader of the group is James K.Galbraith, and I announce here that I am among the 30 on the list that he has assembled.

I think he is the most consistently progressive among the leading Dem candidates. I also think he is the most electable, with polls suggesting he is the only one of the top three who is solidly ahead of all four of the top GOP contenders in the electoral college. I am concerned that at one point he went after Hillary briefly over social security, but it is not in his platform, and she has promised to appoint a commission. Obama seems more clearly down on social security and also has a health plan that will not cover all Americans. On this important issue, Edwards seems to have the best plan. I also note that while Edwards voted for the Iraq war resolution (he was on the Senate Intelligence Committee at the time, giving him more foreign policy experience than many know he has), he has been strongly against it and a war in Iran since, and probably gave the best followup on the Bhutto assassination of any candidate, actually calling Musharraf up on the phone. I disagree with him on the idea of renegotiating NAFTA, but then all the Dem candidates want to do that. I conclude by noting that it is rate that one gets to support someone who is both the most progressive and the most electable, a winning combo, I say.

Away with Sarbanes Oxley?

Whatever happened to the rabid calls for eliminating Sarbanes Oxley? Does anybody even Enron, Tyco, Worldcom, etc? After calls for strong regulation to prevent such things from happening again, Congress gave us the weak Sarbanes Oxley. Not long after, the business press was squealing about the excessive requirements of Sarbanes Oxley.

Now that the subprime mortgage scam is imploding, Sarbanes Oxley has fallen from notice.

Any thoughts?

Running on empty....

Fasten your seatbelts, it's going to be a bumpy night!

Los Angeles TIMES

New cars that are fully loaded -- with debt Americans are rolling over loans, often ending up owing more for the vehicle than it's worth.

By Ken Bensinger / Staff Writer

December 30, 2007

When Jennifer and Bobby Post traded in their 2001 Chevy Suburban last year for a shiny new Ford F-350 turbo diesel with an extended cab, it seemed like a great deal. Even though they still owed $9,500 on their SUV after the trade-in value, they didn't have to put a penny down.

The dealership, near the Posts' home in Victorville [California], made it easy; it just added the old debt to the price of the new truck and gave the couple a seven-year, $44,276 loan.

The Posts were a little worried about taking on such a long obligation, but they couldn't pass up a monthly payment under $700. Now they're having regrets.

"I didn't realize how much debt was in it," said Jennifer Post, who has since moved with her family to Iowa. Now, she'd like to get rid of the truck but can't, because there's so much debt that she'd literally have to pay someone to take it off her hands.

"We have no options," she said.

Americans haven't just been taking out risky mortgages for homes in the last few years; they've also been signing larger automobile loans for significantly longer terms than they used to.

As a result, people are slipping into a perpetual cycle of automobile debt that experts think could lead to a new credit crunch extending from dealerships to driveways and all the way to Wall Street.

Aren't you glad that they've tightened consumer bankruptcy laws, making this "perpetual cycle" more like good old-fashioned debt peonage?

Gone are the days of the three-year car loan. The length of the average automobile loan hit five years, four months in October, up more than six months from 2002, according to the Federal Reserve. And nearly 45% of loans written today are for longer than six years. Even some staid lenders owned by the carmakers, such as Toyota Financial Services and Ford Credit, are offering seven-year financing. And a few credit unions, particularly in the West, are tinkering with the eight-year note.

Credit unions, alas, are acting more and more like commercial banks. They used to be more responsible to their members.

At the same time, the amount of money drivers owe on their cars is soaring. In October, the average amount financed hit $30,738, up $3,500 in just a year and nearly 40% in the last decade, according to the Fed. More troubling, today's average car owner owes $4,221 more than the vehicle is worth at the time it's sold -- up from $3,529 in 2002, according to industry analyst Edmunds.

it's an understatement to say that that's much too much!

... It's not just individual consumers who are at financial risk. Nationwide, an estimated $575 billion in new and used auto loans are written every year by auto manufacturers, banks, credit unions and other lenders. About 30% of the loans that are originated by banks, and 100% of those issued by automaker financiers, are, like mortgages, repackaged and sold as securities, according to the Consumer Bankers Assn.

Aha! more securitization, in which spreading the risk around so that people can't perceive it anymore is treated as if it were abolishing risk.

Analysts warn that just as investors didn't comprehend the risk inherent in some of the more exotic home mortgages in recent years, they aren't considering how risky these car loans are. If longer loan terms allow debt on the loans to grow too large, many drivers may simply default, leading to expensive repossessions.

And even those who keep paying their bills may reach a point, like Gerhardt, where they simply can't afford another car. That could send vehicle sales down the drain, a nightmare scenario for an industry that has already taken a hit this year from slower consumer spending and higher gas prices.

It could also lead to serious losses among financial institutions that have invested in car debt. Among securitized auto loans, two-thirds have terms longer than 60 months, a fact that Standard & Poor's, which rates auto debt for sale on the secondary market, calls a "credit concern."

This month, S&P reviewed its ratings on $113.5 billion in auto loan securities it rated in the last two years out of concerns over growing losses. It didn't make any downgrades but predicted that "rising losses will continue into 2008 across all segments of the auto loan market."

S&P has found that delinquencies of more than 60 days on car loans issued this year to borrowers with the best credit are up 20% compared to those issued last year, while delinquencies on loans issued this year to subprime borrowers increased by 16%. Delinquency rates on car loans are still far lower than on mortgages, but there is growing concern in the financial services industry. Indeed, Tom Webb, chief economist of used-auto analyst Manheim Consulting, said he expects the tally for 2007 repossessions to be up by 10%.

Sounds like it's time to crank up that old Emilio Estevez movie, REPO MAN.

Mark Pregmon, executive vice president for consumer lending at SunTrust Bank, is among the concerned. "Any time you extend the maturity of the loan, you take on more risk. The question is whether there's enough assessment of that extra risk," he said. "Obviously, it's a problem. It's a house of cards."

You took that cliché right out of my mouth!

In the 1970s and '80s, car loans hovered between 36 and 48 months, and drivers typically kept their cars longer than the life of the loan. A number of factors changed that.

One key was interest rates, which fell from a high of 17.8% in the early 1980s to lower than 5% today, according to the Federal Reserve. Another was affordability. According to an index tracked by Comerica Bank, cars have steadily gotten more affordable -- as compared to median family income -- since the late 1990s.

With cheap money at hand for more-affordable cars, the temptation to keep buying became huge. Today, according to Pregmon, financed cars are typically turned over in 24 to 36 months.

At the same time they were extending loan maturities, lenders, competing with one another, began offering more money and requiring smaller down payments.

Today, most lenders offer financing on 100% or even 125% of the sticker price, and some offer the most credit-worthy buyers loans for twice the value of the vehicle they're purchasing. Last year, the average amount financed for new cars reached 99%, according to the Consumer Bankers Assn., up from 95% in 2005.

Lenders are beginning to brace themselves; many have said they intend to tighten standards and require larger down payments.

Despite warnings from S&P, the Consumer Bankers Assn., Lehman Bros. and others, there is little sign that the automobile industry is willing -- or, with consumers demanding low payments, even able -- to reduce the lengths of the loans they issue.

"For banks, it's a matter of meeting consumer demand: no money down and extend the term," said SunTrust's Pregmon. "But as a lender, you've got a moral obligation as well. Are we putting the clients in loans they can't afford?"

Here's another reason to have the government standardize loan agreements and then have the financial sector compete over interest rates.

ken.bensinger@latimes.com

Copyright 2007 Los Angeles Times
--
Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own way and let people talk.) -- Karl, paraphrasing Dante.

The Airport Security Scam

This is exactly right. We are sheep to accept it. The economic cost in terms of direct resources squandered and lost time is massive. The policy doesn’t stop terrorism, it expresses our condition of being terrorized.

Andrew Carnegie

I have just finished an interesting new book: Nasaw, David. 2007. Andrew Carnegie (New York: Penguin), which caused me a bit of embarrassment.

In Railroading Economics, I emphasized Andrew Carnegie's role in paying careful attention to the production process of steel in contrast to they banker-like perspective of the Morgan crew, which took over Carnegie Steel. This Nasaw's story is not entirely different, but the emphasis certainly is. Nasaw totally explains that Carnegie ignored any concern with the minutia of the production process, but merely demanded reductions in cost.

The most important cost for Carnegie was labor. He plowed back about 75% of the company's earnings into reinvestment, often in labor saving technologies. But even more important was the crushing of labor, especially the Homestead strike, which allowed him to increase the working day to 12 hours. This victory probably also greased the skids for the acceptance of new technology.

The book is a magnificent production. Nasaw had access to material that nobody else did.

Nasaw shows how important influence was in accumulating for Carnegie fortune. Carnegie reminds me of Balzac, who wrote:

"At the bottom of every great fortune... , there's always some crime -- a crime overlooked because it's been carried out respectably."

In the case of Carnegie, no great crime seems to have been responsible. Instead, Carnegie left a trail of innumerable crimes. Homestead was the most notable, but it had a number of less bloody precedents in his own company. In his earlier career as a bond salesman, Carnegie engaged in an almost habitual dishonesty along with continual shady dealings, such as kickbacks.

Carnegie was a master of accumulating political influence in the US and in Britain.

The most fascinating part of the book was Carnegie's philosophy. An early age, he anticipated the basic idea of Herbert Spencer, who later became his idol. He decided he would accumulate great wealth, then rather than hoarding it, he would distribute it for noble causes.

Smashing the workers at Homestead was a moral act for him. The workers would not know what to do with any extra money they earned. He wrote:

"... there are higher uses for surplus wealth than adding petty sums to the earnings of the masses. Trifling sums given to each every week or month -- and the sums would be trifling indeed -- would be frittered away, nine times out of 10, in things which pertain to the body and not to the spirit; upon richer food and drink, better clothing, more extravagant living, which are beneficial neither too rich or poor."

Libraries, museums, and concert halls would contribute more to human welfare -- especially for people working 12 hours a day.

RIP --- Benazir Bhutto

Her two periods of serving as Prime Minister of Pakistan were deeply marred by corruption, and in many ways she was a far from progressive figure. However, her assassination today is a terrible tragedy that bodes horrifying possible outcomes in Pakistan and throughout much of the world, given as I think she may have been the only serious alternative to an eventual fanatical takeover there, a country that actually does have nuclear weapons, in contrast with the fantasies of the Bush administration about Iraq and Iran. She was also personally a courageous and intelligent person. This is a deeply tragic event, and I, for one, shall mourn her loss.

An Earful on the Science and Policy of Risk

The New York Times reports that Europe is gradually approaching the point of decision on whether to allow genetically modified corn. Because of WTO rules on such things, the EU is required to base its policy on “science” if it want to keep out mutant corn from the US. This reflects a deep, deep misunderstanding of what science can contribute to policy.



Let’s start with the basics. There are two sorts of error we can make in this uncertain world, Type I (the risk of believing something to be the case when it is not) and Type II (the risk of not believing something to be the case when it is). Science is, among other things, a human enterprise organized around the systematic minimization of Type I error. Experimental protocols are about this, and so are the conventions we follow in determining statistical significance. This obsession comes at the cost of permitting greater Type II error, but that’s OK. Science operates on the basis of a vast division of labor, where each scientist’s work depends on the reliability of the methods and results carried over from what others have done. One false conclusion, if not noticed in time, could invalidate the efforts of an entire research community. This is why a serious Type I error is a potential career ender, whereas an avoidable Type II glitch simply diminishes a researcher’s list of accomplishments.

This single-minded insistence on avoiding Type I error is the reason why science is the one truly progressive human activity. Today’s science is better than yesterday’s, and tomorrow’s will be better than today. You can’t say this about poetry or politics.

(It is also, in the end, why economics is not a “real” science: it is no big deal for an economist to claim something to be true and to later discover that it isn’t.)

Policy, on the other hand, has to take Type II error as seriously as Type I. Take the Bt corn case before the EU, for example. It is a problem if regulators falsely think Bt corn is dangerous and ban it, but it is also a problem if they falsely think it is not dangerous and allow it to be used. A reasonable first cut is the standard cost-benefit approach: value each sort of error in terms of its cost function. Thus the cost of banning Bt corn is the probability of Type I error (falsely believing it to be harmful) times the economic cost of not taking advantage of this technology, whereas the cost of not banning it is the probability of Type II error times the cost of the damage it would do in that case. You go for the lowest cost option.

(There is an even better approach, as I argued here, based on the fullest possible utilization of information.)

The difference should be obvious. Science is radically asymmetric in the way it treats uncertainty: avoiding a false positive is everything. Policy is more balanced: failure to see is potentially as harmful as seeing what isn’t there. If you happen to be the sort of person, as I am, who thinks environmental risks are particularly important to avoid, you might tilt the policy calculus on issues like Bt corn toward less Type II error, even at the expense of more Type I.

Science has one job to do. Policy has another. They follow different rules.

Taxes & the Bible

In my revised standard approach, my comments are in bold, while the original is in italics.

The New York TIMES / December 25, 2007

Professor Cites Bible in Faulting Tax Policies
By DAVID CAY JOHNSTON

At a time when some voters are asking how the religious views of candidates will shape their policies, a professor's discovery of how little tax the biggest landowners in her state paid to finance the government has prompted some other legal scholars to scour religious texts to explore the moral basis of tax and spending policies.

The professor, Susan Pace Hamill, is an expert at tax avoidance for small businesses and teaches at the University of Alabama Law School. She also holds a degree in divinity from a conservative evangelical seminary, where her master's thesis explored how Alabama's tax-and-spend policies comport with the Bible.

Professor Hamill says that since Judeo-Christian ethics "is the moral compass chosen by most Americans" it is vital that these policies be compared with the texts on which they are based. Another professor says she is the first to address this head on, inspiring work by others.

Her findings, embraced by some believers and denounced by others, has also stirred research everywhere from Arizona State to New York University into the connection between religious teachings and government fiscal practices.

Her latest effort is a book, "As Certain as Death" (Carolina Academic Press, 2007), that seeks to document how the 50 states, in contravention of her view of biblical injunctions, do more to burden the poor and relieve the rich than vice versa.

In lectures and papers, Professor Hamill has expanded on her theme, drawing objections from some critics who say that the religious obligation to care for the poor is a matter of personal morality, not public policy.

Professor Hamill asserted that 18 states seriously violate biblical principles in the way they tax and spend. She calls Alabama, Florida, Louisiana, Nevada, South Dakota, Texas "the sinful six" because they require the poor to pay a much larger share of their income than the rich while doing little to help the poor improve their lot.

Alabama, Florida, Louisiana, & Texas are usually thought of as links in the "Bible Belt." You'd think that they'd be more obedient to Biblical Principles, all else equal. Nevada, on the other hand, is the official Sin State. Isn't it strange that it finds itself in the same league as the rest. (I don't know what's happening with S. Dakota. Whatever happened to prairie populism?

The worst violator, in her view, is her own state of Alabama, which taxes its poor more than twice as heavily as its rich, while holding a tight rein on education spending.

The poorest fifth of Alabama families, with incomes under $13,000, pay state and local taxes that take almost 11 cents out of each dollar. The richest 1 percent, who make $229,000 or more, pay less than 4 cents out of each dollar they earn, according to Citizens for Tax Justice, an advocacy group whose numbers are generally considered
trustworthy even by many of its opponents.

In Alabama's defense, shouldn't we also look at the benefits that the poor receive?

Professor Hamill said what first drew her to the issue of fiscal policy and biblical principles was learning that Alabama timber companies, which own more than two-thirds of the land in the state, pay an annual property tax of only about 75 cents an acre.

"The Bible commands that the law promote justice because human beings are not good enough to promote justice individually on their own," she said. "To assume that voluntary charity will raise enough revenues to meet this standard is to deny the sin of greed."

Richard Teather, who teaches tax at Bournemouth University in Britain and has written on the moral dimensions of tax evasion, said that governments have publicly raised the issue of morals and taxes.

"The tax authorities say you have a moral duty to pay your taxes, but you cannot look at that in isolation," Mr. Teather said. "Over here in Britain we have a lot of tax breaks for the very wealthy, which are not generally available to most people, and quite high level taxes for the middle and upper-middle classes, so this doesn't look like a moral system."

Professor Hamill, by her reading of the New Testament, concludes that at least a mildly progressive tax system is required so that the rich make some sacrifice for the poor. She cites the statement by Jesus that "unto whomsoever much is given, of him shall be much required, and to whom men have committed much, of him they will ask the more."

Some of her critics, however, say that the tithes described in the Old Testament show that a flat tax, in which everyone pays the same share of their income to government, should be seen as the biblical standard.

doesn't it also say something about what to do about widows, i.e., stone them?

Gary Palmer, president of the Alabama Policy Institute, agreed that taxes on the poor were much too high in the state, but said that the solution was not to raise taxes on the wealthy, but to lower them on the poor. He characterized Alabama's sales taxes on food and medicine as immoral.

Some of Professor Hamill's critics, in letters and e-mail to her and others, argue that she just wants to soak the rich, wrapping what they called her socialistic views in biblical cloth.

hey, wasn't JC a "socialist" of some sort?

Until Professor Hamill focused on fiscal policies in light of Judeo-Christian moral principles, most scholarly work on religion and taxes was largely devoted to the issue of tax evasion. That was prompted, in part, by a 1992 updating of the Catholic catechism that listed tax evasion as a sin and by enforcement actions aimed at pacifists who refused to pay war taxes.

Professor Hamill said her research found that just one state, Minnesota, came within reach of the principles she identified, because its tax system is only slightly regressive and it spends heavily on helping the poor, especially through public education.

Copyright 2007 The New York Times Company
--
Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own way and let people talk.) -- Karl, paraphrasing Dante.

Could the Spread of Tropical Diseases Make Global Warming Have More Urgency?

Upton Sinclair's Jungle was intended to draw attention to the dirty and repressive conditions in the meat packing industry.

Reflecting on the storm over The Jungle, Upton Sinclair wrote that he was primarily moved by the condition of the workers, not the meat: "I aimed at the public's heart, and by accident I hit it in the stomach."

Upton Sinclair. 1952. American Outpost: A Book of Reminiscences (NY): p. 175.

Similarly, chikungunya, a relative of dengue fever normally found in the Indian Ocean region, has migrated to Italy.

Rosenthal, Elisabeth. 2007. "As Earth Warms Up, Tropical Virus Moves to Italy." New York Times (23 December).
http://www.nytimes.com/2007/12/23/World/Europe/23virus.Html?Ex=1199077200&En=6f19acc84e28278a&Ei=5070&Emc=Eta1

Maybe this is the only way people will become serious.

Mankiw's Monetary Faith

My comments appear below, with Mankiw's original column in italics. -- JD

The New York TIMES / December 23, 2007

Economic View: How to Avoid Recession? Let the Fed Work

By N. GREGORY MANKIW

(N. Gregory Mankiw is a professor of economics at Harvard. He was an adviser to President Bush and is advising Mitt Romney, the former governor of Massachusetts, in the campaign for the Republican presidential nomination.)

The economy is teetering on the edge. Many economists, as well as online betting sites, put the risk of recession next year at about 50 percent. Once we get the final numbers, we might even learn that a recession has already begun.

The question on the minds of many in Congress and in the White House is this: What they should be doing now to keep the economy on track? The right answer: absolutely nothing.

This advice isn't easy for politicians to follow. Because economic downturns mean fewer jobs and falling incomes, they are painful for many families. Voters can confuse inaction with nonchalance and send incumbents packing. But just as patients should avoid doctors who recommend radical surgery for every ailment, voters should be wary of politicians eager to treat every economic ill. Sometimes, bed rest and wait-and-see are the best we can do.

This slam at politicians seems unfair in general, coming as it does from a member of an even lower ilk, an orthodox economic pundit. It ignores the political push in Congress -- mostly coming from Mankiw's GOP -- to do absolutely nothing about recessions, unless it involves tax cuts for the rich or cosmetic "cures" (such as that of 2001-02).

More importantly, it ignores the all-important role of gridlock in DC: many, many different politicos can veto any kind of fiscal action. This includes the President. Indeed, these days the two DP-dominated houses of Congress and the President seem pretty good at blocking each others' initiatives.

Orthocons like Mankiw like to portray the government as chomping at the bit, ready to jump in to mess with the economy. Au contraire. Among other things, the politicians would rather that the Fed get the blame for any economic mess.

Congress made its most important contribution to taming the business cycle back in 1913, when it created the Federal Reserve System. Today, the Fed remains the first line of defense against recession.

Even if the Fed can pull the rabbit out of the economic hat, it should be mentioned that it did not become the "first line of defense" until the end of the fixed exchange-rate system in the early 1970s, which shifted the balance of power from fiscal to monetary policy. Before that, the Fed's job was mostly to keep the US$ at par, as part of a fixed exchange-rate system.

The Fed's control over the money supply is a powerful lever to move overall demand for goods and services. When its trading desk buys bonds and expands the money supply, it lowers interest rates and encourages the private sector to borrow and spend more. The influence of interest rates on the economy is particularly strong in housing, where buyers are rate-sensitive. Because housing woes are the source of the current slowdown, the Fed's tool kit is well suited for the task at hand.

Mankiw presents the "Economics One" (or is it Econ Zero?) version of monetary policy, but the Fed has admitted that it in effect lacks control over the money supply. It does have control over the availability of bank reserves and thus the fed funds (overnight bank-loan) interest rate, a very short-term rate. But in the short run (which is what's important if we're talking an on-coming recession), the fed funds rate is only vaguely connected with the (long-term) mortgage interest rate that Mankiw refers to. If the Fed encourages repeated cuts of the fed funds rate, as Greenspan did, that would likely have an effect of depressing mortgage rates. But the Fed seems loath to repeat Greenspan's policy, because it would encourage inflation and/or a disastrous decline of the US$.

Also, will the banks be willing to lend, especially in the housing market? Due to the "sub-prime" crisis, banks have a lot of "non-performing" (i.e., bad) assets. Do they really want to send good money after bad? Getting beyond such subjective matters, falling asset values hurts the banks' capital (equity). Not only does this upset the banks' stock-holders, but prudent banks would keep their capital from falling too far or too quickly. And the aftermath of a credit crunch seems like a good time to be prudent, if you're a banker.

Finally, with mortgage (and other) debt high compared to potential home-buyers' incomes and assets, they are likely loath to borrow more just to take advantage of lower interest rates. With house prices falling, also, many prospective home-buyers will likely wait for a better deal later on.

If there are problems on both the supply and demand sides, Mankiw's monetary mechanism seems meager at most.

The recession-fighting effects of monetary expansion, however, are not limited to the housing market. When lower interest rates make fixed-income investments [i.e., bonds] less attractive, investors turn to the equity [stock] market and bid up stock prices. Higher stock prices, in turn, make consumers wealthier and more eager to spend. They also make it easier for corporations to expand their businesses with equity financing.

If speculators begin to expect a replay of Greenspan's repeated rate cuts of the early 2000, they would expect bond (fixed-income investment) prices to rise. Those interested in capital gains -- and that means most or all of them -- would thus want to buy bonds (all else constant). In addition, in times of trouble (such as the period after a credit crunch), government bonds are really attractive, since they are quite safe. So again they would be bought up. These forces undermines Mankiw's purported mechanism, because the speculators' money would not be going into equities.

But some speculators and financial investors may turn to the equity market, buying stock shares and driving up their prices. This would make wealthy consumers wealthier and more eager to spend. (Somehow Mankiw ignores the skewed nature of stock ownership. I don't know why!)

The problem is that this is poor compensation for the fall in the prices of homes. It's true that this hasn't hit the rich folks much, if at all. But it's mass consumption that's the rock-bottom (secure) base of economic expansion. It's the mass of consumers -- not the rich elite -- that props up the economy.

It's the mass of consumers who are excessively burdened by consumer and mortgage debt. (It would be a mistake to forget consumer debt (credit cards, etc.) since it's far from the majority of the population that's been doing mortgage borrowing lately.) It's their stagnant consumption spending that will likely drag down the US economy for years to come, even if there is no recession.

In addition, Mankiw should invoke the phrase often used by better economists, "all else equal." The equity market is extremely flaky, subject to speculative booms and busts and impacted by extraneous events. Even if the Fed cuts interest rates more, that does not mean that stocks will automatically go up. For example, Mankiw must ask "what's happening to corporate profits?" if the recession hurts profits -- as usual -- it would depress equity prices (all else equal).

As leftist business observer Doug Henwood regularly observes, Mankiw's story is based on an illusion: corporations do not issue new stock very often as a way of financing expansion. Instead, the main story of late has been that of corporations buying up their own stock. Business expansion, if any occurs in the near future, would be paid for more through retained earnings (profits not distributed to stockholders) and borrowing (bond issuance).

And do corporations really want to "expand their businesses"? Maybe, but a recession discourages expansion. Perhaps Mankiw has heard of the "accelerator effect." It refers to the way that even slow growth of the demand for products can cause a fall in business fixed investment. A recession isn't needed to have this effect. The problem is that fixed investment causes increased ability to produce (potential supply). If fixed investment stays constant in the face of stagnant demand growth, that means that potential supply grows faster than demand. Smart business-types would refrain from further fixed investment, no matter how easy it is to raise funds by borrowing or by issuing new shares.

This effect discourages any kind of business expansion, no matter how financed. In fact, it can cause a recession.

Slow or negative growth also hurts cash flow and profits, all else equal, which undermine retained earnings and self-financing of expansion. With falling or flat rates of utilization of productive capacity, business rates of profit would be hurt, undermining expected profits and the incentive to expand, all else equal.

By making United States bonds less attractive to world investors, lower interest rates from a monetary expansion also weaken the dollar in currency markets. A depreciation of the currency is not in itself to be feared. Treasury secretaries often repeat the mantra of favoring a strong dollar, but these pronouncements are based more on public relations than hard-headed analysis.

True.

A weak currency is a problem if it results from investors losing confidence in a country's economy and currency. The most damaging cases are the episodes of sudden capital flight, as occurred in Mexico in 1994 and several Asian countries in 1997. This outcome is unlikely for the fundamentally sound American economy, but fear of it is one reason that Treasury secretaries maintain public fealty to a strong dollar.

A serious recession would undermine the image of the "fundamentally sound American economy" -- and in finance, it's image that counts. In fact, the image might be sapped by the continuation of US government fiscal deficits and/or by fears of inflation.

But if a weakened currency comes about because the central bank is trying to stimulate a lackluster economy, the story is very different. In that case, depreciation is not a malady but just what the doctor ordered. A weaker currency makes domestic goods more competitive in world markets, promoting exports and bolstering the economy. The dollar's falling value is one reason exports of goods and services have grown more than 10 percent in the past year.

The Fed can go too far, because even a strong currency can be subject to a speculative bust (or boom). This problem is most likely to hit when interest rates are lowered again and again.

Nonetheless, the boost to exports is the most effective result of expansionary monetary policy (interest rate cuts). The problem is that it simply shifts the recessionary problem to the rest of the world, or at least the rest of the world that does not fix its currency to the US$ the way China does. This is an important reason why the fraternity of Central Bankers does not want US rates falling too much. This desire discourages the Fed fully responding to the recession.

The Fed constantly monitors all these developments to ensure that the economy has the stimulus it needs, but not too much. William McChesney Martin, the Fed chairman in the 1950s and 1960s, famously joked that the Fed's job is "to take away the punch bowl just as the party gets going."

As the economy flirts with recession, we need to remember that this aphorism has a flip side. The Fed also has the job of spiking the punch with grain alcohol when the party starts to flag, and that is exactly what it has been doing.

Gee, the economy is like a drunken party? what an analogy!

The Fed has cut its target for the benchmark federal fund rates to 4.25 percent from 5.25 percent last summer. It is a good bet that we will see further cuts over the next few months. And if the chance of a recession turns into a real recession, you can count on it.

What if the financiers' fear of inflation influences the Fed?

Admittedly, monetary policy can sometimes use an assist from fiscal policy. If an economic downturn is deep, if a recovery is anemic or if the Fed is running out of ammunition, Congress can help raise aggregate demand for goods and services. In 2003, the Fed had cut its target interest rate all the way to 1 percent, the economy was still suffering from the lingering effects of recession, and there were increasing worries about deflation. A tax cut was a good complement to monetary expansion to get the economy going again, even though it increased the budget deficit.

Note: the Fed could "run out of ammunition" if the fed funds rate got down very low, like it did when Greenspan drove it down to 1 percent.

The government can't raise spending instead of cutting taxes? In fact, increased spending is a major reason (along with export expansion) why a recession may not happen. It's old-style military Keynesianism: war and militarism breeds short-term prosperity.

Today's situation is different. The Fed has plenty of room to cut rates further, if it deems such cuts necessary. [Right.] At the moment, recession is only a possibility, and inflation is a bigger worry than deflation. In this environment, there is no need for a short-run fiscal stimulus. Congress is better off focusing on longer-term problems, like the looming entitlement crunch [??] or fundamental tax reform. (But don't hold your breath.)

Does the "entitlement crunch" refer to the rich folks' expectation that they deserve regular tax cuts?

IN creating the Fed, Congress wisely made it a technocratic institution free of many of the political pressures that accompany other policy decisions in Washington. Subsequent experience in the United States and abroad confirms that more independent central banks lead to better economic outcomes. That's why, in recent years, many nations have passed reforms to insulate central banks from [democratic] politics.

This "independence" is a sham. Mankiw's statement should be re-stated as saying that the Fed is an "institution largely free of democratic accountability," i.e., free of the need to respond to democratically-elected politicians or to voters.

That's because the Fed is subject to tremendous political pressure from banks and Wall Street sorts. The presidents of the privately-owned Reserve Banks are represented on the Federal Open Market Committee, while the President of the New York Fed is always on that committee. The New York Fed has strong connections with Wall Street. The FOMC's leadership worries a lot about displeasing -- and thus hurting -- financial markets. In many ways, the Fed is nothing but a bankers' cartel that's allied with Wall Street.

BTW, if the banks have a lot of nonperforming loans, they may have to rely on their holdings of government paper (T Bills, etc.) as a reliable source of income. Expansionary monetary policy aimed at fighting a recession would hurt that income. As a result, the banks may oppose rate cuts. Back in the early 1930s, they succeeded in this program, making the economic collapse worse.

By "better economic outcomes," Mankiw means lower inflation. What he's saying is that financier-dominated central banks are pretty good at fighting the financiers' enemy, i.e., inflation. That does not refer to avoiding recessions, though the Fed will try to solve the problem if a recession hurts banks and Wall Street.

The Fed's independence [sic] was created by statute and could just as easily be taken away. The Fed is now coming under heat for not having prevented the subprime crisis, for not fully anticipating it once it was inevitable, and for not responding more vigorously now that it has occurred. Daniel Gross, a financial journalist writing for Slate, has gone so far as to liken the Fed and its chairman, Ben S. Bernanke, to FEMA and its erstwhile head Michael Brown.

The truth is that the current Fed governors, together with their crack staff of Ph.D. economists and market analysts, are as close to an economic dream team as we are ever likely to see. They will make their share of mistakes, but it is too easy to find flaws when judging with the benefit of hindsight. The best Congress can do now is to let the Bernanke bunch do its job.

The staff of Ph.D economists and market analysts are on crack? I learn new stuff every day!

Seriously, Mankiw's conclusion is that we should stop worrying and learn to love Big Brother Ben, even though his institution has messed up severely in the past and tends to reflect the short-term urges of banks and financiers?

Copyright 2007 The New York Times Company

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Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own way and let people talk.) -- Karl, paraphrasing Dante.