Stocks plummet

Macroblog has a good summary and many links about yesterday's sharp fall in stock prices around the world. There was some speculation that the expectation of a significant downward revision in 4th quarter gdp growth played a role. Turns out that the speculation on a large gdp growth revision was spot on. 4th quarter real gdp growth was revised from 3.5% to 2.2%, about a 45% error.

The ten principles of economics

Greg Mankiw claims these are unofficial.

Go Ahead, Major in English!

In the New York Times Magazine, Christopher Caldwell contemplates "What A College Education Buys."

Part of his answer:

But the education kids are rewarded for may not be the same education their parents think they are paying for. Economists would say that a college degree is partly a “signaling” device — it shows not that its holder has learned something but rather that he is the kind of person who could learn something. Colleges sort as much as they teach. Even when they don’t increase a worker’s productivity, they help employers find the most productive workers, and a generic kind of productivity can be demonstrated as effectively in medieval-history as in accounting classes.

Moreover, if you’re not planning on becoming, say, a doctor, the benefits of diligent study can be overstated. In recent decades, the biggest rewards have gone to those whose intelligence is deployable in new directions on short notice, not to those who are locked into a single marketable skill, however thoroughly learned and accredited... Something like the old ideal of a “liberal education” has had a funny kind of resurgence, minus the steeping in Western culture. It is hard to tell whether this success vindicates liberal education’s defenders (who say it “teaches you how to think”) or its detractors (who say it camouflages a social elite as a meritocratic one).

Wiki and Hayek

Markets aggregate information and summarize that information in prices. Hayek argued that information aggregation was perhaps the most important feature of markets. The internet and "wikimania" has introduced new methods of information aggregation. Cass Sunstein desribes the spread of wiki.

Stiglitz on Globalization

Columbia University's Joseph Stiglitz, Nobel Laureate in Economics and author of "Globalization and its Discontents," answered questions about globalization (and plugged his new book) on Daniel Altman's International Herald Tribune blog. Scroll down a bit for a particularly interesting discussion on Latin America.

Health Care Reform Redux

Memories of Harry and Louise have faded, and once again health care "reform" is back on the national agenda

Robert Frank, who visited us in the fall, makes the case against the President's proposal and for Canadian-style "single payer" in his NY Times column:

That Mr. Bush’s proposal will not shrink the ranks of the uninsured is not its most serious problem. Far more troubling is its embrace of a system under which we spend more than twice as much on health care, on average, as the 21 countries in which life expectancy exceeds ours. American costs are so high in part because the reliance on private insurance multiplies administrative expenses, currently about 31 percent of total outlays.
Most health economists agree that government-financed reimbursement is the only practical way to control these expenses, many of them stemming from insurers’ efforts to identify and avoid unhealthy people. Canada’s single-payer health system, which covers everyone, spends less than 17 percent on administrative expenses.

Washington Post columnist Steven Pearlstein writes up a McKinsey study on America's health care costs:

Even after adjusting for wealth, population mix and higher levels of some diseases, McKinsey calculated that we spend $477 billion a year more on health care than would be expected if the United States fit the spending pattern of 13 other advanced countries. That staggering waste of money works out to 3.6 percent of the nation's entire economic output, or $1,645 per person, every year.
In laying out with remarkable clarity how and where we overpay, the McKinsey report punctures myths, exposes common misconceptions and highlights realities long ignored in the health-care debate.

Paul Krugman likes John Edwards' plan. Macroblog has some thoughts on it, too.

Hyperinflation

Greg Mankiw's blog points to this NY Times article on the hyperinflation in Zimbabwe. As always, the culprit is very rapid money growth, money is currently growing at over 1000% per year. As far as causes go, this analysis probably gets things backwards

Hyperinflation has bankrupted the government, left 8 in 10 citizens destitute and decimated the country’s factories and farms.

Bankrupt governments often turn to rapid money creation to generate government revenue. This was true for the German hyperinflation in the 1920s, the Russian hyperinflation in the 1990s, many others as well, and is likely true for Zimbabwe.

Bernanke on Inequality

Fed Chairman Ben Bernanke discussed income inequality in a speech to the Omaha Chamber of Commerce. He provides a thorough overview of the evidence and the issues (its as if he has access to a huge research staff...). Near the end of the speech, he turns to the policy implications:

What, if anything, should policymakers do about the trend of increasing economic inequality? As I noted at the beginning of my remarks, answering this question inevitably involves some difficult value judgments that are beyond the realm of objective economic analysis--judgments, for example, about the right tradeoff between allowing strong market-based incentives and providing social insurance against economic risks. Such tradeoffs are, of course, at the heart of decisions about tax and transfer policies that affect the distribution of income as well as countless other policy debates.

Policy approaches that would not be helpful, in my view, are those that would inhibit the dynamism and flexibility of our labor and capital markets or erect barriers to international trade and investment. To be sure, the advent of new technologies and increased international trade can lead to painful dislocations as some workers lose their jobs or see the demand for their particular skills decline. But hindering the adoption of new technologies or inhibiting trade flows would do far more harm than good, as technology and trade are critical sources of overall economic growth and of increases in the standard of living.

A better approach for policy is to allow growth-enhancing forces to work but to try to cushion the effects of any resulting dislocations. For example, policies to facilitate retraining and job search by displaced workers, if well designed, could assist the adjustment process. Policies that reduce the costs to workers of changing jobs--for example, by improving the portability of health and pension benefits between employers--would also help to maintain economic flexibility and reduce the costs that individuals and families bear as a result of economic change.

The Year in GDP

The Bureau of Economic Analysis released its advance estimate of GDP for 2006 on Wednesday. For the year, real GDP increased 3.4%, which is very close to the average for the postwar period. The fourth quarter was slightly better, with an annual rate of 3.5%.

Here is the breakdown of the contributions to the total from Consumption, Investment, Government and Net Exports:

2006 Total: 3.4% (C: 2.25, I: 0.75, G:0.4, NX: -0.02)
Fourth Quarter: 3.5% (C: 3.05, I: -1.92, G: 0.7, NX: 1.64)

In the last three months of 2006, the consequences of the housing bust are reflected in investment. Residential investment fell at an annual rate 19.2%, contributing -1.16 to the overall GDP change. The decline of the dollar is finally having an effect - with an assist from oil prices - exports increased at a 10% pace and imports decreased at a 3.2% rate in the fourth quarter.

The Washington Post wrote up the GDP numbers, and Econbrowser and Nouriel Roubini blogged.

Bernanke reign ends is first year

Ben Bernanke's first year as the Fed Chair ended as the FOMC held the federal funds rate at 5.25%. Greg Ip And Mark Whitehouse of the Wall Street Journal write

As he finishes his first year as Federal Reserve chairman, Ben Bernanke has dispelled early doubts about his ability to steer the world's largest economy. But his biggest challenge -- bringing the economy in for a soft landing -- lies ahead.

It looks like Bernanke is making the meetings more interesting too. Maybe that is why they are having more two day affairs.

Some of Mr. Bernanke's accomplishments are less visible. He has made Fed discussions more freewheeling and collegial, colleagues say. But he has fallen short of his goal of innovating Fed communications. He has wanted to set a public, numeric inflation target, make more-frequent and more-detailed forecasts and issue more descriptive, less formulaic post-meeting statements. But sensitive to colleagues less enthusiastic about such changes, he has subjected debate to an internal review. That review is expected to wrap up this fall.