Friday, June 29, 2007

But Will They Enforce It?

The NY Times reports that "China Passes a Sweeping Labor Law:"
China’s legislature passed a sweeping new labor law today that strengthens protections for workers across its booming economy, rejecting pleas from foreign investors who argued that the measure would reduce China’s appeal as a low-wage, business-friendly industrial base....
Its almost as if China's legislature has been taken over by a bunch of Communists or something. Why the sudden interest looking out for the working man?
....Passage of the measure came shortly after officials and state media unearthed the widespread use of slave labor in as many as 8,000 brick kilns and small coal mines in Shanxi and Henan provinces, one of the most glaring labor scandals since China began adopting market-style economic policies a quarter century ago.

Police have freed nearly 600 workers, many of them children, held against their will in factories owned or operated by well-connected businessmen and local officials.

Abuses of migrant laborers have been endemic in boom-time China, where millions of temporary workers have faced unsafe working conditions, collusion between factory owners and local officials and unpaid wages. Party-run courts often fail to enforce their legal rights.

Whence comes the iPod

In his NY Times "Economic Scene" column, Hal Varian examines where the iPod comes from. Its a good illustration of how a growing portion of world trade is in intermediate goods (e.g. the hard drive in the iPod), which is a potential problem for international economists since our traditional models are based on trade in final goods.

Wednesday, June 27, 2007

The Economic Role of Unions

Earlier this week, Senate Republicans blocked the Employee Free Choice Act (EFCA), a bill that would enable unions to organize by having a majority of workers sign membership cards, rather than through elections. The issue prompted David Leonhardt to reconsider the role of unions in the economy in a thoughtful NY Times "Economix" column:
...Thanks to a large body of economic research, we can get a sense for how much the decline of unions has to do with these larger economic trends. Unions, the research has shown, do not do much to affect the overall performance of the economy, one way or the other. “Do unions raise or reduce productivity,” Richard B. Freeman, a Harvard economist, asked in his recent book, “America Works,” an excellent overview of the labor market. “The evidence is clear: they do not.”

But if they don’t change the size of the economic pie, they do influence how it’s divvied up. All else equal, a union worker makes about 15 percent more per hour than a nonunion worker and also gets better benefits. So while there are many reasons inequality has increased over the last three decades — like technology and global trade — the decline of unions is certainly one of them...

Leonhardt is against the EFCA itself - he writes, "I think it’s pretty clear that the bill’s opponents have the stronger argument here. In the best of worlds, secret ballots are simply fairer." The case in favor - that illegal intimidation campaigns by employers have become widespread during the election process - was made by the Washington Post's Harold Meyerson last week:

...The goal of the Employee Free Choice Act is simply to give workers the right to join unions without facing the (currently) one-in-five chance of being fired for playing an active role in a campaign to do so.

Firing employees for endeavoring to form unions has been illegal since 1935 under the National Labor Relations Act, but beginning in the 1970s, employers have preferred to violate the law -- the penalties are negligible -- rather than have their workers unionize. Today, employer violations rank somewhere between routine and de rigueur. Over half -- 51 percent -- of employers illegally threaten workers with the specter of plant closings if employees choose to unionize (1 percent actually go through with this threat, according to Cornell University professor Kate Bronfenbrenner). And even when workers vote to unionize, companies can refuse to bargain with them and can drag out the process for years -- indeed, forever...
Full disclosure: as a former union treasurer, you can guess where my sympathies lie on this one...
Here's Mankiw's take (clearly not a former union treasurer!)

Tuesday, June 26, 2007

Putin on the Corporate Board

Washington Post columnist Sebastian Mallaby forsees "The Next Globalization Backlash":
The next globalization battle lurks over the horizon, but you can already guess its contours. It will be shaped by two revolutions in finance and business: the growth of vast government-controlled investment funds abroad and the muddled progress toward shareholder democracy in this country. Taken together, these changes will give foreign governments a say in how corporate America is run. Lou Dobbs is going to love this one...
An increase in foreign ownership of American shares is a likely consequence of the massive trade deficit with the rest of the world. We're buying goods - including defective tires, lead-contaminated toys, and shiploads of a certain gooey black liquid - and paying for them with financial assets (stocks and bonds). Or, alternatively, our trading partners are buying American financial assets and paying for them with goods. Much of this accumulation of assets is ending up in foreign government hands for two main reasons: (i) much of the global oil business is in the hands of state-owned companies and (ii) foreign central banks are piling up dollars as a consequence of intervening in foreign exchange markets to keep their currencies cheap.

Traditionally, foreign governments invest their dollars in US Treasury bonds (which helps keep US long-term interest rates low), but there is a trend towards setting up investment funds to diversify into other, higher-return assets; China's recent purchase of a stake in Blackstone, a private-equity firm, being a noted example. If foreign governments end up with significant holdings of equities (stocks), they will have a voice, as shareholders, in corporate America's decision-making. And this is where Mallaby forsees trouble:
...Chunks of corporate America could be bought by Beijing's government -- or, for that matter, by the Kremlin. Given the Chinese and Russian tendency to treat corporations as tools of government policy, you don't have to be paranoid to ask whether these would be purely commercial holdings.

But the final straw may be that even the least threatening form of investment -- the purchase of publicly traded equities -- will not escape controversy. This is because of that second upheaval: the advent in the United States of something approaching shareholder democracy. As Alan Murray writes in his new book, "Revolt in the Boardroom," companies are no longer controlled by all-powerful CEOs. Instead, chief executives increasingly live in fear of activist shareholders and directors. Bosses from Harry Stonecipher of Boeing to Carly Fiorina of Hewlett-Packard have been ejected from the corporate suite in a manner that would not have been conceivable a generation earlier.

What if the Chinese are seen to have a hand in the firing of some future Fiorina? The more shareholders exercise power, the surer the backlash against governments that buy up chunks of the stock market.

Hmmm.... maybe Vladimir Putin can do something about the obscene compensation packages our CEO's (with the help of their cronies on the corporate board) like to give themselves.

Wednesday, June 20, 2007

America's Productivity Edge (?)

In his NY Times Economic Scene column, Austan Goolsbee discusses some research on the fascinating and important issue of productivity - that is, how much output is produced from a given quantity of inputs. The study of productivity recently has moved on from analyzing the "productivity slowdown" that began in 1973 to the "productivity miracle" of the late 1990's. The US seems to have gotten more out of the miracle than Europe. Perhaps because we're better at computers. Goolsbee writes:
The popular explanation, of course, pointed to information technology and, specifically, to the fact that the price of semiconductors began falling at an even more rapid rate than they had been, starting in the 1990s.

Rather than a traditional drop of 20 percent a year, computer prices began falling more like 30 percent a year. This may sound subtle, but it couldn’t be more dramatic. After 10 years of such declines, the 20 percent rate would have left computer prices almost four times higher than the 30 percent rate did. Low computer prices drove mass adoption of technology and, hence, the productivity miracle was born. Or so the story goes.

The only problem is, the explanation doesn’t work, according to John Van Reenen at the London School of Economics... He said that the prices of information technology fell in Europe, too. And Europeans bought information technology. But they had no productivity miracle.

To explain the experience in the United States, one would have to believe that Americans have some better way of translating the new technology into productivity than other countries. And that is precisely what Professor Van Reenen’s research suggests...

In his conclusion, Goolsbee takes a gratuitous swipe at France:

We hate experiencing major adjustments and industry transformations that force people to look for new jobs. That experience has made many skeptical about the future of the United States in the world economy. Yet the evidence seems to show that for all our dissatisfaction, we are the most flexible economy around and may be best poised to take advantage of the coming changes on a global scale precisely because we are so good at adjusting.

Perhaps the lesson from the research can be boiled down to something most Americans clearly understand: The world economy may be tough on your industry but look on the bright side: you could be French.

Dissing the French is soooo 2003. They may be "cheese eating surrender monkeys," but according to the OECD productivity database, French GDP per hour worked - that is, productivity - is slightly (1%) higher than America's. France does have lower per capita GDP, but that's because French workers work significantly less (1546 hours per year vs. 1713 in the US). Oh, and they don't have to worry about losing their health insurance.


George Mason's Bryan Caplan, guest blogging for the Economist's Free Exchange, explains the boom in "fun" economics books:
It’s Econ 101 – if you earn enormous profits selling a unique product, you won’t be unique for long. As soon the competition smells money in the air, they’ll be hard at work trying to catch the bandwagon. Case in point: Two years after Freakonomics proved that writing about economics in an engaging way could make you rich, the market for fun books about economics is filling up.
Caplan has some more recomendations. Personally, I prefer The General Theory.

Friday, June 15, 2007

Mind the Stature Gap

Paul Krugman just flew in from Europe - and, boy, are his arms tired. While there, he noticed that everyone was taller then him. In his NY Times column today, he wrote about the disparity between the US and Europe in average height:
The data show that Americans, who in the words of a recent paper by the economic historian John Komlos and Benjamin Lauderdale in Social Science Quarterly, were “tallest in the world between colonial times and the middle of the 20th century,” have now “become shorter (and fatter) than Western and Northern Europeans. In fact, the U.S. population is currently at the bottom end of the height distribution in advanced industrial countries.”

This is not a trivial matter. As the paper says, “height is indicative of how well the human organism thrives in its socioeconomic environment.” There’s a whole discipline of “anthropometric history” that uses evidence on heights to assess changes in social conditions...

There is normally a strong association between per capita income and a country’s average height. By that standard, Americans should be taller than Europeans: U.S. per capita G.D.P. is higher than that of any other major economy. But since the middle of the 20th century, something has caused Americans to grow richer without growing significantly taller.

If nothing else, this is a good reminder of how flawed per capita GDP is an indicator of well-being. If you don't have access to the full column through TimesSelect, you can find a more extensive excerpt at Economist's View.

Wednesday, June 13, 2007

Pitfalls of Privatization

College loans may be another example of an area where the government does a better job than the private sector, according to this NY Times op-ed by Madeline Kunin, former Vermont Governor and Deputy Secretary of Education.

Monday, June 11, 2007

Migration and Development

The NY Times Magazine has a feature on Lant Pritchett, an economist working on development. Pritchett has an unconventional approach to global poverty - and one that seems politically far-fetched at the moment - he believes that rich countries should take a much larger number of guest workers from poor countries.
The rich world has lots of well-paying jobs and an aging population that cannot fill them. The poor world has desperate workers. But while goods and capital can easily cross borders, modern labor cannot. This strikes Pritchett as bad economics and worse social justice. He likens the limits on labor mobility to “apartheid on a global scale.” Think Desmond Tutu with equations.
The whole article is worth reading, but here are a couple of amusing tidbits:
  • Pritchett’s Harvard students rallied against all kinds of evils, he writes, but “I never heard the chants, ‘Hey, ho, restrictions on labor mobility have to go.’ ”
  • But the greatest risk posed by the Pritchett plan is cultural conflict, or even conflagration, which Pritchett greets with a shrug. “I don’t think about it a lot because I’m an economist,” he says.

Exploding Toasters and Mortgages

In an article entitled "Unsafe at Any Rate," Elizabeth Warren suggests that financial products should be regulated in a similar manner to consumer products. She writes:
It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street–and the mortgage won’t even carry a disclosure of that fact to the homeowner. Similarly, it’s impossible to change the price on a toaster once it has been purchased. But long after the papers have been signed, it is possible to triple the price of the credit used to finance the purchase of that appliance, even if the customer meets all the credit terms, in full and on time. Why are consumers safe when they purchase tangible consumer products with cash, but when they sign up for routine financial products like mortgages and credit cards they are left at the mercy of their creditors?

...Consumers can enter the market to buy physical products confident that they won’t be tricked into buying exploding toasters and other unreasonably dangerous products. They can concentrate their shopping efforts in other directions, helping to drive a competitive market that keeps costs low and encourages innovation in convenience, durability, and style. Consumers entering the market to buy financial products should enjoy the same protection. Just as the Consumer Product Safety Commission (CPSC) protects buyers of goods and supports a competitive market, we need the same for consumers of financial products – a new regulatory regime, and even a new regulatory body, to protect consumers who use credit cards, home mortgages, car loans, and a host of other products. The time has come to put scaremongering to rest and to recognize that regulation can often support and advance efficient and more dynamic markets.

But doesn't regulation interfere with an efficient market outcome? Only when there are no externalities, perfect competition and perfect information. In this particular case, the relevant market failure is imperfect information. As Warren discusses, the "disclosure" associated with financial products is deliberately obfuscatory and makes it very costly for consumers (even those of us with PhDs in Economics) to fully learn what they are getting themselves into.

Warren's article came to my attention due to Gretchen Morgenson's NY Times column (only free for TimesSelect subscribers), on the issue of "exploding mortgages":

Anyone who believes that the worst is over in the subprime mortgage fiasco need merely wait awhile. A tsunami of interest rate increases on these loans is headed your way.

Adjustable-rate mortgages, with interest rates that recalibrate according to market fluctuations, have been among the more questionable “innovations” sweeping through the staid world of home lending in recent years. Especially ingenious — for lenders, at least — were so-called exploding A.R.M.’s that lured borrowers with unusually low teaser rates that then reset skyward two or three years later (typically pegged to the London Interbank Offered Rate, plus six percentage points).

During the next five years, some $1 trillion in adjustable-rate mortgages will reset. But in the here and now — from just June to October this year — more than $100 billion of that amount is scheduled to reset, and all of it is in loans that are in the riskier subprime category. Given the recent interest rate spike, many of those loans that once carried low teaser rates are on track to reset to at least 11 percent — or more than four percentage points higher than the current rate on a conventional, 30-year home loan.

Very scary indeed - even more frightening than exploding toasters!

Saturday, June 09, 2007

Sympathy for the Federalists

New York Times op-ed columnist David Brooks says there are four schools of thought on economic policy:
First, there are the limited government conservatives, who think taxes should be low and the state should be as small as possible. Second, there are the Hamiltonians, who believe in free market capitalism but think government should help people get the tools they need to compete in it.

Third, there are the mainstream liberals, who think government should intervene in small ways throughout the economy to soften the effects of creative destruction. Fourth, there are the populists, who believe the benefits of the global economy are going to the rich and we need to fundamentally rewrite the rules.

Brooks places himself in the "Hamiltonian" camp. What makes a Hamiltonian?

We Hamiltonians disagree with the limited government conservatives because, on its own, the market is failing to supply enough human capital... We Hamiltonians disagree with the third group, the mainstream liberals, because their programs haven’t worked out... We Hamiltonians disagree with the populists because we don’t find their storyline persuasive...

The global economy radically decreased poverty and increased living standards. It’s crazy to upend this complex system to return to some nostalgic vision of a 1950s industrial wonderland.

When it comes to what Hamiltonians are actually for, two big themes stand out. First, the overall economy has to remain dynamic... The second big theme is a human capital agenda. No one policy can increase the quality of human capital, but a lifelong portfolio of policies can make a difference.

It may help Brooks to sell his ideas - which mostly aren't bad - to associate them with a venerated founding father, but his reading of history is questionable. Hamilton advocated tariffs and government subsidies for industry. His thinking might be viewed as a precursor to the idea of "industrial policy" - active government intervention to develop certain sectors of the economy - which is pretty far out of fashion these days. One of Hamilton's arguments for industrialization in the famous "Report on Manufactures" was: "women and children are rendered more useful and the latter more early useful by manufacturing establisments than they otherwise would be."

If anyone had a "human capital agenda" among the founding fathers, it was Hamilton's rival, Thomas Jefferson, who advocated universal (for white males, anyway) public schooling in Virginia and founded the University of Virginia. Unlike Hamilton, Jefferson was also a beliver in free trade.

Brooks is not the only one experiencing Alexander Hamilton nostalgia - the recently established "Hamilton Project" is trying to develop "centrist" policy ideas. Though many of the people associated with the project are Democrats - for whom Alexander Hamilton should still be a dirty word - maybe its not surprising that they've chosen to use his name. One of the project's founders is Robert Rubin, who served in the Clinton administration after working at Goldman Sachs and is now at Citigroup. Hamilton founded a bank, and was criticized for being overly sympathetic to financial interests.

Thursday, June 07, 2007

Institutions and Inequality

MIT's Frank Levy and Peter Temin argue that changes in "institutions" - labor unions, social norms and government policies - play a significant role in the widening of income inequality in the US in the last 30 years. [the paper is here - you should be able to download it if you are on-campus, and read the abstract anywhere]
They construct a statistic called the "bargaining power index (BPI)": median annual compensation divided by the annualized value of output per hour. This captures the share of total output paid to the median worker - if median wages rise proportionally to output, the BPI would stay constant. The BPI began to decline in the 70's, and the decline accelerated in the 1980's.
One common story is that there is growing gap between workers with and without college degrees, which may be due to skill-biased technological change. Temin and Levy show this hypothesis is inadequate, because the BPI has declined for college-educated workers (it has declined even faster for non-college educated, hence the gap between the two groups). Interestingly, there is a considerable gender gap: the decline for female high school graduates is much less severe than for males, and the BPI is flat for female college graduates.
The postwar period was characterized by strong labor unions, high top marginal tax rates and a high minimum wage which reflected social norms that placed a high value on equality. This changed for a number of reasons in the late 1970's and 1980's - among the factors Levy and Temin cite are the cuts in marginal tax rates in the 1980's, the Volcker fed's tight money policy and less union-friendly government policies (e.g. President Reagan fired striking air traffic controllers). The tight monetary policy combined with large budget deficits led to high real interest rates and a dollar apprieciation which devastated the manufcturing sector, which was heavily unionized.
Washington Post columnist Robert Samuelson wrote about the paper. Samuelson came to some strange conclusions, as Mark Thoma explains in his post on the topic.
Separately, Brad de Long has a podcast on the rise in income inequality.

Friday, June 01, 2007

The Grey Lady Has A Deal For You

Students: the NY Times now offers "TimesSelect" for free to college students.

This gets you access to some of the columns (including Krugman, Thomas Friedman, David Brooks and Nicholas Kristof) and features not available on the "free" web site, as well as archives since 1981.
Its an interesting example of how "the media" is groping to find a "business model" that works in the internet age. Very few newspapers have had much success with charging for content (the Wall St. Journal and Financial Times may be counter-examples). One can certainly see some price discrimination in the Times' strategy - as well as an attempt to shape the habits of consumers while they're young (reading the Times every day is one of the best habits I acquired in my youth).
The really good news is that the new policy applies to anyone with a ".edu" e-mail address, so us liberal college professors no longer have to pay the "tax" of $50 per year to read Paul Krugman.

No good times, no bad times,
There's no times at all,
Just The New York Times,
Sitting on the windowsill
Near the flowers.
- Paul Simon, "Overs" (1967)