A New Blog

I've set up shop with my very own blog, Twenty-Cent Paradigms. It will be mostly macro- and international stuff. I've got a few posts up there now, and I'm hoping for a steady state rate of 2 or 3 a week once the semester starts (but we'll see how it goes...).

The Low Cost of Fighting Global Warming

In an article titled "Climate Change Debate Hinges on Economics," the Washington Post's Steven Mufson reports on the costs of reducing carbon emissions:

Here's the good news about climate change: Energy and climate experts say the world already possesses the technological know-how for trimming greenhouse gas emissions enough to slow the perilous rise in the Earth's temperatures.
Here's the bad news: Because of the enormous cost of addressing global warming, the energy legislation considered by Congress so far will make barely a dent in the problem, while farther-reaching climate proposals stand a remote chance of passage.

Enormous cost?

The potential economic impact of meaningful climate legislation -- enough to reduce U.S. emissions by at least 60 percent -- is vast. Automobiles would have to get double their current miles to the gallon. Building codes would have to be tougher, requiring use of more energy-efficient materials. To stimulate and pay for new technologies, U.S. electricity bills could rise by 25 to 33 percent, some experts estimate; others say the increase could be greater.... Measures taken by the world's governments to reduce greenhouse gases could cost 1 percent of world economic output, according to a report commissioned by the British government and written last year by former World Bank chief economist Nicholas Stern. But Stern said the cost of not taking those steps would be at least five times as much, hitting the developing world hardest...

Considering what's at stake for the future of the human race (and cute polar bears, too), a 25%-33% increase in electricity bills seems a small price to pay. Sign me up! But some folks in Washington seem to think their constituents have a very narrow view of their self-interest:

"I sincerely doubt that the American people are willing to pay what this is really going to cost them," John D. Dingell (D-Mich.), chairman of the House Energy and Commerce Committee, said in a recent C-SPAN interview, adding that he intended to introduce legislation that would impose a carbon tax "just to sort of see how people really feel about this." He said his proposal would boost the gasoline tax by 50 cents a gallon and establish a "double-digit" tax on each ton of all carbon-dioxide emissions.

Carbon-tax supporter Greg Mankiw commented on Dingell's proposal. Here's the transcript of Mufson's chat with readers. If this seems a bit familiar, an article in The Economist which reached a similar conclusion was blogged here in May.

Fair Taxes?

The federal tax system is a very confusing hodgepodge: the income tax has different rates for labor and capital income, and has all sorts of deductions and credits (giving tax breaks appears to be the preferred way of making social policy these days); for many people payroll taxes (social security and medicare contributions) are larger than income taxes; and corporations pay some taxes too, the burden of which ultimately falls on their owners and customers. The Congressional Budget Office (CBO) has performed a very useful service in calculating the effective tax burden faced by people at different places in the income distribution. In the NY Times, Greg Mankiw writes up the CBO's study. He writes:

The C.B.O.’s most recent calculations of federal tax rates show a highly progressive system. (The numbers are based on 2004 data, but the tax code has not changed much since then.) The poorest fifth of the population, with average annual income of $15,400, pays only 4.5 percent of its income in federal taxes. The middle fifth, with income of $56,200, pays 13.9 percent. And the top fifth, with income of $207,200, pays 25.1 percent.

He goes on to say that "Fairness is not an economic concept. If you want to talk fairness, you have to leave the department of economics and head over to philosophy." Mankiw discusses the fairness of the tax code in terms of the thinking of John Rawls and Robert Nozick, though Brad de Long argues that he mischaracterizes them.

Economist Smackdown!

Harvard's Greg Mankiw comments on his "friend," Princeton's Alan Blinder (for those of you who aren't familiar with the academic world, pointing out that something is not in a refereed academic publication is actually pretty harsh, since the peer-review process of journals is how the profession validates quality).

Lifting the Resource Curse?

In the NY Times, Tyler Cowen writes about the "resource curse" that afflicts many low-income countries:

It is unfortunate that economists have to debate whether natural resources are a blessing or a curse for a developing nation. Minerals, diamonds or oil may appear to represent automatic wealth but resource-rich countries usually become mired in corruption. High oil revenues, for instance, allow a government to maintain power and reward political supporters without doing much for its people. The government of Nigeria has taken in billions from high oil prices, yet the average person was probably better off 40 years ago. The easy-to-reach wealth of a resource also encourages coups, and thus political stability is problematic.

He goes on to describe a potential solution.

Laying the Groundwork for Inflation Targeting?

In a speech today to an NBER conference, Ben Bernanke expressed concerned that inflation expectations are not sufficiently "anchored." From the Washington Post story by Nell Henderson:

Fed officials believe it is critical to hold down inflation expectations because of the danger that they can be self-fulfilling: if consumers expect prices to rise, they may more readily pay higher prices; if businesses expect inflation to pick up, they may be quicker to raise their own prices to cover their costs.
"Undoubtedly, the state of inflation expectations greatly influences actual inflation," Bernanke said.
Ideally, if inflation expectations are very stable, or "anchored," they won't vary with swinging oil prices, economic booms or busts, employment data or other changing aspects of a dynamic economy. Bernanke said expectations are better anchored than in the past, but not completely -- they still respond to economic news.

The chairman was careful not to make any specific suggestions, but certainly one way to "anchor" expectations would be to adopt inflation targeting. Under inflation targeting, the central bank announces a specific target level or range for inflation, and conducts monetary policy with the goal of meeting its stated target. Britain, Canada and New Zealand all use inflation targeting, and it has generally been regarded as a success. However, it might constrain the Fed's flexibility under unexpected circumstances (Greenspan's objection), and it it would seem to contradict the Fed's "dual mandate" to achieve price stability and low unemployment by giving primacy to price stability (the likely objection of Congressional Democrats).
As an academic Bernanke was an advocate of inflation targeting and his speech today might be a gentle attempt at nudging people in that direction.

Misreading Adam Smith

Economists' View posted "Morality and Economics," a great commencement address by Joan Robinson from 1977. She makes the case that Adam Smith is a believer in morality after all, and those who interpret Smith an advocate of the untrammeled pursuit of self-interest are mistaken. Read the whole thing, but here's her conclusion:

I hope that the moral consciousness which has grown up in modern times in the youth of America, which has led them to protest against the unequal balance prevailing between morality and the market, will continue to prosper in this generation and that you will find that the doctrines of Adam Smith are not to be taken in the form in which your professors are explaining them to you.

An Incentive Too Far?

The New York City schools are instituting a plan devised by Harvard economist Roland Fryer to pay students for getting good grades. In a NY Times op-ed, psychologist Bernard Schwartz argues that it reflects a naive view of incentives on the part of economists. He writes:

...Unfortunately, these assumptions that economists make about human motivation, though intuitive and straightforward, are false. In particular, the idea that adding motives always helps is false. There are circumstances in which adding an incentive competes with other motives and diminishes their impact. Psychologists have known this for more than 30 years.

In one experiment, nursery school children were given the opportunity to draw with special markers. After playing, some of the children were given “good player” awards and others were not. Some time later, the markers were reintroduced to the classroom. The researchers kept track of which children used the markers, and they collected the pictures that had been drawn. The youngsters given awards were less likely to draw at all, and drew worse pictures, than those who were not given the awards.

Why did this happen? Children draw because drawing is fun and because it leads to a result: a picture. The rewards of drawing are intrinsic to the activity itself. The “good player” award gives children another reason to draw: to earn a reward. And it matters — children want recognition. But the recognition undermines the fun, so that later, in the absence of a chance to earn an award, the children aren’t interested in drawing...

The Economist's Free Exchange is more sympathetic to the idea. Jared Bernstein was prompted to ponder a broader question: "Why Are Economists' Predictions So Often Wrong?" (in doing so, he takes a swipe at Mankiw, who responds).

A European Turns the Tables

It has become conventional wisdom that the European economies are held back by "structural rigidities" - in particular, too much labor-market regulation - in contrast to the "flexibility" of the "dynamic" US economy. In an essay titled "Structural Rigidities in the US and Europe," Belgian economist Paul De Grauwe turns the tables, identifying "structural rigidities" in the US. In particular, the US lags Europe in social mobility, and that the US gets less output per unit of energy input.

De Grawe's piece is at VoxEU, a useful new website publishing commentary by (mostly) European economists.

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.

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!)

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.

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.

Meta-Sillynomics

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.

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.

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.