How Big is the American Economy?

Very Cool Map. I bet Canadians love being associated with Texas.

Eurozone Update

"The politicians in Italy and Spain do not seem to realise how deep-rooted their problems are. We think the markets will force them to take action. They may have to cut real wages, and this could be unpleasant," said Mr Redeker. "These countries will want higher inflation in Germany to get them off the hook, but I doubt Germany is ready to do that. This is going to create friction within the eurozone. Euro weakness will be the inevitable result."

No Magic Bullet

Complex issues, it seems, often lack simple solutions. Consider the EU's determination to mandate the use of biofuel in place of fossil fuel. It turns out that this effort won't necessarily reduce greenhouse gas emissions and may in fact have negative environmental and social consequences.

"In March last year, EU leaders agreed that 10 percent of transport fuels should come from biofuels by 2020, a goal the commission is now turning into concrete legislation. But even before making the legislation public, several expert reports have highlighted the possible negative consequences of the target. Last Friday, a group of 17 NGOs - including Oxfam and Friends of the Earth - sent a letter to EU energy commissioner Andris Piebalgs, asking him to introduce much tougher standards for biofuel production or give up mandatory transport biofuel targets altogether.

They argued that the existing draft legislation does not provide protection for important ecosystems, such as savannas or permanent grasslands "that may be threatened by expanding agriculture to meet the EU's biofuel target." "Destruction of these carbon sinks would lead to large emissions of carbon into the atmosphere, thereby reducing or neutralising the benefits from growing biofuels. Neither does the draft text provide any safeguards to protect water and soil resources," they said in a statement.

They also noted that "large scale biofuel production can cause negative indirect or knock-on impacts such as increasing food and feed prices and increasing water scarcity which would lead to negative impacts on the world's poor."

The limited positive impact and potential negative externalities are in turn accentuated by this: Consequently, at crude oil prices of about USD 60 per barrel, public support [SUBSIDIES] is required in the order of USD 0.15-0.55 per litre...in most OECD countries to make biofuel production based on agricultural crops profitable. With crude oil prices having recently reached levels around USD 90 per barrel, net gasoline and diesel prices have increased to above USD 0.70 per litre, but as crop prices have increased sharply at the same time, the basic economics of biofuel production have not changed significantly.

And this: "It is estimated that the costs per ton of CO2 that is saved through the production and use of biofuels are in the order of USD 500 (about EUR 350), and even higher in many cases. This compares to prices for emission rights in the European Emission Trading Scheme (ETS) peaking at around EUR 30 per ton in March 2006, and currently hovering around EUR 24 per ton for 2008 futures.

To summarize, biofuels have a limited impact on GHG emissions, create negative environmental consequences, require substantial public subsidies to be profitable, and are 10 times more costly than an available alternative, Emission Trading Schemes. And yet, the EU wants to mandate their use. Why?

Vote for Me and I'll Get You a Job

Economic issues have emerged as a dominant concern among voters in this primary season. "The poll numbers in New Hampshire were striking. Among Democrats, 38 percent called the economy the biggest issue, compared with 31 percent who named Iraq and 27 percent who said health care. Among Republicans, 31 percent cited the economy, while 24 percent said Iraq and 23 percent chose illegal immigration."

In this context, two quotes from last night's GOP debate are of interest:

“There are some jobs that aren’t coming back to Michigan. There are some jobs that won’t come back here to South Carolina. But we’re going to take care of them. That’s our goal. That’s our obligation. We need to go to the community colleges and design education and training programs so that these workers get a second chance. That’s our obligation as a nation.” John McCain

“I know that there are some people who think, as Senator McCain did — he said, you know, some jobs have left Michigan that are never coming back,” he said. “I disagree. I’m going to fight for every single job. Michigan, South Carolina, every state in this country. We’re going to fight for jobs and make sure that our future is bright.” Mitt Romney

Interesting because:

• Both accept that the government has an obligation to "protect" jobs or help match people with available jobs.
• McCain assumes the government can do little to prevent job losses, but a lot to help those who lose jobs. He offers very concrete ideas.
  
• Romney assumes the government can and should do a lot to prevent job losses. He offers not a single specific policy to achieve this.

More broadly, I find it interesting that Republicans are poaching traditional Democratic territory. Does this reflect Huckabee's populist Republicanism, or does this reflect thinking forward to the general election?

Political Economy in France and Germany

Apparently, economics education in at least two European countries is political economy, with a heavy emphasis on the political and substantially less on the economics. So says a current piece in Foreign Policy. According to the author, Stefan Theil, "In both France and Germany, for instance, schools have helped ingrain a serious aversion to capitalism. In one 2005 poll, just 36 percent of French citizens said they supported the free-enterprise system, the only one of 22 countries polled that showed minority support for this cornerstone of global commerce. In Germany, meanwhile, support for socialist ideals is running at all-time highs—47 percent in 2007 versus 36 percent in 1991."

Theil suggests that anti-capitalist, pro-socialist views are a consequence of how economics is taught in primary and secondary school. Drawing on a sample of French and German textbooks, he suggests that the emphasis is on explaining why capitalism is bad with little attention to economic theory or what might be viewed as positive consequences of economic competition.

One example: “Economic growth imposes a hectic form of life, producing overwork, stress, nervous depression, cardiovascular disease and, according to some, even the development of cancer,” asserts the three-volume Histoire du XXe siècle, a set of texts memorized by countless French high school students as they prepare for entrance exams to Sciences Po and other prestigious French universities. The past 20 years have “doubled wealth, doubled unemployment, poverty, and exclusion, whose ill effects constitute the background for a profound social malaise,” the text continues. Because the 21st century begins with “an awareness of the limits to growth and the risks posed to humanity [by economic growth],” any future prosperity “depends on the regulation of capitalism on a planetary scale.” Capitalism itself is described at various points in the text as “brutal,” “savage,” “neoliberal,” and “American.”

My favorite example, taken from what Theil says is a German math workbook for 4th graders in Berlin: "In 2004, the cost of a bread roll was 40 cents. From the wheat that went into it, the farmer received only 2 cents. What do you think about this?"

I would have done much better in math if my word problems had taken this form...

I did not go to school in France or Germany, so I do not know how to evaluate the claims Theil makes about the content of standard textbooks used to teach "economics" in France and Germany. Are the books he cites typical examples, or is he sampling from the from the extremes of the distribution?

Moreover, is he right to connect European skepticism about global markets to the content of primary and secondary textbooks?

Iowa

Funny, I thought. I hope I don't get in trouble for stealing it.

Musings on the "Naomi Klein Problem"

Naomi Klein has no formal training in social science. She writes books that have a superficial weightiness, but when examined more critically are found to present illogical theories supported by stories that she interprets without complying with any obvious rules of empirical research. Moreover, her theses often borrow liberally from existing social science research, which she twists to advance her normative agenda. To be blunt, I doubt that any chapter of any of her books would receive a passing grade in any graduate seminar I have ever led or taken. (I remain undecided about what grade I would give her writing in an undergraduate POLI class). Her books become best sellers, she is invited to speak to large audiences, and appears as a guest on talking head TV.

Klein, of course, is symbolic of a broader phenomenon in which people who lack social science training write books that pretend to be serious but aren't really. The arguments thus made then shape public discussion and debate. If you don't like my focus on Naomi Klein, then substitute Thomas Friedman or David Brooks or Robert Kaplan, or Amy Chua, or your own least favorite such writer. They are all the same.

There are (at least) two dimensions to this phenomenon that I don't understand. First, I do not understand why the media turns to non-experts to expound on "global issues." I can think of about 100 people more qualified to expound on the relationship between crisis and reform than Naomi Klein. So, why does the media select the least qualified person? I suspect the answer lies in some combination of having a PR person to issue press releases, I publisher willing to cover expenses to support a recent book, and a media that needs to fill air time. In other words, finding Naomi Klein is easy; finding Alan Drazen and Alberto Alesina is not.

Second, I do not understand why social scientists have ceded this ground to Naomi Klein. That we have ceded this ground is obvious. Sam Huntington, and perhaps, though to a lesser extent Robert Putnam, are the only top-flight political scientists who target a significant portion of their writing to a broad public audience. The rest of us conduct research and write monographs tailored to narrow professional audiences. My point is not to diminish the importance of such research, but to question our unwillingness to communicate our findings beyond a narrow professional community. Because social scientists have ceded this ground, Naomi Klein is the most eager person available. So, the media talks to Naomi.

All of this matters because it produces low quality public debate. "Morrissey", in a comment on an earlier post, proposed the "marketplace of ideas" as a solution to my skepticism about how we can believe what we believe when we try to extract meaningful information from all of the noise. Yet, if the marketplace of ideas is to resolve this problem at least some of the ideas being debated must be supported by logic and systematic empirical evidence. The ideas that emerge are those that have withstood serious scrutiny. Yet, because those who shape the debate too often have a political agenda and lack training in principles of scientific research and deep knowledge of the topic, while those who have this training and knowledge show little interest in shaping the public debate, the marketplace of ideas can't solve the problem.

Happy New Year

Here's hoping that 2008 is just a little bit funky.

Krugman on Stolper Samuelson Effects in US Trade

In case you missed it, Paul Krugman's Friday column focused on the distributional consequences of international trade. He argues that as imports from developing countries have risen during the last fifteen years, trade flows have begun to follow the expectations of standard comparative advantage. Consequently, trade has a more pronounced impact on wage inequality in the US today than it did fifteen years ago.

I am predisposed to the general argument, but am puzzled by the magnitude he claims. He asserts that "it’s hard to avoid the conclusion that growing U.S. trade with third world countries reduces the real wages of many and perhaps most workers in this country...The highly educated workers who clearly benefit from growing trade with third-world economies are a minority, greatly outnumbered by those who probably lose."

He draws on textbook Stolper-Samuelson logic to make the argument: "workers with less formal education either see their jobs shipped overseas or find their wages driven down by the ripple effect as other workers with similar qualifications crowd into their industries and look for employment to replace the jobs they lost to foreign competition. And lower prices at Wal-Mart aren’t sufficient compensation.

Yet, exactly how many workers have lost jobs to "foreign competition?" The competition Krugman emphasizes comes from imports of manufactured goods. The Bureau of Labor Statistics reports that manufacturing employment fell from roughly 17 million in 1997 to 14 million in 2006. That's a reduction of 3 million manufacturing jobs over ten years--300,000 per year on average--in a total labor force of 136 million people. To assert that this displacement imposed a substantial wage reduction on others seems a bold claim to make without providing any evidence to support it.

I look forward to seeing Krugman's research on this question develop. He has posted a few short pieces about the paper he is writing on his blog, here, here, and here. If you want to read what appears to be the state of the art on trade and income distribution, see Robert Lawrence's paper here.

How do We Extract Signal from Noise?

As we head toward the New Year, I offer some fundamental skepticism. In a very cheery examination of the current financial situation, Ambrose Evans-Pritchard seems almost to relish the collapse of the international financial system. He seems uncannily able to find bankers willing to make extreme statements, such as: "Things are very unstable and can move incredibly fast. I don't think the central banks are going to make a major policy error, but if they do, this could make 1929 look like a walk in the park." How's that for a little New Year cheer?

I feature Evans-Pritchard's recent work because it nicely highlights one of two questions I have been pondering for the last two weeks (I will post on the second question tomorrow). How do we humans extract meaningful signal from all the noise? We seem strongly attracted to worse-case scenarios; we compare the current situation to 1929 rather than to other financial episodes that did not produce a global cataclysm (1987, for example, or the bursting of the dot com bubble). The media feeds us quotes with no evidence about where the people quoted fall in the distribution of opinion and analysis. Are the quoted bankers representative of the median view, or is the writer drawing from the gloom-and-doom end of the spectrum? Do the people quoted have incentive (monetary or other) to portray events in a particular manner rather than present "objective analysis?" In short, how does one figure out the "truth" in a world in which the critical question is "what is going to happen?", when the information we have at hand is of uncertain quality and quite possibly biased, but the degree of bias is unknown (and unknowable)?

This seems to be a very hard problem, and yet one we face on a regular basis. For those not interested in the current financial crisis, then ask the same question of global warming. If you are unwilling to fall down the global warming warren hole (and having disappeared into that hole for a full week, I can hardly blame you if you are not), then ask the question of genetically modified organisms. If GMOs do not interest you, then what about economic development? All of these issues pose the same dilemma: we are asked to make decisions today to achieve some future consequence relying on knowledge first produced and then reported by groups of people who may or may not be motivated by the objective quest for truth and that therefore may or may not be biased in ways we cannot accurately measure.

In short, why do we believe what we believe, and should we? How do we extract the meaningful signal from all of the noise, and how do we know that we have extracted the meaningful signal? I don't have the answer, but we seem to believe that the political process is good at selecting the "correct signal." Why do we believe this? Should we?