Saturday, January 26, 2008

Rational Ignorance?

. Saturday, January 26, 2008

I puzzled a few days ago about why the media focuses so much attention on how our Presidents in Waiting would respond to the current economic situation. Today, the folks over at Marginal Revolution have a nice post summarizing and then discussing a Matt Yglesias post on PIW John McCain's apparent ignorance of economics. (Davide Leonhardt has a good article here) Yglesias' bottom line is: "John McCain would not govern very well on economic policy issues, and would fare poorly in a campaign that focused heavily on economic problems."

How much economics McCain knows, and what that implies for his qualification to be President raises a broader question: might it be fully rational for president to know zero economics? Consider the following two propositions:

  • The president has no institutional authority to affect any macroeconomic policy instrument directly. The constitution (Article I) assigns to Congress (to the House, actually) authority over fiscal policy. The Federal Reserve Act assigns to the Federal Reserve Board the authority to set monetary policy. Thus, the president cannot directly make any decision that affects either of the two major macroeconomic policy instruments. It is not obvious, therefore, why a person who wishes to be president would invest lots of time learning the intricate details about economic policy. Because time is scarce, wouldn't it be more rational to invest in learning about those issues that one would be able to affect directly? In the US political system, the president has greatest authority over foreign and security policy. (This is probably why most presidents ultimately wind up focusing on foreign policy and wind up being remembered more for foreign policy than domestic policy successes and failures (with some obvious exceptions, such as FDR).
  • In selecting a president, we are really selecting a presidency, an organization with a highly-refined division of labor staffed by people with specialized knowledge. Perhaps we have a mental image of our president sitting in the oval office for hour after hour pouring over the details of one policy after another. Being president is much like being in school--one hour on macroeconomics, one hour on international politics, etc. This is not what the president does. The president sets a broad agenda; the president (and staff) select people. These people, with expertise in their field, make policy. The president then persuades and cajoles, brides and threatens legislators to vote for these policies.
The president's job, therefore, is to set the agenda, pick smart people with expertise who share this broad agenda, create an organizational structure that enables these people to work effectively, and try to get Congress to enact the policy proposals that emerge. It thus seems quite rational for McCain (and all other candidates) to have little knowledge about economics.

This makes me wonder whether we don't focus on the wrong things when we select presidents. Because the president is a leader, a politician, and not a policy maker, perhaps we should focus more attention on our PIWs' leadership capabilities: their broad agendas ("where do you see the country in five years?"), their ability to work effectively with Congress ("do you think that you work well with others?"), and the degree to which we believe they will exercise good judgment in those domains where they have greatest authority (foreign affairs). This would allow us to worry less about what they as individuals would do when confronted with some hypothetical situation about which they have no expertise and over which they have little direct authority.

Friday, January 25, 2008

Economists and fiscal Stimulus

. Friday, January 25, 2008

The New York Times disputes my assertion that the serious economists do not think that fiscal stimulus is warranted at this point. Apparently, mainstream economists such as Jared Bernstein (Economic Policy Institute), Alan Tonelson (?) and Larry Summers (Clinton Administration) think that stimulus is warranted. Only non-mainstream economists such as David Henderson, (who the Times labels as a "libertarian economist") question its merits. As an aside, I don't know why Bernstein doesn't warrant a "liberal economist" label if Henderson warrants the "libertarian" one. And Alan Tonelson is not an economist. His bio says he has a BA in History.

The story draws conclusions that are not warranted by the evidence provided: "Most economists praised the deal as a necessary effort that by increasing the public debt to put cash swiftly into the hands of ordinary consumers, could limit the severity and duration of a recession and very likely spare some jobs." Did they survey all economists? If not, how do they know that this is what most economists did?

Thursday, January 24, 2008

Stimulus Package

. Thursday, January 24, 2008

Congress and the administration reached agreement on fiscal stimulus. Paulson's comments in the announcement of the agreement indicates partly why this may offer much in the way of quick relief. "If all works well," he expects the rebates to begin flowing in May. He said the aim is to start sending the checks within 60 days of enactment of the stimulus package, with most recipients receiving their checks in less than 10 weeks.

There has been considerable chatter about whether a fiscal stimulus is a) necessary and b) likely to work. The balance of commentary by macroeconomists seems to be a double no. See, for example,
Mankiw, and Brad DeLong. Of quite different ideological stripes, from conservative (Mankiw) to to DeLong a moderate liberal, and yet, similar conclusions: not time yet--let monetary policy do its job and then use fiscal policy. DeLong's video is worth watching, if only for its somewhat fascinating dorky-intellectual-oddness.

Krugman (the columnist, not the economist) demurs.

It is hard to argue with DeLong's conclusion (which I think I anticipated): "John Edwards and Hillary Rodham Clinton might respond that these stimulus packages are political rather than policy documents--acts of campaigning rather than acts of governance--and they are right, up to a point."



EU Finance Ministers seem almost happy about current financial market turmoil.

"Mr Almunia (the EU's Monetary Affairs Commissioner) contrasted imbalances in the US economy with what he described as Europe’s “solid, sound fundamentals”.

“We have a positive current account position. We have a level of savings that is the level required to finance our investments. We have improved our fiscal positions a lot. Moreover, we haven’t got subprime mortgages in our financial systems,” Mr Almunia said.

He denied, however, that he was gloating over the US economy’s troubles. “I’m not engaged in any criticism. I’ve simply described the situation,” he told reporters.

Wednesday, January 23, 2008

On the Lighter Side...

. Wednesday, January 23, 2008

The Onion reports that Bill Clinton has announced his bid for the presidency.

"My fellow Americans, I am sick and tired of not being president," said Clinton, introducing his wife at a "Hillary '08" rally. "For seven agonizing years, I have sat idly by as others experienced the joys of campaigning, debating, and interacting with the people of this great nation, and I simply cannot take it anymore. I have to be president again. I have to."

He continued, "It is with a great sense of relief that I say to all of you today, 'Screw it. I'm in.'"

Too funny. Even more so when juxtaposed to this: President Clinton: "Think what being President's like. They play a song every time you walk into the room. They play 'Hail to the Chief.' Shoot, I was lost for 3 weeks after I left the White House. Nobody played a song anymore. I didn't know where I was. It was terrible." (Yes, this is a real quote).

Tuesday, January 22, 2008

This is Scary

. Tuesday, January 22, 2008

Asian markets at 12:50 a.m. EST.

Check for latest here: World Stock Market Indices

Monday, January 21, 2008

The Only Thing We Have to Fear...

. Monday, January 21, 2008

Is Fear itself. But, this is kind of scary. "Investors reacted with what many analysts described as panic to the multiplying signs of weakness in the American economy...“There is indeed some panic,” said Thomas Mayer, the chief European economist at Deutsche Bank in London.

Sunday, January 20, 2008

Mystify Me

. Sunday, January 20, 2008

I have been deeply puzzled by something of late. As you all know, we may or may not be in or heading toward a recession. As a consequence, Bush and Congress are discussing fiscal stimulus, and Bernanke has promised to bring lower interest rates to the party. All of this is good.

What I don't get is this: the media has devoted lots of time and attention to what each of our hopeful "presidents in waiting" would do. Why? On the one hand, what a PIW would do once elected is irrelevant to the current debate about what we should do. On the other hand, by the time one of them becomes president, either (a) we won't be in recession (average recession is 1 year) or (b) the recession is so unprecedented that what one might do today facing a "normal" recession is irrelevant. Might just as well ask them what they would have done in 1929.

I also don't understand the logic of their proposals:

Clinton: $70 billion plan to "jump start" the economy; repeal the Bush tax cuts for households earning more than $250,000. The "jump start" money is half what seems to be required (about 1% of GDP); repealing tax cuts for the rich will be anti-stimulus.
Edwards: $25 billion immediately, additional $75 billion in event of recession; repeal the Bush tax cuts for households earning more than $200,000. Same problem as Clinton, though Edwards seems not to realize that we may not know we are in recession until it is over.
Obama: $80 billion in tax cuts targeted at middle and low income. Repeal Bush tax cuts. See above.

Republican PIWs: make Bush tax cuts permanent. Not clear how this constitutes a fiscal stimulus.
Ron Paul: Balance the budget, go back on gold. Ron Paul officially wins the Andrew Mellon Prize.

Saturday, January 19, 2008

Trade and Compensation, Again

. Saturday, January 19, 2008

Yet another round of debate on “trade, income, and compensation.” In case you are just tuning in, the trade, income, and compensation debate is the following: Trade liberalization reduces the income of one group of people and raises the income of a different group. Should those who gain compensate those who lose?

Here is why this is tiresome.

A. There is no “right” answer. There are good arguments to be made for yes, and there are good arguments to be made for no. There are no external grounds to which we can appeal to select one over the other.

B. Adherents to the yes side (winners should compensate losers) typically under-analyze the economics.

1. The moral obligation to compensate losers must be reciprocal. If tariff reductions redistribute income then tariff increases must redistribute income in the opposite direction. If we should compensate losers from tariff reductions then we should also compensate losers from tariff increases. As textile workers and farmers and (insert protected industry here) have not compensated losers from high tariffs, I do not see why those who win from low tariffs now have a moral obligation in the other direction. Appeals to “fairness” lose their purchase.

2. Losers from trade liberalization already have been compensated. The tariff enables workers to earn above-market returns. This rent compensates for the lower income they earn once the tariff is gone. Imagine that a worker in a protected industry saves the rent (the difference between the wage in the next best available job and her current wage). Once the tariff is eliminated and the worker is employed at a lower wage, those saved rents, spent slowly over time, provide an income higher than the new lower wage. The fact that people don’t behave this way is irrelevant to the broader insight—the rent the tariff provides is compensation for the risk that the tariff might one day disappear. It is not obvious that society has an obligation to compensate them again.

C. Adherents to the “no" side typically under analyze the political problem.

1. Tariffs reflect political influence. Eliminating a tariff, therefore, requires a policy exchange. This policy exchange need not be compensation for workers in the now-liberalized industry, but it must be something equal to the present value that the tariff holder attaches to the stream of rents the tariff generates. Normative arguments (aw, you should just surrender your property rights) are irrelevant. No free lunch in politics either.

2. Sustaining low tariffs in a democratic society requires popular support . The public is more likely to support trade if they believe they are somewhat insured against its downside risk. Hence, compensation might be a political necessity for openness in a democratic society.

D. Thus, debating whether we should or shouldn't compensate losers is pointless; the question is whether compensation is a necessary part of the policy bargain that must be struck in order to construct majority support for trade. As this is not a normative question, debating the question in normative terms—should we or shouldn’t we—is entirely beside the point.

Friday, January 18, 2008

Why Fiscal Policy is Better

. Friday, January 18, 2008

Mankiw poses an important question for policymakers regarding current enthusiasm for a fiscal stimulus:

"If the economy now gets the fiscal stimulus being proposed (about 1 percent of GDP), does that mean that the Federal Reserve will cut interest rates less than it otherwise would?"

He continues, "If the answer ... is Yes, then ask, How much higher will interest rates be kept as a result of the fiscal stimulus? And is it really better to have a fiscal stimulus and higher interest rates than a smaller deficit and lower interest rates?" (This is a rhetorical question, in case you are unclear, to which the answer is certainly, "no, it is not really better to have a fiscal stimulus and higher interest rates). Update: Mankiw answers the question.

He does not define what he means by "better," but I imagine he conceptualize this in purely economic terms. But, in political terms, the answer is quite different. It's hard for politicians seeking re-election to mail a lower interest rate to voters. Many of them will never even know it has occurred. How can politicians capitalize on their largesse? It's quite easy, however, to send a fiscal stimulus, and when it arrives, voters thank the sender.

So, although monetary policy may be easier, and perhaps even better in economic terms, fiscal stimulus is clearly better in political terms. Sending checks is especially terrific if you can send them to some voters and not to others.

Thursday, January 17, 2008

Why Monetary Policy is Easier

. Thursday, January 17, 2008

As the political discussion of fiscal stimulus to address the non-recession (AKA "downside risk"), familiar patterns emerge.

"Mr. Bush (when did the NYT decide that President Bush no longer deserves the title?) is scheduled to spell out his criteria for the stimulus package in a speech on Friday at a manufacturing company in Frederick, Md."

The Democrats are unwilling to wait to see the details before passing judgment. "Senator Harry Reid of Nevada, the Democratic majority leader, said it was “encouraging that the president has acknowledged the economic problems challenging our nation.” But he complained that Mr. Bush seemed to be following a go-it-alone approach that could “unnecessarily politicize the inevitable bipartisan negotiations” that will be necessary."

It's a good thing we are not in a recession, cause if we were we'd be in deep trouble.

How Big is the American Economy?


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

Monday, January 14, 2008

Eurozone Update

. Monday, January 14, 2008

"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 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?

Friday, January 11, 2008

Vote for Me and I'll Get You a Job

. Friday, January 11, 2008

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?

Wednesday, January 9, 2008

Political Economy in France and Germany

. Wednesday, January 9, 2008

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 si├Ęcle, 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?

Friday, January 4, 2008


. Friday, January 4, 2008

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

Thursday, January 3, 2008

Musings on the "Naomi Klein Problem"

. Thursday, January 3, 2008

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.

Tuesday, January 1, 2008

Happy New Year

. Tuesday, January 1, 2008

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

International Political Economy at the University of North Carolina: January 2008




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