Economics and Alaska

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WW I economic planning as a model in the 1930s and 40s

Carlos Lozada summarizes a research paper by Hugh Rockoff: "The Economics of World War I". (Lozada is a journalist contributing to an National Bureau of Economic Research digest of its sponsored research - Lozada's summary has a link to the original paper).

Lozada summarizes Rockoff's analysis of the macroeconomic and financial impacts of the war. I'll just quote two paragraphs on the impact of the war on post-war ideas about economic planning.

The actual planning effort during the war was relatively limited:

"As part of the war effort, the U.S. government also attempted to guide economic activity via centralized price and production controls administered by the War Industries Board, the Food Administration, and the Fuel Administration. Rockoff judges that the overall impact of these programs on reallocating resources was "rather small." Timing played a role, since some of the agencies were only established once the United States entered the war, and they took time to begin fulfilling their roles. Also, management problems emerged. For example, the War Industries Board attempted to create a "priorities system" for determining the order in which producers would fill government contracts for industrial goods. Unfortunately, all policymakers gave their order the highest rating ("A"). Leaders then created several higher priority ratings (such as "A1"), with much the same result. "Replacing price signals with priorities is not as simple as it sounds," surmises Rockoff."

But many post-war thinkers looked to this effort as a model for future responses to crisis:

"In matters of economic ideology, Rockoff argues that, although the U.S. government took on such an active role in economic affairs during the war, this evolution did not ratchet up the government role in peacetime. Subsequent increases in federal spending resulted mainly from war-related matters (such as veterans' benefits), and the most of the wartime regulatory agencies soon disappeared due to the efforts of conservative politicians. Nevertheless, the successful wartime experience "increased the confidence on the left that central planning was the best way to meet a national crisis, certainly in wartime, and possibly in peacetime as well." This view became increasingly important after the Democrats reached power during the Great Depression. "Almost every government program undertaken in the 1930s reflected a World War I precedent," explains Rockoff, "and…many of the people brought in to manage New Deal agencies had learned their craft in World War I." The author concludes that the scope and speed of government expansion in the 1930s were likely greater because of the impact of the war on the world view of new economic and political leaders, who in turn inspired future generations of reformers. "For America, to sum up," writes Rockoff, "the most important long-run impact of the war may have been in the realm of ideas." "

posted by Ben Muse at 10:42 PM

 
Social Security income and recipient death rates

David Francis reports on research suggesting that retirees with lower income from social security - other factors held constant - tend to have lower mortality rates.

Francis is summarizing research by Stephen Snyder and William Evans. Evans and Snyder exploited a natural experiment that made it possible to check the connection between social security income and mortality rates in Lower Social Security Benefits Reduced Mortality:

"In The Impact of Income on Mortality: Evidence From the Social Security Notch (NBER Working Paper No. 9197), Stephen Snyder and William Evans explore a way to get around this puzzle. They compare the mortality rates of two groups of elderly males affected by a major change in the Social Security laws which arbitrarily trimmed the pensions of later retirees compared to those before them...

Concerned with rapidly rising costs, the federal government changed the way that benefits were calculated for new beneficiaries in 1977. This substantially decreased the size of payments for recipients born after January 1, 1917. As a result of these changes, two people with identical earnings histories but different birth dates would receive substantially different retirement incomes. Those born after what is called the "Notch" had little time to adjust since the changes happened late in their work lives. Most did not even realize the impact of the law's changes on payments until after they retired.

Snyder and Evans compare the five-year mortality rates after age 65 for those born in the fourth quarter of 1916, just before the Notch, with those born in the first quarter of 1917..."

What did they find?

"To the surprise of the authors, they find that those younger retirees with smaller Social Security benefits had a lower mortality rate than retirees with more generous benefits. Since there is little difference between the cohorts except their Social Security income, the authors attribute this difference to the lower incomes generated by the "Notch." The authors test this counterintuitive result by examining the mortality rates for women from the same cohorts. Most women from these birth cohorts receive Social Security benefits as a result of their husbands' contributions to the system, and there is little difference in Social Security earnings across these groups. Therefore, there should be no difference in mortality across these groups, which is exactly what the authors find."

What's the reason for this?

"...Snyder and Evans find that smoking patterns do not explain the higher mortality rate for the higher-income retirees. The younger cohort, those born after the Notch, responded to lower incomes by increasing the amount of their post-retirement work by 5 percentage points more than those born earlier; there was a large increase in work after age 67. Some probably returned as part-time workers, often in different industries, sometimes at reduced wages from their primary career employment. "This work could have positive health benefits if the work keeps the seniors connected to the community and reduces social isolation," the authors speculate."

I wouldn't conclude from this that income isn't related to health outcomes. But this is a reminder how indirect the chain of social causation can be. The idea that that continued activity after retirement is healthy sounds plausible. If the health-activity nexus is correct, it makes me less concerned about Social Security reforms that delay the normal retirement age.

posted by Ben Muse at 11:45 AM

 
A conversation with Suharto

Indonesia's Suharto regime (1967 to 1998) was fabulously corrupt. James Wolfensohn, the President of the World Bank, got a chance to talk to Suharto about it during a 1996 visit. Sebastian Mallaby tells the story,

"...The two leaders each addressed a trade summit, along with a posse of regional big shots, including China's vice premier, Zhu Rongji, and in a gap in the proceedings the VIPs went off to have tea together. Suharto was talking to Zhu, and he summoned Wolfensohn over; and then he broached the subject of corruption. The latest corruption rankings produced by a watchdog group called Transparency International were most upsetting, Suharto declared, for they rated Indonesia as less corrupt than China; he had been happier with the previous year's results, which had recognized his own country as the more energetic embezzler. Zhu looked visibly annoyed, but Suharto carried on, "Don't you think we should tell the president of the World Bank about corruption in this part of the world?" he asked Zhu, who maintained a stony reticence. Then Suharto looked at Wolfensohn. "You know, what you regard as corruption in your part of the world, we regard as family values."

Mallaby tells the story in his new joint biography of Wolfensohn and the World Bank, The World's Banker

The relationship between corruption and growth is not simple. Suharto's regime may have been corrupt, but it's economy also grew very rapidly and poverty dropped. Mancur Olson may have had the answer in his book Power and Prosperity.

This month the Economist surveyed Indonesia's progress since the economic crisis, and Suharto's fall, in 1998. They've created a vibrant democratic state; growth is lagging behind historical rates. The Washington Post reports that 80,000 Indonesians have died in the tidal wave.

posted by Ben Muse at 6:29 AM

 
Mark Schmitt Talks Tax Tactics

How did the Republicans beat Clinton's health plan and his 1994 crime bill? How can the Democrats beat Bush Administration tax legislation? Mark Schmitt explains:"The Decembrist: There Are No Trial Balloons"
posted by Ben Muse at 7:53 PM

 
Economic fluctuations and health

Christopher Ruhm, of the University of North Carolina at Greensboro, finds that temporary economic slowdowns are associated with better health.

Here is the abstract for his new National Bureau of Economic Research (NBER) paper:

"Although health is conventionally believed to deteriorate during macroeconomic downturns, the empirical evidence supporting this view is quite weak and comes from studies containing methodological shortcomings that are difficult to remedy.

Recent research that better controls for many sources of omitted variables bias instead suggests that mortality decreases and physical health improves when the economy temporarily weakens.

This partially reflects reductions in external sources of death, such as traffic fatalities and other accidents, but changes in lifestyles and health behaviors are also likely to play a role.

This paper summarizes our current understanding of how health is affected by macroeconomic fluctuations and describes potential mechanisms for the effects."

(I've divided the abstract into paragraphs) The full paper, "Macroeconomic Conditions, Health and Mortality" (NBER Working Paper W11007, December 2004) is available at the NBER website for $5.

Related papers available for free from Ruhm's website include "Healthy Living in Hard Times", and "Deaths Rise in Good Economic Times: Evidence from the OECD".

posted by Ben Muse at 9:30 AM

 
Trade text online

Steven Suranovic of the George Washington University in Washington D.C. has a nice intermediate undergraduate international trade and policy text, online, here: International Trade Theory & Policy Analysis . The text is available as a pdf file for a fee.

posted by Ben Muse at 8:45 AM

 
The other side of the textile quota fight

The Charlotte Observer serves a textile producing community, and does not share my view of textile quotas. This web page has links to Observer stories on textiles and clothing over the course of the fall:Textile Jobs: Goodbye U.S., hello China -- Charlotte.com

The latest story, by Stella Hopkins, describes the fight by the textile industry to protect itself from foreign competition in the face of the end of the quota regime: "Fighting a flood of textiles". This is a nice piece, describing how the textile industry sought support from other countries that were threatened by Chinese competition, and how the industry used petitions for temporary "safeguard" quotas in a masterful series of rearguard actions.

Joe Johnston's Atlanta Campaign was good, but not better than this.

posted by Ben Muse at 11:44 PM

 
The end of textile and clothing quotas

The multi-year phase out of U.S. textile and clothing quotas (and similar quotas for some other developed countries) is done on January 1. The Economist covers the ground: "The freeing of the world's textile trade"

This isn't the end of restrictions and burdens on textile and clothing trade, but it is the end of a particularly unpleasant one:

"Quotas are a particularly perverse kind of protectionism. Like tariffs, they distort markets and harm consumers: they restrict the supply of a good, thus raising the price consumers must pay. But unlike tariffs, which are collected by the government, quotas are of value to the exporter that fills them, not the state that imposes them. They give exporters the opportunity to overcharge an underserved market."

The Economist is saying here, that when the U.S. raises consumer prices using tariffs, at least the U.S. gets the tariff revenues; when it restricts imports with quotas, it exports the profits associated with the import restrictions and the higher U.S. prices to exporters in foreign countries.

The U.S. took steps to continue to protect the domestic industry from competition, at the expense of domestic consumers:

"...America’s Commerce Department has already slapped new restraints on imports from China of bras, gowns and knitted fabrics, which were freed from quotas earlier than other textile goods, in 2002. America will impose a month-long embargo in January on Chinese goods that were reportedly “overshipped”, that is, imported in excess of their quota, in 2004. And it is contemplating no fewer than 11 requests from industry lobbyists to block imports of several other products, such as trousers and shirts..."

As a result:

"To placate its protectionist antagonists, China this month decided to impose taxes on its exports. This will raise their price and blunt their competitiveness, much as an import tariff or quota would do. But this way at least the Chinese government gets to collect the revenues."

That is, U.S. consumers get higher prices and the Chinese get the tariff revenues.

Addendeum 12-29-04: Guy Berger, over at Full Context, suggests that the Chinese may have been looking for an excuse to impose this export tariff: "Clever Trade Policy and the Mercantilist Fallacy". For a detailed look at the theory underlying Berger's post, see this web page by Steven Suranovic: "Welfare Effects of an Export Tax: Large Country".

posted by Ben Muse at 8:50 PM

 
The deadweight cost of taxes

From the 1997 Economist comes this nice discussion of the deadweight losses of taxes:"The hidden cost of taxes"
posted by Ben Muse at 8:44 PM

 
Secondary market for Christmas presents

The Dulles Town Square (this sounds like a mall) is sponsoring a post-Christmas exchange for unwanted gifts: "For the Rejects Of Christmas, A 2nd Chance" (Rosalind Helderman, Washington Post, 12-29-04, B01)

The mall has set up a table, set out cookies, made participants eligible for a raffle, and advertised. People who got stuff for Christmas that they don't want (has to be worth more than $10) set their gift on a table, taking some other gift in exchange. The mall creates the market in hopes of increasing customer traffic. At the end of the week excess gifts will be donated to charity.

Have the Dulles Town Square and eBay reduced the potential for deadweight losses associated with Christmas gift giving? Now, if you are given a present that you don't value at its market price, you can sell it on eBay for relatively modest transactions costs.

I don't think the Dulles Town Square can be very far from George Mason. I'm trying not to imagine Tyler Cowen and his mother, surprising each other at the table as they exchange the gifts they gave each other.

John Palmer looks at the practice of re-gifting.

posted by Ben Muse at 7:51 PM

 
Tax reform not a priority this year

Jonathan Weisman and Jeffrey Birnbaum report that tax reform is no longer a priority in 2005: "Bush Expected To Delay Major Tax Overhaul" (Washington Post, 12-28-04, E01).

This is a take away message from the lack of attention paid to tax reform at the administration's recent economic summit. The fact that the position of Assistant Treasury Secretary for Tax Policy has gone unfilled for a year is also suggestive.

Weisman and Birnbaum report that reform, when it comes, may be "incremental" rather than "radical." Apparently there is lots of speculation that a reform proposal would draw heavily on ideas in "Option 5" from a 2002 Treasury tax reform study. Here are the elements of Option 5:

• "A lifetime savings account would allow each person to save up to $5,000 a year, shielding capital gains, interest and dividend income from all taxation. Unlike existing tax-favored accounts, the money could be withdrawn at any time for any reason. A family of four could shield $20,000 a year from investment taxation, and since few families could save that much, capital gains, interest and dividend taxation would effectively end for the vast majority of Americans, the Treasury study said." "
• "The plan would also repeal the alternative minimum tax, the parallel income tax system that was set up to ensure the rich pay taxes but that increasingly ensnares the middle class."
• "For low- and middle-income taxpayers, the standard deduction would be significantly increased."
• "The current four tax-filing categories -- married filing jointly, married filing separately, single and head of household -- would be simplified to just married couples and all others. The six current income tax rates -- 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent -- would collapse to four, losing the 28 percent and 33 percent brackets."
• "And corporations would be allowed to immediately deduct -- or "expense" -- from their taxes a portion of the cost of business investments, instead of having to slowly write off those costs based on complex depreciation allowances."
• "To cover the cost of the tax changes, the plan would tax the value of an employee's health insurance benefit as if it were income."
• " "Most Social Security benefits" would also be taxed as income, the report says."
• "Finally, the plan eliminates the itemized deduction for state and local tax payments."

This is one of the reform options from the 2002 study; the administration's actual proposal is still many months away.

posted by Ben Muse at 6:27 AM

 
David Hume writes to Adam Smith about Smith's new book...

In April, 1759, David Hume wrote a wonderful, funny, letter to Adam Smith about the success of Smith's new book. Brad DeLong has the text, here: "Adam Smith Day!" .

posted by Ben Muse at 9:51 PM

 
The Trial of Wyatt Earp

Actually, it was only a preliminary hearing to determine whether or not a crime had been committed at the O.K. Corral. Attorney Tom Fitch got him off.

John Swansburg tells how Fitch did it in this LegalAffairs article:"Wyatt Earp Takes the Stand"

If Fitch hadn't been so good, Earp and his wife, Josie Earp, might never have made it to Nome, Alaska, where they had a checkered career.

posted by Ben Muse at 4:36 PM

 
Why are Malaysians wealthier than Indonesians?

Some say it may be, in part, because Malaysian law is based on English common law, while Indonesian law is based on Dutch, and ultimately French, civil law.

Nicholas Thompson explains in the LegalAffairs article: "Common Denominator" .

"LLSV's ["LLSV" refers to the authors - "Rafael La Porta of Dartmouth's Tuck School of Business, Florencio Lopez-de-Silanes of the Yale School of Management, Andrei Shleifer of Harvard's economics department, and Robert Vishny of the University of Chicago's business school." who jointly developed the argument - Ben] main tool was regression analysis, a mathematical technique in which many variables are plugged into a program that sorts out which ones are correlated and which ones are not. Using regression analysis, for example, you could plug in the heights, weights, and eye colors of 100 people. The results would show that height and weight are correlated (the taller you are, the more you're likely to weigh) but that weight and eye color are not.

Using this tool, "Law and Finance" [the 1998 article in the Journal of Political Economy that set out the original results - Ben] showed that common law countries protect both shareholders and creditors better than civil law countries do, and they also tend to be less corrupt. LLSV took dozens of specific financial indicators—ranging from key gauges, like the odds that a company's assets will be confiscated by the state, to smaller measures, like whether shareholders can vote at company meetings—and regressed them all against legal origin. The regressions showed that the measures that indicate high investor and creditor protection or low corruption connect to common law origin, just as height connects to weight. The measures that represent low protection and high corruption connect to civil law origin.

The regression didn't show that common law necessarily makes people richer, but it did represent a crucial link in a chain of logic that could connect legal origin to prosperity. When shareholders have more rights, people are more likely to invest in markets, because they have more protections against dishonest executives. When creditors have more rights, they are more likely to lend money, which spurs markets to grow. And when countries are free from corruption, investors put more money into them. The LLSV scholars weren't the first to recognize that shareholder and creditor rights spur economic growth, or that corruption stunts it, but they were the first to connect these conditions to a country's legal system and to do so using cold, hard numbers.

There's nothing in the common law per se that significantly protects shareholders—common law doesn't come with a shareholder's bill of rights. Nor is there a mandate for corruption embedded in civil law. "Law and Finance," then, raised as big a question as the one it claimed to answer: Why is a country's legal system so powerful a factor in determining its economic development?

In subsequent papers, LLSV has set out to solve that mystery. The most compelling theory they've developed has to do with the power both systems afford their judiciaries. Common law judges are, on balance, far more powerful than their counterparts in civil law countries. Since judges tend to be a country's most reliable check on the other parts of its government, common law countries grant less power to their executives than civil law countries do. And in developing nations, corruption is generally perpetuated from the top.

The difference in the power that the two systems grant their judges is rooted in their respective histories. French civil law derives from the Napoleonic code, published in 1804 by scholars eager to wrest power from the judiciary. Before the country's revolution, France's courts had earned reputations for elitism and corruption. Influenced by popular discontent with much of the judiciary, Napoleon attempted to write a statutory code that was essentially judge-proof. Judges draw their influence from their power to interpret laws. Napoleon's code stripped them of this prerogative; his code favored the writing of a new law over a judge's interpretation of an old one. Consequently, compared to common law countries, civil law countries have weak judiciaries—and long statute books."

This is a nice article, with a survey of the arguments pro and con. I learned about it from Newmark's Door. A draft of the paper itself is here: "Law and Finance" .

posted by Ben Muse at 3:35 PM

 
Men are working less

You probably knew that, in the U.S., women are much more active in the labor market than they were 50 years ago.

But did you know that men are working less? Much less?

While the hours worked per woman per week (including women out of the labor market and women in it) have risen 82% since 1950, hours worked by men have fallen about 17%. In both instances, the changes are largely due to changes in the numbers of persons in the workforce. The average work week for persons in the work force has fallen slightly for both sexes; but, whereas the percent of women in the paid work force has risen by about 87%, the percent of men in the paid workforce has fallen by about 16%.

The hours worked by men (an average number of hours per week, averaged over all men, including those outside the paid workforce) have fallen in every age group.

• The hours worked by men aged 25 to 64 have fallen from about 7% to about 23%, depending on the 10 year age cohort.
• Hours worked by men aged 65-74, have fallen by 63%! (Conversely, hours worked by women in this age group rose by 7%. The only age group of women whose work hours declined over the 50 year period was women from 75-99). Most of the drop in working hours by men in this age group took place between 1950 and 1970. There was very little change in the 20 years from 1980 to 2000. In fact, there was an extremely small uptick here between 1990 and 2000. (Expect future increases here, as social security retirement ages rise.)
• Young men, aged 15-24, are also working far (27%) less.

These details, and many more, can be found in "Changes in Hours Worked, 1950-2000", by Ellen McGrattan and Richard Rogerson, in the Federal Reserve Bank of Minneapolis Quarterly Review for July 2004. McGrattan and Rogerson are exploiting data from the U.S. census.

Why the changes? Increasingly generous social security benefits over the period 1950 have to be important for men over 65, accounting for the large percentage reductions in work for these men. But the hours worked per man (whether in or out of the work force), and the percent of men employed, dropped for every 10 year age group. Weekly hours per male worker dropped for young and old age groups, and were essentially constant (small rises on the order of 1%) for the other age groups.

It's possible that the entry of women into the work force created new sources of household income that could be substituted for men's income. However, McGrattan and Rogerson provide information on changes in weekly hours worked by person for married and single men. Except for 25-34 year olds, among the traditional working age cohorts (25-64), hours worked per single man dropped by more than hours worked per married man. The substitution argument couldn't work more strongly for single than for married men.

posted by Ben Muse at 11:14 PM

 
Mainstream ketchup has great amplitude.

Why isn't there more variety in ketchups?

Hint - it has something to do with the amplitude of the standard ketchup, and its umami.

Malcolm Gladwell explained in the New Yorker in September: "The Ketchup Conundrum" .

Umami is one of the five tastes (you are probably already familiar with sweet, sour, bitter, and salty). Amplitude is the way they meld together in the taste experience:

"...the testers [taste testers - Ben] assessed the critical dimension of "amplitude," the word sensory experts use to describe flavors that are well blended and balanced, that "bloom" in the mouth. "The difference between high and low amplitude is the difference between my son and a great pianist playing 'Ode to Joy' on the piano," Chambers says....When something is high in amplitude, all its constituent elements converge into a single gestalt. You can't isolate the elements of an iconic, high-amplitude flavor like Coca-Cola or Pepsi. But you can with one of those private-label colas that you get in the supermarket. "The thing about Coke and Pepsi is that they are absolutely gorgeous," Judy Heylmun, a vice-president of Sensory Spectrum, Inc., in Chatham, New Jersey, says. "They have beautiful notes--all flavors are in balance. It's very hard to do that well. Usually, when you taste a store cola it's"-- and here she made a series of pik! pik! pik! sounds--"all the notes are kind of spiky, and usually the citrus is the first thing to spike out. And then the cinnamon. Citrus and brown spice notes are top notes and very volatile, as opposed to vanilla, which is very dark and deep. A really cheap store brand will have a big, fat cinnamon note sitting on top of everything." "

Mainstream ketchup has a lot of amplitude.

Modern ketchup is a response to the potential regulatory problem:

"Tomato ketchup is a nineteenth-century creation--the union of the English tradition of fruit and vegetable sauces and the growing American infatuation with the tomato. But what we know today as ketchup emerged out of a debate that raged in the first years of the last century over benzoate, a preservative widely used in late-nineteenth-century condiments. Harvey Washington Wiley, the chief of the Bureau of Chemistry in the Department of Agriculture from 1883 to 1912, came to believe that benzoates were not safe, and the result was an argument that split the ketchup world in half. On one side was the ketchup establishment, which believed that it was impossible to make ketchup without benzoate and that benzoate was not harmful in the amounts used. On the other side was a renegade band of ketchup manufacturers, who believed that the preservative puzzle could be solved with the application of culinary science. The dominant nineteenth-century ketchups were thin and watery, in part because they were made from unripe tomatoes, which are low in the complex carbohydrates known as pectin, which add body to a sauce. But what if you made ketchup from ripe tomatoes, giving it the density it needed to resist degradation? Nineteenth-century ketchups had a strong tomato taste, with just a light vinegar touch. The renegades argued that by greatly increasing the amount of vinegar, in effect protecting the tomatoes by pickling them, they were making a superior ketchup: safer, purer, and better tasting. They offered a money-back guarantee in the event of spoilage. They charged more for their product, convinced that the public would pay more for a better ketchup, and they were right. The benzoate ketchups disappeared. The leader of the renegade band was an entrepreneur out of Pittsburgh named Henry J. Heinz."

While there have been few changes in the mainstream formula, innovation isn't totally absent:

"A number of years ago, the H. J. Heinz Company did an extensive market-research project in which researchers went into people's homes and watched the way they used ketchup. "I remember sitting in one of those households," Casey Keller, who was until recently the chief growth officer for Heinz, says. "There was a three-year-old and a six-year-old, and what happened was that the kids asked for ketchup and Mom brought it out. It was a forty-ounce bottle. And the three-year-old went to grab it himself, and Mom intercepted the bottle and said, 'No, you're not going to do that.' She physically took the bottle away and doled out a little dollop. You could see that the whole thing was a bummer." For Heinz, Keller says, that moment was an epiphany. A typical five-year-old consumes about sixty per cent more ketchup than a typical forty-year-old, and the company realized that it needed to put ketchup in a bottle that a toddler could control. "If you are four--and I have a four-year-old--he doesn't get to choose what he eats for dinner, in most cases," Keller says. "But the one thing he can control is ketchup. It's the one part of the food experience that he can customize and personalize." As a result, Heinz came out with the so-called EZ Squirt bottle, made out of soft plastic with a conical nozzle. In homes where the EZ Squirt is used, ketchup consumption has grown by as much as twelve per cent."

posted by Ben Muse at 10:54 AM

 
Futures and farm income

Timothy Egan reports in the New York Times that

"...despite the fact that farm income has doubled in two years, federal subsidies have also gone up nearly 40 percent over the same period - projected at $15.7 billion this year, and $130 billion over the last nine years."

("Big Farms Reap Two Harvests With Subsidies a Bumper Crop" NYT, December 26, 2004).

Here is one reason:

"Even those deeply steeped in the system acknowledge it seems counterintuitive. "I struggle with the same question: how the hell can you have such high government payments if farmers had such a great year?" said Keith Collins, the chief economist for the Agriculture Department.

The answer lies in the quirks of the federal farm subsidy system as well as in the way savvy farmers sell their crops. Mr. Collins said farmers use the peculiar world of agriculture market timing to get both high commodity prices and high subsidies.
"The biggest reason is with record crops, prices have fallen," he said. "And farmers are taking advantage of that."

A farmer can sell his crop early at a high price, say, in a futures contract, and still collect a subsidy check after the harvest from the government if prices are down over all. The money is not tied to what the farmer actually received for his crop. The farmer does not even have to sell the crop to get the check, only prove that the market has dropped below a certain set rate."

The price we pay to keep family farmers in business? Egan points out that:

"But because nearly 70 percent of the subsidies go to the top 10 percent of agricultural producers, the recent prosperity is not seen or felt among many small to medium-size growers who keep the struggling counties of the Great Plains alive."

The Environmental Working Group's "Farm Subsidy Database" website has a lot of information on farm subsidies. Two-thirds of farmers don't receive any subsidies at all.

posted by Ben Muse at 10:34 AM

 
Sebastian Montero

One last post before Christmas.

Geitner Simmons' blog "Regions of Mind" treats U.S. regional history, and especially southern and western history. Earlier this month he wrote a moving post on Spanish missionary efforts in the Carolinas in 1567-1568: "Mission"

Sebastian Montero, chaplain of the Spanish Juan Pardo expedition and the subject of the post, worked for about 18 months, starting in February 1567, preaching to the Carolina Indians. Montero's work "can be considered 'the first authenticated missionary success with the North American Indians.' "

If Montero was there for 18 months, from February 1567, he would have spent Christmas 1567 in this work. This Christmas I'm trying to imagine him there.

Anyway, not really a Christmas post, but a fascinating bit of U.S. history, and a good introduction to a great blog.

posted by Ben Muse at 3:03 PM

 
What sort of Christmas presents should I give?

Tim Harford weighs in with some guidance for a more efficient Christmas:Dear Economist, by Tim Harford: The deadweight loss of Christmas

Thanks to Tyler Cowen for the pointer.

posted by Ben Muse at 8:49 AM

 
Running a government is not exactly like running a business

Successful business leaders don't necessarily succeed in government. The President of the Council on Foreign Relations, Richard Haass, writes about this in Business Week:"The Wrong Reading List"

"Why do so many people coming out of business run into trouble? In business, success can be measured by profits. How does one measure the quality of a public service, like law enforcement? By the number of arrests? Of accidents? There are other key differences. Few businesses enjoy a monopoly, but many nonprofits do. There is one city hall. Businesses are also free to go out of business, while government is not. Every remote post office or obsolete military base has its local champion, and so they stay.

Above all, business people tend to operate in a more structured, less complex environment. Former Bendix Corp. chief and Treasury secretary W. Michael Blumenthal says that in a company, "you can control the process and tell group-executive A, 'You're not involved, stay out of it.' And he will, and he must. In government, that's simply unworkable. So you have to learn to become one of a large number of players in a floating crap game, rather than the leader of a well-organized casino that you're in charge of."...

In government you need to find ways to motivate people without dollars...

In fact, the lessons of public administration are increasingly important for businessmen:

"Government has other lessons to teach business. The common thread is this: what matters is not just the bottom line, but how it was arrived at. Process counts. The day of the all-powerful corporate manager is fast fading. Boards of directors, shareholders, the media, courts, workers and unions, regulatory agencies, activist attorneys general, consumer advocates, environmental and other citizens groups--all now exert growing sway. As a result, those in business would be wise to browse beyond the business books. Consulting the literature on politics, on history, may pay dividends. Those in business will succeed only if they come to appreciate that their world increasingly resembles the political arena that they so often ignore or disdain."

Former Treasury Secretary Robert Rubin was a co-senior partner with Goldman Sachs before becoming Secretary, and as a director of Citicorp afterwards. He is in a postion to know both sides. He writes in his memoir:

"This last statement didn't mean that the more top-down business model of business management could or should apply to government. To the contrary, I've developed a deep respect for the differences between the public and private sectors. In business, the single, over-riding purpose is to make a profit. Government, on the other hand, deals with a vast number of legitimate and often potentially competing objectives...This complexity of goals brings a corresponding complexity of process. Our constitutional system of checks and balances has multiple decision centers - Congress, the Executive Branch (with all its own internal complications), the courts, and state and local governments. [Ocean policy, for example, involves 55 Congressional committees, 20 federal agencies, and 140 federal statutes - Ben] Often the relationship among the participants is one of conflict, and, with respect to some issues, the balance of power is ambiguous. Moreover, many participants face electoral accountability. And finally, all important decisions - and even many less important ones - are made with an awareness of how they will be presented in the media.

In the corporate world, power is far more centralized...This simpler model might sometimes look appealing for the public sector. But in reality an immense complexity is inherent in the circumstances of a modern, democratic government. Making government more businesslike can improve efficiency...but the inherent complexity would remain..." (pages 147-148)

Rubin started at the White House as head of Clinton's new National Economic Council. Later he became Secretary of the Treasury.

"I continued to be struck by how different being at Treasury was from life in the White House. In many ways, heading a cabinet agency is like running a business, but someone who goes from the private sector to a cabinet position can easily be misled by the similarities and consequently fail to learn to deal with the differences. As a cabinet officer, you're the head of a large, hierarchically structured organization. As Bob Reich [Clinton Labor Secretary - Ben] told me when I moved to Treasury, you get to "run your own show," much as a private-sector CEO does. In both worlds, setting objectives, establishing effective accountability, and having capable people are crucially important.

But the two worlds are different enough that the analogy to corporate structure can prevent a former CEO from being effective in government. In a noticeable sense, you don't run your own show; the White House does. Goals, as I had already discovered, differ in government and the private sector. In business, the chief focus is on profitability. Government, by contrast, has no simple bottom line but rather a vast array of interests and priorities, many of which exist in a state of tension or conflict. For that reason, decision making in government is vastly more complex.

At Treasury, I also found a difference from business in terms of authority. Many former business executives feel great frustration when they discover the limits on their ability to act in government. I had not been accustomed to, nor did I expect, a corporate-style hierarchical structure. But even I was surprised at what limited power I had in my own building. The various bureaus and agencies that are part of the Treasury Department operate with considerable independence...Even with respect to the Treasury Department proper, many familiar management tools were not available. A private-sector CEO has the power to hire and fire based on performance, to pay top managers large bonuses, or promote capable people aggressively. At Treasury I had the power to hire and fire fewer than 100 political appointees among the 160,000 people who worked under me. Others could be dismissed for gross incompetence, but the practical obstacles to doing so made it seldom worth the effort...

Furthermore, most structural departmental reorganization couldn't be done on my own, but required legislation...

The biggest difference in both process and authority is the organizational complexity involved in making major Executive Branch policy decisions. In the private sector, A CEO has more or less free rein. In a presidential administration, everything revolves around the White House and almost every major policy decision is brought into the White House, often through an extensive interagency process..."(pages 177-178)

There are things the private sector could learn from the public:

"One area where I think business can gain from government is in interagency process - getting people from separate units and with different points of view together around a table to reach common ground on issues that cut across unit boundaries. Two others that can be closely related are managing in the kinds of crises that are becoming more common and often thrust companies into the public eye in unexpected ways, and dealing with the political and "message" dimensions of high-profile issues. Yet another is dealing directly with government itself.

After returning to New York in 1999, the area where I was most keenly aware that the private sector could gain from the experience of government was in managing the decision-making processes around complex issues with multiple internal stakeholders. In government, a chief of staff or a cabinet-level official spends a great deal of time trying to get groups of people from different units to work together in an effective way. This is an inherent need, because most major issues cross organizational lines and require coordination among different agencies, constituencies, and centers of authority to be resolved most effectively...

At big corporations with many different business units, the same kind of need exists. These units maximize their collective profits over time by working together effectively - and the private sector has the advantage of being able to use accounting and compensation to encourage people to work together, which the public sector for the most part cannot do. But the separate business units of a big company usually aren't as used to working through their differences and problems with one another to enhance the well-being of the whole as government is of necessity. They're more used to operating in separate "silos" and being held accountable for their own individual bottom lines. That issue often comes to the fore when companies seek to cross-sell - that is, to use the sales force of one unit to sell related products from other units - or to make product/geography matrices work. (Who runs a credit card business in South Korea - the person in charge of credit cards or the person in charge of South Korea?) People who have learned how to manage interagency processes in Washington have a crucial set of skills what are not likely to have been as well developed in business and can add much to a company if they are properly supported by the CEO."(pages 311-312)

Rubin follows the quoted text with a discussion of the importance to private companies of an understanding of the political dimensions of issues. The Rubin material comes from Rubin's memoir, In An Uncertain World, written with Jacob Weisberg (Random House, 2003).

posted by Ben Muse at 10:28 PM

 
Outsourcing the hall decking

A week ago Gwedolyn Bounds of the Wall Street Journal reported on the growth in the market for Christmas home decorating: "Instant Christmas Spirit: Hire the Experts to Trim the Tree" (WSJ, December 14) :

"There have long been pockets of wealthy people happy to outsource the headaches of holiday decorating. But the combined pressures of a time-crunched culture and more geographically separated families where adult kids often can't get home to help elderly parents trim the tree, has created a ripe entrepreneurial niche catering to the general masses. From landscapers who survive the slow season festooning trees and houses with lights, to florists, painters, and even exterminators, a growing number of small business owners are earning fees ranging from a few hundred dollars to $30,000 and up to deck homeowners' halls inside and out...

Helping fuel the trend, of course, is a growing acceptance that it's OK to pay someone to do tasks that once seemed intensely personal, such as wrapping gifts or addressing holiday cards. While some people have physical disabilities or personal situations that mean they require aid, others choose pros for the convenience...

The urge to decorate bigger and better each year is one natural extension of hiring a pro..."

One decorator noted:

"The family is more separated today. One kid is doing e-mail, another kid is on a videogame, the dad is reading the paper and mom is doing something else."

The implication is that they don't have time for joint work on a decorating project.

This is a great opportunity for many small businesses. It provides filler work for landscapers and others during a slow period:

"Ms. Schuster says she and her husband used to plow snow to keep their Terra-Firma Landscape business going during the winter months. "But it's a very unpredictable business and hard on a life-style," she notes. Christmas, however, "comes every year on the same day."...

This business has a very short season (starts after Thanksgiving and peaks on the two weekends before Christmas). At least one firm, Christmas Decor, operates nationally, with 268 franchises. Sales were $350,000 in 1996, but should be $55 to $65 million this year - about three-quarters from residential business.

The demand is shifting out as the opportunity cost of time on alternative activities, and incomes, increase. To the extent that work once done within the family is not shifted to the market, apparent GDP goes up, despite the fact that no actual national output hasn't.

posted by Ben Muse at 9:42 PM

 
The foreign cement menace

John Palmer links to stories about how the Department of Commerce protects us from foreign cement:"The High Price of Cement"

posted by Ben Muse at 11:38 PM

 
Christmas is coming. What should I serve my friends?

When you want to know the correct wine to serve, you should go to an economist.

Lynne Kiesling addresses the problem here: "Wine Recommendations For Holiday Entertaining".

In 2003 Professor Bainbridge served "Schramsberg Blanc de Noirs (California) 1999" at a party. In 2003 he also provided some wine notes for Thanksgiving - I'd bet these would work for Christmas as well: "Thanksgiving Wine Notes". And here is some advice on "Sparklers for New Years". Bainbridge devotes a whole blog to wine: "Professor Bainbridge on Wine". I'm sure the advice there is good.

Nobel prize winner Daniel McFadden has his own vineyard in Napa Valley. Kevin Courtney of the Napa Register reports:

"McFadden's neighbors in Soda Canyon know him not as a professor who
makes pronouncements on national issues, but as a man with a yearning
to make ever better wine. Growing grapes wasn't the idea when his
wife, a photographer, stumbled upon the Soda Canyon property in
1992. They simply wanted a country get-away. Banchero Vineyard had
begun winemaking there in 1880, but by 1992 all that was left of the
original operation was the stone base of the wine cellar. The
vineyards had long since disappeared. That was fine with McFadden. It
was enough that the operation had cows and chickens and some ancient
olive trees. "A little working farm," as he put it.

Two years later, a new friend at Atlas Peak Vineyards discovered a row
of over-ripe cabernet sauvignon and merlot fruit that had been missed
at picking. Did he want it? "I didn't know anything about it. I was
sort of thrown off the dock," said McFadden, who scrambled to buy and
learn the winemaking basics. "It turned out to be a marvelous
wine. It made a luscious, fruity, meaty wine," said McFadden, who soon
signed up for winemaking courses with his wife at UC-Davis. He
planted 3,500 vines on two acres, most of it in cabernet sauvignon
which he sells to Dave Cronin at Blackford Wines. He makes a barrel or
two for family use, lavishing extra care on his zinfandel. Ever the
academic, McFadden is one of the organizers of this year's annual
meeting of the Vineyard Data Classification Society, an international
group that focuses on the quantitative and analytic study of vineyard
and wine technologies.

McFadden has occasionally tried to marry his economic research with
his new interest in wine, with less than spectacular results. His
statistical tool, discrete choice analysis, showed how a restaurant
could sell more high-profit wine, he said. The trick is to charge the
same price as a wine of inferior reputation and lower profit margin.
Seeing the two choices next to each other on a wine list, diners will
feel compelled to buy the wine with the greater profit, he said. When
McFadden told this to a friend in the restaurant business, "He said,
'Tell me something I don't know.'" "

posted by Ben Muse at 10:23 PM

 
Christmas is coming. How should we behave?

G.K. Chesterton has some advice:

"And now I have to touch upon a very sad matter. There are in the modern world an admirable class of persons who really make protest on behalf of that antiqua pulchritudo of which Augustine spoke, who do long for the old feasts and formalities of the childhood of the world. William Morris and his followers showed how much brighter were the dark ages than the age of Manchester. Mr. W. B. Yeats frames his steps in prehistoric dances, but no man knows and joins his voice to forgotten choruses that no one but he can hear. Mr. George Moore collects every fragment of Irish paganism that the forgetfulness of the Catholic Church has left or possibly her wisdom preserved. There are innumerable persons with eye-glasses and green garments who pray for the return of the maypole or the Olympian games. But there is about these people a haunting and alarming something which suggests that it is just possible that they do not keep Christmas. It is painful to regard human nature in such a light, but it seems somehow possible that Mr. George Moore does not wave his spoon and shout when the pudding is set alight. It is even possible that Mr. W. B. Yeats never pulls crackers. If so, where is the sense of all their dreams of festive traditions? Here is a solid and ancient festive tradition still plying a roaring trade in the streets, and they think it vulgar. If this is so, let them be very certain of this, that they are the kind of people who in the time of the maypole would have thought the maypole vulgar; who in the time of the Canterbury pilgrimage would have thought the Canterbury pilgrimage vulgar; who in the time of the Olympian games would have thought the Olympian games vulgar. Nor can there be any reasonable doubt that they were vulgar. Let no man deceive himself; if by vulgarity we mean coarseness of speech, rowdiness of behaviour, gossip, horseplay, and some heavy drinking, vulgarity there always was wherever there was joy, wherever there was faith in the gods. Wherever you have belief you will have hilarity, wherever you have hilarity you will have some dangers. And as creed and mythology produce this gross and vigorous life, so in its turn this gross and vigorous life will always produce creed and mythology. If we ever get the English back on to the English land they will become again a religious people, if all goes well, a superstitious people. The absence from modern life of both the higher and lower forms of faith is largely due to a divorce from nature and the trees and clouds. If we have no more turnip ghosts it is chiefly from the lack of turnips."

This paragraph is taken from Chapter VI "Christmas and the Aesthetes" in Chesterton's book Heretics. The full chapter is available at "LiteratureClassics.com.

posted by Ben Muse at 11:37 AM

 
Will Sam Bodman be a Good Energy Secretary?

Will Sam Bodman be a good Secretary of Energy? Kent Budge goes over the ground:"Bodman nominated for Energy"

As a bonus, you get a short history of the Department of Energy, and reviews of the Energy secretaries of the Clinton and second Bush administrations.

posted by Ben Muse at 9:29 PM

 
What good is self-esteem?

The evidence that people with higher self-esteem behave better is weak. Roy Baumeister, Jennifer Campbell, Joachim Krueger and Kathleen Vohs looked at this evidence and report in the January 2005 Scientific American: "Exploding the Self-Esteem Myth"

"Given the often misleading nature of self-reports, we set up our review to emphasize objective measures wherever possible--a requirement that greatly reduced the number of relevant studies (from more than 15,000 to about 200). We were also mindful to avoid another fallacy: the assumption that a correlation between self-esteem and some desired behavior establishes causality. Indeed, the question of causality goes to the heart of the debate. If high self-esteem brings about certain positive outcomes, it may well be worth the effort and expense of trying to instill this feeling. But if the correlations mean simply that a positive self-image is a result of success or good behavior--which is, after all, at least as plausible--there is little to be gained by raising self-esteem alone. We began our two-year effort to sort out the issue by reviewing studies relating self-esteem to academic performance."

The authors didn't find much evidence that low high self-esteem contributes to academic success, work success, success in getting along with others, success in love, or lower rates of sexual activity, alcohol use, violence, or drug use by teenagers.

However,

"The consistent finding is that people with high self-esteem are significantly happier than others. They are also less likely to be depressed.

One especially compelling study was published in 1995, after Diener and his daughter Marissa, now a psychologist at the University of Utah, surveyed more than 13,000 college students, and high self-esteem emerged as the strongest factor in overall life satisfaction. In 2004 Sonja Lyubomirsky, Chris Tkach and M. Robin DiMatteo of the University of California at Riverside reported data from more than 600 adults ranging in age from 51 to 95. Once again, happiness and self-esteem proved to be closely tied. Before it is safe to conclude that high self-esteem leads to happiness, however, further research must address the shortcomings of the work that has been done so far. "

The bottom line:

"What then should we do? Should parents, teachers and therapists seek to boost self-esteem wherever possible? In the course of our literature review, we found some indications that self-esteem is a helpful attribute. It improves persistence in the face of failure. And individuals with high self-esteem sometimes perform better in groups than do those with low self-esteem. Also, a poor self-image is a risk factor for certain eating disorders, especially bulimia--a connection one of us (Vohs) and her colleagues documented in 1999. Other effects are harder to demonstrate with objective evidence, although we are inclined to accept the subjective evidence that self-esteem goes hand in hand with happiness.

So we can certainly understand how an injection of self-esteem might be valuable to the individual. But imagine if a heightened sense of self-worth prompted some people to demand preferential treatment or to exploit their fellows. Such tendencies would entail considerable social costs. And we have found little to indicate that indiscriminately promoting self-esteem in today's children or adults, just for being themselves, offers society any compensatory benefits beyond the seductive pleasure it brings to those engaged in the exercise. "

Thanks to Michael Stastny for the pointer.

posted by Ben Muse at 8:45 PM

 
They put their pants on one leg at a time too

In the 1980s the future belonged to the Japanese. Now it's said to belong to the Chinese. At least Skip Sauer has kept his perspective: "China - The New Japan
posted by Ben Muse at 8:11 PM

 
An economic history of the cranberry

This week's Economist has a short economic history of the cranberry: "Red, round and profitable" I grew up on Cape Cod - cranberry central - and never knew any of this stuff:

"...Cranberries really got going, metaphorically and literally, after the revolutionary war, when they became the American navy's equivalent of the British navy's lime. Kept in barrels on board ship, they provided the vitamin C to stave off scurvy on long voyages. Astute traders received up to $50 (about $750 in today's money) a barrel. The snag was that the suppliers had to depend on wild cranberries for their crop. They could not grow them...

...For nearly three decades, Ocean Spray [a growers' cooperative - Ben] grew slowly but steadily. Then, in the autumn of 1959, the American government announced that it had found pesticide residues in cranberry sauce—“from berries produced in the Pacific north-west, not ours”, Ocean Spray officials are quick to add, even 50 years later. The scare passed quickly; tainted supplies were withdrawn and new inspections put in place. But sales were wiped out in November and December and, since few people ate cranberry sauce except at Thanksgiving and Christmas, Ocean Spray lost a year's sales.

For that reason, the company decided to create products that would sell all year. Juice was the obvious product to exploit. Ocean Spray wanted juice with a long shelf-life so that it would be easy for consumers to store and, more important, easy for the company to distribute...

The hard part of making fruit juice with a long shelf-life is not preventing spoilage—pasteurisation and packaging can deal with that—but preserving colour and appearance. Most fruit juices go a yucky brown when kept for more than a fortnight, and develop an off-putting sediment..."

You'll just have to read the article to find out whether or not Ocean Spray was able to solve the problem.

posted by Ben Muse at 11:13 PM

 
A Geography Lesson

Here's a geography lesson: because the world is round, the shortest route from the U.S. West Coast to East Asia runs through the Bering Sea. Last week a ship taking soybeans from Seattle to China was wrecked on the north shore of Unalaska Island in the Aleutians.

This map from the Anchorage Daily News, published in connection with its coverage of the wreck, shows the route: "North Pacific shipping route passes through Alaskan waters".

The ship, the Selendang Ayu, lost power in the Bering Sea, and drifted down on Unalaska Island. Attempts to tow it to safety failed. The Coast Guard saved most of the crew.

Six crewmembers were lost when one of the Coast Guard helicopters went down during the rescue. Here is a hair raising account by reporters Megan Holland and Doug O'Harra in the Anchorage Daily News: "For first time, crew describes rescue mission".

"...The seventh man was on his way up. "And all that remained on the deck was the captain and the rescue swimmer," Watson said. "And that's when something happened. And the aircraft went in the water."

As Lickfield was hoisting, he heard Neel say over the radio: "Wow, this is a big wave.' He said it three or four times. 'This is a big wave.' I could tell there was urgency in his voice."

But the seventh man wasn't quite in. Lickfield completed the hoist and pulled the basket into the cabin of the helicopter.

"All of sudden, the force of this wave, like a force I've never seen before, a wall of water engulfed the helicopter," he said. "Water came blasting into the cabin."

Lickfield heard the engines "flame out" and felt the helicopter begin a sickening descent.

When the helicopter hit the water, it began to roll. Lickfield held on to the door handle and rode it 180 degrees and bailed out on to the surface.

Watson, who was flying the helicopter, said he didn't know what happened. He would not speculate about causes in an interview.

"It happened so fast. I remember us going down into the water. It was like being in our (flight training) simulator in Mobile, Ala. It was like the worst scenario they ever give you in the simulator. It didn't seem real."

Warning horns were going off. Lights flashed red. Nothing was visible through the windows.

"The flight mechanic was calling 'Up, up, up' but there was nothing really we could do, and the aircraft settled in the water."

Upside down, Watson reached for a tube that connected him to a two-minute oxygen supply. The suck of air calmed him, he said.

"Then I patiently felt my hand around the door frame to my right. I just needed to think about where it was, the door handle," he said. "The training steps that we always use they have always hammered into our minds -- to maintain a reference point."

Maybe 45 seconds had passed, Watson said. With his eyes closed, he grasped the handle, opened the door. He undid his seat belt and harness with his left hand and pulled himself into the water with his right hand.

"I didn't even have to swim. The buoyancy of the dry suit, it just floated me to the surface," he said. "It only took a couple seconds for me to make it to the surface."..."

The story has a sad ending - although the three Coast Guardsmen were recovered, only one of the seven Selendang Ayu crewmen on the helicopter survived.

I don't expect these links to the Daily News to remain live for more than a week.

posted by Ben Muse at 10:30 PM

 
Great historical cost overruns

Are we more corrupt than we once were?

Stanley Engerman and Kenneth Sokoloff (E&S) use cost overruns on major U.S. projects as an index of governance quality and political corruption. ("Digging the Dirt at Public Expense: Governance in the Building of the Erie Canal and other Public Works.")

Cost overruns on pre-Civil War canal projects, big public megaprojects of their day, were relatively modest compared to overruns since WWII. E&S report ratios of actual to projected costs in canal projects between 1.16 and 2.42. They report ratios for post-WWII projects between 4.17 and 19.10 (Boston's "Big Dig" is going to cost more than five times the original projections.)

The E&S data set does not include many observations and their observations were not chosen at random. They do point to more recent studies of mega-projects, using larger data sets, that find large contemporary overruns compared to their early 19th Century estimates.

E&S want to use their observations as an index of political corruption, or at least of the quality of governance. Cost underestimates suggest

"...tolerance of incompetence, weak oversight or administration, actual corruption, and other cost-inflating practices by public officials, or the quality of governance more generally. Deliberate misrepresentation of the costs of a big public investment project reflects poor governance, in that public officials can get away with it (whether they are elected officials or not). Moreover, to the extent that costs rise (on average) after the authorization of a public investment project, it would seem reasonable to attribute it primarily to poor management or oversight of the uses to which public funds are being put - whether due to corruption or tolerance of incompetence and other cost-inflating practices."

Compare their index to the one used in the Glaeser and Goldin article I posted on in September ("An index of political corruption"). Glaeser and Goldin developed corruption indices based the appearance of key words in newspaper articles from 1820 to 1970. The find a corruption peak from the 1840s to the 1870s, and then a long gradual decline to the 1970s (my post has a figure with their indices).

Glaeser and Goldin (G&G) and Engerman and Sokoloff (E&S) agree about the relatively honest period before the 1840s, and about the increased problems after. They diverge with respect to the implications of their analyses in the 20th Century. G&G think we're pretty honest now; E&S imply not so.

No one really cares about the relatively virtuous 1820s. But let's quickly dish the dirt on the wicked late-20th Century. In addition to Boston's B"Big dig", E&S point to the start of the interstate highway system (an overrun ratio of 19.10), the Louisiana Superdome in 1966-75 (4.66), the Renovation of Yankee Stadium (4.17), repair of earthquake damage to the eastern span of the San Francisco Bay Bridge (already 3.0, and not due to be done until 2010).

The bottom line:

"The straightforward interpretation, one for which we have already expressed support, is that the governance, or control over the use, of public funds was stricter during the early nineteeth century than it is today. It is difficult to explain the more substantial cost overruns during the modern era, in particular, without acknowledging that either the processes of vetting these public works projects were either badly flawed (if not dishonest), or that oversight by the public authorities was so poor as to permit grossly inefficient use or private extraction of public resurces. What the source of this contemporary institutional failure is not easily identified, but cost overrun ratios during the late twentieth century that seem routinely very high by early nineteenth century standards imply that public officials (or the taxpaying electorate) have lost control. What the basis is for the relatively good performance of the public sector during the antebellum period is likewise unclear."

The E&S paper is "Digging the Dirt at Public Expense: Governance in the Building of the Erie Canal and other Public Works." National Bureau of Economic Research. Working Paper 10965. December 2004. You can link to their abstract and download a copy of the article itself, here. The article is copyright 2004 by Stanley L. Engerman and Kenneth L. Sokoloff.

posted by Ben Muse at 11:36 PM

 
Light blogging this week

Sorry for the light posting this week. I've been traveling and I've only just figured out how to make my laptop work with the hotel's Ethernet service.
posted by Ben Muse at 11:31 PM

 
Offshore outsourcing of flies

Gregory Mankiw, Chairman of the Council of Economic Advisors, used a nice example of the potential gains from offshore outsourcing, in a speech in early December:

"A Montana newspaper, the Missoula Missoulian, recently wrote an editorial about fly fishing that illustrates well the gains from trade. Until the 1970s, the artificial flies used by fisherman in this country were mostly produced domestically. Tying flies is labor intensive and hard work, so now it is mainly done abroad. The resulting availability of lower-cost imported flies allows the average fisherman to buy a larger and more diverse selection. Some flies are still made in the United States , but these are special ones--the very best and the most expensive. Meanwhile, the U.S. sport fishing industry has thrived and is booming in Montana . Montanans who a generation ago would have been commercial fly tiers can now get better-paying jobs building boats, making rods, and leading fishing tours. Trade in fishing lures has been good for fishermen, good for Montana , and good for people around the world. Good for everyone--except the fish."

posted by Ben Muse at 10:15 AM

 
No tax reform in 2005?

The administration's intention to set up a tax-reform commission suggested that reform proposalss weren't imminent.

Now, Mark Schmitt, the Decembrist, passes on a comment from Gene Steuerle of the Urban Institute,

"...who said that he was skeptical that the Bush administration would propose a serious overhaul of the tax code because, "I know what it looks like when people are working seriously on tax reform, and I'm not seeing it." As a Treasury official in the Reagan era, Steuerle was one of the architects of the 1986 Tax Reform Act, so he does indeed know what it looks like, probably better than anyone...

Bottom line: they're not serious about this. As Steuerle said, the lights are not burning late into the night at the Treasury Department. " ("Red State Tax Reform").

Thanks to John Irons at Argmax for the pointer: "No tax reform this year?".

posted by Ben Muse at 3:31 PM

 
Are your property taxes too high?

Property taxes depend on the rate at which the tax is assessed, but they depend on the assessed value as well. Market price movements change property tax revenues with no rate change.

Many are concerned about the ability of assessors to increase municipal revenues by increasing assessed values. Glen Whitman suggests a way of encouraging assessments that accurately track market values: "Incentives for Accurate Property Valuation ".

I learned about this from "Jane Galt" over at Asymmetric Information: "Incentives matter". Galt's post has some good comments.

posted by Ben Muse at 3:01 PM

 
Why do the deficits matter?

Under realistic assumptions, the U.S. faces large budget deficits as far as the eye can see.

William Gale and Peter Orszag, both of the Brookings Institution, explain why the deficits matter in their article, "The US Budget Deficit: On an Unsustainable Path", from the December issue of New Economy.

First, let's characterize the problem (linger on, and reread, the last sentence):

"To get some sense of the long-term budget imbalance facing the nation, we rely on the ‘fiscal gap.’ The fiscal gap measures the immediate and permanent increase in taxes and/or reductions in non-interest expenditures that would be required to establish the same debt-GDP ratio in the long run as holds currently. Along with Alan Auerbach of Berkeley, we have estimated that the US faces a fiscal gap through 2080 of 7.1 per cent of GDP. To close the gap would require an immediate, permanent 40 per cent increase in revenues or 35 per cent reduction in outlays"

What's causing the problem:

"Several factors contribute to this fiscal gap. The most important is projected increases in Medicare and Federal Medicaid costs... Federal expenditures on these two programs are projected to increase by more than ten per cent of GDP by 2070. By comparison, the increase in Social Security costs over the same period is only 2.5 per cent of GDP. Unfortunately, the health-related programs are much more difficult to reform than Social Security.

The recent tax cuts also play a major role in the long-term fiscal gap. If extended and not eroded over time by the AMT, the tax cuts would cost roughly two per cent of GDP over the long term. Even though projected increases in Social Security costs eventually exceed the size of the tax cuts, do not conclude from this that the tax cuts are less expensive than the Social Security increases. The increase in Social Security costs mounts gradually as America ages. The cost of the tax cuts starts immediately, and changes little as a share of GDP over time. In present value, the actuarial deficit in Social Security is only one-fifth to one-third the cost of the tax cuts over the next 75 years. The tax cuts account for more than a quarter of the fiscal gap over the next 75 years."

Why do the deficits matter? The short answer is:

"...budget deficits matter because they reduce national saving and thus reduce future national income. That reduction in future income can occur either because interest ratesrise and domestic investment falls, or because we borrow more from foreigners and therefore owe more to them in the future. Or it could occur through some combination of these two effects."

The longer version of the answer is:

"...The reason is that they reduce national saving. National saving is equal to private saving minus the budget deficit; so when the budget deficit goes up, national saving goes down.

The federal deficit increased by more than six per cent of national income between 2000 and 2003, which triggered a substantial decline in national saving over that period. Indeed, in 2003, the net saving rate for the US amounted to less than two per cent of income. This level of national saving was the lowest since 1934.

But why does national saving matter? The reason is that it determines how rapidly Americans accumulate financial and real assets. The returns to those assets have a substantial effect on future income. The bottom line is that a larger budget deficit and lower national saving today reduce income in the future.

Another way of making the same point is that with a saving rate of two per cent of income, there are necessarily only two options.

The first option is that we reduce the amount that is invested in the US to two per cent of income, which would starve future American workers of computers, buildings, and other productive capital. This crowding out of private investment is brought about through higher interest rates. The budget deficit soaks up available private saving, leaving a smaller pool of national saving to finance domestic investment. Firms that want to borrow for investment projects compete for that smaller pool of available funds. In the process, they bid up the interest rate that they’re willing to pay. The higher interest rate dissuades some firms from undertaking their investment projects, with the net result that investment declines. A reasonable rule of thumb for the US is that each per cent-of-GDP in anticipated future permanent unified deficits raises forward long-term interest rates by 25 to 35 basis points.

The second option is that if we do invest more than two per cent of our income, we must borrow the difference from foreigners – which would leave future generations of Americans increasingly indebted to other nations. Indeed, as national saving has plummeted over the past few years, US domestic investment has increasingly been financed by foreign borrowing. The increase in such borrowing is reflected in our growing current account deficit, which has expanded from about 2.5 per cent of national income in 1998 to more than five per cent in 2003. This borrowing from abroad, however, mortgages the future returns from domestic investment in the US. Foreigners understandably do not lend us money for free, so we must share at least part of the future returns from our domestic capital stock with them. As a first approximation, borrowing more from foreigners has the same adverse implications for the future national income of Americans as reduced domestic investment does. Furthermore, the associated current account deficit likely stokes protectionist pressures in the US, potentially causing harm for the world trading system."

posted by Ben Muse at 9:32 PM

 
Some drawbacks of subsidies

Unless you can increase the quantity supplied without driving up the costs of supplying additional units, a subsidy to consumers that increases demand, is going to drive up prices.

Steve Pearlstein explains, in yesterday's Washington Post: "A Culture Of Subsidies Inflates Costs"

"What two things do a college education, health care and housing have in common?

One is that the price of these things has been rising at least twice as fast as other prices. The other thing is that they are all subsidized by government.

That is no coincidence...

In health care, the big culprit is the tax deduction for employer-paid health insurance, which has hard-wired into the American psyche the expectation that companies should pay for their employees' health insurance. After all, if an employer is willing to spend $9,000 to give your family comprehensive health care, few people would choose to take the $9,000 in cash, pay $2,000 in taxes on it, and use the remaining $7,000 to buy their own insurance.

Unfortunately, the unintended effect of this $112 billion-a-year tax deduction is to make insured consumers largely indifferent to how much health care they consume or what it costs. And in the face of such indifference, doctors and hospitals and drug companies have done what any profit-maximizing industry would do: push prices and utilization up 7 to 10 percent each year until so many people are priced out of the market that government is forced to pump in even more money, spurring a whole new round of spending increases..."

Thanks to Arnold Kling for pointing to this column: "Subsidies Raise Prices".

Mark Steckbeck at The Liberal Order takes a closer look at Pearlstein's argument in: "The Effects of Subsidies". He points out "...that education, health care, and homes are in many cases relatively inelastic in supply" (costs of extra units go up very fast as the quantity supplied increases), and explores some of the implications of this assumption for Pearlstein's argument.

posted by Ben Muse at 8:56 PM