Ben Muse

Economics and Alaska

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Josh Bolten confirmed as head of OMB

OMB Watch reports on the rapid Senate confirmation of Bush aide Joshua Bolten to be head of OMB, here: "Joshua Bolten Confirmed as Director of OMB".

State Budget Crisis (on the edge of the abyss)

Across the nation, state revenues are down and state spending is up. Since 49 of the 50 states have balanced budget provisions in their constitutions, they can't borrow to make up the difference from one fiscal year to another - they must balance their budgets. And today is the last day of the fiscal year. Last Friday Slate carried a column by Brendan I. Koerner on how the balanced budget provisions are enforced in different states: "How Are State Balanced Budget Laws Enforced?". Meanwhile, today's Washington Post carries this story: "Calif. Near Financial Disaster. Hours Remain to Solve $38 Billion Shortfall " Californian Pejman Yousefzadeh contemplates flight: "I Need To Get Out Of California":
    "We have a $38 billion deficit, license plate fees that have skyrocketed like the NASDAQ back in the 1990s, a governor who is as useful as an artificial appendix, and indifferent sports fans who could take or leave their favorite teams.

    "And now, in addition to the above, we have to contend with rampaging samurai..."

How likely are we to see professional bloggers?

Not very, says Arnold Kling according to the blog Finding My Voice, here: "Blogging for dollars -- any time soon?".

Behavioral economics

The Federal Reserve Bank (FRB) of Boston held a conference on behavioral economics this month at a country club on Cape Cod - covered in a story by Stephen Dubner in today's New York Times: "Calculating the Irrational in Economics".

The story line draws a strong contrast between what Dubner seems to see as a rather sterile mathematical economics and a rich, productive new behavioral economics based on a more realistic view of human nature. For example, the story ends with the quote by a Boston FRB economist, "We're looking outside the box [at behaviorism - Ben] because the box we've been looking inside is empty." This is overdrawn - the existing box has a lot of great stuff in it. More accurately: sciences progress, and economics, like other sciences, isn't a finished body of work.

The behaviorists draw particularly on cognitive psychology - a field that looks at how people process information and make decisions - to critique the results of mainstream economics, which assumes relentlessly rational decision-making. There is great potential for behavioral economics to improve the set of models economists use for prediction.

There is also a challenge to the mainstream welfare economics (the economics that looks at not just what the results of a policy decision will be, but at what decision we should or ought to make) that underlies tools such as cost-benefit analysis. For example, the behaviorists point to evidence that people are more concerned about a potential loss of money or wealth (from their current baseline) than they are about a potential gain. Cost-benefit analysis weighs gains and losses to the same people in the same way.

New to me is the doctrine, pushed by certain behavioral economists, of "libertarian paternalism":
    "But the most radical idea presented at the conference belonged to Richard H. Thaler. His paper, written with the legal scholar Cass R. Sunstein, was called "Libertarian Paternalism Is Not an Oxymoron." Leonine and youthful at 57, Mr. Thaler, who teaches at the University of Chicago, is widely considered the founder of behavioral economics (and some say, its next Nobel winner). He is more confident and, accordingly, more prescriptive than his younger colleagues...

    "Mr. Thaler has concluded that too many people, no matter how educated or vigilant, are poor planners, inconsistent savers and haphazard investors. His solution: public and private institutions should gently steer individuals toward more enlightened choices. That is, they must be saved from themselves. Mr. Thaler's most concrete idea is Save More Tomorrow (SMarT), a savings plan whereby employees pledge a share of their future salary increases to a retirement account. In test cases, the plan has proved remarkably successful.

    " "This was not pulled out of thin air," Mr. Thaler said. "It was done using what I call first-grade psychology. We knew this was going to work, no question." Indeed, the SMarT plan takes advantage of behavioral economics' basic tenets: "loss aversion" (people fear loss because it causes them far more pain than the pleasure they receive from gain; but since the SMarT plan covers a future raise, they never feel its loss); "status-quo bias" (since people are reluctant to change, the change can be made for them); and "mental accounting" (people have a pressing need to direct different streams of money into different "accounts")."

Brad DeLong wiles away an idle hour...

Tolkein's Trilogy doesn't tell the whole story: "In the Uttermost West [Revised]".

What do people in low-income nations think of globalization

"...views of globalization are distinctly more positive in low-income countries than in rich ones..." according to the The Pew Center for the People and the Press, says Pejman Yousefzadeh at his blog "Pejmanesque". Here is the complete posting: "GUARANTEED TO GIVE NOAM CHOMSKY HEARTBURN", with links.

Jane Galt meditates on sunk costs

Here: "The Weird logic of internet cafes"

Gregory Mankiw

The New York Times profiles Bush's new chairman of the Council of Economic Advisors, here: "Into the Politics of Economics" Some key points - Mankiw is unusually good at communicating complicated economic analysis to a lay audience; "...he has few previous ties to the administration, which is know for being centralized..."; he may not believe as strongly in the efficacy of the tax cut program as his predecessor (R. Glenn Hubbard).

Is anti-trust immoral?

Tyler Cohen asks, at the "Volokh Conspiracy", here: "Is it shocking to suggest that there is a strong moral argument against antitrust?".

Why do English speaking countries tend to run trade deficits?

John Quiggen speculates, here: "The English disease".

Postrel on specialization

Virginia Postrel's column in today's New York Times looks at the "trend away from vertical integration" in the U.S. economy. Postrel's blog has a post on the column, with a link to it, here: "Vertical Disintegration". Lynne Kiesling blogs on Postrel's post, here: "Virginia Postrel's written a must-read .... Under what circumstances should we substitute administrative arrangements for the market, and when should be use the market? How do these decisions change through time?

Selling your place in line

Yesterday I posted a link to a blog posting by Brad DeLong on the economics of the right to buy and sell your place in line (for example, a line to buy tickets to a sporting event, movie, or concert), here: "Should you be able to sell your place in line?" Here is another piece on the same topic by Steven Landsburg, from Slate: "The First One Now Will Later Be Last. A foolproof method to shorten queues."
    "You spend too much time waiting in lines. "Too much" isn't some vague value judgment—it's a precise economic calculation. A good place in line is a valuable commodity, but it's not ordinarily traded in the marketplace. And this "missing market" inevitably produces inefficient outcomes.

    "If a line-placement market existed, you could pay the guy in front of you to leave, or take up a collection among the people behind you and then pay the guy in front to leave. But you don't because 1) social conventions make paying for a place in line awkward; 2) negotiating a price is a hassle; and 3) you're worried about the "free riders" behind you mooching off your investment. Because there is no market, you and the guy up front miss out on a mutually beneficial exchange, which is the precise economic definition of inefficiency..."

Is that all it did?

The Congressional Budget Office distributed a report on "The Effects of NAFTA on U.S.-Mexican Trade and GDP" in May. The impacts on GDP were small. In summary:
    "This paper assesses the effects of NAFTA on overall levels of trade in goods between the United States and Mexico and on U.S. gross domestic product (GDP)...

    "...U.S. trade with Mexico was growing for many years before NAFTA went into effect, and it would have continued to do so with or without the agreement. That growth dwarfs the effects of NAFTA.

    "NAFTA has increased both U.S. exports to and imports from Mexico by a growing amount each year. Those increases are small, and consequently, their effects on employment are also small.

    "The expanded trade resulting from NAFTA has raised the United States' gross domestic product very slightly. (The effect on Mexican GDP has also been positive and probably similar in magnitude. Because the Mexican economy is much smaller than the U.S. economy, however, that effect represents a much larger percentage increase for the Mexican economy.)

    "Some observers look at NAFTA's effects on the U.S. balance of trade with Mexico (the difference between the values of exports and imports) as an indication of the economic benefit or harm of the agreement. The balance of trade dropped substantially after NAFTA took effect and has declined further in more recent years, leading some people to conclude that NAFTA has been bad for the U.S. economy.

    "However, changes in the balance of trade with a partner country are a poor indicator of the economic benefit or harm of a trade agreement. A better indicator is changes in the levels of trade. Increases in trade--both exports and imports--lead to greater economic output because they allow each nation to concentrate its labor, capital, and other resources on the economic pursuits at which it is most productive relative to other countries. Benefits from the greater output are shared among the countries whose trade increases, regardless of the effects on the trade balance with any particular country. Such effects do not translate into corresponding effects on the balance of trade with the world as a whole; for a country as big as the United States, that balance is largely unaffected by restrictions on trade with individual countries the size of Mexico. Moreover, even declines in a country's trade balance with the world have little net effect on that country's output and employment because the immediate effects of those declines are offset by the effects of increased net capital inflows from abroad that must accompany those declines.(2)

    "Furthermore, CBO's analysis indicates that the decline in the U.S. trade balance with Mexico was caused by economic factors other than NAFTA: the crash of the peso at the end of 1994, the associated recession in Mexico, the rapid growth of the U.S. economy throughout most of the 1990s, and another Mexican recession in late 2000 and 2001. NAFTA, by contrast, has had an extremely small effect on the trade balance with Mexico, and that effect has been positive in most years."
Exactly how small was the impact on the U.S. economy?:
    "...NAFTA has increased U.S. GDP, but by a very small amount--probably no more than a few billion dollars, or a few hundredths of a percent... The trade increases wrought by NAFTA raised Mexican GDP by much larger percentages than they raised U.S. GDP--quite likely 16 to 21 times the U.S. percentages--because of the much smaller size of the Mexican economy..."

Toxic Waste Dumping

"Cronaca" describes how Nazi chemical munitions were disposed of after WWII, here: "Chemical weapons found -- in the Baltic"

The Larry Summers memo

Larry Summers was an important figure in Clinton Administration economic policy-making, Clinton's last Treasury Secretary, and is now President of Harvard. In 1991, when he was chief economist at the World Bank, he wrote a memo to his boss that began:
    "'Dirty' Industries: Just between you and me, shouldn't the World Bank be encouraging MORE migration of the dirty industries to the LDCs [Less Developed Countries]? I can think of three reasons:..."
Go here "Lawrence Summers. The Bank Memo" for the full text of the memo. I learned about this from a posting to "Kieran Healy's Weblog", here: "Moral Clarity ".

"Making the familiar strange"

This great line is from a Virginia Postrel posting today to her blog "Dynamist". The posting, "What Was The Flu Like?", directs the reader to the Grant McCracken "Pepys Now project," the point of which is to explain today's "too ordinary to describe" feelings and understandings to future historians.

We know what it feels like to have the flu, but with medical advance, they [our descendents] won't know. Pepys knew what it was like to live during the plague, but its gone and we don't. For this to work, we have to put ourselves in the shoes of the future people, and make the [our - Ben] familiar strange.

This sounds like a good slogan for someone interested in adding to the world's knowledge. Gravity is ordinary. It's only to someone like Newton who suddenly finds it strange that it becomes an object for analysis.

Napoleon and Alexander were very bad men

"Cronaca" reflects on Napoleon, and links to an essay on Napoleon and Alexander by Victor Davis Hanson (classicist, grape farmer, military historian, and political pundit) here: "Napoleon, criminal megalomaniac". Hanson apparently argues that Napoleon and Alexander were bad men. I haven't read the article yet, but I'll never think of Alexander the same way again after reading Hanson's chapter on his campaigns in Carnage and Culture (a history of the western way of war).
    "...Scholars sometimes compare Alexander to Caesar, Hannibal, or Napoleon, who likewise by sheer will and innate military genius sought empire far beyond what their own native resources might otherwise allow. There are affinities with each; but an even better match would be Adolf Hitler - a sickening comparison that will no doubt shock and disturb most classicists and philhellenes.

    "Hitler similarly engineered a brilliant but brutal march eastward during the summer and fall of 1941. Both he and Alexander were singular military geniuses of the West, who realized that their highly mobile corps of shock troops were like none the world had seen. Both were self-acclaimed mystics, intent on loot and plunder under the guise of emissaries bringing Western "culture" to the East and "freeing" oppressed peoples from a corrupt, centralized Asian empire. Both were kind to animals, showed deference to (but were not really interested in) women, talked of their own destiny and divinity, and could be especially courteous to subordinates, even as they planned the destruction of hundreds of thousands. and ultimately murdered many of heir closest associates and greatest field marshals. Both were half-educated pop philosophers who sprinkled their orders of mass destruction with allusions to literature and poetry. For every promise of a "brotherhood of man," there was a "thousand-year Reich"; for every house of Pindar saved among the rubble of Thebes, there were visions of a new Rome in Berlin; for every gutted Parmenio, there was a murdered Rommel; for every desolate Tyre, Gaza, or Sogdiana, there was a ransacked Warsaw or Kiev; and for every Gederosian desert, a suicidal Stalingrad."
P.S. June 18: I've read the Hanson essay now - it's a review of a recent biography of Napoleon by Paul Johnson. It begins:
    "Why do so many western intellectuals excuse thuggery and whitewash the crimes of megalomaniacs? I have received more angry mail, for example, over a brief article I published a few years ago called "Alexander the Killer" than about anything I have ever written. And the myth of Napoleon, like that of Alexander the Great, is also deeply enshrined in our collective romance—to question either risks real outrage.

    "Both dictators were eerily similar in ways that go beyond being military geniuses who ruled entire continents by their early 30s. In each case ghastly records of slaughter were carefully masked by a professed concern for the arts and sciences—e.g., silly tales of Alexander sleeping with a copy of the Iliad under his pillow and his real efforts to bring a legion of Greek natural scientists with him eastward; or Napoleon's patronage of Vivant Denon (author of the monumental 24-volume Description de l'Egypte) and his gifts of Egyptian booty to a generation of French scholars. Like Hitler's Speer and de Gaulle's Malraux, Denon was one of a long line of gifted toadies dating back to Alexander's Callisthenes, court intellectuals who simultaneously worshiped and loathed the powers that be, who at least noticed them.

    "Napoleon and Alexander were money-driven thieves par excellence, perhaps the difference being only that the looted imperial treasuries at Susa, Babylon, and Persepolis yielded more specie than the Swiss banks at Berne. The Great's "Brotherhood of Man" was about as genuinely utopian as the Code Napoléon. Both strongmen dazzled their immediate circle with lapidary self-infatuation—for example, Napoleon's "At twenty-nine years of age I have exhausted everything. It only remains for me to become a complete egoist." Or Alexander's reply to Parmenio's urging before the battle of Gaugamela to take the terms offered by Darius III: "And I would accept them too—if I were Parmenio." "
Read the rest, here: "The Little Tyrant".

Should you be able to sell your place in line?

We often ration things on the basis of a willingness to wait in a line. People acquire informal "property rights" to priority rankings they achieve through their willingness to wait. Should people be allowed to buy or sell these property rights? Brad DeLong looks at the question, here: "Waiting in Line: How Economists Think". Worth reading because: (1) the question is interesting; (2) nice example of an economist illuminating a question with a simple model; (3) playful and fun; (4) a reminder that rule changes that increase efficiency may have winners and losers; (5) reflection on the assumption in standard models that relative standing isn't a concern to people.

A Tale of Three Cities

The current multi-national trade negotiations are behind schedule.

Recent articles, taken together, outline the story of these negotiations. "Free Trade Optimism: Lessons From the Battle in Seattle", by Harvard development economist Dani Rodrik in the May/June 2003 Foreign Affairs reviews a memoir by former World Trade Organization (WTO) Director-general Mike Moore. Moore was in charge of the Seattle meetings and laid the groundwork for Doha.

See, also, "As U.S. Balks on Medicine Deal, African Patients Feel the Pain" by Roger Thurow and Scott Miller in the June 2 Wall Street Journal (I assume this is available from the WSJ web site, but only for members). Finally, an article titled “The Doha squabble” in the the March 27 issue of the Economist focuses on negotiations on trade in agricultural products. This is available to registered subscribers at the Economist web site.

The three cities: Seattle - site of 1999 WTO meetings - and of well publicized riots, Doha in Qatar - site of a WTO ministers meeting that laid the groundwork for a new series (or “round”) of trade negotiations, and Cancun - site of a WTO ministers meeting to ratify the work of the negotiators this coming September.

Seattle, 1999

The WTO ministerial meetings in Seattle in 1999 were supposed to lay the basis for subsequent negotiations aimed at reducing barriers to trade. Many people think they failed because of anti-WTO rioting and demonstrations. However, Moore evidently discusses two other problems may have been more important. First, Moore, was new at the job of Director-General of the WTO :
    "Moore attributes the debacle at Seattle to the lack of adequate preparation: his leadership team was barely in place and he had had little time to put his own stamp on the process and on the negotiating draft."
Rodrik also says,
    "Moore knew that the collapse of the talks there had less to do with the demonstrations outside the conference center than with the intransigence of the governments inside. Their clashes revolved around two main axes of conflict. First, the United States -- backed by the Cairns Group of 17 agricultural exporters, which it leads -- locked horns with the EU and Japan over agricultural liberalization. The United States demanded significant improvements in market access and a phasing out of export subsidies for farm products, which the EU rejected. Second, developing countries felt that the previous Uruguay Round of trade negotiations had left them saddled with costly obligations, that the trips (trade-related aspects of intellectual property rights) agreement worked against them, and that the rich countries had failed to live up to their commitments (with respect to, for example, liberalization of textiles trade and increased financial assistance). The developing countries were opposed to the push by advanced countries to expand the negotiating agenda to include new issues such as investment, government procurement, competition policy, environment, and labor standards, which the developing countries felt would impose costs and obligations predominately on them."
Doha, 2001

The next WTO ministerial meeting, in Doha, Qatar, was a success; the basis was laid for the new round of trade negotiations, and China got WTO membership. The review gives the impression that this happened in large part because Moore built a consensus by tweaking the Seattle agenda, and marketing it as negotiations to foster development. Agriculture was key to this:
    "...Much of Moore's hard work between Seattle and Doha was directed at putting agriculture at the center of a "development" agenda that would not only capture the moral high ground but also make the momentum for agricultural liberalization unstoppable by enlisting developing-country support on the issue. "By making agriculture a development issue," Moore writes in a revealing passage, "we brought Africa, most of Asia and Latin America together on a common agenda." This brilliant tactic bridged both of the divides that had led to the collapse of the Seattle ministerial meeting. The EU could not have blocked an agreement at Doha without appearing to undermine development, and developing countries could walk away with a document that claimed to put their interests at the center."
It wasn't necessarily obvious that lowering agricultural trade barriers would be good for development:
    "Unfortunately, Moore does not tell us how he managed to convince developing countries that an agenda little changed from Seattle could now serve as the blueprint for a development round. As the locution of the quote above suggests, it was hardly evident that an agenda centered on agriculture would amount to a development round. The developing countries' interest in agricultural liberalization had always been ambiguous. Aside from a few middle-income members of the Cairns Group such as Argentina, Brazil, Chile, and Thailand, which are important agricultural exporters, few developing countries looked at this area as a major source of gain. Research done at the World Bank during the Uruguay Round had highlighted the possibility that most sub-Saharan African nations could actually end up worse off as a result of a rise in world food prices produced by a reduction in European export subsidies. As Arvind Panagariya, an economist at the University of Maryland and a strong supporter of trade liberalization, has noted, the vast majority of the world's poorest nations are net importers of agricultural products and will end up paying higher prices for their imports if agricultural export subsidies in the rich countries are phased out. For the most part, developing countries' interests lie not in deep liberalization in agriculture, but in restricting the agenda to a narrow set of issues and in fixing the perceived shortcomings of the Uruguay Round."
Another element contributing to the success of the Doha conference was U.S. acceptance of a negotiating agenda that included intellectual property rights - especially rights to drug patents. As the Wall Street Journal story points out:
    "At Doha, trade ministers agreed that poor countries should be able to override patent protections and use cheaper generic copies of drugs...But the Doha agreement didn't spell out how poor countries, with no capability to manufacture generic drugs of their own, could import the generics from a third country. The pact also didn't specify precisely which diseases it covered...The developing countries interpreted this as covering any disease they would identify as a public-health problem..."
A drug agreement was frustrated this past December by U.S. opposition. The Journal:
    "But last December [2002 - Ben], when all of the other 143 countries in the World Trade Organization had lined up behind a new plan on the trade of medicines, the U.S. blocked the proposal. The Bush administration, under heavy lobbying from a pharmaceutical industry seeking to limit the scope of the deal, endorsed a list of some 20 infectious diseases that it was willing to address. These included HIV/AIDS, malaria, tuberculosis, typhus, haemorrhagic fever and others categorized as epidemics in developing countries-but that was it...Poor nations were outraged...[developing country doctors] treat more patients combined, for heart-related problems, diabetes, cancer and chronic respiratory diseases - which aren't on the U.S.-backed list - than for AIDS..Malaria kills one million Africans each year. yet nearly twice as many, combined, die of heat or respiratory ailments, diabetes and cancer..."
The Journal strongly implies that this change of heart followed heavily lobbying of the Bush administration by a pharmaceutical industry concerned that "relaxing patents beyond those for a limited list of epidemics would set a precedent leading to much broader erosions of their intellectual-property rights."

For their part the Europeans have blocked agreement on agriculture. This past March negotiators missed their deadline for an agriculture agreement. The Economist points out that the Doha ministers agreed to:
    "“substantial improvements in market access” (ie, reductions in tariffs), “reductions of, with a view to phasing out, all forms of export subsidies”, and “substantial reductions in trade-distorting domestic support”. But what constitutes “substantial”, and how do you measure it? The weasel words of the Doha declaration papered over big differences between farm-subsidizing rich countries and farm exporters..."
Two sides were crucial to the March impasse:
    "In one corner stands the Cairns group of agricultural exporters (including Canada, Australia and Brazil), plus the Americans. Although there are differences among them, this group wants an ambitious outcome, including the scrapping of export subsidies and big cuts in trade-distorting domestic subsidies and tariffs. The Americans want to phase out export subsidies over five years, to cut subsidies to 5% of the value of farm production and to slash tariffs to no more than 25%...

    "In the other corner stand countries that lavish most support on their farmers: the European Union, in particular, but also Switzerland, Norway, Japan and South Korea... The EU rejects the idea that export subsidies should be abolished (it talks about a 45% cut). Its definition of “substantial” is a 55% reduction in trade-distorting subsidies and a 36% cut in tariffs. And it adamantly opposes the idea that those with higher tariffs and bigger subsidies should cut more, suggesting instead that all countries should cut average tariffs by the same amount."
The Economist article suggests the developing country ambiguity with respect to agricultural trade barrier reductions. While Jacques Chirac of France is said to recognize "...that [agricultural - Ben] export subsidies harmed poor countries in Africa...," India " deeply worried that cutting tariffs on agricultural goods might ruin its rural economy."

Cancun, 2003

The next ministerial meeting - meant to close out the current round of negotiations - is scheduled for Cancun this coming September. The Economist suggests the Doha round may be truncated, reaching a more limited set of agreements than had been anticipated, agreement may be delayed, or Doha may go "nowhere."

Is the administration trying to convert the income tax into a consumption tax?

Factions in the administration are, according to this Washington Post story by Jonathan Weisman: "Anti-Tax Crusaders Work for Big Shift. White House Wary Of Broad Changes "
    "...The architects of the last three tax cuts at the Treasury and the Council of Economic Advisers say their combined effect will be to push the United States toward the holy grail of conservative tax theory: a system that they believe would promote economic efficiency and growth by focusing taxation on consumption while rewarding investment. These administration officials argue that taxing returns on investment amounts to unfair and punitive "double taxation," because the income that was invested was taxed when it was earned..."
I learned about this story from A Taxing Blog, here: "Slouching towards a consumption tax"

How do you administer a world war?

Geitner Simmons (Regions of Mind) posts on David Brinkley's book on WW II Washington D.C., here: "The WWII ‘typewriter crisis’ and FDR’s attack on the ‘parasites’ ". He focuses on how administrators dealt with the logistical constraints and shortages associated with the rapidly expanding workforce. He also provides a photo of temporary buildings on the mall, here: "D.C. in wartime".

Why isn't the Fertile Crescent fertile anymore?

Eugene Volokh of the Volokh Conspiracy points to an L.A. Times article by Jared Diamond (author of Guns, Germs, and Steel) arguing that the fertility of the fertile crescent was destroyed by human environmental tinkering, here: "Civilization and agriculture". Diamond apparently draws conclusions for contemporary society, which Volokh critiques. In an earlier article Diamond argued that prehistoric Easter Islanders destroyed the environmental assets on which their society was based, here: "Easter's End".

Allocating scarce resources among competing ends

Today’s Washington Post has a story by Laura Blumenfeld about Rand Beers, a staffer at the White House National Security Council (NSC) who resigned just before the start of the war in Iraq. Beers had served in the NSC in the Administrations of Reagan, Bush, Clinton, and Bush II. At the time of his resignation he was serving as a counterterrorism advisor. He appears to have resigned in part due to burn out, but also in part due to serious concerns over the conduct of the war on terrorism. The whole article (”Former Aide Takes Aim at War on Terror“) is worth reading. Here I’ll only quote the sentence bearing on the tradeoffs, and the reallocation of resources away from counterterrorism activity, associated with the war in Iraq:
    ”The focus on Iraq has robbed domestic security of manpower, brainpower and money, he said. The Iraq war created fissures in the United States' counterterrorism alliances, he said, and could breed a new generation of al Qaeda recruits.“
Beers is now working as a foreign policy advisor in the Kerry campaign. I assume that this story was promoted to the Post by that campaign.

One nation, one market

ParaPundit (Randall Parker) points to the way the U.S. Commerce Clause has helped create a national market and increased national wealth. He also constrast the U.S. approach to the relatively fragmented market in Canada. Here: "Alberta and British Columbia As American States?".

Will the New York State Assembly renew the New York City rent control program?

The New York City rent control program is up for renewal by the legislature this year - it will almost certainly be renewed according to this story in the Economist: "The great Manhattan rip-off". The story isn't too long, but reviews the origins of the rent control program in WWII price controls, its evolution since then, and it's various impacts:
    "It is hard to find any economist who supports rent restraints. Price controls, even if laboriously tweaked, inevitably produce inefficiencies, reduce supply and cause bad side-effects. Black markets and bribery thrive. Building maintenance is often ignored. Landlords and tenants find themselves in poisonous relationships, since they are linked by law rather than by voluntarily renewable contracts. Unscrupulous property owners go to dangerous lengths to evict tenants in order to get higher-paying replacements; as a result, tenant-protection laws have been enacted that make it almost impossible to evict even a scoundrel.

    "Meanwhile, a vast bureaucracy has grown up to administer the price controls, supported by volunteers and litigators. The property owner who misses a filing deadline, or has his paperwork mislaid, can be blocked from even permissible rent increases. Given all this, most sane New Yorkers would rather eat their money than join the rentier class.

    "Oddly enough, for those landlords adept at navigating the system, returns are likely to be unaffected by price caps, as long as properties were acquired after they had been imposed and the potential for income is understood. Indeed, although the press depicts the fight over price restraints as tenants versus landlords, it is more accurate to see it as tenants paying a below-market rent versus tenants who, in effect, pay the cost of this subsidy, says Peter Salins, the provost of the State University of New York and co-author of a book on New York's housing market (“Scarcity by Design”, Harvard University Press, 1992).

    "Who, then, are the lucky tenants? According to another study by Mr Pollakowski, most benefits go to tenants in lower and mid-Manhattan, where the residents are relatively wealthy. The city's poorer folk, most of whom live in the outer boroughs, receive little or nothing. Perhaps the strongest argument offered by supporters of rent control is that it promotes stability; but, typically, long-term tenants in unregulated markets receive similar concessions, since it is in a property-owner's interest to retain dependable renters in his buildings."

"How Health Care Ought to Work"

Future Medicare liabilities are going to place an enourmous burden on government in coming decades. Arnold Kling describes an appropriate private sector health insurance system and talks about some of the psychological barriers we have to thinking about alternatives to our current approach, in short column here: "America Is Crazy ". What would a private system, driven by free market competition look like?:
    "People should pay for their own health insurance. The typical policy would be "catastrophic coverage," meaning that you are covered for large medical expenses. However, catastrophic coverage means that deductibles are high, so that if you have only modest medical expenses in a given year you pay them yourself. Of course, people should be free to choose medical plans with low deductibles, but those plans will tend to be expensive and inefficient.

    "Poor people should receive vouchers that enable them to obtain catastrophic coverage. These vouchers will be financed by taxpayer money, of course. Because hospitals are not going to refuse to treat people, everyone should be required to obtain catastrophic coverage, just as every driver is required to obtain auto insurance.

    "Health care benefits paid by businesses should be taxable to individuals. This would eliminate the tax advantage to business-paid health care, which in turn would lead to companies dropping health care as a benefit. This would get ordinary companies out of the health care business. It would eliminate the situation in which a change of employer automatically means having to reconfigure your health coverage.

    "A health care system in which government involvement is limited to providing vouchers to the poor would be better for the poor as well as more efficient in many respects than what we have today. Unfortunately, mental illness blinds many people to the feasibility and wisdom of such an approach."

Would Hillary Clinton make a good president?

Brad DeLong doesn't think so, based on her performance as a public administrator (head of the health care task force early in the Clinton administration), in his blog posting "Time to Pound My Head Against the Wall Once Again":
    "My two cents' worth--and I think it is the two cents' worth of everybody who worked for the Clinton Administration health care reform effort of 1993-1994--is that Hillary Rodham Clinton needs to be kept very far away from the White House for the rest of her life. She had neither the grasp of policy substance, the managerial skills, nor the political smarts to do the job she was then given. And she wasn't smart enough to realize that she was in over her head and had to get out of the Health Care Czar role quickly.

    "So when senior members of the economic team said that key senators like Daniel Patrick Moynihan would have this-and-that objection, she told them they were disloyal. When junior members of the economic team told her that the Congressional Budget Office would say such-and-such, she told them (wrongly) that her conversations with CBO head Robert Reischauer had already fixed that. When long-time senior hill staffers told her that she was making a dreadful mistake by fighting with rather than reaching out to John Breaux and Jim Cooper, she told them that they did not understand the wave of popular political support the bill would generate. And when substantive objections were raised to the plan by analysts calculating the moral hazard and adverse selection pressures it would put on the nation's health-care system...

    "Hillary Rodham Clinton has already flopped as a senior administrative official in the executive branch--the equivalent of an Undersecretary. Perhaps she will make a good senator. But there is no reason to think that she would be anything but an abysmal president."
DeLong served as Deputy Assistant Secretary in the Clinton Treasury Department.

Why is deflation bad?

Hal Varian explains what causes deflation, why it is a problem, and he thinks is going to happen, in this June 5 New York Times column: "Dealing With Deflation"

Ben Bernanke of the Federal Reserve

CNBC has a profile of Federal Reserve governor Ben Bernanke, here: "New governor is shaking up the Fed"
    "...And prodding the Fed toward change was what president Bush was looking for when he gave the 49-year-old Bernanke a job in Washington last August to fill a vacant seat on the Federal Reserve Board.

    " “I brought Ben’s name to the president because I though he could play a very valuable role as an academic economist,” said Glenn Hubbard, who was President Bush’s top economic advisor. “I think what Ben would like to do, what many economists would like to see, is more of a clear, plain-English translation on how the Fed thinks, what its goals are and how it plans to do them.”

    "That may be one of the most significant developments for markets in years, says Blinder [Econ prof and former Fed governor Alan Blinder - Ben].

    " “The Fed is lagging the rest of the industrial world in transparency,” he said. “If the Fed becomes more transparent, the markets get to understand the Fed better. They get anticipatory in a correct way — rather than in a crazy way — what the Fed will do. That enables the Fed to work its will on the markets better and faster...” "
I learned about this from Brad DeLong's blog, here: "Notes: Ben Bernanke".

What did Martha Stewart do?

Not insider trading. Stephen M. Bainbridge, professor of corporate and securities law at UCLA, explains in the L.A. Times, Here: "The SEC Goes Out on a Legal Limb in Its Bid to Net Martha Stewart".
    "I don't particularly like Martha Stewart's public persona. Like a lot of people, I get a vicarious thrill out of seeing the high and mighty brought low. But charging her with insider trading stretches that crime beyond where it was ever meant to go."
I learned about this from Eugene Volokh at the Volokh Conspiracy blog in a posting titled: "Martha Stewart".

The SEC is going after Stewart for insider trading - the Justice Department wouldn't (" ). The Justice Department is going after here for obstruction of justice. Virginia Postrel has two posts on her blog about how much trouble you can get into lying to the Federal government, here: "Most Pernicious Statute" and here "Lying to the Feds".
    "At the press conference announcing the indictments of Martha Stewart, U.S. Attorney James B. Comey said, "This criminal case is about lying--lying to the F.B.I., lying to the S.E.C., lying to investors." "

    "Not fraud, lying. That rang a bell. At the last advisory board meeting of the Foundation for Individual Rights in Education (FIRE), I had a conversation with FIRE co-founder Harvey Silverglate about the expansive tools federal prosecutors can use to snare just about anyone. (Harvey is both a principled civil libertarian and a criminal defense attorney.) Number one on the list is the infinitely pliable 18 USC sec. 1001, which makes it a crime to lie to a federal agent.

    Last night, I emailed Harvey to see if he had written anything about the statute that I might link to. His articles on the subject aren't online, but he sent the following:..."
    Check Postrel's "Most Pernicious Statute" link to see what he said

What do you learn when you study economics?

Yesterday's Wall Street Journal has excerpts from an entertaining graduation speech given by the president of the Dallas Federal Reserve Bank May 17 to economics graduates at the University of Texas. The full speech is on the web, here: "Commencement Address to Economics Graduates".
    "...Little in the literature, in my opinion, is more relevant to contemporary economic debates than what’s usually called the broken window fallacy. Let me briefly review that for your families.

    "It seems that some teenagers, being the little beasts that they are, toss a brick through a bakery window. A crowd gathers and laments, “What a shame.” But before you know it, as always happens, someone suggests a silver lining to the situation: Now the baker will have to spend money to have the window repaired. This will add to the income of the repairman, who will spend his additional income, which will add to another seller’s income, and so on. You know the drill. The chain of spending will multiply and generate higher income and employment. If the broken window is large enough, it might produce an economic boom. Other catalysts to such booms might be a hurricane, a tornado or just about any government spending boondoggle. Whenever a government program is justified not on its merits but by the jobs it will create, remember the broken window.

    "Most voters fall for the broken window fallacy, but not economics majors. You will say, “Hey, wait a minute!” If the baker hadn’t spent his money on window repair, he would have spent it on the new suit he was saving to buy. Then the tailor would have the new income to spend, and so on. The broken window didn’t create net new spending; it just diverted spending from somewhere else. The broken window does not create new activity, just different activity. People see the activity that takes place. They don’t see the activity that would have taken place. Plus, there’s the waste of the broken window.

    "The broken window fallacy is perpetrated in many forms. Most of the time, jobs are invoked. Whenever job creation or retention is the primary objective I call it the job-counting fallacy. Economics majors understand the nonintuitive reality that real progress comes from job destruction. It once took 90 percent of our population to grow our food. Now it takes less than 3 percent. Pardon me, Willie, but are we worse off because of the job losses in agriculture? The would-have-been farmers are now college professors and computer gurus or singing the country blues on Sixth Street.

    "If you want jobs for jobs' sake, trade in the bulldozers for shovels. If that doesn’t create enough jobs, replace the shovels with spoons..."

More Good Blog Postings

Lynn Kiesling points us to this article, "Senate to Probe Increasing Ethanol in Gas" on the uncertain benefits of looming congressional mandates to use ethanol in gas. She promises a future rant.

Brad DeLong posts on missed opportunities to free up trade at the recent G8 summit, here: "Time to Bang My Head Against the Wall Once Again"...and on the possibility that we will be making black holes in laboratories soon, here: "Kids! Don't Try This at Home!".

Arnold Kling on the Ph.D. surplus: "Academic Salaries". For context, see also his May 26 posting: "The Academic Job Market".

Josh Bolten as head of OMB

OMB Watch weighs in with some background on Josh Bolten, and with some of their concerns over his fitness to head OMB, here: "Josh Bolten Nominated as New OMB Director". I posted earlier on Bolten and OMB, supplying links to New York Times and Slate profiles, here: "Josh Bolten replaces Mitch Daniels".

Good Blog Postings

Virginia Postrel comments on the decline of the anti-globalization movement (manifested this past week by a weak effort at the G8 summit in Evian), here: "MOVEMENT IN DECLINE?".

Arnold Kling points out that people probably ascribe too much power over the economy to decisions made by the President, and even to decisions made by Alan Greenspan, here: "Economic Attribution Error" (also a link to what looks like an interesting paper on the history of fiscal policy in the Clinton administration).

Jane Galt also points to Kling's posting and comments on it, here: "Department of Redundant Link-Praise" .

Max Zawicky posts on state budget crisis induced tax increases, here: "REPUBLICAN GOVERNORS AND THE TAXES THEY LOVE".

How are the states coping with their fiscal crises?

They can't run deficits. They've run down their rainy day funds. When they can't balance the books by raising taxes and cutting spending, they resort to accounting tricks. Today's Washington Post has an entertaining article by Dale Russakoff on some of their efforts: "States Use Gimmicks To Tackle Deficits"
    "What's a governor to do when he raises corporate taxes by $1 billion, proposes $3 billion in spending cuts, taps his state's entire tobacco settlement and drains every state fund with a positive balance -- and still comes up $300 million short of a constitutionally required balanced budget?

    "The way New Jersey Gov. James E. McGreevey (D) got over -- or, actually, around -- this very hurdle sums up the precarious condition of budgets now being crafted in almost every state capital. Unable to stomach enough tax increases or spending cuts to close budget gaps in Year Three of the worst fiscal crisis in a half-century, states are postponing -- and possibly exacerbating -- the day of reckoning through creative accounting.

    "Using financial sleight of hand, McGreevey shifted a June payment to school districts into the next fiscal year, which begins July 1, creating a paper windfall of almost $300 million in 2003. Presto! -- a balanced budget. But also a teetering one.

    "First, the state auditor flagged a possible accounting irregularity: School districts would record the payment in 2003, the state in 2004. Quickly, legislators wrote budget language to free districts of liability.

    "Then 66 districts, facing their own fiscal crises, announced that they could not make payroll without the June checks. Stiffing teachers, even for 10 days, is not an option in union contracts. Legislative leaders proposed to allow districts to borrow what they need to make ends meet and to bill the state for the interest -- an estimated $100,000...

    "...The proliferation of accounting gimmicks in almost every state budget has raised concerns in finance, health care, education, mental health, public safety and anti-poverty efforts -- every endeavor that relies on state government. As states move paydays, delay tax refunds, speed up fee collections, accelerate seizures of unclaimed property, borrow billions of dollars, sell off buildings and lease them back in a chaotic rush to paper over record deficits, analysts say that many state budgets are as flimsy as the paper they are printed on. Even a minor dip in the economy, they say, could force states to confront what so far has been unthinkable -- deep cuts in cherished programs or tax increases."
Click the link for the rest.