Ben Muse

Economics and Alaska

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Greenspan's complicity in the social security mess

Earlier this week Alan Greenspan, Chairman of the Federal Reserve system, testified before the House Committee on the budget. His comments on the need for social security reform attracted the headlines.
    "...One change the Congress could consider as it moves forward on this critical issue is to replace the current measure of the "cost of living" that is used for many purposes with respect to both revenues and outlays with a more appropriate price index...

    Another possible adjustment relates to the age at which Social Security and Medicare benefits will be provided. Under current law, and even with the so-called normal retirement age for Social Security slated to move up to 67 over the next two decades, the ratio of the number of years that the typical worker will spend in retirement to the number of years he or she works will rise in the long term. A critical step forward would be to adjust the system so that this ratio stabilizes. A number of specific approaches have been proposed for implementing this indexation, but the principle behind all of them is to insulate the finances of the system, at least to a degree, from further changes in life expectancy..."
Edward Lotterman points out that Greenspan is implicated in our current difficulties:
    "Federal Reserve Chairman Alan Greenspan does well to address, at the end of his career, problems that he did not have the guts to take on 21 years ago when he still was campaigning for a major federal appointment.

    While many of the suggestions Greenspan made Wednesday now make sense — despite still likely being politically unpopular — one should know the chairman's history on this issue, how he avoided the unpopular road 21 years ago, and how we're paying for those decisions today...."
Read the rest.

High School sports in Alaska

Bill Pennington has a great article on Alaskan high school sports in tomorrow's [Monday, March 1] New York Times. The focus is on the challenges of arranging games between small towns that are hundreds of miles apart, when there are often no roads (for example, there's no road to my home, Juneau, the capital city. We're cut off by mountains, glaciers, ice fields, rivers, and arms of the sea.) A nice peek at life in Alaska.
    BETHEL, Alaska — It took 90 minutes at sea in a small boat, five hours driving in two vans and 75 minutes on a commuter jet before the boys and girls basketball teams from Seldovia reached Bethel, a remote town in western Alaska.

    When the players stepped off the jet onto the Bethel tarmac, as flat as the tundra enveloping it, the late-afternoon temperature was 38 degrees below zero.

    Seldovia's players would stay for four nights, sleeping on classroom floors at the local high school, to play three basketball games in a round-robin tournament...

    ...And so went another typical week in Alaskan high school sports, where to play something as routine as a basketball or volleyball game, hundreds of teams habitually crisscross a mammoth state on jets, marine ferries, vans and even caravans of snowmobiles...
Having put four kids through the Juneau high school, I can say the story rings true. Travel between the schools is expensive, and the kids work hard to raise the money. By the way, anyone think they'll need yard work this spring? raffle tickets? home baked cookies...

Candy makers fleeing the country

Protection for sugar producers is causing candy makers to flee the country - Lynne Kiesling has the story.

How can we possibly compete against low-cost foreign labor?

Peter Gallagher explains. Also enjoy Virginia Postrel, who points out that you can look at the integrated U.S. economy as a model of the world economy with free trade, free migration, and free capital flows.

    "SUPPOSE we lived in an economic world with no borders, where goods, capital and people could move anywhere.

    We've all heard the dire predictions of what would happen. All the businesses and jobs would rush to the places with the lowest wages. The poor countries would get richer, but only by making rich countries poorer.

    Eventually we'd all be roughly equal, but formerly well-to-do Americans would be a lot worse off. Many Americans are afraid that globalization and free trade will have exactly this effect..."
But it hasn't in the U.S., despite wide historical disparities in incomes among states.

The Suskind archive of Bush administration papers

A few weeks ago Ron Suskind's book on Bush Administration decision making, The Price of Loyalty was released. Suskind's book depended heavily on the recollections of fired Bush Treasury Secretary, Paul O'Neill, and on 19,000 internal administration papers that O'Neill gave him.

Suskind is now publishing selections from the papers on his web page.

Brad DeLong comments on one of these papers, a memo from Treasury Undersecretary Peter Fisher to Treasury Secretary Paul O'Neill" on a meeting with the President and Vice-President on corporate governance reforms here:"A Professional Job of Walking on Eggshells".

Making economics even better

Economics isn't a finished product. It's evolving and moving forward. Right now it's incorporating a more sophisticated psychology. Matthew Rabin of Berkeley has been an important figure in this process. Here's an interview with Rabin on what psychology has to offer. Key economic approaches are kept:
    " Q: Economists usually assume that each person knows what she wants, and that these preferences don't conflict with each other and don't change much over time, and that s/he "rationally maximizes" those preferences. What have we learned from Psychological Economics that challenges this? Have you found that this isn't necessarily true? No, virtually all of that is substantially true, and nothing in my work, or that of other behavioral economists, says that this is not true. It's just not the whole truth. The pioneers of Psychological Economics, people like (Danny) Kahneman and (Amos) Tversky, thought people were very rational, that virtually all human decision making and judgement is driven by reasonable heuristics-people trying to be smart, trying to think intelligently about what they're doing, but in certain types of things people screw up and make mistakes."
So economists are right that people behave purposefully - but their psychological premises are incomplete or mistaken. That means that models can't explain a lot of things that are really interesting - or get things wrong.
    "Q: There is another area that you are looking at-how people systematically evaluate their self-interest differently from the way we might think they do. The time-preference, self-control issue, is an area that I'm working on with Ted O'Donoghue. In many ways it may be the most active area for research in economics because it's been formalized. We're starting to understand some of the principles, and it's so right. The phenomenon is about how we trade off well-being one day to the next. When those two days are today and tomorrow, we care a whole lot more about our well-being today than we do about our well-being tomorrow. But you wouldn't say to yourself "Hmm, I could do something 300 days from now or I could do something 301 days from now. Sure it would be a little bit more effort if I did it 301 days from now, but I really don't feel like doing it 300 days from now." People don't think like that. Three hundred days from now and 301 days from now are the same, as far as you're concerned. But if you were choosing between today and tomorrow, even though you know it may be a little bit more effort if you put if off until tomorrow than it would be if you did it today, you still have this gut instinct to put if off until tomorrow, or if it's some pleasurable activity, you have a tendency to do it today.
    We call this "time inconsistent preference," and it's hard to convey how categorically, how unambiguously economists have been wrong about this. Economists have assumed a time-consistent discounting, that to whatever degree we care more about today than tomorrow, we care that same amount more about 7 days from now than about 8 days from now. Every single study done by psychologists, studying humans, rats, pigeons, always shows this other kind of discounting, this hyperbolic discounting which captures time-inconsistent preferences, the fact that we care much more about today than tomorrow, that that's a bigger difference to us than how much more we care about 7 days from now vs. 8 days from now. This alternative notion about the way people discount pleasures and pains and make trade-offs between time periods has been formalized and, as you might think, it matters immensely in economics.

    Q: This seems to go against the whole notion of a constant discount rate, which we apply as a constant over as long a time period as we want.
    The notion that the discount between one day and another is independent of whether that day is now or in the future is just wrong. The idea of time inconsistent behavior can help explain credit card behavior which, if you look at the data on credit card behavior in the United States, is nuts. (We as economists are trained not to be judgmental about people's behavior, but the amount of interest people pay on their credit cards is nuts.) The amount of debt Americans have, and the amount they're paying interest on, is truly phenomenal. There's a trillion dollar industry in people making these very weird tradeoffs, people paying 18 or 19% interest on these debts, implicit in which is this tremendous time preference for consumption now versus later that is not consistent with people's own long-run preferences. People don't wish upon themselves that they be borrowing so much in the future, and they probably swear to themselves that they'll stop doing this. This can help explain that type of behavior and, more generally, the consumption-savings tradeoff--why people arguably save too little."
The site with the interview has links to a lot of Rabin's papers. You may also want to try Rabin's home page. I learned about this from Tyler Cowen.

Jagdish Bhagwati's new book

Trade Theorist and free trade advocate Jagdish Bhagwati has a new book, In Defense of Globalization from Oxford University Press. The Council on Foreign Relations site on the book has an abstract, a table of contents, and a PDF file of the first chapter. The book is available for about $20 from Amazon.

The Council also provides links to a Bhagwati op-ed from Feb 15, "Why Your Job Isn't Moving to Bangalore", and an Bhagwati interview, "Council's Top Trade Expert Knocks 'Protectionism' of Gephardt and Dean" The Gephardt and Dean references suggest the interview content is dated, but this isn't so. Here Bhagwati describes late Clinton Administration and Bush Administration trade efforts:
    "There was a huge difference between the World Trade Organization's ministerial meeting in Seattle in 1999 and [the WTO meeting in] Cancun last year. President Clinton, by the time he got to Seattle, was probably exhausted from the Uruguay Round [of trade negotiations] that finally culminated with an accord in 1994 and NAFTA battles that continued throughout his time in office. His advisers and he had not thought through the implications of going to Seattle, and the incoming reports of all these demonstrations against "globalization" being planned had not registered. Clinton did not manage it well.

    By contrast, Bush came into office wanting to succeed in the Doha round of trade talks. His special trade representative, Robert Zoellick, had actively sought to get the Doha talks launched in Qatar right after 9/11. Then at Cancun, the first ministerial meeting after Doha, one of the sticking points was intellectual property protection for pharmaceuticals. There had been tough restrictions on what could be done by third world countries to supply [drugs to] other third world countries that do not have manufacturing capacity. Restrictions like that did not sit well with a lot of developing countries, and the non-governmental organizations [NGOs] that advised them were up in arms.

    We were being denounced by the NGOs and the developing countries. The United States, under pharmaceutical lobby pressure, held out against making the necessary adjustments or concessions. I was convinced that President Bush in the end, more than on any other lobbying issue, would be able to get the drug companies to make concessions: after all, it meant bringing together less than ten CEOs and bribing or threatening them to agree to the necessary concessions, a task that was far more simple than getting numerous powerful lobbying interests in sectors such as agriculture to accept compromises. I was looking therefore to see if we would make the requisite TRIPs/medicines concession at Cancun: that would be a surefire signal that President Bush wanted to make headway in the Doha negotiations. And the administration did mange to make that concession.. That's when I felt that the president was serious about the Doha Round and about ensuring a successful conclusion to this multilateral effort at freeing trade."
Here he voices uncertainties about the impact of agricultural trade liberalization on poor nations:
    "Can free trade genuinely help the poorest countries?

    That's my big concern. There is a difference between the openness of our market and the penetrability of that market. What worries me is whether we can do very much for African exports: for instance, if we open the doors and New Zealand, Argentina, Brazil, and Thailand all get into the markets, but African countries are unable to [compete]. The second problem is that a lot of countries will continue being importers of food. Right now, 42 of the 49 so-called least developed countries are importers of food and agricultural products. The assumption is that if we remove subsidies and raise agricultural prices, somehow they will be able to export to us. That's not so clear. I am accused of being the world's No. 1 free trader, but I know enough about the subject to know that if two people liberalize, a third might be hurt."
There are lots of other interesting questions and answers.

Fragile Russian boom?

Abiola reminds us how dependent recent Russian economic growth is on oil prices.

Public administration gone bad

Abiola gives us "Just a few things to keep in mind when evaluating calls for government to "do something!" "

Alternatives to Google

Tyler Cowen posted on search engines today, and identifies two potentially useful alternatives to Google, Teoma and Mooter. He has other comments and links as well - this is worth checking out.

Patents and competition policy

Jason Soon links to an Federal Trade Commission (FTC) paper on the the relationship between antitrust and patent policy, and to a paper by Daniel Rubinfeld and Robert Maness on "The Strategic Use of Patents: Implications for Antitrust," and offers commentary, in "Patent scepticism".

"Big Sugar"

The Bush Administration exempted sugar from the recent bilateral trade liberalization agreement with Australia. But why did it imperil the agreement to preserve an obstacle to trade that benefits relatively few Americans and only imposes costs on most of them? Aaron Lukas provides a brief review in "A Sticky State of Affairs: Sugar and the U.S.-Australia Free-Trade Agreement".
    "...The U.S. sugar program is a classic case of concentrated benefits and diffused costs. A very small number of sugar growers receives enormous benefits, while the costs of providing those benefits are spread across the U.S. economy. Consequently, U.S. sugar producers have a very strong incentive to lobby and fund campaigns of U.S. policymakers. And they have done so. Dominated largely by two companies in Florida (Flo-Sun and U.S. Sugar), the sugar lobby has been a major financial contributor to incumbent politicians. In the 2000 election cycle, for example, Flo-Sun, owned by the wealthy Cuban-American Fanjul family, contributed $690,750 in "soft money" to both the Democrats and the Republicans and $78,200 in direct funds to candidates and the parties. [13] Overall, the U.S. sugar industry contributed $7.2 million to political action committees and $5.7 million in soft money donations, for a total of $13 million—a bargain in exchange for protection worth hundreds of millions..."
("Big Sugar" is Lukas' expression)

Tariff-rate quotas are one of our key defenses against foreign sugar. These are described in detail by David Skully in the US Department of Agriculture report, "Economics of Tariff-Rate Quota Administration".

President's Day

Who were the five most important Presidents? Washington, Jefferson, Polk, Lincoln, and Franklin Roosevelt? Washington established the office, Jefferson acquired the Louisiana territories, Lincoln saved the union, and Roosevelt saved it again, beat the Axis, and laid the groundwork for the post-war world.

James K. Polk may be less obvious, but Polk annexed Texas, acquired the Southwest and California following the war with Mexico, and secured the Oregon territory. He finished the creation of the continental U.S. - and helped lay the groundwork for the American Civil War.

I'm willing to be instructed otherwise. (Maybe a little over the top with Roosevelt, but I'm currently under the influence of Conrad Black's new biography, Roosevelt. Champion of Freedom - and I know President's Day was Monday).

What Munch saw, where, and when

You know the painting The Scream by Edvard Munch. A swaying figure with a skull shaped head faces the viewer in the foreground, screaming. A harbor and bright run sunset swirl disorientingly in the background.

The Scream has a very concrete setting in time and space. Munch's painting was based on his emotional reaction to an actual sunset.
    "I was walking along the road with two friends - than the Sun set - all at once the sky became blood red - and I felt overcome with melancholy. I stood still and leaned against the railing, dead tired - clouds like blood and tongues of fire hung above the blue black fjord and the city. My friends went on and I stood alone, trembling with anxiety. I felt a great, unending scream piercing through nature."
Don Olson, Marilynn Olson, and Russel Doescher of Texas State University think they know exactly when, and exactly where (to within a few yards), Munch was overcome. The February Sky & Telescope has the story. You can also visit the Texas State University site for "Don’t Scream for Me, Krakatoa"

Olson, Olson and Doescher think that sometime in the fall of 1883 or early 1884, as he walked along a road by the harbor of Christiana (now Oslo) Munch saw an unusually red sunset caused by the atmospheric effects of the August 1883 explosion of the volcano Krakatoa in Indonesia.

The authors visited Oslo, and by walking the ground and using old photos identify the spot where Munch stood, to within a few yards. The link above only goes to a press release. The actual story walks through the logic of the analysis with current and historical photos, and is much more interesting.

Instruments of dollar policy

Oddly, although the world hangs on everything a U.S. Treasury Secretary says about the appropriate value of the dollar. the Secretary really can't do much about it. Daniel Gross explains over at Slate.

Stephen Kirchner comments over at Institutional Economics,
    "...Gross is rather too generous to former Treasury Secretary Rubin, recycling the conventional wisdom that his Wall Street background made him a more skilled Treasury Secretary. Unfortunately, it also made the Treasury an easy target for regulatory capture by Wall Street, particularly institutional bond holders. The Bush Administration's practice of appointing old-line industrialists to the position has been positive in this regard, although we have seen fewer serious financial crises that would really test whether the Administration would hold the line on these issues better than its predecessor. Interestingly enough, those who predicted that O'Neill would take a mercantilist approach to exchange rate policy because of his industrial background were dead wrong. Both O'Neill and Snow have favoured a non-interventionist policy stance..."
and links to the Cato Journal article "Myth of the Strong Dollar Policy".

John Dean reviews Robert Rubin's book

John Dean reviews Robert Rubin's new book at this FindLaw site. Dean highlights the contrasts between the view of Bush presented in former Treasury Secretary O'Neill's recent book, and the view of Clinton in Rubin's book. He points to Rubin's discussions of the deficit and probabilistic decision making as also worthwhile. Look for a link to a 1998 New York Times Rubin profile by Jacob Weisberg (co-author of the book under review here). At the time, Rubin was still Treasury Secretary.

Dean describes the picture of Clinton that emerges from the Rubin book:
    "...By way of comparison, Rubin reports Bill Clinton's involvement in the details of developing policy, his appreciative listening to all the alternatives, his decisionmaking, and his ability to give his staff constant guidance as to what he wanted. Clinton became involved in economic policy during the post-election transition, and his active role continued throughout his presidency.

    Typical was the post-inaugural period, where Rubin reports several weeks of meetings "to set the exact levels of deficit reduction, priorities for the allocation of budgetary resources, and the specifics of our tax proposal. Clinton remained intensely involved in the specifics." With the first Clinton budget, the president became so immersed in the details that he was able to make easy and fast decisions during the subsequent years.

    In Rubin's book, the Clinton team's brainpower and acumen are apparent -- whether they are devoted to policy development, or to several major economic crises, in Mexico, Russia and Asia. Even when Clinton was being battered by the investigation of Independent Counsel Ken Starr, and the Congressional impeachment drive to oust him, Rubin reports, Clinton continued to show an amazing ability to focus his intellect on problems. He was never disengaged, never bored.

    For instance, Rubin notes that "at a moment when the Lewinsky problems were at their height …, [w]e all sat around the table at Blair House, and [Clinton] led the discussion [of the Russian default on its foreign debt] as if nothing else were going on in the world. It was a remarkable seminar on the many aspects of the problem..."
Corrected 2-12-04 (I originally indicated that the review was by Howard, rather than John, Dean. John is correct. Thanks to the person who pointed out the mistake in the comments.

Suppose you're the president's economic advisor, and you disagree with him?

Jeffrey Frankel of Harvard, a member of Clinton's Council of Economic Advisors (CEA) from 1997 to 1999, has given this a lot of thought. You can find these thoughts in this draft of an article for Challenge magazine, "What Can an Economic Adviser Do When He Disagrees with the President?"

Members of the CEA operate under constraints other administration economic figures don't. These are academics, serving on the CEA for a short period of time, and heading back to live the rest of their lives in the university community. They have to behave themselves on the CEA. They can't say incredible or politically opportunistic things and go back to a successful academic career. The system is meant to give the president honest professional advice.

But the president won't always take that advice. For one thing,
    "...any president has to weigh in many factors besides what economic theory says, including many political factors. That is their job, in a democracy. In my view, a system in which the CEA gives advice that is a few steps farther removed from political reality than the rest of the White House, and in which the president then does something different from that advice because he sees a larger picture, is a system in which everybody is doing his or her job properly..."
So what's a CEA member to do when the president chooses actions that he can't, professionally, agree with? Frankel looks at the history of the CEA since the Johnson Administration, looking at different strategies. One piece of advice, choose your words carefully:
    "Mankiw [Bush's current CEA chair - Ben] has one major factor working in his favor: in these situations, the press and Congress seldom ask persistent or sophisticated questions. Or, if they do ask these questions, the answers don't get reported to the public. So one can usually formulate a careful sentence that appears to be consistent with the White House line and yet is not literally false, and get away with it. His immediate predecessor, Glenn Hubbard, did well with this strategy, which helped him win a powerful role as an administration insider. He signed on to the language that "long-term interest rates do not move in lockstep with actual or expected federal budget deficits." He, like Mankiw, has a textbook with the standard model linking interest rates to budget deficit. But because the sentence is true as written, under this strategy Hubbard has little to fear from his colleagues when he returns to university life. The press either lacked the opportunity or lacked the perspicacity -- I don't know which -- to ask the obvious follow-up questions. ("OK, we understand that budget deficits are not the only factor that determine interest rates. But, in your view, doesn't a budget deficit cause real interest rates to be higher than they otherwise would be? And regardless whether that increase is small, isn't it still true that the deficit crowds out investment?") Perhaps the press is giving this Bush an easier ride than his predecessors due to the post-September-11 national mood. Perhaps the press perceives correctly that its readership lacks the attention span or interest in policy details necessary to read complicated stories. In any case, the hard questions have not yet been asked. So Mankiw's best bet is probably this same strategy. If he can get away with it."
Brad DeLong recently had similar advice for the Undersecretary of the Treasury for International Affairs.

Frankel points out that the constraint on CEA members - they want to avoid saying something incredible so that they can go back to academics, gives the public some nice leverage:
    "But the public, Congress, and the media should ?do their jobs properly? as well. This includes putting members of the Council of Economic Advisers on the spot, when White House policy appears to deviate from good economics."

Service Sector efficiency

Technological change and capital investment drive labor costs down in different businesses and activities at different rates. Sectors that advance slowly see the relative costs of their products rise. Labor intensive service sectors - nursing, teaching, hair cutting - have tended to be among the slowly advancing sectors.

This idea that costs would rise more in labor intensive service sectors is called Baumol's disease, after the economist who popularized it. James Surowiecki explains it in the New Yorker in the column "WHAT AILS US."
    "...The average college professor can?t grade papers or give lectures any faster today than he did in the early nineties. It takes a waiter just as long to serve a meal, and a car-repair guy just as long to fix a radiator hose.

    The rest of the American economy functions differently. In most businesses, workers are continually getting more productive and can produce a lot more per hour than they could ten or twenty years ago. In 1979, workers at G.M. needed forty-one hours to assemble a car. Today, they need just twenty-four. In the nineties, according to the consulting firm McKinsey & Company, retailers boosted their sales per hour by sixty per cent, and that was nothing compared with computer makers, whose productivity since 1995 has gone up sixty per cent each year. Because companies are producing more for less, they can hold down costs, and when times are good they can raise wages without hiking prices. So, in the late nineties, as productivity rose, wages did, too, though inflation lay dormant.

    Generally, productivity growth is a boon, but it creates problems for non-productive enterprises like classical music, education, and car repair: to keep luring talent, they have to increase wages, or else people eventually migrate to businesses that pay better. Instead of becoming nurses or mechanics, they become telecom engineers or machinists. That?s why teachers are getting paid a lot more than they were twenty years ago. (The average salary for an associate college professor has risen almost seventy per cent since the early eighties, and that?s if you adjust for inflation.) To pay those wages, schools and hospitals have to raise prices. The result is that in industries where productivity is flat costs and prices keep going up. Economists call this phenomenon ?Baumol?s cost disease,? after William Baumol, the N.Y.U. economist who first made the diagnosis..."
Arnold Kling links to essays by Hal Varian, Jack Triplett and Barry Bosworth his blog posting "Service Sector Productivity". All three are pointing to the role information technology (IT) is now playing in increasing service sector productivity. Varian's New York Times column is probably the easiest to read. Varian is writing about changing patterns of productivity growth. He notes:
    "...Recently two Brookings Institution economists, Jack E. Triplett and Barry P. Bosworth, have been investigating productivity growth in the services industry and have reached a surprising conclusion: most of the post-1996 growth in productivity has come in services. (A summary of their work is available at The numbers in this column are based on their later, unpublished study.)...

    ...the recent evidence compiled by Mr. Triplett and Mr. Bosworth shows that information technology may just be the cure for Baumol's disease.

    They found that from 1995 to 2001, labor productivity in services grew at a 2.6 percent rate, outpacing the 2.3 percent rate for goods-producing sectors. Furthermore, this phenomenon was widespread: 24 out of the 29 service industries they studied exhibited growth in labor productivity after 1995, and 17 experienced accelerated growth..."
Here's an example of the potential for new techologies to increase labor productivity in fisheries management. Archipelago Marine in British Columbia is pioneering innovative uses of video, remote sensing, and GPS technology to monitor fishing vessel catches. This offers the potential to reduce the costs of on-board observers, these are very expensive, and to extend monitoring onto smaller vessels where it is prohibitively expensive now. These technologies may allow a much smaller number of observers to keep tabs on the catch of any given number of vessels.

Administration Outsourcing Remarks

Gregory Mankiw, the Chairman of the President's Council of Economic Advisors (CEA), testified to Congress two days ago that outsourcing of professional services could have advantages for the U.S. economy. (The CEA is a committee of academics meant to provide the president with disinterested economic advice.) Kerry immediately made this an issue. Tyler Cowen has a useful selection of blog links on the debate.

Mankiw's remarks were made as a part of the presentation to Congress of the annual Economic Report of the President. Alex Tabarrok provides a review of the report.

Free Trade Lite

The U.S. and Australia signed a Free Trade Agreement (FTA) this week. The "Lite" in the post title refers to (a) the bilateral rather than multilateral scope of the agreement, and (b) the relatively limited relaxation of burdens on agricultural trade in the treaty. [The link above is to the US web page on this, the Australian page is here.]

Paul Blustein reported on the agreement for the Washington Post
    "The United States and Australia announced yesterday that they concluded a free-trade agreement, one of the biggest in a series of two-way deals the Bush administration is pursuing with a number of countries aimed at tearing down barriers to international commerce.

    But the accord, while scrapping tariffs on nearly all manufactured goods traded between the two countries, would maintain heavy U.S. protection against imports of Australian sugar, beef and dairy products. That is a sign of the enormous clout American agricultural producers wield over U.S. trade policy, especially in an election year, and it underlines the difficulties of securing broader trade agreements with developing countries whose farmers want to sell more of their goods abroad..."
Elizabeth Becker reports for the New York Times

Free Trade Agreements are agreements to reduce trade barriers between small small groups of countries; the alternative is world-wide "multilateral" negotiations and agreements. The Congressional Budget Office published an issue brief on "The Pros and Cons of Pursuing Free-Trade Agreements" last July.
    "...In most cases, all of their effects--good and bad--should be extremely small. However, the arguments for and against FTAs extend beyond their net economic effects on the United States to considerations of foreign policy and tactics for achieving multilateral free trade.

    The net effects of the new FTAs on the other countries involved should also be beneficial but much more significant than the effects on the United States because of the much smaller size of those countries' economies. FTAs thus provide a way for the United States to help various countries for foreign policy reasons while having little effect on the United States. They also offer a way to continue making headway toward the goal of free trade in the face of difficulties that have slowed progress in the Doha Round of WTO negotiations. In fact, they may help stimulate progress in that round because countries not party to the FTAs may fear being left behind while countries that are party to such agreements expand trade with the United States.

    Critics worry, however, that the pursuit of free-trade agreements could divert the world from multilateral negotiations and lead to the development of rival trading blocs centered on the United States, the European Union (EU), and Japan. Indeed, the EU has negotiated a number of FTAs in recent years. Critics also argue that because of differences in negotiating dynamics, FTAs between small developing countries and such large entities as the United States or the EU are likely to leave in place some trade barriers that multilateral negotiations in the absence of FTAs would eliminate. Foreign-policy and tactical considerations must be weighed alongside the economic arguments in determining whether the pursuit of FTAs is an advisable path to the goal of multilateral free trade."
FTAs are negotiated by the President under the authority of Congress. The statutes leave the choice of countries for FTA negotiations up to the President. The U.S. General Accounting Office (GAO), an arm of Congress, published a report on that process today: "Intensifying Free Trade Negotiating Agenda Calls for Better Allocation of Staff and Resources". (GAO-04-233; published February 10, 2004). [GAO reports apparently don't have unique URLs. Go to the GAO site, use the "GAO Reports" link in the left column, click on "Reports and Testimony", click on "Other Report Search Options", and search by GAO number.]

The GAO study looks at the evolution of the criteria used to determine which countries to engage in FTA negotiations, and the evolution of the internal U.S. decision-making structure. The report's theme, how does the U.S. allocate its scarce negotiating resources among competing ends:
    "...The administration’s overall trade liberalization strategy has driven decisions about deploying resources to advance the U.S.’s ambitious FTA negotiating agenda. However, decisions to pursue FTAs have been made with little systematic planning regarding trade-offs with other trade priorities, even though FTAs are resource intensive. USTR staff and travel funds are heavily committed to FTAs. For example, FTA-related travel accounted for 37 percent of USTR’s travel budget in fiscal year 2003. USTR also relies on specialists at other agencies to assist with negotiations and analysis. USTR is taking steps, such as sequencing negotiations, to address these constraints. Because of concerns over the resources required to accomplish the growing FTA negotiating agenda, the consideration of resource constraints has now been included as one of the factors used for selecting FTA partners. However, decisions to pursue FTAs still come without systematic data or planning for the actual resources that USTR or other agencies require. As more FTAs are contemplated in the wake of the failed Cancun WTO talks, existing mechanisms may prove inadequate to the task of aggressively pursuing a bilateral FTA agenda while remaining engaged in regional and multilateral forums..."
Daniel Drezner posted on the agreement this afternoon, noting especially the absence of liberalization of sugar rules. Australian John Quiggin thinks the treaty is "Dead on Arrival in Australia. Quiggin is also concerned that this agreement will force Australia to substitute U.S. institutions for many of its own
    "...There are two issues in deciding whether economic integration with the US is a good idea. The first is whether, in general terms, the economic and social institutions of the US are better than those of Australia. If you read the writings of FTA supporters, it's pretty clear that they think this is the case, that we would be better off with less government intervention of all kinds, weaker unions, greater income inequality and so on.

    The second issue, thrown into relief by the FTA negotiations is whether it's a good idea to let our economic institutions to be determined by a government that is responsive to American interest groups, but not concerned with the welfare of Australians. The issue of copyright provides a nice example. There are a lot of arguments for and against long periods of copyright, but there are also issues of income distribution. In aggregate, an extension of copyright terms will redistribute income from Australians to Americans because the Americans own more copyrights of general interest than we do. Whatever the balance of the economic arguments, it's a safe bet that American decisionmaking processes will err on the side of long copyright terms..."
Fellow Australian Peter Gallagher is more optimistic about the value of the treaty to his country, and is more optimistic about the value of increased economic integration:
    "What will the deal be worth? More data and analysis are needed to make a full accounting. But my initial assessement is:

    • In trade terms certainly much less than even the modest projections of the CIS study. What we can see so far points to important commercial results for some Australian farm industries that have previously been almost shut out of the US market. The present value of the access for dairy, for example, will be an additional $US40 million exports in the first year -- more than doubling the value of its current access -- growing to (possibly) an additional $US80 - $90 million in year 20. But the longer-term impacts will be much less than 'free trade' promised. In 2002 I estimated the free-trade potential for the Australian industry at about $US500 million (about one half of one percent of the value of US dairy sales). On current indications the agreement will permit access valued at about 20% of that level.

    • Overall however, the outlook is much brighter. It has always been likely that the biggest benefits from this agreement for Australia would be found not in the direct trade impact (because bilateral trade barriers were already low) but in the less tangible impacts of closer economic integration with the world's most productive economy, one of our largest trading partners and our biggest source of (and destination for) investment flows. That benefit remains -- only slightly tarnished by continued US agricultural protection.

    Australia's economic outlook will be improved by this agreement, in my view. Assuming, of course, that the proposed treaties make it through an increasingly protectionist US Congress and through a probably hostile reception from the Australian opposition Labor party."
Revised since first posted

The economic road to Catholicism

Stephen Bainbridge says "I am the only person I know who came to Catholicism through economic analysis of corporate governance."
    "A couple of years ago I wrote a series of law review articles about participatory management – i.e., employee involvement in corporate governance. One of the questions in which I got interested was whether employees have a right to participate in corporate decisionmaking, which lead to an inquiry into natural law, which in turn stimulated an interest in faith-based analyses of corporate governance. At the time, I was an evangelical disgruntled with the state of evangelical scholarship (Mark Noll, who I regard as the doyen of evangelical scholars and church historians, wrote a great book on this problem: The Scandal of the Evangelical Mind). Catholic social teaching struck me as the only well-developed faith-based account around. I relied on it in writing Corporate Decisionmaking and the Moral Rights of Employees: Participatory Management and Natural Law, 43 Villanova Law Review 741 (1998). Reading the papal encyclicals on the economy, especially John Paul II’s Centesimus Annus, and Michael Novak’s books, especially Toward a Theology of the Corporation (which I also keep meaning to review), in doing the research on that project got me interested in Catholicism. (I’m also a longtime reader of the fabulous magazine First Things, which probably lay the groundwork.) One thing lead to another—i.e., RCIA–and my wife and I eventually were received into the Catholic church."

Let's auction off airplane takeoff and landing slots!

I agree with Lynne Kiesling - let's use market prices to ration access to scarce airport facilities and reduce congestion and inconvenience. And:
    "*Make little planes and big planes participate in the same auction. One of the most egregious uses of the nice, long runways at O'Hare during peak periods is seeing streams of Cessnas in between 737s. If the CEO's private plane's journey is that valuable at that time, make the company pay for the time slot."
Lawrence Solum wants to apply a similar principle to the allocation of email storage space on the University of San Diego computer system.

With Byrd to the Antarctic

Norman Vaughan went to Antarctica as an assistant dog handler on Admiral Richard Byrd's 1928-30 expedition. He's the only survivor of that expedition. George Bryson, of the Anchorage Daily News interviewed the explorer (and Anchorage resident) in connection with the opening of an exhibit on Shackleton at the Anchorage Museum of History and Art.

Vaughan tells Bryson a riveting story, complete with murder threats, parasitic worms crawling under the skin, human breath falling solid to the ground, and a 1,500 mile dog sled trek.
    "...They ate pretty well, Vaughan said. Ravenous for protein and animal fat, they'd consumed a lot of whale meat during the long voyage to Antarctica -- part of it in a square-masted sailing ship -- then penguin and seal meat once they landed.

    Butchering seals, Vaughan became infested with parasitic worms, which began to multiply and crawl beneath his skin. They especially tormented his legs as he and the other dog drivers labored to transport 650 tons of supplies from the ship to the Little America building site 10 miles inland. The camp doctor tried to extract the worms with forceps, which Vaughan describes in his book, "With Byrd at the Bottom of the World," in graphically painful terms, but it took weeks until he was fully cured..."
Ten years ago, at 88, he returned to the Antarctic and climbed Mt. Vaughan (named in his honor). He'd like to go back in a couple years to celebrate his 100th birthday.

How to be an Undersecretary of the Treasury for International Affairs

Brad DeLong argues that the Bush Administration Undersecretary should receive an unsatisfactory grade in Undersecretaryship 101.
    "...One of the requirements for a satisfactory grade in Undersecretaryship 101 is knowing how to correctly handle being caught in such an impossible position: the president has made a very, very bad decision [with the new budget - Ben], everyone on the outside knows that it is a very, very bad decision, it will have damaging long-run consequences, so how do you react?

    Your reaction needs to establish three things:

    You are loyal to the president.
    You know that the president's decision is insane.
    You and your allies are working quietly but intensively on the inside to fix things.

    How do you do this? The key is to focus on those parts of what the president says his priorities are that are actually constructive, and to give the wink-wink-nudge-nudge signals to reassure your listeners that you are not lost in the Theta Quadrant. Here are three possible lines Taylor could have taken..."
    read the rest

Should your state government buy IT services overseas, or not?

I agree with Ed Lotterman at the Twin Cities Pioneer Press. State governments should be giving good, cost effective, service to their citizens. If outsourcing gives them an efficiency advantage they should go for it, just like they've substituted word processing for manual typewriting. Why should state governments deny themselves efficiencies available to the private sector? As Lotterman says,
    "Maintenance workers at a private college where I teach zip around in small, imported pickups. Similar pickups were rare when I worked at the University of Minnesota because state institutions generally buy U.S.-made vehicles. There seems to be an analogous sentiment that while a private firm may contract to have software written in Asia, Minnesota state agencies should not."
Alaskans could certainly reduce the money sent out of state for bananas if we required (if we could require) all bananas consumed in Alaska to be produced here. And I bet we could grow them too, if we invested enough money in high-tech greenhouses. But it doesn't make sense to do this. It's not even clear that imposing this requirement, and making it more expensive to live in Alaska, would increase employment in the banana growing and distribution sector. Requiring state documents to be produced with manual typewriters might increase state government employment - so long as we increased taxes proportionately. Is an increase in the tax burden the way to grow the private sector?

One more from Marginal Revolution

Just one more post from Marginal Revolution tonight. Countries taking advantage of comparative advantage under a regime of free trade would tend to specialize in the production of different things. On the other hand, one of the chief defenses against excessive risk is diversification into activities with relatively uncorrelated returns. Tyler Cowen isn't too impressed with the diversification reservation, and explains why in "Does free trade lead to insufficient diversification?".

How to communicate data better

Alex Tabarrok at Marginal Revolution links to a web site with examples of very effective graphics - these communicate lots of information at a glance.

How to maximize the resale value of your home

Paul Kedrosky at Infectious Greed and Tyler Cowen at Marginal Revolution link to a recent study on the resale returns to different types of home renovations. Cowen's summary?
    "Many of these amenities sell for more than what they cost to install. So the bottom line here supports the conventional wisdom of the trade. People don't fix up their homes enough before selling them."

New critique of risk assessment

Lawrence Solum recommends downloading and reading "Against 'Individual Risk': A Sympathetic Critique of Risk Assessment " by Mattew Adler. The abstract describes the paper as:
    "...In short, the Article provides a wide ranging, critical analysis of contemporary risk assessment and risk regulation. The perspective offered here is that of the sympathetic critic. Risk assessment itself - the enterprise of quantifying health and safety threats - represents a great leap forward for public rationality, and should not be abandoned. Rather, the current conception of risk assessment needs to be reworked. Risk needs to be seen in Bayesian rather than frequentist terms. And regulatory choice procedures must be focused, centrally, on the total numbers of the persons exposed to toxins, radiation, pathogens, or other health or safety hazards - not merely the risk that some particular person (whatever her place in the exposure distribution) incurs."
Solum says:
    "...Adler's work continues to advance the ball on a set of issues that is absolutely crucial in both theory and practice of administrative law. Here's how I think about it. "Cost-benefit analysis" and its methodological cousins are here to stay. Given that fact, it is crucially important that this methodology be made as supple as possible. In recent work, Adler has focused on the idea for risk...

For and against intellectual property

Lawrence Solum has links to arguments for and against diferent levels of protection of intellectual property rights - such as drug patents - in "Bainbridge on the Economic Benefits of Drug Patents".

Chris Foote and the Treasure of Nimrud

I always thought The Primal and the Dual would the a great title for a linear programming text. Now there's the "Indiana Jonesish" title above for an economics book. Chris Foote, an economist with the Boston Federal Reserve Bank, spent last summer working as an economic advisor to the Coalition in Iraq: "An Economist Reports from Baghdad" (Federal Reserve Bank of Boston Regional Review, Quarter 3, 2003):
    "Early on, I visit Iraq’s Central Bank, which was also destroyed by looters. Our mission is to check on the Treasure of Nimrud, a collection of ancient Assyrian jewelry that was stored in the bank’s vault for safekeeping in the early 1990s. The bank’s basement was flooded with sewage water during the looting and has only recently been drained. Our group trudges down the unlit, still slimy stairs, careful not to slip. When we reach the bottom, I see that the corner of one of the vault doors has been peeled away, as if by a giant can opener. I am told that during the postwar chaos, someone tried to open this door with a rocket- propelled grenade, incinerating himself in the process. (The lock in the door held.) The deputy head of the Central Bank jiggles a number of keys and opens another door nearby. We are happy to learn that the treasures are intact...
Most of his work was more mundane. I learned about this from Alex Tabarrok.

Change on Feb 9, 204

Bush Administration economic policy making - documentary evidence

Some of the documents Ron Suskind used in his recent look at Bush Administration economic policy making (The Price of Loyalty) may be found here: "An Experiment in Transparency". Timothy Noah at Slate reports on the release project - Suskind posted 20 documents to his web site today, and plans to post about the same number each week for a while. I first learned about this from Brad DeLong: "Documents, Documents, Documents".

One of the documents is a memo from a Treasury press officer to Secretary O'Neill with guidance on how to talk with the press at a February 2001 budget rollout. DeLong provides commentary here and here DeLong's second comment has some good insight into how the Treasury Secretary compromised his standing with senators and his independence with respect to the administration political staff, by lying to avoid embarrassing the White House.

Michael Lewis, a columnist reviews Suskind's book. Lewis suspects that Fed Chair Allan Greenspan cooperated with the author to send a message to the administration:
    "The character in this drama with interesting motives isn't O'Neill but his more shadowy friend, Alan Greenspan. It's evident that Greenspan helped with the book; his fingerprints are all over the thing.

    Why would the Fed chairman grant an interview, even off the record, to a journalist he knew to be armed and dangerous to the Bush White House? Surely, not out of a sense of loyalty to his old friend Paul O'Neill. If Greenspan had that gene, he wouldn't have lasted as long as he has.

    Even more surely, not out of ignorance that he was helping to explode a political bomb. Greenspan doesn't get out of bed before examining the political consequences.

    The only good explanation is that he knew exactly what Paul O'Neill's book would say -- that the fiscal irresponsibility of the Bush administration had been almost criminal and that the manner in which Bush made decisions was deeply disturbing -- and he was pleased to have it said..."
I learned about this column from Brad DeLong.

OMB's peer review proposals

The Office of Management and Budget (OMB) has proposed new guidelines for the peer review of the science underlying regulations. Wired magazine has a critical review of the proposals here: "Stacking the Deck Against Science". I learned about this from Chris Mooney, here: "Wired News on Peer Review"

How much do new drugs really cost?

Alex Tabarrok has a great piece on opportunity costs here: "The cost of new drugs".

The 2005 Budget

President Bush's proposed FY 2005 budget was released yesterday. The budget documents may be found here, at the Office of Management and Budget (OMB) web site: "Budget of the United States Government Fiscal Year 2005". The liberal Center for Budget and Policy Priorities (CBPP) is accumulating a set of analyses of the budget proposals here: "Issues Raised by the President's Budget".

Jonathan Weisman, at the Washington Post discusses the political implications of the budget: "Bush Reaches Back to His Conservative Base". Facing reelection, Bush can push towards the center and try and pick up votes there, or look towards his conservative base, trying to motivate them to come out and vote for him. Weisman reports that many think he is following the second strategy:
    "For months, the White House has faced stiff criticism from conservatives, who have accused Bush of abandoning Republican principles of fiscal restraint. Since the president came to office, spending at the annual discretion of Congress has risen at a historic clip of more than 27 percent. With the new Medicare prescription drug law, which Bush supported, he can claim the largest expansion of entitlement spending in that program's history...

    Federal budget analyst Stan Collender, a managing director of Financial Dynamics, agreed. He said Bush keenly remembers the lesson of the 1992 reelection campaign of his father, President George H.W. Bush, when angry conservatives backed challenger Patrick Buchanan in the primaries and than stayed home in droves when Democrat Bill Clinton won the general election. The Republican conservative base did not mobilize again in 1996, when it perceived the GOP nominee, Robert J. Dole, as a Washington accommodator.

    Indeed, political tacticians have long argued whether national elections are won by candidates who mobilize their core voters or who win over swing voters in the middle. The president appears to have decided, Collender said.

    "This is a heavy play to the Republican base," he said. "He almost didn't have a choice, with the deficit so high and them so angry. The one thing he needs most is to make sure those people come out and vote."
Brad DeLong argues that Weisman's initial story, cobbled together rapidly to get something out, drew heavily on administration press materials, and effectively promoted the administration's story line: "Why Oh Why Can't We Have a Better Press Corps?: Agreement From an Unexpected Quarter".

Mark Schmitt, The Decembrist posted on "How To Read the Bush Budget" on January 3. He's annoyed by Bush Administration innovations in the physical presentation of the document, here: "The Budget Ads are Better than the Super Bowl Ads".

How to run a meeting

There is lots of good advice about how to run an efficient meeting. Tyler Cowen lists some, here: "How to improve meetings" and here "How to improve meetings".

Efficiency has to do with the appropriate balance between means and ends. That balance will depend on a correct understanding of the ends. The value of Cowen's first post lies in its delineation of the many potential ends of a meeting:
    "...Meetings are not always about the efficient exchange of information, or discovering a new idea. Meetings can be about displays of power, signaling that a coalition is in place, wearing down an opponent, staging "theater" to make someone feel better, giving key players the feeling of being insiders, transmitting information about status, or simply marking time until something better happens. It's one thing to hate meetings. But before you can improve them, make sure you know what meetings are all about."

How to administer a colony

Not a course in the UAS Public Administration curriculum.

If your goal is the happiness of the colonial population, you might take a lesson from the German colonial administrators in the early 20th Century South Pacific. Joel at Far Outliers reviews a book on the German colonies in the South Pacific, and the impact of WWI, here: "The German Pacific "Gutpela Taim Bipo"". (about The Neglected War: The German South Pacific and the Influence of World War I, by Hermann Joseph Hiery, U. Hawai‘i Press, 1995).

My understanding had always been that German colonial administration in Africa had been pretty cruel. But German administrators in the South Pacific tended to be drawn from a different social class, and had a different approach. Joel:
    "...While Germany's African colonies were governed by aristocrats, often with the aid of sizable contingents of Schutztruppe (colonial troops), the farflung Pacific colonies were governed by administrators drawn from the middle class, with the aid of tiny police forces.

    In New Guinea they replaced the "Perpetuum Bellum Melanesicum" with a Pax Germanica, which attracted more and more unpacified Melanesians. But they also generally let Melanesian villagers settle their own disputes in traditional ways, often by compensation for damages rather than by the trial and conviction of offenders before German courts..."

Light posting this week

I work for the Alaska Region of the National Marine Fisheries Service. Five times a year the North Pacific Fisheries Management Council meets and makes its policy decisions with respect to the federally managed fisheries off of Alaska. The February meeting is this week. Our office is busy during these meetings; extra working hours don't leave much time for blogging. I should be able to post more often in about a week.