Economics and Alaska

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"Time is money"

Craig Newmark links to evidence that people who make more speed more. Many of the speeders interviewed report that "time is money."
posted by Ben Muse at 5:47 PM

 
Bad law in Virginia

Kevin Brancato (Truck and Barter) posts on Virginia's anti-"price gouging" law. Apparently the law reads (in part),

"During any time of disaster, it shall be unlawful for any supplier to sell, lease, or license, or to offer to sell, lease, or license, any necessary goods and services at an unconscionable price within the area for which the state of emergency is declared. Actual sales at the increased price shall not be required for the increase to be considered unconscionable."

Apparently inspired by the aftermath of Hurricane Isabel, this would limit price increases following a natural disaster to those justified on the basis of cost increases. Brancato also links to a column on the same topic by Walter Williams. Williams points to the possibility that price controls imposed under this law will impede recovery efforts in a stricken community.

I posted on post-Isabel price-gouging last September (linking to some other useful resources): "The pros and cons of price gouging".
posted by Ben Muse at 5:34 PM

 
Offshore outsourcing has little effect on U.S. jobs?

Kash, at Angry Bear summarizes, and links to, an Institute for International Economics report that finds little offshore outsourcing impact on the U.S. job market: "In general, the report does not turn up any evidence the offshore outsourcing is responsible for significant job losses in any particular industry or occupation."


posted by Ben Muse at 12:38 PM

 
Unfounded fear of competition

Tyler Cowen reports on how and why French auction firms survived the relaxation of barriers to international competition, and the entry of Christie's and Southeby's into the market.
posted by Ben Muse at 12:31 PM

 
The "small state" advantage in Congress

Brian Knight reports on the existence, sources, and efficiency implications of the small state advantage in Congress in a new National Bureau of Economic Research (NBER) working paper. From the abstract:

"While representation in the U.S. House is based upon state population, each state has an equal number (two) of U.S. Senators. Thus, relative to the state delegations in the U.S. House, small population states are provided disproportionate bargaining power in the U.S. Senate.

This paper provides new evidence on the role of this small state bargaining power in the distribution of federal funds using data on projects earmarked in appropriations bills between 1995 and 2003.

Relative to earmarks secured in House appropriations bills, Senate earmarks exhibit a small state advantage that is both economically and statistically significant. The paper also examines two theoretically-motivated channels through which this small state advantage operates: increased proposal power through appropriations committee representation and the lower cost of securing votes due to smaller federal tax shares. Taken together, these two channels explain over 80 percent of the measured small state bias. Finally, a welfare analysis demonstrates the inefficiency of the measured small state bias."

See "Legislative Representation, Bargaining Power, and the Distribution of Federal Funds: Evidence from the U.S. Senate" (NBER Working paper w10385).


posted by Ben Muse at 12:11 PM

 
International trade and externalities

Michael Margolis and Jason Shogren point out ("How Trade Politics Affect Invasive Species Control", Resources for the Future discussion paper 04-07) that international trade itself may be a source of negative externalities. Unpleasant invasive species (think zebra muscles in the Great Lakes) may come in the cargo, or in ship ballast water; the movement of cargo may create pollution externalities; trade activity may provide opportunities for the movement of contraband or terrorists. From the abstract:

"Trade has become the main mode of transport for many invasive species including diseases and agricultural pests. Most species are brought to their new homes unintentionally, which constitute a market failure rooted in international trade. Unless it is practical to drive invasion risk to zero, the external costs may justify a tariff..."

The problem is that in a world with interest groups, and interest group contributions to politicians, "The invasive-species tariff is set higher than it would be if government were independent of rent-seeking contributors." "The informational needs required to distinguish disguised protectionism from legitimate public-goods protection are formidable."
posted by Ben Muse at 4:15 PM

 
While Suharto was stealing all his money, Indonesia was growing lickety-split

I posted Transparency International's list of top kleptocrats below. Suharto of Indonesia leads the list, allegedly stealing something between $15 and $35 billion. But I also note that Indonesia grew quite a bit under his regime. Indonesia was one of four ASEAN countries that doubled real income per person between 1980 and 1995. (Michael Sarel, Growth and Productivity in ASEAN countries, IMF working paper, 1997).

I'm not familiar with the details of the Indonesia economy during this period, but I wonder if Suharto is an example of one of Mancur Olson's predatory, rent maximizing, 'warlords' ("Creating the wealth of nations") adopting policies that increase the wealth of the nation, in order to increase his take. It's more lucrative to steal from the rich than from the poor.
posted by Ben Muse at 11:09 PM

 
Tyler Cowen buckles on his armor and sallies forth to UNESCO

Cowen appears to be heading over to France for a meeting on cultural diversity.
posted by Ben Muse at 4:03 PM

 
Core Kerry economic team

Louis Uchitelle reports on the key members of Kerry's economic team in tomorrow's New York Times:A Kerry Team, a Clinton Touch.

"THEY are a motley team, the four members of John Kerry's war room for economic policy.

Remember Roger C. Altman, the high-ranking Treasury official in the early Clinton years, forced out for being too loyal to his boss in the Whitewater investigation? He is one of them. Gene Sperling, a White House insider in all eight Clinton years, is another. Then there are two less-known 30-somethings: Jason Furman, a Harvard-trained economist... and Sarah Bianchi, who was Al Gore's policy adviser in 2000 and is now Mr. Kerry's. Both got their start in the Clinton White House, as young aides barely out of college...

...Even so, the fixes that Mr. Kerry and his core economic advisers are beginning to offer are clearly rooted in Clinton economics, which is resolutely centrist. Fiscal responsibility and deficit reduction, hallmarks of the Clinton years, are bedrock orthodoxy in the Kerry camp, too.

So is faith in the private sector's powers to generate prosperity. Job creation will come from corporate America, not government, once the right incentives and subsidies are in place, the war room says. In fact, the Clinton-era god of deficit reduction and private-sector supremacy is also worshiped in the Kerry camp...."

posted by Ben Muse at 3:51 PM

 
Late 20th Century Kleptocrats

Transparency International reports on the top ten kleptocrats of the late 20th Century:

1. Mohamed Suharto President of Indonesia from 1967-98: US$ 15 to 35 billion
2. Ferdinand Marcos President of the Philippines from 1972-86 US$ 5 to 10 billion
3. Mobutu Sese Seko President of Zaire from 1965-97 US$ 5 billion
4. Sani Abacha President of Nigeria from 1993-98 US$ 2 to 5 billion
5. Slobodan Milosevic President of Serbia/Yugoslavia from 1989-2000 US$ 1 billion
6. Jean-Claude Duvalier President of Haiti from 1971-86 US$300 to 800 million
7. Alberto Fujimori President of Peru from 1990-2000 US$ 600 million
8. Pavlo Lazarenko Prime Minister of Ukraine from 1996-97 US$ 114 to 200 million
9. Arnoldo Alemán President of Nicaragua from 1997-2002 US$ 100 million
10. Joseph Estrada President of the Philippines from 1998-2001 US$ 78 to 80 million"

The list is part of the press release prepared to draw attention to Transparency International's new Global Corruption Report 2004 Brendan I. Koerner explains how Suharto reached the top of his field in Slate: "How Did Suharto Steal $35 Billion? Cronyism 101."
posted by Ben Muse at 5:27 PM

 
Publicly financed stadiums: no net gain

Russell Roberts (at Marginal Revolution) reports on research showing that publicly financed sports stadiums don't tend to produce net economic benefits for the communities that attract them.
posted by Ben Muse at 6:51 AM

 
Medicare and Social Security Reports released

The trustees of the Social Security and Medicare programs issued their annual reports yesterday. Robert Pear of the New York Times says these show that the fiscal status of the Medicare program has gotten worse over the past year, but that there has been little change in the status of the Social Security program:

"Medicare's financial condition has significantly deteriorated, partly because of exploding health costs and partly because of the new Medicare law, the government reported on Tuesday.

In its annual report to Congress, the Medicare board of trustees said the program's hospital insurance trust fund could run out of money before the end of the next decade.

The trustees have made such projections in the past, but this one was much bleaker than the outlook reported just last year.

By contrast, the financial outlook for Social Security, though shaky in the long run, changed little from last year..."

The actual reports are here. The Center on Budget and Policy Priorities (CBPP) discusses the social security report here.
posted by Ben Muse at 6:29 AM

 
High gas prices explained

By Lynne Kiesling, here: "Why Are Gas Prices High and Rising?".
posted by Ben Muse at 10:04 PM

 
Pollination and public policy

Andrew David Chamberlain's post, "Of honey bees and apple orchards" surveys the role of honey bees in the history of economic thought with links to papers on pollination markets and the U.S. honey program.

I recommend a stop by Chamberlain's blog, The Idea Shop. It's well written, with lots of original content and enticing links. These posts are little jewels; as compositions, they'll repay study by other bloggers.
posted by Ben Muse at 9:47 PM

 
What can you tell about a state by the assets it exempts from bankruptcy proceedings?

Scheherazade reads the character of a state in the assets it exempts from bankruptcy proceedings.
posted by Ben Muse at 8:28 PM

 
What are we good at?

Will the U.S. be able to compete in a world without trade barriers? Marc Andreessen, developer of the web browsers Mosaic and Netscape, surveys our strengths for John Robb.

I learned about this from Alex Tabarrok at Marginal Revolution who also provides a link to a USA Today column on Andreessen's views.
posted by Ben Muse at 6:40 AM

 
Being rich isn't what it once was

The share of U.S. wealth in the hands of the top 1% of U.S. persons fell a lot in the twentieth century. Take a look at the trend, as estimated in a new working paper by Wojciech Kopczuk and Emmanuel Saez ("Top Wealth Shares in the United States, 1916-2000: Evidence from Estate Tax Returns")



Figure 2 in Kopczuk and Saez.

The share ranges between 35% and 40% from 1916 to the start of the depression, then falls through the depression years and the world war. After the war, it never rises above 25%, and even appears to fall somewhat during the 1970s. It is stable at about 21-22% during the boom of the 1990s.

What caused these shifts? Kopczuk and Saez have some ideas:

• The shift from the "high" wealth share before the depression to the "low" level from the world war on may be associated with (a) the collapse of stock values during the depression and (b) the increase in corporate income taxes during WWII. (p 11)


• The failure of the wealth share to bounce back after the world war may be due to (a) the persistence of progressive income and estate taxes after the world war, (b) the emergence of strong anti-trust policies in the New Deal and their persistence after the war, and (c) post-war "democratization" of higher education contributing "to the emergence of a large middle and upper middle class in America which was able to accumulate wealth and hence perhaps reduce the share of total wealth accruing to the groups in the top percentile." (pgs 18-19)


• A week or so ago I posted on an analysis of twentieth century income trends in top income groups prepared by Piketty and Saez. The figure I posted showed upward trends in the income shares received by the top 10% and 1% of U.S. income earners in recent years. The figure above shows that this increase in income didn't translate (up to 2000) in an increase in the wealth share for the top 1% of the population. Kopczuk and Saez speculate that (a) there was not enough time during the boom for people to accumulate enough wealth, (b) savings rates for people with high incomes may be lower now than they once were, (c) a larger proportion of high earners may be up there for only a short period of time. (pgs. 16-17)

This time series isn't available from government data sets. Kopczuk and Saez had to estimate this using information from estate tax records and data sets on mortality rates. The paper provides the details and a discussion of potential biases.
posted by Ben Muse at 8:16 PM

 
Sending wine across state lines

The constitutional amendment repealing prohibition (the 21st) included a section (Section 2) allowing states to regulate shipments of alcoholic drinks across their borders: "The transportation or importation into any state, territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited."

On the other hand the Constitution's Commerce Clause, "The Congress shall have Power...To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes...", gives Congress the power to regulate commerce between states.

The tension between the two provisions is currently being addressed by the courts. On March 7, I posted on a federal court case overturning Michigan regulations forbidding direct alcohol shipments from out of state, but not in-state, wineries. The post built on another by Jim Leitzel at Vice Squad. Also see Peter Gallagher's comment to my post, with an Australian's perspective on the apparent protectionist intent of many state regulations.

Stephen Bainbridge, a wine lover, has also been posting (at his blog ProfessorBainbridge), on this. On January 16, he posted with a brief mention of the issue, and a link to a Wine Institute website with legal background (and a state by state survey of restrictive laws and regulations). On January 17, he posted a response to his earlier post by reader Matthew Patterson. Petterson provides helpful background on the legal history of the 21st Amendment's Section 2. Petterson also argues that the way to free up interstate trade in wines is not to use the commerce clause to undercut the "plain meaning" of Section 2, but to work on getting states to change their laws. Today (March 21) Bainbridge points to several on-line Wine Spectator columns on the legal status of the various cases.
posted by Ben Muse at 8:28 PM

 
The de-industrialization that wasn't

Brink Lindsey takes on the job loss rationale for protection in a new Cato Institute briefing paper, "Job Losses and Trade. A Reality Check.". Is the U.S. de-industrializing?

"It is true that manufacturing’s share of gross domestic product has been gradually declining over time—from 27.0 percent in 1960 to 13.9 percent in 2002. The percentage of U.S. workers employed in manufacturing has likewise been falling—from 28.4 percent to 11.7 percent over the same period. The primary cause of these trends is the superior productivity of U.S. manufacturers... output per hour in the overall U.S. nonfarm business sector rose 50 percent between 1980 and 2002; by contrast, manufacturing output per hour shot up 103 per-cent. In other words, goods are getting cheaper and cheaper relative to services. Since this faster productivity growth has not been matched by a corresponding increase in demand for manufactured goods, the result is that Americans are spending relatively less on manufactures. Accordingly, manufacturing’s shrinking share of the overall U.S. economy is actually a sign of American manufacturing prowess.

Exactly the same phenomenon has played out over a longer time period with respect to agriculture. In 1870, 47.6 percent of total U.S. employment was in agriculture; by 2002, the figure had fallen to 1.7 percent. In the future, manufacturing will in all likelihood continue down the path followed by agriculture: as strong productivity growth reduces the price of manufactured goods relative to services, manufacturing’s share of the overall economy will continue to fall. People who bemoan this prospect don’t recognize economic progress when they see it.

International trade has had only a modest effect on manufacturing’s declining share of the U.S. economy. It is true that imports displace some domestic production; on the other hand, exports boost sales for U.S. manufacturers. Since the United States now runs a trade deficit in manufactured goods, the net effect of trade at present is to reduce the size of the manufacturing sector. Over time, however, the effect of the trade balance on manufacturing’s share of GDP has not been large. As mentioned above, manufacturing’s share of GDP declined from 27.0 percent to 13.9 percent between 1960 and 2002; if trade had been in balance throughout that period, the estimated decline would have been from 26.5 percent to 16.0 percent. The basic picture thus remains the same even when the effects of trade are eliminated: a steady, relentless drop in manufacturing’s share of economic activity."

Lindsey takes on this, and nine additional, "fears" about "trade-related job losses" in a readable 16 pages. I learned about the Lindsey paper from Arnold Kling.
posted by Ben Muse at 3:29 PM

 
Wheels on luggage

New ideas come hard. An anecdote from Robert Shiller's new book, The New Financial Order, brings this home:

"The first successful patent on wheeled suitcases was filed by Bernard David Sadow in 1972, in Fall River, Massachusetts. Sadow recalled to my research assistant that the idea of his wheeled suitcase encountered much resistance at first, and buyers at all the major department stores rejected the idea as unsaleable. They did not argue that the wheeled suitcase was a bad idea, only that no one would buy it...

[from a footnote - Ben] Sadow managed to talk to a vice president at Macy's, who agreed in the early 1970s to start selling the luggage. The suitcases did indeed sell, and set off a major trend, even though Sadow's initial model, with fur tiny wheels, was unstable. If one walked fast while pulling it, the suitcase wobbled from side to side and sometimes developed a rocking cycle with increasing amplitude unilt the suitcase fell over sideways. Since the suitcase in its normal upright resting position tended to be low relative to one's hand, the handstrap had to be fairly long, and because it was flexible, did not allow any control of side-to-side wobble. One tried walking in a bent-over position to keep one's hand closer to the suitcase for better control, which was uncomfortable and still mostly unsuccessful in controlling the wobble. [end footnote]

Sadaw's suitcases were a big improvement over suitcases without wheels, but they tended to wobble and fall over when pulled. The next great advance did not come until nearly twenty years later when a Northwest Airlines pilot, Robert Plath, invented a suitcase with two wheels widely spaced, so that the suitcase rolls along sideways with a wide axel between the two wheels. This, combined with a rigid retractable pulling handle finally yielded a stable, easily pulled suitcase that can also be used as a platform for other articles. He called it the "Rollaboard."

First of all, it wasn't until 1972 that someone came up with the idea of wheels on luggage; then, when someone came up with the idea, he had to fight to find firms willing to sell it; then it took about 20 years to figure out how to solve its main drawback.
posted by Ben Muse at 9:49 PM

 
19th Century Aleut whaling

I've been working on a project connected with Aleutian fisheries recently, so I've been thinking about the Aleutians a lot at work. The Aleutians are pretty barren. There are no trees and no wood for construction. The weather is brutal. But the Aleuts, the Unangan, thrived there for thousands of years.

Marine resources, including whales, were very important to them. The native craft was the kayak - but how do you hunt whales from kayaks?



This is taken from the cover of the Aleut Corporation's 2003 Annual Report. This is a colorized version of an original 1883 drawing by Henry W. Elliott, a U.S. Treasury officer and a conservationist, who spent a lot of time out there in the late 19th Century.

Elliott described the hunt:

"The native hunter used, as his sole weapon of destruction, a spear-handle of wood about six feet in length; to the head of this he lashed a neatly-polished socket of walrus ivory, in which he inserted a tip of serrated slate that resembled a gigantic arrow-point, twelve or fourteen inches long and four or five broad at the barbs, and upon the point of which he carved his own mark.

In the months of June and July the whales begin to make their first inshore visits to the Aleutian bays, where they follow up schools of herring and shoals of Amphipoda, or sea-fleas, upon which they love to feed. The bays of Akootan and Akoon were and are always resorted to more freely by those cetaceans than are any others in Alaska, and here the hunt is continued as late as August. When a calm, clear day occurs the natives ascend the bluffs and locate a school of whales; then the best men launch their skin-canoes, or bidarkas, and start for the fields. "Two-holed" bidarkas only are used. The hunter himself sits forward with nothing but whale-spear in his grasp; his companion, in the after hatch, swiftly urges the light boat over the water in obedience to his order.

Carefully looking the whales over, the hunter finally recognizes that yearling, or the calf, which he wishes to strike; for it is not his desire to attack an old bull or angry cow-whale. He calculates to a nice range where the whale will rise again from its last point of disappearance, and directs the course of the bidarka accordingly. If he is fortunate he will be within ten or twenty feet of the calf or yearling, and as it rounds its glistening back slowly and lazily out from its cover of the wavelets the Aleut throws his spear with all his physical power, so as to bury the head of it just under the stubby dorsal fin of that marine monster; the wooden shaft is at once detached, but the contortions of the stricken whale only assist to drive and urge the barbed slate-point deeper and deeper into its vitals. Meanwhile the canoe is paddled away as alertly as possible, before the plunging flukes of the tortured animal can destroy it or drown its human occupants."

Take a look at those kayaks again, and guesstimate from the picture how far these guys are from shore. Imagine how hard it would be to tow the dead weight of the whale through the water with a kayak, or even two or three kayaks together. How do you get the whale to a beach where it can be slaughtered for its various products? Elliott continues:

"As soon as the whale is thus wounded it makes for the open sea, where "it goes to sleep" for three days, as the natives believe; then death intervenes, and the gases of decomposition cause its carcass to float, and, if the waves and currents are favorable, it will be so drifted as to lodge on a beach at some locality not so very remote from the place where it was struck by the hunter. The business of watching for these expected carcasses then became the great object of everyone's life in that hunters' village; dusky sentinels and pickets were ranged over long intervals of coast-line, stationed on the brows of the most prominent headlands, where they commanded an extensive range of watery vision. But the caprices of wind and tides are such in these highways and byways of the Aleutian Islands, that on an average not more than one whale in twenty, struck in this manner by native hunters, was ever secured; nevertheless, that one alone (when cast ashore) amply repaid the labor and the exposure incurred chiefly by watching day after day, in storm and fog, from the bluffs of Akoon and Akootan. The lucky hunter who successfully claimed, by his spear-head mark, the credit of slaying such a stranded calf or yearling, was then an object of the highest respect among his fellow-men, and it was remembered well of him even long after death. Also, the greatest expression of respect for the size and ability of a native village and its people was the statement that it was so populous as to be able to eat all the meat and blubber of a large whale?s carcass in a single day!"

The Arctic Province, by Henry W. Elliott, 1886.

Elliott figures in U.S. environmental history. The website AskArt. com provides a short biography from which the following is extracted:

"Henry Wood Elliott is best known as the savior of Alaska's fur seal population, but he was also one of the finest watercolorists to work in the Territory. A Cleveland native, Elliott first visited Alaska in 1867 with the Western Union Telegraph Survey...

He was sent north again in 1872 as U.S. Treasury Agent supervising the Alaska Commercial Company's management of the fur seal industry in the Pribilof Islands. He visited Alaska regularly thereafter, spending much of the rest of his life fighting in Congress to reverse the practices that had led to disastrous declines in the northern fur seal population."

The full picture, on which the colorized version is based, can be found on a National Oceanographic and Atmospheric Administration (NOAA) web site: "The Whale Fishery

The Aleut Corporation annual report has several additional pages focusing the Akutan whaling station and Aleut involvement in commercial whaling in the early 20th Century.

Minor revision on 3-22-04
posted by Ben Muse at 7:47 PM

 
It's not fair!

Some people have so much! Not only has he been given a gift for poetry, but Rumsfeld also has a talent for martial arts.

Thanks to AB for the reference.
posted by Ben Muse at 11:41 AM

 
Light blogging in the short run

A lot of real work right now - blogging will probably be light for a few days.
posted by Ben Muse at 8:15 PM

 
Policy and path dependency

"Seemed like a good idea at the time" by Edward Lotterman.
posted by Ben Muse at 6:45 AM

 
Viennese origins of the American mall

Tyler Cowen has a post on Victor Gruen. Gruen, a refugee from Hitler in 1938, designed the first American shopping mall in the early 1950s.
posted by Ben Muse at 6:36 AM

 
A good man, badly handled

Nebraska businessman Tony Raimondo was slated for a Department of Commerce position to help U.S. manufacturing, until it became known that he had opened a factory in China. The resulting controversy led Raimondo to withdraw.

But according to the Omaha World-Herald, the Chinese factory was serving the Chinese market and Nebraskans think it created 100 Nebraskan jobs. Geitner Simmons has the story.

It's surprising the administration didn't see the way this story could go. Today's Washington Post has a story on problems the administration is facing in coordinating it's economic "message": "Missteps on Economy Worry Bush Supporters".

"A string of glaring missteps by President Bush's economic team has raised alarm among the president's supporters that his economic policymakers may have lost the most basic ability to formulate a persuasive message or anticipate the political consequences of their actions.

In recent weeks, the White House has had to endure its chief economist's positive comments about job "outsourcing," or sending work overseas; controversial passages in the annual Economic Report of the President; questions over the legitimacy of Bush's 2005 budget; a California swing in which Bush bragged about the possible addition of two or three jobs to a 14-person business in Bakersfield and a flap over a job-creation forecast that not even the president could stand by...

But the non-naming of Anthony F. Raimondo on Thursday as assistant commerce secretary for manufacturing and services has brought the concerns to a boil.

The long-anticipated announcement of a manufacturing czar was supposed to be a good-news day for a White House struggling with its economic message. Instead the planned, smiling photo op fizzled when it came to light that a year ago Bush's choice had opened a major plant in Beijing..."

Revised on 3-13-04
posted by Ben Muse at 9:39 PM

 
Trends in U.S. income distribution

Thursday I posted a figure from an NBER working paper by Thomas Piketty and Emmanuel Saez showing the trend in the proportion of U.S. income earned by the top 10% of income earners. You can get a copy of the figure, and the paper it's a part of, at Emmanuel Saez's webpage.

The figure was striking. In 1917, the top 10% of "tax units" had about 40% of national income. The percent of the income earned by this group rose until about 1929, ranged from about 44% to about 46% until 1940, then plummeted to the area of 32% during the war, and sat there until about 1972. From 1972 to 1998, the share of income received by this group rose almost continuously, ending the period in the area of 42%.

Just for reference, the average income threshold for entry into the top 10% was about $81,000 in 1998.

Here's another figure from a Quarterly Journal of Economics paper based on the NBER working paper. Where the figure on Thursday simply showed the trend for the top decile, this figure breaks the top decile down into the top percentile, the 95 to 99th percentiles, and the 90 to 94th percentiles:


Figure 2 on page 12 of Piketty and Saez, "Income Inequality in the United States, 1913-1998." QJE 118(1):1-39.

This figure is also striking. Look at the radically different patterns followed by the top percentile and the groups in percentiles 90 to 99.

Percentiles 90-99 appear to rise gradually from 1917 to 1940, do the 1940 WWII drop, then, following the war, begin a long sustained increase through 1998.

But the top percentile is all over the place. The authors had enough data to start this series up in 1913, before the start of WWI. It plummets on U.S. entry into the war and during a post-war depression, rises through the boom of the 1920s, peaking in 1929, plummets with the onset of the Great Depression, and again with the onset of WWII, then continues to fall following the war, bottoming out about 1972, and then rising over the period 1972-1998. A large part of this last rise takes place in 1987 and 1988, following the Tax Reform Act of 1986, the authors point out.

What's going on with this top percentile income share? Why do the top percentile and the remaining percentiles in the top 10% move so differently? Piketty and Saez:

"...During the large downturns of the interwar period, capital income sharply fell while wages (especially for those near the top), which are generally rigid nominally, improved in relative terms. On the other hand, during the booms (1923-1929) and the recovery (1933-1936), capital income increased quickly, but as prices rose, top wages lost in relative terms...The negative effect of the wars on top incomes is due in part to the large tax increases enacted to finance them. During both wars, the corporate income tax (as well as the individual income tax) was drastically increased and this mechanically reduced the distributions to stockholders. National Income Accounts show that during World War II, corporate profits surged, but dividend distributions stagnated mostly because of the increase in the corporate tax (that increased from less than 20 percent to over 50 percent) but also because retained earnings increased sharply..."

Just a word about what constitutes income here.

"...We use a gross income definition including all income items reported on tax returns and before all deductions: salaries and wages, small business and farm income, partnership and fiduciary income, dividends, interest, rents, royalties, and other small items reported as other income...we focus mainly on series that exclude capital gains. Income...is computed before individual income taxes and individual payroll taxes, but after employers' payroll taxes and corporate income taxes."

Revised 3-24-04. The paragraph beginning "This figures is also striking." was revised to eliminate text indicating that the top percentile was primarily income from capital while the remaining percentiles were primarily income from labor. The later is true, but the former was only true in the earlier years.
posted by Ben Muse at 7:25 PM

 
An economist at play

Lynne Kiesling hikes through Derbyshire and visits the "birthplace of modern economic activity."
posted by Ben Muse at 7:54 PM

 
World income distribution

Kash, at Angry Bear, reports that the Economist has a survey article on Global Income Inequality. Kash provides key extracts.
posted by Ben Muse at 12:09 PM

 
Changing income distribution in the U.S.

The following figure shows estimates of the top decile income share (excluding capital gains) in the U.S. from 1917 to 1998.



The figure is from "Income Inequality in the United States, 1913-1998," a National Bureau of Economic Research (NBER) working paper by Thomas Piketty and Emmanuel Saez (NBER No 8467, September 2001).

There's lots of interesting stuff in this figure - the increase in the top income share from 1917 to 1929, the plateau from 1929 to 1941, the collapse during the World War, the stable, modest percentage from 1945 to 1972, then the relentless increase, through Democratic and Republican administrations alike, from 1972 to 1998.

There's a lot more in the paper - changes in distibution by fractile within the top decile, information on changes in wage and capital income shares, and comparison of top U.S. decile share trends with those in other countries. The paper is available for $5 from the NBER. (P.S. 3-13-04 This work was published in the February 2003 Quarterly Journal of Economics as "Income Inequality in the United States." You may download the entire QJE paper here.) Here's the NBER abstract:

"This paper presents new homogeneous series on top shares of income and wages from 1913 to 1998 in the US using individual tax returns data.

Top income and wages shares display a U-shaped pattern over the century. Our series suggest that the 'technical change' view of inequality dynamics cannot fully account for the observed facts. The large shocks that capital owners experienced during the Great Depression and World War II seem to have had a permanent effect: top capital incomes are still lower in the late 1990s than before World War I.

A plausible explanation is that steep progressive taxation, by reducing drastically the rate of wealth accumulation at the top of the distribution, has prevented large fortunes to recover fully yet from these shocks. The evidence on wage inequality shows that top wage shares were flat before WWII and dropped precipitously during the war. Top wage shares have started recovering from this shock since the 1960s-1970s and are now higher than before WWII. We emphasize the role of social norms as a potential explanation for the pattern of wage shares.

All the tables and figures have been updated to the year 2000, the are available in excel format in the data appendix of the paper."

I've divided the abstract into paragraphs for easier reading.
posted by Ben Muse at 9:05 PM

 
Regions of Mind

I had understood that Geitner Simmons was going to reform, restrict his blogging to Tuesdays, and get on with his book. I'm glad he failed - although I regret the likely delay in the book.

At any rate his failure is our gain. Here are three recent and worthwhile posts, each extremely moving in their different ways: "Fallen Soldier", "Jack Johnson and Jim Crow radicalism", and "'The Passion'; brutality in popular culture ".

I learn a lot about the history of my country and human nature (and how to pull together a good blog post) from frequent visits.
posted by Ben Muse at 12:08 PM

 
Pirate attacks up

The Progressive Policy Institute (PPI) reports that pirate attacks are up "...annual reports published by IMO [International Maritime Organization - Ben] show that pirate attacks averaged about 100 a year in the early 1990s, and now routinely exceed 400."

Why? There's more ship traffic moving more cargo than before, "but economic and political issues -- notably the aftershocks of the Asian financial crisis and the collapse of Somalia -- seem to be playing roles too."

A quarter of all attacks take place in heavily traveled and vulnerable Indonesian waters, where, "...stresses since the financial crisis, meanwhile, have cut Indonesia's navy budget by about two-thirds..."

"Somali waters may be the world's least-policed and most dangerous. The IMO has a permanent warning to shipmasters to avoid the area altogether if possible, and especially not to anchor within 50 miles of the coast..."
posted by Ben Muse at 6:54 PM

 
New blog: Blame India Watch

Brad DeLong points to the new blog, Blame India Watch

"Blame India Watch is concerned with the increasing anti-Indian/anti-India sentiment among tech workers, as well as media coverage that focuses disproportionately on Indian workers or propigates anti-India(n) sentiment. What began a few years ago as IT grumbling about Indian-specific H-1B "Temporary Guest worker" and L-1 "Intracompany Transfer" workers and immigrants has now morphed into the outsourcing issue, and is now gaining international attention. We aim to highlight this scapegoating, encourage IT workers to put a stop it, and redirect the anger to where it belongs."

I've added a link under the "Fight for free trade" heading to the left.
posted by Ben Muse at 9:29 PM

 
King Island Christmas continued

Last December I posted a short item on the book and musical, King Island Christmas. King Island Christmas is a children's book about events in the Alaskan Inupiat Eskimo community of King Island in the 1950s. Although the village site on King Island was abandoned many years ago, the King Islanders are still a distinct community in Nome, Alaska.

At least some of them aren't thrilled by the book and musical. Beth Marino wrote about their concerns in The Nome Nugget in November, 2002:

"Who owns the Native Alaskan culture and how far do those rights extend? It seems like an easy question to answer, but cultural ownership can turn into a prickly situation; as the King Island Native Community is finding out.

The King Island Native Community asked for support from the Alaska Federation of Native delegates this year, as the Islanders prepare their case against the theft of intellectual and cultural property rights.

The resolution passed by AFN to protect cultural rights came into being because of an unsanctioned theatre company that has found success peddling a play called King Island Christmas. According to the King Island Community, the tribe was neither consulted on the play nor received recognition or compensation in any manner and they are busy wondering what, if anything, they can do to reclaim their ownership of culture..."

Also see George Sabo's letter to the editor of the Nugget the following week (you'll need to scroll down the page a bit). Sabo's concerns are focused on the musical. He believes it: (1) misrepresents the King Island culture, (2) was produced without King Island input, (3) was produced by a company that misappropriated the King Island name, and (3) did not result in any compensation to the King Islanders. He thinks this situation is unjust.

The story and letter are 18 months old. The story indicates that the King Islanders were thinking about pursuing legal remedies, but I'm not sure about the current status of those efforts.

I'd been a little perplexed by the story. What would a copyright on a culture mean? Presumably it would provide a community - (how to define it and its cultural inheritance?) - with control over how cultural motifs are used and with a right to the income from their use. It wouldn't serve the purpose of encouraging creative activity since it would be protecting creation that had taken place in the past. It would stifle creative activity by increasing the costs of using materials from different cultures to create new things.

Tyler Cowen at Marginal Revolution reports today on other parties interested in cultural copyrights.

"Recent UNESCO/WIPO proposals have called for the creation of copyright in folklore and oral culture. In other words, if a corporation drew from the native stories of a tribe, it would owe royalties or could face legal sanctions.

We all know that U.S. copyright typically protects the expression of an idea, and not the idea itself. But hey, native tales and folklore are expressions of sorts, just not durable ones in the way we are accustomed to protecting. I don't see any principle in the pure theory of copyright itself that should rule out such an extension..."

Cowen provides useful links to other on-line cultural copyright resources. Eloise at Spitbull posts on the issues Cowen raises, in "The Folklore Of Copyright Law" Eloise makes economic arguments similar to mine above, and adds links to other online materials on copyright issues.

P.S. 3-11-04 Tyler Cowen has a follow-up post laying out more of the pros and cons of copywriting folklore. Let me draw your attention to two other items as well. The online version of Indian Country carries a story on "Sovereignty and Intellectual Property Rights by Rebecca L. Adamson. The World Intellectual Property Organization has a web page at its site on "Intellectual Property and Genetic Resources, Traditional Knowledge, and Folklore".

P.P.S. 3-13-04 On January 20, MSNBC carried a story on the upcoming anthropological field work on old King Island.
posted by Ben Muse at 8:46 PM

 
"If you set out to take Vienna, then take Vienna." (N. Bonaparte)

And if you set out to record Dylan Thomas, then record Dylan Thomas! The National Public Radio (NPR) web site carries this Renee Montagne story (a couple of years old) about the young entrepreneurs who founded Caedmon Records. A lesson in focus, initiative and enthusiasm. As a bonus you get to listen to Thomas reciting excerpts from A Child's Christmas in Wales and Do Not Go Gentle Into That Good Night.
posted by Ben Muse at 8:12 PM

 
Bhagwati on globalization

Noted trade economist Jagdish Bhagwati asks "What Enriches The Poor And Liberates The Oppressed?"in this March 5 column from The Times of London, and answers, "globalization."

"...My view is that economic globalisation has a human face and that it advances, rather than inhibits, the achievement of social agendas as wide-ranging as the promotion of gender equality worldwide and the reduction of poverty and child labour in poor countries. The choice between these two assessments of economic globalisation is a matter of the utmost importance. It also has immediate implications for what I call "appropriate governance". If you believe that globalisation lacks a human face, then you will favour appropriate governance that encourages policy interventions to restrain globalisation...

...If globalisation brings parents increased wealth, are they more likely to send their children out to work or less so because they do not need children to work and can send them to school instead? If the former is the case, then clearly policies that inhibit globalisation seem sensible. But if the latter is more likely - and numerous studies show that the rise in incomes resulting from the increased exports that accompany trade liberalisation has resulted in peasants stopping their children working and sending them to school - then we should ask: what can we do to accelerate the pace at which child labour will be reduced by globalisation?...

...A sophisticated 20-year study of recent US experience by two female economists, Elizabeth Brainerd and Sandra Black, found that, because internationally tradeable industries were in fierce competition, firms could not afford to pay men more than equally able women. Prejudice was simply unaffordable. And because they ended up hiring fewer men and more women, so raising the average wages for women and lowering the average for men, the wage differential shrank faster than in other industries..."

posted by Ben Muse at 8:04 PM

 
Should developing countries allow free movements of capital across their borders?

Brad DeLong wrestles with this one.

Fifteen years ago "it was easy to be in favor of international capital mobility." Capital controls led to corruption, as people competed for the right to move capital by bribing the civil service. Moreover, free capital was expected to migrate to poor countries, boosting productivity and incomes.

What actually happened was that capital migrated from the poor countries to rich countries, and developing countries "with open capital flows" turned out to be vulnerable to capital crises.

"...Instead of capital flowing from rich to poor, it flowed from poor to rich--and overwhelmingly in recent years into the United States of America, whose rate of capital inflow is now the largest of any country, anytime, anywhere. Central banks that sought to keep the values of their home currencies down so that their workers could gain valuable experience in exporting manufactures to the post-industrial core, first-world investors who feared sending their money down the income and productivity gap after the crises of Mexico '95, East Asia '97, and Russia '98, techno-enthusiasts chasing the returns of the American technology boom, the third-world rich who thought a large Deutsche Bank account would be a good thing to have in case something went wrong and they suddenly had to flee the country in the rubber boat (or the Learjet)--all of these fueled the flow of money into the United States, which was thus enabled to invest much more than it managed to save. The U.S. economy became, and remains, a giant vacuum cleaner, soaking up all the world's spare investible cash. As best we can calculate, the United States has run current-account deficits averaging 2.5% of GDP over the past two decades--that's $270 billion a year at today's level of GDP. Only one-third of this can be attributed to inflows from the developing world, but $90 billion a year is still the (current exchange rate) income of the poorest 500 million people in India.

The fact that the flow of capital seemed more to go from poor to rich than from rich to poor, that capital flowed by and large to capital-abundant regions like the United States, was disturbing. International capital mobility was supposed to add to, not drain, the pool of funds financing development in peripheral countries."

posted by Ben Muse at 8:56 PM

 
Protecting consumers from interstate shipments of wine

Jim Leitzel at Vice Squad posts on state efforts to keep their consumers from buying wines in other states over the internet: "Other States Join Michigan Appeal On Interstate Alcohol Shipments".

The post is motivated by Michigan's appeal of a federal court ruling overturning Michigan regulations forbidding direct alcohol shipments from out of state, but not in-state, wineries. Leitzel links to the ruling, a press release from the Wine and Spirits Wholesalers of America, and testimony by Nobel Prize winning economist Daniel McFadden (owner of a vineyard). The press release is worth reading for items like:

"The vast majority of states recognize that we'll have alcohol anarchy if the influential, billion-dollar wine industry succeeds in getting alcohol sales to become unregulated, unaccountable and anonymous," President and CEO of the Wine & Spirits Wholesalers Association, Inc. Juanita D. Duggan said. "The fact is that the wine industry is putting soaring profits ahead of sound policy, with no concern for kids, communities or common sense. Today's action [Michigan's appeal of the federal court decision to the Supreme Court - Ben] deals a significant setback to the billion-dollar wine industry's concerted effort to make alcohol sales as easy as point, click, drink."

However, as Leitzel notes:

"Some state regulations that ban interstate direct wine shipments appear to be designed not to control alcohol distribution to minors, or to ensure alcohol tax collections, but rather, to protect the economic interests of some established in-state distributors and retailers -- at a cost to consumers..."

The divergence of interest between wine producers and wine wholesalers, reflected in the quote, is interesting. Moreover, clearly the wholesalers aren't worried about over-regulation by the government's heavy hand. Most people would concede that states have an interest in addressing the problems associated with underage drinking.

The crux of this case, however, are Michigan regulations that treat in-state and out-of-state wineries differently, and appear to suppress the competition faced by the in-state firms. As the federal court decision states:

"The plaintiffs allege that Michigan's system discriminates against out-of-state wineries in favor of in-state wineries because it prevents out-of-state wineries from shipping wine directly to Michigan consumers, which in-state wineries are allowed to do. As the district court correctly noted, this distinction between in-state and out-of-state wineries can only be understood by reading a number of provisions in conjunction with each other:

[The distinction] can be gleaned from various Michigan Liquor Control Commission regulations, which are codified within the Michigan Administrative Code. R436.1057 states that "[a] person shall not deliver, ship, or transport into this state beer, wine, or spirits without a license authorizing such action. . . ." The only applicable license, an "outstate seller of wine license," may according to R436.1705(2)(d) be obtained by a "manufacturer which is located outside of this state, but in the United States, and which produces and bottles its own wine." However, under R436.1719(4) the holder of such a license may ship wine "only to a licensed wholesaler at the address of the licensed premises except upon written order of the commission." In answers to interrogatories, a representative of the Michigan Liquor Control Commission indicates that "[a]t present, there is no procedure whereby an out-of-state retailer or winery can obtain a license or approval to deliver wine directly to Michigan residents . . . "

In contrast, the Michigan Liquor Control Commission indicates that the "ability to deliver wine to the consumer is available to winemakers licensed in Michigan, inasmuch as under the provisions of MCL 436.1113(9) these licensees are permitted to sell at retail the wines they manufacture. . . . A licensed Michigan winemaker may deliver their [sic] own products to customers without an SDM [specially designated merchant] license . . . .

The plaintiffs contend that this differential treatment of in-state and out-of-state wineries violates the dormant Commerce Clause because it gives in-state wineries a competitive advantage over out-of-state wineries. In-state wineries can, for example, bypass the price mark-ups of a wholesaler and retailer, making in-state wines relatively cheaper to the consumer and allowing them to realize more profit per bottle. In addition, the cost to an out-of-state winery of the license that enables it to sell to a Michigan wholesaler is $300, while a comparable Michigan winery must pay only a $25 license fee to qualify to ship wine directly to Michigan customers. Finally, for customers who desire home delivery, Michigan wineries have a competitive advantage over out-of-state wineries that cannot ship directly to customers. In response, the state argues that the regulations to which an in-state winery is subject "more than offset, both in costs and burden, any nominal commercial advantage given by the ability to deliver directly to customers" and characterizes the burden on out-of-state wineries as "de minimis." "

Michigan has a legitimate interest in getting its sales tax receipts and in protecting minors. But at least to some extent these goals appear to be used as a rhetorical cover for efforts to protect local wineries from competition.

The legal issues turn on a an analysis of the interaction of two provisions in the Constitution. Prohibition was repealed by the 21st Amendment. One part of the amendment reads, "The transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited." On the other hand, the Commerce Clause, giving Congress the authority to "regulate commerce with foreign nations, and among the several states, and with the Indian Tribes..." has long been considered to place a limit on State powers to regulate interstate commerce.

Revised in the course of 3-7-04.
posted by Ben Muse at 8:46 AM

 
Inside the Bush White House

Paul Krugman reviews two books on the internal mechanics of the Bush White House, in the New York Review of Books. These books, American Dynasty by Kevin Phillips, and The Price of Loyalty by Ron Suskind,

"...can be seen as a second wave of Bush critiques. The first wave, exemplified by Molly Ivins's Bushwhacked, Joe Conason's Big Lies, and David Corn's The Lies of George W. Bush, described what Bush has been doing these past three years. But they offered only scant explanations of how and why the Bush administration does what it does. (I made a brief stab at an explanation in the introduction to my own The Great Unraveling, but it was no more than a sketch.)

The new books go deeper into the agonizing question of what is happening to our country. Ron Suskind—an investigative reporter with a knack for getting insiders to tell what they know —offers a detailed, deeply disturbing look at how the Bush administration makes policy. Kevin Phillips—a former Republican strategist who feels that his party has betrayed the principles he supported—investigates the history of the Bush clan, and argues that this family history provides the key to understanding George W.'s motives and even his technique of governing..."

I learned about this from Brad DeLong
posted by Ben Muse at 9:35 PM

 
People respond to incentives

The Congressional Budget Office (CBO) has just released a short 10 page report on the economic impacts of U.S. anti-dumping legislation. This legislation allows firms to petition the government for tariffs on foreign imports, based on a claim that the foreign goods were "dumped" in the U.S. at an inappropriately low price. If the firms are successful they get to share in the revenues from the tariffs.

Kash, at Angry Bear has a wonderful (hearsay) story about the profit opportunities this creates for entrepreneurs.

Kash's story reminds me of the "Vipers of Abruzzi." As Stephen Rhoads tells it, Abruzzi "...was plagued by vipers, and the city fathers determined to solve the problems by offering a reward for any viper killed. Alas, the supply of vipers increased. Townspeople had started breeding them in their basements." (Rhoads, The Economist's View of the world)

Getting back to the economic impacts of the antidumping law, the report summary says:

"The Continued Dumping and Subsidy Offset Act (CDSOA) of 2000 was enacted on October 28, 2000, as part of the appropriations act for Agriculture, Rural Development, Food and Drug Administration, and Related Agencies programs for the fiscal year ending September 30, 2001. CDSOA requires that the revenues from antidumping and countervailing duties on a given import be distributed on an annual basis to the domestic producers that were either petitioners or interested parties supporting the petition in the case that resulted in the duties being levied 2001, $330 million in 2002, and $293 million in 2003. The Congressional Budget Office (CBO) projects that distributions will total $3.85 billion from 2005 through 2014. On June 16, 2003, the World Trade Organization (WTO) Appellate Body agreed with the ruling of an earlier panel that CDSOA violates the WTO agreement by providing remedies for dumping and subsidies beyond those permitted by the agreement. The United States is therefore vulnerable to retaliation - the amount has not yet been determined - if it does not repeal or modify the law.

In addition to the prospect of foreign retaliation against U.S. exports, the distributions mandated by CDSOA are detrimental to the overall economic welfare of the United States because (1) they encourage the filing of more antidumping and countervailing-duty cases, resulting in more duties that on balance harm the economy; (2) they subsidize the firms receiving them, preventing resources from flowing to higher-value activities in other firms and industries; and (3) they increase the private and public cost associated with the operation and implementation of the laws. They also discourage settlement of cases by U.S. firms, which has mixed effects on the economy..."

posted by Ben Muse at 9:19 PM

 
Does increased international trade promote child labor?

Eric Edmonds and Nina Pavcnik say no (or more accurately, that the evidence isn't there), in this National Bureau of Economic Research paper "International Trade and Child Labor: Cross-Country Evidence". According to the abstract:

"We explore the relationship between greater exposure to trade (as measured by openness) and child labor in a cross country setting. Our methodology accounts for the fact that trade flows are endogenous to child labor (and labor standards more generally) by examining the relationship between child labor and variation in trade based on geography.

We find that countries that trade more have less child labor. At the cross-country means, the data suggest an openness elasticity of child labor of -0.7. [so as their measure of openness to trade increases by 1%, their measure of child labor is decreasing by 0.7% - Ben] For low-income countries, the elasticity of child labor with respect to trade with high income countries is -0.9. However, these relationships appear to be largely attributable to the positive association between trade and income. When we control for the endogeneity of trade and for cross-country income differences, the openness elasticity of child labor at cross-country means is much smaller (-0.1) and statistically insignificant.

We consistently find a negative but statistically insignificant association between openness and child labor conditional on cross-country income differences when we split the sample into different country groups, consider only trade between high and low income countries, or focus on exports of unskilled-labor intensive products from low income countries.

Thus, the cross-country data do not substantiate assertions that trade per se plays a significant role in perpetuating the high levels of child labor that pervade low-income countries."

I've broken this up into paragraphs for easier reading. This is NBER Working Paper #w10317, February 2004.
posted by Ben Muse at 12:27 PM

 
Now you see it, now you don't!

Robert Greenstein and Joel Friedman,of the Center for Budget and Policy Priorities,report on a "Budget Rule Change [that] Would Make the Cost of Extending the Tax Cuts Disappear"

"The President’s 2005 budget includes a legislative proposal to change the budget rules so that the cost of extending the 2001 and 2003 tax cuts would be incorporated into the official budget “baseline.” Under existing rules, the baseline is required to reflect current law and thus shows the tax cuts expiring. As a result, official estimates by the Congressional Budget Office, the Joint Committee on Taxation, and the Treasury Department all show proposals to extend these tax cuts as having large costs. If the Administration’s proposed change to the baseline rules is implemented, however, the official estimates would show proposals to make the 2001 and 2003 tax cuts permanent as having zero cost...

The audacity of the Administration’s proposed change becomes apparent when the proposal is considered in the context of the budget gimmick used to facilitate passage of the 2001 and 2003 tax cuts. The Administration and the Congressional leadership wrote sunset dates into the 2001 and 2003 tax cuts for the purpose of making the cost of those tax cuts look smaller. This allowed more tax cuts to be packed into the legislation without breaching Congressional budget limitations. This gimmick worked because CBO was required under the rules to assume that the tax cuts would, in fact, expire and would thus have no cost in the years after they to sunset.

The Administration’s proposed change to the baseline rules... would require CBO to reverse its earlier approach and assume now that there would be no cost associated with extending these tax cuts beyond their sunset dates..."

The two page hand out describes and critiques the administration's formal rationale for this proposal.

Revised 3-3-04
posted by Ben Muse at 8:38 PM

 
Laurence Kotlikoff

Laurence Kotlikoff is worried. He thinks the medium term U.S. budget deficit is a cause of concern, and that U.S. unfunded political liabilities for Social Security and Medicare are unnerving.

His The National Interest paper with Niall Ferguson, "Going Critical. American Power and the Consequences of Fiscal Overstretch" draws on another paper by Jagadeesh Gokhale and Kent Smetters, "Fiscal and Generational imbalances: new Budget Measures for New Budget Priorities." Their starting point is a question asked and answered by Gokhale and Smetters:

"Suppose the government could, today, get its hands on al the revenue it can expect to collect in the future, but had to use it, today, to pay off all its future expenditures commitments, including debt service. Would the present value (the discounted value today) of the future revenues cover the present value of the future expenditures? The answer was a decided no: according to their calculations, the shortfall amounts to $45 trillion. To put that figure into perspective, it is twelve times larger than the current official debt and roughly four times the size of the country's annual output."

The bulk of these unfunded federal commitments are political commitments to the social security and Medicare programs (mostly to the Medicare program). Ferguson and Kotlikoff explore various outcomes. A "controlled" landing will require, above all else, a willingness to reform the Medicare program, which accounts for about 82% of the shortfall.

Countries often deal with fiscal crises through inflation.

"As is well known, printing money helps a government in fiscal difficulties in three ways. First, the government gets to exchange intrinsically worthless pieces of paper for real goods and services. Second, inflation waters down the real value of official debt. (At the end of World War I, all the major European combatants had accumulated public debts in excess of around two years' national income. But, by 1923, the Germans had rid themselves of nearly all their debt by printing so much money that the real value of government bonds fell close to zero.) Third, if the salaries of government workers are paid with a lag or only partially adjusted for inflation, inflation will lower their real incomes. The same holds true for welfare, Social Security and other government transfer payments, provided they are not index-linked..."

Inflation isn't likely to solve our problems:

"First, only a modest proportion of the federal government's $45 trillion budget gap would actually be reduced through a jump in inflation of the sort described above. Much of the government's tradable debt is of short maturity - indeed, fully a third of it has a maturity of one year or less. This makes it much harder to inflate away debt since any increase in inflationary expectations will force the government to pay much higher interest rates when it seeks to renew these short-dated bonds. Second, Social Security benefits are protected against inflation via an annual inflation adjustment. Medicare benefits are also effectively inflation-proof because the government unquestioningly pays whatever bills it receives."

Kotlikoff and co-author Scott Burns, are about to publish a book on the fiscal implications of our aging population: The Coming Generational Storm : What You Need to Know about America's Economic Future. The book will be published by the MIT Press. The book's website (with links to the prologue and first chapter) summarizes the book as follows:

"In 2030, as 77 million baby boomers hobble into old age, walkers will outnumber strollers; there will be twice as many retirees as there are today but only 18 percent more workers. How will America handle this demographic overload? How will Social Security and Medicare function with fewer working taxpayers to support these programs? According to Laurence Kotlikoff and Scott Burns, if our government continues on the course it has set, we'll see skyrocketing tax rates, drastically lower retirement and health benefits, high inflation, a rapidly depreciating dollar, unemployment, and political instability. The government has lost its compass, say Kotlikoff and Burns, and the current administration is heading straight into the coming generational storm.

But don't panic. To solve a problem you must first understand it. Kotlikoff and Burns take us on a guided tour of our generational imbalance, first introducing us to the baby boomers-- their long retirement years and "the protracted delay in their departure to the next world." Then there's the "fiscal child abuse" that will double the taxes paid by the next generation. There's also the "deficit delusion" of the under-reported national debt. And none of this, they say, will be solved by any of the popularly touted remedies: cutting taxes, technological progress, immigration, foreign investment, or the elimination of wasteful government spending.

So how can the United States avoid this demographic/fiscal collision? Kotlikoff and Burns propose bold new policies, including meaningful reforms of Social Security, and Medicare. Their proposals are simple, straightforward, and geared to attract support from both political parties. But just in case politicians won't take the political risk to chart a new direction, Kotlikoff and Burns also offer a "life jacket"-- guidelines for individuals to protect their financial health and retirement."

I read the first chapter, a lively survey of ongoing demographic changes in the U.S. Kotlikoff is writing for a wide audience. An example of the style:

"As years go, 1957 was notable, if primitive. Remote control for television sets had yet to be invented. This meant the 47.2 million sets in 39.5 million American households had their channels changed by hand, if you can imagine that. The sets were also relatively small and offered pictures only in black and white...

Oliver Hardy of Laurel and Hardy fame died, but Lyle Lovett was born. Lyle’s birth was not much noticed at the time because 1957 was the year we produced the most babies ever born in America in a single year. We did it at the rate of one baby every seven seconds, closing the year with 4.3 million newborns, from a total population of only 172
million.

You can get an idea of what a staggering feat that was by doing a modern comparison. In spite of having 100 million more Americans today, we produced fewer than 4 million newborns a year through the late 1990s..."

I learned about these papers from Arnold Kling and Alex Tabarrok.

Minor changes 3-2-04.
posted by Ben Muse at 10:44 PM

 
How to run a country into the ground

The dictator Kwame Nkrumah made a mess of Ghana's economy. Abiola describes the political policies, and links to a PBS site on the economic policies, by which he did this.

The Beverly Hillbillies notwithstanding, its not always good to find oil on your land. Abiola tells what happened in Nigeria.
posted by Ben Muse at 10:09 PM

 
Price discrimination

Alex Tabarrok explains why "buy one, get one free" promotions can be more profitable for stores than half price sales. He also links to an online introduction to price discrimination by Hal Varian.
posted by Ben Muse at 9:47 PM