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12/30/2004
WW I economic planning as a model in the 1930s and 40s Carlos Lozada summarizes a research paper by Hugh Rockoff: "The Economics of World War I". (Lozada is a journalist contributing to an National Bureau of Economic Research digest of its sponsored research - Lozada's summary has a link to the original paper). Lozada summarizes Rockoff's analysis of the macroeconomic and financial impacts of the war. I'll just quote two paragraphs on the impact of the war on post-war ideas about economic planning. The actual planning effort during the war was relatively limited:
Social Security income and recipient death rates David Francis reports on research suggesting that retirees with lower income from social security - other factors held constant - tend to have lower mortality rates. Francis is summarizing research by Stephen Snyder and William Evans. Evans and Snyder exploited a natural experiment that made it possible to check the connection between social security income and mortality rates in Lower Social Security Benefits Reduced Mortality:
Concerned with rapidly rising costs, the federal government changed the way that benefits were calculated for new beneficiaries in 1977. This substantially decreased the size of payments for recipients born after January 1, 1917. As a result of these changes, two people with identical earnings histories but different birth dates would receive substantially different retirement incomes. Those born after what is called the "Notch" had little time to adjust since the changes happened late in their work lives. Most did not even realize the impact of the law's changes on payments until after they retired. Snyder and Evans compare the five-year mortality rates after age 65 for those born in the fourth quarter of 1916, just before the Notch, with those born in the first quarter of 1917..."
A conversation with Suharto Indonesia's Suharto regime (1967 to 1998) was fabulously corrupt. James Wolfensohn, the President of the World Bank, got a chance to talk to Suharto about it during a 1996 visit. Sebastian Mallaby tells the story,
The relationship between corruption and growth is not simple. Suharto's regime may have been corrupt, but it's economy also grew very rapidly and poverty dropped. Mancur Olson may have had the answer in his book Power and Prosperity. This month the Economist surveyed Indonesia's progress since the economic crisis, and Suharto's fall, in 1998. They've created a vibrant democratic state; growth is lagging behind historical rates. The Washington Post reports that 80,000 Indonesians have died in the tidal wave. 12/29/2004
Mark Schmitt Talks Tax Tactics How did the Republicans beat Clinton's health plan and his 1994 crime bill? How can the Democrats beat Bush Administration tax legislation? Mark Schmitt explains:"The Decembrist: There Are No Trial Balloons" Economic fluctuations and health Christopher Ruhm, of the University of North Carolina at Greensboro, finds that temporary economic slowdowns are associated with better health. Here is the abstract for his new National Bureau of Economic Research (NBER) paper:
Recent research that better controls for many sources of omitted variables bias instead suggests that mortality decreases and physical health improves when the economy temporarily weakens. This partially reflects reductions in external sources of death, such as traffic fatalities and other accidents, but changes in lifestyles and health behaviors are also likely to play a role. This paper summarizes our current understanding of how health is affected by macroeconomic fluctuations and describes potential mechanisms for the effects." Related papers available for free from Ruhm's website include "Healthy Living in Hard Times", and "Deaths Rise in Good Economic Times: Evidence from the OECD". Trade text online Steven Suranovic of the George Washington University in Washington D.C. has a nice intermediate undergraduate international trade and policy text, online, here: International Trade Theory & Policy Analysis . The text is available as a pdf file for a fee. 12/28/2004
The other side of the textile quota fight The Charlotte Observer serves a textile producing community, and does not share my view of textile quotas. This web page has links to Observer stories on textiles and clothing over the course of the fall:Textile Jobs: Goodbye U.S., hello China -- Charlotte.com The latest story, by Stella Hopkins, describes the fight by the textile industry to protect itself from foreign competition in the face of the end of the quota regime: "Fighting a flood of textiles". This is a nice piece, describing how the textile industry sought support from other countries that were threatened by Chinese competition, and how the industry used petitions for temporary "safeguard" quotas in a masterful series of rearguard actions. Joe Johnston's Atlanta Campaign was good, but not better than this. The end of textile and clothing quotas The multi-year phase out of U.S. textile and clothing quotas (and similar quotas for some other developed countries) is done on January 1. The Economist covers the ground: "The freeing of the world's textile trade" This isn't the end of restrictions and burdens on textile and clothing trade, but it is the end of a particularly unpleasant one:
The U.S. took steps to continue to protect the domestic industry from competition, at the expense of domestic consumers:
Addendeum 12-29-04: Guy Berger, over at Full Context, suggests that the Chinese may have been looking for an excuse to impose this export tariff: "Clever Trade Policy and the Mercantilist Fallacy". For a detailed look at the theory underlying Berger's post, see this web page by Steven Suranovic: "Welfare Effects of an Export Tax: Large Country". The deadweight cost of taxes From the 1997 Economist comes this nice discussion of the deadweight losses of taxes:"The hidden cost of taxes" Secondary market for Christmas presents The Dulles Town Square (this sounds like a mall) is sponsoring a post-Christmas exchange for unwanted gifts: "For the Rejects Of Christmas, A 2nd Chance" (Rosalind Helderman, Washington Post, 12-29-04, B01) The mall has set up a table, set out cookies, made participants eligible for a raffle, and advertised. People who got stuff for Christmas that they don't want (has to be worth more than $10) set their gift on a table, taking some other gift in exchange. The mall creates the market in hopes of increasing customer traffic. At the end of the week excess gifts will be donated to charity. Have the Dulles Town Square and eBay reduced the potential for deadweight losses associated with Christmas gift giving? Now, if you are given a present that you don't value at its market price, you can sell it on eBay for relatively modest transactions costs. I don't think the Dulles Town Square can be very far from George Mason. I'm trying not to imagine Tyler Cowen and his mother, surprising each other at the table as they exchange the gifts they gave each other. John Palmer looks at the practice of re-gifting. Tax reform not a priority this year Jonathan Weisman and Jeffrey Birnbaum report that tax reform is no longer a priority in 2005: "Bush Expected To Delay Major Tax Overhaul" (Washington Post, 12-28-04, E01). This is a take away message from the lack of attention paid to tax reform at the administration's recent economic summit. The fact that the position of Assistant Treasury Secretary for Tax Policy has gone unfilled for a year is also suggestive. Weisman and Birnbaum report that reform, when it comes, may be "incremental" rather than "radical." Apparently there is lots of speculation that a reform proposal would draw heavily on ideas in "Option 5" from a 2002 Treasury tax reform study. Here are the elements of Option 5:
12/27/2004
David Hume writes to Adam Smith about Smith's new book... In April, 1759, David Hume wrote a wonderful, funny, letter to Adam Smith about the success of Smith's new book. Brad DeLong has the text, here: "Adam Smith Day!" . The Trial of Wyatt Earp Actually, it was only a preliminary hearing to determine whether or not a crime had been committed at the O.K. Corral. Attorney Tom Fitch got him off. John Swansburg tells how Fitch did it in this LegalAffairs article:"Wyatt Earp Takes the Stand" If Fitch hadn't been so good, Earp and his wife, Josie Earp, might never have made it to Nome, Alaska, where they had a checkered career. Why are Malaysians wealthier than Indonesians? Some say it may be, in part, because Malaysian law is based on English common law, while Indonesian law is based on Dutch, and ultimately French, civil law. Nicholas Thompson explains in the LegalAffairs article: "Common Denominator" .
Using this tool, "Law and Finance" [the 1998 article in the Journal of Political Economy that set out the original results - Ben] showed that common law countries protect both shareholders and creditors better than civil law countries do, and they also tend to be less corrupt. LLSV took dozens of specific financial indicators—ranging from key gauges, like the odds that a company's assets will be confiscated by the state, to smaller measures, like whether shareholders can vote at company meetings—and regressed them all against legal origin. The regressions showed that the measures that indicate high investor and creditor protection or low corruption connect to common law origin, just as height connects to weight. The measures that represent low protection and high corruption connect to civil law origin. The regression didn't show that common law necessarily makes people richer, but it did represent a crucial link in a chain of logic that could connect legal origin to prosperity. When shareholders have more rights, people are more likely to invest in markets, because they have more protections against dishonest executives. When creditors have more rights, they are more likely to lend money, which spurs markets to grow. And when countries are free from corruption, investors put more money into them. The LLSV scholars weren't the first to recognize that shareholder and creditor rights spur economic growth, or that corruption stunts it, but they were the first to connect these conditions to a country's legal system and to do so using cold, hard numbers. There's nothing in the common law per se that significantly protects shareholders—common law doesn't come with a shareholder's bill of rights. Nor is there a mandate for corruption embedded in civil law. "Law and Finance," then, raised as big a question as the one it claimed to answer: Why is a country's legal system so powerful a factor in determining its economic development? In subsequent papers, LLSV has set out to solve that mystery. The most compelling theory they've developed has to do with the power both systems afford their judiciaries. Common law judges are, on balance, far more powerful than their counterparts in civil law countries. Since judges tend to be a country's most reliable check on the other parts of its government, common law countries grant less power to their executives than civil law countries do. And in developing nations, corruption is generally perpetuated from the top. The difference in the power that the two systems grant their judges is rooted in their respective histories. French civil law derives from the Napoleonic code, published in 1804 by scholars eager to wrest power from the judiciary. Before the country's revolution, France's courts had earned reputations for elitism and corruption. Influenced by popular discontent with much of the judiciary, Napoleon attempted to write a statutory code that was essentially judge-proof. Judges draw their influence from their power to interpret laws. Napoleon's code stripped them of this prerogative; his code favored the writing of a new law over a judge's interpretation of an old one. Consequently, compared to common law countries, civil law countries have weak judiciaries—and long statute books." 12/26/2004
Men are working less You probably knew that, in the U.S., women are much more active in the labor market than they were 50 years ago. But did you know that men are working less? Much less? While the hours worked per woman per week (including women out of the labor market and women in it) have risen 82% since 1950, hours worked by men have fallen about 17%. In both instances, the changes are largely due to changes in the numbers of persons in the workforce. The average work week for persons in the work force has fallen slightly for both sexes; but, whereas the percent of women in the paid work force has risen by about 87%, the percent of men in the paid workforce has fallen by about 16%. The hours worked by men (an average number of hours per week, averaged over all men, including those outside the paid workforce) have fallen in every age group.
Why the changes? Increasingly generous social security benefits over the period 1950 have to be important for men over 65, accounting for the large percentage reductions in work for these men. But the hours worked per man (whether in or out of the work force), and the percent of men employed, dropped for every 10 year age group. Weekly hours per male worker dropped for young and old age groups, and were essentially constant (small rises on the order of 1%) for the other age groups. It's possible that the entry of women into the work force created new sources of household income that could be substituted for men's income. However, McGrattan and Rogerson provide information on changes in weekly hours worked by person for married and single men. Except for 25-34 year olds, among the traditional working age cohorts (25-64), hours worked per single man dropped by more than hours worked per married man. The substitution argument couldn't work more strongly for single than for married men. Mainstream ketchup has great amplitude. Why isn't there more variety in ketchups? Hint - it has something to do with the amplitude of the standard ketchup, and its umami. Malcolm Gladwell explained in the New Yorker in September: "The Ketchup Conundrum" . Umami is one of the five tastes (you are probably already familiar with sweet, sour, bitter, and salty). Amplitude is the way they meld together in the taste experience:
Modern ketchup is a response to the potential regulatory problem:
Futures and farm income Timothy Egan reports in the New York Times that
Here is one reason:
The answer lies in the quirks of the federal farm subsidy system as well as in the way savvy farmers sell their crops. Mr. Collins said farmers use the peculiar world of agriculture market timing to get both high commodity prices and high subsidies. "The biggest reason is with record crops, prices have fallen," he said. "And farmers are taking advantage of that." A farmer can sell his crop early at a high price, say, in a futures contract, and still collect a subsidy check after the harvest from the government if prices are down over all. The money is not tied to what the farmer actually received for his crop. The farmer does not even have to sell the crop to get the check, only prove that the market has dropped below a certain set rate."
12/24/2004
Sebastian Montero One last post before Christmas. Geitner Simmons' blog "Regions of Mind" treats U.S. regional history, and especially southern and western history. Earlier this month he wrote a moving post on Spanish missionary efforts in the Carolinas in 1567-1568: "Mission" Sebastian Montero, chaplain of the Spanish Juan Pardo expedition and the subject of the post, worked for about 18 months, starting in February 1567, preaching to the Carolina Indians. Montero's work "can be considered 'the first authenticated missionary success with the North American Indians.' " If Montero was there for 18 months, from February 1567, he would have spent Christmas 1567 in this work. This Christmas I'm trying to imagine him there. Anyway, not really a Christmas post, but a fascinating bit of U.S. history, and a good introduction to a great blog. What sort of Christmas presents should I give? Tim Harford weighs in with some guidance for a more efficient Christmas:Dear Economist, by Tim Harford: The deadweight loss of Christmas Thanks to Tyler Cowen for the pointer. 12/23/2004
Running a government is not exactly like running a business Successful business leaders don't necessarily succeed in government. The President of the Council on Foreign Relations, Richard Haass, writes about this in Business Week:"The Wrong Reading List"
Above all, business people tend to operate in a more structured, less complex environment. Former Bendix Corp. chief and Treasury secretary W. Michael Blumenthal says that in a company, "you can control the process and tell group-executive A, 'You're not involved, stay out of it.' And he will, and he must. In government, that's simply unworkable. So you have to learn to become one of a large number of players in a floating crap game, rather than the leader of a well-organized casino that you're in charge of."... In government you need to find ways to motivate people without dollars...
In the corporate world, power is far more centralized...This simpler model might sometimes look appealing for the public sector. But in reality an immense complexity is inherent in the circumstances of a modern, democratic government. Making government more businesslike can improve efficiency...but the inherent complexity would remain..." (pages 147-148)
But the two worlds are different enough that the analogy to corporate structure can prevent a former CEO from being effective in government. In a noticeable sense, you don't run your own show; the White House does. Goals, as I had already discovered, differ in government and the private sector. In business, the chief focus is on profitability. Government, by contrast, has no simple bottom line but rather a vast array of interests and priorities, many of which exist in a state of tension or conflict. For that reason, decision making in government is vastly more complex. At Treasury, I also found a difference from business in terms of authority. Many former business executives feel great frustration when they discover the limits on their ability to act in government. I had not been accustomed to, nor did I expect, a corporate-style hierarchical structure. But even I was surprised at what limited power I had in my own building. The various bureaus and agencies that are part of the Treasury Department operate with considerable independence...Even with respect to the Treasury Department proper, many familiar management tools were not available. A private-sector CEO has the power to hire and fire based on performance, to pay top managers large bonuses, or promote capable people aggressively. At Treasury I had the power to hire and fire fewer than 100 political appointees among the 160,000 people who worked under me. Others could be dismissed for gross incompetence, but the practical obstacles to doing so made it seldom worth the effort... Furthermore, most structural departmental reorganization couldn't be done on my own, but required legislation... The biggest difference in both process and authority is the organizational complexity involved in making major Executive Branch policy decisions. In the private sector, A CEO has more or less free rein. In a presidential administration, everything revolves around the White House and almost every major policy decision is brought into the White House, often through an extensive interagency process..."(pages 177-178)
After returning to New York in 1999, the area where I was most keenly aware that the private sector could gain from the experience of government was in managing the decision-making processes around complex issues with multiple internal stakeholders. In government, a chief of staff or a cabinet-level official spends a great deal of time trying to get groups of people from different units to work together in an effective way. This is an inherent need, because most major issues cross organizational lines and require coordination among different agencies, constituencies, and centers of authority to be resolved most effectively... At big corporations with many different business units, the same kind of need exists. These units maximize their collective profits over time by working together effectively - and the private sector has the advantage of being able to use accounting and compensation to encourage people to work together, which the public sector for the most part cannot do. But the separate business units of a big company usually aren't as used to working through their differences and problems with one another to enhance the well-being of the whole as government is of necessity. They're more used to operating in separate "silos" and being held accountable for their own individual bottom lines. That issue often comes to the fore when companies seek to cross-sell - that is, to use the sales force of one unit to sell related products from other units - or to make product/geography matrices work. (Who runs a credit card business in South Korea - the person in charge of credit cards or the person in charge of South Korea?) People who have learned how to manage interagency processes in Washington have a crucial set of skills what are not likely to have been as well developed in business and can add much to a company if they are properly supported by the CEO."(pages 311-312) Outsourcing the hall decking A week ago Gwedolyn Bounds of the Wall Street Journal reported on the growth in the market for Christmas home decorating: "Instant Christmas Spirit: Hire the Experts to Trim the Tree" (WSJ, December 14) :
Helping fuel the trend, of course, is a growing acceptance that it's OK to pay someone to do tasks that once seemed intensely personal, such as wrapping gifts or addressing holiday cards. While some people have physical disabilities or personal situations that mean they require aid, others choose pros for the convenience... The urge to decorate bigger and better each year is one natural extension of hiring a pro..." One decorator noted:
This is a great opportunity for many small businesses. It provides filler work for landscapers and others during a slow period:
The demand is shifting out as the opportunity cost of time on alternative activities, and incomes, increase. To the extent that work once done within the family is not shifted to the market, apparent GDP goes up, despite the fact that no actual national output hasn't. 12/22/2004
The foreign cement menace John Palmer links to stories about how the Department of Commerce protects us from foreign cement:"The High Price of Cement" Christmas is coming. What should I serve my friends? When you want to know the correct wine to serve, you should go to an economist. Lynne Kiesling addresses the problem here: "Wine Recommendations For Holiday Entertaining". In 2003 Professor Bainbridge served "Schramsberg Blanc de Noirs (California) 1999" at a party. In 2003 he also provided some wine notes for Thanksgiving - I'd bet these would work for Christmas as well: "Thanksgiving Wine Notes". And here is some advice on "Sparklers for New Years". Bainbridge devotes a whole blog to wine: "Professor Bainbridge on Wine". I'm sure the advice there is good. Nobel prize winner Daniel McFadden has his own vineyard in Napa Valley. Kevin Courtney of the Napa Register reports:
makes pronouncements on national issues, but as a man with a yearning to make ever better wine. Growing grapes wasn't the idea when his wife, a photographer, stumbled upon the Soda Canyon property in 1992. They simply wanted a country get-away. Banchero Vineyard had begun winemaking there in 1880, but by 1992 all that was left of the original operation was the stone base of the wine cellar. The vineyards had long since disappeared. That was fine with McFadden. It was enough that the operation had cows and chickens and some ancient olive trees. "A little working farm," as he put it. Two years later, a new friend at Atlas Peak Vineyards discovered a row of over-ripe cabernet sauvignon and merlot fruit that had been missed at picking. Did he want it? "I didn't know anything about it. I was sort of thrown off the dock," said McFadden, who scrambled to buy and learn the winemaking basics. "It turned out to be a marvelous wine. It made a luscious, fruity, meaty wine," said McFadden, who soon signed up for winemaking courses with his wife at UC-Davis. He planted 3,500 vines on two acres, most of it in cabernet sauvignon which he sells to Dave Cronin at Blackford Wines. He makes a barrel or two for family use, lavishing extra care on his zinfandel. Ever the academic, McFadden is one of the organizers of this year's annual meeting of the Vineyard Data Classification Society, an international group that focuses on the quantitative and analytic study of vineyard and wine technologies. McFadden has occasionally tried to marry his economic research with his new interest in wine, with less than spectacular results. His statistical tool, discrete choice analysis, showed how a restaurant could sell more high-profit wine, he said. The trick is to charge the same price as a wine of inferior reputation and lower profit margin. Seeing the two choices next to each other on a wine list, diners will feel compelled to buy the wine with the greater profit, he said. When McFadden told this to a friend in the restaurant business, "He said, 'Tell me something I don't know.'" " Christmas is coming. How should we behave? G.K. Chesterton has some advice:
12/21/2004
Will Sam Bodman be a Good Energy Secretary? Will Sam Bodman be a good Secretary of Energy? Kent Budge goes over the ground:"Bodman nominated for Energy" As a bonus, you get a short history of the Department of Energy, and reviews of the Energy secretaries of the Clinton and second Bush administrations. What good is self-esteem? The evidence that people with higher self-esteem behave better is weak. Roy Baumeister, Jennifer Campbell, Joachim Krueger and Kathleen Vohs looked at this evidence and report in the January 2005 Scientific American: "Exploding the Self-Esteem Myth"
However,
One especially compelling study was published in 1995, after Diener and his daughter Marissa, now a psychologist at the University of Utah, surveyed more than 13,000 college students, and high self-esteem emerged as the strongest factor in overall life satisfaction. In 2004 Sonja Lyubomirsky, Chris Tkach and M. Robin DiMatteo of the University of California at Riverside reported data from more than 600 adults ranging in age from 51 to 95. Once again, happiness and self-esteem proved to be closely tied. Before it is safe to conclude that high self-esteem leads to happiness, however, further research must address the shortcomings of the work that has been done so far. "
So we can certainly understand how an injection of self-esteem might be valuable to the individual. But imagine if a heightened sense of self-worth prompted some people to demand preferential treatment or to exploit their fellows. Such tendencies would entail considerable social costs. And we have found little to indicate that indiscriminately promoting self-esteem in today's children or adults, just for being themselves, offers society any compensatory benefits beyond the seductive pleasure it brings to those engaged in the exercise. " They put their pants on one leg at a time too In the 1980s the future belonged to the Japanese. Now it's said to belong to the Chinese. At least Skip Sauer has kept his perspective: "China - The New Japan 12/20/2004
An economic history of the cranberry This week's Economist has a short economic history of the cranberry: "Red, round and profitable" I grew up on Cape Cod - cranberry central - and never knew any of this stuff:
...For nearly three decades, Ocean Spray [a growers' cooperative - Ben] grew slowly but steadily. Then, in the autumn of 1959, the American government announced that it had found pesticide residues in cranberry sauce—“from berries produced in the Pacific north-west, not ours”, Ocean Spray officials are quick to add, even 50 years later. The scare passed quickly; tainted supplies were withdrawn and new inspections put in place. But sales were wiped out in November and December and, since few people ate cranberry sauce except at Thanksgiving and Christmas, Ocean Spray lost a year's sales. For that reason, the company decided to create products that would sell all year. Juice was the obvious product to exploit. Ocean Spray wanted juice with a long shelf-life so that it would be easy for consumers to store and, more important, easy for the company to distribute...
12/16/2004
A Geography Lesson Here's a geography lesson: because the world is round, the shortest route from the U.S. West Coast to East Asia runs through the Bering Sea. Last week a ship taking soybeans from Seattle to China was wrecked on the north shore of Unalaska Island in the Aleutians. This map from the Anchorage Daily News, published in connection with its coverage of the wreck, shows the route: "North Pacific shipping route passes through Alaskan waters". The ship, the Selendang Ayu, lost power in the Bering Sea, and drifted down on Unalaska Island. Attempts to tow it to safety failed. The Coast Guard saved most of the crew. Six crewmembers were lost when one of the Coast Guard helicopters went down during the rescue. Here is a hair raising account by reporters Megan Holland and Doug O'Harra in the Anchorage Daily News: "For first time, crew describes rescue mission".
As Lickfield was hoisting, he heard Neel say over the radio: "Wow, this is a big wave.' He said it three or four times. 'This is a big wave.' I could tell there was urgency in his voice." But the seventh man wasn't quite in. Lickfield completed the hoist and pulled the basket into the cabin of the helicopter. "All of sudden, the force of this wave, like a force I've never seen before, a wall of water engulfed the helicopter," he said. "Water came blasting into the cabin." Lickfield heard the engines "flame out" and felt the helicopter begin a sickening descent. When the helicopter hit the water, it began to roll. Lickfield held on to the door handle and rode it 180 degrees and bailed out on to the surface. Watson, who was flying the helicopter, said he didn't know what happened. He would not speculate about causes in an interview. "It happened so fast. I remember us going down into the water. It was like being in our (flight training) simulator in Mobile, Ala. It was like the worst scenario they ever give you in the simulator. It didn't seem real." Warning horns were going off. Lights flashed red. Nothing was visible through the windows. "The flight mechanic was calling 'Up, up, up' but there was nothing really we could do, and the aircraft settled in the water." Upside down, Watson reached for a tube that connected him to a two-minute oxygen supply. The suck of air calmed him, he said. "Then I patiently felt my hand around the door frame to my right. I just needed to think about where it was, the door handle," he said. "The training steps that we always use they have always hammered into our minds -- to maintain a reference point." Maybe 45 seconds had passed, Watson said. With his eyes closed, he grasped the handle, opened the door. He undid his seat belt and harness with his left hand and pulled himself into the water with his right hand. "I didn't even have to swim. The buoyancy of the dry suit, it just floated me to the surface," he said. "It only took a couple seconds for me to make it to the surface."..." I don't expect these links to the Daily News to remain live for more than a week. 12/15/2004
Great historical cost overruns Are we more corrupt than we once were? Stanley Engerman and Kenneth Sokoloff (E&S) use cost overruns on major U.S. projects as an index of governance quality and political corruption. ("Digging the Dirt at Public Expense: Governance in the Building of the Erie Canal and other Public Works.") Cost overruns on pre-Civil War canal projects, big public megaprojects of their day, were relatively modest compared to overruns since WWII. E&S report ratios of actual to projected costs in canal projects between 1.16 and 2.42. They report ratios for post-WWII projects between 4.17 and 19.10 (Boston's "Big Dig" is going to cost more than five times the original projections.) The E&S data set does not include many observations and their observations were not chosen at random. They do point to more recent studies of mega-projects, using larger data sets, that find large contemporary overruns compared to their early 19th Century estimates. E&S want to use their observations as an index of political corruption, or at least of the quality of governance. Cost underestimates suggest
Glaeser and Goldin (G&G) and Engerman and Sokoloff (E&S) agree about the relatively honest period before the 1840s, and about the increased problems after. They diverge with respect to the implications of their analyses in the 20th Century. G&G think we're pretty honest now; E&S imply not so. No one really cares about the relatively virtuous 1820s. But let's quickly dish the dirt on the wicked late-20th Century. In addition to Boston's B"Big dig", E&S point to the start of the interstate highway system (an overrun ratio of 19.10), the Louisiana Superdome in 1966-75 (4.66), the Renovation of Yankee Stadium (4.17), repair of earthquake damage to the eastern span of the San Francisco Bay Bridge (already 3.0, and not due to be done until 2010). The bottom line:
12/9/2004
Light blogging this week Sorry for the light posting this week. I've been traveling and I've only just figured out how to make my laptop work with the hotel's Ethernet service. 12/4/2004
Offshore outsourcing of flies Gregory Mankiw, Chairman of the Council of Economic Advisors, used a nice example of the potential gains from offshore outsourcing, in a speech in early December:
12/2/2004
No tax reform in 2005? The administration's intention to set up a tax-reform commission suggested that reform proposalss weren't imminent. Now, Mark Schmitt, the Decembrist, passes on a comment from Gene Steuerle of the Urban Institute,
Are your property taxes too high? Property taxes depend on the rate at which the tax is assessed, but they depend on the assessed value as well. Market price movements change property tax revenues with no rate change. Many are concerned about the ability of assessors to increase municipal revenues by increasing assessed values. Glen Whitman suggests a way of encouraging assessments that accurately track market values: "Incentives for Accurate Property Valuation ". I learned about this from "Jane Galt" over at Asymmetric Information: "Incentives matter". Galt's post has some good comments. 12/1/2004
Why do the deficits matter? Under realistic assumptions, the U.S. faces large budget deficits as far as the eye can see. William Gale and Peter Orszag, both of the Brookings Institution, explain why the deficits matter in their article, "The US Budget Deficit: On an Unsustainable Path", from the December issue of New Economy. First, let's characterize the problem (linger on, and reread, the last sentence):
The recent tax cuts also play a major role in the long-term fiscal gap. If extended and not eroded over time by the AMT, the tax cuts would cost roughly two per cent of GDP over the long term. Even though projected increases in Social Security costs eventually exceed the size of the tax cuts, do not conclude from this that the tax cuts are less expensive than the Social Security increases. The increase in Social Security costs mounts gradually as America ages. The cost of the tax cuts starts immediately, and changes little as a share of GDP over time. In present value, the actuarial deficit in Social Security is only one-fifth to one-third the cost of the tax cuts over the next 75 years. The tax cuts account for more than a quarter of the fiscal gap over the next 75 years."
The federal deficit increased by more than six per cent of national income between 2000 and 2003, which triggered a substantial decline in national saving over that period. Indeed, in 2003, the net saving rate for the US amounted to less than two per cent of income. This level of national saving was the lowest since 1934. But why does national saving matter? The reason is that it determines how rapidly Americans accumulate financial and real assets. The returns to those assets have a substantial effect on future income. The bottom line is that a larger budget deficit and lower national saving today reduce income in the future. Another way of making the same point is that with a saving rate of two per cent of income, there are necessarily only two options. The first option is that we reduce the amount that is invested in the US to two per cent of income, which would starve future American workers of computers, buildings, and other productive capital. This crowding out of private investment is brought about through higher interest rates. The budget deficit soaks up available private saving, leaving a smaller pool of national saving to finance domestic investment. Firms that want to borrow for investment projects compete for that smaller pool of available funds. In the process, they bid up the interest rate that they’re willing to pay. The higher interest rate dissuades some firms from undertaking their investment projects, with the net result that investment declines. A reasonable rule of thumb for the US is that each per cent-of-GDP in anticipated future permanent unified deficits raises forward long-term interest rates by 25 to 35 basis points. The second option is that if we do invest more than two per cent of our income, we must borrow the difference from foreigners – which would leave future generations of Americans increasingly indebted to other nations. Indeed, as national saving has plummeted over the past few years, US domestic investment has increasingly been financed by foreign borrowing. The increase in such borrowing is reflected in our growing current account deficit, which has expanded from about 2.5 per cent of national income in 1998 to more than five per cent in 2003. This borrowing from abroad, however, mortgages the future returns from domestic investment in the US. Foreigners understandably do not lend us money for free, so we must share at least part of the future returns from our domestic capital stock with them. As a first approximation, borrowing more from foreigners has the same adverse implications for the future national income of Americans as reduced domestic investment does. Furthermore, the associated current account deficit likely stokes protectionist pressures in the US, potentially causing harm for the world trading system." Some drawbacks of subsidies Unless you can increase the quantity supplied without driving up the costs of supplying additional units, a subsidy to consumers that increases demand, is going to drive up prices. Steve Pearlstein explains, in yesterday's Washington Post: "A Culture Of Subsidies Inflates Costs"
One is that the price of these things has been rising at least twice as fast as other prices. The other thing is that they are all subsidized by government. That is no coincidence... In health care, the big culprit is the tax deduction for employer-paid health insurance, which has hard-wired into the American psyche the expectation that companies should pay for their employees' health insurance. After all, if an employer is willing to spend $9,000 to give your family comprehensive health care, few people would choose to take the $9,000 in cash, pay $2,000 in taxes on it, and use the remaining $7,000 to buy their own insurance. Unfortunately, the unintended effect of this $112 billion-a-year tax deduction is to make insured consumers largely indifferent to how much health care they consume or what it costs. And in the face of such indifference, doctors and hospitals and drug companies have done what any profit-maximizing industry would do: push prices and utilization up 7 to 10 percent each year until so many people are priced out of the market that government is forced to pump in even more money, spurring a whole new round of spending increases..." Mark Steckbeck at The Liberal Order takes a closer look at Pearlstein's argument in: "The Effects of Subsidies". He points out "...that education, health care, and homes are in many cases relatively inelastic in supply" (costs of extra units go up very fast as the quantity supplied increases), and explores some of the implications of this assumption for Pearlstein's argument. |