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Brooks Wilson's Economics Blog: September 2009

Tuesday, September 29, 2009

The N.F.L. and Dementia

Most fans know that football is hard on players' bodies. This is a reason that careers are short and salaries are high. The danger of the sport is part of the supply function of players. Alan Schwarz reports on a raging debate about a new health threat in a New York Times article, "N.F.L. Study Finds Link to Dementia."

A study commissioned by the National Football League reports that Alzheimer’s disease or similar memory-related diseases appear to have been diagnosed in the league’s former players vastly more often than in the national population — including a rate of 19 times the normal rate for men ages 30 through 49.

The N.F.L. has long denied the existence of reliable data about cognitive decline among its players. These numbers would become the league’s first public affirmation of any connection, though the league pointed to limitations of this study.

The findings could ring loud at the youth and college levels, which often take cues from the N.F.L. on safety policies and whose players emulate the pros. Hundreds of on-field concussions are sustained at every level each week, with many going undiagnosed and untreated.

A detailed summary of the N.F.L. study, which was conducted by the University of Michigan’s Institute for Social Research, was distributed to league officials this month.

The study has not been peer-reviewed, but the findings fall into step with several recent independent studies regarding N.F.L. players and the effects of their occupational head injuries.

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Monday, September 28, 2009

Pretson and Ho on US Health Care System

The abstract of a Population Studies Working Paper titled, "Low Life Expectancy in the United States: is the Health Care System at Fault?," by Samuel Preston and Jessica Ho reads

Life expectancy in the United States fares poorly in international comparisons, primarily because of high mortality rates above age 50. Its low ranking is often blamed on a poor performance by the health care system rather than on behavioral or social factors. This paper presents evidence on the relative performance of the US health care system using death avoidance as the sole criterion. We find that, by standards of OECD countries, the US does well in terms of screening for cancer, survival rates from cancer, survival rates after heart attacks and strokes, and medication of individuals with high levels of blood pressure or cholesterol. We consider in greater depth mortality from prostate cancer and breast cancer, diseases for which effective methods of identification and treatment have been developed and where be behavioral factors do not play a dominant role. We show that the US has had significantly faster declines in mortality from these two diseases than comparison countries. We conclude that the low longevity ranking of the United States is not likely to be a result of a poorly functioning health care system.

The authors include statistical results but minimize technical description. The authors do make frequent use of medical terms for obvious reasons.

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Saturday, September 26, 2009

Health Care: A Misdemeanor for Not Paying Health Care Tax

In general, economists believe that individuals should control their resources in pursuit of their self interest through markets. Markets sometimes fail because of externalities, the lack of market provision of public goods, market power and asymmetry of information. Based on normative beliefs, some believe that goods such as health care should be provided for all through government financing, another way of saying that the government should require some people to pay for medical bills of others. A health care reform bill before the Joint Committee on Taxation proposes a tax penalty for people who do not buy health insurance and incarceration for those who fail to pay the tax. Carrie Budoff Brown of Politico writes in "Ensign receives handwritten confirmation," that

This doesn't happen often enough.

Sen. John Ensign (R-Nev.) received a handwritten note Thursday from Joint Committee on Taxation Chief of Staff Tom Barthold confirming the penalty for failing to pay the up to $1,900 fee for not buying health insurance.

Violators could be charged with a misdemeanor and could face up to a year in jail or a $25,000 penalty, Barthold wrote on JCT letterhead. He signed it "Sincerely, Thomas A. Barthold."

The note was a follow-up to Ensign's questioning at the markup.

The first link is to a copy of the handwritten, and the second, to an article about Ensign's questioning of the tax, euphemistically called a fee in the note.

This tax would fall heavily on young, healthy tax payers who do not purchase health insurance. Within a market, they are consumers who derive more satisfaction by buying goods other than health care. Under universal coverage, the law considers these consumers free riders.

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Friday, September 25, 2009

Pew Global Attitudes Project: Mexico

Economics students learn that trade of goods and services benefits trading partners. They generally do not consider models that examine the impact of resource flows such as labor through migration. Our economy draws Mexican immigrants like a giant magnet. With their proximity to our country, and handed down knowledge of family and friends who have immigrated, Mexicans understand that American society is freer of violence, and the need to have political connections to succeed. A Pew Global Attitudes Project titled, "Most Mexicans See Better Life in U.S.," reports interesting but not surprising results.

Facing a variety of national problems -- crime, drugs, corruption, a troubled economy -- Mexicans overwhelmingly are dissatisfied with the direction of their country. With drug-related violence affecting much of Mexico, large majorities describe crime (81%) and illegal drugs (73%) as very big problems, and Mexicans overwhelmingly endorse President Felipe Calderón's tough stance against drug traffickers.

Most believe life is better in the United States. Close to six-in-ten (57%) say that people who move from Mexico enjoy a better life in the U.S., up from 51% in 2007. And the vast majority of those who are in regular contact with friends and relatives living in the U.S. say those friends and relatives have largely achieved their goals.

A substantial minority of Mexicans say that if they had the means and opportunity to go live in the U.S. they would do so, and more than half of those who would migrate if they had the chance say they would do so without authorization.

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Loans by the DOE: Good Investment or Political Payoff?

One danger of a government highly involved in decisions of private companies is that economic success becomes dependent on political connections. A second danger is that the average citizen will not have the time to gather the information to distinguish between economic interventions that will benefit the economy and those that benefit the politically connected. Corruption can be disguised as a public investment, necessary for some larger good. Both dangers are good reasons for the government to avoid unnecessary interactions. Josh Mitchell and Stephen Power, writing for the Wall Street Journal, describe how two politically connected small startup firms making luxury hybrid sports cars received nearly one billion in loans from the Department of Energy in "Gore-Backed Car Firm Gets Large U.S. Loan."

WASHINGTON -- A tiny car company backed by former Vice President Al Gore has just gotten a $529 million U.S. government loan to help build a hybrid sports car in Finland that will sell for about $89,000.

The award this week to California startup Fisker Automotive Inc. follows a $465 million government loan to Tesla Motors Inc., purveyors of a $109,000 British-built electric Roadster. Tesla, like Fisker, is a California startup focusing on high-end hybrids, with a number of celebrity endorsements that is backed by investors that have contributed to Democratic campaigns.

The awards to Fisker and Tesla have prompted concern from companies that have had their bids for loans rejected, and criticism from groups that question why vehicles aimed at the wealthiest customers are getting loans subsidized by taxpayers.

"This is not for average Americans," said Leslie Paige, a spokeswoman for Citizens Against Government Waste, an anti-tax group in Washington. "This is for people to put something in their driveway that is a conversation piece. It's status symbol thing."

DOE officials spent months working with Fisker on its application, touring its Irvine, Calif., and Pontiac, Mich., facilities and test-driving prototypes.

Matt Rogers, who oversees the department's loan programs as a senior adviser to Energy Secretary Steven Chu, said Fisker was awarded the loan after a "detailed technical review" that concluded the company could eventually deliver a highly fuel-efficient hybrid car to a mass audience. Fisker said most of its DOE loan will be used to finance U.S. production of a $40,000 family sedan that has yet to be designed.

We know that the market is generally better at allocating resources than the government, but that the government can sometimes improve market outcomes. Was this a good investment, a payoff to the politically connected, or something else?

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Thursday, September 24, 2009

Radical Chic Environmentalist Mau-Mau Paper Companies

Radical chic environmentalists complain that American's use of soft toilet paper is environmentally destructive, preaching that we should use recycled paper instead.  They are mau-mauing corporate executives who feel pangs of guilt when their companies make products their customers enjoy.  As described by David A. Fahrenthold of the Washington Post, in "Environmentalists Seek to Wipe Out Plush Toilet Paper," most executives are listening to their consumers and ignoring environmentalist.
There is a battle for America's behinds.

It is a fight over toilet paper: the kind that is blanket-fluffy and getting fluffier so fast that manufacturers are running out of synonyms for "soft" (Quilted Northern Ultra Plush is the first big brand to go three-ply and three-adjective).

It's a menace, environmental groups say -- and a dark-comedy example of American excess.

The reason, they say, is that plush U.S. toilet paper is usually made by chopping down and grinding up trees that were decades or even a century old. They want Americans, like Europeans, to wipe with tissue made from recycled paper goods.

It has been slow going. Big toilet-paper makers say that they've taken steps to become more Earth-friendly but that their customers still want the soft stuff, so they're still selling it...

But despite environmentalists' concerns, they say customers are unwavering in their desire for the softest paper possible.
The questions is why do these companies listen to the radically chic environmentalist at all?  It really could be environmental guilt.
This summer, two of the best-known combatants in this fight signed a surprising truce, with a big tissue maker promising to do better. But the larger battle goes on -- the ultimate test of how green Americans will be when nobody's watching.

"At what price softness?" said Tim Spring, chief executive of Marcal Manufacturing, a New Jersey paper maker that is trying to persuade customers to try 100 percent recycled paper. "Should I contribute to clear-cutting and deforestation because the big [marketing] machine has told me that softness is important?"
Toilet paper producers should focuse on supplying products that their customers demand within the confines of the law.  Perhaps this is the rub.  These environmentalists might have threaten to use their political muscle to legislate their morality if the producers do not comply with their demands.  I offer no evidence, just a concern for freedom.

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A Book Review by Mankiw

The Great Depression was the most traumatic economic event in U.S. history.  Production declined 30 percent and unemployment reached 25 percent.  As the length of the depression grew, some economists began to doubt the soundness of Classical economic models that predicted that a market economy would quickly return to full employment in response to an economic downturn.  John Maynard Keynes was the economists whose theories appealed most to doubting economists.  He believed that market imperfections slowed wage and price adjustments, thus slowing or possibly stopping market readjustments. He believed that the government, through increased deficit spending and to a lesser degree easy money policies could speed economic recovery.  His theories became a paradigm or school of thought known as Keynesian economics.  Keynes is considered to be the father of macroeconomics and though his theories have been largely replaced in the literature by more mathematically sophisticated and better empirically supported theories, his insight that market imperfections can slow economic recovery and that the government can hasten recovery remain central components of many models. 

Robert Skidelsky, an historian, has completed a three volume biography of Keynes that Gregory Mankiw reviews for the Wall Street Journal in "Back in Demand."  Mankiw observes that the historical background in the book is engaging and interesting but that the author simplifies competing economic ideas sometimes to the point of absurdity.  Skidelsky calls for a revival of Keynesian In part, Mankiw writes
In "Keynes: The Return of the Master," Mr. Skidelsky makes the case for Keynes—not only for his place in the history of economic thought but also for his relevance today. To understand the global economic crisis of the past year, he says, we need more unadulterated Keynes.
Certainly, some economists have called for a rebellion against current paradigms and a renewal of Keynes.  The call for a revival of Keynesian thought and the title of the book has a Star Wars feel to it.  That's the way I see the sometimes hostile debate between Keynes' supporters and those who believe his theories are outdated.  It should be noted that a great number of economists who believe Keynesian economics is outdated believe that he made significant contributions that have been assimilated into the scientific collective (sorry to mix Star Wars and Star Trek metaphors) All economists view Keynes as the first Force in macroeconomics, but was he the part of the dark side?

Mankiw describes three viewpoints on Keynes.  The first views Keynes as the Force.

To admirers, Keynes was nothing short of the savior of the capitalist system. His "General Theory of Employment, Interest and Money" (1936) proposed a diagnosis and remedy for the calamity known as the Great Depression. According to Keynes, economic downturns are not a fundamental indictment of the market economy. Rather, recessions and depressions arise from insufficient aggregate demand. A smart government can remedy the problem with its monetary and fiscal policy—say, by printing up some money and spending it. Once the right policies are put in place, the thinking goes, the world is safe again for free markets.
The second views Keynes as part of the dark side of the Force.
To detractors, Keynes was an economist whose reach exceeded his grasp: He tried to replace classic economic principles with new ones of his own, but what he offered was vague and incomplete. Keynes's many followers have tried to give his theory analytic rigor, but with only limited success. Despite these intellectual deficiencies, the detractors say, Keynesians recklessly push their ideas in the political arena, where they often lead to high inflation and excessive budget deficits. The fiscal policy of the Obama administration is a case in point. When the White House pushed for a massive increase in infrastructure spending to create jobs, it was taking a page from the Keynes playbook.
The third views Keynes as a flawed theorist, an Anakin Skywalker, who was both good and bad.
Which brings us to a third group of macroeconomists: those who fall into neither the pro- nor the anti-Keynes camp. I count myself among the ambivalent. We credit both sides with making legitimate points, yet we watch with incredulity as the combatants take their enthusiasm or detestation too far. Keynes was a creative thinker and keen observer of economic events, but he left us with more hard questions than compelling answers.

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Tuesday, September 22, 2009

Chu on Cap and Trade

(HT Drudge) Ian Talley of the Wall Street Journal describes remarks by Energy Secretary Steven Chu at a smart grid conference in, "Steven Chu: Americans Are Like ‘Teenage Kids’ When It Comes to Energy."

“The American public…just like your teenage kids, aren’t acting in a way that they should act.” Dr. Chu said. “The American public has to really understand in their core how important this issue is.”

It is exactly statements like this that convince the American public that Washington is full of elitists that view them as inferior intellectually and morally.  In addition to teaching adults, or perhaps rather than attempting to teach adults, he administration intends to teach our children. 

The administration aims to teach them—literally. The Environmental Protection Agency is focusing on real children. Partnering with the Parent Teacher Organization, the agency earlier this month launched a cross-country tour of 6,000 schools to teach students about climate change and energy efficiency.
Talley continues.
Still, Secretary Chu said he didn’t think that the public would throw the same political temper tantrum over climate legislation has has happened with the healthcare debate.

Asked if he expected a town-hall style pushback, Dr. Chu said he was optimistic the public would buy the administration’s arguments that energy efficiency and caps on greenhouse-gas emissions will spark an economic rebound.

“I don’t think so…maybe I’m optimistic, but there’s very little debate” that a new green energy economy will bring economic prosperity, Mr. Chu told reporters.
I believe Chu errs in his economic analysis in arguing that cap and trade legislation will "spark" economic growth and "bring economic prosperity."  As a new and costly policy designed to alter decisions about energy use, the policy will create uncertainty in every sector of the economy that will delay a rebound as energy users, both consumers and producers, attempt to analyze the impact of the bill and discover cheaper fuels and more efficient production methods.  Some geographic areas that have superior "green" energy sources will grow and areas with superior high carbon energy sources will decline, forcing businesses and households to relocate.  Benefits from the plan will not be felt for a generation and those who foot the bill will be festering in airtight carbon sequestering graves.   

These extraordinary adjustment costs may all be necessary if unabated carbon emissions would have a catastrophic impact on the economy and other countries follow our lead.  Otherwise, it will be cheaper to clean up the environmental mess if or as it occurs. 

I also think that Chu mistakenly believes that there will be little political pushback, particularly if the administration's private estimates that the bill will cost the average household $1,761 a year are correct (Declan McCullagh. CBSNews, "Obama Admin: Cap And Trade Could Cost Families $1,761 A Year").  That is a price that will raise complaints from the dead let alone the living. 

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Monday, September 21, 2009

Non-Profits are Morally Not Superior to For Profits

Innovation has changed the way news is reported.  No longer do we need to wait for the evening news to learn of important events in our nation and community or the daily newspaper for more detailed information.  News is reported near instantaneously on the Internet.  Such innovation has challenged the survival of newspapers and many are failing.  President Obama game voice to aspects of the innovation that some find disconcerting (Michael O'Brien, The Hill, "Obama open to newspaper bailout bill"). 
Obama said that good journalism is "critical to the health of our democracy," but expressed concern toward growing tends in reporting -- especially on political blogs, from which a groundswell of support for his campaign emerged during the presidential election.

"I am concerned that if the direction of the news is all blogosphere, all opinions, with no serious fact-checking, no serious attempts to put stories in context, that what you will end up getting is people shouting at each other across the void but not a lot of mutual understanding," he said.
New legislation proposes allowing newspapers to form as tax exempt cooperatives that has at least drawn the president's interest.
Sen. Ben Cardin has introduced S. 673, the so-called "Newspaper Revitalization Act," that would give outlets tax deals if they were to restructure as 501(c)(3) corporations. That bill has so far attracted one cosponsor, Cardin's Maryland colleague Sen. Barbara Mikulski...

The president said he is "happy to look at" bills before Congress that would give struggling news organizations tax breaks if they were to restructure as nonprofit businesses.
The senators and the president miss two important points: profits provide great incentive to produce high quality, low cost products and for non-profit are not morally superior to for profits because they will either have incentives that imitate those of for profit firms or will not perform efficiently. 

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Sunday, September 20, 2009

Henderson and Grinols on Health Care

James Henderson and Earl Grinols, both economics professors are Baylor University, and authors of "Health Care for Us All," make an enlightening contribution to the Waco Tribune-Herald's Opinion section today.  In "Health Care Mythbuser," Henderson lists ten common opinions or "myths" about the current health care proposals before the Congress.  I quote Myths 7 and 9, which describe how the tax burden is shared between health insurance companies and consumers, and how some companies that provide health insurance coverage to employees will respond incentives created by a government plan.
Myth No. 7: The fee proposed by Sen. Max Baucus on high-premium health insurance plans is a tax on health insurance companies. Fees imposed on goods and services are passed on to end consumers. The cost of the proposed fee on insurance companies will be shifted to those who purchase private health insurance policies, in effect taxing individuals with good insurance regardless of their incomes.
Myth No. 9: If you like your private insurance plan, you can keep it. If a government-run plan is approved, it will likely pay Medicare rates. Because Medicare pays hospitals about two-thirds of what private plans pay, the government plan will have premiums that are 20-25 percent lower. The lower cost, coupled with the play-or-pay mandate on employers, will lead them to substitute the government plan for private insurance. The Lewin Group (2009) estimates that one-half of all Americans with private coverage will lose it when their employer switches to the government option. 
Grinols lists three fundamental elements that should be included in reform to avoid damaging portions of our health care that are among the world's best in "A Lesson on How Insurance Works."
Fundamental I: Lack of earnings is not a health care problem. It is an income problem. The solution to too little income is provision of income.

Fundamental II: There must be a stronger reason for Americans to want to buy health insurance. This, too, is not a health care problem but a motivational problem.

Fundamental III: There are alternative health care insurance reforms that have not become part of the legislative discussion and these points should be brought in. Homogeneous risk pooling by age, sex and location is one, but there are others which lead to individuals’ ability to buy portable insurance at any time, switch companies at will, and pay the same premiums as others of their age and sex without threatening companies’ ability to offer insurance.

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Friday, September 18, 2009

Initial Unemployment Claims for September 12, 2009

On September 17, 2009 the Department of Labor released the most recent data on initial unemployment claims for the week ended September 17, 2009 in "Unemployment Insurance Weekly Claims Report."  Seasonally adjusted initial claims was 545,000, down 12,000 from a revised estimate of initial claims of 557,000 for the week ended September 5, 2009. The 4 week moving average decreased 8,750 to 563,000. The average is down 95,750 from its peak, signaling a possible peak for this business cycle. [1]

Using National Bureau of Economic Research estimates on the beginning and ending dates of recessions, I have  included a graph that compares the recessions that began in March 2001, July 1990, and July 1981 with the current recession which began in December 2007. I have not attempted to adjust the data for changes in the size of labor market. The plots are measured over 106 weeks, beginning eight weeks before the recessions began. The horizontal axes begins in October 2007, the date the current recession began, and the data for the other recessions is superimposed on those dates. The graph gives some insight into why economists, politicians and others have expressed so much concern about the current recession. The current recession seems to have the depth of the 1981 recession but the 4 week moving average seems to be falling more slowly than it has in past episodes.

Shobhana Chandra of Bloomberg writes in, "U.S. Initial Jobless Claims Fell to 545,000 Last Week (Update1)," that
The job market may be starting to stabilize as government and private reports reinforce forecasts that economic growth will resume this quarter. Economists surveyed by Bloomberg this month said the unemployment rate will reach 10 percent this year, a reminder that hiring may not pick up for several months and that consumers likely won’t lead the recovery.

“It’s nice to see another move down in initial claims but the continuing number is definitely kind of sticking at pretty high levels,” said Michael Feroli, an economist at JPMorgan Chase & Co. in New York. “As long as we’re continuing to see pretty high initial and continuing claims, we’ll still have negative job growth.”
[1] Robert J. Gordon did research looking at the relationship between the 4 week moving average of initial unemployment claims and found that recessions often bottom out shortly after the 4-week moving average of initial unemployment claims peaks. The average may have peaked at 658,750 for the week ended April 4, 2009. 
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Thursday, September 17, 2009

Mankiw on the Baucus Health Care Proposal

Senator Baucus, the chairman of the Senate Finance Committee has introduced legislation titled, "America's Healthy Future Act," to reform health care. The CBO has done a quick analysis and has determined that

[T]he Chairman’s proposal would reduce the federal deficit by $16 billion in 2019, CBO and JCT estimate. After that, the added revenues and cost savings are projected to grow more rapidly than the cost of the coverage expansion. Consequently, CBO expects that the proposal, if enacted, would reduce federal budget deficits over the ensuing decade relative to those projected under current law, with a total effect during that decade that is in a broad range around one-half percent of GDP. The imprecision of that calculation reflects the even greater degree of uncertainty that attends to it, compared with CBO’s 10-year budget estimates.

These projections assume that the proposals are enacted and remain unchanged throughout the next two decades, which is often not the case for major legislation.

Mankiw doubts that the plan will remain unchanged and tells the following story to illustrate his concern.

Your friend Joe, who says he want to lose weight, asks you for an extra slice of pie after dinner. Naturally, you are doubtful about the wisdom of the request.

"Ahem, Joe," you whisper, "Aren't there a lot of calories in that?"

"Yes," he says, "but the pie is part of a larger plan. I am committed not only to eating that slice of pie but also to going to the gym every day for the next week and spending at least half a hour on the treadmill. The exercise will more than work off those extra calories."

"But that's what you said last week, when you asked for an extra piece of cake. And you never made it to the gym."

"Yes, I know," Joe replies ruefully, "but this time I really mean it....Can you please pass the pie?"

One day after Mankiw's comments, Lisa Mascaro of the Las Vegas Sun (HT Drudge) reports that Senate Majority Leader Harry Reid has determined that the legislation was not good for Nevada, meaning that the costs were too high, and that he would not vote for a bill that was bad for Nevada. Senator Baucus was quick to agree to changes that would decrease the cost of the legislation for Nevada. Baucus will have to buy off more Senators.

Senate Majority Leader Harry Reid said it's [the bill] not good enough for Nevada.

Reid is concerned about the cash-poor state's inability to boost Medicaid spending as would be required under the bill...

Reid said he received assurance from the chairman, Sen. Max Baucus of Montana, that the formula would be changed before the bill goes to committee next week.

"I spoke to the Chair of the Finance Committee and he assured me that this bill will be improved for Nevada," Reid said.

"Let me be very clear, I will not bring a health insurance reform bill to the Senate floor that is not good for Nevada.”...

The majority leader's objection show just how difficult the task before Congress in trying to meet the needs of all lawmakers who have problems with the legislation.

The CBO and Mankiw make a direct hit.

The bill also limits government provided health care to American citizens much the same way that current law limits employment to American citizens or those with green cards.

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Wednesday, September 16, 2009

Easterbrook Eulogizes Norman Borlaug

Gregg Easterbrook is one of America's best developmental economists. These economists study economic development and attempt apply lessons learned to poor countries. Economists have learned a great deal, but on frustrating lesson is that it is difficult to quicken the pace of economic growth. Poverty remains a persistent problem in much of the world. In a Wall Street Journal article titled, "The Man Who Defused the 'Population Bomb'," Easterbrook describes the unique contribution of Norman Borlaug who greatly eased hunger. He is a man America should honor. In part, Easterbrook writes

Norman Borlaug arguably the greatest American of the 20th century died late Saturday after 95 richly accomplished years. The very personification of human goodness, Borlaug saved more lives than anyone who has ever lived. He was America's Albert Schweitzer: a brilliant man who forsook privilege and riches in order to help the dispossessed of distant lands. That this great man and benefactor to humanity died little-known in his own country speaks volumes about the superficiality of modern American culture...

As a young agronomist, Borlaug helped develop some of the principles of Green Revolution agriculture on which the world now relies including hybrid crops selectively bred for vigor, and "shuttle breeding," a technique for accelerating the movement of disease immunity between strains of crops. He also helped develop cereals that were insensitive to the number of hours of light in a day, and could therefore be grown in many climates...

Sometimes the environment (and people) are too important to be left to the environmentalists.

After his triumph in India and Pakistan and his Nobel Peace Prize, Borlaug turned to raising crop yields in other poor nations especially in Africa, the one place in the world where population is rising faster than farm production and the last outpost of subsistence agriculture. At that point, Borlaug became the target of critics who denounced him because Green Revolution farming requires some pesticide and lots of fertilizer. Trendy environmentalism was catching on, and affluent environmentalists began to say it was "inappropriate" for Africans to have tractors or use modern farming techniques. Borlaug told me a decade ago that most Western environmentalists "have never experienced the physical sensation of hunger. They do their lobbying from comfortable office suites in Washington or Brussels. If they lived just one month amid the misery of the developing world, as I have for 50 years, they'd be crying out for tractors and fertilizer and irrigation canals and be outraged that fashionable elitists in wealthy nations were trying to deny them these things."

Environmentalist criticism of Borlaug and his work was puzzling on two fronts. First, absent high-yield agriculture, the world would by now be deforested. The 1950 global grain output of 692 million tons and the 2006 output of 2.3 billion tons came from about the same number of acres three times as much food using little additional land.

"Without high-yield agriculture," Borlaug said, "increases in food output would have been realized through drastic expansion of acres under cultivation, losses of pristine land a hundred times greater than all losses to urban and suburban expansion." Environmentalist criticism was doubly puzzling because in almost every developing nation where high-yield agriculture has been introduced, population growth has slowed as education becomes more important to family success than muscle power...

Easterbrook sums things up nicely.

Often it is said America lacks heroes who can provide constructive examples to the young. Here was such a hero. Yet though streets and buildings are named for Norman Borlaug throughout the developing world, most Americans don't even know his name.

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Sowell on Causation and Correlation

(Edited Sept 17, 2009) In his most recent book, "The Housing Boom and Bust," Thomas Sowell quotes the Millennial Housing Commission which wrote
Decent and affordable housing has a demonstrable impact on family stability and the life outcomes of children. Decent housing is an indispensable building block of healthy neighborhoods, and thus shapes the quality of community life...Better housing can lead to better outcomes for individuals, communities, and American society as a whole.
Sowell argues that the authors confused causality with correlation, writing
It is certainly true that neighborhoods with better housing also usually have more stable families, better educated children and lower crime rates. But statisticians have long pointed out that correlation is not causation, though that may be the most often ignored lesson statistics.
Sowell notes that using the logic of the Millennial Housing Commission, early policy makers tore down slums to force people into better neighborhoods. Later, policy makers used kinder methods such as financial incentives and lowered lending standards to entice people into better neighborhoods, As might be expected when you assume causation when only correlation exists, the government actions have had little positive effect.

I think that the Millennial Housing Commission may have reversed causality. More stable families create better neighborhoods and better housing. Perhaps there is an omitted variable that causes both better families and better neighborhoods. What do you think?

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Tuesday, September 15, 2009

Ants, Markets and Spontaneous Order (Repost I)

One of the difficult ideas to explain in economics is how a spontaneously ordered markets result in such a marvelous outcome: the greatest benefit to society from the allocation of resources. Markets, with proper laws and foundational regulations, guide self-interested or greedy agents into creative, innovative actions that are not only good for the involved economic agent, but society as a whole.

It is not easy to convey the efficiency of spontaneously ordered markets to students. They seem to understand how self-interest or greed orders an individual’s activities profitably, but not how this benefit extends to society. Russ Roberts, in his EconTalk interview with Deborah Gordon, "Gordon on Ants, Humans, the Division of Labor and Emergent Order," discovers a brilliant example to describe spontaneous order—ant colonies.

Ant colonies are well ordered and appear to operate under some sort of central command, but it is not so. The colonies have no central planner. Each ant secretes pheromones and hydrocarbons based on conditions surrounding the colony. Other ants smell the pheromones and hydrocarbons, and use these scents to guide their actions into digging, patrolling, and foraging. As the scents change, ants alter their behavior and the colony adapts and prospers.

Imagine the confusion that would result if a queen ant did order activity in the colony. How would the queen know the conditions around the colony? Should the ants dig, and how deep? How many ants should patrol and where? Once patrolling is accomplished, how many ants should forage and in what direction? Each reporting function would be new to the colony, time consuming, contain less information than spontaneously ordered functions, and be totally unnecessary.

Humans behave in a manner similar to ants. Each has an infinitesimal knowledge about the overall functioning of the economy. The best home builder (brightest, hardest working and most honest) probably has no idea how roof tiles are produced, let alone how automobiles are assembled. Each individual collects information provided by prices and profits and directs his or her activities accordingly. As prices and profits change, economic activity through individual action changes. Resources are reallocated, products are innovated, and the economy adapts and prospers.

Collective behavior in a human colony creates confusion based on insufficient information if colony planners attempt to alter the reallocation of resources and innovation within society. Planners just don’t have the information possessed by thousands of economic agents. Diverting resources to information gathering and planning is time consuming and costly; diverted resources cannot be used to produce goods and services.

It is here I believe that the analogy between ants and humans breaks down. Ants follow secreted chemicals that dictate their actions. The human brain allows for a wider range of behavior that may profit the individual but be destructive to others and the entire human colony. Foundational rules such as the prohibition on theft and definition of property rights support the spontaneous ordering of resources and innovation. While there is disagreement among economists just how broad these foundational rules and regulations should extend, it is clear that nearly all economists believe that society should maintain through collective actions the greatest freedom possible on resource allocation and innovation.

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WWII and the Economy (Repost I)

In one of my first posts, I criticized Paul Krugman and George Will over their description of depression era economic policy and its effectiveness. Although I believe my reading of the economic literature is correct, I wish I had offered my opinion as another hypothesis of events that had some empirical support.

I also disagree with their assessment that WWII was a great public works program that ended the Great Depression. After reviewing a few sources, I am less sure that the opinion I will offer is the majority opinion, but I believe that it is correct.

War is never good for an economy. It may be the least bad alternative or it may be the morally right action, but it is never good for the economy. I am not only worried about an incorrect interpretation of WWII, but the implication that if war can be good for the economy once, then it might be good again.


Those who argue the economic virtues of WWII generally point to two apparent economic accomplishments of the war: unemployment fell and gross domestic product grew. The graph, "U.S. Economy: 1938-1945", a nostalgic "guns and butter" graph for those of us who studied economics during the Vietnam War, illustrates this position. This graph has made up numbers and breaks down production into two goods, guns representing armaments, and butter representing consumer goods. In 1938, the nation was in the interior of the frontier. As the war progressed, unemployment fell, and production increased. We ended up at a point labeled 1945. The expansion of the production frontier from the blue line to the red line represents economic growth.

Why is this analysis flawed? Value in exchange occurs only when it is voluntary. When another country threatens our physical safety, or our way of life, we have been denied our freedom to select the mix of guns and butter that we desire. We do not build armaments or go to war because we enjoy it, but because we must. I hope that I am correctly stating American values.

Unemployment did decrease during the war. In 1939 between 7 and 8 million workers were unemployed. In part that was accomplished by drafting a big chunk of our labor force. By the ended of the war, approximately 12 million men were in uniform. I doubt that hundreds of thousands of the newly unemployed are lining up at recruiters offices. They apparently value their unemployed civilian activities more than their potential employed military activities.

War is also tough on resources. Output did increase as illustrated on the graph, but those resources were used to make goods that are only desirable if we are threatened, tanks, artillery, bombers, etc. Furthermore, use of these resources generally leads to their destruction. They might add to GDP, but they add little to national wealth. We have also failed to mention what I believe to be the biggest loss, about 400,000 dead and 1,000,000 injured.

Growth in our economy should be measured by the increase in the value of goods and services we wish to consume. The production of consumer goods did not grow during the war, and a large number of those goods were rationed. Because we could not purchase goods that we wished to consume and we were compelled to produce goods we did not wish to produce, it could be argued that the price mechanism was not functioning and GNP was improperly measured.

Three conditions must be met to conclude that war is good for the economy. It must be fought in foreign lands, must be won, and a low value must be placed on American dead. Unemployment is growing and production is declining. Certainly we could find a war that meets the first two conditions, and if we are careful, we could minimize American deaths. Should we reinstitute the draft and expand the War on Terrorism as part of a stimulus package?

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Cruseturner on Washington and the Nation Debt

A good article published by MCC's own Ashley Wayne Cruseturner relates George Washington's timeless wisdom to today's problems with public sector debt.  The article is titled "Why It's Time to Face the Hard Truths Embraced by George Washington," and is published in the History News Network.  Cruseturner observes
In his celebrated Farewell Address, George Washington bequeathed to us a series of shrewd observations. Reflecting the vast experience of an extremely practical national leader, as well as the prevailing philosophy of the American Revolution, his valedictory instructions include a common sense economic roadmap for long-term national strength and security.

“Cherish public credit,” Washington counseled. Employ it sparingly. Spend public money frugally. Avoid costly and unnecessary wars. Judicious spending on defense is wiser than inviting aggression through weakness, and sometimes exigencies necessitate appropriating public money, but do not mortgage the future. Always pay your own way.
If you have a complaint about the public debt, don't blame your elected representatives, blame yourself.
Equally important, Washington asserted, good government is responsible government. Government must be worthy of our taxes. Our elected officials are ultimately responsible for holding down spending, but, in truth, public officials are hostages to public opinion. Expenditures will reflect the popular will. We the people must demand responsible government.
Taxing all citizens would help tame the deficit beast.
In regard to changing long-term patterns of national behavior, perhaps the only answer lies in taxing ourselves so that we ALL feel the pain of taxation. By “all” I mean every single American—no matter his or her socioeconomic rank. For those who pay no taxes, every government program is a good one. On the other hand, if we all pay taxes, we are all invested in good stewardship and a more responsible government.

We must summon the discipline to rebuke politicians who pledge lower taxes for 95 percent of us while promising more government services for all. We must transcend the tantalizing sophistry that the masses will benefit from a tax structure that only "inconveniences" the fortunate few. It is time to face reality. Those numbers do not add up.
Charles Murray also called for widening the income tax base.  I posted and linked to his article here.  I also made more radical and much less realistic suggestions from improving incentives for both citizens and our elected officials to related spending to taxation here

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Monday, September 14, 2009

More on the US's Trade Dispute with China

(HT Drudge)  As would be expected, China has announced its opposition to the Obama administration's decision to place a 35% tariff on tires from China.  Geoff Dyer and Tom Braithwaite of the Financial Times in "US tyre duties spark China clash," outlines the issues in the trade dispute. 
In his first big test on world trade since taking office in January, Mr Obama sided with America’s trade unions, which have complained that a “surge” in imports of Chinese-made tyres had caused 7,000 job losses among US factory workers.

Chen Deming, China’s minister of commerce, condemned the decision, saying that it “sends the wrong signal to the world” at a time when Washington and Beijing should be co-operating to deal with the worst economic and financial crisis in decades.

“This is a grave act of trade protectionism,” Mr Chen said in a statement. “Not only does it violate WTO rules, it contravenes commitments the US government made at the [April] G20 financial summit.”
Economists often wonder if presidents listen to their economic advisors and this is a data point that suggests they do not.  Larry Summers and Christina Romer, two top notch economists, must be hiding under their desks and refusing calls from reporters.  The administration will be hard pressed to find economists who support the action.  Brad DeLong gives a simple numerical example to explain why the tariff is a bad idea.  After citing a reporter who notes that the tariff will add $3.50 per tire and save 5,000[1] U.S. jobs, DeLong does some back of the envelope calculations.
Let's see... 250 million cars in America... need 4 tires per car... need new tires every 2.5 years. 400 million tires a year... $1.4 billion dollars a year... 10,000 worker jobs saved... $140,000 dollars per worker-job per year.

Looks like we could (a) let the Chinese sell us tires, (b) tax each tire by $2.50, (c) pay each tire worker who loses his or her job $100K a year, and we come out ahead: American households have more money to spend on other things, China has more jobs to help what is still a very poor country grow, and tire workers have higher incomes and more leisure as well.

But, you say, it would be stupid to impose a $2 a tire tax and use the money to pay each laid-off tire worker $100K a year.

That's the point: when the policy you are adopting is worse for everybody than a policy you agree is stupid, the policy you are adopting is best characterized as really stupid.
Does the administration believe that we are the only country that has domestic producers who will complain when competition heats up with foreign producers?  Dyer and Braithwaite continue.
China said it would now investigate imports of US poultry and vehicles, responding to complaints from domestic companies.

The US earlier warned Beijing against taking retaliatory action. “Retaliation would be inappropriate, as the United States acted entirely within the bounds of trade laws and within the safeguard provision that China itself agreed to upon accession to the World Trade Organisation.
[1] The job numbers used by DeLong come from another article and differ by 2,000 from those cited by Dyer and Braithwaite. 

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Saturday, September 12, 2009

The Obama Administration and Trade

Economists like trade. According to Alston, Kearl, and Vaughn, who surveyed economists in their 1992 American Economic Review article titled, "Is There Consensus among Economists in the 1990s?" 93% of economists agree with the statement that "tariffs and import quotas usually reduce general economic welfare."  Whether between households, states, or nations, it increases prosperity through specialization.

Those who oppose open trade succumb to Caplan's antiforeign bias, and perhaps antimarket, and make-work biases as well.  Politicians who support measures to limit trade may be voicing their constituents' biases or their special interests' wants but they are doing so at the expense of their constituents' well-being.

The Obama administration has nipped at the heels of our free trade policy.  According to the Wall Street Journal's editorial writers, ("A Protectionist Wave,"),
The White House leaked word late Friday evening that the U.S. will impose a 35% tariff on imported Chinese tires used by millions of low-income Americans. We wonder if President Obama understands the political forces he's unleashing with this blatant protectionism.
Mr. Obama is setting a precedent in the tire case because he is applying a previously unused part of the trade law known as Section 421. This allows U.S. industries or unions to seek protection from "surges" of Chinese imports, with a lower burden of proof than normal antidumping or countervailing duty cases. President Bush nixed the four Section 421 petitions that reached his desk, citing the national economic interest. Domestic lobbies had lobbied Mr. Obama hard to reverse that pattern and set a new protectionist precedent...

This threat will now be realized as other industries pursue the 421 solution to reducing competition. Some of the product categories that have seen import surges include shoes, lawn mowers, television monitors, hearing aids, musical instruments like keyboards and guitars, women's underwear, blouses and t-shirts, according to Greg Rushford, editor of a newsletter on trade policy. Oh, and trousers, women's knit shirts and bras, according to Cass Johnson, president of the National Council of Textile Organizations—another lobby that must be gleeful that Mr. Obama has unleashed Section 421.

As a candidate, Mr. Obama courted union support, and the United Steelworkers filed the tire case anticipating he would pay them back. Some in the business and policy communities thought Mr. Obama didn't really mean it, and that like Bill Clinton he would stand for the national economic interest in open trade once he became President. Mark that down as another misjudgment. In his first big trade test in the White House, Mr. Obama has allied himself with the protectionists, and the world will see his political surrender and rush to exploit it.
Consumers who buy Chinese tires, including millions of low-income Americans will be taxed through higher prices for tires that they freely chose to buy.  I disagree with one point made by the writers, that this was the administrations "first big trade test."  I believe that that honor goes to signing the stimulus bill (American Recovery and Reinvestment Act of 2009) with the buy American clause.  President Obama's economic advisors should remind him of the role that protectionism played in deepening and prolonging the Great Depression. 

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Friday, September 11, 2009

Cochrane On Math and Logic in Economics

John Cochrane gave a good explanation of why math is so important to economics in, "How did Paul Krugman get it so Wrong?"  He writes,
Math in economics serves to keep the logic straight, to make sure that the “then” really does follow the “if,” which it so frequently does not if you just write prose. The challenge is how hard it is to write down explicit artificial economies with these ingredients, actually solve them, in order to see what makes them tick.
If this sounds familiar to my students, then I have done a good job.
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Krugman Vs. Cochrane

Not long ago, Mankiw linked to a New York Times article by Paul Krugman titled, "How Did Economists Get It So Wrong?"  Krugman gives a brief (7,000 word) history of macroeconomic thought ending with a plea that the profession re-embrace the economics of Keynes.  In his article, he did a lot of simplification of modern macroeconomic thought that might be viewed as caricatures of significant contributions that disagree with his opinions.  Today, Mankiw linked to a response by John Cochrane titled, "How did Paul Krugman get it so Wrong?"  In his 4,000 word response, Cochrane defends many contributions dismissed by Krugman.  Interested students would benefit by reading both papers.   
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Gray's "Samuel Johnson and the Virtue of Capitalism"

Principle 5 of Mankiw's ten principles of economics states that "trade can make everyone better off."  It is an old claim in economics going back to Adam Smith, supported by empirical evidence and widely accepted within the economics profession.  Economists believe that trade leads to specialization and specialization to the creation of wealth.  Eliza Gray wrote a short article for the Wall Street Journal titled "Samuel Johnson and the Virtue of Capitalism," in which she demonstrates that Johnson, the author of the first authoritative dictionary in English, had a firm grasp of the economics of trade.  She writes,
Johnson also understood that what Smith would later call the division of labor was instrumental for human happiness and progress. "The Adventurer 67," which he wrote in 1753 at the height of a commercial boom (and 23 years before Smith published "The Wealth of Nations"), delights in the sheer number of occupations available in a commercial capital like London. The insatiable demand for the most specialized goods and services means employment for anyone who wants to make a living: ". . . myriads [are] raised to dignity, by no other merit than . . . contributing to supply their neighbors with the means of sucking smoke through a tube of clay."

"[E]ach of us singly can do little for himself," he wrote insightfully, "and there is scarce any one amongst us . . . who does not enjoy the labor of a thousand artists." He also saw the market as the only mechanism by which the diversity of human desires could be satisfied: "In the endless variety of tastes and circumstances that diversify mankind, nothing is so superfluous, but that some one desires it . . ."

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Wednesday, September 9, 2009

What is Green and Glows in the Dark?

Environmentally friendly generation III nuclear power plants.  Some might argue with the environmentally friendly part, but they don't emit carbon to generate electricity.  Most economists believe that markets are innovative and the new generation of nuclear power plants provide evidence.  In a good article, titled "The New Nukes," Rebecca Smith of the Wall Street Journal writes that the new plants will be safer, cheaper and more efficient than old plants. 
For the first time in decades, popular opinion is on the industry's side. A majority of Americans thinks nuclear power, which emits virtually no carbon dioxide, is a safe and effective way to battle climate change, according to recent polls. At the same time, legislators are showing renewed interest in nuclear as they hunt for ways to slash greenhouse-gas emissions.

The industry is seizing this chance to move out of the shadow of Three Mile Island and Chernobyl and show that it has solved the three big problems that have long dogged it: cost, safety and waste. Researchers are working on reactors that they claim are simpler, cheaper in certain respects, and more efficient than the last generation of plants.

Some designs try to reduce the chance of accidents by automating safety features and minimizing the amount of hardware needed to shut down the reactor in an emergency. Others cut costs by using standardized parts that can be built in big chunks and then shipped to the site. Some squeeze more power out of uranium, reducing the amount of waste produced, while others wring even more energy out of spent fuel.
Smith points out that nukes will always have their critics.  My guess it is environmentalist who push a soft green solution of renewable energy: wind, tide and solar.  I don't know who will win the debate that will take place in markets and the Congress, but Smith describes the critics' concerns.
And while the industry is winning converts, plenty of powerful enemies remain. Many scientists and environmentalists still distrust nuclear power in any form, arguing that it can never escape its cost, safety and waste problems. What's more, critics say, trying to solve the problems in one area, such as safety, inevitably lead to more problems in another area, such as costs.

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Tuesday, September 8, 2009

Obama, Soda and the Nanny State

(HT Drudge) President Obama, with the exception of his smoking habit, lives a healthy lifestyle. He eats well, exercises and his efforts show; he looks good. He even keeps a bowl of apples in the Oval Office, but apparently he does not have enough on his plate and, hinting aside, let it be known in a forthcoming issue of Men's Health that he supports "sin tax" on sugar-laced products.

I do not believe that it is the role of government to shape our diet through the tax code. Such thinking should be exercised. If sugar-laced products are made more expensive through the tax code, what will we buy instead? Will we but even less healthy foods or more electronic forms of entertainment that make us even more sedentary? Might a beer or shot of tequila substitute for a soda? Some might even take up smoking to suppress their appetite.

If the government must get into the kitchen to tax people into reduce their weight, tax it directly and not the products that they buy. I would also advise the president to drop the anti corporate language.

Breitbart reports in "Obama open to 'sin tax' on fizzy drinks to stem obesity," that
President Barack Obama hinted he could support a "sin tax" on fizzy drinks to help lower high rates of US obesity, but admitted it would be an uphill battle against corporate and economic interests.
"I actually think it's an idea that we should be exploring," Obama said in the forthcoming issue of Men's Health, regarding potential taxes levied on soft drinks such as colas and other sugar-filled products.

"There's no doubt that our kids drink way too much soda. And every study that's been done about obesity shows that there is as high a correlation between increased soda consumption and obesity as just about anything else," he said in excerpts released ahead of the magazine's mid-September publication.

The president -- reported to be one of the fittest US commanders-in-chief in decades -- stressed that "obviously there is resistance on Capitol Hill to those kinds of sin taxes.

"Legislators from certain states that produce sugar or corn syrup are sensitive to anything that might reduce demand for those products," he said.

In addition, "people's attitude is that they don't necessarily want Big Brother telling them what to eat or drink, and I understand that," Obama added.

"It is true, though, that if you wanted to make a big impact on people?s health in this country, reducing things like soda consumption would be helpful."

Obama, who said he works out nearly every day in order to clear his head and reduce stress, described himself as "a healthy eater" with low blood pressure.

He keeps a bowl of apples in the Oval Office. "It was our first step toward health reform," he said.

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Sowell: Housing Boom and Bust

At the one year anniversary of the financial crisis of 2008, I am making an effort to learn more about its origins by reading several books with different perspectives.  I began by reading Posner's "A Failure of Capitalism."  Posner has extensive expertise in legal and economic aspects of regulation.  He took a Keynesian approach in his macroeconomic analysis of the crisis.  Keynesian economics is dated but anybody who studies modern macroeconomics will recognize his influence on those who followed, particularly New Keynesian economists.  As soon as it is available, I will order and read Chinn and Friden's forthcoming book.  Chinn is a careful modeler who pays close attention to empirical results.  I don't know much about Friden.  I suspect that they will use a real business cycle or New Keynesian approach.  I just ordered Thomas Sowell's "The Housing Boom and Bust."  Sowell is often described as a libertarian or sometimes a conservative.  Sowell believes that government policy designed to increase home ownership was an important cause of the financial crisis.  Chinn, Friden, and Posner dismiss this view.  Below I have included part of a book review by dostoyevsky76 that I found online.
The first half of Housing Boom and Bust is like the housing market in the first half of this decade--seemingly endless potential. While I disagree politically with some of what Sowell believes, he is a clear-thinking, thoughtful writer. His book "Basic Economics" is a five-star work. He has the ability to lucidly explain arcane subjects without talking down to readers.

But this book only begins to tell the story of the housing bust and ensuing financial crisis. It's the equivalent of watching a football game and the t.v. station only shows you the first half. It was a great two quarters, but I want to see the rest of the game.
This book does an excellent job of explaining the political origins of this crisis. The main thrust of Sowell's argument is that government action usually leads to the opposite of intended consequences. The mantra of "affordable housing" led to government interference into banking which weakened standards of due diligence for home buyers. The government's most significant act was the pressure put on Fannie Mae and Freddie Mac to buy mortgages from lenders who had lowered their standards in the pursuit of providing "affordable housing." Only banks that played along in the late 90s were allowed to offer more exotic securities, and thus increase their potential for profit.

What isn't here is the extent to which lenders and investors took every advantage of this system, flooding the market with new investment tools that didn't hold up to the light of day (mostly due to the unsoundness of many of the mortgages that provided their foundation). Just like any other market or opportunity that is offering unusually high rewards, huge numbers of lenders and investors were drawn to mortgage-backed securities at the beginning of this decade. It was the dangerous extent to which major creditors were heavily leveraged with these securities and their by-products, such as credit default swaps, that has led to the severity of this crisis.

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Friday, September 4, 2009

British Death Panels?

Monty Python-Bring Out Your Dead

(HT to Drudge for running the article, and Russ Roberts at Cafe Hayek who beat me to the punch with the Monty Python video)  The economic point in the following article is that all goods and services must be rationed.  If not by price, then by some other mechanism.  In a tragic story that is growing in depth, six British doctors signed an open letter claiming that some terminally ill patients are incorrectly judged as close to death and then given treatment that induces an untimely death.  Those with gallows humor might enjoy the Monty Python clip that foreshadows the British health care system's misdiagnosis of death alarmingly well.  In "Dying patients," published by the Telegraph, the six doctors write
SIR – The Patients Association has done well to expose the poor treatment of elderly patients in some parts of the NHS [National Health Service] (report, August 27). We would like to draw attention to the new “gold standard” treatment of those categorised as “dying”. Forecasting death is an inexact science.

Just as, in the financial world, so-called algorithmic banking has caused problems by blindly following a computer model, so a similar tick-box approach to the management of death is causing a national crisis in care.

The Government is rolling out a new treatment pattern of palliative care into hospitals, nursing and residential homes. It is based on experience in a Liverpool hospice. If you tick all the right boxes in the Liverpool Care Pathway, the inevitable outcome of the consequent treatment is death.

As a result, a nationwide wave of discontent is building up, as family and friends witness the denial of fluids and food to patients. Syringe drivers are being used to give continuous terminal sedation, without regard to the fact that the diagnosis could be wrong.

It is disturbing that in the year 2007-2008, 16.5 per cent of deaths came about after terminal sedation. Experienced doctors know that sometimes, when all but essential drugs are stopped, “dying” patients get better.
Kate Devlin, a medical correspondent for the Telegraph in "Sentenced to death on the NHS," describes how the system of treatment of the terminally ill evolved.  Those who are following the American health care debate will recognize parallels in language use and goals with the British system: an attempt to limit unnecessary procedures for the benefit of the ill and the use of evidence-based medicine. 
Under NHS guidance introduced across England to help doctors and medical staff deal with dying patients, they can then have fluid and drugs withdrawn and many are put on continuous sedation until they pass away.

But this approach can also mask the signs that their condition is improving, the experts warn...

The warning comes just a week after a report by the Patients Association estimated that up to one million patients had received poor or cruel care on the NHS.

The scheme, called the Liverpool Care Pathway (LCP), was designed to reduce patient suffering in their final hours...

It was recommended as a model by the National Institute for Health and Clinical Excellence (Nice), the Government’s health scrutiny body, in 2004...

Under the guidelines the decision to diagnose that a patient is close to death is made by the entire medical team treating them, including a senior doctor...

In 2007-08 16.5 per cent of deaths in Britain came about after continuous deep sedation, according to researchers at the Barts and the London School of Medicine and Dentistry, twice as many as in Belgium and the Netherlands...

A spokesman for the Department of Health said: “People coming to the end of their lives should have a right to high quality, compassionate and dignified care.

"The Liverpool Care Pathway (LCP) is an established and recommended tool that provides clinicians with an evidence-based framework to help delivery of high quality care for people at the end of their lives.
In a superb example of Orwellian doublespeak, the death panels were established by a government agency with the acronym NICE.  Niiiice!  Any system of medical care will have errors that end in death, and the article does not provide the percentage of those placed under deep sedation who died unnecessarily, but, based on the articles, the number is probably uncomfortably large. 

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Thursday, September 3, 2009

Sony and 3D TV

Markets is a wonderfully innovative.  Sony announced that it intends to sell 3D TVs  to consumers beginning in 2010.  As is the case with many new products a standard format has not yet emerged.  Maija Palmer, writing for the Financial Times on September 1, 2009 in "Sony to throw its weight behind 3D TV," describes the market for the emerging technology.
3D technology looks set to hit the home consumer market next year, with Sony on Wednesday announcing plans to sell 3D televisions globally by the end of 2010.

Sony’s decision to throw its weight behind the technology will be an important boost for the 3D industry, which has so far focused mainly on cinemas. British Sky Broadcasting has said it would introduce a 3D satellite channel in the UK next year, but it had been unclear whether there would be equipment available to view it on.
Speaking at the IFA technology trade show in Berlin, Sir Howard Stringer, Sony chief executive, will announce plans not only to sell 3D Bravia television sets, but to make Sony’s Vaio laptop computers, PlayStation3 games consoles and Blu-ray disc players compatible with the technology...

The consumer electronics industry has yet to agree on a single 3D standard, posing the risk of a format war akin to that between VHS and Betamax or Blu-ray and HD-DVD...

The electronics industry is looking for the next technology to boost sales, as high-definition television sales move past their peak. Hyundai is producing early 3D sets for the Japanese market and Panasonic has flagged up plans for products.

Sony’s commitment, however, improves 3D’s chances of becoming mainstream. It has given no indication of prices, but analysts expect early 3D TVs to cost several thousand dollars. Hyundai’s 3D TVs cost more than €3,400 [about $4,900].

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Implementing Britain's Renewable Energy Policy

(HT Drudge)  Andrew Porter, the political editor of the Telegraph, writes about Britain facing impending blackouts due to mismanaged energy policy in "Britain facing blackouts for first time since 1970s," dated August 31, 2009.  In the talk of creating a green economy and jobs elected officials seem to miss an important point: most policies designed to foster the development of clean energy do so by driving up the cost of nonrenewable relative to renewable fuels.  That is the objective of carbon taxes, fuel taxes, and restrictions on building nonrenewable fueled power plants.  These policies are justifiable economically up to the point that the marginal benefits from a cleaner environment exceed or are equal to the marginal costs of implementing the green policies.  If the marginal costs exceed the marginal benefits, the policy should not be implemented. 

Rationing of economic goods can be accomplished in many ways.  Economists generally prefer rationing through price.  Those who desire to pay the market price can buy the good and those who believe the price is too high will not; the quantity supplied to the market will equal the quantity demanded.  Britain seems to be on a path to ration electricity through blackouts.  Blackouts can be avoided by increasing price.  Apparently, British policy makers would rather hide increases in cost by rationing through blackouts rather than acknowledge that their policy increases energy prices.

Porter describes the problem and how it came to light.
Demand for power from homes and businesses will exceed supply from the national grid within eight years, according to official figures...
The gap between Britain’s energy needs and demand throws fresh doubt on the Government’s assertion that renewable energy can make up for dwindling nuclear and coal capabilities.

The admission that Britain will face power-cuts is contained in a document that accompanied the Government’s Low Carbon Transition Plan, which was launched in July...

Under the plan, 40 per cent of the UK’s electricity will need to come from low-carbon energy sources including clean coal, nuclear and renewables...

Greg Clark, the shadow climate and energy change secretary, said:..."The next government has an urgent task to accelerate the deployment of a new generating capacity, and to take steps to ensure that as a matter of national security there is enough capacity to provide a robust margin of safety.”

Mr Clark also pointed out that the scale of the blackouts could in fact be three times worse than the Government predictions. He said some of the modelling used was “optimistic” as it assumes little or no change in electricity demand up until to 2020.

It also assumes a rapid increase in wind farm capacity. There is also the assumption that existing nuclear power stations will be granted extensions to their “lifetimes"...
Our citizens and policy makers should closely study Britain's problems in implementing a clean energy policy as we attempt to replace fossil fuels with renewable fuels. 

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Tuesday, September 1, 2009

Chinn and Frieden, and Posner on Origins of the Fall of 2008 Financial Crisis

I find substantial agreement about the origins of the fall of 2008 financial crisis between Menzie Chinn and Jeffry Frieden and Richard Posner.  I do not agree with all their conclusions, but I respect their analysis and give it serious consideration.  They find that large budget deficits during the Bush era, high leverage by firms in the financial sector, financial innovation and lax regulatory control were the culprits.  Chinn and Frieden write in "Reflections on the Causes and Consequences of the Debt Crisis of 2008," La Follette Policy Report, Vol. 19, No. 1, Fall 2009 (see also Chinn's post, "Reflections on the Causes and Consequences of the Debt Crisis of 2008" on Econbrowser) that
In late 2008, the world's financial system seized up. Billions of dollars worth of financial assets were frozen in place, the value of securities uncertain, and hence the solvency of seemingly rock solid financial institutions in question. By the end of the year, growth rates in the industrial world had gone negative, and even developing country growth had declined sharply.

This economic crisis has forced a re-evaluation of deeply held convictions regarding the proper method of managing economies, including the role of regulation and the ideal degree of openness to foreign trade and capital. It has also forced a re-assessment of economic orthodoxy that touts the self-regulating nature of free market economies.

The precise origin of this breathtaking series of events is difficult to identify. Because the crisis is such an all-encompassing and wide-ranging phenomenon, and observers tend to focus on what they know, most accounts center on one or two factors. Some reductionist arguments identify "greed" as the cause, while others obsess about the 1990s era amendments to the 1977 U.S. Community Reinvestment Act that was designed to encourage banks and other financial institutions to meet the needs of the entire market, including those of people living in poor neighborhoods. They also point to the political power of government-sponsored entities such as Fannie Mae and Freddie Mac, agencies designed to smooth the flow of credit to housing markets.

In our view, such simple, if not simplistic, arguments are wrong. Rather, we view the current episode as a replay of past debt crises, driven by profligate fiscal policies, but made much more virulent by a combination of high leverage, financial innovation, and regulatory disarmament. In this environment, speculation and outright criminal activities thrived; but those are exacerbating, rather than causal, factors.
In Posner's book, "A Failure of Capitalism," that I commented on here, he writes
So the market can be blamed for recessions, which without government intervention would often turn into depressions, as they often did before the government learned (we thought) in the aftermath of the Great Depression how to prevent that from happening.  But it doesn't let the government off the hook.  It failed to take timely and coherent measures to check the downturn.  The seeds of failure were sown in movement to reduce the regulation of banking and credit, which began in the 1970s.  They germinated during the Clinton Administration, when the housing bubble began and the deregulation of banking  culminated in the repeal of the Glass-Steagall Act (which had separated commercial banking from investment banking and it was decided not to bring the new financial instruments, in particular credit-default swaps, under regulation even to the limited extent of moving trading in swaps to exchanges, which would have given the public information about the scope, risks, and value of these investments.  Greenspan, Ruben, and Summers, the dominant figures in U.S. economic policy during the Clinton era, allowed the head of steam to build up that would eventually blow the housing and banking industry sky-high. 

But there might not have been a depression if not for the Bush Administration's mismanagement of the economy.  Bush cannot be criticized for having reappointed Greenspan as chairman of the Federal Reserve in 2004.  Greenspan had a towering reputation; it is only in hindsight that we can see that his reputation was inflated and after seventeen years in the post he had overstayed his welcome.  And Bernanke looked like a superb choice to succeed Greenspan in 2004, and probably was, though he went on to make grave mistakes...

Another mistake of the Bush Administration's management of the economy, though one the gravity of which is apparent only in hindsight, is the budget deficits of the Bush years, which so increased the size of the national debt.  So great was the national debt before the financial crisis hit that the economy will be hard-pressed to absorb the enormous expenditures that are being made in an effort to spur a recovery, without doing serious long-term damage to the U.S. economy. 
I accept the argument that the Fed's easy money policy contributed to the financial crisis.  I also accept the argument that the Bush administration's profligate spending contributed to the severity of the crisis and increased the difficulty of an effective fiscal response now.  The Bush deficits are even more egregious for those who believe that war expenditures were easily observed as unnecessary as the campaigns in Afghanistan and Iraq began.  Many liberal and libertarian economists warned of the difficulty of building democracy in those countries based on good empirical data.  It is hard to deny that high leverage contributed to greater insolvency of financial institutions as default rates increased.  I would like to read more about the role that new credit default swaps played; I simply don't understand it well.   

My largest disagreement with Chinn and Frieden, and Posner is their dismissal of active government regulation of Fannie and Freddie designed to increase home ownership.  Posner calls the government involvement, "pushing through an open door," meaning that the mortgage industry would have made these loans without government help.  They may be right but I would like to see an event study investigating changes in bank lending behavior as the Congress put pressure on the agencies to increase nontraditional lending.  I also believe that local practices authorizing building permits and building codes were at least an "exacerbating" factor in the crisis.  Many local governments limited permits and stiffened codes in ways that tended to increase the inelasticity of housing supply, setting the stage for large price increases and subsequent decreases in many of the cities that experienced the largest bubbles.

Before I draw a stronger conclusion about root causes of the financial crisis, I would like to see more evidence in several areas.  My prior beliefs make me doubt that the repeal of the Glass-Steagall Act had a negative impact.  Likewise, I would like more evidence linking weak enforcement through the SEC under the Bush administration to the financial crisis.  

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