1,000 years of historical context for Social Security

The Social Security Administration has a fascinating brief history of the societal and political developments that led eventually to the enactment of America's Social Security program in 1935. Although it was enacted during The Great Depression, it wasn't primarily a countercyclical device but was the culmination of the evolution of collective economic security institutions starting with guilds in the Middle Ages. Thanks to Mark Thoma for bringing this to my attention.

The US trade deficit is tribute paid to foreigners. And it’s big.

In 26 of the last 27 years, the US has run a trade deficit.

Trade data and GDP data from US Bureau of Economic Analysis.

When the US exports less in goods and services than it imports, and earns less from its investments abroad than foreigners earn on their investments here, there is increased debt to foreigners, which must be serviced and eventually paid off, and/or transfers to foreigners of title to US assets such as company stock and real estate. Effectively, it's as though foreigners collected a sales tax on all economic activity in the US, essentially a tribute paid by the US to foreigners. The rate has been as high as 6.0 % of Gross Domestic Product, was about 4.9% in 2008, and has averaged 2.9% since 1981.

In 2007, the total tribute paid was $731 billion. That's larger than the Troubled Asset Relief Program ("TARP"), which may take more than a year to disburse. It's almost as large as the multi-year economic stimulus package pending in Congress now. It's larger than all US federal spending on defense in 2007 and more than twice as large as all federal non-defense spending. (BEA link.) It is almost twice as much as federal corporate income taxes in 2007. (Tax Policy Center link.)

The comparative advantage argument for trade liberalization assumes imports and exports will be balanced. (There is a theory about how currency exchange markets will automatically result in balanced trade, but obviously the theory is not operating in the real world.) On the other hand, the older mercantilist idea that national wealth accumulation comes from maximizing exports and minimizing imports has worked splendidly for China in recent years. The US has neither balanced trade nor a trade surplus but, instead, has run a large chronic trade deficit—and there is no reputable theory predicting net benefits from that.

Despite this, free trade ideologues are wringing their hands about the possibility that new political winds may blow in a wave of protectionism. Although it would be unfortunate for the US to adopt illegal tariffs in the name of ending the recession, US trade policy has been broken for 2 to 3 decades and needs a major overhaul. We should start now, not because we are in a recession, but because changes are long overdue.

Fortunately, the recent conventional wisdom that all trade liberalization is good and inevitably produces good results has been shattered. Nobel laureates Paul Samuelson and Paul Krugman and other prominent economists including Dani Rodrik, Alan Blinder, Martin Wolf, Larry Summers, Joseph Stiglitz, and even Alan Greenspan have said that the US middle class is net worse off as a result of the way we have implemented trade liberalization. We need to take a strategic approach to foreign trade and work hard to get the potential net benefits for middle class Americans.

Update on Monday, March 16, 2009 at 01:41PM by Skeptic

There is a point of view that America does not need to manufacture things--we can import substantially all manufactured goods and earn the necessary foreign exchange by exporting services. Dean Baker points out the math makes that utterly implausible.

The end of manufacturing school argues that we will pay by exporting services. This is where arithmetic is so useful. The volume of U.S. trade in goods is approximately three and half times the volume of its trade in services. If the deficit in goods trade were to continue to expand, we would need an incredible growth rate in both the volume and surplus of service trade and our surplus on this trade in order to get to anything close to balanced trade.

For example, if we lose half of our manufacturing over the next twenty years, and imported services continue to rise at the same pace as the past decade, then we would have to see exports of services rise at an average annual rate of almost 15 percent over the next two decades if we are to have balanced trade in the year 2028.

A 15 percent annual growth rate in service exports is approximately twice the rate of growth in service exports that we have seen over the last decade. It would take a very creative story to explain how we can anticipate the doubling of the growth rate of service exports on a sustained basis.

The story becomes even more fantastic on a closer examination of the services that we export. The largest single item is travel, meaning the money that foreign tourists spend in the United States. This item alone accounts for almost 20 percent of our service exports.

Baker goes on to identify the kinds of services the US has been exporting and discusses the bleak prospects for rapid expansion in those categories. 

Thanks to Mark Thoma for the link.  He has commentary here.

Update on Thursday, March 26, 2009 at 10:11AM by Skeptic

Brad DeLong said 6 years ago that some trade deficit may be OK, depending on the reasons for it.  He regrets that he does not know what portion of the recent US trade deficit is troublesome and what portion is not. 

He says one thing we should not worry about is foreigners holding US securities because they think those are safer and/or because their families might want to move here.  However, DeLong admits that would turn troublesome if foreigners start moving their savings to a new favorite country.  He doesn't address the issues of the continuing drain of wealth into foreign hands or the stagnation of the parts of the US economy that depend on exports.

Update on Saturday, May 2, 2009 at 08:31AM by Skeptic

The New York Times has a similar graph back to 1947, and imports and exports each seperately here.

Update on Friday, October 30, 2009 at 12:18PM by Skeptic

I should have mentioned that the official gross domestic product ("GDP") is also reduced dollar for dollar by net imports.  This is a consequence of the GDP formula itself:  GDP = consumer spending + gross private investment (not net of depreciation/amortization) + government consumption and investment (but not transfer payments) + net exports.  So when net exports have averaged -3%, that means foreign trade reduced GDP by 3%. 

This arithmetic also illustrates why many nations, including China and the other Asian nations with which the US runs a chronic trade deficit, have a deliberate (and successful) strategy of "export-led growth."  Their net exports lead directly to increases in their own GDP.  In contrast, one might say the US has an "import-led growth strategy," but that's an oxymoron.  Thomas Palley was wondering in 2006 why nobody would talk about this at a conference of the prestigious Institute for International Economics. His answer:

That brings us back to the opening conundrum. Why no mention of export-led growth? One reason is that trade is a touchy subject in Washington, and trade has enough problems without being tied to global financial instability. Export-led growth also shows that trade is not a level playing field, confirming critics' claims about countries manipulating exchange rates and pursuing mercantilist policies that subsidize their manufacturers. Finally, the export-led growth story implies the US is relying on import-led growth that sacrifices the manufacturing base, which is a doubtful long run national growth strategy. So why do people ignore the elephant? To quote Bill Clinton, "Denial. It's not just a river in Egypt."

The Obama administration should decide which metrics are most important to track its economic goals and relentlessly focus everybody’s attention on them.

Mark Thoma:

I want to make a . . . point that is being overlooked too often in the debate about the recovery package. Most observers are marking the turnaround in the economy as the point where GDP begins to turn upward, i.e. after the trough in GDP, and expressing worry that the stimulus package might extend beyond that point.

But looking to the last two recessions for guidance, the trough in employment came much later than the trough in output, the traditional one quarter lag between the upturn in GDP and the upturn in employment was extended considerably, and once employment did turnaround, the recovery of employment was sluggish relative to the recovery in GDP (overall job growth during the Bush years was relatively weak).

So marking the turnaround in GDP as the turning point in the economy rather than looking at the behavior of GDP in conjunction with other measures such as the behavior of employment can lead policymakers to pull back on the recovery effort too fast. If employment follows same path it followed in the last two recessions and lags GDP considerably, the need for stimulus in employment will extend far beyond the point where GDP begins to recover. Thus, if some infrastructure projects cannot be completed before GDP turns upward, and instead take a year or longer to complete - something we're hearing a lot of worry about - that won't be a problem, just the opposite as it will provide a helpful and needed boost to employment.

I agree, but the unemployment rate is not the only additional metric that should drive policy.

Public attention, and therefore political attention, now focuses only on GDP and to a lesser extent on the headline unemployment rate. Other economic data are followed only by wonks and traders in the financial industry. Obama has announced a goal of putting middle class incomes on an upward trajectory, but available metrics are inadequate and largely ignored. Family and household incomes should be very important in tracking progress toward that particular goal, but they are available only annually and long after the end of a year. If these data were available monthly, or at least quarterly, and promptly after the end of the period, they could be very useful and could garner sustained public and political attention. It would be necessary to change the way data are collected and devote more resources.

The Obama Administration should adopt a careful strategy of economic metrics because you can only "expect what you inspect." If there are no good metrics to track progress toward goals, or if the metrics are obscure, out of date, or hard to interpret, progress will not occur, goals will get fuzzy, and accountability becomes impossible.

Presentation and leadership matter too. The selected metrics should be issued in a user friendly format with graphics and historical context that can go straight into news media without technical assistance and straight onto web sites. Top government officials should make it known frequently that they are instantly aware of the latest data and incorporating them into their policy deliberations. Major speeches should refer to the selected metrics and progress or lack thereof. Habits of the media and the public need to be changed—and they can be changed through this kind of leadership. Four or eight years of this kind of focus might leave an enduring legacy of what people think about when they think about economic conditions.

Update on Saturday, March 14, 2009 at 10:49AM by Skeptic

Nominal and real hourly earnings of production workers (>5/6 of people who work) are published monthly by the Bureau of Labor Statistics.  Nominal earnings tend to fluctuate very little, but the critical question for middle class prosperity is whether these earnings do or do not substantially exceed the inflation rate on a sustained basis.  Historical analysis of real hourly earnings here.

Update on Wednesday, September 9, 2009 at 12:31PM by Skeptic

Joseph Stiglitz also wants to Rethink the GDP Fetish. He thinks it is not a good measure of citizen well-being and that "what we measure affects what we do." An international Commission on the Measurement of Economic Performance and Social Progress, established by French Presiident Sarkozy in 2008, is expected to issue its report on 14 September 2009. 

CATO and 200 professors fight rear guard action against the stimulus package.

On January 9, 2009, Obama said, "There is no disagreement that we need action by our government, a recovery plan that will help to jumpstart the economy." 

A full page CATO Institute ad in the front section of today's NYTimes says in the biggest type size on the page, "With all due respect Mr. President, that is not true."  Below that, 200+ economics professors sign a statement saying they "do not believe that more government spending is a way to improve economic performance," but that "lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth." 

It's odd that they would deny the President's statement that government action is needed, because tax cuts, which they favor, would require government action.  But when they say increased government spending is not even "a" way to improve economic performance--in other words, it won't work at all--they adopt a truly outer fringe position.  Most economists who think tax cuts ordinarily work better than increased government spending, or at least are philosophically preferable to government spending, don't deny that government spending is stimulative when there is high unemployment.  Lots of careers on the line here, but these are desperate times in academia.  Pickett's Charge and The Light Brigade come to mind.

Update on Sunday, February 1, 2009 at 10:49AM by Skeptic

Newly elected Republican National Committee chairman Mike Steele also embraces the objectively false and indefensible: “You and I know that in the history of mankind and womankind, government—federal, state or local—has never created one job,” he said. “It’s destroyed a lot of them.”  How does this stuff help the Republican Party recover?

Orthodox economics is in crisis. Or maybe not.

In this post, Mark Thoma quotes from a Paul Krugman post, elaborates on it, and links to Brad DeLong's post, all savaging the Chicago School orthodoxy that has been so influential for 3 decades. Krugman says economists who "have spent their entire careers on equilibrium business cycle theory are now discovering that, in effect, they invested their savings with Bernie Madoff." Thoma thinks "what has happened will have a much bigger impact on the profession and the models it uses to describe the world than most economists currently realize."

There are more comments than usual, many way beyond heartfelt. Interestingly, the defenders of the Chicagoans don't really defend their view as right on the merits but attack as worse what they assume is the alternative. Lots of speculation about why economists keep giving bad advice. Commenter "Not Mark T" says "My old poli-sci advisor used to smirk, "Better to be wrong than to be irrelevant."

On the other hand, Jeff Madrick mingled in person with thousands of economists early this month and found no self-awareness of any problems in the profession.

I could find no shame in the halls of the San Francisco Hilton, the location at the annual meeting of American economists that just finished. Mainstream economists from major universities dominate the meetings, and some of them are the anointed cream of the crop, including former Clinton, Bush and even Reagan advisers.

There was no session on the schedule about how the vast majority of economists should deal with their failure to anticipate or even seriously warn about the possibility that the second worst economic crisis of the last hundred years was imminent.

I heard no calls to reform educational curricula because of a crisis so threatening and surprising that it undermines, at least if the academicians were honest, the key assumptions of the economic theory currently being taught.

There were no sessions about why the profession was not up in arms about the deregulation of so sensitive a sector as finance. They are quick to oppose anything that undermines free trade, by contrast, and have had substantial influence doing just that.

The sessions dedicated to what caused the crisis were filled, even those few sessions led by radical economists, who never saw turnouts for their events like the ones they just got. But no one was accepting any responsibility.

I found no one fundamentally changing his or her mind about the value of economics, economists, or their own work. No one questioned their contribution to the current frightening state of affairs, no one humbled by events.

Maybe I missed it all. There were hundreds of sessions. I asked others. They hadn't heard any mea culpas, either.

Paraphrasing Not Mark T, maybe the necessary introspection and re-education would go faster if those who were wrong were made irrelevant. Hasn't happened so far in the Obama Administration.

Update on Tuesday, January 27, 2009 at 09:43PM by Skeptic

Here on Angry Bear is the score card. The contest is between the Fresh Water Economists and the Salt Water Economists. Key players are named, and game plans revealed. The Fresh Water team is the reigning champion, but it has suffered devastating injuries. The Salt Water side has more star players and momentum; they sense weakness and are moving in for the kill. Can Freshwater survive the onslaught? The announcer is clearly a homer, and so am I. Mark Thoma has re-posted an edited version here and will probably have more comments than appear on Angry Bear.

Update on Wednesday, January 28, 2009 at 11:45AM by Skeptic

Paul Krugman lands another salvo on the Fresh Water formations:

What this reveals, I think, is just how insular part of the macroeconomics profession has become. They just don’t read anything that doesn’t come from their cult circle; they just weren’t aware of major bodies of work that didn’t happen to be in their preferred style.

This insularity is asymmetric. Ask a PhD student at Princeton what a real business cycle theorist would say about something, and he or she can do that; ask a student at one of the freshwater schools what a new Keynesian would say, and I doubt that he or she could answer. They’ve been taught that there is one true faith, and have been carefully protected from heresy.

Update on Thursday, February 5, 2009 at 04:00PM by Skeptic

Joseph Stiglitz says Davos Man is rejecting core Chicago School beliefs.

Equally striking was the loss of faith in markets. In a widely attended brainstorming session at which participants were asked what single failure accounted for the crisis, there was a resounding answer: the belief that markets were self-correcting.

The so-called “efficient markets” model, which holds that prices fully and efficiently reflect all available information, also came in for a trashing. So did inflation targeting: the excessive focus on inflation had diverted attention from the more fundamental question of financial stability. Central bankers’ belief that controlling inflation was necessary and almost sufficient for growth and prosperity had never been based on sound economic theory; now, the crisis provided further skepticism.

Update on Saturday, April 18, 2009 at 09:31AM by Skeptic

This anonymous Economist blogger defends economists from criticisms that he/she seems deliberately to misunderstand. The burgeoning criticisms are not of all economists but only of the orthodox group of them that has dominated government policies for nearly 3 decades. He/she started by quoting this strong and articulate criticism from this Business Week cover story and then miserably failed to refute it.

The rap on economists, only somewhat exaggerated, is that they are overconfident, unrealistic, and political. They claim a precision that neither their raw material nor their skill warrants. Too many assume that people behave like the mythical homo economicus, who is hyperrational and omniscient. And they take sides in quarrels that freeze the progress of research. Those few who defy the conventional wisdom are ignored.

I hope his/her economics skills are better than his/her advocacy skills. Business Week got it right IMHO.  

Even a Realitybase post can sometimes get a high Google PageRank when it has likely search terms in the title.

I just noticed this morning that if you Google "crude oil hoarding," this Realitybase post is the third highest ranked page, out of 59,500. If you Google "oil hoarding," the same Realitybase post ranks fifth out of 668,000. Why does Google rank so highly this one page from my obscure little blog? I'd like to think the answer is the quality of the information and analysis and the elegant writing, but then shouldn't my other posts be highly ranked also? ;-)

Here's what I think may be going on. The title I gave that post was much more descriptive than I usually use: Lots of crude oil hoarding a year ago, and still some now. I have read that the secret Google algorithm gives added weight to pages that contain the search terms in the title. I tried another Google search, "Stiglitz financial crisis," thinking it might link to Stiglitz on the causes of the financial crisis and how to prevent the next one. Bingo! Google ranks that post third out of 228,000. But when I Google "Soros financial crisis," George Soros explains the financial crisis is not in the top 100 of 296,000, and when I sharpened the search to "Soros explains financial crisis," my post was still not in the top 100 of 78,900. Hmmm. Well, Soros is a lot more prominent than Stiglitz, and a lot of the high-ranking pages in the Soros searches were major news media.

So, it looks like I have to choose between (a) a short, snarky, or whimsical title that may intrigue or amuse my regular readers, or (b) a comprehensive summary of the content of the post. Can I do both? Not likely. Which is more important?

Update on Friday, March 20, 2009 at 10:28AM by Skeptic

I've been noticing that this post on CEO pay is attracting a lot of page views.  Why?  When you search Google Images for "high CEO pay," graphs from my post are the first and sixth images that are displayed.

Update on Monday, March 23, 2009 at 09:16AM by Skeptic

If you Google "American Dream died," this post is ranked 8th out of 89,100,000.

Update on Thursday, March 26, 2009 at 10:03AM by Skeptic

Google "too much foreign competition" and this post is the second highest ranked of 1.8 million.

Update on Monday, August 24, 2009 at 11:02AM by Skeptic

When one Googles "comparative advantage journal," this Realitybase post is ranked 2nd of 1.45 million.

Dreams of my President

Congressional Republicans are insisting that the pending economic stimulus package contain much bigger tax cuts, but tax cuts have been very ineffective at creating jobs and boosting consumer spending, according to this Economic Policy Institute report. Mark Thoma says the Republicans don't really care about stimulus but have ulterior motives.

They already screwed this up once, the initial tax cut stimulus package put into place last spring was too small and poorly targeted, it had all sorts of problems all in the name of appeasing this same group [free market fundamentalists] - and here they are trying to muck up the process once again, to hold jobs hostage while they try to get tax cuts in place, even though something like 40% of the package is already devoted to tax cuts. Camel, tent, nose. I think it's time to stand up and say no, sorry, you lost the election, and not by just a little bit. You had your chance and look where we ended up - with a terrible economy, huge holes in the budget making it much harder to respond to the downturn, a financial sector wrecked by your anti-government, self-regulation philosophy, what is it about the past several years that would lead us to have any confidence at all you have the slightest clue how to manage a well-running economy instead of driving it into a ditch, let alone heal one that is broken. 

I have a dream.

Jared Bernstein (who recently moved from EPI to the White House and is certainly familiar with these data and the implications for future policy) is not the only Administration economic policy advisor who can make this case in devastating detail, and (remember, this is a dream) they all do make the case. Even dreamier, Obama has immersed himself in these and related economic policy details. (It's a little fuzzy, but he seems to be wearing a Bill Clinton suit and eating pizza with economists at 0100; there's a VW Beetle in the White House driveway—is somebody watching a DVD of Dave while I'm trying to sleep?)

Cut to the Cabinet Room the next day: Obama is meeting with a bipartisan group of Congressional leaders. Larry Summers and other economic policy team members are in the chairs along the wall. Rep. John Boehner, two chairs to the right of the President, is speaking.

Boehner: "House Republicans cannot support this economic stimulus package unless there are more big tax cuts in it. We're willing to tolerate some government spending in the interest of bipartisan compromise, but only tax cuts can get the economy moving again."

Obama: "I understand you believe that only tax cuts stimulate the economy, but why should anybody else believe what you believe? All the real-world evidence is to the contrary. The tax rebates a year ago were very inefficient as stimulus. Nobody estimates that more than half of the money was promptly spent. Some estimates are that 2/3 or more was used by taxpayers to pay down debt or add to savings. Do you have analyses that support a different conclusion?"

Boehner: "Blah, blah, blah."

Obama: "I will support any idea, from any person or party, that has a solid potential to raise middle class incomes or otherwise rescue the economy from sinking into a deep recession. The argument you just made seems based on a flimsy and discredited theory and didn't persuade me, but I would like to offer you, and anybody else in the room, to have your economic experts meet with my economic team and present your real-world evidence that a particular kind of tax cut will help us do that. I trust them to fairly report to me what they heard, and that your advisors will fairly report to you my advisors' views. Then, we should meet and discuss this again. I'm a very pragmatic guy, and if you persuade me that your tax cut proposals will work better for the middle class and economic recovery than what's on the table, I'll support them even if it annoys my colleagues on the other side of the room."

Boehner: "Blah, blah, blah."

Obama: "If, after the dialog I have suggested, I continue to believe your proposals are intended to support a different agenda and will not benefit the middle class and the economy as much as what's on the table, I'll go to the American people to help you reap and suffer the political consequences of your position. It would be good for America to have a Congressional consensus and to have us all share credit for rescuing the economy. Nevertheless, I am determined to implement a practical, pragmatic policy that works for middle class Americans, and I will do that even if I have only a one vote margin in each house. What I'm offering you is an opportunity—much more opportunity than my predecessor ever gave you—to have a continuing dialog about what's good for America and to influence policy if you have facts and reason on your side. I'm not offering to meet you halfway on your demands. The old economic paradigm has failed, and an overwhelming majority of Americans understand that. Those who cling too long to the old ideology will be humiliated in public opinion and held accountable in the voting booths."

Fade to dog licking my face.

Update on Tuesday, January 27, 2009 at 06:42PM by Skeptic

What Obama seems to be doing is not inconsistent with the dream.

Update on Monday, February 2, 2009 at 09:24AM by Skeptic

Consistent with the dream, Obama is using his massive email database to tell supporters he's reaching out to Republicans on the stimulus package and urging them to hold house parties and otherwise to build support for the package.

The economic crisis is growing more serious every day, and the time for action has come. Last week, the House of Representatives passed the American Recovery and Reinvestment Act, which will jumpstart our economy and put more than 3 million people back to work. I hope to sign the recovery plan into law in the next few weeks. But I need your help to spread the word and build support. It's not enough for this bill to simply pass Congress. Americans need to know how it will affect their lives -- they need to know that help is on the way and that this administration is investing in economic growth and stability. Governor Tim Kaine has agreed to record a video outlining the recovery plan and answering questions about what it means for your community. You can submit your questions online and then invite your friends, family, and neighbors to watch the video with you at an Economic Recovery House Meeting. Join thousands of people across the country by hosting or attending an Economic Recovery House Meeting this weekend. The stakes are too high to allow partisan politics to get in the way. That's why I've consulted with Republicans as well as Democrats to put together a plan that will address the crisis we face. I've also taken steps to ensure an unprecedented level of transparency and accountability. Once it's passed, you will be able to see how every penny in this plan is being spent. You can help restore confidence in our economy by making sure your friends, family, and neighbors understand how the recovery plan will impact your community. Sign up to host or attend an Economic Recovery House Meeting and submit your question for the video now: http://my.barackobama.com/recovery Our ability to come together as a nation in difficult times has never been more important. I know I can rely on your spirit and resolve as we lead our country to recovery. Thank you, President Barack Obama P.S. -- If you can't host or attend an Economic Recovery House Meeting, you can still submit your questions for Governor Kaine and then share the video with your friends and family this weekend. Learn more here: http://my.barackobama.com/recovery

Update on Thursday, February 5, 2009 at 08:45AM by Skeptic

The dream is coming true. Obama is taking his policy differences with the Congressional Republicans to the American people in this Washington Post op ed.

In recent days, there have been misguided criticisms of this plan that echo the failed theories that helped lead us into this crisis -- the notion that tax cuts alone will solve all our problems; that we can meet our enormous tests with half-steps and piecemeal measures; that we can ignore fundamental challenges such as energy independence and the high cost of health care and still expect our economy and our country to thrive.

I reject these theories, and so did the American people when they went to the polls in November and voted resoundingly for change. They know that we have tried it those ways for too long.

Update on Friday, February 6, 2009 at 08:48AM by Skeptic

Paul Krugman thought the talking-with-the-Republicans part of the dream was a mistake, but he agrees Obama needs to make his policy arguments to the public.

So what should Mr. Obama do? Count me among those who think that the president made a big mistake in his initial approach, that his attempts to transcend partisanship ended up empowering politicians who take their marching orders from Rush Limbaugh. What matters now, however, is what he does next.

It’s time for Mr. Obama to go on the offensive. Above all, he must not shy away from pointing out that those who stand in the way of his plan, in the name of a discredited economic philosophy, are putting the nation’s future at risk. The American economy is on the edge of catastrophe, and much of the Republican Party is trying to push it over that edge.

Update on Tuesday, February 17, 2009 at 08:45AM by Skeptic

It seems President Obama may be having the same dream. Bob Herbert reports this interview:

He said that the fact that he’d been rebuffed so far in his quest for bipartisanship would not stop him from reaching out for Republican support.

“Going forward,” he said, “each and every time we’ve got an initiative, I’m going to go to both Democrats and Republicans and I’m going to say, ‘Here’s my best argument for why we need to do this. I want to listen to your counterarguments. If you’ve got better ideas, present them. We will incorporate them into any plans that we make, and we are willing to compromise on certain issues that are important to one side or the other in order to get stuff done.’ ”

When I asked him if there was any reason to believe that the G.O.P. had made a good-faith effort at bipartisanship, given the fact that only three Republicans voted for the stimulus plan in the Senate and none in the House, he said he did not want to question the motives or sincerity of those who opposed the plan.

But he made a point of adding, “Now, I have to say that given that they were running the show for a pretty long time prior to me getting there, and that their theory was tested pretty thoroughly and it’s landed us in the situation where we’ve got over a trillion-dollars’ worth of debt and the biggest economic crisis since the Great Depression, I think I have a better argument in terms of economic thinking.”

He also made it clear that he won’t let his desire for bipartisanship undermine important initiatives. “I’m an eternal optimist,” he said. “That doesn’t mean I’m a sap.”

Coal is a big problem, not a solution.

One government policy response to the threat of global climate change is to provide incentives to develop clean electricity sources, such as solar and wind power, and to require their use by "renewable portfolio standards." An unintended and unfortunate consequence of those policies could be to displace clean natural gas fired power plants instead of shutting down dirty coal fired power plants, according to the CEO of Entergy, Wayne Leonard, in this NYT op ed piece. It is worth reading in full. Of course, being right about problems with that policy doesn't mean his preferred policy, cap and trade, isn't also fraught with potential for unintended consequences and failure.

Whatever global climate change policies are put in place, they can succeed only if they put a stop to burning coal without carbon capture and sequestration ("CCS"). If CCS technology is not commercialized—and the Bush administration shut down the most promising attempt to demonstrate CCS—the only way to save the planet is to stop burning coal. Period. There is at least one thing wrong with every policy option for getting to that result, but that's what has to happen. And it has to happen worldwide.

Update on Tuesday, January 27, 2009 at 09:12AM by Skeptic

While I think price manipulations could bring about dramatic changes in the fuels and technology used in electricity generation, I don't think increasing the tax rate on highway fuels is a practical answer to either our energy security problem or the global climate change problem. Very high highway fuel tax rates, more than $2 per gallon say, would only reduce per-vehicle consumption to a level approaching present-day Europe, and that's not good enough. Here is an excellent CBO study in October 2008, and Climate Progress has a good analysis here.

Economics professors are training virtual reality gamers.

Professor Mark Thoma, who hosts the best economics blog on the web, writes this:

Congress and the executive branch have, to a considerable extent, been devoted to business interests in recent years. In essence the argument is that what's good for business is good not just for America, but for the whole world. The ideological basis for this approach is that the interests of business and of greater society always coincide so that maximizing business interests maximizes social benefits at the same time, and that a hands off approach from government is the best way to allow those coincident interests to express themselves.

Unfortunately, however, this ideological foundation incorporated a flawed understanding of the interaction between market structure and social benefits, particularly the ability of markets to self-correct when the market structures deviate from the socially optimal structure. The result of this, particularly as it came to be applied in the political arena, contributed to the existence of cronyism, rent-seeking, institutions that became too big, interconnected, and too powerful to fail, and other problems. Political power combined with rigid ideology built upon a false premise - the doctrine of immediate self-correction by markets - gave us a result that was far from the competitive ideal presented in textbooks, a world that was far from the ideal competitive model that produces such large benefits for society.

I think there is some understanding that the approach of the past did not work, with the current state of the economy it's hard to argue that it did, and that we need to go in a new direction. And I'm sure we will try. But I wonder, when all is said and done, will anything really change?

There are millions of citizens and public officials who graduated from college believing that what they were taught in two semesters of economics was "true." That's how the text books are written, and teaching the current standard model may be the easiest way to cover a lot of material. For the rest of their lives, most of these graduates will start their thinking about every economic issue from these same core beliefs--including beliefs that professional consensus later finds objectively false or rarely relevant in the real world. Pete Peterson is an egregious but typical example.

In a little while, the standard model in economics texts will be revised, and some different set of "truths" will be instilled into the next generation of collegians. Whatever they are, these new truths will eventually be spectacularly contradicted by the real world and will be replaced, leaving millions of angry and distrusting believers unable to adjust. So updating the standard model does not get at the fundamental problem that economics is often taught, and even more often received, as a secular religion. Professors, you're more responsible for this than your alumni.

Perhaps if the first (for most students, the only) year of economics were taught as history of economic thought and political philosophy, professors would portray less certainty and, thus, do less long-lasting damage. Or teach the course by the case method in which students are exposed to a full range of conflicting arguments and materials and come to the realization that we don't know for sure why what happened happened, that subtle differences in the facts might have led to different outcomes, and that there is a lot more uncertainty in the real world than in the virtual reality models of economic "science." Perhaps graduates of such programs would be more apt to analyze unique real world problems with the tools of economics rather than to thoughtlessly apply the same "solution" to every problem.

Update on Tuesday, January 27, 2009 at 07:50AM by Skeptic

On the other hand, David Brooks praises institutional conformity and indoctrination here.

As we go through life, we travel through institutions--first family and school, then the institutions of a profession or a craft. Each of these institutions comes with certain rules and obligations that tell us how to do what we are supposed to do. . . . New generations don't invent institutional practices. These practices are passed down and evolve. So the institutionalist has a deep reverence for those who came before and built up the rules that he has temporarily taken delivery of. . . . The rules of a profession or an institution are not like traffic regulations. They are deeply woven into the identity of the people who practice them.

He offers this in contrast to the vision of a faculty committee at Harvard on the purpose of education. “The aim of a liberal education” the report declared, “is to unsettle presumptions, to defamiliarize the familiar, to reveal what is going on beneath and behind appearances, to disorient young people and to help them to find ways to reorient themselves.”

Update on Monday, March 23, 2009 at 12:36PM by Skeptic

Professor Steve Keen says recent events clearly expose the fatal flaws in neoclassical economics and argues that it should be obliterated from college curricula and economics journals. But he doubts it will happen.

Given how severe this crisis has already proven to be, the reform of economic theory and education should be an easy and urgent task. But that is not how things will pan out. Though the “irresistible force” of the Global Financial Crisis is indeed immense, so to is the inertia of the “immovable object” of economic belief.

Despite the severity of the crisis in the real world, academic neoclassical economists will continue to teach from the same textbooks in 2009 and 2010 that they used in 2008 and earlier (laziness will be as influential a factor here as ideological commitment). Rebel economists will be emboldened to proclaim “I told you so” in their non-core subjects, but in the core micro, macro and finance units, it will be business as usual virtually everywhere. Many undergraduate economics students in the coming years will sit gobsmacked. as their lecturers recite textbook theory as if there is nothing extraordinarily different taking place in the real economy.

The same will happen in the academic journals. The editors of the American Economic Review and the Economic Journal are unlikely to convert to Post-Keynesian or Evolutionary Economics or Econophysics any time soon—let alone to be replaced by editors who are already practitioners of non-orthodox thought. The battle against neoclassical economic orthodoxy within universities will be long and hard, even though its failure will be apparent to those in the non-academic world.

Much of this will be because neoclassical economists are genuinely naïve about their role in causing this crisis. From their perspective, they will interpret the crisis as due to poor regulation, and to government intervention in areas that should have been left to the market. Aspects of the crisis that cannot be solely attributed to those causes will be covered by appealing to embellishments to basic neoclassical theory. Thus, for example, the Subprimes Scam will be portrayed as something easily explained by the theory of asymmetric information.

They will seriously believe that the crisis calls not for the abolition of neoclassical economics, but for its teachings to be more widely known. The very thought that this financial crisis should require any change in what they do, let alone necessitate the rejection of neoclassical theory completely, will strike them as incredible.

How replacing petroleum fuels with alternative liquids would change greenhouse gas emissions

One thing that is not obvious from the graph is that the 47% reduction in greenhouse gases attributed to replacing highway fuels with electricity from the grid assumes an average mix of electricity generation sources.  More than 83% of CO2 emissions from US electricity generation come from the half that comes from coal.  Although grid power to on-board batteries to on-board electric motors wastes only about half as much energy as an on-board internal combustion engine, the potential greenhouse gas improvement would be lost to the extent that shifting to electric vehicles results in the construction, or delays the retirement, of coal-fired power plants.  The marginal coal plant would emit about as much CO2 per vehicle mile as the petroleum fueled vehicles displaced.

The US is a corporate tax haven.

In a post titled Crazy People, Paul Krugman quotes Grover Norquist and then comments.

Grover Norquist:  "The U.S. corporate rate is 35 percent; the European rate is 25 percent. Obama is a more international guy, so we should be close to the European average. We'll stop torturing people, we'll stop torturing corporations, and that will make us more like Europe."

This isn't some random crank: this guy was at the center of the K Street Project, the attempt to build Republican dominance in Washington. And he thinks that a few percentage points on the corporate tax rate is the moral equivalent of waterboarding.

Not only is he twisted, but Norquist misleads.  Because of abundant exceptions, credits, deductions, accelerated depreciation and amortization, lawful and unlawful income shifting, and tax havens and shelters, the effective rate paid by corporations in the US (13.4%) was below the average (16.1%) for the 19 OECD nations in 2000-05.

"As a result of these and other characteristics of the corporate income tax, the U.S. is generally considered a tax haven for corporations, and not a jurisdiction to be escaped to other more corporate-tax-friendly ones, especially in the case of some industries, such as the financial services sector."

Linda Beale at http://ataxingmatter.blogs.com/tax/2008/10/studies-on-corporate-taxes.html She goes on to explain that—

"[T]ax breaks lead to very low tax rates on certain types of investments — even negative rates in some cases. For example, a 2005 Congressional Budget Office study found that the effective marginal corporate rate — the rate paid on the last dollar of income earned and arguably the tax rate most relevant for investment decisions — on debt-financed investment in machinery was negative, estimated at -46 percent. This means that the total value of the deductions that companies may claim for such investment is much larger than the tax they pay. (Put another way, it means that other taxpayers effectively subsidize the investment.)"

Matt Yglegias has a chart showing corporate tax revenues as a percent of GDP. http://yglesias.thinkprogress.org/archives/2008/11/in_praise_of_irish_corporate_taxes.php The US is certainly no outlier.

It isn't US-based multinational companies that are disadvantaged by our tax code. It's the ordinary Main Street, plain vanilla, cash cow, purely US companies that are most likely to pay the highest tax rates.

Update on Sunday, February 20, 2011 at 05:57PM by Skeptic

Linda Beale gives additional analysis here in responding to an American Enterprise Institute complaint about US corporate tax rates.  Inter alia, she points out that while the top US marginal rates are higher than many other industrialized countries, our tax base is riddled with loopholes, with the result that those "low-tax" actually collect a higher percentage of corporate income than the US does. 

Even in Wyoming, they think Cheney’s a dick.

30% approval rating there. NPR segment here.

Two hypotheses for why US CEO pay is so high

Average CEO compensation in the US is more than twice the average of other advanced countries and is 56% higher than second place Switzerland.

Also, the ratio of CEO compensation to the compensation of manufacturing production workers, at 39:1, is almost twice the average of the other advanced countries.

The usual defense of high US CEO pay is that it is set by market forces. If that's true, doesn't that mean the US has a relative shortage of CEO talent compared to the other advanced countries? (A short supply of qualified candidates has driven up prices more in the US than in other countries.)  On the other hand, if US CEO talent is relatively as abundant as in other countries, doesn't that mean the US CEO pay market has failed and should be fixed to eliminate inefficiencies?

Update on Wednesday, January 28, 2009 at 10:24AM by Skeptic

This post is meant to show that the US CEO pay market is probably broken.  That doesn't mean I have any enthusiasm for government capping CEO pay.  Why?  Because I think excessive CEO pay is a symptom of a larger corporate governance problem, I don't want to be distracted by palliative care for a symptom.  Let's get at the core problem, whatever it is.  There's been a discussion about CEO pay on Mark Thoma's blog, and my most extensive of several comments is here.

Update on Tuesday, April 28, 2009 at 09:38AM by Skeptic

This post says "obscene Wall Street salaries are proof of market failure."

Update on Thursday, July 9, 2009 at 08:41AM by Skeptic

Researchers at UPa suggest much of the difference between US and European pay is explained by the fact that US CEOs receive a greater portion of their pay in risky equity-based compensation.

Update on Thursday, December 31, 2009 at 09:05AM by Skeptic

Peter Drucker had some views about executive pay, as Mike Hiltzik reminds us in this remembrance in the year Drucker would have become 100 years old.

Real leaders, Drucker observed, are leaders of teams showing respect for people and their work. Nothing destroys that as efficiently as excessive CEO compensation. He maintained that the appropriate pay range was 20 to 25 times what the rank and file earned -- it's now in the hundreds. That level of inequality foments disillusionment among mid-level managers, as he said in a 2004 Fortune interview, and corrodes mutual trust between the enterprise and society.

Excessive compensation, he wrote in 1974, is designed to create status rather than income. "It can only lead to political measures that, while doing no one any good, can seriously harm society, economy, and the manager as well."

The average hourly wage of production workers was about $18.50 in 2009, according to BLS, or about $38,500 per year.  Drucker's 20-25 rule of thumb factor would suggest an approrpriate CEO salary of $770,000 to $963,000 per year. 

Update on Sunday, September 23, 2012 at 01:41PM by Skeptic

Since I wrote this post, I have learned how hard it is, at least for me, to convey sarcasm, irony, and other subtleties in a blog post.  So let me assert straight out that, yes, I do believe the US CEO pay market is so broken/captured that it really does not deserve to be called a market. Gretchen Morgenson discusses today in NYT a recent study containing data that demolishes the canard that we have to pay our CEO excessively or s/he'll defect.  This study by Charles M. Elson and Craig K. Ferrere investigated whether CEO's have transferrable skills and found that--

C.E.O. skills are very firm-specific. C.E.O.'s don't move very often, but when they do, they're flops.  

I would point out that the study doesn't address the labor market for other C-Suite and lesser officers, where it is possible, I assume, there are some fair markets.  

UPDATE 9/26/12: Posting on the Harvard Law School Forum on Corporate Governance and Financial Regulation, one of the authors says the source of the problem is neither broken markets nor captured boards but is the practice of peer grouping.  

In the paper, Executive Superstars, Peer Groups and Over-Compensation — Cause, Effect and Solution, which was recently made publicly available on SSRN, we develop a pragmatic approach to understanding the run-up in CEO compensation over the past several decades. Rather than looking to markets or captured boards for the explanation, we argue that the actual mechanical process of peer benchmarking by which pay is set is the cause of the present controversy. From this perspective, we present what we believe will be an effective solution; additionally and collaterally, some interesting lessons about executive recruitment, particularly the CEO “superstar” culture, may be gleaned from our findings. We thank the Investor Responsibility Research Center Institute, which has long funded compensation research, for their financial support and helpful assistance in the development of this paper. The piece makes a contribution to the executive compensation literature as it offers a novel explanation for the perpetual rise in CEO pay and suggests a significantly different solution to the compensation controversy. As boards have typically looked outside the organization to set CEO pay, we argue that this approach, known as “peer grouping,” is seriously flawed as it relies on the notion of an easy transferability of executive talent which empirically, is incorrect. Therefore, boards should look within the organization itself rather than to external comparators to create an appropriate CEO pay structure. We suggest that this approach should begin to resolve the CEO compensation problem. Click here to read the complete post . . .  After reading the post, I would say that peer grouping is shown to be the specific way in which boards are captured, not that they are not captured. Worth reading.

No WMD in Iraq: Bush blunder or cover-up?

In his last press conference Bush said he was "disappointed" that weapons of mass destruction were not found in Iraq.  Any halfway competent administration would have assigned somebody to plant WMDs in Iraq so they could be "found."  So, who messed up that assignment, and why is Bush not holding them accountable?

Willing suspension of disbelief delayed response to financial dangers.

Public filings of 20 big banks disclosed as early as October 2007 the large quantities of subprime mortgages on their balance sheets and the asset-backed securities in the special investment vehicles ("SIVs") that kept assets off their balance sheets in a technical sense. No later than December 2007 it should have been clear that write-downs of these assets in the range of at least 20% would be required and that that would seriously threaten the solvency of some banks. In the case of Citi, a 41% write-down of these assets would make it insolvent. Neither regulators nor investors seem to take notice or to care. Michael Pomerleano has the story in this Financial Times post.

Pomerleano also points out that international agreements "virtually encourage the creation of off-balance sheet instruments that contributed to the subprime crisis." A recent PBS special hosted by Niall Ferguson, The Ascent of Money, makes the point that SIVs were pioneered by Enron, made its financial statements opaque, and led to its spectacular downfall.

Pomerleano continues:

Until recently I was not fully aware of the glaring deficiencies of Basel II. In December 2008 I read a compelling book written by Daniel Tarullo, President-elect Barack Obama's nominee to the board of governors of the Federal Reserve.

In Banking on Basel- the Future of International Financial Regulation (Institute of International Economics, October 2008) [book summary here], he points out that: "Thus, there is a strong possibility that the Basel II paradigm might eventually produce the worst of both worlds—a highly complicated and impenetrable process (except perhaps for a handful of people in the banks and regulatory agencies) for calculating capital but one that nonetheless fails to achieve high levels of actual risk sensitivity".

Tarullo notes as well that the Basel Committee itself implicitly acknowledged in spring 2008 that the revised framework would not have been adequate to contain the risks exposed by the subprime crisis.

To add to the irony, it appears that the institutions that failed were Basel II compliant.

If it only takes 11% as many hours of work to pay for a refrigerator as it did in 1949, are middle class families better off?

"Yes," says University of Michigan economics professor, Mark J. Perry, who found an old Sears catalog, and seeming to agree is this post, Consumers Never Had It So Good, by the New York Times website economics editor, Catherine Rampell.

"No," says Elizabeth Warren, Harvard Law School insolvency expert (and chair of the Congressional Oversight Panel created to oversee the implementation of the Emergency Economic Stabilization Act). In a 50 minute lecture in this video with slides, The Coming Collapse of the Middle Class, she documents the middle class predicament, cheaper consumer products notwithstanding. (I tried a few months ago to find a transcript, but failed. Sorry, fellow troglodytes.)

In comments to the Rampell post, robertdfeinman summarizes the Warren lecture:

The essential point is that the proportion of funds spent on necessities has shifted so that household goods are a declining portion of the budget, but the ability to live a decent middle class lifestyle is under threat. It also takes two people in the work force where it used to take only one.

We now have to pay our own health care, retirement, higher education, etc where before much of this was provided by employers.

Education through high school, the typical terminal degree was free. Now students have to finance their remaining education themselves. There are other examples as well.

It's 45 minutes long, but she managed to get some interesting data from the census bureau and seeing it presented is worth the time watching.

Liberal and libertarian economists

Modern liberal economists draw their core beliefs from Adam Smith, but starting in the late 19th Century they were mugged by reality, says Brad DeLong, who explains where the group is now, how it got here, and how it compares to libertarianism here.

What cut in half the growth rate of average wages in 1982?

The following graph shows that the average hourly wage of US production workers rose at a very steady rate from 1964 to 1982 when it abruptly changed and has been growing at half the prior rate ever since. The effective annual compound interest rate from 1964 to 1982 was 6.50% and since then has been 3.24%. Why?  (The wage data are plotted on a natural log scale because that shows a constant percentage increase as a straight line.)

 

 Download Excel spreadsheet.

The energy efficiency (and political) geography of corn to ethanol.

The energy efficiency of using non-renewable energy sources (fossil fuels and nuclear) to grow corn and convert it to ethanol is poor at best—1.39 joules of output for every joule of input. (The gain comes from renewable solar inputs as the corn grows.) In other words, 72% of the energy in this so-called "renewable" fuel actually comes from non-renewable sources. When one considers the best whole State, Iowa, the energy gain drops to 1.32 to 1, and 76% of the energy inputs are non-renewable. In most regions of the US, the net return is negative, meaning the non-renewable energy inputs exceed the energy content of the ethanol output. The geographic region of negative net return expands considerably when the calculations do not give a credit for the 19% of output that is in the "distiller's grains" co-product.

This post and map by "EROI Guy" on The Oil Drum shows that "energy return on investment" depends greatly on where the corn is grown. He points out that as the nation increases its commitment to turning corn into transportation fuels, increasing amounts of corn will have to be grown in marginal regions that require more energy inputs, which will reduce the marginal and average conversion efficiency and drive up corn prices.

To the extent our goal is to reduce CO2 emissions, corn to ethanol is a terrible idea because the proportion of "renewable" content in the ethanol is very small or negative. If we don't care about global climate change or increasing the cost of transportation fuels but do care about minimizing energy imports, corn to ethanol is a way to convert domestic coal to a transportation fuel—not a good way, but a way. Notice that the EROI map closely resembles the political map on this issue.

Excerpt from EROI Guy:

How much of the 36 billion gallons mandated by the RFS [Renewable Fuels Standard] is an net energy profit? The answer depends, in part, on where the ethanol is produced. If the mandate was fulfilled only by ethanol produced in Iowa, which has a refinery-gate EROI of 1.32:1 (Table 1), the net energy profit provided by the ethanol is actually 9 billion gallons. On the other hand if the ethanol were produced in Texas, then the net energy profit is only 4.7 billion gallons.

Clearly, the net gains from this process are less appealing than the gross. The net gains are even lower if co-product credits are removed. Co-products are dry or wet distiller's grains, which are a very contentious subject in the literature on corn-ethanol. This matter is significant because the energy credits allotted to the use of co-products as a by-product of the corn-based ethanol process account for 19% of the total energy gains of the corn-based ethanol process (co-products are allotted 4.13 MJ/L while ethanol is 21.46 MJ/L). More importantly, when this 19% is removed from the EROI calculation, the EROI of corn-based ethanol for marginal lands (e.g. Texas) is less than 1. Which is to say that the net energy profits from the production of 36 billion gallons of ethanol in Texas, for example, would be -1.08 billion gallons [36 billion gallons * (1- (1/0.97))]. In other words, without the energy contained in the co-products, the production of corn-based ethanol on marginal lands creates net energy losses rather than profits.

Whether or not co-products should be included in the calculation of the EROI is a topic for a different discussion, but the impact of excluding them is profound. The primary message to be gleaned from this post is that "scaling-up" corn-based ethanol or other similar biofuel projects usually have complications, such as lower corn yields on marginal lands, and these complications tend to increase the costs, not the gains, associated with converting feedstocks with low energy densities to final products with higher energy densities.

Update on Friday, August 28, 2009 at 01:20PM by Skeptic

Ironically, it is predicted that global warming is likely to raise temperatures most in the corn belt, causing large drops in crop yields.  Climate Progress has a map, the story, and links here. 

We are making inconsistent demands on bailed-out banks.

Our government is telling troubled financial institutions that they need to de-leverage to guarantee their long-term solvency, and we have helped by using taxpayer TARP dollars to buy preferred stock.  Our government is also telling these same institutions that they should use the TARP money to lend.  I'm sorry, but those are conflicting demands, as Dwight Cass points out here.  What part of the TARP money should be used to de-leverage and what part should be lent out?  Who should decide?