Teddy Bloggie Blog Blogging

Personally and economically, the news coming from the Federal Reserve hasn't been very good recently. I still wonder why they rescinded the offer they made me over the summer, but moving on...

The current economic outlook is sustained high unemployment and a real possibility of deflation. Deflation and high unemployment will make life hard, especially for new graduates like me. Now I'm facing the dual reality of unemployment and rising costs of servicing student loans as the value of my debts increase, in real terms, if deflation actually materializes. Is anyone else worried? The fed isn't.

There's an intrinsic problem with regional Federal Reserve Banks (and the Fed in general) and that is the board of the regional banks are populated with bankers and industrialists. If I were a banker, I'd definitely be more concerned with creditors than with debtors... But unfortunately, I'm a debtor.

Strange News From the Federal Reserve:

At current levels of unemployment, there is downward pressure on the rate of inflation. Unless the unemployment rate falls sometime in the next two years, it is more likely than not that the U.S. will be in deflation--and in that case the Federal Reserve's ability to stimulate the economy will be very small.

I would have thought that a desire to stay far away from the edge of deflation would have provoked more interest rate reductions by now. It continues to puzzle me...

--Brad DeLong

With the extremely close election in 2000, it was evident that both political parties came away without popular support and it led Robert Reich to proclaim that the de facto leader of the country is in fact Alan Greenspan. There's some truth to that statement because the biggest carrot and stick for the economy is the Federal Reserve's monetary policy. Just think who would be buying autos and houses in this economy if it weren't for the historically low interest rates? And the sole wielder of the carrot and stick is Alan Greenspan. Sure, there are other members of the open market committee but Alan's the chair and his way is the right way. If you take a look at the minutes at the meetings rarely does anyone object to his whims (okay, I've never read the minutes either, but economists at the Fed have told me as much). Plus, the Fed chairmanship is designed to be independent of Washington's politics. It's as close to a king as we have in the United States. I'm not implying this is a bad thing though, don't get me wrong. The independence is necessary so that monetary policy is not used as a lever for political gains.

The question is this: what happens if and when deflation rears its head and the Fed loses its control over the economy? In a deflationary environment, the fed will lose the stimulative effects of lowering interest rates. King Greenspan will no longer be king. Well, lucky for Greenspan he'll probably step down as the Chairman at about the same time deflation hits the U.S. What timing! After all, a king doesn't get remembered as fondly if the successor is his better...

The principle of self-interest is what our economic system is built upon. So the wisdom passed from John Locke to Adam Smith to me is that I should pursue the biggest paycheck I can get my grubby hands on. In light of such profound wisdom, I interviewed for a job tutoring junior high and high school kids today. It pays $18/hr. while charging the parents $40/hr. God bless them for wanting their kids to outperform their fellow classmates and paying me for the services. I've helped out in West Oakland and Oakland Chinatown on a volunteer basis before, but the urgent need to actually have cash in my pockets necessitated a move uptown, right up to Piedmont.

After the interview, during lunch I picked up the morning run of the Oakland Tribune. On the front page is the article Whites Shun Public Schools. It turns out "In San Francisco, one of the most dramatic examples, 57 percent of white elementary and middle school students go to private school, compared to 9 percent of blacks." Now, the conclusions were not surprising to me but the magnitude of the disparity was. Further, I was now going to participate in this perpetuation of unequal access to quality education by being pimped out to the highest bidder. Assume I can help make the crucial difference in whether a student goes to college (play along for a minute). That would mean, based on current research, the student with the college degree will earn 50% more than a high school graduate. He then has a family and hires a tutor. Will this cycle perpetuate? Forget estate taxes as a means of reducing the caste system in the U.S. since Bush is wiping them out with Oprah's help (she's the one who called them death taxes. Hmm... does she have something to gain from the removal of the estate tax?) Anyway, the question is: Will my tutelage drive a wedge in society?

Don't answer that. Today, a huge-ass Roadway truck backed into my motorcycle as I sat on it honking in disbelief so I really need my $18/hr.

I downloaded the recent money supply data from the Federal Reserve.

To see the graph, click on "More..."

What's neat is that you can really see the spike around 9/11. The upward slopes in the graphs probably reflect the Fed's effort to keep the economy humming, but might it also be caused by people sitting on cash rather than having them in investments? Although the money supply has grown, there seems to be no signs of inflation. Unemployment is up, risks in the markets are now higher, oil prices are once again going up, and we might go to war. It's a good thing the money supply is moving in the right direction to at least counter some of the bad economic news.

So the next time someone asks you whether money grows on trees, tell them, "no, but it should grow when it needs to."

Why did unemployment go down during the Clinton administration? Was it purely by chance or did policies inacted during the administration have an impact? I think the answer is a bit of both. The Clinton era focus on deficit reduction and economic integration vs Bush's focus on tax cuts and protectionism surely pulled on different levers in the economy. It's hard to do a comparison and say exactly what the different effects were since we can't talk about the policies under the assumption of ceteris paribus. However, even if policies don't have a direct link, the effects on foreign and domestic investment must play an important role. When U.S. citizens and foriegn investors see that U.S. government spending is under control and U.S. debt is being reduced, they feel better about the future. Long-term interest rates, they know, will be lower than if the country pursues Bush-esque economic policies and economic growth will be higher (we would be saving and investing in the future). Maybe I'll delve into this some other time...

Beside comparing the outcomes of policies we can also look at the the people and ideas that were embodied in those policies. Clinton had a better economic policy team; I have no doubt about that. I would argue that the policies between 1992-2000 were coherent, and Clinton's economic team didn't have to change their rhetoric as the Bush team has had to do. Clinton's aim was simple and easy: more butter, less guns, less debt. But Bush's agenda has so far been confusing and incoherent. For example, we were told that the big tax cuts were necessary because the American people deserved to share in the nation's surplus. The people who pay the most taxes should get the most back, they argued and passed. When the surplus vanished under the weight of $1.6 trillion tax cut, and as the nation faced deficits in the hundreds of billions and a new recession, the rhetoric changed. We were told that the tax cut was a way to prime the economy, fiscally pumping cash into the economy. But for one thing: people who receive the biggest tax breaks aren't the ones who have a high propensity to spend that extra income. If you give tax breaks to people who are hovering near poverty, they'll probably spend any extra disposable income they get and help the economy along the way. However, if you give the money to people who make more than $270,000/yr. they probably won't feel compelled to spend the extra money. It just doesn't fly. As circumstances change, policies should change (not your reasons for your policies). Anyway, I've digressed far enough from what I wanted to point out.

What I meant to say is, one way that we can measure the health of the economy is to look at the unemployment rate. Luck, or presidential timing, has a lot to do with what you see in unemployment statistics, but if trends speak for themselves, then the answer to whether people and policies matter is obvious and clear.

No, this isn't about bouncing coffee and energy. Here's what happened. My friend Chau instant messaged me the other night and wanted to know, as a part of her homework assignment, why as the price of coffee went up, consumption of instant coffee (which costs more) shrank but consumption of roasted coffee (cheaper alternative) stayed about the same. It took me a while to understand her question; and actually, she found out the answer before I understood her question. The answer is that the elasticity of demand for instant coffee and roasted coffee are not the same. Since caffeine is a socially accepted drug and lots of people are addicted to it, it has characteristics of other drugs, namely the total caffeine intake is not very elastic - you pretty much have to get your daily fix. When the price of coffee goes up, people substitute the cheaper version, in this case roasted coffee, for the more expensive instant coffee. Even if coffee prices soared, roasted coffee consumption will probably stay the same or maybe even increase. Roasted coffee would be considered to have an inelastic demand curve.

I didn't think much about this until I read about the California energy crisis that occurred last year. The principle of elasticity explains why withholding energy makes sense for companies in an inelastic industry like energy. As prices increase for energy, consumers still have to consume about the same amount since not doing so means either they're freezing or reading in the dark. In an inelastic market, even a slight decrease in supply can cause a jump in prices. Now that I think of it, that's also why the drug war is so beneficial for drug dealers (street drugs should be cheap except for the limit on supply and the inelastic demand). Going back to the California energy market though, the same principles apply. Energy has a few interesting properties. Natural gas is a homogeneous good, it's storable, its supply is limited by the available pipelines and people need it for cooking, cleaning, lighting, heating, cooling, etc. That's why the perfect competition, supply=demand arguments of classical economics break down. Here's Brad DeLong exploring the topic...

Administrative Law Judge Says El Paso Withheld Capacity

Economists' conventional knee-jerk belief is that it almost never pays a company to withhold output unless it has a durable monopoly. If it withholds output it loses sales. It gets a higher price for what it does sell, true, but its competitors take its market share--and that market share will be expensive to win back.

One of the nice things about being at Berkeley is that you can run into people who tell you when you are being an idiot, and thus you learn more stuff.

In this case that person if Professor Severin Borenstein, who carefully and patiently explains to me why the energy market is different. First, what does El Paso lose by withholding pipeline capacity for natural gas deliveries? It loses the pennies that are paid from shipping natural gas from one place to another, but the natural gas itself can be and is easily stored. It's not as if they had to idle factories or destroy output in order to withhold supply from the market. So withholding output is very cheap. Because one hydrocarbon molecule is much like another, there is no difficulty in regaining market share. So there are next to no costs from withholding output.

And there are enormous benefits. Full pipelines being run by competitors means that nobody else can expand supply if, as was the case, California natural gas storage tanks are dry. Inelastic demand means a small supply restriction provokes a large price increase. El Paso got only 15-20 percent of that increase. But so what? Suddenly deciding that pipeline maintenance had to be performed meant that El Paso (and its competitors) made out like bandits.

"The crux of the matter," Severin says, "is that when supply and demand are inelastic all standard intuitions about market power--derived from industries with elastic supply and demand--are badly, badly false. An HHI of 1200 means absolutely nothing at all, for it is irrelevant to the real question: can this firm through its own uncoordinated actions alone boost its profits by withholding supply?"

Brad DeLong uses his own life perspective to gauge the market. I can relate...

Irrational Pessimism?: Archive Entry From Brad DeLong's Webjournal

The Economist scolds the world's investors for suffering from irrational pessimism:

---

Economist.com: SOME six years ago, Alan Greenspan, the chairman of America’s Federal Reserve, accused investors of “irrational exuberance” in propelling the stockmarket to unjustified heights. Now the same investors are asking whether the same markets are suffering from irrational gloom. While investors have plenty to be glum about—insipid company profits, slowing economic growth, a rising risk of defaults among bonds and loans, and even the prospect of war—it has been tempting of late to conclude that the markets have lost their sense of proportion.

The stock markets jumped in the past week and a half. I'm not convinced that the worse is over. Here's what I contributed to the m100 journal this week:

For the past seven trading days, the Dow is up 14 percent while the Nasdaq is up 15.5 percent. Gains this week were fueled by better-than-expected earnings from IBM, Microsoft, and Citigroup. However, disappointing earnings from Intel put the brakes on an optimistic market on Wednesday, the only down day since the Dow reached a five year low on October 9th. This mid-October rally has at least lifted the gloom that hung over Wall St. following what seemed like a bottomless September and early October.

As for economic news, the core consumer price index, which excludes the volatile food and energy components, rose a modest 0.1 percent in September. Retail sales slumped 1.2 percent and the volatile housing starts leapt 13 percent in September.

Although the markets have reacted positively to the better-than-expected earnings of recognizable bellwethers, some investors have questioned the latest uptrend. Instead of seeing the latest round of earnings as an indicator of a market turnaround, the bears believe the upside surprises are better explained by the lowered expectations which were announced in September and early October. They would contend that investors are watching a battle between bad and worse with their rose colored lenses on. The bears would point to the deflationary pressure on the economy, the possible housing bubble, and the war with Iraq on the horizon as reasons for caution. Nonetheless, the bulls had the upperhand for the week affecting a shift in broad market sentiment. Charging stock indices along with rising treasury yields indicate that investors are rebalancing their portfolios and are warming to the equity market.

I would add to the economic data that industrial production is falling, the employment picture is still bleak and the Bush administration is trying to take all the teeth out of the SEC. Notice in the above that housing starts jumped 13 percent in September? Even though that statistic is very volatile, it's still the result of the market trying to seek an equilibrium with an overvaluation. It's the most telling trend that there's a bubble here. I feel bad for all those people that are going to be left selling houses at cost or below the cost of construction when this blows up.

In any case, I still think the economy's in terrible shape no matter how the Dow or Nasdaq does in the next few weeks.

If only the media can get their act together to disabuse the public and really report on the impact of Republican policies as Brad DeLong has done in the following.

Whingeing and Snivelling From a Democrat: Archive Entry From Brad DeLong's Webjournal

Well... I'll tell you why I'm whingeing and snivelling right now... It's not so much because Republicans control all three centers of power--the presidency, the house, and the senate... It's because I have a low opinion of *these* particular Republicans...

You see, it's not that I think America would be a better country if Republicans never had a majority in any house of congress and never held the presidency. I kind of think periods of Republican political dominance should be like abortions--safe, legal, and *rare*.

Arnold Kling writes the following and posits that Microsoft's monopoly is over-rated: (but he's wrong!)

Microsoft Divides up P&L

Microsoft released a profit report that allocated profits and losses by division. These reportedly showed a high profit margin in the divisions that sell Windows(tm) and Office(tm). But they showed losses in four other division, including MSN. Kevin Werbach asks

What to make of this? Despite all the concerns, Microsoft has failed to expand its Windows monopoly into other markets,? Or, Microsoft has succeeded in pulling everything that matters into its Windows monopoly and commoditizing all other markets?

First of all, who knows how the accounting tracks the economics? For example, the MSN "icon" on Windows is deemed by competitors to be highly valuable. How did Microsoft account for this? Did they charge the MSN division a shadow price for all the promotion it received from the Windows division? If so, did they charge too much? Too little?

My guess is that, if anything, MSN lost more than what the accounts show. To me, this shows that Microsoft's monopoly power and marketing prowess are over-rated.

As smart as Arnold Kling is, he's making a really lame argument. You see, Microsoft has a history of using losses in competitive segments to drive out innovative companies and products that threaten their monopoly position in the crucial software division. They can be profitable even while hemorrhaging losses in 4 divisions because the monopoly in windows and office can keep them in the black. Look at Netscape. MS gave away Internet Explorer because Netscape was proposing using the browser as the main operating system. It was a great move on Microsoft's part even though it was done at a considerable loss in revenue.

It's tough going in the software industry for emerging software vendors exactly because you can expect Microsoft to be willing to lose money in order to control the market. Wordperfect went away, Netscape Navigator went away all because Microsoft can lose money in those businesses to drive out the competitors. For me Microsoft's monopoly isn't over-rated, it's the weapon of mass destruction in a hegemonic software world.

With the consumption that inevitably comes along during the Christmas season, I wanted to talk about the future of not having. Part of this idea came from a discussion I had with Tony Hebert, a research fellow with the Department of Housing and Urban Development.

As I see it, the consciousness surrounding consumption is changing around the world, or better put, it's beginning to change. Tony, for his part, disagrees because he sees that consumerism is as strong as ever, especially as each market segments into infinitely smaller pieces. I think he's right that consumerism is as strong as ever before, but I believe the people are now paying more attention to the effects of consumerism and that consciousness extends to civic projects and civic planing. Tony also hopes I'm right. Me too.

I don't have all the facts to back up my claim, but here's a brief sketch of what I'm noticing...

In the past, a country's progress has been measured in what that country has developed in terms of its massive infrastructure. Those with it were considered developed, those without, were either underdeveloped or developing. When I think of industrialization in the antebellum years, I think about the massive industries associated with the robber barons of the time. The railroads, coal mines, steel factories. We built monsterous skyscrappers, dams, canals and saw those projects as signs of human progress. Then we had a period where durable goods signified social and economic evolution.

Today, we see the same things happening in China, India and to a lesser extent Brazil. But today, it's no longer a sign of progress as much as a necessity and a symbol of playing catch-up. Post-industrial countries will look back and see that the massive dams, sprawling freeway systems, and concrete trophies are signs of social adolescence.

Hopefully, we'll leave that behind. The evidence for this are the growing interest and development of low cost building techniques that are not material intensive and the interest in development that leaves local landscapes unadulterated. Also, more of our economic output are in services than in durable goods now. Problems resulting from development as we have known it such as environmental degredation and transportation congestion are not compatible with the more and bigger solutions of the past. Economic resources will have to be spent in solving today's and tomorrow's problems by figuring out ways to build smaller, smarter, and more efficient. The solutions may even be concentrated on getting rid of the causes of the problem instead of coming up with a solution. Wouldn't that be a hoot! That consiousness will also probably extend to a new form of consumerism.

Since it's almost Christmas time, maybe the vision of not needing and not wanting as gauge social and economic progress will prove timely.

The Bush administration is trying to rally a resurgence of Reagan loving for their own benefit. I like the former prez too, but it's laughable how republicans want to make you believe Reagan's economic plans were superior to Clinton's. Yeah, Reagan looked presidential, had great presence in front of the American people and could communicate with them in ways that were both surprising and effective. But his economic plans were better? Hah! In every measure of economic success that I know of the Clinton years were more prosperous. Republicans disagree.

Bushies' new tax plan is a rehashing of Reagan econmics. The Republicans are pushing a similar increasing deficit, increasing defense spending, decreasing social benefits budget and tax plan as was implemented in the Reagan administration. Admittedly, I think running a large deficit in the current economy is both necessary and prudent, but it should be done right. It should follow a new round of Keynesianism that would get government to invest where industry isn't and thereby increasing employment and bolstering growth. It should be targeted at building U.S. infrastructure, getting money to states that are in serious, deep fiscal trouble, and securing social programs like health and low wage housing that are on the brink. Pragmatically, Republicans don't want to help most states because most of them are led by Democratic governors who are required to run balanced budgets (something the federal government isn't constrained to do). "So let the poor in those states suffer - we'll win the next election" Republicans seem to say. Bah Politics.

The most obvious flaw with Bush's tax plan is that the centerpiece shouldn't be the elimination of dividends. It's double taxation Republicans claim; but what isn't? Most people get taxed on income and then pay sales tax. They pay payroll taxes plus income taxes. Why this focus on dividends tax unless you're trying to shore up political support from the wealthy? It makes no economic sense.

Cheney was out defending this plan recently, meaning he was lying through his teeth again: Cheney Returns Fire in Battle on Tax Cuts. "The fact is that 54 million Americans own stocks that pay dividends," he said. "Moreover, 45 percent of all dividend recipients make under $50,000 a year." It's plain evil that he would even say such a thing. Most people do not own individual stocks that pay dividends. They may own them in IRAs or 401K plans, but the dividends you receive in retirement programs are not taxed in the first place. Also just because 45 percent of all dividend recipients make under $50,000 doesn't mean they're going receive the same benefit from the tax plan. I received a grand total of $1.50 in dividend income last year. That would mean a reduction in taxes of about 30 cents. Woo-hoo! Am I one of the 45 percent of dividend recipients? What Cheney's statistics don't tell you is that there's a problem of sample size and degree of benefits. Let's say there are only 100 people receiving taxable dividends out of a thousand and all 55 of the most wealthy will receive significant benefits from the elimination of dividend tax while out of the bottom 945, 45 will receive some benefit, but most likely a very small tax reduction since they hold fewer shares. I mean, short of writing a bill that out right gives millionaires a huge tax break, elimination of dividends tax is the next best thing. How can Cheney even say with a straight face that this isn't targeted toward the wealthy (like himself) and quote irrelevant, misleading statistics to back up his claim?

Brad DeLong says this:
Ah. We are told that the Bush tax cut means that every year "ninety-two million Americans will keep an average of $1,083 more of their own money." But this is not what the average family will receive: think $265 instead. (On the other hand, it is worth $90,000 a year to the average family making more than one million a year.)

Also with some REAL numbers from the Urban Institute - Brookings Institution Tax Policy Center (click image to enlarge):

With almost 30% vacancy rates in commercial real estate in certain parts of the bay area I don't see how the residential real estate market isn't tanking a little more. I mean, someone's gotta work to pay the mortgage, right? Or am I not understanding this? I know residential real estate prices are more "sticky", but it should be falling a little more than it has. Maybe they can convert some of the commercial space into residential space. I've always wanted an industrial loft.

COMMERCIAL SPACE VACANCIES
Fourth-quarter vacancy rates and average rents in central business districts and outside CBDs. Source: Cushman & Wakefield

See Valley vacancy rate highest in U.S. Nearly 30% of offices in South Bay are empty

My former Econ 100B macro-economics professor, Peter Orszag, who resembles the nerdy kid in school, helped set the Democratic Policy Committee straight when he was invited to testify on Bush's latest round of tax cut proposals. I bet they noticed his nasal-sounding voice, but I'm also sure they learned a lot. I did. Part of the reason I took up the Economics major. Go Bears!

The Administration's Economic "Stimulus" Proposals

Senator Dorgan, Ms. Pelosi, and Members of the Committee, thank you for inviting me to testify this morning on the Administration's recent economic stimulus plan. As you know, that plan consists primarily of a new tax cut for dividends (and capital gains), and acceleration of most (but not all) of the provisions from the 2001 tax cut that were scheduled to take effect in future years. My testimony makes four basic points:

* Even according to the Administration's own analysis, the proposals would have a negligible effect on economic activity during 2003 and would reduce job growth after 2004. In the short term, the plan would have only a modest impact because it is not targeted to boosting demand for goods and services; in the long term, any positive effects would be offset by the expansion in the budget deficit and associated reduction in national saving.

*The package is fiscally irresponsible, with a budget cost through 2013 of more than $925 billion (including debt service), and a long-term cost that exceeds one-quarter of the 75-year actuarial deficit in Social Security. These costs are in addition to the other substantial tax cuts already enacted or proposed by the Administration; collectively, the tax cuts amount to between 2 and 3 times the size of the actuarial deficit in Social Security over the next 75 years. Especially in the face of the coming retirement of the baby boomers, it would be reckless to adopt policies that would exacerbate the projected long-term budget imbalance.

* The package would provide a tax cut of $100 or less to almost one-half of tax filers, while providing an average tax break of $90,222 to those with more than $1 million in income. The tax cuts would also reduce the share of total Federal taxes paid by the top 1 percent of the income distribution, and would widen the already substantial disparities in after-tax income between those at the very top end of the income distribution and others.

* The dividend exclusion proposal would fail to achieve its ostensible goal of taxing corporate income once and only once. It would not address the component of corporate income that is not taxed (or is preferentially taxed), despite the fact that the non-taxation or preferred taxation of corporate income is arguably at least as significant a concern as double taxation. It would also undermine the political viability of true corporate tax reform and create costly new loopholes in the tax code.

As our parents retire, we'll have to pay the debts that they leave for us, including the national debt. It's looking to be quite a debt (without costs of war being factored in). I think taxes in the 50%+ range is in our future. If you like that, you've gotta love Bush Jr.

Hmm, this graph kind of resembles his good friend Ken Lay's work at Enron, doesn't it? But Bush Jr. thinks big and promises to deliver us a bankrupt country - take that Ken Lay! I guess tax cuts now for the wealthy and war in Iraq should make me feel better or at least forget about having to pay this bill in my future. Thanks Dubya.

Why Are We Ruled by These Fools? Department: Archive Entry From Brad DeLong's Webjournal

Alan Greenspan testified before Congress today. I think his overall goal is to urge our politicians to get the U.S. fiscal policy back in order. Although usually on the side of President Bush, he urged a new accounting system to be adopted for making fiscal decisions, going from cash accounting to accrual accounting. Basically, he wants us to think about future liabilities (baby-boomers) vs future revenue sources (our sorry unemployed selves). Something the Bush administration has brushed off, even discontinuing 10-year projections because of a shortage of red ink.

It's also nice to hear Greenspan do his job - clear his throat and tell everyone that we're going to see endless deficits if things keep going the Bush way...

FRB: Testimony, Greenspan -- Monetary policy report to the Congress, U.S. Senate -- February 11, 2003

A general difficulty concerns the very nature of the unified budget. As a cash accounting system, it was adopted in 1968 to provide a comprehensive measure of the funds that move in and out of federal coffers. With a few modifications, it correctly measures the direct effect of federal transactions on national saving. But a cash accounting system is not designed to track new commitments and their translation into future spending and borrowing. For budgets that are largely discretionary, changes in forward commitments do not enter significantly into budget deliberations, and hence the surplus or deficit in the unified budget is a reasonably accurate indicator of the stance of fiscal policy and its effect on saving. But as longer-term commitments have come to dominate tax and spending decisions, such cash accounting has been rendered progressively less meaningful as the principal indicator of the state of our fiscal affairs.

An accrual-based accounting system geared to the longer horizon could be constructed with a reasonable amount of additional effort. In fact, many of the inputs on the outlay side are already available. However, estimates of revenue accruals are not well developed. These include deferred taxes on retirement accounts that are taxable on withdrawal, accrued taxes on unrealized capital gains, and corporate tax accruals. An accrual system would allow us to keep better track of the government's overall accrued obligations and deferred assets. Future benefit obligations and taxes would be recognized as they are incurred rather than when they are paid out by the government.

Reestablishing budget balance will require discipline on both revenue and spending actions, but restraint on spending may prove the more difficult. Tax cuts are limited by the need for the federal government to fund a basic level of services--for example, national defense. No such binding limits constrain spending. If spending growth were to outpace nominal GDP, maintaining budget balance would necessitate progressively higher tax rates that would eventually inhibit the growth in the revenue base on which those rates are imposed. Deficits, possibly ever widening, would be the inevitable outcome.

A thought crossed my desk.

If I had lived in the middle-ages and I, only I, had the stuff that's now splayed on my desk, I would be a rich man. I could record music, play music, record video, show moving images, print pictures, and print books.

And those monks would've been so jealous... What would've taken them days to do by hand I can crank out at about 10 pages per minute. Compounded economic and technological growth really seems incredible when you think about it...

A few years ago I thought I didn't like Paul Krugman. I even told Prof. DeLong that when I proposed to teach a class on Robert Reich's Work of Nations since I didn't know any better - I was a dumb kid. Well, I'm wrong. He's the only voice that's making any sense to me nowadays. He's still the know-it-all, but he's gained the responsibility to say what the newspapers won't print, and to counterbalance Bush administrations bully pulpit. Also, he uses his know-it-all-ness to great effect. I'll give two examples:

Ok, this one's really just for the archives, but if you'd like to read a clear piece of analysis, a breakdown of economic players and teams during the Reagon era, and why people can say conflicting things about Reagonomics and all be right in one way or another then feel free to read on.

The Real Supply Siders: From Brad DeLong's Webjournal

John Quiggen succumbs to High Relativism, and proclaims that whether Ronald Reagan was "convinced" that cutting tax rates would raise tax revenues is unknowable.

Lee Tien of the Electronic Frontier Foundation and of the PUB (our local hangout) posed a challenge to me after I asked him for an un-paid internship at EFF. The challenge is to think of a way to increase marginal costs on people who sent spam emails. Here's the situation: since there is no marginal cost to sending spam (each additional email they send out doesn't cost them anything in terms of cash or time), they would overwhelm the carrying capacity of the internet, slowing down legitimate information exchange by crowding the internet with psuedo viagra ads and pathetic porn come-ons (I mean, can't they at least be funny or creative?). Recently, AOL said they had to filter A BILLION pieces of spam in a single day!

Spam is a tough problem to solve. Some have suggested government involvement by legislating spam. A recent proposal in California would require spammers to put "ADV:" in the subject field of all email advertisements. Another solution is to have people use spam filters at the receiving end to sort out the junk. There is a major problem with these two solutions. Basically, it doesn't solve the "crowding out the network" problem related to spam's zero marginal cost.

My idea is simple. It includes a tiny bit of consumer activism and a centrally located database. Recipients of what they consider to be spam would forward messages to this database. The database would use a Bayesian filter to decide whether the message being forwarded was indeed spam or legitimate mail. At the centrally located database, volunteers would feed the system samples of legitimate mail and samples of spam mail to build up the initial confidence levels of the Bayesian filter. For more information on Bayesian filters, see Arnold Kling's recent explanation.

The system would also weight the number of messages originating from any particular email address. If the filter decides that the messages are indeed spam and enough recipients forward the message to statistically reject the null hypothesis (null: not spam), the system will publicize the email address as a "spammer". Now, this database would not deal with enforcement. It would simply be a database of spammer email addresses. It would be up to individual ISPs to enforce spammers. It would work because the cost of spamming and crowding the networks affects ISPs directly and they have the incentive to enforce. So in effect, you have a centrally located database that ISPs would use to displace spammers. There are three major advantages to such a system:

1. The more spam mail you send out, the more likely you'll get on the spammers list, thus increasing the marginal cost to each additional piece of spam email you send out. Caveat: consumers bear some reporting cost that is balanced by the reduction of Spam in their mailbox. It will take time to see if that cost/benefit creates a workable system.

2. Bayesian filtering and recipient reporting reduces the dictatorial nature of the current MAPS system. It replaces a autocratic system with a democratic one. It also gets the government out of the process (which many people would view as a good thing).

3. The system of enforcement would be robust and distributed. It would be in the interest of each ISP to remove people on the "spammers list" and therefore the costs and benefits are well assigned. ISPs cleaning up spammers is analagous to restaurants cleaning up after the dirty customers, it's a cost that they should be willing to shoulder.

Okay, there's a fourth important point:

4. If a non-profit, like the EFF created and maintained the system. It would add some balance to the electronic battle between the dark forces of Industry vs. the naive Consumer.

Now the harder problem... how do I go about getting that un-paid internship?

For an allegorical take on the budget mess on capitol hill these days, check out John Iron's excellent blog entry. ArgMax Economics Weblog: Homer's Budget

The following article shows that the internet can reduce a lot of costs associated with car shopping, especially if you're a woman or a minority.

How Much Is That Civic Online?

By VIRGINIA POSTREL

THE 21st century hasn't brought us flying cars. But it has made the nonflying kind a lot easier to buy.

Back in 1986, when I purchased my first Honda Civic, car shopping meant going from dealer to dealer to dealer, taking test drives and hearing sales pitches. The process was time-consuming and unpleasant. It required a lot of driving around, and to get a price, you had to be willing to dicker for hours.

Car buyers no longer have to go through all that. When I replaced my old Civic with a 2003 model, I test drove a couple of cars and, when I was ready to buy, filled out an online form. Within 30 minutes, a dealer e-mailed me an excellent offer. Two hours later, I had a new car.

In the early days of e-commerce, six or seven years ago, car sales were the pundits' favorite caveat. Customers will always want to kick the tires, they said, so the Internet is no place for selling cars.

Bush promises 1.5 million jobs from a $550 billion dollar tax cut. Hmm, that comes out to be a cost to the government of $366,666.67 per job.

That doesn't seem like a good deal -- that seems like a terrible deal! Our schools are firing teachers and Dubya's brilliant plan is to spend $366,666 on each NEW job he creates? Remember, without a respective $550 billion cut in spending, the burden of this tax cut will fall on current and future tax payers. You, you and you!

Of course, what Dubya promises isn't what he means. He means that most of the money will go to his rich friends and political allies, and we the tax payers will be paying for it. The billions will be used to cut dividend tax, which nobody but the richest even pay the slightest attention to. The money that millionaires and billionaires receive from the government may lead them to hire some more chauffeurs, butlers, maids and other minimum wage staff. Maybe a few more for the shoe factory! If they hire 1.5 million of them because of the Bush tax cut, Bush's promise will become a reality.

Meanwhile... aren't our schools broke? Aren't there homeless people who could use some money? Isn't Bush seeking to take money out of school lunch programs? Isn't he promising to rebuild Afghanistan and Iraq? Where's the money going to come from?

One day, I'll be looking at my taxes, and I'll be thinking -- hey, I'm paying for the money Bush gave to his rich friends, and all those jobs that Bush created. I could've bought a house, maybe a small apartment, but instead I'm paying for that millionaire's boat payment and those outrageously expensive jobs Mr. Bush created through his tax cuts! Hurrah!

I've never thought so hard on the difference between dim-sum and mongolian barbeque.

Tug Boat Potemkin

Can Libertarians Do Yum-Cha?

"Doing yum-cha" is a pleasant way to spent a rainy Sunday afternoon in Melbourne. Or anywhere other city. Melbourne has plenty of Chinese restaurants that put on a good yum-cha, and it's a popular way to celebrate special occasions like birthdays, wedding and divorce anniversaries, send-off lunches and those secret, after the event, "they finally sacked our bastard manager" parties.

A few words of explanation might be in order for anyone who's never been to a yum-cha. What you get is a lot of free tea (now seems as good a time as any to slip in the obligatory reminder that literally translated yum-cha means "drink tea"; however more intoxicating beverages are usually available, for a price) and a lot of dim sum*.

Following is a interview with Prof. George Akerlof of UC Berkeley that I saw on Spiegel Online. It's nice to see a well-known economist talk with some emotion and show some disgust at George W's economic policies. Usually, people think of the economics profession as a bunch of droids who have a preoccupation with numbers. But more interviews with Akerlof and the like may change that sort of image. I wish I had taken a class with Akerlof - it might've been fun to listen to a teacher who talks about economics as a debate about social choice and social consequence. And he'd probably be able to do it with a sense of purpose and applicability and critical evaluation that's sometimes missing in learning about equations and graphs.

Akerlof-Interview im englischen Original:

SPIEGEL ONLINE reached George A. Akerlof, co-winner of the 2001 Nobel Prize in economics, on the phone while he was vacationing in New England. Following are excerpts of the conversation.

SPIEGEL ONLINE: Professor Akerlof, according to recent official projections, the US federal deficit will reach $455 billion this fiscal year. That's the largest ever in dollar terms, but according to the President's budget director, it's still manageable. Do you agree?

George A. Akerlof: In the long term, a deficit of this magnitude is not manageable. We are moving into the period when, beginning around 2010, baby boomers are going to be retiring. That is going to put a severe strain on services like Medicare, Medicaid and Social Security. This is the time when we should be saving.

It seems everywhere you look, a job is being sent to another country, where it can be done more cheaply. But don't just think of the poor guy who lost his job. It's more of a game... musical chairs really, sometimes with too many chairs but most times with too few.

Prof. DeLong's piece on service-sector outsourcing is a great argument for the benefits of international trade in jobs. Of course, it's good until you lose your job to this type of trade

But I can't stop the history train and neither can you. So let's just accept it -- and breathe.

1100 Words on Service-Sector Outsourcing: Archive Entry From Brad DeLong's Webjournal

We economists don't spend enough time pushing the political arguments for freeing-up trade and accelerating the development of poorer countries. We feel that the economic case alone is so strong that that should be sufficient.

FT.com / Comment & analysis: ...On the political side, does anybody really want Indians and Chinese in 50 years' time - the 3bn educated citizens of what will then be industrialised economies and proud countries - to remember that western Europe and North America took whatever steps they could to slow Indian and Chinese economic growth in the first half of the 21st century? Democratic politics will produce strong pressures to compensate and assist those who work in industries that will be battered by foreign competition. But, please, let the compensation and assistance take the form of social insurance rather than trade protection.

Ivory, apes and peacocks: that is what the international trading fleet of Solomon, son of David, imported 3,000 years ago. But did Ye-Shua, herding sheep in the hills of Samaria, or Ish-Baal, farming in the shadow of the hill of Megiddo, care? No. Until after the industrial revolution, international trade barely touched the lives of farmers and workers. Before 1500 it was just too costly to ship anything other than slaves, silks, spices, perfumes and other precious items. Even the commercial revolution added only a few things to the list of traded goods: guns, tobacco, rum, high-quality cloth, fine porcelain, coffee and a few others.

International trade became a big deal for ordinary people only with the arrival of the iron-hulled, steam-powered, ocean-going cargo ship. Cheap transport made it profitable to trade the staple manufactured and agricultural commodities of the industrial age: US wheat, Australian wool, Argentine beef, British machines, German steel, French luxuries, Swiss precision instruments, Italian pottery, Brazilian coffee, Malaysian rubber, African palm oil and so on.

By 1900, people everywhere knew that if they grew crops or worked in factories they were competing with workers two continents away - and if the dynamics of comparative advantage shifted, they could lose their jobs, their incomes and their livelihoods.

So, a century ago, they organised. They sought protection against that age's globalisation. American steel-masters and steelworkers sought (and got) protection against British producers, boosting steelworkers' standard of living and helping to enlarge the fortunes of J.P. Morgan and steel magnates Andrew Carnegie and Elbert Gary. But protection came at a price: it was more expensive to construct America's railroads, so America's farmers and ranchers paid higher shipping costs and some of what would have been their incomes went instead to subsidise rich New Yorkers' tickets to Carnegie Hall.

The Junker military-service nobility of Germany was horrified when Hamburgers made their bread from American wheat. They allied with German steelmasters seeking protection against British competition in the "marriage of iron and rye". Higher grain prices and lower living standards for Germany's urban workers meant more wealth and political power for the army-officer class, and that class's added weight played a role in driving Germany down its disastrous 20th-century political course.

Now we have another turn of the wheel. The internet, the submarine fibre-optic cable and the communications satellite are cast in the role played last time by the iron-hulled, ocean-going steamship. Now it is not just atoms but bits that are traded across oceans in rapidly increasing volumes. Customer support, medical analysis, technical work, computer programming, form-filling and claims-processing - all these jobs can now move around the globe in the same way that farming and factory jobs could a century ago.

This global reallocation of jobs promises to be a powerful source of world economic growth over the next two generations. But, as happened a century ago, those workers who face new competition from people a hemisphere away are not happy about it. Large-scale international trade has hit the service sector and, as a result, foreign competition is no longer merely a phenomenon that affects blue-collar workers and gives white-collar workers the opportunity to buy manufactured goods more cheaply. The political system is beginning to respond: New York City no longer dares to digitise tickets and send them to Ghana for processing; New Jersey politicians want public sector contracts limited to US-based processing centres and in return the government of India wants to add a provision securing market access for service sector professionals to the Doha round of world trade talks.

The current wave of concern about service-sector outsourcing is overblown. It is more a reaction to macroeconomic distress than to a shift in the world distribution of employment; if the post-industrial core were closer to full employment, few would care. There are still seven US jobs in software and systems design for every four such jobs that existed when Netscape launched its initial public offering in 1995.

Trade, after all, does not destroy jobs but shifts them elsewhere. If central banks succeed in keeping the advanced post-industrial economies near full employment, for every job that moves out to an Indian call centre another job moves in. If Indians spend the harder currencies they earn on developed countries' exports, it will be a job making machine tools or new kinds of hybrid seeds, or managing the construction of an Indian factory. If Indians use the harder currencies they earn to invest in the developed world, it will be a job in construction. There are more and bigger winners from the demand created by a job's shift to an Indian call centre than there are losers.

But there are losers and they are articulate and potentially angry. For the moment, they are relatively few in number, and the tide of their concern will ebb as the business cycle turns. But it will come back, for there will be more and more losers over the next two generations. The next wave of concern over service sector outsourcing will be bigger, and the one after that bigger still.

Nearly a century ago, the political systems of Germany, France, Italy, America and even Britain accommodated protectionist pressures as the domain of commodities traded across oceans grew. Such accommodation was almost certainly a mistake then and would almost certainly be a mistake now.

On the economic side, more people would suffer from a backlash against globalisation than from an increase in free trade and foreign competition. Such a backlash would also slow the economic growth of developing nations such as India and China.

On the political side, does anybody really want Indians and Chinese in 50 years' time - the 3bn educated citizens of what will then be industrialised economies and proud countries - to remember that western Europe and North America took whatever steps they could to slow Indian and Chinese economic growth in the first half of the 21st century? Democratic politics will produce strong pressures to compensate and assist those who work in industries that will be battered by foreign competition. But, please, let the compensation and assistance take the form of social insurance rather than trade protection.

Check out the following article from the economist. I think they're mostly right about the prospect of a large Dollar depreciation. Greenbacks are set to be worth less in a few months or years against the Euros and Yens.

Here's why it's happening:

We spend as a nation more than we produce so that we have to borrow money from other countries. China and Japan and Euroland countries buy dollar denominated bonds and assets. Well if everyone's buying dollars to buy dollar denominated assets, that keeps the price of dollars up. But this can only go on for so long. If they decide to cash in their dollar denominated assets, the price of dollars will drop.

They'd sell these dollar denominated assets if:

a) They think we're indebted to them beyond our ability to pay them back. (in 2002, foreign claims against the U.S. exceeded U.S. claims on foreign countries by 3 trillion dollars)

b) Countries other than the U.S. begin to grow faster and foreign investors cash their U.S. investments in for better opportunities abroad. Maybe they'll want to diversify their holdings even if growth doesn't pick up abroad.

c) Some rogues start selling dollars because they think you're going to start selling dollars. More dollars being sold, less people buying - poof! Money gone. And that's the rub.

Financial markets have become much more liquid, meaning that if a unexpected drop happens, it will probably be sharp and painful.

That would be bad. Remember Thailand, Malaysia, S. Korea? How about Argentina? Know what happens if your currency drops far and fast? People stop buying things because they get scared, they stop investing because the perceived risk in the economy is suddenly much higher. The U.S. won't be like Argentina since our debt is in dollars where as in Thailand for example, when their currency (the Baht) fell by 50%, they all of a sudden had twice the debt since their debt was denominated in dollars! Nevertheless, a large change in exchange rate won't be pretty.

Maybe it's time to park your money in a bank in London or Tokyo. But shhh... don't tell anyone you're doing it, otherwise there might be a run on the dollar.

How do we stop it from happening? Well, the government needs to balance its books. We then need to raise interest rates so that people spend less and save more. This might cause a recession and higher unemployment, but you can't drive off a cliff (war spending, tax cuts) and expect to walk away unscathed.

From Paul Krugman's site, I found this: a chart that shows a highly regressive tax scheme, just the opposite of what you would expect - that the wealthier would pay a higher share of their income to taxes. I believe whatever your political bent, you should support progressive taxation since the poor spends most of their income on necessities like food, shelter, healthcare, etc. I'm not sure what the total tax burden (federal + state + local) looks like, but the Bush II tax cuts have also been highly regressive. All this is happening against the backdrop of budget-constrained state and local governments slashing programs that aid the poor. All in all, making for a system that's becoming more and more regressive.

Source: The Institute on Taxation and Economic Policy - study on the distribution of tax burdens

xirazoo (8:56:34 PM): i got my refund from jcrew
tedtwong (8:56:56 PM): good. stop buying and returning stuff... you'll drive up the prices for the rest of us :-)
xirazoo (8:57:24 PM): like you care
tedtwong (8:57:33 PM): I do... as an economist.
xirazoo (8:57:38 PM): and i can't always decide on things
xirazoo (8:57:46 PM): at least i can return stuff if i don't want it
tedtwong (8:58:28 PM): yeah, but that diverts the cost of processing to the stuff they actually sell, which will raise the price of things that you eventually decide to buy.
xirazoo (8:58:50 PM): how?
tedtwong (9:00:20 PM): think about the retailer as a system. they buy clothes and sell them. If you raise their cost of doing business (by having them spend time and energy processing returns), that cost has to be offset by the money the get from sales. To raise the revenue, they have to raise prices.
xirazoo (9:00:43 PM): oh
tedtwong (9:01:32 PM): I just came up with this... but pretty interesting way to persuade you to stop buying stuff, huh?

The NY Times reports:

White House Moves to Impose Quotas on Chinese Textiles

The Bush administration, in a further escalation of trade tensions between the United States and China, announced Tuesday it had decided to impose quotas on three types of textile products in an effort to give the U.S. textile industry temporary breathing room from a flood of Chinese imports.

U.S. Rep. Jim DeMint, R-S.C., one of the lawmakers who pushed for the quotas, praised the administration's decision.

"We have to have the means to hold countries like China accountable if they refuse to play by the rules," DeMint said. "This decision will help level the playing field and ensure that trade will be both free and fair."

Unfortunately, nothing in the article stated what the unfairness was. The whole point of free trade is so that countries with comparative advantages can exploit them and everyone is better off for it. I don't believe wholeheartedly in unconditional free trade, but if you promote free trade in your speeches while putting quotas in place for political expediency, you'd be rightly called a hypocrite.

Along with the steel tariffs that have been ruled a violation by the WTO and our farm subsidies that kill agriculture markets in other countries, this textile quota will increase the perception that in the U.S., "free and fair" means "stupid mercantilist supremacy".

More on U.S.-China Trade

Trade Policy, Bush Style: Archive Entry From Brad DeLong's Webjournal

Trade Policy, Bush Style
Marcelo the Pygmy Chimpanzee writes:

BONOBO LAND: Let's all try to look surprised about the U.S.'s decision to impose quotas on the growth of certain textile imports from China.

All the obvious comments apply. No, this doesn't make any economic sense at all. Yes, the Bush administration is playing the "yellow peril" card for 2004. Yes, this might get uglier in the future, although, and five years ago I would have laughed at the idea, maybe we can count on the Chinese government having a tad more self-preservation and common sense than the American. So, with luck, we'll not get all caught in another trade war (first the EU, then China... who's next, Japan?). No, neither the WTO nor the IMF are amused. Yes, the dollar did go south on these news. No, this doesn't look good for the Miami talks in a couple of days either.

And, yes, this is a headache-inducing piece of news.

I very much hope that the Bush administration economists are thinking about where the line is after which resignation-on-principle is the best option...

Found this by way of Prof. Brad DeLong's site.

Thomas Carlyle attacking the 'political economists'

The Origin of the Term "Dismal Science" to Describe Economics

Robert Dixon

The University of Melbourne

Generations of students and the reading public have been taught that it was Thomas Carlyle who gave economics (political economy as it was then known) the name "the dismal science" and that he did so as a reaction to the pessimistic predictions of Malthus in relation to population growth and its consequences. I shall demonstrate that, although it is true that Carlyle was the person who first described economics as the dismal science, he did not do so in response to the writings of Malthus (or Ricardo). We shall see that Carlyle first used the term in the context of a debate which was unrelated to Malthus's writings on population (indeed unrelated to Malthus at all) and that the specific context (slavery v. the market as an organising principle for plantation labour in the West Indies) is not only interesting but also uplifting. For this reason, the origin of the term "dismal science" is worth exploring with students.

I've learned a lot of microeconomic theory this year, especially now since I'm a TA for 100A. But everyday I feel further and further from reality. There's something about doing math problems and solving nonlinear programming problems that prys you away from the real world. Firms are Ys, inputs are Xs, consumers are Us. It's like we're examing sand on a beach, noting that they're made of silica, that if we melt them they turn to glass. They are rough when examined closely and of different shapes and sizes and colors. Like examining sand individually, there hasn't been much so far in grad school that has passed the "so what" test for me, yet I'm still here. The reason, I think, is because I want to see the beach -- to see how everything, how each grain of sand, fits together. I want to bury myself in it for a few moments and feel it with my belly, maybe find the sun glinting off it and find some satisfaction and beauty in what I'm studying. I want to build a sand castle... this no longer has anything to do with grad school or economics. I just want to hit the beach, go sailing.

Or, as a close substitute, read more about the real world: trade, social security and universal health care.

The Trade Tightrope By PAUL KRUGMAN You can't blame the Democrats for making the most of the Bush administration's message malfunction on trade and jobs. When the president's top economist suggests, even hypothetically, considering hamburger-flipping a form of manufacturing, it's a golden opportunity to accuse the White House of being out of touch with the concerns of working Americans. ("Will special sauce now be counted as a durable good?" Representative John Dingell asks.) And the accusation sticks, because it's true.

This post is about an economics paper I wrote up for a class with Aya and Tar, as opposed to some new anti-contraceptive device. We constructed a theoretical model of the declining fertility rates that we see in the world and tried to tie it to wages, child labor practices, and other stuff. It's not really complete or thorough, but it was two nights of creative math tinkering -- ok, mostly one night, tonight, 4 hrs. Enjoy it or run from its ugly equations, here it is:

Fertility Paper

From Argmax

I learned a while ago that the ordinary least square (OLS) variance is =sigma^2/(X'X), but I didn't really know why intuitively until today.

In statictics we're always walking in a valley made of of data. Our only job is to look for the low spot in the valley by picking the right betas (B's), betas are the coordinates that describe our location. If the valley is nicely bowl shaped, we should just curl into a ball and let gravity take us there. Well, we have computers, so we can't just curl into a ball, we have to stand upright like robots and take little steps. It's still relatively easy for a computer to find the low spots when it's nicely shaped. Sometimes the valley is flatter and we can't discern the gentle slope that led here from the mountains in the distance, and so computers find it hard to find the lowest spot also.

In OLS, the criterion is minimize sum of square errors (E'E). Pick our betas, look around and see if we're at the bottom of the valley in terms of E'E. In calculus, we would take a derivative and see if it's zero.

Since E'E=(Y-XB)'(Y-XB)

The first derivative of E'E is = 2/(X'X)*B-2X'Y
Setting the result to zero and solving for B gets you to the min.

But the second derivative (the Hessian) of E'E = 1/(X'X) tells you the variance. Well, actually, the variance is sigma^2/(X'X) but this is "relationship" not "equivalence". The relationship here is between how certain you can be about beta given the criterion and the data; not how big a role the real error plays in the variance of beta. In any case, the Hessian determines how big a role sigma squared has to play. If the Hessian is large, the variance is going to be small, and if the Hessian is small, the variance is going to be relatively larger.

In calculus terms, the first derivative when set to zero and solved tells you that you're at the minimum of the criterion (E'E), so you've found the flat spot in the criterion to a first order. But the second derivative at the point of the solution gives you the variance/covariance matrix in least squares -- it tells you, as you've walked to the min of the criterion valley, how steeply the path around you appear. If the path was steep, you're pretty sure you're at the min. If the valley floor is pretty flat and changes slowly, so that (X'X) is a small number, then your variance is going to be large since you're not going to be sure that you're at the absolute lowest point in the valley you've just explored.

This isn't strictly correct mathematically because we're in a K dimension valley usually, but I think it gives me something to hang onto when I'm writing (X'X) and trudging through another econometrics class.

Markets are efficient for aggregating information I've been told; makes private information public. It seems the University of Iowa has taken that idea to the realm of politics. They've established a market for political outcomes. Is a market better at predicting the future than polls? I don't know, but I'm looking forward to buying some futures contracts on Kerry.

Brad DeLong's Semi-Daily Journal: A Weblog: Neocolonial Origins of Comparative Development

Neocolonial Origins of Comparative Development
Glaukon: The experience of East Asia does not fit Acemoglu et al.'s story of the colonial origins of comparative development at all well. Both Taiwan and (South) Korea are now rich--but they shouldn't be. Taiwan is almost as unhealthy as Hong Kong for European (and Japanese) settlers, and so sheer settler mortality along should have led to the imposition of "extractive" rather than "developmental" institutions on the island--as it should have in Hong Kong. And South Korea had a highly-productive and highly-developed rice-based agriculture: "extractive" institutions to maximize surplus extraction should have taken root there as well--see Acemoglu et al.'s "Reversal of Fortune." So what's their story?

Thrasymakhos: I think that they can tell a very good story along their lines for (South) Korea, Taiwan--and Hong Kong too. But you have to look later than the colonial period. The Japanese decapitated the landlord class in Korea and Taiwan, and then the KMT decapitated the Japanese collaborator class in Taiwan after it arrived in force in 1948. Both Korea and Taiwan, therefore, started the neocolonial period with very egalitarian and favorable distributions of land--making large scale extraction of resources with the assistance of a local comprador-landlord class impossible.

Glaukon: And?

Thrasymakhos: And then comes the Cold War. It is of the utmost importance to the United States during the Cold War that (South) Korea and Taiwan--and Hong Kong--shine when compared economically to Maoist China. So the United States makes itself as open to Korean and Taiwanese (and Hong Kong's, and Japan's) exports as it is to western Europe's. Plus there is significant economic aid. Plus (in Korea) the demand provided by the American army. An institutional complex more encouraging of "developmental" institutions could hardly be imagined. It's not the colonial origins of comparative development, but...

Glaukon: But it is the neocolonial origins of comparative development. Oh very good, very good indeed!

If this is the neoclassical origins of comparative development, the pattern bodes favorably for China. Foreign direct investment is very high, and land is favorably distributed.

When we visited a few villages in China, it was the land distribution in China that made the largest impression on me. Each farmer has about the same land as her neighbor in per capita terms (have women become the larger contributors to farm labor in China as men have been swept up in the urban migrant working population?).

How did it get so equitable? Well, large scale decapitation and humiliation of Chinese by other Chinese in the Mao-led political movements following 1949, a different experience than that of Korea or Taiwan, is responsible. Land is currently redistributed every five years in some areas (or when villagers come to a consensus), although the central government policy is to redistribute land every 30 years to account for deaths and births and relocations while giving farmers some incentives to invest in their land. These investments include fish ponds, orchards, plus the usual maintenance of irrigation and other infrastructure. As a result, there are very few landless poor in China; they're poor but not sleeping in the gutter landless.

There are some economists who are pushing for the privatization of land and the introduction of land rights so that farmers can sell their land to facilitate the rise of large scale farming and provide capital for the farmer to invest in other activities. Basically, economists are always pushing for markets to take over other institutions. I don't think that's a good idea in China. Clearly, you would have a large number people that would sink into poverty, landless poverty, just by the randomness of markets (they could lose their money in investments, or become jobless after a move to the cities). Right now, villages has their equitable land distribution as their basic social security. When recessions hit urban areas, migrant workers head back to their villages because their families (parents, siblings) have claims to agriculture land. You can still rent out the land in many places, but you can't sell it. The rural land rental market is getting larger and that's good because it will allow good farmers access to more land and will give bad farmers a small monetary reward for leaving farming and find other jobs.

This equitable distribution of land will also serve as a buffer for urban migration. It's going to happen during the process of development - rural households moving to urban areas - but it can't happen too fast. At least a hundred million migrant workers are now helping urban areas develop, working in construction, manufacturing, and service jobs; however, at the same time the numbers are stressing the housing, healthcare, and other infrastructure. If migration rate increased (or, hypothetically, if China had rich landlords who could replace and force workers off the land through mechanization), you would be seeing brazilian style favelas or shanty towns springing up on the outskirts of cities. So far I haven't seen that, which is a really positive sign after 20+ years of reforms.

I think Thrasymakhos is right that equitable land distribution is an important part of development, and it will help to make rural China "developmental" instead of "extractive".