Grasping Reality with Both Hands: The Semi-Daily Journal Economist Brad DeLong

New York Times Death Spiral Watch (John Tierney Edition)

Outsourced to Mark Kleiman:

The Reality-Based Community: Greenhouse-gas footprints and environmental activism: John Tierney, demoted from the NYT op-ed page and now continuing his libertarian propagandizing in the guise of "science writing," points out that flying around to climate-change conferences creates a large carbon footprint for high-profile environmental activists. That allows Tierney to claim the sort of faux-populist gotcha! so beloved among glibertarians and greedhead conservatives. (The theocrat, nativist, and imperialist wings of conservatism prefer their faux-populist gotcha!s on different topics.)

If you travel frequently by air, even on commercial flights, you can’t escape having a huge carbon footprint. Yet many of the most vocal advocates of cutting emissions — politicians, environmentalists, journalists, scientists — are continually jetting off to campaign events and conferences and workshops. Are they going to change the way they operate? If not, how are they going to persuade anyone else to cut back emissions? (My advice to the peripatetic preachers: Do not try explaining why your work is more important than everyone else’s.)

Where to start?

1. The point of environmental management isn't to denounce sin, it's to get prices right. The problem with GHG-emitting activities is that they are artificially underpriced due to the lack of a carbon tax (or equivalent mechanism, such as cap-and-trade, for internalizing the external costs of those activities). With the right prices, the cost of conferences with physical attendance will rise, improving the competitive position of alternatives such as high-quality teleconferencing, which allows people to meet virtually rather than physically. But if people want or need to confer in person, and are willing to pay the full price including the price of the environmental damage their travel does, they can do so with a clear conscience.

2. Rich people use more goods and services than poor people. That's what "rich" means. Of course multi-millionaires have larger gross GHG footprints than you and I do. So what? If Tierney wants to work on decreasing income gradients, I'm all for it. But of course he's not. He just hates the idea that some rich people use their wealth to promote ideas he dislikes.

3. A large gross carbon footprint doesn't imply a large net carbon footprint. That's what offsets are about. Once GHG contributions are priced appropriately, there won't be any need for private offset purchases. But in the meantime someone who wants to be personally GHG-neutral can get there by writing checks for the activities necessary to offset his or her footprint. Tierney's admirer and fellow faux-populist glibertarian Glenn Reynolds thinks that this is no better than "buying indulgences." The difference, of course, is that the purchase of an indulgence didn't offset the damage done by the underlying sin (and certainly didn't make reparation to the other people injured by it), while GHG offsets actually undo the original damage. If Al Gore is prepared to pay for enough carbon sequestration or tree-planting or whatever to offset the GHG costs of his house and his air travel, it's no skin off my nose, and given the nature of market transactions it's a benefit to whomever he's buying the offsets from; otherwise those people wouldn't be willing to sell at the price. Isn't it astonishing how many devotees of "the free market" know jack sh*t about how market processes actually work?

Footnote Yes, Tierney's technique is precisely that of feminists who criticize anti-feminist women such as Phyllis Schlafly for not staying home and raising their kids, as anti-feminist ideology would dictate. And the technique is equally dishonest and offensive in the two cases. Schlafly is a liar and a scoundrel, but she ought to be criticized for what she says, not for entering into the debate. Is she supposed to leave the case for sex-role differentiation to be made exclusively by men, which would discredit it from the outset?

Second footnote Yes, there are some fools on the "moral/spiritual" or "deep environmentalist" end of the spectrum who also disdain offsets as indulgences. Indeed, the Al Gore who wrote Earth in the Balance might not have been fully comfortable with the offset idea. But if he's learned something in the meantime, and the climate-change denialists haven't, it's not Gore who warrants criticism.

Third footnote And yes, offsets are not without their practical problems, especially the problem of choosing a baseline. But that's a technical issue, not the basis for an objection in principle.

Yuppies in the Fields

We signed up for Eatwell Farm's http://www.eatwell.com/ large weekly box of (relatively) locally grown (they are in Dixon) vegetables for $24.50 a week. They tell us such things as:

The chickens have spent their spring among the citrus, leaving their valuable droppings to fertilize the trees. Now they have moved on to their summer pasture, which is two acres of alfalfa that we planted last fall. I believe that the eggs are always richest when the chickens eat alfalfa. The egg production fell for a few days after we moved them. It is back up to normal now...

They send us recipes:

They encourage us to view the farm as more than just a black box from which a weekly box appears:

If I were a better sociologist, I would have something profound to say about how the highest form of gesellschaft turns out to be where one becomes rich enough to purchase a reasonable facsimile of gemeinschaft as a luxury out of one's ample disposable income--and then one begins to view the turnips in the box not with a "Jeebus! I'm paying this for turnips?! I loath turnips!" But rather with a "Hmmm... This is a challenge..."

Italian turnip soup, if you are curious.

Jonah Gelbach on McCain's "Economist" "Supporters"

Jonath makes the mistake of taking the McCain "economists" letter as an analytical statement, rather than as an expression of attitude written by spinmasters, and demands intellectual consistency:

Economists for Obama: McCain's Economist Supporters vs. Facts: Over at MarginalRevolution, Tyler Cowen has posted the text of an email... prominent, right-leaning economists [who] have endorsed John McCain's stated economic proposals... the usuals (e.g., Becker, Hassett, McCain chief economic adviser Doug Holtz-Eakin, Taylor, Harvey Rosen, Meltzer, etc.)... [NS] prominent economists who have earned their academic reputations.... I've previously discussed the enormous increase in deficits that would be caused by McCain's tax proposals, as scored by Len Burman and Greg Leiserson of the Tax Policy Center. So let me focus on the second paragraph [of the letter], which is uniformly contradicted by both facts and experience:

"His plan would control government spending by vetoing every bill with earmarks." Well, this one has already been repudiated by... John McCain's chief economic adviser, Doug Holtz-Eakin. I've already posted on this issue:

McCain has already had to change his "definition" of those nasty earmarks he'll eliminate (somehow, without a line-item veto). According to this story by the Politico's Ben Smith, Holtz-Eakin initially claimed that there were $100 billion in earmarks in the current budget, the idea presumably being that eliminating all of these earmarks would give McCain $100 billion to work with in paying for his tax cuts. After a former senior Democratic staffer, Scott Lilly, pointed out that many of these earmarks included stuff McCain supports, like money for Israel, Egypt and U.S. military construction, Holtz-Eakin stated that in fact the real amount of money associated with earmarks McCain would not fund (again, magically preventing them without a line-item veto) was only $16-18 billion.

"[I]mplementing a constitutionally valid line-item veto..." Clearly, this one is there to allow them to respond to criticisms, like the parenthetical reference in my earlier post, based on the fact that under current law, the President has no capacity to pick and choose which items to fund. President McCain will have to sign or veto actual statutes, not their components.... I am not a constitutional lawyer, but given my understanding of the Court's language in Justice Stevens's opinion for the Court, I find it very difficult to imagine that McCain and his lawyers (much less his economists) will be capable of "implementing a constitutionally valid line-item veto".

"[P]ausing non-military discretionary government spending programs for one year to stop their explosive growth..." Gee, I hardly know where to begin on this one. First off, a one-year pause would do nothing to stop "explosive growth". It would reduce the level of spending, to be sure, but then that "explosive growth" would go right on happening. This is a mathematical principle of which each of the economist-letter's signatories no doubt is aware.

That said, this post over at CBPP is worth a look [Update: I see that Mark Thoma posted much of the CBPP post, which I should have noted was written by Richard Kogan, back in March]. It shows the following:

Domestic discretionary spending fell from 18.4% of all non-interest federal spending in 2001 to (an estimated) 14.7% in 2008. By comparison, defense and security spending (in which the CBPP includes DHS and Veterans' spending) rose from 21.7% to 29.2%.

The real, i.e., inflation-adjusted, growth rate of domestic discretionary spending over this period was 1.3%. That's hardly an "explosive growth" path; by comparison, defense/security increased 9.1%, while SS/Medicare/Medicaid increased 3.8%.

As a share of GDP, domestic discretionary spending actually fell, from 3.1% to 2.8%. That means that this category of spending has been becoming less, not more, burdensome. Defense/security rose from 3.6% to 5.6% of GDP over this period, while SS/M/M rose from 7.7% to 8.4%.

I am frankly baffled as to what my colleagues on the right are talking about when they discuss "explosive growth" in "nonmilitary discretionary government spending". The real money on the spending side is in the military and entitlement categories....

[I]t is difficult for me to believe that people who promote John McCain's economic policies on the basis of the second paragraph of the letter above can simultaneously be aware of the facts and providing honest assessments. Perhaps I am wrong. I hope so.

I think that the disconnection of the letter from fiscal and economic reality is, from the point of view of the signatories, a feature and not a bug--because the McCain platform is so far out in the Gamma Quadrant, nobody will think that this is what the economists actually believe, and they will not have to spend any time defending it.

Grading Tim Geithner

Felix Salmon defends Tim Geithner at the New York Fed. I think Felix is right:

Has Tim Geithner Been Captured by Wall Street?: Gary Weiss has a long profile of Tim Geithner in the June issue of Portfolio, and... he gives a lot of space to some very harsh criticisms of the New York Fed chief... accuses Geither of having been captured by those he would regulate, and of working for Wall Street rather than Main Street, especially when he helped to orchestrate the acquisition of Bear Stearns by JP Morgan....

Weiss does a reasonably good job of laying out the first best defense against such accusations - that the risks of doing nothing were so enormous that Geithner was forced to act. Once you've accepted that, everything else is niggling: did the Fed use too much of its own balance sheet? Could Geithner have designed a different kind of bailout? The answers to those questions are unknowable, and in any case don't change the fact that Geithner averted something which could have been truly disastrous...

But more important is that:

the accusations themselves are... incoherent. In what way could Geithner have been "outmatched" by Alan Schwartz, when he forced Bear Stearns to be sold for a peppercorn, wiping out its executives' enormous equity holdings?... [I]t's simply false to say that Bear Stearns' competitors "stood to gain" from Bear going out of business: the collapse of one investment bank is bad news for all of the others, since it forces a 360-degree reevaluation of counterparty risk. Weiss makes great play of the fact that Geithner is heavily influenced by Goldman alumni such as Gerry Corrigan and John Thain... but the biggest winner in the Bear Stearns deal was Jamie Dimon. And a victorious JP Morgan is a much bigger competitive threat to Goldman Sachs and Merrill Lynch than Bear Stearns ever was.

Weiss is right that the New York Fed is a creature of Wall Street, but that's what it's meant to be. If... you're worried that Wall Street has too much influence over the Fed, then you should be looking... to Ben Bernanke - a man whose name, tellingly, appears only in passing in Weiss's piece.

As I have said before, I think the Fed's behavior was appropriate. JPMorganChase got a nice present for being well-capitalized enough to be willing to help the Fed deal with systemic risk. Those at Bear Stearns whose actions had created the systemic risk got appropriately fleeced:

Grasping Reality with Both Hands: The Semi-Daily Journal Economist Brad DeLong: Twenty First-Century Central Banking: The problem of dealing with moral hazard in twenty first-century central banking has taken an interesting twist. Twice in the past decade the Federal Reserve has intervened in cases in which specific institutions have gotten into serious trouble--specific institutions that the Federal Reserve, or at least the New York Federal Reserve Bank (lines of authority are somewhat unclear) has concluded are too big to be allowed to fail through standard processes. The two institutions are the hedge fund Long Term Capital Management--LTCM--in 1998, and the bank Bear-Stearns in 2008.

In 1998 LTCM had suffered major losses on a mark-to-current-market basis (although its long-term prospects in the event of global financial recovery from the crisis looked correspondingly good), and appeared both illiquid and--if forced to liquidate its positions at then-current values, especially if liquidation induced significant price pressure against it--insolvent. Alan Greenspan and Peter Fisher at the New York Fed gathered all of the Federal Reserve's major creditors in a room, told them that they had a problem, and told them that they should solve it: that systemic risk would be created by an LTCM bankruptcy and liquidation and that the Fed did not want to go there. The creditors agreed to cooperate and split both the liability and the upside (with the exception of Bear Stearns, that declined), and they made LTCM an offer. The only alternative bidder was said to be Warren Buffett, who claims to have not been focused on the situation because he was fishing in Alaska. With only one potential bidder, the equity of LTCM's principals and investors was confiscated--to the dismay of LTCM's principals and investors, some of whom believe that they would have been able to get a much better split of the upside had they been allowed to play their creditors off against each other.

In 2008 Bear Stearns had suffered major losses on a mark-to-current-market basis (although its long-term prospects in the event of global financial recovery from the crisis looked correspondingly good), and appeared both illiquid and--if forced to liquidate its positions at then-current values, especially if liquidation induced significant price pressure against it--insolvent. Ben Bernanke and Tim Geithner at the New York Fed declared that systemic risk would be created by a Bear Stearns bankruptcy and liquidation, that the Fed did not want to go there, and that the only deal they would fund and support would be a deal that sold Bear Stearns to J.P. MorganChase at $2 (later raised to $10) a share, and the Federal Reserve kicked into the deal a put on Bear Stearns assets that one might speculate had a full-information liquid-market value of perhaps $3 billion. Various speakers for principals and investors in Bear Stearns protested that this effective confiscation of their equity value was unfair and inappropriate, and that a better split of the upside or at least a payment of more than $2 a share was appropriate.

We now have two precedents. If the Federal Reserve judges that a major financial institution:

• is too big to fail in that its failure will generate systemic risk
• has followed portfolio strategies that have produced inappropriate and excessive leverage requires immediate action

then the Federal Reserve will intervene to structure and support a deal that leaves principals and investors in the offending systemic risk-creating institution with effectively zero equity. Counterparties will be rescued. Principals and investors will not--even if normal more lengthy legal and bargaining processes would give principals and investors a share of the equity value on the table.

This is not the arms-length equal-treatment impersonal-rule-of-law ideal to which a government should aspire. This does, however, seem to get the incentives about right.

Charlie Kindleberger once wrote, in Manias, Panics, and Crashes, that the key to avoiding both depression and moral hazard was for the lender-of-last-resort to always show up in a crisis but for its appearance to always be doubted until the very last moment. These two precedents suggest that the Federal Reserve is evolving a case-law-of-twenty-first-financial-crisis that is somewhat different: in a crisis the lender-of-last-resort will always show up, but investors and principals in individual institutions that need to be specially rescued will discover that the lender of last resort is not their friend.

When Hyperbolic Discounting Attacks!

Back in January, the question of whether to declare the last day of instruction here at U.C. Berkeley--May 12--part of reading period and cancel the class is a no-brainer. the students are good, enthusiastic, and well prepared. There are oceans of material to cover. The syllabus has just been hacked with a chainsaw--the half-week unit on contemporary Chinese monetary policy has just bitten the dust--and I don't wan;t to have to cut any more. And the question of whether to extend the semester and have another meeting on May 14 is also a no-brainer: it wouldn't be fair to grab normal course time for review, would it?

But today it is May 12, and this is the 44th time I have trudged into this particular course's classroom this semester. And my heart sinks at the thought that I have to do it again...

This is not to say that this has been a bad course: these are good kids, they were well-preoared, and they have learned a lot.They are still pestering me with questions about John Hicks's IS curve and John Taylor's monetary policy reaction function (which I have no covered at such length that I guessed they have to be on Friday's exam). But my marginal disutility of lecturing all of a sudden feels very high...

---

On a related issue, I have never been gladder that my real gradebook is in paper in my backpack then when I see this:

Why Oh Why Can't We Have a Better Press Corps? (Chris Wallace of Fox Department)

Outsourced to Ezra Klein:

EzraKlein Archive | The American Prospect: Martin asks, "This weekend, Chris Wallace on Fox interviewed Sens. Schumer and Durbin. He noted that Sen. Obama wants to raise the capital gains tax, but that 50% of the people who get taxed make $50,000 or less, therefore making this a middle class tax hike. Is this true? Are they playing with the numbers?"

I can't tell you exactly which number set Chris Wallace is working off of, so I'm not really in a position to say whether exactly 50 percent of those getting taxed make under 50 percent. But there's definitely some trickery going on here. Lots of ordinary Americans have money in the stock market through pension funds and the like. But they have very, very little of it. A share or two of stock, a bit of property. In 2005, the wealthiest one percent of Americans received almost 70 percent of long-term capital gains, and paid 72 percent of the capital gains taxes. What Wallace is trying to do is confuse the issues of eligibility and exposure. Lots of Americans might end up paying a minimal amount of the capital gains tax, but the real exposure is among the wealthy....

That group there in the middle? The so-called average taxpayers Wallace is so concerned about? They make, on average, $176 from capital gains in a given year. They will pay next to nothing. The Top 1 percent makes $232,000! The capital gains tax, in other words, is a tax on people with capital gains. Those people are overwhelmingly the rich, and the rich are overwhelmingly the ones who pay the tax. The fact that lots of Americans have nominal holdings is effectively meaningless here. Wallace is just using them to mislead as to the tax's true target.

Charlie Stross Takes His Sense of Indignation for Its Sunday Walk

The large bandwidth downside of advertiser-supported media:

Charlie's Diary: Why your internet experience is slow: Here is a random-ish URL from Salon.com, a not too unusual online magazine: http://www.salon.com/tech/col/smith/2008/05/09/askthepilot276/. This HTML page contains the first chunk of a piece of journalism by Patrick Smith... 950 words of text... 6.5Kb.... (Patrick, if you're reading this, I am not picking on you; I just decided to do some digging when I got annoyed by how long my browser was taking to load your words.)

In actual fact, the web page my browser was downloading turned out to be 68.4Kb in size. The bulk of the extra content consists of HTML tags and links.... But that's just the text, and as we all know, no web page is complete without an animated GIF image. So how big is this article, really?... I switched off my browser anti-advertising plugins (AbBlock and NoScript), hit "reload", and then saved the web page. Inline in the page are: 4 JPEG images, 4 Shockwave FLASH animations, 4 PNG images, 8 GIF images (of which no less than five are single-pixel web bugs), 4 HTML sub-documents, 6 CSS (style sheet) files, 22 separate Javascript files... in order to read 950 words by Patrick Smith my cable modem had to pull in 948Kb, of which 942Kb was in no way related to the stuff I wanted to actually read....

This is a novel in HTML.... "Accelerando" runs to 145,000 words; it fits in about 400 pages.... It is 949Kb in size, or about 10Kb larger than a Salon.com feature containing 950-odd words....

If content is king, why is there so little of it on the web? And why are content providers like Salon always whining about their huge bandwidth costs, given that 99% of what they ship — and that is an exact measurement, not hyperbole — is spam?

(Note: these are rhetorical questions. Despite the burning certainty that someone on the internet is wrong, you don't need to try and explain how the advertising industry works to me. Really and truly. I'm just taking my sense of indignation for a Sunday walk.)

Fake Steve Jobs on the Red Queens' Race that Is a Competitive, Contestable Market--and Why Dell Will Not Bounce Back

You know, I have forgotten whom Fake Steve Jobs really is:

The Secret Diary of Steve Jobs: Why Dell will not bounce back: love Charles Cooper of CNET... but I have to take issue with his latest effort (see here) where he tries to argue that while Dell looks like crap today, in fact Dell could bounce back just the way Apple did....

What people overlook is that the advantages that allowed Dell to prosper for about a decade were all fleeting advantages. Dell was for a while an innovative company, but its innovations did not involve product design. They involved manufacturing and distribution efficiencies. On the distribution side, Dell sidestepped the cumbersome... distribution model... wholesalers like Ingram Micro and Tech Data who in turn sold to retailers who in turn sold to end customers -- Michael Dell early on recognized that this was stupid and simply decided not to play ball.... The other PC makers knew they were caught in an abusive relationship with their channel but it took them a decade or so to unwind the old relationships and sell direct.... Game-changer here was the Internet which made it easy for anyone to set up their own Web store and build direct relationships with customers. Dell's advantage got erased.

On the manufacturing side, Dell figured out faster than the others in its space how to squeeze component suppliers... brought in loads of former Wal-Mart people... you, Mr. Parts Supplier, end up paying rent to Dell for the privilege of carrying its inventory on your books. Nice, right? Trouble with this "innovation" is that the advantages it creates are fleeting. What wiped this one out was a little place called China.... The rise of China means everyone can make PCs pretty much as cheaply as Dell does. And it's not just cheap manufacturing anymore. The real genius and power of China lies in its armies of low-cost and brilliant engineers. Seen a Lenovo box lately? Heck of a lot nicer than anything Dell is pooping out from its factory in Round Rock.

Bottom line is this: the only innovations worth making are the ones involving product ideas and product design.... To sustain an edge in any market you must make better products than your competitors, consistently, over and over and over again. Just making the same products as everyone else but taking a little friction out of the system can give you an advantage, but only a temporary one.

The other reason Dell won't rebound is that the company is yoked to Microsoft. Vista has hurt them tremendously. Don't doubt it. All of the PC makers know this and they are furious about it. But what can they do? They put their future in the hands of the Beastmaster. They figured they could deal with the Borg's evil nature; they didn't anticipate having to deal with the Borg's incompetence.... [I]nstead of putting our future in the hands of the MicroTards we undertook the massive effort of creating a next-generation operating system of our own. A lot of people, including some very smart ones, said this was crazy. Especially for a company with 2% market share. They said we were suicidal, ridiculous, old-fashioned, hubristic, doomed. The effort cost us huge amounts of time and money and was far from a sure bet. But my feeling is if you don't dare bet on yourself and your own people, you shouldn't be in business. So we made the bet. And now it is paying off in spades -- on Macs and iPhones and other devices which we have not yet announced but will restore a sense of childlike wonder to your lives, trust me....

Now as for Dell, well, you know what their big problem is? Dell doesn't have me. Or anyone like me. Mostly because, let's face it, there isn't anyone else like me. I'm one of a kind. Sui generis, as the French say. What Dell has is Michael Dell. Don't get me wrong. He's a nice guy. And a smart guy. But he's not a visionary. He's not an artist. The stuff he's good at -- squeezing suppliers, screwing distributors -- was very cool ten or fifteen years ago. Today? No big deal.... The truth on Dell? Dell is Gateway. Dell is Kaypro. Dell is Osborne Computer. It's DEC and DG and Apollo. It's a flower that bloomed and now must die. It's roadkill. It's mulch. Nothing wrong with that. In fact, it's a good thing.

Bruce Bartlett Prays for Fiscal Sanity from the GOP

He prays in vain: >The GOP's bait-and-switch tax strategy - Los Angeles Times: The rhetoric defies reality, when what the nation really needs is a permanent plan. It is an article of faith among Republicans that tax cuts are the cure for every problem the economy faces, and that tax increases are the equivalent of economic poison. Any hint by Democrats that the current administration's tax cuts should be revisited in light of changing economic or fiscal conditions is met with charges that they are proposing the largest tax increase in history. >The truth is that President Bush's tax cuts didn't do much good for the economy; they were mostly giveaways to GOP political constituencies and were little different conceptually from pork-barrel spending. Although there were some good elements to the tax cuts, such as the reduction in marginal tax rates, they were fatally undermined by their temporary nature. >The fact is that the massive tax increase Republicans claim the Democrats are proposing is entirely the result of the GOP's penny-wise and pound-foolish policies. Rather than expend the effort to make their tax cuts permanent in the first place, they attached expiration dates to every major provision. Most will expire automatically at the end of 2010. The alleged tax increase that would result is simply a consequence of the tax system returning to what it was before 2001, when the first tax cuts were implemented.... >Republicans respond that they had no choice; they didn't have the votes to enact permanent tax cuts, so it was temporary cuts or nothing. This is not true. They could have made them permanent, but that would have required bipartisanship and more political capital than Republicans were willing to spend. So they took the easy way out, figuring that Democrats wouldn't dare oppose extending the tax cuts when the time came, lest they be accused of favoring a vast tax increase.... >This sort of political game may be fun for Republicans who think that they have boxed Democrats into a corner. But this game has had real economic consequences. Because the tax cuts are not permanent, their economic impact has been severely diminished. All economists know that permanent tax changes have far more effect than temporary ones because people won't change their behavior significantly unless they have some assurance that the tax regime will be in effect for the long term...

Why Oh Why Can't We Have a Better Press Corps? (Don Gonyea of NPR Department)

Outsourced to James Fallows:

James Fallows: "Stupidest policy ever" contest update: Don Gonyea of NPR... traditional "one side claims, the other side responds" approach -- as if there were any identifiable economist or energy expert, from any political camp, who thought that the "tax holiday" proposal made sense. Maybe he missed the previous night's All Things Considered broadcast, which contained a very good segment about the pointlessness of the [gas tax holiday] plan? And he presented the whole issue as a matter of campaign tactics: the Hillary Clinton campaign had been hitting Obama hard with a crisp attack ad about his refusal to give American motorists "the help they need," while Obama had come back only with a woolier, more "complicated" reply about why the plan was mad. Yes, this episode shows us something about the two campaigns, but it's not mainly about their relative skill in attacking each other.

Reducing the Number of One-Person per Car Commutes

What is to be done with respect to mass transit:

Matthew Yglesias: Transit Up: Via Atrios, we learn that people are price sensitive:

With the price of gas approaching $4 a gallon, more commuters are abandoning their cars and taking the train or bus instead.

Mass transit systems around the country are seeing standing-room-only crowds on bus lines where seats were once easy to come by. Parking lots at many bus and light rail stations are suddenly overflowing, with commuters in some towns risking a ticket or tow by parking on nearby grassy areas and in vacant lots.

The question is: What happens next? What really shouldn't happen is for politicians to run around talking as if expensive gasoline is a temporary phenomenon. Responsible leaders will tell people that prices will fluctuate, but that as long as the Chinese and Indian economies keep growing, the general trajectory will be upward. Then they should sympathize with people who would like to take transit, but find it prohibitively inconvenient and with people who've just started taking transit and are finding it annoying and they should commit to making transit better and more available.

Alternatively, you could act like southern Florida and propose steep service reductions on your commuter rail system. But that'd be crazy. Jurisdictions with existing commuter rail lines need to make service more frequent. With transit, you can get into good equilibria and bad equilibria. On the good path, you have tons and tons of people who want to ride your line and as a result service is very frequent so as to accommodate all the traffic. And because service is so frequent, lots of people find the line convenient to use. On the bad path, infrequent service leads to low ridership which leads to infrequent service which leads to low ridership.

Why Aren't More People Going to College?

Altonji, Bharadwaj, and Lange do not know.

They say:

The anemic response of skill investment to skill premium growth | vox - Research-based policy analysis and commentary from leading economists: The earnings premium for skilled labour has increased dramatically in recent decades. Yet... Americans are not acquiring significantly greater skills in response to this change.... Since 1980, the demand for skilled labour has risen faster than the supply of skills, fuelling a steady increase in the earnings premia found for measures of skills such as schooling or cognitive test scores. The rapid rise in the skill premium represents a substantial increase in the economic incentive to acquire skills.... [B]etween 1980 and 2000 the internal rate of return for completing high school rather than dropping out after tenth grade has increased from approximately 40% to 55%.... How rapidly and how much young adults respond to this increase in the returns to skills and how this response varies across the population have important implications....

In Altonji, Bharadwaj, and Lange (2008), we... look at factors that influence skill acquisition, such as parental education and growing up in a two-parent family... make use of measures of the ease with which young adults transition from schooling into the labour market.... [O]verall the 1997 youth cohort is more skilled than the 1979 cohort... at the median... skill[s]... increased by about 6.5 percent. Is [that]... a behavioural response by youth to the widening skill premium?... [N]o.... [M]embers of the more recent cohort have significantly more educated parents than young people in 1979.... Holding parental education, race and gender, and family structure constant, the supply response to the increase in skill premia between cohorts was small: about 1% on average and about 1.5% at the median.... It seems that very large increases in skill premia are necessary to induce young workers to increase their investments in skills substantially.... This implies that, all else equal, the large degree of earnings inequality observed today is likely to persist far into the 21st century....

[T]he difference in the skills of the 1980 and 2004 youth cohorts is larger at the top of the skill distribution than at the bottom... due to the changing distribution of parental education.... [T]he changing distribution of skills in the population will exacerbate rather than counteract the trend towards increasing earnings disparities....

At this point we can only speculate as to why the response in skills to the increase in skill premia is so small... non-pecuniary costs of skill investments... liquidity constrained... myopic... other reasons... consistent with a number of studies (e.g. Kane (1994), Dynarski (2003)) that find that schooling decisions are quite sensitive to direct costs of schooling and tuition subsidies.... Cunha and Heckman (2007)... [perhaps] parental investment during early childhood shapes the potential to acquire additional skills later in life....

At this point, the question of why the supply response to the increase in the labour market returns to skill has been so small is an open one. In our opinion, it ranks among the most important empirical issues facing labour economists today.

This raises the possibility that the only easy way to reduce market inequality is to greatly increase the supply of the skilled and educated in the long run by making higher education free--which is a very dubious policy on the inequality front, because it starts with a honking huge transfer from the average taxpayer today to the relatively rich well-educated of tomorrow.

Malthusian Danger Cage Match Round II

Steve Bodzin joins the Malthus-McArdle team against Greg Clark and Brad DeLong:

Hoisted from Comments: Steve Bodzin: Howdy Brad,

It's not so simple, is it? Real estate and urban planning lock in high levels of energy consumption in the U.S. There is no easy way for the U.S. to approach a Danish level of consumption without, in Clark's word, "suffering." Some of this "suffering" -- fewer vehicle and air trips and a reduction in use of climate control -- would be very good for the environment and economy, but when choices become more constrained by a lack of resources, that is indeed suffering.

Except for the high-schoolers being forced to bike to school in Davis. That isn't suffering.

It is in June! And in August! Being forced to leave one's bathtub in Davis during the summer is suffering!

Alma Mater Blogging...

Greg Mankiw's desire to move Harvard to someplace better adapted to human life than Massachusetts was triggered by:

Greg Mankiw's Blog: Time for Harvard to Move?: The Wall Street Journal reports one of the most pernicious ideas I have heard of late: "Massachusetts legislators, demonstrating a growing resentment against the wealth of elite universities in tight economic times, are studying a plan to levy a 2.5% annual tax on the portion of college endowments that exceed $1 billion. The effort takes aim at one of the primary economic engines of the state, which is home to nine universities with endowments that surpass the $1 billion level, led by Harvard University's $35 billion cache, the nation's largest.... Supporters said the proposal would raise $1.4 billion a year. Based on the most recent size of Harvard's endowment, the university would have to shell out more than $840 million annually..."

There is an important underlying issue here with respect to America's private universities...

Let me put it this way: in 1960, the University of California--then overwhelmingly UCB and UCSF and UCLA--was about four times the size of Harvard, 5000 vs. 1200 undergraduates a year, with graduate students and faculty roughly in proportion. Clark Kerr, as president of the University of California in the 1960s, took a look at space constraints in Berkeley and Westwood, took a look at the rising population of California, took a look at increasing wealth, took a look at increasing educational attainment, took a look at the increasing attractiveness of American universities to people abroad, and conclude that the number of undergraduate students who could and would want to take full advantage of a UC education was going to grow eightfold over the next fifty years. So he decided to go all-out to clone UCB and UCLA.

And he did it.

Today we have UC Davis, UC Merced, UC Santa Barbara, UC Santa Cruz, UC Sunnydale, UC Irvine, UC Riverside, UC San Diego which together with UCB and UCLA graduate 40,000 undergraduates a year. Quality of education at UCB and UCLA has suffered a little bit as this cloning process has diverted resources away from us--but only by a very little bit. And the other UCs are damned good--with Davis and UCSD now being, I think, equal to the flagship campuses (although we don't admit it in bureaucratic system wars). And the Cal States do an impressive job as well. And the community colleges provide remarkable educational value for the money. The high administrators of the University of California starting with Clark Kerr have an extraordinary, remarkable accomplishment to look back upon. And they should be very proud--especially as they have accomplished it in the face of declining relative levels of support from the state legislature in Sacramento.

Harvard, over the same fifty-year time span... Harvard has gone from 1200 undergraduates a year to 1600, and has done so in spite of starting with a substantial endowment and receiving $15B of private charitable gifts. Harvard does a great many things well--and I am impressed by the fact that Larry Summers's presidency seems to have had the effect of creating a large brand-new science building on every block. But it is hard to think that the production function from resources to outcomes is an efficient one or something to be particularly proud of: I think presidents Pusey, Bok, Rudenstine, Summers, and Bok again were beaten by the system. At meetings of high academic administrators Berkeley Chancellor Robert Birgeneau and his ilk can hold their heads up high as proud successors to a highly capable group of administrators who made a lot of lemonade out of the lemons that they were handed, but I don't think Harvard president Faust can do the same.

Somebody last week--was it Jan de Vries? John Ellwood? Somebody else? I forget who, but it is not original to me--said that the right model for Harvard over the past century is Yugoslavia. Remember the story of the Yugoslavian socialist worker-managed firm? If you add another worker to the firm, that worker gets a pro-rata share of the firm's value added. The firm's value added has a component attributable to the firm's capital stock, a component attributable to the ideas embedded in the firm, a component attributable to the firm's market position, and a component attributable to the workers. Hire another worker, and only the last of these goes up: the first three do not, and so average compensation falls.

This means that a worker-managed firm is likely to shrink whenever it gets good news that makes it more productive--the larger is the value added due to ideas, capital, or market position, the more expensive does it become for the existing workers to replace workers who leave, let alone hire enough workers to expand. While a competitive market capitalist firm responds to good news about its productivity and value to society by increasing employment, a Yugoslavian-model market socialist firm responds to good news about its productivity and value to society by shrinking. On this analysis, the very success of Harvard over the past two generations together with its degree of worker management has created enormous internal pressures not to expand, the better to share out the surplus among the existing stakeholders.

If this story of Harvard-over-the-past-two-generations-as-the-socialist-Yugoslavia is correct, then a bunch of hard questions to which I do not know the answers are raised about:

• The judgment of those who have tried to satisfy their charitable impulses by giving $15B to my alma mater over the past two generations.
• The proper incentives that the government should try to present to the institution--and to those who might try to satisfy their charitable impulses in the future by adding to its endowment.
• The responsibility of alumni like myself to try to influence the future governance of the institution: corporation members like Bob Reischauer know what is going on at least as well as I do, but seem to have been unable to move the institution.
• The question of how Harvard should expand if indeed it should expand: it doesn't seem to be nearly as good as the small liberal arts colleges or even its rivals Yale and Princeton at undergraduate education (I did very well, but only because I quickly found two places--Social Studies in Hilles basement, and the graduate economics program--where Harvard was, effectively, a small college); the medical school and the biomedical complex that surrounds it appears to do very well indeed as research institutions; the public policy school seems to have been an experiment worth trying that did not fulfill Derek Bok's hopes, but that I cannot fully evaluate; few of the many people I know who went to the law school say many good words about it; et cetera.

Greg Mankiw Wants to Move Harvard

Greg Mankiw wants to move Harvard to someplace better adapted to human life than Massachusetts:

Here is what I would consider.... Harvard could create a second campus in another state. Call it Harvard South. (Put it in a better climate than Boston, and I would be one of the first faculty to volunteer for the move.) Transfer much of the endowment to Harvard South. Support Harvard North by slowly selling off land in Massachusetts. Eventually, make Harvard South the main campus, and Harvard North the satellite. If Massachusetts state lawmakers remain hostile, close Harvard North down entirely.... I have often wondered what the efficient scale of a university is and, in particular, whether it would be better to create a second Harvard with the university's wealth than to expand the first one. Maybe the Massachusetts state legislature will give the powers-that-be at Harvard an incentive to consider more radical expansion plans.

There may be a Pareto-improvement possible here. Extrapolating from how much it cost to get Tom Campbell here at Berkeley formally called the Bank of America Dean of the Haas School of Business, I am confident that it would cost relatively little--perhaps 5% of Harvard's current endowment--to get us to be willing to rename this campus the Harvard University of California at Berkeley. And while I haven't talked to department chair Hermalin or personnel chair Shannon about this, I do think their judgment would be that adverse selection problems are low enough and Harvard's standards in economics high enough that we would be willing to issue a blanket offer to its faculty (but this would not, I understand, be the case in some other fields, computer science and chemistry for example). For Greg I'd even be willing to give up my office, with its $10M view of the Golden Gate, San Francisco, and its bay from its perch 100 feet above Berkeley's faculty glade. (Although if he wants both the west and the south view, he would have to strike a deal with Maury Obstfeld.)

There is one important proviso. Harvard's administrators--everyone who works in Massachusetts Hall, University Hall, and whatever that atrocity on the south side of Harvard Square is called--would have to stay behind. Even if we had not been certain of this point before, this month's Harvard ad-hoc committee personnel decisions have fixed our resolve. I had always thought that "when they heard the news, they couldn't stop laughing" was hyperbole. But it took John Quigley five full minutes before he could say an intelligible word...

Linux: The Revenge of Ronald Coase

Tom Slee writes:

Whimsley: Linux Grows Up and Gets a Job: One of the highlights: "over 70% of all kernel development is demonstrably done by developers who are being paid for their work". 14% is contributed by developers who are known to be unpaid and independent, and 13% by people who may or may not be paid (unknown), so the amount done by paid workers may be as high as 85%. The Linux kernel, then, is largely the product of professionals, not volunteers.

So Linux has become an economic joint venture of a set of companies... participating for a diverse set of commercial reasons. Some want to make sure that Linux runs on their hardware. Others want to make sure that the basis of their distribution business is solid. And so on, and none of these companies could achieve their goals independently....

This does not mean that Linux was always a commercial venture, or that all open source projects are commercial ventures.... Open source started off as a small-scale set of projects done mainly by volunteers. As the scale and scope of open source projects an increasing number have provided their contributors with some money (augmented perhaps by a waitressing job). Now a few of the most successful have hit the big time and become full-scale economically important commercial enterprises.

Things change. As open source software has matured and expanded it has become both more unlike the rest of the world and more like it. It will be fascinating to see what comes next, but the Linux Foundation report has made clear that open source has crossed its commercial Rubicon, and there is probably no going back.

The Four Seasons vs the Bureaucrats of Mumbai

Joe Leahy writes:

FT.com / Asia-Pacific / India - Riches rise from Mumbai slum clearance: [T]his week, after years of navigating red tape, the 202-room Four Seasons Mumbai became the first luxury hotel of its size to launch in the city’s south in about 20 years.... “In hindsight, the choice of this location seems quite straightforward but at that time this wasn’t an obvious site for a hotel,” Adarsh Jatia, a director of the family company, Magus Estates and Hotels, says. Guests arriving at night at the Canadian chain’s first hotel in India will see slum-dwellers sleeping on one side of the road and on the other the glittering glass tower of Mumbai’s newest symbol of luxury.

In India’s financial capital, engine of the country’s rapid economic growth, such scenes are increasingly common as high-end developments sprout up among the sprawling huts.... The idea is to move slum-dwellers into apartment blocks occupying a corner of the area over which they sprawl and redevelop the remainder.... The Four Seasons slum-dwellers living on the site were compensated.... “You’re seeing Rolls-Royces on one side, luxury hotels on the other and slums in between – that’s why they call Mumbai the Maximum City,” Jason Stinson, marketing director at the hotel, says....

Archaic restrictions that have prohibited the construction of high-rise buildings and sky-high land prices have contributed to the shortage, Vincent Lottefier, chief executive of Jones Lang LaSalle Meghraj, says. Bureaucracy and a shortage of skilled workers make building hotels difficult – the opening of the Four Seasons was delayed by at least two years. The hotel needed 165 government permits – including a special licence for the vegetable weighing scale in the kitchen and one for each of the bathroom scales put in guest rooms. In the end, the hotel cost $100m (€64.5m, £51m), or about $500,000 per room, and prices – which start at $500 per night rising to more than $1,000 – reflect that.

But there is little social envy [expressed to Financial Times reporters]. Vishal Doshi, whose shop sells samosas in the slum, says the hotel brings prestige. “Everyone can now say: ‘I’m living near the Four Seasons’,” he says. He is under no illusions that he will be a guest there any time soon. “This side of the road is for servants, that side for bosses,” he says.

Megan McArdle and Thomas Malthus vs. Greg Clark

The cage match!

In this corner, Megan McArdle and Parson Malthus:

Megan McArdle: Economics of Contempt:

Call me crazy, but I think a permanent doubling of food and energy prices would slow our rate of economic growth pretty significantly. How long it would take incomes to recover "at current rates of economic growth" is irrelevant when the doubling of food and energy prices would lower the rate of economic growth.

Given that we and all our machines run on either food or energy, it's a pretty safe bet to say that doubling their prices would have a sizeable impact on growth.

In this corner, Greg Clark:

China, India and Malthus - Los Angeles Times: Thomas Malthus warned in 1798 that population pressures would forever keep food and energy scarce and incomes low. In the 200 years since, world population has grown sevenfold, to 6.7 billion. Yet food and energy have become cheaper and more abundant. Malthus's dystopia, it seemed, belonged in history's junkyard. But, suddenly, rapid growth in China and India and the consequent scramble for increasingly scarce resources has revived the Malthusian specter. By 2050, 9 billion people in a world where all have U.S. consumption standards would need eight times as much oil and five times as much food than the planet current uses. Is the future a world of $10-a-gallon gas and $20 Big Macs?

Two things allowed growth to occur from 1750 to 2000 with declining commodity prices. First, only a small fraction of the world grew rapidly.... The West was alone in its voracious appetite for raw materials and energy. Second, fossil fuels cheaply substituted for land in agriculture by increasing crop yields.... What will happen depends on the race between technological improvement and growing demand.... [N]o one can predict which force will win. A "full world"... may also be one of cheap and abundant commodities. But suppose the worse. Suppose [commodity] abundance is over. Must we fear that?

The answer is no. First, the share of modern U.S. consumption devoted to raw food and energy purchases is small: 1.4% for food raw materials, 7% for energy. The U.S. economy can withstand enormous increases in food and energy costs with little damage because food and energy are even now so extravagantly cheap that most of both are squandered in uses of little value. In my town -- Davis, Calif. -- there is a traffic jam outside the main high school each morning as healthy teenagers are ferried by car or drive themselves a few miles to school. They are ferried from houses that are heated, air-conditioned and lighted, most of which rarely gets used by people.

Currently in the U.S., we consume the energy equivalent of six gallons of gas per person per day.... Danes, for example -- whose public policy mandates expensive energy -- use the equivalent of only three gallons.... The Danes are not suffering.... Given that we can easily reduce consumption when costs go up, a permanent doubling of the prices of food and energy would reduce income by less than 6%. At current rates of economic growth, incomes would recover from such a shock in less than three years. After that, onward on our march to ever greater prosperity.

I call this one for Greg Clark. I am a utopian neoliberal optimist.

Paul Krugman Reads the New Yorker

Gurk!

Moming Zhou with the oil news:

Crude surges to above $120 for first time on supply concerns - MarketWatch: SAN FRANCISCO (MarketWatch) - Crude oil futures surged nearly $4 Monday to above $120 a barrel for the first time on concerns about supply disruptions in Nigeria and weakness in the U.S. dollar. Crude oil for June delivery soared $3.89 to an intraday high of $120.21 a barrel on the New York Mercantile Exchange in mid-morning trading, a new record high for a front-month contract. Nigeria's rebel group Movement for the Emancipation of the Niger Delta, or MEND, said Sunday it was responsible for an attack on a Shell oil flow station in the south of the country, according to media reports.

The Current State of Dodd-Franik

Jeanne Sahadi

Dodd-Frank: In a 266-154 vote... lawmakers approved... Frank... to let the Federal Housing Administration (FHA) insure up to $300 billion in new loans over four years if lenders agree to reduce the mortgage principal.

To qualify, the lender would have to cut the debt to no more than 85% of a home's current appraised value. If the FHA-refinanced loans went into default, the FHA would pay the lender the remaining principal owed.

While 1.4 million loans are likely to be eligible for such a program, the Congressional Budget Office estimates such a measure would end up insuring 500,000 borrowers. The CBO estimates the FHA expansion program would cost taxpayers $1.7 billion.

"This bill is very time limited and limited in specifics to a subset of mortgages and meant to mitigate a market failure," Frank said during the floor debate on Thursday.... [T]he program is limited to loans for owner-occupied residents... lenders and investors would be taking a loss on every loan... borrower[s] would be paying higher-than-usual premiums to the FHA... would share equity in their home with the government. "No borrower who goes through this process will say at the end of it, 'Boy, that was fun. Where do I buy a ticket to get back on Space Mountain?" Frank said.... If the bill is a bailout for anyone, they say, it's a bailout for communities across the country, which suffer when home values and property taxes go down because of foreclosures...

David Wessell on Dodd-Frank

David Wessel writes:

Capital - WSJ.com: The latest flash point in the debate over the nation's bursting housing bubble is this: Since so many American houses are worth less than their mortgages, should the government do more to get lenders to settle...?

Of the 80 million houses in the U.S., about 55 million have mortgages. Of those, four million are behind on payments. Foreclosure proceedings were begun on about 1.5 million homes last year, up more than 50% from 2006. This year will be worse. The Treasury, according to presentations its officials have made recently, predicts house prices could fall another 10% to 15% before touching bottom.

Moody's Economy.com estimates that one in roughly 12 American families with mortgages -- four million in all -- already... are... "underwater." The firm predicts that by early 2009 nearly one in four, or 12 million... underwater. Most will continue to pay mortgages on time. Many won't....

Lenders... prefer to avoid foreclosure if possible.... Better to cut a deal than end up with an empty, decaying house.... In ordinary times, a lender shouldn't need prodding from the government to do what's in its self-interest. But these aren't ordinary times. The drop in home prices is pervasive, mortgage markets messy and complexities caused by turning mortgages into securities many....

Mr. Frank would offer lenders and eligible borrowers a deal: If the lender agrees to cut the debt so the homeowner owes no more than 90% of the house's current value, and the Federal Housing Administration (or an outfit to whom it outsources this) determines the homeowner can afford a new loan, then the lender gets rid of the mortgage and the FHA insures a new mortgage for the remaining balance.

The lender takes a hit, but gets rid of the risk.... [T]he lender has to chip in another 5% of the property's current value. The homeowner has to surrender some profits, if any... when the house is sold.

The White House condemns this.... [T]he Treasury argued in a recent PowerPoint presentation: "Homeowners who can afford their mortgage but walk away because they are underwater are merely speculators." (It's a bit jarring to hear the Treasury vilifying people who are acting in their economic self-interest.)...

Despite the restrictions, the plan could allow some homeowners to get a deal they don't deserve; that's the unfortunate byproduct of any rescue. But the Treasury and Fed surrendered the let-the-market-work-it-out high ground when they agreed to risk nearly $30 billion of taxpayer money to shield Bear Stearns, its creditors and counterparties from losses....

[T]he Congressional Budget Office... predict[s] only 500,000 mortgages would be refinanced.... So, perhaps it's best considered a prudent experiment for coping with a bad situation that might get worse: Create a mechanism now so the bugs are worked out, in case home prices plunge more than anticipated...

Menzie Chinn Watches the Turnaround of the U.S. Current Account

The U.S. current account turns around:

How far does it have to turn around? One unresolved issue is how much of the oil trade deficit will ever have to be repaid--if oil wealth is going to be invested in the U.S. in dollars in order to give princelings and dictators a political-risk insurance policy, the oil part never has to be "paid back" in a foreign-exchange sense. If foreign oil wealth is going to be used to buy imports of capital goods and raw materials from the U.S., to fuel industrialization, the answer is quite different...

Gas Prices Matter!

Supply and demand at work:

From the Federal Highway Association: http://www.fhwa.dot.gov/ohim/tvtw/08jantvt/08jantvt.pdf

The Fed Thinks About Paying Interest on Banks' Required Reserve Deposits

Steve Randy Waldmann writes:

Interfluidity :: Stock of Treasury securities at the Fed: As of April 30, the Fed's uncommitted stock of Treasuries was $382B, just under half of its December 5 stock. The Fed recently announced a $50B expansion of the TAF program, and a widening of acceptable collateral for its TSLF program. Assuming the Fed sterilizes the extra TAF funding (very likely) and that the $200B pledged to TSLF is now fully exploited (likely), the Fed's stock of uncommitted Treasuries will soon be $275.5B. Just over 64% of the Fed's stock of Treasury's will have been exhausted since the Fed began its unconventional lending programs in December.

The Fed wants to swap out Treasuries for other securities in order to reduce the risk premium--to raise the (temporary) market supply of Treasuries and reduce the supply of other securities until the crisis passes and MBSs and other securities recover their value. (If they never recover their value, then we have much bigger things to worry about.)

The Fed may also want to raise the general level of interest rates in order to fight inflation--which requires that it sell its Treasuries for safe bank reserves rather than temporarily swap them for risky MBSs.

The Fed is clearly thinking that it may run out of Treasuries with which it can accomplish these two missions. Hence it is coming up with an alternative way to raise the general level of interest rates--that is, paying interest on banks' required reserve deposits at the Fed.

Martin Feldstein Calls for Large-Scale Public Intervention in the Housing Market...

He writes:

FT.com / Comment & analysis / Comment - Misleading growth statistics give false comfort: Macroeconomic Advisers... [estimates monthly GDP] using the same conceptual approach as the government uses for its quarterly estimates.... Its most recent estimates... show that real GDP rose from an annual $11,649bn [real 2000 dollars] last October to $11,701bn in December and $11,777bn in January but fell to $11,686bn in March, a decline of about $100bn in two months.... The misstatement that the economy expanded in the first quarter creates an inappropriately sanguine view of the months ahead....

Although the tax rebates now under way may provide some temporary help, the combination of falling real incomes, declining household wealth and a dramatic drop in consumer confidence suggests further falls in consumer spending and GDP. But the most serious risk is that the rapid fall in house prices – down more than 12 per cent in the past year and falling at a 25 per cent rate in the past three months – will raise the number of negative-equity mortgages, leading to widespread defaults and foreclosures.

Because US mortgages are “no-recourse”... individuals with negative equity have an incentive to default. There are now an estimated 8m negative-equity mortgages – more than 15 per cent of all outstanding mortgages.... A downward spiral in house prices would cause a fall in household wealth and in the capital of financial institutions, potentially resulting in a deeper and longer recession than any seen in the past several decades.

Now is the time for policy action to forestall such a house price collapse. There is nothing more the Federal Reserve can do by lowering short-term interest rates or by creating new credit facilities.... What is missing is action to prevent positive-equity mortgages from becoming negative-equity mortgages. The federal government could achieve that by providing low-interest loans with full recourse that would allow any homeowner to pay down a significant fraction of his mortgage. Homeowners would be in effect giving up the potential to default on their mortgage loans in exchange for lower interest costs...

Different from the more typical proposal these days of having the Federal government guarantee private mortgages (in exchange for warrants on the upside), but different in ways that I suspect are minor...

David Leonhardt on the "True" Inflation Rate

I'm not sure that it is (now) overstated by much, but I think he's right in his claim that inflation is not understated--at least not if you have tastes for high-tech toys:

Seeing Inflation Only in the Prices That Go Up: Next week, the Bureau of Labor Statistics will release its monthly report on inflation... that the Consumer Price Index rose just three-tenths of a percentage point in April. Over the last year, the index has risen only about 4 percent.

I’m guessing that doesn’t square with your sense of reality.

In my household, we just broke the $60 barrier for filling up our gas tank... the price of bananas is up almost 20 percent... eggs are up 35 percent. Costco and Sam’s Club recently began rationing rice... big-ticket items that have been getting more expensive for years — like health care and college — just keep on getting more so.

This contrast between the official government statistics and day-to-day reality has led to a boomlet in skepticism.... [W]hat’s going on here?

To answer that question, it helps to go back.... In 2003, a pound of hamburger cost all of $2.20. More than two decades earlier, in 1980, it cost $1.86, which means that the nominal price of burger meat rose only 18 percent over a period in which the nominal hourly pay of the typical American worker rose 150 percent. Similar stories can be told about eggs, bananas, bread and frozen orange juice. Food was getting cheaper.... During the 1980s and 1990s, though, did you ever stop and marvel at what a small share of your paycheck you were spending at the supermarket? I didn’t. I also didn’t really notice that gas cost less in the late 1990s than it had in the 1980s.... Price increases are simply more noticeable — more salient, as psychologists would say — than price decreases....

The price of major appliances has been flat over the last year. Furniture is 1 percent less expensive. A decade ago, a basic four-door Toyota Corolla LE cost $16,018, according to the company. The 2009 basic model costs $16,650, and it’s a safer, more powerful, more fuel-efficient car than its predecessor....

The conspiracy theories about inflation play off these human instincts, but they also depend on two other oddities. The first is the amount of attention given to the so-called core inflation rate. This is a version of inflation that excludes food and energy, which makes it a little like a grade point average that excludes math and French.

The core inflation rate does have a purpose... [to] help Federal Reserve officials base interest rates on underlying price trends, instead of being overly influenced by food or gas prices, both of which can be volatile....

The final piece of the puzzle... is the way that the Bureau of Labor Statistics has changed the price index recently.... [E]conomists who have studied the changes say they have had only a modest effect on the inflation rate, lowering it by perhaps a half point a year. More to the point, the changes seem to have made the index more accurate than it used to be. “It’s about as accurate as anybody is going to get it,” Mr. Cecchetti said...

Hillary Rodham Clinton and John McCain vs the Economists

Felix Salmon writes:

Clinton vs the Economists: [D]oes it matter if politicians ignore economists? Thoma and Mankiw say yes, if they're willing to ignore the experts on one of the few areas where the experts agree with each other, then you can't trust that they will ever make good use of advice. Krugman and Cowen say no, there are bigger fish to fry, and economists tend to overrate their own importance.

For me, personally, this gas-tax episode has changed my opinion of Hillary Clinton quite dramatically. Yes, I've been an Obama supporter for a while, but I've been less opposed to Clinton than most Obama supporters, until now. But the gas-tax proposal reminded me of the way that she described the proposed Dubai Ports deal as a threat to national security, and I realized that I just couldn't trust her assertions. I'm pretty sure she's smart enough to know that she's pandering - what Mankiw calls "mendacity with a dash of condescension". Which means that Clinton considers working-class votes to be more important than working-class voters. And that's not a claim I'd make about either of the other two candidates.

And Greg Mankiw writes:

Greg Mankiw's Blog: In Praise of Gas Tax Hysterics: Paul Krugman thinks all of the fuss about the gas tax holiday has become a bit hysterical. He agrees that the policy is a bad idea, but it is no big deal, so let's not focus on it. Paul is right that the issue is, quantitatively, small potatoes, but I am nonetheless pleased to see it get so much attention. This issue is like the canary in the coal mine: No one really cares about the canary, but its condition tells us about deeper problems that lie below.

Many economic issues (e.g., health care, corporate taxation, the trade deficit) are vastly complicated, with experts holding a variety of opinions. When candidates disagree, it simply means that each is siding with a different set of experts, and it is hard for laymen to figure out which set of experts is right. By contrast, the gas tax holiday is not nearly as complicated, and the experts speak with one voice.

Why, then, are candidates proposing the holiday? I can think of three hypotheses:

• Ignorance: They don't know that the consensus of experts is opposed.
• Hubris: They know the experts are opposed, but they think they know better.
• Mendacity with a dash of condescension:* They know the experts are opposed, and they secretly agree, but they think they can win some votes by pulling the wool over the eyes of an ill-informed electorate.

So which of these three hypotheses is right? I don't know, but whichever it is, it says a lot about the character of the candidates.

It is very clear on both McCain's and Rodham Clinton's part that it is not ignorance It my be to some degree hubris on McCain's part--but I doubt it. It is overwhelmingy on Rodham Clinton's part and predominantly on McCain's part the third option: mendacity with a dash of condescension.

And Greg is right: it says a lot of bad things about th character of John McCain and Hillary Rodham Clinton that they would do this.

James Poulos Fears the Black Helicopters

He does not want to see Fareed Zakaria ascend to the Secretary-Generalship:

James Poulos » Deconstructing Globalization: The United States has already succeeded in globalizing the world — by globalizing American culture. What Zakaria wants, I think, is for the United States to succeed at the new task of globalizing itself.... Not a single proponent of globalizing America is against maximizing migrant labor among the lower classes and maximizing math and science among the upper classes. My distaste for migrant labor and the hegemony of engineers, each taken separately, is already almost incalculable because of my judgments about what ruins a healthy republic. Taken together, these two great prescriptions for globalizing America fill me with something I must quickly laugh off as paranoid rage.

Everywhere I turn some bold-faced name is guzzling this kool-aid.... I’m content for America to continue in its capacity as globalizer. I’m much less sanguine about America becoming a globalizee. This isn’t just because I’m a nationalist; it’s because I’m convinced that the United States has, and depends upon, a globally unique system of government which is itself dependent upon America’s unique geopolitical, cultural, and religious heritage. The maintenance of that heritage demands a conscious effort not to regularize the American workforce into a system of migrant drones at the bottom and civil engineers at the top....

Probably the most grievous error of the pro-globalization crowd is its intransigent comprehensiveness fetish: globalizing America hasn’t meant making foreign countries ‘more like the US’ in some kind of holistic, across-the-board fashion; it’s meant exporting the things about America that work, that can travel, that are fungible and useful and beneficial in different cultural contexts. (Yes, this is an incomplete and too-happy picture of what’s happened. But I’m identifying the good so I can contrast it better with the bad.) Globalization, in its natural, uncontrolled diversity, will be and should be an irregular process in which countries pragmatically adopt and appropriate a la carte things from elsewhere that work for them...

On David Brin's "The Transparent Society"

Michael Froomkin writes:

Discourse.net: CFP '08 Accepts Our Panel on 'The Transparent Society': I’m delighted to report that my proposal for a panel on “‘The Transparent Society’ — Ten Years Later” has been accepted for CFP’08, thanks no doubt to the sterling panelists I was able to assemble. Our panel is now scheduled to take place on Thursday, May 22, 2008 at 3:30-5:00(PM) in the George room at the Omni Hotel in New Haven.

Computers, Freedom and Privacy is the most fun conference I go to; the program can be variable, I admit, but the hallway conversations are always fantastic. Come - it’s fun.

Here’s the panel description:

This year marks the 10th anniversary of the publication of David Brin’s controversial book, “The Transparent Society”. The book argues that in the face of the explosion of sensors, cheap storage, and cheap data processing we should adopt strategies of vision over concealment. A world in which not just transactional information, but essentially all information about us will be collected, stored, and sorted is, Brin says, inevitable. The only issue left to be decided is who will have access to this information; he argues that freedom, and even some privacy, are more likely to flourish if everybody - not just elites - has access to this flood of data.

Brin proposes a stark choice: either the information will be “secret” and “private”—in which case only governments, always potentially repressive, will have access. Or, the information will be “open” and “public” and we will all be transparent to each other. Given this choice, Brin argues, better to be naked to each other than to empower a few with unique access to information about the many. The attempt to protect privacy as we know it carries too great a risk, as it leads if not inevitably than at least all too easily to a world of enormous information-driven tyranny in which the powers — primarily governments — with access to our ‘private’ information will abuse it. In contrast, a high-transparency world with very little privacy is one in which citizens have tools that allow them to monitor their governments.

Brin proposed a paradox which infuriated a good segment of the privacy community. It is normally an article of faith for privacy advocates that privacy empowers, and the removal of privacy is at least disempowering and at worst oppressive. Brin counters that privacy advocates have it exactly backwards: trying to maintain traditional ideas of information privacy in the face of technological changes he sees as (now) inevitable is what will disempower and perhaps oppress; only a program of radical information openness, nakedness even, stands a chance of leveling a playing field on which information is truly power.

The reception of “The Transparent Society” reflected the audacity of its claims. Some dismissed it; some attacked it; a few embraced it. What is striking, however, is that the ideas have had staying power: the book remains in print, it is regularly footnoted, and it comes up in discussion. Right or wrong, “The Transparent Society” has become more than a polar case trotted out as a good or bad example, but an as-yet unproved but also un-falsified challenge to how we think about privacy — one that demands continuing reflection (or, some would say, refutation).

The tenth anniversary of publication is an appropriate time to do that reflection at CFP.

About the presenters:

David Brin (remote participation): David Brin is the author of “The Transparent Society,” the inspiration for this panel. He is a noted futurist and science fiction wr