Brad DeLong

Fire David Brooks. Fire David Brooks Today (Why Oh Why Can't We Have a Better Press Corps?)

The New York Times wouldn't hire an op-ed writer who was this illiterate. Why does it employ David Brooks, who appears to be innumerate?

Jared Bernstein reports. You decide:

MaxSpeak, You Listen!: DAVID BROOKS RUINED MY SUBWAY RIDE
By Jared Bernstein: His oped in the NYT this A.M. ($$) is way too dismissive of a number of factors that inequality analysts widely agree play a role in the long-term problem of unequal economic outcomes.

As is too often the case, journalists who can't find a factor that explains 51% of the phenomenon in question dismiss everything. Brooks argues that declining unionization is not a "driving force" because it only explains 10-20 percent of the rise in inequality. But that's as big as any other force that economists have measured. Roughly speaking, the decline in the real value of the minimum wage explains about that much (more for female wage inequality). And globalization is generally cited as accounting for around this share of the increase as well....

Does Brooks or anyone else seriously believe that the increase in trade, investment flows and multinational corporate activity has had no impact on inequality? Does he believe that large and sustained trade deficits have nothing to do with the loss of manufacturing jobs and the fall in the relative wages of non-college educated workers?

At this point, I'm not aware of any serious analysis of inequality that is anywhere near this dismissive of these impacts. Granted, they are discussed in terms of transitional costs, but they are widely recognized as part of the problem. Fed Chairman Bernanke, for example, worries about these issues.

Offshoring in Brooks's piece is another mythic force.... But... Brooks ought to be aware that the literature on the impact of offshoring has appropriately shifted its focus from job loss to wage loss. You don't have to lose your job to be affected by competition from the fact of millions of skilled workers coming online in the global economy. Alan Blinder famously makes this case in a recent Foreign Affairs piece ($$).

Next, Brooks claims that workers are just as secure as they were in decades past and that social mobility is unchanged. But even he would agree that there's more inequality now than there used to be, and unless mobility has increased, we are much further from each other across the economic spectrum, and no more likely to span the increased distances. We need more social mobility to offset rising inequality, and we haven't gotten it....

Brooks is also in denial about "factor shares." Again, no serious analyst questions whether profit rates or shares are uncharacteristically high right now though again, many argue this is soon to be corrected. Brooks notes that the compensation share of GDP is relatively unchanged (the wage share of national income is near historic lows), but this includes CEO pay, bonuses, stock options, and so on. Again, inequality analysts recognize that big, inequality-inducing shifts have occurred within the compensation share of national income.

Finally, those who want to dismiss the impact of everything except skills have to explain what happened in the 1990s. Measures of inequality--especially those that emphasize the gap between the middle and bottom--compressed over those years. The 20th percentile real wage rose in step with productivity, and poverty fell sharply, especially among the least advantaged. That hadn't happened since the latter 1970s and it hasn't happened since. Did skills temporarily rain down on people's heads, 1995-2000, and then disappear?

Obviously, other forces are at play.... To dismiss everything except skills is to misdiagnose the problem, inevitably leading to insufficient solutions.

If the New York Times editorial page operation wants to survive, it needs to establish one benchmark principle: people aren't allowed to write about things they don't understand.

Commitments: Wednesday Oct 18: Macro/Growth/International Reading Group

Commitments: Wednesday Oct 18: Macro/Growth/International Reading Group: I'm now signed up to present, in Evans 597 at noon:

Esther Duflo, Abhijit V. Banerjee and Kaivan Munshi (2002), "The (Mis)allocation of Capital".

Alan Krueger Channels Ori Heffetz...

Ori Heffetz's work has some empirical implications for the spite-vs-envy question:

Untitled Document: Doctoral Thesis Says Rich People Spend More on Conspicuous Things: By ALAN B. KRUEGER: Published: January 6, 2005: LONG before Thorstein Veblen coined the term ''conspicuous consumption,'' economists from Adam Smith to Karl Marx had argued that people choose to buy some goods because of what those goods reveal about their standing in society, not because of any intrinsic enjoyment they get from the purchase.

Yet conspicuous consumption remained mainly a theoretical curiosity.... Now Ori Heffetz, a doctoral student in economics at Princeton University, has developed the first broad-gauged index of product visibility. Sure enough, he finds in his thesis that conspicuous items make up a greater share of the consumption budget in wealthier families.

The idea of conspicuous consumption is intuitive. A Timex watch, for example, tells time about as well as a Rolex, but the particular watch you wear tells a lot about your purchasing power and personality. A major motivation for buying an extravagant watch is to signal to others that the consumer has ''made it,'' a point not lost on advertisers. In Veblen's view, the wealthy engage in conspicuous consumption to advertise their wealth.... Because conspicuous consumption makes others feel less successful, some economists have argued that society would be better off if a high tax rate were applied to goods that are the object of conspicuous consumption.

It is unclear, however, whether conspicuous consumption is a motivation underlying the purchase of many products or just a few. Furthermore, products that are conspicuous may nonetheless be consumed for their intrinsic value.... To determine whether conspicuous consumption is a rarity deserving little attention or central to understanding what people buy, it is necessary to have a measure of the extent to which a good is conspicuous.

Mr. Heffetz measured the visibility of various products by conducting a telephone survey.... The index of visibility, or ''vindex,'' is the average score for how long it would take to notice that the consumer spent more than average on a product. The logic is simple: visibility is a cultural as well as a physical property. If neighbors talk about their expenditures on some goods, then they are more conspicuous than otherwise. The more conspicuous a product, the sooner it is noticed.

The visibility ranking that resulted from the survey is quite sensible. Cigarettes, clothing, cars and jewelry are the most visible products, while underwear, home insurance, life insurance and car insurance are the least. An implication of the theory of conspicuous consumption is that families spend relatively more on conspicuous goods as their incomes rise....

Mr. Heffetz estimated the relationship between the amount spent on each of 29 products and a household's income... the higher the visibility of a good, the more likely it is to be a luxury item....

The relationship is far from perfect, however. Cigarette consumption is greater among lower-income households than among higher-income ones, yet cigarettes are the most noticeable product of all... visibility accounts for 12 percent of the way in which income relates to consumption across products. Interestingly, the effect of visibility on consumption applies only to the richest half of families, for whom the visibility index accounts for 20 percent of the way additional income is spent on various products...

Why Oh Why Can't We Have a Better Press Corps?

Mickey Kaus looks at this table:

Table 22. Number and Percent of People Below
50 Percent of Poverty Level: 1975 to 2005

 _____________________________________
 Year         Total    Number  Percent
 _____________________________________
 2005......  293,135   15,928      5.4
 2004 14/..  290,617   15,693      5.4
 2003......  287,699   15,264      5.3
 2002......  285,317   14,068      4.9
 2001......  281,475   13,440      4.8
 2000 12/..  278,944   12,592      4.5
 1999 11/..  276,208   12,887      4.7
 1998......  271,059   13,914      5.1
 1997......  268,480   14,594      5.4
 1996......  266,218   14,412      5.4
 1995......  263,733   13,892      5.3
 1994......  261,616   15,404      5.9
 1993 10/..  259,278   15,971      6.2
 1992 9/...  256,549   15,547      6.1
 1991 8/...  251,192   14,059      5.6
 1990......  248,644   12,914      5.2
 1989......  245,992   11,983      4.9
 1988......  243,530   12,676      5.2
 1987 7/...  240,982   12,469      5.2
 1986......  238,554   12,677      5.3
 1985......  236,594   12,380      5.2
 1984......  233,816   12,770      5.5
 1983 6/...  231,700   13,590      5.9
 1982......  229,412   12,806      5.6
 1981 5/...  227,157   11,189      4.9
 1980......  225,027    9,804      4.4
 1979 4/...  222,903    8,553      3.8
 1978......  215,656    7,708      3.6
 1977......  213,867    7,474      3.5
 1976......  212,303    7,016      3.3
 1975......  210,864    7,733      3.7

and catches Eric Alterman in a mistake:

Maybe Cocooning Is Easy!: Eric Alterman, in a post titled "Extreme Poverty is US," writes (quoting today's NYT poverty numbers story):

Again, moreover, "although the numbers living below the poverty line held steady between 2004 and 2005, there has been a sharp increase in those living in extreme poverty."

That's funny, because if you look at the Census numbers, they show... a jump of... well, zero from 2004 [in extreme poverty].... I contend that "zero" is not a "sharp increase."... Alterman... [is] quoting... NYT reporter Rick Lyman paraphrasing "advocates for the poor"--specifically Robert Greenstein, whose influential outfit (Center on Budget and Policy Priorities) specializes in devising esoteric measurements to suggest that good poverty news is really bad poverty news...

But what is the "good poverty news" in the Census Bureau's report? What is the "good poverty news" in this table?

Is it that there are more people in extreme poverty than in any year since 1993? Is it that the proportion of Americans in extreme poverty is greater than in any year since 1997? Is it that the extreme poverty rate is 0.9%--2,336,000 people--higher than in 2000, at the last business cycle peak?

Is it that the overall poverty rate stands at 12.6%, 0.1% less than last year? Is it that the overall numbers in poverty stand at 36,950,000, 50,000 less than last year? Is it that 5,369,000 more people were poor last year than at the last business cycle peak, in 2000? Is it that the poverty rate is higher than in any year from 1999 to 2003 or from 1969 to 1979? Is it that the number of people in poverty this year and last year is greater than in any year since 1994?

If you parse Kaus closely, he doesn't actually say that there is "good poverty news." He talks about how Bob Greenstein "specializes in... suggest[ing] that good poverty news is really bad poverty news" and about how Eric "Alterman [got] his bogus spin." He wants his readers to think that there is a whole bunch of good poverty news that is being spun as bad, but he doesn't actually say so.

This is, I think, a reason why the only people who should read this stuff are trained professionals who already know the issues very well (and hence learn nothing at all from Kaus and his ilk). They won't lie to you--quite. They will do their best to leave you with a misleading impression--in this case, that the Census Bureau's poverty report was good poverty news that is being spun as bad. And it will probably work--unless you're a trained professional.

---

Here's what Lyman reports from Bob Greenstein:

Census Reports Slight Increase in %u201905 Incomes - New York Times: advocates for the poor pointed out that, although the numbers living below the poverty line held steady between 2004 and 2005, there has been a sharp increase in those living in extreme poverty. The average person living in poverty actually earned $3,236 less than the poverty line -- $19,971 for a household of four -- in 2005, the highest such gap ever measured by the Census Bureau, said Robert Greenstein, executive director of the Center on Budget and Policy Priorities, a liberal research group. And 43 percent of the poor earned less than half of the poverty limit, Mr. Greenstein said, again the highest such percentage ever recorded.

"This is further evidence that the nation's economic recovery has had very limited reach, with many low- and medium-income families not sharing in the game," he said...

Department of "Huh?"

Greg Mankiw appears to miss the point. He writes:

Greg Mankiw's Blog: News for Emily Litella: All of us who work with macroeconomic data have learned, sometimes the hard way, that conclusions based on preliminary data are subject to change. Here is a good example. The NY Times two days ago in a front-page, above-the-fold article: "wages and salaries now make up the lowest share of the nation's gross domestic product since the government began recording the data in 1947." The NY Times online today, presumably to be reported in tomorrow's paper (on what page? [update: page C1]).... As a result, wages and salaries no longer make up their smallest share of the gross domestic product since World War II.... As Emily Litella would say, "Never mind."

By continuity, the fact that wages and salaries are almost at their lowest share of income in the government's memory is almost as interesting and alarming as the fact that wages and salaries are at their lowest share of income in the government's memory. It is simply not true that it's interesting if wages and salaries are at their lowest share and not interesting if wages and salaries are almost at their lowest share.

UPDATE: And Jason Furman writes to Greg Mankiw:

Update: My friend Jason Furman emails me his observations on the matter:

Greg,Measured properly wages and salaries in the first half of 2006 were the lowest as a share of economy since WW II.The proper denominator for factor shares is gross domestic income (GDI) or national income. Using either denominator, wages and salaries are the lowest since World War II. CEA's Economic Report of the President always shows incomes as a fraction of GDI as does NIPA Table 1.11.

You are correct that as a share of gross domestic product (GDP) wages and salaries are no longer the lowest since WW II. But this is an apples-to-oranges comparison -- which is why neither the very careful CEA nor the very careful BEA would do it. (It is, alas, a common practice to use GDP in the denominator -- one that many excellent economists and reporters, including the New York Times -- follow.)

Specifically, the statistical discrepancy between GDP and GDI shows up in the denominator but not in the numerator. In 2006-Q2, GDP was $76 billion lower than GDI. If you're using GDP in the denominator, then this $76 billion should be subtracted from some combination of wages, profits, rents, etc. Conversely, in 2005 GDP was $71 billion higher than GDI. As a result, to use GDP in the denominator you should also add this $71 billion to incomes.

Since we don't know how the statistical discrepancy breaks out between different factor incomes (that's why it's a "statistical discrepancy") we use GDI in the denominator. Or to avoid screwy results from depreciation, I generally prefer to use national income. Either way, the Times headline holds up.

Best, Jason

P.S. I should say I'm not that interested in wage shares, compensation shares are the relevant metric for most important questions. And the upward revision in wages certainly is a good sign and helps make sense of the revenue surprises we experienced this year -- and might suggest they'll be somewhat more durable than the potentially more ephemeral capital gains and corporate profits. But since you were being picky, I thought you might as well help your Ec 10 students to learn some national accounting arcana.

I would dispute Jason's belief that compensation shares are the relevant metric for most important questions. Compensation shares are the relevant metric for some important questions. But in my view, the ratio of median compensation or the geometric mean of compensation to labor productivity is the metric for most important questions.

Lyndon Johnson, Yes. William Jennings Bryan, No.

Paul Krugman:

The Big Disconnect - New York Times: There are still some pundits out there lecturing people about how great the economy is. But most analysts seem to finally realize that Americans have good reasons to be unhappy with the state of the economy: although G.D.P. growth has been pretty good for the last few years, most workers have seen their wages lag behind inflation and their benefits deteriorate.... [T]he disconnect didn't begin with Mr. Bush, and it won't end with him, unless we have a major change in policies.... The real wage of nonsupervisory workers reached a peak in the early 1970's, at the end of the postwar boom. Since then workers have sometimes gained ground, sometimes lost it, but they have never earned as much per hour as they did in 1973. Meanwhile, the decline of employer benefits began in the Reagan years.... The most crucial benefit, employment-based health insurance, has been in rapid decline since 2000.

Ordinary American workers seem to understand the long-term disconnect between economic growth and their own fortunes better than most political analysts.... The [Pew] center finds that workers perceive a long-term downward trend in their economic status. A majority say that it's harder to earn a decent living than it was 20 or 30 years ago, and a plurality say that job benefits are worse too....

Workers' concern about worsening benefits is new... the health care crisis is back, both because medical costs are rising rapidly and because we're living in an increasingly Wal-Martized economy, in which even big, highly profitable employers offer minimal benefits. Employment-based insurance began a steep decline with the 2001 recession, and the decline has continued in spite of economic recovery....

Why have workers done so badly in a rich nation that keeps getting richer? That's a matter of dispute, although I believe there's a large political component: what we see today is the result of a quarter-century of policies that have systematically reduced workers' bargaining power. The important question now, however, is whether we're finally going to try to do something about the big disconnect. Wages may be difficult to raise, but we won't know until we try. And as for declining benefits -- well, every other advanced country manages to provide everyone with health insurance, while spending less on health care than we do.

The big disconnect, in other words, provides as good an argument as you could possibly want for a smart, bold populism. All we need now are some smart, bold populist politicians.

I'm enough of a believer in CPI bias to want to say "real compensation for male nonsupervisory workers has stagnated since 1973"--I think it has grown, but only very slowly, and much less rapidly than productivity.

On the other hand, I'm enough of a touchy-feey sociology-lover to believe that a good chunk of the utility the rich derive from their conspicuous consumption is transferred to them from the poor: the happiness America's working poor and middle class derive from the compensation distribution--given their compensation, the compensation of the rich, and the lifestyles of the rich and famous--seems to me to be certainly less than that of their counterparts back in 1973.

The easiest and most important thing the government can do to neutralize the adverse consequences of rising inequality is to make the tax system more progressive, not less. A reality-based government would react to growing pretax inequality by taxing the rich more, and subsidizing the poor more (through policies like the EITC) as well.

But when I read Paul's call for "smart, bold populism," I am reminded of earlier calls a couple of decades ago by Milton Friedman, Marty Feldstein, and their ilk for smart, bold conservatism or smart, bold libertarianism. But they did not get what they ordered: on the economic policy front the policies of Reagan and of Bush II have been a horrible botch. What populist policies that we can think of would be smart? And how can we make our high politicians allergic to populist policies that are stupid?

Lyndon Johnson, yes. William Jennings Bryan, no.

Greenhouse and Leonhardt on Real Wages and Productivity

The thoughtful and reliable Steven Greenhouse and David Leonhardt:

Real Wages Fail to Match a Rise in Productivity - New York Times: With the economy beginning to slow, the current expansion has a chance to become the first sustained period of economic growth since World War II that fails to offer a prolonged increase in real wages for most workers.... The median hourly wage for American workers has declined 2 percent since 2003, after factoring in inflation. The drop has been especially notable, economists say, because productivity -- the amount that an average worker produces in an hour and the basic wellspring of a nation's living standards -- has risen steadily over the same period.

As a result, wages and salaries now make up the lowest share of the nation's gross domestic product since the government began recording the data in 1947, while corporate profits have climbed to their highest share since the 1960's.... Until the last year, stagnating wages were somewhat offset by the rising value of benefits, especially health insurance, which caused overall compensation for most Americans to continue increasing. Since last summer, however, the value of workers' benefits has also failed to keep pace with inflation....

"Some people who aren't partisans say, 'Yes, the economy's pretty good, so why are people so agitated and anxious?'" said Frank Luntz, a Republican campaign consultant. "The answer is they don't feel it in their weekly paychecks."...

Economists offer various reasons for the stagnation of wages. Although the economy continues to add jobs, global trade, immigration, layoffs and technology -- as well as the insecurity caused by them -- appear to have eroded workers%u2019 bargaining power. Trade unions are much weaker than they once were, while the buying power of the minimum wage is at a 50-year low. And health care is far more expensive than it was a decade ago, causing companies to spend more on benefits at the expense of wages.

Together, these forces have caused a growing share of the economy to go to companies instead of workers' paychecks. In the first quarter of 2006, wages and salaries represented 45 percent of gross domestic product, down from almost 50 percent in the first quarter of 2001 and a record 53.6 percent in the first quarter of 1970, according to the Commerce Department. Each percentage point now equals about $132 billion.

Total employee compensation -- wages plus benefits -- has fared a little better. Its share was briefly lower than its current level of 56.1 percent in the mid-1990%u2019s and otherwise has not been so low since 1966....

For most of the last century, wages and productivity... have risen together.... But in recent years, the productivity gains have continued while the pay increases have not kept up. Worker productivity rose 16.6 percent from 2000 to 2005, while total compensation for the median worker rose 7.2 percent, according to Labor Department statistics analyzed by the Economic Policy Institute, a liberal research group. Benefits accounted for most of the increase.

"If I had to sum it up," said Jared Bernstein, a senior economist at the institute, "it comes down to bargaining power and the lack of ability of many in the work force to claim their fair share of growth."...

Average family income, adjusted for inflation, has continued to advance at a good clip, a fact Mr. Bush has cited when speaking about the economy. But these gains are a result mainly of increases at the top of the income spectrum that pull up the overall numbers.... In 2004, the top 1 percent of earners... received 11.2 percent of all wage income, up from 8.7 percent a decade earlier and less than 6 percent three decades ago, according to Emmanuel Saez and Thomas Piketty, economists who analyzed the tax data...

The State of Working America 2006-07

Probably the most useful single volume about the state of the American economy you can have on your bookshelf:

New From EPI -- The State of Working America 2006-07: On Labor Day 2006, the Economic Policy Institute releases its advance edition of The State of Working America 2006/2007. Prepared biennially since 1988, EPI's flagship publication sums up the problems and challenges facing American working families, presenting a wide variety of data on family incomes, taxes, wages, unemployment, wealth, and poverty — data that enables the book's authors to closely examine the impact of the economy on the living standards of the American people. The State of Working America 2006/2007 is an exhaustive reference work that will be welcomed by anyone eager for a comprehensive portrait of the economic well-being of the nation.

http://www.stateofworkingamerica.org/

Prices at the Pump

Hal Varian on why gas prices react so fast to rises in oil prices:

The Rapidly Changing Signs at the Gas Station Show Markets at Work - New York TimesTHE recent gyrations in oil prices offer a textbook illustration of how financial markets and commodity markets interact. Oil prices are notoriously volatile, particularly when times are tense in oil-producing countries -- just about all the time these days. So when BP announced this month that it might have to suspend as much as 8 percent of the nation's oil production because of corrosion in pipes on the North Slope of Alaska, the price of crude oil immediately shot up by 3 percent and wholesale gasoline prices simultaneously increased by about 2 percent.

But why? Even if it will cost more to produce gasoline in the future, gasoline being sold today was made with cheaper oil. This must be a rip-off, right? Actually, no. The reason behind the quick price change is a phenomenon known as storage arbitrage.

To spell out the argument, imagine that you own a storage tank full of gasoline that is currently worth $2 a gallon at wholesale prices. It is widely believed, however, that the price of gasoline will be $2.10 next week. You would be crazy to sell your gasoline now: just wait a few days and the higher price will be yours. But if everyone waits a few days, there is no gasoline to be sold now and the resulting shortage pushes the price of gasoline up. How high does it have to go? The answer is $2.10 a gallon. That is the price necessary to induce those who have gasoline to sell it now rather than to wait till next week.

This argument does not depend on whether you think the gasoline market is a paragon of perfect competition or an evil oligopoly. All it requires is that you believe that people who own gasoline, like just about everybody with something to sell, prefer to receive a higher price rather than a lower price. Even if the price of gasoline were set by a perfectly benevolent conservationist, we would expect to see the same pattern of price movements. If oil will be scarcer in the future because of the BP pipeline shutdown, we would want to conserve the already-produced gasoline that we have now. That means that the price of gasoline has to rise right away to prevent hoarding and to encourage conservation.

Storage arbitrage arguments were featured in a recent article in the Sunday Business section of The New York Times with the headline "Is a Futures Stampede Keeping Oil Prices High?%" The article described a provocative report written by Ben P. Dell, an analyst at Sanford C. Bernstein & Company, that blamed speculation in oil futures markets for high oil prices. Mr. Dell's argument was that inexperienced institutional investors had been investing in contracts for future delivery of oil, driving up futures prices. If the price of oil to be delivered in the future goes up, it has to pull the current spot price up as well....

Milton Friedman argued that speculation normally helps to stabilize prices rather than destabilize them.... If speculative trading tends to push prices higher when they are already high and lower when they are already low, then traders must be buying high and selling low. That would mean that traders have to lose money on average.... To the contrary, speculative traders try to buy low and sell high, activities that by their nature tend to push prices up when they are too low and down when they are too high.... If speculators start to worry that the price of oil could soon be significantly lower, some of that stored oil would come back on the market, pushing spot prices down, and offering welcome relief to consumers.

IIRC, there are some signs of a rocket-feather asymmetry: that gasoline prices rise quickly when oil prices rise, and fall more slowly when oil prices decline...

Dean Baker on Judges Behaving Badly

Dean Baker says that he has no trouble seeing mechanisms by which changing government policy has widened the distribution of income in the past generation:

Beat the Press: Income Inequality: Missing Mechanisms: There has been a raging blog debate, following in the wake of some recent Paul Krugman columns, as to whether the rise in income inequality is due to policy or the natural workings of the economy. While Krugman indicated that he believed the policy view (promising details later), many of the economists weighing in have said that they don't see any policy mechanism(s) that could explain the rise in inequality.

Perhaps I have different eyes (or maybe I don't have sufficient training in economics), but I see the mechanisms almost everywhere. There is a nice example in the news today. A judge ruled that Northwest's flight attendants can't go on strike to oppose the wage cuts that the airline is unilaterally imposing following in the wake of its bankruptcy.

In other words, a U.S. judge is telling workers that they will go to jail if they refuse to work for the wages that Northwest wants to pay them. (I know, I'm skipping some steps here.) Judges don't have to threaten workers with jail for refusing to agree to employers' demands. This is a policy decision.

For those who find the labor-management framework difficult to understand, imagine that Northwest purchased flight attendant services from the Flight Attendant Services Corporation (FASC), which is a corporation wholly owned by the workers it employs. Suppose that FASC tells Northwest that it will not provide services for the lower fee it is now offering. Would any judge threaten FASC with jail if it didn't agree to offer its services on Northwest's terms?

There are many other examples of rulings that have gone against labor in the last quarter century. For practical purposes, it is now legal to fire workers for organizing a union (the penalties are a joke). This is not the whole policy story; I have much more in my book, The Conservative Nanny State. It's short and free (and the summary is even shorter), so you have no excuse not to read it, unless you want to remain as ignorant as an NPR reporter your whole life.

I agree with Dean: this is a bad decision. Judge Marrero is letting Northwest forum shop. That the bankruptcy judge--who knows the case and the issues--refused to issue an injunction is as close as we get in this world to certainty that the injunction should not have been issued. This is a judge who is not doing his job properly.

But in a big country this is a (relatively) little decision. My sense (and it is just a guess) is that declining unionization and union power might account for perhaps a fifth of the widening in income inequality; that reductions in the value of the minimum wage might account for a tenth; and that legal changes that have shifted the balance of power within the corporation toward CEOs might account for another tenth. I have a hard time finding other policy changes that have a big impact--and only a portion of declining unionization and union power is due to changes in government policy since the 1970s.

---

Northwest Walkout Is Blocked - New York Times: By JOSEPH B. TREASTER and JEFF BAILEY: A federal judge temporarily blocked a potential strike by flight attendants at Northwest Airlines yesterday and urged the company and its workers to resume contract talks.... The ruling, issued by Judge Victor Marrero of United States District Court in New York, was not permanent but it was a big victory for Northwest management. The airline was facing the prospect of random work stoppages across its international network that could have begun as early as 10:01 p.m. Eastern time last night in an effort by flight attendants to disrupt Northwest operations without calling an across-the-board strike.

Judge Marrero, ruling on a motion by Northwest to enjoin the flight attendants from striking, issued an injunction so that he could further study the legal issues involved. He did not indicate how he might eventually rule....

After a bankruptcy judge declined to enjoin a strike, Northwest, which is based in Eagan, Minn., appealed to the United States District Court in Manhattan, where Judge Marrero sits.

Jared Bernstein Starts Thinking About the Forthcoming Poverty Release

Jared Bernstein writes:

TomPaine.com - The Catch-Up Economy: As summer draws to a close, the mind inevitably turns to... benchmarks. A benchmark is a number you use to help put another number in context. It answers the economist’s pesky question: Compared to what? Now is the time to be thinking about benchmarks because on August 29 the government will release findings on household income and poverty for 2005.

In a world where most of our economic information is about broad averages... these statistics offer important insights into how families of different income classes fared last year. Every five minutes, we’re updated on the latest squiggle in the stock market, but only once a year the Census Bureau tells us how many children are poor in America....

Most of us who follow such things expect positive results: median household income—-the income of the typical household, smack dab in the middle of the income scale—-should rise a bit in real (inflation-adjusted) terms, and poverty should fall.

What underlies our optimism? First, 2005 is the fourth full year of an economic recovery that began in late 2001. As we would expect, poverty rose and household income fell in that recessionary year. But the negative trend has persisted in each recovery year since, and that has taken us by surprise.... The poverty rate, for example, rose each year from 2002 through 2004, a historically unprecedented trend. Since 2000, when poverty bottomed out at 11.3 percent, it has climbed to 12.7 percent in 2004, adding 5.4 million persons, including 1.4 million children to the ranks of the poor.

That’s not supposed to happen in an economic recovery, and it is a telling reminder of just how unbalanced this economy has been.... It’s also a sharp reversal of the poverty trend of the 1990s, when an all-too-unique period of broadly shared prosperity pushed poverty rates into a seven-year slide, with the biggest benefits accruing to the least advantaged. Child poverty among African Americans, for example, fell by 14.9 percentage points over these years, more than twice the overall decline for all children....

[W]ith most labor market indicators trending up... we expect enough of the growth to reach the bottom half to begin to reverse the slide. But there is almost no way the 2005 results will repair the damage done thus far. The income of the median household is down $1,700 (in 2005 dollars) since 2000, and it would take an unusually large gain to make that up in one year. Poverty is likely to decline by only a few tenths of a point, and will remain well above its 2001 level of 11.7 percent....

Note that getting back to the previous income peak and poverty trough is not that demanding a benchmark. Productivity over this recovery has been quite stellar—up 14 percent just since late 2001. Most economists assume this automatically translates into higher living standards, but don’t tell that to the median family.

If the August 29 release reveals that incomes rose for middle and low-income families, we will applaud even meager gains. Our applause should be tempered, however, by the knowledge that we are behind where we ought to be.

Armed with appropriate benchmarks and reference points, we must place the upcoming Census results in the context of an economic recovery that has produced an alarmingly large gap between growth and the living standards of most families...

Government Policy and Income Inequality Yet Again Again

Paul Krugman emails:

I think it's really important to realize that we have only a modest amount of direct evidence that technological change is driving increased income inequality. That is, while there have been a few studies showing some connection between increased use of IT and changes in the wage structure, very little of the conventional wisdom that technology is the culpritis based on those studies.

So why is technology given the credit? Basically because it's the residual category - and as Bob Solow said about the role of technology in growth, the residual is the measure of our ignorance. We estimate the effects ofthe stuff whose effects we know how to measure - taxes and globalization, mainly - and then attribute the rest to technology.

The point is that it's all too possible that we're attributing to technology rising inequality that may be largely due to hard-to-quantify political and institutional change.

There are several reasons to think that politics plays a big role. One is the broad correlation between the political climate and trends in inequality, which I pointed out in the Times. (By the way, Larry Bartels in Princeton's politics department shows that there's a strong correlation between party control of the White House and inequality trends even in the short run; see http://www.princeton.edu/~bartels/income.pdf. It's kind of a mysterious result, but worth pursuing.)

Another piece of evidence is the wide difference in inequality trends between the US and to a lesser extent the UK, on one side, and everyone else.

Yet another piece of evidence, which I think is very suggestive, is the discontinuous nature of the Great Compression. If you go back to the original Goldin and Margo paper, http://www.nber.org/papers/W3817, they found that there was a drastic reduction in wage inequality over the course of just 5 or 6 years in the 40s, which then stuck for another 30 years. In the paper, they struggle to reconcile this with a supply-and-demand framework, but it sure looks like a change in norms which had sustained effects on market outcomes.

So what are the mechanisms? Unions are probably top of the list; I believe that there's a qualitative difference between wage bargaining in an economy with 11 percent of workers unionized, which is what we had in the early 30s, and one with 35 percent unionization, which is what emerged from World War II. That's discontinuous change, partly driven by a change in political regime. And the process went in reverse under Reagan.

An overall climate of public scrutiny may matter too, especially at the top of the scale.

And don't forget that some taxes affect the pre-personal-tax distribution of income. Taxes on corporate profits went from a minor inconvenience before FDR, to a major source of revenue under Eisenhower, and back again.

The bottom line is that the view thatrising inequality reflectforces beyond the reach of politicians may sound sensible, but it's actually a supposition based on very little evidence, and there's a lot of evidence on the other side.

Government Policy and Income Inequality Yet Again

Andrew Samwick thinks about mechanisms through which "conservative" economic policy might lead to a significantly more unequal pre-tax income distribution:

Vox Baby: Show Me the... Mechanism: Krugman argues that the dominant political ideology is the main cause of changes in inequality. I want him to show a mechanism.... Others in Brad's recap have speculated about such mechanisms. There are a few different groups of them. Here's my quick take on them:

1) Weaker bargaining positions for labor, exacerbated by government policy.... Interesting idea. I think it's plausible.... [W]e've got to insist on a better comparison before assessing their importance.

2) Tax policy leading to higher pre-tax incomes disproportionately at the high end.... I don't think this is a valid explanation of some fundamental economic shift. It is a criticism of using reported income, rather than accrued income, to compare income distributions at different points in time.

3) Tax policy leading to higher pre-tax incomes disproportionately at the high end.... This one comes from Matthew Yglesias.... When you have a very progressive rate structure, an employer can get a lot more bang for his buck by directing his employment budget at middle-income people.... I think that's fascinating. I hadn't fully appreciated that a progressive tax system might be used to give lower-income workers a leg up in competing for the marginal unit of production. It remains an empirical question as to how important this might be.... I would have thought the effect to be small, compared to things like increasing global competition in product markets.

4) Lax enforcement of laws that should prevent the rich from stealing from others: This group is basically organized around the notion that CEOs and other top corporate officers have seen their pay grow tremendously over this period, and some of that, the theory goes, must be due to illicit activities. Hard to argue that none of it is ill-gotten, though I am not in the camp that suggests it is very high...

The Rise in U.S. Inequality: What the Labor-Side Real Professionals Say

Greg Mankiw wrote: "Policy choices such as tax rates and minimum wages have not been the main causes of increasing inequality. At least that is the consensus, as I understand it, of the professional labor economists who study the issue."

That overstates it a bit, I think. The real professional labor economists argue. And my perspective--here in Berkeley under the intellectual hegemony of the terrifyingly brilliant David Card--is that the real professionals are arguing fiercely.

Here are some of their recent contributions:

Unionization and Wage Inequality: A Comparative Study of the U.S, the U.K., and Canada: David Card, Thomas Lemieux, W. Craig Riddell: This paper presents a comparative analysis of the link between unionization and wage inequality in the U.S., the U.K., and Canada. Our main motivation is to see whether unionization can account for differences and trends in wage inequality in industrialized countries. We focus on the U.S., the U.K., and Canada because the institutional arrangements governing unionization and collective bargaining are relatively similar in these three countries. The three countries also share large non-union sectors that can be used as a comparison group for the union sector. Using comparable micro data for the last two decades, we find that unions have remarkably similar qualitative impacts in all three countries. In particular, unions tend to systematically reduce wage inequality among men, but have little impact on wage inequality for women. We conclude that unionization helps explain a sizable share of cross-country differences in male wage inequality among the three countries. We also conclude that de-unionization explains a substantial part of the growth in male wage inequality in the U.K. and the U.S. since the early 1980s.

Skill Biased Technological Change and Rising Wage Inequality: Some Problems and Puzzles: David Card, John E. DiNardo: The rise in wage inequality in the U.S. labor market during the 1980s is usually attributed to skill-biased technical change (SBTC), associated with the development of personal computers and related information technologies. We review the evidence in favor of this hypothesis, focusing on the implications of SBTC for economy-wide trends in wage inequality, and for the evolution of wage differentials between various groups. A fundamental problem for the SBTC hypothesis is that wage inequality stabilized in the 1990s, despite continuing advances in computer technology. SBTC also fails to explain the closing of the gender gap, the stability of the racial wage gap, and the dramatic rise in education-related wage gaps for younger versus older workers. We conclude that the SBTC hypothesis is not very helpful in understanding the myriad shifts in the structure of wages that have occurred over the past three decades.

The Polarization of the U.S. Labor Market: David H. Autor, Lawrence F. Katz, Melissa S. Kearney: This paper analyzes a marked change in the evolution of the U.S. wage structure over the past fifteen years: divergent trends in upper-tail (90/50) and lower-tail (50/10) wage inequality. We document that wage inequality in the top half of distribution has displayed an unchecked and rather smooth secular rise for the last 25 years (since 1980). Wage inequality in the bottom half of the distribution also grew rapidly from 1979 to 1987, but it has ceased growing (and for some measures actually narrowed) since the late 1980s. Furthermore we find that occupational employment growth shifted from monotonically increasing in wages (education) in the 1980s to a pattern of more rapid growth in jobs at the top and bottom relative to the middles of the wage (education) distribution in the 1990s. We characterize these patterns as the “polarization” of the U.S. labor market, with employment polarizing into high-wage and low-wage jobs at the expense of middle-wage work. We show how a model of computerization in which computers most strongly complement the non-routine (abstract) cognitive tasks of high-wage jobs, directly substitute for the routine tasks found in many traditional middle-wage jobs, and may have little direct impact on non-routine manual tasks in relatively low-wage jobs can help explain the observed polarization of the U.S. labor market.

Rising Wage Inequality: The Role of Composition and Prices: David H. Autor, Lawrence F. Katz, Melissa S. Kearney: During the early 1980s, earnings inequality in the U.S. labor market rose relatively uniformly throughout the wage distribution. But this uniformity gave way to a significant divergence starting in 1987, with upper-tail (90/50) inequality rising steadily and lower tail (50/10) inequality either flattening or compressing for the next 16 years (1987 to 2003). This paper applies and extends a quantile decomposition technique proposed by Machado and Mata (2005) to evaluate the role of changing labor force composition (in terms of education and experience) and changing labor market prices to the expansion and subsequent divergence of upper- and lower-tail inequality over the last three decades We show that the extended Machado-Mata quantile decomposition corrects shortcomings of the original Juhn-Murphy-Pierce (1993) full distribution accounting method and nests the kernel reweighting approach proposed by DiNardo, Fortin and Lemieux (1996). Our analysis reveals that shifts in labor force composition have positively impacted earnings inequality during the 1990s. But these compositional shifts have primarily operated on the lower half of the earnings distribution by muting a contemporaneous, countervailing lower-tail price compression. The steady rise of upper tail inequality since the late 1970s appears almost entirely explained by ongoing between-group price changes (particularly increasing wage differentials by education) and residual price changes.

Trends in U.S. Wage Inequality: Re-Assessing the Revisionists: David H. Autor, Lawrence F. Katz, Melissa S. Kearney: A large literature documents a substantial rise in U.S. wage inequality and educational wage differentials over the past several decades and finds that these trends can be primarily accounted for by shifts in the supply of and demand for skills reinforced by the erosion of labor market institutions affecting the wages of low- and middle-wage workers. Drawing on an additional decade of data, a number of recent contributions reject this consensus to conclude that (1) the rise in wage inequality was an “episodic” event of the first-half of the 1980s rather than a “secular” phenomenon, (2) this rise was largely caused by a falling minimum wage rather than by supply and demand factors; and (3) rising residual wage inequality since the mid-1980s is explained by confounding effects of labor force composition rather than true increases in inequality within detailed demographic groups. We reexamine these claims using detailed data from the Current Population Survey and find only limited support. Although the growth of overall inequality in the U.S. slowed in the 1990s, upper tail inequality rose almost as rapidly during the 1990s as during the 1980s. A decomposition applied to the CPS data reveals large and persistent rise in within-group earnings inequality over the past several decades, controlling for changes in labor force composition. While changes in the minimum wage can potentially account for much of the movement in lower tail earnings inequality, strong time series correlations of the evolution of the real minimum wage and upper tail wage inequality raise questions concerning the causal interpretation of such relationships. We also find that changes in the college/high school wage premium appear to be well captured by standard models emphasizing rapid secular growth in the relative demand for skills and fluctuations in the rate of growth of the relative supply of college workers - though these models do not accurately predict the slowdown in the growth of the college/high-school gap during the 1990s. We conclude that these patterns are not adequately explained by either a ‘unicausal’ skill-biased technical change explanation or a revisionist hypothesis focused primarily on minimum wages and mechanical labor force compositional effects. We speculate that these puzzles can be partially reconciled by a modified version of the skill-biased technical change hypothesis that generates a polarization of skill demands.

It's a four-sided cage match between technology, globalization, sociology, and public policy.

Ford Sets Steep Cuts to Vehicle Production

Gurp:

Ford Sets Steep Cuts to Vehicle Production - New York Times: By MICHELINE MAYNARD: The Ford Motor Company said today that it would cut vehicle production by 21 percent in the fourth quarter, its steepest cut in more than two decades, because sales of its most important products, light trucks, are faltering.

Ford said it was abandoning its goal, reiterated as recently as April, of selling 900,000 pickup trucks a year in the United States. That could mean that the reign of Ford's F-series pickup truck as the best-selling vehicle in America could be coming to an end after nearly a quarter-century.

The company said the production cuts were necessary because high gasoline prices were eroding sales of light trucks and sport-utility vehicles, which account for two-thirds of Ford's sales, and that it could no longer hope for fuel prices to fall again.... "We know this decision will have a dramatic impact on our employees, as well as our suppliers," Mr. Ford wrote in the message. "This is, however, the right call for our customers, our dealers and our long-term future."

Ford Motor executives are trying to develop an expanded version of the North American turnaround plan that the company announced in January. The plan, called the Way Forward, called for the company to close 14 plants and eliminate 30,000 jobs by 2012 to streamline its operations and cut costs. Ford is now looking at deeper cuts, on a swifter timetable than the original plan. It is expected to announce the additional steps in September. General Motors is undergoing a similar effort to trim costs and turn around its North American vehicle business; it has said it will close all or part of a dozen factories and eliminate tens of thousands of jobs.

Ford's announcement today that it would cut fourth-quarter production by 168,000 vehicles will have an immediate impact on its bottom line. Auto companies count vehicles as sold when they are shipped from the factory to the dealer, not when they are ultimately purchased by the consumer. Under this system, cutting production directly reduces the manufacturer's potential for revenue and profits.

Ummm. No. A small correction. Ford's announcement today does not have "an immediate impact on its bottom line." It has an immediate impact on what Ford reports its bottom line to be--but not on the bottom line itself.

Detroit Bets on Rapidly-Falling Oil Prices

Daniel Gross writes:

Daniel Gross: August 06, 2006 - August 12, 2006 Archives: HOT WHEELS: Nick Bunkley writes in the New York Times about Ford and GM's contrarian business strategy.

As gasoline prices surge past $3 a gallon in most of the country and closer to $4 in some cities, sales figures show Americans are snapping up small cars that go easier on fuel and on their wallets. But none of the smallest cars are designed or developed by Detroit companies, which in the face of high gas prices are now highlighting another kind of automobile not usually thought of as energy efficient: the muscle car.

Ford Motor said Wednesday that it planned to build a 325-horsepower version of the Ford Shelby GT. It also plans a big luxury car, the Lincoln MKS, which will become the struggling brand's flagship sedan. The announcement came at an industry conference here sponsored by the Center for Automotive Research. On Thursday, General Motors is expected to confirm that it will resurrect one of its most famous muscle cars, the Chevrolet Camaro, which was a hit at the Detroit auto show in January....

Ford or Chrysler sell no subcompacts in the United States, even though they or their corporate parents sell them in other global markets. By contrast, Toyota, Honda and Nissan have all introduced small cars in the last few months, all of them sold overseas.

"It is a mistake and it's very disappointing," said John Casesa, managing partner of Casesa Strategic Advisers in New York. "I just think it shows that Detroit still has a business model predicated on low energy prices."

Dot-Com Companies in a Mature Market

Daniel Gross writes about how hard Yahoo! and company are finding it to mature gracefully. Having an exclamation point! in your name doesn't help:

Why Yahoo!, eBay, Amazon, and AOL are tanking. By Daniel Gross: By Daniel Gross: From the ashes of the 2001-2002 crash there emerged four horsemen of the dot-com apocalypse: Amazon.com, Yahoo!, eBay, and AOL. This quartet of iconic companies, wounded but not destroyed in the crash, survived the plague years and flourished when the market recovered. But in recent weeks, at a time when online advertising and e-commerce are enjoying strong growth, all four have pulled up lame.... [E]ach derives the lion's share of its revenues from a maturing U.S. market, each is finding profit margins slipping as it tries to diversify, and each has foolishly reached back to tried-and-failed ideas of the dot-com era for salvation.

On Tuesday afternoon, Amazon, the leading e-tailer, announced its quarterly earnings. The top line was good: Revenues rose 22 percent from the year before. The bottom line? Not so much. Operating income fell 55 percent to $47 million from $104 million in the year-earlier quarter. Why? Amazon ramped up spending on technology and content, slashed prices, and offered more free and reduced-rate shipping. In other words, it had to work a lot harder for the money.... eBay also took some lumps when it reported earnings last week.... Operating income fell 18 percent in the quarter.... Yahoo! reported a similar story. Revenues, 88 percent of which came from advertising, rose a very healthy 27 percent. But operating income fell 12 percent.... AOL's parent company, Time Warner, won't announce its second-quarter earnings until next week. But the first quarter... saw operating income fall—by about 14 percent, from $314 million to $269 million. And on July 11, the Wall Street Journal reported that AOL might soon adopt a new business strategy: It will morph from a subscription-powered Internet-access provider to an advertising-supported portal.... [I]f it can keep people using AOL for e-mail (and hence as a launching pad for the Internet), it might be able to capture more of the Internet-ad-sales market...

Department of "Huh?"

Huh?

Greg Mankiw writes:

Greg Mankiw's Blog: Measuring Wages: Measuring Wages: Economist David Altig opines about measures of labor earnings:

If I had my way, appeals to the BLS average hourly earnings series would be banished from commentary about wages and the fortunes of the workers -- unless the the commentator explains why that measure is a truer measure of labor compensation than those that include in-kind payments to employees (that is, benefits).

Good point. I am always surprised when I see economists compare wages and productivity using wage measures that exclude fringe benefits. Theory says that productivity should determine total compensation, not cash earnings.

As a presumed target, I have to ask "why?" I thought that everybody knew that wages and salaries were only one component--albeit the largest component--of total compensation. But I also thought that everybody knew that (except at the very top end) differences between growth rates of wages and salaries and growth rates of real compensation were relatively small.

We have pretty good data on short-run and medium-run movements in average hourly wages and median usual weekly earnings. We have pretty bad data on benefits. We know that average total compensation growss about 0.4% per year faster than average wages and salaries, and that the gap is smaller--0.2%?--at the median.

Yes, it would be very nice, it would be better to have median weekly real compensation. But we don't. So why not use what we have got?

Hoisted from Comments: Dean Baker on Sources of Today's Great Fortunes

Dean Baker on the sources of today's great fortunes: luck, talent, workaholism--but most of all intellectual property protection.

He says:

Brad DeLong's Semi-Daily Journal: Luck vs. Talent vs. Workaholism: Luck, talent, industriousness? Hey, how about good old-fashioned protectionism? How much moey would Bill Gates have if the government didn't arrest people who made and distributed copies of Windows without his permission.

We can call it "copyright," but this word isn't holy water that can turn a monopoly into a competitive market. Copyright is a government granted monopoly that has allowed some people to get very rich. If economics focused on where the money is, we would have alot more people trying to devise more efficient mechanisms to foster innovation and creative work, and fewer people worrying about modest tariffs on imported shirts.

The Pattern of Growth in Income Inequality

Greg Mankiw notes:

Greg Mankiw's Blog: Lazear vs Krugman: NY Times columnist Paul Krugman yesterday:

There's a persistent myth, perpetuated by economists who should know better -- like Edward Lazear, the chairman of the president's Council of Economic Advisers -- that rising inequality in the United States is mainly a matter of a rising gap between those with a lot of education and those without...

And he questions why economist Paul Krugman, a high-ranking candidate for this year's Nobel Prize, writes this.

The reason, I think, is contained in this graph:

from Thomas Piketty and Emmanuel Saez (2006), The Evolution of Top Incomes: A Historical and International Perspective (Cambridge: NBER Working Paper No. 11955, January 2006).

The big rise in inequality in the U.S. since 1980 has been overwhelmingly concentrated among the top 1% of income earners: their share has risen from 8% in 1980 to 16% in 2004. By contrast, the share of the next 4% of income earners has only risen from 13% to 15%, and the share of the next 5% of income earners has stuck at 12%. The top 1% have gone from 8 to 16 times average income, the next 4% have gone from 3.2 to 3.7 times average income, and the next 5% have been stuck at 3 times average income.

It's hard to attribute this pattern to a rise in the premium salary earned by the well-educated by virtue of the skills their formal education taught them. Such a rise in the education premium would produce a much smoother rise in relative incomes among the whole top tenth of the income distribution. The cross-percentile pattern doesn't fit.

It is especially hard because most theories of the rising education premium attribute it to skill-biased technological change generated by the high-tech computer industrial revolution. But the high-tech boom's effects on overall productivity became large only in the second half of the 1990s, well after the biggest increases in inequality. The timing doesn't fit either.

Something else is going on.

If the New York Times were smarter, it would give Paul Krugman 2000 words every two weeks, rather than confining him to the straightjacket of 700 words twice a week, so that he could explain background issues like this more adequately...

New Data on Income Inequality

Greg Mankiw sees a little bit of good news in the latest income distribution data: after rising astonishingly rapidly from 1986 to 2000, income inequality in 2004 was no worse than in 2000:

Greg Mankiw's Blog: New Data on Income Inequality: In today's NY Times, Paul Krugman calls attention to the update of the Piketty-Saez data on income inequality, although Paul describes the data differently than I would.Here is what I see: After rising substantially from 1986 to 2000, income inequality is essentially the same in 2004 (the most recent year of data) as it was in 2000.

I hope he's right, and that the trend of rising inequality has stopped--it is a very disturbing phenomenon, and further rises would be very worrisome indeed. But I can't be as optimistic as he is. He sees an essentially flat trend from 2000-2004. I see numbers for 1999 and 2000 that may have been transitorily boosted by high salaries paid during the dot-com bubble, and then a decreased in inequality from 2000-2002--a decrease that is then reversed in 2003-2004, which carries us up to bubble levels.

So my hope that we might not see 1999 and 2000 levels of income inequality again appears to have been vain.

The Further Derangement of the U.S. Income Distribution

Paul Krugman writes:

Left Behind Economics - New York Times: I'd like to say that there's a real dialogue taking place about the state of the U.S. economy, but the discussion leaves a lot to be desired. In general, the conversation sounds like this:

Bush supporter: "Why doesn't President Bush get credit for a great economy? I blame liberal media bias."

Informed economist: "But it's not a great economy for most Americans. Many families are actually losing ground, and only a very few affluent people are doing really well."

Bush supporter: "Why doesn't President Bush get credit for a great economy? I blame liberal media bias."

To a large extent, this dialogue of the deaf reflects Upton Sinclair's principle: it's difficult to get a man to understand something when his salary depends on his not understanding it. But there's also an element of genuine incredulity. Many observers, even if they acknowledge the growing concentration of income in the hands of the few, find it hard to believe that this concentration could be proceeding so rapidly as to deny most Americans any gains from economic growth.

Yet newly available data show that that's exactly what happened in 2004.... Unfortunately, data on the distribution of income arrive with a substantial lag; the full story of what happened in 2004 has only just become available.... Here's what happened in 2004. The U.S. economy grew 4.2 percent, a very good number. Yet last August the Census Bureau reported that real median family income -- the purchasing power of the typical family -- actually fell. Meanwhile, poverty increased, as did the number of Americans without health insurance. So where did the growth go?

The answer comes from the economists Thomas Piketty and Emmanuel Saez... in 2004 the real income of the richest 1 percent of Americans surged by almost 12.5 percent. Meanwhile, the average real income of the bottom 99 percent of the population rose only 1.5 percent. In other words, a relative handful of people received most of the benefits of growth.... Even people at the 95th percentile of the income distribution -- that is, people richer than 19 out of 20 Americans -- gained only modestly. The big increases went only to people who were already in the economic stratosphere.... [T]he real earnings of the typical college graduate actually fell in 2004. In short, it's a great economy if you're a high-level corporate executive or someone who owns a lot of stock. For most other Americans, economic growth is a spectator sport....

[D]on't expect this administration or this Congress to do anything to limit the growing concentration of income. Sometimes I even feel sorry for these people and their apologists, who are prevented from acknowledging that inequality is a problem by both their political philosophy and their dependence on financial support from the wealthy. That leaves them no choice but to keep insisting that ordinary Americans -- who have, in fact, been bypassed by economic growth -- just don't understand how well they're doing.

Keven Drum Praises Roger Lowenstein on Immigration

He writes:

The Washington Monthly: THE IMMIGRATION EQUATION....I'd like to join a legion of other bloggers in recommending "The Immigration Equation," Roger Lowenstein's piece in the New York Times Magazine yesterday about the economics of immigration. In fact, based on his previous pieces in the magazine, I think I'd be safe in recommending practically everything he writes for them sight unseen.

The nickel version of Lowenstein's investigation is that, yes, basic economics suggests that importing millions of unskilled Mexican immigrants ought to reduce the wages of unskilled native-born Americans and make it harder for them to find jobs. And yet, mysteriously, it doesn't seem to. At most, it appears to lower wages for unskilled workers only a tiny amount, and it might not lower them at all.

Why? There are theories, but as near as I can tell nobody really seems to know. Nonetheless, the evidence for a significant effect is pretty thin. If you want to argue against immigration from Mexico, you're probably better off doing it on cultural and assimilationist grounds than in trying to torture the economic data to justify your position.

In any case, Lowenstein does a great job explaining both sides of the argument. If you want to understand what the economic debate is about, it's well worth reading.

Greg Mankiw Explains Why Economists Favor Immigration

He does it very very well:

Greg Mankiw's Blog: Why Economists Like Immigration: With members of the House and Senate sparring over immigration reform, it is worth summarizing why most economists are sympathetic with the more welcoming approach of the Senate bill.

The study of economics leaves a person with two strong impulses:

The Libertarian Impulse: Mutually advantageous acts between consenting adults should, absent externalities, be permitted. The ability to engage in such trades is how people in free-market economies achieve prosperity. When the government impedes voluntary exchange, it prevents the invisible hand of the market from working its magic.

The Egalitarian Impulse: The market economy rewards people according to supply and demand, not inherent worth. Markets often fail to provide people the ability to adequately insure themselves against the vicissitudes of life and accidents of birth. We should, therefore, look for ways to help those who end up at the bottom of the economic ladder.

Most economists feel these two impulses to some degree. The difference between right-leaning and left-leaning economists is how strongly they feel each of them. Right-leaning economists have a stronger libertarian impulse, whereas left-leaning economists have a stronger egalitarian impulse.

Although some debates in economics come down to which impulse a person feels more strongly, on immigration the two impulses are reinforcing. The libertarian impulse says, let the American employer hire the Mexican worker, for it is voluntary exchange. The egalitarian impulse takes note that the Mexican immigrant is the poorest person involved in the situation, and he benefits from more relaxed immigration restrictions.

Here is a conjecture: Whenever a policy appeals to both the libertarian impulse and the egalitarian impulse, economists will offer a relatively united view, as they do on the topic of immigration.

I would add a third impulse: the cosmopolitan impulse. Economists tend to think that foreigners are people, and thus that their well-being counts. From the economist's point of view, increasing immigration is a hell of a powerful global economic development policy. The most you can say for restricting immigration is that it is an extremely costly and relatively ineffective domestic anti-poverty policy.

And then, of course, there is George Borjas, who is (a) an economist who is (b) not in favor of immigration from Latin America.

Driving in New Delhi

Alex Tabarrok writes:

Marginal Revolution: Corruption: Joel Waldfogel covers an interesting new study of corruption in the motor vehicle department in India. Some eight hundred Indians were randomly assigned to one of three groups: the first group got a cash bonus for getting a license, the second group was given driving lessons, the third group was a control.... [T]he first group bribed their way to a license. In addition to taking the shortest period of time, most of the first group never even had to take a test!

Waldfogel has more details. He misses, however, what I think is the most important finding of the study. The delay in the Indian DMV is "endogeneous," i.e. it's not due to torpor or constraint but instead is a result of corruption. How can the Indian bureaucrats make the most of their control over licenses? First, make the line long. But that can increase the bribe-price only so much - especially given how cheap it is to hire someone in India to wait in line for you. The real value is in the license itself so the Indian examiners randomly fail many applicants, even those with good driving skills. Paying the bribe, therefore, is really the only route to a license. The net result is long lines and unsafe drivers.

Corruption like this is endemic throughout the world. Libertarians should take note, however, the problem in this case is not so much that there is too much government but that government is too weak.

Does Corruption Produce Unsafe Drivers?: Marianne Bertrand, Simeon Djankov, Rema Hanna, Sendhil Mullainathan: We follow 822 applicants through the process of obtaining a driver's license in New Delhi, India. To understand how the bureaucracy responds to individual and social needs, participants were randomly assigned to one of three groups: bonus, lesson, and comparison groups. Participants in the bonus group were offered a financial reward if they could obtain their license fast; participants in the lesson group were offered free driving lessons. To gauge driving skills, we performed a surprise driving test after participants had obtained their licenses. Several interesting facts regarding corruption emerge. First, the bureaucracy responds to individual needs. Those who want their license faster (e.g. the bonus group), get it 40% faster and at a 20% higher rate. Second, the bureaucracy is insensitive to social needs. The bonus group does not learn to drive safely in order to obtain their license: in fact, 69% of them were rated as "failures" on the independent driving test. Those in the lesson group, despite superior driving skills, are only slightly more likely to obtain a license than the comparison group and far less likely (by 29 percentage points) than the bonus group. Detailed surveys allow us to document the mechanisms of corruption. We find that bureaucrats arbitrarily fail drivers at a high rate during the driving exam, irrespective of their ability to drive. To overcome this, individuals pay informal "agents" to bribe the bureaucrat and avoid taking the exam altogether. An audit study of agents further highlights the insensitivity of agents' pricing to driving skills. Together, these results suggest that bureaucrats raise red tape to extract bribes and that this corruption undermines the very purpose of regulation.

Three points:

• This shows a high degree of collective action on the part of corrupt bureaucrats--one that one would (incorrectly) think would not survive even cursory scrutiny by the state.
• The problem is not that the state is too strong: the state is totally unable to control its own functionaries. A state that cannot control its own functionaries is by definition weak.
• The problem is that the state is weak in the wrong places and strong in the wrong places: weak in its control of its own functionaries (where it should be strong) and strong in its control of and ability to hassle the public in order to extort money (where it should be weak).

The Minimum Wage

From Max Sawicky. We have, in relative terms, cut the minimum wage enormously over the past generation (and have not seen any significant improvement in employment). The question is whether we should continue to let inflation and productivity growth cut the relative value of the minimum wage further, or be satisfied with the relative cuts we have already seen.

Max Sawicky quotes Dean Baker:

MaxSpeak, You Listen!: ARE YOU NEED ARE TWO SENTENCES: Courtesy of Deano, apparently posted at 5:16 a.m. (was this before he went to bed, or after he got up?), why we should raise the minimum wage:

The minimum wage bill currently being pushed by Senator Kennedy would raise the minimum wage to $7.25 by 2009. By comparison, the minimum wage was almost $8.00 an hour (in 2006 dollars) in the late sixties. This means that if Kennedy's bill were approved, the real value of the minimum wage in 2009 would still be more than 10 percent lower than it was in the late sixties, even though productivity will have increased by more than 120 percent over this period...

The Minimum Wage: Some Aircover for Gene Sperling...

Gene Sperling could use some aircover. Greg Mankiw writes:

Greg Mankiw's Blog: Sperling on the Minimum Wage: Gene Sperling, former economic adviser to Bill Clinton, tries to get President Bush to endorse a minimum-wage increase. Gene dismisses worries about adverse effects on employment. He writes:

No one has yet rebutted convincingly David Card and Alan Krueger's study that compared fast-food jobs on the border of New Jersey and Pennsylvania, and found no decrease in lower-wage jobs after New Jersey raised its state minimum wage.

The key word here is "convincingly." Gene is, apparently, not convinced by the Neumark-Wascher study that reevaluated the Card-Krueger work.... To me, Gene looks like a doctor prescribing a drug relying on a single controversial study that finds no adverse side effects, while ignoring the many reports of debilitating results.

Some air cover is provided by two non-big-fans of the minimum wage whose take on the evidence on employment effects coincides with Gene's:

• Tyler Cowen
• Stephen Landsburg

Some more air cover if provided by Card and Krueger. I, at least, thought the issue was settled in Card and Krueger's favor by their rebuttal of Neumark and Wascher.

And Jason Furman tells me to go read Daron Acemoglu and Jörn-Steffen Pischke on the minimum-wage-and-training issue:

Daron Acemoglu and Jörn-Steffen Pischke (2001), "Minimum Wages and on-the-Job Training (Bonn: IZA Working Paper 384):

Becker’s theory of human capital predicts that minimum wages should reduce training investments for affected workers because they prevent these workers from taking wage cuts necessary to finance training. In contrast, in noncompetitive labor markets, minimum wages tend to increase training of affected workers because they induce firms to train their unskilled employees. We provide new estimates on the impact of the state and federal increases in the minimum wage between 1987 and 1992 on the training of low wage workers. We find no evidence that minimum wages reduce training, and little evidence that they tend to increase training. We therefore develop a hybrid model where minimum wages reduce the training investments of workers who were taking wage cuts to finance their training, while increasing the training of other workers. Finally, we provide some evidence consistent with this hybrid model.

And also Daron Acemoglu, “Good Jobs vs. Bad Jobs”:

Daron Acemoglu (2001), "Good Jobs versus Bad Jobs," Journal of Labor Economics 19:1, pp. 1-21:

This article develops a model of noncompetitive labor markets in which high-wage (good) and low-wage (bad) jobs coexist. Minimum wages and unemployment benefits shift the composition of employment toward high-wage jobs. Because the composition of jobs in the laissez-faire equilibrium is inefficiently biased toward low-wage jobs, these labor market regulations increase average labor productivity and may improve welfare.

Morning Coffee Videocast: ENRON

In which I hog Google's bandwidth, drink my morning coffee, and think about the fraud at ENRON:

ENRON: Brad DeLong 6 min 6 sec - Jun 15, 2006:

Brad DeLong's Morning Coffee. ENRON collapsed because most of the profits reported by Enron Energy Services were really losses: when you give your dealmakers the power to value the deals they make, watch out. Even with this major fraud in process, ENRON's profits were still too low to make Lay and Skilling happy--and so they commissioned Fastow to further pretty up their numbers. ENRON was not a sound company.

A "Third Way" on Network Neutrality

The highly intelligent Lynne Keisling finds something interesting on net neutrality:

Knowledge Problem: A "Third Way" on Network Neutrality: Regular KP readers might have noticed my reticence to opine on the current net neutrality roilings (which is why I am grateful to Mike for picking up the slack). There's a good reason for that: I don't find either of the polemic, binary, extreme positions that are being argued and memorialized in legislative proposals compelling or fully correct. I find the arguments in favor of so-called net neutrality histrionic and likely to lead to stagnation of the Internet. I am (much) more compelled by the arguments in favor of not regulating net neutrality, but I still have concerns about owners of the fixed wires infrastructure being able to earn uneconomic rents during the process of Schumpeterian competition for the post-broadband platform. Given that position, I thought it better to keep my mouth shut.

But no longer! I have ammunition! This ammunition takes the form of Rob Atkinson's and Phil Weiser's paper, A "Third Way" on Network Neutrality. Phil is one of the most thoughtful and knowledgeable scholars on this question (and I'm sure I'd say the same about Rob if I knew him!), so I take his arguments seriously. And this argument deserves to be taken seriously. For example,

We believe that the current state of the network neutrality debate, like many polarized issues, denies the reasonable concerns articulated by each side and obscures the contours of a sensible solution. In this paper, we outline both the reasonable concerns of each side in the debate with respect to the future of the Internet, as well as the claims made by each side that we believe are not factually correct or economically supportable. We hope that by doing so, and by placing the issues into a proper context, we can shed light on the underlying issues as well as articulate the essential elements of a sensible and effective solution.

Their "sensible and effective solution" involves three basic concepts: open information (broadband providers should state their access terms and usage policies clearly) for consumer protection, an ex post antitrust-competition policy approach instead of an ex ante preventive regulation approach, and targeted tax policy to encourage broadband investment. They take seriously the issue of complementarity within networks; in other words, for example, the idea that access to Google and other applications increases the value of broadband access, so what economic incentive do they have to limit your access if it means you would be willing to pay less for their broadband service?

I heartily encourage you to read this short, concise, well-written, reasonable argument. I don't agree with all of it (not surprisingly, I'm not a big fan of social engineering through tax policy), but I think this approach strongly dominates all of the polemic legislative proposals that are being considered.

Conspiracy of Fools

The pile shrinks further:

Kurt Eichenwald (2005), Conspiracy of Fools: A True Story (New York: Broadway: 0767911792).

It's interesting. Eichenwald writes a huge book--800 pages--and at the end of it a casual reader has no understanding of why Enron went bankrupt. Enron reported $11 billion of stockholders' equity as of the end of 2000. It made an additional $2 billion or so during the Great Raid on California in early 2001. Yet by September of 2001 it had $30 billion in debt, $10 billion of which was coming due in the next year, and no net cash flow.

Andy Fastow and his friends didn't take that much via their Raptor and LJM vehicles: $250 million tops. Andy Fastow and company didn't lose all that much by using Raptor, LJM, and other vehicles to place bets on Enron stock on behalf of Enron--$1.25 billion, max. There's still some $11.5 billion of reported stockholders' equity that went missing.

Enron used what it claimed was "mark to market" accounting. Each time a contract was completed, the contract was valued as if it were a liquid security, and the value imputed in that as if process was booked as revenue. This meant that a negotiator desperate to reach a deal could (a) give away the store to the counterparty, and still (b) make assumptions in his "mark to market" valuation that made the deal look really profitable.

Now at least the first generation of Enroners were not profoundly stupid fools: they had people in charge of reviewing and monitoring the contracts made--experts in figuring out what the contract would be worth if it were a liquid security. People like Vince Kaminski, who one day, Eichenwald reports, got a call from Enron President Jeff Skilling:

"There have been some complaints, Vince, that you're not helping people do transactions," Skilling said. "Instead, you are spending all your time acting like cops." A pause. "We don't need cops, Vince."

Skilling's predecessor as President of Enron, Richard Kinder, quit Enron in 1996 when the board of directors refused to anoint him as CEO-heir-apparent. He went out and founded Kinder Morgan, buying up Enron's pipeline operations in 1997 Today Kinder Morgan is a profitable energy transportation and distribution company with a current market value of roughly $25 billion--of which $2.4 billion is Kinder's. You can bet that Richard Kinder very much believes that his company needs "cops."

Nevertheless, $11.5 billion in reported stockholders' equity gone? That's a lot of money to lose because you are allowing your traders and executives to assign optimistic valuations to their own deals.

Marty Feldstein Is For Tradeable Gasoline Rights

Mark Thoma finds Martin Feldstein proposing tradeable gasoline vouchers as a better way of reducing energy consumption than tighter vehicular CAFE standards:

Economist's View: Tradeable Gas Rights: Martin Feldstein has a way to reduce gasoline consumption, tradeable gas rights:

Tradeable Gasoline Rights, by Martin Feldstein, Commentary, WSJ: The rapid rise in the price of gasoline has produced calls for tougher fuel economy standards on new cars and trucks. Although reduced gasoline consumption would be good for the environment and for national security, such a regulatory change would be a mistake. A far better approach would be a system of tradeable gasoline rights, or TGRs. These could be distributed in a way that actually raises the income of a majority of households while giving everyone an incentive to reduce gasoline consumption...

[...]

Advocates of a gasoline tax argue that it would produce extra revenue that could be used to reduce the budget deficit or to finance equally large cuts in personal taxes.... [But] it is hard to believe that Congress would now respond to the public's unhappiness over high gasoline prices by enacting a gasoline tax that would raise the price even more.

That aversion to a higher gasoline tax is why tougher mileage standards for new cars is back on the legislative table. They would, however, do virtually nothing to lower the price of gasoline. And if individuals want to economize on gasoline by driving smaller or more fuel-efficient cars, they can do so now without government action. ...

Higher gas mileage standards would reduce gasoline demand in a very inefficient way by focusing exclusively on the rated mileage of new cars. Separate fuel efficiency standards for each type of vehicle -- one of the options now being considered -- would be even worse because it would provide no incentive to switch to more fuel-efficient cars.

Requiring higher mileage standards on new cars would do very little to reduce total gasoline consumption in the near term because each year's new cars are only about 10% of the total cars on the road...

I think Marty's right. I think it's a clever idea--and much better than tightening CAFE. Tom Kalil was talking about higher gasoline taxes with the revenue dedicated to paying the first X thousand of individuals' Social Security taxes. But I think Marty's scheme is more transparent, which gives it powerful political-economy advantages.

Toyota Leapfrogs GM

Mark Thoma finds a piece by Lee Hawkins and Norihiko Shirouzu about the disabilities of GM:

Economist's View: Leapfrogging: A look at the advantages a newly constructed Toyota auto assembly plant will have over an existing GM plant:

"A Tale of Two Auto Plants," by By Lee Hawkins Jr. and Norihiko Shirouzu, WSJ: For more than 50 years, General Motors Corp. has built cars and trucks here at Texas' only auto assembly plant... The sprawling factory, one of GM's best, employs 3,000 people and buys myriad parts and services from local suppliers to build the big sport utility vehicles that have been among the company's most profitable -- including "the national car of Texas," the Chevrolet Suburban.

Now, though, a rival has come deep into the heart of Texas to battle GM. At a 2,000-acre site in San Antonio, Toyota Motor Corp. is getting ready to start production later this year of the newest generation of Tundra pickup trucks in a plant that will use the Japanese car maker's most advanced machinery and methods.

Separated by 280 miles, these two factories bring into stark relief the competitive problems plaguing GM... In no small part, the world's largest auto maker's difficulties stem from the fact that its challengers can start fresh, unencumbered by old plants and old obligations that limit innovation and add ... to the cost of each vehicle...

Toyota appears to be working aggressively to make the most of its advantages. The company has been able to deploy the latest know-how to fit various manufacturing processes ... into a relatively compact space and make the plant more efficient.

On the other hand, ... GM can't maximize its success by adopting its newest, best methods... "Arlington is doing a great job for GM, but they can't have an optimal layout, and their footprint is landlocked because a world with subdivisions and expressways has grown up around it...," Mr. Robinet says...

Even so, Arlington ranked No. 1 among North American large-SUV factories last year, at 22.39 assembly labor hours per vehicle... Two decades ago, GM factories suffered from a sizable gap compared with similar Toyota factories... Recent ... surveys show that this gap has narrowed substantially. But GM's productivity gains are offset by higher hourly labor costs and the burden it carries for benefits owed to retirees.

In Arlington, GM pays union-scale wages of ... about $1,800 ... per vehicle. ... Harbour Consulting President Ron Harbour estimates Toyota's total hourly U.S. labor costs, with benefits, at about $35 an hour -- less than half of GM's rates. The brand-new plant won't have any direct retiree costs for many years. So if the San Antonio factory does no better than match the Arlington plant in productivity, it could still enjoy a labor cost advantage of about $1,000 per vehicle, a substantial sum in industry terms...

Morning Coffee Videocast: Gasoline Prices and American Politics

In which I hog Google's bandwidth, drink my morning coffee, and express my frustration at the politics of gasoline prices in America today:

Gasoline Prices and American Politics: Brad DeLong 4 min 35 sec - May 23, 2006:

Brad DeLong's Morning Coffee. It's very sad to watch both political parties abandon all shred of principle in the hope of winning political advantage by exploiting the gasoline price issue.

Advertising Once Again...

John Quiggin is smart:

John Quiggin: Becker and Murphy on advertising: During the discussion following the death of JK Galbraith, the issue of advertising came up. In the Affluent Society Galbraith dismissed the idea that advertising is informative, and argued instead that it was used to manufacture demand for goods and services people would otherwise not want. The NYT obit suggested that Gary Becker and George Stigler had disproved this, a proposition that attracted some attention, mainly focusing on the work of Becker and Murphy.

Although Becker and Murphy don't present it this way, their model actually supports Galbraith in most respects.... [T]he idea that advertising could be informative is excluded by assumption. In the standard neoclassical model, adopted here consumers are supposed to know their own tastes (and the processes by which tastes may change over time) and to be fully informed. Advertising is simply media content that is complementary with consumption of the goods advertised... [like] salted nuts or pretzels on the counter in a bar. For obvious reasons, salted nuts are complementary with beer. And just as it makes sense for bar owners to make nuts available freely or cheaply, it makes sense for people selling a good to offer ads.

What about consumers? An obvious case of the Becker-Murphy story arises when the ads tell a story that enhances the subjective value of consuming the good in question. A pair of shoes that make you feel like a basketball star is better (for the target market) than a pair of shoes that just covers your feet. Becker and Murphy pay a fair bit of attention to this case, and so do people who comment on them. But this isn't the only way that ads can be complementary. Ads that make you discontented with your existing possessions....

The economic model presented by Becker and Stigler provides a simple and elegant way of distinguishing the two. If advertising is a good, which enhances the package of ad+product, consumers will be willing to pay for it. If advertising is a bad, consumers will have to be paid (or forced) to consume it. An immediate consequence is that most of what we think of as advertising is a bad. We watch TV ads not because we like them, but because we are paid with the programs they accompany.... Given the public good properties of financing broadcast TV, it's possible to make a second-best argument that this social arrangement improves welfare on balance (I still need to work through this one, but for me at least, the price is too high, and I hardly ever watch ad-inclusive TV)...

International Trade

Amit R. Paley, Washington Post staff writer, should quit his job. The chance that somebody who at "3 a.m.... knew he would flunk his Statistics 52 exam later that day if he didn't call his tutor for help" would then pull an A on said exam after one hour of pre-dawn tutoring is very small. A reporter needs a bullshit detector. Amit R. Paley doesn't have one, and should find another line of work.

That aside, a nice piece about how outsourcing is creeping closer to academe proper:

Homework Help, From a World Away: By Amit R. Paley: Monday, May 15, 2006; Page A01: It was almost 3 a.m., Alex Del Monte recalled, and he was cramming like crazy. He gulped can after can of Red Bull to stay awake, but the George Washington University sophomore knew he would flunk his Statistics 52 exam later that day if he didn't call his tutor for help. But so late at night? Not a problem if your tutor works 8,500 miles away and 9 1/2 hours ahead in Bangalore, India.

In an hour-long session that cost just $18, the Indian tutor, who said his name was Mike, spent an hour walking Del Monte through such esoteric concepts as confidence intervals and alpha divisions, Del Monte recalled. He got an A on the final exam. "Mike helped me unscramble everything in my mind," the 20-year-old said.

Thousands of U.S. students such as Del Monte are increasingly relying on overseas tutors to boost their grades and SAT scores. The tutors, who communicate with students over the Internet, are inexpensive and available around the clock, making education the newest industry to be outsourced to other countries. Tutoring companies figure: If low-paid workers in China and India can sew your clothes, process your medical bills and answer your computer questions, why can't they teach your children, too?

But educational outsourcing has sparked a fierce response from teachers and other critics who argue that some companies are using unqualified overseas tutors to increase their profit margins. "We don't believe that education should become a business of outsourcing," said Rob Weil, deputy director of educational issues at the American Federation of Teachers. "When you start talking about overseas people teaching children, it just doesn't seem right to me."...

"Overseas people." Really nice locution, there, Mr. Weil. Why don't you quit your job and find some honest work as well?

Morning Coffee Videocast: Immigration Is a Good Thing

In which I drink my morning coffee, use up Google's bandwidth, and muse about immigration:

4 min 43 sec - May 14, 2006. Brad DeLong's Morning Coffee. We should be open to immigration--for lots of reasons.

Immigration Is a Good Thing

Radio: Marketplace: Glenn Hubbard: Oil Market Making Washington Crazy

Glenn Hubbard has a nice commentary at Marketplace about the politicians' attempts to "exploit" the gas price issue:

Marketplace: Oil market making Washington crazy: GLENN HUBBARD: Now, I know policymakers and economists don't always speak the same language. But Washington's recent rhetoric on oil is enough to make an economist's head spin.

Consider Congress' pandering offer of $100 tax rebates to help cover the cost of gas. Or President Bush's recent call to investigate "price gouging" while simultaneously pressing for greater investment in the oil industry.

These statements are sufficiently over the top to bring forth an involuntary Econ 101 reaction. You know what I mean -- supply and demand.

Tightening supply reflects continued low production in Iraq, supply disruptions in Nigeria, and investment-unfriendly politics in Venezuela and Bolivia.

At home, regional variations in environmental standards and recent mandates for blended ethanol that exceed production squeeze gasoline supply and raise prices.

On the demand side, we in our SUVs make too little effort to encourage energy efficiency. And abroad, China has leapt past Japan as the world's number two oil consumer.

Politicians' rhetoric notwithstanding, we repeal the laws of supply and demand only at our peril.

Think of the disastrous program of federal crude oil price regulation in the 1970s or Hawaii's recent repeal of its scheme to cap fuel prices that led to shrinking supply.

But there is an antidote to high prices. The answer is: high prices. High prices encourage conservation on the demand side. They also encourage the development of new oil reserves %u2014 and, importantly, alternative energy sources -- on the supply side.

And some policy activism would help.

We need to support basic research for new technologies and export energy-efficient techniques to emerging economies.

We need to clear out harmful domestic barriers to production and refining.

And at the broadest level, we need to coordinate the domestic and foreign policy sides of the nation's energy policy.

At the very least, ideas like "price gouging" and "$100 rebates" need to be, well, more refined.

Eddie Lazear Is a Mensch

He does good in his seat at the CEA:

Bush Economist: Gas Tax Cut Not the Answer: Cutting gasoline taxes is not a good way for the country to deal with soaring energy prices, President Bush's top economist said Tuesday. "One of the things we worry about when we cut the tax on gasoline is that it basically stimulates additional use," said Edward Lazear, chairman of the White House's Council of Economic Advisers.

"Over a longer period of time, it would be a significant problem ... because what it would do is it would encourage us to use more oil, not less and that is the way we got to the situation right now," he explained. "That probably is one of the policies that we would like to avoid," he said. Lazear's comments come as lawmakers on Capitol Hill grapple with ways to provide Americans with relief from rising energy prices...

Covering the Economy: What Makes an American?

Ezra Klein on immigration:

Ezra Klein: What Makes an American?: Larry King last night. The show featured wall-to-wall coverage of the May Day rallies with continuous commentary by a panel of Lou Dobbs, smiling beatifically; Dana Rohrabacher, who was unsuccessfully trying to hide the crazy; Bill Richardson, whose jowls could be used to smuggle immigrant families across the border; and Janet Murgala, president of the National Council of La Raza. What struck me throughout the broadcast was the pains Rohrabacher and Dobbs took to qualify every statement with a paean to the goodness and virtue of the immigrants in question. Hard-working folks, good, kind and honorable, too. Indeed, some of the best people you'll ever meet. Now let's put 'em on a bus.

The reason I'm relatively sanguine about the outcome of this debate is that the anti-immigrant forces are chained to some very tough rhetoric. The essence of "American" has never been geography, rarely do politicians wax rhapsodic over the quirk of fate that saw them born in San Diego rather than five miles further south. Instead, we've always prided ourselves on comprising a collection of transcendent characteristics, characteristics which allowed us to emerge a global nation, easily able to incorporate all those who would seek to share our values.

In this debate, however, the poor Mexicans who undergo a dangerous trek so they can work agonizingly hard for very little, and do all of it to guarantee their children a better life, are such quintessential expressions of American ideals that it's impossible to exclude them from the more metaphysical description of citizenship. So, instead, folks like Rohrabacher are being forced to redefine "American", making it nothing but an accident of geography, divorcing it from everything that has made our citizenship as more myth than mundane statement of birth place. And that, I think, is going to prove a pretty hard sell.

---

Nell Henderson of the Washington Post:

Effect of Immigration on Jobs, Wages Is Difficult for Economists to Nail Down: By Nell Henderson Washington Post Staff Writer: Saturday, April 15, 2006; D01: According to the economic models, it's a no-brainer: a surge of low-skilled immigrants should increase the supply of such workers, driving down wages at the expense of working-class Americans. Sen. Byron L. Dorgan (D-N.D.).... "I don't think you need a professor to understand that when you import substantial cheap labor, it displaces American workers."

But recent research suggests that the economic impact of immigration is not so simple. The effects are difficult to disentangle from other factors that have dampened wage growth for most workers in recent decades, including new technologies, the decline in manufacturing jobs, the drop in unionization, globalization and recessions. Yes, an influx of immigrants has helped depress the incomes of the lowest-skilled workers in recent decades, many economists agree. But they argue about the magnitude of the effect; some say it's big while others see it as slight. Meanwhile, increased immigration -- legal and illegal -- helps keep inflation low, boosts rents and housing values, and benefits the average U.S. taxpayer while burdening some state and local governments, other research finds...

My assessment of Henderson:

Brad DeLong's Semi-Daily Journal: The Immigration debate (Why Oh Why Can't We Have a Better Press Corps?): The problem, of course, is that Henderson's is a "he said, he said" article. Henderson doesn't provide readers with any information to help them evaluate the reasons why Borjas and Card have different views of what the data say. I like George Borjas and Larry Katz, but I do wish that Henderson had written that the large minus eight percent estimate of the effect on the wages of high-school dropouts reported by Borjas and Katz in http://papers.nber.org/papers/w11281 is imprecisely estimated: their data are fuzzy, and give an approximately one-sixth chance that the effect on high-school dropouts is positive. I like David Card, and do wish that Henderson had quoted enough to allow us to see why Card thinks the effects are small...

Paul Krugman on immigration:

North of the Border: I'm instinctively, emotionally pro-immigration. But a review of serious, nonpartisan research reveals some uncomfortable facts about the economics of modern immigration, and immigration from Mexico in particular. If people like me are going to respond effectively to anti-immigrant demagogues, we have to acknowledge those facts. First, the net benefits to the U.S. economy from immigration, aside from the large gains to the immigrants themselves, are small. Realistic estimates suggest that immigration since 1980 has raised the total income of native-born Americans by no more than a fraction of 1 percent. Second, while immigration may have raised overall income slightly, many of the worst-off native-born Americans are hurt by immigration -- especially immigration from Mexico.... George Borjas and Lawrence Katz... estimate that U.S. high school dropouts would earn as much as 8 percent more if it weren't for Mexican immigration. That's why it's intellectually dishonest to say, as President Bush does, that immigrants do "jobs that Americans will not do." The willingness of Americans to do a job depends on how much that job pays -- and the reason some jobs pay too little to attract native-born Americans is competition from poorly paid immigrants...

Alan Krueger on Immigration

Alan Krueger on Immigration: Immigration policy involves fundamental issues about what and who we are as a country. There are no simple answers on immigration policy because different people can legitimately assign different weights to the welfare of new immigrants, recent immigrants, and various groups of natives. In addition, there is considerable debate disagreement among economists about the economic impacts of immigration...

Gianmarco Ottaviano and Giovanni Peri:

Brad DeLong's Semi-Daily Journal: Immigration Once Again: Greg Anrig directs us to "the most significant new study about" immigration by the excellent and hard-working Gianmarco Ottaviano and Giovanni Peri:

Gianmarco I.P. Ottaviano and Giovanni Peri: "Rethinking the Gains from Immigration: Theory and Evidence from the U.S.": The standard empirical analysis of immigration, based on a simple labor demand and labor supply framework, has emphasized the negative impact of foreign born workers on the average wage of U.S.-born workers (particularly of those without a high school degree). A precise assessment of the average and relative effects of immigrants on U.S. wages, however, needs to consider labor as a differentiated input in production. Workers of different educational and experience levels are employed in different occupations and are therefore imperfectly substitutable.

When taking this approach, one realizes that foreign-born workers are "complements" of U.S.-born workers in two ways. First, foreign-born residents are relatively abundant in the educational groups in which natives are scarce. Second, their choice of occupations for given education and experience attainments is quite different from that of natives. This implies that U.S.- and foreign-born workers with similar education and experience levels are imperfectly substitutable. Accounting carefully for these complementarities and for the adjustment of physical capital induced by immigration, the conventional finding of immigration's impact on native wages is turned on its head: overall immigration over the 1980-2000 period significantly increased the average wages of U.S.-born workers (by around 2%)...

Arnold Kling gets medieval on George Borjas:

Arnold Kling: Open Markets, Open Borders...:

George Borjas writes:

Immigration policy is just another redistribution program. In the short run, it transfers wealth from one group (workers) to another (employers). Whether or not such transfers are desirable is one of the central questions in the immigration debate.

There is an isomorphism between immigration, outsourcing, and free trade in general. In each case, overall economic efficiency is increased, due to the law of comparative advantage. There are distributional effects, to be sure, but no nation has been able to demonstrate an ability to use trade restrictions of any sort to reduce overall poverty. Redistribution implies that trade is a zero-sum game. Borjas implies that immigration works like a tax on low-income workers and a subsidy to high-income employers. Of course, in any sort of competitive market, employers do not profit from lower costs but must instead pass them onto consumers. But why let a little economics get in the way of a folk-Marxist story?

Immigration, like all other forms of trade, is positive-sum game.... Immigration restrictions may change the composition of the least-well off. Overall, however, by weakening the economy immigration restrictions are likely to produce more poverty rather than less. I am not a passionate supporter of open immigration as an economic policy. I do not think that the gains are huge. But I am angry any time an economist misleadingly describes trade as a "redistribution program." At that point, you forfeit your identity as an economist and instead become a demagogue...

---

Singing the National Anthem in Spanish:

Think Progress:

President Bush, 4/28/06:

I think the national anthem ought to be sung in English, and I think people who want to be a citizen of this country ought to learn English and they ought to learn to sing the national anthem in English.

But in his book American Dynasty, Kevin Phillips notes that during Bush's first presidential campaign, he would often sing the national anthem in Spanish. From pg. 142:

When visiting cities like Chicago, Milwaukee, or Philadelphia, in pivotal states, he would drop in at Hispanic festivals and parties, sometimes joining in singing "The Star-Spangled Banner" in Spanish, sometimes partying with a "Viva Bush" mariachi band flown in from Texas...

Peter Baker of the Washington Post:

Administration Is Singing More Than One Tune on Spanish Version of Anthem: President Bush declared last week that the national anthem should be sung in English not Spanish, but he evidently never told his own government or campaign organizations. The State Department posts four Spanish versions of "The Star-Spangled Banner" on its Web site, and accounts from the 2000 election suggest that the song was at times performed in Spanish at Bush campaign events. Critics even turned up one reference to Bush himself singing the anthem in Spanish on the trail, but there was no confirmation.

The furor over a newly released Spanish version of the anthem has underscored once again the power of symbols in American politics. At a time when the immigration debate in Washington has divided Republicans on Capitol Hill, drawn hundreds of thousands of protesters into the streets and triggered a nationwide boycott, all sides are scrutinizing the words and records of the president and other politicians for signs of inconsistency.... Responding to a reporter, Bush said: "I think the national anthem ought to be sung in English. And I think people who want to be a citizen of this country ought to learn English, and they ought to learn to sing the national anthem in English."

And there seems little evidence that the matter had concerned Bush before. The Center for American Progress, a liberal group run by Clinton chief of staff John D. Podesta, posted on its blog a reference to Bush singing the anthem in Spanish. In his book, "American Dynasty," Kevin Phillips wrote that Bush "would drop in at Hispanic festivals and parties, sometimes joining in singing 'The Star-Spangled Banner' in Spanish, sometimes partying with a 'Viva Bush' mariachi band flown in from Texas."

White House spokesmen and former campaign operatives said they could not recall whether that happened, though given the level of Bush's Spanish proficiency, they seemed dubious.

"Honestly, I don't remember him ever singing the national anthem in Spanish," said Leonard Rodriguez, who was national director of Hispanic Coalition for Bush/Cheney 2000. "I can't see any of his advisers recommending it." But he added: "They may have played it. That's certainly in the realm of possibility." And Rodriguez said he does not recall Bush ever objecting to it.

A Telco Lobbyist Strikes Back...

I don't know enough about "net neutrality" to have an opinion, other than that Telco regulation is incredibly complicated. The argument against "net neutrality" is that it is a form of rate regulation, and even good rate regulation tends to turn very bad over time--witness the ICC--and I tend to think that that is a good argument.

But Telco lobbyist Mike McCurry deserves some kind of prize for claiming that what is in the interest of the side that has been writing him paychecks for eight years just happens to be "what I believe." I don't think McCurry knows enough about technology or economics to have an opinion on net neutrality--let alone a belief. I might have a different view of McCurry if he knew what the first name of Vinton G. Cerf was.

The Blog | Mike McCurry: Hostile Commentary and Net Neutrality | The Huffington Post: Reading lots of comments on my last post, I guess my point got made: the culture and discourse of the Internet is not what you would teach kids at the dinner table -- unless you kept a bar of soap handy.

On net neutrality, I feel like screaming "puh-leeeze." The First Amendment of the Internet is under assault! Oh yeah, how many of you lifted a finger to protect the First Amendment when the Washington Post and other "MSM" cited it to ferret out the truth about WMD and the wars inside the U.S. intelligence community over the pre-Iraq war (and now pre-Iran war)?...

The Internet is not a free public good. It is a bunch of wires and switches and connections and pipes and it is creaky. You all worship at Vince Cerf who has a clear financial interest in the outcome of this debate but you immediately castigate all of us who disagree and impune our motives. I get paid a reasonable but small sum to argue what I believe. How many of the net neuts out there are honest about the financial resources and special interests behind your side of the argument? Do you really believe this is good v. evil or just an honest disagreement about what will make the 'net flourish and prosper?...

As it is, I think Arianna Huffington is making a mistake in letting McCurry use her podium to do his work as a lobbyist for his clients.

Robert Reich Is Right: Raise the Minimum Wage

He writes:

Robert Reich's Blog: Tenth Anniversary of Minimum-Wage Hike. Democrats Should Do it Again.: Message to Democrats: It's time to do it again. Current estimates are that 12 million Americans are at the federal minimum wage (now $5.15 an hour). Almost all the 1996 increase has been eroded by inflation. Democrats should propose increasing it to at least $7 an hour. Force Republicans to vote on it. If they refuse to, or they vote it down, make it a big issue in the fall campaign.

Contrast the plight of America's 30-million working poor with the fortunes of America's CEOs. The CEO of Exxon-Mobile just raked in over $400 million for his efforts last year. Assuming he worked a normal work week (not counting time on the golf course with members of his compensation committee), he got about $200,000 an hour....

In 1996, Republicans predicted that the raise from $4.25 to $5.15 would result in millions of job losses. But in fact, about 13 million new jobs were added to the American economy between 1996 and 2000. Earth to Congressional Democrats: Now's the time. Tenth anniversary. All the gain then now lost to inflation. 85 percent of Americans favor it. Mid-term election in the fall. It's a no-brainer.

---

Remember from October 13, 2004, when George W. Bush claimed to be in favor of raising the minimum wage?

washingtonpost.com: Third Presidential Debate -- President Bush and Sen. John Kerry: BUSH: Actually, Mitch McConnell had a minimum-wage plan that I supported that would have increased the minimum wage...

Note that he had to specify: McConnell's plan was to increase and not decrease the minimum wage.

Impeach George W. Bush. Impeach him now.

The Mind Is Its Own Place...

The mind is its own place, and can make a heaven of hell, a hell of heaven. Or so John Milton's Satan argued to himself, after his failed attempt at regime change.

Marginal Revolution: Did Gary Becker prove that advertising is informative?: Did Gary Becker prove that advertising is informative? So claims a NYT obituary for John Kenneth Galbraith. CrookedTimber and Brad DeLong question whether such models should be called "proofs." Fair enough, but neither does the obituary correctly represent Becker's theory of advertising. As I understand Becker's work (with Kevin Murphy) on the topic, individuals consume "social images" or "self-images." Having Nike shoes gives you the "benefits of being cool" if a) you actually have Nikes, and b) the ad links Nikes to a cool image for your relevant peer group. The standard economic theory of complements then applies for analyzing ads.

Under some conditions, advertising can be a "bad" for consumers, not a "good," and advertisers will pay consumers to watch ads. Furthermore ads will present images and cultural linkages, rather than substantive information in the traditional sense. This generates some Galbraithian results, but without requiring that consumers are "tricked" or even "persuaded" into a particular point of view. This is not a proof; I think of it as an existence theorem that advertising can make corporate sense, and sometimes be socially welfare-improving, yet without being very informative...

It is, of course, true that in the Becker-Murphy "social images" model commercial advertising cannot get you to the first-best. A world in which you have to wear Nike shoes in order to obtain a symbolic link to the successful athletic career of Michael Jordan is worse than one in which wearing any shoes at all gives you a symbolic link to the successful athletic career of Michael Jordan. The government should take Nike's TV advertising slots by eminent domain, and play commercials that link all shoes--not just Nikes--to the "cool image" of Michael Jordan.

An Yglesias for All Seasons

A Man for All Seasons (1966): Thomas More: May I see that chain Richard?

Richard Rich: Certainly.

Thomas More: It is a fine chain.

Richard Rich: It has pleased His Majesty to make me Justiciar for Wales.

Thomas More: Why Richard, it profits a man nothing to give his soul for the whole world... but for Wales?

Matthew Yglesias appears to be happy that the Democrats are diminishing their maneuvering room to ever get the country to adopt a sensible energy and environmental policy:

TAPPED: WHO YOU CALLIN' STUPID? Methinks a lot of folks out there are too quick to underestimate the intelligence of highly trained professional politicians. The basic dilemma facing Democrats at the moment regarding gasoline goes as follows:

High gas prices are very unpopular with the public. This presents an opportunity for the opposition party to score gains against a genuinely pernicious incumbent party by presenting itself as prepared to "do something" about the situation. But, simultaneously, the correct liberal point of view is that high gasoline prices are actually a good thing for environmental and foreign policy reasons. Ergo, Democrats propose "legislation that would put a moratorium on the Federal gasoline tax for at least 60-days to provide consumers immediate relief at the pump," but would also "chop oil company tax benefits and burden refineries with unwarranted reporting requirements, making it unable to win enough support in Congress to have even a remote chance of passing."

This accomplishes the political goal of making the Republicans unpopular -- siding with their corporate masters to defeat a plan to lower the price of gasoline -- while also accomplishing the policy goal of not making gasoline prices lower. That, to me, deserves the label "smart."...

John Whitehead... and Brad DeLong... labeling the initiative an example of "stupidity." But it's not silly, it's not stupid, and it's a very efficient way of combining the Democratic Party's two primary goals under circumstances where they seem to be deeply in tension. If you want to call it "dishonest political theater" or "posturing," then that's your right. But it's very smart posturing. The substantive drawbacks of the proposal are no downside at all because it clearly can't pass...

It's hard to reverse rhetorical field. Once you're on record as saying that the problem with gasoline prices is that they're too high, it's hard to get to where you ultimately want to be.

The Financial Times Has a View of Bush Energy Policy

The Financial Times editorial page tells us what it thinks of George W. Bush and his energy policy:

FT.com / Comment & analysis / Editorial comment - Bush runs on empty: Pity the leader of a nation that regards cheap petrol as a basic human right. That is President George W. Bush's position as pump prices start to approach a high of $3 a gallon ahead of next month's driving season - and next autumn's mid-term elections - while his approval ratings are closing fast on a low of about 30 per cent.

Do not pity him for too long, though, because Mr Bush has really squandered the chance to do something about what he has correctly characterised as America's "addiction" to oil.

After the attacks of September 11 2001, the president had a unique opportunity to create a bipartisan and public consensus behind increased energy efficiency and reduced energy dependency, especially on oil imported from politically unreliable parts of the Middle East, Africa and Latin America. He did not take it. Instead, the administration took four years to produce an energy bill that, in spite of some electricity network improvements, in no way addresses the fact that per capita energy use in the US is far higher than in any of its competitors - in transport, for example, three times that of Japan.

This level of energy intensity has little to do with high rates of economic growth and a great deal to do with driving habits. More fuel-efficient engines do not translate into more miles per gallon if cars keep getting heavier and faster, and the culture and the economic incentives ensure that the Hummer trumps the Hybrid.

This week the president announced a package of measures to the Renewable Fuels Association. He plans to "leave a little more oil in the market" by suspending deposits in the strategic petroleum reserve; issue a series of waivers on clean fuel standards; and order a probe into possible price manipulation by big oil. The markets rightly read this as inconsequential populism and the oil price remains stubbornly high.

More to the point, and unlike previous price spikes from the Arab oil embargo to the three Gulf wars, it is not just current prices that are high. The markets are forecasting prices above $70 a barrel five years ahead. The era of cheap oil may be over.

High global economic growth, especially in Asia, is powering demand for a tight supply of oil, made tighter by insufficient refining capacity. Most of all, there are probably no big new oil fields to be discovered, while nearly all the big old oil fields are in regions (not just the Middle East) offering an infinite variety of political risk. As but one example, a more considered, less bellicose US attitude towards Iran would do more to steady the oil market than all Mr Bush's measures put together.

In the end, however, America's addiction can be beaten only by hard policy decisions: rigorous fuel-efficiency standards, a tax regime that prices petrol realistically, as well as a framework of incentives for investment in alternative technologies. Meanwhile, the best agent of change is expensive oil.

Impeach George W. Bush. Impeach him now.

Party of Stupidity Watch II

The Republicans. Tim Haab is on the case:

Environmental Economics: Read this Quick: Gas Rebate Proposal: GOP senator are proposing a $100 tax credit to "offset the pain of higher pump prices for gasoline." I have to post this quickly because there is an economic lesson to be learned, but this thing is likely to be voted down before I can finish typing.

So what's the lesson? Consumers respond to prices at the margin--that is behavior changes when the price of the last unit of a good purhased changes. Imagine the local street hot-dog vendor us trying to get you to buy more hot dogs. Which is more likely to increase hot dog sales--the vendor giving you $5 or the vendor dropping his price by 10%? Now, I've already argued that the evil gas producers can't lower their prices on a whim, but the government could if they wanted to--by reducing the per gallon gas tax. Now that would be just plain silly--right?

My point is, this gas tax rebate proposal will have absolutely no effect on gas prices or gas consumption behavior. It will simply give everyone a $100 bonus to do with as they see fit.

If the goal of the Senate is to reduce the burden on those spending the most on gas, a lump-sum rebate won't do it. IF the goal is to just give everyone $100 and see what happens, this looks like the perfect proposal. And as John has repeatedly and convincingly argued...IF the goal is to reduce dependence on gas powered vehicles, then we need an increase in the gas tax.

This thing is dead in the water because the tax rebate proposal contains an amendment allowing drilling in ANWR.

Party of Stupidity Watch I

Party of Stupidity watch. The Democrats. John Whitehead is on the case:

Environmental Economics: Dems propose a holiday: Right, it would be silly plus stupid (i.e., "inefficient" to an economist). But, who cares in an election year:

Following President Bush's four-point plan outlined today, Democrats proposed legislation that would put a moratorium on the Federal gasoline tax for at least 60-days to provide consumers immediate relief at the pump. But the proposed legislation would also chop oil company tax benefits and burden refineries with unwarranted reporting requirements, making it unable to win enough support in Congress to have even a remote chance of passing...

Remember: the Democratic position--and the correct position as far as the public interest is concerned--is that gasoline prices are not too high but too low. Global warming, road congestion, and a desire to curb the damage that can be done by the mess in the Middle East all mean that we should be providing incentives for Americans to wean themselves to a less oil-guzzling lifestyle.

Covering the Economy: Gasoline Prices

Democrats are (because of the environmentalist wing of the party) generally in favor of higher gasoline taxes and higher gasoline prices--except when gasoline prices are high). Republicans are in favor of letting oil markets "work"--except when gasoline prices are high.

Here's a sampling of stories:

Here's AP:

AP Josef Hebert | Plans Produced to Attack High Gas Prices : WASHINGTON — High gasoline costs and the political fallout they may create are producing a flurry of proposals from both Republicans and Democrats aimed at soothing motorists' anger. But nobody is predicting prices will ease anytime soon. Democrats are blaming Republicans, especially President Bush, while Republicans argue that congressional Democrats have stood in the way of more domestic oil production.

Bush directed his environmental agency Tuesday to stand ready to ease clean air rules if they interfere in gasoline supplies this summer. Industry analysts said that likely would have only a marginal influence on prices. The president also announced that the government would not take 10 million barrels of oil out of the market for the U.S. emergency reserve as had been planned. Bush maintained that "every little bit helps," even though industry analysts said that was so little oil it would have no impact on prices.

The president expressed frustration at his inability to force down prices. "What people are seeing at their gasoline pumps reflects the global economy in which we live," he acknowledged in a speech aimed at countering critics who have accused him of being soft on oil companies and ignoring high prices at the pump.

Bush vowed to pursue any collusion or price gouging and directed the Justice Department to help states pursue allegations that "gas prices have been unfairly manipulated." But the White House opposes additional federal laws to address price gouging or strengthen antitrust laws as they pertain to oil companies, as some members of Congress have proposed. "There are very good laws on the books," said Al Hubbard, the president's chief economics adviser. "What's important is that those laws are enforced aggressively."...

Here's Gary Richards from the Mercury News:

MercuryNews.com | 04/26/2006 | Soaring gasoline prices forecast: By Gary Richards Mercury News: California's average gasoline price jumped two cents Tuesday to $3.14 a gallon, and some analysts said drivers could be paying $3.35 or more by Memorial Day, May 29. The gloomy forecast came on the same day President Bush announced measures he said could curb rising prices -- freeing up oil reserves and temporarily waiving regional clean-air requirements.

Those moves may have calmed the energy market -- crude oil and gas futures fell slightly Tuesday. But most experts say they will provide little significant relief over the next few weeks. ``We wish we could tell you there's light at the end of the tunnel, but it's probably an oncoming train,'' said Sean Comey, spokesman for AAA of Northern California.

Bush called for a nationwide probe into possible price manipulation. He directed the Energy Department to delay oil shipments this summer to the Strategic Petroleum Reserve, the government's fuel stockpile. The change would free up about 12 million barrels of oil over the summer, a small percentage considering the nation consumes 20 million barrels a day. ``It's more symbol than substance,'' said David Sandalow, an energy expert at the Brookings Institution.

Skeptics, including Sen. Barbara Boxer, D-Calif., questioned Bush's call to investigate price gouging, saying the Federal Trade Commission is already probing the issue because of legislation Democrats pushed through Congress. The agency's findings are expected late in May.

And here's Chris Cilizza from the Washington Post:

The Fix -- Chris Cillizza's Politics Blog on washingtonpost.com: Parsing the Polls: The Politics of Gas Prices: You can't swing a cat in Washington, D.C., this week without hitting a politician talking about the rapid increase in gas prices and what should be done about it. President George W. Bush on Tuesday sought to address the problem, calling for an investigation into possible price gouging the increased in alternative fuels like ethanol. The president ruled out setting a fixed price for gas.

The rising cost of gas -- now around $3 a gallon across the country -- has Republican strategists concerned (and Democrats elated) about its impact on the national political environment this fall. Already on the defensive over Iraq and the handling of Hurricane Katrina, congressional Republicans are seeking to project a proactive response to gas prices -- although most members admit that there is no quick or easy solution. (Expect GOP leaders to do a series of events on Thursday as Exxon Mobil announces its profits.) Democrats, for their part, have tried to tie gas prices to Republicans' alleged "giveaways" to oil companies over the past few years.

Who will win this rhetorical fight? And is the public paying attention? Let's parse the polls to find some answers.

Two things immediately become apparent when examining recent polling on gas prices: Americans see the rising costs as a major burden and are generally unhappy about what the Bush administration has done to address the problem.... 70 percent of those tested said the "recent price increases in gasoline" have caused "financial hardship" for their families.... 23 percent of respondents said gasoline prices have caused "a severe hardship that affects your ability to maintain your standard of living," while 26 percent identified it a "moderate hardship that affects you somewhat but does not jeopardize your current standard of living." Just more than one-quarter of voters (28 percent) said the gas price increase has caused them no hardship.... [C]onsiderable anxiety exists in the general public about gas -- its price and availability. It is a prototypical pocketbook issue -- one that every American (Democrat, Republican and independent) can identify with and one that people want the government to address.... [T]he public is dissatisfied with the Bush administration's approach to solving the problem. In the Post-ABC survey, just 23 percent approved of the job the White House was doing on the "situation with gasoline prices," while 74 percent disapproved....

Putting aside the fact that more than one-third of the sample put the blame on President Bush, the finding that a near-majority of voters cite U.S. oil companies as the root of the problem should concern Republican strategists.... [V]oters are much more open to believe that Republicans are helping out their friends in Big Oil -- especially when the president and vice president have each served as high-ranking officials in oil or energy services companies.

Expect Democrats to hammer home those connections in the weeks and months ahead of the fall election, and they're likely to lay out a broad vision of their own on energy policy. These numbers seem to suggest a considerable opening for Democrats on the issue (much more so than corruption in Congress), but it remains to be seen if any alternative they offer will resonate with disgruntled voters. A plan should emerge before this summer, according to an informed party strategist...

Economics of Publishing

The marginal cost of printing an extra copy of a book is really cheap:

alg: P&Ls and how books make (or don't) money: part the first: the mass market original complete failure: The [paper, printing, and binding cost]... also includes the cost of printing the cover, so it changes depending on the cover's special effects. Spot gloss, embossing, debossing, foil, print over foil -- it's all special effects and it costs extra. A cover that is printed with an entirely glossy finish does not cost extra. A cover printed with an entirely matte finish does not cost extra. Embossing and foiling type on a cover can cost up to 25 cents extra per copy. For a 320 page book with no effects on the cover, PP&B for 35,000 books costs $19,295. Not included in the PPB is the manufacturing cost -- fixed cost to keep the lights on in the factory, pay the workers, move the machines. This is covered under "typesetting and design" though...

55 cents a book...

More than 90% of the cost of the book is made up of (a) the fixed cost of producing the first copy, and (b) the complicated distributional and informational process that gets it into the hands of somebody who wants it.

Immigration Once Again

Greg Anrig directs us to "the most significant new study about" immigration by the excellent and hard-working Gianmarco Ottaviano and Giovanni Peri:

Gianmarco I.P. Ottaviano and Giovanni Peri: "Rethinking the Gains from Immigration: Theory and Evidence from the U.S.": The standard empirical analysis of immigration, based on a simple labor demand and labor supply framework, has emphasized the negative impact of foreign born workers on the average wage of U.S.-born workers (particularly of those without a high school degree). A precise assessment of the average and relative effects of immigrants on U.S. wages, however, needs to consider labor as a differentiated input in production. Workers of different educational and experience levels are employed in different occupations and are therefore imperfectly substitutable.

When taking this approach, one realizes that foreign-born workers are “complements” of U.S.-born workers in two ways. First, foreign-born residents are relatively abundant in the educational groups in which natives are scarce. Second, their choice of occupations for given education and experience attainments is quite different from that of natives. This implies that U.S.- and foreign-born workers with similar education and experience levels are imperfectly substitutable. Accounting carefully for these complementarities and for the adjustment of physical capital induced by immigration, the conventional finding of immigration’s impact on native wages is turned on its head: overall immigration over the 1980-2000 period significantly increased the average wages of U.S.-born workers (by around 2%).

Considering its distribution across workers, such an effect was positive for the wage of all native workers with at least a high school degree (88% of the labor force in year 2000), while it was null to moderately negative for the wages of natives without a high school degree.

Open Markets, Open Borders...

Arnold Kling gets medieval on George Borjas:

EconLog, Free Trade Equals Redistribution?, Arnold Kling: Library of Economics and Liberty: George Borjas writes:

Immigration policy is just another redistribution program. In the short run, it transfers wealth from one group (workers) to another (employers). Whether or not such transfers are desirable is one of the central questions in the immigration debate.

There is an isomorphism between immigration, outsourcing, and free trade in general. In each case, overall economic efficiency is increased, due to the law of comparative advantage. There are distributional effects, to be sure, but no nation has been able to demonstrate an ability to use trade restrictions of any sort to reduce overall poverty.

Redistribution implies that trade is a zero-sum game. Borjas implies that immigration works like a tax on low-income workers and a subsidy to high-income employers. Of course, in any sort of competitive market, employers do not profit from lower costs but must instead pass them onto consumers. But why let a little economics get in the way of a folk-Marxist story?

Immigration, like all other forms of trade, is positive-sum game. All forms of trade restrictions hurt the economy. Immigration restrictions may change the composition of the least-well off. Overall, however, by weakening the economy immigration restrictions are likely to produce more poverty rather than less.

I am not a passionate supporter of open immigration as an economic policy. I do not think that the gains are huge. But I am angry any time an economist misleadingly describes trade as a "redistribution program." At that point, you forfeit your identity as an economist and instead become a demagogue.