Ben Muse

Distribution of the U.S. Federal

Distribution of the U.S. Federal tax burden

New Congressional Budget Office (CBO) study on how federal government tax burdens were distributed among income groups from 1997-2000, here: "Effective Federal Tax Rates, 1997 to 2000" There are lots of tables and charts here, and I may try to reproduce some when I figure how to copy figures with my old version of Acrobat reader. However, the key points:

"In the late 1990s, households experienced only small changes in effective tax rates. Between 1997 and 2000, the overall effective federal tax rate dipped slightly in the first year before climbing to a level in 2000 that was 0.2 percentage points above that in 1997... In each of the four years, the overall effective tax rate was higher than in any year since 1979, peaking at 23.1 percent in 2000. That rising rate resulted at least partly from the tax code’s progressive rate schedule and the continued growth of pretax household income, the average of which reached an all-time high of $74,100 in 2000—11 percent above its level in 1997 of $66,700 (expressed in 2000 dollars).

"Those overall trends were not uniform across the income distribution. The effective tax rate borne by households in the lowest fifth, or quintile, of the distribution climbed by 0.6 percentage points—from 5.8 percent in 1997 to 6.4 percent in 2000... In contrast, the rate faced by households in the middle quintile fell by 0.7 percentage points—from 17.4 percent to 16.7 percent. The top quintile’s effective tax rate was a steady 28.0 percent in both 1997 and 2000. The biggest reduction in rates was found among households in the top 1 percent of the income distribution: the effective rate for those households fell by 1.7 percentage points to 33.2 percent in 2000. That drop in rates resulted from a reduction in the effective corporate income tax rate faced by those households.

"The increase in the overall effective tax rate stemmed from a rise of 0.8 percentage points in the effective individual income tax rate that was offset by smaller declines in the effective rates on payroll and corporate income taxes... Two factors contributed to the uptick in individual income tax rates. First, real (inflation-adjusted) income growth pushed more house-holds into higher tax brackets, a phenomenon known as “real bracket creep.” Second, reported income at the upper end of the income distribution grew disproportionately quickly, making a larger share of income subject to the higher rates of the top tax brackets.

"Effective individual income tax rates rose (became less negative) for households in the lowest income quintiles and rose for those in the highest quintiles. They were nearly constant for households in the fourth quintile and fell for those in the second and middle quintiles...

"Effective rates for other taxes showed little change between 1997 and 2000, almost regardless of income level. Social insurance, or payroll, tax rates were roughly constant for all households except those in the highest quintile, for which the cap on Social Security taxes limits the growth of payroll tax liability (see Figure 5). The effective corporate income tax rate fell slightly in every year between 1997 and 2000; the largest percentage-point decline occurred among the highest income categories... Finally, the effective federal excise tax rate during that period shifted by no more than 0.1 percentage points for any income group and was constant across all four years for households with the highest income...

"Average real pretax reported income increased by 11 per-cent between 1997 and 2000... However, all quintiles did not see the same percentage rise. For households in the lowest quintile, average income grew by 3 percent, compared with 17 percent for those in the highest quintile. That unequal growth was observed as well in the top percentiles of the income distribution: average income for the top 10 percent of households climbed 20 percent over the three years but jumped 34 percent for the 1 percent of households with the highest income...

"Because of the rapid growth of reported income for that 1 percent of households—and despite the decline in their effective tax rate—the share of taxes paid by the wealthiest households increased from 22.7 percent of all federal revenues in 1997 to 25.6 percent in 2000... Other households in the top 10 percent of the income distribution experienced a small increase in their tax share. The larger share paid by the wealthiest households was balanced by decreases in the shares paid by house-holds in the middle three quintiles and the lower half of the highest quintile. The share of taxes that households in the lowest quintile accounted for did not change over the period."

I learned about this from EconoPundit "Rich pay more..."

Jackson Hole Conference ends The

Jackson Hole Conference ends

The Federal Reserve Bank of Kansas City's 27th Annual symposium on economic policy, in Jackson Hole Wyoming, is over.

Martin Crutsinger of the Associated Press reports, here: "Federal Reserve economic conference ends"

"JACKSON, Wyo. -- Take Ph.D. economists from some 20 countries, add the world's most powerful central banker and spice things up with white water rafting and horseback rides and you have the recipe for what might be called "Summer Camp for the Incredibly Gifted and Talented..."

The text of Allan Greenspan's speech may be found here: "Monetary Policy under Uncertainty". A Reuter's story on the speech by Victoria Thieberger may be found here: "Greenspan Defends Fed's Monetary Policy"

"Federal Reserve Chairman Alan Greenspan fired back at critics on Friday, saying flexible policy was better for the complex U.S. economy than rigid rules like inflation targets.

" "Some critics have argued that such an approach to policy is too undisciplined -- judgmental, seemingly discretionary and difficult to explain," Greenspan told the Kansas City Fed's annual conference, a venue he used last year to defend his handling of the 1990s stock market bubble.

"Some advocates of more structured monetary policy, including Fed Governor Ben Bernanke, have said the Fed should adopt policy prescriptions like inflation targets, which many central banks -- including the European Central Bank -- use to keep prices within set boundaries..."

Rich Miller analyses the speech for Business Week Online, here: "Greenspan's Credibility Gap ".

James Stock and Mark Watson apparently gave a paper on changes in business cycle fluctuations that attracted a lot of interest. Fox News reports, here: "Study Shows Fed Was Lucky Over Past Two Decades "

"JACKSON HOLE, Wyo. — The moderation in business cycle swings in the past two decades owes more to good luck than good management by central banks, according to a paper presented at a Federal Reserve (search) conference Friday.

"In a paper that gives little credit to the power of monetary policy for calming business cycles, economists from the National Bureau of Economic Research (search) concluded that improvements in policy were not the main factor behind the smaller booms and busts of recent years.

"The drop in economic volatility has more to do with an absence of major blows like the oil shocks of the 1970s than policy, NBER economists James Stock and Mark Watson argued."

You can find a copy of Stock and Watson's paper here: "Has the Business Cycle Changed? Evidence and Explanations" Brad Delong commented on it, and posted his remarks to his blog: "Comment on Stock and Watson"

In another post, DeLong noted that administration officials were missing from the conference: "Jackson Hole Conference".

"...And the George W. Bush administration people were strangely absent: the only one I saw was former CEA Chair Glenn Hubbard. But nobody from the Treasury, nobody from the current CEA [Council of Economic Advisors - Ben], nobody from the NEC [National Economic Council - Ben]."

Symposium proceedings from prior years may be found at the Kansas City Fed's website, here: "Symposium Proceedings".

Brad DeLong explains just how much fun it was, here: "Summer Dawn Comes to the Big Teat Mountains" and here "Jackson Hole Conference":

"Unfortunately, it started (unusually for Jackson Hole on Labor Day weekend) to rain--hard--just after the conference began Friday morning, and it kept raining all through Saturday: that made hiking, horseback riding, and white-water rafting seem much less attractive than...

...debating whether "monetary policy" is usefully modeled by a John Taylor-style interest rate rule.

...listening to Alan Greenspan reflect on the "...strange phenomenon in 1998 of the sudden emergence of and sharp rise in risk premia on fundamentally-riskless but temporarily illiquid securities..."

...hearing the second conference chair in a row say that they are going to recognize Jacob Frenkel because they want to "...see how short and succinct a comment can be..."

...watching Ken Rogoff apologize because he "... didn't get the culture. This morning when I got up I put on a tie. And I didn't realize that the Jackson Lake Lodge is like Harvard: When they say that a room is 'wired' what they mean is that it has electricity..."

...and nodding as Guillermo Ortiz [Mexican central banker - Ben] says that he has a key intellectual advantage: while everyone else's thin blood is struggling to carry enough oxygen to their brain at the Jackson Lake Lodge's 6800 feet above sea level, he is actually breathing thicker air than he is used to..."

Sir William Petty's catamaran Kieran

Sir William Petty's catamaran

Kieran Healy has a short posting (based on his reading of Pepys' diary) on 17th Century proto-economist William Petty's experiments with catamarans, here "Funding Basic Research ". Healy links to sites with writings by and about Petty. While Healy's post is short, he does link to a longer Petty catamaran post (use his "double-bottomed boat" link).

Neoclassical and behavioral economics

The Economist "Economics focus" column this week highlights research examining the implications of cognitive psychology for economic analysis.

Modern mainstream, or neo-classical, economics is based on assumptions about decision making that cognitive psychology finds wanting. Neo-classical economics assumes that people make decisions to maximize a satisfaction or utility that does not depend on their income or consumption levels relative to those of the people around them. It assumes that people make decisions without regard to sunk costs or to their current endowments of goods. It assumes that they don't psychologically compartmentalize their budgets or resources, devoting the different compartments to different purposes.

Results from cognitive psychology are challenging many of these assumptions, and economics is faced with figuring out the implications. The Economist column is devoted to research on one of these issues - the endowment effect. In summary, the article finds that experience in market contexts is associated with a learning process. Persons with little experience with market transactions have a significant endowment effect, but this disappears as they acquire experience. The article is here: "To have and to hold". The following selection doesn't address the main result of the article, but it does indicate what's at stake:

"Some recent work should at least help. It explores the �endowment effect�, one of the chief tenets of prospect theory. Put simply, this means that people place an extra value on things they already own. Think of a favourite sweater, or your house: would you swap either for something of equal market value? Over the past decade, prospect theorists have found support for the endowment effect in scores of experiments. In one of the best-known, researchers at Cornell University began by giving university students either a coffee mug or a chocolate bar, each with identical market values. First the experimenters confirmed that roughly half the students preferred each good. After the goodies were handed out, they let the students trade: those who had wanted mugs but got chocolate (or vice versa) could swap. "With barely 10% of students opting to trade, the endowment effect seemed established (you would expect 50% to have swapped, given the random allocation of gifts). Even after a short time with things of little value, ownership had overwhelmed the students' prior tastes. Dozens of other tests have produced similar results, and have produced a wave of criticism of neoclassical economics. "The criticism has been taken seriously, as it should be: if the endowment effect is real, people's economic decisions are fundamentally different from what economists have assumed. The implications of this are profound. To take one example, the Coase theorem, which argues that initial allocations of wealth do not matter as long as markets allow people to trade their stakes�the rationale for government auctions of everything from radio spectrum to mobile-telephone licences�would no longer be valid. To take another, although economists have shown that you need only a few sharp traders for prices in financial (and other) markets to become efficient, the volume of trade with an endowment effect will be below what it might be without one."

I learned about this from "Pejmanesque". I think cognitive psychology will enhance and enrich neo-classical economics, but that neo-classical economics will ultimately retain much of its essential character. I've thought this since I read a book called Choosing the Right Pond by Robert Franks of Cornell (many years ago).

Franks accepted that status matters to people, an idea not built into the neo-classical assumptions. He pointed to evidence that people care less about their position vis-a-vis people they don't come in contact with, and more about their position with respect to others in the circles within which they move. He also recognized that people are different, that status matters much more for some than for others, In this, he saw, were opportunities for gains from trade.

Neo-classical theory suggests that in competitive markets, people will be paid a wage equal to the value of their marginal product. Now people differ in their marginal productivity as well as in their taste for status. Everyone could work in a firm where everyone else had the same marginal products and was paid the same wage. But how much better off things would be if people with a taste for status worked in firms with people who were indifferent to it!  This would make the people who really valued status happier without a proportionate reduction in the happiness of the others. Relatively high wage people, who valued status highly, might be willing to give up some part of their wages in order to enjoy the proximity of other persons who had lower wages (and thus status). People with lower wages might be willing to work in an organization with higher wage and status persons if they were given a somewhat higher wage than they would otherwise have had as compensation for their relatively lower status.

Frank's conclusion was that the range of wages observed would not be as wide as a marginal productivity wage model would suggest. As I recall he then had some ingenious tests of the hypothesis and did not reject it.

minor editorial revisions June 11, 2007

Rationing forgiveness under conditions of

Rationing forgiveness under conditions of excess demand

Donald Sensing retells the story of Monsignor Hugh O'Flaherty and Col. Herbert Kappler, here: "Loving one's enemies".

P.S. (8-31-03): A follow-up post: "An Israeli responds".

Resource allocation when prices are

Resource allocation when prices are set below the market clearing level (in Brisbane)

John Quiggin describes the allocation of seats on a city bus, here: "Age before beauty"

Why is Bustamante's proposed constitutional

Why is Bustamante's proposed constitutional amendment to control gasoline prices a bad idea?

California gubernatorial candidate Cruz Bustamente has proposed an amendment to the California constitution to allow the state's public utilities commission to regulate gasoline prices. Natural resource economist Lynne Kiesling describes some of the problems with this proposal, in this blog posting: "Bustamante's Proposal to Regulate Gasoline as a Utility".

Drugs for poor countries I

Drugs for poor countries

I posted Thursday on the agreement this week to alter trade rules to make it easier for poor countries to access pharmaceutical drugs, here: "Drug availability for poor countries" Peter Gallagher posted Friday on the implications of the agreement. Gallagher provides some short, readable background, placing the agreement in the context of international patent protection treaties. He concludes that, really, this shouldn't have been a big deal:

"In truth, it's not much of a public health problem at all. More than 90% of the drugs on the World Health Organization's list of essential public health medicines are not patented anywhere. Of the others, some are not patented in e.g. African countries. Most are already available under preferential pricing arrangements (typically free) between the global drugs companies and governments of poor countries.

"The legal conflict in the TRIPS Agreement, too, is pretty small beer. You can probably think of a couple of sentences that could be added to the TRIPS Agreement to work around specific problems with a small number of patented drugs without undermining the global patent system.

"So why the agony? The real problems appear to have been ideological NGO's who have been pressing exaggerated claims about the public health consequences of the patents and a legalistic approach by the officials and lawyers advising the drug companies that seemed to exaggerate the threat to the companies' global interests

"Most of the negotiators at WTO in Geneva share the general incredulity that this basically simple issue was not solved a year ago. Let's hope it's now behind us."

Bad news from London (about traffic)

Iain Murray in Tech Central Station critiques London's new congestion charge system, here: "Down the Tube ".  I learned about this from Arnold Kling: "Demand Too Elastic?".

I posted earlier this year on the London scheme: (a) "Using a fee to control externalities"; (b) "London's Congestion Pricing Scheme"; (c) "Follow-up on London congestion pricing".

Lynne Kiesling on the Administration's

Lynne Kiesling on the Administration's new New Source Review rules

Here: "New Source Review".

"To hear some of the "environmentalist" and media folks talk about this, it's like the EPA has repealed all air quality regualtions and we'll be soon plummeted into a universe of dark, sooty skies. But how realistic an opinion is that? Not very, in my view. First, new source review and the stringent treatment of equipment upgrades has induced firms to stick with older, less efifcient, more polluting technology than they might otherwise have implemented. What the Chicken Litlle crowd often forgets is that fuel costs for these companies are a substantial portion of their budgets, so if power plants and refineries can get more bang for their fuel buck by installing new technology, they would like to. Furthermore, these newer technologies are cleaner burning, and therefore less polluting than the grandfathered ones. But if installing these new technologies will trigger a long, extensive, bureaucratic review, at the end of which you will be subject to more stringent emission regulation, are you going to want to go through all of that as long as you can avoid it? Certainly not. [NOTE: always remember and never forget that arguments like these are marginal arguments, that I am claiming at the margin that NSR induces less technology upgrading than we would see otherwise]

"So the complaint about the NSR changes seems to be that the companies will be allowed to upgrade their equipment without being forced to decrease their emissions. OK, so ... how does this make us worse off than we have been in the situation in which they choose not to upgrade at all? They will still be held to the same Clean Air Act regulations..."

Bustamante wants to regulate gasoline

Bustamante wants to regulate gasoline prices as if gasoline were a public utility

Mark Kleiman posts on the story here: "BAD and Good Reasons For Not Wanting Bustamente as Governor".

Costs in the Canadian health

Costs in the Canadian health care system

Arnold Kling posts on the costs of health care in the Canadian health care system, here: "Canadian Health Care". Non-price rationing:

"When my wife and I stayed at a Bed and Breakfast on Prince Edward Island, the owner said that seven years ago when they first moved to PEI, he was put on a three year waiting list to be assigned a personal physician. He has a heart murmur, and he was unhappy about this. One day, by chance he ran into the head of the provincial health service and talked her into moving him to the head of the queue. He told this as a reassuring story, but it made me wonder about the people he bumped back."

The IMF has concerns about

The IMF has concerns about U.S. fiscal policy

CNNMoney reports on an upcoming IMF report: "IMF slams U.S. over budget "

"MILAN, Italy (Reuters) - The International Monetary Fund is set to reproach the United States for being too optimistic in its assumptions on government spending and revenues and lacking a coherent budget plan, according to a summary of a draft report.

"The report "criticizes the U.S. government's excessively optimistic assumptions regarding the development of overall state spending and revenues and the lack of a medium-term concept to consolidate budgets and reform the social insurance system," the draft said..."

I learned about this from ArgMax: "IMF on US Budget ". Brad DeLong also links to the story ("The IMF Is Unhappy"), and adds the following comment:

"Various people who have worked in past Republican administrations say that the quality of economic-policy decision-making in this particular Bush Administration really is atrociously bad--as bad as in Reagan's disastrous first year."

I wonder if that continues to apply since the turnover in policy making staff late last year and early this year.

How much interest is there

How much interest is there in outdoor sports and wilderness experiences?

Weak demand for outdoor recreation experiences? Alicia Ault reports on the 22nd Outdoor Retailer Summer Market in the OpinionJournal, here: "A Wealth of 'Gear'--for What?".

"But despite the party-on patina, the 862 exhibitors and the 17,863 attendees, the show has become an increasingly desperate trip. The $5.2 billion specialty outdoors market is showing its age.

"According to the Outdoor Industry Association's 2002 annual recreation survey, the number of newcomers to cycling, canoeing, climbing, hiking and snowshoeing was flat, continuing a trend that started in 1999. Backpacking declined. And the outdoors folks are trying to figure out how to crack the youth market, which would rather jump off a cliff than hump a pack through the woods."

I learned about this from EconoPundit (who just returned from a car camping vacation): "Coleman car-campers are gloating... "

California's budget crisis Mark Kleiman

California's budget crisis

Mark Kleiman reports on California's budget crisis (with an interesting looking link to an analysis by UCLA professor Dan Mitchell, "Family Time, Cliffs, and Train Wrecks: California’s Ongoing State Budget Crisis"), here: "PLEDGING BANKRUPTCY". Kleiman writes:

"Here's the basic fact facing the candidates in the recall election:

"If California does not raise taxes signficantly this year, it will go bankrupt, this year. There literally won't be money in the state treasury to pay current bills.

"The pseudo-budget passed by the legislature and signed by the governor includes several assumptions contrary to fact. In particular, it assumes a 10% cut in the state payroll, but we're now two months in to the fiscal year and no one has been laid off or had his pay cut. Every passing month means that the cut, when and if it happens, will have to be that much bigger in order to get to the 10% target for the whole year. And for the part of the state workforce under union contracts, pay cuts will require negotiations: a process that hasn't started and for which success can't be assured..."

Steel tariffs back on the

Steel tariffs back on the table?

The LA Times has a report that the administration is reevaluating the tariffs it imposed on steel imports in 2002. The article is here (free registration with the Times will be required): "Bush Team Is Said to Seek Lower Steel Tariffs". The article claims that internal administration opposition to the tariffs is coming from the economic team, headed by the Treasury and Commerce Secretaries, and that Bush's decision on what to do will be based on the job impact:

"Bush approaches the November 2004 election with 2.6 million lost manufacturing jobs on his watch. Opponents of the tariffs blame higher steel prices that resulted from the duties for keeping 200,000 people out of work last year.

"The president's decision ultimately will depend on whether he accepts that analysis or one by steel producers that the tariffs have saved more than 10,000 jobs, including ones in key electoral states such as Ohio, West Virginia, Pennsylvania and Michigan, advocates both for and against the tariffs say."

I learned about this from VodkaPundit, here: "Late II" (who was assisted by Pejamseque

Drug availability for poor countries

Drug availability for poor countries

I posted last night on a story that the U.S. had agreed to trade law revisions that would make it easier for poor countries to access drugs for illnesses such as AIDs, malaria, etc. ("Doha Round drug agreement"). The Economist carries the story here today: "The right fix?". I learned about The Economist column from "Jane Galt".

Do good looking teachers get

Do good looking teachers get better course evaluations?

Hal Varian reports on research at the University of Texas in today's New York Times. Dan Hammermesh and Jeff Biddle examined discrimination based on appearance by testing the hypothesis that better looking teachers received better evaluations from their students. Rather than link you to the Times let me refer you to Virginia Postrel's blog (which has links to related resources as well: "Good Looks=Good Scores". From the Times:

"...The economists collected teaching evaluations for 463 courses taught by 94 faculty members at the University of Texas at Austin, along with some characteristics of the instructors, like sex, race, whether they were on tenure track, and whether they were educated in an English-speaking country.

"They asked six undergraduate students to rate the photographs of the professors on a 10-point scale and used the average measure as a beauty score. The student ratings on the beauty scale were highly correlated with one another, suggesting that they were measuring the same aspects of appearance.

"According to the economists' statistical analysis, good-looking professors got significantly higher teaching scores. The average teaching evaluation was 4.2 on a 5-point scale. Those at the bottom end of the attractiveness scale received, on average, a teaching evaluation of about 3.5, while those on the top end received about 4.5..."

Clearly there's nothing wrong with my teaching that can't be fixed with a girdle, a lot of hair dye, and a fair amount of botox.

Doha round drug agreement Today's

Doha round drug agreement

Today's papers are reporting a possible agreement on liberalizing trade rules to make it easier for poorer countries to get obtain inexpensive drugs. U.S. opposition, out of a concern that drug patents would be undermined, prevented an agreement on this agenda item in the Doha Round trade talks last December. Apparently the U.S. is backing off of its opposition. Elizabeth Becker reports in today's New York Times, here: "In Reversal, U.S. Nears Deal on Drugs for Poor Countries"

"The United States said today that it was close to accepting an agreement, which it had rejected last December, to help poor nations buy generic medicines through exemptions from trade rules.

"The reversal by Washington — meant to improve the access of millions of people in those countries to expensive patented medicines for AIDS and other diseases — could enhance the Bush administration's international standing and prevent the collapse of global trade talks to be held in Mexico next month.

"After weeks of intensive negotiations, the United States won assurances that countries would not take advantage of the arrangement to increase exports of generic drugs to nations that are not poor and do not have a medical emergency, diplomats involved in the discussions said..."

What's at stake:

"Poor countries already have the right to manufacture copycat versions of brand-name medicines in the event of a health emergency by issuing what is called a compulsory license. But the poorest nations have no factories to produce such medicine. The pending trade agreement solves that problem by allowing these countries to import the generic drugs from developing nations like Brazil or India under the compulsory license."

The Times gives a lot of credit to U.S. Trade Representative Robert Zoellick:

"Ambassador Robert B. Zoellick, the United States trade representative, was credited today by several officials with persuading the American pharmaceutical industry, as well as the White House, that a compromise had to be reached before the trade talks start on Sept. 10."

My post on June 16: "A Tale of Three Cities" may provide some context.

New, higher, budget deficit estimates

New, higher, budget deficit estimates

The Congressional Budget Office issued new federal budget deficit projections today. Jonathan Weisman reports in the Washington Post, here: "2004 Deficit to Reach $480 Billion, Report Forecasts"

"The federal government will post a record $480 billion deficit next year and accumulate nearly $1.4 trillion in new debt over the coming decade before climbing back into the black by 2012, the nonpartisan Congressional Budget Office said yesterday.

"But if President Bush succeeds in making his tax cuts permanent, the government will run substantial budget deficits as far as the eye can see, the forecast made clear. Add the White House's proposed $400 billion prescription drug benefit, and the deficit would total $324 billion in 2013..."

Richard Kogan at the Center for Budget and Policy Priorities (CBPP - a liberal budget think tank) points out that the CBO deficit projections are based on conservative assumptions:

"CBO’s figures, however, are considerably too optimistic. They omit as much as $3.7 trillion in costs over the next ten years, which result from legislation Congress is likely — and in many cases, virtually certain — to enact.

Enactment of the 2001, 2002, and 2003 tax cuts has filled the federal tax code with tax breaks that are scheduled to expire between 2004 and 2010. If Congress makes these tax cuts permanent — and there will be very strong pressure to do so — projected 10-year deficits will increase by $1.85 trillion (including the additional interest payments on the debt). In addition, while two percent of tax filers will be subject to the Alternative Minimum Tax in 2004, that figure is set to explode in subsequent years. If Congress amends the AMT so no more than two percent will be subject to it in years after 2004, the ten-year deficit will increase by another $760 billion.

Program increases — primarily for the military, Iraq occupation and reconstruction, and a Medicare prescription drug benefit — are expected to swell the deficit by up to an additional $1.1 trillion over the ten-year period..."

Kogan's full analysis may be found here: "Deficit Picture Even Grimmer Than New CBO Projections Suggest". The extent to which Kogan believes the CBO's budget assumptions understate the likely extent of the deficits can be seen in the following figure from his paper:

Why people on the left

Why people on the left should be in favor of free trade

Angry Bear, a liberal economist and blogger, explained today why liberals should be in favor of freer trade, here: "Tariffs and Trade". Later in the day he elaborated here: "More Free Trade".

The minimum wage vs. the

The minimum wage vs. the earned income tax credit (EITC)

The minimum wage is a legal requirement that employers pay no less than a certain sum per hour. The EITC is an amount that is subtracted from a worker's income taxes (or paid to the worker if the credit exceeds the worker's tax liability). Which is better for low income workers? Max Zawicky reports on a debate conducted by two other bloggers (Nathan Newman and Mathew Yglesias) and makes his own contribution, here: "You Say Potato, I Say Tomato".

How to write a sentence

How to write a sentence

Geitner Simmons is starting a new series of occasional posts on writing. He writes for a living and he writes well (as his blog posts show). The first post deals with the problems caused when you try and stuff too many ideas into a single sentence, with example from political columnist David Broder: "Better Writing: Breaking up an unwieldy sentence".

Larry Summers Tomorrow's New York

Larry Summers

Tomorrow's New York Times Magazine has an article by James Traub on economist and Harvard President Larry Summers. Here's the link: "Harvard Radical". Summers held important positions in the World Bank and in the Clinton Treasury. Here's an extract from the article describing his public policy career:

"...Economics is one of the few academic fields in which you can go straight into the world of policy and politics if you are so inclined. Summers was so inclined. In 1988, he worked as a part-time adviser to Michael Dukakis's presidential campaign. In 1991, he took a two-year leave of absence to become chief economist at the World Bank. His work there generally received very positive reviews, but his reputation was not helped by the leaking of one of his memos. ''I've always thought that underpopulated countries in Africa are vastly underpolluted,'' Summers wrote. He suggested that the World Bank encourage ''more migration of the dirty industries'' to less developed nations. The memo made Summers sound like the Dr. Strangelove of economics and earned him a very frosty relationship for several years with Vice President Al Gore, who may have never before encountered the term ''underpolluted.'' (Summers says that the memo was written by a subordinate, though he has always accepted blame for the language.)

"Summers's position as an international civil servant precluded him from working on Bill Clinton's presidential campaign, as many of his Dukakis friends were doing, but he was desperate to be in the game. Summers spoke constantly about economic issues to his contacts in the campaign and suggested other economists for explicit policy advice. When Clinton won, Summers joined the transition team, hoping for a big job.

"But Summers still bore strong traces of the Harvard House of Pizza. As Gene Sperling, a member of Clinton's National Economic Council and Summers's closest contact in the White House, put it, ''Here was a guy with a big brain, and you want him on your team, but there was a sense that you needed to have a grown-up around.'' Summers was hoping to be named chairman of the Council of Economic Advisers, but when he lost out he accepted the post of under secretary of the treasury for international affairs, where he would be surrounded by grown-ups. Nevertheless, the big brain stood Summers in good stead. He quickly gained a reputation as a master explainer -- the man who could lay out the macroeconomic consequences of any given change in tax policy, who could figure out in his head what effect it would have on the gross domestic product 10 years down the road.

"In 1995, Robert Rubin became treasury secretary, and Rubin came increasingly to rely on Summers not only for economics but also for policy advice. ''Larry had an almost academic sense of purpose,'' Rubin said, ''but not an academic naivete.'' Rubin says that Summers understood how to market highly abstract policy in a way that would resonate with ordinary people. It also turned out that Summers could be a fine tactician, and even something of a diplomat, much to the surprise of White House officials. Summers played a leading role in the controversial bailout of Mexico in 1995, as well as in handling the Asian financial crisis in 1997 and 1998. Most people who worked for Summers at the time have only good things to say about him now. Stuart E. Eizenstat, who served as a deputy when Summers took over from Rubin in 1999, says that he never encountered the Summers of legend and lore. ''He was a prince to work for,'' Eizenstat told me. ''He was considerate of my views, he included me on all major decisions, he did not make snap judgments, he fought through decisions, he gave me a wide swath of jurisdictions.'' Several noneconomists who worked either for or with Summers said that he never condescended to them and that they always felt he was arguing in order to get to the merits. Washington is, of course, a place with a uniquely high tolerance for brusque behavior.

"It is a truism among Summers's friends and colleagues that he ''grew'' during his years in the Clinton administration. Summers concedes the point, but only after converting it into a sort of utility equation: ''Over time, I came to see that mutual interest was often a more important catalyst to agreement than compelling logic.'' What is striking, and a little bit touching, is how very self-conscious this process was. With the model of Rubin ever before him, Gene Sperling recalled: ''Larry started really consciously working on the kinder, gentler Larry Summers. We talked about it all the time for years and years. It was not unusual for Larry to call and say, 'You think I was too abrupt at this meeting?' And I'd say, 'Yeah.' We'd talk about what to do.'' And so Summers rounded off his rough edges. It is a source of genuine wonderment to people at Harvard that the Larry Summers they are seeing is the sanded-down one..."

I learned about this from InstaPundit.

Getting paid for getting bumped

Getting paid for getting bumped

Airline passengers weren't always compensated for getting bumped from flights. Herbert Inhaber tells how it came about, and talks about the role of economist Julian Simon in the process, here in this Tech Central Station column: "Julian's Genius". Simon argued for the introduction of the market mechanism, rather than administrative rationing, "...when he found out that stewardesses were putting elderly people off overbooked planes, on the assumption that they would complain less than younger ones."

I learned about this from Pejmanesque.

French heat wave deaths The

French heat wave deaths

The European heat wave may have killed 10,000 in France. Chris Bertram at Crooked Timber points out that, although we tend to view a disaster like this mechanically - heat applied to a given population kills a certain number - the actual impacts of the heat were mediated through French social structures. He draws attention to the work of Eric Klinenberg on a Chicago heat wave in 1995, and to Klinenberg's book, Heat Wave: A Social Autopsy of Disaster in Chicago. Here's the link to Bertram's post:"France's heatwave"

Bertram links to interviews with Klinenberg, and to the Amazon page for Klinenberg's book. Excerpts from one of the reviews on the Amazon page, by Rob Hardy, follow:

"What weather phenomenon kills the most people in America? Hurricanes? Tornadoes? Floods? Add those up and they will still not total the deaths attributed to the real killer: heat waves. The other phenomena yield good pictures, and that is one reason you don't hear much about heat deaths. But according to Eric Klinenberg, an assistant professor of sociology at New York University, there is another, more subtle reason. Victims of a heat wave "are primarily social outcasts - the elderly, the poor, and the isolated - from whom we customarily turn away." In _Heat Wave: A Social Autopsy of Disaster in Chicago_ (University of Chicago Press), Klinenberg has looked at the week-long heat wave of July 1995, which killed over 700 people. (Another comparison: the famous Chicago fire of 1871 killed about three hundred.) In Chicago, the heat hit up to 106 degrees, with a heat index over 120. Cars broke down in the streets, and bridges, rails, and roads buckled. Even with the windows open, brick homes could heat up to 120 degrees. The heat killed, but it did not just kill randomly. In clear, objective, but often biting pages, Klinenberg shows the patterns of urban life that brought death to certain regions and certain social groups..."

For example, Bertram quotes Klinenberg from an interview pointing out that the Chicago heat wave was harder on elderly men than elderly women since the women tended to have more elaborate social networks. It remains to be seen what happened in France.

Alaska fiscal future Amanda Bohman

Alaska fiscal future

Amanda Bohman reports that Kevin Ritchie of the Alaska Municipal League, and Landa Baily of the Alaska Department of Revenue, made presentations on the state's fiscal future to the Fairbanks North Star Borough Assembly Thursday. The report is in the Fairbanks News-Miner, here: "Assembly weighs in on sales tax debate"

Ritchie and the League favor an income tax over a sales tax. Baily described the Governor's plans:

"Baily said Murkowski's fiscal plan is to milk the state's reserve account, called the Constitutional Budget Reserve, cut $250 million from state government next year and boost resource development. She said the governor is still considering revenue sources such as a motor fuel tax, which was rejected by the Legislature earlier this year."

The story notes that Governor Murkowski has favored a limited sales tax in the past.

Globalization and inequality

Globalization and inequality

The Economist has a nice little essay on the relationship between globalization and worldwide income inequality ("Catching Up.  If You Consider People, Not Countries, Global Inequality is falling rapidly") - summarizing a talk by Stanley Fischer at this past winter's American Economic Association meetings .  Fischer was a high official at the International Monetary Fund.

The article is premium content on The Economist's web page, but Brad DeLong has provided an extract, along with the key graphic, here: "In Memory of Rudi Dorbusch".  DeLong also provides a useful link to a copy of Fischer's original talk.

Another review of The Literary

Another review of The Literary Book of Economics

Jeff Jacoby gives it a good review in today's Boston Globe, here: "The unbearable dullness of economic writing". He wonder why economics writing is so hard to read:

"Ahem!" said the Mouse with an important air, "are you all ready? This is the driest thing I know. Silence all round, if you please! `William the Conqueror, whose cause was favoured by the pope, was soon submitted to by the English, who wanted leaders, and had been of late much accustomed to usurpation and conquest. Edwin and Morcar, the earls of Mercia and Northumbria --' ""Ugh!" said the Lory, with a shiver. -- Lewis Carroll

"Alice in Wonderland"

IF LEWIS CARROLL were writing today, he would have the Mouse recite "the driest thing I know" not from an old history book, but from something by a contemporary economist. Something like -- oh, like Alan Greenspan's testimony before Congress last month: "Some of the residual war-related uncertainties have abated further and financial conditions have turned decidedly more accommodative, supported, in part, by the Federal Reserve's commitment to foster sustainable growth and to guard against a substantial further disinflation. Yields across maturities and risk classes have posted marked declines, which together with improved profits boosted stock prices and household wealth. If the past is any guide, these domestic financial developments, apart from the heavy dose of fiscal stimulus now in train, should bolster economic activity over coming quarters..."

Michael Watt's, the author of the new The Literary Book of Economics,

"...had the ingenious notion of representing economic principles with selections drawn from literature, poetry, and drama. The result is a wonderfully rich and vivid survey of the economic realm -- a compilation far more likely to kindle an interest in economics than Greenspan's jargon-filled sludge.

"For Watts, Robert Frost's "The Road Not Taken" illustrates the idea of opportunity cost -- the options forgone every time a choice is made. Six epitaphs from Edgar Lee Masters's "Spoon River Anthology" help illuminate specialization and the division of labor -- key elements of industrial productivity. "A Modest Proposal," Jonathan Swift's satirical recommendation that Irish children be eaten, is a perfect -- and grisly -- example of cost-benefit analysis..."

I posted about this book a few days ago, here: "This looks like an interesting book".

Implications of our current account

Implications of our current account deficit with China

Kash, at the Angry Bear reports on some of the political implications of our large and growing current account (trade in goods and services) deficit with China, here: "The “China Problem” on the Economic Agenda".

Why we vote the way

Why we vote the way we do

Parapundit points to a new study, here: "Ballot Candidate Name Order Influences Voter Choices ".

Kling, on foreign outsourcing Arnold

Kling, on foreign outsourcing

Arnold Kling's July 14 Tech Central Station column, here: "Please, Outsource to My Daughter ".

""…many of us have our shirts laundered at professional cleaners rather than wash and iron them ourselves. Anyone who advised us to "protect" ourselves from the "unfair competition" of low-paid laundry workers by doing our own wash would be thought looney."
--Alan Blinder

By Alan Blinder's definition, longtime conservative activist Phyllis Schlafly is looney. And, as Glenn Reynolds pointed out in a column on outsourcing, she is not alone. The phenomenon of using the Internet to outsource white-collar work has created the latest fad in economic terrors -- fear that the United States is about to be run over by that economic juggernaut: India...."

I learned about this from Kash at AngryBear, who wonders about the political implications of outsourcing white color jobs: "International Trade Hits a New Group". Here's a link to the Glenn Reynold's Tech Central Station column Kling mentions this also discusses the political implications: "Outsourcing and Elections ".

How are California's gubernatorial candidates

How are California's gubernatorial candidates planning to address the state's fiscal crisis

CalPundit is keeping track:

• Cruz Bustamante and Peter Ueberroth: "BUDGET DAYDREAMS"


• Arnold Schwarzenegger: "NEVER SAY NEVER"

More bankruptcies than divorces John

More bankruptcies than divorces

John Quiggin finds that, in the year ending March 2003, there were more bankruptcies than divorces in the U.S. He considers the implications, here: "Broke vs broken up".

Pre-Cancun maneuvers Peter Gallagher's blog

Pre-Cancun maneuvers

Peter Gallagher's blog follows trade issues closely. He posts here on the recent pre-Cancun U.S.-European Union agreement on trade: "Trans-Atlantic trade deal ", and here on an alternative proposal forthcoming from India, China, and Brazil: "The storm builds ". He notes that poorer countries restrict farm trade among themselves:

"Unfortunately, neither Brazil nor India has a strong record in opening their own agriculture markets. Brazil has an average agricultural tariff of about 35% with 96% of its agricultural tariffs higher than 15%. Almost half of India's agricultural tariff lines are above 100%."

Immortality and its discontents Geitner

Immortality and its discontents

Geitner Simmons speculates about the drawbacks of living to 600, here: "Immortality".

"The Man Without Qualities" on electrical shortages

Robert Musil at The Man Without Qualities posts on a column by Vernon Smith and Lynne Kiesling in today's Wall Street Journal.  Smith and Kiesling argued for the use of flexible prices to help address electrical system problems, here: "Musil posting".  Musil is posting on the same column I posted on earlier today: "What to do about electricity shortages"

Musil points out that Smith and Kiesling are arguing for prices as a way of controlling congestion on the electrical lines and that the proposal is similar to proposals to use pricing to control congestion on roads.  He points out the political obstacle.  He also links to other blogmentary on the Smith and Kiesling column.

I've posted a couple of times this year on the use of fees for dealing with traffic congestion: (a) "Using a fee to control externalities"; (b) "London's Congestion Pricing Scheme"; (c) "Follow-up on London congestion pricing"; (d) "Dealing with congested roads"

Don't get too optimistic about

Don't get too optimistic about Cancun

Freer trade in farm products is important to poor countries. It is a key part of the ongoing "Doha Round" of trade negotiations. But these negotiations are not going well. Jacob Levy is not optimistic about a breakthrough at the Cancun meeting of ministers this September. Find his thoughts here, in this New Republic column: "Unequal Protection".

And it is good for us:

"Agricultural protectionism--the combination of quotas, tariffs, and subsidies for farm products--may be the purest example of destructive special-interest politics ever created. Rich countries--with a few exceptions, such as Australia--burden their own populations three times over. The policies cost taxpayers directly--the atrocious 2002 U.S. farm bill is slated to cost $180 billion over ten years. (Worse, annual unbudgeted "emergency" farm spending during the late 1990s accounted for a great deal of the spending boom that squandered much of the predicted budget surplus long before the first Bush tax cut took effect.) In return for their largesse, taxpayers get the privilege of paying higher prices as consumers (and, of course, inflated prices for basic foodstuffs hit the poorest proportionately hardest). And, by locking up an excess of labor and capital in an agribusiness sector that couldn't turn an honest profit on its own, agricultural protectionism inhibits productivity growth, preventing shifts in employment and investment to more productive parts of the economy."

But, while advocating free trade, the current administration has repeatedly adopted schemes that inhibit trade:

"The administration has allegedly been pursuing a strategy of capitulation to protectionist interests in the short term in order to build political capital for the big fights down the road: eventual ratification of the accords from the Doha round and for a Free Trade Area for the Americas (FTAA). But there is neither theory nor evidence to support the idea that ratification will go more smoothly because of three years of surrender. Every quota, tariff, and subsidy organizationally strengthens the special interest that it benefits, not only keeping employment in those sectors artificially high compared to more productive uses of the same labor, but also entrenching the sector's dependence on the protective measures. The steel industry, for example, won't be any less hostile to the FTAA than it otherwise would have been; but the organized steel lobby, dedicated to protecting the least competitive American steel producers, will be stronger than it would have been. Conservatives occasionally attempt to initiate a political spiral in their favor by "defunding the left"--cutting government spending to those groups, such as Legal Services, that lobby or sue for further government spending--and by privatizing the federal workforce, which undercuts the political power of government employees' unions. Whatever its ethical implications, the idea makes tactical sense--and is precisely the contrary of the strategy the administration has been pursuing on trade."

What are the odds that the administration will stand up to special interests now and try to free up trade?

"Unfortunately, the six months before the Iowa caucuses are the period in which the president is least likely to feel political pressure on the issue. Indeed, one can almost guarantee that Democratic presidential candidates--some out of conviction, some out of electoral imperatives, and some who are unable to distinguish between the two--will be calling for more "help for America's farmers," and will condemn Bush for any tentative moves he might make toward openness."

The whole thing is worth reading. I learned about this over at The Volokh Conspiracy.

What to do about electricity shortages

Whenever I see an essay attributed to either Vernon Smith or Lynne Kiesling I take notice.   When I see something attributed to both of them I'm especially interested.  They've authored an essay in today's Wall Street Journal on electrical power reform which is well worth reading. 

The Journal isn't available online without a subscription, but here's a link to a couple of paragraphs from it on Kiesling's blog: "Smith and Kiesling in the Wall Street Journal"

Here are some extracts:

"When a transmission line is stressed to capacity, and its congestion cost spikes upward, the market is signaling the need for increased capacity in any of three components of the delivery system: increased investment in technologies for achieving price responsive demand at end use appliances; increased generation nearer to the consumer on the delivery end of the line; or increased investment in transmission capacity..."

Their focus is on the pricing component.  Our current retail electricity price regime is very rigid.  Prices are unable to change in resonse to short-term shifts in electricity supply and demand curves.  The result is a meat-ax approach to allocating available electricity supplies:

"When the inevitable occurs...and unresponsive demand exceeds supply, demand must be cut off.  Your utility sheds load by switching off entire substations - darkening entire regions - because the utility has no way to prioritize and price the more valuable uses of power...This is why people get stuck in elevators and high-value uses of power are shut off along with all the lowest priority uses of energy..."

With more flexible retail prices (that vary by hour or day, for example) people would be prompted to cut off less important uses of electricity during periods of otherwise high demand or low supplies.  Evidently the technologies exist that would allow this:

"...The simplest and cheapest is a signal controlled switch installed on an electrical appliance, such as an air conditioner, coupled with a contract that pays the customer for the right to cut off the appliance for specified limited periods during peak consumption times of the day..."

In addition, policy changes that separate electrical generation and transmission are needed.

And then there's this:

"...If you were to design an electrical system maximizing the vulnerability to attack [they are thinking of terrorist attack - Ben], it is hard to imagine a better design than what has evolved in response to regulation.  If a terrorist attack took out half the energy supply to Chicago, the only viable response would be to shut down half the substations.  Demand response [in response to flexible prices - Ben] would allow a prioritization of energy use, shutting down only the lowest priority of power consumption while supplying high valued uses..."

The war on terror is a misnomer.  Terror is a tactic.  We are at war with al Qaeda.  The operatives who drove the planes into the World Trade Center and the Pentagon were innovators.  They've pushed the terror-tactic envelope out.  The prospect of terror attacks is now a permanent part of our lives. 

Terror requires a military and a police response.  But a response is required at another level as well.  If we are going to protect ourselves, while protecting what is important about our way of life - including our liberties - we are going to have to innovate and change many of the ways we do things.  We are going to have to create a society whose institutions and physical infrastructure can, so far as possible, absorb terrorist attacks with minimal damage.  There is work here for city planners, architects, transportation planners, and so on.  There is also, apparently, work here for economists.  Smith and Kiesling are right on the money in pointing to the need for institutions that have the flexibility to survive with minimal damage when they are under attack.

Why doesn't overseas outsourcing justify

Why doesn't overseas outsourcing justify trade barriers?

Brad DeLong explains, here: "Outsourcing Our Future?".

"...So what, then, is the impact on the American economy when Singapore educates its people to become competent network developers, or India educates its people to become competent help-center technicians? It's not that jobs leak away. Remember: trade balances. Indians want rupees, not dollars: they will only sell us as much as we can pay for in rupees, and the only way we get rupees is by selling things to Indians. The things we sell to Indians are either goods and services exports, or capital exports--Indians buying financial assets or real property in America, the sale of which is used to finance domestic investment spending. Either way (if the Federal Reserve does its job) Americans' demand for imports made in other countries is recycled into foreign demand that employs Americans in industries that export goods, export services, make producers equipment, or build structures...

"When foreign countries acquire the capability to make stuff, there are two impacts on the American economy. First, we can no longer sell the stuff we make abroad for such high prices as we did before: our exporters face more competition as they try to sell abroad. Second, our consumers and domestic businesses can buy things made abroad more cheaply: producers of import-competing goods and services find that they face more competition and must lower their prices, but other businesses find that their costs fall, and households find that their incomes buy more good stuff.

"Which effect dominates? Theoretically, either one can. The opening of the Suez Canal and the coming of large-scale cotton production to India and Egypt after the U.S. Civil War was surely not good for the gross economic product of America's cotton south, and contributed (along with the boll weevil, the neglect of education and other public services, and the corruption of the herrenvolk democracy that set up Jim Crow) to the south's economic retardation toward the end of the nineteenth century (how big a role Egyptian and Indian competition played in this is not something I am confident that I can judge). But in the post-World War II world, it seems clear that the U.S. has gained much more than it has lost from the economic development of its trading partners. The U.S. as a whole benefits enormously from the fact that Japan is a rich industrial economy rather than something like Indonesia. The producer and consumer surplus the U.S. gains from trade with rich western Europe far exceeds what it gains from trade with poor eastern Europe. The way to bet seems to be that examples like the growth of other producers to compete with the cotton south are the exception, and win-win benefits are the rule..."

"Left-wing neoprimitivism" Geitner Simmons posts

"Left-wing neoprimitivism"

Geitner Simmons posts on "...left-wing neoprimitivism -- the school of thought that says all will be well if modern society discards the (supposed) comforts of contemporary economic life and radically ratchets down economic conditions to 19th century levels (if not 18th century ones)..." here: "The Electrification Conspiracy".

The BBC reports on a

The BBC reports on a potentially dangerous feature of Microsoft Word

Here: "The hidden dangers of documents".

"...There is a function in many versions of Microsoft Office programs, which includes Word, Excel and PowerPoint, that means that fragments of data (which Microsoft refers to as metadata) from other files you deleted or were working on at the same time could be hidden in any document you save.

"This could be embarrassing for any home workers whose colleagues find out that they have been applying for jobs while working at home or being less than complimentary about their co-workers...

"With the right tools this hidden data can easily be extracted.

"Unix and Linux users can turn to tools such as Antiword and Catdoc to turn the document, including its formatting information, into a simple text file..."

What types of information can Word pick up?

"...Computer researcher Simon Byers has conducted a survey of Word documents available on the net and found that many of them contain sensitive information.

"He gathered about 100,000 Word documents from sites on the web and every single one of them had hidden information...

"The hidden text revealed the names of document authors, their relationship to each other and earlier versions of documents.

"Occasionally it revealed very personal information such as social security numbers that are beloved of criminals who specialise in identity theft.

"Also available was useful information about the internal network the document travelled through, which could be useful to anyone looking for a route into a network..."

I learned about this from InstaPundit

What do patents do? A

What do patents do?

A few days ago I posted on the origin of patents, in 15th Century Northern Italy, as a device to encourage innovation, here: "The origin of patents". I also posted on the role of patents in the pharmaceutical industry, here: "The history of Mevacor".

Brad DeLong links to a new study, drawing on information about inventions displayed in two 19th Century world fairs, which suggests that patents don't increase the overall level of innovation, but they do change the direction of innovation, here: "Petra Moser on Nineteenth-Century Innovation"

Business and Politics Liz Ruskin

Business and Politics

Liz Ruskin has a great story on the nexus between business and government in today's Anchorage Daily News, here: "Financial wizard works magic for Stevens. RUBINI: Investing with property developer has turned the senator's financial fortunes around.".

Ruskin profiles Anchorage real estate developer John Rubini ("...whom the Alaska Journal of Commerce has named one of the 25 most powerful Alaskans..."), focusing on his relationship with U.S. Senator Ted Stevens, and more generally on his interaction with the political process.

"...Last year, after his outfit won the Park Service job [a building Rubini and his partner built and leased to the Park Service - Ben], Rubini proposed to erect a more attractive building if the Anchorage Assembly would waive the property taxes for five years. Rubini and the assemblyman who championed his cause, Allan Tesche, abandoned the plan after a squall of protests, which Rubini said was "driven by competitors who wish they had won the bid.''

"Rubini's firm, like Pfeffer's [a competing developer - Ben], operates at the intersection of private enterprise and public policy, where local government turns to business to realize its goals. Both Pfeffer and Rubini have been accused of exploiting their connections with city politicians to help their businesses.

"Developers often hear that allegation, and most of the time it's unfounded, Pfeffer said.

"There's nothing wrong with a developer giving campaign contributions or holding fund-raisers for the city's elected officials, he said. It's part of being seen as a credible and involved citizen as well as a developer, he said.

"I think what the deal is in our business, you are doing projects in our community, and that means you have to interface and communicate with everybody," Pfeffer said. "You've got to communicate with the highest authority that has an opinion on it," he said.

"All the same, Pfeffer accused Rubini of crossing the line this spring, when Rubini appealed to an Anchorage Assembly member to reopen the bid process on the new health department building site after his original proposal was rejected.

" "What he's doing is working the politics to change the ground rules," Pfeffer complained at the time.

"Pfeffer's response is more tempered now.

" "While I think highly of John and Leonard, sometimes in the heat of the deal you can find yourself going down a path that is slightly outside the rules, and if that happens, I'm going to call it, and I would expect them to do the same," he said. "I don't begrudge them talking to (political leaders) to see if they can get it changed, but I don't think it's in the ground rules."

"Hyde said Rubini's suggestion -- to start over and have bidders propose construction on land the municipality already owns -- would have saved the city money. And, Hyde acknowledged, it would have given JL Properties another shot at the project."

The looming Medicare crisis Medicare

The looming Medicare crisis

Medicare funding poses big budget problems that we are not now facing up to. This Congressional Budget Office study ("A 125-Year Picture of the Federal Government's Share of the Economy, 1950 to 2075") projects federal Medicare expenditures growing from something like 2.2% of GDP today to almost 5% in 2030, and to about 9.6% in 2075. The following figure, from the study, projects federal outlays as a percent of GDP:

Part of the problem is the aging population. Gina Kolata points to additional problems posed for the Medicare budget as new, and expensive treatments, become available - in story in today's New York Times: "New Therapies Pose Quandary for Medicare" (registration may be required, the link may fail after a couple of weeks).

" "We seem to be getting new technologies that are effective for common conditions, like congestive heart failure, like emphysema," he went on. "If you are talking about a treatment for a rare genetic disorder that affected 500 or even 1,000 patients a year it would not make much difference. But in the case of L.V.A.D.'s, or with lung volume reduction surgery, the potential number who will get it is quite large so it will force the issue. How are we going to make it available to Medicare beneficiaries without wrecking the Medicare budget?"

"Dr. Tunis, of the Medicare services center, says he understood that the costs of new technologies can be staggering. But he adds that cost has traditionally not been a consideration in deciding what to cover.

"If the technology was effective, we would find a way to pay for it," he said. "There is no dollar value per life per year at which Medicare would decline to pay."

But costs are mounting..."

Kolata describes a recent clinical trial of an emphysema operation, lung reduction surgery. The article suggests that the trials found that only a subset of emphysema patients would clearly benefit: for 25% of the patients with upper lobe damage and poor exercise capacity the operation was a huge success. The implication in the article is that for other subgroups of emphysema patients there might be some benefit, there is no suggestion in the article that the operation can harm them. Then the article turns to the question of how to ration this care:

"Seventy percent of the nation's estimated two million emphysema patients have upper lobe damage. How will Medicare know whether a particular patient also has poor exercise capacity?

"Dr. Cooper says the solution is to restrict the operation to a few centers of excellence where experienced surgeons will assess patients and decide who should have the operation.

"Dr. Tunis agreed but said there were limits to how much policing Medicare could do, or wanted to do.

" "We don't have a direct way of enforcing compliance with coverage, particularly in patient selection criteria," he said. "It's sort of an honor system. But a lot of these patient characteristics are somewhat subjective or qualitative."

"And that, says Dr. Garber, is almost guaranteed to lead to overuse.

"There is pressure from patients, doctors and hospitals to cover expensive new procedures, even if their benefits are modest. And that is understandable, Dr. Garber said. "If you the patient are insulated against the cost consequences of your decision, why not get the latest and greatest?" But, he added, there is a price to be paid.

"One solution would be to greatly increase Medicare's budget. But that would mean tax increases. Another would be for Medicare to consider cost-effectiveness, rather than just effectiveness. But, Dr. Tunis said, every time that has been proposed, the agency has had to back down."

What causes the enormous U.S.

What causes the enormous U.S. trade deficit?

Brad DeLong posts on the causes of the large U.S. current account deficits over the last 30 years. Part is due to domestic fiscal mismanagement, part is due to foreign fiscal mismanagement, part is statistical errors, but part is also due to foreigners who want to hold dollar assets. DeLong anatomizes foreign dollar demand nicely: " "Exorbitant Privilege," or, How Worrisome Is the U.S. Trade Deficit?".

Government credit cards Intel Dump

Government credit cards

Intel Dump looks at Pentagon efforts to control use and misuse of government credit cards, here: "Using government plastic to buy... well... plastic".

Should Alaska use gambling to

Should Alaska use gambling to raise revenue?

Alaska is in a fiscal bind, and gambling revenues could be one of the tools we use to cut ourselves free. Sean Cockerham reports on the state of play in the debate this summer, here, in today's Anchorage Daily News : "House ready to roll on gambling". Pete Kott, Speaker of the Alaska House, expects the House will act on a gambling bill, but apparently isn't so sure about the Senate. The Governor's thoughts aren't known. Ongoing this summer:

• "State senators are interested in at least discussing it. The Senate Labor and Commerce Committee is talking about holding a hearing in the next couple of months on gaming issues, in advance of the January start of the legislative session."


• "The Alaska Department of Revenue, at the request of legislators, has launched a monthlong study that aims to get good numbers on how much money activities like video gambling and a lottery could bring to the state. The idea is that Alaska would join a multistate Powerball lottery."


• "Kott, a big lottery supporter, said he plans to send a member of the state House, Anchorage Republican Rep. Tom Anderson, to Newport, R.I., next month for a conference of the National Council of Legislators From Gaming States. It will be a chance to better explore the pros and cons of expanding gambling here, Kott said."

Summer is coming to an

Summer is coming to an end

• The rain and fog are moving in.
  
• The fireweed are turning white.
  
• The leaves on my maple are red; leaves on the dogwood are turning red.


• My daughter gets on the ferry to head south to college on Tuesday.


• My sons have to register for high school next week.


• "Back to school" displays in Fred Meyers.


• Catalogs are beginning to highlight Christmas stuff.


• Wrapping ribbon with a distinctly Christmas motif, and toys, have shown up in Costco.


• Lord of the Rings hype is starting.


• Its time to finish my syllabus for the fall class.

Jane Galt explains why the

Jane Galt explains why the Exxon Valdez cleanup didn't stimulate the (national) economy.

Actually, why the the post-blackout cleanup won't be good for the economy, here: "Stupidest thing yet heard about the blackout".

"Stupidest thing yet heard about the blackout

"This will stimulate the economy -- think of all the money people will make cleaning up after the blackout!"

That was a talking head on some radio show I listened to for about three minutes before hurling the radio across the room in sheer horror at the

a) rampant partisan silliness
b) stunning technological ignorance
c) egregious economic illiteracy

"...I've heard versions of this same illogical trope from many people. Environmentalists arguing that expensive new environmental regulations create wealth because, gee, look at all the new jobs we got making catalytic converters!* Big government types arguing that pouring money down a rathole on their pet project isn't really a waste of money, because now we've increased GDP by however much we've spent on rathole operators and expensive rathole pouring machines designed by 100% American engineering talent. Hawks who argued that the war in Iraq was just the medicine to cure our ailing economy, because, well, look how well World War II turned out!"...

The Reason Public Policy Institute has created a blackout resource page (why it happened, what to do about it), here: "Northeastern / Midwest Electricity Blackout Resource Center". I learned about this from energy policy blogger Lynne Kiesling at "The Knowledge Problem".