The Custom-House

They put their pants on

They put their pants on one leg at a time too

In the 1980s the future belonged to the Japanese. Now it's said to belong to the Chinese. At least Skip Sauer has kept his perspective: "China - The New Japan

A Geography Lesson Here's a

A Geography Lesson

Here's a geography lesson: because the world is round, the shortest route from the U.S. West Coast to East Asia runs through the Bering Sea. Last week a ship taking soybeans from Seattle to China was wrecked on the north shore of Unalaska Island in the Aleutians.

This map from the Anchorage Daily News, published in connection with its coverage of the wreck, shows the route: "North Pacific shipping route passes through Alaskan waters".

The ship, the Selendang Ayu, lost power in the Bering Sea, and drifted down on Unalaska Island. Attempts to tow it to safety failed. The Coast Guard saved most of the crew.

Six crewmembers were lost when one of the Coast Guard helicopters went down during the rescue. Here is a hair raising account by reporters Megan Holland and Doug O'Harra in the Anchorage Daily News: "For first time, crew describes rescue mission".

"...The seventh man was on his way up. "And all that remained on the deck was the captain and the rescue swimmer," Watson said. "And that's when something happened. And the aircraft went in the water."

As Lickfield was hoisting, he heard Neel say over the radio: "Wow, this is a big wave.' He said it three or four times. 'This is a big wave.' I could tell there was urgency in his voice."

But the seventh man wasn't quite in. Lickfield completed the hoist and pulled the basket into the cabin of the helicopter.

"All of sudden, the force of this wave, like a force I've never seen before, a wall of water engulfed the helicopter," he said. "Water came blasting into the cabin."

Lickfield heard the engines "flame out" and felt the helicopter begin a sickening descent.

When the helicopter hit the water, it began to roll. Lickfield held on to the door handle and rode it 180 degrees and bailed out on to the surface.

Watson, who was flying the helicopter, said he didn't know what happened. He would not speculate about causes in an interview.

"It happened so fast. I remember us going down into the water. It was like being in our (flight training) simulator in Mobile, Ala. It was like the worst scenario they ever give you in the simulator. It didn't seem real."

Warning horns were going off. Lights flashed red. Nothing was visible through the windows.

"The flight mechanic was calling 'Up, up, up' but there was nothing really we could do, and the aircraft settled in the water."

Upside down, Watson reached for a tube that connected him to a two-minute oxygen supply. The suck of air calmed him, he said.

"Then I patiently felt my hand around the door frame to my right. I just needed to think about where it was, the door handle," he said. "The training steps that we always use they have always hammered into our minds -- to maintain a reference point."

Maybe 45 seconds had passed, Watson said. With his eyes closed, he grasped the handle, opened the door. He undid his seat belt and harness with his left hand and pulled himself into the water with his right hand.

"I didn't even have to swim. The buoyancy of the dry suit, it just floated me to the surface," he said. "It only took a couple seconds for me to make it to the surface."..."

The story has a sad ending - although the three Coast Guardsmen were recovered, only one of the seven Selendang Ayu crewmen on the helicopter survived.

I don't expect these links to the Daily News to remain live for more than a week.

Great historical cost overruns Are

Great historical cost overruns

Are we more corrupt than we once were?

Stanley Engerman and Kenneth Sokoloff (E&S) use cost overruns on major U.S. projects as an index of governance quality and political corruption. ("Digging the Dirt at Public Expense: Governance in the Building of the Erie Canal and other Public Works.")

Cost overruns on pre-Civil War canal projects, big public megaprojects of their day, were relatively modest compared to overruns since WWII. E&S report ratios of actual to projected costs in canal projects between 1.16 and 2.42. They report ratios for post-WWII projects between 4.17 and 19.10 (Boston's "Big Dig" is going to cost more than five times the original projections.)

The E&S data set does not include many observations and their observations were not chosen at random. They do point to more recent studies of mega-projects, using larger data sets, that find large contemporary overruns compared to their early 19th Century estimates.

E&S want to use their observations as an index of political corruption, or at least of the quality of governance. Cost underestimates suggest

"...tolerance of incompetence, weak oversight or administration, actual corruption, and other cost-inflating practices by public officials, or the quality of governance more generally. Deliberate misrepresentation of the costs of a big public investment project reflects poor governance, in that public officials can get away with it (whether they are elected officials or not). Moreover, to the extent that costs rise (on average) after the authorization of a public investment project, it would seem reasonable to attribute it primarily to poor management or oversight of the uses to which public funds are being put - whether due to corruption or tolerance of incompetence and other cost-inflating practices."

Compare their index to the one used in the Glaeser and Goldin article I posted on in September ("An index of political corruption"). Glaeser and Goldin developed corruption indices based the appearance of key words in newspaper articles from 1820 to 1970. The find a corruption peak from the 1840s to the 1870s, and then a long gradual decline to the 1970s (my post has a figure with their indices).

Glaeser and Goldin (G&G) and Engerman and Sokoloff (E&S) agree about the relatively honest period before the 1840s, and about the increased problems after. They diverge with respect to the implications of their analyses in the 20th Century. G&G think we're pretty honest now; E&S imply not so.

No one really cares about the relatively virtuous 1820s. But let's quickly dish the dirt on the wicked late-20th Century. In addition to Boston's B"Big dig", E&S point to the start of the interstate highway system (an overrun ratio of 19.10), the Louisiana Superdome in 1966-75 (4.66), the Renovation of Yankee Stadium (4.17), repair of earthquake damage to the eastern span of the San Francisco Bay Bridge (already 3.0, and not due to be done until 2010).

The bottom line:

"The straightforward interpretation, one for which we have already expressed support, is that the governance, or control over the use, of public funds was stricter during the early nineteeth century than it is today. It is difficult to explain the more substantial cost overruns during the modern era, in particular, without acknowledging that either the processes of vetting these public works projects were either badly flawed (if not dishonest), or that oversight by the public authorities was so poor as to permit grossly inefficient use or private extraction of public resurces. What the source of this contemporary institutional failure is not easily identified, but cost overrun ratios during the late twentieth century that seem routinely very high by early nineteenth century standards imply that public officials (or the taxpaying electorate) have lost control. What the basis is for the relatively good performance of the public sector during the antebellum period is likewise unclear."

The E&S paper is "Digging the Dirt at Public Expense: Governance in the Building of the Erie Canal and other Public Works." National Bureau of Economic Research. Working Paper 10965. December 2004. You can link to their abstract and download a copy of the article itself, here. The article is copyright 2004 by Stanley L. Engerman and Kenneth L. Sokoloff.

Offshore outsourcing of flies Gregory

Offshore outsourcing of flies

Gregory Mankiw, Chairman of the Council of Economic Advisors, used a nice example of the potential gains from offshore outsourcing, in a speech in early December:

"A Montana newspaper, the Missoula Missoulian, recently wrote an editorial about fly fishing that illustrates well the gains from trade. Until the 1970s, the artificial flies used by fisherman in this country were mostly produced domestically. Tying flies is labor intensive and hard work, so now it is mainly done abroad. The resulting availability of lower-cost imported flies allows the average fisherman to buy a larger and more diverse selection. Some flies are still made in the United States , but these are special ones--the very best and the most expensive. Meanwhile, the U.S. sport fishing industry has thrived and is booming in Montana . Montanans who a generation ago would have been commercial fly tiers can now get better-paying jobs building boats, making rods, and leading fishing tours. Trade in fishing lures has been good for fishermen, good for Montana , and good for people around the world. Good for everyone--except the fish."

Why do the deficits matter?

Why do the deficits matter?

Under realistic assumptions, the U.S. faces large budget deficits as far as the eye can see.

William Gale and Peter Orszag, both of the Brookings Institution, explain why the deficits matter in their article, "The US Budget Deficit: On an Unsustainable Path", from the December issue of New Economy.

First, let's characterize the problem (linger on, and reread, the last sentence):

"To get some sense of the long-term budget imbalance facing the nation, we rely on the �fiscal gap.� The fiscal gap measures the immediate and permanent increase in taxes and/or reductions in non-interest expenditures that would be required to establish the same debt-GDP ratio in the long run as holds currently. Along with Alan Auerbach of Berkeley, we have estimated that the US faces a fiscal gap through 2080 of 7.1 per cent of GDP. To close the gap would require an immediate, permanent 40 per cent increase in revenues or 35 per cent reduction in outlays"

What's causing the problem:

"Several factors contribute to this fiscal gap. The most important is projected increases in Medicare and Federal Medicaid costs... Federal expenditures on these two programs are projected to increase by more than ten per cent of GDP by 2070. By comparison, the increase in Social Security costs over the same period is only 2.5 per cent of GDP. Unfortunately, the health-related programs are much more difficult to reform than Social Security.

The recent tax cuts also play a major role in the long-term fiscal gap. If extended and not eroded over time by the AMT, the tax cuts would cost roughly two per cent of GDP over the long term. Even though projected increases in Social Security costs eventually exceed the size of the tax cuts, do not conclude from this that the tax cuts are less expensive than the Social Security increases. The increase in Social Security costs mounts gradually as America ages. The cost of the tax cuts starts immediately, and changes little as a share of GDP over time. In present value, the actuarial deficit in Social Security is only one-fifth to one-third the cost of the tax cuts over the next 75 years. The tax cuts account for more than a quarter of the fiscal gap over the next 75 years."

Why do the deficits matter? The short answer is:

"...budget deficits matter because they reduce national saving and thus reduce future national income. That reduction in future income can occur either because interest ratesrise and domestic investment falls, or because we borrow more from foreigners and therefore owe more to them in the future. Or it could occur through some combination of these two effects."

The longer version of the answer is:

"...The reason is that they reduce national saving. National saving is equal to private saving minus the budget deficit; so when the budget deficit goes up, national saving goes down.

The federal deficit increased by more than six per cent of national income between 2000 and 2003, which triggered a substantial decline in national saving over that period. Indeed, in 2003, the net saving rate for the US amounted to less than two per cent of income. This level of national saving was the lowest since 1934.

But why does national saving matter? The reason is that it determines how rapidly Americans accumulate financial and real assets. The returns to those assets have a substantial effect on future income. The bottom line is that a larger budget deficit and lower national saving today reduce income in the future.

Another way of making the same point is that with a saving rate of two per cent of income, there are necessarily only two options.

The first option is that we reduce the amount that is invested in the US to two per cent of income, which would starve future American workers of computers, buildings, and other productive capital. This crowding out of private investment is brought about through higher interest rates. The budget deficit soaks up available private saving, leaving a smaller pool of national saving to finance domestic investment. Firms that want to borrow for investment projects compete for that smaller pool of available funds. In the process, they bid up the interest rate that they�re willing to pay. The higher interest rate dissuades some firms from undertaking their investment projects, with the net result that investment declines. A reasonable rule of thumb for the US is that each per cent-of-GDP in anticipated future permanent unified deficits raises forward long-term interest rates by 25 to 35 basis points.

The second option is that if we do invest more than two per cent of our income, we must borrow the difference from foreigners � which would leave future generations of Americans increasingly indebted to other nations. Indeed, as national saving has plummeted over the past few years, US domestic investment has increasingly been financed by foreign borrowing. The increase in such borrowing is reflected in our growing current account deficit, which has expanded from about 2.5 per cent of national income in 1998 to more than five per cent in 2003. This borrowing from abroad, however, mortgages the future returns from domestic investment in the US. Foreigners understandably do not lend us money for free, so we must share at least part of the future returns from our domestic capital stock with them. As a first approximation, borrowing more from foreigners has the same adverse implications for the future national income of Americans as reduced domestic investment does. Furthermore, the associated current account deficit likely stokes protectionist pressures in the US, potentially causing harm for the world trading system."