Category: Economics

Criminals have been able to hack into computer systems via the Internet and cut power to several cities, a U.S. Central Intelligence Agency analyst said this week….

"We
have information, from multiple regions outside the United States, of
cyber intrusions into utilities, followed by extortion demands," he
said in a statement posted to the Web on Friday by the conference’s organizers, the SANS Institute.
"In at least one case, the disruption caused a power outage affecting
multiple cities. We do not know who executed these attacks or why, but
all involved intrusions through the Internet."

I am highly suspicious – why has no one heard of this before? – but every year I do feel more and more like I’m living in a Neal Stephenson novel.

Matt Shapiro and Joel Slemrod report:

Many households received income tax rebates in 2001 of $300 or $600. These rebates represented advance payments of the tax cut from the new 10 percent tax bracket. Based on a survey of a representative sample of households, this paper finds that only 22 percent of households receiving the rebate would spent it. Instead, they would either save it or use it to pay off debt. This very low rate of spending represents a striking break with past behavior, which would have suggested a much higher rate of spending. The low spending rate implies that the tax rebate provided a very limited stimulus to aggregate demand.

The pointer is from Angus.  Purely coincidentally, a moment later I read the following:

…both the White House and Congressional Democrats are leaning heavily
toward a combination similar to the one the administration turned to in
2001 as a recession-fighting tool. It would include a one-time tax
rebate for individuals and an immediate expansion in the deductions
that businesses take for investment in equipment. If Congress acts
quickly, checks could be in the hands of American taxpayers as early as
spring.

Hmm….By the way, here is the Elmendorf and Furman paper on fiscal stimulus.

Addendum: Don’t forget Alex’s post on this.  Mark Thoma and Bruce Bartlett are here, and as you might expect Greg Mankiw asks the correct pointed question.

Andrew Samwick at Vox Baby reports on the neuroeconomics sessions at the AEAs.  He is justifiably impressed with the work of David Laibson.  Laibson has pioneered the theory and implications of hyperbolic discounting.

But a clever economist can always come up with a rational (time-consistent) model to explain what appears to be irrational hyperbolic discounting.  Laibson, however, uses fMRI scans to show that different parts of the brain are activated when making decisions at different time-scales.  As Andrew notes, the isolation of the different decisions to different parts of the brain gives Laibson’s argument significant credibility against more standard neo-classical explanations for the same phenomena.

Here’s one paper suggesting that regulation doesn’t necessarily solve current problems:

We find that most aspects of mortgage broker licensing systems, such as mandatory professional education, do not have a significant and consistent statistical association with market outcomes. However, one component — the requirement in many states that mortgage brokers maintain a surety bond or minimum net worth — does have a significant and fairly consistent statistical relationship with both labor and consumer market outcomes. In particular, we find that tighter bonding/net worth requirements are associated with fewer brokers, fewer subprime mortgages, higher foreclosure rates, and a greater percentage of high-interest-rate mortgages. Although we do not provide a full causal interpretation of these results, we take seriously the possibility that restrictive bonding requirements for mortgage brokers have unintended negative consequences for many consumers. On balance, our results also seem to support theories of occupational licensing that stress the importance of pure entry and exit barriers over those that focus more on the human capital effects of licensing.

Get that?  Tighter regulation does mean fewer subprime mortgages, but also higher foreclosure rates and higher interest rates on the mortgages.  This paper is hardly the final word, if only because broker licensing is not the only possible means of regulation.  But in the meantime caution is in order; don’t be attracted to the idea of tighter regulation simply because you feel we haven’t had good enough regulation so far.  Regulators are famous for fighting the last war, not preventing the crisis to come.

So far I’m not finding an ungated copy of this paper.

Here is the link, via Greg Mankiw.  If we are comparing the Fair Tax to the traditional VAT, compliance is issue number one and I’m not convinced by Kotlikoff’s defense:

This [compliance] is a reasonable concern, and one I share.  In examining the real revenue-neutral FairTax rate, my co-authors and I ignored compliance issues, not because they are unimportant, but rather because we had no firm basis for estimating their impact…

…it’s clear that the incentive to cheat will be significant. But it’s also clear that the incentive to evade income taxes is greater than would be the incentive to evade the FairTax.  Moreover, much of the evasion under the FairTax would come in the same form and done by the same actors as evasion under the income tax; for example, a waitress who fails to collect FairTax on tips is also, presumably, not paying income taxes on those tips under the current system….   

The reasons I’m not overly worried about evasions number five.  First, the vast majority of retail sales occur in major retail outlets, like WalMart.  Second, we’ll have vastly fewer taxpaying entities (14 million rather than more than 100 million) on which to focus our enforcement efforts.  Third, we’ll have hundreds of thousands of otherwise unemployed IRS agents, accountants, and tax attorneys to enlist to enforce a single tax.  Fourth, we can always compel firms to report, via 1099-type forms, their sales to other firms.  This will provide the same records that arise under a VAT.  Fifth, the government can stipulate that all retail sellers provide buyers with a written receipt, regardless of whether the transaction is or is not in cash, specifying that the FairTax has been paid. Thus if sellers don’t mail in the taxes, there will be a paper trail of the evasion. Sellers who try to bribe buyers to forgo receipts and split the FairTax among themselves run the risk of having the buyer turn them in.   

I would say this: push for a Fair Tax and if you’re lucky you’ll get something like a VAT, if only for reasons of enforcement.  Plus you’ll also get the same income tax we have now, which isn’t going away anytime soon.  New Zealand, of course, did something like this.  "Fair Tax = Tax Increase"; it’s a pretty good and simple slogan.

On most of Kotkiloff’s other points, he’s simply "fighting for a draw," as they say.  Think through federalism with no federal income tax as a base for state and local taxes.  The transition issues are a monster.  If encouraging savings is the main goal, why not just eliminate the taxation of capital income under the current scheme?

Here is a long NYT piece on the Bernanke regime; here is Anna Schwartz complaining about Bernanke as Fed chair.  In the comments, I am taking nominations for the following: given perfect hindsight, what should the Fed have done and when?  Keep two things in mind: a) looser money sooner probably would not have helped the credit problems (and might have tied the Fed’s hands later on), and b) your recommendations cannot refer to actions which predate the Bernanke regime.

People used to think that more population was bad
for growth. In this view, people are stomachs–they eat, leaving less for
everyone else. But once we realize the importance of ideas in the economy,
people become brains–they innovate, creating more for everyone else….

In the 20th century, two world wars diverted the energy of two
generations from production to destruction. When the horrors ended, the
world was left hobbled and split. Communism isolated much of the world,
reducing trade in goods and ideas–to everyone’s detriment. World
poverty meant that the U.S. and a few other countries shouldered the
burdens of advancing knowledge nearly alone.

The battles of the
20th century were not fought in vain. Trade, development and the free
flow of people and ideas are uniting all of humanity, maximizing the
incentives and the means to produce new ideas. This gives us reason to
be highly optimistic about the future.

That’s me, writing at Forbes.com.  Read more about why the economics of new growth theory gives me reasons to be optimistic here.

Privatizing toll roads in the U.S. may result in significant diversions
of truck traffic from privatized toll roads to "free" roads, and may
result in more crashes and increased costs associated with use of other
roads, according to a new study.

It’s interesting how congested, dangerous, public roads are framed as a problem of safe, fast, toll roads!  The problem, however, is easily solved.  Price all the roads!  Unrealistic?  Foolish?  Not at all, especially not for large trucks which are the focus of the above study.  The key is to tie the price to the truck not to the road.  With today’s GPS technology trucks can be outfitted with GPS devices that can price all roads according to time, congestion, quality and a variety of other factors.  In fact, just such a system is working in Germany right now.

In other congestion news the DOT is finally allowing airports to charge landing fees based on congestion.  This is good news for travelers who can thank the economically-astute, Harley riding, no-nonsense Secretary of Transportation, Mary Peters.

By the way, Transportation Secretary Peters wrote the foreword to Street Smart: Competition, Entrepeneurship and the Future of Roads, a very good book on road pricing and privatization edited by Gabriel Roth and published by the Independent Institute (where I am the director of research.)

From Brad DeLong.  Excerpt:

The best way to keep a stimulus bill from becoming a lobbyist-pleasing ineffective and destructive Christmas tree in which a lot of the money goes to people who won’t spend it and a lot more to people who shouldn’t get it is to keep the legislative vehicle simple and clean. Boosting employment in the short term by cutting a lot of identical checks by April if we need to is something congress and the IRS can do. And Obama’s plan seems to me to have the best chance of doing that–if he can sign Pelosi and Reid up to move a clean, focused bill.

Here is my latest New York Times column, on four things that we have learned over the last year.  Here is the opening:

Harry S. Truman once said he wanted to talk to a one-armed economist, “so that the guy
could never make a statement and then say: ‘on the other hand.’ ” Yet
economic knowledge continues to progress in unexpected ways. Here are a
few of the things we learned in the last 12 months…

But to continue the lunchtime debate with some of my colleagues, the piece ends as follows:

Knowledge is a wonderful thing, but sometimes simply knowing what we
don’t know is a form of understanding. So beware the one-armed
economist; sometimes a good economist could use two or even three arms
or more.

I would make one modification to the tone of the piece: A number of days elapsed between the final draft and publication; I now estimate the probability of a recession higher than the rhetoric of this piece might to some people indicate.

The source is REPEC, here is the list.  I believe if I were starting out today, I would end up as a law professor, not an economist, though perhaps I would do economics in a legal guise.

I might add that number of citations and influence are, in my view, diverging.  Steve Levitt has had a huge influence on economics, an influence which is underrepresented in his number of citations.  You won’t cite him just because you’ve been inspired by the kind of paper he writes, and how many other economics papers are there on girls’ names or soccer kicks?  Furthermore the more that economic research fragments, and becomes less theoretical, the more that the most cited papers are likely to be macroeconomics, as this list illustrates.  At least macro papers will still share a common topic.

Hat tip to Economic Logic.

Megan McArdle writes:

As the Boomers age, they will consume fewer of the things that we produce efficiently, and more of the things that we provide relatively inefficiently.

Here is more, and I hereby take Megan to be a robot pessimist. 

It is a revealing question to ask which sectors a person considers technologically stagnant.  Baumol claimed it is the performing arts, but TV and the internet have belied this; it is true that those media are not *live* performance but that is substituting objective aesthetic judgment for what consumers really care about.  People love Dexter, whether or not there is someone actually in the box.  For stagnant sectors, I will nominate:

1. Haircuts, you might as well get them in Mexico

2. Automobiles (given the overall extent of technological progress, are they really so much better than in 1957?), although the $2500 car may change this

3. Spicy food, it seems best in relatively poor countries

I’m not yet sure about teaching.  It seems to be a candidate but people are learning an awful lot from blogs these days; don’t fixate on delivering the old service the way we always have.

Your picks?  Keep in mind that something has to be stagnant in relative terms, to date it sure isn’t computer chips but they raise the bar for the average.  I expect pharmaceuticals and webcams to make it much easier to care for old people, but only on a per year of life basis; the number of years lived and thus total cost will rise too.

From the Wilson Quarterly of this January, here is one excerpt:

For better or worse, microborrowing often entails a kind of ­bait ­and ­switch. The borrower claims that the money is for a business, but uses it for other purposes. In effect, the cash allows a poor entrepreneur to maintain her business without having to sacrifice the life or education of her child. In that sense, the money is for the business, but most of all it is for the child. Such ­life­saving uses for the funds are obviously desirable, but it is also a sad reality that many microcredit loans help borrowers to survive or tread water more than they help them get ahead. This sounds unglamorous and even disappointing, but the ­alternative–­such as no doctor’s visit for a child or no school for a ­year–­is much ­worse.

The piece attempts to redress many myths of micro-credit.  For instance it is often claimed that micro-credit doesn’t involve collateral, but that isn’t quite true.  The borrowing is done in small groups, and if you don’t pay your share the neighbors come and take away your TV set.  In reality micro-credit takes the collateral-seizing function away from the bank and puts it in the hands of our neighbors, thereby increasing loan repayment rates.

My favorite part of the piece is this:

Sometimes microcredit leads to more savings rather than more debt. That sounds paradoxical, but borrowing in one asset can be a path toward (more efficient) saving in other ­assets.

…Westerners typically save in the form of money or ­money-­denominated assets such as stocks and bonds. But in poor communities, money is often an ineffective medium for savings; if you want to know how much net saving is going on, don’t look at money. Banks may be a ­day­long bus ride away or may be plagued, as in Ghana, by fraud. A cash hoard kept at home can be lost, stolen, taken by the taxman, damaged by floods, or even eaten by rats. It creates other kinds of problems as well. Needy friends and relatives knock on the door and ask for aid. In small communities it is often very hard, even impossible, to say no, especially if you have the cash on ­hand.

…Under these kinds of conditions, a cow (or a goat or pig) is a much better medium for saving. It is sturdier than paper money. Friends and relatives can’t ask for small pieces of it. If you own a cow, it yields milk, it can plow the fields, it produces dung that can be used as fuel or fertilizer, and in a pinch it can be slaughtered and turned into saleable ­meat or simply eaten. With a small loan, people in rural areas can buy that cow and use cash that might otherwise be diverted to less useful purposes to pay back the microcredit institution. So even when microcredit looks like indebtedness, savings are going up rather than down.

In other words, read Keynes’s chapter 17, go long on animals (liquidity premium exceeds carrying costs), go short on money (carrying costs exceed liquidity premium, at least in poor countries), and increase your future expected net wealth.

As the economy slows many people from Larry Summers to Martin Feldstein are calling for a fiscal stimulus.  I am not convinced.  Spending and tax decisions can
rarely boost an economy.

First, the money for any new spending or tax cuts has got to come from somewhere, right?  Thus there is usually substantial crowding out of any stimulus.

Second, by the time the new spending or tax cut
gets through the political process the economy has moved on and the
stimulus is no longer relevant except by accident.

Third, there just
isn’t that much discretionary spending to play with and even a large
increase in spending, say tens of billions, is too small to make much of
a difference in a 13 trillion dollar economy.

Fourth, in their desperation to "do
something" politicians will often do something foolish.  If a spending
increase or tax cut isn’t worthwhile on its own merits then it’s highly
unlikely to be worthwhile once we add in the benefits of "stimulus."  Thus, it’s one thing to argue for extending unemployment benefits as a matter of welfare it’s quite another to think that an increase in unemployment benefits will so increase spending as to reduce unemployment!  (The implicit view of Larry Summers.)

Economists may call for "temporary," "conditional," and "targeted" stimulus but they won’t be the ones designing the plan.  Spending
increases and tax cuts are policies with long term
consequences that we need to think about carefully. 

Thus, I do not favor a fiscal "stimulus"
package.

An alarm clock to get you out of bed in the morning:

Connects via WiFi to your online bank account, and donates YOUR real money to an organization you HATE when you decide to snooze!

Hat tips to Kottke and Magnetbox, apparently there is doubt as to whether this is real.  The wise guy also may wonder why you just don’t disable the snooze function on your alarm clock.  But of course that is precisely the sort of non-convexity that markets seek to avoid.  At times you will wish to sleep past your limit, even at your prespecified price, but perhaps you cannot always know in advance.