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January 31, 2006
This year I'll be able to go!
The Homer Jones Memorial Lecture sponsored by the St. Louis Fed and a number of St. Louis area universities is on March 8 this year. (Click for details) Jerry Jordan will be speaking on "Money and Monetary Policy in the 21st Century."
Last year, I remarked in the blog with some dismay that I was not able to attend Ben Bernanke's lecture.
Marking it on my calendar now...
Posted by William Polley at 03:19 PM | Comments (0) | TrackBack
Adieu, Mr. Greenspan (and adieu, "measured")
The funds rate did go up another 25 basis points. The press release from the FOMC meeting contains only three differences from the last one. (New language in bold.)
Although recent economic data have been uneven, the expansion in economic activity appears solid. Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained. Nevertheless, possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures.
The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives.
"Measured" is gone from the first sentence of paragraph two. Not much to say about it--we knew it would happen sooner or later (click here and here).
The language about the uneven data is no doubt a reference to Friday's GDP report. And finally, the word "may" in the first sentence of paragaph two replaces the words "likely to be". I interpret "may" is being somewhat weaker.
The door is open for leaving rates unchanged in March or May, however, on the March meeting, I would still lean to an increase as being more likely than not. The May meeting is really a coin toss at this point.
UPDATE: In other news, Ben Bernanke was confirmed by the Senate. This Reuters story does not give the vote details as to how many voted against confirmation.
WASHINGTON (Reuters) - The U.S. Senate on Tuesday confirmed White House adviser Ben Bernanke as chairman of the Federal Reserve, clearing him on Alan Greenspan's last day in office to take over America's most powerful economic post.
The Senate approved the former Fed governor on a voice vote.
He enjoyed strong support from both Republicans and Democrats, however Sen. Jim Bunning, a Kentucky Republican, spoke in opposition to the nomination, complaining that Bernanke would too closely follow Greenspan's policies.
Posted by William Polley at 01:55 PM | Comments (0) | TrackBack
January 30, 2006
Apparently they missed the memo
Some senators do not keep up with the Fed confirmation hearings. (NY Times)
Wall Street may be intensely interested in just about every word ever uttered by Mr. Bernanke, the former Princeton economist and chairman of the White House Council of Economic Advisers who is President Bush's choice to succeed Alan Greenspan.
But in Washington, he is barely on some people's radar screens. Indeed, here is what Senator George Allen of Virginia, who is considering a bid for the Republican presidential nomination in 2008, said when asked his opinion of the Bernanke nomination.
"For what?"
Told that Mr. Bernanke was up for the Fed chairman's job, Mr. Allen hedged a little, said he had not been focused on it, and wondered aloud when the hearings would be. Told that the Senate Banking Committee hearings had concluded in November, the senator responded: "You mean I missed them all? I paid no attention to them."
Later in the article...
Economists are a bit mystified, though not entirely surprised. The Alito hearings were brimming with controversy, from the judge's membership in a Princeton University alumni group that fought against affirmative action to a 20-year-old memorandum in which he said that the Constitution did not provide a right to an abortion.
The Bernanke hearings, by contrast, centered on the world of monetary policy, a field where most of the big ideological fights were settled long ago.
Perhaps some of my esteemed readers would disagree with that! Actually, I think the writer is just oversimplifying the following remark by Alan Blinder.
"Monetary policy has become much less political than it used to be years back and centuries back," said Alan S. Blinder, a former Fed vice chairman who is a professor of economics at Princeton, where he was a colleague of Mr. Bernanke's. "There's a consensus on what monetary policy should be doing, which is to say keeping inflation low and, subject to that constraint, keeping employment high. So politicians take this attitude that it's for technocrats, and it doesn't matter too much whether the guy is a Republican or a Democrat."
That's a pretty broad statement, but essentially correct as far as it goes. There are a lot of things I look for in a Fed chair, but party affiliation isn't one of them. But taking it at face value, if it really is the case that party affiliation doesn't matter much, and that is why the some senators are uninterested, I think that says more about those senators than it does about monetary policy.
Posted by William Polley at 09:44 PM | Comments (3) | TrackBack
What does a more transparent and democratic Fed mean for Mr. Bernanke?
The Wall Street Jounal's Greg Ip has the insight to ask this important question. (Subscription required)
Though a highly respected economist, Mr. Bernanke won't initially command the deference that Alan Greenspan earned during more than 18 years as chairman. With his colleagues expecting to contribute more, Mr. Bernanke may face a delicate tradeoff when they disagree. He might compromise, which could damp his influence over the Fed's message. Or he could decide to impose his views, which could provoke dissents and raise questions about his authority.
Fed officials say the increase in internal democracy is both inevitable and constructive, and has led to more collegial policy making. The Fed's tradition of deciding by consensus is well entrenched, they say. Some officials say an increase in formal dissents would even be healthy. At turning points in the economy, they could reveal honest disagreements among officials on difficult questions.
...
An early glimpse of this democracy in action unfolded late last year in the run up to the Fed's Dec. 13 policy meeting. Virtually all Wall Street economists expected the Fed to raise interest rates by a quarter of a percentage point. Still unclear, however, was whether the Fed would signal a change in the future course of rates.
For FOMC members, most of the suspense ended long before they gathered around a huge conference table at Fed headquarters in Washington, D.C., according to people familiar with the process. About a week earlier, the five Fed governors and 12 regional reserve bank presidents who participate in committee decisions had received three drafts of the statement from the Fed's staff.
A debate ensued, these people say. Several presidents circulated extensive comments via encrypted email. By the day of the meeting, the FOMC had largely agreed on what the statement should say. The key point: it would no longer call interest rates "accommodative" -- a broad hint that rate increases could soon come to a halt.
I have to say that I'm not that surprised that these discussions are taking place. In order to get the statement out right after the meeting (and the minutes out after only 3 weeks--more on that in the article) there would have to be pre-meeting discussion or people are going to feel like they are not part of the process. Bernanke will need to manage that process in a way that no other new chairman has. Things were a lot different when Greenspan came on board in 1987.
There's a lot more in the article, including how Alan Greenspan managed dissent over his 18+ years at the helm. There is some interesting discussion of the changing role of the reserve banks and their presidents over the years as well. This is definitely a good read to start out your week on the eve of Greenspan's last FOMC meeting.
Posted by William Polley at 12:01 AM | Comments (0) | TrackBack
January 29, 2006
Super Bowl economics
The Wall Street Journal has a nice article on the economic impact (or non-impact) of the Super Bowl. (subscription required) Two blogging economists were quoted (King Banaian of SCSU Scholars and Craig Depken of Division of Labour)
"There are numerous studies by reputable economists showing that the Super Bowl has a significant positive economic impact on host cities," said NFL spokesman Greg Aiello, who's all too familiar with the critiques from Mr. Sanderson and other sports economists. "Businesses and city leaders know the Super Bowl draws thousands of people to their city who spend large amounts of money and that the Super Bowl gives the host city unmatched media exposure. Cities want the game because it has tremendous value. It's common sense."
Tell that to Phil Porter, a University of South Florida economist who has looked at the economic impact of six Super Bowls. He found that Miami-area hotel rates and occupancy levels increased only 4.4% for Super Bowl XXIX compared with the same period in the prior and following years. Similarly, he found that Super Bowl XXXIII, also in Miami, had no more than a $37 million impact on the South Florida economy. Economists Robert Baade of Lake Forest College and Victor Matheson of Williams College pegged it at $21 million to $32 million, about one-tenth of the NFL's claims.
...
The NFL's estimates, bought and paid for by the league, assume that every dollar spent around a Super Bowl is new money that stays in the community. But the economists argue that you can't merely look at the gross aggregate of Super Bowl-related spending.
"Most economic impact studies implicitly assume the hotel occupancy would have been zero without the event," says University of Texas economists Craig Depken and Dennis Wilson, who looked at the 2004 Super Bowl in Houston.
"The athletes, the chain hotels and restaurants receive money from the Super Bowl and take the money out of the area," notes King Banaian, economics chairman at St. Cloud State University in Minnesota. "This reduces the impact on the local economy."
Right. When these economists and others say that you can't just look at the aggregate, that's another way of saying that you have to understand opportunity cost. How else could the city have spent that money? How many people would have been in the hotels if they didn't have the Super Bowl? The list goes on.
Posted by William Polley at 11:44 PM | Comments (0) | TrackBack
Enron, before the fall
What comes to mind when you hear the word Enron? Remember when they were just an ordinary pipeline company? Remember when what they did as a company started to get a little fuzzy? CNN reposts a Forbes article from 2001 that will take you back to those heady days. Read it and remember.
Posted by William Polley at 12:36 AM | Comments (2) | TrackBack
January 28, 2006
To the memory of the Challenger crew
Twenty years ago today, the nation was stunned by the loss of the space shuttle Challenger and her crew of seven astronauts. I was 13 years old. At the time I did not yet have my pilot's license though I was already dreaming of it. Flying is one of the most thrilling things I can think of. The idea of space travel... well, there are no words for the feeling I have about it.
My 4 year old son and I enjoy watching the International Space Station on clear nights as it goes overhead. He knows there are people up there. In fact, the world he will grow up knowing is a world in which people have always been in space. There have been people in orbit every single day of his life. We also enjoy looking at the moon and the planets with our telescope (114mm Newtonian reflector). He knows the names of all the planets. (Saturn is our favorite.) Maybe he will want to go to space. Maybe my two year old daughter (who is still a little young for the telescope) will want to. Though the risks would be scary for a parent, it would make me very proud.
There is a feeling that you get when you fly solo in an airplane. You are alone, and yet there is no feeling of loneliness. You are as free as you will ever be while you have breath. Going into space must provide that feeling multiplied a hundred-fold. We earthbound people can only imagine what it must be like. Those who go into space not only pursue scientific knowledge. They also pursue a dream as old as mankind and as new as a preschooler looking through a telescope for the first time--the dream of leaving this world and taking our place among the stars.
The Challenger crew has taken their place among the stars.
The following poem has a special place in the hearts of pilots. It was quoted by Ronald Reagan in his eulogy of the Challenger crew. The words evoke feelings of joy and wonder, and that is an appropriate way to remember all who give their lives for the dream.
Oh, I have slipped the surly bonds of earth
And danced the skies on laughter-silvered wings;
Sunward I've climbed, and joined the tumbling mirth
Of sun-split clouds — and done a hundred things
You have not dreamed of — wheeled and soared and swung
High in the sunlit silence. Hov'ring there,
I've chased the shouting wind along, and flung
My eager craft through footless halls of air.
Up, up the long, delirious burning blue
I've topped the windswept heights with easy grace
Where never lark, or even eagle flew.
And, while with silent, lifting mind I've trod
The high untrespassed sanctity of space,
Put out my hand, and touched the face of God.
"High Flight"
--John Gillespie Magee, Jr.
Posted by William Polley at 01:06 AM | Comments (3) | TrackBack
January 27, 2006
Disappointing GDP
Reuters has the headline of the day: Forecasters way off on growth estimates.
The Wall Street Journal has some responses from economists, including Angry Bear's Kash Mansouri
The only thing that kept GDP growth positive at all was a massive build-up in inventories -- the largest increase in inventories since early 2002. Apparently businesses were caught off guard by the slowdown in demand, and have not yet slowed their production accordingly. Presumably, they will. All in all, this is an extremely worrying report. I've been bearish about economic growth in 2006 for a little while now, and this has just confirmed my worst fears.
Indeed. Inventories contributed 1.45% on the plus side. Basically things shook out this way. Durables were way down, but nondurables and services are still strong. Fixed investment was pretty flat, some components up, some down. Exports didn't contribute much and imports continue to be a drag (see also, nondurables). Government spending, particularly defense spending is down. (Full press release)
So what is with defense spending? Isn't there a war on? Look closely. There was a surge in defense spending in the 3rd quarter followed by a drop in the 4th quarter. The fiscal year ends on Sept. 30.
I'm just sayin'.
So maybe that is just an artifact of budgeting and the timing of the fiscal year. I'm not sure that seasonal adjustments would catch all that, especially if the war causes a lot of unusual spending activity that isn't built into the adjustment process. So one has to think that defense spending and government spending in general will be back up in the first quarter of this year.
But what about durables? What about fixed investment? Is the buildup of inventories troubling? Remember, there was a big draw down of inventories in the 2nd quarter. Perhaps today's data represents part of that ebb-and-flow. If so, and if defense spending goes back to normal, the only really discouraging part of the report is the drop in durable goods. And there's no way to sugar coat that, especially given the announcement by Ford this week (oh, and this report just in concerning GM). If any weakness remains in the first quarter of 2006, that will probably be it.
If you're not too depressed already, go over and read James Hamilton's assessment. He has some links to others as well. King at SCSU Scholars says, "there's no way you can paint this as good news."
While I expect that there might be a small revision upward in the next month or two, I would also revise my 2006 growth estimate down a couple tenths. We're probably looking at the low 2% range, that is unless another shoe drops. Remember, the thing that gets you is the thing you didn't see coming.
There will undoubtedly be some reflection on what all this means for interest rates. The FOMC meeting is next week, and participants are observing the usual pre-meeting "blackout". I don't think it changes anything for Greenspan's last meeting, but after that...
I know we'll all be looking forward to macroblog's implied probability charts. (Link to this week's edition--before GDP data)
UPDATE: Altig's implied probability charts are up. The title of the post is "GDP Tanked...And Nobody Cared." I guess that should tell you that the market still has its chips down on another quarter point rate hike in March. At the moment, the likely candidate for a pause is the May meeting. There will be a lot to talk about between now and then.
Posted by William Polley at 04:32 PM | Comments (0) | TrackBack
Bush announces nominees for two open Board of Governors positions
Greg Ip and John D. McKinnon write in the Wall Street Journal:
The White House announced that President Bush will nominate Kevin M. Warsh, a White House adviser on domestic finance and capital markets, and Randall S. Kroszner, who teaches at the University of Chicago's Graduate School of Business.
...
The nominations come as Alan Greenspan prepares to step down Tuesday after 18½ years as chairman. Ben Bernanke, a monetary economist who is chairman of Mr. Bush's Council of Economic Advisers, is scheduled to succeed him Wednesday. He awaits Senate confirmation, tentatively expected Tuesday.
Mr. Bernanke created one of the vacancies when he quit as a Fed governor to go to the White House last summer. Edward Gramlich, appointed by President Clinton, stepped down as a Fed governor in August.
The nominations would tilt the board's composition toward financial-industry expertise rather than macroeconomics. Mr. Warsh, a lawyer by training, was an investment banker at Morgan Stanley before joining the White House National Economic Council. He has been the White House's point person on financial-industry issues. Mr. Kroszner, who served on the Council of Economic Advisers during Mr. Bush's first term, specializes in banking, banking regulation, international-financial crises and monetary economics.
...
Of the five governors, three have primarily a financial-industry background. Mark Olson was a banker, Capitol Hill aide and consultant. Susan Bies, a Ph.D. economist, was an executive at First Tennessee National Corp., a regional bank. Vice Chairman Roger Ferguson, who has a Ph.D. in economics and a law degree, was a consultant specializing in the financial industry.
Obviously there will be more to write about this over the coming days and weeks. Professor Kroszner is definitely qualified for the post. I'm not entirely sure yet what to make of the Warsh nomination. Expect questions on his experience outside the administration. Some people questioned Ben Bernanke about his ability to distance himself from the executive branch where he had served as an adviser. Admittedly, potential chairmen get more intense scrutiny than a nominee for a governorship. Still, I would expect that people will want to know where Mr. Warsh stands on policy and regulatory issues. I expect an interesting set of hearings, probably not quite at the level of the Alito hearings, but more intense than the typical hearings for a Fed governor.
Posted by William Polley at 04:07 PM | Comments (0) | TrackBack
January 26, 2006
Forecasting GDP
4th quarter GDP figures come out in the morning. Talk is that it will be under 3% for the first time in almost 3 years. That might well be. I'd put my chips on the "under 3%", but I'd never go "all in" on advance quarterly GDP. In the latest Econoblog, Kash (of Angry Bear) explains why:
In October 2005 the Congressional Budget Office published "The CBO's Economic Forecasting Record," in which they took at look at the track record of both the CBO and "Blue Chip consensus" forecasts for various macroeconomic variables. Doing a quick check on the accuracy of the Blue Chip consensus forecast for GDP growth shows that, on average, the consensus forecast was off by 1% (in absolute value). Forecast errors were particularly large during large changes in GDP. In other words, economists are particularly bad at identifying turns in the business cycle.
Now, I'm not sure whether this average error of 1% is larger or smaller than I would have expected, compared to an average GDP growth rate of 3.1%. But I am quite sure that it's disappointing to see that a forecast that simply extrapolated last year's GDP growth into next year's GDP growth would have had a slightly smaller average error. In other words, the average of our best macroeconomic models does no better at predicting GDP growth than a person who simply always guesses that next year's GDP growth will be the same as this year's!
To me, that's a pretty bad testament to the state of the economics profession's understanding of the macro economy. Are economists leaving out important information? Is the importance of psychology and other inherently difficult-to-model factors making hay of our economic models? I'm not sure … but add it all up and I find myself regularly disappointed with our ability to make good macroeconomic forecasts.
Kash and James Hamilton (Econbrowser) bat it around a bit, and it's well worth the read--and timely given the upcoming release of the advance GDP data.
Hamilton relates an interesting anecdote:
I spoke recently with the manager of a fund with one of the best forecasting records of anybody in the business, and was very interested in his description of how they worked. At the research stage, they use all variety of sophisticated econometric techniques to look for relations in the data. But when it gets to the point of actually making the investment call, they throw out the econometric estimates of all the coefficients, and replace them with values that make sense from the point of view of an understanding of the basic forces that are operating, values that are hopefully consistent with the econometric estimates, but not identical. They are thus deliberately coming up with a statistical model that does a worse job of fitting the data than something else that is available, but hopefully is more robust about predicting what may come next in a world which, as we've both observed, is constantly changing. That's certainly consistent with my advice for any forecasters -- don't try to do too much with overfitting the data, but settle for a simple model that gets the broad brush correct.
Sound advice. Turning points, when they happen, can look like outliers. Overfitting the data is bound to cause you to miss the turning. There is much that we do not understand.
UPDATE: The folks at Davos aren't doing much better.
Posted by William Polley at 07:53 PM | Comments (0) | TrackBack
Social safety nets, opportunity cost, and the importance of understanding economics (Part II)
In Part I of this two part post, I laid out a specific example pulled from the headlines that highlights the opportunity cost of an act of compassion. In this post, I will try to generalize a little to see what we can learn from this.
When you hear the term "social safety net," what comes to mind? I tend to think of Social Security, unemployment insurance, or welfare programs. A social safety net is there to catch you if you fall through the cracks in your own support system. A social safety net is the government following the "Golden Rule" (Do unto others...) on our collective behalf. My ideal social safety net is part of the social contract I would design from behind Rawls' "Veil of Ignorance." These are some things that come to my mind.
But the social safety net is not free. As a concrete example, consider Social Security--part retirement plan, part safety net. Your benefits when you retire are related to your contributions, but are less than what those contributions might have received if invested in other assets. The reason is that Social Security also pays disability and survivors benefits. That knocks a couple points off your implied rate of return. That, my friends, is opportunity cost.
So it is with other things that governments do to protect us. Consider the example of fire protection I raised in the previous post. Fire protection is usually thought of as a public good rather than a social safety net, but the notion of opportunity cost is the same. And because it is closely tied to the concept of insurance, it is certainly a relevant comparison. Fire protection is very costly, and modern firefighters do much more than their ancestors, the fire insurance companies of a couple hundred years ago. Modern fire departments protect us against more than the loss of our home or business. They protect us from hazardous material spills and come to our aid in medical emergencies. A hazmat team is expensive, and if modern fire companies were financed only by homeowners insurance, I doubt that hazmat teams would exist, at least not in their present form. Government stepped in. We collectively choose to pay for a higher level of protection. Again, this has an opportunity cost. When a city needs to hire more firefighters, taxes must go up or something else must be cut.
But just as there is a cost, there are also benefits--in some cases benefits that extend beyond the individual. And many people would argue that it is part of the social contract that we have a responsibility to pay a share of the cost even when we do not enjoy a direct private benefit.
Measuring the private benefit of this blanket of protection is to ask the question of how much you would need to be compensated in order to voluntarily waive your right to that protection. But that does not measure the social benefit. It does not measure how much you are willing to pay to ensure that protection is there for your neighbor.
Of course caring for your neighbor is not the usual picture of the rational, utility maximizing, self-interested homo economicus (Adam Smith's Theory of Moral Sentiments notwithstanding), but consider the following scenario.
Suppose that your city is building a "free" public health clinic. You could measure individual private benefit by asking people how many times per year they would expect to visit the clinic. The number of visits per year times the average cost per visit is the total private benefit.
For some individuals, the private benefit would be zero. People with insurance would probably reveal a preference for seeing their private doctor rather than going to the county health department. Yet do they share in the social benefit from the clinic? To find out, you might ask someone who gets zero private benefit which they would prefer: 1) a guarantee that the clinic will remain open serving the community or 2) the clinic closes tomorrow, but the person gets a crisp, new $10 bill.
Would I be "irrational" if I turned down the $10? I don't think so. The reason markets fail in the presence of a positive externality is that people do not take into account the benefit of an action to others because their contribution to the total social benefit is so small. But if you asked people to reveal how much benefit they get from the collective action of others, you can get a rough estimate of the social value that would be lost due to the market failure.
I say, "rough estimate" because even this method is not without its pitfalls. If you survey people who obtain private benefit, they may give an inflated answer. Nonetheless, such studies can be done, if interpreted with caution. From the Minneapolis Fed (fedgazette):
Sports teams, for example, create a public good by virtue of the fact that they often engender community pride, interest and enjoyment outside of ticket-buying customers (what economists call externalities). "The magnitude of this benefit is unknown, and is not shared by everyone; nevertheless, it exists," wrote Roger Noll of the Brookings Institution.
In some cases, it might be hard to say more than "it exists," but even that does say something. In the case discussed in the separate articles by Landsburg and Frank, I would argue that a social benefit exists. But Roger Noll's comment above on a totally different issue would apply just as well here. I don't know the magnitude, and properly measured, it's probably smaller than most of us would initially think. Yet it must be put on the table for discussion.
Economic analysis, particularly through focusing on opportunity cost and the notion of "willingness to pay" can shed much light on everyday subjects like these. We dissect cases like this to separate out the social benefits/costs from the private benefits/costs. We prioritize elements of the social safety net based on their opportunity cost. We justify or criticize government intervention on the basis of costs and benefits that are seen as well as those that are unseen. Economists may not always agree, but we can usually identify the root source of our disagreements. We do all this because, as Frank says,
We cannot think intelligently about these decisions without weighing the relevant costs and benefits.
Posted by William Polley at 06:34 PM | Comments (0) | TrackBack
January 25, 2006
Social safety nets, opportunity cost, and the importance of understanding economics (Part I)
It all started with a piece by Steven E. Landsburg in Slate which asked the question: "Do the Poor Deserve Life Support?" The subtitle was, "A woman who couldn't pay her bills is unplugged from her ventilator and dies. Is this wrong?" Landsburg argues that it is not.
This brought forth a response from Robert Frank who wrote in the New York Times,
Many commentators have attacked his argument as morally preposterous. Well, yes. But it is also economically preposterous.
Bloggers Arnold Kling and Brad DeLong have also noted the exchange, and it is indeed noteworthy. So if you haven't read the Landsburg and Frank articles. Do so now, and come on back.
So here we have two top-notch, respected economists who find themselves completely at odds on this question. Both use economic logic and reasoning. The average person on the street might find each of them quite persuasive individually. Taken together, how do you make sense of them when they are so clearly opposed?
Let's dig in and see the source of the disagreement. Landsburg's main arugment is that the person in question probably would not have placed a high value on hypothetical "ventilator insurance" ex ante and therefore should not receive the benefit ex post. Landsburg writes,
...for the same cost, we could give each of those people a choice between ventilator insurance on the one hand or $75 cash on the other hand. If it turns out that I'm wrong and they all want the ventilator insurance, so be it. But why not at least ask them?
You can't do that with every government service. You can't offer people a choice between police protection and its cash value, because police patrols tend to protect entire neighborhoods at once, not just specific individuals. You might not want to offer people a choice between a flu vaccine and its cash value, because you'd really prefer to have vaccinated neighbors. But critical life support isn't like that; the benefits are targeted to specific individuals. There's no reason those individuals shouldn't be allowed to choose different benefits if they want them.
And Frank writes,
Even those who are not poor recognize that catastrophe is only one unlucky break away. One might lose one's job and be unable to afford health insurance, for example, or be stranded by a mountain blizzard and unable to afford a helicopter rescue. With such prospects in mind, most people favor collectively financed rescue efforts. That a poor person would not, or could not, buy private insurance against such contingencies is entirely beside the point.
Frank compares the life support situation to a helicopter rescue. Landsburg draws a stark contrast between life support and government provided services like police protection. Landsburg is right that you can't let people opt out of police protection. There is a free rider problem. If the rest of the neighborhood pays I still get the protection, so it would be individually rational to want to opt out. So the government provides the protection and requires payment in the form of taxes.
The way most cities are set up, the same is true of fire departments, but it wasn't always so. Long ago, insurance companies formed fire departments for the purpose of protecting their interests. Each building had a plaque indicating which company provided them with protection from fire, as well as insurance against loss. Presumably, people could choose their fire company on the basis of location, price, etc. I would guess that people could choose to have no insurance at all. In that case, I suppose that the companies who insured buildings on either side would work to prevent the fire from spreading but would not necessarily concern themselves with the uninsured building.
Today, our fire departments are usually agencies of city or county government, making them functionally similar to police departments. They respond to all calls for help, without regard to your insurance company, or even whether you pay taxes to that juristiction (as in the case of responding to an auto accident or medical emergency). Through many years of voting and policymaking, we have decided that this is a good system--just as most people would agree that public police protection is superior to a patchwork system of private security guards.
And yes, those public servants are the ones who rescue us from mountain blizzards, mine explosions, terrorist attacks, and a million other things for which writing individual insurance policies would be difficult if not impossible. The question is whether life support, of the type required in the article, is one of those situations.
Landsburg says that the benefit of life support is targeted at a specific individual. Well, so is the mountain rescue operation, at least once you have an "identified life" at stake (to use a term employed by Frank). So that isn't the real difference. The real difference is much more fundamental. The life support in this problem is not for the purpose of saving a life, but for the purpose of prolonging it enough to grant a dying wish.
One can try to measure the economic benefit of saving a life. One might even come up with a "willingness to pay" ex ante to save a life from mortal peril. And obviously society puts a high enough price on this as to employ rescue squads, search and rescue teams, and so on. But how do you measure the willingness to pay to grant a dying wish to say good-bye to a family member? Should the poor be priced out of this insurance market?
More to the point, would society be better off in a world where granting such consideration (within certain bounds of reason) was a social norm? Should taxpayers reimburse the hospital for providing a few more days of care in this case?
Unfortunately, this question is neither as objective, nor as simple, as asking whether society benefits from police protection or a national defense. Well meaning people can disagree. Answering in the affirmative does not come without cost for society. And yes, as Landsburg points out, it would mean that there would be fewer resources available to help the poor in other situations, perhaps more life-threatening situations. That is true. But we should also consider the social benefits of such a norm. Frank appeals to Adam Smith in arguing for a consideration of sympathy and empathy. The Theory of Moral Sentiments is the place to look for such discussions.
How much would you be willing to pay for a social norm such as this?
To be continued...
Posted by William Polley at 01:51 PM | Comments (0) | TrackBack
A couple of links relevant to my principles class
Robert Frank's article on a life-or-death cost benefit decision and Steven Landsburg's piece in Slate.
Price controls on water in Bolivia (via EclectEcon and Division of Labour).
Posted by William Polley at 01:49 AM | Comments (0) | TrackBack
January 24, 2006
Canada votes
Well, my prediction that the Liberals would keep their hold on the Canadian government turned out to be wrong. Post-election observations:
1. The Conservatives did better in Quebec than I expected.
2. The Liberals did better elsewhere than a lot of people expected.
3. The NDP really shook things up (at the time of this writing, they were up 9 seats from the last election).
I happened to be visiting Canada back in 2003 when the merger of the Canadian Alliance and the Progressive Conservatives was announced and it was all over the news. (I was there for the IAES Conference.) It was very interesting. I remember thinking that this new Conservative party would score a big victory within a few years. Certainly the 2004 election was a step in that direction. I figured that in one or two more elections they might win a majority. I didn't think it would happen like this.
And now the Conservatives have a government, but since they have fewer seats than the Liberals and the NDP combined (and fewer than the Liberals alone won in 2004) it will be difficult to advance their agenda. NDP leader Jack Layton suggested as much in his post-election remarks.
So what to make of the Liberals? With a stronger than expected showing and with a new (still to be determined) leader at the helm, they could emerge stronger next time. That would suggest to me that the next election will be just as close. And if the Conservatives don't deliver for Quebec, they could watch their margin evaporate.
If someone can breathe new life into the Liberals and the NDP gains a few more seats in the next election, the Conservative government will be short lived.
Americans can think of it this way... imagine the Republicans leading the Congress with a quarter of the members being of a 3rd (and 4th) party that is not on board with their agenda.
I know very little about the NDP. Until tonight, they were a marginal presence at best. But they made strong gains, and have their power concentrated in BC and Ontario (at the moment, it looks like the NDP beat the Liberals in BC). I would like to know more about them. They will, I think, hold the balance of power until and unless one of the two major parties breaks one way or the other.
The Conservatives have been given an opportunity to show Canada what they've got much earlier than most people would have expected back in late 2003. Their future in the next decade will be determined by what they do with that opportunity in the coming months. It's been a meteoric rise to power. Will it last?
Who will lead the Liberals? Will Quebec tilt even more to the Conservatives? Will the NDP continue to grow in influence? This is pretty exciting stuff. If you're burned out on U.S. politics, check out what's going on north of the border. I'm not even Canadian, and I'm hooked.
The Globe and Mail, of course, has complete coverage.
Posted by William Polley at 12:47 AM | Comments (0) | TrackBack
January 23, 2006
Up, up, and away
It sounds crazy, but it just might work. From IN-FORUM (Fargo, ND--free registration required):
BISMARCK – Why put up more than 1,000 towers to spread cell phone service across North Dakota when a few balloons would do it?
So says former Gov. Ed Schafer, one of the backers of a plan to attach wireless re-peaters to weather balloons high above the state to fill gaps in cellular coverage.
“I know it sounds crazy,” Schafer said, “but it works in the lab.”
Extend America, a North Dakota wireless telecommunications company, and Chandler, Ariz.-based Space Data Corp. are developing the balloon-borne cellular technology, believed to be the first of its kind.
A trial balloon will be launched next month in North Dakota to test the theory, said Schafer, the chief executive officer of Bismarck-based Extend America. Schafer left office in 2000 after eight years as governor.
...
Jerry Knoblach, the CEO of Space Data, said although the balloon technology called SkySite is new to cellular, “the platform is very well proven.”
His company has launched thousands of the free-floating balloons in Texas, Oklahoma, Louisiana, Arkansas and New Mexico to track data for oil company vehicles, wells and pipelines over the past year, he said. And Knoblach is certain the balloons will work for cellular service in North Dakota – even in cold or stormy weather. He said balloons were launched even during Hurricane Katrina.
“It’s just like a weather balloon at the airport,” Schafer said. “There’s enough hydrogen in them to rise very rapidly.”
Up to 20 miles above the Earth, stratospheric winds would push the latex weather balloons across the state at about 30 mph. Each balloon would deliver voice and data service to an area hundreds of miles in diameter, Schafer said.
“Nine balloons would always be in the air, with some going up, some going down, and some in the middle,” Schafer said.
Once the balloons transit the state’s stratosphere, the electronic gear would be jettisoned remotely and fall to the earth with a parachute.
The electronic equipment, about the size of a toaster, would be recovered through the use of a global positioning satellite device.
“We’d pay some guy a bounty, put in a new battery pack and send it off again,” Knoblach said.
Schafer said a repeater could be used indefinitely “unless it lands in a lake or gets run over by a truck.”
Unless it drifts over the border into Minnesota, landing in a lake should not be a problem. By now you're probably wondering about the cost,
Knoblach said the hydrogen-filled balloons cost about $55 each. The balloons swell from six feet in diameter to 30 feet after they gain altitude. After the electronic equipment is released, the balloons expand with the drop in air pressure until they burst.
Winds at high altitudes are consistent, blowing west to east in the winter, and east to west in the summer, Knoblach said. The balloons would travel above the jet stream, and he said they would not be bothered by storms.
Schafer said it costs about $250,000 to build one cellular tower in North Dakota, and many remote areas don’t have enough customers to pay for it.
“To cover every square mile of North Dakota, it would take 1,100 cell towers,” Schafer said. “We can do the whole state with three balloons – and it won’t have problems with that line-of-sight stuff,” he said, referring to hills that can block signals from towers.
Sure sounds interesting. I'll keep my eyes open to see if they have a follow up on the "trial balloon". If their cost estimates are correct and it works technically then this could really take off. I guess my main technical question would be about reliability of the service. Do they expect that they could achieve "five 9's"? (99.999% uptime) That would probably be the make-or-break for the technology. Whatever the case, I give them credit for creativity. As an economist, I'm particularly intrigued by the attempt to overcome the barrier of high fixed costs of building a network with low customer density.
Posted by William Polley at 01:29 AM | Comments (0) | TrackBack
January 22, 2006
Compound growth
Students, click on over to the Big Picture and take a look at the power of compound interest.
In the comment section, "M1EK" is correct with his comment about inflation, but that problem is easily overcome by assuming a constant real contribution instead of a constant nominal contribution.
Posted by William Polley at 10:31 PM | Comments (17) | TrackBack
To invert or not to invert
Tim Duy thinks an inversion is coming. Of course we have already had one kind of inversion, but the kind that Duy is talking about is in the 10 year-fed funds spread. I would definitely agree that it is more likely than not. Duy gets another important thing right as well...
A cessation in rates hikes should not be interpreted as the first step toward cutting rates.
I would only insert the word "temporary" before "cessation" because I would consider it to be temporary until proven otherwise. If the Fed keeps rates constant in March, I would certainly not rule out another increase at the following meeting. Ever since we started talking about when the Fed would "pause" that is exactly how I have characterized it. Unless there is very good evidence to the contrary, I would see it as a "pause" rather than an ending that would presage a decrease as the next move.
Duy also remarks that the Beige Book had "mixed messages." The regional nature of the report does occasionally produce such a result. In any case, there wasn't much in there to change my outlook. Steady as she goes.
Posted by William Polley at 09:52 PM | Comments (0) | TrackBack
January 17, 2006
Economic indicators this week
Industrial production is up 0.6%. Autos are still hurting but other areas are taking up the slack. Capacity utilization is at 80.7%, up from 80.3%. Not too bad. Capacity utilization is a full percent higher than it was last year and now just 0.3% below the 1972-2004 average. (WSJ Article)
This could, of course, be seen as inflationary. We'll get a look at that tomorrow with the December CPI and the Beige Book. Most are expecting the core CPI to increase by 0.2%. If it is rises more than that, it would fuel talk of interest rate increases extending into March. (Remember, January is all but a foregone conclusion.) The Beige Book will give us some additional insight into whether and where business are finding themselves able to pass along higher energy costs to their customers. It will be two very useful data points in one day.
Among other items on the calendar this week are initial jobless claims and housing starts on Thursday. Friday brings the Michigan survey of consumer sentiment.
Stay tuned.
Posted by William Polley at 02:58 PM | Comments (0) | TrackBack
January 03, 2006
An over-the-counter spot market for yuan? Yes, you heard correctly.
From the WSJ (subscription required):
BEIJING -- China will allow the yuan to be traded over the counter for interbank spot forex trading starting Wednesday, the country's central bank said Tuesday.
China will publish yuan benchmark rates each trading day versus the U.S. dollar, euro, Japanese yen, and Hong Kong dollar, the People's Bank of China said in a statement on its Web site.
The new trading system is another step toward giving market forces a larger role in determining the value of the yuan, and making the market for the currency more flexible.
See here for my last post on the yuan.
China Daily sums up the developments for 2005 and looks forward to the new year. A slow, steady path to revaluation and more open exchange is definitely in the works. True, it's still pretty much a dollar peg, but these moves are significant as a signal. When it comes to their currency, China seems to be doing everything right at the moment. One can't help but expect another small revaluation to happen sometime soon. This summer, announcements of changes in the operation of the market were quickly followed by the small revaluation. We've had two pretty significant stories in the last few days. If there is another revaluation soon, it will be small. This is a story that will play out over years, but the next headline could always come at any time.
Posted by William Polley at 03:10 PM | Comments (0) | TrackBack
FOMC Minutes
Full text from FOMC website.
Excerpts:
In the Committee's discussion of monetary policy for the intermeeting period, all members favored raising the target federal funds rate 25 basis points to 4-1/4 percent. With spending apparently retaining considerable momentum, and with the indirect effects of increased energy prices still threatening to raise core inflation at least for a time, the Committee thought that additional policy firming at this meeting was appropriate to keep inflation and inflation expectations in check. Committee members generally anticipated that policy would likely need to be firmed further going forward. In that process, the Committee would need to be mindful of the lags in the effect of policy firming on the economy. However, it would also have to take account of the effects of the sustained period of favorable financial conditions on asset prices and aggregate demand as well as the resulting possibility of further increases in resource utilization and pressures on prices. Views differed on how much further tightening might be required. Because the Committee's actions over the past eighteen months had significantly reduced the degree of monetary policy accommodation, members thought that the policy outlook was becoming considerably less certain and that policy decisions going forward would depend to an increased extent on the implications of incoming economic data for future growth and inflation.
The Committee agreed that several changes in the wording of the announcement to be released after today's meeting would be appropriate. The federal funds rate had been boosted substantially, and, in the view of some members, it was now likely within a broad range of values that might turn out to be consistent with output remaining close to potential. In these circumstances, the Committee thought that policy should no longer be characterized as accommodative. Members concurred that the statement should note that the expansion remained solid despite elevated energy prices and hurricane-related disruptions. While inflation and long-term inflation expectations remained contained, the Committee agreed that the announcement should indicate that possible increases in resource utilization, as well as elevated energy prices, had the potential to add to inflation pressures and that "some further measured policy firming is likely to be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance." Although future action would depend on the incoming data, this characterization of the outlook for policy was seen by most members as indicating that, given the information now in hand, the number of additional firming steps required probably would not be large. Some members thought that the word "measured" was no longer necessary, but its retention for this meeting was seen as potentially useful to preclude a possible misinterpretation that the Committee now saw a significant possibility of adjusting policy in larger increments in the near future. Wording of the announcement along these lines was not expected to have a substantial effect on market expectations for policy, though such effects were especially difficult to judge given the extensive changes being made to the statement. The members agreed that the announcement should end by noting that policy will respond to changes in economic prospects as needed to foster the Committee's objectives.
See here for the Wall St. Journal's take.
I thought it was worth quoting those two paragraphs so as not to take any part of it out of context. It is interesting to note that they kept the word "measured" in to make sure that no one would think that it meant that rates were about to go up at a higher rate (e.g. 50 basis points). For the moment at least, that seems to be off the table, especially since they mention being mindful of policy lags.
No, the tone now seems to be that most of the heavy lifting is done. That news certainly pleased the stock market. There are still some inflation hawks who would go further, and certainly developments in the incoming data could still push things in that direction--I don't dispute that. Greenspan will hike rates one more time as he leaves. After that, it's an even bet. Dave Altig's implied probability charts showed things moving in that direction a few days ago. I am certainly looking forward to an update. I think it's going to be pretty close for March, maybe 55/45. We'll see.
Nothing too surprising in the minutes. The most interesting part was the discussion of the change in language and possible misinterpretation. The road to transparency is not without bumps.
Elsewhere in the blogosphere, Barry Ritholtz has a pithy summary.
UPDATE: Mark Thoma is more surprised than I was by the "measured" discussion. I can see where they are coming from. It wouldn't have been my interpretation. In fact, I argued against that interpretation back in September. Maybe that's why I'm less surprised.
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