Deinonychus antirrhopus

The Wolak Model

In several posts below (sorry I'm too lazy to link to them) there were several references to Frank Wolak's simple model for what happened during the energy crisis. It really is a brilliant model, IMO, given its simplicity. Here is the simple form of the model.

There are three generators that bid in electricity. Each of the three generators can produce 500 MW each. The demand is forecasted to be 1,300 MW. No two generators can meet all the demand. Further lets assume that bidding is sequential and the bidding rules are structured so that whatever the highest bid is to clear the market each market participant recieves that bid price.

Now with this set up there is clearly no disadvantage to being a first mover (if anything it is advantage to move first). So the first firm bids in 500 MW, and so does the second. Total demand bid into the system at this point is 1,000 MW, 300 MW short of the maximum necessary. At this point the final generator has tremendous market power and can basically set whatever price he wants. Now some might think that the generator can charge whatever price he wants. This is not quite the case. The generator would be constrained by the demand curve. If the price is $1,000,000/MW clearly nobody will purchase any electricity.

So why does Frank Wolak just set demand in his model to some number (in this case 1,300)? There are institutional factors here. These factors basically created a complete disconnect between the retail market and the wholesale market. The two main institutional factors are,

1. The retail rate freeze.
2. The regulatory requirment that the utilities must serve.

The first one completely protected retail customers from the price volatility in the whole sale market. For example, prior to the electricity crisis in CA, the typical residential customer faced an average rate of $.13/kWh, and would pretty much pay that rate no matter what the cost was in the wholesale market. This means demand for electricity in the wholesale market was perfectly inelastic (i.e. unresponsive to price changes).

The second one means that no matter how much it cost to buy the power retail customers demanded the utilities had to buy it. Even if it cost $100,000,000 a day, they had to spend that much money (and recover only pennies on the dollar).

This in effect removed almost all constraints from the price of electricity save for the price caps. Of course, in December, those price caps were effectively removed when FERC put into place the $150/MW soft cap. This is when you saw prices going as high as $1,500/MW in some hours. Just to put this in some perspective, the utilities back when they were vertically integrated charged around $30/MW.

More on Dave's Jonah Goldberg Post

I was reading the article by Jonah Goldberge that DaveL posted, and came across this bit

Whether the war was necessary or not, reasonable people of all political persuasions outside the arena of partisan politics understand that the task of reconstructing Iraq is immensely necessary.

I think this is exactly right. As soon as I read that I thought about Afghanistan. Not the Afghanistan of today, but the Afghanistan of about two decades ago. When U.S. backed mujahadeen managed to drive the Soviets out of Afghanistan. What did the U.S. do? Leave. Mission over, time to go home. "Thanks for helping us embarass the Soviets. We'll be going, now. Give us a call if you ever are in the neighborhood, we'll go get pizza...bye now. Take care." Afghanistan then plunged into chaos as individual warlords fought for control. Eventually the Taliban moved in and took over. In short, Afghanistan became the "Club Med for terrorists" (I can't remember where I read that). Osama bin Laden set up shop and skip forward a few years later and you have planes slamming into the World Trade Center and Pentagon.

Pulling out of Iraq right now would be incredible stupidity. Not only could it result in a similar situation as what happened in Afghanistan, it would make the U.S. look like has no intestinal fortitude. At the first sign of American Blood the U.S. folds up its tents and heads for home.

It seems to me that right now the U.S. is committed to Iraq, either we follow through and try to do the best job possible, or you give up and face some potential very unpleasant consequences. Of course, maybe I'm wrong. Maybe the U.S. would pull out and Iraq would become a peaceful and productive nation even faster...but somehow I think that is highly unlikely.

This also leaves me wondering, exactly what are the Democrats offering as suggestions to Iraq? Anything, or is it simply to criticize Bush?

Happy Halloween

It's that time of year, where TV shows run Halloween based episodes. The best one I've seen so far is a rerun of South Park's episode Spooky Fish (scroll down to episode 215). It's frightening, not just because Stan's pet fish is a homicidal maniac, but because the episode is shown with small pictures of Barbra Streisand in all four corners of the screen.

Scary.

Exponential Growth

After the back and forth with Arnold Kling yesterday in this post I thought an additional post might be a good idea.

Arnold made a point that the prediction error was understated in my simple graph. This is true, as I simply graphed the actual data along with the estimated value of the data from a linear model and did not graph the predicted (future) values vs. actual future values (we can do this since it is a contrived example for purposes of demonstration).

The first chart shows the real danger of mistaking an exponential process with a linear one. The dark blue series is the actual data, the red series is the estimated historical values of the model. The green values are the predicted values due to the linear model. As we can see, the linear model provides a very decent fit to the historical data. For those who know somethings about statsitics/regression analysis, the adjusted R² is 0.92 which is a very good fit. But you can see that in terms of predictions the linear model does worse and worse with each additional increment in the explanatory variable. This highlights another pitfall that is easy to fall into with statistics, going for the high adjusted R². While this does mean your model does explain what happened historically, as we can see it is in no way a gaurantee that the model will explain the future well at all.

The difficulty is that you may not be able to tell you have an exponential process simply by looking at the data. The first 30 or so observations look pretty linear, especially when you throw in a random error terms as I did. So what do you do? Look at the residuals. The vertical bars represent the difference between what is observed and what was predicted in the historical data and the model. Notice that the residuals are mostly positive at the ends and negative in the middle. This systematic movement in the residuals indicates you are missing something with your simple linear model. Further, that you may have some problems with predicting future values of the process you are analyzing. The solid line in the graph is a third order polynomial to show that the residuals do indeed tend to follow a systematic pattern.

Now I would be remiss not to mention a word of caution. This analysis of the residuals does not say that you have an exponential process with certainty. What it says is that you have missed something. It could be a relevant variable, such as if the process you are analyzing has a cyclical component. Or it is possible you have mis-specified your model (which is the case here in this example--but we only know this because the example is contrived). Ideally, you should learn about whatever process you are analyzing, or if you don't have time to do that talk to somebody who has. This way you might get an idea for how you'd expect the data to behave (i.e., is it exponential, cyclical, linear, etc.). And always graph your data. It is much, much easier to see relationships between data when you graph it. Skipping the graphing stage will increase the likelihood of you doing something stupid.

ECRI: Weekly Leading Index

The weekly leading index from ECRI has inched down, and the growth rate has also continued to decline. Although these declines are minor. This graph shows the growth rate of the leading index.

In this graph we can see that the leading index has actually surpassed its value at the begining of 2000. Further, we can see that the trend was downward, a clear indicator that recession was on the way.

Okay...

I finally did it (with some help from Ricky West). I moved the "Posted by...." line from the bottom of posts to just under the title of posts to reduce the confusion factor as to who is posting what.

It took some trial and error to get the look the way I wanted it, and if you had any problems accessing the site, I apologize.

Operation Hero Miles

I got an e-mail from Bryan at JunkyardBlog about a new program where the airlines will allow people to donate their frequent flier miles to help the troops over in Iraq come home for leave.

New Economy Redux?

This is an interesting article on Social Security over at the American Enterprise Institute. The thrust of the article is sure, there is a demographic problem for Social Security (SS) and yes, it is quite likely the economy wont save us (i.e., economic growth wont be large enough to offset the increased expenditures in SS), but there is every reason to believe that science will save us.

The economic implications of this growth in computing power are staggering. We are used to thinking of the capital stock as growing slowly. As computers take up an increasing share of the capital stock, and as they continue to improve by a factor of two every two years or so, the capital stock will begin to grow at astonishing rates. Labor productivity, which we are used to thinking of as increasing at a rate of 1 to 2 percent per year, could increase by 4 percent or more in the next decade, and we could see double-digit increases in the years that follow. Consequently, Kurzweil foresees a future 25 years from now in which “there is almost no human employment in production, agriculture, and transportation.”

While all of this might be true, I don't think this should be the bed rock of public policy. It is sort of a "hope that science will save us" view. This strikes me as policy that will ramp down expenditures on freeways and roads, because in the future we'll have flying cars.

Look at all the goodies we have now. Pretty impressive computers. Thirty years ago, many people might think you're crazy if you told them the future would have computers on desktops that could crunch through gigs of data and be point-and-click simple. We have cell phones, and ways of storing vast amounts of data in amazingly compact ways (a DVD can hold gigs of data).

Suppose we could construct a technology index and set say, 1968=100. What would the current value of the index be? 200? 300? 600? Has human productivity increased by that much? No. What happened? Well, all these advances in technology have allowed people to have more time to engage in non-productive activities.

For example, you boss says, "Prepare a report on costs for district 5 for the last six months." Now instead of having a few sheets of white paper with some typed up tables you have used Excel to put together a slick little report. You have borders, shading, bold, italics, color, and maybe even some cute little pictures. Now you have spent a considerable amount of time putting all that together, but it does not provide anymore information than the old report that was done on a typewriter.

Lets not get into how many man-hours of work have been lost playing mine sweepr, soletaire and other games. Factor in the net and browsing and it becomes pretty clear that people aren't doing that much more work even though technology has increased tremendously.

The economics of this is pretty simple. People make a labor-leisure decision. How much am I going to work and how much non-work am going to engage in. If they can engage in the same amount of work for less time, it makes the person better off. The person is not going to do more work without additional compensation.

It strikes me that these kinds of "exponential reasoning" while very seductive is actually potentially very misleading. I could very well be wrong, but I don't think that science and additional computing power are going to bail us out of this problem.

Link via Arnold Kling

Update: Arnold Kling responds to the comments on this topic here.

His response about the nonlinear nature of these sorts of things does have some validity to it. Here is a simple example.

The blue line is a simple exponential function, and the red line is a linear approximation. One might believe that an exponential phenomenon is linear early on. This could be the case.

I'm still not convinced that this is going to be the near utopian boom that the initial article is claiming. Don't get me wrong, I hope it is, but I'm doubtful.

Also, we are not arguing fine points. Arnold Kling and I do agree that basing public policy on such outcomes as if they were likely or some sort of baseline is probably a bad idea.

Update II: Arnold Kling, in comments, notes that my graph underestimates the potential for error. This is true. If we extended both series out say another 20 or more data points we'd see that the linear approaximation is way off.

The point of my graph was to show how easily one could mistake a nonlinear process as an linear one when you don't have sufficient data. The example above has 30 data points, which isn't great, but isn't totally horrid either.

Its an interesting issue. I'm hoping to look into it a bit more.

Employment Costs are Up

According to the Bureau of Labor Statistics total compensation costs for civilian workers rose 1% from June to September of 2003.

The bulk of the increase has been in the cost of benefits. For private industry the cost of benefits increased 1.4% while the cost from wages and salaries went up 0.9%.

GDP: Advanced Estimate

Wow! Not much else to say to that. The Bureau of Economic Analysis' advanced estimate of GDP is that it grew at an annualized rate of 7.2% for the third quarter of 2003. This is a huge increase from the second quarter growth rate of 3.3%.

Is this sustainable? No. That kind of growth is very high, and likely isn't sustainable. However, it could be that high for the next few quarters as the economy continues to rebound from the last recession. If this growth is sustained for a few quarters it will most likely have a strong positive impact on employment. The big question is can this growth be sustained.

The big contributors to the growth in GDP was personal consumption expenditures, equipment and software, residential investment, and exports.

Update: In comments Robin writes,

Again, notice that it is business to business spending that is the softest part of the economy - and the part the Democrats want least to stimulate.

Which is correct. I noted this problem in this post.

Update II: Just thought I'd post a link to Robert Prather, who has a post that notes the same point I did. That is hasn't been low personal consumption expenditures that have been the problem, but the decrease in investment.

Robert also points to this WSJ.com article (requires subscription), and in that article is this paragraph,

For months, economists have argued that a real recovery wouldn't take hold until business executives had confidence to start investing again. A variety of surveys of executives in recent months suggest that they are becoming more confident, while still cautious after the stock market bust and accounting scandals of recent years. For example, the Business Roundtable, an association of large companies, said earlier this month that 23% of its executives expected to increase capital spending in the months ahead, while only 12% were cutting. Just three months earlier, the percentage of those planning additional spending was roughly equal to the percentage that planned to cut. The percentage of executives planning to pare their payrolls has also declined.

Goldberg on Rebuilding Iraq

Jonah Goldberg has his usual pithy summary of leading Democrats' position on the rebuilding funds for Iraq. I love this bit:

Of course, the administration does have a plan. And central to that plan is, well, spending money to rebuild Iraq. The Democrats make it sound like all the U.S. Army is doing in Iraq is having one giant-sized Chinese fire drill every day. One can just imagine John Kerry going to the local garage:

Kerry: I won't pay you to fix my car until you have a plan.
Mechanic: Um, I do have a plan: You pay me. I replace the engine I just took out. Your car works. That's the plan.
Kerry:How can you say you have a plan? Look at the terrible shape my car is in. It's worse than before; there isn't even an engine.
Mechanic: You're an idiot.

Moral Hazard, Adverse Selection and Insurance

Since I did a post on adverse selection (well, pointed to a post on adverse selection), I thought one that was a bit more detailed on the underlying theory would be a good idea.

What is moral hazard? Moral hazard occurs when a person can take actions that can influence the probabilities of various outcomes occurring. For example, an individual who is diriving a car who has no insurance will probably be much more careful than if he did have insurance. The reason is the down side to not having insurance when you get into an accident can be pretty bad. Instead of getting a payment from your insurance company the other person (if you are at fault) will sue you and go after your assets. Whereas if you have insurance you don't have to worry about this.

Insurance basically reduces the gap between different states of the world. Suppose there are two states of the world, good and bad. When the good state obtains you suffer no losses. When the bad state obtains you suffer a loss of say $5,000, and your initial wealth is $20,000. Now suppose, the probability of the bad state occuring is 0.1 and obviously 0.9 for the good state. This person will be willing to pay up $567 for insurance.¹, and the competitive insurance permium (assuming perfect information, and that the insurance market is competitive) is $500. Now if the bad state occurs the person's wealth is $19,500 and if the good state occurs wealth in good state is $19,500.

Moral hazard creeps in when the person's actions can influence the probabilities, and taking preventive actions is costly, adn there is imperfect informatin (i.e., the insurance company does cannot tell what precautions you have taken). For example, to protect against fires in your house, you might install smoke alarms, buy fire extinguishers, and keep flamable substances to a minimum. But this takes work. With insurance, since the impact of the bad state occuring is reduced you might be less inclined to take all of these precautions. In this case, insuring fully against the loss is can lead to moral hazard. That is, if the probability of the bad state prior to insuring was 0.1 when you took all the precautinos, with full insurance you might not take all the precautions and the probability now becomes .15. In this case, the competitive premium should be $750 to reflect in increased risk the insurance company faces. To get around this the payoff in the bad state might be $19,100, and the payoff in the good state $19,500. Now there is an incentive to take precautions so that the good state obtains.

Pretty boring I know, but it is important in looking at insurance markets, especially for automobile insurance. Adverse selection is more of a problem in health insurance markets. For example, you might know if you or people in for family tend to have a specific problem. In this case you offer insurance plans that say offer complete coverage (with a higher premium) and partial coverage (with a lower premium). The preimiums and covereage are structured so that the low risk person selects partial coverage adn the high risk full coverage.

Note that a pooling equilibrium is not possible. A pooling equilibrium is one where the insurance company offers a plan with a premium that is the average of the high risk and low risk premiums. The problem is that with such a strategy, bot the high risk and low risk will end up with the same coverage. But at this point, another insurance firm can come along and offer a policy that offers a premium/coverage combinationt that is attractive to the low risk individuals, but is unattractive to the high risk individuals. So all the low risk individuals take the new plan, leaving only high risk (and high cost) individuals with the initial plan/insurance company.

This is why with universal coverage legislation you see in all the legislative mumbo-jumbo a section which outlaws private insurance. The universal insurance program offered by the government is basically a big pooling equilibrium. So if private insurance is not outlawed, then the government is left with only the high risk/high cost people. It should also be noted that in this situation (i.e., pooling equilibria), the low cost individuals are subsidizing the medical care for the high risk/high cost individuals.
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¹Assuming the person's utility is a natural logarithm of wealth.

David Friedman Has a Blog

David Friedman, anarchist-anachronist-economist , has started a blog.

New York Times Sloppiness

Kevin Brancato notes that a couple of New York Times reporters are making lots of economics statements with no empirical backing being provided. For example, here is the following by Edmund L. Andrews,

most economists, including those at the Fed and many in the private sector, predict that job growth will remain very modest and that the unemployment rate will remain near 6 percent.

Kevin thinks that when reporters make such claims they should list their sources. I agree completely. Adding the sentence for the source of these claims would not increase the length of any story. Further, it would help restore trust in the New York Times as a newspaper and not a rag. Or in Kevin's words,

In my comments, I was asked why I expect better of the NYT. My answer was curt, and I should explain myself. Because of the errors of Mr. Krugman and other improprieties, I no longer trust the reporting of the NYT, and this includes the business/economics section. I was under the impression that the Times wants its readers' trust. The only way for them to regain my trust is to enable me to verify that statements in articles are accurate.

Quite. The New York Times is supposed to be the newspaper of record and it should act like it.

Adverse Selection

This post by Tyler Cowen highlights quite nicely the problem with adverse selection.

Adverse selection is basically a problem where different events have different probabilities of producing unfavorable outcomes, and individuals who are involved in the event know these probabilities while others do not. Basically, think of it as inside informatin.

The post by Tyler Cowen looks at Google going public with its stock and wonders is it such a boon. The initial reaction might be, "Ooh, I should get in on that." But should you? If Google is such a great thing, why go public? Why not keep all that money for yourself? Maybe the people at google know something we don't? And that last part high lights precisely the problem of adverse selection.

Arrow on Krugman

This is an old article by Kenneth Arrow taking Paul Krugman to task for some misrepresntations in one of his Slat articles. I found this part illuminating,

Krugman admits that he wrote the article because he was "just pissed off," not a very good state for a judicious statement of facts, as his column shows.

It makes me wonder how many of Krugman's current columns are written while he is pissed off.

This part was also rather damning,

Hence, Krugman's whole attack is directed at a statement made neither by Arthur nor by Cassidy. Krugman has not read Cassidy's piece with any care nor has he bothered to review what Arthur has in fact said.

Eugene Volokh on Bushism of the Day

This time around Professor Volokh catches Slate in an act of bad journalism. When placing the qoute on context, all the supposed stupidity of the statement vanishes. Prof. Volokh again dings the web based journal and once again failing to provide a link to the transcript so readers can verify for themselves the absurdity of the comment. Of course, if you are going to grossly distort what somebody says, you'll probably not want to post such a link.

What a bunch of buffoons.

Krugman Cat Index

The crowd over at NRO's the Corner has devised a new economic idicator, The Krugman Cat Index.

Change the last 4 digits of the url to today's Dow index to see how high Krugman will kick his cat because of good economic news. At 9000, the poor kitty apparently achieves escape velocity.

Good Public Policy?

Federal agencies should promulgate only such regulations as are required by law, or are made necessary by compelling public need, such as material failures of private markets to protect or improve the health and safety of the public, the environment, or the well being of the American people. In deciding whether and how to regulate, agencies should assess all costs and benefits of available regulatory alternatives, including the alternative of not regulating.--Source

The above is an excerpt from the Order on Regulatory Planning and Review. Who came up with this order? President Clinton--or somebody on his staff. At any rate the last part of the order is indeed impressive. If it is cheaper to simply live with the problem than to regulate it, then the best policy is probably to live with it.

Krugman and Electricity Yet Again

In this post I argued that Princeton Economics Professor and New York Times columnist Paul Krugman was being misleading on the California energy crisis. I pointed out that the California electricity crisis had a number of factors that lead up to the market melt down starting around August of 2000, and that the problems were known to people in the business prior to the meltdown.

Well, via Brad DeLong we have this PDF which is the Testimony of Frank Wolak before the Senate Committee on Commerce, Science, and Technology.

What is interesting here is that Wolak is one of Krugman's sources, and Krugman points to Wolak when he talks about market manipulation.

We're approaching the first anniversary of the sudden, unexpected end of California's energy crisis. I went way out on a limb, at least by journalistic standards, by saying that market manipulation was a key feature of that crisis. I have since been vindicated: arguments that people called leftist nonsense a year ago are now conventional wisdom.

But of course I wasn't a brilliant investigative reporter; I just knew enough to talk to the right people, and to understand what they were saying. Paul Joskow and Severin Borenstein were very helpful. But my most helpful source of all was Frank Wolak, the Stanford professor who also heads the CAISO market surveillance committee. (CAISO is the "system operator").

In a recent paper (which doesn't seem to be on his web site yet) Wolak offers a very nifty model to explain what was going on. However, as they say in the journalistic trade, he buries his lede: the model is in passing, amid a dense discussion of institutions and their reform. So I thought I would lay it out here, to give you an idea of how I think about the whole thing.--emphasis added (Link)

The problem is that in reading the testimony by Frank Wolak you see that he draws a very clear distinction between a firm using its own unilateral market power and market manipulation.

What is the difference? The difference is that every firm has unilateral market power to varying degrees. If you have lots of small firms each firms unilateral market power is minimal and has little to no effect on the price. Firms in a market where there are only a small number of firms in total will have a much larger degree of unilateral mnarket power. Further, that each firm will use its unitlateral market power to increase its profits (and this is normal and to be expected).

The major cause of the California electricity crisis was the unilateral exercise of market power by suppliers to the California ISO control area. A firm exercises its unilateral market power by withdrawing generating capacity from the market either by bidding extremely high prices for some or all of its capacity or by refusing to make a portion of its capacity available to the market at any price. The goal of both of these strategies is to create an artificial scarcity of energy in order to drive up the market price.

Now to the novice this might look like market manipulation. And in a way it is. Each firm is engaged in a strategy to increase the price of the good it is selling. It is gaming the market, in one sense manipulating the market.

Wolak continues,

It is important to emphasize that it not illegal under US antitrust law for a firm to exercise its unilateral market power. Markets not dominated by a small number of firms face sufficient competition to discipline the unilateral attempts of these firms to raise market prices. Even in a market with a large number of firms, each one will still attempt to exercise all of its available unilateral market power. However, in a workably competitive market, each firm will find it unilaterally profitable to withhold very little supply from the market because the price increase it achieves from withholding very little supply from the market is very close to the price increase it achieves from withholding a significant amount. This logic implies that the firm’s unilateral profit maximizing strategy leads it to exercise very little market power.

In other words, unilateral market power and use of such power is not in and of itself illegal under U.S. Anti-Trust law. In fact, if firms did not do this it could be argued that the upper management and executives should be fired for incompetence in not maximixing shareholder value.

Later Wolak writes,

Now I would like to make the distinction between the unilateral exercise of market power and market manipulation. As discussed above, the unilateral exercise of market power is equivalent to the firm using all legal means to serve its fiduciary responsibility to its shareholders to earn the highest return possible on their investment. Market manipulation does not have a generally agreed upon definition. However, most would agree than market manipulation implies intent to harm competition or market efficiency and certainly implies “bad” behavior on the part of the manipulator. However, it is virtually impossible to infer intent from a firm’s actions. Returning to my earlier example, how do we know if the intent of a power supplier in buying power in the day-ahead market and selling it the real-time market was to harm competitors, and not just attempt to serve its fiduciary responsibility to its shareholders? Unless the market participant tells us their goal is harm competition or market efficiency we cannot tell.

In other words, it is not at all clear that what was going on was necessarily market manipulation, or that every instance where unilateral market power was exercised was market manipulation. The key point is that the the firm that is manipulating the market intends to harm it competitors, whereas with exercising unilateral market power firms could simply be serving the fiduciary responsibility of their shareholders. In fact, if a firm is witholding electricity it could be argued it is helping it competitors if it succeeds in raising the market price. For example, suppose there are two generators, and generator A bids in 500 MW at $20/MW. Generator B witholds and bids in only 300 MW at $500/MW. If that bid is accepted the market clearing price is $500 for both generators. Generator B has not only enriched himself, but Generator A as well. Kind of hard to argue harm when your competitor is making so much money.

Now this does not mean that what the generators did should be condoned. I agree with Wolak that rules need to be put in place to prevent such abuse of unilateral market power. But it does highlight the way in which Krugman is in subtle ways misleading and deceptive.

Update: Some readers are having some difficulty here with this post. Perhaps I can simplify the issue. Exercising unilateral market power is not illegal. Market manipulation and price rigging on the other hand will usually bring in the law enforcement boyos. By his continual use of the words "market manipulation" and "price rigging", Krugman is giving the distinct impression of illegal behavior. While illegal behavior might have occured, Krugman's claims are considerably stronger than the claims by Frank Wolak, and pointing to Frank Wolak as support for his position is dishonest. Both to Krugman's readers, and to Professor Wolak.

More on Krugman and Employment

Since the initial post on this has slipped somewhat down the page I thought this deserved its own post. Robert Musil e-mails (and posts on his blog),

Krugman can't use total private employment data, because there are counterexamples to his "since-Hoover" claim if that is the measure:

Eisenhower:

• Jan 1957 - Total Private Employment = 44,554
  
• Jan 1961 - Total Private Employment = 44,208

Ooops. (Robert used the seasonally unadjusted numbers, but the claim is true for the seasonally adjusted numbers as well.)

And shifting over to EconoPundit, I highly recommend this link for a discussion of this by Steve Antler. He also has a wonderful bit by Jim Glass who points out yet more of Krugman's disembling. The gist of it is that back in 1996 Krugman was arguing that 6% was the new NAIRU (Non Accelerating Inflation Rate of Unemployment) and that to go below that and to try and achieve GDP growth of 4% or more was pure folly. Now, of course he is singing a different tune saying that Bush is the Son of Satan¹ in part because we haven't gotten back to that low a level of unemployment (and may not).
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¹Okay, Krugman hasn't really called Bush the Son of Satan, but he has been very harsh.

New Econoblog Links

I have finally gotten around to adding links to some econobloggers I've been reading for awhile now. Here they are in no particular order:

• Arnold Kling's EconLog
  
• EconoPundit by Steve Antler
  
• Marginal Revolution by Tyler Cowen and Alex Tabarrok.

Check them out, you wont be disapppointed.

Wolfowitz survives attack, DU regrets

Our friends at the DU express their sympathies for Paul Wolfowitz.

Flubadubya

If wishes were horses... Wolfie et. al. would be corpses

Mari333:
A US soldier died, tho, and 15 were wounded
What a shame that old blackhearted lizard Wolfie survives, and one of our kids dies. There is no justice in that.

And now for a truly specious comment:

DoYouEverWonder:
Keep in mind that in their last election, 99% of the people voted for Saddam. I think the Iraqis are just very good at pretending they like you and are thankful while in the meantime they are twisting the knife they just stuck in your back. It's all about survival.

Translation: All (or 99% at least) of Iraqis are liars. Nice little bit of bigorty there.

Carnival of the Capitalists

The third installment of the Carnival of the Capitalists is up and looks good. This week it is being hosted at Noble Pundit. Be sure check out the entries there, something is boudn to catch your interest. For example if you liked my post on rent seeking, you might want to check out Robert Prather's post on the same topic.

Rent Seeking

This article is on the Fundamentals of Rent Seeking by Gordon Tulluck, one of the early pioneers who researched the use of political power for economic gain.

In the linked article Tullock discusses his first paper on this that looks are rent seeking in terms of monopoly. One of he ways to secure monopoly profits is via government fiat. Tullock applied economic theory to the process of securing such monopoly rights. The idea is simple, a firm will expend resources to secure such a benefit until the (discounted) marginal cost is equal to the (discounted) marginal return. If this is true the the social loss due to monopoly is not just the deadweight loss, but may also includes the economic profits.

Initially Tullock met a great deal of resisitance from economists when he first put forward this notion (1967). At that time it was widely viewed that through economic theory the government could exercise a great deal of control over the economy for the welfare of its citizens. Of course, now this view is no longer in such a dominant position.

Even if the rich were disposed to have the government take their wealth and redistribute it to the poor, it seemed clear to me that such a process would be vulnerable to moral hazard. Potential recipients would be well-advised to become suitable objects for charity. When stationed in China with the US Department of State, I would see many beggars who had deliberately and horribly disfigured themselves in order to beg successfully. Even though I often felt disposed to supply the charity that they sought, I did so at a considerable negative utility to myself.

The problem worsens sharply once government replaces private individuals in the charitable process. There is no obvious reason why governments driven by a vote motive should stop at the point where the utility of the rich is maximized. Much more likely is the outcome where the median voters coercively transfer, at no cost to themselves, a large part of the wealth of the rich to the poor, or where special interest groups access the political process to transfer the wealth of consumers to their own members.

This is an interesting argument. It points out how the decision for redistribution is one that rests with the (median) voter and not with the people who actually have the money.

Further, there is no assurance of economic efficiency here either. The assumptions under the median voter theorem that the results be efficient are rather stringent, such that the distrubtion of preferences is such that the mean and median coincide.

Anyhow, the entire article is worth a read as it lays out some of the early history of the development of the rent-seeking literature. While this literature and many of the researchers are considered to be "conservative" this characterization, I think, is misleading. The authors are probably more accurately characterized by a wariness for political power and its ability to disrupt markets, even markets that are lacking in externalities or other issues that can necessitate government intervention. It is in a sense, an economic version of the liberal slogan, "Question Authority". You hear it all the time from liberals when it comes to issues such as foreign policy, but almost never when it comes to economics. For many liberals, the government is often the first and only choice for solving many problems, and never mind that the government can often be a source and/or contributing factor to a problem (see for example the California electricity crisis).

Bad Economics from Economist.com

Thanks to Robert Prather at Insults Unpublished for spotting this link. Anyhow, it is an article on the "addiction" of the West to Middle East oil. What caught my eye was the discussion how much money the OPEC cartel has managed to extract from the U.S. as economic profits (i.e., the amount of money the price (per barrel) of oil over and above the market clearing price) $7 trillion dollars, and externalities from the use of petroleum as a fuel source.

That points to a second sort of cost. According to one American government estimate, OPEC has managed to transfer a staggering $7 trillion in wealth from American consumers to producers over the past three decades by keeping the oil price above its true market-clearing level. That estimate does not include all manner of subsidies doled out to the fossil-fuel industry, ranging from cheap access to oil on government land to the ongoing American military presence in the Middle East.

The final disguised cost of oil is the damage it does to the environment and human health. Unlike power plants, which are few in number and so easier to regulate, cars are ubiquitous and much more difficult to control. The transport sector is a principal source of global emissions of greenhouse gases.

The only long-term solution to this connected set of problems is to reduce the world's reliance on oil. Achieving this once seemed pie-in-the-sky. No longer. Hydrogen fuel cells are at last becoming a viable alternative. These are big batteries that run cleanly for as long as hydrogen is supplied, and which might power anything in or around your home—notably, your car. Hydrogen is a fuel that, like electricity, can be made from a variety of sources: fossil fuels such as coal and natural gas, renewables, even nuclear power. Every big car maker now has a fuel-cell programme, and every big oil firm is busy investigating how best to feed these new cars their hydrogen.

Whomever wrote that article clearly flunked Public Finance 101...badly. When a commodity comes with a negative externality it means that teh price is generally too low. That is, the consumption and/or production of the good imposes costs on others that is not borne by the consumer/producer. This means that the price is too low. for example, by using gasoline in our cars, it results in a lower air quality, but that effect is not reflected in the price of gasoline (how do you put a price on air quality?). Hence the price is too low and you have too much consumption. If the solution hasn't jumped out at you yet, let me point out there is a phrase I have used a few times now, the price is too low.

Thus, the increased price form the formation of OPEC might have actually been good for the environment. So it is kind of strange to see this column which is arguing the price is too high...but not high enough. Talk about totally confused....but it doesn't end there!

Another alternative likely to become available in a few years is “bioethanol”. Many cars (quite a few of them in America) already run on a mixture of petrol and ethanol. The problem here is cost. At the moment, the ethanol has to be heavily subsidised. But that might alter when biotechnology delivers new enzymes that can make ethanol efficiently from just about any sort of plant material. Then, the only limit will be how much plant material is available (see article).

Did the author stop to think about the possible negative externalities of increased agricultural output? If the souces of these fuels are grown in the U.S. then it will mean more intensive use of various forms of pesticides and fertilizers.

Now my area of expertise is not in hydrogen fuel cells (its in economics...unlike the author of this article), but it seems to me that the hydrogen fuel cell idea might be a bit misleading.

Such changes will not occur overnight. It will take a decade or two before either fuel cells or bioethanol make a significant dent in the oil economy. Still, they represent the first serious challenges to petrol in a century. If hydrogen were made from renewable energy (or if the carbon dioxide generated by making it from fossil fuels were sequestered underground), then the cars and power plants of the future would release no local pollution or greenhouse gases.

Now it seems to me that in reading the above part that fossil fuels would still be necessary when using hydrogen fuel cells. If this is the case then the question becomes can you get more energy bang for your energy buck (i.e., will a given amount of oil/gasoline result in more energy with fossil fuels than simply using oil/gasoline directly)? If the answer is no, then I don't see the improvement.

As for the hope for renewables, that is also questionable. If you rely on solar, you can only drive your car on a sunny day. If you rely on wind, will you have developed a perpetual motion machine if you put a windmill on top of your car(sarcasm alert)? Renewables right now are not cost effective. They maybe in the future, but not right now.

What a bad article.

Unpatriotic?

Since Kevin has given the go ahead to use underhanded techniques, is it now safe to say that the bearer of this sign is unpatriotic?

Picture via Belligerent Bunny Blog

Is Kevin Advocating Lying?

I was reading Kevin's post on Gay Marriage (for the record I don't care--your want to marry a person of the same sex, fine; you want to marry a person of the opposite sex, fine). It was the last several of paragraphs that caught my attention,

As I wrote a few months ago, I think it's gong to take some careful framing. At the same time, of course, I'm well aware that careful framing and a dollar will get you a cup of coffee, so after all the careful framing is over we also need a snappy one-liner that makes us look good and makes the Republican activists look like neanderthals.

How about one of those Reaganesque fables about someone who wasn't allowed to visit his longtime gay partner in the hospital because he wasn't "related" and then his partner died before anyone could step in?

That's just to get the ball rolling. One liners, quips, stories, fables, etc., they're all good, so let's start collecting them. And remember, bonus points if they're actually true.

I guess now it is okay to make the Democrats look unpatriotic. What a jackass.

Social Security and Medicare

I e-mailed Kevin on his missing out on the Hospital Insurance and his reply is that he wants to consider just Social Security (SS). The problem with this approach though is that the two programs are connected.

First, the demographic problem with SS is present with Medicare. Max Sawicky claims otherwise, but this is untrue (I suppose if I were as nasty as Max can be at times I'd call him an intellectual pygmy). Basically, you can't increase the number of elderly by the degree that we are going to see without there being an increase in the cost of the programs supporting the elderly.

To be sure, part of the problem with Medicare is the acceleration of health care costs. Still, this does not mitigate that there would still be a problem with Medicare, it would simply be a smaller problem.

Another reason that Medicare and Social Security are connected is that Medicare subsidizes consumption of the very goods that are going to make the Social Security problem worse (in part). As medical technology and care improves in the future people will live longer. So the more medical resources people consume the longer they'll tend to live.

This reminds me of the problem with partial equilibrium analysis in economics (i.e., supply and demand analysis for a single market). It assumes that all other things are constant. They aren't. Change something in one market and it has implications for the markets of compliments, substitutes, and even unrelated goods (through the income effect of a price change).

My Goof...and Kevin's

I figure this deserved its own post since the one right below this one is so long already.

Kevin made a big long post about how Social Security is only going to be about 7% of GDP. Yeah, one might be tempted to say, "Oh who cares."

Well I goofed and so did Kevin. We were looking at only OASDI. We forgot the HI portion of Social Security, Hospital Insurance, when we add that in it becomes 12.24% of GDP or about $45 Trillion by the time you get to 2080.

Oh yeah, and the increasing the income cap on income that the Social Security tax applies to? My rough back of the envelope calculations indicate it will raise a little over $4.2 Trillion by the time you get to about 2080. Now, I don't account for changes in population, increased interest income, and the income distribution is linear. Still I can't imagine I am off by more than double, and certainly not by the $22.7 Trillion Social Security will be in the hole for 2080 alone.

To view a table of the calculations click on the "Continue reading...." link. There will also be a link to code I used to calculate these numbers.

Average Increase in Social Security Revenue	Years Additional Revenue is Collected	Income Group	Population In this Income Group	Total Increase in Social Security Income
440	69	94,100	700,000	21,264,654,600
880	68	101,200	684,440	40,978,391,967
1,321	67	108,300	668,880	59,185,414,704
1,761	66	115,400	653,320	75,926,819,881
2,201	65	122,500	637,760	91,243,704,573
2,641	64	129,600	622,200	105,177,165,850
3,081	63	136,700	606,640	117,768,300,784
3,522	62	143,800	591,080	129,058,206,448
3,962	61	150,900	575,520	139,087,979,913
4,402	60	158,000	559,960	147,898,718,251
4,842	59	165,100	544,400	155,531,518,535
5,282	58	172,200	528,840	162,027,477,837
5,723	57	179,300	513,280	167,427,693,228
6,163	56	186,400	497,720	171,773,261,780
6,603	55	193,500	482,160	175,105,280,566
7,043	54	200,600	466,600	177,464,846,657
7,483	53	207,700	451,040	178,893,057,125
7,924	52	214,800	435,480	179,431,009,044
8,364	51	221,900	419,920	179,119,799,483
8,804	50	229,000	404,360	178,000,525,516
9,244	49	236,100	388,800	176,114,284,214
9,684	48	243,200	373,240	173,502,172,650
10,125	47	250,300	357,680	170,205,287,896
10,565	46	257,400	342,120	166,264,727,022
11,005	45	264,500	326,560	161,721,587,102
11,445	44	271,600	311,000	156,616,965,208
11,885	43	278,700	295,440	150,991,958,411
12,326	42	285,800	279,880	144,887,663,784
12,766	41	292,900	264,320	138,345,178,397
13,206	40	300,000	248,760	131,405,599,325
Total				4,222,419,250,749

Link to the code. If you have SAS, simply click on the link and copy and paste the code into your program editor and then submit. I wrote the code in SAS v8.2, but nothing is unique to 8.2 and should work on older versions of SAS.

Distort, Distort, Distort

Kevin Drum is back in rare form (must be those zinc pills) distorting claims in Megan McArdle's second article on Social Security. Kevin writes,

Megan quite correctly says that the basic problem with Social Security is that as the baby boomers retire they will suck up a larger and larger portion of our national wealth, but then mysteriously suggests that this trend will continue forever until finally Social Security falls "off the cliff into insolvency."

This is quite inaccurate. There is nothing about an endless unchanging upward trend. In fact, if we provide a full quote of the section Keving pulled the "falling off the cliff" snippet from we get a different picture.

To understand exactly why Social Security is so troubled, it's helpful to stop thinking about our looming fiscal crisis, and think instead about the demographic problem that's causing it. For all the exhaustive arguments about tweaking benefit levels, changing the structure of FICA, or raising taxes, the main problem with social security is devastatingly simple. While there are currently 3.3 workers in the workforce supporting every retiree, in the 2040's -- when the Social Security Administration's projections show the program falling off the cliff into insolvency -- there will be fewer than 2, due to a combination of falling birth-rates and longer lifespans. Any long term solution, therefore, must do one of two things: increase the ratio of workers to retirees, or increase the productivity of the workers so that they can support themselves, and the retirees depending upon them, in the style to which everyone has become accustomed.

Hmmm, Megan says we go from 3.3 to 2. Doesn't look like an unchagning trend to me.

Kevin then points to this chart. To prove his point. Unfortunately for Kevin, he fails to note the increasing trend in that graph from about 2035 onwards. Granted, it isn't a steep increase, but it is an increase none-the-less. Further, I don't know of anybody who has claimed that the rate on increase in Social Security is going to be rise dramatically and not become flatter. What I have seen is that there will be a large increase, that will not go away, which is precisely what we see in the graph. In fact, if Kevin were to be honest and look at the page relating to the number of workers from the Trustees Report. He'd see that there is a similar relationship over time with respect to the numer of workers to beneficaries.

Kevin then proceeds to stick his head in the sand here,

4% of GDP is not a huge sum, and neither is 7%. As a country, we could afford to spend 7% of GDP on our retirees today if we needed to, and in 30 years we'll be able to afford it even more easily. And if you prefer to think of it in terms of taxes, it means nothing more than gradually increasing the income cap on Social Security taxes from today's $80,000 to about $300,000 by 2035 (adjusted for inflation, of course). It's just not that big a deal.

First, 7% of GDP is s huge sume, try around $1.4 trillion dollars. And no, it wont be easier to afford it in the future because unless you are cutting benefits, taxes will have to go up to pay for it. How much? Well if we increased the payroll tax right now, today it would have to be a 31% increase in the tax. Where do I get this, from the Social Security Trustees Report. Apparently Kevin didn't read the second page. The final claim is really odd when coupled with the statement that we'll be better able to afford it in the future. Especially Kevin's belief that income mobility is quite low. Basically it means raising taxes. Somehow, you'll find extra money to pay these taxes that itself wont be taxed.

I'm genuinely mystified by the legions of people who insist on perpetuating the myth of Social Security disaster. What's the point? They can read graphs as well as I can, and they must know perfectly well that long term funding of Social Security is not that difficult a problem. So why the apocalyptic rhetoric?

What Kevin is failing to do is to consider that not only is there a problem with Social Security, but with Medicare too. Can you read this graph Kevin? And that graph was created back in the halcyon days of 2000 when everybody was predicitng surpluses for a long time into the future.

Apparently it's to scare everyone into thinking that we should scrap the whole idea of Social Security and move to private accounts. Megan makes a brave effort to wave her hands and claim that somehow it's OK to allocate 7% of GDP to retirees as long as it comes from mandatory investments in private accounts instead of from federal taxes, but this is nonsense. We can either afford to divert that much of our output to nonworking retirees or we can't. It doesn't really matter where it comes from.

This is ridiculous. Kevin makes it seem like the question is, do we allocate 7% of GDP to the elderly or not. That isn't the issue. The issue is with how we are doing it. If the that money is allocated through taxes it is contractionary. If you do it through a program that requires compulsory saving that is something that can enhance growth. Further, if you borrow money to pay for this, you are taking funds that could be used for productive purposes and are instead simply giving it to people so they can maintain a level of consumption.

(And her claim that mandatory accounts increase national savings is purest moonshine. Trading a $200 billion deficit for an extra $200 billion invested in the stock market does us no good at all. If it did, then we could have a real Ponzi scheme in which the feds crank up the printing presses and give us all a bunch of money to invest. By and by, we'd all be rich!)

The only moonshine is the stuff Kevin is drinking. The idea of printing money and giving it to people to invest has the nasty side effect of increasing inflation. Not only will inflation reduce the purchasing power of the money printed, but the pruchasing power of every dollar already out there. I also suggest that Kevin look up what a Ponzi scheme is, printing money has nothing to do with it.

Bottom line: starting around 2010 or so we need to begin raising the income cap on Social Security taxes. In addition, we may want to raise retirement ages and cut back modestly on benefits in other ways. But we don't need to do anything dramatic, and private accounts are mostly a matter of taste, not something that's likely to change this dynamic in any serious way.

Again this is not correct. With a personal account the money is yours. Instead of an IOU, you will actually have money in an account that is yours, and not somebody elses.

After all, once the system got cranked up you'd have workers putting money into private accounts and retirees all withdrawing from private accounts. Net investment: about zero.

This is possible, but it depends on a host of factors such as growth rates for the investments, and how much people withdraw vs. how much people save. For example, if I save $45 and you withdraw $25 there is an increase in savings by $20.

At the end Kevin completely distorts with this,

The chart above is as simple and clear as it can be. Social Security funding is not that big a problem, expenditures flatten out rather than going off a cliff....

Megan said nothing about expenditures falling off a cliff, but that the program, if nothing is done, "...falling off the cliff into insolvency ..."

So, the question is, what does Kevin Drum know that Laurence Kotlikoff, The CBO, and many, many other people do not?

More Krugmania

I'm quite sure Prof. Krugman will write an Op-Ed denouncing this kind of cronyism. Then again maybe not. If there is one thing Krugman does not do, that is look at the warts on the Democratic Party.

Why Does Krugman Have To Lie Mislead?

In his latest column Krugman writes,

Bear in mind that the payroll employment figure right now is down 2.6 million compared with what it was when George W. Bush took office. So Mr. Snow is predicting that his boss will be the first occupant of the White House since Herbert Hoover to end a term with fewer jobs available than when he started. This is what he calls success?

This is patently untrue. If 2,000,000 jobs are added by November, then employment will be around 139 million to 140 million people working. When Bush became President the number of people employed was just under 138 million. I don't know about you, but 138 million is less than 139 million.

The graph at the right shows the employment data from the Bureau of Labor Statistics. If we were to add 2,000,000 to the current number it would be off the chart.

Now, it might be the case that this target wont be met, but that isn't what Mr. Krugman is saying. He is saying that, even if Snow's prediction comes true, there will be a lower level of employment than when Bush took office.

Update: Man, Krugman is sloppy.

Mr. Snow thinks the economy will, finally, start to do better than that — but it's not happening yet. In September, employment rose for the first time since January, but the increase was only 57,000 jobs. And to have kept up with the population growth since Mr. Bush took office, the economy would have to add not two million, but seven million jobs by next November.

I thought, "What the...employment went down in September, where the heck is he getting this 57,000 increase?" So I went to BLS and check the latest Employment Situation Report. Sure enough employment was down 52,000. Then I saw it, Non-farm employment is up 57,000. That must be what he is looking at.

And now I see where Krugman got the other statement about Herbert Hoover. He is relying solely on non-farm employment data. In this case, it is true, that with 2,000,000 new non-farm jobs Bush will still be lower than what he started with.

I think this is a bit misleading. I'm a bit strange in that I check the BLS website fairly frequently. Most people wont do this and will not know exactly what Krugman is talking about. Further, one could make a case that Krugman has chosen his data to suit his argument. Not all that forthright, IMO.

Update II: In comments Robin Roberts writes,

There are times where using the non-farm employment data makes sense in context, but such use is noted. This is another case where Krugman knows better, and his misleading use of data can't be accidental.

Which is what I was trying to write, he simply did it in a more concise manner. If Bush ended his term will employment below when he started the Herbert Hoover comparison would, to the best of my knowledge, be true. Further, it would be true with just the non-farm data. So it appears that Krugman is using the non-farm data to justify his statement, and is not telling his readers to make it sound a bit scarier.

ECRI: Weekly Leading Index Growth Rate Trending Down

ECRI's Weekly Leading Index has slipped since last week, down to 127.6 from 129.1, with a growth rate of 10.9% (down from 11.9%).

Speaking of Old Pictures

Here are a couple of Julian at the L.A. Zoo this past summer. Here is one of him at the polar bear pit.

And here is one of Julian with Phil Bronstein's toe...err a komodo dragon. This one was particularly funny. My wife mentioned to him the story about Phil Bronstein's run in with a komodo dragon at the L.A. Zoo, so when we got to this exhibit he ran inside saying rather loudly, "I want to see the one that ate Phil Bronstien's toe!"

California Summer Sky

I took this picture a few months ago and came across it again.

In Love With Himself

I gotta admit this does sound just a bit pathetic.

How do you think I could have succeeded in the military if everybody didn't like me? It's impossible... Do you realize I was the first person promoted to full colonel in my entire year group of 2,000 officers? I was the only one selected. Do you realize that? ... Do you realize I was the only one of my West Point class picked to command a brigade when I was picked? ... I was the first person picked for brigadier general. You have to balance this out. ... A lot of people love me.

So, after reading that do you get an image of Clark standing before a mirror with his general hat on barking out, "Are you the best you can be?" And then snapping a salute and barking back, "Sir, yes sir!"

Via Henry Hanks.

So....Is This Racist?

The above political cartoon appeared in the Black Commentator.

Via Power Line.

Talk About Missing the Obvious

Click here. It is almost mind blowing.

If it is deemed that I am supposed to pay for someone else's children's education, it seems to me that I should be the one do determine where my money should go.--Posted by RAJ

I can't bring myself to tell this guy that he is already paying for the education of other people's kids. Its called taxes.

Among the dozens of problems with vouchers is the fact that I suspect many school systems in rural and other areas will not be profitable enough for those areas to be served by private schools.--posted by Kimmit

My understanding of the voucher system is that the public schools will only get money via vouchers. That is if a parent wants to send their kids to a public school that is where the voucher money goes too. The idea is to introduce competition and choice into a system that currently has less competition and choice.

Luis, I don't see how, if the new voucher schools have the right to "admit and expel as needed" that won't leave a group of expelled or unadmitted students who either have no place to go, or else end up back in the same "failing public schools" we've been complaining about, which would then becoome even more concentrated versions of the original problems.--Posted by Zizka

Apparently Zizka thinks it is quite fair to put disruptive kids into classrooms with kids who are trying to learn.

The path to a reasonable context here probably begins with finding a way to look at vouchers that doesn't make it look like some ginormous subsidy program.--Posted by Naive Idiot

Apparently it did not occur to Mr. Idiot that public school expenditures are already a subsidy. They subsidize education.

E-Mail Messed Up

My e-mail is messed up. I don't know what the problem is. I have no idea when the problem will be resolved. So, if you have sent me an e-mail and I haven't responded, that is why. If you want you can e-mail me at my back up yahoo account: recursive_1@yahoo.com

Liberal Memes

John Cole has a post about the persistency of liberal memes. I know what he means. Here are two that I've run into more than a few times.

Clinton ended the recession that started under Bush I. Really? Sometimes they will point out that this expansion Clinton supposedly started resulted in 10 years of economic growth. Now the last part is true, there was a 10 year expansion. However, the last recession started in March of 2001. So if we subtract 10 years from that date we March 1993 apparently. Oh yeah, and this had nothing to do with tax increases.

The other meme is that unemployment didn't go down until Clinton got into office and did something...what I don't know, and it is irrelevant because these people haven't bothered to check the data.

Again, raising taxes had nothing to do with this. The tax increase came after unemployment was already on a downward trend.

Universal Health Care

On the radio this morning two radio talk show hosts were talking to George Stephanopolous (hope I spelled that right). The topic was health care, universal health care. It reminded me of a post by Arnold Kling and a post by Kevin Brancato.

The notion is that increased health care spending is not simply a result of increased prices, but also of increased demand. As such not all of the increased spending can be characterized as rising costs (I know this is obvious, but some readers need the obvious explained to them).

So my question to the reader is how will universal health care coverage reduce rising costs?

Update: In comments Dave Sheridan points to this article by Andrew Grossman.

For many Russians, the most difficult part of the transition to capitalism has been abandoning the idea of a "right price." Under the Soviet Union, prices were set by the government and consistent across all legal sellers. A bottle of milk cost the same in the grocery store as in the corner mart. That is, if there was milk to be had.

Those of us more accustomed to free markets expect prices to vary for a variety of reasons, such as quality, convenience, and whether you hold a "Safeway Club" card. But not everyone understands that: in the market for medical care the federal government thinks it's found the "right price."--emphasis added

Too me, the key point there in the article is the part I have emphasized. Government price controls often tend to result in shortages. At least this is the case when the good in question is in high demand. This is because high demand usually goes along with a high price.

Time Inconsistency and Social Security

One thing I've seen in some privatization suggestions for Social Security is letting individuals have control over their own private accounts. This sounds great, but there is a big problem with this. Time inconsistency. The optimal plan for such accounts will not be time consistent. What does that mean? Good question.

Time inconsistency is a problem that policy makers have when formulating policy over time. Basically you arrive at a plan that is represented by the sequence {x_t} where t = 1, 2,...,∞, and x_t is some policy action taken in each period. Now, the individuals in the economy know this policy, and they are also fowrad looking. So they realize that at some future data the policy maker can achieve an improvement in overall welfare by switching from the initial policy. Thus, the individuals in the economy do not believe the initial policy announcement and the "optimality" of that plan cannot be achieved.

An example might help. The policy maker is sitting there looking at his macroeconomic models and realizes that the optimal monetary policy is a zero rate of inflation. So the policy maker announces this plan. But the people look forward and realize that a few years down the road there will be a temptation to increase the inflation rate and reduce unemployment (as per the Philips curve trade off). Since people are making decisions according to the zero inflation rate policy they will mistake the increase in prices as price increase (i.e., a real effect) and change their behavior, thereby lowering unemployment. But, as noted the people in the economy realize this...so when that increase in inflation arrives, unemployment does not increase. Why? Because people have figured out why prices are rising, its just inflation, so do not change your behavior. Now you have a sub-optimal outcome.

How does this relate to Social Security? If you give people control of their private accounts, then some people will think they are smart and will try to time the market. Or they'll get a great stock tip from Uncle Benny, or some other silly thing. And they'll lose money...maybe lots of money, maybe even all of it. Then in this case the government will realize they can improve everybody's welfare by covering those loses. People will see this right form the start, and you'll have lots more people engaging in much more risky behavior.

The best way to analzye these kinds of things is to put them into a general equilibium model and run simulations. See if indeed, people behave as if their risk is being covered by the government to varying degrees. My guess is that this will be the case.

The solution, compulsory savings where you cannot fiddle with your personalized savings account. This will reduce the risk and remove the incentive for people to try and game the market. This doesn't mean you can't invest the money in the market. It does mean however that you have only one place to invest it and everybody invest in that one investment. Say a broadly defined general index fund that will have decent rates of return over time.

Megan McArdle on Social Security Again

And it is worth a read. This time Megan points out that there really isn't much of a way to save the current system unless you want to raise taxes, cut benefits, or borrow money...alot.

She also closes by noting that privatization does offer a way out, not a painless one to be sure, but a way out. With a privatization plan the money you save will at least be your money. You can't say that right now. The money take out of your paycheck right now goes to paying current beneficiaries and goes into the trust fund to pay future beneficiaries (and in the mean time is loaned out to the government).

I would also add the following: privatization is not a magic bullet though. Simply privatizing the program wont do it. You'll still have to pay for the current beneficiaries. Even if you don't find that appealing and ethically objectionable, practically you have no choice. Those elderly people vote. And if you want to fix this problem you will need them on your side.

Plans, Plans, Plans

Everybody has a plan these days. Every politician out there can't support something without a plan (the better ones have bullet points!). For example, here is Dean's Plan for renewable energy as a way to stimulate the economy (no really).

1. Ensure reliable, diverse, and low cost energy supplies at stable prices to all Americans
2. Strengthen our national security
3. Create jobs and stimulate economic growth
4. Spur innovation and make America the world's energy technology leader in the 21st century
5. Protect our environment

Not that bad, except the part about low cost energy and creating jobs and stimulating growth. Renewables are typically rather expensive right now. This was one of the reasons why there was a push for deregulation in California with regards to elecricity. Prices were high due to California's high level of renewable generation.

Of course this does not mean that research into these alternative sources of energy is not a good idea, but Dean's own plan suggests that they are not economically feasible right now. If the were feasible right now, then you wouldn't need subsidies and tax breaks for such sources of energy.

Governor Dean proposes creating a renewable portfolio standard, requiring more American biofuels, boosting wind energy transmission, creating a solar power tax credit, extending the production tax credit, and investing in renewable energy and efficiency as part of the Fund to Restore America.

Now, this wont drive up the price since there will be subsidies, but subsidies means that government spending in other areas is diverted or taxes have to be increased. These things will cost jobs. So on net it isn't clear that the 15,000 will result in an increase in overall employment.

Create a Renewable Portfolio Standard 20% by 2020. Despite a bipartisan plea from 53 Senators, the GOP leadership in Congress, buckled under to oil and gas interests and rejected calls to require that our nation generate 10% of its electricity from renewable sources. Governor Dean will put the interests of Americans ahead of special interests and require that our nation generate 20% of its electricity from renewable sources by 2020. To ensure efficient and flexible implementation, Dean will create a renewable energy credit trading system.

There is no specifics as to how this is to be achieved, but it can't be achieved without some sort of regulations/subsidies. If it is regulations, then it will raise the cost of energy (at least in the short run) for Americans and may end up providing no net increase in unemployment and perhaps even a decrease.

Basically the plan sounds like a pork plan for states like Iowa. Vote for Dean and he'll kick some federal bucks your way. The stated outcomes are speculative at best, and badly in need of specifics. Nothing to see here, move along.

Bush's Social Security Plan

I've been meaning to blog about this for a few days now, but haven't really had the time. Anyhow, President Bush put forward a plan for reforming Social Security. Here are the main goals of the plan:

1. Modernization must not change Social Security benefits for retirees or near-retirees.
2. The entire Social Security surplus must be dedicated only to Social Security.
3. Social Security payroll taxes must not be increased.
4. The government must not invest Social Security funds in the stock market.
5. Modernization must preserve Social Security`s disability and survivors insurance programs.
6. Modernization must include individually controlled, voluntary personal retirement accounts, which will augment Social Security.

These all sound really good, save for the last one. The problem with the last one is giving individuals control over such accounts. Suppose one individual gets a really "hot" stock tip and he moves a large portion of his retirement funds into that stock. Then the stock tanks. Ooops. Now, this isn't so bad, after all its just his money, right? Wrong. There is the problem of time inconsistency here. Oh sure, the politicians will talk a good game about how people will have to bear the effects of their choices, but when the chips are down and votes are on the line...they'll cave. So they'll insure the money, or reimburse people for dumb investments. Remember the Enron retirment plans that vanished? Well, part of the reason for that was the really bad judgement of the employees who invested in their retirement in Enron stock. Maybe a small percentage, okay, but larege percentages? Bad move. If something were to happen...oh wait, we already know the answer there. In fact, investing in a single stock is quite risky. If you don't have the time to sit around gathering and reading information about various corporations, watching the movements of several different stocks and so forth, you shouldn't be investing in a single stock, generally speaking. So giving individuals control of these accounts in this regard would be a big mistake. As for the details of the Bush Plan (I'll give Bush credit, he at least had some details, unlike most of his opponents right now) click here. The linked report offeres three models for reforming Social Security. The first model has a 2% "carve out". This basically means that 2% of the workers Social Security (SS) payments will go into a private account. Then the workers traditional SS benefits would be reduced in the future by amounts equal to the decrease in the workers SS taxes. One of the problems with this model is that it would have negative implications for the budget deficit immediately. As 2% of SS revenue would be going into private accounts, that would reduce the current surplus which is used to lower the current deficit. A larger current deficit, ultimately means that at some point in the future you will likely have to have higher taxes to pay off the debt. The second model is more complex and I'll put the main points in bullets

• Workers can voluntarily redirect 4 percent of their payroll taxes up to $1000 annually to a personal account (the maximum contribution is indexed annually to wage growth). No additional contribution from the worker would be required.
• In exchange for the account, traditional Social Security benefits are offset by the worker’s personal account contributions compounded at an interest rate of 2 percent above inflation. Workers opting for personal accounts can reasonably expect combined benefits greater than those paid to current retirees; greater than those paid to workers without accounts; and greater than the future benefits payable under the current system should it not be reformed.
• The plan makes Social Security more progressive by establishing a minimum benefit payable to 30-year minimum wage workers of 120 percent of the poverty line. Additional protections against poverty are provided for survivors as well.
• Benefits under the traditional component of Social Security would be price indexed, beginning in 2009.
• Expected benefits payable to a medium earner choosing a personal account and retiring in 2052 would be 59 percent above benefits currently paid to today’s retirees. At the end of the 75-year valuation period, the personal account system would hold $12.3 trillion (in today’s dollars; $1.3 trillion in present value), much of which would be new saving. This accomplishment would need neither increased taxes nor increased worker contributions over the long term.
• Temporary transfers from general revenue would be needed to keep the Trust Fund solvent between 2025 and 2054.

This model will basically end up depleting the surplus at a faster rate than the do nothing approach, hence the transfers from the General Fund. I don't see this as solving the problem. This will once again result in a large hole opening up in the federal budget resulting in deficits unless income taxes are raised, other spending is cut, or some combination of the two. The third model is also quite detailed

• Personal accounts are created by a match of part of the payroll tax – 2.5 percent up to $1000 annually (indexed annually for wage growth) – for any worker who contributes an additional 1 percent of wages subject to Social Security payroll taxes.
• The add-on contribution is partially subsidized for workers in a progressive manner by a refundable tax credit.
• In exchange, traditional Social Security benefits are offset by the worker’s personal account contributions compounded at an interest rate of 2.5 percent above inflation.
• The plan makes the traditional Social Security system more progressive by establishing a minimum benefit payable to 30-year minimum wage workers of 100 percent of the poverty line (111 percent for a 40-year worker). This minimum benefit would be indexed to wage growth. Additional protections against poverty are provided for survivors as well.
• Benefits under the traditional component of Social Security would be modified by:
  • adjusting the growth rate in benefits for actual future changes in life expectancy,
  • increasing work incentives by decreasing the benefits for early retirement and increasing the benefits for late retirement, and
  • flattening out the benefit formula (reducing the third bend point factor from 15 to 10 percent).
• Benefits payable to workers who opt for personal accounts would be expected to exceed scheduled benefit levels and current replacement rat
  Posted by Steve at 10:15 PM | Comments (0)

CA Energy Crisis Revisited...Again

A popular (conspiracy) theory (advocated at times by Paul Krugman) is that the energy companies in CA manipulated the price to such insane levels because they felt they had protection from the Republicans who were to take control of the White House and retain control of the Senate and Congress. Its a compelling story on its surface to many people. Ken Lay, his Enron Boyos, and the rest of the energy goons in Texas helped Bush to the White House, so when Bush parked his butt in the Oval Office he'd repay them by ignoring California.

There are only a couple of problems with this theory. First and foremost is that Clinton also ignored California. Gray Davis, a Democrat, also ignored California and he was the damn governor. You see, according to Krugman's own sources, Wolak, Borenstein and others the California crisis started in 1998. Here are some key references:

• Preliminary Report On the Operation of the Ancillary Services Market of the California Indpendent System Operator. This report was released in 1998 and was authored by Frank Wolak, Robert Nordhaus, and Carl Shapiro. In the report are the first indications that there are possible problems with market power on the part of generators.

• The Competitiveness of the California Energy and Ancillary Services Markets.
  The name pretty much says it all. This report was issued in March of 2000, about 5 months prior to the boiling point in August of that same year. I recommend reading the whole thing, but here is a quote that'll give one the gist of the report,

  Three major conclusions emerged from the Borenstein, Bushnell and Wolak (2000) analysis ("BBW"). First, significant market power was present in the California energy market during the summer months—July to September—of both 1998 and 1999.--emphasis added

• Diagnosing Market Power in California's Deregulated Wholesale Electricity Market.
  This report, by Borenstein, Bushnell, and Wolak, also shows that there was market power. The authors write,

  Overall, prices average about 17% above the competitive level during summer 1998 By Department of Justice standards this is indication of significant market power.

  Note, the date of publication: March 5, 1999.

So it is clearly the case that there was a problem with these markets well before the August meltdown. One part of the reason that there was an August meltdown was that nobody did anything back in 1999 or in the first several months of 2000 to stop the meltdown from occuring.

Now, was the melt down in August of 2000 the result of a plan to loot California and count on the political connections to shield them from any legal actions? I doubt it. Most of the time I hear people say the following, "Why did they jack the prices up so much? Why not keep them somewhat high and milk that cow for as long as possible?" The thinking implicit here is looking at the pricing/generation decisions from the stand point of a single actor. Suppose you are playing the prisoner's dilemma against yourself. That is you are players one and two. Are you going to play (Don't Confess,Don't Confess) or are you going to play (Confess,Confess)? The latter of course. The implicit assumption is that the generators were colluding. But did they have too? Not really. The CAISO website will tell you which plants are offline. Mighty convienent if you are trying to decide if you should take a plant offline to influence the price, no?

Further, lets return to the prisoner's dilemma. In the simple single stage of play the Nash equilibirum for the game is (Confess,Confess). However, if you were to switch over to a game where you didn't know when the last stage would occur the results can change...alot. You can now get "collusive" behavior even without outright collusion. This is especially true in games with a small number of participants, and there weren't that many generators in California.

So it is indeed quite possible for there to have been price manipulation and instances of market power without collusion. To get the popular theory you need to assume collusion. There is no reason to conclude this, IMO. At least not in the sense that the management of these companies were getting together and agreeing on a single course of action.

Krugman on Electricity

Whenever I encounter a fan of Paul Krugman's they always ask, "Okay, so he is partisan and often a bit shrill, but where exactly is he wrong?"

Fine. Here. Where exactly? Right here,

One answer might be that the apparent malefactors are very big contributors to the Republican Party. Some analysts have suggested that energy companies felt free to manipulate markets because they believed they had bought protection from federal regulation — the conspiracy-minded point out that severe power shortages began just after the 2000 election, and ended when Democrats gained control of the Senate.

There is a lie buried in there, but since most people do not work in the energy business they wont spot it. The California energy crisis really heated up in August. Are national elections prior to August? Ever? What is that I hear from you Krugman fans? Crickets?

Further, that is when the situation started to heat up to the boiling point. Have you ever done any cooking? Well, when you are boiling water (say for pasta), the pot starts to make noise right when it is about to boil. In August that was what was happening. Prices were sky high and there didn't look to be an end in site.

But really things were broken before that. Back in the summer of 1999 things weren't good either, and those who followed the situation closely knew this...and probably told Krugman about it.

And lets also point out that the President is the President-elect in those months after the election. So this comment about Federal Regulators, while accurate, is not a result of Republicans,

Federal regulators certainly seemed determined to see and hear no evil, and above all not to reveal evidence of evil to state officials.

Oh, but that's one little instance? Oh no, Krugman new about the problems in 1999 and even the problems in 1998. Don't believe me? Click here

Does this really happen? A recent National Bureau of Economic Research working paper by Severin Borenstein, James Bushnell and Frank Wolak cites evidence that exactly this kind of market manipulation took place in Britain before 1996 and in California during the summers of 1998 and 1999.

Krugman is lying to you...blatantly and openly. See, in 1998 and 1999, the electricity producers were manipulating pri