Ball and Mankiw on Intergenerational Risk Sharing

Intergenerational Risk Sharing in the Spirit of Arrow, Debreu, and Rawls, with Applications to Social Security Design

[ Journal of Political Economy, 2007, vol. 115, no. 4]

"Do market economies allocate risk efficiently? If not, what government

policies can improve the allocation of risk? These are classic questions

of economic theory. One celebrated answer comes from the Arrow-

Debreu theory of general equilibrium. This theory teaches that under

certain conditions—in particular, if contingent-claims markets are complete—

the allocation of risk will be Pareto efficient. In other words,

with complete markets, society can let the invisible hand allocate risk.

"This paper explores a deviation from Arrow-Debreu theory that arises

from the fact that not everyone is born at the beginning of time. In an

overlapping-generations economy, markets must be incomplete, because

a person cannot engage in risk-sharing trades with those who are not

yet born. The risks associated with holding capital assets, for instance,

can be shared with others alive at the same time, but they cannot be

shared with future generations. As a result, the allocation of risk need

not be efficient, and government policy may be able to make Pareto

improvements..."

"This approach builds on two traditions. The first is the Arrow-Debreu

theory of general equilibrium. In essence, our thought experiment

opens up all markets that are assumed to exist in Arrow-Debreu theory

but, in fact, cannot exist in an overlapping-generations economy. The

second tradition is the Rawlsian approach to social justice. Our thought

experiment envisions a hypothetical time period in which all generations

are alive in an "original position" behind a "veil of ignorance." In Rawls's

(1971) work on social insurance, the ignorance concerns cross-sectional

uncertainty about one's station in life. Here, the ignorance concerns

time-series uncertainty about whether one is born into a lucky or unlucky

generation.

"This theoretical investigation is motivated by practical issues of public

policy. The government influences the allocation of risk among generations

in many ways, most notably through the social security system.

A benevolent policy maker might try to use these instruments to achieve

the allocation of risk that the invisible hand would reach if it could.

That is, the policy maker might try to implement the outcome that

people would achieve on their own if, as in our thought experiment,

they were able to fully trade risks. Our goal, therefore, is not only to

examine how different the world would be with complete markets but

also to discuss how, without such markets, government policy might

substitute for them. This analysis sheds light, for instance, on how the

social security trust fund should be invested and how benefits should

respond to macroeconomic shocks..."

"We find a simple policy that does so: a fully funded social security system in which the system's

trust fund holds equity. In this system, benefits are adjusted in response

to shocks to equity returns to keep the system solvent.

There is, however, more than one way for policy to achieve any given

allocation of risk. Policy makers can also implement the completemarkets

equilibrium if the social security trust fund holds safe debt. Yet

in this system, benefits must be adjusted in what, at first glance, may

seem a surprising way: they must be negatively indexed to equity returns...

"Conclusion...

An obvious but important result from our analysis is the suboptimality

of private retirement accounts—a possible social security reform

that has received much attention in recent years. Private retirement

accounts merely replicate the equilibrium without any intergenerational

risk sharing. That is, private retirement accounts leave all generations

facing more risk than they should.

Another robust conclusion from our analysis is that the government

should spread capital risk among generations in a way that appears

absent from current policy. If equity claims to capital are held privately,

as they are now, then optimal intergenerational risk sharing requires

that social security benefits be negatively indexed to the capital return:

social security benefits should be cut when the stock market is doing

well. In the absence of such negative indexation, the government should

invest the social security trust fund directly in capital. Negative index

ation and government ownership of capital seem to be the only mechanisms

that allow current capital risk to be shared optimally with future

generations.

"Several recent proposals for social security reform have, in fact, included

such provisions. The Clinton administration, for instance, proposed

investing the social security trust fund in equities, as envisioned

in our proposition 4. The negative indexation of benefits to equity

returns may seem less likely, but in fact it is part of the Feldstein proposal

for social security reform (see, e.g., Feldstein and Samwick 1999; Feldstein

and Ranguelova 2001). In this plan, individuals would have private

accounts invested in capital markets; the more they earn in these accounts,

however, the less they would receive in supplemental benefits.

This "clawback" provision, as it is often called, resembles the negative

indexation envisioned in our proposition 5. Either approach could implement

the complete-markets equilibrium, raising the expected welfare

of all generations. In theory, intergenerational risk sharing offers the

prospect of a free lunch.

"Admittedly, given economists' limited understanding of these issues,

it may be too early to jump to policy conclusions. The model in this

paper makes many strong assumptions: individuals within a generation

are homogeneous, capital returns are exogenous, all generations are

the same size, and so on. Addressing real-world issues of social security

reform will require relaxing these assumptions. Fortunately, the concept

of a complete-markets equilibrium—the equilibrium in an overlappinggenerations

model with complete Arrow-Debreu contingent-claims markets

in a Rawlsian original position—is quite general. Future work could

investigate the nature of the complete-markets equilibrium and the institutions

that can implement it in a richer variety of settings."

http://0-www.journals.uchicago.edu.oasys.lib.oxy.edu/JPE/journal/issues/v115n4/10350/10350.web.pdf

On James Scott and Friedrich Hayek by Brad DeLong

From Brad DeLong's review of James Scott (1998), Seeing Like a State: How Certain Schemes to Improve the Human Condition Have Failed

One of the best one sentence summaries of Hayek:

that the bureaucratic planner with a map does not know best, and can not move humans and their lives around the territory as if on a chessboard to create utopia;

that the local, practical knowledge possessed by the person-on-the-spot is important;

that the locus of decision-making must remain with those who have the craft to understand the situation;

that any system that functions at all must create and maintain a space for those on the spot to use their local, practical knowledge (even if the hierarchs of the system pretend not to notice this flexibility).

Also

...Scott draws heavily on the excellent work of Jane Jacobs to criticize this planned, surprise-free, every-apartment-building-looks-the-same high-modernist order of pre-planned Brasilia. Jacobs argued that rigid spatial segregation of functions made for visual regularity from the bird's-eye view of the architect but made the city damn hard to live in. By contrast, it is the mingling of residences with shopping areas and workplaces that makes an urban neighborhood interesting--and livable. And this urban diversity of uses cannot be planned by the high-modernist architect. At best it can be planned for--by the government providing a framework and infrastructure for urban development instead of specifying land use down to the last square centimeter.

As Scott argues, even planners who recognize diversity will never plan it. You cannot spend your life at the office, and bureaucratic budgets are limited. Thus:

...the logic of uniformity and regimentation is well-nigh inexorable [in comprehensive urban planning]. Cost effectiveness contributes to this tendency. Just as it saves a prison trouble and money if all prisoners wear uniforms of the same material, color, and size, every concession to diversity [in the urban plan] is likely to entail a corresponding increase in administrative time and budgetary costs.... [T]he one-size-fits-all solution is likely to prevail (pp. 141-2).

Scott contrasts the communism of Rosa Luxemburg and Alexandra Kollontai to that of Lenin. Luxemburg did see that when one was exploring new social territory: "only experience is capable of correcting and opening new ways. Only unobstructed, effervescing life falls into a thousand new forms and improvisations, brings to light creative force, itself corrects all mistaken attempts" (p. 174). And Luxemburg did see that Lenin's "socialism... decreed from behind a few official desks by a dozen intellectuals" was headed for complete disaster:

Hayek's adversaries--Oskar Lange and company--argued that a market system had to be inferior to a centrally-planned system: at the very least, a centrally-planned economy could set up internal decision-making procedures that would mimic the market, and the central planners could also adjust things to increase social welfare and account for external effects in a way that a market system could never do.

Hayek, in response, argued that the functionaries of a central-planning board could never succeed, because they could never create both the incentives and the flexibility for the people-on-the-spot to use the immense amount of knowledge about the actual situation that only people-on-the-spot can know. As Hayek argued in his "Impossibility of Socialist Calculation," the enormous amount of dispersed knowledge that individual producers know and act on in a market economy can never be mobilized by a central planner. That a central planner could--that he or she could ever "possess a complete inventory of the amounts and qualities of all the different materials and instruments of production" available to the manager of a single plant--is "a somewhat comic fiction."

In Hayek's view, as he wrote in "The Use of Knowledge in Society," the fundamental economic problem is:

...the fact that knowledge of the circumstances of which we must make use never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.... It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge...

All of Scott's examples are cases illustrating that the centrally-planned social-engineering that Scott calls "high modernism" is definitely not a way to solve this fundamental economic problem. The bulk of Scott's book is spent adducing evidence for the critique of centrally-planned social engineering that had been made by Friedrich Hayek back before World War II.

Yet a casual reader of the book would not find any significant pointers to the Austrian intellectual tradition--no references to works like "The Impossibility of Socialist Calculation," "The Use of Knowledge in Society," or "Competition as a Discovery Procedure" that are directly on point for Scott's critique of centrally-planned social-engineering (the only works referred to are The Road to Serfdom and the collection Studies in Philosophy, Economics, and Politics, with no references to the individual works collected in the volume).

The key fault of what Scott calls "high modernism" is its belief that details don't matter--that planners decree from on high, people obey, and utopia results. Note that Scott's conclusion is not just that attempts at high-modernist centrally-planned social-engineering have failed. It is--as von Mises argued 70 years ago--they are always overwhelmingly likely to fail. As Scott puts it:

... [the] larger point [is that]... [i]n each case, the necessarily thin, schematic model of social organization and production animating the planning was inadequate as a set of instructions for creating a successful social order. By themselves, the simplified rules can never generate a functioning community, city, or economy. Formal order, to be more explicit, is always and to some degree parasitic on informal processes, which the formal scheme does not recognize, without which it could not exist, and which it alone cannot create or maintain (p. 310).

...subconscious fear that recognizing that one's book is in the tradition of the Austrian critique of the twentieth century state will commit one to becoming a right-wing inequality-loving Thatcher-worshiping libertarian (even though there are intermediate positions: you can endorse the Austrian critique of central planning without rejecting the mixed economy and the social insurance state).

---

References

Friedrich Hayek, ed. (1935), Collectivist Economic Planning: Critical Studies on the Possibility of Socialism (London: Routledge: 0678007659).

Friedrich Hayek (1937), "Economics and Knowledge," Economica 4, pp. 33-54.

Friedrich Hayek (), "The Impossibility of Socialist Calculation,"

Friedrich Hayek (1945), "The Use of Knowledge in Society," American Economic Review 35, pp. 519-30.

Friedrich Hayek (), "Competition as a Discovery Procedure"

Jane Jacobs (1961), The Death and Life of Great American Cities (New York: Vintage).

Jane Jacobs (1965), The Economy of Cities (New York: Vintage).

Frank Knight (1936), "The Place of Marginal Economics in a Collectivist System," American Economic Review 26:2, pp. 255-6.

Abba Lerner (1934), "Economic Theory and Socialist Economy," Review of Economic Studies 2, pp. 51-61.

James Scott (1998), Seeing Like a State: How Certain Schemes to Improve the Human Condition Have Failed (New Haven: Yale University Press: 0300070160).

Ludwig von Mises (1920), "Die Wirtschaftsrechnung im sozialistischen Gemeinwesen," Archiv fur Sozialwissenschaften und Sozialpolitik 47:1, pp. 86-121.

October 24, 2007 at 10:44 PM in Economics, Philosophy: Moral, Political Economy, Sorting: Front Page, Sorting: Things of Enduring Value Permalink

http://delong.typepad.com/sdj/2007/10/james-scott-and.html

Greg Mankiw's Blog: Correlation vs Causation

Thursday, October 25, 2007

Correlation vs Causation (from Greg Mankiw)

http://gregmankiw.blogspot.com/2007/10/correlation-vs-causation.html

Was RAND Wrong?

by Alex Tabarrok of Marginal Revolution

No, not Ayn Rand, the RAND experiment on health care. The RAND experiment randomly assigned people to different health plans and one of the big findings was that cost sharing reduced use of health care but had little effect on health outcomes. My colleague, Robin Hanson, likes to use this as a club to argue that we should cut medical spending in half.

Even randomized experiments have problems, however, and it turns out that there was a lot of attrition in the RAND experiment. A Healthy Blog quotes from a new paper in the October 2007 issue of the Journal of Health Politics, Policy and Law, by Dr. John Nyman of the University of Minnesota (alas not online).

Of the various responses to cost sharing that were observed in the participants of the RAND HIE, by far the strongest and most dramatic was in the relative number of RAND participants who voluntarily dropped out of the study over the course of the experiment. Of the 1,294 adult participants who were randomly assigned to the free plan, 5 participants (0.4 percent) left the experiment voluntarily during the observation period, while of the 2,664 who were assigned to any of the cost-sharing plans, 179 participants (6.7 percent) voluntarily left the experiment. This represented a greater than sixteenfold increase in the percentage of dropouts, a difference that was highly significant and a magnitude of response that was nowhere else duplicated in the experiment.

What explains this? The explanation that makes the most sense is that the dropouts were participants who had just been diagnosed with an illness that would require a costly hospital procedure. … If they dropped out, their coverage would automatically revert to their original insurance policies, which were likely to cover major medical expenses (such as hospitalizations) with no copayments … As a result of dropping out, these participants' inpatient stays (and associated health care spending) did not register in the experiment, and it appeared as if participants in the cost-sharing group had a lower rate of inpatient use. … the cost-sharing participants who remained exhibited a lower rate of inpatient use than free FFS participants, not because they were responding to the higher coinsurance rate by forgoing frivolous hospital care but instead because they did not need as much hospital care, since many of those who became ill and needed hospital care had already dropped out of the experiment before their hospitalization occurred. …

Hat tip to The HealthCare Economist.

http://www.marginalrevolution.com/marginalrevolution/2007/10/was-rand-wrong.html

RAND Hits Back

Alex Tabarrok

Joseph Newhouse and the other RAND researchers have responded to Nyman's paper arguing that attrition bias biased their results. The RAND researchers were aware of these issues and in fact designed the experiment to avoid incentives for non-random attrition. Most importantly, the basic RAND findings have now been replicated in many other studies (smaller and not always experiments but the results are solid). I call it a knockout for RAND.

It's a credit to the many insightful commentators on Marginal Revolution that many of these points were made already in the comments on my original post.

Thanks to Jason Furman for the pointer.

http://www.marginalrevolution.com/marginalrevolution/2007/10/rand-hits-back.html

Daniel Kahneman from Arnold Kling: Library of Economics and Liberty

October 19, 2007

Kahneman

Arnold Kling

Daniel Kahneman, the psychologist who won an economics Nobel, talked at Edge.org. Transcript.

it turns out that experience utility can be defined in at least two very different ways. One way is when a dentist asks you, does it hurt? That's one question that's got to do with your experience of right now. But what about when the dentist asks you, Did it hurt? and he's asking about a past session. Or it can be Did you have a good vacation? You have experience utility, which is everything that happens moment by moment by moment, and you have remembered utility, which is how you score the experience once it's over.

And some fifteen years ago or so, I started studying whether people remembered correctly what had happened to them. It turned out that they don't. And I also began to study whether people can predict how well they will enjoy what will happen to them in future. I used to call that "predictive utility", but Dan Gilbert has given it a much better name; he calls it "affective forecasting". This predicts what your emotional reactions will be. It turns out people don't do that very well, either.

I want to be snide and say, "and we try to elicit reports of how happy someone is in the present. And it turns out that people don't do that very well, either."

Whether you are a believer or a skeptic in what he does, I recommend the talk.

http://econlog.econlib.org/archives/2007/10/kahneman.html

MacBook Pro How to install memory

MacBook Pro: How to install memory
Learn how to correctly install memory into a MacBook Pro (all 15-inch and 17-inch models). Your MacBook Pro computer has two memory slots that you access by removing the memory door in the battery bay. Your MacBook Pro comes with at least 512 megabytes (MB) of 667 MHz Double Data Rate (DDR2) Synchronous Dynamic Random-Access Memory (SDRAM) installed. It may have more memory preinstalled, depending on the configuration you chose when you bought the computer. Both memory slots can accept an SDRAM module that meets the following specifications: Double Data Rate Small Outline Dual Inline Memory Module (DDR SO-DIMM)format 1.25 inch or smaller 512 MB or 1 gigabyte (GB) 200-pin PC2-5300 DDR2 667 MHz Type RAM Depending on the configuration of the MacBook Pro you purchased, both memory slots may already be full. The maximum amount of memory you can install in your MacBook Pro is 3 GB (see article 304662; using 1 GB DIMM and 2 GB DIMM in each slot). Installing Additional Memory: Before installing additional memory, you will need to remove your battery and put it back in after installing the memory. The following procedure includes all the necessary instructions for both parts of the process. Step 1: Removing the Battery Shut down your MacBook Pro. Disconnect the power adapter, Ethernet cable, and any other cords connected to the MacBook Pro, in order to prevent damaging the computer. Turn the computer over. Locate the battery release latches on each side of the battery. Slide both latches up. The battery should pop up slightly. Lift the battery out. Warning: The internal components of your MacBook Pro can be hot. If you have been using your MacBook Pro, wait ten minutes after shutting the computer down to let the internal components cool before continuing. Step 2: Installing the new Memory Using a Phillips size 00 screwdriver, unscrew the memory door and remove it from the battery bay of your computer. Touch a metal surface inside the computer to discharge any static electricity from your body. If you need to remove a memory card (for example if you are replacing it or if you need to get past the memory in the top slot to access the bottom slot), you can remove the card by spreading the tabs on each side of the card away from the notches in the memory card. The card should pop up slightly. Lift the memory card to about a 25-degree angle and then gently slide the card out of the memory slot. Insert the new memory card at a 25-degree angle. Line up the notch in the card with the small tab in the memory slot and slide the card into the slot until the gold edge is almost invisible. Then firmly push the memory card into the memory slot. You might feel some resistance. Gently spread the small tabs in the memory slot away from the notches and push the memory card down until the two tabs on either side of the card lock into place. Note: Make sure your memory is installed according to the illustration above, where the gold contacts are almost completely inserted into the connector. Insert any additional memory in the second slot. Replace the memory door and make sure the door is lying flat before you screw it back into place. To insert the battery Place the bottom edge of the battery into the battery compartment at an angle, as shown below. Gently press the top edge of the battery down until the battery latch locks into place.

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Date Created: March 17, 2006

Date Modified: January 26, 2007

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Econ 311 China beats Germany to take world trade crown - Telegraph

China beats Germany to take world trade crown

By Ambrose Evans-Pritchard and Mark Kleinman in Hong Kong

China has surged ahead of Germany for the first time to become the world's top exporter, prompting ever louder demands from the United States and Europe to revalue the yuan.

Data from the World Trade Organization show that the country vaulted past the US at the beginning of this year and has since moved at lightning speed to eclipse Germany's once indomitable export machine. It shipped $111bn (£54bn) worth of goods in August, up 55pc from a year earlier.

Now boasting 8pc of global exports – three times the Britain's dwindling share – China has jumped up the technology ladder. Machinery, equipment and cars now make up 46pc of total exports, while textiles are fading from the picture.

The Secret History of the American Empire by John Perkins

The Secret History of the American Empire by John Perkins

Normally I would not post on such stuff but this book is currently 759 in best sellers; its rankings in other categories is,

#2 in Books > Professional & Technical > Accounting & Finance > International
#2 in Books > Business & Investing > Economics > International
#3 in Books > Business & Investing > International


All of this is scary. Perkins is the same paranoid who wrote Confessions from an Economic Hit Man a few years back and the abbreviation EHM is used throughout the new book.

The type of thinking (and writing) on display in this book is apparent right up front. From page 5 we have,

Points 1 and 2 The United States represents less than 5 percent of the world’s population; it consumes more than 25 percent of the world’s resource. This is accomplished to a large degree though the exploitation of other countries, primarily in the developing world.
Point 3 The United States maintains the largest and most sophisticated military in the world. Although this empire has been built primarily through economics – by EHMs – world leaders understand that whenever other measures fail, the military will step in, as it did in Iraq.
Point 4 The English language and American culture dominate the world
Points 5 and 6 Although the United States does not tax countries directly, and the dollar has not replaced other currencies in local markets, the corporatocracy does impose a subtle global tax and the dollar is in fact the standard currency for world commerce. This process began after World War II when the gold standard was modified; dollars could no longer be converted by individuals, only by governments. During the 1950s and 1960s, credit purchases were made abroad to finance America’s growing consumerism, the Korean and Vietnam Wars, and Lyndon B. Johnson’s Great Society. When foreign businessman tried to buy goods and services back from the United States, they found that inflation had reduced the value of their dollars – in effect, they paid an indirect tax. Their governments demanded debt settlements in gold. On August 15, 1971, the Nixon administration refused and dropped the gold standard altogether. Washington scrambled to convince the world to continue accepting the dollar as standard currency. Under the Saudi Arabian Money-laundering Affair (SAMA) I helped engineer in the early seventies, the royal House of Saud committed to selling oil for only U.S. dollars. Because the Saudis controlled petroleum markets, the rest of OPEC (Organization of Petroleum Exporting Countries) was forced to comply. As long as oil reigned as the supreme resource, the dollar’s domination as the standard world currency was assured – and the indirect tax would continue.
A seventh characteristic emerged during my discussions with students: An empire is ruled by an emperor or king who has control over the government and the media, is not elected by the people, is not subject to their will, and whose term is not limited by law.


Where to begin? Let’s go in order.

Point 1: It never occurs to some that the US produces about 25 percent of the world’s goods so it must necessarily consume about 25 percent of the world’s resources.
Point 2: Perkins believes the reason the US consumes 25 percent of the world’s resources is primarily by exploiting the developing world, however, our imports are only 16% of GDP and the US buys the overwhelming majority of its imports from the developed world; Europe, Japan, Canada and Mexico (China is a very recent entry into the top tier of exporters to the US). The problem with the developing world is that they do not have enough interaction with the US, not that they have too much; serious development scholars and members of the IFI know this well.
Point 3: The first sentence is true and thank god that the second sentence also has some truth to it.
Point 4: This sounds funny – no?
Point 5 and 6: Foreigners are not forced to hold dollars, they chose to hold dollars. Virtually all dollars held outside the borders of the US are in Euro-dollars, that is, dollars in held in banks not located in the US where they earn interest that protects the purchasing power of they holdings from inflation. The people who were hurt by high US inflaton (essentially in from 1978 to 1983) were US citizens and these were lenders who were locked into low fixed interest rate loans. Perkins makes it sound as if there were a conscious plan to engineer an inflation to reduce the real value of foreign holdings of dollars (using inflation in this way – to deflate the real value of foreign debt placements, is what developing countries do). He claims he played a rather large role in the 1970s helping bail the US out of some (unnamed) crisis after Nixon moved the US off a $35 per ounce peg to gold (economists would not call this a gold standard), however, whatever scrambling took place was to ensure that the international payments system did not break down. Note: any country in OPEC can sell oil for any price they wish; see Venezuela and Iran most recently.
Point 7: I’ll leave it to the reader’s imagination as to where Perkins is going with this.

Overall the writing is weak, the reasoning childish, the self-promotion shameless (he mentions the NGOs he founded and runs in virtually every chapter), and the paranoia overwhelming.

Possible Readings for Econ 251 & Econ 361 Econbrowser: Rules versus discretion in monetary policy

From James Hamilton: Central Bank of Cyprus Governor Athanasios Orphanides and Goethe University Professor Volker Wieland (both former staff economists of the U.S. Federal Reserve Board).... explored what happens when we try to explain the fed funds rate not from the actual values of inflation and GDP, as in Taylor's original formulation, but instead with the forecasts of inflation and GDP that the Fed provides through its semiannual Humphrey-Hawkins report. Brandeis Professor Stephen Cecchetti, former Director of Research at the Federal Reserve Bank of New York and Associate Economist of the Federal Open Market Committee, protested that these forecasts were sometimes produced in a somewhat ad hoc fashion. But Orphanides and Wieland noted that the fit of a Taylor Rule to the data improved substantially when forecasts were used in place of actual outcomes as explanatory values in the regression, with the Rbar squared increasing from 0.74 to 0.91. In particular, the forecasts explain why the Fed chose to cut interest rates a little sooner in the early phases of the recessions of 1990 and 2001, as the Fed (correctly) anticipated the downturn. On the other hand, an error in predicting the resurgence of inflation in 2003-2004 may explain some of the slowness of the Fed to raise interest rates, on which we've commented previously.

Actual path of fed funds rate (black line), path predicted by a Taylor Rule that uses actual values of inflation and GDP (blue line), and path predicted by a Taylor Rule that uses forecasts of inflation and GDP (red line). Source: Orphanides and Wieland (2007).

 

http://www.econbrowser.com/archives/2007/10/rules_versus_di.html

What Nordhaus Said in 2002

Bryan Caplan

Economists are great at "predicting" events after they happen. Unfortunately, the real trick is predicting events before they happen. Friedman thus deserves extra credit for foreseeing stagflation. Donald Wittman deserves extra credit for foreseeing the base closings bill. Now I'd like to hand out another foresight award to Bill Nordhaus. Here's what he said about the Iraq War back in 2002:

Particularly worrisome are the casual promises of postwar democratization, reconstruction, and nation-building in Iraq. The cost of war may turn out to be low, but the cost of a successful peace looks very steep. If American taxpayers decline to pay the bills for ensuring the long-term health of Iraq, America would leave behind mountains of rubble and mobs of angry people. As the world learned from the Carthaginian peace that settled World War I, the cost of a botched peace may be even higher than the price of a bloody war.

Economists of all people should have been open to the possibility that intervention in Iraq would actually make matters worse. But Nordhaus was one of the few who saw it coming, and went on the record. Well done.

Geo-Engineering and Climate Change

From Arnold Kling Go to Greg Mankiw for the pointer. What I would like to know is whether geo-engineering represents a just-in-case technology. That is, if we can execute an Operation Sunscreen that quickly stops temperatures from rising, that would make for a really strong case against sacrificing a lot of GDP through a carbon tax. Because we do not yet know how bad global warming is going to be, the longer we can wait before doing anything about it, the better--but only if we know that we can wait and still do something about it!

 

http://econlog.econlib.org/archives/2007/10/random_things_t_1.html

Wachowicz's Web World: Web Sites for Discerning Finance Students

 

http://web.utk.edu/~jwachowi/wacho_world.html

Has Middle America Stagnated?

A closer look at hourly wages

Terry J. Fitzgerald
Senior Economist

 

Figure 1 presents two of the most widely cited wage series indicating stagnation—median hourly wage from the Economic Policy Institute (EPI) and average hourly earnings (AHE) of production and nonsupervisory workers from the Bureau of Labor Statistics (BLS). From 1975 to 2005, median hourly wages increased a slight 12 percent, while AHE actually fell by 4 percent.

In contrast, Figure 2 shows that labor income per hour for the national economy grew substantially over the same period, rising by 39 percent.^{1, 2}  

...

Just two adjustments—using the same price index and including benefits—have greatly diminished the growth rate differences between the microeconomic and macroeconomic series. Rather than falling by 4 percent over the past 30 years, average hourly earnings have actually risen by 16 percent. Growth in the median hourly wage went from 12 percent to a more respectable 28 percent.

Still, the growth rate for each of the micro series remains noticeably below the 39 percent growth rate in national labor income per hour. This is especially true for average hourly earnings. The next two sections take up these remaining differences, starting with average hourly earnings.

http://www.minneapolisfed.org/pubs/region/07-09/wages.cfm

http://www.minneapolisfed.org/pubs/region/07-09/tables.cfm#table2

Richard Clarida says the fall in the dollar isn't over yet: (hat tip: Economist's View)

Richard Clarida says the fall in the dollar isn't over yet:

The Dollar's Got Further to Slide, by Richard Clarida, Commentary, WSJ: Nearly every day in recent weeks seems to bring news that the dollar has fallen to record lows against the euro and other major currencies. Important factors include the Fed's bold -- but appropriate -- 50 basis-point cuts in the Federal Funds rate and the discount rate, and the policies we are likely to see in coming months from the European Central Bank and the Bank of England. ...

Since the August 2006 [FOMC] meeting, at which the Fed announced at least a pause if not an end to the interest-rate hike cycle, the dollar [has drifted downward]. [chart] There are several reasons for this, and these reasons suggest the dollar downdraft is likely to continue for some time to come. First, the U.S. economy in the second half of 2006 slipped into what has now been more than a year of below-trend growth. Moreover, this occurred in the context of buoyant global growth...

This relative U.S. underperformance is likely to continue, as the economy works through the headwinds of the housing contraction and consumer retrenchment in the face of tighter credit conditions and a soft labor market. But a U.S. recession is not necessarily in the cards, in large part because the Fed will probably ease more in future months to provide insurance against an economic contraction. ...

It appears as though the trade deficit has peaked, and it starting to decline as a result of slower U.S. growth, a robust global economy, and a weaker dollar. Indeed, all of the increase in the trade deficit between 2004 and 2006 was due to higher oil prices. The non-oil trade deficit has been more or less constant since 2004, and is now starting to show clear evidence of decline. ...

As the U.S. economy moves from being an engine of global growth to a path that is in line with the average of other major countries, the trade deficit will narrow and a weaker dollar will be part of that adjustment. This adjustment need not be inflationary.

Currencies can depreciate because of bad monetary policy, as was the case for the U.S. in the 1970s. But they can also depreciate with sound monetary policy if currency adjustment is called for -- as it is now -- to rebalance the domestic and global economies as the U.S. trade deficit shrinks.

The world financial system is undergoing an evolution, as economies from Asia to the Middle East to Europe allow more flexibility in their exchange rates and/or peg them against a basket of currencies and not just the dollar.

Reserve diversification will continue, and sovereign wealth funds will likely invest across a broader range of assets than reserve managers do at present. All of these developments will keep the dollar downdraft going for some time.

A U.S. inflation surge is not likely, although the Fed will face upward pressures on inflation from sources that were not so prominent until recent years -- a possible slowdown in productivity growth and booming commodity prices, as well as the weaker dollar.

But ultimately the U.S. inflation rate will be up to the Fed. At present, with core inflation measures within the Fed comfort zone, and payrolls contracting, the Fed is now rightly focused on cutting interest rates to preempt a U.S. recession.

http://economistsview.typepad.com/economistsview/

Emailing: Apple - Mac OS X Leopard - Up-to-Date - Qualifying Computers

Mac OS X Leopard

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• Overview
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Mac OS X Leopard Qualifying Computers

Model Number	Apple Store Family Part Number	Description
iMac	iMac
MA710LL/A	Z0DV	iMac 17" 1.83GHz
MA590LL/A	Z0DJ	iMac 17" 2.0GHz
MA758LL/A		iMac 17" 2.0GHz
MA589LL/A	Z0DH	iMac 20" 2.16GHz
MA759LL/A		iMac 20" 2.16GHz
MA456LL/A	ZODD	iMac 24" 2.16GHz
MA772LL/A		iMac 24" 2.16GHz
MA876LL/A	Z0E2	iMac 20" 2.0GHz
MA877LL/A	Z0E3	iMac 20" 2.4GHz
MA878LL/A	Z0E4, Z0FC	iMac 24" 2.4GHz
MB199LL/A		iMac 20" 2.0GHz
MA200LL/A		iMac 20" 2.4GHz
MA201LL/A		iMac 24" 2.4GHz
MA322LL/A		iMac 24" 2.8GHz
Mac mini	Mac mini
MA607LL/A	Z0DM	Mac mini 1.66GHz
MA608LL/A	Z0DN	Mac mini 1.83GHz
MA723LL/A		Mac mini 1.83GHz
MB138LL/A	Z0F0	Mac mini 1.83GHz
MB139LL/A	Z0F1	Mac mini 2.0GHz
Mac Pro	Mac Pro
MA356LL/A	Z0D8	Two 2.66GHz Dual-Core Intel Xeon/1GB 667MHz
MB052LL/A		Two 3.0GHzDual-Core Intel Xeon/2GB 667MHz
MacBook	MacBook
MA699LL/A	Z0DS	MacBook 13.3" 1.83GHz Intel Core 2 Duo/512MB
MA700LL/A	Z0DT	MacBook 13.3" 2.0GHz Intel Core 2 Duo/1GB
MA701LL/A	Z0DU	MacBook 13.3" 2.0GHz Intel Core 2 Duo/1GB
MB061LL/A	Z0ES	MacBook 13.3" 2.0GHz Intel Core 2 Duo/1GB
MB062LL/A	Z0ET	MacBook 13.3" 2.16GHz Intel Core 2 Duo/1GB
MB063LL/A	Z0EU	MacBook 13.3" 2.16GHz Intel Core 2 Duo/1GB
MB064LL/A		MacBook 13.3" 2.0GHz Intel Core 2 Duo/1GB
MB065LL/A		MacBook 13.3" 2.16GHz Intel Core 2 Duo/1GB
MB157LL/A		MacBook 13.3" 2.16GHz Intel Core 2 Duo/2GB
MB158LL/A		MacBook 13.3" 2.16GHz Intel Core 2 Duo/2GB
MacBook Pro	MacBook Pro
MA895LL/A	Z0EB	MacBook Pro 15" 2.2GHz/2GB
MA896LL/A	Z0EC	MacBook Pro 15" 2.4GHz/2GB
MA897LL/A	Z0ED	MacBook Pro 17" 2.4GHz/2GB
MB074LL/A		MacBook Pro 15" 2.2GHz/2GB
MB075LL/A		MacBook Pro 15" 2.4GHz/2GB
MB076LL/A		MacBook Pro 17" 2.4GHz/2GB
MB077LL/A		MacBook Pro 17" 2.4GHz/2GB
MA609LL/A	Z0DP	MacBook Pro 15" 2.16GHz/1GB
MA610LL/A	Z0DQ	MacBook Pro 15" 2.33GHz/2GB
MA611LL/A	Z0DR	MacBook Pro 17" 2.33GHz/2GB
MA867LL/A		MacBook Pro 15" 2.16GHz/1GB
MA868LL/A		MacBook Pro 15" 2.33GHz/2GB
MA869LL/A		MacBook Pro 17" 2.33GHz/2GB

RAMJET Inc. - MacBook Pro

MacBook Pro

Motherboard RAM: 0mb Sockets: 2 RAM type: PC2-5300, DDR2-667, 200pin, SO-DIMM The MacBook Pro represents a great leap forward in processsor power with the switch away from the PowerPC to the Intel processor. The memory is also a faster type of DDR2 running at 667Mhz, called PC2-5300. There are two memory upgrade slots. The system maximum depends on which version of the MacBook Pro you have. The Intel Core Duo models can run a maximum of 2GB. The Intel Core2 Duo at 2.16Ghz or 2.33Ghz can run 3GB maximum, and the Core2 Duo at 2.2Ghz or 2.4Ghz can run 4GB maximum. 2Gig Single Module: Ramjet uses a Non-stacked module for the 2GB single module. The cheaper stacked IC variety of 2GB DDR2-667 SO-DIMM runs hotter and draws more power, which hurts performance and decreases battery life. Ramjet ONLY uses premium non-stacked chips. 512mb DDR2 PC2-5300 for MacBook Pro $25 1G DDR2 PC2-5300 for MacBook Pro $39 2Gig DDR2 PC2-5300 for MacBook Pro Core2 $125

http://www.ramjet.com/macbook.asp

Occidental College: ITS Computer Standards

 

ITS Computer Standards
Apple Macintosh

Desktop
Mac Mini
Core Duo 1.83Ghz CPU
2 GB RAM
SuperDrive (DVD+R DL/DVD±RW/CD-RW)
80 GB Hard Drive
19" LCD Monitor

Mac Laptops: all come with an external LCD monitor, external keyboard & mouse; Apple does not provide docking stations.

Macbook 13" (5.2lbs)
Core 2 Duo 2Ghz CPU
2 GB RAM
SuperDrive (DVD+R DL/DVD±RW/CD-RW)
80 GB Hard Drive
Mac OS X v10.4 Tiger

Macbook Pro 15" (5.6lbs)
Core 2 Duo 2.16Ghz CPU
2 GB RAM
DVD burner
120 GB Hard Drive


MS Windows Computers

Desktop
Dell Optiplex 745
Core 2 Duo 2.13Ghz CPU
2 GB RAM
DVD-ROM Drive
80 GB Hard Drive
Windows XP Professional
19" LCD Monitor

PC Laptops: all come with an external LCD monitor, external
keyboard & mouse and docking station

Dell Latitude D420 11.6 inches (3 lbs)
Core Duo 1.2Ghz CPU
1.5 GB RAM
CDRW/DVD ROM combo drive
80 GB Hard Drive
Windows XP Professional

Dell Latitude D620 13 inches (4.4 lbs)
Core 2 Duo 2Ghz CPU
2 GB RAM
CDRW/DVD Rom Drive
60 GB Hard Drive
Windows XP Professional

http://www.oxy.edu/x13403.xml

Monotheism and Economic Development from Borjas Blog

October 23, 2007
Monotheism And Economic Development
There's a lot of interest among economists in determining why economic growth occurs in some places and not in others. Some fascinating new research by Murat Iyigun argues that the development of monotheistic religions was part of the spark that helped some regions to develop:

The Axial Age, which lasted between 800 B. C. E. and 200 B. C. E., covers an era in which the spiritual foundations of humanity were laid simultaneously and independently in various geographic areas, and all three major monotheisms of Judaism, Christianity and Islam were born between 1200 B. C. E. and 622 C. E. in the Middle East...Monotheist religions produced a paradigm shift in sociopolitical institutions because they (a) involve a strong degree of increasing returns to scale and the natural monopoly powers commensurate with it, (b) not only personalize the spiritual exchange relationship between the individual and the one deity, but also, due to the fact that this relationship extends into the afterlife as well, enhance individual accountability, and (c) expand their adherents’ time horizon beyond biological life and impact the time discount between one’s lifetime and the after-life. Taken together, these features suggest that the spread of monotheism ought to have promoted sociopolitical stability. Utilizing original historical data between 2500 B. C. E. and 1750 C. E. on 105 limited access orders, such as dynasties, kingdoms and empires, I show that monotheism had a positive and statistically significant impact on the length of reign as well as the average geographical size of social orders. Thus, I find empirical evidence that the birth and adoption of monotheistic religions aided early development both in the West and the Near East until the advent of the Industrial Revolution.

http://borjas.typepad.com/the_borjas_blog/2007/10/monotheism-and-.html
Posted at 05:58 AM in Economics | Permalink

Six Difficult Questions About Climate Change - Steven Landsburg

What Al Gore doesn't understand about climate change.

By Steven E. Landsburg
Posted Monday, Oct. 22, 2007, at 7:44 AM ET

---

Barring a last-minute intervention by the Supreme Court, the 2007 Nobel Peace Prize will be shared by Albert Gore Jr. Admittedly, Gore has been less of a menace to world peace than some previous laureates (think Henry Kissinger). But there is nothing particularly peaceable about Gore's rhetorical approach to climate policy. At his most pugnacious, Gore has depicted the fundamental trade-off as one between environmental responsibility and personal greed. Of course, as everyone over the age of 12 is perfectly aware, the real trade-off is between the quality of our own lives and the quality of our descendants'.

In other words, climate policy is almost entirely about you and me making sacrifices for the benefit of future generations. To contribute usefully to the debate, you've got to think hard about the appropriate level of sacrifice. That in turn requires you to think hard about roughly half a dozen underlying issues.

1. How much does human activity affect the climate? This is actually a whole menu of questions: What can we expect given the current level of carbon emissions? What if we cut those emissions by half? By two-thirds? And so on. These are questions for physical scientists, not economists or politicians.

2. How much harm (or good!) is likely to come from that climate change? This is partly a matter of physical science and partly a matter of economics. If the world temperature rises 3 degrees, agronomists try to predict the wheat yield in Oklahoma; economists try to predict when Oklahomans will turn to alternate ventures—and when it will become profitable to grow wheat in Alaska. Climatologists estimate what it takes to put New York underwater; economists estimate the cost of moving New York inland.

3. How much do we—or should we—care about future generations? Edmund Phelps, the 2006 Nobel laureate for economics, argued long ago that you (and I) should care exactly as much about a stranger born 1,000 years hence as we do about a stranger who's alive today. Phelps' view has been highly influential among economists, who now take it as more or less the default position. But even economists are sometimes wrong, and there are powerful arguments for "discounting" the welfare of future generations. First, many people (myself excluded, however) believe we should care more about our countrymen than about a bunch of foreigners—hence the sentiment for a border fence. If we are allowed to care less about people who happen to be born in the wrong country, why can't we care less about people who happen to be born in the wrong century? And second: Few of us feel morally bound to churn out as many children as we possibly can, which means we think nothing of denying future generations the gift of life. If it's OK to deny them their very lives, shouldn't it be OK to deny them a temperate climate?

There is a ton more to be said in response and counter-response, but in the end, you've got to take a stand. Does the next generation count 100 percent as much as our own, as Edmund Phelps demands? Or 99 percent? 95 percent? 90 percent? I'll show you later how much the answer matters.

4. How likely are those future generations to be around, anyway? If you think life on Earth will be destroyed by an asteroid in 200 years, it makes little sense to worry about the climate 300 years from now. (Of course, the issue is complicated by the fact that our climate policies change the survival odds.)

5. Just how rich are those future generations likely to be? If you expect economic growth to continue at the average annual rate of 2.3 percent, to which we've grown accustomed, then in 400 years, the average American will have an income of more than $1 million per day—and that's in the equivalent of today's dollars (i.e., after correcting for inflation). Does it really make sense for you and me to sacrifice for the benefit of those future gazillionaires?

6. How risk-averse are we? This matters not just because of uncertainty about the effects of climate change but because it affects the way future generations want us to behave. Imagine yourself as a disembodied soul, waiting in line to be born—possibly next year, possibly 100 years hence. If you have little tolerance for risk, you'll want us to pursue policies that make life about equally good at all times; if you're willing to roll the dice, you might prefer a policy that allows some generations to live riotously at the expense of others.

Only after you've addressed each question in turn can you say something sensible about climate policy. To carry out that program in detail would indeed be a Nobel-worthy achievement. I don't propose to earn my Nobel Prize in this column space, but I can at least offer a quick back-of-the-envelope calculation to show you how this stuff works.

First, I'll make the extreme assumption that our environmental recklessness threatens to shave 1 percentage point off economic growth forever. Because of compounding, our disposable incomes will be reduced by 9.5 percent a decade from now and by 63 percent a century from now—perhaps because we'll spend 63 percent of our incomes relocating coastal cities. Now toss in some standard (but arguable) assumptions about risk aversion and discounting. (Note to econogeeks: I assumed a risk-aversion coefficient of 1, and I discounted future generations' welfare at an annual rate of 5 percent, partly because we might care less about them and partly because we're not sure they'll exist.) Run this through your calculator, and you'll find we should spend up to about 17 percent of our incomes on climate control—provided that our investment is effective. That's an expenditure level that I expect would satisfy Al Gore.

Change the numerical assumptions, and you'll change the numerical conclusion. Make the discount rate 1 percent instead of 5 percent, and you can justify spending up to a whopping 62 percent of our incomes on climate control; lower the discount rate to 10 percent, and you can't justify spending more than 8 percent of our incomes.

The moral of that story is not that economists can justify anything; it's that assumptions really matter. Therefore you need to be clear about your assumptions, and you need to be prepared to justify them. If you're not talking about discount rates and levels of risk aversion, you're blathering.

The most thoughtful assessment of climate change is the Stern Review, prepared in October 2006 at the behest of the British government. The Stern Review reaches conclusions generally compatible with Al Gore's worldview, but only after laying out the underlying assumptions so clearly that skeptics like me can tinker around with them and see how the conclusions change. In other words, they've taken a hot-button issue and reduced it to its constituent pieces so that opposing parties can stop yelling at each other and say, "Let us calculate." That's what I call a contribution to world peace. I wish the Nobel Committee had agreed.

http://www.slate.com/id/2176156/

Global-warming hucksters

Global-warming hucksters

The scaremongers are not always wrong. The Trojans should have listened to Cassandra. But history shows that the scaremongers are usually wrong.

Parson Malthus predicted mass starvation 250 years ago, as the population was growing geometrically, doubling each generation, while agricultural production was going arithmetically, by 2 percent or so a year. But today, with perhaps 1 percent of our population in full-time food production, we are the best-fed and fattest 300 million people on Earth.

Karl Marx was proven dead wrong about the immiseration of the masses under capitalism and the coming revolution in the industrial West, though they still have hopes at Harvard.

Neville Chute's "On the Beach" proved as fictional as "Dr. Strangelove" and "Seven Days in May." Paul Ehrlich's "Population Bomb" never exploded. It fizzled when the Birth Dearth followed the Baby Boom.

"The Crash of '79" never happened. Instead, we got Ronald Reagan and record prosperity. The Club of Rome notwithstanding, we did not run out of oil. The world did not end in Y2K, when we crossed the millennium, as some had prophesied. "Nuclear winter," where we were all going to freeze to death after the soot from Reagan's nuclear war blotted out the sun, didn't quite happen. Rather, the Soviet Empire gave up the ghost.

Is then global warming – a steady rise in the temperature of the Earth to where the polar ice caps melt, oceans rise 23 feet, cities sink into the sea and horrendous hurricanes devastate the land – an imminent and mortal danger?

...

Like the panics of bygone eras, this one has the aspect of yet another re-enactment of the Big Con. The huckster arrives in town, tells all the rubes that disaster impends for them and their families, but says there may be one last chance they can be saved – but it will take a lot of money. And the folks should go about collecting it, right now.

This, it seems to me, is what the global-warming scare and scam are all about – frightening Americans into transferring sovereignty, power and wealth to a global political elite that claims it alone understands the crisis and it alone can save us from impending disaster.

Under the Kyoto Protocol, from which China and India were exempt, the United States was to reduce carbon emissions to 1990 levels, which could not be done without inducing a new Depression and reducing the standard of living of the American people. So, we ignored Kyoto – and how have we suffered? The Europeans who signed on also largely ignored it. How have they suffered?

...

The mammoth government we have today is a result of politicians rushing to solve "crises" by creating and empowering new federal agencies.

Whether it's hunger, poverty or homelessness, in the end, the poor are always with us, but now we have something else always with us: scores of thousands of federal bureaucrats and armies of academics to study the problem and assess the progress, with all their pay and benefits provided by our tax dollars.

Cal Coolidge said that when you see 10 troubles coming up the road toward you, sometimes the best thing to do is nothing, because nine of them will fall into the ditch before they get to you. And so it will be with global warming, if we don't sell out America to the hucksters who would save us.

http://www.worldnetdaily.com/staticarticles/article58279.html