Wednesday, February 29, 2012

More Macro-Economic Instability After The Federal Reserve's Creation Than Before

From Cato Working Paper, "Has the Fed Been a Failure?" by George A. Selgin, William D. Lastrapes and Lawrence H. White:
As the one-hundredth anniversary of the 1913 Federal Reserve Act approaches, we assess whether the nation's experiment with the Federal Reserve has been a success or a failure. Drawing on a wide range of recent empirical research, we find the following: (1) The Fed's full history (1914 to present) has been characterized by more rather than fewer symptoms of monetary and macroeconomic instability than the decades leading to the Fed's establishment. (2) While the Fed's performance has undoubtedly improved since World War II, even its postwar performance has not clearly surpassed that of its undoubtedly flawed predecessor, the National Banking system, before World War I. (3) Some proposed alternative arrangements might plausibly do better than the Fed as presently constituted. We conclude that the need for a systematic exploration of alternatives to the established monetary system is as pressing today as it was a century ago.

Has the Fed Been a Failure?, Cato Working Paper No. 2

Daunting Statistics Of Job Hunting

From Knowledge@Wharton, "Why the Job Search Is Like 'Throwing Paper Airplanes into the Galaxy' ":
According to a recent article in The Wall Street Journal, 7.6 million people applied to Starbucks for 65,000 corporate and retail job openings during the past year; close to one million people applied to Procter & Gamble for 2,000 positions, and two million people applied to Google for 7,000 openings. Approximately 90% of big companies, the article adds, use applicant tracking systems to screen and rank job candidates. Research from CEB shows that only 35% of applicants meet the basic requirements of the job they have applied for.

Good Listening Skills Key To Better Executive Decision Making

From McKinsey Quarterly, "The executive’s guide to better listening: Strong listening skills can make a critical difference in the performance of senior executives, but few are able to cultivate them. Here’s how." by Bernard T. Ferrari:
The situation facing the CEO will be familiar to many senior executives. Listening is the front end of decision making. It’s the surest, most efficient route to informing the judgments we need to make, yet many of us have heard, at one point or other in our careers, that we could be better listeners. Indeed, many executives take listening skills for granted and focus instead on learning how to articulate and present their own views more effectively.

This approach is misguided. Good listening—the active and disciplined activity of probing and challenging the information garnered from others to improve its quality and quantity—is the key to building a base of knowledge that generates fresh insights and ideas. Put more strongly, good listening, in my experience, can often mean the difference between success and failure in business ventures (and hence between a longer career and a shorter one).

Three Strikes Laws Do Not Reduce Crime

California’s three-strikes law has not reduced violent crime, but has contributed significantly to the state’s financial woes by substantially increasing the prison population, according to a University of California, Riverside researcher.

Declining crime rates in California and nationwide reflect declines in alcohol consumption, not tough-on-crime policies such as three-strikes laws, says Robert Nash Parker, a sociologist and director of the Presley Center for Crime and Justice Studies at UCR.

Tuesday, February 28, 2012

The Unintended Longer Term Effects Of The 1960s Warren Court's Expansion Of Criminal Defendant Procedural Rights

An interesting summary and review of the book, "The Collapse of American Criminal Justice"by William Stuntz and published by Harvard University Press.

From (reprinted from The Boston Globe), "Where American criminal justice went wrong" by Leon Neyfakh:
But as Stuntz saw it, the Warren Court’s reforms had another, far less obvious effect: They created new incentives that changed the way defense lawyers and prosecutors did their jobs. Stuntz described it as a chain reaction, set off by the fact that the court had focused all its efforts on procedure, and had failed to impose any substantive limits on what legislators could criminalize and the punishments they could impose. The result was that defense attorneys--especially overworked public defenders--realized they could score easy victories for their clients by getting charges dismissed on procedural grounds; legislators, in turn, reacted by criminalizing a much broader range of activities and imposing harsh minimum sentencing requirements, which prosecutors could use as leverage to win guilty pleas.

“He [Stuntz] suggested that the question of guilt or innocence had been lost in the shuffle,” said Yale Kamisar, professor emeritus at the University of Michigan Law School, who is considered the intellectual godfather of the Warren Court’s rulings. “The way the system worked, it wasn’t really the dominant thing anymore. ”
"It is the lawyer’s conceit to believe, on some level, that if you can get the procedure to be perfect, that will ensure that the results will be perfect," said Joseph Hoffmann, a professor at the Indiana University Maurer School of Law, who has known Stuntz since the two of them clerked together on the Supreme Court. "It’s the way most lawyers look at the world....They would say procedural justice is how you get to substantive justice."

Stuntz believed one needed only to look at the extraordinary racial disparity in America’s prisons to know that notion was wrong. And it was this belief that caused him to take a position that truly distinguished him from his fellow conservatives: that America’s higher courts shouldn’t just restrict themselves to procedural doctrine, but should think instead about the substance and the effects of laws, and be willing to strike them down if they are not enforced fairly.

Mismatch Theory And Affirmative Action

From TIME, "How Affirmative Action Backfires at Universities: The policy of placing students with better-prepared peers ultimately makes classrooms less diverse. Here's why" by Heather Mac Donald:
a body of empirical research has emerged showing that racial preferences can hurt their purported beneficiaries by catapulting them into schools for which they are inadequately prepared. Placed in classrooms pitched above their current level of knowledge, they learn less than they would if they were among peers whose academic skills more closely mirror their own. This “mismatch” effect is particularly relevant to the University of Texas case, Fisher v. University of Texas [the case that is before the US Supreme Court], because the university claims that it needs to admit students according to race in order to achieve “classroom diversity.” Mismatch theory predicts — correctly — that using racial preferences will have the opposite effect.
Mismatch theory, as applied to racial preferences, has its share of critics. It is not a scientific theory. It is a social science theory that is subject to much debate about the methods for determining the existence of a mismatch and about the policy recommendations if a mismatch is found.

For example, if a large group of the top minority students that apply to a college list engineering as their preferred major but during their college years switch out of the engineering major because they are inadequately prepared to do the mathematics work to graduate with an engineering degree, is the proper school policy response to be more strict in its admission policy in assessing the ability to complete an engineering major and admit fewer minorities, or is the correct policy to provide additional encouragement and assistance to minorities so they can obtain an engineering degree? What if the college is like a MIT, where the students who do not get preferential admission are in the top 1% of the US, if not the world, and can learn advanced mathematics and science at an accelerated rate? What about law schools and medical schools, which are more skill and experience based professions than engineering?

Monday, February 27, 2012

NYC Teacher Evaluation Scores Show The Irrelevancy of Teachers On Student Test Performance

Two articles in The New York Times (mentioned below) about the recently released NYC teacher evaluations indicate that teacher quality is not an important factor in student performance. Parents, teachers, media and many educational researchers overemphasize the importance of teacher quality on student learning and student standardized test performance.

Of course, there is more to a good teacher's characteristics than just the ability to teach effectively. In lower grades, a nurturing, reassuring and encouraging personality is probably a trait that most parents and children would like. The ability to maintain discipline and safety in the classroom, without being overly harsh, is another trait parents and students would probably like to see in teachers at all grade levels. Similarly, teachers that instill curiosity or an interest in a particular subject or extra-curricular activity are valuable beyond their ability to improve reading or math scores.

As for student performance on reading and math tests, research indicates that teacher quality is not that important. For example, research shows that teacher credentials, such as certification, advanced degrees, and years of experience in the classroom, do not affect student educational performance in reading and math. See as an example my post, "Teacher Credentials Unrelated To Student Achievement." Also, see results from Teach for America and similar programs which place eager, but not trained in education, recent college graduates into poorly performing schools. These students are very effective in the limited time they are in the schools.

Gambler's Fallacy

Many educational researchers, because of their own prior beliefs in effective teaching, fall into the gambler's fallacy of believing in "hot hands" that certain decks of cards, roulette wheels or slot machines are paying out more than others, when what the gambler is seeing is a momentary random streak of winning hands.

Studies that evaluate teacher impact on student performance over time generally find wide variation in a teacher's effectiveness from one year to the next. If some teachers are more effective than others and the important factor, then why does student performance measurement vary much from year to year? (For example, a recent Harvard study that found that better teachers in the lower grades had an adulthood impact on students and their earnings stated "teacher value-added is not in fact a time-invariant characteristic." and "if true VA [value-added] is mean reverting, deselecting teachers based on their current VA [value-added] will yield smaller gains in subsequent years, because some of the low VA [value-added] teachers improve over time.") These studies find some teachers are better than others because over the time frame measured, on average, they are more effective than other teachers. It is the same as believing in winning slot machines. Over a short time frame, with wins and losses, the researchers see some teachers have a higher winning average than other teachers, confusing a random streak for a measure of the effectiveness of the gambler. Additionally, researchers have found and attempt to control in their studies, that there is student sorting in the schools where some teachers consistently get more of the higher test scoring, better students than other teachers.

NYC Evaluation Results

The data from the NYC teacher evaluations shows that high, average and low scoring teachers are about equally scattered among all the NYC schools, the high and the low performing schools.

From The New York Times, "Teacher Quality Widely Diffused, Ratings Indicate" by Fernanda Santos and Robert Gebeloff:
The controversial ratings of roughly 18,000 New York City teachers released on Friday showed that teachers who were most and least successful in improving their students’ test scores could be found all around — in the poorest corners of the Bronx, like Tremont and Soundview, and in middle-class neighborhoods of Queens, like Bayside and Forest Hills.
They were in similar proportions in successful and struggling schools, and they were just as likely to have taught the most challenging of students and the most accomplished.
From The New York Times, "In Teacher Ratings, Good Test Scores Are Sometimes Not Good Enough" by Sharon Ottyerman and Robert Gebeloff:
At Public School 234 in TriBeCa, where children routinely alight for school from luxury cars, roughly one-third of the teachers’ ratings were above average, one-third average and one-third below average.

At Public School 87 on the Upper West Side, where waiting lists for kindergarten spots stretch to stomach-turning lengths, just over half the ratings were above average. The other half were average or below average on measure, based on student test scores.
The principal cause of the wide variation within schools is the methodology of the ratings, which compares teachers with similar student demographics and scores. For teachers in schools with high-achieving students, good test results are often not good enough, at least by the standards set by the formula.
The NYC evaluations control and adjust for different student demographics, family income, etc. Students from better off families perform better on standardized tests and teachers should not get credit for the higher test scores of these students, especially since the higher scores are due to socio-economics and not teacher effectiveness.

The article mentions that some of the higher income parents were surprised that teachers who they evaluated as effective did not produce test results beyond the expectation for the families' demographic group.

On average, independent of teacher quality, students from higher income families do better on standardized tests including SATs, graduate from high school at higher rates, go to and graduate from college at higher rates than students from poorer families.

Changes that have effect on student performance in school tend to be outside of the classroom, such as an increase in parental expectations of student educational performance, increase in parental literacy, decrease in teenage pregnancy rates, decrease in bullying in school and other factors which are unrelated to teacher effectiveness.

Friday, February 24, 2012

Federal Education Subsidies Raise Tuition Prices: A Known Economic Effect of Subsidies

From SmartMoney, "Why College Aid Makes College More Expensive" by Jack Hough:
If subsidies puff up buying power and shift prices higher, as economics courses teach, could federal aid for college help create an affordability problem? After all, the federal government began spending more on college aid with the Higher Education Act of 1965 and the full funding of Pell Grants in 1975. Since 1979, tuition and fees have tripled after adjusting for inflation. That's much faster than the increase for real estate and teacher pay.
Stephanie Riegg Cellini of George Washington University and Claudia Golden of Harvard take a new approach, focusing on for-profit schools. Some of these are eligible to participate in so-called Title IV aid programs (named for a portion of the aforementioned Act) and some not.

After adjusting for differences among schools, the authors find that Title IV-eligible schools charge tuition that is 75% higher than the others. That's roughly equal to the amount of the aid received by students at these schools.

3 In 10 Adults Have College Degrees: Historic High

from The Washington Post, "Number of U.S. adults with college degrees hits historic high" by Daniel de Vise:
Representing a historic high, three in 10 adult Americans held bachelor’s degrees in 2011, census officials reported Thursday.

College attainment has crept upward, slowly but steadily. In 1947, just 5 percent of Americans 25 and older held degrees from four-year colleges. As recently as 1998, fewer than one-quarter of the adult population held college degrees.
The new data show African Americans and Hispanics gaining ground in college completion. From 2001 to 2011, Hispanics rose from 4.4 percent to 6.1 percent of the nation’s college-educated population. In the same span, blacks rose from 6.7 percent to 7.6 percent of all degree-holders.

Chevy Volt Buyers Have Same Higher Income As Mercedes And BMW Buyers But Get A $7500 US Rebate

From Rasmussen Reports, "Trickle Down Environmentalism Has Little Public Support" by Scott Rasmussen:
The CEO of General Motors said recently that the average income of those buying Chevy's electric Volt is approximately $170,000 a year. That puts electric car buyers in the same league as BMW buyers or those who drive a Mercedes-Benz. It may not be the 1 percent, but it qualifies in the top 7 percent of all American earners. That's a more elite group than those who buy Cadillacs or Lexus cars.
Under Obama and at his request, the US government gives more than $5 billion in taxpayer subsidies to jump-start the electric car industry and the US gives a $7,500 rebate to anyone who buys an electric car.

Obama's new budget proposes raising the rebate to $10,000.

England Raises Top Marginal Tax Rate And Collects Less Tax Revenue

From "David Cameron's Tax Lesson: A 50% tax rate yields less revenue than advertised" in The Wall Street Journal:
Preliminary figures out this week show that Britain's 50% top marginal income-tax rate may have reduced tax revenue from top earners by as much as 5%, compared to the old 40% top rate. Tax revenue from those filing self-assessments due January 31 was down some £500 million versus last year.
So this January's numbers are a first look at the effect of the 50% tax rate, put in place by the previous Labour government in its last days and kept there by the Tory-Liberal Democrat coalition headed by Mr. Cameron.

That tax hike was the first increase in the top marginal rate in Britain (which kicks in at £150,000 a year) since then-Chancellor Nigel Lawson cut it to 40% from 60% in the late 1980s.

CBO's Slide Presentation On US Budget Deficit To Harvard Economic Classes

CBO Director Doug Elmendorf's Presentation at Harvard University
A summary of CBO Director Doug Elmendorf's presentation that accompanied the above slides is available at "Back To The Classroom: A Visit To Harvard University."

Thursday, February 23, 2012

Fecal Testing Finds Colon Cancers At Same Rate As Colonoscopy

In a random, controlled study of two groups totaling over 53,000 asymptomatic individuals between 50-69 years old, the rate of finding colon cancer was the same for those that underwent a colonoscopy and those that had a blood stool test. Fecal testing had a much higher rate of participation than colonoscopy, 34.2 percent versus 24.6 percent, and therefore a greater number of individuals with colon cancer were found in the fecal testing group than in the colonoscopy group, 33 versus 30 individuals. The colonoscopy did find a higher rate of benign tumors in the colon than the fecal test.

From "Colonoscopy versus Fecal Immunochemical Testing in Colorectal-Cancer Screening" by Drs. Enrique Quintero and Antoni Castells:
Subjects in the FIT [Fecal Immunochemical Testing, or commonly known as stool testing] group were more likely to participate in screening than were those in the colonoscopy group. On the baseline screening examination, the numbers of subjects in whom colorectal cancer was detected were similar in the two study groups,
The study is a 10 year study and the current article is an interim report on participation and detection rates. The primary purpose of the study is to compare the rate of death from colorectal cancer of the two detection methods at the end of 10 years, which I presume will be forthcoming from the researchers at a later date.

Congress Takes Away Credit and Banking Services From The Poor

From "America's 'Unbanked' Masses: Millions have lost access to credit or essential banking services due to regulatory reforms" by Meredith Whitney:
Fewer Americans have access to traditional banking services such as checking accounts, consumer loans and credit cards than they did five years ago. Part of this has to do with the housing bust severely damaging the finances of U.S. households. But millions more have lost access to credit or essential banking services due to regulatory reforms imposed over the past four years.
But importantly, banks are not to blame for the unintended consequences of ill-planned and ill-timed regulatory reform. The Credit Card Accountability, Responsibility, and Disclosure Act (CARD) essentially restricted a bank's ability to quickly reprice credit-card interest rates. It was passed in 2009 after the peak of the credit crisis, with most of the provisions going into effect in February 2010.

Since mid-2008, over $1.6 trillion in credit lines have been expunged from the system. Under the new law, banks could no longer use other credit bureau information to reprice, as decisions had to be based upon the credit experience of the issuer alone. These restrictions made it far more difficult to effectively price for the evolving risk of a consumer.

Overdraft protection ("Reg E") reform has had a similar impact on retail bank customers. By limiting the fees banks can charge customers, regulators have in effect made the expense of servicing some customers greater than the revenue they generate. In many cases, regulations have made the overall economics of branch banking uneconomic. Consequently, many bank branches have shuttered, nearly 1,500 since 2009.

Tuberculosis Cases Rising In London: 50 Percent Increase In Ten Years

From "Ancient Killer Bug Thrives Near London’s Canary Wharf" by Andrea Gerlin:
Tuberculosis is staging a comeback in London, where some neighborhoods suffer infection rates found in African countries in which the disease is endemic. The number of cases surged 50 percent in the 10 years to 2009, according to a National Health Service agency.

The airborne bacteria has taken root in a population of recent immigrants, addicts and homeless who live close to affluent business districts and may pose a risk for those they rub elbows with.
The disease was as prevalent in London as in some of the world’s poorer nations in 2010. The city had 43 cases per 100,000 overall and rates of 65 or more per 100,000 in hotbeds such as Tower Hamlets, some of them on par with Karonga district in Malawi, says Ali Zumla, a professor at University College London. By contrast, New York reports nine cases per 100,000 people and Berlin eight.

NY Times Over Hypes Medical Study

The NY Times says about a newly published study on colonoscopy, "strong evidence has been lacking until now." Unfortunately, the article quotes several experts about the limitations of the study's design which undermine any broad conclusions about the overall life-saving benefits of the procedure.

From The New York Times, "Report Affirms Lifesaving Role of Colonoscopy" by Denise Grady:
The new study did not compare colonoscopy with other ways of screening for colorectal cancer and so does not fully resolve a longstanding medical debate about which method is best. Tests other than colonoscopy look for blood in the stool or use different techniques to examine the intestine.
But Dr. Harold C. Sox, an emeritus professor of medicine at Dartmouth Medical School and former editor of a leading medical journal, Annals of Internal Medicine, cautioned that the new study was not the last word. He said it was not clear that the same reduction in the death rate found in the study would occur in the general population.
The type of evidence in this study, based on looking back at patient records, is not considered as reliable as that from a randomized controlled study, in which groups of patients are picked at random to have one treatment or another and then compared over time.

Dr. Sox also said that because all of the patients in the study had adenomatous polyps, it is not certain that the findings would apply exactly to the general population, in which this type of polyp is found in about 15 percent of women and 25 percent of men.
Also, if you read the article, the study only compared colorectal cancer deaths among the groups. It did not look at overall mortality rates to see if any increased deaths occurred from the known complications of a colonoscopy.

Million Dollar Plus Home Foreclosures Increasing

From "Million-dollar foreclosures rise as rich walk away" by Jessica Dickler:
Out of all foreclosure activity, the share of foreclosures on properties valued at $1 million or more has risen by 115% since 2007 while the share of multi-million dollar foreclosures -- or homes valued at more than $2 million -- jumped by 273%. Meanwhile, the share of foreclosures on mid-range properties valued between $500,000 and $1 million fell by 21%.

Wednesday, February 22, 2012

Health Care Variation And Social Costs

My posted comment to The Washington Post Ezra Klein's Wonkblog, "Why health care costs vary in one chart" by Sarah Kliff:

Source: The Washington Post
Need to adjust for cost of living differences. Going from Greece to England, analyst will use PPP (purchasing power parity) to compare country healthcare prices. Why not do the same adjustment within the US. There are significant price differences in McDonald's Big Macs in different parts of the US. Why should medicine be any different? Should we regulate McDonald's prices?

Also, social costs, such as wait time for appointment, waiting time in doctor's office, etc., are a big part of unmeasured medical costs. Some patients pay more to lower their social costs and people in some areas of the country expect quicker access. Doctors offer quicker service at a higher cost because it costs more. A doctor who can see a last minute appointment has to have left some room in his/her schedule for an unexpected patient. There is a trade off in prices between efficiency and quicker access.

It takes more MRI machines to be able to schedule a two-day appointment then it does for a three-month appointment. Per patient seen, the three-month appointment system is a lower cost medical provider than the two-day system because fewer machines are purchased. The medical outcomes may be identical, but the social cost to the patient with the injury is greater with the three-month system. It is just that the social costs, extra pain, longer time immobile, more OTC pain killers, lower work inefficiency, etc., are not included as medical costs but should be.

The study implies that the extra costs are an unnecessary excess. It may be that the extra costs are going into better daily quality of life services from the medical providers to lower patients' social costs.

Saturday, February 18, 2012

Racial And Educational Disparities Of Out Of Wedlock Births

From The New York Times, "For Women Under 30, Most Births Occur Outside Marriage" by Jason Deparle And Sabrina Tavernise:
Large racial differences remain: 73 percent of black children are born outside marriage, compared with 53 percent of Latinos and 29 percent of whites. And educational differences are growing. About 92 percent of college-educated women are married when they give birth, compared with 62 percent of women with some post-secondary schooling and 43 percent of women with a high school diploma or less, according to Child Trends.
The US also has the highest out of wedlock birthrate for teenagers among the developed countries.

Young birth mothers (teenagers or slightly older), out of wedlock parents, absent fathers, and educational level of parents correlates very highly with how a child will perform in school, reading and math test scores, and the level of education the child will attain, high school dropout, high school, or college.

While Black students have a higher rate of these factors that predict poorer school performance, and as group therefore have lower average math and reading scores and lower high school graduation rates, especially for Black males, White students who have the same socio-economic characteristics, young mother, out of wedlock parents, absent fathers, and parents with low educational levels, also have lower math and reading scores and lower high school graduation rates and college attendance. It is just that these socio-economic factors occur at a higher rate within the Black student population than the White student population and make it appear that the US educational system does not teach Blacks or minorities well. The US educational system also does not teach Whites with the same socio-economic traits well.

Friday, February 17, 2012

State And Local Government Employees Higher Paid Than Private Sector Workers

State and local government employees make more than their private sector counterparts with local government employees making more than their state worker counterparts.

From Journal of Economic Perspectives, "Compensation for State and Local Government Workers" by Maury Gittleman and Brooks Pierce:
the workers being hired in the public sector have higher skill levels than those in the private sector, so the challenge is to compare across sectors in a way that adjusts suitably for this difference. After controlling for skill differences and incorporating employer costs for benefits packages, we find that, on average, public sector workers in state government have compensation costs 3-10 percent greater than those for workers in the private sector, while in local government the gap is 10-19 percent. [Emphasis Added]

Thursday, February 16, 2012

Country Size, Industry Specialization And Religion Affect Income Mobility And Income Inequality As Much As Other Factors

Country size, industry specialization within a country, and religious subgroups as much as any other factors, such as poverty and education, could lead to higher income inequality, less income mobility and higher inter-generational affects of rich and poor families.

From The National Review Online, "The Great Gatsby, Moby Dick, and Omitted Variable Bias" by Jim Manzi:
[Alan] Krueger [President Obama’s economic adviser] posits a causal mechanism of wealthy parents increasingly giving their kids an edge through superior education. There is almost certainly some truth to this. He implies that are there other causal mechanisms by which inequality today can cause less social mobility in the future. But what about all the other potential reasons, beyond what their Gini Coefficient [statistical inequality measure used by academics] was in 1985, for varying levels of social mobility between countries as diverse as Japan, France, and New Zealand?

The most obvious example is just the size of the countries. It’s at least plausible that much bigger countries contain more variety. In fact, if you ... use the population of each country as the X-axis, you get a very strong a statistical relationship (log-linear R2 = .64). Big countries have higher IGE [Intergenerational Earnings Elasticity, the degree to which your parents' earnings determine your earnings]....

Alternatively, we might see that some countries tend to specialize more than others. As a practical example, part of the reason that a country like Finland can have so much equality and social mobility versus America might be that many more of the relatively poorer farmers who trade food for Finnish mobile phones live and reproduce in other countries. If so, then we might see that if we replace the X-axis with exports as a % of GDP, there could be another statistically significant relationship with IGE. Check (R2 = .48).

Alternatively, different countries might be more or less populated by heterogeneous subgroups that are more likely to reproduce for non-economic reasons with others within their own group. Religious fractionalization versus IGE? Check (R2 = .57).

Government Spending Decreases Private Spending, Increases Government Employment And Does Not Increase Private Employment

Abstract from "Government Spending and Private Activity" by Valerie A. Ramey, University of California at San Diego:
This paper asks whether increases in government spending stimulate private activity. The first part of the paper studies private spending. Using a variety of identification methods and samples, I find that in most cases private spending falls significantly in response to an increase in government spending. These results imply that the average GDP multiplier lies below unity. In order to determine whether concurrent increases in tax rates dampen the spending multiplier, I use two different methods to adjust for tax effects. Neither method suggests significant effects of current tax rate changes on the spending multiplier. In the second part of the paper, I explore the effects of government spending on labor markets. I find that increases in government spending lower unemployment. Most specifications and samples imply, however, that virtually all of the effect is through an increase in government employment, not private employment. I thus conclude that on balance government spending does not appear to stimulate private activity. [Emphasis added]

High Arsenic Levels In Organic Foods That Substitute Brown Rice Syrup For High Fructose Corn Syrup

From "High arsenic levels found in organic foods, baby formula" by Linda Carroll:
Next time you pick up an organic cereal bar or buy infant formula, you might want to read the label closely. High levels of arsenic, a chemical linked to cancer, chronic diseases and developmental effects, have been found in foods that list organic brown rice syrup as a primary ingredient, according to a new study from Dartmouth University.

Organic brown rice syrup is often used as a substitute for high fructose corn syrup in prepared organic foods. One of the infant formulas tested contained twice the inorganic arsenic allowed in drinking water, according to Environmental Protection Agency standards. One cereal bar contained 12 times the legal limit for drinking water of 10 parts per billion (ppb). High-energy foods tested had 8 to 17 times the limit.
In fact, rice takes up arsenic from the soil, Jackson explained. As it turns out arsenic looks very much like silica to the rice plant and "rice takes up silica to help it stand up in water logged soils."

Different varieties of rice take up different amounts of arsenic, Jackson said. Brown rice tends to have particularly high levels of arsenic.

Intelligent Discussion Of US China Trade: Video

Excellent, if not too short, video discussion of US trade with China between a very knowledgeable Cato Trade Policy Analyst Sallie James and Fox Business News anchor Neil Cavuto.

Sallie James is a policy analyst with Cato Institute's Herbert A. Stiefel Center for Trade Policy Studies. James was an executive officer in the Office of Trade Negotiations in the Australian Government's Department of Foreign Affairs and Trade and she was a Senior Policy Adviser in the Australian Government's Department of Agriculture, Fisheries and Forestry. James received her Bachelor of Economics and Master of Economics degrees from the University of Adelaide, and her Ph.D. in Agricultural Economics from the University of Western Australia.

Tuesday, February 14, 2012

7.2 Percent Probability US In Recession, Atlanta Fed Finds

From The Atlanta Fed Center for Quantitative Economic Research, Center for Research on Economic and Financial Cycles, "Real Time Analysis of the U.S. Business Cycle" by Marcelle Chauvet, professor of economics at the University of California, Riverside, and research director of the Center for Research on Economic and Financial Cycles:

The most recent probability of recession from the DFMS [Dynamic Factor Markov Switching] model is for November 2011, which uses information up to February 2012. The probability that the U.S. economy is in a recession as of November 2011 is 7.2 percent.

Happy Valentine's Day: Google Doodle

Substantially Less US Wage Inequality On An After-Tax Basis

The combination of the progressive tax rates of the US tax code with state income and sales taxes undoes a significant amount of US wage inequality on an after tax basis. State gasoline taxes make after tax wages more unequal and undo about 25 percent of the wage compression effect of state income and sales taxes.

From Finance and Economics Discussion Series, Divisions of Research & Statistics and Monetary Affairs, Federal Reserve Board, Washington, DC, "Quantifying the Role of Federal and State Taxes in Mitigating Wage Inequality" by Daniel H. Cooper, Byron F. Lutz, and Michael G. Palumbo, January 12, 2012:
Overall, we find that the combined federal and state tax codes substantially mitigate wage inequality....On average, the compression achieved by state taxes is equal to only around 10 percent of the compression achieved by the federal tax code. This average effect, though, obscures economically meaningful differences across the states. In a few states, such as Minnesota, Oregon, and Wisconsin, state tax compression amounts to one-fourth to one-third of the compression brought about by federal taxes. On the other hand, the tax systems in thirteen states—including some large states such as Florida, Texas, and Illinois—actually widen the distribution of income. We find that the state-levied gasoline tax plays a surprisingly large role in the amount of compression across states. On average, it is estimated to offset roughly 25 percent of the income compression achieved by state income and general sales taxes. Our analysis also shows that exemptions for food and clothing from some states’ sales taxes play a quantitatively important role in narrowing the after-tax income distributions of these states.

Our second approach assesses the evolution over time of tax-induced income compression. We find that income compression due to federal and state taxes has risen mildly over the last 25 years. The rapid increase in before-tax labor income inequality documented widely by other researchers has thus been transmitted a bit less than one-for-one into after-tax labor income. Our analysis concludes by decomposing this increase in tax compression into the portion attributable to legislated changes in the tax code and the portion attributable to changes in the pre-tax distribution of earnings. We conclude that the increase in tax compression is more than explained by the latter. Specifically, the substantial increase in pretax wage inequality over this period interacted with progressive tax parameters to increase the amount of income compression caused by the tax system. We find that legislated changes to the tax code worked to offset some of this increase. That is, over time the tax code was adjusted to reduce income compression.

Monday, February 13, 2012

Obama Cannot Stop Spending, Cannot Project A Balanced Budget Within 10 Years: Proposes Buffet Tax, Raising The Top Individual Tax Rate, Taxing Dividends As Income And Oil Industry Tax

From The Wall Street Journal, "Budget Seeks to Boost Tax Revenue" by Siobhan Hughes:
Source: The Wall Street Journal
President Barack Obama on Monday proposed that a decades-old, widely criticized tax category be replaced by the so-called Buffett rule, which targets the wealthiest Americans.

In the election-year budget proposal, the White House also called for higher taxes on the oil and gas industry, fund managers and estates while allowing Bush-era tax cuts for the wealthy to expire. The tax proposals are part of Mr. Obama's broader budget plan, which outlines his re-election-campaign message and indicates the White House strategy for another fiscal clash looming after the November elections.
From The Wall Street Journal, "Obama Takes Aim at GOP Policies in 2013 Budget" by Jared A. Favole And Corey Boles:
With the aim of boosting economic growth, the president proposes $30 billion in new spending to upgrade schools, a new tax credit to lift hiring by small businesses, and a six-year, $476 billion plan to update roads, railways and runways. He also calls on Congress to pass, before the end of February, an extension of the payroll-tax cut and unemployment insurance for the remainder of the calendar year.
He defends the new spending in the face of significant deficits by saying, "Reining in our deficits is not an end in and of itself." He said that while that is the ultimate goal, "we also must invest in the areas that will be critical to giving every American a fair shot at success and creating an economy that is built to last."

Obama's Reelection Chances Rise As Stocks Gain And Economy Improves

From "Obama Futures Rallying in Correlation With S&P 500 Best Start in 21 Years" by Whitney Kisling:
The Standard & Poor’s 500 Index’s biggest rally to start a year since 1991 is coinciding with a 15 percent increase in President Barack Obama’s re-election odds, showing growing investor confidence in the U.S. economy.
Prospects for an improving American economy have added almost $3 trillion to equity prices since October and helped spur a 14-percentage-point swing in the odds of re-election.
Obama is favored on Intrade to win reelection with odds of 1.5 to 1. Obama has a 59.4 percent chance of winning reelection to Romney's 39.2 percent chance.

Sunday, February 12, 2012

Former Classmate Gets Glowing Review From Al Hunt

Tom Vilsack and I were law school classmates. Nice to see he is doing a great job.

From Bloomberg, "Vilsack Makes U.S. Agriculture a High-Growth Area" by Albert R. Hunt:
The farm sector is one of the few bright spots in a rough U.S. economy. [Tom] Vilsack [current U.S. agriculture secretary], the popular former governor of Iowa, who has an appreciation of policy and politics, is one of the success stories of the Obama administration.
Vilsack, 61, has been in office three years, and is emerging as one of the most effective and respected agriculture chiefs.
“He’s doing a very good job,” Republican Senator Charles Grassley says of his fellow Iowan. The veteran lawmaker gives Vilsack high grades for settling civil rights issues concerning black farmers, helping family farmers get more information and compete better, and boosting agricultural exports. “I’ve heard nothing negative about him,” Grassley says.

Friday, February 10, 2012

The Disastrous and Unfair Mortgage Settlement

Adults understand that in life, actions have consequences and that misdeeds should not be rewarded. Children do not.

Furthermore, if an action has a reward then people will do more of it to get the reward.

Somehow, the two basic life principles of consequences and rewards have eluded President Obama, US Attorney General Holder and the various State Attorneys General. This Triumvirate are the unstopped bullies in the school cafeteria who feel no remorse at taking whatever food and snacks they want from the other kids in the lunchroom.

All homeowners suffered an economic loss from the downturn in home prices. Additionally, a recent Atlanta Federal Reserve Bank study (see my post, More Mortgage Borrower Rights Delay But Do Not Decrease Foreclosures) found that mortgage modifications do not decrease the number of defaults and foreclosures. The Obama Holder bullies are just being mean towards the banks in order to take corporate and shareholder money and give it to their friends.

Pity the poor US souls who delayed buying a house until they saved up a larger down payment, bought a house within their means and are neither in default or underwater on their mortgage. Pity the poor US souls who honored their legal mortgage loan responsibilities and made cutbacks in their discretionary spending so they could meet their monthly mortgage payments. Pity the poor US souls who watched their homes' values decline, who honored their commitments and who acted like adults. Pity these poor US souls because their elected President and his appointees ignored their honesty and maturity and instead rewarded their spoiled childlike siblings who disavowed their family chores and played.

The announced US and state mortgage settlement with the banks rewards dereliction and creates a perverse incentive for people to avoid their obligations. Obama and his cohorts are teaching people that misbehavior does not have negative consequences and in fact that ignoring one's commitments deserves a reward.

All homeowners, not just those who were derelict in meeting their mortgage payments, saw their wealth and home values decline from the downturn in home prices. A homeowner with an underwater mortgage is not a protected class of persons, in the legal and constitutional sense, such as race or gender. The US government faces a higher legal standard for treating one class of its citizens differently than when the class is constitutionally legally protected. It would seem that those citizens who would be entitled to reimbursement under the mortgage settlement except that they did not default on their mortgage or they made a larger down payment and are not underwater could sue the US government and claim that they are unfairly and unconstitutionally discriminated against by the US and state governments. Maturity, delaying gratification and honoring one's obligations are not legally justifiable reasons for different treatment by the US government or the states.

The child in the White House needs to learn that actions have consequences.

Tuesday, February 7, 2012

Adding Dessert Helps Dieters Lose And Keep Off Weight: Research Finds

When it comes to diets, cookies and cake are off the menu. Now, in a surprising discovery, researchers from Tel Aviv University have found that dessert, as part of a balanced 600-calorie breakfast that also includes proteins and carbohydrates, can help dieters to lose more weight — and keep it off in the long run.
Attempting to avoid sweets entirely can create a psychological addiction to these same foods in the long-term, explains Prof. Jakubowicz. Adding dessert items to breakfast can control cravings throughout the rest of the day.
Could it be that our societal obsession with weight loss and what people should or should not eat is actually a factor in causing obesity?

US Budget Deficit On Target For $1.1 Trillion Or More

From CBO "Monthly Budget Review February 2012:"
If lawmakers enact no further legislation affecting spending or revenues, the federal government will end fiscal year 2012 with a deficit of nearly $1.1 trillion, CBO estimates, compared with $1.3 trillion in 2011. However, enactment of proposals such as pending legislation to extend the payroll tax cut could have a significant impact on the deficit for 2012.

Monday, February 6, 2012

Obesity May Be Infectious

Obesity and chronic liver disease can be triggered by a family of proteins that alter populations of microbes in the stomach, a discovery that suggests the condition may be infectious, Yale scientists report.

US Corporate Effective Tax Is Too High And Not Competitive Internationally: Video

From The Tax Foundation, "Video: What Do U.S. Corporations Really Pay in Taxes?" by Richard Morrison:

Romer Offers Wrong Diagnosis And Wrong Medicine For US Economy Employment Slump

Christina D Romer, former chairwoman of President Obama’s Council of Economic Advisers, in The New York Times Economic View section, "Do Manufacturers Need Special Treatment?" correctly argues that Obama's and others call for more manufacturing in the US to create more employment is a sentimental and nostalgic call for an earlier day, that will not return, when manufacturing employed many more workers than it does today.

Romer wrote:
JOBS A key argument for encouraging manufacturing is to create jobs and reduce unemployment. Unfortunately, those effects are probably small.

Unemployment today is high, but not because of a decline in manufacturing. That decline has been going on for 30 years — and for most of the 1990s and 2000s, the unemployment rate was less than 6 percent.

Today, we face a profound shortfall of demand. That truly is a terrible market failure, and it warrants government intervention. But we need actions that raise overall demand — like a tax cut for households so they have more take-home pay to spend, more aid to troubled state and local governments, and public investments in infrastructure. These are all things that President Obama has advocated.
AS an economic historian, I appreciate what manufacturing has contributed to the United States. It was the engine of growth that allowed us to win two world wars and provided millions of families with a ticket to the middle class. But public policy needs to go beyond sentiment and history. It should be based on hard evidence of market failures, and reliable data on the proposals’ impact on jobs and income inequality. So far, a persuasive case for a manufacturing policy remains to be made, while that for many other economic policies is well established.
Efficient And Capital Intensive

Manufacturing has become much more efficient and capital intensive than it was 30 years ago. Today, a smaller US manufacturing workforce can produce more than 30 years ago with many fewer workers. Likewise, manufacturing output is a smaller part of the total US economy, though the US manufactures more than it did 30 years ago. Manufacturing has followed the same path as agriculture did a 100 years ago. A 100+ years ago about 80 percent of the US was employed in agriculture. Today, the percent of agricultural employees is in the low single digits, while the US is growing much more than it did a 100 years ago.

Similarly, agriculture and manufacturing are a smaller share of GDP than there were in the past. Services are a much greater share of the US output than there were 30 or a 100 years ago.

There is a natural economic tendency for companies to invest in capital to increase employee productivity and lower the manufacturing costs of goods. Employers have no choice. The employer that can produce more at a lower cost by using more machines and other capital investment will be able to sell more of his goods a a lower price, and make more profit, than the manufacturer who uses a more expensive production method. The higher price manufacturer will be forced out of business by loss of the consumers of its products who switch to the lower cost seller.

The total US economy, inflation adjusted GDP, is above its pre-recession levels, while the number of employees is still millions below the pre-recession level.

Romer's Call For Action

Romer calls for more aid to local governments, more public infrastructure investment and more household tax cuts. In other words, Romer calls for more deficit spending and government stimulus. Unfortunately, none of Romer's prescriptions will cure our employment problem.

Households need to expect future growth in their personal incomes. Growth comes from making productive investments, which will have a positive payback net of taxes. If households expected the US economy to make productive investments, households would expect higher incomes net of taxes. With an anticipation of future higher incomes, households would spend more now, companies would invest more to meet demand and employment growth would accelerate.

Government Investment

Government investment has a much lower return than private investment. Government is significantly much less efficient and productive than the private sector in getting a job done. Plus, government decision-making about investments is often based on political reasons instead of the private sector's economic criteria of the rate of return on the investment.

Infrastructure investment by governments is non-productive and inefficient. The older infrastructure that needs repair or replacement is often in the older communities that are no longer the economic centers that they were when the original infrastructure was built. When the original US highway system, or the original cross country railroad system, was built, it shortened the travel time between two distant points. There was an economic gain in shortening shipping and travel times. Today, much of infrastructure investment is pork barrel spending with insufficient economic return on the investment to justify the expense.

Taxes, Deficits And Take Home Pay

Households understand that lowering their taxes and increasing their take home pay today without lowering government spending will lower their future take home pay. The government debt, and the interest on the debt, created by deficit spending will consume a larger part of a household's total pay in the future. As the US debt increases, the probability of non-payment of future, promised obligations like social security or Medicare increases and bears more heavily on current spending and increases the need for current savings.

Likewise, corporate taxes, which are ultimately consumer and employee taxes, and investment taxes, such as capital gains, hinder private sector investment and lower worker take home pay.

Health Care

Heath Care is a huge expense in the US, but that is not the problem. Much of health care is paid for by employers for their employees and for senior citizens through the Medicare payroll tax. While it is true that lower health care costs and lower Medicare payroll taxes would increase the take home pay to workers, it is irrelevant if the workers would spend that same amount on health care anyway.

The harm that occurs to our economy and that lowers consumer spending is that consumers spend more on health care than they would otherwise. Consumers do not face a market price system in health care. Without a health care market price system, consumers allocate a larger share of resources to health care than they would if they faced market prices.

Similarly, health insurance and Medicare with their fee for services payment schedules instill rigidity and stifle medical delivery system innovation, efficiency gains and cost reductions. For example, doctors do not use emails, webcams, telephones or their nurses to diagnose simple patient ailments, such as conjunctivitis (pinkeye), etc., for which costs could be much less than for an office visit. Medicare and health insurance reimbursement is geared towards visits to the doctor's office and diagnosis by a doctor and this payment structure promotes inefficiencies and inhibits cost reductions.

It is the current government structure of health care, both in Medicare and in the employer tax deduction, that leads to an expected continued inefficiency in the delivery of health care, in an over investment in health care services and in over spending on consumer health care.

The over investment and inefficiencies of that investment in health care also lead to a household expectation of lower income net of taxes and health care expenses.

Solution For Employment Growth

The best solution for accelerated employment growth is to decrease government investments, including infrastructure. Increase private investment through removal of government barriers and government competition to private investment. Instill market pricing in health care at the consumer level so resource allocation will be made more productive.

With less government spending and investment, with more private sector investment and with restored market based price signals in health care, the US economy would see accelerated GDP and employment growth.

Thursday, February 2, 2012

Lack Of US Engineering Graduates Is A Gender Preference Problem

My comment to The Wall Street Journal, "The Excellence Gap: Our public schools are shortchanging their best students." by Sol Stern:
The lack of majors in engineering and physical science is primarily a college gender problem. Women do not choose an engineering major in the same numbers as men and there are many more women than men in college.

High school graduation rates after years of increasing started to decline around 1970, especially among males. Females have a higher high school graduation rate than males, and there are now about 1.4 women enrolled in college for every male. In 1960, the numbers were reversed and there were about 1.6 males for every woman in college. Not only are there more females in college than men, but percentage wise, a greater percentage of women high school graduates go on to college than men high school graduates.

A lower percentage, and a lower number, of women who are in college major in engineering or the physical sciences as compared to men.

On of the reasons that we have fewer engineering graduates is that the college student body is now composed of many more women and these women do not choose engineering as a major or profession.

Tax Policy Needs To Foster Economic Growth And Decrease The Defict

My comment to "Will tax hikes hurt economic growth?" by Mark Thoma on CBS Money Watch:
As often happens in discussions about tax increases, the debates ambiguously interchange tax rate with tax revenue increases. If the issue is reducing the deficit, then along with spending reductions, tax revenue increases must occur. Tax rate changes, up or down, without a tax revenue increase will not produce more government funds. Since avoidance of government program or subsidy cuts are often mentioned side by side with tax rate increases, there are also issues of consumer welfare and how tax policy affects the nation's, or sub-population group's, well-being.

If effective tax rates are increased, taxpayers will undertake mitigating tax effects to reduce their taxes, e.g. buy more municipal bonds, delay sales producing capital gains, work less, delay investment, switch to more tax favorable investment categories, etc.

The economy and individuals will react to tax law changes and the amount of revenue from tax law changes has a degree of uncertainty. Behavior will change. The uncertainty is whether the behavioral change will offset the tax increase completely or only partially. Depending on the tax change and individual economic behavior, total revenue may go up, go up by less than projected, decline or remain the same.

Add to the debate that governments often spend increased tax revenue on programs, benefits and subsidies, which have their own negative and positive economic effects on employment, economic growth and future tax revenues. Additionally, consumer welfare changes are usually not modeled as part of tax law changes.

CBO uses JCT (joint committee on taxation) numbers for the amount of expected tax revenue from a proposed tax law change. Unfortunately, JCT models for tax law changes, while they assume some tax reducing behavioral responses, assume that taxes do not affect the overall growth of the US economy. JCT assumes away any economic growth affects from tax changes. In other words, Congress takes a blind eye that its tax law changes may affect the economy.

If the economy grows, there will be more tax revenue even if there is no change to tax rates, i.e. rates are not increased or lowered.

If tax rates are increased, individual and government behavior will change that will affect the economy. The economy could grow, grow less than if there were no tax changes, or decline. Tax revenue may increase, remain static or decline depending on the amount of economic and behavioral affects and the amount of change in tax rates.

The issue of tax law changes is more important now than it has been in a long time. US economic output is well below its long-term trend. The gap between the potential US economy and the current economy is enormous, as measured by total GDP, GDP per capita, workforce participation rates, and employment levels.

While the US current and projected deficit is a concern, so is the US economic output gap. Policies that can foster faster economic growth, increase employment and workforce participation must be part of any policies that bring the projected US deficit to manageable levels.

Additionally, there is the unstated the assumption that if tax reduction, or tax policy inaction, occurs, general welfare will decline due to program cuts. While program cuts and benefit decreases may occur, it is a gigantic, illogical leap to assume that overall, or in any specific US population subgroup, general welfare will decline. Government legislated program mandates are often paternalistic with restrictions on eligibility and benefit use. They substitute government choices for individual participants' free choice. Program eligibility requirements have implicit high marginal tax rates, at the point where the benefit is lost. Along with benefit use restriction requirements, there is no certainty that a program participant's welfare is better with a government program that without.

Wednesday, February 1, 2012