Author: R.A. | WASHINGTON

WILL WILKINSON is not, I believe, a fan of fiscal stimulus. In a new post he addresses fans of Keynesianism, writing:

Apparently some folks are so enamored of Keynesian ideas about demand-side juju that they are hesitant to admit that the broken window fallacy is a fallacy at all. Well, alright; I’m not the guy to argue you out of your macroeconomic commitments.  But we can agree that it is a fallacy at the micro level, can’t we? That a literal broken window represents a net loss of wealth? That the flood that wiped out downtown Cedar Rapids in 2008 wasn’t good for the economy of Cedar Rapids? It’s a fallacy at the meso-level too, isn’t it? How far do we have to scale up before we get to the possibility of a “good for the economy” disaster? What is an example of one?

Again, I’m not sure who is suggesting that we should go around and break windows in order to replace them. But his argument here seems to suffer from a lack of imagination. A disaster represents an immediate loss of wealth, but it may create opportunities to improve long-term growth by, for instance, overcoming previous path dependencies. Or more narrowly: can we really say, in a world in which the sunk cost fallacy has power, that the broken windows fallacy is a fallacy? Let’s say my old window is a cruddy window, and I would derive net benefits from replacing it, but I am reluctant to because I’ve already paid for the original window and throwing it out would seem like a waste. If some delinquent then throws a rock through my window, I’m made better off.

Honestly, readers, can you not think of a handful of things in your life about which you’d actually be happy if some government agent came in and broke them? An old television? Your first generation iPod? Your deeply underwater five-bedroom home in a foreclosure-ridden neighbourhood?

ALYSSA KATZ has a piece today on the surprisingly low rate of mortgage defaults in the state of Texas, no stranger to booms and busts. Texas’ relatively low rate of unemployment has helped keep defaults low, she writes, but:

[T]here is a broader secret to Texas’s success, and Washington reformers ought to be paying very close attention. If there’s one single thing that Congress can do now to help protect borrowers from the worst lending excesses that fueled the mortgage and financial crises, it’s to follow the Lone Star State’s lead and put the brakes on “cash-out” refinancing and home-equity lending.

Texas has strict rules on home-equity lending, relative to other states, and this has helped to prevent ratios of loan size  to home value from rising as high as they have elsewhere. This is certainly worth thinking about in considering potential changes in the regulatory environment. A word of caution, however—it’s very easy to underplay the importance of both the relative strength of the Texas economy and the advantage of not having a significant housing bubble. Consider:

Here we have a collection of price trajectories through the bubble. The red markets are Miami, Los Angeles, Washington, Las Vegas, and Phoenix. The broken line is the 20-city average. The blue markets are Charlotte, Atlanta, and Denver, and the solid black line is Dallas. Several points. First, the absence of a bubble alone is going to go a long way toward reducing default rates, because it means that you don’t have thousands of borrowers who bought at prices well above current levels. Negative equity, regardless of loan type, is a significant driver of defaults, particularly in the presence of high unemployment rates. Combine Texas’ low unemployment rate with the absence of a bubble and you end up with a low default rate. Texas wasn’t alone in enjoying these characteristics, and its default rate isn’t meaningfully different that in similar states.

The other point to make is that there is less incentive to take a cash-out home equity loan in non-bubble market, because you have a lot less equity on which to draw. In Miami and Los Angeles, home values at the peak of the bubble were nearly three times their 2000 level. Borrowers in those states could, they believed, take out massive home-equity loans and still have significant positive equity. In Texas markets, where home values peaked at perhaps 130% of their 2000 level, the room to take out potentially debilitating home equity loans was much more limited, regulations aside.

An important question, then, is why Texas avoided a housing bubble. Flexible housing supply is one reason. Rapid construction helped to prevent sustained price increases sufficient to spark a bubble mentality. Neither was Texas close enough to bubble markets, like California, to “catch” the bubble.

And surely regulations helped. But one should be careful about assigning them too much credit.

JUSTIN FOX has this nailed:

The basic form of an academic economics paper is a couple of comprehensible paragraphs at the beginning and a couple of comprehensible paragraphs at the end, with a bunch of really-hard-to-follow math or statistical analysis in the middle.

As does Felix Salmon:

What he doesn’t (need to) mention is the way that journalists, myself included, read economics papers: we generally have no ability or inclination to try to understand the details of the formulae and regression analyses, so we confine ourselves to reading the stuff in English, and work on the general assumption that the mathematics is reasonably solid.

But Mr Salmon worries that this glossing of the mathematical meat of papers, combined with the journalists hunger for anything remotely new or titillating, could easily lead to the spread of misinformation:

The blogosphere is full of interesting debates between people who understand and respond to what everybody else is saying. But the minute that economic papers get cited, the degree of understanding plunges, and most bloggers and journalists are cowed by all those equations into simply assuming that it all stands up somehow.

There’s no easy way around this problem, but at the very least it should probably be much more out there in the open than it is. No one likes admitting ignorance, but the blogosphere would be a better place, I think, if we all did so more regularly, especially when it comes to the nuts and bolts of economic analysis.

I think it is obviously correct that a world in which more bloggers (and journalists generally) were capable of penetrating the mathematics and empirics and rendering judgment on papers would be a better one. And I think it’s generally wise to approach new papers cautiously (as journalists should approach any potential information source cautiously). The readable text isn’t useless; it should provide a guide to the reasoning underlying the arguments fleshed out in the maths. If the reasoning doesn’t make sense, be sceptical. If the results are staggeringly counterintuitive, be sceptical (though not dismissive). And if you feel unsure about a paper, look for corroborating results; any stand-alone finding should be treated with a great deal of caution.

All that said, Mr Salmon is typically a proponent of free information, and I think that where academic papers are concerned, more openness is better. Papers are more likely to be trustworthy than other commonly cited sources, and misinformation in papers is more likely to be discovered and eventually corrected. The maths may even serve a filtering function, by making those with a tenuous grasp of the subject matter less likely to directly cite the research (out of fear of saying something stupid). Instead, they may consult acadmemic experts for comments, where they’re more likely to get a reasonable assessment of a paper’s meaning and validity (academic quotes often conclude with something like, “It’s an interesting result, but we’ll have to see how it holds up.”).

So in general, I say: freely available academic papers are a very good thing.

A RELATIVELY poorly understood phenomenon in America is that rich, dense states tend to contribute much more in federal taxes than they get back in federal spending and tend to vote Democratic, while poor, rural states lean heavily Republican and are net recipients of federal largesse. This leads to situations where states that absorb huge amount of government aid (particularly for agriculture) are hotbeds of Tea Party activity, where voters decry the heavy boot of the federal government on their backs.

Via Mark Thoma, Jeffrey Frankel provides an illustrative chart:

It’s tempting to make this a huge gotcha point and slam Tea Partiers for cognitive dissonance, but the holding of conflicting beliefs is one of America’s deepest and most common traditions. Consider the results of a recent survey:

In this economy, voters are wary of raising taxes, even if the revenue raised goes to something they deem important, like paying down the deficit. A majority (51 percent) say that even though the deficit is a big problem, we should not raise taxes to bring it down, while only 43 percent say that we might have to raise taxes to reduce the deficit. This rejection is even more acute among the least educated and lowest income voters, who are being disproportionately hurt by the recession and as such are even more strident in their rejection of a new tax to pay down the deficit.

And by an even wider 2:1 margin, voters reject cuts in Social Security, Medicare or defense spending to bring the deficit down (61 to 30 percent). With nearly three-quarters of the federal budget devoted to these items, exempting them from cuts leaves little room to make realistic progress on deficit reduction…

Nearly half of voters think the deficit can be reduced without real cost to entitlements, with 48 percent believing there is enough waste and inefficiency in government spending for the deficit to be reduced through spending cuts while keeping health care, Social Security, unemployment benefits and other services from being hurt.

Voters think that addressing the deficit is important, but they vehemently oppose cuts to programmes constituting the overwhelming majority of the federal budget, and they aren’t too anxious to raise taxes either. This kind of thing obviously complicates the politics of deficit reduction. Or, you know, the politics.

YESTERDAY, Barack Obama announced a proposal to open parts of the Atlantic and Gulf coasts, and the north coast of Alaska, to offshore oil drilling. Environmental journalist David Roberts laid out a typical political criticism of the policy:

The most important thing to understand about President Obama’s announcement on offshore drilling is that it’s mostly for show. Its intended effects are political — corralling more Senate votes for a climate bill and defusing anticipated voter anger over gas price spikes. Even on those grounds, however, it’s unlikely to succeed.

Mr Roberts goes on to point out that the oil from these areas won’t amount to much in the scheme of things; certainly, it will be too little to have much of an effect on American oil imports or on global oil prices (or domestic petrol prices). Accordingly, it won’t much blunt criticisms of the administration this summer, should petrol prices rise as anticipated. And as Mr Roberts says, a bargaining chip isn’t much of a bargaining chip if it’s played pre-emptively.

These criticisms only make sense if you assume that the president and his staff aren’t very smart. It would make sense to hold this chip in reserve if you could expect to get something meaningful for it, but as Mr Roberts himself argues elsewhere, the Republicans have found an effective strategy in blanket opposition to everything. If you can’t expect to get anything for it, then it’s not much of a bargaining chip. Mr Roberts is correct that this won’t stop Republicans from complaining that he should do more on drilling, but it’s much more difficult to rile up audiences by saying the president has opened an insufficient amount of territory to drilling than by saying he refuses to allow any new drilling.

It seems to me that Mr Obama concluded that there probably wasn’t much political gain to be had from holding out on this, and that taking the decision probably makes sense on its own terms. Just as the drilling won’t produce enough oil to shift oil costs, it also won’t lower costs enough to shift oil demand noticeably, in a fashion counterproductive to greening of the economy. The American government can expect to raise revenue from this measure by selling leases to the opened areas. And oil continues to be a valuable commodity. If the decision makes sense on its own terms and has limited political impact, why not do it?

I MENTIONED yesterday that I had the chance to hear Paul Volcker speak on financial reform. Mr Volcker has had a distinguished career in public service, but he is perhaps best known for his time as Fed chairman, during which he famously quashed inflation, in the process sending America into what was previously the worst recession of the postwar period. The Fed began raising interest rates in 1977, and the American economy tipped into recession in 1980, at which point the central bank took its foot off the brakes. But inflation rates continued to rise, and so shortly after the economy recovered (briefly) in July of 1980, Mr Volcker orchestrated a series of interest rate increases that took the federal funds target from around 10% to near 20%.

What followed was an extraordinarily painful recession. Unemployment rose to near 11%. Manufacturing states were battered by the downturn; the near 17% unemployment rate in Michigan was worse than the state sustained in this latest recession. Mortgage lenders were devastated by high interest rates. The banking system was pushed to the point of insolvency. Things were quite bad. And while growth snapped back to trend rather quickly after the Fed took its foot offf the brake for good, there was considerable suffering through the recession, and the effects of unemployment, on health and earnings of sacked workers, persisted for years.

And yet, Mr Volcker is widely hailed as a hero for his total victory over inflation. This is understandable; inflation can be an extremely unpleasant phenomenon. It distorts consumption and investment decisions, and erodes faith in markets and government. But I found myself wondering yesterday whether the Volcker Recession was, after all, worth the pain. Was it a good decision to send the American economy into a debilitating recession for three years in order to whip inflation?

As with any counterfactual, an answer is difficult to come by. I think that if you can conclude that inflation was in an irreversible upward spiral, it seems clear that the recession was worth it. Had Mr Volcker not done what he did, some other action would have been necessary later on, and at greater cost. But was inflation really out of control?

One point worth noting is that inflation in the 1970s was largely driven by increases in energy costs, and especially by increases in the price of oil. The first oil shock, in 1973, sent consumer price inflation from around 4% to near 9%, but headline inflation thereafter fell back to 5%. Crisis hit again in 1979, and from 1978 to 1980 annual consumer price increases rose from just over 6% to near 15%.

Oil prices fell, along with inflation, during the deep American recession, but it was felt that with economic recovery, both resource prices and inflation would return. In September of 1982, two young members of Martin Feldstein’s Council of Economic Advisors, Paul Krugman and Larry Summers, wrote:

Consumer price increases in the last year and a half have been below the underlying rate because of real appreciation and declining real commodity prices. Even if these relative prices level off, the inflation rate will rise, because of the removal of the bonus.

But that’s not what happened. The energy crises of the 1970s sparked a broad interest in energy efficiency and a wave of petroleum exploration. From 1970 to 1980, global crude oil production rose by nearly 30%. Total consumption of petroleum in America didn’t return to 1978 levels until 1998. And real crude prices fell from their 1980 high to sustained low levels that persisted until about 2004. Based on fundamentals, the inflationary impact of oil crises would likely have diminished significantly into the 1980s, with or without a Volcker Recession.

Another factor supporting spiraling inflation increases was the wage-price feedback loop. As prices rose, labour organisations demanded ever high wage increases, which fed back to consumer prices, which spurred additional wage increases. This was a key factor contributing to broader consumer price inflation in America in the 1970s. But would this loop have been sustained, in the absence of recession?

Perhaps not. The share of union members in the American workforce had been in slow decline from the immediate postwar period through the early 1970s, but during the 1970s the erosion of labour power picked up speed. Between the early 1970s and the early 1980s, the share of the workforce in unions fell from around 30% to 20%. In the private sector, unionised industries were subject to increasing competition from rapidly developing, export-oriented Asian economies, notably Japan. It seems likely that eroding worker bargaining power would have made it ever more difficult for labour to demand significant wage increases on a regular basis. Declining unions would have helped to stop inflation.

Would those factors have been sufficient to take the air out of growing inflationary pressures? Perhaps not. Consumer expectations, once set, are difficult to adjust. A central bank-induced recession of some kind was probably both inevitable and beneficial. But I don’t know that the case is so clear cut as it is made out to be. Serious recessions are no small thing, and it would be good to revisit these questions every once in a while to make sure we know what we think we know.

THE ECONOMIST had tea with Justin Fox, author of “The Myth of the Rational Market”:

The book, by the way, provides a nice little, accessible intellectual history, a bit of which you get in the interview.

THE Bank of England’s Andy Haldane has a paper out in which he attempts to estimate the cost of the financial crisis. As I noted earlier this week, the American government appears to be up $7 billion on its investment in Citi, and the cost of the TARP bail-outs as a whole is likely be around $100 billion. That’s not chump change, but it’s quite manageable for an economy the size of America’s. Britain’s bail-outs, like America’s, will probably total around 1% of GDP—again manageable. But the narrow fiscal cost of saving financial institutions doesn’t really capture the full damage done by the crisis. Mr Haldane writes:

[T]hese direct fiscal costs are almost certainly an underestimate of the damage to the wider economy which has resulted from the crisis – the true social costs of crisis. World output in 2009 is expected to have been around 6.5% lower than its counterfactual path in the absence of crisis. In the UK, the equivalent output loss is around 10%. In money terms, that translates into output losses of $4 trillion and £140 billion respectively.

Moreover, some of these GDP losses are expected to persist. Evidence from past crises suggests that crisis-induced output losses are permanent, or at least persistent, in their impact on the level of output if not its growth rate.3 If GDP losses are permanent, the present value cost of crisis will exceed significantly today’s cost.

By way of illustration, Table 1 looks at the present value of output losses for the world and the UK assuming different fractions of the 2009 loss are permanent – 100%, 50% and 25%. It also assumes, somewhat arbitrarily, that future GDP is discounted at a rate of 5% per year and that trend GDP growth is 3%. Present value losses are shown as a fraction of output in 2009. As Table 1 shows, these losses are multiples of the static costs, lying anywhere between one and five times annual GDP. Put in money terms, that is an output loss equivalent to between $60 trillion and $200 trillion for the world economy and between £1.8 trillion and £7.4 trillion for the UK. As Nobel-prize winning physicist Richard Feynman observed, to call these numbers “astronomical” would be to do astronomy a disservice: there are only hundreds of billions of stars in the galaxy. “Economical” might be a better description.

Mr Haldane’s broader point is that a financial system that can impose these kinds of costs on the economy—equivalent, in a way, to negative pollution externalities—should face serious regulation. These numbers are certainly open to investigation, and one should be hesitant to place the entire cost of lost output at the feet of the financial system. But even a relatively small share of $200 trillion is quite a lot of money.

BACK in February, I linked to this interesting economics result:

[A] January paper by economists Daron Acemoglu of Massachusetts Institute of Technology and Pierre Yared of Columbia University, published by the National Bureau of Economic Research, is a reminder that peace is the soil that nourishes trade. The two economists compared the growth of trade between 1988 and 2007 and the growth of militarism over roughly the same time frame and found that countries that experience an above-average increase in military spending are likely to experience a below-average increase in trade.

“Militarism is negatively associated with trade,” the two authors argue.

No kidding:

The econometric analysis presented in this paper…provides empirical support to back up the many complaints made that there has been a “thickening of the border” after 9/11. It estimates that Canadian exports of goods, excluding energy and forestry products, to the United States have been 12.5 per cent lower than would have been expected based on estimated relationships. It should be noted that this is substantial negative impact on exports even in comparison with the likely positive impact of the FTA/NAFTA, which, even though it reduced non-tariff barriers, only eliminated tariffs averaging around one per cent. The analysis also confirmed that there was an 8-per-cent negative impact on the exports of services to the United States and an almost 13 per cent on the imports of travel services. It is ironic to consider such large  estimates of the negative impact on Canadian exports of the post-9/11 border tightening at the same time as opposition to NAFTA is being expressed in the United States. Indeed, it could be argued, based on the analysis presented in this paper, that the any positive impact of the FTA/NAFTA on imports from Canada have already been substantially eroded.

That’s quite the costly policy.

MARKETS don’t like this:

Nonfarm private employment decreased 23,000 from February to March on a seasonally adjusted basis, according to the ADP National Employment Report. The estimated change of employment from January 2010 to February 2010 was revised down slightly, from a decline of 20,000 to a decline of 24,000.

The March employment decline was the smallest since employment began falling in February of 2008. Yet, the lack of improvement in employment from February to March is consistent with the pause in the decline of initial unemployment claims that occurred during the winter.

Markets had been expecting an increase in payrolls, as measured by ADP of 40,000 or so. This may raise fears that official March employment figures, to be reported by the Bureau of Labour Statistics on Friday, may disappoint. But don’t expect outright contraction:

Since employment as measured by the ADP Report was not restrained in February by the effects of inclement weather, today’s figure does not incorporate a weather-related rebound that could be present in this month’s BLS data. In addition, today’s figure does not include any federal hiring in March for the 2010 Census. For both these reasons, it is reasonable to expect that Friday’s employment figure from the BLS will be stronger than today’s estimate in the ADP National Employment Report.

Oddly enough, ADP reports that healthy service sector hiring was offset by losses in manufacturing and construction. That is somewhat at odds with other sources, including the Institution for Supply Management, which has been reporting better employment conditions in manufacturing than non-manufacturing sectors. But one thing seems clear: as yet, there is no sign of sustained job growth in the American economy.

THERE is no end of debate over what should and shouldn’t be considered relevant in considering monthly price index moves. Setting that aside, many of the price indicators favoured by policymakers show a clear pattern to recent inflation moves:

That’s from the Dallas Fed, via Mark Thoma. Earlier today, I listened to Paul Volcker discuss financial regulatory reform, and after his remarks he was asked about Olivier Blanchard’s floating of the idea of the utility of a move to 4% inflation targets. Mr Volcker reiterated a comment he’d previously made about the suggestion (that it’s “nonsense”), before declaring:

It doesn’t make me at all nervous that we have 0% price inflation at the moment.

It was a strange statement, reflecting a view that any inflation at any time is bad, as if there were never any potential downside to falling prices. It was not a rigorous answer—”I can see x upsides and y downsides and on balance a higher inflation target is a bad idea”—but a moralistic one. That’s an unhealthy attitude for a policymaker to have, but it seems to be surprisingly common among central bankers.

Mr Volcker’s comments on financial regulation were generally sound, but there is a view among many that Barack Obama made a big mistake not granting Mr Volcker more authority, which I think is very much mistaken.

DURING the depths of recession, California looked ready to slide off into the Pacific Ocean. Home to some of the default-ridden housing markets, devastated by the collapse of industry and trade, cursed with a dysfunctional legislature, the Great Recession looked like the end of the Golden State’s long run of state-level success. But things may be turning around. Consider, first, the Philly Fed’s map of coincident indicators:

Here‘s how these are computed:

The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). The trend for each state’s index is set to the trend of its gross domestic product (GDP), so long-term growth in the state’s index matches long-term growth in its GDP.

And things are clearly looking better out west. Meanwhile, Standard and Poors published the latest Case-Shiller home price data this morning, for the month of January.

The broader indexes rose in January on a seasonally-adjusted basis, despite declines in eight markets and near declines in five others. Doing much of the heavy lifting: California markets. Prices rose 0.6% in San Francisco, 0.9% in San Diego, and 1.8% in Los Angeles. As you can see, all three of those markets enjoyed strong gains the previous month, as well.

And perhaps the best news of all for Californians is this: tax revenues since December have been 3.9% greater than had initially been forecast. Revenues are expected to rise in Fiscal Year 2010 and Fiscal Year 2011. The hard times aren’t entirely over, but the worst appears to have passed.

Astute observers may also note that the strongest performance in the Philly Fed’s map belongs to Michigan. And that Detroit has enjoyed two consecutive monthly gains in the Case-Shiller index (albeit small ones). And that Michigan’s revenues are forecast to rise 6% from 2010 to 2011. Perhaps there is hope for everyone on the other side of this downturn.

ED GLAESER makes an intriguing argument this morning at Economix: cities with educated workforces have enjoyed lower levels of unemployment through this recession. That sounds incredibly mundane, but it’s not. The relationship between human capital levels and unemployment is stronger than you’d expect from just adjusting local populations for education levels. In other words, we know that unemployment is lower for individual workers with college degrees, and so we’d assume that cities with more college graduates would, on average, have lower unemployment rates. And they do. But too much lower to simply be a result of the effects of population composition.

Mr Glaeser credits the same positive spillovers from high metropolitan levels of human capital that make smarter cities so productive (and highly remunerative) in the first place:

A stronger explanation for the social multiplier that exists between education and unemployment is the power of “Human Capital Spillovers,” which is econ-speak for the benefits of having well-educated neighbors.

In 1993, James Rauch wrote a seminal paper showing that holding individual education constant, wages rise with the skills of metropolitan areas. Enrico Moretti has taken over this topic and written sophisticated papers that look both across metropolitan areas and within firms, showing that supermarket workers get more productive when better workers are in their shift.

Human capital spillovers can explain the overly strong metropolitan area relationship between skills and unemployment. If skilled co-workers make your company more productive, then your company will have fewer layoffs. If skilled entrepreneurs find opportunity in stormy times, then their hiring may keep unemployment rates down.

The productivity relationship could certainly be one aspect of this, but I’d like to see more investigation into the question. It certainly seems, for instance, that the sectoral mix in a metropolitan area with strong human capital spillovers should be different than in other metro areas (some firms don’t need or benefit from spillovers and would then be reluctant to pay the higher rents in spillover cities). The recession has had an asymmetric impact on industries, which could explain the employment difference. High human capital cities might also be home to wealthier households, which are better able to smooth consumption during recessions.

But it’s a fascinating point, and I certainly agree with Mr Glaeser when he says, “The fact that education has mattered so much during this recession only reminds us that America’s future depends on its human capital.”

FILE this under things I hadn’t realised: trading in shares of Citi accounted for a quarter of all volume on the New York Stock Exchange on Monday:

Over the last few months, breaking developments and shifting expectations about the government’s handling of its Citigroup shares have made the bank the only show in town during slow market days.

So far on Monday, almost 700 million shares in Citi have changed hands. At one point in the day, that volume was more than 27% of New York Stock Exchange composite volume. It has since slipped a smidgen below 25%.

If the early pace were to hold, that would represent Citi’s biggest share of overall volume since Dec. 17, when 3.8 billion of its shares changed hands, representing an astonishing 47% of composite volume.

Felix Salmon explains:

This is not good for the market, and it’s long past time, I think, for that reverse stock split at Citigroup. It’s beyond silly for any company to have 28.5 billion shares outstanding; a one-for-10 split would overnight bring Citi volume down to sensible levels, bring the price into line with other Dow components, and prevent some of the crazy speculation going on in Citi stock, where a swing of a few cents per share can mean massive P&L for the day-traders.

Meanwhile, Treasury is up $7 billion on its TARP investments in Citi. Next on the to do list: rein in moral hazard and address that too-big-to-fail thing.

WILLIAM SALETAN discusses the market for human eggs; it turns out people are willing to pay for potential smartness:

[T]he big story is SAT scores. “Holding all else equal, an increase of one hundred SAT points in the score of a typical incoming student increased the compensation offered to oocyte donors at that college or university by $2,350,” Levine reports. When the ad was placed for a specific couple, the premium was higher: $3,130 per 100 SAT points. And when an egg donor agency placed the ad on behalf of the couple, the bonus per 100 points rose to $5,780.

Matt Yglesias discusses the implications:

Saletan, meanwhile, comments that “science and narcissism are limiting eugenic stratification” but I think he’s overestimating what narcissism is doing. Saletan notes that “[m]ost couples want their own offspring, not donor eggs or sperm” which is true. But given the way society functions, I bet most children with high-SAT mothers also have high-SAT fathers. If it were the case that SAT scores were purely a product of heritable genetic characteristics, we’d already be just as eugenically stratified as egg donations could make us. But the incorporation of crass things like money and precise SAT scores, doesn’t change the fact that in non-donor contexts you typically have people who went to fancy colleges marrying each other and thus, in practice, selecting for high SAT score.

Emphasis mine. Now, it’s certainly the case that well educated people tend to marry each other these days, but that hasn’t been the case for all that long—a few generations at most. Women haven’t actually been attending university for all that long, and the rise of a large class of professional women is quite a recent development. Men may have been selecting for intelligence to some extent before it became common for women to be primary breadwinners, but they were likely as focused or more focused on other characteristics. I don’t think there has been nearly enough time, in other words, for selection pressures to have done much in the way of genetic stratification, though there has been plenty of time for class effects to impact generational mobility. I still boggle over the statistic that a child from the highest income quintile without a college degree is more likely to end up in the top income quintile than a child from the bottom income quintile with a college degree.

There’s also the possbility that an increasingly bimodal intelligence distribution is unlikely thanks to the phenomenon of regression toward the mean—smart parents will tend to have children not quite as smart as them (they pass on intelligence incompletely) while parents of lower intelligence will tend to have smarter children.

THIS is three minutes well spent:

Interesting to think of China’s unbalanced development as an instrument shifting demand away from developed nations and toward poor countries, particularly those exporting basic commodities.

AMERICA’S looming deficit challenge has put the idea of a value-added tax, a VAT, on the radar in Washington. Both of America’s neighbours have VAT (or VAT-like) taxes, and in Europe VATs at rates around 20% help fund social safety nets. The Economist concluded back in November that a 5% VAT could close about half of America’s 2014 budget deficit, which is a decent performance (see this for a discussion of pros and cons).

Experts generally praise the VAT because it’s relatively efficient and difficult to evade, but also because it’s simple—nothing like the maze of deductions, credits, rules, and regulations that characterise America’s byzantine income tax system. But is this really the case? Pete Davis writes:

Tax reformers lambast the complexity of our income tax with good reason, but somehow assume that the same people who legislated that complexity will legislate a clean VAT. Again, the U.K. experience is very instructive. Their VAT is notoriously complicated, and so would be ours.

Mr Davis points out that a VAT would affect taxpayers and groups in an uneven fashion—lower-income households, older manufacturing firms, and state governments would suffer more than others. These asymmetric effects would create pressure to carve out exemptions or credits, not unreasonably, but once the horse has left the barn, well, you can imagine how this will go. Particularly in a dysfunctional legislative system in which any senator can place a hold on a bill and prevent it from moving forward unless some constituency-oriented demand is met.

The discussion is very similar to that for climate policy. Here is Robert Stavins musing on the (possibly exaggerated) death of cap-and-trade:

[T]he most important factor — by far — which led to the change from politically correct to politically anathema was the simple fact that cap-and-trade was the approach that was receiving the most serious consideration, indeed the approach that had been passed by one of the houses of Congress.  This brought not only great scrutiny of the approach, but — more important — it meant that all of the hostility to action on climate change, mainly but not exclusively from Republicans and coal-state Democrats, was targeted at the policy du jour — cap-and-trade.

The same fate would have befallen any front-running climate policy.

Does anyone really believe that if a carbon tax had been the major policy being considered in the House and Senate that it would have received a more favorable rating from climate-action skeptics on the right?  If there’s any doubt about that, take note that Republicans in the Congress were unified and successful in demonizing cap-and-trade as “cap-and-tax.”

Cap-and-trade became unpopular because it was being targeted by interests opposed to its enaction, and it became a target because its passage seemed feasible. But it was also an easier target because of the many complicating side-deals and special arrangements made to the regime, which were precisely the things allowing its passage to become feasible. A growing chorus of cap-and-trade critics railed against the allowances granted to industry groups and argued in favour of a “simple” carbon tax. But of course any carbon tax would face opposition from affected interest groups until their demands were met, in the form of side-deals and special arrangements. A passable carbon tax would be an extremely complicated carbon tax.

And similar arguments have been made about alternate health care reform proposals, like Wyden-Bennett. But of course, you don’t get actual reform that is clean and simple. To pass it, you have to buy off the industry groups and labour unions and so on.

What does all of this suggest? Well, one point to take away is that it may often be a good idea to delegate reform responsibilities above or below the level of the sovereign state, in order to circumvent the authority of vested interests. But another point is this: contra Greg Mankiw, the wonk who advocates for a policy based on an idealised and theoretical assessment of its merits relative to alternatives may be doing the world a disservice. Instead, more time should be spent thinking about how politics is likely to warp a policy and building a relatively resilient package of reforms.

For instance, as Mr Stavins has pointed out before, a properly designed cap-and-trade system will limit carbon emissions efficiently regardless of how carbon allowances are allocated. A carbon tax will not. Mr Mankiw derides cap-and-trade as a carbon tax plus corporate welfare, but he seems to miss that its properties make cap-and-trade more passable, and more effective despite the inevitable Congressional tinkering and weakening.

It’s worth thinking about this in light of the ongoing debate on financial reform. Economists have debated, at length, which policies are most likely to reduce the problem of too-big-to-fail and which will do most to boost the resiliency of the system. But they should ask two things of every policy they consider: how will industry lobbying influence the structure of the bill, and how will industry lobbying influence the enforcement of the law. You can see these questions getting an increased level of attention among pundits, but it would be helpful to develop a more rigorous approach to them—to model and test the resiliency of policy solutions. After all, it’s not like the political process is going to be going away any time soon.

A FEW weeks back, The Economist took a look at how the last decade compared with previous periods in American economic history:

If you look at the middle chart there, you see that for most of the previous century, income grew roughly as much (or occasionally more than) consumption. But during the most recent decade, consumption grew significantly more than income. This was the product of stagnant income growth and easy borrowing, and it corresponds to the great period of increase in household indebtedness.

But that’s all over now, right?

Well, perhaps not. Real personal consumption expenditures grew in February, by 0.3%, following on an increase of 0.2% in January. That’s the fifth consecutive monthly increase, which seems like good news; certainly markets are taking it as a positive this morning. The problem is that incomes barely rose in February—by less than 0.1%. And they declined in January. And what happens to savings when spending is rising and incomes are flat?

The personal savings rate was back down to 3.1% in February. It will rise in the future—it basically has to. But sustained higher saving will be difficult to achieve absent income growth, just as increases in consumption are unsustainable absent income growth. And there is little sign that growth in incomes is looking any more robust than it was over the past decade.

THE trendline characterising the evolution of my views on this issue contains a recent discontinuity:

Parents aren’t just raising adorable kids. They are also producing little human capital units that are likely to grow up, get jobs, pay taxes and raise little human capital units of their own…many economists…argue that nonparents derive some important benefits from the time, money and effort that parents expend.

A new paper scheduled for presentation at the upcoming meetings of the Population Association of America offers a striking empirical illustration of this argument.

Over all, parents pay less in net taxes than nonparents do — until the future net tax contributions of their children are taken into account.  These more than offset the difference, leading the authors to conclude that the average parent contributes far more than the average nonparent to net taxes — a difference of more than $200,000 in 2009 dollars (discounting future contributions at an annual rate of 3 percent).

Of course, children are also net carbon producers, but that impact could be minimised with the adoption of a carbon price. It’s worth thinking about the fact that tomorrow’s debt burden will be easier to handled if there are more people around to pay taxes (and easier still if those taxpayers are healthy and well educated, improving life-term earnings).

AFTER the financial crisis and recession comes the debt crisis, or at least that’s the historical pattern. Most of the world’s governments have seen their public debt levels rise through the last few years as revenues have shrunk amid recession and countercyclical fiscal stimuli have been put in place. In a few corners of the world, debt pressure has pushed up interest rates and generated concern about imminent crisis. Europe is currently struggling to avert a debt crisis in Greece, and many are wondering where the trouble will bubble up next.

They’re keeping their eyes on America, where debt levels have increased fairly significantly through the recession, but where interest rates on long-term debt have remained very low. This combination can’t last forever, it’s assumed, despite the underlying strength of the American economy and the dollar’s status as global reserve currency. Sooner or later markets will demand more for holding American debt, at which point things could get very interesting and the American government could have to make some tough decisions—hard choices that would ideally wait until the American economy was running at full strength.

On Friday, the Wall Street Journal looked at the lacklustre results of a few Treasury offerings and the resulting uptick in the rate on longer term Treasuries and declared that the moment of concern was nigh. Meanwhile, Paul Krugman posted this chart:

And he pointed out that the little upward jog at the end hardly seems worth mentioning. So who is right?

More information is needed. Happily the blogosphere is able to provide. Steve Waldman collects a nice series of charts here to make several points. First, he says, if you take an even longer view, over the last 30 years, the latest upswing in rates seems even less significant. But:

[T]here is another way to think about those rates. The US government’s cost of long-term borrowing can be decomposed into a short-term rate plus a term premium which investors demand to cover the interest-rate and inflation risks of holding long-term bonds. The short-term rate is substantially a function of monetary policy: the Federal Reserve sets an overnight rate that very short-term Treasury rates must generally follow. Since the Federal Reserve has reduced its policy rate to historic lows, the short-term anchor of Treasury borrowing costs has mechanically fallen. But this drop is a function of monetary policy only. It tells us nothing about the market’s concern or lack thereof with the risks of holding Treasuries…

Since the financial crisis began, the market determined part of the Treasury’s cost of borrowing has steadily risen, except for a brief, sharp flight to safety around the fall of 2008. Investors have been demanding greater compensation for bearing interest rate and inflation risk, but that has been masked by the monetary-policy induced drop in short-term rates.

Taking a longer view, we can see that the current term premium is at, but has not exceeded, a historical extreme…

In other words, the fact that rates are low does not necessarily indicate that all is well. James Hamilton provides additional context. He points out that the similarity of the movement between inflation-protected Treasuries and Treasuries broadly indicates that markets are not concerned about inflation. And a doomsday scenario is inconsistent with the strength of equity markets. This leads Mr Hamilton to scratch his chin:

When bond yields and stock prices rise together, I would usually read that as a signal of rising investor optimism about future real economic activity. The February numbers for home sales and other indicators that we’ve been receiving most recently don’t exactly support that thesis. Let’s hope that investors are correctly anticipating that better news lies ahead.

I would say that neither labour markets or housing markets are inspiring confidence right now. On the other hand, there are data points out there pointing toward recovery, among them retail sales figures and corporate earnings. The rise in interest rates could easily be just a sign that investor sentiment is returning to normal, and the safety premium built into Treasury rates during the crisis is eroding.

The data bears watching closely. But that’s about the most one can say for now. For the moment, the risk of too-rapid fiscal retrenchment seems to be greater than the risk of debt-driven increases in interest rates.