Reading for the Day

How Obama Reconciles Dueling Views on Economy

Quote of the Day

“How the discipline of economics fares in revealing previously unrecognized social relations depends on the competition of disciplines in terms of both subject matter and techniques, as Coase has noted. I expect economics to fare well in this competition, but in the end to reveal, describe, and explain no more than an island in man’s behavior.”

-G. Warren Nutter 1979, p. 268.

cited in How to Buy, Sell, Make, Manage, Invent, Produce, Transact, Consume, Marry with Words by Deirdre McCloskey

Obama on Social Security Reform

via Andrew G. Biggs blog

Hillary on Economists

This morning, George Stephanopoulos began his televised interview with Senator Hillary Clinton by asking if she could name a single economist who supports her plan for a gas tax suspension.

She did not. “I’m not going to put in my lot with economists,” she said on ABC’s “This Week” program. A few moments later, she added, “Elite opinion is always on the side of doing things that really disadvantages the vast majority of Americans.”

Throughout the exchange, Mrs. Clinton argued that she trusted her own eyes and ears instead. “This gas tax issue to me is very real because I have been meeting people across Indiana and North Carolina who drive for a living, who commute long distances, who would save money,” she said.

Senator Barack Obama has derided the gas-tax suspension as a gimmick that would save consumers little and cost thousands of jobs, and Kara Glennon, a member of the audience at a town-hall meeting, seemed to agree. Gas prices are “not academic” for her, she told Mrs. Clinton, because she makes less than $25,000 a year—and then she accused Mrs. Clinton of pandering. “Call me crazy, but I listen to economists because I think I know what they studied,” she said.

-There Goes the Economists’ Vote

How not to give economic policy advice to governments

Per Kurowski, a former World Bank executive director writes in a comment on Rodrik's blog;

What should a World Bank economist know about governance and growth?

Easy answer!

The importance of being very clear about: the governance by whom, and the growth for whom.

The biggest confusions that I have seen in this respect is when World Bank economists have teamed up on the government side, which is anyhow quite logical given that they are their direct bosses, but ending up working against the interests of the people.

Example:
“Dear government privatize this electrical distribution company and offer some future high rate adjustments (defended on the based of this questionable model) and that way you can obtain a very good price for it; and thereby get your hands on plenty of resources to spend on your favorite projects… and not having to worry about repaying loans or such nonsense… as the electrical consumers will take care of that for you by paying the higher than needed tariffs. Of course, please make sure though that the tariff increases occur somewhat down the line, since we do not want to be so transparent that the consumer, following the dots, makes the connection.”

Obamanomics- 'Pain trickled down'

If we can extend a hand to banks on Wall Street when they get into trouble, we can extend a hand to Americans who are struggling, often through no fault of their own.

Obama’s Speech on the Economy

Obama Pushes Tougher Oversight

Who's behind the Speech;

Two of Mr. Obama’s chief advisers for his speech served under President Clinton: Joseph E. Stiglitz was chairman of the president’s Council of Economic Advisers, and Robert B. Reich was secretary of labor.

Text of the Speech



The Dark Art;

Almost all that any politician says on any topic other than political strategy should be treated with even less respect than would be accorded a professional circus-clown's speculations about string theory.

The Thomas C. Schelling Symposium

The Thomas C. Schelling Symposium

Featuring amongst others Kenneth Arrow, George Akerlof and Daniel McFadden

Link of the Day

Telos

Tax Policy in Down Under

THE Rudd Government should scrap dividend imputation credits and instead reduce the company tax rate by about a third if it wants to increase investment in Australia, according to a tax expert and former Labor government adviser.

Nicholas Gruen, chief executive of Lateral Economics and Peach Home Loans, said dividend imputations — which allow companies to pass on to shareholders the benefit of Australian tax paid on profits — cost $20 billion a year but did not substantially improve a company's cost of capital.

Speaking at the Committee for Economic Development of Australia's tax forum in Canberra yesterday, Dr Gruen said imputation credits were an inefficient form of tax expenditure.

"The evidence suggests that it doesn't increase share prices," he said. "If you got rid of dividend imputations and spent the $20 billion on reducing company tax rates, you would make the shares much more attractive to foreign shareholders … The price would go up a lot and the cost of capital would go down."

Dr Gruen, who worked as an economic adviser to John Button as industry minister and John Dawkins when he was treasurer, said the $20 billion in tax revenue gained could then be used to lower the company tax rate from 30% to about 19%.

The Corporate Tax Association's executive director, Frank Drenth, and PriceWaterhouseCoopers partner Tim Cox expressed reservations about scrapping the system, saying dividend imputations helped the Tax Office monitor whether companies paid tax.

The forum also included a panel discussion on how to increase workforce participation. Australian National University research fellow and economist Andrew Leigh said Government should consider earned-income tax credits, which are used in the US and Europe. The credits are paid to low-income earners to provide incentives to work.

Ann Harding, director of the National Centre for Social and Economic Modelling, cited research released last year estimating that 910,000, or 7.1%, of working-age Australians faced an effective marginal tax rate of more than 50%. She said it was difficult to eliminate the problem, where people who earned more money faced the loss of government assistance.

Skills required to be an economist in International Development Agencies

Interesting article by A.W. Coats, The Role of Economists in Government and International Agencies: A Fresh Look at the Field;

Limitations of space obviously preclude a comprehensive account of economists’ work in international agencies and I shall therefore concentrate on some of the revealing and perceptive observations in the extended Report of Discussion at a Washington conference on this subject in 1983 (Coats 1986). For example in an initial statement by George Baldwin, a senior and highly experienced World Bank official, he commented (among other things) on the differences between international agency work and academia. In the latter sphere, he said,

there is a premium on independent originality . . . One tries to ‘make a name for oneself’ to a degree totally alien to a bureaucratic environment . . . where there is a premium on being a good team member . . . one who works effectively with non-economists, one who does not awe others with brilliance but who is nevertheless persuasive and flexible in reaching policy positions or project judgements. . . . The publish or perish imperative of academic life is very real and a maker or breaker of academic careers. It counts for very little in the World Bank. . . . In academic life there are opposing pulls in the direction of research and teaching. Each tends to be the opportunity costs of the other . . . [whereas] in the Bank, another pull replaces it . . . the need to decide whether to go for promotion into a managerial job or to remain ‘an economist’. This is not a daily pressure on Bank economists as the research/teaching is for academic economists; but it confronts many of the good economists at some point in their bank careers. (ibid., pp. 116- 7; sentence order modified).

Another important desideratum for a Bank economist that does not apply in academia

is the premium on achieving ‘closure’, i.e. on making up one’s mind and placing one’s bets’ about what ought to be done, is a proposed project a sound one? . . . [Unfortunately] situations are seldom crystal clear, the evidence is never enough, and the time for giving the Bank’s advice always has deadlines. Bank economists have to move in much closer to government decisions than academic economists normally do. (ibid.)

Communication skills are important for any economist, but they differ according to the type of institution: there is a premium on using jargon-free language that can be understood by senior policy makers in governments, language that is specific enough to leave government leaders room for manoeuvre in choosing policy options. The oral skills required are . . . those of the good bureaucrat who must participate in meetings to achieve consensus, and of the good diplomat who must win and hold the confidence of the host government officials during field missions. (ibid., p. 117).

I have cited Baldwin’s remarks at length because he opened the discussion and his views were endorsed by the other conferees. His observations on the data problems encountered in field missions abroad were also perceptive.

Another, and final example, of the skills required by a successful international economist was provided by Stephen Morris, a long-time senior economist in OECD, who emphasized the importance of the economist’s ‘selling job’, or persuasion:

At a rough guess, from the middle grades up, an economist working in an international organization spends only half of the time using professional skills to decide upon the right answer to a problem, the other half will be devoted to trying to find the best way to persuade people that it is the right answer. And as the individual rises in the hierarchy, the art of persuasion becomes steadily more important. Economists’ training does not necessarily fit them well for this selling job. Good academic writing . . . is too long and pedantic for the busy policy maker.

Econometrics is even worse. Historical or country examples are likely to be much more telling. Numbers should be used sparingly, tables should be kept small, charts should tell a story. Intellectual qualms and professional conscience must, at least on occasions, be overruled so as to permit oversimplification in order to advance what is hopefully a good cause. Anyone who is not prepared to spend a good deal of their working life drafting, redrafting, and reredrafting - and then trying to sell the product to national officials - should not make a career in an international organization. (in Coats 1986, p 103).

Morris warns of the dangers in an international organization of relying exclusively upon career economists (though he himself actually worked in OECD for twenty seven years!):

Working for a long time at two or three removes from actual decision making, people working in international organizations can easily get out of touch with political reality and become over impressed by their own supposed omniscience. At the same time, because they do not have the power of a national government behind them, and can never be sure what real influence they have, they can become overly sensitive, defensive, or defensively aggressive

. (ibid., p. 110)

To Economists at World Bank, IMF and UN, please feel free to share your thoughts in the comments. Does the following comment of Easterly still apply?

Second, many readers have asked if my statement in the original prologue that “my employer ...the World Bank... encourages gadflies like me to exercise intellectual freedom" was really accurate. Well almost. It should be modified slightly to "the World Bank ..encourages gadflies like me to find another job."

Related;
Economists in Government by A. W. Coats

Classical Economists and Economic Policy (Debates in economic history)
by A.W. Coats

The Society of Government Economists

Which is for you: MPA, MPA/ID, or PhD?

Why Visiting Economists Fail
Dudley Seers

Economists in Government: An International Comparative Study-A. W. Coats
-book review

The Place of the Economist in Government
Robert Hall

Institutions: Top Down or Bottom Up?

Institutions: Top Down or Bottom Up?- Easterly

A large research program in economics has established a persuasive link between institutions and economic development. But what does this imply for development policymaking? Can a political leader or aid agency who seeks to promote development readily change institutions? This article starts off wildly general, and then moves to specifics.

Two contrasting worldviews coexist in institutional economics, which go all the way back to the 18th century Enlightenment. Let us label these views “top down” versus “bottom up.” The top down view of institutions sees them as determined by laws written by political leaders (the view of most Enlightenment intellectuals like Rousseau and Condorcet). The bottom up view sees institutions instead as emerging spontaneously from the social norms, customs, traditions, beliefs, and values of individuals within a society, with the written law only formalizing what is already mainly shaped by the attitudes of individuals (the view of the leading critic of the top-down French Revolution, Edmund Burke).

The two worldviews have very different implications for institutional change. In the top down view, the political leadership can start with a blank slate, tearing up the old laws and making new laws at any time (as was attempted in the French Revolution). The bottom up view sees current institutions as heavily constrained by previous institutions. Institutional change in the bottom up view is always gradual, evolutionary rather than revolutionary.

The two views also have very different implications for the role of economists or other “experts.” In the top down view, there is a heavy burden on economists to determine the optimal institutions to recommend to political leaders, using theory and empirics to design new institutions from scratch. In the bottom up view, there is a much more specialized role for economists, who at best can recommend desirable incremental changes, subject to the constraint that institutional reforms cannot attempt “too much” without disrupting the functioning of the economy by much more than is justified by the benefits of the “desirable change.”

In the top down view, economists recommend institutions through pure reason. In the bottom up view, economists express reluctance to make drastic changes to institutions whose rationale they cannot fully comprehend, showing respect for the historical evolution that has somehow yielded today’s institutions. This is not to advocate the extreme view that “what is, is right,” only the more modest view that “what is, is for a reason.” The reason a particular institution has emerged (even if it is a bad reason) will certainly affect the consequences of attempts to change that institution.

Even if the bottom up economists can think of NO reason why a particular institution exists, they are still cautious about changing existing institutions abruptly (assuming such institutions are not too obviously destructive) with the knowledge that there is SOME reason, not yet understood and perhaps never to be understood, for their existence. As Richard Dawkins said about the analogous exercise in evolutionary biology of trying to understand the rationale for the anatomy of each species, “evolution is smarter than you are.”

California Health Reform Lessons

More on the Federal Reserve of Health

Obama's Health Plan -- a Preview;

One of the attractions of "Critical" is that it provides a more detailed blueprint of the Democratic approach to overhauling American health care than either Mr. Obama or Hillary Clinton has offered on the campaign trail. One of Mr. Daschle's co-authors, Jeanne Lambrew, handled the powerful health-care desk at the Office of Management and Budget for the Clinton administration and now works at the Center for American Progress, an influential Democratic think tank. Mr. Daschle is similarly fluent in his party's thinking on health-care policy.

The most important proposal in "Critical" is the creation of a "Federal Health Board," explicitly modeled on the Federal Reserve Board. Its duties would include "recommending coverage of those drugs and procedures backed by solid evidence. It would exert influence by ranking services and therapies by their health and cost impacts."

Mr. Daschle predicts that the board would change the entire health-care market by forcing expanded Medicare, Medicaid and veterans programs to follow its lead. Private health insurers would follow along, too, in part for the political cover such a move would give them to make unpopular but cost-conscious decisions not to pay for certain benefits.

What about the uninsured? Mr. Daschle wants to open to all Americans the Federal Employee Health Benefits Plan -- a menu of private-insurance options now accessible only to government workers. He would offer, in addition to the current plans, a government-run program, presumably similar to Medicare, although he provides few details. There would also be some form of means-tested premium support (or tax benefits) for Americans who couldn't afford one of the available plans.

Of course, "Critical" includes plenty of laments about the problems of our current system, from overused drugs to insufficient preventive care. Mr. Daschle also includes the familiar paean to Medicare's "lower administrative costs" without acknowledging the central irony: Most of Medicare's costs are borne by doctors and hospitals that must meet the requirements of a host of regulations; if they do not, they may face federal investigations and lawsuits for noncompliance. Private health plans don't have the luxury of burdening doctors and hospitals in this way. Thus Medicare has a mere handful of mostly generalist clinicians reviewing its coverage and payment decisions. A large private health insurer would have to employ hundreds to accomplish the same task.

Despite the fresh enthusiasm Mr. Daschle shows for his federal health-board proposal, it's not exactly a new idea. Mr. Daschle himself proposed it as part of the failed American Health Security Act of 1993. He admits that the board is loosely based on the National Institute for Clinical Excellence in Britain and the Federal Joint Committee in Germany. Both are charged with managing the public's access to higher-cost drugs, medical devices and procedures. But both are growing increasingly unpopular in their home countries -- precisely because they've become a triumph of cost-containment over patient access and choice.

As for America's own Federal Reserve serving as a model for Mr. Daschle's health board: The comparison seems misjudged. The Fed has a single price-setting role -- determining, through interest rates, the price of money itself. By contrast, a health board would manage the pricing, and use, of tens of thousands of medical products and procedures. How can a single board (instead of, say, the market) make so many decisions, and wisely? Mr. Daschle proposes a dozen or so "experts" who would be "chosen based on their stature, knowledge, and experience, ensuring that the decisions they make have credibility across the health-care spectrum."

Surely this is not the best way to go about reforming the U.S. health-care system. That it needs reforming, though, is beyond dispute. The next occupant of the White House, whatever his party affiliation, will undoubtedly try to broaden insurance coverage. One alternative to empowering government agencies would be simply to help individuals buy affordable private insurance. That effort might start by leveling the playing field between big purchasers, who get better rates for their employees, and individuals, who make up the bulk of the uninsured. People buying into an expanded version of the federal employees' health plan, for instance, would get the same tax advantages, deducting the cost of their health insurance as if they had received it through an employer.

Two Advisors

Brian Deese, senior economic policy adviser to Senator Hillary Clinton,says Clinton's Dialogue Influenced by Economy

McCain Adviser Silvia Says Economics to Decide Election

Blumenthal Says Clinton, Obama Health Plans Are Similar

The End of Great Moderation- Econ Talk of the Week

Alex Leijonhufvud on great moderation, inflation targeting, cybernetics and economic theory.

Related;
Axel Leijonhufvud and a Bit of Autobiography

Some further search uncovered a book in distinguished blue binding, and an intriguing title in golden letters, On Keynesian Economics and the Economics of Keynes: A Study in Monetary Theory by an author with a familiar Scandinavian name, Axel Leijonhufvud. I was completely captivated by this book, and it became my economics bible until I graduated from the University of Copenhagen.

Leijonhufvud presented macro economics in way that made sense (of course, my professors considered him a "minor verbalist" although some admitted, when pressed, that he had a "fine intuition"). He had — with Robert Clower — been one of the first economists to make a reasoned call for micro-foundations in macro-economics, stressing that micro-foundations should be built on rationality assumptions but with great attention to information assumptions. He argued that aggregation was something highly problematic. Implied in this was a break with the general equilibrium model. Modelling should be done, not by postulating ad hoc rigidities, but by examining adjustment processes, "false prices", "rationing," etc.

Leijonhufvud claimed in the book to be able to re-construct Keynes as following exactly such a program. This "economics of Keynes" was a far cry indeed from the "Keynesian economics" that I hated. Leijonhufvud had a great style and he made a provocative argument. Naturally, I became a diehard Leijonhufvudian. Leijonhufvud's book also led me to discover the work of Hayek, and later Kirzner and Mises, as well as Shackle and Loasby. I think it also led me in the direction of Herbert Simon, and therefore ultimately towards the muzzy management stuff that I currently do.

Axel Leijonhufvud: Life Among the Econ

The uses of the past

How to be a jack of all development trades

You need to go to Harvard’s MPAID program according Chris Blattman;

For all other development careers, I would endorse the ID program with gusto. Yes, a PhD program has its benefits, but the opportunity cost in terms of alternative experience (and foregone earnings!) is enormous. A PhD makes you a one-trick pony. An MPA or MPA/ID plus three or four years of work experience makes you a handy jack of all development trades.

It is great advise- just one thing in terms of the benefits, I wouldn't count too much on the following;

Job placement has been outstanding, especially if you are interested in working for one of the IFIs (international financial institutions like the World Bank or IADB). The ID brand is exceptionally strong there. I think this is a reflection of great screening and selection of students, but also a superb network and a terrific environment and teaching.

But is Harvard’s MPAID program the ‘best development curriculum in the world’. I give some alternatives below;

1- Princeton’s MPAID

2- Columbia's MPA in Program in Economic Policy Management. The Director of the program is an eminent economist, Guillermo Calvo.

The program, which started in 1992 as a cooperative effort of Columbia's School of International and Public Affairs (SIPA), Graduate School of Business, and Department of Economics, draws upon the considerable faculty and other resources of these and other divisions of the University. In addition, the program has operated as a partnership with the World Bank. Funding for 15 students is granted by the Joint Japan / World Bank Graduate Scholarship Program. Students who successfully complete all requirements of the Program in Economic Policy Management will be awarded the degree of Master of Public Administration (MPA) from the school.

3. Williams College MPA in Development Economics

The Center for Development Economics (CDE) at Williams College offers an intensive, one academic year, master's degree program designed for economists from low and middle-income countries who have some practical experience. The goal of the program is to provide students with a thorough understanding of the development process, emphasizing analytical techniques helpful to policymakers. The result is an effective mix of theory and policy application that enables students to be more objective in their home environment.

So what are the other similar programs? Dani Rodrik may want to comment on the Columbia program- I understand he was involved in starting that program?

Explainer of the Day- $100 a barrel of oil

How did we get there

Rodrik's students are lucky

I wanted to take this opportunity to thank you for sending my resume to ... 2 years ago.... I love my job mainly because I get to do what I studied at the MPAID and most importantly do these things with the perspective that you've provided me via PED101. It's amazing how many development practitioners have such a siloed view of what they do. I can't explain to you how much your class and the program as a whole has grounded my perspective on development.

I can't tell you how often I've actually used your PED101 presentations for work purposes... [E]specially where you've got transitions from humanitarian aid to development needs, you need a holistic perspective like this and MPAID provides that perspective. In particular, it provides students with the tools they need to (a) question the advice of individuals who try to sell a "one-size fits all" approach to development e.g. structural adjustment loans or anti-corruption fixes and (b) equips students with the training now most needed (and in high demand) by government ministries - ability to provide sound policy advice to developing countries regardless of the most 'sexy' approaches e.g. globalization, trade liberalization, etc. which might not be appropriate in every context.

-Customer satisfaction

Assorted, Most Macro

Happiness: Enough Already

What Is the Yield Curve Telling Us?

Monetary Policy: Providing Liquidity

A Brief History of Central Banks

Global Risks to U.S. Monetary Policy

Price Stability: Issues and Challenges

Some Lessons on the Rescue of Long-Term Capital Management

Inflation Central

High-Level Regional Seminar on Inflation Targeting

Current Account Surplus in Latin America: Recipe Against Capital Market Crises?
Guillermo Calvo and Ernesto Talvi

Global-Warming Jujitsu

Will the FTC Allow Microsoft to Buy Yahoo?

The Difference Between US and UK Economists


Professional Prognosticators: Is forecasting a science or an art?


Runs Make the Bank: The fragile capital structure of banks makes them inevitably prone to runs, and that's a good thing

Oil Prices Rise to Near-Record Levels, Then Fall

Feel Like a Fraud? At Times, Maybe You Should

China up close: Understanding the Chinese economy and financial system

Notional Pensions: Does Sweden Have the Answer?

From Complacency to Crisis: Financial Risk Taking in the Early 21st Century

Financial Globalization and the U.S. Current Account Deficit

Wrong call by RBI

Republic of Serbia: Selected Issues

Industry-Specific Exchange Rates

Economic survey of the Netherlands 2008

Inequality and Growth: Challenges to the Old Orthodoxy

Krugmania

Social protection in Pakistan

A recent World Bank report;Social protection in Pakistan : managing household risks and vulnerability

Abstract: The report is the result of an inter-institutional collaborative effort between the Government of Pakistan, civil society, and international donors. This report finds that while Pakistan implements a wide array of social protection programs, the effectiveness of these programs could be significantly improved. The report finds that social protection programs in Pakistan face important constraints in terms of coverage, targeting, and implementation, and inability to respond to vulnerability, which will need to be overcome in order that they can more effectively protect the poor. The report suggests a two-pronged approach for social protection reform: (i) improving the ability of safety net programs to reach the poor, promote exit from poverty, and respond to natural disasters; coupled with (ii) a longer term approach for strengthening social security. Considering social protection as a system rather than a collection of different programs would allow the government to curtail fragmentation, improve the quality of social protection spending, and have higher impact. Given fiscal constraints, the report suggests that coverage expansion first exploits the opportunity for efficiency improvements in current programs, through better targeting and reduction in duplication and overlap. However, the decline in real spending on the two main safety net programs is worrisome. It is therefore welcome that the government is considering how best to ensure adequate yet fiscally affordable spending on safety nets as part of its draft social protection strategy.