DeLong on interest rates

John Quiggin3 Comments

There’s an interesting piece by Brad DeLong in Saturday’s Australian Financial Review, which I can’t find anywhere online.He lists four reasons why interest rates can be expected to rise in the future. The first two are just two facets of the same thing – the embrace of deficit finance by the US Republicans in both Congress and the executive branch. The third is closely related: the failure of Western European governments to address the coming fiscal crisis associated with retirement income policies. All of these are currently being offset by the willingness of the Chinese and Indian central banks to buy US and Euro bonds in an effort to maintain competitive exchange rates. But this can’t last forever.

The fourth factor is “the inability of Western European governments top enact sufficiently bold liberalising reforms to create the possibility of full employment, together with the failure of Western European monetary policy to be sufficiently stimulative to create the reality of full employment”. I have some doubts about this. Leaving aside any questions about the efficacy of “liberalising reforms”, it’s far from clear that the adoption of stimulatory monetary policy in the short run is conducive to low nominal interest rates in the long run. I would have thought that just as stimulatory deficits in a recession need to be offset by larger surpluses during booms, an active monetary policy implies a larger variance in interest rates over the cycle.

More significantly, it seems to me that, on a crucial point Brad has the argument backwards. He says “Believers in low interest rates … point to rapid technological progress, which has boosted output.” In general, technological progress ought to create new investment opportunities at high rates of return, while the associated increase in asset values should raise current consumption. This should raise the real rate of interest, not lower it. In fact, this is precisely the argument Brad makes in relation to India and China.

On checking, I was surprised to find out that the ratio of nonresidential gross investment to US GDP is near an all-time low, at 10.0 per cent (you can get the data from the Bureau of Economic Analysis . Taking account of the increasing share of computers and software, which have high depreciation rates, it seems likely that the net investment share is lower than ever. Maybe this can be explained if all the technological progress takes the form of capital-saving reductions in the cost of computing and telecommunications. This would reduce demand for capital (but ought to increase demand for labor, something that has evidently not taken place).

Monday Message Board

John Quiggin24 Comments

It’s Monday again, and time for the Monday Message Board. This is a chance for everyone to give their comments on any topic. Also, if you have longer pieces you’d like to draw to the attention of readers, feel free to post a link. I’ve been a bit slack about policing the “no coarse language” rule in the last couple of weeks, but please adhere to it and stick to civilised discussion.

PPPs – the magic pudding lives

John Quiggin1 Comment

There’s quite a good piece on Public-Private Partnerships by Graeme Hodge in today’s Age. Fair and balanced, but providing some justified scepticism. Meanwhile the news page of the same paper has a perfect example of the magic pudding mentality that still underlies most advocacy of PPP arrangements.

Brian Caldwell, the outgoing dean of education at Melbourne University, has called on the Bracks Government to follow the lead of the Blair Government in Britain, which is rebuilding schools in partnership with the private sector…Professor Caldwell said that while the Government was moving “quite impressively” to improve the quality of buildings, the cost in many schools was enormous.He called on the Government to adopt the policy of the Blair Government, which is rebuilding schools in urban areas. It often involved the private sector building schools and leasing them back to the Government, which paid them off over 25 years.

Caldwell doesn’t mention cost savings or risk transfer or any of the other reasons why PPPs might be worthwhile, he just seems to think that this is a way of getting money for nothing.

Caldwell on to say that the British PPP program is “coupled with redesigning the educational programs of the schools.” But there is, in general, no link between PPP construction and educational programs, which are typically still public in these cases. Conversely, there are plenty of examples of partial or complete privatisation of education in systems where the public maintains ownership of the school buildings (as with PPP construction, the record of such ventures is mixed at best).

Another enterprising university disaster

John Quiggin10 Comments

A few years ago, Monash University was being described as the first global university‘ on the strength of its multiple campuses in Australia, Malaysia, the UK and South Africa. Along with Alan Gilbert of Melbourne, then VC David Robinson[1] was one of the leading promoters of the idea of the ‘enterprising university’. In practice this meant using the public endowment of the university to establish private, for-profit offshoots, an agenda that is still being pushed vigorously by Tim Dodd and the AFR Higher Education Section. Robinson aimed for a campus on every continent, while Gilbert pushed the idea that the Internet could be used to bring academic handloom weavers into the factory age, an idea embodied in U21 Global.

Now Monash’s African operation is described as a money pit. Exactly the same could be said of U21Global[1], a $US50 million enterprise which has so far produced nothing more than a very ordinary online MBA to add to the hundreds already on the market.

The question of why, outside narrowly vocational training, for-profit educational ventures are almost invariably unsuccessful is a complex and difficult one. But the facts speak for themselves. From an Australian perspective,an equally important question is why university managers (mostly former academics with no obvious qualifications for a business career) entrusted with large sums of public money have been allowed to dissipate it in money-losing speculative investments.

fn1. Robinson got sacked a couple of years ago over a plagiarism scandal. As I pointed out in a very early post, this was hypocritical behavior on the part of a University council that backed his anti-academic agenda. “University managers have done their best to suppress the assumptions of free exchange of information in which notions like ‘plagiarism’ make sense. In the brave new world of ‘intellectual property’, you nail down what you can of your own ideas and appropriate anything from the common pool that hasn’t already been grabbed. The former vice-chancellor of Monash seemed entirely suited to the new world, and it was hypocritical to sack him.”

fn2. As with Monash, the term “global” is an aspiration rather than a reality. In practice, U21Global does not even try to compete outside the Asian market, and it seems that it is increasingly focusing on Singapore, its physical location.

The new Iraq

John Quiggin11 Comments

Although there’s plenty of news coverage of inquiries into the “intelligence” that justified the Iraq war, coverage of events in Iraq itself seems to have declined sharply since the formal handover of sovereignty and the shutdown of the Coalition Provisional Administration. There seems to be a general media consensus that things have gone quiet, with the result that, when the usual news of bombings, kidnappings and assassinations is reported, it’s always prefaced with something like Suicide Blast Shatters a Calm (NYT 15 July) or after a week of relative calm (Seattle Times 7 July).

Regardless of the calmness or otherwise of the situation, the installation of Allawi as PM has certainly produced a new dynamic. Allawi has moved quickly to establish himself as a strongman, resolving by default the questions left unanswered in the “handover”. His announcements of emergency powers and the establishment of a security service/secret police have been criticised, but they amount to little more than the assumption of powers previously exercised by the CPA with no legal basis of any kind. The big question before the handover was whether any new military operations would be under the control of the interim government or of the American military. Allawi has moved pretty quickly to ensure that he will give the orders here, putting the onus on the American military to come to his aid if his forces run into serious resistance.
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Is economics an empirical science ?

John Quiggin29 Comments

Tyler Cowen[1] lists a number of economic propositions which he formerly believed, but has abandoned in the light of contrary evidence. Most of these propositions were elements of the economic orthodoxy of the 1980s and 1990s, variously referred to as Thatcherism, neoliberalism, the Washington consensus and, in Australia, economic rationalism. They include the efficacy of monetary targeting, the beneficence of free capital movements and the desirability of privatisation in transition economies.

Following in the same spirit, I thought I’d list a couple of propositions on which I’ve changed my mind in the face of empirical evidence. These are elements of the Keynesian orthodoxy of the 1950s and 1960s, on which I was trained. Following Cowen, I’ll list them as false claims I used to believe

* There is a long-run trade-off between unemployment and inflation

* Keynesian fiscal policy is a powerful and reliable instrument for stabilising aggregate demand

On both these issues, I’ve come to accept that Milton Friedman was largely right, and his Keynesian opponents largely wrong.
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A case for drug law reform

John Quiggin18 Comments

Prompted by the recent discussion of blogging on Australia Talks Back (audio here), new reader Ted Kroiter has sent an email asking me to point to his views on drug law reform. . You can also read my thoughts on the same topic. Discussion welcome.

UpdateA striking feature of our drug laws is that there’s a fundamental distinction drawn between those drugs that have been widely used since, say, 1600 (alcohol, tobacco, caffeine) and those that have only been used for 50-100 years (cocaine, heroin, marijuana, amphetamines and so on). Is anyone willing to defend this distinction? As a matter of personal disclosure, I should say that the current rules suit me very well. I am a regular consumer of two of the three main legal drugs, and have no interest in any of the illegal options, (though there are times when a double espresso with added benzedrine might be just the ticket).

The new consensus on minimum wages

John Quiggin10 Comments

Coming in a bit late, I have the opportunity to survey a range of blogospheric discussion of the topic of minimum wages, which largely supports the view (not surprising to anyone but an economist) that minimum wages are good for low-income workers. The traditional view among economists was that minimum wages reduced employment and thereby harmed workers, but this view has been overturned, or heavily qualified, by empirical evidence, beginning with the work of Card and Krueger.

The debate kicked off with a piece by Stephen Landsburg in Slate, noting that recent US econometric studies had failed to find economically and statistically significant negative effects on employment resulting from higher minimum wages. This was surprising, in view of a range of earlier studies which found right-signed effects, but were statistically weak because of small samples. Landsburg argues that this might be an example of publication bias, in which studies with no statistically significant results tend to get discarded. He concludes

Now that we’ve re-evaluated the evidence with all this in mind, here’s what most labor economists believe: The minimum wage kills very few jobs, and the jobs it kills were lousy jobs anyway. It is almost impossible to maintain the old argument that minimum wages are bad for minimum-wage workers. In fact, the minimum wage is very good for unskilled workers. It transfers income to them

Landsburg then goes on to argue against the minimum wage on the curious ground that it’s a less transparent alternative to policies such as an Earned Income Tax Credit. Brad de Long responds, endorsing the EITC, but arguing that minimum wages are also an effective policy instrument for transferring income to the poor.

There are quite a few interesting responses. Steve Verdon develops Landsburg’s argument, pointing out that a minimum wage increase which raises the general cost of goods and services is like a consumption tax and has an associated deadweight loss. That’s true, but it’s also true of whatever tax may be used to finance the EITC. Robert Waldmann suggests changing the structure of payroll tax, but as he himself points out, his argument disregards the point that the budget is already in deficit. Tyler Cowen observes that increases in wages may be offset be reductions in working conditions. Interestingly, no-one seems to have defended the traditional view on empirical grounds.
An interesting and important question is whether these results can be transferred to other countries like Australia, where the minimum wage is higher relative to average weekly earnings. In the survey of the literature we did for the National Wage Case, Steve Dowrick and I concluded that, although there might be some reduction in employment and some leakage to low-wage workers in high-income households, the evidence showed that minimum wages help low-income workers . Our study is here (PDF file)

Overall, my view is close to that of Brad de Long. Minimum wages are a useful policy instrument, but by no means the only or most important one, to improve the position of low-income workers.

Update Jacob Levy asks, reasonably enough

If, as Landsburg claims, the published studies are “all in agreement” about the direction of the effect, then the underlying distribution of studies can’t be as he describes it, can it? Publication bias in favor of significant findings, superimposed on an actually-neutral relationship ought to generate equal numbers of ostensibly-significant findings in each direction.

Actually, the Card and Krueger study found weak positive impacts of minimum wages on employment using a data set where most of the obvious sources of bias had been removed. There may have been earlier studies with similar results, but they would almost certainly have been discarded, on reasonable grounds of weak statistical significance or omitted variable bias. By contrast, studies with similar weaknesses, but with the expected sign would have been published.