In a fascinating article in the New York Times, N. Gregory Mankiw points out why the "stimulus bill" has failed so signally to help the economy recover: it's the wrong tool.

The results are striking. Successful stimulus relies almost entirely on cuts in business and income taxes. Failed stimulus relies mostly on increases in government spending.

All these findings suggest that conventional models leave something out. A clue as to what that might be can be found in a 2002 study by Olivier Blanchard and Roberto Perotti. (Mr. Perotti is a professor at Bocconi University in Milano, Italy; Mr. Blanchard is now chief economist at the International Monetary Fund.) They report that “both increases in taxes and increases in government spending have a strong negative effect on private investment spending. This effect is difficult to reconcile with Keynesian theory.”


Supply-siders, though, might be quick to pick up the justification offered, and investigate the academic and statistical underpinnings linked to in the article.

UPDATE: Corrected spelling of Bocconi University, added link to their website, thanks to fpb for pointing it out.

I'll keep posting this. I want different results, guys: do you suppose we ought to be doing something different than we are?

Somehow reality (red dots) does not seem to be following either the "without stimulus" path or the "with stimulus" path.

Someone want to explain to me again why economists use numbers when they appear not to be connected to the other numbers out there? Perhaps their own dimensional scale -- "this is an economic number, neither on the real nor the imaginary line"

Commentary here.

The unemployment rate went up to 9.7%, reversing the improvement we saw in July.

Reading is really hard. There have been those who said that in order to write well, you had to be able to read: but standout counterexamples put paid to that theory. Mr. Norris presents his numbers, and says, "So much for the idea that flexibity to hire and fire produces more jobs."

He includes a graph in the newspaper.




Do you notice the distance between the lower line (US) and the upper line (Europe) for the majority of the time covered? This area represents jobs, paychecks, in the US not issued in Europe. Yes, the two lines have converged, and Yes, the time displayed is only 15 years, and Yes, this is not the measure to compare (total employment in Europe, expressed as a percentage, and the same in the US), but it gives a feeling anyway. His whole article is a hymn to the dot on the right and speculation as to what might happen in it. The dot itself, of course, is subject to revision.

Sigh.

Seen the promises out there for "new, green jobs"? Wondered what you were being promised?

Well, let's start by saying what it isn't (paper on SSRN, HIGHLY RECOMMENDED:

A rapidly growing literature promises that a massive program of government mandates, subsidies, and forced technological interventions will reward the nation with an economy brimming with green jobs. Not only will these jobs improve the environment, but they will be high paying, interesting, and provide collective rights. This literature is built on mythologies about economics, forecasting, and technology.

Myth: Everyone understands what a green job is.

Reality: No standard definition of a green job exists.

Myth: Creating green jobs will boost productive employment.

Reality: Green jobs estimates include huge numbers of clerical, bureaucratic, and administrative positions that do not produce goods and services for consumption.

Myth: Green jobs forecasts are reliable.

Reality: The green jobs studies made estimates using poor economic models based on dubious assumptions.

Myth: Green jobs promote employment growth.

Reality: By promoting more jobs instead of more productivity, the green jobs described in the literature encourage low-paying jobs in less desirable conditions. Economic growth cannot be ordered by Congress or by the United Nations. Government interference - such as restricting successful technologies in favor of speculative technologies favored by special interests - will generate stagnation.

Myth: The world economy can be remade by reducing trade and relying on local production and reduced consumption without dramatically decreasing our standard of living.

Reality: History shows that nations cannot produce everything their citizens need or desire. People and firms have talents that allow specialization that make goods and services ever more efficient and lower-cost, thereby enriching society.

Myth: Government mandates are a substitute for free markets.

Reality: Companies react more swiftly and efficiently to the demands of their customers and markets, than to cumbersome government mandates.

Myth: Imposing technological progress by regulation is desirable.

Reality: Some technologies preferred by the green jobs studies are not capable of efficiently reaching the scale necessary to meet today's demands and could be counterproductive to environmental quality.

Let's spend a moment on those notes about employment: will more people have jobs as a result of these policies? Start with a report from a country that has actually tried the policy: Spain. What do we learn about employment under green jobs?

Optimistically treating European Commission partially funded data, we find
that for every renewable energy job that the State manages to finance, Spain’s
experience cited by President Obama as a model reveals with high confidence,
by two different methods, that the U.S. should expect a loss of at least 2.2 jobs
on average, or about 9 jobs lost for every 4 created, to which we have to add
those jobs that non-subsidized investments with the same resources would
have created.

In other words, if we look at everything in the best light possible, we expect that those green jobs should RAISE unemployment, not decrease it. Do you think that is a good public policy? Do you think perhaps your congresscritter might be open to listening to you? Your family and friends? Take a moment and speak to one of these choices. It's your country.

The "TED Spread" (the index of how trustworthy banks think other banks are) has gone from "total disaster" to "tight money" -- in other words, we're not facing a meltdown, just bad times ahead.

And this is the good news. Economics, the dismal science....

Simple form to fill out, only two pages (five if you count the cursory instructions).

Any bank that made loans on a form like this would be called up by its auditors and told that no certification would be forthcoming, and that bank examiners would be called in. But this is the United States Treasury....

It's amusing to encounter the latest iteration of the idea that "labor saving devices" exacerbate unemployment. We all see daily the starving maids and butlers in the street, put there by household appliances, right?

And yet the idea recurs. It never seems to occur to the proponent that creating more stuff with less labor leaves a growing Gross Domestic Product with a population the same size, and that the effect, in most democracies, is to increase the general level of prosperity.

Televisions, justified with tortured explanations about educational effect, turn into color TVs, into more than one per household, into expected items in every hotel room. The perspective from Anacostia park becomes ever nicer.

If you are in LA, should you rent? How about if you are in Las Vegas? Atlanta? Cleveland? I have dealt with this issue before, in a national average sort of way: but there is new research that breaks it down by city level.

Conclusion?

The analysis shows that for several cities with bubble inflated house prices such as Los Angeles, Boston, and Washington the cost of homeownership is likely to be two or even three times as high as the cost of renting a comparable unit. Furthermore, since house prices are likely to continue declining towards long-term trend levels, homeowners in these markets are unlikely to ever accumulate equity in their homes.


In these markets, encouraging people to remain as homeowners, even with substantial write-downs from their original mortgage terms, is likely to lead to situations in which they pay far more of their income in housing costs than necessary. The result could be that these families forego ealth care insurance for their kids or quality child care, since they will be forced to continue to make extra sacrifices to remain homeowners, with considerably less likelihood of a long term financial benefit relative to renting.

Scientific American has done me a favor, though: in the current article on economics it gave a great example of the genetic fallacy, which is so common that I find myself answering it frequently. Here's the relevant passage:

The 19th-century creators of neoclassical economics—the theory that now serves as the basis for coordinating activities in the global market system—are credited with transforming their field into a scientific discipline. But what is not widely known is that these now legendary economists—William Stanley Jevons, Léon Walras, Maria Edgeworth and Vilfredo Pareto—developed their theories by adapting equations from 19th-century physics that eventually became obsolete.

His criticism boils down to the idea that the model does not include externalities, and therefore is rubbish. Sadly, this critique has been out of date for about thirty years, certainly since Baumol's work in the 1970's, and he cites as criticisms a number of statements that would lead to him failing university economics work.

The author, Robert Nadeau, appears to be hyping his forthcoming book on economics and the environment. Based on his article here, it may be too late to stop the presses so he could learn enough to write on the subject he's tackling: but he might find it profitable to talk to a fellow prof in his university, Tyler Cowen, who once commented

On average market solutions have positive Pareto-relevant externalities, if only through supplying experimentation and strengthening social norms in favor of commerce. That's true even for the market in thumbtacks, if you consider it as feeding into a broader social stream. Externalities are virtually everywhere and often I prefer to think in terms of Hayek's theory of spontaneous order. Where markets should be allowed to operate, markets are usually too weak in their reach and scope. Yes there is a continuum of social returns but only rarely are we close to an optimum.

But I don't mean this as a plea for laissez-faire. Governments must produce public goods, maintain social order, and of course support markets. At the margin, those activities, such as imposing accountability under the law, are also largely underprovided. For the appropriate selection of policies, government is also better-than-first-best, despite its apparent static inefficiencies.

Which displays considerably more understanding of the things Mr. Nadeau wishes to discuss, and more, alas, than I can likely hope for in his book, based on this article.

Speak, Fed!

Woof!

Obviously, after that, I'd better pay attention.

Malthus is Still Wrong. Malthus is Still Wrong.

And for those of you addicted to the mathematical insight that food grows arithmetically but population geometrically (Yes, this is you, Niall Ferguson) and similar mathematized illogicalities, I have a one for you.

For every mouth, there are two hands to work with. Satisfied? You can even count them, unlike the famously unreliable Malthusian (or, updated, Meadows) model.

Everyone produces more than they consume.

UPDATE:Even the New York Times is starting to notice that overpopulation is not the problem. But that is the point: people are the most valuable resource in potentia, and one of the jobs of society is to use that potential.

It's interesting to me that the labor theory of value is still going strong. I read the definition on Wikipedia, and contrasted it with Marginalism, which has the virtue of not saying that anything has a value other than that attributed to it by market participants.

But the old concept survives. Interesting.

One of the most famous is Williams Greider, whose current article brings up the same fallacies as his old book.

The case for free trade, for unilaterally dropping all tariffs, is easy to state, if famously difficult to understand: it's the first theorem in economics that requires mental work to understand.

Just to refresh your memory: comparative advantageworks like this:

Two nations, individuals, or states can gain by trade if each produces the goods for which it has a comparative advantage. Hibernia has a comparative advantage over Freedonia if the cost of producing widgets in Hibernia, relative to the cost of producing other goods in Hibernia is lower than the cost of producing widgets in Freedonia relative to the cost of producing other widgets in Freedonia

Pay attention to the bold print. Comparative advantage says something about the cost of producing different goods in the LOCAL ECONOMY in each place relative to the production of other goods in the LOCAL ECONOMY. That's why you should read the article under "easy to state" above very closely, and play with it for a while. Most people who make mistakes in international trade, like Greider, continue to say that it is a matter of comparing the absolute cost of making a widget in one economy versus the absolute cost of making a widget in the other economy. Note that if you made that comparison the basis, there would be NO BUSINESS OF ANY KIND WHATSOEVER in Southern California: it's cheaper almost every place else in the United States, to say nothing of other countries. Yet there is business here, and people of such astonishing wealth that paying a million dollars for a house is not at all uncommon. The absolute advantage is elsewhere for everything: yet people do well here. Mr. Greider has much to ponder before he reiterates his mistake again.

Not, as demonstrated, that he will learn from his mistake. Evidently he likes making this mistake, despite being called on it before.

We've already seen that core inflation is low: today, the BLS announced that the prices of finished goods rose a stunnng 1.1% last year. I think we don't have much to worry about on the inflation side.

As a good friend notes, the deficit is going away already and the manufacturing sector is going strong.

One of our better indications of price is the import price index, and it's telling us something interesting:

Import prices rose for the second consecutive month in December and
the 1.1 percent increase was the largest monthly advance since May. The price
index for overall imports also increased for the fifth straight year in 2006,
advancing 2.5 percent after more substantial increases of 8.0 percent and 6.7
percent in 2005 and 2004, respectively.

A 4.8 percent increase in petroleum prices was the largest contributor
to the overall December rise. Petroleum prices resumed their upward trend
after declining 21.5 percent for the three-month period ended in November.
The index rose 6.2 percent overall in 2006, the fifth consecutive year the index
advanced, but the smallest annual increase over that period.


1. People are no longer worried about the dollar: after the '05 and '06 hype, it isn't deflating at the speed everyone worried about.

2. To the extent we talk about technology that gets around petroleum, the price on petroleum rises (yes, there's tension in the Middle East. But there's always tension in the Middle East.)

Straight from the Financial Times, an English paper with pretensions of knowledge:

Europe to suffer as the world warms up
By Andrew Bounds in Brussels

Published: January 5 2007 22:22 | Last updated: January 5 2007 22:22

Chilly northern Europe could reap big benefits from global warming, while the Mediterranean faces crippling shortages of both water and tourists[bold mine - NB] by the middle of the century, according to the first comprehensive study of its effects on the continent.

Evidently, the notion of "natural resources" which are subject to "shortages" has definitional problems I never thought of. Silly me!

Well, folks, looks like we're due for a rise from the Fed again, at least if they follow Greenspan's formulas:

Federal funds rate = 8.5 + 1.4 (Core inflation - Unemployment).

Core inflation (all items less food and energy) is 2.6%
Unemployment (seasonally adjusted) is 4.5%

That leaves the prediction of the fed funds rate at 5.84%, while the actual target is 5.25% currently (with trading between 4 7/8 and 6 3/4, averaging about 5.28%, but with a spike in standard deviation that might indicate someone has noticed we're low.

Batten down the hatches, folks.

I'm not kidding.

Look at those statistics. Anyone who wants a job can get one, and many jobs are going begging. These are not all "lawn care" jobs either.

This is appalling.

Let's get on the stick here and get a workable immigration program to get some people here (I know there is another way to get job applicants which is quite enjoyable, but there's a time lag before they become available, and we need them now.)

Smile, folks. Write your Congressman.

State Goals: to protect consumers from getting things that the State, in its amazing wisdom, decides they are not worthy of.

Latest example in action: the predatory lending laws, which can prevent people from getting housing, though I note that morgage brokers can help people when the laws are not too tight.

The funny thing about predatory lending?

It would have been covered by ordinary "loan-sharking" statutes, but the legislature decided that fighting an urban legend with a new statute would give them some "face time" in the evening news. The people who can't get housing? No such "face time" -- but they're wildly grateful, right?

So passes a great advocate of liberty and coherent thought.

I await crows of delight from those who were unable to understand him in the first place.

From the Bureau of Labor Satistics:


Real average weekly earnings rose by 1.3 percent from September to October
after seasonal adjustment, according to preliminary data released today by the
Bureau of Labor Statistics of the U.S. Department of Labor. This increase
stemmed from a 0.3 percent increase in average weekly hours combined with a 0.4
percent increase in average hourly earnings and a 0.7 percent decrease in the
Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).


Now if I can just get my own earnings to match the increase. For those clicking the link, check out why you'd prefer to work for a utility company....

You know, I've heard a lot about the Stern Report: but somehow I don't see links to it anywhere.

Given the poor quality of most statistical studies of climate change, I'm not surprised by the conclusion: anyone needing a rationale for more taxes is cheering right now. Sadly, Mr. Stern hasn't properly researched the economic effect of higher taxes, but then, that might be controversial. Global Warming is safer. Besides, you can ignore prior research if it contradicts your own. I was more impressed by the prior report at least partly because it was available to review.


But now I know how to respond to the cries of "oh No!" Calmly. Changes of two to three degrees are rather mild: it changes more between my house and outdoors.

UPDATE: Thanks to alert reader CCORD (check out the comments for a link to his website), here is the link to the Stern Report. Further updates as I digest this monster.

OTHER UPDATES: Arnold Kling is first on the scene, with Tim Worstall gamely tryingto catch up with more details , and the ever popular Bjorn Lomborg and the Wall Street Journal, one who has the statistical background, and the other with an economic background. Finally, a really thoughtful discussion of the area, for those interested.

I think, with that, I will close the issue: Stern Report: DOA.

Last Hurrah: Marginal Revolution has a few points, too. And he is kinder to the report.

According to the numbers, working for private employers is a bad decision compared to working for the Federal Government.

Money quote:

The average federal worker earned $100,178 in wages and benefits in 2004, which compared to $51,876 for the average private-sector worker, according to U.S. Bureau of Economic Analysis data. Looking just at wages, federal workers earned an average $66,558, 56 percent more than the $42,635 earned by the average private worker.

As you might guess, this has been a hot topic for federal employees to discuss Guess whether or not they agree. And, as expected, the group responsible for advising on Federal Employee wage increases has, once again, advised on an increase: after all, we understand that secretaries in the federal government are woefully underpaid when compared to the Corporate Secretary of IBM (though Mr. O'Donnell might not think so).

And those federal benefits add up. Care to advise your collegians on where to apply?