Ben Muse

Economics and Alaska

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What do you do with the francs, once you've sold them the wheat?

The Economist reviews a biography of 19th and early 20th Century art dealer Joseph Duveen, "Flogging culture to Americans" .

Here's what we apparently did with some of our francs:
    "THE half-century between the 1880s and the Wall Street crash of 1929 saw one of the most remarkable migrations of cultural artefacts. In unprecedented quantities, Old Master paintings, sculpture, furniture, silver, Chinese porcelain, altarpieces, books and manuscripts, medieval architecture, clocks and carpets were shipped from Europe to the United States.

    This was not the booty of war, but rather a seismic shift in the world economy. In the late 19th century, European agricultural revenues collapsed as imported grain from America—and the discovery of oil there—caused steep falls in food prices. The land-rich families of the British and European aristocracy, who owned most of Europe's cultural treasures, faced mounting debts and even economic ruin. The new rich were Americans who marked their ascendancy with the trappings of fine art from the lands of their forefathers.

    The Europeans sold; the Americans bought. The new collections formed the basis of the great American museum collections we know today. The scale of the enterprise, even early on, was something to be reckoned with. When John Pierpont Morgan died in 1913, his art collection was valued at $60m. These and similar collections would be worth billions today..."
A lot of these imports found their way to Boston's Isabella Stewart Gardner Museum.

The Competitive Advantage of Alaska Native Corporations

Alaska's native corporations are turning up in unexpected places, report Robert O'Harrow and Scott Higham in last Thursday's Washington Post: "Alaska Native Corporations Cash In on Contracting Edge"

    "In July 2002, U.S. Customs Service officials announced they were preparing to award a half-billion-dollar contract for maintenance of thousands of gamma-ray, X-ray and other scanning machines at the nation's ports and borders. Some of the nation's biggest defense contractors, including Lockheed Martin Corp. and DynCorp, were asked to consider bidding for the work.

    But a year later, Customs officials issued a statement saying there would not be competition for the work, after all. Instead, they decided to give a no-bid contract to a little-known company
    [Chenega Technology Services Corp. - Ben] owned by Native Alaskans....

    Chenega had little experience maintaining high-tech scanning machines. So it ended up subcontracting much of the work to some of the big companies that had originally expressed interest in the contract...

    Chenega did offer Customs officials a unique opportunity. By hiring Chenega, Customs could avoid the slow and costly competitive bidding process for government contracts that is designed to ensure that taxpayers get the most for their money.

    Chenega Technology Services Corp. is one of more than 200 privately held Alaska Native Corporations permitted to operate as disadvantaged small businesses as part of government efforts to encourage Native American participation in federal contracting. The corporations have benefited from legislation introduced by members of Congress, most prominently Sen. Ted Stevens (R-Alaska), the powerful chairman of the Senate Appropriations Committee.

    Alaska Native Corporations can maintain their small-business status, even if their parent companies have millions of dollars in revenue and thousands of employees. They are exempt from the $3 million federal cap on no-bid service contracts that are in place for other minority small businesses. The corporations do not have to be run by Native Alaskans. And they can subcontract much of their work to other firms, but their employees must do at least 50 percent of the work."
What are these Alaska Native Corporations?

    "Chenega Corp., the parent of Chenega Technology, was formed as an Alaska Native Village Corporation in 1974. Three years earlier, the federal government had settled historical land disputes under the Alaska Native Claims Settlement Act. The act created a network of 13 regional and more than 200 village corporations to handle $962 million and 44 million acres from the federal government. They were also given the right to operate as profit-making businesses."
How did they get the competitive contracting advantage?:

    "In their first 20 years of operation, many of the Alaska Native Corporations struggled, with several teetering on the edge of financial ruin.

    Then, in the early 1990s, Stevens and other lawmakers stepped in. Stevens, 81, a senator since 1968, has enormous clout on Capitol Hill as chairman of the Senate Appropriations Committee. He introduced language that changed the Alaska Native Claims Settlement Act in 1992 to enable the corporations to be treated preferentially as small businesses for federal contracting.

    Stevens also introduced language that negated, for contracts awarded to corporations owned by Native Americans, a Defense Department requirement of elaborate cost-benefit analyses before government work could be outsourced to private companies."
The article doesn't suggest that Chenega does poor work.

P.S. December 1: Today's Anchorage Daily News carries a story by Robert O'Harrow of the Washington Post indicating that the Transportation Safety Administration (TSA) has decided not to award Chenega a similar sole-source technology maintenance contract, that had been under consideration: "TSA opts for bids; Chenega bows out . MAINTENANCE: Native corporation was in line for sole-source contract".
    "The Transportation Security Administration this week said it would resume plans to seek bids for a large technology maintenance contract, ending consideration of a proposal to give the work to an Alaska Native corporation without competition.

    The TSA had been considering whether it might speed up the maintenance work by awarding the contract to Chenega Technology Services Corp., one of more than 200 privately held Alaska Native corporations permitted by Congress to sidestep normal procurement rules because of their status as disadvantaged small businesses.

    Chenega Technology had earlier secured a $500 million sole-source deal with U.S. Customs and Border Protection to maintain that agency's screening machinery. In a meeting last month attended by Chenega executives and by staff members from the offices of Alaska's Republican senators, Lisa Murkowski and Ted Stevens, TSA officials were urged to piggyback on the Customs contract.

    The proposed contract covers maintenance work for the metal detectors, X-ray machines and Explosive Trace Detectors at the nation's 450 commercial airports. The contractor is to take over for Boeing Co., which was paid $1.2 billion under a competitive contract that was criticized by the Department of Homeland Security's inspector general for more than doubling in size.

    The TSA suspended plans for a competition after meeting with Chenega Technology officials in October. In a letter to contractors on Nov. 15, the agency said it "has been made aware of an alternative approach" to award the contract and needed to "exercise due diligence" to determine whether the approach had merit.

    On Monday, TSA officials dropped that idea.

    "After carefully reviewing the options and weighing the opinions of the experts, the TSA concluded that the competitive bidding process provides the right avenue to a contractor that will provide the government the best value," said Rear Adm. David M. Stone, the assistant secretary of homeland security for the TSA. "As good stewards of the taxpayers' dollars, we can do no less..."

Administration's Commerce Secretary Choice

Mike Allen and Jonathan Weisman at the Washington Post report on the Bush Administration choice of Kellogg executive Carlos Gutierrez to head the Commerce Department: "Gutierrez Is Pick for Commerce Secretary"

Weisman provides a biography, here: "Nominee Led Kellogg's Upswing".

The first article is most interesting for the light it sheds on the role of economic advisors in the current administration:
    "Administration officials said Bush and senior adviser Karl Rove believe their economic lineup was a shortcoming of the first term and are determined to seat a stronger team to sell Congress on Bush's campaign promises to add private accounts to Social Security and rewrite major portions of the tax code...

    Bush aides said that in addition to Gutierrez's inspiring immigrant's story, they see his background in sales as a crucial credential, since Bush has used his economic team primarily to promote the White House agenda rather than to make policy. Officials familiar with the search process said that, Gutierrez notwithstanding, the White House has found it harder to attract a top-flight team because some candidates are unwilling to give up lucrative posts to come to Washington to be White House cheerleaders.

    One economist, who was rumored to be up for a position on the Council of Economic Advisers, said he could not take a job that has been steadily pushed to the sidelines over the past two years. "You can't be attracted to a job where you'd be out of the loop," he said.

    A top White House official disputed that, saying: "The idea we can't recruit people to serve because they don't want to be cheerleaders is absolutely wrong..."
After reporting on two economists who have declined positions in the administration, the article goes on (drawing heavily on remarks by conservative economist Bruce Bartlett):
    "But some Republican economists say the administration's top economic jobs have been marginalized, while their inhabitants have been publicly humiliated.

    "Why would you want to take a job where you have no influence?" asked Bruce Bartlett of the conservative National Center for Policy Analysis. "What's the point?" ...

    The dismissals of Treasury Secretary Paul H. O'Neill and chief economic adviser Lawrence B. Lindsey two years ago signaled that Bush would accept no dissent or friction in his administration, Bartlett said.

    Treasury Secretary John W. Snow is seen as more of a promoter of White House policymaking than a policymaker, and Snow faces anonymous quotes predicting his departure. "It doesn't look like the White House treats its economic advisers very well, regardless of competence or loyalty," Bartlett said."

Byrd Amendment Sanctions

Last Friday, the World Trade Organization (WTO) gave the go-ahead to the EU countries, and six other countries, to impose punitive tariffs on exports from the U.S. USA Today has the story, "WTO approves sanctions over U.S. anti-dumping law"

What's at stake is one element of U.S. anti-dumping law. In 2000, Senator Byrd of West Virginia got a statute through Congress requiring that revenues from "anti-dumping" tariffs be turned over to the businesses that petitioned for the tariffs.

"Dumping" occurs when a foreign company sells a product in the U.S. for less than it does in its home country. Assuming that the price in the foreign country, and the price in the US, were both calculated fairly, so that it actually was true that a foreign company was selling for less in the U.S. than at home, there may be perfectly legitimate business reasons for this, having nothing to do with unfair competition. But U.S. law and regulation mandate the use of procedures that are likely to show that there was a price difference, even when there really wasn't.

A U.S. company that wants to use anti-dumping rules files a petition with the Department of Commerce, and Commerce launches an investigation into the foreign pricing behavior. Commerce seeks to calculate a "dumping margin" (the difference between the foreign and U.S. prices). As described below, Commerce uses procedures that stack the deck against foreign companies.

If Commerce says dumping occurred, and the International Trade Commission (ITC) says that it injured U.S businesses, tariffs equal to the dumping margin can be imposed on the exporters. The Byrd amendment turns these tariffs over to the businesses that filed the initial petitions.

The WTO determined in 2002 that this provision violated trade agreements the U.S. has agreed to. The argument is that, in effect, the provision imposes a double penalty on exporters to the U.S. accused of dumping: their goods are subject to tariffs, and their U.S. competitors receive a subsidy equal to the tariff revenues. The decision was upheld on appeal in 2003. On Friday, the WTO authorized selected foreign nations to impose punitive tariffs on U.S. exports while the Byrd Amendment remains. The President has said he will work with Congress to bring the U.S. into compliance.

As mentioned above, the "anti-dumping" procedures are not written to give foreign companies a fair shake. Brink Lindsey and Dan Ikenson cite an example of procedural bias (and not just one) in their CATO Institute report, ""Antidumping 101. The Devilish Details of "Unfair Trade" Law":
    "One of the most egregious methodological distortions in contemporary antidumping practice is the so-called cost test. The purpose of the cost test is to eliminate from consideration sales made in the home market [the "home market", that is the foreign company's home market - Ben] at prices lower than the full cost of production. When below-cost sales are eliminated in this way, the result is that all U.S. sales are compared with only the highest-priced (that is, above-cost)home-market sales.

    What possible purpose could be served by excluding below-cost home-market sales from normal value?
    ["normal value" is the technical term for the price against which the U.S. price is to be compared - Ben] Remember that the main theory behind the antidumping law is that the foreign producer is enjoying an artificial advantage because of a sanctuary market at home. According to the theory, trade barriers or other restrictions on competition cause prices (and profits) in the home market to be artificially high, thus allowing the foreign producer to cross-subsidize unfairly cheap export sales. Consequently, price differences between the export market and the home market are supposedly probative of unfair trade because they might indicate the existence of a closed sanctuary market in the foreign producer’s home market. Whether those price differences exist, though, cannot be fairly determined if all the lowest home-market prices are excluded from the comparison.

    Indeed, the existence of below-cost sales in the home market is actually affirmative evidence of the absence of a sanctuary market. A sanctuary market, after all, is supposed to be an island of artificially high prices and profits. If home-market sales at a loss are found in significant quantities, isn’t that a fairly compelling indication that there is no sanctuary market? But because of the cost test, it is precisely under these conditions that dumping margins are boosted significantly higher than they otherwise would be.

    The cost test is thus fundamentally misconceived...

    The effect of the cost test on the dumping calculation can be dramatic. For example, in Table 5
    , there are five sales of widget product Code 1 in the U.S. market at different prices ranging from $1.00 to $5.00. Likewise, in the home market there are five sales at the identical prices. Assuming the same volume is sold in each of the 10 transactions, the weighted-average price for Product 1 is $3.00 in both markets. The dumping margin for this comparison is zero. There is no price discrimination whatsoever. However, this is not how the calculation works.

    The cost test imposes restrictions on the eligibility of home-market sales that factor into the average price. Sales made at prices below the full cost of production are eliminated from consideration. In Table 5, the two home-market sales at prices below $2.50 are excluded, causing the average home-market price of Product 1 to rise to $4.00
    [in the hypothetical example in the table, all of the goods are produced for the same price, $2.50/unit, no matter what price they are sold for. Two goods sold in the foreign market, and two sold in the U.S. are sold for less than $2.50. Only the ones in the foreign market are deleted from the comparison. - Ben]. This generates a dumping margin of 33 percent despite the fact that there are no price differences between markets."

Lindsey and Ikenson were writing at the end of 2002; I assume this example is still relevant. The rules are not fair to foreign companies. They are not fair to U.S. consumers either. These are denied competition for their business, and are faced with higher prices.

Sebastian Mallaby describes the topsy-turvy moral world of U.S anti-dumping practice as it was implemented in the recent shrimp anti-dumping case: "Jumbo Shrimp Follies".

Lindsey and Ikenson apparently develop their argument at greater length in book form, in Antidumping Exposed: The Devilish Details of Unfair Trade Law".

Overhaul of Bush Economic Team

Mike Allen of the Washington Post reports the White House will be overhauling its economic team: "Bush to Change Economic Team" . Allen's story is based on conversations with White House "aides and advisors" this weekend.

The Secretary of the Treasury and the Chair of the Council of Economic Advisors, as well as the Secretary of Commerce and Director of the National Economic Council (the last two retirements
had already been announced), will be replaced. Josh Bolton at the Office of Management and Budget will be retained.

The story the White House appears to be trying to get across this weekend is that the President is moving decisively to lay the groundwork for an ambitious social security and tax reform agenda, by replacing his existing team with one with more political and public relations skills:
    "Republican officials said Bush's economic team has been weaker than his national security advisers, and that the president believes he needs aides who can relate better to Congress and be more effective in dealing with financial markets and television interviewers. A more skilled team is essential, the aides said, because of the complex and politically challenging agenda of overhauling Social Security to add private investment accounts and simplifying the tax code."
Allen reports on rumors of possible candidates for various positions.

Who will follow Greenspan?

Alan Greenspan will be leaving the Federal Reserve Board Chairmanship at the end of next year. He's held the position since august 1987.

USA Today carries a short AP story on potential replacements: "Bush's big economic pick will be next Fed chairman"
    "With Bush's re-election, the focus is on Republicans. Candidates include Harvard economics professor Martin Feldstein, chairman of the Council of Economic Advisers during the Reagan administration; Columbia University professor Glenn Hubbard, who was Bush's first CEA chairman; Treasury Undersecretary John Taylor; and Federal Reserve board member Ben Bernanke.

    Handicappers generally put Feldstein, 65, at the top of the list, in part because he is the best known. He has had a distinguished teaching career at Harvard and served from 1982 to 1984 as chairman of the CEA, a post that Greenspan used as a stepping stone to the Fed job.

    Some believe Hubbard, at 46 the youngest on the list, might have an inside track because of his strong support for Bush's tax cuts. Also, doubts linger among some conservative GOP supply-siders about Feldstein, given his reputation as a deficit hawk.

    Taylor, 57, gained prominence as a monetary expert at Stanford University before coming to Treasury. He developed the "Taylor rule," a formula designed to aid the Fed in setting interest rates. He has had trouble making an impact on administration economic policy in his current job.

    Bernanke, 50, is viewed as the dark horse. Little known outside academic circles before coming to the Fed board in August 2002, Bernanke has impressed veteran Fed watchers who have started to read his speeches carefully for insights into Fed thinking on a range of economic issues."

Turnover at the NEC

Andrew Samwick at Vox Baby reports that Stephen Friedman will be stepping down as director of the President's National Economic Council (NEC) at the end of the year, "Steve Friedman to Step Down at the NEC", and has some thoughts on who should take his place (Deputy Director Keith Hennessy).

The director of the NEC is responsible for economic policy coordination within the administration. Samwick outlines the formal responsibilities. Among other things, Samwick's post is worthwhile for its insights into the practical meaning of the formal responsibilities, and for its thoughts on the type of person needed to fill the job.

Kash over at Angry Bear also posts on the changing of the administration's economic guard: "Help Wanted: Economic Advisors for President"

Kash says that the NEC Chair is typically an administration's top economic policy salesman, and that Friedman has maintained an unusually low profile. Friedman has had a low profile, but I'm not sure that "chief economic spokesman" is an appropriate role for this position. The NEC was formed to perform a policy coordination function on behalf of the president. The director needs to encourage the great government departments to participate in a joint economic policy making process with other agencies. Department heads would resent a director who tried to speak on their behalf. An attempt to do so might be seen as undercutting departmental independence.

I have no idea how Friedman has performed in what I imagine is his primary mission, which should be (a) getting the different departments to buy into the Council process as a way of ensuring their points of view are represented in White House decision making, and of ensuring that the President gets a dispassionate presentation of a meaningful selection of options (the "honest broker" function), and (b) follow up - promoting the coordinated administrative and legislative implementation of the President's economic policies.

Both posts link back to a Jonathan Weisman story in Wednesday's Washington Post: "Top Economic Adviser to Bush Is Leaving Post". Weisman reports that N. Gregory Mankiw, the Chairman of the White House Council of Economic Advisors, is also expected to leave next year.

Why did the Pilgrims starve?

The Pilgrims arrived at Plymouth late in 1620; the famous Thanksgiving celebration took place in the fall of 1621. But the early years were rocky, and hungry.

Alex Tabarrok over at Marginal Revolution has written a short holiday post (A Thanksgiving Lesson) arguing that a large part of the problem was an attempt by the colonists to function as a communist society. Tabarrok's post is built around the quotation of an eloquent discussion of incentives written by Plymouth Colony Governor William Bradford in his History Of Plymouth Plantation. I won't quote from it here, but it's worth reading in Tabarrok's post. The remainder of this post will make more sense if you do read Tabarrok's.

Why did the Pilgrims experiment with communism? They didn't want to. The investors in Europe, who financed the Pilgrims, insisted on it. Lyle Glazier, writing in 1954:
    "As serious colonial scholars know, these claims that the Plymouth settlement was patterned after "apostolic communism," or after Plato's ideal commonwealth are flights of fancy which even a casual reading of Bradford's History immediately dissipates. The fulminations against "that conceite of Plato's," far from indicating that the Pilgrims had modeled their commonwealth on Plato's, indicates rather that Bradford, exasperated at the inefficiency of a system which threatened the Pilgrim's with starvation, vilified that system in hyperbole by condemning its most famous exposition.

    The truth is that although the Pilgrims did accept economic communism for the first two and a half years of their plantation at Plymouth, they did so unwillingly, not ever considering it an idealistic experiment in social betterment. For them all - for all the others as well as for Bradford - it was an economic expediency, forced upon them by the English investors, or "adventurers," who insisted that for the first seven years of the settlement all goods and all profits should be shared in common. Far from sanctioning such a program, the Pilgrims resented it from the beginning, and they continued to resent it as long as it endured...

    ...Robert Cushman,
    [agent for the Pilgrims - Ben] apparently believing (and with some grounds) that the entire project would fail unless he met the conditions imposed by the investors, agreed to abrogate the two terms which the Pilgrims prized above all: (1) that their dwellings and lands, with improvements, should be their own and not be included in the general settlement at the end of seven years, and (2) that each settler should be granted two days each week to work for the improvement of hs own property...

    ...the planters
    [the Pilgrims - Ben] remained so rankled by the new terms that they resolutely refused to accept them, so that when at last they left England for America, they had not signed the papers. In fact, at the last moment they had to sell some of their badly needed supplies, including firkins of butter, in order to pay harbor clearance fees, when the angry investors refused to advance them any further loans.

    Later, some months after they had settled in Plymouth, they did sign the agreements in desperation, after Cushman, coming over on the Fortune, had preached them a sermon on their moral obligation to meet the demands of the investors who had paid their passage. As the result of this signature, they did commit themselves to economic communism for a period of seven years, a commitment which Bradford took the initiative in breaking during the summer of the third year, in order to save the colony from another winter of starvation rations..."
(American Quarterly; 6(1):72-75; Spring, 1954).

So the communal system was in place from sometime in (the Spring?) of 1621, until the summer of 1623 - or for two summers. After the two year experiment, it was abandoned by the colonists.

It sounds like the "communal" system might have been the result of an effort by the investors to solve a principal-agent problem. The colonists would have been on their own, a long way off. They could easily have diverted time and resources to their own purposes, rather than to the purposes of the joint enterprise. The investors might have insisted on the conditions (all houses built and lands improved, and no time for your own use) to constrain the opportunities of their agents, the colonists, to ignore the investors' interests.

The early organization of the Plymouth Colony has been put to rhetorical use. A Google search after reading Tabarrok's post brought up a large number of conservative's citing it in favor of the importance of economic systems that consider incentives. The Glazier note I've been quoting indicates that liberals, also, have drawn on it:

    " seems to have become fairly common for liberals (on the defensive) to point out, "Well, after all, you know, the Pilgrim Fathers were communists." Far from it...
This would have been in 1954, and the years before.

I'll skeptical of this for now; the "communism" episode, placed it is full context, including its rejection, couldn't have been favorable to liberal causes. Only certain radical strains of liberal thought would have advocated communism any way.

Sea squirts

When people travel, or move goods from one place to another, plants and animals often hitchhike along. If these species take off in their new location, they can be a costly nuisance. "Invasive species" can be a negative externality associated with travel and trade.

Resources for the Future authors take a look at some of the economic issues in this March 2004 Resources article, "Fending Off Invasive Species: Can We Draw The Line Without Turning To Trade Tariffs?", and in this more technical working paper:"How Trade Politics Affect Invasive Species Control".

Doug Fraser reports in the Cape Cod Times on the appearance of sea squirts on Georges Bank, off of New England:"Squirt invasion" . Scientists have found the sea squirts, native to the sea floor off of Europe, beginning to colonize the sea floor on Georges Bank, off of New England. These things are apparently a menace:

    "Known as sea squirts, these animals are just a little more than a half-inch long, but congregate in colonies that form thick mats, smothering sea life on the ocean floor, including scallops, the second most valuable commercial species in New England, and sea vegetation that provides shelter and food for fish...
    ...The squirts attach to gravel and hard-sand sea bottom and cannot tolerate the shifting sand that makes up most of the top of Georges Bank. Unfortunately, many commercially important juvenile fish species like cod also prefer gravelly bottom."
They reproduce and cover new ground rapidly. Fraser has a nice photo showing the edge of a sea squirt colony menacing some nice bottom gravel.

Its not clear how the sea squirts got on Georges Bank, but hitchhiking on ships' hulls is a real possibility:
    "No one yet knows how the squirts arrived here, but it is considered an alien species since scientists believe the only native colonies are off the Netherlands and France. It has been found growing on ships' hulls and may have dropped off on a trans-Atlantic passage. Sea squirts were first found in New England off the Coast of Maine in 1993 and since then have been reported in coastal waters from Connecticut to northern Maine. They have also been found along the California coast, and this October in Puget Sound in Washington."

Fishing activity can help them spread:

    "Valentine's experiments this past winter showed that breaking up sea-squirt colonies actually helps spread them faster as the animals resort to asexual budding to rebuild themselves. He is concerned that scallopers or fish draggers could increase the territorial growth of sea squirts by towing through an infested area."
Invasive species are a concern here in Alaska. We host a lot of vessel traffic. Each year hundreds of fishing vessel arrive from ports in the lower 48. Ballast water and hull fouling organisms are a concern. As are rats, which might threaten island bird colonies. The Alaska Department of Fish and Game (ADF&G) reports that there have been 24 non-indigenous plant and animal species found in Alaska waters.

"" provides access to infromation on Federal invasive species programs. The Australian government's invasive species page is here. The "Invasive Species Weblog" is here.

Blue laws

Kevin Brancato posts on laws limiting certain types of commerce on Sunday: "Sunday Shopping". Some history, some implications, and a link to a defense of a day of rest.

Space tourism

David Tufte is posting on the economics of space tourism. Start here "Marginal Cost of Space Travel". There's a rocket with a cost of $10,000 per suborbital launch?

Alex Tabarrok is a space tourism skeptic: "Romance and Realism in Space Tourism".

How to estimate the appropriate anti-dumping tariff for shrimp

Sebastian Mallaby explains how we do it in the U.S.:"Jumbo Shrimp Follies"

Thanks to Craig Newmark for the pointer.

Why are you paid in health insurance?

Almost all (95%) Americans with private health insurance get if from their employer. People are paid in health insurance as well as with money. Doesn't this seem strange? After all, most of us aren't paid in apartment rentals, or with bags of groceries.

I pointed to a profile of economic historian Melissa Thomasson a few days ago. Thomasson works on the history of medical care and medical insurance. The profile cited a 2003 American Economic Review paper of hers on "The Importance of Group Coverage: How Tax Policy Shaped U.S. Health Insurance." (AER September, 2003)

Why are we paid in medical insurance?:
    "The development of this kind of group, employment-based insurance in the United States can be traced to several factors: a provision in the 1942 Stabilization Act that allowed employers to use fringe benefits to attract labor during World War II; the ability of insurance companies to counter adverse selection by selling to employee groups; and perhaps most importantly, a tax policy first introduced in 1943 and codified in 1954 that exempts employer contributions to employee health plans from taxable employee income." (page 1373)
Recall that adverse selection refers to "a process that occurs when individuals with different expected losses are charged the same premium, whereby those with low expected losses drop out of the insurance pool, leaving only individuals with high expected losses. Adverse selection can make it difficult to sustain private insurance markets." (World Bank)

She provides a brief discussion of the evolution of the tax treatment of employer provided medical insurance:
    "Modern health insurance developed in the 1930’s, when the nonprofit organizations of Blue Cross and Blue Shield (the Blues) began to offer prepaid plans covering hospitalization and physicians’ services. For-profit commercial insurance companies entered the health market after seeing the success of the Blues, and the market grew quickly. While only 9 percent (12.3 million) of Americans had health insurance coverage in 1940, 32 million had health insurance by 1945 (Source Book of Health Insurance Data, 1960).

    Both commercial insurance companies and the Blue Cross/Blue Shield plans initially focused on offering insurance to groups of employees. Group health insurance was advantageous advantageous for both insurance companies and employers for several reasons. First, employment based group health insurance allowed insurance companies to avoid adverse selection since the insured group was formed for a reason other than health insurance coverage. In addition, since employers collected premiums, group insurance plans were associated with lower administrative costs (Phelps, 1997). Finally, government policies in the 1940’s and 1950’s provided significant incentives for the formation of employment-based insurance arrangements. Under the 1942 Stabilization Act, employers were allowed to offer health benefit packages to secure workers during a period of wage and price controls. In addition, a 1943 administrative tax court ruling reinforced the link between health insurance and employment by stating that employers’ payments to commercial insurance companies for group medical and hospitalization premiums on behalf of their employees were not taxable as employee income.

    The 1943 ruling served as a precursor to the tax subsidy of employer-provided insurance enacted in the 1954 Internal Revenue Code (IRC). However, the direct effect of the 1943 ruling on the quantity demanded of health insurance may have been limited due to the fact that the circumstances in which it applied were not clear-cut and that it was subject to wide interpretation. By actually codifying the tax exemp-tion, the 1954 Internal Revenue Code removed a substantial amount of uncertainty surrounding the taxability of employer contributions to employee health plans. As a result, risk-averse firms that were unlikely to contribute to a health insurance plan for employees prior to 1954 may have done so after the 1954 IRC reduced much of the uncertainty. The changes to the IRC were also likely associated with substantial announcement effects, since they provided a statutory basis for the tax treatment of employer contributions that was heretofore buried in administrative tax court cases.

    How might the change in the tax laws in 1954 have affected the demand for health insurance? The 1954 change in the IRC was in fact a tax “subsidy” of employer-provided health insurance. After the implementation of the tax subsidy in 1954, a worker paid $1 in wages receives ($1 - t) after taxes (where t is the worker’s marginal tax rate), while $1 contributed to a worker’s health insurance premium is untaxed. Thus, households with employers who contribute to their health insurance premiums face a lower after-tax price of health insurance than households without this fringe benefit. As a result, the overall effect of the tax subsidy on the demand for health insurance may have been twofold. First, the tax changes may have increased the quantity demanded of employer provided health insurance among workers whose employers did not already offer health insurance benefits, or among workers who had previously declined employer-provided coverage. This effect should show up as an increase in the number of Americans covered by group, employer-provided health insurance. Second, for workers whose employers already provided group health insurance coverage, the amount of coverage purchased should have risen given the decline in the after-tax price of health insurance. Given that workers in high income tax brackets particularly gain from tax-advantaged compensation, both of these effects should be stronger for households with high marginal income tax rates."
    (pages 1374-1375)
Thomasson exploits two surveys of family expenditures on health care and insurance from the 1950s, done before and after the 1954 tax law change, to examine these hypotheses.
    "The paper suggests that the tax subsidy led to a shift from individual to group insurance and increased the amount of health insurance coverage purchased by households, especially households with high marginal tax rates...Households with group policies bought even greater amounts of coverage after the tax subsidy was enacted, and households with higher marginal tax rates were more likely to have group insurance than they did before 1954, and purchased greater amounts of coverage...Overall, results indicate that the tax subsidy increased the amount of coverage purchased by 9.5 percent, suggesting an elasticity of demand for health insurance coverage of -0.54..."( page 1382)
The elasticity may be an upper bound, if the demand for health insurance has become more inelastic since 1954.

Economic Policy Position Turnover

Tyler Cowen supplements the available gossip on who may be in line for what second term Bush Administation positions on the Council of Economic Advisors and the proposed bipartisan committee on tax reform. Also, people who may be tapped to replace Greenspan at the Federal Reserve: "Gossip from the Bush Administration"

Adverse selection

The Cliometric Society profiles economic historian Melissa Thomasson. Thomasson specializes in the economic history of medical insurance and health care.

Her paper "Early Evidence of an Adverse Selection Death Spiral? The Case of Blue Cross and Blue Shield" explores competition between the non-profit insurers Blue Cross and Blue Shield, and emerging for-profit insurers. Adverse selection refers to "a process that occurs when individuals with different expected losses are charged the same premium, whereby those with low expected losses drop out of the insurance pool, leaving only individuals with high expected losses. Adverse selection can make it difficult to sustain private insurance markets." (World Bank):
    "Thomasson (2004) examines the structure of the health insurance market and looks at the interplay between nonprofit and for-profit insurance companies under the employment-based system. Originally, the nonprofit Blue Cross and Blue Shield plans (the Blues) community rated their policies, meaning they charged individuals the same premium, regardless of risk. The Blues community rated, at least in part, as a way to rationalize their nonprofit status, arguing that they operated in the community interest. While the Blues were among the first groups to offer health insurance coverage, technological advances in medical care, increasing incomes, and several government policies passed in the early 1940s quickly served to bring more traditional, for-profit insurance companies into the health insurance market. For-profit insurance companies experience rated their policies, so that they charged lower premiums to their best (i.e. lower-risk) customers. Thomasson also finds that when for-profit insurance companies entered the market and experience rated their policies, they lured the best consumers from the Blue Cross plans, threatening the ability of the Blues to survive. In response, the Blues began to adopt community rating on a limited basis, which rapidly leveled the playing field. This trend continued; by the mid-1990s, several Blues plans jettisoned their nonprofit status — and the rating restrictions that accompanied it — in order to more ably compete with their for-profit competitors."
The profile is great reading, with brief summaries of Thomasson's papers and a set of references. There are about eight profiles of cliometrians and their work in the series: "CURRENT RESEARCH IN CLIOMETRICS. FEATURED CLIOMETRICIANS".

Norio Matsumoto

I've linked to the unbelievable Alaska photos of Norio Matsumoto for a long time. Today's Juneau Empire has a profile of Matusmoto by I-Chun Che: "To capture the aurora".

This is what you do to get good pictures:
    "...this is a man who has chartered a plane to fly to the southwest fork of Kahiltna Glacier [in Denali National Park - Ben] for the past five winters and stayed there by himself for one or two months...

    Matsumoto normally spends the first five days making a snow cave. As his skills have improved over the years, his cave is now big and fancy with stairs leading to a bedroom...

    "The cave is about 20 degrees below. It's actually pretty warm when it's 40 degrees below outside," Matsumoto said.

    When the weather is nice, he stays up all night waiting for the peak of the aurora borealis. He uses Nikon FM2 and F3 cameras because they don't need batteries. He has to hold his breath when looking through his viewfinder because his breath might freeze the camera.

    When snowstorms sweep through the glacier and visibility is low, he reads books he has brought from Japan. He keeps a journal... For entertainment, he once hammered nails with a frozen banana through his books."

Hurricanes and Presidential Politics

Matthew Hisrich discusses the role of disasters and disaster relief in presidential elections:"Did the Florida Hurricanes Cost Kerry the Election?"

I learned about this from Joshua Hall in a post on "The Political Economy of Disaster Relief" at the blog Division of Labour. Hall also links to an abstract of the Economic Inquiry article "The Political Economy of FEMA Disaster Payments" by Thomas Garrett and Russell Sobel.
    "We find that presidential and congressional influences affect the rate of disaster declaration and the allocation of FEMA disaster expenditures across states. States politically important to the president have a higher rate of disaster declaration by the president, and disaster expenditures are higher in states having congressional representation on FEMA oversight committees. Election year impacts are also found. Our models predict that nearly half of all disaster relief is motivated politically rather than by need. The findings reject a purely altruistic model of FEMA assistance and question the relative effectiveness of government versus private disaster relief."
Garrett is an economist with the St. Louis Fed. His bio there (the link above) lists his publications, and includes a link to "Political Allocation of Agriculture Disaster Payments in the 1990s." The abstract to this reads:
    "Legislation passed during the 1990s attempted to move U.S. agriculture disaster relief to a more market oriented process. The failure of this legislation has been attributed to the political system behind agricultural disaster relief. This paper explores the impact of political influence on the allocation of U.S. direct agriculture disaster payments. The results reveal that disaster payments are not based solely on need, but are higher in those states represented by public officials key to the allocation of relief. The effectiveness of legislation aimed at promoting more efficient disaster payments systems, such as crop insurance, over direct cash payments is also examined."
Sobel is a professor at West Virginia University. Sobel is quoted in this story on the relationship between the hurricane and the election in The Mercury News.
    "...Should Ivan's remnants make their way to the Mid-Atlantic, as they may, another battleground state, Pennsylvania, might be similarly situated. In short, experts say, in terms of disaster assistance, it's best to be in a big state where people are having trouble making up their minds.

    All politics may well be local, but almost half of all disaster assistance is political, concluded two economists in a paper published last year.

    "Florida is a politically important state," noted Russell Sobel of West Virginia University, coauthor of the paper. He said he was not surprised to see it getting this kind of attention..."

Thank God we've got the WTO now!

Deirdre McCloskey reports,

    "In one decade in the eighteenth century, according to the Swedish economist and historian Eli Heckscher in his book of 1932, Mercantilism, the French government sent tens of thousands of souls to the galleys and executed 16,000 (that’s about 4.4 people a day over the ten years: you see the beauty of statistical thinking) for the hideous crime of...are you ready to hear the appalling evil these enemies of the State committed, fully justifying hanging them all, every damned one of their treasonable skins? ...importing printed calico cloth..."
This is from her paper, "The Secret Sins of Economics." This sort of thing undoubtedly violates some sort of multilateral trade agreements, or certainly will with the expiration of the rules allowing clothing and textile quotas at the end of the year.

There are many sins, but "in the end they are one, deriving from pride, as all sins do." I can't tell you what the one sin is yet. I've worked my way through the "Virtues misidentified as sins," "Venial Sins, Easily Forgiven," and have reached, "Numerous Weighty Sins Requiring Special Grace to Forgive But Sins Not Peculiar To Economics." The last section is "The Two Real Sins, Almost Peculiar to Economics." She doesn't tell you what the ultimate sin is until the end, and I'm not sure I should tell you when I find out. I don't want to spoil the surprise for you.

I learned about this from a posting by Tyler Cowen: "The Secret Sins of Economics"

P.S. 11-11-04; 11 PM:

After thinking it over this evening, I'm wondering about this estimate of 16,000 executions. Is this really true? It sounds unlikely. John McDermott indicates, in footnote 12 to "Mercantilism and Modern Growth" ) , that Robert Ekelund and Robert Tollison disagree with the 16,000 estimate in their 1981 book Mercantilism as a Rent-Seeking Society. (College Station: Texas A&M University Press).

We should copy the Chinese shamelessly

And the Cubans, and the Indians, and the Brazilians, and anyone else who has a good idea (always giving due deference to intellectual property rights).

The Red Prawn posts on things they do well outside the US and Canada: "Great ideas from China". Mahalanobis provides a useful supplementary post: "Great Ideas From China".

Ten Ways to Look at the Election Results

The Red Prawn posts ten different maps illustrating the U.S. election results in ten different ways:"Alternate views of the electoral map"

Thanks to Mahalanobis for a pointer to this blog.

Private vs. public supply of water

Ernesto Schargrodsky reviews Thirsting for Efficiency: The Economics and Politics of Urban Water System Reform, edited by Mary Shirley, in the most recent Journal of Economic Literature. (Sept 2004, pages 882-884). Thirsting (Elsevier Science, 2002) is a collection of papers on private operation of municipal water supply in developing countries. Schargrodsky gives it a good review.

One lesson from the book:
    "...the benefits of contracting out water services to private operation seem larger for countries with weaker institutions."
Schargrodsky finds this counter-intuitive:
    "This last conclusion may sound surprising since a first intuition would suggest that weak institutions should lead us to favor public ownership, as private investments would remain underdeveloped for fear of appropriation. Weak institutional settings, then, should tilt things in favor of public participation in the incentives-versus-externalities trade-off. Inversely, strong institutional settings should foster private management."
But, what we see happening in the world is different:
    "However, this is not the case: today most developed countries in the world operate water systems publically."
This could be because:
    "To understand this paradox, the chapter by Keith J. Crocker and Scott E. Masten on the shift towards public water ownership through U.S. development suggests that the social value of these externalities grows with development."
On the other hand:
    An alternative hypothesis, I believe, could also be advanced: these same institutional weaknesses usually induce low quality in the public sector bureaucracy and low constraints on the political misuse of resources, resulting in a more severe deterioration in the performance of water systems under public management. In better institutional environments, the relative disadvantage of public provision in terms of efficiency may diminish, making public provision relatively more appealing at similar externality levels."
Scott Masten illustrates the potential for appropriation in his paper, "Public Utility Ownership in 19th-Century America: The 'Aberrant' Case of Water". Arguing that public ownership of water and sanitation utilities has become far greater than public ownership of other public utilities, Masten asks why.

He finds the main answer in the greater difficulty of contracting for water and sanitation services, and the greater opportunities for one side or the other to take unilateral steps to redirect the rents from service provision.
    "...I argue that a variety of factors did indeed leave water and sewer transactions more vulnerable than other utility transactions to appropriation hazards...
The nature of water supply (low marginal costs, high metering expenses) made pricing through access fees problematic:
    The nature of water and sanitation limited the pricing of these services compared to other utilities in adverse ways, particularly, by constraining the application and size of fees tied to use of the services. First, water and sanitation services are unique among utilities in having both substantial metering costs and, under normal circumstances, (nearly) nonrivalrous consumption. The often negligible resource cost of water and sewer services combined with the self-operating character of the corresponding systems made the incremental cost of supplying these services, in many cases, virtually zero. Moreover, even if incremental service costs were nontrivial, the positive public health externalities of centralized water and sewer use (both directly and in relation to each other) dictated against significant service charges. The appropriate unit price for water and sanitation services in light of these considerations would typically have been too low to justify the cost of installation and reading of meters.

    Other utilities, by contrast, had either substantial marginal costs of service or low metering costs. Thus, although utilities like gas and electricity had metering costs comparable to water’s, the inefficiencies that would have resulted from failing to assess charges based on usage given the substantial variable costs of generating electricity and manufacturing gas would have justified metering of these services. And although telephone and telegraph services had low marginal service costs, these services also enjoyed exceptionally low metering costs: Monitoring of use could be performed from a central office, avoiding the expense of installing and gathering data from on-site meters.

    At the same time that metering costs discourage the application of usage charges, the relative difficulty of excluding access and preventing resale of water and sanitation services limited the size of access or connection fees. Whereas electricity and gas are difficult, even dangerous, to transport and store, water can be carried or stored in barrels or other containers or diverted with pipes or hoses with little cost or risk. Moreover, to the extent that access fees deterred use, public health and nuisance concerns also constrained the fees municipalities would have wanted charge for access to water and sanitation services."
Because there were problems with private water companies cost recovery through user fees, private companies were more dependent on government transfers for revenue - increasing their exposure to attempts to appropriate rents:
    "The need of water and sanitation utilities to rely more heavily than other utilities on inframarginal payments (payments unrelated to either use or access) to recover their capital costs...

    ...a privately-owned utility that cannot recover its costs through access or usage charges must to some degree rely on transfers from the government for its revenue. Dependence on transfers from municipal authorities, however, increases the utility’s exposure to appropriation efforts: Transfers make tempting targets for redistribution. The need of water and sanitation franchises to rely relatively heavily on inframarginal payments from municipal revenues for their income would have increased the need for negotiated adjustments and occasioned greater opportunities for conflict and appropriation."
Both sides could have scope for manipulating the terms of the contract:
    "...If a party to a water or sewer contract did become dissatisfied with the terms of the agreement, the nature of water and sanitation systems provided that party with ample opportunities and a set of tactics to evade or amend the contract. First, compared to utilities such as electrical and telephone service whose delivery primarily entails installation of aboveground poles and wiring, the installation and repair of the underground distribution network of water and sewage systems has the potential, particularly in urban settings, to cause significant disruptions to traffic and commerce. Second, and in some ways more important, water is essential for fighting fires. To assure that firefighters have access to water supplies that are adequate in terms of both quantity and pressure, water systems must be capable of providing large volumes of water at high pressure. Historically, the failure of water systems had been responsible for or contributed to a number of major urban conflagrations. The potential for disruption and, in the case of water, destruction from the withholding of cooperation or simply from exercising less-than-full diligence made cooperation important but also created a valuable tactic that private suppliers of water and sewer services could exploit in search of price or other concessions from the city. On the other side, city officials could attempt to use feigned dissatisfaction (or even interference) with the utility’s provision of these services to justify reducing payments or revoking a utility’s franchise."
Contracting problems would be expected to be worse the more densely populated the city:
    "Since the disruptiveness of installation and repair activities and the hazards of fire increased with population density, the potential for and cost of conflicts over contract to terms were likely to become more acute as cities became more congested."
Masten does find that,
    "...cross-section analysis of waterworks at the turn of the century [the 19th to 20th, not the 20th to 21st - Ben] shows population density, which aggravated two of the central sources of contractual friction between cities and private water companies, to be the most important determinant of public municipal ownership."
Revised later in the evening, 11-8-04

Natural disasters aren't good for the economy

We're predators. Our eyes filter out things that aren't moving and focus on things that are. We're alert for injured, vulnerable things, that are moving in unnatural ways.

When we look at Florida after a hurricane we see all the frenetic emergency relief activity and the reconstruction. We don't see the unemployment and lost income. And for some reason we refuse to identify the lost wealth in the destruction we see (maybe because it's the result of past, and no longer obvious, activity).

This past hurricane season in Florida stimulated news stories on how a natural disaster can actually benefit the economy. The reporters focus on what is obvious to them. They may also be intrigued by the apparant paradox of the idea that a disaster can have net economic benefits. There is probably also a very human and understandable desire to see the cloud's silver lining.

On August 18, E. Frank Stephenson of Division of Labour caught Greg Fields of the Miami Herald arguing that Hurricane Charley would make Southwest Florida better off: "Charley-nomics".

On September 26, USA Today published a story on the economic consequences of the recent hurricanes: "Economic growth from hurricanes could outweigh costs".
    "Although natural disasters spread destruction and economic pain to a wide variety of businesses, for some, it can mean a burst in activity and revenue.

    For that reason, economists tallying the numbers expect the hurricanes will be neutral in their effect on the U.S. economy, or may even give it a slight boost, particularly because of an expected reconstruction boom in the already red-hot construction industry..."
This led to a number of blog posts. Tyler Cowen led off the next day:"Bombing Iraq to Prosperity".
    "I would not have dared this [the story in USA Today - Ben] as satire. Nor is it presented as a sophisticated critique of national income accounting, which in fact does treat such expenditures as productive. Will it next be suggested that excess productivity is our main economic problem?
Other posts referenced Cowen's post in the next few days. These may be found listed at the end of his post.

References to Frédéric Bastiat's "broken window fallacy" were common. According to the Wikipedia:
    "The parable describes a shopkeeper whose window is broken by a little boy. Everyone sympathizes with the man whose window was broken, but pretty soon they start to suggest that the broken window makes work for the glazier, who will then buy bread, benefitting the baker, who will then buy shoes, benefitting the cobbler, etc. Finally, the onlookers conclude that the little boy was not guilty of vandalism; instead he was a public benefactor, creating economic benefits for everyone in town.

    The fallacy of the onlookers' argument is that they considered the positive benefits of purchasing a new window, but they ignored the hidden costs to the shopkeeper and others. He was forced to spend his money on a new window, and therefore could not have spent it on something else. Perhaps he was going to buy bread, benefitting the baker, who would then have bought shoes, etc., but instead he was forced to buy a window. Instead of a window and bread, he had only a window. Or perhaps he would have bought a new shirt, benefitting the tailor; in that case the glazier's gain was the tailor's loss, and again the shopkeeper has only a window instead of a window and a shirt. The child did not bring any net benefit to the town. Instead, he made the town poorer by the value of one window."
Bastiat presented this parable in his essay, "What Is Seen and What Is Not Seen". The broken window, and the efforts to repair it, are what is seen. The hidden costs are what is not seen.

Two of the best posts were those by Lynne Kiesling ( "Bastiat's Broken Window Fallacy"), and Mike Giberson ( "Hurricane of Fortune? Unemployment Claims Up") both at Knowledge Problem. Kiesling linked to interesting essays on Bastiat. Giberson provided citations and abstracts of two recent two journal articles on the economic impacts of disasters. Paulo Guimaraes et al. examined the impact of Hurrican Hugo on South Carolina and,
    "...found that the income gains were neutral overall, despite a major surge in some sectors. Even in these sectors, the economic gain remained below the unreimbursed wealth loss. Thus, the catastrophe had a net negative economic effect."
Mark Skidmore and Hideki Toya took a long-run perspective, and found that:
    "The cross-country empirical analysis demonstrates that higher frequencies of climatic disasters are correlated with higher rates of human capital accumulation, increases in total factor productivity, and economic growth."
This conclusion stood out from much of the rest of the material in the blog postings.

An additional post, not mentioned in Cowen's: "Who Says Keynesianism is Dead?" by Don Boudreaux at Cafe Hayek.


This is a second post on economic themes in this season's hurricane commentary. On August 17 I posted on hurricane related discussions of price gouging: "Price Gouging".


Revised 11-8-04

Second Term Economic Policy-Maker Changes

On Thursday the Gregg Hitt and Jacob Schlesinger reported on potential administration personnel changes in the Wall Street Journal
    "On the economic team, Treasury Secretary John Snow and budget director Josh Bolten are expected to stay for a time. The other two main players - Steve Friedman, head of the National Economic Council, and Greg Mankiw, chairman of the Council of Economic Advisors - are expected to leave soon."
Thursday's Journal also carried a reminder that Alan Greenspan's term will be up in January 2006, and that he can't be reappointed.
    "A critical decision will be picking a successor to Federal Reserve Chairman Alan Greenspan. His 14-year term as Fed governor expires in January, 2006, and by law he can't serve another one. Many former administration officials put Harvard University's Martin Feldstein at the top of the list of favorites.

    Mr. Feldstein was chairman of President Reagan's Council of Economic Advisors and has provided the intellectual underpinnings of some of Mr. Bush's economic policies, especially the idea of private Social Security accounts alongside the regular ones. Glenn Hubbard, the first chairman of the Council of Economic Advisors, may also be considered, although at 46, his youth could be a drawback."
Gary Fields, Robert Block, and Greg Ip reported on other potential changes in Friday's Journal:
    "The central question in economic policy is whether Treasury Secretary Snow remains. He campaigned heavily for President Bush, especially in his home state of Ohio - though he gave the Kerry campaign useful fodder by branding job losses there "a myth." He is seen in Congress as ineffectual, and that could make him expendable if Mr. Bush needs somebody stronger to push through tax and Social Security revisions.

    But Mr. Bush may choose to run those revisions more through the White House. In that case, one of the little-known economic officials who could make a big difference over the coming year is Charles P. Blahous III, a former congressional staffer who is the top administration offical on Social Security overhaul.

    Securities and Exchange Commission Chairman William Donaldson is expected to leave at some point during Mr. Bush's second term. Appointed originally as a caretaker to calm tensions after the scandals of his predecessor, Harvey Pitt, Mr. Donaldson has proved a more vigorous corporate reformer than Wall Street had expected. Many companies had complained to the White House and a second Bush term could bring the "potential for trying to undo what the SEC has done in the last few years," said one commission official."

So many promises

Partial Social Security privatization, extension of the first term tax cuts, revenue neutral tax simplification, cutting the deficit in half by 2009, more spending for education, no cuts to defense and national security spending...he can't do it all. Jonathan Weisman reports in Friday's Washington Post:"Analysts Call Outlook for Bush Plan Bleak"
    "President Bush signaled yesterday that he would add personal investment accounts to the Social Security system, simplify the tax code without raising taxes and cut the budget deficit in half, all before he leaves office in 2009.

    Ambitious as those promises are, they may be mathematically impossible, budget and policy analysts say..."
Defining the baseline carefully can help:
    "Chad Kolton, a spokesman for the White House budget office, said the president can and will cut the deficit in half by 2009. But, he said, the deficit in 2009 would be half what the White House first projected it to be for 2004: $521 billion. That projection, made in January, proved to be inflated by $108 billion, in part because faster economic growth produced $82 billion in additional tax revenue and in part because spending was $27 billion less than anticipated.

    But Kolton said that pledge never included the cost of Social Security reform, nor will the 2006 budget that Bush will unveil in early February."

The London Congestion Charge is Working

In February 2003, London began to charge drivers five pounds (about $8) to enter a 21 square mile core area in its downtown. The fee was meant to reduce traffic congestion.

Richard Bourn and Stephen Joseph report (in Australian Policy Online) on the congestion charging program introduced in central London last year. They say its working: "London's Successful Drive Against Congestion" :
    "EIGHTEEN months after its introduction, London’s congestion charge has largely ceased to be controversial. The transport and environmental benefits are beyond doubt and the predicted social drawbacks have not materialised. A few concerns remain about the effects of the charge on some businesses in central London but these have been inflamed by the business interests that always opposed it. Meanwhile the success of the charge has been such that it has carried Ken Livingstone back for a second term as London’s mayor, after forcing the Labour party to readmit him and admit that its concerns about the charge were ill-founded.

    The aim of the congestion charge was honest and explicit: to reduce traffic congestion by reducing traffic volume by 10 to 15 per cent. To achieve this, drivers are required to pay £5 per day if they enter central London between 7am and 6.30pm, Monday to Friday. In the event the reduction in traffic has been greater than anticipated. Overall traffic entering the zone is down 18 per cent during charging hours, with a reduction in car traffic of 30 per cent and a similar reduction in congestion. There has been little displacement of traffic into areas round the zone or additional congestion on the ring road. Motorists themselves have benefited; for those who still drive in the zone, journeys are quicker and more reliable..."

Read the rest; it's a nice column.

I've been following the story here intermittently. Previous posts include: January 2003: "
Using a fee to control externalities"
; February 2003: "London's Congestion Pricing Scheme"; February 2003: "Follow-up on London congestion pricing"; August 2003: "Bad news from London (about traffic)"; September 2003: "Congestion pricing in London";

These last two are not really about London, but about proposals for a national road pricing scheme in great Britain: July, 2004 "Britain's road-pricing proposal "; August 2004 "The cost of one more driver".

No interest in deficit reduction

Brad DeLong doesn't see any interest in deficit reduction among Republicans in Congress or in the White House: "Second Term Economic Policy: A Modal Forecast"
    "...Thus our current rulers will only take the deficit seriously when markets lose confidence in the American political system's ability to handle its finances, and the dollar falls and interest rates spike. By then it will be very late in the day indeed, and maneuvering room will be tight."
As Paul Blustein and Jonathan Weisman suggest in this Washington Post story, "Dollar Falls On Fears of U.S. Deficits", administration comments since the election don't suggest a lot of concern over the deficit:
    "President Bush's news conference yesterday did little to lessen concerns over the deficits, Wall Street analysts and currency traders said. Bush simultaneously promised not to raise taxes under the guise of tax simplification, to pursue a costly restructuring of Social Security and to cut the budget deficit in half by 2009."
Revised 11-5-04.

Red and Blue Counties

Brad Delong links to a map by Robert Vanderbei showing "red and blue" counties. This is much more interesting than the "red and blue" state maps, and paints a more complex picture: "Purple Haze: The Real Vote Map"

Reviewing the county level data shows that the country is less sharply divided along "NE-West Coast" and "South-Plains" lines than the state maps suggest.

Bush Administration Economic Position Changes

The Washington Post reports that we should expect John Snow to leave the Treasury before too long, and Donald Evans to leave Commerce: "President to Consider Changes for New Term":
    "Treasury Secretary John W. Snow is likely to be replaced but will be given plenty of time to make a graceful exit, administration officials involved in the discussions said. Card [White House Chief of Staff Andrew Card - Ben] is a possible replacement, although he is planning to stay in his job for now, friends said. One top administration official said U.S. Trade Representative Robert B. Zoellick is interested in the job but unlikely to get it.
    Commerce Secretary Donald L. Evans has not said he is leaving but has sent strong signals that he plans to return to Texas, administration officials said."
Card is a former Massachsetts politician, Secretary of Transportation, and transportation industry public affairs specialist and lobbyist. I can't see anything in his background that would give him the experience with financial markets you'd like to see in a Treasury Secretary.

P.S. 11=8-04. Richard Stevenson reports in today's New York Times that Card will be staying on as Chief of Staff: "Card Will Stay On as Chief of Staff". Other notes in the story:
    "Other long-time aides, like Margaret Spellings, the domestic policy adviser in the White House, who is often mentioned as a possible education secretary, could move to other top-level jobs within the administration. The fate of newer faces in the White House, like Stephen Friedman, the former Wall Street executive who has been director of the National Economic Council the last two years, is less clear to insiders but seems to hinge as much as anything on their own decisions about staying on...

    There is already some turnover in sub-cabinet positions. On Monday, Brian C. Roseboro, deputy undersecretary of Treasury for finance, informed the White House that would be leaving in December. Mr. Roseboro has been in charge of the increasingly big job of refinancing the federal debt."

What would an explicit market for human cadaveric organs look like?

In my last post I quoted from an article by Andy Barnett, Roger Blair, and David Kaserman (see the citation at the end of this post) on rent seeking in markets for human cadaveric organs: "Rent seeking in cadaveric organ markets". As I noted there, and in an earlier post ("Deadly price controls"), federal legislation prohibits the sale of human cadaveric organs.

What would a market for human cadaveric organs look like? How would it work? What are the implications of asking grieving relatives if they want to sell the organs of their loved one? Are advocates of markets proposing that organs be rationed among potential transplant patients using market prices? Barnett et al. discuss this. Advocates ...
    " not propose barkers hawking human organs on street corners. They do not envision transplant patients, or their agents, dickering for a heart or liver with families of the recently departed. They do not advocate a market for organs from living donors. Indeed, markets are seen as a device that could reduce the need for living donors by increasing the number of cadaveric organs collected. Proponents of markets do not advocate an aution in which desperate recipients bid against each other for life-sustaining organs. And most market advocates propose using the price system only for organ collection, not for distributing collected organs among potential recipients.

    What is proposed is a system in which agents of for-profit firms offer a market-determined price for either premortem or postmortem agreements to allow the firm to collect organs for resale to transplant centers. For example, insurance companies could enter the organ procurement market by merging with existing organ procurement organizations. Then, organ procurement officers who presently negotiate with families of recently deceased individuals could offer payment in cash or burianl expenses for the right to remove needed organs. Such a system would be equivalent to providing the deceased with an ex-post term life insurance policy with no premium. Alternatively, individuals may be offered a reduction in medical insurance rates in return for a premortem annually renewable agreement that allows their insurance company to collect and sell their organs in the event that they die during the policy year in a way that makes organ collection feasible. Firms that collect organs would then sell them to transplant centers that place orders for needed organs.

    Compared to the current policy, markets for organ procurement dramatically change both the incentive of organ procurement personnel to ask permission to remove organs and the incentive of potential donors to grant that permission when asked. Markets provide tangible rewards, that is, profits, to those who are successful at organ collection. Hence, organ procurement firms have incentive to seek out potential donors and to structure requests and payment packages that are most likely to induce a positive response to the request for permission to collect the organs. Further, payment to organ donors provides a direct incentive, in addition to any altruistic inclination they may have, to grant permission."
Page 98 in Barnett, Andy H., Roger D. Blair, and David L. Kaserman. "A Market for Organs." In Entrepreneurial Economics edited by Alexander Tabarrok. Oxford Univesity Press. 2002.

Rent seeking in cadaveric organ markets

Last night I based a post about price controls in markets for cadaveric human organs for transplants on a recent journal article - Beard, Kaserman, and Saba. "Limits to Altruism: Organ Supply and Educational Expenditures." Contemporary Economic Policy. 22(4):433-441. October 2004: "Deadly price controls".

Beard et al. described the ways that transplantable human organs were obtained from people who have just died. They pointed out that under federal statutes families could not be paid for organ donations.

This is a price control, suppressing explicit price competition for cadaveric organs. But, the organs are a valuable resource, and when explicit price competition is precluded, people will compete for the value in other ways. Beard et al. point out that:
    "Because the price of a valuable resource is held at zero under this system, rents are created. Those rents, in turn, are likely to be captured by downstream suppliers (e.g., physicians, transplant centers, and UNOS)." (434)
UNOS is the organization that distributes organs to transplant centers.

Today I came across an interesting discussion of one of the forms this competition takes. This is provided in an article by Andy Barnett, Roger Blair, and David Kaserman. A fuller citation follows:

    "...the public policy that outlaws sales of cadaveric organs encourages hospitals to start their own transplant programs, because that is the only way they can capture the economc rents (or true market value) contained in the organs they collect for free. The artificial shortage created by the zero-price policy pushes the value of the relatively few organs that are collected far above the market-clearing level. This rise in value is especially large given the highly price-inelastic demand for organs. Such value is referred to as economic rent. Because the agent (currently the hospital) that collects these organs cannot legally sell them to a transplant center or to a patient, it can only capture the economic rent by also performing the transplant operation. That is, the economic rents that go uncollected by the altruistic donor do not disappear but are, instead, captured by the transplant surgeon and the hospital at a subsequent stage of production - the transplant operation.

    As a result of this economic incentive, we have witnessed a surge in the number of transplant centers in the United States over the past decade, even as the number of transplants performed annually has remained virtually constant. Many of these new centers perform fewer than five transplants per year. In economic terms, the transplant industry is experiencing substantial entry by inefficiently small firms. Entry occurs when profits rise above normal levels in an industry. Normally, such entry then drives the market price back down to the competitive level by increasing supply, therefore eliminating excess profits.

    In the transplant industry, however, entry does not increase supply; it merely redistributes the available organs among a larger number of transplant centers. Consequently, entry reduces profitability by pushing costs up rather than pushing prices down. The result is a highly inefficient industry struture with more than the cost-minimizing number of transplant centers."
Page 93 in Barnett, Andy H., Roger D. Blair, and David L. Kaserman. "A Market for Organs." In Entrepreneurial Economics edited by Alexander Tabarrok. Oxford Univesity Press. 2002.

Bush Trade Policy: Past and Prospects

Peter Gallagher looks at where we've been, and where we may be going in the next four years: "Trade and the G W Bush Administration bis"

Deadly price controls

A journal article on organ transplants

The most recent issue of the Western Economics Association journal Contemporary Economic Policy has an article on the supply of cadaveric human organs for transplant. The authors are T. Randolph Beard, David Kaserman and Richard Saba, all of Auburn University. There's a full citation below.

Price controls

The U.S. system for cadaveric organ donation is dominated by the National Organ Transplant Act (NOTA) of 1984. Under the act organ acquisition is in the hands of organ procurement organizations (OPOs), which operate as non-profits and may not pay for organs. There are 55 regionally based OPOs. OPOs are effectively monopsonists within their collection areas. Distribution of organs to patients is in the hands of the United Network for Organ Sharing (UNOS). (434-435).

The rules prohibiting payment for organs effectively set the formal market price at zero. Price controls lead shortages; the quantity demanded will exceed the supply. That's happened in this market. Beard, Kaserman, and Saba point out that,
    "...there is a severe and growing shortage in this country of cadaveric human organs available for transplantation. Currently, the list of patients waiting for a suitable donor organ to become available stands at almost 85,000. Less than half of these people are expected to live long enough to receive the needed organs because expected waiting times are now beginning to stretch into years. At least 16 lives are lost each day (more than 6000 a year) as a direct consequence of this shortage." (433)
Beard et al cite one study suggesting that the market clearing price for cadaveric organs would be between $500 and $1,500 (439). They also note that,
    "Because the price of a valuable resource is held at zero under this system, rents are created. Those rents, in turn, are likely to be captured by downstream suppliers (e.g., physicians, transplant centers, and UNOS)." (434)
Cadaveric organ acquisition

They provide an interesting description of the process of cadaveric organs. Screening criteria for potential donors are strict,
    "Such donors must die within a hospital. They also must have healthy, well-functioning organs and be free of infection at the time of their death. In addition, the donor organs must be free of cancer, because the use of posttransplant immunosuppressive therapy tends to accelerate progression of the disease. In the past, an age limit on donors was generally applied [although this has gradually been relaxed to increase supply - Ben]."
Because of these strict screening criteria, most organs come from accident or stroke victims. Only about 1% of deaths in the U.S. may meet the criteria. (435)

When a person has signed a donor card under the Uniform Anatomical Gift Act of 1967, family member permission is not legally needed for transplantation.
    "In practice, however, permission of surviving family members is generally sought even in cases where a valid donor card is present; in clear violation of the 1967 act, the organs frequently are not collected if the family denies consent.
    Thus, as a practical - though not legal - matter, the property rights to the organs of deceased individuals rest with the surviving family members..." (435)

    Given the need to obtain the family's consent to cadaveric organ donation, the methods used in seeking that consent become extremely important in determining the success of the procurement process. Current (so-called required request) regulations stipulate that all families of recently deceased potential donors be approached for permission to remove the organs. Because that request is determinative, how it is made is crucial to the outcome. Specifically, several studies have shown that both the timing of the request and how it is framed can have significant effects on observed consent rates..." (436)
So you don't want to approach the family like the doctor who "having just informed the family that their relative had died, asked, "You don't want to give away any of his parts, do you?" " (436) Our authors point out that you can pass legislation requiring that family members be asked, but you can't require they be asked nicely.

Beard et al are interested in the factors that determine donation rates. They are especially interested in the role of educational efforts aimed at health care professionals and families in influencing those rates. I'll just finish by quoting the abstract.
    "Current U.S. law prohibits compensation for cadaveric organ donation. The resulting organ shortage causes thousands of deaths per year. The primary tool currently relied on by the organ procurement industry to increase organ supply is educational spending aimed at both industry professionals and the general public. This article evaluates the effectiveness of such spending across a fairly comprehensive and unique sample of free-standing U.S. organ procurement organizations, controlling for the size of the organization, population demographics, and geographic region. The authors find no evidence that such spending is effective on the margin and conclude that the organ shortage is unlikely to be resolved by increased educational expenditures."
Beard, T. Randolph, David L. Kaserman, and Richard P. Saba. "Limits to Altruism: Organ Supply and Educational Expenditures." Contemporary Economic Policy. 22(4):433-441. October 2004.

Organs Online

Alex Tabarrok of Marginal Revolution has written on organ transplant issues. The column "Life-Saving Incentives: Consequences, costs and solutions to the organ shortage" is over at the Library of Economics and Liberty. "How to Get Real About Organs" is over at Economic Journal Watch. Here's a Tabarrok PowerPoint presentation: "The Shortage of Human Organs for Transplant" At Marginal Revolution he's posted on "Cadaveric vs. Live Organ Donation", and "Adam Smith on the morality of financial compensation". The April 12, 2004 issue of The Lighthouse has a short article on Tabarrok on organs, with several useful links to articles by him and others. The Fall 1997 issue of The CATO Journal carried an article by Charles T. Carlstrom and Christy D. Rollow: "The Rationing of Transplantable Organs: A Troubled Lineup".

The big story of the night

Of course tonight's big story is the Arlington stadium vote. Will Arlington Texas vote to subsidize a new Dallas Cowboys stadium? It looks like they might - Craig Depkin reports the early returns: "Early returns do not look good"

November 3: Stadium wins: "Some more on the stadium vote... "

Time runs out for textile and clothing quotas

The U.S. is supposed to have been phasing out a set of quotas on imports of clothes and textiles during the last 10 years, under the Agreement on Textiles and Clothing (ATC) . The phase-out period will end December 31, this year. (for details on the ATC see the WTO web site: "Textiles Monitoring Body (TMB). The Agreement on Textiles and Clothing") However, we didn't take advantage of the time we were given. We've waited until the last minute to do the "heavy lifting."

How we procrastinated

Under the ATC the U.S., Canada, Norway, and the E.U. maintained import quotas for individual products, like work gloves and cotton pants, from specific countries. The products covered by the ATC were listed in the agreement.

The countries involved agreed to gradually dismantle their quota systems product by product, and to gradually increase the size of the quotas for goods that remained under quota.

But they have procrastinated in every possible way that they can. The history of the process is described by Hildegunn Nordås in Section III of the WTO publication "The Global Textile and Clothing Industry post the Agreement on Textiles and Clothing".

The ATC set out four target dates by which products accounting for stated percentages of the volume of a country's 1990 imports of listed products were to come out from under the quotas. All products were to be out from under the quotas (more accurately brought within the trade rules of the General Agreement on Tariffs and Trade (GATT) ) by the end of 2004. Countries had considerable freedom to select the products they wanted to bring out from under the quotas for each of the four target deadlines.

Countries with clothing and textile quotas under this agreement have complied fully with it, but have managed to avoid serious de-quotafication.

The listed product count was inflated by including products that had not been subject to quotas under the predecessor Multi-fibre Agreement (MFA). Let trade analyst Hildegunn Nordås pick up the story:
    "The products to be included in the agreement are listed in the Annex to the ATC. This Annex includes, however, items that were not restricted under the MFA and the list therefore served to inflate the basis from which liberalization was calculated...

    Turning to the integration process
    [the integration of the products into the GATT and out of the ATC, and associated ending of the quotas - Ben] , it is fair to say that progress has been limited. Stage 1 brought the integration of one single restricted product by one country into the GATT – Canada integrated work gloves. Nevertheless, all the restricting countries complied with their first stage commitments. This was possible because of the extension of the list of products in the Annex to ATC, as mentioned above. The opportunity to integrate non-restricted products had not been exhausted during step 1, so step 2 saw more of the same – it was the unrestricted products that were integrated first. When the third stage was reached, the opportunity to integrate products that previously had not been restricted under the MFA had been exhausted. However, the Textiles Monitoring Body observed that there was a tendency to integrate products where quota utilization was particularly low... in the United States, out of 43 specific constraints to be eliminated, 21 had utilization rates below 50 per cent and of these the utilization rate was zero for three quotas...

    The number of constraints does not reflect the value or volume of imports, and it is important to stress that the Members...have fully complied with their obligations under the ATC. Nevertheless, the large number of constraints left to the fourth stage
    [the large number left to expire with the end of the program this December] and the low share of clothing in the volume of integrated products so far suggests extensive back-loading and that the most sensitive products and the products with the highest value-added have been left to the final stage of integration. In short, the table leaves the impression that liberalization has been kept to a bare minimum."

Dan Ikenson provides another description of the procrastinatory process in the 2003 CATO Institute report "Threadbare Excuses. The Textile Industry’s Campaign to Preserve Import Restraints".

    "The ATC includes a detailed list of products—well over one thousand specific tariff provisions—to which its rules apply. Each importing country is required to integrate (remove from quota restraints) products from the list covered by the ATC in compliance with the following schedule:
    By January 1, 1995—Products that accounted for at least 16 percent of the country’s
    1990 import volume
    By January 1, 1998—Products that accounted for at least an additional 17 percent of the country’s 1990 import volume
    By January 1, 2002—Products that accounted for at least an additional 18 percent of the country’s 1990 import volume
    By January 1, 2005—All remaining products ...
    The ATC allowed the importing countries to decide which products would be integrated
    at each stage, with the condition that the list at each stage should include products from four subgroups: tops (unspun fibers) and yarns, fabrics, made-up textile products, and clothing.
    In implementing the ATC, each of the importing countries took full advantage of thediscretion afforded them. The list of products to be integrated under the ATC was included as the annex to the agreement. It included a substantial number of products that were never even restricted under the MFA [the agreement which was replaced by the ATC - Ben]. According to estimates in a 1994 Journal of World Trade article, previously unrestricted products accounted for 37 percent of U.S. total annex import volume in 1990 (the base year for integration considerations). For the EU, previously unrestricted imports accounted for 34 percent of the annex, and for Canada the figure was 47 percent. Each of those members included previously unrestricted products in their respective integration schedules for the first three stages of the ATC, thus enabling them to claim compliance without really liberalizing the quotas for many products.
    Exercising more discretion, the importing countries chose to integrate primarily products in the tops and yarns, fabrics, and made-up textile categories in the earlier stages, pushing off most clothing categories to the final stage. Of course, developing countries have the greatest comparative advantage in labor-intensive clothing production. Clothing has also been more heavily restricted than the other groups of products."
Ikenson describes several other strategies used to avoid compliancewith the spirit of the ATC.

Domestic political response to the looming deadline

And now, here we are. The ATC is going to expire. There are no more opportunities to procrastinate. Like a student who has put off the semester's work until the last week, we have a lot to do in a short time.

The expiration is no surprise. The Progressive Policy Institute prepared a short "brief" on the expiration of the multi-fibre agreement a year ago: "America Will End Its 'Quota' System for Clothes, Yarn, and Fabric Dec. 31, 2004". I posted on it this past July: "Phasing out the textiles agreement ".

There is a widespread expectation that Chinese producers will edge out many other foreign importers, and some U.S. production as well. Textile lobbyists have filed petitions requesting some additional protection. The Bush Administration agreed Friday to consider a petition from domestic textile manufacturers to limit textile imports.

Paul Blustein of the Washington Post wrote about the filing of the petitions on October 13 he wrote about the filing of the textile petition: "Textile Makers Fight for Limits. With Caps Expiring, U.S. Industry Fears Glut of Chinese Imports".

    "The petitions that the U.S. industry is filing this week, if approved by an interagency U.S. government committee, would limit the annual growth of Chinese imports in nine targeted textile and apparel categories to as little as 7.5 percent. Those limits, known as safeguards, apply only to China under the terms of the agreement that gave Beijing membership in the World Trade Organization and could continue until 2008."
Martin Crutsinger also wrote about this for the Associated Press: "Textile industry seeks protection. Flood of Chinese goods feared when quotas end". On October 22 the administration implemented safeguard quotas on socks. Blustein reports again: "U.S. Limits Chinese Sock Imports". The sock decision broke some new ground:

    "The government's ruling yesterday on the U.S. sock industry's petition, which was filed in June, could have important implications for the other markets at stake by indicating how officials will decide the other cases. The administration last year imposed safeguard limits on imported Chinese brassieres, dressing gowns and knit fabric -- all categories where quotas had already been lifted -- but the socks case is the first in which the "threat of disruption" is being used to bolster the argument for such an action.
On October 30 Blustein had a story on the administration's intent to consider additional safeguard quotas: "U.S. to Consider Limiting Pants Imports From China". Again, this is a "threat-based" action that is under consideration:

    "Yesterday's action was just a procedural step, in which an interagency committee accepted for consideration a petition filed by the industry seeking to impose safeguard limits on cotton trousers. But it was important because the petition was based on the "threat" that Chinese trousers would "disrupt" the U.S. market once quotas are lifted, rather than on evidence that market disruption was actually happening. Retailers and wholesalers that import Chinese clothing have objected that safeguards should be considered only after it is clear that the market is being disrupted"
Elizabeth Becker describes the impact of the loss of North Carolina textile jobs vividly in the New York Times: "Textile Quotas to End, Punishing Carolina Towns".

    "Meanwhile, here in the slowly beating heart of the remaining American textile industry, workers and owners of factories still operating along a stretch of Interstate 85 from Charlotte to Greensboro see the dawning of 2005 as a death sentence. More companies, they fear, will go bankrupt. More communities will wither like Kannapolis, and thousands more workers will be desperate for training, employment and health insurance.

    In hopes of staving off the worst, politicians in the Southeast from both parties are taking advantage of the close outlook for the presidential election to win last-minute concessions from the White House that could slow the flood of imports from China.

    And, seriously weakened as it is, the American textile and apparel industry is still flexing its political muscles. [On Oct. 29, days before the election, the Bush administration accepted the industry's petition seeking relief, promising to consider special steps to limit Chinese exports.]...

    And lost in the swirl of anxiety are the benefits that the change will bring to tens of millions of consumers. Americans alone are expected to save an estimated $6 billion in lower-cost goods once the quotas are gone, allowing clothing makers and designers from New York to Milan the freedom to choose factories based on cost and quality rather than a complicated system of 1,300 categories for every nation.

    But that is little consolation to this Carolina community of 36,000, which was reduced to an economic ghost town in little more than a year once Pillowtex, Ms. Harrington's former employer, fell into bankruptcy. The residents have remained, but the factories are being dismantled and the stores and shops shuttered on Main Street after this one-industry town lost its industry...

    While American consumers' household budgets will benefit from lower prices for blouses and pillowcases, the shock to the affected workers and communities will be immediate and gut-wrenching..."
A cautionary note

Peter Gallagher was here before me, posting on the end of the ATC in November 2003 ("What the textile quotas mean":
    "A decade ago, the United States and other industrialized countries agreed to abolish all textile and clothing quotas from 1 January 2005, replacing the quantitative barriers, which are otherwise illegal in WTO, with tariffs. It was one of the two most important agreements ever signed in WTO (the other is the 1994 Agreement on Agriculture); the pre-eminent trade policy contract between the industrialized 'north' and the industrializing 'south'...

    Any sign -- such as these new 'temporary' quotas on competitive production -- that the USA might welch on its commitment to replace its remaining textile and clothing import quotas with tariffs on schedule on 1 January 2005 will deeply sour global trade relations particularly with developing country governments in parts of East Asia..."
Gallagher makes other interesting points, and has useful links.

I'm voting for Kerry

It goes against the grain - I voted for Bush last time - but I'll vote for Kerry today. The two big issues for me are the war in Iraq and the deficits and failure to address future Social Security or Medicare issues.

The war in Iraq was unnecessary. Hussein had regional aspirations, but I don't think he was a direct threat to the U.S. ("Is Saddam Hussein reckless - or is he a rational international actor?") It turned out that there were no weapons of mass destruction, and the evidence that Iraq was an important supporter of terrorist activity directed against the U.S. is weak. The war has been run poorly. We suffered a heavy diplomatic defeat going in to it, and post-war planning was inadequate. The treatment of prisoners has often been shameful, and the administration has refused to take responsibility. All this said, the world is different now than it was before the war, and, for moral and security reasons, we can't walk away from the situation we've created.

Deficits during a recession are appropriate. But the tax cuts that underlay a large part of them, targeted disproportionately at relatively affluent people with lower spending propensities, were not as potent as they might have been. Moreover, under reasonable assumptions about the future, they are making federal deficits much worse. These deficits will eat into domestic savings, reducing future economic growth or, to the extent we borrow to support investment, making the proceeds of growth the property of people outside the country. They will make it much harder to deal with funding the upcoming Social Security and Medicare deficits. I can't see any serious steps the administration has taken to address these.

The economics are important, but the war is the most important issue. I'm not at all sure that Kerry will be a better economist. His numbers don't add up, and I'm concerned about many of the things he has said about trade. Frankly, I don't really know what he can do better about the war either.

But he is not the person who created the situation in Iraq. On this issue, of overwhelming importance, the current administration has a record of relatively bad judgment and poor performance.

So, off to vote.

Are Regional Free Trade Agreements a Good Idea?

Economists generally think lowering barriers to trade is a good idea, but they disagree about whether or not it's a good policy for countries to lower barriers by forming a series of Regional (Free) Trade Areeements (RTAs).

Ronald Wirtz has a nice introduction to the debates over RTAs in the September issue of the Federal Reserve Bank of Minnesota's The Region: "A Fork in the Free-Trade Road".

A few days ago I mentioned Peter Gallagher's recent report on East Asian thinking on WTO trade actions ("Peter Gallagher on Asian Attitudes on Trade Issues"). I quoted a selection from his post on the problems businessmen saw with RTA related transactions costs. Wirtz elaborates:
    "But as more countries tread the RTA path to free trade, they are also leaving behind a legacy of entrenched interests that could impede the WTO's multilateral march toward the same goal. Maintaining trade barriers in RTAs for certain domestic industries like sugar is just one example. Possibly a more sinister, festering example concerns so-called rules of origin (ROOs), which are used to determine the original national content of an import coming from a trade partner. These rules are designed to prevent transshipment, or the transfer of goods from one country (a nonmember of an RTA) to an RTA member country for further duty-free (or reduced duty) shipment to a third country that is also an RTA member. Transshipment circumvents the tariffs that would have applied had the first country shipped goods directly to the third country.

    While ROOs seem straightforward, even reasonable if one agrees with the need for RTAs, Burfisher, Robinson and Thierfelder say that they “are increasingly recognized as an insidious form of trade protection,” in part because high content requirements artificially increase demand for local input, and thus offer a big incentive to divert trade.

    In the broader picture, ROOs are part of what critics call “administered protection”—differing tariff levels, implementation schedules, technical standards, customs administration, ROOs and a host of other details-that “allow” trade under the payload of a heavy rulebook and related paperwork. This is what Bhagwati referred to almost a decade ago in his “spaghetti bowl” analogy: RTAs present a multitude of intersecting, overlapping and crisscrossing agreements, each with its own set of unique administrative rules and standards—most of which exist at the request of some industry worried about its competitive trade position. A WTO survey of 215 RTAs covering trade in goods and services in force last year uncovered some 2,300 bilateral preferential relationships.

    Such trade complexity can be particularly daunting for small countries and producers in general. As RTAs proliferate, so do myriad rules of origin, at which point customs administration and private sector recordkeeping can become “burdensome,” according to a 2003 briefing paper commissioned by the U.S. Agency for International Development. “Anecdotal evidence suggests that for some low-tariff products that are not price-sensitive, the cost of record keeping may outweigh the benefit of favorable tariff treatment.” This report and many others have charged that such rules—and ROOs in particular—divert trade rather efficiently, which benefits that diverting country but likely harms others in the process.

    And the spaghetti bowl only gets bigger as more RTAs are enacted and trade integration gets deeper, multiplying the conditions on which countries agree to change the terms of trade with each other. As more administrative rules are built up, all of them need to be harmonized or otherwise eliminated for multilateral trade to take place. Given that such administrative rules are often put in place to protect domestic industries from foreign competition, the likelihood of their eventual, wholesale elimination seems no more probable than negotiating the matter on a multilateral level in the first place."