Static Assumptions Undermine Economic Policy Analysis


Over 50 years ago, Schumpeter emphasized that static models of capitalism miss what is most important in capitalism.  Yet static analysis still dominates most policy discussions.  But there is hope:


(p. A14) A bit of background:  Most official analysis of tax policy is based on what economists call "static assumptions."  While many microeconomic behavioral responses are included, the future path of macroeconomic variables such as the capital stock and GNP are assumed to stay the same, regardless of tax policy.  This approach is not realistic, but it has been the tradition in tax analysis mainly because it is simple and convenient.

In his 2007 budget, President Bush directed the Treasury staff to develop a dynamic analysis of tax policy, and we are now reaping the fruits of those efforts.  The staff uses a model that does not consider the short-run effects of tax policy on the business cycle, but instead focuses on its longer run effects on economic growth through the incentives to work, save and invest, and to allocate capital among competing uses.

 

For the full story, see:

ROBERT CARROLL and N. GREGORY MANKIW.  "Dynamic Analysis."  The Wall Street Journal  (Weds., July 26, 2006):  A14.


Audacity and Scale of Hurricane Katrina Waste and Fraud Are Amazing

Photo scanned in from my paper copy of the NYT issue cited below.  Compare the version above to the cropped version that appeared in to online version below–whether deliverate or innocent, the effect of the cropping is to reduce the visual magnitude of the scene (and hence reduce the evidence of the magnitude of the waste).

 

(p. A1)  WASHINGTON, June 26 — Among the many superlatives associated with Hurricane Katrina can now be added this one:  it produced one of the most extraordinary displays of scams, schemes and stupefying bureaucratic bungles in modern history, costing taxpayers up to $2 billion.

A hotel owner in Sugar Land, Tex., has been charged with submitting $232,000 in bills for phantom victims.  And roughly 1,100 prison inmates across the Gulf Coast apparently collected more than $10 million in rental and disaster-relief assistance.

There are the bureaucrats who ordered nearly half a billion dollars worth of mobile homes that are still empty, and renovations for a shelter at a former Alabama Army base that cost about $416,000 per evacuee.

And there is the Illinois woman who tried to collect federal benefits by claiming she watched her two daughters drown in the rising New Orleans waters.  In fact, prosecutors say, the children did not exist.

The tally of ignoble acts linked to Hurricane Katrina, pulled together by The New York Times from government audits, criminal prosecutions and Congressional investigations, could rise because the inquiries are under way.  Even in Washington, a city accustomed to government bloat, the numbers are generating amazement.

"The blatant fraud, the audacity of the schemes, the scale of the waste — it is just breathtaking," said Senator Susan Collins, Republican of Maine, and chairwoman of the Homeland Security and Governmental Affairs Committee.

 

For the full story, see:

ERIC LIPTON.  "’Breathtaking’ Waste and Fraud in Hurricane Aid."  The New York Times  (Tues., June 27, 2006):  A1 & A13. 

 

  Cropped version of the photo run in the online version of the NYT article cited above.

Source of the graphic:  the online version of the NYT article cited above.

Five More Hours Per Week of Leisure Time in 2003 Than in 1965

The easiest way to measure leisure is to take survey data on how many hours a week people spend at work and subtract.  Since 1965, the number of hours the average American works for pay has not changed much.  By this simple measure, then, leisure has also stayed the same.

But are we really working as much as ever?

”All time away from work is not equal,” Erik Hurst, an economist at the Graduate School of Business at the University of Chicago, said in an interview.  Some time off is actually just more work.

To put it in economic terms, we spend some time off the job in consumption (watching TV, hanging out with our friends, reading for pleasure) and some in production (cooking dinner, cleaning the house, doing household repairs).  Some activities, like sleeping and eating, fall somewhere in between, while others, including child care and gardening, combine pleasure and production.

The difference is not just that we enjoy some activities and dislike others.  It is that we could, in theory, pay someone else to do the production for us.  A cook or a restaurant can make dinner, but nobody else can play golf or watch TV for you.

. . .

Americans are not, in fact, working as much as they used to.  They are just getting paid for more of the work they do.  Using several different definitions of leisure, Professor Hurst and Mark A. Aguiar, an economist at the Federal Reserve Bank of Boston, analyzed time-use surveys done from 1965 to 2003.  Whether they defined leisure narrowly or broadly, they got a consistent result.

”Leisure time — measured in a variety of ways — has increased significantly between 1965 and 2003,” they write in ”Measuring Trends in Leisure:  The Allocation of Time Over Five Decades,” a Boston Fed working paper.  . . .  Using the most restrictive definition, which includes only ”entertainment/social activities/relaxing” and ”active recreation,” the economists found that leisure had increased 5.1 hours a week, holding demographics like age constant.  (Without that control, leisure has grown 4.6 hours.)  Assuming a 40-hour work week, that is like adding six weeks of vacation — an enormous increase.

”I was surprised by the magnitude,” Mr. Aguiar said in an interview, though the general trend agrees with earlier research.

 

For the full commentary, see: 

VIRGINIA POSTREL.  "ECONOMIC SCENE; The Work You Do When You’re Not at Work."  The New York Times  (Thursday, February 23, 2006):  C3.

 

A PDF of the NBER draft of the Aguiar and Hurst paper can be found at: 

http://faculty.chicagogsb.edu/erik.hurst/research/aguiar_hurst_leisure_nber_submit_final.pdf

Road Opens a Year Early: Contract Included Incentives


OmahaExpresswaySmall.jpg With monetary incentives to finish early, Hawkins Construction Company finishes westbound lanes a year ahead of schedule.   Source of photo:
http://www.omaha.com/index.php?u_pg=1636&u_sid=2214442&u_rnd=7720251

 

The long delays, and lack of visible progress in expanding 132nd, near our house, became a running joke—but the wasted travel time was not funny.  Similar road construction delays were occuring all over town, to the point where it looked as though the issue might threaten the mayor’s re-election.  So he got serious, and in new road contracts, included substantial monetary incentives for finishing the job ontime, and even more incentives to finish it early.  The expressway pictured above is one of those built under the new contract.  Maybe incentives really do matter?

 

(p. 1A)  An electronic sign above West Dodge lured drivers with a simple message:  "Expressway Open."

The real draw was the quicker commute drivers encountered Thursday evening during the first rush hour after the opening of the West Dodge Road Expressway.

After two years of construction, the expressway’s westbound bridge opened to traffic at 10:35 a.m. Thursday, more than a year ahead of schedule.

A steady flow of traffic streamed across the bridge Thursday evening.

"It was wonderful," said commuter Jean Crouchley.

 

For the full article, see:

MICHAEL O’CONNOR AND RICK RUGGLES.  "A Concrete Example of Progress; Motorists Expect Daily Drives to be Quicker with New Route."  Omaha World-Herald (Friday, July 28, 2006):  1-2.

(Note: The online version of the article had the title: "Making quick work of commute on Expressway.")


“The More Sweatshops the Better”

JACQUELINE NOVOGRATZ, a veteran of the Rockefeller Foundation and a former consultant to the World Bank, talks enthusiastically about the development of a company in Africa where some 2,000 women earn, on average, $1.80 a day producing antimalarial bed netting.  With the assistance of a $350,000 loan from an American investor, the business started making the nets nearly three years ago and is likely to add 1,000 more jobs within the next year.

”They’re in the process of building a real company town there,” Ms. Novogratz said.

 

Ms. Novogratz is not an outsourcing executive at a multinational company.  Rather, she is the chief executive of the Acumen Fund, a philanthropic start-up based in New York that uses donations to make equity investments and loans in both for-profit and nonprofit companies in impoverished countries.  One of the stars of her small portfolio is the bed-netting maker, A to Z Manufacturing, a family-owned company in Tanzania — a country where 80 percent of the population makes less than $2 a day.

. . .

”To put it in the baldest possible terms, the more sweatshops the better,” said William Easterly, professor of economics at New York University and author of ”The White Man’s Burden:  Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good.”  Professor Easterly is not advocating the deliberate creation of workplaces with miserable conditions.  ”As you increase the number of factories demanding labor, wages will be driven up,” he said, and eventually such factories will not be sweatshops.

Ms. Novogratz says it can be difficult to tell well-off, philanthropy-minded Westerners that what Africa really needs is more $2-a-day jobs.  But when they understand the alternatives, she said, such concerns tend to melt away.  Before they found work at the netting factory in Tanzania, for example, many of the women were street vendors or domestic workers and earned less than $1 a day.  A to Z’s wages place the women in Tanzania’s top quartile of earners, Ms. Novogratz said.

 

For the full commentary, see: 

DANIEL GROSS.  "ECONOMIC VIEW; Fighting Poverty With $2-a-Day Jobs."  The New York Times    Section 3, (Sunday, July 16, 2006):  4.

Life Has Improved; And Can Continue to Improve

 Source of graphic:  online version of the NYT article cited below. 

 

(p. 1)  New research from around the world has begun to reveal a picture of humans today that is so different from what it was in the past that scientists say they are startled.  Over the past 100 years, says one researcher, Robert W. Fogel of the University of Chicago, humans in the industrialized world have undergone “a form of evolution that is unique not only to humankind, but unique among the 7,000 or so generations of humans who have ever inhabited the earth.”

. . .

(p. 19)  . . .  stressful occupations added to the burden on the body.

People would work until they died or were so disabled that they could not continue, Dr. Fogel said. “In 1890, nearly everyone died on the job, and if they lived long enough not to die on the job, the average age of retirement was 85,” he said. Now the average age is 62.

A century ago, most people were farmers, laborers or artisans who were exposed constantly to dust and fumes, Dr. Costa said. “I think there is just this long-term scarring.”

 

For the full story, see:

Health1860s1994.gif Source of graphic:  online version of the NYT article cited above. 

HealthCivilWarAndNow.gif EscapeFromHungerAndPrematureDeath1700-2100BK.jpg  Source of graphic:  online version of the NYT article cited above.  Source of book image:  http://www.cambridge.org/us/catalogue/catalogue.asp?isbn=0521808782

 

Fogel’s book is a primary academic source for much of what is interesting in the New York Times article.  Fogel predicts that if we don’t screw things up, half of today’s college students will live to be 100.  He shows that academics in the past have consistently and significantly underestimated the maximum lifespans that would be attainable in the future.

The full reference for the Fogel book is:

Fogel, Robert William. The Escape from Hunger and Premature Death, 1700-2100, Cambridge Studies in Population, Economy and Society in Past Time. Cambridge, UK: Cambridge University Press, 2004.

 

Environmentalists Hurt Poor Quatemalans

Residents of El Estor, a small Q’eqchi community of 40,000 people located in northeast Guatemala, cheered when they heard that Vancouver-based Skye Resources was interested in reopening a local abandoned nickel mine.  According to local press, the town’s mayor and several community leaders led a rally last September in favor of the mine with a banner that read, "El Estor says yes to responsible mining."

It’s easy to see why there was such excitement. Skye Resources estimates that it will employ 1,000 people and create four indirect jobs in the community for every new mining job.  That plus an overall investment of at least $539 million is not irrelevant for an impoverished town with one of the highest illiteracy rates in the country — over 40% for indigenous men and 35% for indigenous women.

The festive mood didn’t last long.  Within months, opposition to the project began to swell.  Well-organized protesters were soon demanding that the Guatemalan government withdraw the mining license it had issued, alleging environmental risks and inadequate consultation with the community.

. . .

In a country with such dire needs for capital and technology to lessen the want of the poor, it is worth exploring whether such anti-mine activism truly expresses the will of the people.  Looking behind the scenes, the funding and instigation of the activism appears heavily driven by international nongovernmental organizations that end up discouraging development while trying to fulfill their own mission.

Boston-based Oxfam America and Toronto’s Rights Action are two anti-development NGOs active in Guatemala.  Oxfam has partnered with MadreSelva (Mother Jungle), a Guatemala City environmental group headed by affluent urbanites, to block mining projects.

 

For the full commentary, see: 

ANDREA TUNAROSA.  "AMERICAS; What Do NGOs Have Against Poor Guatemalans?"   The Wall Street Journal (Fri., July 21, 2006):  A15.