Comments on economics, mystery fiction, drama, and art.

Sunday, November 21, 2004

Bush and the Reform on the Intell Community

Let me see if I have this straight.

Bush says he's strongly in favor of the current bill to reform the intelligence apparatus in the U.S. He intends to work for its passage.

That bill centralizes the intell budget. So the budgetary control over the intell budget that the Department of Defense currently has, will be no more.

The Secretary of Defense has publicly criticized the change in budgetary control, and the DoD has worked to change that provision of the bill.

Apparently some people in the White House have also worked against the bill.

So despite bipartisan support in the Senate, bipartisan support in the House, the support of the 9/11 Commission, and the support of the President, the bill is dead. The Congressional Republican leadership won't permit a vote.

I forget. Is it the President who appoints the Secretary of Defense, or the other way around?

Congress Invades the IRS--For Now

This is too amazing, and too depressing, for words. Slipped, without notice, into the omnibus spending bill Congress is working on is a provisiont hat allows the Appropriations Committee chairs, or their designees, to have access to ANY tax return, and in a way that waives any penalties for how they use the information in the returns. It was apparently discovered almost by accident. (And the Republican leadership asserts that it got into the bill by "accident").

Here's the language of the provision:

"Hereinafter, notwithstanding any other provision of law governing the disclosure of income tax returns or return information, upon written request of the Chairman of the House or Senate Committee on Appropriations, the Commissioner of the Internal Revenue Service shall allow agents designated by such Chairman access to Internal Revenue Service facilities and any tax returns or return information contained therein."

Here's the link to the AP piece:

Friday, November 19, 2004

The Secret Sins of Economics

Deirdre McCloskey's pamphlet published by Prickly Paradigm Press, LLC--The Secret Sins of Economics--is a treat. It takes on what many consider to be the failings of economics, debunks them, and then concludes with what she feels are the two true sins--the failure of economic theory to move (much) beyond qualitative arguments on the theorizing hand and the fetish of statistical (rather than quantitative, economic) significance on the empirical hand.

While a few conclusions drawn from economic theory (Purchasing Power Parity) have strong quantitative implications, mostly our conclusions are qualitative--in general, rising incomes cause people to purchase more of most goods and services, for example. Or, other things equal, rising prices include people to buy less. The problem is that there is no way around this. I can think of no purely theoretical analysis which would let us say more than that higher prices are associated with smaller purchases. There's any number of reasons for this, but the primary one is that economics is not rooted in the physical laws of the universe, but in the psychology of individual decision-makers, and there's no reason to expect that the quantitative aspects of those decisions will always and forever be the same.

There is, for example, substantial evidence that the income elasticity of demand for food declines as income rises. And, in fact, this is not a surprise, and has been predicted from solely theoretical arguments. However, the precise quantitative nature of that relationship is almost certainly contingent, not determined or unchanging.

So we are dependent on empirical work to determine by how much people change their behavior when their circumstances change. And I have no problem with that. And I have no problem with the reality that how much people's behavior changes in response to (say) a change in income differs for different goods and services, and was different 20 or 30 or 40 years ago from what it is now. So the first of McCloskey's two sins strikes me as an aspect of the world economists (and other social scientists) have to deal with, and not at all as a sin.

What this does, however, is make the nature of the empirical work even more crucial to our enterprise. McCloskey's argument against over-reliance on significance testing is rather simple to make, but rather complex to understand. She argues that our analysis does give us estimates of the magnitude of the impact of changes in some X on some Y, and that in every case those magnitudes are accompanied by noise. Her argument is that statistical significance testing elevates an assessment of the magnitude of the noise to the primary position, relegating the estimated magnitude of the effect to secondary importance.

Her primary example here is drawn from the analysis of mammograms on early detection and treatment of breast cancer (rather than from economics), but the point is clear. The studies show that regular mammograms (beginning at age 40) are associated with a greater chance of early detection and treatment of breast cancer, thus saving lives. However, the magnitude of this result is not statistically significant (studies of mammograms for women over 50 yield similar, but larger and statistically significant results). Failure to use the results from studies of 40 - 50 year olds, she argues, is tantamount to murder: "Are you telling me, Mr. Medical Statistician, that even though there is a life-saving effect of early mammograms in the data on average, you are uncomfortable about claiming it? I thought the purpose of medical research was to save lives. Your comfort is not, as I understand it, what we are chiefly concerned about...The over-50 people [those who recommend regular mammograms only for women over 50] are killing patients. Maybe only slightly more than zero patients. But more than zero is murder" (pp. 50 - 51).

My problem is that the issue is more complicated than that. Let's suppose that the data show that the point estimate of the effect of early mammograms is to reduce death rates, and that the standard error of the estimate is such that we can be 70% certain that the true effect is to reduce death rates. That means there is a 30% chance that the true effect is either to leave death rates unchanged--or to raise them. Why might early mammograms raise death rates? Because treatment based on "false positives" might kill people. My (admittedly made-up) numbers, then suggest odds of 7 - 3 that early mammograms save lives--and 3 - 7 that they might lead to additional deaths. That's what significance testing tells us. Are we comfortable with 7 - 3 odds? Or do we want something better?

Her aspirin example makes the point. By early in the study is was apparent that the odds were much better than even that aspirin reduced repeat heart attacks.

It's true that we tend to emphasize statistical significance, and I wouldn't argue that we, in some cases, over-estimate it. But sometimes it demonstrates our reluctance to take too large a chance or doing something wrong.

How many of us, for example, would be willing to take these odds?

If the Federal Reserve raises interest rates (in the face of inflation), there's a 7-in-10 chance of resolving inflation without a depression--and a 3-in-10 chance of cratering the economy?

I don't know the answer to that, either. But significance testing is implied in our answer.

Wednesday, November 10, 2004


What do these cities have in common?

Mosul, Samarra, Baghdad, Ramadi, Kirkuk

They are cities specifically identified in today's New York Times ( where violence has increased during our attack on Fallujah. According to the Times:

"The American military reported 130 attacks on Monday, well above the average of 80 a day over most of the summer."

So what we've done is displaced the violence, not ended or contained it. What a surprise.

And when the non-combatants return to Fallujah, and find their homes and places of work destroyed, how graeful will they feel? Are we solving a problem, or helping the problem grow?

Monday, November 08, 2004

The Backman Affair

So the Arizona Diamondbacks hired Wally Backman to be their manager, then fired him when several brushes with the law (in its various forms--assault, DUI, bankruptcy) came to light.

I have very mixed feelings about employers using a potential employee's legal record as a criterion on which to make hiring decisions, particularly for people who have completed their obligations (including punishment) under the law. After all, if people with records cannot get hired in decent jobs, then their ability to earn a living is (perhaps arbitrarily) reduced, and the probability that they might turn to illegal activities may well increase.

In Backman's case, of course, the real issue is that he failed to disclose his record to the Diamondbacks. Then again, as an article at makes clear, if he had told them, he would not have been offered the job. So there was no way for him to win.

And then the question is--was his record germane to his qualifications for the job? Would it lower his effectiveness, on-field or off-field, as a manager? As a spokesman for the Diamondbacks? Does his record predict a higher probability of future offenses, which might themselves make him unavailable to perform his job? If the answers to those questions are all "no," then do we think that the Diamondbacks would have acted appropriately not to hire him, had they known?

Too many unknowns. But, somehow, the conclusion that his past disqualifies him seems a little unfortunate, at least to me.

Friday, November 05, 2004

Merger Mania

In the last month or so, two mergers have taken place that have-or might have--implications for northwest Indiana.

In the first, announced in mid-October, Harris Bank (a subsidiary of BOM Ltd., of Canada) has sought to acquire Mercantile National Bank, the largest locally-owned bank in northwest Indiana. Harris has asstes of $51 billion, and BOM (formerly Bank of Montral) is a $256 billion bank and financial holding company. Mercantile has about $800 million in assets and will give Harris its first physical presence in northwest Indiana.

This is an important merger for northwest Indiana for a couple of reasons. First, many banks in n orthwest Indiana have remained independent of national bank holding companies. As a result, banks here have probably been more focused on local banking services. And the naking market has remained extremely competitive. This merger changes--or could change--all that. Harris (and BOM) have a larger agenda than serving northwest Indiana, and their operation of banks in the region is likely to reflect that. One consequence will be that there will be one less business voice speaking on behalf of the region, and one less business with a commitment to investments in the region.

Second, the purchase of Mercantile is likely to mean that other currently locally-owned banks will become takeover targets. If the consequence is that fewer banks in the region are locally owned, then (experience elsewhere tells us) medium and small firms here are likely to find access to credit more difficult.

The second merger, though, is the big one. ISPAT-Inland, a privately-owned international steel manufacturer, has reached agreement on acquiring the International Steel Grou (ISG), a company founded on the remains of LTV Steel (and enlarged through its purchase of Bethlehem Steel. The result will be the world's largest steel manufacturing company. The resulting company will be known as Mittal Steel. This merger is likely to have fewer immediate local consequences (especially if the world steel market remains strong). But if the merger results in cost savings and a stronger competitive position for Mittal Steel, one likely impact is that U.S. Steel might seek to make acquitions of its own. Or it might become a takeover target. Either way, larger companies with less local ownership and commitment will come into being. The result may well be, in the long-run, less stability and greater uncertainty for workers in and suppliers to the steel industry.

Although the importance in steel to the local economy has diminished greatly (it's now between 7% and 8% of local employment, donw over the last 25 years, from about a third), it's still the most important industry in terms of value of output and income generated. Greater uncertainty is not a good thing.

Wednesday, November 03, 2004

Uninformed voters?

There's been some (not a lot) of comment out there about whether uninformed voters "should" vote.

It seems to me that being informed or uninformed is an endogenous, not an exogenous, characteristic of voters. People who make a commitment to vote are more likely to make themselves invormed.

So my point of view is that we ought to encourage people, early in an electoral cycle, to commit to vote (promise a spouse or a close friend, or someone whose regard you value). Then we are likely to have more voters who are better informed.

The Aftermath of the Election

Well, that certainly was not what I expected--or hoped for.

I do not expect the second Bush term to demonstrate more willingness to cooperate, more willingness to seek common ground. I expect less. I expect them to argue that they do have a mandate for their programs, because they won the electoral college, because they won a mojority of the popular vote, because they increased their majorities in the Senate and in the House.

What I do expect is the following:

*A continuation of the shift in the federal tax burden away from income from property and toward income from work. The perverse thing about this is that it discourages investments in human capital, at a time when those investments have, if anything, a higher payoff than they have had historically.

*A continued disregard of the interests and concerns of people who work for a living. I expect additional changes in overtime rules, making it easier not to pay overtime. I expect continued opposition to increases in the minimum wage. I expect rules changes that lead to less safety in the workplace. I expect new constraints on workers' compensation porgrams. I expect changes in Social Security that make the program neither "social" nor "secure." (Am I the only one who finds calls form "mandatory" savings programs which have to make use of equity instruments to be both risky and not, well, in keeping with individual liberty?)

*A fiscal policy that continues its lack of concern for large deficits. Now, I am not a deficit hawk. But large, and probably rising federal deficits will constitute a major problem for the economy, as they will be unconnected from any counter cyclical policy. And those deficits are all but certain to rise. This flows partly from the tax policy. Federal tax revenues will almost certainly fall, as the tax cuts are made permanent, and as additional cuts in taxes on income from property are enacted. Spending seems unlikely to be cut (overall). The deficits will grow.

*Rising interest rates. In fact, I think long-term interest rates have already begun to increase as a result of the federal budget deficits. And rising long-term interest rates will have consequences. First, firms will be likely to spend less on new caoital goods. Second, higher interest rates will support a higher international value ofr the dollar (at least in the short-term), which will encourage imports and price our exports somewhat out of world markets.

*Environmental policies that do too little to protect the environment. Do I need to make this case?

*A lack of concern for energy conservation. Now, I don't think energy "independence" should be a real policy goal. But policies that encourage energy use in ways that disregard the social costs of that energy use (such as the tax treatment of trucks and SUVs purchased for business purposes) are not a good idea. (Neither is it a good idea to subsidize the purchase of large vehicles, but that's a separate issue.) Rather, energy taxes should be something we look at seriously.

I don't even want to address foreign policy issues here, or domestic security/civil rights issues. Or Supreme Court (and other federal court) appointments.

I think it'll be a nasty four years.

Monday, November 01, 2004

Osama bin Laden: Economic Analyst

According to a story on-line at the Washington Post ( , Osama bin Laden claims to have destabilized the U.S. economy:

“On the tape, the Saudi millionaire brags that he is succeeding beyond his dreams in destabilizing the U.S. economy and bankrupting the U.S. government…Bin Laden also suggested that the huge sums of money Washington spends on homeland security and the military serve his agenda of weakening the U.S. economy…He added: ‘We are continuing this policy in bleeding America to the point of bankruptcy….Every dollar of al Qaeda defeated a million [U.S.] dollars . . . besides the loss of a huge number of jobs…As for the size of the economic deficit, it has reached record, astronomical numbers estimated to total more than a trillion dollars.’"

Whatever other effects that the Iraq misadventure has had, destabilizing the U.S. economy is not one of them. Currently, U.S. GDP runs about $10.8 TRILLION (in real terms, 3rd quarter 2004; So far, over about 20 months, our total authorized spending on Iraq is about $225 billion. This pro-rates to about $135 billion per year, or about 1.25% of our real GDP. [For what it's worth, the total U.S. government debt is right now about $7.5 trillion, and, between June 30, 2003 and June 30, 2004, increased by about $600 billion; Almost certainly less than half that increase is a consequence of the increased federal government spending on Iraq and on security. Apparently bin Laden is not accurately informed about the magnitude of our existing government debt.]

Economically, this is sustainable. It’s not even the principal component of the current federal government budget deficit—that’s a consequence of the Bush tax cuts. It’s only about one-third more than the increase in health care spending in 2004 compared with 2003. (Health care spending seems likely to have increased by a little over $90 billion; see

The invasion of Iraq was wrong for a whole slew of reasons--undertaking an offensive war is not something I think the U.S. should do. The cost to the standing of the U.S. in the world has been tremendous. The human cost, mostly to Iraq (see the Lancet study), but also to the U.S., is insupportable. But economcally destabilizing to the U.S.? I don't think so.

I guess it’s a good thing for him (and a bad thing for the rest of the world) that bin Laden is a better terrorist leader than economist. And at least this helps us understand why his wealth is inherited.