Month: October 2010

How Corrupt is the United States?

According to a recent study, the United States has more public sector corruption than do many other developed economies. More precisely, Transparency International reports that corruption perceptions are higher for the United States than for 21 other countries. Those nations perceived to be less-corrupt are:

  • Australia, Canada, Ireland, New Zealand, and the United Kingdom;
  • The Nordics: Denmark, Finland, Iceland, Norway, and Sweden;
  • Austria, Germany, Luxembourg, Netherlands, and Switzerland;
  • Hong Kong, Japan, and Singapore;
  • Barbados and Chile; and
  • Qatar.

A more positive spin would be that the United States is viewed as less corrupt than 155 other nations in the study. But many of those other nations are much poorer. For benchmarking purposes, it makes sense to compare the United States to other developed economies. The following chart thus shows the Transparency International measure (in which higher numbers represent less corruption) for all the members of the Organization for Economic Cooperation and Development:

The United States ties with Belgium as the 18th least corrupt member of the OECD.

These findings gibe with what several friends in the international investment community have told me. In their view the United States has slipped in its commitment to the rule of law. At the margin, that makes places like New Zealand, Australia, and the Nordics more attractive places to invest.

About the Transparency International numbers: TI creates its Corruption Perceptions Index by aggregating 13 corruption surveys performed by other organizations (e.g., the World Bank and the Economist Intelligence Unit). As The Economist notes, the TI methodology raises some questions. But it’s still an interesting snapshot of corruption perceptions in the world.

Another Tepid Quarter for GDP

BEA released its first estimates for third-quarter GDP yesterday. Headline growth was a disappointing, if not surprising, 2.0%.

Here’s my usual graph of how various components of the economy contributed to overall growth:

Housing fell back into the red, while non-residential structures eked out a small gain. Consumers continued to spend at a moderate pace (consumer spending grew at a 2.6% rate, thus adding 1.8 percentage points to growth). But the big stories were the continued boost from inventories, and the continued drag (in GDP-accounting terms) from imports.

The pessimistic take on inventories (see, for example, this tweet from Nouriel Roubini) is that the third quarter build up was unintentional, and thus is bearish for fourth quarter growth. The optimistic take, I suppose, is that maybe businesses see stronger demand ahead. But that feels rather, er, speculative.

For my usual set of caveats about the import figures (and, therefore, all of these figures), see my last post on the GDP numbers.

Gender Arbitrage by Multinationals

Economists often argue that market competition can limit some of the economic inequities from discrimination (this idea goes back at least to Gary Becker’s 1957 treatise The Economics of Discrimination). If some businesses refuse to hire well-qualified women or minorities, for example, that creates an opportunity for other businesses to hire those workers at lower cost. Non-discriminatory companies could then gain a competitive advantage over their discriminating rivals. Over time, the success of the non-discriminators could bid up wages to the disadvantaged group of workers.

The practical impact of such competition depends, of course, on the willingness of some employers to be non-discriminatory in their hiring practices. The week’s Economist reports an interesting example of how foreign multinationals are playing that role in South Korea:

Working women in South Korea earn 63% of what men do. Not all of this is the result of discrimination, but some must be. South Korean women face social pressure to quit when they have children, making it hard to stay on the career fast track. Many large companies have no women at all in senior jobs.

This creates an obvious opportunity. If female talent is undervalued, it should be plentiful and relatively cheap. Firms that hire more women should reap a competitive advantage. And indeed, there is evidence that one type of employer is doing just that.

Jordan Siegel of Harvard Business School [and Lynn Pyun of MIT and B.Y. Cheon of Hanshin University report] that foreign multinationals are recruiting large numbers of educated Korean women. In South Korea, lifting the proportion of a firm’s managers who are female by ten percentage points raises its return on assets by one percentage point, Mr Siegel estimates.

You can find the original working paper here. The money quote from the abstract:

Using two unique data sets from South Korea, we show that in the 2000s multinationals have derived significant advantage in the form of improved profitability by aggressively hiring an excluded group, women, in the local managerial labor market.

Perhaps needless to say, the fact that these firms are earning higher profits indicates that there’s still plenty of room to bid up the salaries of managerial women in South Korea.

U.S. Economy Word Cloud

Tim Kane at the Kauffman Foundation is out with his latest survey of economics bloggers (full disclosure: I am both an adviser to the survey and a participant in it).

My favorite feature this quarter is a word cloud of adjectives (and some adverbs) that the respondents offered to an open-ended question about the U.S. economy:

Uncertain, sluggish, weak, and fragile sound about right to me, but I think growing should be a bit bigger. After all, the problem we have is slow, as-yet-unimpressive growth. (I forget what I answered, but I bet uncertain and fragile were on the list.)

Among the more amusing responses from other bloggers: taupe and flirtatious.

You can find the full survey results here.

Happy World Statistics Day

Collecting and disseminating useful data about the economy, government finances, demographics, health, the environment, etc. can be a difficult business. Survey methodologies and estimation techniques are inevitably open to legitimate criticism and also attract a good deal of not-so-legitimate criticism (for examples of both, see the debate over the “birth death model” in estimating payroll employment). But all in all, I think our official statisticians perform a valuable service.

So in honor of the first World Statistics Day, let me quote from UN Secretary General Ban Ki-Moon:

I commend the dedication that many statistical experts bring to their reports and publications.  They carry out an essential public service — one that promotes peace and democracy by giving citizens reliable and impartial public information about their communities.  Their core values — service, integrity and professionalism — deserve full support in all nations.

Home Construction Hits Yet Another Low

Housing starts and permits usually dominate the headlines on residential construction data day. In September, for example, single-family starts increased a healthy 4.4% (total starts increased 0.3%), and single-family permits rose 0.5% (but total permits declined 5.6%).

Those are certainly important measures, but I also like to look at a third measure of residential activity in the report: the number of single-family houses under construction.

That measure suggests that the housing market has continued to deteriorate in recent months:

The number of single-family homes under construction at the end of September fell to just 269,000, down about 14% from a year ago. I had once hoped that the housing market was putting in a bottom, with homes under construction plateauing at about 300,000. But we’ve now witnessed five straight months of declines.

Can the Chilean Miners Solve the Cartel Problem?

The rescue of the Chilean miners was a heartwarming miracle. The miners have both my sympathy and respect – I can’t even begin to imagine what those first 17 days were like, trapped far underground without any hint that rescue was even possible. I wish them the best as they try to return to normal life.

I also thank them for providing an excellent case study for my microeconomics class. According to media reports, the 33 miners agreed to a pact of silence in which none will speak about the details of the first 17 days of their ordeal. In addition, they struck an agreement to coordinate the telling of their story and to share equally the resulting profits.

In short, the Chilean miners formed a cartel. A justified and moral cartel to be sure — they deserve whatever profits they can jointly extract from their ordeal — but a cartel nonetheless.

All of which raises a natural question: Can such a cartel be successful? Or will it succumb to the perennial challenge that confronts all cartels: how to enforce a joint agreement in the face of individual temptations? A unified silence may well maximize the financial value of the story and defend the privacy of those moments that some miners do not want to share with the world. But the media circus will tempt some miners to cheat on that agreement either for monetary gain or to ensure that their individual perspective gets reported.

I wouldn’t want to downplay the solidarity among these men, but over at the New York Daily News, Jaime Urabarri reports that there are already concerns that the agreement may break down. In “Chilean miners may break pact of silence, for the right price,” he writes:

Some of the rescued Chilean miners are apparently willing to tell their story for the right price, despite a promise made between all 33 of them that none would reveal details about the worst of their 69-day ordeal buried underground.

During a special Sunday mass held in honor of last week’s dramatic rescue, miner Jorge Galleguillos said that the pact was non-binding and hinted that he’s entertaining offers to spill the beans on exactly what happened.

“I have to think about myself,” he argued, without going into specifics about what information he’d be willing to share.

There are also rumors that some of the miners have already reached deals to tell their story. El Mercurio reported last week that Victor Segovia agreed to sell the contents of the journal he kept during his time in the mine for $50,000 to German newspaper Bild.

My prediction? Regardless of how this turns out, the Chilean miners will show up in the next edition of many economics textbooks.

The Biggest Tax Policy Mistake of the Year

The fine folks over at the New York Times Freakonomics blog recently asked me to identify the “biggest potential tax policy mistake that might be made this year.” Here’s my answer:

With little time left on the legislative clock, policymakers will be hard-pressed to top the tax policy blunders they’ve already made this year. Most notable is their failure to decide what this year’s tax law should be. While politicians, analysts and the media endlessly debate how expiring tax cuts might affect taxpayers in 2011, the real disgrace is that we still don’t know what the tax law is in 2010.

Will our leaders really allow the alternative minimum tax to hit 27 million taxpayers this year, a whopping 23 million more than in 2009? Did the estate tax really expire back in January, making 2010 the year without an estate tax? Will companies really receive no tax credits for their investments in research and development?

Under existing law, the answer to each of these questions is yes. Unless Congress acts, the AMT will expand its reach almost 500 percent, George Steinbrenner’s estate will pay no estate tax, and America’s most innovative companies will go without the R&E tax credit. But in today’s world, existing law doesn’t mean much until Congress throws in the legislative towel. The upcoming lame-duck session will thus feature healthy debate about patching the AMT, retroactively resuscitating the estate tax and extending a host of expired business tax credits — all policies that would determine 2010 taxes.

Such retroactive policymaking is an embarrassment. In a well-functioning democracy, policymakers should establish the laws of the land in advance so that families and businesses can knowledgeably plan their activities. Surprises may sometimes necessitate mid-course corrections. An economic downturn may justify mid-year tax cuts, or a sudden crisis may require mid-year tax increases. But persistent retroactive lawmaking undermines the core idea that ours is a nation of law.

Needless uncertainty also creates real costs. Uncertainty about the R&E tax credit, for example, limits its usefulness as an incentive. If businesses think that it might expire, they have less reason to take it into account when planning their research efforts. That can turn a helpful incentive into a pointless giveaway.

Needless delay also undermines the IRS’s ability to implement the tax system. In 2007, for example, Congress fiddled until just before Christmas before deciding to enact that year’s AMT patch. Because of that delay, affected taxpayers couldn’t begin filing their returns until February 15, when IRS computers finally reflected the new law.

Congress has made a huge mistake by leaving taxpayers in limbo for more than 10 months. Let’s hope they resolve that quickly when they return for what promises to be a frantic lame-duck session.

Joel Slemrod, Bill Gale, and Clint Stretch also contributed to the discussion.

Will Budget Concerns Ever Influence Carbon Policy?

Climate change legislation died an ignominious death in the Senate earlier this year. If you’d like to understand why, check out Ryan Lizza’s autopsy of the effort in the latest New Yorker. Lizza documents how the “tripartisan” trio of John Kerry, Joe Lieberman, and Lindsey Graham came up short in their effort to craft a 60-vote coalition in the Senate. Among the bumps along the way:

  • On March 31, President Obama announced a dramatic expansion in offshore waters open for oil and natural gas drilling. In so doing, he gave away one of the sweeteners that the trio was hoping to use to attract pro-drilling senators.
  • On April 15, Fox News reported that, according to “senior administration officials”, the White House was opposing efforts by Senator Graham to increase gasoline taxes. That claim was perverse–the bill didn’t include higher gasoline taxes and Graham certainly wasn’t pushing them–but not surprisingly it created problems for Graham back home.

Lizza’s article is rich with such anecdotes, but it’s the larger picture I’d like to emphasize. Kerry, Lieberman, and Graham adopted a traditional approach to building a Senate coalition. They identified their main goal–comprehensive climate change limits–and then started negotiating with individual Senators and special interests to see how they could get to 60 votes. Nuclear power, electric utilities, oil refiners, home heating oil, even cod fisherman all make an appearance at the bargaining table. But it’s not clear that such horse-trading could ever yield 60 votes.

This failure makes me wonder whether the traditional approach will ever generate a substantive climate bill. I suppose that’s still possible, particularly if the EPA begins to implement a burdensome regulatory approach to limiting carbon emissions. That might bring affected industries running back to the table.

But I would like to suggest another strategy: Perhaps the environmental community should make common cause with the budget worrywarts. In principle, a carbon tax is a powerful two-birds-with-one-stone policy: it cuts carbon emissions and raises money to finance the government. (This is equally true of a cap-and-trade approach in which the government auctions allowances and keeps the proceeds.) Perhaps there’s a future 60-vote coalition that would favor those outcomes even if various energy interests would be opposed?

Such a coalition is unthinkable today. Opposition to energy taxes runs deep, as Senator Graham experienced. But fiscal concerns will continue to grow in coming years, and spending reductions may not be enough to get rising debts under control. If so, maybe we’ll see a day in which a partnership of the greens and the green eyeshades will take a stab at a carbon tax.

Water Funds: Coase in South America (and New York)

Rivers often create important resource conflicts. Downstream cities want clean water to drink. Upstream residents want to make a living, but that sometimes damages water quality. In the highlands above Quito, Ecuador, for example, residents often convert land to farming and ranching; that allows them to raise valuable crops and livestock, but weakens the land’s ability to naturally cleanse water before it flows downstream.

How can we solve this problem? One response would be for a central government to enact laws and regulations that force the upstream folks to take better care of the watershed. Such laws can play an important role in improving water quality, but they raise several practical concerns. For example, regulatory burdens may place undue economic burdens on upstream residents. And the laws and regulations may be hard to enforce, particularly if local communities view them as an unwelcome burden.

Another strategy is for the downstream water users to pay the upstream residents for keeping the water clean. Such payments can make protecting the watershed into a profit center for upstream communities and can encourage them to accept rigorous approaches to monitoring and enforcement. (In the economics literature, this approach is often distributed as Coasian, in honor of Ronald Coase, who emphasized it in his work.)

Last week Esther and I dined with some officials of the Nature Conservancy (TNC) and learned that they are encouraging exactly this approach to water conservation in South America. TNC is helping create water funds:

Water users pay into the funds in exchange for the product they receive — fresh, clean water. The funds, in turn, pay for forest conservation along rivers, streams and lakes, to ensure that safe drinking water flows out of users’ faucets every time they turn on the tap.

Some water funds pay for community-wide reforestation projects in villages upstream from major urban centers, like Quito, Ecuador, and Bogotá, Colombia. In other cases, like in Brazil’s Atlantic Forest, municipalities collect fees from water users and make direct payments to farmers and ranchers who protect and restore riverside forests on their land through water producer initiatives.

“These ‘water producers,’ as we call them, are being fairly compensated for a product they’re providing to people downstream in Rio de Janeiro and São Paulo: fresh water,” explains Fernando Veiga, Fernando Veiga, Environmental Services Manager for the Conservancy’s Atlantic Forest and Central Savannas Conservation Program in Brazil. “They’re receiving $32 per acre, per year, for keeping their riverside forests standing.”

TNC has an informative interactive graphic that illustrates how it works in the headwaters above Quito. (Note to TNC: the graphic would be even better if it involved less clicking.)

Perhaps needless to say, this idea is not unique to South America. New York City, for example, has been pursuing a related approach, buying up buffer land around the upstate reservoirs that supply the city.