RFK on GNP

The American Prospect's Kate Sheppard reports on a hearing held by Senator Byron Dorgan on the deficiency of Gross Domestic Product as a proxy for economic well-being. As she notes, the point was eloquently by Robert Kennedy in this 1968 speech. Each semester, as I read a passage from it to my principles students, I am reminded I that I'm no Robert Kennedy. Next time I might play this instead:
Hat tip: Ezra Klein. NB: Kennedy refers to Gross National Product (GNP); nowadays GDP is the more commonly cited aggregate measure, but the two are closely related.

Update (9/13): The Glaser Progress Foundation informs me that video has moved to a new web location.

They Have Us Outnumbered

Inside Higher Ed informs us:

Full Time Professional Positions in Higher Education
Fall 2004
Administrators: 49.4%
Faculty: 50.6%

Fall 2006
Administrators: 51.4%
Faculty: 48.6%

Next time your tuition increases, don't blame us professors...

To Strive And Not To Enjoy

In his NY Times column, Bob Frank looks at the link (or lack thereof) between income and happiness. After discussing some of the flaws in how GDP and price indexes are measured, he says:

But there is a much bigger problem, one that challenges the very foundation of the presumed link between per-capita G.D.P. and economic welfare. That’s the assumption, traditional in economic models, that absolute income levels are the primary determinant of individual well-being.

This assumption is contradicted by consistent survey findings that when everyone’s income grows at about the same rate, average levels of happiness remain the same. Yet at any given moment, the pattern is that wealthy people are happier, on average, than poor people. Together, these findings suggest that relative income is a much better predictor of well-being than absolute income.

That we are so concerned with our relative status - that our happiness seems to depend more on how much (or little) we feel we are getting ahead than on how well off we are - suggests we have still not shaken loose of the attitudes that Keynes describes in his 1930 essay "Economic Possibilities For Our Grandchildren." He believed that a set of values that encouraged accumulation of wealth for its own sake was an important ingredient in promoting the increase of capital required for economic growth. However, continued growth would ultimately liberate future generations from the "economic problem" of scarcity and allow humanity to live "wisely, agreeably and well" by a nobler set of principles. But, Keynes warned, the transition would be difficult:

The strenuous purposeful money‑makers may carry all of us along with them into the lap of economic abundance. But it will be those peoples, who can keep alive, and cultivate into a fuller perfection, the art of life itself and do not sell themselves for the means of life, who will be able to enjoy the abundance when it comes.

Yet there is no country and no people, I think, who can look forward to the age of leisure and of abundance without a dread. For we have been trained too long to strive and not to enjoy...

Has India Traded Its Passion For Glory?

So many times, it happens too fast...
The Economist believes India needs to reform its public sector:

In many ways India counts as one of liberalisation's greatest success stories. For years, it pottered along, weighed down by the regulations that made up the licence raj, producing only a feeble “Hindu” rate of growth. But over the past 15 years it has been transformed into a far more powerful beast. Its companies have become worldbeaters. Without India's strength, the world economy would have had far less to boast about.

Sadly, this achievement is more fragile than it looks. Many things restrain India's economy, from a government that depends on Communist support to the caste system, power cuts and rigid labour laws. But an enduring constraint is even more awkward: a state that makes a big claim on a poor country's resources but then uses them badly...

[Prime Minister] Singh made administrative reform a priority when he took office in 2004, and he duly set up a commission to look into it. But even the finance minister admits that most of its deliberations have been academic. The civil service is expected shortly to be awarded a huge pay rise, which will be swiftly embraced, along with tougher performance standards, which will be studiously ignored...

That is, Singh must not lose his grip on the dreams of the past; he must fight just to keep them alive.

Unemployment: As We Were Just Saying

David Leonhardt's column on how the unemployment rate can be deceptive (see earlier post) was timely indeed. The latest numbers from the Bureau of Labor Statistics have the number of people employed decreasing by 255,000 in February, but the unemployment rate also fell, from 4.9% to 4.8%. This was made possible by a decrease in labor force participation; the labor force declined by 450,000 and the participation rate fell from 66.13% to 65.88%.

Those numbers are from the household survey; the decline of 63,000 jobs reported by the establishment survey got the headlines (which is strange, I would expect the headline writers to prefer the more dramatic figure).

Either way, not a good sign. Paul Krugman pre-empts the NBER and calls it a recession.

Hillary Doesn't Mean it Either

A mini-scandal over the apparent assurances given by economic advisor Austan Goolsbee to the Canadians that Barack Obama's anti-NAFTA rhetoric shouldn't be taken too seriously may have contributed to his defeat in our primary on Tuesday. Since I brought it up in a recent post, I should, in fairness, note that it appears the Clinton camp was doing the same thing, according to The Globe And Mail:

The leak of a confidential diplomatic discussion that rocked the U.S. presidential campaign began with an offhand remark to journalists from the Prime Minister's chief of staff, Ian Brodie....

Mr. Brodie, during the media lockup for the Feb. 26 budget, stopped to chat with several journalists, and was surrounded by a group from CTV.

The conversation turned to the pledges to renegotiate the North American free-trade agreement made by the two Democratic contenders, Mr. Obama and New York Senator Hillary Clinton.

Mr. Brodie, apparently seeking to play down the potential impact on Canada, told the reporters the threat was not serious, and that someone from Ms. Clinton's campaign had even contacted Canadian diplomats to tell them not to worry because the NAFTA threats were mostly political posturing.

The Canadian Press cited an unnamed source last night as saying that several people overheard the remark.

The news agency quoted that source as saying that Mr. Brodie said that someone from Ms. Clinton's campaign called and was "telling the embassy to take it with a grain of salt."

Hat tip: Jason Zengerle.

The leak has become a bit of a scandal for the Canadian government, with calls for the Mounties to investigate. I know from experience that the Canadians take confidentiality seriously - before I went to graduate school, I wrote about Latin American syndicated loans for a trade publication, and when the Latin deals were drying up in '98 and '99 in the wake of the Asian crisis, we made an attempt to extend my beat to Canada. It was a futile effort - the Toronto bankers, unlike their New York counterparts, were unwilling to violate their confidentiality rules to gossip about their deals.

Of course, this hasn't been very enlightening about where the next President actually will stand on trade issues. A hopeful sign are the intelligent comments that Goolsbee made at a forum in January, as reported in this story on the Chronicle of Higher Ed's campaign blog.

Update (3/7): Or maybe not... more confusion on who said what to whom.

The Last War, or the One Before?

Re-fighting past battles isn't only for generals. Economists are finding different historical precedents for our current economic woes, which lead to very different policy implications.

Collapsing asset prices and credit market turmoil recall the depression (and its recent Japanese echo):

• Morgan Stanley's Steven Roach draws a comparison to Japan's post-bubble slump of the 1990's.
• Robert Reich finds a worryingly relevant passage in the memoirs of depression-era Fed chairman Marriner Eccles.
  

Record oil prices and simultaneous inflation and unemployment bring back memories of 1970's stagflation:

• Fed watcher Tim Duy says we are "Inching Closer to the Reality of Stagflation"
• Allan Meltzer thinks the Fed is repeating the mistakes of the 1970's (and Econospeak's Econoclast has a critical response)
  

The Bernanke Fed's tune sounds more like "Happy Days Are Here Again" than "I Will Survive" - it has been willing to respond aggressively with rate cuts to stimulate the economy and aid the financial sector, even at the risk of inflation.

In the Things That Make You Go Hmmm... Dept.: The lyrics to "Happy Days Are Here Again" were written by J. Yellen, and the President of the San Francisco Fed is also J. Yellen.

Unemployment and the Unemployment Rate

Of all economic statistics, the unemployment rate is probably the one that gets the most headlines, so it is important to understand what it doesn't tell us. Doing so can help us understand why so many people seem unhappy with the state of the economy, even as the unemployment rate (4.9%) is low by historical standards.

In his Economic Scene column, David Leonhardt points us to the increase in the number of people who are not employed, but not looking for work (and therefore not counted as unemployed):

Consider this: the average unemployment rate in this decade, just above 5 percent, has been lower than in any decade since the 1960s. Yet the percentage of prime-age men (those 25 to 54 years old) who are not working has been higher than in any decade since World War II. In January, almost 13 percent of prime-age men did not hold a job, up from 11 percent in 1998, 11 percent in 1988, 9 percent in 1978 and just 6 percent in 1968.

Even prime-age women, who flooded into the work force in the 1970s and 1980s, aren’t working at quite the same rate they were when this decade began. About 27 percent of them don’t hold a job today, up from 25 percent in early 2000.

There are only two possible explanations for this bizarre combination of a falling employment rate and a falling unemployment rate. The first is that there has been a big increase in the number of people not working purely by their own choice. You can think of them as the self-unemployed. They include retirees, as well as stay-at-home parents, people caring for aging parents and others doing unpaid work.

If growth in this group were the reason for the confusing statistics, we wouldn’t need to worry. It would be perfectly fair to say that unemployment was historically low.

The second possible explanation — a jump in the number of people who aren’t working, who aren’t actively looking but who would, in fact, like to find a good job — is less comforting. It also appears to be the more accurate explanation.

Various studies have shown that the new nonemployed are not mainly dot-com millionaires or stay-at-home dads. (Men who have dropped out of the labor force actually do less housework on average than working women, according to Harley Frazis and Jay Stewart of the Bureau of Labor Statistics.)

Instead, these nonemployed workers tend to be those who have been left behind by the economic changes of the last generation. Their jobs have been replaced by technology or have gone overseas, and they can no longer find work that pays as well. West Virginia, a mining state, is a great example. It may have a record-low unemployment rate, but it has also had an enormous rise in the number of out-of-work men.

That is, we have seen an increase in the number of "discouraged workers" who no longer are actively looking for work. The unemployment rate is the percentage of the labor force who are unemployed; to be counted in the labor force, one must be working or looking for work. So when an unemployed person gives up looking and drops out of the labor force, the unemployment rate actually falls. An increase in discouraged workers would be reflected in a falling labor force participation rate (% of people over 16 who are in the labor force).

Although by the NBER's reckoning, the last recession ended in November 2001, the labor force participation rate (red line) has not recovered. It also takes an unemployed person longer to find a new job now - the median duration of unemployment spells (blue line) remains above its pre-recession level. On Sunday, the Times' Peter Goodman looked at the weakness of the labor market. The anecdotes in his article are a reminder that the pain that appears modest in aggregate economic statistics is really quite severe for some.

For more on labor force participation, see the links at the end of Mark Thoma's post on Leonhardt's column.

Democrats Should Listen to Robert Reich on Trade

In last week's Democratic debate, Tim Russert, in his customary fashion, pressed Barack Obama and Hillary Clinton on their criticisms of the 1993 North American Free Trade Agreement (NAFTA):

MR. RUSSERT: ..[I]n the debate that Al Gore had with Ross Perot, Al Gore said the following: "If you don't like NAFTA and what it's done, we can get out of it in six months. The president can say to Canada and Mexico, we are out. This has not been a good agreement." Will you as president say we are out of NAFTA in six months?

SEN. CLINTON: I have said that I will renegotiate NAFTA, so obviously, you'd have to say to Canada and Mexico that that's exactly what we're going to do. But you know, in fairness --

MR. RUSSERT: Just because -- maybe Clinton --

SEN. CLINTON: Yes, I am serious.

MR. RUSSERT: You will get out. You will notify Mexico and Canada, NAFTA is gone in six months.

SEN. CLINTON: No, I will say we will opt out of NAFTA unless we renegotiate it, and we renegotiate on terms that are favorable to all of America.

But let's be fair here, Tim. There are lots of parts of New York that have benefitted, just like there are lots of parts of Texas that have benefitted. The problem is in places like upstate New York, places like Youngstown, Toledo, and others throughout Ohio that have not benefitted. And if you look at what I have been saying, it has been consistent....

...But let's talk about what we're going to do. It is not enough just to criticize NAFTA, which I have, and for some years now. I have put forward a very specific plan about what I would do, and it does include telling Canada and Mexico that we will opt out unless we renegotiate the core labor and environmental standards -- not side agreements, but core agreements; that we will enhance the enforcement mechanism; and that we will have a very clear view of how we're going to review NAFTA going forward to make sure it works, and we're going to take out the ability of foreign companies to sue us because of what we do to protect our workers....

MR. RUSSERT: But let me button this up. Absent the change that you're suggesting, you are willing to opt out of NAFTA in six months?

SEN. CLINTON: I'm confident that as president, when I say we will opt out unless we renegotiate, we will be able to renegotiate.

MR. RUSSERT: Senator Obama, you did in 2004 talk to farmers and suggest that NAFTA had been helpful. The Associated Press today ran a story about NAFTA, saying that you have been consistently ambivalent towards the issue. Simple question: Will you, as president, say to Canada and Mexico, "This has not worked for us; we are out"?

SEN. OBAMA: I will make sure that we renegotiate, in the same way that Senator Clinton talked about. And I think actually Senator Clinton's answer on this one is right. I think we should use the hammer of a potential opt-out as leverage to ensure that we actually get labor and environmental standards that are enforced. And that is not what has been happening so far...

The Canadians are not amused. The Canadian Broadcasting Corporation reported:

Prime Minister Stephen Harper issued a friendly warning to Democratic presidential hopefuls south of the border on Thursday, saying it would be a "mistake" for the United States to reopen the North American Free Trade Agreement...

"If any American government ever chose to make the mistake of opening that, we would have something we would want to talk about as well," the prime minister said with a smile, in response to a question from NDP Leader Jack Layton.

He didn't elaborate, but earlier this week, Trade Minister David Emerson and Finance Minister Jim Flaherty said U.S. officials should not forget the benefits of the agreement and hinted Canada could respond to a NAFTA pull-out by renegotiating U.S. access to Canada's oil.

There have been reports that Obama economic advisor Austan Goolsbee has been quietly reassuring the Canadians that he doesn't really mean it... (see also Andrew Leonard's take).

If the Democrats wanted to say something intelligent about trade, they might listen to former labor secretary Robert Reich, who writes:

...It’s a shame the Democratic candidates for president feel they have to make trade – specifically NAFTA – the enemy of blue-collar workers and the putative cause of their difficulties. NAFTA is not to blame. Consider the numbers. When NAFTA took effect, Ohio had 990,000 manufacturing jobs. Two years later, in 1996, it had 1,300,000 manufacturing jobs. The number stayed above a million for the rest of the 1990s. Today, though, there are about 775,000 manufacturing jobs in Ohio. What happened? The economy expanded briskly through the 1990s. Then it crashed in late 2000, and the manufacturing jobs lost in that last recession never came back. They didn’t come back for two reasons: In some cases, employers automated the jobs out of existence, using robots and computers. In other cases, employers shipped the jobs abroad, mostly to China – not to Mexico.

NAFTA has become a symbol for the mounting insecurities felt by blue-collar Americans. While the overall benefits from free trade far exceed the costs, and the winners from trade (including all of us consumers who get cheaper goods and services because of it) far exceed the losers, there’s a big problem: The costs fall disproportionately on the losers -- mostly blue-collar workers who get dumped because their jobs can be done more cheaply by someone abroad who’ll do it for a fraction of the American wage. The losers usually get new jobs eventually but the new jobs are typically in the local service economy and they pay far less than the ones lost.

Even though the winners from free trade could theoretically compensate the losers and still come out ahead, they don’t. America doesn’t have a system for helping job losers find new jobs that pay about the same as the ones they’ve lost – regardless of whether the loss was because of trade or automation. There’s no national retraining system. Unemployment insurance reaches fewer than 40 percent of people who lose their jobs – a smaller percentage than when the unemployment system was designed seventy years ago. We have no national health care system to cover job losers and their families. There's no wage insurance. Nothing. And unless or until America finds a way to help the losers, the backlash against trade is only going to grow.

Reich also has some scoop on Clinton's claim that she privately opposed the deal during her husband's administration.

In any event, hopefully this primary race comes to an end Tuesday. If it continues on to Pennsylvania we may get the unedifying spectacle of Clinton and Obama trying to outdo each other in praise of our "antidumping" rules, which are often applied to protect the steel industry.

The first person I ever voted for was Paul Tsongas; if only were still with us to call out the "Pander Bears", sigh...

Update (3/3): New details emerge on l'affaire Goolsbee. Also, Jagdish Bhagwati believes an Obama administration is the "less disturbing prospect" for trade.

Update #2 (3/5): Willem Buiter weighs in, responding to Bhagwati.

Lin on Institutions and Development

We can count Justin Lin, the new chief economist of the World Bank, among those who believe that institutions are crucial for economic growth. He told the Wall Street Journal:

At the beginning, people put a lot of emphasis on resources, and that’s why we had family-planning policy, not only in China but in other parts of the world. [The thinking was that] The more resources per capita, the wealthier the nation. Later on people thought that natural resources may not be so important, they think that capital and technology are important. Now economists start to understand that for all those things — capital needs to be accumulated, technology needs to be adopted, human capital also needs to be accumulated — you need to understand the incentive, the motivation behind those kind of human choices.

These kind of traditional factors of wealth are just some kind of proximate causes. It’s like you say rich people have a lot of money, but you need to understand why they have a lot of money. Now you need to look into what is the deep cause, the real fundamental cause of development. I think increasingly people now understand that institutions are the most fundamental cause.

Because institutions will shape the incentive structure in an economy, about people’s motivation and willingness to engage in work, lending, accumulation of capital. Now people understand that to understand why a country is performing well or performing poorly, institutions are the key. Fundamentally all economic progress needs to be achieved by people’s effort. We need to understand people’s incentives, and people’s incentives are shaped by the institutions in a country.

Although we recognize institutions’ importance, that institutions matter, from what I see, institutions are an area that requires more research. They are often second-best, they are a choice under a certain kind of constraint. If we do not remove those kinds of constraints, if we want to change the institution, you may jump from the second-best to the third-best. Many interventions did not achieve the intended goal, it’s because they did not really address the cause of those kind of distortions.

It sounds like he is reading his Dani Rodrik, and indeed, Professor Rodrik is pleased.