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I find the idea that the Clintons have “played the race card”—which is now established as one of the stylised facts of this election—hard to understand. It is never defended in detail. The case is advanced as a matter of deduction rather than fact. The logic seems to be that race has become a big issue in the Democratic primaries, and that this will mainly help the Clintons in future primaries; therefore, it is all a Clinton plot. I have no instinctive affinity with the Clintons’ campaign—but I think the accusation is wrong.

Consider Dick Morris’s analysis, “In Contrast to Obama, Hillary Plays the Race Card”—one of the articles that got this whole thing started. His only specific instance of card playing was this:

They embarked on a strategy of talking about race — mentioning Martin Luther King Jr., for example — and asking their surrogates to do so as well. They have succeeded in making an election that was about gender and age into one that is increasingly about race.

He goes on:

It does not matter which specific reference to race can be traced to whom. Obama’s campaign has resisted any temptation to campaign on race and, for an entire year, kept the issue off the front pages. Now, at the very moment that the crucial voting looms, the election is suddenly about race. Obviously, it is the Clintons’ doing. Remember the adage: Who benefits?

I can see why Morris does not want to go into “which specific reference can be traced to whom”. Specific references that prove the point are difficult to find.

Continue reading "How the press played the race card"

The Wall Street Journal recently ran a piece by Bruce Bartlett arguing that a fiscal stimulus in the form of a tax rebate is no use, because people will save rather than spend the windfall.

It’s an insult to Keynes even to call a tax rebate Keynesian economics. It should be called "feel good economics" because its only real effect is to make politicians feel good about themselves and buy re-election with the public purse.

People probably do expect too much from a fiscal stimulus under current circumstances, as I argued in an article earlier this week, but I think that Bartlett greatly overstates the case. I got an email from Larry Seidman of the University of Delaware, copying me a letter he sent to the WSJ responding to Bartlett. Since, so far as I know, it hasn’t yet run, I am posting it here with Larry’s permission. He makes points that advance the discussion and deserve to be better understood–especially concerning the importance of (a) cutting the payroll tax and (b) sustaining the treatment.

In "Feel-Good Economics" (Jan 19-20), Bruce Bartlett writes, "In short, there is virtually no empirical evidence that tax rebates are an effective response to economic slowdowns."  He may not be aware of the empirical study using data from the Consumer Expenditure Survey published in the leading peer-reviewed technical journal of the economics profession, the American Economic Review, in its December 2006 issue entitled "Household Expenditure and the Income Tax Rebates of 2001" co-authored by David Johnson (U.S. Census Bureau), Jonathan Parker (Princeton), and Nicholas Souleles (Wharton, U of Pennsylvania) who found that "households spent 20 to 40 percent of their rebates on nondurable goods during the three-month period in which their rebates arrived, and roughly two-thirds of their rebates cumulatively during this period and the subsequent three-month period.  The implied effects on consumption demand are substantial.  Consistent with liquidity constraints, responses are larger for households with low liquid wealth or low income."  The last sentence implies that it is crucial to rebate payroll tax as well as income tax in order to reach low-income households.

He also may not be aware of another empirical study published in the journal Business Economics in its July 2006 issue entitled "A Temporary Tax Rebate in a Recession: Is it Effective and Safe?" in which my co-author Kenneth Lewis and I, using a macroeonometric model by Ray Fair (Yale) and the empirical results from a 2003 AER article by Joel Slemrod (U of Michigan) and Matthew Shapiro (U of Michigan), estimated that if the 2001 rebate had been twice as large ($1,200 instead of $600) and had been repeated four times (every quarter for one year), it would have reduced the unemployment rate a full percentage point (from 6.0% to 5.0%).  This empirical estimate implies that in today’s larger economy (GDP $14 trillion instead of $10 trillion), a $1,700 payroll-plus-income-tax rebate repeated four times (every three months) would reduce the unemployment rate from 6.0% to 5.0%, saving 1.5 million jobs (with 5.0% there are 7.7 million unemployed; with 6.0% there would be 9.2 million unemployed).  This would cost roughly $100 billion per quarter or $400 billion for the year–about 3% of GDP.

Thus, contrary to Bartlett’s assertion, empirical evidence suggests that as long as the dosage of a payroll-plus-income-tax rebate is strong (twice as large as in 2001), sustained (repeated every three months until the economy has recovered), and stopped (once recovery is complete), it is effective and safe medicine for a slowing economy.

Incidentally, Larry reminded me that I wrote a piece for The Economist in 2002 about an earlier article of his on automatic fiscal stabilisers. If you are curious, you can read it here (pdf). It had slipped my mind. This is not the only issue that cycles up and down with the economy.

Most people I have spoken to, and I think most commentators, found John Edwards to be much the most impressive candidate at last night’s Democratic debate in South Carolina. He at least conveyed a sense of urgent interest in the issues, which Hillary Clinton and Barack Obama did not. Hillary was too busy attacking Obama, and Obama was too busy responding to her charges. Their squabbling was a depressing thing to watch.

As in previous debates, Hillary mostly out-argued Obama. As before, she was forceful and controlled, and he was muddled and hesitant. I think he succeeded in debunking her accusations, but he was far from impressive, and I often found myself having to give him the benefit of the doubt (for instance, when he explained, sort of, why he voted “present” rather than “no” to objectionable pieces of Illinois legislation). Hillary smiled as he stumbled, radiating smugness and contempt—not her most appealing posture.

She cannot believe, I imagine, that Obama routinely does business with slum landlords, or that he is less intent on widening access to affordable health care than she is, or that he is a secret, albeit wavering, supporter of the war in Iraq, or any of the other things she seemed to imply. Her chances of convincing Democratic voters that he is as feckless and vacillating a man as she says also seem slim. Then what is the tactical calculation? How is this misdirected aggression, which I would like to believe sullies her more than it hurts her intended victim, supposed to pay off?

Perhaps the idea is just to unsettle Obama and make him look weak. And he did look weak. He did not dare to rise above the quarrels the Clintons are picking with him—as the spirit of his campaign really obliges him to—and then having chosen to respond he failed to crush her, as I think a more effective debater could have. On the face of it, it is pretty audacious for Hillary Clinton, of all people, to attack Obama for lack of experience, for vacillation, for “failing to take responsibility”, for saying one thing and meaning another. A skilful debater could have shredded her for that, but this is not Obama’s strength. He seems to lack the instinct, and evidently the rhetorical means, to destroy an opponent—not something you could say of Hillary. If he fights the campaign the way the Clintons are forcing him to fight it, he puts himself at a big disadvantage.

After the debate, CNN aired an Obama ad: “There is no liberal America, no conservative America, there is only the United States of America.” Maybe it is just empty rhetoric, but I have to say my spirits lifted. After the debate’s mean-spirited back and forth, a little inspiration was welcome. That, for sure, is something Obama can do.

Like almost everybody else, I was surprised that the Fed cut rates by 75 basis points rather than 50, and I am still wondering why. Even 50, ahead of FOMC schedule, would have been regarded as  strong medicine. And it was a great pity, I think, that the trigger for the move was the equity-market crash, rather than (as far as we know) a sudden surge of worse-than-expected real-economy data.  It is bad practice for the Fed to be perceived as responding with greatest urgency to equity-market fluctuations. Yes, it looks like panic. Read Willem Buiter’s take:

This extraordinary action was excessive and smells of fear.  It is the clearest example of monetary policy panic football I have witnessed in more than thirty years as a professional economist.  Because the action is so disproportionate, it is likely to further unsettle markets.  Even the symptoms of malaise that appear to have triggered the Fed’s irresponsible rate cut, the collapse of stock markets in Asia and Europe and the clear message from the futures markets that the US stock markets would follow (a 500 point decline of the Dow was indicated), are unlikely to be improved by this measure and may well be adversely affected.

In the absence of any other dramatic news that the sky is falling, I can only infer from the Fed’s action that one or both of the following two propositions must be true.

• The Fed cares intrinsically about the stock market; specifically, it will use the instruments at its disposal to limit to the best of its ability any sudden decline in the stock market.
• The Fed believes that the global and (anticipate) domestic decline in stock prices either will have such a strong negative impact on the real economy or provides new information about future economic weakness from other sources, that its triple mandate (maximum employment, stable prices and moderate long-term interest rates) is best served by an out-of-sequence, out-of-hours rate cut of 75 basis points.

The first proposition would mean that the Fed violates its mandate.  The second is bad  economics.

The Fed’s brief statement sheds no light:

The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth.  While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households.  Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.

On my reading, there is no attempt to justify the scale of the action; in fact the statement fails even to acknowledge the scale of its action. This narrative could perfectly well have applied to a 25 basis-point cut delayed until the next FOMC. And what the narrative does say ignores the news that presumably caused the Fed to do what it did. Falling share prices are not so much as mentioned, except for the pro forma reference to "broader financial market conditions". So much for Bernanke’s commitment to transparency.

Taken at face value, the statement actually makes no sense. If you wanted to defend the manner of this dramatic monetary easing, you would have to say that the stockmarket crash had awakened a hitherto sleeping Fed to the true horror of the problems facing the economy. Is that how Bernanke wants his actions to be perceived? Even if it is, since when does the stockmarket convey that kind of actionable information?  (And if it does convey that kind of actionable information, why only when it falls, not when it rises?)

Not a good day for the Fed, in my view.

I spent the first part of January in Tanzania, visiting among other places Mahale, on Lake Tanganyika. For those who expressed an interest,   here is one of the residents. (My wife Lori took the picture.)

I am going to Tanzania to meet some chimpanzees. No Iowa, no New Hampshire. I imagine they will get along without me. See you on or around January 18th. Have a good Christmas.

"Outsourced" is a low-budget no-stars romantic comedy about globalisation, improbable as that might seem.  A young American executive is sent to India to run the company’s call-centre. The clash of cultures–and the downright strangeness of India as seen through American eyes–provides the jokes. But there is no condescension, nor any fatuous admiration of the foreign for its own sake, which would have been equally annoying. Our hero struggles until he surrenders  to his new environment, at which he falls for India and for his engaging Indian assistant. It sounds too sweet, but not at all. It is intelligent and wonderfully well-observed, as well as charming, and this frequent visitor to India, at any rate, lapped it up. 

The reviews were good but not ecstatic. A few seemed to take offence at the very idea of an easy-going movie about life in the "trenches of globalisation" (as one miserable killjoy put it). Imagine making light of such horrors. In fact the movie neither glosses over nor exaggerates the human consequences of outsourcing. For me, it got that balance just right as well. With the possible exceptions of "Michael Clayton" and "No Country for Old Men", I enjoyed it more than anything else I saw in 2007. Matt Groening apparently loved it as well: enough said.

It has seemed to be getting a very limited US distribution all this year. See it if you can–you’ll thank me. In the US, you can buy the DVD here.

An article by Yale’s Judith Chevalier in last Sunday’s New York Times slipped by me, until Greg Mankiw’s blog redirected me to it. The piece discusses an issue that has so far received little attention, but which is likely to loom much larger before long: the trade-policy implications of unilateral (or at any rate, imperfectly co-ordinated) US action on climate change. Suppose the US adopts a cap-and-trade regime for carbon, as promised by Hillary Clinton, or as envisaged by the Lieberman-Warner Climate Security Act (yes, make this a security issue, why not) currently before Congress. Also suppose that China does nothing to curb its carbon emissions. Then Chinese imports, it will be argued, will have an unfair cost advantage in US markets.

One goal of a tradeable permit system is to force consumer prices for goods to reflect the harm that the production of those goods causes the planet. For example, if a television were made using a high-emission process, the factory would have to buy many carbon permits, driving up the TV’s price. A television made in a low-emission factory would require fewer permits, lowering its relative price. Consumers, of course, would have an incentive to choose the TV from the low-emission factory, and all factories would have an incentive to lower emissions.

A problem would arise, however, if a producer needed to buy permits to make televisions in a country with a carbon cap, while no permits were required in a country without a cap. The television from the country without the cap would be cheaper, consumers would prefer it, and there would be no economic incentive to cut emissions. Environmentalists call this the “leakage problem”: just as a balloon squeezed at one end will bulge at the other, emissions caps applied in only some economies will lead to emissions surges in others.

A provision in the current version of the Climate Security Act links responsibility to carbon consumption, not production. This idea derives from a joint proposal by the American Electric Power Company and the International Brotherhood of Electrical Workers. The provision requires that importers of goods from countries without carbon caps obtain permits for the emissions resulting from the goods’ production. While this requirement could be used to protect American jobs from foreign competition, if handled equitably, it could provide an elegant solution to the leakage problem.

If the United States adopted a tradable permit system that treated emissions from domestic producers identically to emissions associated with imported goods, then products that are more emissions-intensive, whether domestic or imported, would require more permits and thus be more expensive. Producers in the United States and abroad would have an incentive to reduce greenhouse gases to make their goods more competitive.

Greg points out that the carbon-tax equivalent of this proposal would be border adjustment of tax rates–that is, carbon-based import tariffs and export subsidies. Either approach, as Ms Chevalier puts it, "would face scrutiny under current trade agreements". Given prevailing anti-trade sentiment (no disrespect to  the International Brotherhood of Electrical Workers), the risk that this idea might be co-opted as part of a wider retreat from liberal trade is plain. But if the US is going to get serious about carbon abatement, as seems likely if not next year then in 2009, the issue will have to  be confronted.

A supplementary reading on the scale of the challenge. Daniel Gros points out on Vox that the price of coal has fallen sharply relative to the price of oil, which presages (other things equal) a huge expansion in global coal-fired electricity generation–the most carbon-intensive kind.

It is often thought that high oil prices could contribute to lowering CO2 emissions because they make energy more expensive, thus encouraging lower energy consumption. But this view overlooks that a high price of oil relative to coal encourages the substitution of a hydrocarbon with pure carbon, thus increasing the carbon intensity of energy use. The supply of coal is abundant, especially in the new emerging energy giants China and India, and relatively elastic. This implies that the price of coal is likely to stay low, thus encouraging an increase in the carbon intensity of energy use everywhere. Reaching the goal of reducing CO2 emissions will thus be even more difficult than generally assumed if oil (and thus also gas) prices remain at present levels.

The latest World Energy Outlook from the International Energy Agency already forecasts on a business-as-usual scenario an increase in the share of coal in global energy use. But over the last five years business has not been as usual as one half of the increase in global energy consumption has come from coal, prompting acceleration of global CO2 emissions. Sustained high hydrocarbon prices will intensify this trend, making it highly unlikely that the goal to reduce CO2 emissions can be reached.

Are the media treating Hillary Clinton more harshly than Barack Obama? Howard Kurtz in the Washington Post:

Clinton’s senior advisers have grown convinced that the media deck is stacked against them, that their candidate is drawing far harsher scrutiny than Barack Obama. And at least some journalists agree.

"She’s just held to a different standard in every respect," says Mark Halperin, Time’s editor at large. "The press rooted for Obama to go negative, and when he did he was applauded. When she does it, it’s treated as this huge violation of propriety." While Clinton’s mistakes deserve full coverage, Halperin says, "the press’s flaws — wild swings, accentuating the negative — are magnified 50 times when it comes to her. It’s not a level playing field."

The article cites plenty of instances. I think there’s no question that Obama has been given an easy ride. It struck me throughout the televised debates that Clinton was generally declared the winner, but by a narrow or less-than-commanding margin–whereas in fact she nearly always trounced him. Quite a few commentators have called her slip over driver’s licences for illegal immigrants in the Philadelphia debate a turning-point: since then she’s been in trouble, they say. But Obama made a complete fool of himself on the very same issue in the next debate, by which time Hillary had sorted out her line, and he got away with it. Yes, the press is failing to be objective. Yes, it is treating Hillary quite harshly, while fawning over Obama.

But is this sentiment peculiar to the press, I wonder, or a feeling in the country at large? I suspect the latter. The United States may have doubts about Obama’s policies (if it knows or cares) or lack of experience (compared with Hillary’s such as it is), but it likes him. He is new, and the country is giving him the benefit of the doubt. When it comes to Hillary, there is no such instinct. She is asking for eight years in the White House–another eight years, as her claim of greater experience keeps reminding people–and people seem tired of her already.

Bill makes this worse. Predictably, with problems in Iowa and her national numbers starting to slide, he is playing a more forward role. David Warsh, author of the indispensable Economic Principals, drew my attention to this column by Alex Beam in the Boston Globe:

In 1999, after almost seven years of Bill Clinton’s rule, the commentariat christened a new buzzterm: Clinton fatigue. The peccadilloes, the double-dealing, the outright lying had overwhelmed the American public. "The Clintons have finally worn out their welcome," wrote columnist Linda Bowles. "There is a prevailing sentiment that it’s time for them to go, and to take their baggage with them."

Clinton fatigue. With the presidential election less than 11 months away, I am feeling it already.

I’m not talking about Mrs. Clinton…

My Clinton fatigue is about Bill. I am getting sick of him.

Bill’s problem is that he has no idea of how to be a political wife. Right now, Michelle Obama is the best in the business. Smart, accomplished, articulate, and capable of projecting empathy, she moves the Obama campaign forward with every appearance. She fills the stage without stealing the spotlight from her husband, from Oprah, or from whoever she appears with. With Bill Clinton, it’s just the opposite…

[An angle suggested by Herald columnist Margery Eagan:] Is Bill "The Underminer," as defined by the hilarious book of the same name by Mike Albo and Virginia Heffernan? The underminer is your "friend" who waxes enthusiastic about your fabulous trip to New Zealand, and then lets slip that he was hang-gliding there in the early 1980s, you know, before all the American tourists arrived.

Mainly, I think Bill makes his wife look weak. Otherwise, why would she need his help? And he reminds people just how long this double-act has been in business. When it comes to policies, Hillary may in fact be more of a "change candidate" than Obama (see Paul Krugman on this), hard though it is to say, ahead of time, how either presidency would work in practice. The point is, with Bill at her elbow, she does not look or sound like the change candidate. The more she relies on him, the more stale and diminished she will seem.

Barack Obama’s campaign for the presidency has revived. Until recently Hillary Clinton had a commanding lead in the polls and was starting to seem unstoppable. But Mr Obama has pulled ahead in Iowa and level in New Hampshire, the states that vote first in the primaries. He is gaining ground again nationally. The television debates, in which he performed poorly, are behind him. What matters now is the ability to move a crowd and the energy of campaign staff on the ground. On the first, Mr Obama has no equal in this contest. On the second, he has no grounds for complaint. He is back in the race.

But here is an odd thing: the Democratic party’s progressive base has mixed feelings about this revival. What is their problem, one wonders? What could be more exciting or more transformative, from their point of view, than this candidate? Mr Obama is a clever, reflective and engaging man; he has dedicated his impressive intellect to a liberal political vision; he has a voting record in the Senate that puts him well to the left of Mrs Clinton; he makes, nonetheless, a strong appeal to the centre; he carries none of the baggage of the Clinton dynasty; and, in a country still riven by race, he just happens to be black. What’s not to like?

The main answer is not differences over policy – though it is true that Mr Obama’s positions in the campaign have tended to be in the centre, at least compared with his Senate voting record.

You can read the rest of this new column for the FT here.