Morning Reading and Reactions
By Arnold Kling
The main result of Barro’s other hit paper on economic growth—a 1992 article in the Journal of Political Economy, coauthored with Xavier Sala-i-Martin—has stood the test of time so well, in fact, that his Harvard colleague Larry Summers has dubbed it the “iron law of convergence.” As with Barro’s 1991 article, the idea was simple and involved bringing in new data: the trick this time was to use data for regions within a country…
[this] offered a cleaner way to focus on one particular question: do regions that are initially poor catch up with richer regions? For the U.S. states, the answer was yes. In the aftermath of the American Civil War, the southern states were generally poorer than other states. But Barro and Sala-i-Martin showed that, in the one hundred or so years following 1880, the states that were initially poor grew faster. There was catch-up, or—in the jargon of economists—”convergence.” The rate at which the poor states caught up to the rich was not particularly fast though, only about 2–3 percent a year.
I am ashamed to see that until today I was not familiar with this paper or the result.
Later in the profile:
Barro argues, however, that rare disasters, such the Great Depression or 9/11, even though they are low-probability events, can keep investor demand for safe assets such as government bonds high relative to that for stocks.
Keep that in mind when you read Yves Smith.
DeLong and others treat the problem as liquidity, when the liquidity problems reflect concerns that Nouriel Roubini has discussed before, ones of insolvency and uncertainty. Lowering interest rates 50, or even 200 basis points is not going to make anyone any more willing to buy asset backed commercial paper. What might make them more willing is knowing if that particular counterparties have good collateral.
I think of it as a rise in the risk premium. The Wall Street Journal gives an example–the London Interbank Borrowing Rate (LIBOR) has shot up relative to comparable interest rates.
Also in the Journal, Clark Havighurst and Barak Richman argue, as I have in the past, that passage of the Bush tax reform proposal for health insurance is a necessary prelude to any major health policy reform.
A good way to prepare the public for needed health reforms would be to expose consumers to the true cost of health insurance. President George W. Bush’s pending proposal to tax the value of employees’ health benefits as income, while also providing a compensating standard deduction or tax credit, would serve the useful purpose of stimulating market and political demand for low-cost alternatives, including coverage that stops short of paying for everything seemingly mandated by professional (that is, non-economic) standards.
Congress is making a mistake in ignoring the president’s proposal. If voters realized that it is not only the uninsured whom the current system victimizes, would-be reformers of all stripes might finally find a broad constituency willing to support fundamental change.
Finally, from The New York Times.
[Billionaire William] Gross said he did not think the public benefits from philanthropy were commensurate with the tax breaks that givers receive. “I don’t think we’re getting the bang for the buck for gifts to build football stadiums and concert halls, with all due respect to Carnegie Hall and other institutions,” he said. “I don’t think the public would vote for spending tax dollars on those things.”
Does he think that the public would vote for spending tax dollars on the things that Congress spends money on?
As a Civil Societarian, I would view eliminating the charitable deduction as an attempt by government to stifle all of the competing voluntary institutions. Seriously, I see any attempt to curtail the charitable tax deduction as something that would make me go the barricades and join a revolution. I would view choking off private charity as a major step toward totalitarianism.