An Inside View of the Mortgage Crisis

Important op-ed piece in today's WSJ by economist Charles Calomiris. I agree that Wall Street was at fault a lot in bringing about the financial crisis, but so was the government, especially through Freddie Mac and Fannie Mae. Calomiris helps doucment this.

Nobel Prize Announcement

The new Nobel prize winners in economics are Thomas Sargent and Christopher Sims for work in macroeconomics. An article from the WSJ is here. Sims' work is primarily econometric as he helped develop and popularize Vector Auto Regression. Sargent's work links monetary policy and fiscal policy. He helped build the reputation of the University of Minnesota's economics department. The Nobel site will have further explanations of the work of both men that should be of interest.

Is Small Business the Engine of Growth?

It is common for politicians and others to say that small businesses account for most job creation. This is somewhat misleading though. Many small businesses go out of business after a year or two, so that they are also responsible for a lost of job loss. A new working paper by Erik Hurst and Benjamin Wild Pugsley suggests that small businesses are small and do not account for a lot of new employment. They note that most small business owners are not the entrepreneurs that provide the "creative destruction" Schumpeter wrote about. Instead, most small business owners do not bring a new idea to the market and do not have a desire to grow large. Instead, many are starting small construction firms, a legal practice or small retail store or restaurant. The motive is often being one's own boss rather than starting the next Apple Corporation.

Most small businesses have no paid employees. For the state of Michigan, over half of all business establishments have fewer than five employees. The Small Business Administration provides regulations that determine the size limits for "small" businesses. A table of these limits for industries can be found here. The limits are given in revenues for some industries and in number of employees for some. For example, establishments in mining have employee limits of 500, while those in transportation manufacturing have limits of 1,000 employees.

Simple explanations of the economy or job growth generally miss the mark. But politicians often look for simple explanations and simple solutions. Promoting small business will not solve the employment problem. A better solution is to provide an environment that supports business activity regardless of the size of the firm.

Tyler Cowen on Taxes

In his Sunday New York Times column, Tyler Cowen challenges the "no new taxes" pledge many of the Republican candidates are stressing. It is a worthwhile column to read as he notes that no new taxes today, without spending cuts that are not going to happen, means a pledge to higher taxes in the future--at least if one is "fiscally conservative."

Back when the Reagan tax cuts were being discussed, I favored the cuts for two reasons. The first is that I thought the marginal tax rates were too high and discouraged investment while encouraging tax avoidance behavior. Second, lowering federal income would be the only way to lower government spending. I still think I was correct on the first point but not on the second point. Government tends to borrow when its income is reduced. Now, one of the points Cowen is making, is that eventually taxes will have to be raised. But we are still able to delay that because of the position of the US in the world economy. We are not Greece. But postponing deficit reduction is not a sustainable position. Fiscal conservatism consists of two major points--over time we must balance the [operating] budget, and the size of the federal government should be limited.

Debt Ceiling Comment by a Colleague

Here is a column about the debt ceiling by my colleague, Todd Steen.

Thomas Geoghegan Again!

The labor lawyer, Thomas Geoghegan had a busy day--an op ed piece in the Wall Street Journal and another in the New York Times. The latter is about increasing social security benefits. Based on his reasoning, government can tax and spend us into prosperity. Again, I will quote his ending--he seems to save his strongest statements for the end--"A bigger pension--a raise in Social Security benefits--is the stimulus this demoralized country needs. Come on, Democrats: think of F.D.R., Robert Wagner, or heck, even Lyndon B. Johnson. Let's ask ourselve: Who are we for?"

Is Boeing a Threat to American Entierprise?

Today's Wall Street Journal has an op ed piece by a labor lawyer concerning the National Labor Relations Board unfair labor charge against Boeing. Boeing has built a plant in South Carolina instead of the state of Washington. Mr. Goeghegan argues that Boeing is moving for lower-cost labor, and that this means lower-skilled labor. He seems quite willing to assume that labor in South Carolina is lower skilled than labor in the North. He claims that the move is a signal that quality will fall and will harm Boeing in the long run. Further, it will hurt the American enterprise system. He ends the essay, "If a single story in the news can sum up the reasons for America's global decline, it's the decision build a Dreamliner that will gut the American dream."

There are several flaws in his arguments. First, in free markets, higher wages would usually indicate higher skilled labor, but the difference between Boeing's plant in Washington and the new plant in South Carolina reflects differences in union wages and nonunion wages. The wage difference does not necessarily reflect productivity differences. Does Mr. Geoghegan also believe that the quality of the Mercedes built in Alabama is necessarily less than those built in Germany? Second, at least part of what Boeing seems to be trying to prevent is work stoppages due to strikes. Third, it is always amazing when an outside person knows what is in the long-term interests of a corporation better than the management team of the firm.

Theologians and Economics--Some Positive Signs

An article in the recent Presbyterian Outlook by a minister offers some hope that theologians and pastors who were trained in an anti-market seminary can break away from that training. Rev. Hobson certainly hasn't come to the position of the Acton Institute, but there is progress.

Housing Is Still the Issue

The American economy continues to struggle, regardless of what equity prices show. The slowness of the recovery reflects a couple of things--the fact that the recession started with a financial crisis, and the excess supply of existing houses. It does not make sense to build a lot of new homes when there are so many homes on the market and when foreclosures are still so great. The failure by the Administration to see accurately the causes of the recession led them to pursue solutions that were bound to be ineffective. Not that there are easy solutions to the housing market problems. Low interest rates are not the stimulus they might be when people owe more on their mortgage than the house is worth, and when consumer debt levels are high. Getting more money into the hands of households would make sense, but counting on spending on shovel-ready projects that provide funds to highway construction firms does not help carpenters or homeowners.
Eventually, debt levels will fall, house prices stabilize and housing will recover. But eventually has already been a long time and remains a longer time yet.

Fight of the Century in Germany

A German televesion station (Sat3) just had a segment on the latest Russel Roberts and John Papola's video contrasting Keynes and Hayek. I don't monitor every channel in the US all the time to see what is showing, but a random channel selection got me to this in Germany. Is there some reason German television and news offers more depth than American news and television. Several years ago I recall reading an article in a German newspaper about the most recent (at the time) Nobel price winner in economics, and the article was much more informative about the economics involved than any article I saw in an American paper. Maybe German news and TV realize they cannot compete with the pap of American news and entertainment, so actually offer more in-depth analysis of things.
On a similar note--I like the fact that the news anchors are basically news readers and not celebrities, as in the U.S.

Energy in Germany

There are two interesting articles in today's business section of the German newspaper, DIE WELT. One concerns the high price of gasoline and that the antitrust division (Bundeskartellamt) is looking into collusion among the top five firms in Germany. The price of a liter of gasoline is 1.62 euros. With an exchange rate of a little more than $1.40 per euro and with 3.785 liters per gallon, it works out to $8.60 a gallon. Now, this is for premium and not regular. According to the article, this is the highest price ever in Germany.

The second article concerns a warning from electric utility firms that there may be blackouts in southern Germany this winter. The winter is prime time for electricity for a variety of reasons--short hours of daylight, cold weather, and southern Germany is highly industrialized so large demand from industry. Why this winter? After the problems with the nuclear power plant in Japan, Germany has put its older nuclear plants off line and are giving stress tests of some kind on others. The utility companies are saying that too much capacity will be off line if all this happens, and blackouts could result. An option that some think is possible is to import electricty from France, but France is a net importer in the winter.

Representatives of the Green Party dismiss the concerns. One represtative said that there are no bottlenecks and another that it is their view that there is not a problem. The article also reports that Alcoa has recently announed that they will not expand production facilities in Germany because they consider Germany's energy policy to be too risky.

The Price of a Dollar

The dollar exchange rate with the euro as of Friday is $1.4156. I believe it was $1.19 when the euro officially began and the euro almost immediately declined with respect to the dollar. Eventually, one euro bought less than 90 cents. In recent years, that trend reversed and not long ago, some thought it would hit $1.50.
In today's New York Times, Christina Romer has a column on the exchange rate. In it, she argues that the exchange rate is just a price, a view that most economists would agree with. In general, I do too. However, there are three caveats in my agreement. The first is straight-forward--manipulation of the exchange rate to affect trade patterns should be avoided. Once one country begins it is difficult for others to not follow, and soon we have a kind of beggar-thy-neighbor policy causing problems. Second, when people are uncertain over the state of monetary policy, the exchange rate provides some evidence. The Fed is trying to have an easy money policy right now, and the exchange rate is evidence that they are succeeding even if unemployment remains high.
Finally, all statements about exchange rates being merely prices fail to reflect fully the fact that the dollar is still the reserve currency in the world. Further, the U.S. receives substantial benefits from that status. If other countries, and especially businesspeople and those in financial markets develop a lack of trust in the dollar, the special status of the dollar could switch to another currency. At this point in time, the euro would appear to be the likely candidate, but the Eurozone has problems of its own. China has indicated in the past that it would like a greater role for the reminibi. However, so long as it manipulates its currency, it is unlikely China's currency will replace the dollar. But, forty or fifty years from now, who knows?

BOOMS AND DEPRESSIONS

In previous posts I have described books on the recent "Great Recession" that I found helpful. I just finished the single best book, although it was written in 1932 and about the Great Depression--Irving Fisher's BOOMS AND DEPRESSIONS. Like several recent books, Fisher focused on debt as a key part of the problem. Some of the book read like it could have been written today--debt in securities, debt in housing, for example. I have been critical of the Fed and QEII, but Fisher makes me reconsider somewhat. He focuses a lot on the effects of falling prices during the early 1930s. Bernanke, as a student of the Great Depression, is aware of these dangers and has focused attention on preventing falling prices.
I wish that some publisher would make this fine book available again to the public.

Who is Rich?

Andrew Ross Sorkin of the New York Times has an article in Sunday's paper on how $250,000 became the dividing line between the rich and everyone else. It is worth a look.

Taxing the RIch at the State Level

Article in the weekend edition of the Wall Street Journal talks about states that rely on taxing the rich for most of their revenues suffered significant declines in revenue as a result of the last recession. Incomes of the wealthy tend to be more volatile than for other people. Much of this is due to the fact that most wealthy people have substantial income from equity markets. A sharp fall in the stock market reduces their incomes a lot. For example, the article reports that earnings of the top 1% of households in California fell by more than twice as much as the rest of the state's population. In New York the top 1% of earners paid 41% of the state's income taxes in 2007, compared to 25% in 1994. A result is that when the economy declines, state tax revenues decline even more. The federal government increasingly is relying on tax receipts from the top earners. The problems associated with volatility are less at the federal level, but increasing. Taxing the rich sounds good to many, but there are costs. Once again, there are not free lunches.

GE Avoids Paying Taxes

A front page article in the New York Times concerns how General Electric managed to pay zero corporate income taxes in 2010 even though its profits from U.S. operations was $5.1 billion. It's total profit was $14.2 billion, with the difference not repatriated to the U.S. One can imagine the hue and cry this may cause among liberals, but I think all of us should be concerned.

Taxes distort decision making; there is virtually no way to prevent that. But the U.S. tax code distorts at so many levels it is hard to know the final effects. From the high rate on repatriated profits, to the high corporate tax rate, to tax credits for some activities--the code encourages firms to spend huge amounts of money on lawyers and tax accountants to understand and take advantage of the code. But, that isn't all. The article shows that GE often takes the initiative in lobbying for tax breaks. They have a lot of lobbyists and utilize them. The article ends with a quote from Gary Sheffer, a G.E. spokesman, "We are a diverse company, so there are a lot of issues that the government considers, that Congress considers, that affect our shareholders. So we want to be sure our voice is heard."

I do not object to lobbying since it is difficult to see how a representative democracy would operate if people cannot make their views known to their representatives. Of course, corporations are not people, but the shareholders and workers are.

The recent task force that made recommendations on ways to reduce the deficit argued for lowering of rates but reducing loopholes and tax breaks. I enthusiastically endores such a plan. On the other hand, I am somewhat pessimistic or cynical. If Congress enacted a simplified tax code for both individuals and corporations that eliminated tax deductions and credits for every item Congress has thought needed support, we would have a better system. But, I would expect that breaks, loopholes, credits and other distortions would creep back in over time, so that a decade from now it would look a lot like the current code.

Government Debt Receiving Attention.

Two items of interest related to federal government deficits are available today. The first is a letter written by ten former chairs of the president's Council of Economic Advisers. The ten include four who served democratic presidents and six who served republican presidents.

A second is a ranking of countries provided by the Comeback America Initiative. A video of his interview on CNBC is also available.

Alfred Kahn Dies

Alfred Kahn died Dec. 27 of cancer. He was 93. I had several opportunities to hear Kahn give a presentation or to talk with him. Once, when I was at Miami University and the other times at LSU. Kahn was the most complete economist I ever met. He worked in the area of regulatory economics, a subject I taught at both the undergraduate and graduate level while at LSU. He knew the theory, he knew the empirical evidence, and he was a practioner of regulation, both in public utility regulation in New York and heading up the CAB under Pres. Carter. He was partially responsible for deregulation of airlines--an act that made airline travel affordable for families. Because of his experience deregulating airlines, he was asked to advise former Communist nations after the collapse of the Soviet empire.

Kahn taught at Cornell University and his daughter married a graduate student in English who ended up teaching at LSU. Consequently, we were able to have him make a couple of presentations when he would be visiting his grandchildren in Baton Rouge. On one occasion, he spoke to a group of faculty about his advising former Communist beaurocrats about "deregulating" their economies. I asked him if he planned on visiting Russia some time. His response was, "No." He added that he would rather go to Italy for the 25th time than go to Russia for the first time. He said that a proud moment in his life was when an Italian asked him what part of Italy he was from. (No German has ever asked me a similar question.)

Another strength of Kahn as an economist was his willingess to learn and to change his mind. An example is that when deregulating airlines, Kahn thought a gradual approach was best. He later concluded that that had been wrong because a slow process created new vested interests. He concluded that a rapid change was better.

I consider Alfred Kahn to be an excellent example to anyone who aspires to be an economist.