John Lunn's Basically Economics Blog

An Inside View of the Mortgage Crisis

2011-10-27T12:32:00.003-04:00

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

2011-10-10T07:54:00.002-04:00

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?

2011-10-05T08:17:00.003-04:00

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

2011-10-03T07:28:00.002-04:00

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

2011-07-29T11:10:00.002-04:00

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

Thomas Geoghegan Again!

2011-06-20T13:40:00.002-04:00

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?

2011-06-20T12:55:00.002-04:00

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

2011-05-28T01:40:00.003-04:00

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

2011-05-27T08:35:00.002-04:00

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

2011-05-25T14:31:00.002-04:00

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

2011-05-23T05:07:00.002-04:00

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

2011-05-22T03:07:00.003-04:00

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

2011-05-21T14:34:00.003-04:00

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?

2011-05-16T10:15:00.001-04:00

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

2011-03-29T12:03:00.003-04:00

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

2011-03-25T09:31:00.002-04:00

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.

2011-03-24T08:11:00.003-04:00

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

2011-01-01T19:55:00.003-05:00

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.

Notes on Lehman Bankruptcy

2010-12-29T08:30:00.003-05:00

Very interesting post on a blog that I never heard of before. This is the kind of information difficult to know unless one is an insider or one who researches the minute details of regulations and laws.

Krugman on Scrooge

2010-12-27T08:56:00.002-05:00

Paul Krugman had a column shortly before Christmas in which he compared Scrooge to many Republicans. He notes that Charles Dickens' Christmas classic is actually a left-wing tract. However, I wonder if he endorses all of Dickens' work. According to the excellent book, HOW THE DISMAL SCIENCE GOT ITS NAME, Dickens wrote BLEAK HOUSE as an antidote to UNCLE TOM'S CABIN, with the purpose of showing that the suffering of white factory workers was more severe than the suffering of black slaves. Like Thomas Carlyle, who coined the term "dismal science" in an article entitled, "On the Negro Question," Dickens believed that whites were superior to blacks and that enslavement of blacks apparently was fine. I recognize that endorsing one opinion of a particular writer doesn't imply that one endorses all the opinions, but since Krugman is so quick to tarnish with a broad brush, maybe it is justified in this case.

Current Policy as Reason for Concern

2010-12-06T08:14:00.002-05:00

Christina Romer's column in Sunday's New York Times offers her judgment on the affect that uncertainty is having on the economic recovery. She discusses several concerns that are in the popular press and on shows like SquawkBox. These concerns are the fate of the Bush tax cuts, and environmental regulation. (I think she leaves out some though). She argues the biggest concern is uncertainty over the health of the economy. Her solution for resolving this uncertainty is a reaffirmation from the president, Congress, and the Fed that they will do whatever is necessary to create jobs. Fiscal and monetary policy must be expansionary, but a plan for tackling the long-term budget problems should be developed also.

It appears she is calling for additional fiscal stimulus. She is sticking with a Keynesian approach for the current state of the economy. But, she is ignoring the housing market. The wealth of most households is impacted more by changes in the value of their homes than in their portfolios. Further, housing is part of the real economy. The inventory of houses still exists, defaults and foreclosures continue to occur, and many others are still under water. The housing market is no where close to a new equilibrium as yet. I believe both Romer and those still in the Obama Administration are focusing on the wrong solutions because they misinterpret the problem.

Ben Bernanke was on 60 Minutes last night. He defended Fed policy, including the current round of quantitative easing. He noted that the Fed can change interest rates on very short notice so that they can reverse their policy when the time is right. When asked how confident he was that the Fed could achieve the necessary reversal at the right time, he replied, "100 percent." I hope and trust that this comment was for the sake of public confidence. If he literally is that confident in the Fed's ability to turn quantitative easing around and that they can know when the proper time to do so, then I am very nervous. Economists have no reason for such hubris. When we think that we can control the economy or fine tune the economy, or act like engineers, it is time to panic.

Mankiw on Taxes and Spending

2010-11-22T08:10:00.002-05:00

Mankiw's column in yesterday's New York Times is worth a read. He discusses tax and spending policies, noting how a tax credit is often like a spending increase. He argues, as do most economists, that the tax rate should be lowered and the base extended. The latter is done, at least in part, by removing many credits and deductions.

John Cochrane on Geitner's Proposal at the G-20

2010-10-26T12:31:00.003-04:00

Today's WSJ has an interest op-ed piece by John Cochrane. Secretary of the Treasury Geithner called for G-20 countries to undertake policies that would reduce external imbalances below some specified share of GDP. It appears that Geithner is most concerned about China's trade surplus with the U.S. However, the U.S. has a trade deficit with many countries other than China.

China saves a lot more that the U.S., partially because China lacks a social security system. The only way middle-aged adults can plan for retirement is by saving today. It often appears that Americans believe social security provides a better retirement than it does since so many don't save much. However, one positive outcome of the recent financial and economic crisis is that Americans are saving more and borrowing less.

Cochrane points out several problems with Geithner's proposal. First, how does anyone know the proper amoung of saving any given country should have? Second, countries at different levels of development will have different outcomes with respect to trade balances. The U.S. borrowed abroad to fund the railroads in the 19th Century. Cochrane also points out that promises to fix our long-term problems later are hardly enforceable. Finally, there is a strong notion of an ability for government and international agencies to plan the operation of modern economies.

Cochrane's piece is worth a read.

Two Links of Interest

2010-10-25T11:49:00.002-04:00

Saturdays WSJ had an interesting op-ed by Joseph Stiglitz on why quantitative easing will not succeed. The linkages between quantitative easing and business activity are tenuous, which seems to be the case to me as well.

On a different area, Bernanke gave a talk today about housing markets. His written remarks are here.

Bernanke's Speech

2010-10-15T08:34:00.001-04:00

Here is the link to the speech Bernanke is giving at a conference for the Boston Fed.

Krugman on Stimulus--Again

2010-10-11T08:32:00.002-04:00

Krugman's op-ed piece in the Times today argues that the claim that the Obama administration tried a massive stimulus plan and it didn't work is wrong. In fact, the stimulus plan was not large enough and much of the plan was not federal government spending. Instead, it was tax cuts and grants to states to make up for the lost revenues states faced. Much of what he says is true. In posts I did at the time of the stimulus, I argued that much in the stimulus bill was not stimulus. Instead, it was spending on programs that Democrats wanted but didn't put in the regular budget.

Krugman also argues that when people think of Obama as pushing big government, they don't have any massive new programs to point to. Here, it is clear that no matter how smart Krugman is, he doesn't get some basic ideas that people have. Krugman notes that the health care bill hasn't really kicked in yet so there is no new bureaucracy in place yet. True, but people anticipate there will be. People see that the focus of the administration had not been jobs but programs long held dear by Democrats in Congress, especially health care. The stimulus bill, as already pointed out, also included many things that may or may not be good, but could not be considered stimulus spending. People see that, for all the rhetoric from the administration, the focus of the administration was on programs long sought after by Democrats and not economic recovery. Krugman misses the point because he shared the same desire for the programs pursued by the president.

Two interesting articles

2010-10-11T07:59:00.004-04:00

Two interesting pieces in the business section of the NY Times yesterday. Mankiw's column illustrates the effects that higher taxes on high-income earners can have on work effort. He uses himself as a case study. An article on the historical gains of the stock market after the midterm elections provides astonishing data. The article writes about the data from the perspective of it being the third year of a presidential term, but data I received from a former student showed that the 200 days after the midterm election consistently had high returns while the 200 days prior to the midterm elections returns were much lower, with many years showing negative returns. It is difficult to know what to make about the data.

Can the Obese Eat Their Way to Good Health?

2010-10-07T12:21:00.003-04:00

David Wessel's column in today's WSJ discusses the need for more action on the economy. He discusses how there are three views--more stimulus is needed now, stimulus didn't work so have to rely on Fed, and the worry over debt so the need for austerity. He opts for more short-term stimulus combined with credible longer-term deficit reduction. He concludes with noting that financial crises tend to recover slowly, "But is this really the best we can do?"

I don't know if it is the best we can do or not. But, is his solution of short-term stimulus and credible long-term austerity does not seem realistic to me. In theory, one can make a case for it. But what would constitute credible long-term deficit reduction? Congress is expert at promising things long term that either never happen or are changed later due to some new crisis.

Given that many have used medical analogies, I will try one also. For example, I have read where people say that a doctor would be remiss not to do all that is possible for a cancer patient. Agreed. But what if our sick economy is more like health issues related to obesity? It would be wrong to keep feeding the patient to alleviate a symptom since the basic problem is obesity. Similarly, if the problem was too much leverage and debt, then more debt may not be the prudent action to take.

Adam Smith's Marketplace of Life

2010-10-02T11:44:00.002-04:00

I just finished reading Adam Smith's Marketplace of Life by James Otteson. I recommend the book highly. Otteson is a philospher who looks carefully at Smith's Theory of Moral Sentiments. He argues that Smith developed a theory of markets to explain the evolution of moral actions and codes in a society, that later enabled to explain the operation of economic markets in The Wealth of Nations. The same approach underlies both books. Otteson uses the term marketplace rather than the more common term, "spontaneous order." The idea is the same though.

I will be teaching the History of Economic Thought for the first time next semester, and Otteson's book is a great resource in preparation for the class.

In Krugman v. Rajan, I Side with Rajan

2010-09-21T11:24:00.004-04:00

Paul Krugman has a book review on three books about the causes of the financial crisis and/or ways to get the economy going again. One of the books is by Rajan, Fault Lines, a book I commented on favorably in an earlier post. As might be expected, Krugman is critical of Rajan whereas I was not. Rajan has a response to Krugman also. Rajan's criticisms of Krugman's review I think are exactly right.

Krugman discusses four causes of the housing bubble that economists and others have identified. The first is the low interest rate policy of the Fed through most the the 2000s. Second, the "global savings glut." Third, financial innovations, and finally government programs.
Rajan cited government policy and the low interest rates in particular. Krugman rejects both, and argues instead for financial markets and a "Minsky moment."

Krugman's arguments that Fed policy and government policies were not responsible are specious, as Rajan shows. Krugman says the Fed couldn't be responsible because there were housing bubbles in Europe also and the European Central Bank was not pursuing low interest rates like the Fed. But, as Rajan notes, the Fed pushed the interest rate to 1% and the European Central Bank to 2%, so both were low by historic standards. Krugman aruges that Fannie and Freddie were not responsible for subprime mortgages, but they were part of the overall government emphasis, regardless of political party, to extend homeownership.

This review by Krugman is further evidence that Krugman has ceased to be an economist and is a political columnist instead. The evidence he cites to back his claims or refute other claims would not be accepted by most teachers if offered by their students. Krugman is so obsessed with showing that Republicans are at fault for all the ills and Democrats are not, that he seems to be identifying and interpreting evidence through biased eyes. As Rajan notes, government officals of both the Clinton and the Bush administrations were involved in policies that help bring about the bubbles and the crisis.

Some Good Articles in the Wall Street Journal

2010-09-15T18:04:00.004-04:00

The Wall Street Journal has had a couple of interesting op-ed pieces recently. Two are somewhat related. An op-ed piece by Robert Barro discusses "Obamanomics" from an incentive point of view, and finds Obamanomics lacking. In today's journal, Alberto Alessina provides a piece that talks about research he has done on tax cuts versus stimulus. The evidence points to tax cuts being more effective than stimulus spending. (Naturally, Krugman disagrees.) Finally, and on a different note altogether, Danish statistician, writes a piece about the polarization of the debate concerning global warning. He persistently has said he believe global warming is a problem and is human made, but that solutions other than massive cut backs in carbon emissions are available. Finally some in the media have seen his recent comments but take it as a change of heart. His piece points to the problems in todays' polarized ideological environment, and I suspect they can be extrapolated to many issues today.

Basel III Accord

2010-09-13T09:03:00.002-04:00

The news release from the Bank for International Standards concerning the new capital requirements for banks can be found here.

Assorted Links

2010-09-08T08:22:00.003-04:00

Several interesting papers and articles are available.

Paper by Jeremy Stein on securitization and the financial crisis.

Bernanke's testimony before the financial crisis committee.

Interview with William R. Allen who taught at UCLA for many years about the "glory " years of UCLA. University Economics, a principles text co-authored by Allen and Armen Alchian remains the best I have ever seen, although perceived by many as too difficult for most undergraduate students. I was a for Allen at one time, along with many other grad students there.

$50 Billion for Infrastructure

2010-09-07T14:15:00.002-04:00

President Obama is calling for a $50 billion transporation bill to increase spending on infrastructure. According to the Wall Street Journal article, the President said, "All of this will not only create jobs now, but will make our economy run better over the long haul."

In previous posts, I noted that much that was in the stimulus package was not really stimulus, but that infrastructure spending makes sense because it does increase the productivity of the economy over time. The original stimulus bill called for almost $50 billion for the Department of Transportation. According to the government's web page for tracking the recovery, the Department of Transportation has spent $18.5 billion so far. This is since passage of the Act in early 2009. The government has not been very quick on spending money that may actually be stimulative and a true investment.

On the Duralbility of False Statistics

2010-09-07T12:07:00.004-04:00

Occasionally a statistic gets into the public domain through the news media that turns out to be untrue. A recent article in the Wall Street Journal illustrates this. We often hear thta the typical American will go through about seven careers in a lifetime. I have heard that claim at college graduations and from politicians. Carl Bialik explores the truth to this claim and finds that there is no support for it. Often, the source is listed as the U.S. Bureau of Labor Statistics, but the data are not tracked by the BLS.

A number of years ago I read an article in which the author searched for the source of a claim he had seen in print numerous times. The claim was that one in four coeds would be raped at a particular university in the four years they attended the school. The author said he found it hard to believe. If it were true, parents would have to be crazy to let the daughters attend the school. He tracked it down to a speech by someon who came up with the number by taking the reported number of rapes and increasing the number by some factor to account for unreported rapes.

Bjorn Lomborg, in his book, The Skeptical Environmentalist, offers another example. The press often would quote a statistic that 40,000 species are lost every year. Where did the estimate come from? Lomborg found the source in a book by Norman Myers, The Sinking Ark. Myers took a number of 100 species a year, which was a "hazarded guess," at a 1974 conference. Myers then stated that the number seemed low. He then supposes that the final 25 years of the 20th century would witness the elimination of 1 million species. This works out to 40,000 a year. But the number was not based on evidenc; it was pulled out of the air.

Too many of us assume that a number that appears in a newspaper must be true. But reporters are often not statistically trained, and apparently seldom try to find the source of a claim. Some skepticism is needed by all of us.

The Recession and Keynesianism Once Again

2010-09-03T14:39:00.004-04:00

Christina Romer's farewell to the National Press Club as she leaves her post as chair of the Council of Economic Advisors caught my eye because I think it might have supported some statements I made in yesterday's post. The title is, "Not My Father's Recession" and refers to the recession in the early 80s that I referred to yesterday. She correctly noted that the sources of the two recessions differed and that led to differences in the depth of the recessions and caused economists to misinterpret events in late '08 and early '09. However, I am disappointed in that she didn't take the next step. She still argues for a Keynesian diagnosis and solution. She offers some reasons why the stimulus seems to have been less effective than desired, but doesn't consider other options than increased government spending. Romer writes in Keynesian terms, "The only surefire ways for policymakers to substantially increase aggregate demand in the short run are for the government to spend more and tax less. In my view, we should be moving forward on both fronts."

Paul Krugman's most recent op-ed piece in the New York Times calls on President Obama to push for a very large stimulus package. He argued in early '09 that the stimulus plan was too small and should have been much larger. He claims that the evidence is that the stimulus worked but was too small and another round is needed.

It seems to me that the stimulus plans are similar to another program used last year--the "Cash for Clunkers" program. The program stimulated auto sales while it lasted, but then there was a big drop in car sales after the program ended. The program merely shifted the timing of auto purchases and didn't impact overall demand for cars. Similarly, increased government spending increases GDP by definition, but may not jump start the rest of the economy if there are structural problems that need to be corrected, such as too much debt on the balance sheets of households. As Krugman notes in his piece, as the stimulus plan has wound down, the impact on GDP has fallen. He says this shows we need another round of stimulus. I ask, "When will the need cease?" I think the answer is when households have repaired their balance sheets. To me, this suggests the emphasis should be on reducing the tax burden on households rather than increase government spending. The increased cash flow may not generate increased spending immediately as people pay down debt, but will get us to a point when people can feel more comfortable spending again.

Economic Discontent as Noted by Michael Boskin

2010-09-02T14:20:00.003-04:00

An op-ed piece in today's Wall Street Journal is of interest about the slowness of the recovery, but I think also fails in an important way. Michael Boskin argues that the recovery promised by the Obama administration has fallen short. It is hard to disagree with that. He then compares the GDP growth rate in the 4 quarters and 12 quarters after the trough of some past recessions--1975 and 1983. The growth rates were much higher in the previous two recessions than in this recession.

My concern is that not all recessions are alike and that the cause of a recession may be important in determining the pace of recovery. Both the 1975 and 1983 recessions were related to supply side issues such as rising oil prices, and a recent past of high inflation. The Fed tried to reduce inflation by raising interest rates. In the case of 1975, the Fed soon quit raising interest rates because of the recession while in the early 80s, the Fed held firm. Once inflation was reduced substantially and people recognized it, the economy was in a good position to grow rapidly.

The current recession has a different source. Fed policy was not tight; in fact it was probably too loose. Debt was the big problem. Consumers were spending beyond their means and running up debt. When housing collapsed and many households realized their wealth was not as great as they had thought, they reduced spending and worked on increasing savings and reducing debt. It takes time to do this and we cannot expect consumers to return to their old spending patterns in a short period of time. Further, as noted in Reinhart and Rogoff's book, This Time is Different, recessions that begin with financial crises tend to last longer. That is, the cause of the recession matters.

Latest Housing Report

2010-08-24T10:32:00.003-04:00

The latest housing report is out and the news is not good. (See here). I fear we may continue and accelerate the public support and subsidy for housing that helped lead to the crash in 2008.

Industrial Policy

2010-08-12T07:30:00.003-04:00

The Economist for this week has several articles related to the question of industrial policy. They observe that industrial policy is being revived in many countries, including the U.S. The also observe that industrial policy can claim as many failures as successes. Another part of the change in policy is that manufacturing is being stressed. From Obama's talk of strategic industries like autos to France's help of a toy manufacture, there is an emphasis on aiding manufacturing. While this is not exactly the same as the beggar-thy-neighbor policies of tariff increases that occurred during the Great Depression, it can generate a similar kind of conflict. Another popular area receiving government support in many countries is "green technology." We can only hope that people soon realize the waste of taxpayers dollars that these policies generate.

Are Interest Rates Too Low?

2010-08-12T07:21:00.002-04:00

An interesting op-ed piece in yesterday's Wall Street Journal by John Michaelson. He challenges the conventional wisdom that maintaining low interest rates is necessary to stimulate the economy. This is a conventional wisdom I have been questioning myself for awhile. In a recent post on three books I enjoyed reading, I noted that Rajan points out two negative effects of low interest rates--less income for people who own bonds and a tendency for investors to seek higher returns through leverage.

Michaelson argues that firms make investments based on increased demand much more than on relatively small changes in interest rates. He also argues that we have an example that shows the low-interest rate policy doesn't work--Japan. I find the article stimulating and worthy of consideration.

Housing Again

2010-08-08T09:20:00.002-04:00

Gretchen Morgenson has a good article in today's New York Times concerning housing policy. She discusses Fannie and Freddie and also the close relationship that developed between the GSEs and Country Wide, the company that generated so many mortgages that turned out to be bad. But, she also discusses the idea that federal policy toward housing needs to be re-examined. I concur. The tremendous subsidies and policies that promote housing need to be exmained critically. Otherwise, we will eventually end up again with rising debt levels and housing-financed spending. When the time occurs, I am sure that the attitude will again be, "This time is different."

A Trio of Books that Help Explain the Recent Crisis

2010-07-23T11:54:00.003-04:00

I recently posted about an excellent book on the financial crisis--Gary Gorton's SLAPPED BY THE INVISIBLE HAND. I now have two additional books to recommend. The first is by Carmen M. Reinhart & Kenneth S. Rogoff, THIS TIME IS DIFFERENT: EIGHT CENTURIES OF FINANCIAL FOLLY, and hte second is by Raghuram G. Rajan, FAULT LINES: HOW HIDDEN FRACTURES STILL THREATEN THE WORLD ECONOMY. One can get a good understanding of the causes of the crisis by reading these three books.

Reinhart & Rogoff look at eight centuries of data concerning financial crises. The information is sobering on at least two accounts--the frequency of the crises and the severity of the recession following a banking crisis. They also not that crises often follow a period when the belief at the time is that "this time is different" and complacency or hubris leads to problems. It is interesting to note that for many of the crises, a run-up of housing prices preceeded the collapse.

Gorton shows how much what happened can be described as a bank run in the shadow banking sector. Since I wrote on it previously, I won't add more here. Rajan's book tries to be the most comprehensive regarding the recent crisis. He pins the blame on the places I have suggested in the past--policymakers, the financial firms, the global saving glut, and poor regulation. He also discusses the problems caused by policymakers responding to a downturn given that the safety net in American society is less secure than in Europe. He notes a key pointsthat I think has not received adequate attention. Low interest rates have two negative effects--it reduces incomes of savers and it encourages people who want more return to take on more risk by increased leverage.

I highly recommend all three books for a greater understanding of the crisis. Hopefully, a better understanding can aid in determing how best to encourage a sustainable recovery.

Obama in My Hometown Dissing my Representative

2010-07-15T18:35:00.003-04:00

President Obama appeared briefly in Holland, Michigan today for the groundbreaking ceremony for a new factory built by LG Chen, a Korean manufacturer. The factory will build batteries for GM's Volt. The $351 million plant is receiving $150 million from the stimulus bill passed last year. While giving his talk, President Obama diverted from his prepared text to say, "Some made the political calculation that it's better to obstruct than lend a hand. They said no to the tax cuts, they said no to small business loans, they said no to clean energy projects. It doesn't stop them from coming to ribbon cuttings -- but that's OK. " Obama had earlier acknowledged the presence of Pete Hoekstra, representative to Congress from the district that includes Holland.

Hoekstra's response was, "It demeans the office of the president. It's disappointing. It is unpresidential....This is my home district. These people are paying the taxes that he's handing out today. I'm here to respect the office of the president, and I don't think he reciprocated."

I agree that it was unpresidential. In a news report from a local tv station, Hoekstra referred to another small business owner who was expanding and hiring more people without government funding. Why isn't that owner getting any coverage.

In previous posts, I have commented on the fact that much of the stimulus was not actually stimulus spending. The Holland plant is an example. Yes, it will create jobs in an area that has unusually high unemployment. But, the batteries used in Volts are instead of other devices used in cars that are not battery operatred or hybrid. The reduced demand for those devices mean that some people are not working that would have been working but for the government grant to LG Chen.

In the past, I have often disagreed with President Obam but tended to respect him and wish hime well. The pettiness he showed today may make me reconsider.

Good Book on the Finanical Crisis

2010-07-12T09:25:00.002-04:00

I finished reading SLAPPED BY THE INVISIBLE HAND: THE PANIC OF 2007 by Gary Gorton. It is the best book I have read on the crisis. The only drawback to the book is that it is mostly a collection of previously written articles. Most such books lack some continuity. It is less true for this book though since two long chapters were written after the crisis began.

Gorton's book isn't the complete story, but it covers a key component to the crisis--how did problems in subprime markets lead to the collapse of the banking system? He shows how it happened and shows that it was basically a bank run. The difference between the recent situation and traditional bank runs is that it took place out of sight in the "shadow banking system." That is, the run was by firms on other firms and didn't involve tradional depositors.

Unfortunaely, Gorton's book is unlikely to get the wider readership that it deserves since it is more technical and doesn't focus on the conflicts among different business and government leaders or see evil around every corner. I found the book very enlightening and highly recommend it.

Krugman on Business Climate

2010-07-09T08:24:00.002-04:00

Paul Krugman's lastest op-ed piece in the New York Times challenges the view that business is not spending because they see the Obama Administration as antibusiness. He claims there is no truth to the claims that business is not spending because of concerns over taxes, regulation, and budget deficits. As evidence, Krugman cites data like capacity utilization and surveys of business leaders that show that more of them cite the poor economy than political climate as the major problem. Hence, says Krugman, the government should ignore the alleged reports of business unease and pump up the economy. An improved economy will get business spending again.

There is a problem with Krugman's analysis though. He assumes an either/or situation when it can be a both/and situation. Yes, the economy is doing poorly and if we had a stronger and faster recovery, business would spend more and hire more workers. But, one of the reasons for the poor economy may be nervousness on the part of business, especially if it manifests itself in putting off hiring new workers due to uncertainty.

Uncertainty is a key concern that Krugman ignored in his piece. I agree with him that business people will always complain about taxes and regulation, just as most citizens complain about taxes as April 15th approaches each year. But business investment spending concerns the future, and when the future is more uncertain than normal, business leaders are more likely to be cautious. Given that some of the administration's policies affect the cost of hiring workers, the caution affects hiring decisions. A concern that the administration is antibusiness just feeds into the fear.

Finally, it appears to me that the Administration sees its problem with business as false perceptions. This may be due, in part, to a president and many leaders, who have no experience in or with business.

Can We Learn from the Financial Crisis Inquiry Commission?

2010-07-03T07:07:00.003-04:00

Good article in the New York Times today about the work of the Financial Crisis Inquiry Commission. Joe Nocera describes the commission as seriously seeking answers to what went wrong--unlike the Congressional hearings. It is six months still before their report will be due. It should provide interesting reading once it is available.

According to the French, Google is a Monopoly

2010-07-02T07:24:00.002-04:00

Article in the NY TImes today says that the French have declared Google a monopoly. The article goes on to say that Google dropped ads from a French firm that sells products enabling people to know where police are. Again, I wonder if Google was a French firm if the ruling would be the same. We will continue to see firms in the tech sector having "monopoly" positions because they are producing network goods--goods that are more valuable to a consumer when most other consumers use the good. Finally, the article notes that this could have an effect of Google's future creativity since antitrust lawyers will now have more influence on what they do.

Taylor on the Financial Overhaul Bill

2010-07-01T07:07:00.004-04:00

Good op-ed piece in the WSJ today. Stanford economist John Taylor, known for the Taylor Rule that tracked well the Fed's interest rate setting until the mid-2000s, argues the financial overhaul bill will be ineffective in preventing another crisis because it doesn't address the causes of the crisis.

There may be good reasons for some of the changes in the bill. One needs to examine the details more closely, as well as the actual regulations developed after the bill is passed, to have an idea whether this is so. Even then, we may need experience with the regulations to have a better idea about the efficacy of the regulations. But we have better ideas today about the causes of the crisis and clearly the bill does not address them.

Financial Regulation Bill

2010-06-25T08:23:00.003-04:00

The financial regulation bill has a finalized form from the reconciliation conference. (See WSJ article here.) It will take some time to read through the bill and evaluate it. At this point, I just want to note that the task force President Obama put together to determine the causes of the financial and economic crisis has not finished its work or put together a report. Yet, we get a bill to prevent anything like this from happening again (according to Sen. Dodd). Just what is the point of the task force then?

Does President Obama Understand Animal Spirits?

2010-06-24T14:42:00.003-04:00

The recent Economist has an editorial about President Obama's handling of BP and the oil spill in the Gulf. The page entitled "Lexington" also discusses Obama's relationship with business. The claim that some on the right make that Obama is socialist is refuted. Of course, whether the refutation is correct or not depends on one's definition of socialism. Traditionally, socialism refers to government ownership of the means of production. By this definition, Obama is not a socialist. According to some political scientists, modern socialism refers to an enlarged welfare state and expanded social safety nets. By this definition, I would classify Obama as socialist, but I would also classify most in the Democratic Party as socialist then. My colleague in Hope's Political Science Department, Jeff Poulet, argues that the older definition should be adhered to, and I will do so.

The Lexington page made an interesting point though, and one with which I would concur. It said that Obama doesn't understand business. The same could probably be said of many politicians of both major parties. Academics who support business often have no actual experience in business, and may not understand business. A case could be made that Ayn Rand, who wrote so glowingly about the businessperson who stood firm to his or her beliefs and who was successful in spite of government didn't seem to realize how often business people seek government help in one way or another.

When I visit a business, especially a manufacturing concern, I am struck by the amount of capital equipment used to make the product. The equipment is costly and generates increased labor productivity and higher wages. To purchase the equipment, the firm must have raised funds from stockholders, or from savings of the entrepreneur, or through borrowing, or from profits. Yet, for many politicians, profit is almost a dirty word.

The optimistic faith of an entrepreneur who steps out and begins a business is courageous. Most new businesses fail. This is where the "animal spirits" mentioned by Keynes in his General Theory comes into play. Would anyone start a new business on the basis of mathematical expectation alone? Keynes argued no because the future is unknown. Instead, people often have a spontaneous urge to action rather than inaction.

I question whether Obama or many other politicians and even many academics appreciate the risk and courage it takes to start a business. And even for businesses that have been around awhile and have grown, there is still a huge risk in expanding and building new facilities. Hiring workers involves a great responsibility. I have also spoken with business owners who speak of lost sleep worrying about how they can keep employees employed. I admire people who are willing to step out, risk their savings, in order to create new products or services and employment for others.

Power Hungry

2010-06-22T08:05:00.002-04:00

I just finished an excellent book on energy--POWER HUNGRY by Robert Bryce. The subtitle of the book is "The Myths of 'Green' Energy and the Real Fuels of the Future. His basic argument is that the popular "green" energies--wind and solar--can never replace hydrocarbons as the major source of power in the world. He notes that it is not energy that we want, but power. As he notes, "Energy is the ability to do work; power is the rate at which work gets done." (p. 13). It's power we want and we want it 24/7. He continues, "Renewable energy has little value unless it becomes renewable power, meaning power that can be dispatched at specific times of our choosing." (p. 39).

Bryce focuses on what he calls the Four Imperatives. These are: power density, energy density, cost, and scale. The renewables fail on these imperatives.

He also has some good one-liners:

"If you are anti-carbon dioxide and anti-nuclear, your are pro-blackout."

"All-electric cars are The Next Big Thing. And they always will be."

As Bruce says repeatedly, it is a matter of math and physics. He sees the solution to more use of natural gas and nuclear power.

The book can help clear the air of hype and sensationalism, which are often invoked by environemental activists.

Rethinking Home Ownership

2010-06-19T12:08:00.002-04:00

David Wessel in Thursday's WSJ had a good piece on homeownership. In previous posts, I have argued that much of our problem leading up to the financial crisis was an over-emphasis on increasing homeownership rates in the country. Wessel offers a solid analysis of the issue.

Government Failure as seen by Prof. O'Driscoll

2010-06-14T14:25:00.003-04:00

Good op-ed piece by Gerald O'Driscoll in today's Wall Street Journal. A combination of regulatory capture and information problems makes it unlikely that big government can effectively regulate complex environments, whether ecological or financial.

Companies are Still Risk Averse

2010-06-11T09:51:00.002-04:00

The Wall Street Journal has an article today about a report cash holdings of nonfinancial firms. Cash holding are up 26% from a year earlier, and the increase is the greatest ever in records that go back to 1952. Evidently, firms are very cautious and risk averse still. I wonder if we have a kind of employers' strike, as some have described the latter part of the Great Depression. There was so much concern by business leaders then over the activism of the government and uncertainty about future policy that they were fearful to increase investment spending and hiring. The current situation is reminiscent of that, but we still have too small a time period to reach such a strong conclusion.

Is Obama Anti-Business or Anti-Markets, Part II

2010-06-04T11:37:00.002-04:00

Now that I am back from Germany and done with the spring semester, I plan to post more regularly. In an earlier post, I discussed whether Obama is actually anti-business or anti-markets. The question is relevant because the two are not the same thing. Obama has said he is not anti-business, and offers support things like the bailout of General Motors. But, that act makes him anti-market. An op-ed piece in today's Wall Street Journal written by the governor of Indiana offers another explanation as to why that is the case. He reminds readers that the bailout of GM and Chrysler resulted in unique bankruptcy proceedings--proceedings that caused secured debtors to lose much more than would have been the case under normal bankruptcy procedures. This violation of the "rule of law" is anti market even if it helped two large firms. Once again, when government picks favorites in business they are not being pro-markets. They are also not being pro-business since some businesses are helped and others harmed by the favoritism.

Can democracy, globalization and the nation state co-exist?

2010-05-15T02:37:00.003-04:00

Dani Rodrik has an interesting piece in Project Syndacate, that can be found here. He argues that there is a trilemma involving globalization. Three good things are democracy, globalization, and nation-states. Rodrik says that we can have only two out of the three. He uses the Greek situation to elaborate. For globalization to work, either Greece has to give up democracy so the government doesn't provide the social programs the people want or Greece has to give up independence and follow the lead exactly of the bigger EU countries, Germany in particular.

Rodrik raises some interesting points, including a comparison to the US experience of the federal government wresting power away from the states. But Greece can have globalization and its nation state if it hadn't joined the euro zone. Increasing globalization does not require movement to a single currency. Certainly there is a reduction in sovereignty when nations join international groups or free trade areas, but it is a voluntary reduction and limited to certain areas.

Rodrik may prove to be correct. As yet, I am not convinced.

A United States of Europe?

2010-05-09T07:56:00.003-04:00

I am in Germany to teach a short-course for a college on economic policy. The current Euro crisis should provide some interesting discussion. There is also an election today in one of the German states that may be interpreted as a judgment on Merkel's focus on Europe rather than on Germany. From the start, the euro was a political rather than an economic move, even though there were economic reasons for moving to a common currency. I think the political motive was to force more political integration. Clearly, all of Europe is not an optimum currency area. Greece is demonstrating that.

Krugman had a piece recently in which he reconsidered whether Greece should pull out of the euro. Earlier, he opposed it on grounds articulated by Barry Eichengreen. I also found Eichengrfeen's analysis persuasive, but, like Krugman, am having second thoughts. Recently, Mankiw also entered into discussion on the issue, with some pertinent comments.

On many occasions when I have visited Europe, I have asked people whether they wanted the EU to eventually be a United States of Europe. Uniformly, the response to that suggestion is horror. Yet, the elites in Europe who helped organize the EU in the early years, and still exist in the governments of major members (France and Germany in particular), want a United States of Europe. The current crisis may push things one way or the other, and I am not certain yet which way.

Basics of a Value-Added Tax

2010-05-02T11:42:00.002-04:00

Greg Mankiw's article in today's New York Times provides a good and simple explanation of a value-added tax. He notes that it could be very similar to the flat tax offered by Hall and Rabushka many years ago. However, the flat tax has been offered as a substitute for the current income tax and a value-added tax is usually discussed as a new source of revenue for the government. Any discussion in today's political environment will surely be about extra revenue to reduce the deficit rather than an alternative to the progressive income tax.

Is Obama Anti-Business or Anti-Markets? Part I

2010-04-22T07:52:00.003-04:00

Below is an e-mail I sent to Squawk Box this morning after hearing two of the hosts debate whether President Obama's policies are ant-business. In a CNBC interview yesterday, the president said that he was in favor of markets. My message was:

Three comments on the discussion this morning between Joe and Carl about whether the Obama Administration is anti-business. First, the financial firms on Wall Street and business are not one and the same. Obama is correct when he says that the financial sector is to facilitate business. Second, Obama is clearly in opposition to the market system since he wants to use taxes and subsidies to reallocate resources in the economy. Obama is smart and the danger of smart presidents is they think they know better than the market where to invest capital. Third, many business leaders, especially of large corporations, don't favor the operation of the market system. They want tariffs when facing import competition, or tax breaks, or subsidies and so on. Crony capitalism is often favored by business and members of both major political parties.

I will elaborate more later, i.e., when this semester is over.

Daylight Savings Time

2010-03-23T09:20:00.003-04:00

I live in West Michigan, which is the western edge of the Eastern Time Zone. Summers are great, with it being light until about 10:00. But, with the earlier move to daylight savings, its been dark in the morning. My wife has often asked whether daylight savings actually saves energy. A recent study by an economist says no--daylight savings causes an increase in electricity usage. For many years, part of Indiana went to daylight saving time and part did not, so there was a natural experiment when the rest of Indiana went to daylight saving time. The result--greater electricity usage in the counties after they went to daylight saving. The counties that had been using daylight saving for some time were the control group. I understand it was Ben Franklin's idea originally, so even Ben could be wrong.

What Happended to Toxic Assets?

2010-03-19T08:15:00.003-04:00

This is the most hectic semester I have had since arriving at Hope College. One result is that the quantity of posts to my blog is down. I will try to improve after spring break, during which I will be an expert witness and not catching up on my classes. I feel as if I am following the Japanese auto model--"just-in-time" teaching. I don't recomment it.

On another note. Sen. Dodd has put forward a plan for financial regulation. It made me wonder what ever happened to the toxic assets we heard so much about a year or more ago? A toxic asset is not necessarily a bad asset or a valueless asset. A toxic asset is an asset for which the value is unknown. It may be that the banks and other market participants now know the value of the assets, have written off the bad ones and are comfortable with the good ones. I don't know and haven't heard anything about it.

Another question I have concerns the failure of banks to extend loans. I understand that the number of loans is down. But there could be two reasons--people with a lot of debt already are not applying for loans, or people are applying but banks are turning them down. Actually, it is likely both are partially correct. But banks are more likely to be cautious if they still have toxic assets on their balance sheets, which brings me back to my first question. I am hopeful that recovery will build but am still concerned about some weaknesses that may still exist in the economy.

Trade Volume Increasing

2010-03-02T08:39:00.002-05:00

A study by a Dutch group finds that the volume of world trade has been increasing rapidly. (See the Financial Times article here.) The increase in world trade is a good sign that the world economy is improving. Still, there are concerns with Europe and the problem associated with Greece, and in the sustainability of our own recovery. At this point, I am willing to take good news when it appears.

Interview of Larry Summers

2010-03-02T08:30:00.002-05:00

The transcript of an interview with Larry Summers is available here. Karen Finerman of CNBC interviewed Summers, asking about the economy, Greece, and other current economic issues.

The Stimulus One Year Later According to Robert Barro

2010-02-23T13:09:00.004-05:00

Robert Barro has an op-ed piece in today's Wall Street Journal. In it he opines on the effectiveness of the stimulus package, based on estimates of the government spending multiplier he has estimated. His estimates are less than unity, which means that an extra $900 billion of government spending leads to an increase in GDP of less than $900 billion. This differs from the claims made by others such as Paul Krugman, who believes the stimulus was vital but too small. I am unaware of any economic research Krugman has done on the spending multiplier, but he presumes that when there is slack in the economy, such as in a recession, the "crowding-out effects" that might occur in normal times will not take place.

But Krugman's arguments are based on the Keynesian model, which was rejected by much of the profession because of empirical evidence. It also is based on an over-arching concern on the short run. But, it was an emphasis on the short run, as exemplified by government, business, banks, and households, that helped create the problems we currently have. We may yet develop the situation that Keynesians believed after World War II--the economy was inherently unstable and persistent efforts by the federal government would be needed to maintain growth. If so, I believe a key reason for it will be government policies that focused so much on the short run that market forces were not permitted to provide a sustainable growth rate.

Allan Stockman dies

2010-02-20T09:07:00.002-05:00

I just learned from the Cowen/Tabarrok blog (Marginal Revolution) that Allan Stockman died. I met him several times. He worked on a post-doc at UCLA while I was in grad school there. He then moved on to the University of Rochester where he spent his career. He wrote a principles of economics text, and I participated in a panel that read portions and offered comments on it. He was a first-rate economist, specializing in international finance. An obituary is here.

Health Care as Seen by the CEO of the Cleveland Clinic

2010-02-20T08:46:00.002-05:00

The March 1 issue of Fortune has an interview with Delos Cosgrove, CEO of the Cleveland Clinic. The clinic is one of the most highly rated medical facilities in the country, and has the highest acuity patients of any hospital in the country. (That is, they have the sickest group of patients.) Dr. Cosgrove offers some interesting comments on health care costs. Like many others, he focuses attention on behavioral patterns--obesity, smoking, and exercise. He argues that the claim that we the quality of health care in the US is not very high is false. He also notes that health care costs will continue to rise, no matter what happens in Congress regarding health care reform. Why? One reason is we have more elderly and we can do more for the elderly today than in the past. He also notes that suffering has gone down. It is a nice counter to so much of what politicians claim about health care and what can be done.

Europe and the Euro

2010-02-15T07:45:00.002-05:00

I don't often agree with Krugman, but when he focuses on international economics, he usually is good. His column in today's NY Times is right on. I would only add that the political elites in Europe who pushed the euro through wanted it to help push more political integration--ultimately a United States of Europe. Hence, Krugman's conclusion along with the supporting statement by Eichengreen are the result of that decision over a decade ago.

Good Column on the National Debt

2010-02-14T06:37:00.002-05:00

Greg Mankiw has a good column on the national debt in today's Wall Street Journal Business section.

The Liberal Bias of Professors

2010-01-20T05:52:00.002-05:00

An interesting article in the New York Times discusses recent research on the political leanings of professors in American colleges and universities. Not surprisingly, it notes that professors are more liberal than society as a whole. This is old news. The newer approach is the reasons given. Many liberals argue it is because conservatives are stupid and most professors are not stupid. Brad DeLong refers to the Republican Party as the Stupid Party on his blog.

Neil Gross and Ethan Fosse argue that professors are "politically typed" in a way similar to how nurses are "gender typed." The article states:

"Nearly half of the political lopsidedness in academia can be traced to four characteristics that liberals in general, and professors in particular, share: advanced degrees; a nonconservative religious theology (which includes liberal Protestants and Jews, and the nonreligious); an expressed tolerance for controversial ideas; and a disparity between education and income."

Liberals are more attracted to academia. Another argument is that once in place, it is difficult to change things because professors at a university decide who can be hired and tend to hire people like themselves. When I was at LSU in the late 1980s, a professor from the English Department wrote in the student newspaper that he thought it would not be possible for either a Republican or a Christian to become part of the faculty of the department there. (He noted that he was neither but thought the department should be open to people of other views.) It was not true of the Economics Department at LSU since there were a number of Christians and a number of Republicans in the department. (These were separate but overlapping sets.) It is also certainly not true about Christians in the English Department at Hope College since Hope is a Christian college. However, Republicans may be nonexistent there.

In some areas, professors can be very narrow minded. As the blogs of DeLong and Krugman show, liberal professors can also be mean, hateful, and intolerant.

Charles Calomiris offers a spiritual response to the financial crisis

2010-01-16T09:11:00.002-05:00

Thanks to my former colleague, Doug McMillin, for the reference to a talk Charles Calomiris gave in March of last year. (The paper can be found here.) He identifies four causal factors to the crisis--factors that have been mentioned in this blog before. He also discusses some ways out. Finally, he looks at examples of people making decisions is crises--including biblical figures Ruth and Job, and historical figures such as Alexander Hamilton, JP Morgan, and Andrew Mellon. All in all, an interesting paper.

Happy New Year

2010-01-01T10:45:00.003-05:00

It is now 2010. Is that "twenty-ten" or "two thousand ten"? Who decides? Unlike France, there is not an official organization to keep the purity of the language. Instead, we rely on usage, although the media has a lot to do with what ends up being used. Another way of putting it is that the development of the English language follows an evolutionary process--a process that could be called "spontaneous order." France relies on a government-endorsed process. When I was in Germany on sabbatical, VW ran ads in German magazines that used an English term. (I don't remember the term, unfortunately). When the ads were run in French magazines, the German company could not use the English term in the ads.

We seem to be becoming more like France in our approach to the economy. Johnson Controls will soon be starting a new facility to manufacture batteries for hybrid autos. They are also getting subsidies from the government because the government thinks it knows the technology is promising and should be supported. This government-supported approach sometimes works and sometimes doesn't; although usually follows paths endorsed by politically-important constituencies of the party in power.

It is the increasing reliance of government leadership in the economy that makes me most nervous about the coming year and beyond. Hopefully, I will be wrong and a sustainable recovery will occur.

[I leave tomorrow for Atlanta and the American Economic Association meetings so probably will not post anything new until I return. Again--Happy New Year!]

On Floyd Norris' Book Selections

2009-12-26T14:09:00.006-05:00

In the business section of the New York Times on Christmas Day, Floyd Norris offered a short list of the best books in 2009. The list contains six books:

--Liaquat Ahamed, Lords of Finance: The Bankers Who Broke the World.
--Robert J. Barbera, The Cost of Capitalism: Understanding Market Mayhem and Stabilizing our Economic Future.
--Johan Cassidy, How Markets Fail: The Logic of Economic Calamities
--Justin Fox, The Myth of the Rational Market: A History of Risk, Reward and Delusion on Wall Street.
--Frank Portnoy, The Match King: Ivan Krueger, The Financial Genius Behind a Century of Wall Street Scandals.
--T.J. Stiles, The First Tycoon: The Epic Life of Cornelius Vanderbilt.

(Note that all six titles of colons and subtitles.)

I have not read the last two books and am not interested in them as far as the recent recession and financial crisis is concerned. Ahamed's book is fascinating, describing the relationahsips among the key central bankers in the years leading up to the Great Depression. I recently finished reading The Myth of the Rational Market and am ready to read How Markets Fail. The book by Fox focuses on the idea of efficient markets in finance. It is good in that it describes the theory relatively well, and presents some interesting anecdotes about the famous economists and finance professors who developed and tested the theories. But, Fox rejects efficient markets, and is much more favorable to behavioral finance. For all the labors he goes through, his bottom line solution is, "It leaves us with a need to find ways to temper speculative excess while acknowledging that we won't necessariyl be able to distinguish speculative excess from an entirely sustainable boom." (p. 319). Very helpful. With that we should be able to have a bright and riskless future.

In skimming through the introduction to the book, How Markets Fail, the topic is broader than the stock market, but looks at people like Hayek, Friedman, and others who advocated free marekts as the best way to organize economic activity. Cassidy also discusses behavior economics, but seeks to offer a broader critique that he calls reality-based economics. He criticizes the Fed for not trying to pop bubbles earlier.

This last point is interesting because it is a topic the members of the Open Market Committee had discussed. It is also a topic in Lords of Finance. Benjamin Strong, who was President of the New York Federal Reserve Bank until is death shortly before the stock market crash, believed there was a bubble but that the means that would be used to pop it could cause a big crash and a depression. After his death, the key decision makers in the Fed tried to pop the bubble, and we had a big crash and a severe recession. No one knows what a concerted effort to pop the housing or stock market bubbles in 2005 or 2006 would have brought about. Perhaps a less severe recession, and perhaps just as severe a recession only sooner.

I also have not read The Cost of Capitalism, but Norris describes it as an attempt to exlain the importance of Hyman Minsky and to demolish neoclassical economics. I have recently read Minsky's, Stabilizing an Unstable Economy (no subtitle). I found Minsky to be difficult to read--not because the ideas or writing was difficult but because I found so much of it to be nonsense. He described the period from 1946 to 1966 as one in which the U.S. had a stable economic and financial system, and that it has become more unstable since then. The reason for the increasing instability is financial innovation. In the end, he calls for a much larger role for government to keep the system more stable. I suspect that Minsky would have argued that he paid more attention to historical realities than traditional economists. I am not sure that is true though.

Many people around my age (baby boomers) recall the time Minsky said was stable in nostagic terms. The U.S. economy was strong and American firms dominated the world's economy. This was the time period when things were normal. But this is false; it was a time of abnormality. World War II left Europe and Japan in shambles. It took time for these economies to recover and rebuild. It took time before they could compete with American business. The world economy became more normal in the sixties.

There is another historical dimension glossed over by Minsky--the actions the government was taking. Lyndon Johnson won the presidency with a huge mandate and a Democratic Congress. He pushed for more government involvement in the economy through things like Medicare and the war on poverty. Meanwhile, we also had an actual war in Vietnam than picked up steam. The resulting pressure on prices led to the Fed mostly accommodating the fiscal policy, but sometimes trying to reduce inflation. The end result was often a stop-start monetary policy that saw inflation and unemployment increasing. The continued conflicts in the Middle East and the new-found power of OPEC led to large increases in oil prices. U.S. labor markets experienced a huge influx of young workers as baby-boomers entered in large numbers, and as women began seeking long-term careers rather than jobs until marriage and children. Minsky makes no reference to any of these changes in the U.S. that surely had repurcussions on the stability of the economy.

So, I must disagree about the greatness of several of the books selected by Norris. (I'll offer my own list in a later post). But I would like to finish the lengthy post with one other observation. The Federal Reserve was created in 1914 after the turmoil of the Panic of 1907. The Fed was supposed to make such panics a thing of the past. Yet, twenty-five years later we were in the worst depression the country ever experienced. Many economists blame the Fed for the severity and length of the depression. If people followed the pattern of many books today--the recession we just had shows the bankruptcy of economics and of markets. One could have concluded with better justification for the argument in 1930 that the Fed failed so miserably that it should have been disbanded.

Bad News and More Bad News

2009-12-22T09:41:00.003-05:00

The government announced that the GDP figures for the third quarter have been revised downward again. (See WSJ article on it here.) The original estimate that was released in mid-October was 3.5% annual growth rate. It was revised down to 2.8% in November and now revised again to 2.2%. That is a substantial change in the figures. One thing it shows is that we should be cautious in our declarations about the strength or lack of strength of the recovery based on preliminary figures. A country hungry for good news in October jumped on the robust estimate. It is still positive growth, but more in line with the concern felt by many that unemployment will take a long time to return to levels we observed earlier in the decade.

Yesterday's Wall Street Journal reported that the decade of the '00s has seen the worst performance by the U.S. stock market for any decade, even worse than the '30s.

Hopefully, there is no where to go but up.

Quo Vadis?

2009-12-15T10:31:00.003-05:00

Two articles in yesterday's Wall Street Journal relate to concerns I have raised in this blog before. The first article talks about the federal government through the Department of Energy becoming the largest "venture capitalist" in the country. A small automotive firm, Fisker Automotice, Inc., ran into financing difficulties with plans to build a plant in Finland. With the help of the U.S. government, and Vice-President Biden, the company received funds and set up the plant in Delaware. (Evidently, VP Biden still is a senator from Delaware.) According to the article, the DOE will lend or give out more than $40 billion to businesses that work in "clean" technology.

The second article describes how Edward Montgomery, the auto-communities recovery czar, is able to cut through red tape to help auto firms redevelop abandoned auto sites. In particular, he has been able to get the EPA to expedite and alter its brownfied site-assessment program. Perhaps it is a coincidence, but the auto industry, in which the federal govenrment now has ownership stakes in two of the leading auto makers, is the main beneficiary of the czar's activities.

We are moving from an economic system that relied on private firms and initiatives to one that is becoming more dependent on government. Of course, we did not have a "free-enterprise economy" before January 2009--there has always been a lot of government involvement in the economy. But there still seems to be a difference now. I suspect government officials argue much of it is due to the recession. The same thing happened during the Great Depression, and much of the government involvement persists to today. Are we in for another ratcheting up of government guidance (control?) of the economy?

Tax Cuts versus Government Spending

2009-12-13T16:33:00.003-05:00

Greg Mankiw's column in today's business section of the New York Times compares economic research on the stimulative impact of tax cuts relative to government spending. He cites research papers that find a larger impact for tax cuts, including work done by the President's advisor, Christina Romer. I know space is limited in a column, but I wish Mankiw had emphasized more the difference between temporary changes and permanent changes. As anyone who has had any microeconomics knows (or at least learned at one time) all elasticities are greater the longer the time period.

The stimulus offered while George W. Bush was still president was a tax cut, but a temporary tax cut. The effect was that most people used the tax cut to pay down debt or increase savings. I think these are good things, but they do not stimulate the economy. Similarly, increased spending that is know to be temporary in nature will not have as much effect as an increase in spending that should last a long time. If a firm wants to take advantage of a temporary increase in spending, it will not make long-term investments as part of the process. If the firm believed the spending might be available for many years, it would respond in a different manner. One of the reasons tax cuts provide more stimulus when the cuts are expected to be permanent, or as permanent as anything can be that involves the government, then there is both a spending effect and an incentive effect. The latter is not in place for temporary tax cuts or rebates. Probably the worst think Keynes ever said was, "In the long run, we are all dead." But time passes and constant focus on the short run leads to ad hoc measures that lead to more measures later on.

On Interest Rate Risk

2009-12-13T16:20:00.002-05:00

The Sunday New York Times has an article about banks not refinancing mortgages much right now. In his speech on Saturday, the President blamed large financial institutions for the recession. Others in the article suggested that banks should be more willing to refinance mortgages, and many would want to because interest rates are low.

Financial institutions were at fault but so was the government. Government policy encourages homeownership in many ways, including pushing regulated banks to find creative ways to help poorer risk families obtain mortgage financing. Ultimately, banks and other financial institutions got on the bandwagon, ultimately paying very little attention to "due diligence."

Interest rates are low right now, but the article also points out that the low rates are due to government programs that probably will phase out soon. In other words, rates will be going up. A bank that refinances potentially locks in for 15 or 30 years at a low interest rate. If interest rates begin rising in a few years, the bank cannot force the borrower to accept a higher rate. That is, the banks bear the interest rate risk. Securitization has been one of the methods used to get rid of the interest rate risk. But securitization is part of the "risky loans and complex financial products," that the President complained about in his speech.

I had hoped that the current recession would lead to changes in behavior. There are signs that households are wising up and increasing their savings while reducing their debt. It is not clear that financial institutions have made changes other than ones necessary to comply with government concerns. And, it is not clear the government is making any lasting changes. There is still a push to encourage wider howeownership, the building of new homes despite the large inventory of unsold homes, and the ever-constant desire for low interest rates. We may have missed a depression in the economy, but I find the situation today depressing.

A Day of Infamy

2009-12-08T13:45:00.003-05:00

The EPA announced that greenhouse gasses are a threat to public health, preparing the way for EPA regulation of the sources of greenhouse gasses. It is ironic that this announcement fell on December 7--the anniversary of the Japanese attack on Pearl Harbor and the day President Roosevelt called it a day which will live in infamy. EPA Administrato Lisa P. Jackson is quoted in the release, "These long-overdue findings cement 2009's place in hitory as the year when the Unted States Government began addressing the challenge of greenhouse-gas pollution and seizing the opportunity of clean-energy reform." As an editorial in the Wall Street Journal today notes, seizing is the correct verb. The EPA is seizing the political process and taking on the role of the legislative branch.

I am sure the EPA would dispute this claim, and would argue that their decision is legitimatized by past acts such as the Clean Air Act. But a policy as controversial as climate change policy has been should surely be handled through the legislative process. Instead, democratic principles are ignored in favor of administrative fiat. Perhaps Ms Jackson is so convinced in her rightness that grabbing power is justified in her mind. It may be the same attitude as displayed by the scientists whose e-mails have been released and indicated that they were trying to keep any dissenters to the climate change "consensus" from publication. They may be right, but in lands where the rule of law is supposed to apply and in which democratic procedures and institutions exist, the route taken is simply wrong.

Justice and Economic Growth

2009-11-30T13:16:00.002-05:00

Michael Sandel is a professor of government at Harvard who teaches a popular course on justice. He now has published a book based on the course and it was reviewed in Sunday's New York Times. The reviewer, Jonathan Rauch, notes that many public policy disagreements are really differences about justice. I suspect he is correct, although Tom Sowell's book, A Conflict of Visions, remains a better discussion of his point. But Rauch begins his review by recalling a conversation with a prominent conservative commentator who railed against the Obama administration's handling of General Motors and Chrysler. Rauch states that he found the fury of the commentator puzzling. He asks, "Was it such a crime for the government to treat differently situated stakeholders differently, even if doing so was unorthodox?" Clearly, Rauch thinks the answer is no, but I must respectfully disagree.

When economists give advice about how a poor country can encourage economic growth a common part of the answer is the importance of the rule of law. When decisions about who owns productive resources are left to the whims of the reigning government, few people make long-term investments in the resources. A predictable constancy is necessary if investments are to be made. Or, as Mancur Olsen put it--the wealth of a society depends on its ability to make long-term investment commitments. Such investments will not be made when the fruit of the investments may be confiscated at a later date. To alter bankrutpcy proceedings for the sake of political expediency is to move away from the rule of law. Rauch is aware that the rule of law is involved, but dismisses it when he writes, "Is justice absolute and process-driven, so that we should stick to rules come what may? Or is it situational and outcome-aware, so that we should sometimes imporise to take account of special circumstances?" Rauch seems to favor the latter. I favor the former, along with Hayek, Sowell, and Milton Friedman (to name a few).

We may be moving into a period of slower growth rates for the country. The focus on the short term that exists in Washington, the alteration of rules due to the emergency of a recession, and probably health care reform will reduce somewhat incentives to invest. For the latter, David Brooks offered an interesting discussion of health care reform as a trade-off between vitality and security. The social safety net will be enhanced but marginal tax rates will increase. The latter will reduce growth rates in the future.

Living in a liberal democracy means that decisions about trade-offs like those just mentinoed are decided through political processes. If society prefers less growth but bigger safety nets, then who am I to say society is wrong? Most Europeans I have met prefer their society to ours. But I am not certain most Americans prefer European economic and social systems to ours. Time will tell.

China and the U.S.

2009-11-29T16:00:00.002-05:00

Tyler Cowen's article in today's New York Times is worth reading. Cowen refers to the symbiotic relationship between the U.S. and the U.S., as noted also in Niall Ferguson's term, "Chimerica." At the heart of the problem is the exchange rate policy of China--pegging the dollar-yuan rate so that Chinese exports remain cheap in the U.S. China maintains the exchange rate by borrowing heavily in the U.S., which helps keep interest rates low in the U.S.

Since the financial crisis and the full-fledged recession began, I fear that the U.S.-Chinese relationship has not been getting enough attention. Part of the reason may be simple--what can the U.S. do about the relationship unilateraly? The U.S. cannot China to revalue its currency. But the bail-outs of Wall Street, the continued propping up of housing markets by the U.S. government, and the call for a "jobs bill" by many Democrats, along with the push for health-care reform, drops the China-U.S. relationship down on the Administration's to-do list. I hope Cowen's article can help raise concern over the China-U.S. relationship higher on the to-do list.

HUD Saved Us from a Depression

2009-11-13T08:47:00.002-05:00

An article in today's New York Times concerns the Federal Housing Administration. FHA provides insurance for homebuyers who don't meet traditional criteria for conventional loans. In othe words, the FHA is part of the government support and encouragement of homeownership. During the subprime craze, many buyers bypassed the FHA, but in the last year or so the FHA has backed a lot of mortgages. Their reserves are low--0.53 percent of the total porfolio, and some think that the FHA will need a bailout before too long. Yet, they also had faced pressure from Congress to open their doors to a broader group of applicants, i.e., applicants with lower down payments and poorer credit ratings. Brian Montgomery, a former head of the FHA, said that even if a bailout is needed, people should still feel gratitude. The article ends with a quote form Mr. Montgomery, "They should be going over to the H.U.D. building and frankly thanking the career staff for saving them from a depression."

So, government subsidization and pressure on lenders to encourage broader homeownership led to the run up in housing prices. When the housing bubble burst, we entered a severe recession. The FHA has continued to prop up housing markets, evidently saving us from a depression. But the collapse in prices that followed the run-up in prices is due, to a considerable extent, to government policy. Does that make sense?

Are Football Hemets Risky?

2009-11-11T13:19:00.002-05:00

An article in today's WSJ raises an interesting question about head safety. Concussions are common among pro football players, and retirees often experience head and brain issues later on in life. Would they be better off without helmets? Obviously, no helmets would change the game. When I was in graduate school, a classmate thought about doing his dissertation on whether safer football equipment actually reduced injuries. His expectation was no--as the equipment gets better, the behavior of the players changes. This fits into a well-known article written by Sam Peltzman concerning automobile safety mandates and whether they resulted in saved lives. Peltzman hypothesized that as people drove safer cars, their driving behavior would change. People would drive less defensively. The probability of dying in a car accident is the probability of being in an accident times the probablity of death given you were in an accident. Safer cars--mandatory seat belts, collapsable steering columns and so on, reduce the probability of death given an accident. But changed driving behavior may increase the probability of an accident. Peltzman's empirical analysis found that few drivers and passengers in cars died but more pedestrians and motorcycle riders died. This is consistent with the behavior change. (See Sam Peltzman, "The Effects of Automobile Safety Regulation," JOURNAL OF POLITICAL ECONOMY, 1975, 83 (4), pp. 677-726).

Government as Co-Conspirator

2009-11-11T08:24:00.002-05:00

In my previous post I cited a WSJ op-ed piece, in which the author argued that the government has been a co-conspirator with many on Wall Street in running up debt that led to the financial and economic crises. I think the article still focuses too much on Wall Street and not enough on the government. It does note that the recent actions of the government, both the Fed and the Treasury, are similar to actions taken several times over the last thirty years. The most surprised and disappointed man in America had to be Dick Fuld, CEO of Lehman Brothers, when the government didn't resuce them the way it did so many others in the past. Given what happened afterwards, it is very doubtful the government will ever let any large financial institution go under again. So, the moral hazard issues continue. The short-term approach followed by the Fed and Treasury also continues.

Government as Co-Conspirator in Financial Meltdown

2009-11-06T13:52:00.001-05:00

Interesting op-ed piece in today's WSJ. Am busy so no time to comment today but will do so soon.

More on "Jobs Saved"

2009-11-04T08:17:00.002-05:00

Former colleague Victor Claar sent me a link to a news story about errors in the counting of saved jobs, including the treatment of raises as equivalent to saved jobs.

There is another dimension I had not considered as yet. There has been a disruptive construction project on an intersection in Holland through which I often drive. Signs indicated that funds came, at least in part, from the stimulus package. The firms that worked on the job then must estimate how many jobs the project saved or created. The project lasted three months. Will the companies report these jobs saved or created as if they were year-long jobs or will the length of the project be considered? In earlier blogs I wrote about how the methodology used by the government to estimate jobs created or saved focused on job-years. I believe the average citizen reading about jobs saved or created believes that the number of unemployed falls or at least doesn't increase by the number of jobs saved. But, that clearly is wrong, and there is really no way to tell by how much.

Things That Can Be Explained by the Bell Curve

2009-11-03T08:35:00.003-05:00

My previous post on Ed Lazear brings to mind a lecture I often give in class on the Bell curve. The tails of the Bell curve never touch the axis. So, if intelligence is measured on the axis and a pretty intelligent person is two standard deviations above the mean, there are still some people farther out--three, four, five standard deviations. In percentage terms, the probability of someone being five standard deviations above the mean is small, but when you consider that we live in a country of 300 million people, there can be a number of people at that level of intelligence. No matter how smart I may think I am, there are lots of people a lot smarter.

What if we measure something like sexual deviency on the axis? In a country of 300 million people there may only be five or six people at five or more standard deviations away from the mean. But that is enough people to fill up an episode of Jerry Springer. And, they all want to be on TV. So, some of these TV shows don't prove that the country is going to pot; they just verify the Bell curve.

Are Economists Insensitive?

2009-11-03T08:25:00.003-05:00

I posted yesterday about an op-ed piece by Ed Lazear. I met Lazear over twenty years ago at Lousiana State University. A colleague had visited at the University of Chicago and was able to bring a couple of economists from Chicago to LSU for a few days. Lazear came the day after he ran in the Chicago Marathon. He was hobbling around quite a bit. We took him to lunch at a restaurant in the student union, which was in the middle of campus. It was about a ten minute walk. The next day as we got ready to go to lunch, he asked if we could go somewhere by car. No one thought to take into consideration the obvious pain he was in when walking after the marathon. So my answer to the question in the title is, "Yes."

He presented a paper on "Sales". He began by talking about paying the bills and noticing that his wife's shoes were more expensive than his. She said that women's shoes tend to be more expensive. But why? he wondered. His shoes had more material in them, were more durable, and one would think would cost more. This is someting I had discussed with my wife on more than one occasion. Men's shoes should be more expensive but are not. What is going on? Lazear went on to develop a model to explain why, other things equal, women's clothes had higher prices than men's clothes. It made sense when he went through the model. It was published later in the American Economic Review. This anecdote illustrates one of many differences between economists who end up at the University of Chicago and economists who end up at places like LSU.

Salieri is my patron saint.

Jobs Again

2009-11-02T14:09:00.002-05:00

There is an op-ed piece by Ed Lazear in today's Wall Street Journal. Lazear was chair of the Council of Economic Advisors under Bush. He writes that his final economic forecast while a part of the council predicted the economy would begin to recover in the third quarter, and this was without considering a stimulus plan. Of course, his forecast could have been overly optimistic, but it could also mean that the GDP growth in the third quarter was not due to the stimulus plan we have.

He also talks about the estimates of jobs created and the jobs retained as due to the stimulus. Recipients have to fill out a report providing the data. Lazear notes two problems with the reports. The first is reporting bias. A construction firm wanting additional funds may believe that it needs to err on the high side of estimates of jobs created or retained. Second, these programs are likely to count people who switch jobs as new hires.

I have written before on the methodology used by the government to estimate the jobs created and saved by the stimulus. It is a direct link to the spending, assuming so much money equates one job. It also measures job-years and not individuals. That is, a person who is hired as part of a two-year project would count as two jobs--one for each year. The Administration has been criticized for the way they are trying to estimate jobs created or saved, but they keep doing it. The process gives the illusion of precision that is only an illusion. The concept of a job saved is ok--grants sent to states that use the money as a stop-gap in cuts in schools will save some jobs of teachers. But to think we can measure these in a meaningful way is not legitimate.

Perhaps the members of the administration think that if you repeat something often enough, people will believe it must be true.

Is the Recession Over?

2009-10-29T09:23:00.003-04:00

The Bureau of Economic Analysis issued a statement today reporting that GDP increased in the third quarter. Normally, that would mean the recession is over. Obviously, the pain is not over yet, and we are no where near a level of output that we had before the recession began. Another concern is that the third quarter may be something of an anomoly because auto sales surged with the "cash for clunkers" program. Real personal consumption expenditures rose 3.4 percent while durable goods increases 22.3 percent.

The figures are preliminary and may be adjusted when more data become available in late November.

Low Rating for U.S. in Health Care

2009-10-22T09:11:00.002-04:00

A column in yesterday's Wall Street Journal discusses the often-used ranking of the U.S. health care system as 37th in the world. Experts know that the ranking system is seriously flawed, yet politicians keep citing it to demonstrate how bad the U.S. system is, and to justify the call for reform. A number of years ago, I organized a conference at Hope College on health care. In the research I did preparing for the conference, I learned that many European countries don't count the births of very premature babies as a live birth. The U.S. does. Since many of the very premature babies die shortly after birth, there will be a difference in the infant mortality rates from this difference. Now, it is unlikely that the difference in definition accounts for all the differences between the U.S. and Switzerland, but it accounts for some. There are numerous other differences in definitions, life-style choices, incidence of smoking, violent crime, and ethnic diversity across countries to make international comparisons difficult. Add to the fact that much of the rest of the world free rides on U.S. spending on research and development, and much of the differences across countries can be explained.

This is not to argue that changes in our system may not be advisable. It is meant to suggest that merely copying what some other countries are doing may not be optimal for the U.S.

Golf is a Bourgeoise Sport

2009-10-14T08:15:00.002-04:00

Caesar Chavez of Venezuela has railed against golf as a capitalist and elitist sport, also calling it bourgeoise. I have to agree with Chavez that golf is bourgeoise. I will even add that golf is the quintessential capitalist sport. To me, these are good things though.

Golf is an individualist game. There is no team. There is no one to blame except oneself if one doesn't do well. It is the golfer and the course. True, golfers also compete against other golfers just as businesses compete with one another. The winner in the competition, be it golf or business, is the one who is better than the other.

A former colleague of mine when I was at LSU raised an interesting question about team sports. The comment is often made that sports builds character. He wondered whether that was true. In football, for example, coaches teach how to hold without being seen by the refs. Basketball players work on subtle ways to push off without being seen. Pitchers in baseball look for advantages such as vaseline on the ball. Former Cincinnat Reds manager said once that he collected baseballs discarded by the umps during games when Dodgers pitcher Don Sutton pitched to show the similarity in cuts on the balls. Anderson accused Sutton of using a belt buckle to cut the ball to increase the movement of the ball.

In golf, players penalize themselves when they break a rule, even when inadvertently they break a rule. Refs are not part of the game. Officials at tournaments are there to help clarify rules but not to catch cheating. When was the last time a baseball player told an umpire that he had missed the tag?

Deirdre McCloskey wrote an excellent book, The Bourgeoise Virtues: Ethics for an Age of Commerce. A commercial society may not produce works like The Iliad, but life for the majority of people is significantly better in a commercial society than in a warrior society.

Root Causes of the Economic Crisis Continued

2009-10-14T08:07:00.002-04:00

In an earlier post (Oct. 1) I mentioned an article in the Journal of Accountancy that I thought was very good about the root causes of the economic and financial crises and the recession. I also noted that Marty LaBarge and I had written a comment on the article and sent it to the journal. The comment, divided up by questions supplied by editors, is part of an "Economic Discussion" on the original article. It is available, along with other comments on the original article, on-line here. My only complaint is that they left in our reference to a figure we supplied on US net exports but didn't publish the figure.

The Other Nobel

2009-10-13T12:43:00.003-04:00

There is an interesting op-ed piece in the Wall Street Journal today about the Nobel Peace Prize. Bret Stephens argues that the committee often selects people who are "Goodists"--people who think all conflict stems from avoidable misunderstandings.

This reminds me of an interesting book by Thomas Sowell, A Conflict of Visions: Ideological Origins of Political Struggles. Sowell argues people tend to have one of two overriding visions about humanity. One he calls the unconstrained vision. He uses William Godwin's Enquiry Concerning Political Justice as a work that illustrates this approach. (Godwin was Mary Shelley's father, I believe.) To Godwin the essence of virtue is the intention to benefit others. With proper education and enlightenment, human beings could behave with the best interest of others and bring about social good. The second vision about humanity is the constrained vision. Examples would be Adam Smith and the authors of the Federalist Papers. Human beings have moral limitations and tend to be egocentric.

The two visions lead to different views about how to organize social and political life. For one thing, the unconstrained vision sees education as a way to move society forward and toward perfecting humanity. The constrained vision values education but does not see education as the key to making people better. The unconstrained vision does not look to incentives to affect behavior while the constrained vision does. The constrained vision also looks for ways to reduce the power one human being has over another. The constrained vision looks for political systems that includes ways to separate power and to slow down or limit government. The unconstrained vision usually leads to view that seeks a more active government.

The op-ed piece is worth a look. Even more, Sowell's book is a good read.

Nobel Prize 2009

2009-10-12T08:01:00.005-04:00

The Nobel Prize in economics has been awarded to Elinor Ostrom and Oliver Williamson. The academy offers a statement for the public on the significance of the research, which can be found here, and a more detailed paper on the significance meant more for economists, which can be found here. Ostrom is the first woman to win the prize in economics. (I was surprised in the early years that Joan Robinson never won since she was a big name from the 1930s and 1940s. But, she died and the award is not made posthumously.)

The two economists are linked in that their work relates to property rights/transaction costs approaches to economic analysis. Williamson worked on the firm as an institution and Ostrom worked on open-access property and communal property-rights regimes. I am a little disappointed in Williamson. His work is in the same field as Ronald Coase, but I always felt Willamson's work was not at the same level as Coase's work. His focus on post-contractual opportunistic behavior strikes me as inadequate as a basis of firm governance. I saw Williamson present a paper once while I was at UCLA, and he used more "you knows" in his talk than I have ever heard from an educated person. But, I am in the minority among industrial organization economists in my regards of Williamson. Ostrom is a good choice. She has done important work on property rights, and helped change the landscape. When I first taught about property rights, I talked about three types of systems--private, public, and communal. Today I talk about four types--private, public, communal and open access. Hardin's "The Tragedy of the Commons" should be called "The Tragedy of the Open-Access Property Rights Regime." (I know it doesn't have the same ring to it.) But there are assets owned by communities that manage to limit access of one another and to prevent use by those outside the community. Open-access property is truly available to all and no one can be prohibited from using it. The problems associated with over use are greater for the latter. The supreme example today is global climate change.

Executive Pay

2009-10-06T09:01:00.004-04:00

The Wall Street Journal reports that the government's pay czar is targeting salary cuts for firms that received aid from the government. This is not a surprise; government money usually implies government control or at least restrictions on behavior. An example is federal funds that go to universities or colleges comes tied with government regulations. A few colleges, perhaps Hinsdale College in Michigan is the best known, refuse to accept government funding.

There is also a question of the method used by the czar to limit pay. In particular, there will be a shift from salary to stock and requirements that the stocks should be held for a period of time. The goal is to reduce the incentive for taking large risks in hopes of short-term gains. But why don't the boards of directors of these firms establish such practices? They exist in many firms. Why is the government better able to sculpt the appropriate pay package than the boards? I doubt the government is better. But, we are also back in the "too-big-to-fail" problem. If a bank is too big to fail, people anticipate that there is always a government bail out in the background, and this lowers the cost of acquiring funds for the bank. It also increases the incentive to take on more risk. The optimal solution is to end too-big-to-fail, and let banks that suffer losses from taking on too much risk bear the consequences.

Finally, to learn more about executive compensation, go to the web site of the Center on Executive Compensation. They offer information and research about ways to arrange executive compensation so that it rewards longer-term profitability.

What Did People Expect?

2009-10-03T09:06:00.003-04:00

The headline for an article in yesterday's Wall Street Journal is "Cruel September for Car Makers." Car sales fell 23% in September. But in the preceeding couple of months, the government's "Cash for Clunkers" program was in effect. The auto industry had used incentives in the past to boost sales, and usually found that the boost in sales came at the cost of sales in other months. The government's program was the same type of thing. The big question is whether it generated a net increase in car sales or merely changed the timing of the sales. Given it included a sizeable subsidy for new car buyers who had a "clunker" and bought a more fuel-efficient car, it is likely it stimulated demand from what it would have been rather than merely transfer sales from the end of the year to the late summer months. But it is hard to see a reason to expect improved sales for the rest of the year.

It is interesting to see that Ford continues to increase market share while GM and Chrysler are losing market share. Ford is the firm that did not get direct aid from the federal government and now faces competition from government-aided firms, yet is gaining market share at their expense. Apparently, producing cars people want matters more than government support.

Root Causes of the Economic Crisis

2009-10-01T09:57:00.003-04:00

There is an interesting article on the root causes of the economic recovery in the October issue of the Journal of Accountancy. I think it is correct in its assessment of the crisis. My colleague, Marty LaBarge, and I have written a comment to it, in which we agree with the article but offer a little more information about the international dimension of the crisis. It can be found here.

Tracking Property Ownership

2009-09-27T09:17:00.003-04:00

A column in Sunday's business section of the New York Times discusses the difficulty in sorting out claims on property after the big run up in prices and in the number of transactions. A private firm that tracked electronically mortgages called the Mortgage Electronic Registration System claimed to eliminate the need to record changes in property ownership in local land records. Gretchen Morgenson notes that there have been foreclosures that missed a possible lien holder on a home because the information was not in the land records. MERS has successfully proceeded in the courts to obtain funds for the claimant that used its serves. But, a recent Kansas Supreme Court ruling prevented a claimant from getting part of the proceeds of a foreclosure process because the information was not part of the official records. As Morgenson notes, the business model of MERS has been rejected by the Kansas Supreme Court.

A market system relies on well-defined property rights. Traditionally, we have put more effort into maintaining clear lines of ownership on real property--land and the buildings on land. Market systems also rely on bankruptcy laws that allow property to move to higher valued uses. The mortgage market in recent years may be bringing these two needs into conflict. It will be interesting to see how other state courts handle things. MERS did not cause the housing markets around the country to overheat, but it did facilitate the process.

Do We Get It?

2009-09-24T13:40:00.002-04:00

An article in today's Wall Street Journal discusses actions of the Fed to encourage home buying. These include keeping interest rates low, buying up mortgage-backed securities, and exptening a mortgage-purchase program. The current crisis began when the bubble in housing prices burst. Some adjustments were needed in housing and mortgage markets. Is continuing to subsidize housing and increasing the extent of subsidization really in the best interests of generating a sustainable recovery? Will we revert to an over-reliance on debt?

Posner, the Keynesian

2009-09-24T13:25:00.003-04:00

Richard Posner, one of the denizens of the law-and-economics movement, as well as a federal judge, wrote a book on the economic recession, A Failure of Capitalism. He also has a blog through the Atlantic magazine on the "depression," the term he prefers. Now he has an article in the New Republic on how he became a Keynesian. In addition, he weighs in on economists lack of understanding of the macroeconomy, although he is not as mean-spirited as Krugman. He said he was baffled by the economists' disarray and decided to read Keynes' General Theory himself. What he offers is a principles-level account of Keynes' ideas.
When Posner says that, "There is no professional consensus on the details of what should be done to arrest the downturn," he is correct. But he seems to imply there should be a consensus. But macroeconomics is complex because the macroeconomy is complex. Polls of economists have consistently found economists to be more of one mind on micro issues than macro issues. But, even in micro issues, there can be substantial disagreements. To take Posner's area, law and economics, there is not a consensus on whether capital punishment deters murder. There are philosophical differences, theoretical differences, and empirical differences among people who have examined the issue. This does not imply that we should give up on law and economics or that we should go back to economic analysis of law that predates Coase or Posner's early work.
If you check out his blog, you can see that Posner is also experiencing the rabid rage of Krugman and Brad DeLong because he criticized a speech Christina Romer gave. As a lawyer and judge, he seems thick-skinned enough to deal with the criticism.

The Chicken Tax

2009-09-22T16:17:00.003-04:00

The Wall Street Journal today has an article about a tariff in the auto industry that dates back to the 60s. It goes back to a dispute with Europe when Europe imposed high tariffs on imported chicken. The U.S. retaliated with a tariff on foreign-made trucks and commercial vans. The tariffs are still in place. Delivery vans imported to the U.S. face a 25% tariff, while passenger vans face a tariff of 2.5 percent. So, Ford produces a van in Turkey, adds rear side windows and some rear seats and ships them to the U.S. Once here, the rear seats and rear side windows are removed. By doing this, they spend more money but save even more taxes.
George Stigler noted that economists don't have influence on politicians. As proof he offered tariffs. Almost all economists think tariffs are bad but tariffs are still ubiquitous. The chicken tax is a reminder that once a tax or tariff is imposed, it is difficult to get repealed.