Public Lands Management

I just received an e-mail message from PERC concerning President Obama signing the Ombibus Public Lands Management Act. Two members of PERC wrote a piece in Forbes criticizing the decision. Their article can be found here.

Is the American Consumer Becoming More Prudent?

Consumer credit fell in February, as reported in an article here. Accompanying the article is a graph showing consumer credit for almost 20 years. While reduced borrowing may be linked to reduced spending, and the government would like to see spending increase to help the economy pull out of recession, I think consumer credit needs to fall further. Households need saving to help during unexpected events such as serious car trouble, furnace going out, illness, layoff, and numerous other possible events. Further, longer-term saving for anticipated events such as buying a house, college education, and retirement is prudent. In fact, prudence needs to be emphasized in our economic life. Prudence is a term with a long history in economics. Adam Smith wrote of the virtue of prudence, and, more recently, Deirdre McCloskey describes prudence as, "...first in political and economic and bourgeois value." (Deirdre N. McCloskey, The Bourgeois Virtues: Ethics for an Age of Commerce. (Chicago: The University of Chicago Press, 2006), p. 253.) Perhaps the American consumer is becoming more prudent. Then again, it could be a short-term effect due to declining wealth and increased job losses.

Are the "Generals" Remembering History or Fighting the Last War?

The current economic and financial crisis has generated a lot of discussion about previous recessions as well as the Great Depression. Clearly, the approach taken by the federal government and many prominent economists is to take from Keynes the idea of government spending as a stimulus and replacement for reduced consumer spending and reduced business investment. There has been a lot of work over the past decades devoted to understanding the causes of the Great Depression and possible remedies. In this sense, people seem to be paying attention to the adage from George Santayana, "Those who cannot remember the past are condemned to repeat it." Yet, each crisis is different in the sense that the institutional structure of the economy is different, the international setting is different, and technology is different. It is often said that generals have a tendency to, "fight the last war." If we consider the post-World War II recessions as "police actions," then we may be fighting the last war rather than remembering history.

Changes in Mark-to-Market

The following is provided by my colleague, Martha LaBarge, Assistant Professor of Accountancy at Hope College. I have similar concerns that the current crisis will lead to a loss of independency of the Fed:

The FASB today approved two staff positions intended to provide additional
guidance regarding mark-to-market accounting rules. The results of both
positions will be to reduce writedowns of financial assets.
The first provides interpretation of the definition of fair value when no market exists
for an asset. The position defines criteria which allow assets to be
marked-to-model when the market is inactive instead of valuing assets at
fire-sale prices.
The second allows differentiation between asset impairments
due to credit loss and impairments due to other market factors. Credit
losses would still require a write-down which would hit earnings.
Market-related losses would, however, bypass the income statement and be
recorded in other comprehensive income.
Lawmakers pressured Robert Herz, FASB Chairman to act quickly when testifying before Congress mid-March. With only a fifteen day comment period, these changes
were adopted in time to be reflected in financial institutions’ first quarter
results.
Supporters argue that the writedowns under mark-to-market rules are
procyclical, causing earnings decreases and damaging capital ratios.
Investors argue that under the change, financial statements lack
transparency. While the “toxic assets” remain the same, their value may be
reported differently.
This move calls into question the independence of the FASB. Only three months ago the SEC decided mark-to-market standards had not contributed to the economic crisis and should not be suspended. The FASB has sacrificed clarity to the investor to pander to lawmakers and financial institutions. Former SEC Chairman,
Christopher Cox put it this way, "Accounting standards aren't just another
financial rudder to be pulled when the economic ship drifts in the wrong
direction. Instead they are the rivets in the hull, and you risk the integrity
of the entire economy by removing them."

Industrial Policy: Some Current Examples

Industrial policy is the attempt by government to direct the allocation of resources into particular areas. The Obama administration is formenting industrial policy, although it is not offering a specific plan labelled "industrial policy." Problems with industrial policy include the ability of government officals to know better than the private sector what new areas are likely to be economically viable over time, allocations may be based more on political influence than economic rationality, and unintended consequences.
The auto industry provides an example. Supposedly, General Motors and Chrysler are on short leashes to reorganize in a way acceptable to the government. The President has stated that he wants to see the American auto industry become a leader in building the next generation of clean transportation. Using government funds to push GM in that direction is an example of industrial policy. Do government officials have a better idea than people who have worked in the industry for years as to what technology will ultimately prove reliable, affordable and clean?
The auto industry, along with AIG, provide illustrations of unintended consequences. General Motors and AIG have competitors, and some of these competitors are not receiving funds from the government. In particular, Ford has not asked for government money. Yet, the government is giving funds to General Motors that may enable them to reorganize in a swifter fashion than would take place under Chapter 11, and may tip the competitive balance toward GM and against Ford. Competitors of AIG have said that AIG has used some of the money received to offer better rates on some product lines, tipping the competitive balance of power in favor of AIG.
It may be that GM and AIG are "too big to fail" and for the sake of the nation as a whole, the bailouts are necessary. I am not convinced, but it may be the case. Yet, the government actions and financial support have the potential of benefitting the firms who were losing the competitive battle in the marketplace and harming firms that were operating more efficiently and competitively. Government support alters the competitive balance.

Top Majors at Harvard University

Greg Mankiw's blog yesterday had a list of the top ten majors at Harvard. Economics is first by a wide margin over Government. There is a link to Mankiw's blog on this page if you want to check it out.
Since I speak some German and enjoy travelling to Germany, it is unfortunate that Germanic Languages and Literature is in the bottom ten majors at Harvard.

March Job Loss

ADP publishes a survey of the labor force prior to the official announcement by the government. The ADP survey has tracked the offical results closely most months. The March survey shows a loss of 742,000 jobs, which is more than many people thought or hoped. There had been some positive signs in the news--rising mortgage applications, retail sales levelling out, and sales of homes stabilizing. Normally, job loss or creation lags other indicators of the strength of the economy, but clearly the recent news suggests that the recession will continue into the near future.