New book by colleague

Congratulations to my colleague, Kim Hawtrey, whose book is soon to be released. A description of the book at Amazon can be found here.

Lehman Brothers Anniversary

It has been a year since Lehman Brothers went bankrupt after the government refused to bail them out as it had with Bear Stearns. There has been a spate of articles and essays on the events that have occurred in the last year. Several interesting columns appeared recently in the Financial Times. Niall Ferguson wrote on why a Lehman deal would not have prevented the financial crisis and the recession. In fact, he argues, it took the collapse of Lehman Brothers and the credit freeze to get Congress to act and pass a huge, across-the-board bail out. Martin Wolf wrote on the wrong lessons from Lehman's fall. Wolf argues that we cannot allow the too-big-to fail doctrine continue, and that an ambitious overhaul of the financial system is in order. John Kay writes that changes are needed in what assets are required to stand behind deposits at banks.

The essay I like best is buy William White, "Some Fires are Best Left to Burn Out." He raises the question of whether the constant effort at preventing any and all recessions from occurring or from continuing increases the ultimate cost of a later severe recession. He uses an analogy from fighting forest fires. Fires thin out undergrowth and rejuvenate the forest. If all forest fires are prevented or immediately put out, it leads to a larger more dangerous forest fire later. The focus tends to be on the short term and causes problems in the long term.

White's point is important. It is common to hear laments in the financial press about businesses being too concerned about the profits of the next quarter. This short-term emphasis comes at the expense of long-term planning and profitability. But the same tendency exists in the public sector. Every recession that has taken place since I have been a professional economist has been seen as requiring immediate action to stop and get the economy growing again. This has been true of recessions that turned out to be relatively short or mild. The Obama administration argued that the end was near and the stimulus package was needed to prevent a depression. Never mind the huge deficits; we have to fix things now! I am not arguing for or against the stimulus package at this point. I am just noting the similarity between the private and public sectors. But what if firms that focus on the next quarter end up reducing their long-term viability? And what if the government's efforts to forestall or prevent any economic downturn ensure that there will be eventually a severe downturn? White says, "Just as good forest management implies cutting away underbrush and selective tree-felling, we need to resist the credit-driven expansions that fuel asset bubbles and unsustainable spending patterns."

(Note: I did not link the opinion pieces from the Financial Times since a subscription is required to upload the articles.)

Letter on Krugman's Essay

The letter to the editor of the Sunday magazine of the New York Times that my colleague, Marty LaBarge, and I wrote in response to Paul Krugman's essay, "How Did Economists Get It So Wrong?" will be published in Sunday's magazine, and is available on-line here. A comparison with my earlier post below shows that the editors shortened it by a sentence.

More On Jobs Saved and Created

In an earlier post, I outlined how the government is counting the number of jobs created or saved by the American Recovery and Reinvestment Act, or the stimulus package passed by Congress in February. Since the government used a formula that related so much spending to a job, it ignored the fact that some of the spending would be replacing other spending. For example, spending on green technologies means less spending on "dirty" techonologies. A job created in one area offsets the loss of a job in another rather than creates a new job.
The Wall Street Journal now has an article on estimates the states are reporting to the federal government about the number of jobs created or saved. The figures are much less than the estimates of the federal government.

Baucus Health Care Plan

The New York Times reports (see here) that Sen. Baucus has issued a health care plan. It is cheaper than the other plans that have been proposed, and the Congressional Budget Office estimates even lower costs, although still over $700 billion. Republicans have blasted the plan over making so many cuts in Medicare to pay for the coverage of the uninsured and other increased or new benefits. Democrats claim that the reductions in the rate of growth of Medicare will be accomplished through greater efficiencies rather than reductions in benefits. I am sure there are inefficiencies in Medicare. But, if reductions in costs could be made through reducing inefficiences, what is stopping the government from doing so?

Odds and Ends

A couple of items to look at if the reader is interested. Sunday's NY Times business section had a number of good articles and columns about the year anniversary of the collapse of Lehman Brothers. Definately is worth a look.
On another topic, a blog that relates economics and theology that I find very good is Kruse Kronicle. He is providing a series of posts on key economic issues. The first dealt with scarcity, a concept accepted by economists but there are theologians who dispute that scarcity if a worthwhile starting point.

How Did Economists Get It So Wrong?

Paul Krugman had an essay in Sunday's New York Times magazine. He argued that modern macroeconomics was unable to see the crisis coming and that a new macroeconomics would have to start with Keynes. My colleague, Marty LaBarge, and I submitted the following letter to the editor of the magazine:

Paul Krugman offers a critique of modern macroeconomics in his essay, "How Did Economists Get It So Wrong?" He cites a concern for mathematical elegance over truth and reliance on efficient marekt theory as reasons for economists missing the instability in markets. But similar arguments could be made about the Keynesianism that Krugman advocates. In its heyday, Keynesianism included elegant mathematical models that demonstrated marekts are inherently unstable, and had its own version of an efficiency theory, only it was government that was efficient; a wise and good government could "fine-tune" the economy through appropriate fiscal policy, ignoring how real-world governments actually operated. While financial markets do fall short of perfection, the progression of the "perfect storm" of events that generated the worst recession since the Great Depression--the global saving glut, low interest rates, securitization, and government policy supporting homeownership--cannot be blamed on "extraordinary delusions and the madness of crowds."

Krugman pays no attention to the approximately twenty-year period of good macroeconomic performance known as the "Great Moderation." He also ignores "bubbles" that didn't lead to recessions. Something is at work besides irrational financial markets. The market system works well most of the time. Perhaps a key factor affecting whether a shock to the system or even 'irrational exuberance" leads to a serious recession is the level of buffer stocks held by households and firms. When savings exist and debt levels are not inordinately high, the economy adjusts to a shock. But when debt levels are high and savings low, the bursting of bubbles in houses and equities can turn into a severe recession. The crucial question now is whether taking on huge levels of government debt is the best way back to sustainable growth.

We don't know if the letter will be published or not.