Wednesday, December 29, 2010

Notes on Lehman Bankruptcy

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.

Monday, December 27, 2010

Krugman on Scrooge

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.

Monday, December 6, 2010

Current Policy as Reason for Concern

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.

Monday, November 22, 2010

Mankiw on Taxes and Spending

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.

Tuesday, October 26, 2010

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

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.

Monday, October 25, 2010

Two Links of Interest

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.

Friday, October 15, 2010

Bernanke's Speech

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

Monday, October 11, 2010

Krugman on Stimulus--Again

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

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.

Thursday, October 7, 2010

Can the Obese Eat Their Way to Good Health?

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.

Saturday, October 2, 2010

Adam Smith's Marketplace of Life

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.

Tuesday, September 21, 2010

In Krugman v. Rajan, I Side with Rajan

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.

Wednesday, September 15, 2010

Some Good Articles in the Wall Street Journal

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.

Monday, September 13, 2010

Basel III Accord

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

Wednesday, September 8, 2010

Assorted Links

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.

Tuesday, September 7, 2010

$50 Billion for Infrastructure

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

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.

Friday, September 3, 2010

The Recession and Keynesianism Once Again

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.

Thursday, September 2, 2010

Economic Discontent as Noted by Michael Boskin

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.

Tuesday, August 24, 2010

Latest Housing Report

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.

Thursday, August 12, 2010

Industrial Policy

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?

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.

Sunday, August 8, 2010

Housing Again

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."

Friday, July 23, 2010

A Trio of Books that Help Explain the Recent Crisis

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.

Thursday, July 15, 2010

Obama in My Hometown Dissing my Representative

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.

Monday, July 12, 2010

Good Book on the Finanical Crisis

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.

Friday, July 9, 2010

Krugman on Business Climate

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.

Saturday, July 3, 2010

Can We Learn from the Financial Crisis Inquiry Commission?

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.

Friday, July 2, 2010

According to the French, Google is a Monopoly

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.

Thursday, July 1, 2010

Taylor on the Financial Overhaul Bill

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.

Friday, June 25, 2010

Financial Regulation Bill

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?

Thursday, June 24, 2010

Does President Obama Understand Animal Spirits?

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.

Tuesday, June 22, 2010

Power Hungry

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.

Saturday, June 19, 2010

Rethinking Home Ownership

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.

Monday, June 14, 2010

Government Failure as seen by Prof. O'Driscoll

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.

Friday, June 11, 2010

Companies are Still Risk Averse

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.

Friday, June 4, 2010

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

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.

Saturday, May 15, 2010

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

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.

Sunday, May 9, 2010

A United States of Europe?

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.

Sunday, May 2, 2010

Basics of a Value-Added Tax

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.

Thursday, April 22, 2010

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

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.

Tuesday, March 23, 2010

Daylight Savings Time

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.

Friday, March 19, 2010

What Happended to Toxic Assets?

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.

Tuesday, March 2, 2010

Trade Volume Increasing

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

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.

Tuesday, February 23, 2010

The Stimulus One Year Later According to Robert Barro

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.

Saturday, February 20, 2010

Allan Stockman dies

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

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.

Monday, February 15, 2010

Europe and the Euro

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.

Sunday, February 14, 2010

Good Column on the National Debt

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

Wednesday, January 20, 2010

The Liberal Bias of Professors

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.

Saturday, January 16, 2010

Charles Calomiris offers a spiritual response to the financial crisis

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.

Friday, January 1, 2010

Happy New Year

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!]