Monday, December 31, 2012

On the Eve of the Fiscal Cliff

It is New Year's Eve and still no resolution to the fiscal cliff.  I had thought there would be a resolution but it seems unlikely now.  As I have written before, I don't think it will be a cliff since things will change slowly and Congress can still act in January to change things. The extent to which one views the changes tomorrow as a cliff depends on how Keynesian one is. Since I am not a Keynesian, I don't see it as dramatic as many others do. John Cochrane has a post on his blog that puts the cliff in perspective. He calls it a molehill.  As he notes, the key question involves incentives and we have to look much more broadly at things than just the tax rates in the tax code.

The fiscal cliff can lead to positive things if President Obama and Congress use the next couple of months to work out a long-term solution to the budget deficits that includes true tax reform, i.e., a tax structure that raises revenue in line with needed spending, that minimizes disincentives for work and investment, and eliminates most of the portions of the budget and tax codes that engage in industrial planning.

Greg Mankiw's article in the New York Times yesterday pointed out some basic facts that both political parties tend to ignore.  Any long-term solution to budget deficits requires that the middle class pay substantial taxes.  Alternatively, cuts in entitlements have to be large and our entitlement programs basically are for the middle classes. 

New Year's Eve is supposed to be a time of optimism--hopes for the new year. Fortunately, as people we can have a good year even if the macroeconomy is not great.  Life consists in more than wealth and consumption goods. I prefer to rely on God's grace than on my 401k plans or on social security.

Saturday, December 29, 2012

The Whole Nine Yards

An interesting piece in today's NY Times on the origin of the term, "the whole nine yards." It turns out that this has fascinated people interested in word origins for a number of years. A number of explanations have been offered, including the length of ammunition belts in WW II aircraft or the amount of cubic yards produced by a cement mixer. Recently, discoveries of the term "the whole six yards" in the early 1900s in some Kenucky papers means the other explanations are false.  A definitive answer has not been offered yet, but many options have been eliminated.

On another note, the article referred to the origin of the Windy City for Chicago. I had thought it originally came from New York politicians complaining about Chicago's lobbying for the 1892 World's Fair, and the fact that Chicago is windy helped make the term stick. That, too, is wrong. Newspaper accounts from the 1860s used the term because of Chicago's weather.  For economists, the big mistake on origins was economics as the dismal science. Most thought that Thomas Carlyle was referring to Malthus, whose vision was rather dismal. But actually Carlyle was referring to John Stuart Mill and his opposition to slavery in the British colonies.

Countdown to the Fiscal Cliff

As January 1 approaches so does the fiscal cliff. A couple of days ago, I was sure that the government would not come to an agreement. Now, things look slightly better. Negotiations are now going on in the Senate to come up with a compromise.  If it passes the Senate, Speaker Boehner has said he will bring it to a vote in the House.  Perhaps some congressmen will not want to go on record as voting against a package to a vert the fiscal cliff. Of course, there are Tea Party Republicans who want to be on record as voting against an increase in taxes. So, I don't think the odds are high that a deal will be found.

As I have written before, I am not convinced that going over the cliff will be that negative since a bill can be passed in the new congress to avert much of the impact. It could also be retroactive to Jan. 1. The fact that many will gladly vote for a tax reduction after Jan. 1 means that most of the Bush tax cuts would be reinstated. Ultimately, I don't see anything happening that will address the long-term problems.  The short-term mentality still prevails in Washington and, unfortunately, on Main Street.

Monday, December 24, 2012

On the Fiscal Cliff and the Long Term

So far there is no resolution to the fiscal cliff. Perhaps we will go over it. In the long run, I don't think it much matters if we do or not. If we go over, I am sure that there will be legislation proposed to cut taxes on all except the top 2 percent. I posted several days ago about an article in the St. Louis Fed Review about the increase in the deficit since the early 1970s.  We have also known since before then that the "Baby Boom" generation was a phenomenon that impacted things when they hit certain ages--the need to build more schools when boomers reached school age, expansion of colleges and universities when boomers hit college age, more houses as boomers began family formation, and so on. In  the same way, we have known that boomers would impact social security and medicare when they hit retirement age.

If we look at voting in this country since the early 1970s, we can say that the people have wanted more from the government but have not wanted to pay for all of it.  Whenever any politician has broached the subject of social security or medicare reform, he or she has been slapped down by voters. Social security taxes do not go into funds set aside for the persons, but are used to pay social security benefits of current retirees. Instead of having boomers pay more on the grounds that they ultimately will collect more, we end up forcing younger generations to bear more of the burden. The alternative is to reduce benefits to some extent. The debt levels will not fall significantly by only making cuts in discretionary spending unless taxes rise substantially.

The fiscal cliff provided an opportunity for serious thought and discussion about the long term if that discussion had begun early in 2012. There is not enough time between Christmas and New Years for such a conversation to occur. The track record of the Congresses and the presidents we have had is settle for short-term patches and not to tackle the longer term issues such as the unsustainability of the entitlement programs as they exist today. But, I have come to realize that the Congresses and presidents we have had merely provided what the electorate wants.  We want more but we don't want to pay for it.  But who do we get the "more" from?  Many years ago my father suggested that a law should be passed that said that any future laws had to substitute the term "taxpayers" for government, as in "the taxpayers will provide the funds for defense, or for building highways, or for medicaid payments." I don't know if it would make a difference but it might be worth a try.

Political Freedom versus Freedom in Christ

The Wall Street Journal runs an editorial every Christmas Eve that first appeared in 1949. The sentiment is good and one that I could agree with for the most part.  But it also misuses Scripture in a way totally  contrary to what Paul was thinking. The title of the editorial is "In Hoc Anno Domini," and begins with Saul of Tarsus on his journey to Damascus. Tyranny in the form of the Roman Empire dominated the Mediterranean region. But into that world came light in the form of a man from Galilee. Several gospel quotations are provided and the idea that the truth would set us free. But, darkness can always return. (This was written not many years after World War II and while the iron curtain was descending). What if humankind returns to a new Caesar?

The editorial concludes with, "And so Paul, the apostle of the Son of Man, spoke to his brethern the Galatians, the works he would have us remember afterward in each of the years of his Lord:
'Stand fast therefore in the liberty wherewith Christ has made us free and be not entangled again with the yoke of bondage.'"

Paul was not writing about political freedom. He was writing about spiritual freedom. While I value political freedom a great deal, I do not confuse it with our freedom in Christ. Paul typically introduced himself as a slave of Jesus Christ. In his view, all human beings are slaves--either to Christ or to sin and death. From this perspective, it mattered little whether one was a literal slave or master; the slave who was free in Christ was blessed while his master, if he was a slave to sin, was not.

As Paul said to the Corinthians, "If for this life only we have hoped in Christ, we are of all people most to be pitied." (I Cor. 15:19, NRSV).

Wednesday, December 12, 2012

Will Munis Lose Their Tax Exemption?

According to an article in today's Wall Street Journal, President Obama and Speaker Boehner are willing to consider deductibility limits on municipal bonds. Municipal bonds are bonds sold by state and local governments.  For many years, the interest earned on municipal bonds were exempt from federal income taxes. The idea was to reduce the costs of borrowing for state and local governemnts. Investors are willing to accept lower yields on municipal bonds because the interest is tax-exempt.  Investors care about their after-tax return, so an investor in the top tax bracket can recieve a lower interest rate on municipal bonds than on equivalent corporate bonds because of the tax difference.  One can argue that munipical bonds should or should not be treated differently. I suspect many people would like to see the interest on school bonds remain relatively low. But the rationale offered by politicians, according to the article, is interesting. Clearly, one goal is to increase federal government revenue. The article quotes a portion from the administration's budget documents arguing that limiting interest and other tax breaks for the higher-income households would, "reduce the benefit that high-income taxpayers receive...and help close teh gap between the value of these [breaks] for high-income Americans and the value for middle-class Americans."

I would have hoped there would have been some discussion about the impact on state and local governments and their ability to raise money for capital projects.  In general, I favor removing tax breaks across the board. Favoring some groups over others distorts capital markets. But if decisions are made based on income-redistribution concers only, then I don't see that as an improvement.

Fed extends bond buying.

The Fed is extending buying bonds. See WSJ article

Tuesday, December 11, 2012

On the Ethics of a Shepherd

I am currently reading a book by Yoram Hazony entitled, The Philosophy of Hebrew Scritpture.  I am finding it interesting concerning the Old Testament, but surprisingly also found some ideas that connect with some of the political debate in the last election. In a chapter, "The Ethics of a Shepherd, Hazony discusses differences between Abraham and his great-grandson, Joseph, and argues that the ethical system of the great eastern empires (partially represented by Joseph)--Egypt and Babylon--contrasted with he ethical system developed in the Hebrew Scriptures (as represented by Abraham and Moses). He then compared the ethic of the empires with the Athenian ethic coming from Plato and Aristotle, finding them similar. Hazony writes, "...[Athenian philosphy] continued to find it difficult to think of the ethical life of man as having reference to anything outside the common life of members of the political community constituted by the state. In this respect, the thought of Plato and Aristotle is still much like that of the great empires of the ancient Near East, accepting it as a given that if we are to make sense of the moral order, we must begin with the individual as part of the state that governs him." (p. 130, emphasis in the original). Havony quotes from Plato and then concludes, "The state, then, is to be held sacred, and more revered than one's parents." (p. 131).

Havony also looks at Aristotle, concluding, "Aristotle does not seem to think that the end of man--the highest purposes for the sake of which the individual acts and lives his life--can even be distinguished from the end of the state." (p. 131).  Havony claims that the view was the a child would be mistaken to think his parents provided his life and education because actually the laws and the state protect his parents, so ultimately are responsible for the child's life and education.

This sounds like the debate that occurred over a speech President Obama gave in which he said, "You didn't build that." How much of a person's success should be attributed to things the person does versus the environment provided by the state? There was also the words of John F. Kennedy, "Ask not what your country can do for you, ask what you can do for your country." One way of asking this is to ask whether the government is there to provide an environment for the individual to thrive, or is the indivual the servant of the state? These are questions Milton Friedman often wrote about, arguing from a libertarian point of view. While I suspect the truth lies somewhere in between, I fear the collectivist tendency implicit in Kennedy's quote and the implication many tried to draw from Obama's statement.

Monday, December 10, 2012

A Longer-Run Look at the U.S. Debt

An article in the most recent Federal Reserve Bank of St. Louis REVIEW by Daniel Thornton offers a long-run perspective on the U.S. Deficit and Debt Problems. It is very interesting and sheds light on what has caused the increase in debt.  Several findings are of interest:
1.   For most of our history, federal debt was associated with war, and during the time after a war, the debt/GDP fell for a number of years.
2.  The exception is the increase in debt associated with the Great Depression, but the increase in debt was not that large.
3.  The increase in annual deficits began in the early 1970s.
4.  Tax revenues as a percent of GDP stayed relatively constant but federal expenditures as a percent of GDP increased.
5.  The increases in government spending are associated with increases in Social Security and Medicare/Medicaid, and other payments to individuals.  That is, to transfer payments.
6.  The two major sources of government revenue are the individual income taxd and social security taxes.
7.  The individual income tax revenue relative to GDP has not been greatly affected by changes in the highest marginal individual income tax rate.
8.  The average individual income tax rate paid by households based on income shows that the highest quintile pays an average income tax rate about four times higher than the lowest quintile.
9.  Since 1979, the lowest income-earners have benefited the most from all the tax law changes.

Different people are likely to draw different inferences from these "facts."  Those who believe that we have to have substantial redistribution will argue that the rise in expenditures is necessary and to close the deficit, more tax revenues need to be raised from the higher-income households.  Those who believe the size of government is too large, will call for reduced expenditures.  But any future plans should at least acknowledge that historical record.

Friday, December 7, 2012

The Fiscal...Cliff...Slope,,,Curb?

The Fiscal Cliff is all they talk about on some of the business channels now, at least by my infrequent watching of the channels. Fiscal policy involves government expenditures and taxes, and both are will be impacted in early January unless Congress and the president come to an agreement about how to change things. On January 1, the Bush tax cuts will expire so rates will return to those that prevailed in 2000.  The lowest rate will increase from 10 to 15 percent, the next from 15 to 25 percent, and the remaining by smaller amounts--mostly by 3 percentage points.  Other tax changes would also take place such as increased in capital gains and taxes on dividends, and a return to the criteria for the Alternative Minimum Tax that prevailed in 2000. According to the non-partisan Tax Foundation, the increased taxes collected would be $514 billion.

Government spending will also be cut.  The law has federal government expenditures falling by $110 billion, divided evenly between defense spending and discretionary non-defense spending, i.e., exclusing Social Security, Medicare, federal pensions and federal salaries.  So, both the tax increases and the cuts in government spending are considered contractionary policies, which most economists would consider unwise in a weak economy.

A simplistic way of looking at the effects would be  to take the components of GDP and see the impact. In the third quarter of 2012, we had: C = $11,149.4 billion, I = $2080.4 billion, G = $3090.1 billion, and net exports = -$522.9 billion. This gives a GDP of $15,797.4 billion. THe fall in G of $110 billioin reduces government spending to $2908.1 billion, which would lower GDP by 0.7%. Assuming the tax changes lead to reductions in consumption spending, we would have C=$10,35.8 and end up with a reduction of GDP of 3.9%.  If spread over a couple of quarters, we would have a recession.

Some argue that the "cliff" is really a "slope" because the changes will occur slowly over the year. People will see lower take-home pay in each paycheck. So, if the new Congress acts, the effects would be minimal.  But since the major players politically are the same as we now have, it is difficult to see how a new Congress will so different from the status quo.

There are also some who argue we should go over the cliff. For example, Howard Dean, the former chair of the Democratic National Committee argues "progressives" should want to go over the cliff because it will generate greater tax revenue to fund programs with.  The tax increases are about five times more than the spending cuts.

Two other issues worth considering. First, most estimates of government multipliers from before the recent recession were that the multiplier on tax changes was greater than the multiplier on expenditure changes, and permanent changes have much bigger impacts than temporary changes.  If so, then the contractionary effects of the tax increases will be much greater than the effects of the spending cuts. Second, tax changes also affect incentives, which would also be a drag on the economy.

On the other hand, if one is not a Keynesian, should one think the effects in the long run may actually be positive?

Thursday, November 29, 2012

Are We Becoming Europe?

I met a sociologist once who commented that he had visited at Princeton University while on sabbatical. He said, "I used to hate the rich; now I hate them with cause." I understood what he meant, for the rich, especially those who grew up rich, seem to feel entitled to all sorts of benefits and expect others to behave deferentially to them. It might seem then, that I would be ready to raise taxes on the rich. But, other things are involved than merely trying to punish the rich for being rich.  While greed is one of the seven deadly sins, so is envy.  (My former colleague, Victor Claar, has written and spoken on envy in recent years.)

If we are to receive the benefits of a stable government, we have to pay taxes.  But, as noted in a book years ago entitled, THE LAW AND THE PROFITS, governments do not have a tight budget constraint. If they want to spend more they can either tax or borrow more. What should be the amount of people's income that go to taxes? There is no "correct" answer, but one that gets worked out through our political process. 

Recently, Steven Rattner had an op-ed in the New York Times, in which he argues for higher taxes on the rich. He writes, "Don't forget that the taxes on capital gains and dividends are absurdly low."  I don't know on what he bases that other than personal opinion, and maybe he is correct. But, he completely ignores that the dividends have already been taxed as corporate profits. Rattner wants all of the extra revenue to come from the wealthy, even thought the wealthy already pay the vast majority of federal income taxes. When forty percent of households pay no federal income tax, what skin do they have in the game?

Another piece in the NY Times is by Eduardo Porter. He argues that we should increase the share of GDP that goes to taxes in order to maintain a better safety net than we now offer. Progressivity isn't the key but broader taxes that collect more revenue as well as more generous welfare programs. He argues that that is what the richer countries in Europe do and we should too.

These two pieces are just a sample of editorials and op-ed pieces in which an argument for larger government is offered. Porter is more forthright in his plan by saying we should be more like Europe. But, the European countries are having a harder time maintaining their programs, and this is not just the case for the basked cases like Greece. Germany has made reforms that have  loosened labor markets; France is still resisting such liberalization, but is also seeing downgrades to its debt.

A book I am reading, and will do a review of when finished, is The Redistribution Recession by Casey Mulligan. He shows that the generosity of the benefits we offer the unemployed and others has increased substantially since 2007. A result is that many unemployed would need a high-paying job to be better off than they are receiving govenrment benefits.  We may be moving closer to Europe whether intended or not. For a couple of decades unemployment in Europe remained higher than in the U.S. The Great Recession altered that briefly. The question now is whether we will follow Europe's path, which has included persistently higher unemployment and slower economic growth.

Tuesday, November 20, 2012

Peter Diamond on How to Set-Up a Commission to Generate Tax and Spending Reform

Peter Diamond has an op-ed in today's New York Times. He argues that supercommittees are not the way to get tax and spending reform. Instead, he says that the method used by Congress on base closings is better.  Give the committee its marching orders--goals and so forth. But, more  importantly, don't have any sitting members of Congress on the committee. Then, when the report is submitted to Congress, it is an up or down vote.  He notes that in the Simpson-Bowles commission, almost all of the sitting members of Congress on the commission voted against the report.  What is needed is a committee that is less political, i.e., isn't concerned about reelection.  Then hard choices can be made and Congress has to say yes or not, keeping further tinkering by Congress out of the picture.  It makes sense to me, but will congressmen and senators give up trying to curry favors with their constituents and friends?

Monday, November 19, 2012

Review of Gorton's Newest Book--Misunderstanding Financial Crises

I just read Gary Gorton's new book and it is excellent.  I have written on Gorton's earlier book, SLAPPED BY THE INVISIBLE HAND, and this new book, MISUNDERSTANDING FINANCIAL CRISES: WHEY WE DON'T SEE THEM COMING, is also invaluable in understanding the recent financial crisis.  Once again, Gorton focuses on the shadow banking system and how there was a bank run in August 2007 involving this system.  He also discusses many of the financial crises in the past in the U.S., and how we had them in the free banking era, the national banking era and after the Fed was created.  Gorton argues also that economists ignore history too much and this causes us to consider each crisis as unique when there are many similarities among the crises.

Gorton calls the era from the creation of the FDIC and deposit insurance for banks to the early part of the new century as The Quiet Period--a long time period in which we did not have a financial crisis involving the banking system as a whole.  The deposit insurance meant that depositors would not have to race to the bank to pull out their funds when concern over the liquidity of the banks existed because their funds were safe.  This ended the problem of bank runs as traditionally defined.  But financial innovations in response to inflatoin in the 70s as well as competition, changed the environment and the shadow banking system emerged that involved investment banks, other large financial insitutions, corporations and hedge funds.  It was this system that experienced the bank run in 2007.  At the end, Gorton provides some arguments for what can be done to prevent a similar run in  the shadow banking system in the future, noting that Dodd-Frank does not provide the solution.  He also makes clear the important distinction between the function of capital in the system when times are normal versus times of crisis.  Increased capital requirements do not solve the problem when the system is in crisis.

I recommend the book highly. It is less technical than his earlier book and seems more unified since the earlier book involved chapters that had been articles in journals.  I think that a real solution to the problems of periodic financial crises involving banking will not be solved without taking into consideration the arguments in this book.

There is also a recent article on the shadow banking system that can be found here.

Monday, November 12, 2012

A Noneconomic Analysis of the Election

A couple of interesting op-ed pieces on the election, although they are not written by economists or economic in content. I was struck by some similarities in the arguments. The first is by a colleague in the political science department at Hope--Jeff Polet. The second is by a syndicated columnist, Jonah Goldberg. They both point to a long-standing movement in American politics to break away from the constitutional emphasis on checks and balances and a politics that reflects a variety of mediating institutions to one more organic or following what Bismark did in Germany. 

Tuesday, November 6, 2012

The Electoral College and Federalism

Today is election day and the polls all suggest that the presidential race is very close.  It is possible that Romney could win the popular vote and still lose the electoral vote, or vice versa. A tie in the Electoral College is even possible depending on how a few states go. Given that every four years we hear some pundits argue that it is time to do away with the Electoral College and just use the national popular vote to decide the presidency, I anticipate we will hear similar calls after the election.

To me, the Electoral College is one of the last vestiges of the idea of federalism in our system.  While we may be American citizens, we also are citizens of a specific state.  The United States is a federal system of a collection of states and not one massive nation along the lines of France. While we have done away with many aspects of federalism, including constitutional change that generated direct election of senators and non-constitutional changes such as the Department of Education and programs like No Child Left Behind, I find federalism very appealing.  The basic idea is that government should be as close to the people as possible.  It is impossible for the federal governemnt to be close to the people, but there are things only the federal government can and should do, such as national defense.  The local government should do all that it is capable of doing, but when the geographic area is too small for a task, then the county or state should do it, and only when the state level is too small should the federal government be involved.  This idea may seem quaint today, but would generate a more representative government than what we have.  My vote today has no impact on the presidential election but could determine a local school board election.  I can call up the mayor of Holland but would never get through to the president, and probably not to a senator.

Finally, when I hear calls for doing away with the Electoral College, I ask, why not do away with the Senate then also?  Why should South Dakota have as many senators as California?  Isn't this also antiquated if the Elector College is antiquated?  But the Senate was put in place, at least in part, so the large states couldn't run roughshod over the smaller states.  There are movements encouraging eating local and so on; I say, let our politics be local whenever possible.

Monday, November 5, 2012

Referendum on Obamacare

Today's Wall Street Journal has an op-ed by Christopher DeMuth on Obamacare and the election. He sees the election as a referendum on Obamacare as well as liberty. He notes that most Americans pay little attention to the federal government except when elections roll around because government doesn't affect  most people in a regular way. Exceptions are highly regulated industries, and some incentives for taking on mortgage debt. But, if the president is reelected and Obamacare is strenthened, we will regularly deal with the government.  I think it is worth reading.

Thursday, November 1, 2012

Three Noteworthy Pieces in Today's Journal

Three interesting articles and op-ed pieces in today's WSJ.  The first article is by David Wessel and provides background for the fiscal cliff and budget talks. There is also a video that can be seen that is interestings. There is also an op-ed piece on global climate change and Hurricane Sandy. It points out that in many ways we have fewer hurricanes and less-destructive hurricanes than in years past. The third is an op-ed piece by Alan Blinder. He argues that the recovery has been slow but steady and that to have expected better is to have been mistaken.  I have a couple of quibbles with Blinder's piece though. First, he is pretty much a standard Keynesian and emphasizes government spending more than I think is appropriate. But another is more political. He mentions the Simpson-Bowles plan, noting that Pres. Obama did not embrace it but neither did Paul Ryan. The difference is that the commission was appointed by Pres. Obama and he failed to endorse or support the recommendations. The plan just fell flat. As president, he should have been providing leadership on the issue but failed to do so.  To equate Ryan's no-vote with Obama's lack of support and leadership is misguided.

Thursday, October 4, 2012

Dodd-Frank and the Administrative Law Process

There is an interesting op-ed in the Wall Street Journal today, written by Eugene Scalia, the son of Justice Scalia. He has been the lawyer in several challenges to the Dodd-Frank rules written by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).  Congress passes laws but often leave it to commissions and agencies to work out the details.  The rules set by agencies and commissions are part of what is know as administrative law.  The public is supposed to have input into the rules-making processes. The law provides for groups with standing to challenge specific rules issued by the agencies. It is a part of the checks-and-balances in our system.  An example of an agency that offen faces challenges in the courts is the Environmental Protection Agency.  If business interests think regulations are to stringent, they may appeal. But if environmental groups think regulations are not stringent enough, they may take the EPA to court.

Scalia notes that the SEC and the CFTC have lost several challenges in the courts to the rules they have set. The setting of the rules is required by the Dodd-Frank bill.  Scalia refutes the idea that it is Republican-appointed ideologues that have caused the set backs by showing how Democratic-appointed justices have often been involved, including at least one who was appointed by Presdient Obama.  The reasons he claims that the SEC and CFTC have lost in the courts is that they often have relied upon weak economic analysis, disrespected the courts, and failed to recognize the importance of process.  Administrative law is nothing if not process related.

When I took a law course for economists sponsored by George Mason Law School almost twenty years ago, I was surprised to discover that I found the portion on administrative law to be so interesting.  I still find it interesting.

Thursday, September 27, 2012

Is Quantitative Easing the Right Policy

The Fed's recent announcement of pursuing additional Quantitative Easing--now called QEinfinity by some or QEp (p for perpetual)--keeps monetary policy in the foreground.  Scott Sumner is the best known advocate of nominal GDP targeting--the idea the Fed should target a nominal rate of GDP growth, perhaps 5%, with the idea that ultimately it will help get to 3% real GDP growth.  Tyler Cowen in his Marginal Revolution blog has several good posts on it.  He supports the idea but is concerned about the linkages that will or should or might lead to the growth of real GDP.  Today's Wall Street Journal has an op-ed piece that claims the easy money of the Fed is punishing the middle class.  It is worth a read.

I am less certain about nominal GDP targeting as the cure. Like Cowen, it can sound rather mechanical.  Whether one agrees with the op-ed piece I cite above, it is clear that easy money is punishing savers, including most retirees.

Tuesday, September 4, 2012

Is China a Case for Stimulus?

Is China an example of fiscal stimulus successfully maintaining a growing economy? Tyler Cowen and Matt Yglesias offer contrasting opinons.  (A link to Cowens which also links Yglesias' blog is here.)  Cowen argues that the spending has been riddled with malinvestments and influenced by corruption so helps demonstrate an important problem with massive stimulus programs. Yglesias counters with the argument that no sector has lower productivity than the unemployment sector, so that even malinvestments are better than no investments.  He also states that no one in China is debating whether the typical household is better off than it was four years ago.

But Yglesias is ignoring a couple of points in my view. First, it is a short-run view only.  Just as I can live well by running up debt, eventually it has to stop. The same is true for nations.  Second, and relatedly, if we asked the typical American household in 2006 or early 2007 whether they were better off than four years earlier, most would have said they were better off.  Unemployment was relatively low, housing prices were high and rising, the stock market was booming, and the consumer was seen as the engine of strong economic growth. But that all came crashing down once house prices collapsed.  Given the overbuilding of office buildings and apartments in China, it is difficult to believe that a similar crash won't happen there.

A final thing to consider is the political situation in China.  The autocratic central government is very concerned about social stability.  Maintaining growth and increased GDP is crucial to prevent social unrest.  But the measures being used to maintain growth may cause even more social unrest if and when the whole thing falls apart. 

Wednesday, August 29, 2012

New CAFE standards

The Obama Administration is increasing substantially fuel economy standards for auto makers.  An article can be found here.  The current rules are 29 miles per gallon for the corporate average fuel economy (CAFE); they are to increase to 35.5 mpg by 2016 and 54.5 mpg by 2025. How are they to do this?  Increase development of electrified vehicles and generate more fuel efficiency through engine improvements and lighter car bodies.  A hidden cost in this is that injury and death rates are higher in smaller, lighter cars.

According to the article, the administration estimated that Americans would reduce oil consumption by about 12 billion barrels over the course of the program.  Transportation Secretary LaHood said the standards would save Americans $1.7 trillion in fuel costs, or an average of more than $8000 a vehicle by 2025.  Environmental groups applaud the standards.

What are the problems?  First, auto prices will be higher.  Mr. LaHood agreed prices would increase but only by a fraction of what is saved in gas. I have no idea how he knows this.  Economic theory suggests that prices will increase by the present value of the expected savings on fuel costs.  This will also depend on what fuel prices are in 2020 or 2025.  As noted in the article, GM is shutting down production for while on the Chevrolet Volt hybrid becase of a backlog of inventory.  People aren't buying the vehicle.  It also will negatively impact poorer people. We are likely to see older, less efficient vehicles stay on the road longer because these would be the cars poorer families could afford to drive.

Another problem is that compliance is not determined by what the companies produce but by what they sell. This means that the firms may have to lower prices on the more fuel-efficient cars if people aren't buying them in order to be compliant.  Some have argued that an important part of the difficulties GM had that led to its bankruptcy were due to CAFE.  To meet the standards, GM sold the most efficient cars at a loss, counting on profits on the larger vehicles such as SUVs to nake up for the losses.

This is another example of the government trying to achieve a goal through regulations instead of prices.  If the problem is too much oil consumption, then raise the price of oil and gasoline.  Then people decide whether they want to conserve through more fuel efficient cars, use mass transit more, or other means. It also provides incentives for people to come up with more fuel-efficient autors. But consumers and taxpayers would see the higher cost of gasoline as due to congressional action.  When car prices rise over time, those same consumers and taxpayers may blame the "greedy" auto makers for the higher prices.

Monday, August 27, 2012

Please, No Return to the Gold Standard!

There are news reports about the Republicans forming a study group to look into a return to the gold standard.  I hope this dies quickly since I don't think it is a good idea.  The gold standard never worked as the textbook model of it indicates, and the economies of the world were not more stable under the gold standard.  There is also ample evidence that the gold standard caused considerable harm. The most telling of these is the work by Eichengreen and others that showed that the countries with the deepest and longest-lasting depressions during the 30s were the ones that stayed on the gold standard the longest.  Another example we can draw from is the current euro zone.  As far as the euro zone goes, the euro is a single currency. The effects are the same as if you had numerous currencies with exchange rates that were both fixed and unchangeable.  A gold standard is an example. The problems of the euro zone are due, at least in part, to the fact that the value of the euro is too high for the southern nations and lower than it should be for Germany and a couple of other countries.  Any stablization among the countries that make up the zone is hindered by the common currency. 

The gold standard is one of the few areas where I think Keynes was right--it is a relic from days gone by and we should not go back to it.  In fact, Keynes and Milton Friedman both argued against the gold standard, although for different reasons.  I hope the Republicans don't go down this path.

Sunday, August 26, 2012

Alabama and LSU Football, and the NCAA as a Cartel

An interesting article in today's New York Times sports section on SEC football.  I mention it for two reasons.  One is that there is reference to the NCAA decision regarding Penn State and the desire to make sports less the driving force in major colleges.  I think the article indicates that the goal is likely to go unmet.  Second, the discussion of the fanaticism for football at Alabama and LSU. I went to college in the state of Alabama and taught at LSU for nine years.  Every time I looked at the Birmingham paper when I was a student at Samford, regardless of the time of year, there was a story on either Alabama football, or Auburn football, of the NY Jets because Joe Namath played there.  Basketball, baseball etc. were totally unimportant compared to football.  LSU is also crazy for football.

The article indicates that Alabama seems to be more intense than LSU and cites an obituary of a fan. However, a colleague at LSU who had season tickets recounted an incident one time. Two older guys in the seating section he was in were discussing a friend. The friend had recently died while at a LSU game.  They agreed that there was no better place to be when one's time was up.

Finally, I regard the NCAA as basically hypocritical when it talks about cleaning things up. So long as the schools make millions off of football and pay players nothing, the idea of a student-athelete is a joke for the most part.  The NCAA is a oligopsonistic cartel, taking advantage of players to rake in millions. For some players, the colleges provide training for professional careers.  But the simple math involved with how many college players there are relative to the rosters in the NFL indicates most players will never be pros. Paying the players openly would be more honest.

Monday, July 30, 2012

We Can't Return to the "Golden Age" of the Postwar Era

Robert Shiller's column in yesterday's New York Times epitomizes an approach and argument that I find totally fallacious and even silly.  The title is "Taxes Needn't Discourage Philanthropy."  He begins by asking the question--"How high can taxes go?" He notes that the top marginal rate in 1944 was 94%.  Yet, we didn't have class warfare and we didn't have an economic disaster. Of course, we were in World War II at the time, which he acknowledges.  He notes that one reason for the high rates was to ensure that the war would not create new millionaires.

After the war, the rate came down a little but not much. In 1963 the top rate was still 91%. Shiller argues that the high rates didn't impact growth negatively since the real GDP growth rate from 1948 to 1963 was 3.7%. This was higher than the overall average growth rate of 3.2 % from 1929 to 2011. He argues that one reason was that we had greater social harmony in those fifteen years, some of which was a hangover from the patriotism felt during WW II. It takes a while, but he eventually gets to his theme of encouraging philanthropy by encouraging positive feelings of reciprocity.  While worthy of comment on its own, I want to focus on the idea of using the first fifteen years after the war as evidence of things we could do today.  I think it is wrong.

People often regard the way things were when they were teens and young adults as some sort of norm.  For people older than I am, this time period was the fifties and early sixties--a time when American business was strong and the economy grew rapidly, as noted by Shiller.  However, this "golden age" was not a normal time period. In fact, it was an aberration.  The was was not fought on US soil and American industrial facilities were not destroyed. The same can not be said for most of Europe and Japan.  We faced no competition for most of that period.  In the sixties, Japanese goods were considered to be cheap and junk by most Americans.  American business people did not have to be particularly wise or innovative to be successful.  Few people talked about the importance of small business since the presumption was that big industry was the norm.  Major industries were oligopolistic and the firms often viewed as invincible.  General Motors was the quintessential American firm.  The economic situation was not viable in the long run.  Europe recovered, as did Japan, and new compeition came along.  To argue that any government policy that persisted at that time must have had either good or benign effects because of the success of the American economy at the time is misguided.  America's role in the world was unique and not sustainable over time.

Another point Shiller makes is that the American public was more harmonious at the time. He writes, "Many people sacrificed their lives during the war, and, for a while, it seemed that the survivors were especially chartiable to one another, on both a personal and an institutional level.  I wonder if African Americans in the deep South who lived at that time would agree with Shiller.  It was a time of white, male dominance that is totally unacceptable today.  Even at the end of  the war, Jews still often could not get into Ivy League schools, or at least could not get on the faculty.  People thought diversity at the time referred to Italians and Irish, not Hispanics and Cambodians.  To me, it is more difficult to see solidarity when society is increasingly diverse.

As the political and economic debate in the country has focused on whether the role of the federal government should be constrained or more dominant, I see references to the early-postwar times as evidence that high marginal tax rates can be associated with strong economic growth.  Shiller's piece is just one of a number of examples I could have used.  But the world has not stood still since 1963.  We need better evidence than appeals to a bygone "golden age."

Monday, July 23, 2012

The Complexity of the Tax System

Today's Wall Street Journal has an article on firms passing up some tax breaks because of the complexity and the hassles.  Since many of the breaks are for small firms, the cost of compliance tends to be more relative to benefits.  The Small Business Administration estimates that the tax-compliance cost per employee for a firm with fewer than 20 employees is about $1600 compared to less than $800 for firms with 20-499 employees.  The article notes that many in Washington decry the complexity of the system, yet the system persists. Why?  The author of the article offers an answer, "...both theWhite House and Congress can't seem to resist fine-tuning the tax code to satisfy their diverse goals."  Precisely.

The complexity is there for the code we pay as individuals also.  Most people don't itemize deductions even though anyone paying a mortgage is likely to have lower taxes by itemizing.  Again, is it the complexity and not wanting the hassle that leads to this behavior? 

During the early years of the Reagan presidency, when the Republicans had captured the Senate for the first time in decades, there was talk of tax reform and simplification.  If I remember correctly, Bob Dole was the head of the appropriate committee in the Senate and he said that he didn't believe in simplification  for the sake of simplification.  I do.

Friday, July 20, 2012

Edmund Phelps on Why Germany is Right to Ask for Austerity

Edmund Phelps has a good op-ed piece in yesterday's Financial Times. He offers a different perspective on the crisis in Europe, arguing that it is not caused by the euro and that the fix is not to aid the insolvent in order to avert defaults.  Instead, he claims that a combination of Keynesianism and "corporatism", which he defines as, "...state projects serving cronies and vast social protection programmes, both run by elites." He argues these programs surged in the 70s and 80s in much of Europe.  By the mid-1980s Italy was running sizeable fiscal deficits and the same for France in the early 1990s.  In 1990 the Basel I agreement lowered a bank's capital requirement on sovereign debt to zero, which increased public debt.

Phelps continues, "This was wonderful in the Keynesian view: more wealth supported rising consumer demand. In the 'structuralist' view, however, it spelt trouble." Both Italy and France saw productivity growth stop in the late 90s. Incomes increased but based on debt rather than productivity. Eventually, credit markets recognized the problems and interest rates increases. Given the interconnections among European banks and the governments, all are nearly insolvent.  Phelps examines some ways in which Italy, France and Greece could move away from the status quo, but I think are unlikely to take place.

Phelps concludes by arguing that there is a split between those who want to continue with corporatism and Keynesianism, and those who want greater fiscal responsibility and a well-functioning capitalistic system. 

For anyone who has access to the newspaper, the article is worth reading and remembering.

Tuesday, July 17, 2012

The Presidential Contest is Shaping Up to be a Debate Over Globalization

David Brooks' column in todays NY Times provides a good discussion of how the presidential contest should shape up. That is, he argues that the president's attacks on Romney's record at Bain is essentially an attack on globalization.  In other cases, the president has not seemed to attack globalization or those who have employed outsourcing as a strategy, e.g., Steve Jobs.  You cannot have exports without also importing. And, American firms will not be able to compete broadly if they cannot rationalize their production processes in light of where they can produce cheaply and service overseas markets.  Politicians of both parties can revert to mercantilistic arguments at the drop of a hat--or in pursuit of a vote.  We need some leaders who acknowledge the benefits of free trade and globalization and who will argue accordingly. 

Monday, July 16, 2012


I finished yesterday Jerry Muller's, The Mind and the Market: Capitalism in Modern European Thought. It has been on my shelf for several years; I should have read it sooner. It is interesting and worth looking at.  He offers several insights I had not seen, showed that several ideas I have used are older than I realized, and provided an interesting balance of intellecutals who were supporting capitalism, opposing capitalism, and were ambivalent to capitalism.

His openning chapter, which provides the historical backdrop to his work, discusses the general hostility toward trade and money-making within two old traditions in European thought--the Christian tradition and the tradition of civic republicanism.  In the latter, Plato, Aristotole and most ancient philosophers disparaged commerce.  The goal of society was to enable free men to live a good life, which included heavy civic involvement and the military defense of the city-state. Merchants were often permitted in the cities due to necessity, but usually could not be citizens.  Muller claims that the Church softened its stance a little as a result of a more dynamic economy in the Late Middle Ages (1100-1300). 

Another important feature of intellectual life prior to modernity was the idea that the state should aid its members to achieve a shared good life.  There would be a purpose to society that all agreed upon, or at least the leaders agreed upon.  Again, virtue might be seen as a key part of it.  But the religious wars of the 16th and 17th centuries induced some to reject the idea of a shared goal.  Muller writes, "The great historical fact that served as the moral backdrop for thinking about capitalism was not the factory or the mill, but war--not war with the foreign invader, but internal war, civil war, between men with rival views of ultimate salvation, men who were so sure of their view of salvation that they were prepared to shed the blood of their fellow man in order to save his soul."  It was against this backdrop that some began a search for a way to live together without an overarching shared goal, but one that allowed people to pursue their own goals. Muller continued, "As long as religious factions saw the state as a proper tool for the enforcement of faith, religiously based civil war was a possibility. And as long as the state legiimated itself as guiding its citizens to a single, unified purpose and vision of the good life, the state would be prey to religious civil war."  Muller notes, "These seventeenth-century thinkers envisioned the future as one in which the state would restrict its claims to realize a shared vision of the good life. Much of modern politics has been a revold against this rejection of the good life as the pupose of politics."

Muller has chapters, or parts of chapters on, Voltaire, Adam Smith, Justus Moeser, Edmund Burke, Hegel, Marx, Matthew Arnold, Weber, Simmel, Sombart, Lukacs, Freyer, Schumpeter, Keynes, Marcuse, and Hayek.  I have used Hayek's idea that we live in two worlds at the same time--the communal or familial world and the great society and we operate differently in these two world.  I had not realized how much of this thought is found in Hegel.  One unifying thought among all the intellecutals discussed by Muller is that they accepted the idea that capitalism was extremely productive at increasing wealth; but not all thought this was a good thing, or at least thought that other costs associated with capitalism were too great.

I also was not as aware as I should have been on the historical linkage between anticapitalism and antisemitism. Jews had moved into commerce and banking in Europe, often because other sources of employment were not open to them. Then, when they were relatively rich, were villified as the plunderers of the people.  Hayek, who was not Jewish, tended to almost consider himself a Jew because his intellectual milleau in Austria were primarily Jews, and he identified with them as in some sense an outsider to the society. He sought a society where being a Jew would not matter, which he thought more likely in the great society than in the parts of society that were more communal.

Muller also offers some interesting quotes from Keynes.  Muller writes, "He [Keynes] disparaged this elevation of the future over the present as an attempt 'to secure a spurious and delusive immortality.'"  It sounds like his "in the long run we're all dead" line was not just a rhetorical flourish. Keynes focused on the short run and disparaged the long run and saving in general. Keynes linked deferred gratification with the quest for immortality as well as usury and the Jews. Muller quotes Keynes again, "'Perhaps it is not an accident that the race which did most to bring the promise of immortality into the heart and essence of our religions has also done the most for the principle of compound interest and partuclarly loves this most purposive of human institutions."  Muller cites volume 2 of the three volume biography on Keynes by Robert Skidelsky for Keynes' views on Jews.

In some of my work on why so many thelogians don't like markets, I have noted that for many, especially those in Radical Orthodoxy, the history of an idea is important. Muller has helped with this. But what Muller also does and the theologians tend not to do, is also related the history of ideas to history--the things going on in the lives of people that provide a backdrop to the ideas.  I am more convinced of how important this task is.  Muller has done a good job, in my view.

Sunday, July 15, 2012

A Mixture of Articles in Today's NY Times

Several interesting pieces in today's NY Times, although of different themes and topics.  These include an article on the difference in family incomes between people who are married and those who are not.  It cites research on how much changes in family structure for middle class Americans has affected incomes and is responsible for a substantial share of increasing income inequality.  It is well done and provides interesting data.  I was somewhere recently and heard a speaker encourage students to realize that economic success is related to getting a degree, getting married, and having children--in that order! (I wish I could remember who said it but I cannot.)

Tyler Cowen's article in the business section is also very good. He writes on Medicaid in light of the recent Supreme Court decision. He notes the weaknesses in the way Medicaid has been established and thinks it is likely many states, and not just those with Republican governors, will choose to not expand Medicaid.

An op-ed piece questions whether liberal Christianity can be saved.  He notes that Bishop Spong some years ago argued the Episcopal Church had to change or die, but that it has changed as the Bishop had encouraged, and is dying.

Finally, another article related to religion is in the sports section.  It looks at American marathoner, Ryan Hall, and his unorthodox training methods. It also  focuses on Hall's religious beliefs. He is a charismatic Christian. A former Olympic athlete who attends the same church compared him to Eric Liddell.  Quite  interesting and in depth.

Thursday, July 5, 2012

Interesting Pieces in Today's WSJ

Several interesting pieces in today's Wall Street Journal.  John Taylor on monetary policy and the next crisis is quite good.  He doesn't say so, but it strikes me that if price controls distort, continued low interest rates must also distort.  On a different note, Stephen Moore writes about lessons regarding energy policy from the power outage in his neigborhood.  He argues that as we pursue green energy and actively disourage coal and natural gas, we can expect such outages on a regular basis.  Austan Goolsbee writes about the impact of the Supreme Court decision on Obamacare, claiming there wasn't one. He argues that this shows that the slow recovery is not due to business fears over regulation. If so, markets would have dropped and they did not.  This relies on the belief that the markets had not anticipated the Supreme Court's decision though.  He offers some other interesting empirical tests though.
Finally, a news article that got a lot of attention on Squawk Box this morning--some cities are considering using eminent domain to seize mortgages from banks, write down the amount so the owners can stay in their homes.  To do so, they would have to compensate the holders of the mortgages, but the plan would be to pay them the "market value" of the mortgage rather than the contracted amount.  There has been a widening of the power of eminent domain to take property even when it is not to be used by the government.  I find this very disconcerting.  It strikes me as a weakening of the rule of law--one of the key ingredients for an economy to be successful

Friday, June 22, 2012

Anna Schwartz Dies

Anna Schwartz died yesterday in Manhattan at the age of 96. She is best known for her collaboration with Milton Friedman, A Monetary History of the United States, 1867-1960. The book changed the way people regarded the Great Depression because it showed how far the money supply fell from 1929 to 1933.  Monetary policy went from a neglected tool by Keynesians to the dominant tool in economic policy.  Her obituary is here.

Randall Parker has an interesting book, Reflections on the Great Depression, in which he interviewed a number of famous economists who lived through the depression.  Anna Schwartz was one of the economists in the book.  Friedman's interview is also in the book.

Wednesday, June 20, 2012

On Five Keys to Restoring America's Prosperity

I finished reading John Taylor's First Principles: Five Keys to Restoring America's Prosperity and enjoyed it very much. It is very good in its analysis and policy recommendations.  The five key principles he lists are: predictable policy framework, rule of law, strong incentives, reliance on markets, and a clearly limited role for government.  In other words, a focus on economic freedom as much as possible.  They are fairly similar to the "modest proposal" I offered in one of my lectures at Acton University.  The suggestions I made included: observe federalism, let the government do what the private sector cannot, let taxes be collected to cover expenditures (making some allowance for expenditures that are truly investments), let the Fed apply a monetary rule, and let the goverment create an environment in which entrepreneur's can flourish. The latter would certainly include strong incentives and predictable policy framework.

Taylor argues that, "If people are forward-looking and adjust their behavior to new circumstances, then economic policy works best when formulated as a rule. Government's adherence to known rules allows people to have a clearer sense of what is coming, and therefore to make informed decisions about long-range plans."  To me, this is the most important statement Taylor makes in his book. It offers in a nutshell an argument for rules and against constant discretiionary behavior trying to fine-tune the economy.

Taylor offers support for his claims.  He argues that when policymakers support economic freedom, they rely on automatic stabilizers rather than Keynesan discretionary interventions, the Fed applies rules, and regulatory policy enforce known rules rather than deviate from them to help certain people.

Taylor looks at the post-war history of the U.S. to illustrate his arguments.  From the 1950s ot the late 1970s, the federal government and the Fed tended to be interventionist.  Keynesianism was the official doctrine employed in the government and monetary policy tended to waver in light of current economic conditions. Then, Paul Volker led the Fed to concentrate on price stability, arguing that unemployment wouldn't fall until stable prices were achieved. The election of Ronald Reagan brought a less interventionist approach for the executive branch as well. This approach lasted through the Clinton years, but President George W. Bush pusured more interventionist policies, and the Fed began to deviate from the rules-oriented approach it had followed. Today, interventionism abounds.

Taylor then provides chapters on how to get out of the mess we currently have. One is on debt, another on monetary rules, a third on ending crony capitalism, a fourth on entitlements, and a final on rebuilding American economic leadership. 

All-in-all, I found the book thoughtful and helpful.  It is worth taking a look at.

Saturday, June 16, 2012

On Acton University

I  spent the last several days in Grand Rapids attending Acton University--a program for people who want to know more about market economies, liberty, and theology. I gave two lectures--one on theologians vs. capitalism and another on basic macroeconomics.  I also attended some lectures, including one on John Ryan and the New Deal and another on fair trade. The latter was presented by my former colleague, Victor Claar. He has an excellent monograph on the subject entitled, Fair Trade? It's Prospects as a Poverty Solution. I highly recommend the monograph.

Wednesday, June 13, 2012

On Europe, Again!

Europe remains the focus of much of the business news.  In the NY Times, German economist Hans-Werner Sinn offers an op-ed on why Berline is balking at a bailout.  His basic argument is that the kind of risk-sharing demanded by some pundits and politicians is only possible if the euro-zone were actually a nation with a contitution and a common legal superstructure.  Meanwhile, Gerald O'Driscoll opines in the WSJ that the euro will fail.  He cites Milton Friedman who predicted the euro would fail within ten years.  It has lasted longer than that, but O'Driscoll thinks failure is almost certain. He concludes his column with the idea that the EU should have adopted political union before creating the euro and not the other way around.  Another column offers support for Merkel's approach, arguing the lack of leadership is in the debtor nations. The lead article in the WSJ is on the spreading threat in Europe over the euro crisis. Another article focuses on Italy.

O'Driscoll referred to the time as a crisis, meaning the original idea of the Greek work that underlies the English word--a turning point. Either the currency will fail or it will recover by the euro-zone adopting more fiscal and political integration.  While O'Driscoll thinks it will fail, I still think there is a good chance the greater political integration will occur.

Tuesday, June 12, 2012

In Defense of Germany

Gideon Rachman's op-ed piece in today's Financial Times offers support for Germany's approach to the euro crisis.  He cites the newest Economist, in which it is argued that an international consensus on what Angela Merkel should do--shift from austerity, develop a banking union with euro-wide deposit insurance, and a type of debt mutualization (like euro bonds).  President Obama is among the world leaders pushing Germany to do something.

But Rachman argues otherwise. He thinks the demands are politically dangerous as well as unrealistic. Take a Europe-wide bank deposit system like the FDIC in the U.S. Rachman quotes a senior Dutch politician, "'We cannot push through a banking union when the French have just cut thier retirement age to 60 and we have raised ours to 67.'"

I have argued numerous times that the euro was a political decision, designed to force more political integration in the EU. But, as Rachman notes, the necessary integration cannot happen that quickly.  Among things needed would be to have a European government that could override the current national governments. They would need to harmonize the various European social security systems.

Rachman also claims that Merkel has had a political success that is little noted as yet.  She has been able to keep the far-right and far-left parites on the sidelines.  Meanwhile, in the last French election one-third of the voters supported either a far left or a far right party. Currently, the extremist parties are leading in the polls in the Netherlands.  The political center is holding in Germany and this is no small accomplishment.

Saturday, June 9, 2012

Is Berlin Worrying Too Much About the Wrong Historical Period?

There is an interesting op-ed in the Financial Times by Niall Ferguson and Nouriel Roubini. They point out that Europe has dithered over recapitalizing their banks, often relying on sovereign debt to do so. Of course, the sovereign debt is part of the problem now.  They also argue that Germany is key but Germany is focusing too much on the hyperinflation after WW I and not enough on 1933.  They offer some solutions that could be worked, and note that the monetary union always implied further fiscal and political integration, a point I have often made.

They conclude with:

Ultimately, as Angela Merkel, the German chancellor, herself acknowledged last week, monetary union always implied further integration into a fiscal and political union. But before Europe gets anywhere near taking this historical step, it must first of all show it has learnt the lessons of the past. The EU was created to avoid repeating the disasters of the 1930s. It is time Europe’s leaders – and especially Germany’s – understood how perilously close they are to doing just that.

Friday, June 8, 2012

Corruption in Europe and India

While on sabbatical at the University of Göttingen, I met Johan Graf Lambsdorf, whose reserach was on corruption across nations. He has been involved in compiling a Corruption Perceptions Index as part of Transparency International. This organization just came out with a report on corruption in Europe. Italy, Greece, Spain, and Portugal fared much worse than most of the other members of the euro zone.  The problems they are having today may not be directly related to corrpution, but I don't think it is a coincedence either. Corruption reduces economic growth and efficiency. It discourages entrepreneurship. It can increase government spending without providing benefits. Honest government is one of the institutions needed for economic growth.

Corruption is cited in an article about India in today's NY Times as well. Food often rots while the poor go hungry.  India provides subsidies to farmers to encourage more food production and sells food to the poor at prices lower than the would pay in stores.  But, corruption leads to much of the food being diverted. Some poor cannot get ration cards--a bribe may be needed.

The harm to people caused by corruption is real and significant.

Thursday, June 7, 2012

Some Interesting Reading

A couple of interesting op-eds from the NY Times/International Herald Tribune.  One is on life in Athens today and the other on debt and the Walker recall election in Wisconsin.

Is College Still a Good Investment?

NY Times "Economix" offers a look at the value of a college education from those who didn't go to college.  Apparently high school graduates are finding their job market awful and think college grads have it better.

Debt is an issue for college grduates in  the U.S. today.  But debt taken on for investment purposes is preferable to debt taken on for consumption purposes.  Higher education is an investment, although there are consumption aspects as well--football games, parties, friends, and hopefully, some classes.  When looking at the success of recent graduates in getting good jobs, we have to consider more than raw numbers. For example, the college or university attended, the major chosen, and whether the graduate is willing to relocate.

College costs have risen faster than inflation for some time. There are several reasons for this. One is Baumol's Law--some activities are inherently more labor-intensive than others.  Science students still need time in laboratories and writing skills will not be enhanced in a class of 500. Technological improvement that increases labor productivity in manufacturing does not have the same impact in education. But colleges have to provide wages that reflect opportunity costs of working in industry. A second reason is that the percent of personnel in colleges and universities that are involved in teaching has fallen over several decades. Some of this is due to government regulations regarding discrimination, safety, and other issues. Some of it is due to competition--providing student activities, sports teams, and so on.

College remains a good investment for most students. But, if a student cannot go without taking on debt, he or she should consider carefully some decisions: what are my plans after college and how does my major/minor and nonclassroom activities aid in achieving those plans? Can a cheaper college be found? For example, a student going to a state university will spend more if attending a state university from a different state than his or her residence.  Also, read carefully the acceptance letter that contains the aid being offered.  Make sure you can distinguish aid from loans.

Wednesday, June 6, 2012

Soros on the Euro Crisis

An interesting speech by George Soros on the euro crisis and the financial crisis. While not endorsing all of his points, it is worth a read.

Doom and Gloom

The news remains bad.  A NY Times article reports that the Greek government may not have enough revenues to pay its bills, such as paying employees, as early as July. The steep recession is reducing government revenues. Another article reports that Spain may need help soon because the risk premium on their bonds is becoming too high. The G-7 are holding meetings on the crisis in Europe and maybe something will come out of that. (Article here). 

A column by Martin Wolf is entitled, "Panic Has Become All Too Rational." He notes a lot of reasons to be gloomy about he world economy.  He describes the West as in a contained depression. Deflationary forces are at work as households are reducing debt levels by spending less and savng more. Government policies have prevented it from becoming a full-fledged depression, but austerity is altering that. The scariest comment he makes is that he used to wonder how the 1930s could have happened. Now he understands. Clearly, Wolf thinks it could happen again.

Air Quality Monitoring in Beijing

Having lived in Pasadena, California for four years, I know something about polluted air.  During a visit to Beijing with a group of students. it was clear (pun intended) that Beijing's was at a whole other level. The best description I heard from someone who lived there was "apocalyptic." The Asia Pacific edition of the NY Times has an article on the Chinese government wanting embassies to stop monitoring and tweeting on the air quality in Beijing. The picture with the article is of the Beijing I saw while there in March.  I was told by an American living in Beijing that the readings on the meters are often at the maximum--the readings are off the chart.  China's policy appears to be concentrate on economic growth and then clean up. Come to think about it, that is what most of the industrial countries today did.

Tuesday, June 5, 2012

Is Europe Lurching Toward a United States of Europe?

Being in Germany and reading a lot on the euro crisis, I wonder if it is similar to what it would have been like in the months leading up to the Constittutional Convention that generated the U.S. Constitution in 1787.  The loose confederation of states was perceived as not working well. The men at the convention tried to hammer out a new government that would provide more integration among the states and establish a federal system with checks and balances, powers retained by states, and a federal government above all.

Each day here new articles appear that suggest further integration, then counter views, and then another step towards further integration.  Today is an example. According to an article in today's NY Times,  Germany is signalling some willingness to pooling of debt but not eurobonds. (Article is here). An article in Financial Times writes of Germany banks oppositon to some forms of a stronger banking union. The European Central Bank meets Wednesday and some speculate it may try to do more because Europeans are getting very nervous about the euro crisis. (Article is here.)

A Financial Times op-ed argues that Europe needs a Lehman moment and a Greek exit could provide that. A former head of UK Investments with Lehman Brothers, Michael Tory, writes that the American public suffered from bailout fatigue after bailouts to Fannie Mae, Freddie Mac and Bears Stearns.   Attempts to stop contagion bank by bank wasn't working and a recapitalization of the banking system was needed. There was just no political will for that action.  The Lehman bankruptcy changed things. Quickly action was taken as Ben Bernanke and Treasury Secretary, Hank Paulsen, scared Congressional leaders into action. TARP was the end result.  Tory argues a Greek exit could provide the same stimulus to action and force European leaders to take action. Tory writes, "They would face a very clear choice: unite immediately behind a comprehensive fix to secure the countries next in line (Spain, Portugal, Ireland etc) or watch the entire eurozone project disintegrate."

One part of the Lehman story Tory leaves out.  The American public did not like TARP. This is true for those on the left and the right.  Republicans who voted for TARP faced Tea Party candidates in primaries in the 2010 elections and most of them lost to the Tea Party candidates.  The politicians may have done the right thing, but they paid a price for doing so.  Might some European politicians take that as a lesson from the American experience?

Monday, June 4, 2012

Spain Calls for Centralized Control of National Budgets

Spain has called for centralized control of national budgets in the euro zone. Clearly, this is a move toward more fiscal coordination or even control by Brussels. An article in today's NY Times suggests the euro zone is lurching towards a crossroads--either it will move towards more centralization of fiscal policy or the euro will fall apart. There are renewed calls for creation of a Eurobond, which Germany still rejects.  Germany has called for increasing the powers of the European Commission in Brussels.  Ms Merkel's plans are longer term, requiring treaty changes.  Spain doesn't have that much time. Throughout the "Greek crisis" many have noted that the real concern isn't Greece but Spain. The latter is a much larger economy and any bailout at a scale large enough to be effective will be very expensive.

Saturday, June 2, 2012

Not All the Employment News is Bad

The most recent job numbers was disappointing and growth remains anemic. However, there is some good news in the economy, especially for the Midwest. A report on the resurgence of American manufacturing shows that jobs in manufacturing have been growing. The report also mentions some of the top jobs in terms of new hiring and a likely replacement rate for the decade.  Exports tend to be fueling much of the increase.  Tyler Cowen has a piece in The American Interest in which he discusses the implications of an export-oreiented America.  Until recently, the U.S. has been the leading exporter in the world. We often forget that for two reasons--(1) we often ran trade deficits, i.e., we exported a lot but imported more, and (2) exports are not large relative to GDP. But manufacturing has also changed. The new hires have to be more skilled some robotics do most of the assembly work.  The new hires have to be skilled to work with the equipment.  Manufacturing output is increasing much faster than manufacturing employment. This trend is unlikely to change.

In the U.S. in recent decades, the gap between earnings of college graduates and high school graduates as increased.  America is increasingly a country specializing in human capital and humans working with computer-based capital. But college degrees are not needed for all good jobs.  Instead, skills as machinists, welders, and similar trades can provide good jobs as well. Skills are needed in today's marketplace. One question is: Does our education system provide learning opportunities for skills as well as for college preparation?

Friday, June 1, 2012

Is Germany Ready for More Integration?

An article in yesterday's Financial Times states that there are substancial discussions going on behind the scenes in Germany regarding further integration.  The official position of Germany fails to indicate that because Germany is concerned that comments might negatively influence some important elections coming up--the Irish referendum, elections in Greece, and parliamentary elections in France.  Further, there is always a concern of spooking financial markets.

According to the article, there is a broad consensus among the two major parties and the Green Party that greater fiscal integration is needed. It quotes Joschka Fischer, former foreign minister and member of the Green Party, “We are now very close to break-up,” he said. “Either we move ahead very fast, or we will go back to disintegrating. Will we share our wealth? Will we integrate our debt? Will we transfer our power to common institutions?”

Presumably, Germany is willing to put all of these on the negotiating table, but further fiscal integration also has to be on the table. The author also cites a recent Pew Global Attitudes Poll that shows a majority of Germans favor more integration, that is not the case in France, Italy or Greece.

This is not the impression one gets from most news stories and op-ed pieces.  The poll also found Chancellor Merkel the most respected leader in most countries--Greece excepted--which is inconsistent with the reporting that Merkel is isolated from the rest of the leaders.

Thursday, May 31, 2012

Energy Change Plans in Germany

Germany passed a plan last year to shut down all nuclear plants by 2022.  Not that Germany had built a new plant in many years; like the U.S. the nuclear plants are older.  There has been a strong anti-nuclear movement in Germany since Chernobyl.  But, plans for the change are behind schedule. Part of the reason may be that the euro crisis has consumed so much time of the government leaders.

The plans include a much greater reliance on renewable energy. The goal is 50% of energy produced by renewable sources by 2030.  This is mostly wind power generated mostly by turbines in the North Sea.  But much of industry is in the southern part of Germany so a new network of power lines are needed.  This will requires an investment of $25 billion over the next decade.  This process has been slowed by paperwork and regulations in the various German states.  Also, farmers are demanding more money for the land taken for the power lines. As a spokesman for the German Farmers Federation notes--land is limited.

For those who are concerned about global climate change, nuclear power is a good option to replace coal plants, but the Green Party in Germany is also very anti nuclear.  But relying so heavily on wind power presents problems too.  Since electricity cannot be stored, what happens when the wnds are down?  Another problem is that there is power loss as the electricity flows through power lines, so the further the power has to travel, the greater the loss.

After the earthquake and tsunami in Japan hit last year, Warrren Buffet said that many died in the tsunami and few will die from the troubles at the nuclear power plants. But, people will still build homes on the coast but nucelar power will be killed.  At the time I heard him say this, I thought he was right. I still do.

Wednesday, May 30, 2012

Martin Wolf on German Self-Interest

Martin Wolf has an interesting piece in today's Financial Times. The newspaper also has a series on the euro crisis, including a diagram showing how Greece could exit the euro zone and what the consequences would be. I believe a subscription is necessary to see the full column though so I will briefly summarize Wolf's column, "The Riddle of German Self-Interest."

Wolf says the crisis is clear, and he focuses on Spain and Italy because of their size. They are unable to manage their debts without some assistance. Much of the government's debt is held by the banks in the countries.Some of the debt has been generated to help the financially weak banks. Wolf uses a common metaphor to describe this--two drunks trying to hold each other up. Wolf argues that the austerity required by the EU is ineffective because the private sector has already gone to austerity and declining government spending keeps GDP going down. As he puts it, "The reward for pain today is pain tomorrow."

He then looks at how Germany wants the euro zone organized. He believes it is no to eurobonds, no to increase in funds for the European Stability  Mechanism, no to monetary expansion, and yes to austerity. So how do the German authorities think the slide in the periphery nations will be halted? Wolf offers two hypotheses. First, Germany believes the weaker nations will eventually pull out of the euro leaving a smaller but more stable euro. Second, they think their policies will work and things will turn around. Wolf doesn't think it will work. In fact, he thinks Germany is shooting itself in the foot since Germany relies on exports to other EU countries so heavily.

Wolf's final paragraph is:

"In October 1939, Winston Churchill said: “I cannot forecast to you the action of Russia. It is a riddle, wrapped in a mystery, inside an enigma; but perhaps there is a key. That key is Russian national interest.” The key in Europe today is Germany’s perception of its national interest. Once it becomes evident that their conditions will not work, German leaders will have to choose between a shipwreck and a change in course. I do not know which Germany will choose. I do not know whether its leaders know. But on that choice hangs the fate of Europe."

Tuesday, May 29, 2012

Feldstein on the Euro

Martin Feldstein has a column on the euro and how France had wanted it to encourage more political integration. Of course, France thought they would lead the political union.  Things are not working out as France had hoped.
Given the  crisis in Greece and the realization that a breakup of the euro zone could happen, we are getting a lot more analysis of the issues.

The Role of Government

David Brooks' column in today's NY Times discusses Hamilton's approach to government, arguing that it was a healthy one. I don't know enough about Hamilton, and presume that when people use a historical figure as a model, they often convert the historical figure into the image they want.  Even so, I think Brook's arguments are interesting.  He sees the problem as one in which government has over reached several times in the past, which has led to a more antigovernment approach by the current Republican Party, especially the Tea Party members in it. Instead of focusing on government as good or bad, Brooks argues for discussing what government can do, which I presume also means what government cannot do well.

I take the approach that people are people.  The people who go into government are not less self-interested than people who go into business. Constraints are needed on them.  In the economic sector, competition provides the needed constraints. In the government sector, compeition is also involved, but so is the structure of govenrment. Hence, the need for separation of powers and a reliance on federalism.  The end result for me is that the private sector does a lot of things well, but also needs basic support from the government in terms of property rights, rule of law, and so on. There remains things that government can contribute, with obvious ones like national defense.  For the rest, more discussion on the level of government that should be involved for a particular program would be helpful.  The federal government should not always be the first option.

My mentor, Harold Demsetz, wrote an article in which he argued for a comparative institutional approach. In situtaion where we recognize that the market system is not functioning as well as we would like, we should not automatically turn to government for a solution. We have to examine the actual solution government would provide (rather than some ideal solution), and determine which is better. I would add, we also need to look at what level of government would actually be providing the solution. In a world of information costs, asymmetric information, an uncertain future, and so on in the real world, the information problems and uncertainty apply to business and government personnel.

Monday, May 28, 2012

Is Jack White an Economist?

The rocker, Jack White, issued a vinyl album and limited the number of albums produced to meet the demand from some fans for something rare, ineresting and valuable. He recognized that rare and valuable had to go together.  Instead of selling them for a regular price, and letting the price rise in the secondary market, his company sold them on e-Bay and captured the higher price themselves. As one might expected, many fans were upset and complained of exploitation. He countered with some basic economic analysis. For an article on this in Forbes, see here

There have been economics articles on why ticket prices for concerts or sporting events are not higher when the demand for the event is much greater than the supply at the sale price. Examples include concert tours of big acts and the Super Bowl. Selling ticket prices for a concert at the market-clearing price may not be the long-run profit-maximizing strategy because the fans who buy the CDs may not be able to afford the concert tickets, and the group wants to keep them as fans. Even if they fail to obtain a ticket to the concert, they blame it on the popularity of the group rather than the ticket price.  In the Jack White example, the album is probably a one-time thing so the long-term consequences are likely to be slight.  Another rationale for the lower ticket prices for concerts is that there are other revenues to be had. For example, t-shirts and gear advertising that the fan attended the concert.  The profits from these are likely to be greater if the fans at the concert and younger.

Question: the article refers to a rock star who attended the London School of Economics and you can see who the star is by clicking on the link. Do you know who it is? (I did, and actually used it in an extra-credit question in History of Economic Thought. No one got it right.).

Sunday, May 27, 2012

Tyler Cowen on the Euro Zone

Tyler Cowen has an interesting column in today's business section of the NY Times. He describes the euro zone's instititutional failure in dealing with the crisis.  While the euro creates a "monetary nation", it does not create a true nation. The governments of Greece and Spain are sovereign so all the agreements that brought about the euro are international agreements.  The nation that should be the leader of the group is Germany, but Germany's past makes it difficult for Germany to exert such leadership. (Another leader could be Britain where there is a great deal of human capital in international financial arrangements, but they aren't in the euro zone). Cowen's piece is pretty negative regarding the prospects for a solution that is not very costly.  I am visiting Germany to teach a course for the third consecutive May and the Greek crisis has been in the news each time.  The first time I thought it was interesting but not terribly important, last year I thought it was important and would probably lead to further integration in the EU. This year, I am much more pessimistic about prospects for a successful solution. Something I began to think about being in Germany is that the unification of Germany over two decades ago now offers insight into what is happening in the euro-zone today. After a little research, I'll write more on it in a future post.

Thursday, May 24, 2012

Euro Leading to Political Union?

I have written a couple of times about how I thought the creation of the euro was a political and not an economic act.  There is a column on CNBC's http:/ / that says the same thing.  To see it, go to http:/ /

Wednesday, May 23, 2012

Here We Go Again with Greece

This will be the third May in a row in which I teach a course on economic policy in Germany.  The first time I included a case study on the Greek crisis since it was in the news at the time.  Later in the summer, the Greek story settled down only to come on strong again the next April/May. So, I used it again.  Now, we see Greece is again a major story and I will use it a third time.

There are some differences though. While I introduce the students to optimum currency area theory and apply it to the euro-zone, I didn't seriously consider whether Greece might exit the euro in the past.  Now I think the probability is at least 50-50 that they will exit the zone.  A lot depends on the Greek election in June, but even if the more radical elements do not win, will the people put up with "austerity" to the point where it might pay off? How long will it take?  Can they even do it or are their debts too high?

To add to the concerns is the recent French election and how the relationship between France and Germany will alter.  For most of the post-war period, France called the shots with Germany often financing the projects. But, with the passing of years and the growing strenth of Germany's economy, Germany is asserting itself more.  Both the French and German leadership have been committed to the European Union and increased political integration, but this may be changing too.

A recent book in Germany, written by a former banker with the German central bank, is roiling things more.  Thilo Sarrazin's book is entitled, Europe Doesn't Need the Euro. Chancellor Merkel has been quoted as saying the the euro fails, then Europe fails.  It should be an interesting time in Germany