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.

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.

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.

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.

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.

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.

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.