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.

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.

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.

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. 

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.

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.

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.