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

Below is an e-mail I sent to Squawk Box this morning after hearing two of the hosts debate whether President Obama's policies are ant-business. In a CNBC interview yesterday, the president said that he was in favor of markets. My message was:

Three comments on the discussion this morning between Joe and Carl about whether the Obama Administration is anti-business. First, the financial firms on Wall Street and business are not one and the same. Obama is correct when he says that the financial sector is to facilitate business. Second, Obama is clearly in opposition to the market system since he wants to use taxes and subsidies to reallocate resources in the economy. Obama is smart and the danger of smart presidents is they think they know better than the market where to invest capital. Third, many business leaders, especially of large corporations, don't favor the operation of the market system. They want tariffs when facing import competition, or tax breaks, or subsidies and so on. Crony capitalism is often favored by business and members of both major political parties.

I will elaborate more later, i.e., when this semester is over.

Daylight Savings Time

I live in West Michigan, which is the western edge of the Eastern Time Zone. Summers are great, with it being light until about 10:00. But, with the earlier move to daylight savings, its been dark in the morning. My wife has often asked whether daylight savings actually saves energy. A recent study by an economist says no--daylight savings causes an increase in electricity usage. For many years, part of Indiana went to daylight saving time and part did not, so there was a natural experiment when the rest of Indiana went to daylight saving time. The result--greater electricity usage in the counties after they went to daylight saving. The counties that had been using daylight saving for some time were the control group. I understand it was Ben Franklin's idea originally, so even Ben could be wrong.

What Happended to Toxic Assets?

This is the most hectic semester I have had since arriving at Hope College. One result is that the quantity of posts to my blog is down. I will try to improve after spring break, during which I will be an expert witness and not catching up on my classes. I feel as if I am following the Japanese auto model--"just-in-time" teaching. I don't recomment it.

On another note. Sen. Dodd has put forward a plan for financial regulation. It made me wonder what ever happened to the toxic assets we heard so much about a year or more ago? A toxic asset is not necessarily a bad asset or a valueless asset. A toxic asset is an asset for which the value is unknown. It may be that the banks and other market participants now know the value of the assets, have written off the bad ones and are comfortable with the good ones. I don't know and haven't heard anything about it.

Another question I have concerns the failure of banks to extend loans. I understand that the number of loans is down. But there could be two reasons--people with a lot of debt already are not applying for loans, or people are applying but banks are turning them down. Actually, it is likely both are partially correct. But banks are more likely to be cautious if they still have toxic assets on their balance sheets, which brings me back to my first question. I am hopeful that recovery will build but am still concerned about some weaknesses that may still exist in the economy.

Trade Volume Increasing

A study by a Dutch group finds that the volume of world trade has been increasing rapidly. (See the Financial Times article here.) The increase in world trade is a good sign that the world economy is improving. Still, there are concerns with Europe and the problem associated with Greece, and in the sustainability of our own recovery. At this point, I am willing to take good news when it appears.

Interview of Larry Summers

The transcript of an interview with Larry Summers is available here. Karen Finerman of CNBC interviewed Summers, asking about the economy, Greece, and other current economic issues.

The Stimulus One Year Later According to Robert Barro

Robert Barro has an op-ed piece in today's Wall Street Journal. In it he opines on the effectiveness of the stimulus package, based on estimates of the government spending multiplier he has estimated. His estimates are less than unity, which means that an extra $900 billion of government spending leads to an increase in GDP of less than $900 billion. This differs from the claims made by others such as Paul Krugman, who believes the stimulus was vital but too small. I am unaware of any economic research Krugman has done on the spending multiplier, but he presumes that when there is slack in the economy, such as in a recession, the "crowding-out effects" that might occur in normal times will not take place.

But Krugman's arguments are based on the Keynesian model, which was rejected by much of the profession because of empirical evidence. It also is based on an over-arching concern on the short run. But, it was an emphasis on the short run, as exemplified by government, business, banks, and households, that helped create the problems we currently have. We may yet develop the situation that Keynesians believed after World War II--the economy was inherently unstable and persistent efforts by the federal government would be needed to maintain growth. If so, I believe a key reason for it will be government policies that focused so much on the short run that market forces were not permitted to provide a sustainable growth rate.

Allan Stockman dies

I just learned from the Cowen/Tabarrok blog (Marginal Revolution) that Allan Stockman died. I met him several times. He worked on a post-doc at UCLA while I was in grad school there. He then moved on to the University of Rochester where he spent his career. He wrote a principles of economics text, and I participated in a panel that read portions and offered comments on it. He was a first-rate economist, specializing in international finance. An obituary is here.