Thursday, April 30, 2009
From the Tax Foundation. Growing up in Manchester, NH (about twenty minutes north of Nashua) meant you heard many of these stories. NH has state liquor stores, many of which are strategically placed near the state borders. I once observed a snow fence being put up near one along I-93 (one of two main highways between NH and MA.) Turns out the fence was to protect the license plates of liquor store patrons from being viewed by MA state patrol on the other side of the border. It's clear who that liquor store markets to.
A bill has been passed in the New Hampshire Senate that would protect New Hampshire businesses from being forced to collect sales taxes for other states. The bill, proposed earlier in the year by Governor John Lynch, is a reaction to reports that Massachusetts revenue officials have been bullying New Hampshire small businesses in order to get the businesses to do their bidding and collect sales tax on sales to Massachusetts residents. The bill will probably pass the House without a problem.
The issue stems from the fact that New Hampshire has no state sales tax while Massachusetts has a 5% sales tax. Because of this, Massachusetts residents who live close to the border have an incentive to shop in New Hampshire. Massachusetts is apparently not pleased with all this tax avoidance, and is putting the pressure on businesses to collect sales tax.
That couldn't happen in MN, could it? Maybe.
Now, our POTUS is being fawned over as having "calm under pressure" (for an example, see this style article in the WaPo regarding last night's "First 100 Days" performance.) Yet, something is wrong.
This morning while at my fitness center, I watched all 12 minutes or so of Mr. Obama's performance on his takeover of the auto industry. Not once did Mr. Obama look the camera straight in the eye. Never did he talk directly to us, his American audience. The entire speech was given while Mr. Obama looked from side to side.
Why doesn't he talk to the camera directly, as did Presidents Reagan and Bush? Why is Obama afraid to look straight ahead? He has given enough speeches (written and printed for him) that fear of speaking is not an excuse.
My experience over decades of seminars, teaching, sales presentations, etc. have taught me that when experienced speakers do not look you in the eye, they either know that what they are saying is not kosher or they're hiding something.
Could it be that Mr. Obama knows that his actions are killing freedom?
What's the main thread in these disparate stories? It's the brilliantly acute insight that running an organization � be it commercial or otherwise � is hard. Remaining afloat is hard. Making payroll can be extra hard.Link added. How hard is it to run a company? So hard that people who naturally would have an affinity for government are fuming over the intrusions of President Savoir-Faire (or is that Savior Faire?)
Let's say you own a new business. Every dollar you have may be tied up in it. Sure you fantasize about getting rich, but for the time being at least, just about everything in your life is consumed by your dream. Your employees also rely on your success for their own families to stay fed and sheltered. Sleepless nights aside, you take satisfaction in contributing to your community in the most tangible ways you can: providing products, services and jobs. Not incidentally, you also generate a reasonably steady stream of tax revenues.
But then you fire up your computer one morning and read that DFLers in the Minnesota Legislature � on the off-chance your business has a decent year despite the worst economic downturn in three-quarters of century � expect you to pay one of the highest income tax rates in the country: 9 percent if their House bill prevails; 9.25 percent if their Senate bill does.
I'm not unmindful of how difficult it is to balance a biennial budget that's almost $5 billion out of whack. But I'm more mindful and admiring all the time of what it takes to run a successful business and how dependent we are on the men and women who do so here � as opposed to the overwhelming majority of other states with lower tax burdens. (Note: The personal income taxes of many business owners are based on their companies' revenues.)
Ayn Rand once noted that "The American businessmen, as a class, have demonstrated the greatest productive genius and the most spectacular achievements ever recorded in the economic history of mankind. What reward did they receive from our culture and its intellectuals? The position of a hated, persecuted minority."
As of last night�s deadline, we were part of a group of approximately 20 relatively small organizations; we represent many of the country�s teachers unions, major pension and retirement plans and school endowments who have invested through us in senior secured loans to Chrysler. Combined, these loans total about $1 billion. None of us have taken a dime in TARP money.
As much as anyone, we want to see Chrysler emerge from its current situation as a viable American company, and we are committed to doing what we can to help. Indeed, we have made significant concessions toward this end � although we have been systematically precluded from engaging in direct discussions or negotiations with the government; instead, we have been forced to communicate through an obviously conflicted intermediary: a group of banks that have received billions of TARP funds.
What created this much-publicized impasse? Under long recognized legal and business principles, junior creditors are ordinarily not entitled to anything until senior secured creditors like our investors are repaid in full. Nevertheless, to facilitate Chrysler�s rehabilitation, we offered to take a 40% haircut even though some groups lower down in the legal priority chain in Chrysler debt were being given recoveries of up to 50% or more and being allowed to take out billions of dollars. In contrast, over at General Motors, senior secured lenders are being left unimpaired with 100% recoveries, while even GM�s unsecured bondholders are receiving a far better recovery than we are as Chrysler�s first lien secured lenders.
It is these people that some want leading the charge to combat swine flu.
We began by passing a Recovery Act that has already saved or created over 150,000 jobs ......and I wanted to know, how do you know that? John Kartch (h/t: Gary) notes a comment on such calculations by Sen. Max Baucus (D-ID):
You created a situation where you cannot be wrong. If the economy loses 2 million jobs over the next few years, you can say yes, but it would've lost 5.5 million jobs. If we create a million jobs, you can say, well, it would have lost 2.5 million jobs. You've given yourself complete leverage where you cannot be wrong, because you can take any scenario and make yourself look correct.So where do they get away with a number like that?
Actually, I thought this was easy. The administration has claimed that ARRA ("the stimulus bill") will "save or create" 3.3 million jobs in 2 years. So I thought perhaps what they were doing was taking the date of signing, Feb. 17, computing how much of two years had passed (71/730 ~= 9.7%) and ... well, that doesn't work, because on a pro-rated basis they would get to claim 321,000 jobs.
I thought then maybe he had specific numbers. I recall him saying that he was told Caterpillar would call back "some of" the 20,000 in layoffs it had originally called for. (UPDATE: Added the words some of, as stated in the transcript. I apologize if I implied he meant "all of" those jobs.) But that doesn't work out either, because Caterpillar is still laying off. Initial filings for unemployment insurance have risen through the first 100 days, though today's number is a hopeful step downward.
As most people have mentioned, the bill has a ramp-up in spending, so that much of the money happens in FY 2010. Maybe he's projecting less. But doesn't someone in the White House owe us an explanation of that number? Don't we get to see a projection here? Why 150k and not 200k or 300k? They've hired more economists than Allan Iverson hires posse, so someone has to have done this number. (Tried CEA, they've done one report. I know Prof. Romer is more productive than this!) If someone in the White House press corps should happen to read about this, please ask press secretary Gibbs to get us a determination of how this number was calculated. (UPDATE after video)
UPDATE: The following morning, apparently (and after this post is written), Prof. Romer gets up before the Joint Economic Committee and pulls the same number out, as Spencer notes in comments. (I guess I was supposed to write this knowing her testimony a priori.) She says:
I have been told by the Office of Management and Budget that approximately $75 billion in spending under the ARRA has been obligated and almost $14 billion in outlays have already occurred. During the first 100 days in office, which the Administration marked yesterday, we estimate that the ARRA has already saved or created 150,000 jobs.The nearest footnote that explains what arse she pulled that number from is the Great Multiplier Manifesto, written by her and Biden economic adviser Jared Bernstein while the Obama team was still in transition. Here's the formula (p. 5):
We take an estimate of the amount of spending related to a component and apply the relevant multiplier to estimate the likely overall effect on GDP. The total effect on jobs is then estimated using the 1% of GDP equals 1 million jobs rule of thumb.So let's connect the knee bone to the shin bone. $14 billion is spent in current quarter (Feb. 17 to current, not a traditional quarter, but hey!), and first quarter multiplier is 1.05 (p. 13.) So impact on GDP is $14.7 billion. Current dollar GDP for 2009Q1 is $14,264.2 billion. Total change: 0.103%. Using the "rule of thumb" means 103,000 jobs. Not 150,000. The only way the other 47,000 jobs show up in a calculation is to use a long-run multiplier (the famed 1.57) that would give you 157,000 jobs. But that means the administration is counting jobs their models predict WILL SOMEDAY HAPPEN due to their spending now.
This assumes, of course, that you buy the Great Multiplier Manifesto hook, line and sinker. And that you'd like to brag that you managed to "create or save" 103,000 jobs while not saving 1,314,000 others since Feb. 1. This latter number will be updated with the April job loss figures a week from tomorrow; that number could add another 500,000 to the total of jobs not created and not saved.
Wednesday, April 29, 2009
This puts a big hole in the Obama administration�s economic projections for the next year, and also for the long term. The OMB based its deficit projections on an assumption that the US economy would return to growth this year, which this GDP puts in severe doubt. With the economy barely moving towards the positive from the worst quarter in 26 years, these numbers look like sheer fantasy...As Casey Mulligan reminds us, you have to look at a 6.1% decline as it's written, as a seasonally adjusted annual rate. The actual amount GDP fell in the first quarter is 1.56%. 6.1% is the answer to the question: "what would happen if GDP fell 1.56% per quarter for four consecutive quarters?" It hasn't yet. The administration is forecasting a -1.2% change in real GDP year-over-year for 2009. In dollar terms, that's $11,512.2 billion. First quarter GDP clocked in at $11,340.9 billion. That would make real GDP on average for 2009 need to come in around $11,569 billion to make the administration's forecast come true, an average growth rate of 2.7% for the last three quarters of 2009. In contrast, the Blue Chip survey currently expects a 2.6% decline in real GDP, to $11,349 billion, so roughly flat GDP performance from here on. Which of these is true? We don't know yet. (Blue Chip, btw, had a drop of 5.1% expected for Q1; I had penciled in 5.5% in a contest my forecasting class had. Two of seventeen students beat me.)
So everyone expects some numbers to pick up. Inventories got stripped, particularly in autos where consumption of motor vehicles were up at the same time the industry had dropped production to very low levels. Both of these data would indicate that for those firms that survive, it might be safe to bring a few workers back and get production going again. Personal consumption was up overall in Q1, and leaner household budgets seemed to favor more domestic goods, as imports dropped substantially (consuming imports is a drag on GDP.) You don't have to be as optimistic as Brian Wesbury to see something to a turnaround in the offing here. If you visualize an economic cycle like a sine wave, we've moved past the point of inflection and are coasting towards a bottom.
Ed also writes:
Some will say that the stimulus package has not had enough time to work. It passed in mid-February, though, and six weeks of government spending didn�t move the needle. That highlights its greatest weakness: it doesn�t actually provide short-term stimulus. Republicans kept pointing out that most of the spending came after 2009, and half of it after 2010, when by the Obama budget projections the economy would already be in recovery.The truth on that remains to be seen. The bill wasn't passed until half the quarter was over; projects had little opportunity to start before the end of the quarter. You might argue that there's an expectations effect of higher government spending, but I don't necessarily think that is needed. FY 2009 is supposed to put on $120 billion in new spending, meaning that amount is spent by September 30. The outside lag for fiscal spending (the multipliers) usually have their effects pretty quickly. There's also $64 billion in tax provisions (I dare not call them tax cuts, since you can't cut zero) that should further butress consumer spending. (Source for these data: CBO.) Add zero interest rates to that, and it's not at all out of the realm of possibility that the Obama budget numbers could be right.
It's this current quarter that will tell the tale. For that budget to have any possibility of working, the slide pretty much needs to stop right now. In the recession language we used here for some time, that would be a V recession rather than a U. I would not bet on a V, but I also would not say it's "sheer fantasy".
Tuesday, April 28, 2009
I am probably the most sympathetic conservative to the idea of removing tax preferences in legislation, but I think Rep. Ann Lenczewski has missed the main message of tax reform. The lesson from 1986 was that you could only trade their removal for lower tax rates. The 2005 tax reform proposal at the Federal level was an example of this as well. But removing tax preferences makes substantial changes in the tax price of certain economic activities. Removing the tax preference for home ownership raises the cost of it, at a time when the market needs to stabilize. The plan Lenczewski proposes reminds me of nothing so much as the famous yacht tax. The home construction industry is probably in worse shape in 2009 than the boat-building industry was in 1990. Million-dollar mortgages support million-dollar homes which support many electricians and carpenters. A phase-in during a period of robust home construction would make much more sense than the present bill.
I could go on, but time is short. I outsource my own thoughts on tax reform to Alvin Rabushka.
Monday, April 27, 2009
I don't see Obama the way Eric does, so perhaps I'm less disappointed than he is, even though I am half-Armenian. But you can hardly be surprised any politician, when faced with a group of voters who say "do anything else, but just promise me X," from making that promise. I guess Eric's surprise is that Obama turns out to be a politician.
I want to be mature and reasonable about such matters. Turkey is an important U.S. ally of long-standing, borders on Iraq and Iran and Syria (and the independent state of Armenia) and has one of the most developed democracies in the Muslim world. The argument is fundamentally historical, and not everyone cares as much about history as I do. Pissing off Turkey is not something to be done lightly.
But all of those reasons were well-known before Obama made his commitment to recognize the Armenian genocide. Like many Americans, I want to believe Obama represents an important break from the politics of lies and fancy spin, a break that has to do with honesty, integrity and promise-keeping. I still do believe that, but not on this matter.
If he wasn't going to keep the promise, he shouldn't have made it.
I was unaware that Eric had interviewed Vahakn Dadrian; I attended Dadrian's talk here at SCSU during that trip in 2000. If he has a copy of that interview still, I will want to read it.
Thanks as well to the mention on Hot Air from my good friend Ed Morrissey.
I got that this morning, and then had another prof tell me the discussion in his intermediate macro course. There's both a supply and demand effect, but my guess is that the supply effect (through a growth model) is the most frequently used answer to this question. Tyler Cowen links to this NYT article from 2007 in which mortality was greatly reduced by quarantines and public transportation closings. But that disrupts production much like a terrorist attack. In both cases, the estimated impact is relatively low. (Ditto Katrina.)
It does seem though that if the effects of swine flu are widespread, you'd see more capital deepening, meaning that each worker has to become more productive because they have more capital to work with. If labor becomes more scarce, you'd see an increase in wages, and you'd probably some attempt at capital substitution. The Spanish flu story is a reminder that the numbers could get big enough to create these kinds of effects. It takes much longer to rebuild labor than capital that is suddenly destroyed.
I am 61 years old. I have lived and worked in Britain all my life. Not even in the dark days of penal Labour taxation in the Seventies did I have any intention of leaving the country of my birth.
Despite a rumour put around some years back, I have never contemplated leaving Britain for tax reasons. But in the 40-plus years I have been lucky enough to work here, I've seen a bit. So I must draw your attention to what is really proposed in this Budget.
Here's the truth. The proposed top rate of income tax is not 50 per cent. It is 50 per cent plus 1.5 per cent national insurance paid by employees plus 13.3 per cent paid by employers. That's not 50 per cent. Two years from now, Britain will have the highest tax rate on earned income of any developed country.
I write this article because I fear the inevitable exodus of the talent that can dig us out of the hole we find ourselves in. It is inevitable, given that other countries are bidding for entrepreneurs.
Give up? Suppose I said "composer" rather than "author". Link below.Meanwhile, let's consider what Senator Tom Bakk, whose bill to put up tax rates in Minnesota is now in conference with a competing bill by Rep. Ann Lencewski (she deserves her own post, which will have to be tonight), said about alcohol and income taxes:
The new income taxes would raise virtually everything Senate DFLers were looking for in new revenue to help erase a $4.6 billion deficit through the middle of 2011. They are also proposing across-the-board spending cuts and using federal stimulus dollars.So people would drive across the border for alcohol if we raise the tax on booze, but if we raise the tax on work they'd stay put? Not just the top rate either. As Sen. Julianne Ortman pointed out on my show Saturday, the Bakk plan gives us two of the top ten state income tax rates in the U.S. Bakk seems impervious to the idea that life location decisions are as influenced by tax rates as booze purchase decisions.
Senate Taxes Committee Chairman Tom Bakk said tax cuts of the 1990s were unsustainable and the state needs more money for priorities such as schools, even though the Senate voted to cut K-12 education.
Bakk said the reductions would be deeper without new tax dollars.
"It's a huge deficit that the state is facing. Everybody's going to have to participate in the solution," said Bakk, a Democrat from Cook who is preparing to run for governor.
...Bakk said eliminating the current mortgage interest deduction could hurt Minnesota's high rate of homeownership and higher alcohol taxes would drive some liquor shoppers across the Wisconsin border. [Both these provisions are in the House bill --kb]
Bakk said about 85 percent of taxpayers would pay more under his plan, but most of the money would come from people with the highest incomes. ...
The Senate tax bill would raise the lowest rate, 5.35 percent, to 6 percent on income of up to $31,860 for married couples filing jointly. The middle rate would rise from 7.05 percent to 7.7 percent on income between $31,860 and $126,580. The current top rate would climb from 7.85 percent to 8.5 percent on income of $126,850 to $250,000.
The new fourth-tier rate of 9.25 percent would apply to incomes starting at $250,000 for married couples, $141,250 for single taxpayers and $212,500 for single heads of household.
The Briton who doesn't believe this? Andrew Lloyd Webber. H/T: Stephen Karlson. Webber notes a young entrepreneur in the stage construction industry:
Under the new tax regime, he will have to pay 13.3 per cent to employ himself before he pays himself anything. And then he will have to pay 51.5 per cent on what's left.I realize Sen. Bakk lives on the other end of the state, but he might want to pay a bit of attention to Sioux Falls.
This is a guy at the cutting edge of his profession who works all over the world. He is in demand in every major territory where entertainment is produced. He has a young wife and two children. Last Thursday he told me that he and his wife had decided that the UK was no longer where they wanted to live.
His wife thinks the State education system is inadequate. And she fears that a bankrupt Britain will increasingly be a worse place in which to live as the horror of our present financial mess hits us all in the solar plexus.
He says that he is young enough to set up shop somewhere else. The new tax rates were the final straw. These talented young people know they will make it impossible for them to educate their kids privately in the UK.
So Britain plc loses not just the 40 per cent he would have paid in personal taxes under the old regime - plus NI and everything else - but... Come on, I don't need to explain the knock-on effect. It's obviously huge and immensely damaging ...
I am an economist who first wrote about governance issues of central banks in 1983. Since then I have written several articles about the central banks, including the Federal Reserve. I'm opposed to the Fed audit bill sponsored by Reps. Ron Paul and Michele Bachmann, among many others. ...I'm not at liberty to quote the response from one of the supporters, but I can characterize the response as focused on some deeper issues of loss of control of the money supply to a "single world order". He also noted the loss of value of the dollar since the Fed's founding. I responded:
My work has centered on a central bank's independence from executive and legislative control. The received wisdom of central banking scholars over the last 25 years has been that the more independent a central bank is, the better it is at controlling inflation. Inflation works as a tax on people's holding of money; when a central bank is controlled by government, the government is better able to use money creation to augment the resources it can seize from the people. (It seizes by printing something for nothing called money and then buying goods from people for this paper. It creates a monopoly for money creation to support its ability to use this "inflation tax".) Leroy Laney, Tom Willett and I wrote one of the two first papers about this in 1983 in the Economic Review of the Dallas Federal Reserve Bank, and countless others have supported our findings since then.
Some central banks use internal auditing procedures. The Fed has an internal Office of Inspector General that provides an audit: , and that report also contains an audit statement by Deloitte and Touche. What H.R. 1207 proposes is to replace that audit with something controlled by Congress. I believe this is a mistake.
The use of an audit imposes legislative control on a central bank and reduces its independence. In the case of this bill, that audit would be a Congressional act and would invite the meddling of the Democratic majority, led by Barney Frank and Chris Dodd. I cannot see this as being a positive; they are more likely to interfere at the key moment coming up, when banks begin to lend again and the Fed must withdraw the extra reserves they injected to support the banking system over the fall and winter. They are far more likely to delay that withdrawal than speed it up. That delay will lead to extra inflation.
Thanks ... for agreeing that a more independent Fed would be better at controlling inflation. That is the only job it can do well, a lesson it has learned the hard way, at great expense to America. But it was not the Federal Reserve's decision to move us from the gold standard which would have protected the dollar's value. FDR suspended gold payments to individuals; Bretton Woods was signed by FDR; Nixon closed the gold window and ended BW. These were the decisions of Congress and the executive, the people you now want us to vest with the power to audit the Fed.Rep. Bachmann continues to focus on losses on the books of the Federal Reserve as if the money it is losing came from taxpayers, most recently on the Maiden Lane losses. Yet that money comes from funds the Fed has already gained by interest on Treasuries its collected in the past. That money was already paid out -- they are sunk costs to the government. If Rep. Bachmann and Rep. Paul would like the Fed to stop buying Treasuries, that is a different bill than the one proposed.
I would only reiterate that the bill puts an audit by government replaces a private audit, and permits that audit to make recommendations to Congressional leaders, including the leaders of the two banking committees, who happen to be the guys who did such a great job looking after Fannie and Freddie. As a matter of monetary policy, this is a bad idea.
The audit bill is at base a stalking horse of Congress to remove the quasi-constitutional independence of the Fed. The history is quite clear, and it is to the detriment of those Republicans not named Ron Paul that they sponsor this bill. They are paving the way to higher inflation at the very time they decry the potentially inflationary impact of high budget deficits.
Friday, April 24, 2009
- They came for him
- before the birds were up�
- he left without shoes
- or tie, shirt or suspenders.
- It was quiet.
- The birds, the birds
- were still sleeping.
Many Armenians refer to April 24 as Genocide Remembrance (Recognition) Day, but Martyr's Day is the most often used term, and this year has a special flavor for two reasons. First, the diaspora community is excited at the possibility that President Obama may fulfill a pledge he made during the campaign (that I talked about last month.) And now we have news that after 94 years we may begin to see a relationship between Turkey and Armenia as nations.
Turkey and Armenia said they agreed on a "road map" to restoring relations, shortly before U.S. President Barack Obama is to make a closely watched statement Friday on the 1915 mass murder of Armenians in the Ottoman Empire.It is a breakthrough, but it has been worked at for some time. We have had meetings on this for years, many mentioned on this blog. (Example.) The resistance to this is not one-sided. The Turks would like re-opening, and so would Armenians, but both
The road map, worked out in marathon talks with U.S. and Swiss mediation that lasted late into Wednesday night, sets out a "sequence of steps" that the historical foes must take toward restoring diplomatic relations and reopening Europe's only closed international border, according to people familiar with the matter.
The statement was a breakthrough, these people said, because for the first time both sides have gone on the record saying they had agreed to a framework for reconciliation. No time frame has been agreed upon.
There is suspicion among some Armenians that the Turks have made this agreement to forestall recognition by the U.S. Maybe it will, but for the people in Armenia what matters more, Obama's statement or increased trade? That's a question that will be heatedly debated among them.
So I sit here waiting for the Obama announcement (I'm going to go to lunch then see what he says when I get home -- so far, nothing) I wonder how those who pinned their hopes for recognition on The One's election will feel if they don't get what they thought they would.
He says it, just not in English. Instead, he says it in Armenian: meds yeghern.
Do I wish he had said "genocide" in English? Yes. Let's be clear that calling it The Great Catastrophe (or Calamity) he's borrowed a term Armenians use instead, one that Pope John Paul II used in 2001. Bush used this same term in English in 2005. The Armenian National Institute keeps a collection of presidential proclamations. Maybe Obama wanted to show off his language skills, but he's certainly not pressed the reset button with this little trick. The Armenian National Committee of America's chairman Ken Hachikian is pretty miffed:
Ninety four years ago, one of the great atrocities of the 20th century began. Each year, we pause to remember the 1.5 million Armenians who were subsequently massacred or marched to their death in the final days of the Ottoman Empire. The Meds Yeghern must live on in our memories, just as it lives on in the hearts of the Armenian people.
History, unresolved, can be a heavy weight. Just as the terrible events of 1915 remind us of the dark prospect of man�s inhumanity to man, reckoning with the past holds out the powerful promise of reconciliation. I have consistently stated my own view of what occurred in 1915, and my view of that history has not changed. My interest remains the achievement of a full, frank and just acknowledgment of the facts.
�I join with all Armenian Americans in voicing our sharp disappointment with President Obama�s failure to honor his solemn pledge to recognize the Armenian Genocide.�ANCA tracks Obama's campaign promises and other statements here. To ANCA I say, you were warned.
�In falling short of his repeated and crystal clear promises, which reflected a thorough knowledge of the facts, the practical implications, and the profound moral dimension of Armenian Genocide recognition, the President chose, as a matter of policy, to allow our nation�s stand against genocide to remain a hostage to Turkey's threats.�
�The President�s statement today represents a retreat from his pledge and a setback to the vital change he promised to bring about in how America confronts the crime of genocide.�
POSTSCRIPT: From Armenian President Serzh Sargsyan's interview with the Wall Street Journal published this morning:
WSJ: On April 24, President Barack Obama is due to make a statement on Armenian memorial day. The focus is on whether he uses the term genocide or doesn't. Right or wrong, it seems clear that if the U.S. recognizes the genocide that will make the Turks less willing to engage with Armenia. Which is more important to you? The U.S. genocide recognition now, or success in these reopening talks with Turkey?
Mr. Sargsyan: I think already now the motivation of Turkey has decreased, because as you said Prime Minister Erdogan is now offering preconditions. I believe it is not us Armenians who push the U.S. to recognize the genocide. The U.S. had its diplomats, missionaries and businesses in the Ottoman Empire, as well as its insurance companies, on the ground at the time of the genocide. The amount of evidence, the amount of factual materials the U.S. possesses on the matter of genocide is excessive and is as convincing today as it was years ago. Therefore the moment the U.S. finds it necessary to recognize the genocide they will do it�I don't believe we are pushing people into a dilemma between national interest and moral standing.
WSJ: So your preference, the preference of the Armenian government, would be for Mr. Obama to recognize the Armenian genocide, even if that puts the last nail in the coffin of any deal with Turkey to open the border any time soon?
Mr. Sargsyan: I would not like to see this process in a coffin. I would like us to be more open and broad-minded when watching this issue. That is why we want this issue of genocide not to be an obstacle to our relations with Turkey. After all, by recognizing the genocide neither we nor other countries that recognize it want to harm Turkey. I think this matter is very straightforward, restoration of justice and prevention of genocide in the future. Because if we try to tie relations between Armenia and Turkey to recognition of the genocide by one country or another �Armenian-Turkish relations will always be the footballs of other countries. If some countries decide to create difficulties in those relations, they would just announce a recognition of genocide and so would compromise relations between Armenia and Turkey. Once again, it is not we who are pushing the U.S. to recognize the genocide.
As I've said repeatedly, the issue of genocide recognition is a diasporan issue, not an Armenian issue. Sargsyan will take a good amount of abuse for this statement among the diaspora (it matters in Armenia too, but you get a different flavor there).
TCF Financial Corporation announced Wednesday that it had completed the repurchase of its TARP preferred stock from the U.S. Treasury. It paid a redemption price of $361.2 million plus accrued dividends of $3.4 million.Contemplate that last sentence: The government required TCF to drop its dividend in order to repay its loan. Would a bank be allowed to make you drop your kid's allowance from $5 a week to $1 before you could pay off the auto loan early? Banks in trouble often end up in agreements with the Fed that include seeking permission to pay any dividends, but banks were brought into TARP as a matter of solidarity, even patriotism. Solidarity isn't free, I guess.
TCF Chairman and CEO William A. Cooper said the bank had maintained a strong capital position over the last year through its own operations, and it didn�t need to rely on the public capital infusion to continue its traditional lending pace. Cooper said TCF is the largest bank to pay back TARP funds to the U.S. Treasury.
TCF�s executives had complained that Treasury and the U.S. Congress had subverted the TARP program by changing its rules after banks had joined. Those rules added controls over compensation and dividends programs, and Cooper said those changes contributed to a stigma of weakness and reliance on public support � a stigma that didn�t reflect his bank�s condition.
As part of the agreement for withdrawing from the program, TCF also agreed to reduce its first-quarter dividend from 25 cents to 5 cents.
How many pints of blood will be taken from the others?
U.S. banks that get preliminary results today of U.S. government stress tests may struggle to raise money after bad assets at the biggest lenders almost tripled on average in the past year.Emphasis added.
Pittsburgh-based PNC Financial Services Group Inc. saw nonperforming assets -- those no longer accruing interest -- jump more than fivefold in the first quarter from a year earlier. They more than quadrupled at U.S. Bancorp in Minneapolis. At 13 of the largest U.S. banks, bad assets increased 169 percent on average from a year ago, according to first-quarter data compiled by Bloomberg.
The tests on the 19 largest banks are likely to focus in part on loan quality as a measure of health. The lenders, which may need to raise $1 trillion in capital to cushion losses according to an April 23 KBW Inc. report, may have a hard time persuading investors to give them cash.
If the banks learn the results of the stress [tests] today, �it�s a week plus until we find out, that�s where the danger is,� said Anton Schutz, president of Mendon Capital Advisors Corp. in Rochester, New York, which manages $150 million of financial stocks. Schutz runs the best-performing financial stock mutual fund over the past year, Burnham Financial Industries. �You get market movement on what might be fact or fiction,� he said.
Even if banks say their capital levels are adequate, the government could require them to raise more money, JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said April 16 during the firm�s earnings conference call.
�I don�t know what we need to do because it may not be solely up to us,� Dimon, 53, said in response to a question about whether the firm was planning to issue new equity. �I don�t think we need it.�
The Senate has agreed to spend $5 million to investigate the cause of the economic crisis as it moves toward passing a $245 million bill that would substantially increase the number of FBI agents and prosecutors working mortgage fraud.You're going to investigate yourselves? And you need $5 million to do that?
The legislation is aimed at showing voters that lawmakers are serious about getting to the bottom of the nation's financial woes, even as they struggle to agree on how to improve the economy and prevent it from getting worse.
"We must hold those responsible for this calamity to account," said Sen. Kent Conrad, D-N.D.
OK, that might be too flip a response. But if you look beyond Congress you will never stop looking, or you will have a fight between potential sources of instability that ends up pinning blame on the basis of political connections (or lack thereof.) You cannot pinpoint one or two items and say "if not for that..." There are already books with competing claims. One thing a Congressional committee is not, is an editorial board, or a set of scientific referees.
I expect they'll do it anyway, though, and we should be grateful it only costs $5 million.
Thursday, April 23, 2009
A puzzle has been solved. Despite their intense interest in sports, no golf courses exist in the Socialist-Communist bloc. Why is golf solely in capitalistic societies? Because it is not merely a sport. It is an activity, a lifestyle; a behavior,a manifestation of the essential human spirit. Golf's ethics, principles, rules and procedures of play are totally capitalistic. They are antithetical to socialism. Golf requires self-reliance. independence, responsibility, integrity and trust. No extenuation is� granted misfortune, mistake or incompetence. No second chances. Like 1ife, it is often unfair and unjust, with uninsurable risks. More than any other sport, golf explo1ts the whole capitalist spirit.The rest is here. Reflecting on this, John Bunzel a few years ago related the story of former Detroit Lion Alex Karras, who said "My best score is 103, but I've only been playing 15 years."
There's hope for me yet. And given the sunny day and the end of classes for me this week I take my leave.
Thanks to Bill L. for the scannable piece. I will note a html copy from Emilio Pacheco.
The turmoil after the Lehman Brothers failure is not so much an argument for intervention in that case, but rather an indicator of the impossibility of implementing a clear bright-line rule for bailouts. Efforts to distinguish a bright line between Bear Stearns and Lehman Brothers, and the lack of a consistent policy coupled with the multiple efforts to address the crisis, contributed to the angst visited upon market participants during 2008 and 2009. Even with the economic analysis resources at its disposal, the Federal Reserve has been unable to reliably predict contagion or judge an appropriate timing or level of intervention. Like the FDIC, the Federal Reserve has also been opaque with regard to the precise institution-specific reasons for intervention, which is seemingly at odds with Chairman Bernanke�s historical emphasis on transparency regarding central bank policy.I read a draft of this paper that Vern sent, and liked the focus on "clear evidence of contagion" for bailouts. (I think he and I agree less on whether there was clear evidence last September, but clarifying the criteria is useful.) It is not, as they say in the introduction,
...that the failure of an institution will impose losses on a broad array of creditors, shareholders, and counterparties, or that it will present a challenging or difficult receivership or bankruptcy process to work through. Even if a standard can be articulated, it is another matter to successfully implement that standard in practice. We believe that the lack of a clear standard and the shifting efforts at implementation have exacerbated the current financial turmoil by sending confusing and inconsistent signals to market participants.There is still the problem of convincing angry taxpayers and their supporters on Capitol Hill that contagion is a clear and present danger (if it does exist.) Those that try tend to get no thanks for their efforts, but I would prefer that those who see contagion work harder to make the case than telling the naysayers like Malkin to just shut up. As McKinley and Gegenheimer argue, that case isn't easy even for experts.
As I get closer to teaching money and banking next month, I'll focus on more of these papers. This one will be on the course reading list, which I will post (I'm in fact going to replicate my 2005 intro to econ series -- example -- with the lectures from this one -- this time maybe with sound and video??) Suggestions for additional readings invited in comments.
I thought this open favoritism couldn't happen here. But:
- Chrysler's four banks are being asked to take much less than expected on their Chrysler debt. Stuart Varney warned a few weeks back, "If Rick Wagoner can be fired and compact cars can be mandated, why can't a bank with a vault full of TARP money be told where to lend?" Well, who are the four banks? JPMorgan Chase & Co., Goldman Sachs Group Inc., Citigroup Inc., Morgan Stanley, and a bunch of investment funds. All four banks are on the list of TARP recipients.
- A bill in the Minnesota House blacklists a company for unfair labor practices "past and present" even though the federal agency charged with making the determination has not found any violations. Its crime? Handing its employees information about unionization that doesn't favor unions. In effect, the bill requires the company to relinquish its First Amendment right to free speech on its own premises in order to sell goods to government.
At 87 Gordon's mind is as sharp as ever. No scholar has done more than Gordon to disabuse people of any romantic or religious notions that they might have about the nature of government. ...I have several recollections of Tullock, the first of which is here. I hold out hope that I will yet get to meet Alchian. As a macroeconomist I would have put other names on Boudreaux's list of who deserves it as much -- Tom Sargent and Jagdish Bhagwati, for example -- but I'd be pleased if Alchian or Tullock went first.
Among the most important of Gordon's insights are
- his demonstration that good political decisions are public-goods no less than are the public-goods that allegedly are provided in only sub-optimal quantities on private markets;
- his demonstration that people and institutions spend resources in socially (if not privately) wasteful way seeking privileges from government;
- his demonstration that there is nothing at all special about majority rule as a means of arriving at collective decisions; that is, a supermajority rule is at least as likely -- and, probably, more likely -- to maximize welfare over time than is a rule of simple majority.
No economist still living deserves the Nobel Prize in Economics more than does Gordon -- and only Armen Alchian deserves it as much. It's a damn shame that neither Gordon nor Alchian has yet received this award.
Wednesday, April 22, 2009
The good news is that economists can take a more dispassionate view. And the way economists contribute to the debate is with public choice theory, an idea fathered by Duncan Black, Gordon Tulluck [sic] and the Nobel Prize-winner James Buchanan. While the theory of public choice can be broadly applied, it is the ideas of "special interests" and "rational ignorance" that are useful in understanding last week's tea parties.Let me interject that I don't think that's exactly right, though in spirit I agree with Wesbury and Stein. Once you've accepted a $15 hit it becomes irrelevant to your future decision-making: It's a sunk cost. What gets you is a huge wallop, like $787 billion, then you get people's attention to that piece. Tea parties will attack that one bill, but a relatively smaller number will try to get back all the previous $15's. Going after the $15's means activating all the platoons of special interest groups that rent-seeked their fortunes in Congresses past.
Here's an example of public choice at work. Let's say teachers could benefit by $2,000 each per year (in higher pay or benefits, smaller classes, etc.) from a piece of legislation currently under debate. But the cost per taxpayer averages just $15 per year.
The "special interests" (teachers and politicians) have substantial personal incentive to see that the bill is passed. Teachers, who benefit directly, will use time and money to lobby for the bill. And lawmakers will expect campaign contributions, votes or both, in exchange for their support.
But the taxpayer will remain "rationally ignorant" of the whole process. Why spend time even thinking about an issue when the cost is only $15 per year?...This is why government will tend to grow in excess of what a true democracy really wants. At least, it will grow until those $15 hits accumulate to such a level that people have finally had enough, and in a seemingly spontaneous eruption, the average voter finds the energy to fight back.
The story is akin to the myth of the frog in the pot of boiling water, that if you put it in hot water it jumps out, but if you put it in cold water and gradually raise the heat it dies from the hot water. (I've heard it ascribed to both Mark Twain and Ian Fleming, and Wikipedia says it's not true, but the metaphor persists.) Our descent into European government spending levels hasn't just started with Obama. It may just be that he's going faster towards it than we are prepared to accept. If government took a few more $15's each year, you might get to Europe, just more slowly. Such a plan, I suppose, lacks audacity.
Wesbury and Stein also note:
Here is an interesting set of facts. If the government increased the top tax rate from the current rate of 35% to 100% (yes, that's right 100%), it would only collect an extra $400 billion this year. In other words, confiscating all the income that is currently taxed at 35% would not raise enough revenue to cover any of the annual deficits projected in the next 10 years. There is no way that tax hikes on the rich alone can pay for proposed spending in the current budget.That is assuming that those people taxed at 35% will produce as much as they will when taxed at 100%. When you tax any activity at 100%, how much of that activity do you get? You don't need to be a supply-sider to answer 'zero'.
Tuesday, April 21, 2009
One bill that�s already in conference committee is the bonding bill. The bonding bill is expected to create more than 3,600 jobs in the construction phase by spurring infrastructure improvements across the state, and even more ongoing jobs will be created once renovations and facilities are completed. It�s a key area where we can spend a little money to make even more money in the future and put Minnesotans back to work. Unless Minnesota makes important investments in economic development initiatives and other job-growing policies, we will not recover from this recession or have an opportunity for success in the future.
But it hasn't worked, as the data above show. There has been no increase in construction even in the areas most likely to add jobs with government money.
The Senate bonding bill weighs in at a whopping $329 million while the House version is a �slimmed down� $248 million. Both bills greatly exceed what the State Management and Budget Office pegs as the maximum remaining bonding capacity in order to keep the State within a 3 percent debt service payment limit.And while the whole construction industry is on its back, we have a local legislator proposing a bill to create a new board for a state residential building code. That'll help, Larry!
Under normal legislative procedures major bonding bills (public construction projects financed with state general obligation bonds) are dealt with in the even year sessions. But never wanting to miss an opportunity to spend the State further into debt, DFL majorities in both the House and Senate want to use the recession as an excuse to create �public works� jobs at taxpayers� expense.
And all I'm asking in return, honey
"But cumulatively, they make an extraordinary difference because they start setting a tone ... $100 million there, $100 million here � pretty soon, even here in Washington, it adds up to real money."Is to give me my profits
Except, you know, really it doesn�t. Let�s say the administration finds $100 million in efficiencies every working day for the rest of the Obama administration�s first term. That�s still around $80 billion, or around 2% of one year�s federal spending.
When you get home (just a, just a, just a, just a)
Yeah baby (just a, just a, just a, just a)
When you get home (just a little bit)
Yeah (just a little bit)
--The �Stimulus� bill created $787 billion in new debtB-U-D-G-E-T
--Assume an interest rate of 5 percent
--5 percent of $787 billion = $39.5 billion
--$39.5 billion divided by 365 days = $108.2 million per day in interest generated from the debt issued to finance the stimulus package
All that money is not free
Your kids' wealth belongs to me.
Labels: other people's money
Monday, April 20, 2009
Tyler Cowen writing from Portugal says the rest of the restaurant market steers away from anything un-Portuguese. "The biggest mistake here is to try to replicate the kind of seafood meal you might enjoy in the U.S." Works for me, not least of which because I don't like seafood. When I decide to eat American overseas, it's usually because I hanker for something from home. When that happens, I'd rather find a Pizza Hut than Jose's Cafe Americaine.
So I wonder if it's really demand as Joseph Epstein writes in the WSJ today.
There is something to demanding customers, certainly -- this reminds me of comments about the Chicago Cubs or the Golden State Warriors sucking because their fans are easily pleased -- but New York food is good because you have options, and a way to keep the other options nearby. Unlike the other cities Epstein names, New York restaurants are near each other; you can easily go from one to the next if a restaurant disappoints you. In Albuquerque, we were at the mercy of hosts and hostesses who fortunately showed us a good time, but there are several options in Old Town that you could pick from. In Santa Fe, that nearness of restaurants is similar to New York's.
Demand has a lot to do with it. By this I don't mean demand as in the old economists' formula of supply and demand. What I mean is that New Yorkers are, and always have been, more demanding than any other Americans when it comes to what they eat. Years ago, when I worked in New York, I used occasionally to grab a quick lunch at a luncheonette, as they were then called, on the corner of Fifth Avenue and 15th Street. The place had no tables, only a long counter, so that one could hear other people's orders. I recall vividly the extraordinary specificity of customers' requests.
"I want a sardine sandwich, on rye, lightly toasted, with a very thin slice of onion -- last time the slice was a little too thick -- with a gentle rinse of lemon between the onion and the sardines. Pickle on a separate plate."
New Yorkers tend to order food as if they are spoiled children dining in their mothers' kitchens. They demand excellent service, which includes accommodation for their idiosyncrasies (that pickle on the separate plate). If they do not get what they want, they howl, return food, do not return to the restaurant, and verbally torch the place. If you open a restaurant in New York, you had better be good, or you will soon be gone.
I have sometimes violated the rule (a famous weekend in Yerevan, Armenia, where I went to a Russian and an Indian restaurant on consecutive nights and missed Barbeque Street) but usually feel the choice was a bad one. When in Rome, eat Italian!
Nobu Su, head of Taiwan's TMT group, which ships commodities to China, said Beijing is trying to extricate itself from dollar dependency as fast as it can.Those alarmed by the suggestion of a new world currency should relax. This Chinese behavior simply reflects a preference long held in Asia for metals other than gold. After the US and Europe moved towards gold monometallism in the 1870s, only China and India remained on a silver standard -- the loss of demand for silver moved its price to gold from around 16-to-1 (the legal standard) to near 30:1.
"China has woken up. The West is a black hole with all this money being printed. The Chinese are buying raw materials because it is a much better way to use their $1.9 trillion of reserves. They get ten times the impact, and can cover their infrastructure for 50 years."
"The next industrial revolution is going to be led by hybrid cars, and that needs copper. You can see the subtle way that China is moving into 30 or 40 countries with resources," he said.
The SRB has also been accumulating aluminium, zinc, nickel, and rarer metals such as titanium, indium (thin-film technology), rhodium (catalytic converters) and praseodymium (glass).
While it makes sense for China to take advantage of last year's commodity crash to restock cheaply, there is clearly more behind the move. "They are definitely buying metals to diversify out of US Treasuries and dollar holdings," said Jim Lennon, head of commodities at Macquarie Bank.
John Reade, metals chief at UBS, said Beijing may have a made strategic decision to stockpile metal as an alternative to foreign bonds. "We're very surprised by Chinese demand. They are buying much more copper than they will need this year. If this is strategic, there may be no effective limit on the purchases as China's pockets are deep."
There is in fact nothing sacrosanct about the current fiat dollar standard even in the Constitution. A switch to a gold standard, a bimetallic standard or any other metallic standard -- which in essence makes the dollar's value a promise of government -- has been part of the U.S. history since the Coinage Act of 1792.
As for the Chinese, their behavior was well-described as being diversification. Loose money, if it leads to inflation (eventually), is often hedged by holding industrial metals.
Stearns County court officials are struggling with unreturned jury duty questionnaires and with students who claim they aren�t county residents though they registered to vote in the county. Other students never get the questionnaires because they have changed addresses.Students move often; students in the dorm for fall semester often aren't there in the spring because they found other accommodations or they left the university. The report indicates 24 juror questionnaires sent to student-voters in dorms came back undeliverable. More probably from students in off-campus housing -- they don't know how much. But this begs the question I asked a few years ago: How certain are we that students who vote here really have an interest in the district? I would like in particular to know how supporters of the school district levies last year feel about having solicited votes for the levy from students who won't even bother to show up to jury duty.
�It is a big issue here in Stearns County,� said Tim Roberts, court administrator in Stearns and Benton counties. �I think it becomes an issue when we try to get people in and hold them accountable for jury service.�
Mr. Roberts is later stated to wonder "whether students should vote by absentee ballot in their home county so they don�t end up on a jury list in a county where they live only because they attend school there." Amen, brother! but this does not suit the DFL controlled Secretary of State's office:
The state wants to register as many voters as it can and welcomes the voter registration drives, said Jim Gelbmann, deputy Secretary of State. While acknowledging the unintended consequences, he said that having students vote absentee from their home county eliminates the ease of voting on the campus where students attend classes.Was one of those unintended consequences the election of Al Franken? Franken won the 18-24 demographic 48-35 with 12% of all voters in that age group.
Friday, April 17, 2009
Using a combination of cuts, federal recovery funds and new revenues it brings the state budget into balance for not only the next two years, but also the two years beyond that. This is something our Governor does not plan to do. Instead he pushes much of our present problems into the next two years. Seemingly he is hoping, and that�s all it is, is a hope, that things will get much better, much sooner than most economists believe. If his hope is misplaced Minnesota will be in even worse financial straits.
I don't think the Obama administration is buying that with their forecast of GDP. CBO, who has panned some of the President's numbers, nevertheless expects real GDP to grow 4% in 2011, 4.1 in 2012. Indeed, the disingenuous part of Sen. Clark's statement is that there are no forecasters saying growth will be weak in 2011, when the next biennium budget begins. �(See the WSJ survey last week, or Blue Chip yesterday.)� Why is Sen. Clark so pessimistic about Minnesota? �Why does she not share the optimism of her party's leader?
I will be dissecting other parts of this letter next week.
Anyone who is contemplating the pricing of fares on Northstar should come look at the Rail Runner between Albuquerque and Santa Fe. �Open less than six months, the train carries traffic between cities about 60 miles apart and takes about 90 minutes. �When I rode up to Santa Fe this morning at 10:30 for lunch, more than half the people on the train were clearly tourists; I thought this was a waste of taxpayer money to buy me, a nonresident, a cheap ride. �But the 4pm train back to Albuquerque was full of commuters who live not in the bigger city but in northern suburbs around Sandoval and Bernalillo. �The train may have been at 70% capacity at its peak ridership. �My ride was $8 round trip, much cheaper than contemplated for Northstar. �
I'm not a transportation specialist, but I'm willing to speculate that the demand for urban rail is elastic, so higher prices decrease quantity demanded greatly. �If so, would the fares being discussed for Northstar be too high? �It seemed to me and my colleague with whom I traveled that there was enough fare on that afternoon train to more than cover the variable cost of the train. �But the question is whether the benefits of less congestion, emission, etc., are enough to warrant the $385 million spent on the route. �
Thursday, April 16, 2009
I was last here for the same meetings four years ago, and at that time I didn't blog much because of cost. �The hotel now offers the T-Mobile plan, which I find at right at my reservation price. �(Quick principles of economics question: �Why do more expensive hotels charge for internet access but the cheaper ones advertise free internet? �Answers in comments please.)
These meetings are not just economists -- indeed, we're a minority here. �So the opening reception last night is a great bit of anthropology of social scientists, as are the book displays. �I get a better understanding of why the natural sciences view us as not up to their standards. �I'll bring pictures later.
Old Town was delightful last night, and for the vegetarians who are sometimes put off by not being able to get red or green chili�no carne, let me send you to the Church Street Cafe. �We were three loud and hungry economists, and yet we got great service anyway and the vegetarian red chili sauce was outstanding on my vegetarian rellenos. �
So I missed the Tea Party. �See Leo for video and pictures and a description of the St. Cloud version. �You had to look hard to find any coverage in this morning's USA Today on my doorstep (that's why I typically toss the other three sections of that paper, keeping only sports.) �A few people have told me about this video, I'm off to watch it now then taking the taxpayer-subsidized train to Santa Fe for sightseeing, as all my sessions are tomorrow. �Thanks, taxpayers of New Mexico!
Tuesday, April 14, 2009
Individual income tax receipts were $47 million (4.5 percent) less than forecast in February. Almost the entire income tax shortfall was due to lower than projected withholding tax receipts. While lower than expected withholding tax receipts are always a matter of concern, this shortfall appears to be due to lower than projected bonus payments, not lower wages. Withholding payments generally have tracked February�s forecast quite well except during a short period in mid-March when many firms pay bonuses depending on the firm�s performance during the past year.Also, on the state of the economy generally, the update relies on Global Insights, who are still revising 2009 GDP downward. I agree with revising down but I probably was on a higher previous level than they were. Also:
...while the worst of this crisis may soon be over, that does not mean that the economy will quickly return to normal. Global Insight�s April baseline does not show real GDP returning to pre-recession levels until the spring of 2011. Employment takes even longer to recover, with the number of jobs remaining below the 2007 peak until early 2013.I still think this is pressing down on the state budget more than had we hired almost any other national forecasting service to drive the state forecast. This is not the Obama Administration's forecast.
(BTW, there's a rather PG-13 rated slide show that made the rounds last fall to be found here.)
One of the places where I expect blame to be laid, complete with Barney Frank auto-da-fe, is the ratings agencies. Bloomburg's Caroline Baum, commenting on the failure thus far of the TALF program to jump-start credit markets, makes the point:
Most investors have neither the time nor the temperament to pick through individual loans that are pooled, sliced, diced and transformed into something with a credit rating and a cash flow to determine their viability. That job was designated to three credit-rating companies -- Moody�s Investors Service, Standard & Poor�s and Fitch -- which were paid by the issuer of the securities, not the investor.I wasn't aware of that history, and now want to know why we changed to having the issuer pay. Were investors just being cheap? Aren't they smart enough to understand the incentive incompatibility? It just seems very strange. It's like going to Yankee Stadium and letting the New York team hire the umpires because you don't want to pay for plane tickets for a third party arbiter.
That wasn�t always the case, according to Paul Kasriel, chief economist at the Northern Trust Corp. in Chicago. Prior to the 1970s, the onus was on the investor to pay for ratings.
That relationship removes the conflicts of interest inherent in the current system. Investors should be the one paying for credit evaluation, Kasriel says. �They�re getting a free ride.�
They also got what they paid for.
I just did not see how ratings agencies were any more able to determine the quality of a CDO-squared than a relatively sophisticated investor.
Also, I learned from the talk that AIG's chief regulator is the New York State Insurance Department. Is there any reason to believe that they had particular knowledge to evaluate the riskiness of AIG's financial products division? I read this on that site by the state insurance commissioner, a Mr. Eric Dinallo.
The fear in 2000 was that if we regulated credit default swaps and required holding sufficient capital, the market would go where unregulated sellers could make more money. We forgot that the biggest competitive advantage of the US financial system has always been safety, security and transparency. If we destroy that perception, the long-term cost to our society is incalculable.We're paying that cost now because rather than allowing the risky business to run offshore we decided we could rely on someone else to tell us where the risks are. It wasn't just investors outsourcing risk evaluation -- government did too.
I see that there are two kinds of movies that people rent: Academy Award Nominees and crap. People wanted to watch Michael Clayton (good movie, btw) and No Country For Old Men (boring, IMO) so they could have some idea of which should win the Oscar. And people wanted to watch Good Luck Chuck (for some unknown reason) but knew based on its horrible box office performance and reviews that they would probably only want to watch it once � and even then probably only for $1 at Redbox. Baby Mama and Fool�s Gold are in this same league too.Click his link to see the chart. I rarely rent DVDs except when I travel (and nowadays I just download a rental and toss it on the iPod.) The movies I own are ones I want to watch over and again, which are seldom on the TV. (Note: I do not buy premium movie channels with my cable.) I own about 50 DVDs, many of them TV series. When Littlest was littler, we bought all manner of movies for her. Why? Because your kid watches movies 20, 30 times in a week, and often it's just one movie. I was joking with colleagues about the one Number One Son watched one night five times, Harry and the Hendersons. Godawful crap, and every time it would end, even at 3am, he'd wake up from the couch and cry for someone to restart it (this was in the days of VCR, so someone had to rewind, and he was four and not as skilled at operating the machine as Littlest, who was potty- and VCR-trained at about the same time.)
I think it�s noteworthy that The Dark Knight was the best-selling movie of the year at the box office, as well as the best-selling DVD, but it is nowhere on the rental list. I guess when everybody has already seen the movie and everybody knows someone who owns the DVD, there�s no reason to rent it.
Of the top 20 movies sold, 9 of them can legitimately be called kid�s movies. (And yes, it can be a kid�s movie if it has The Rock in it. He�s the new Ice Cube � Ice Cube after he sold out, that is, and did Are We There Yet? and Are We Done Yet? Now The Rock does Race to Witch Mountain and Game Plan. I smell what the Rock is cookin� and it doesn�t smell so good.) Only one of these 9 movies, Game Plan, is also on the rental list. Parents buy their kids the DVD, plain and simple.
Last week I spent hundreds of dollars at the vet on routine medical care for my aging cat.Well yeah, if you've decided to make a pet a member of your family, you probably don't cut back Fluffy's medical care first. You do cut back on the teeth cleanings, and in a pinch you might decide to sacrifice the furniture rather than getting Missy de-clawed, but the rabies shot is probably a necessity rather than a luxury good. 40% of us would rather have our dog on a desert island than our spouse; 10% more would go for the cat.
My cat gets better health care than some people. This is an outrage.Your threshold for outrage, madam, is different than mine. My daughter gets a ride to school in the morning in a better car than some of her classmates. Is this an outrage? I got the king-size fry at Burger King at lunch yesterday, while the kid next to me could only afford a medium. Is this an outrage? And what would you have me do about it?
If I can afford to pay these kinds of vet bills, I can afford to pay higher taxes to prevent thousands of my fellow Minnesotans from losing their health care in the current legislative effort to balance the state budget.Well then, dear lady, be my guest! According to American for Tax Reform's Center for Fiscal Accountability, you can send a check payable to "State of Minnesota" and mail it to
Minnesota Department of Finance
400 Centennial Office Building
658 Cedar Street
St. Paul, MN 55155
Here's the statute that permits them to accept your cash. You can also put them in your will, or have your dividends from your patrician stock holdings dedicated to deficit reduction. Just give Finance a call, and they'll make it happen for you.
You're welcome. I'm glad to help you send that money along and allow you to feel better about taking care of that cat.
But wait, there's more:
Those of us who can afford higher taxes and believe in humane public policy should let our legislators know we support raising revenue as well as cutting costs and improving efficiency to balance the budget.At last we find out the logic. Because I own a cat (voluntarily) and get him or her health care (voluntarily, without calls for providing public health insurance to millions of Fluffies and Fidos by resort to a cap-and-trade program), I am entitled to write a letter that would support "raising revenue". When the letterwriter chooses to take her cat to the vet, it's done instead of something else. She cuts back on spending elsewhere. But because she makes that choice, she has the right to demand that government confiscate your money to buy something for someone else's benefit.
Because only you have to balance a budget without resorting to force. Governments don't have to do that.
Monday, April 13, 2009
Reversing its role as the world�s fastest-growing buyer of United States Treasuries and other foreign bonds, the Chinese government actually sold bonds heavily in January and February before resuming purchases in March, according to data released during the weekend by China�s central bank.If you asked me what caused that, I would put it to differences in trade. Remember that a trade surplus with Country X means Country X will buy your assets (I suppose they could hold your cash, but that earns zero interest -- less, in real terms if there's inflation.) A massive slowdown of the U.S. economy in the first quarter would show up in trade volumes between the two countries, and the Chinese report they exported 17.5% less to the U.S. in January year-over-year, and the U.S. Census has reported a similarly steep drop for February. Brad Setser wraps all of this together.
China�s foreign reserves grew in the first quarter of this year at the slowest pace in nearly eight years, edging up $7.7 billion, compared with a record increase of $153.9 billion in the same quarter last year. ...
Chinese reserves fell a record $32.6 billion in January and $1.4 billion more in February before rising $41.7 billion in March, according to figures released by the People�s Bank over the weekend. A resumption of growth in China�s reserves in March suggests, however, that confidence in that country may be reviving, and capital flight could be slowing.
China�s trade surplus was larger in the first quarter of 2009 than in the first quarter of 2008 ($62 billion v $41 billion). [This largely due to lower cost of imported oil and energy, he notes. --kb] The global shock has gotten rid of many of the world�s macroeconomic imbalances. American households are saving more and importing less, so the US deficit is down. The oil exporters are no longer running a surplus. Even Japan�s surplus has come down, as demand for Japan�s exports has fallen more rapidly than Japan�s commodity import bill. China�s surplus though has continued to rise.He thinks China went into recession in Q4 2008. If so -- and I just don't know enough about China to judge that -- the Chinese would be pleased by the US stimulus package providing a locomotive to their economy, which will keep their demand for US Treasuries up. I expect it's got nothing to do with Chinese reluctance to purchase our bonds, just that they had less dollar reserves to invest.
I was flashed to that insight in reading this today:
The Earth's climate is driven by the receipt and redistribution of solar energy. Despite this crucial relationship, the sun tends to be brushed aside as the most important driver of climate. Calculations on supercomputers are primitive compared with the complex dynamism of the Earth's climate and ignore the crucial relationship between climate and solar energy.
"To reduce modern climate change to one variable, CO
2, or a small proportion of one variable - human-induced CO 2 - is not science. To try to predict the future based on just one variable (CO 2) in extraordinarily complex natural systems is folly. Yet when astronomers have the temerity to show that climate is driven by solar activities rather than CO 2 emissions, they are dismissed as dinosaurs undertaking the methods of old-fashioned science."
Over time, the history of CO
2 content in the atmosphere has been far higher than at present for most of time. Atmospheric CO 2 follows temperature rise. It does not create a temperature rise. CO 2 is not a pollutant. Global warming and a high CO 2 content bring prosperity and longer life.
Emphasis added. Ian Plimer's new book is due out tomorrow in Australia and next month in the USA.
Labels: global warming????
A very small number of taxpayers -- the 10% of the country that makes more than $92,400 a year -- pay 72.4% of the nation's income taxes. They're the tip of the triangle that's supporting virtually everyone and everything. Their burden keeps getting heavier.From the CBO Director's blog:
As a result of the 2001 tax cuts enacted by a bipartisan Congress and signed by President George W. Bush, the share of taxes paid by the top 10% increased to 72.8% in 2005 from 67.8% in 2001, according to the latest data from the Congressional Budget Office (CBO).
...Mr. Obama is adding to this trend with his "Make Work Pay" tax cut that means almost 50% of the country will no longer pay any income taxes, up from a little over 40% today. A certain amount of income redistribution in a capitalistic society is healthy, but this goes too far. The economic and moral problem is that when 50% of the country gets benefits without paying for them and an increasingly smaller number of taxpayers foot the bill, the spinning triangle will no longer be able to support itself. Eventually, it will spin so slowly that it falls down, especially when the economy is contracting and the number of wealthy taxpayers is in sharp decline.
Higher-income groups pay a disproportionate share of federal taxes because they earn a disproportionate share of pretax income and because effective tax rates rise with income. In 2006, the highest quintile earned 55.7 percent of pretax income and paid 69.3 percent of federal taxes, while the top 1 percent of households earned 18.8 percent of income and paid 28.3 percent of taxes. In all other quintiles, the share of federal taxes was less than the income share. The bottom quintile earned 3.9 percent of income and paid 0.8 percent of taxes, while the middle quintile earned 13.2 percent of income and paid 9.1 percent of taxes.The original report:
Much of the progressivity of the federal tax system derives from the individual income tax. In 2006, the bottom quintile�s effective rate for the individual income tax was -6.6 percent, which is to say that refundable earned income and child tax credits exceeded the income tax owed by that group. On average, households in the second quintile also received more in credits than they paid in individual income taxes. The average effective income tax rate was 3.0 percent for the middle quintile and 6.0 percent for the fourth quintile. For the highest quintile, the rate was 14.0 percent. The top percentile, on average, paid 19.0 percent of their income in individual income taxes.
Tickets for the all-you-can-eat pavilion in right field are being reduced from $35 to $25 for 70 of the team�s 81 home games. The price includes unlimited hot dogs, nachos and soda.It's not because the team stinks. It's the economy there: The Angels had a hard time selling out their Opening Day and were offering 4-for-3 discounts, even though officially the game was "sold out".
Prices for soft drinks will be $3.75, down from $5; bottled water will be $3.75, down from $5.75; and beer will cost $6, down from $8, at concession stands.
...A free fan club for kids will be offered, and fans arriving by car will receive a free team publication. Also new are all-inclusive packages that include tickets, T-shirts, peanuts and parking starting at $99 for a family of three.
Fields are getting smaller, and the need is therefore to sell out. Teams are building stadia with more variation of ticket experiences (here's one unhappy Yankee fan's view of the new stadium; pay particular attention to the two pictures of upper decks of old and new Yankee stadia) to push fans into higher-priced seating. But if you are selling scarcity value of seats to boost ticket prices, a recession like this one making 4-for-3s and price-cutting (at an older, larger Dodger Stadium) is going to have a larger impact on team revenues than if you were still trying to fill the larger caverns of the old Shea-sized stadia.
Friday, April 10, 2009
Happy Passover to our Jewish readers, and Happy Easter to our Christian ones. See you Monday.
There seems to be a little bit of disconnect. The government has always built roads, it's always built infrastructure and things like this. I think the point that Ellen's trying to make in this context is if you're expecting it to be a big stimulus, it's not that -- it's not going to be a huge stimulus, but if you build these roads and bridges and things along these lines on the basis of what their cost and benefits look like, that makes a lot of sense to do that.A couple years ago I read "ten little words" from Peter Gordon on applied economics: 1) at what cost? 2) compared to what? and 3) how do you know? Applied to the stimulus package, Fishback reminds us, you can add two questions (not so succinct, alas): 4) Do we have $787 billion of programs that you can move forward that add benefits to the economy? and 5) Did ARRA select them? I don't have an answer to 4) and I'm pretty sure the answer to 5) is 'no'. Your mileage may vary, but I find the rubric created quite helpful in organizing my thoughts on stimulus.
So the big question is can you move them up or move them forward? Does it make sense to actually build something that's not worth the money to do it? And what she's saying, what a lot of people are saying is no, it doesn't make sense to build a bridge to nowhere. It makes sense to build the right projects, but don't expect that you're going to get some huge extra stimulus behind it.
The $15 billion, coming from the U.S. Treasury Department, will be used to purchase securities backed by the SBA-guaranteed loans in an attempt to jump-start the secondary credit market for small businesses. Banks that offer SBA-guaranteed loans have hit a lending wall in recent months, as the secondary market is frozen, so banks can't get the old loans off their balance sheets to free up capital for new loans.So the guarantees don't go directly to the small businesses; all they get is a reduction in fees charged for taking out SBA-guaranteed loans. The money is to induce the big investment banks to take on these loans; the $15 billion would end up in the pocket of big banks. Will it make borrowing easier for small firms and smaller banks?
..."Traditionally, about half of banks offering SBA guarantees sell those loans to mortgage packagers like investment banks where they're then sold on the market to investors," says Bob Seiwert, senior vice president of the American Bankers Association. "But no one's buying those packages now, so the lenders can't make new loans."
I talked to a local commercial banker yesterday after a talk I gave. He reported to me that the bank is about to be audited, in the normal course of its business. His regulator asked that all loans to non-owner-occupied commercial real estate be pulled aside. For this there had to be all manner of additional documentation to verify primary and secondary sources of funds to repay the loans. "Our impression is they don't wish us to lend any money to non-owner-occupied commercial properties." So you can guarantee all the money you want for SBA loans, but if regulators are putting up lots of barriers to transactions that money will remain parked and unused.
Thursday, April 09, 2009
- Let me lead by complimenting our students. Those who disagreed with Rep. Bachmann, or with the presenter, Mr. Horner, at the St. Cloud event used their free speech rights with due respect for the speakers, were not disruptive, and made me rather proud of my university today. Don't agree with them, not sure they understood the points Mr. Horner was making (more on that in a second) but when he asked for his turn to speak they relented with the shouting of questions and gave Horner his due. I'd rather they didn't shout, but given Horner answered them when they shouted, he agreed to that format. I agree with Andy that they were restless, but largely because they were in a minority in the crowd.
- Horner is entertaining. If I could suggest one thing, it'd be to s-l-o-w d-o-w-n. The points were excellent but rattled off quickly because he had lots he wanted to do. So I agree with Muse on that one, though he did have a handout that I got that helped comprehension. (I hate handouts. I use PowerPoint often, and let me say to Mr. Horner -- watch Prof. Tufte for some tips.)
- But he did change at least one person's thinking. A couple rows ahead of where I eventually sat (finally finding Mrs. S in the crowd) was a fellow professor of another social science. An excellent professor, I am inclined to think he holds views that favor the MMGW theory. After the talk I asked him what he thought and he said that he thinks we should not do cap-and-trade. That surprised me; why? I asked. It doesn't seem to do what we want, he said, and it's not clear how it would work and not clear people can actually understand it. This has long been my point on cap-and-trade. Any estimate of "what does this cost the average citizen?" comes up against the fact that it is a hidden tax. It's so well hidden, so complex in its changing of relative costs, so shifted forward and back between producer, labor supplier, capital, and consumer, that any attempt to measure the cost has to be theoretical and contentious. Horner says this, but then throws out a number anyway. DON'T DO THAT! Your best point is that you cannot know the cost of this thing. The only solid number you can generate is what you intend to sell the initial pollution rights for. All the rest is dross. If you buy MMGW theory, you should buy it with an explicit tax, openly adopted in Congress and signed by the President. Cap and trade is bad policy because it hides costs and benefits.
The word you want is "disputed", Larry. The point I made above is that every number can be disputed. And yes, I do work as an editor from time to time, at the right price. Call my office if you would like my services.
Arizona State University will not award President Barack Obama an honorary degree when he speaks at commencement on May 13.This is silly. The term on a honorary degree is honoris causa. Literally, a degree to honor the recipient, "for the sake of the honor." You waive the rules for taking courses and writing a thesis in order to give someone an award who has never been to the school.
The university decided against awarding Obama the degree because it is customarily awarded for �lifetime achievement,� ASU spokeswoman Sharon Keeler told POLITICO.
�It�s normally awarded to someone who has been in their field for some time,� she said. �Considering that the president is at the beginning of his presidency, his body of work is just beginning.�
Is Arizona State worried that he won't do enough beyond, oh, I don't know ... elected the first black President of the United States? I may not agree with the man's policies, but I don't think it would cheapen the academic integrity of ASU to give a degree now versus waiting three years or so. I mean, this isn't Yale we're talking about here.
Mr. President, I'm fine with you canceling your address.
You know the story: Many people were displaced from their homes and left for Texas or to the east. All that extra growth they're talking about? It's just getting back to where they were. That big drop is of course Katrina. And that is the reduction in population that lead to the increase in per capita GSP in 2006. They went nowhere in 2007, and for at least state personal income they were around the median growth for 2008.
None of this matters for the Times, though, and this leads Lawrence Reed to muse "[i]ts reasoning is so infantile, its evidence is so transparent, and its economics is so woefully deficient that one can�t help but wonder if it was printed simply to advance somebody�s big government agenda."
A blast from the past on "the broken window fallacy and Katrina."
Wednesday, April 08, 2009
The most disturbing trend may be an increased taste for arbitrary expropriation. People don't invest if the government rewrites the rules to take their earnings. When the House of Representatives voted a 90 percent tax on bonuses, economic populism trumped responsibility. Allowing bankruptcy judges to cram down mortgages expropriates lenders and creates more uncertainty and lawyers' fees. Giving aid to people who lose their homes is a better way to help those in pain.Wednesdays have eight hours of lecturing for the next five weeks, with administrative duties in between. See you tomorrow.
Few variables are as reliably correlated with economic growth as respect for private property. America's economic strength reflects, in part, the fact that investors have historically found this a legally reliable place. That reputation is a golden goose, and destroying it would be like adding trillions to the debt.
Tuesday, April 07, 2009
If Krugman is arguing that some of that increase in government spending is temporary, fine. I don't know that we're arguing the multiplier is zero. Just a lot smaller than CEA chair Romer is. A lot smaller.
Federal government spending as a share of GDP is threatened to go to 23%; one would be foolish not to plan that some day that blue line needs to converge on the red one. Will you be able to get all that from those earning over $250,000 per year?
AAUP President Cary Nelson is wondering where the limit to the heckler's veto is. Yet on our campus we have a heckler's veto, as witnessed by the "wall" created in reaction to an ugly racist smear left on a classroom project. Allowing Churchill, Ayers, Mahmoud Ahmadinejad or George Rockwell to a campus is permitted, says Prof. Nelson, but because the student(?) who wrote on that wall has no constituency, we can heckle him to our hearts' content?
The students of that class that created the project are now distributing green bracelets to represent WE ARE ONE: NO HATE ON CAMPUS". Really? I am curious why Prof. Nelson failed to put David Horowitz on his list? They certainly know each other.
I am willing to have Bill Ayers speak at SCSU. Happy, in fact. You take the power away from monsters by demystifying them. But we so fear our own reaction to monsters that we instead erect walls, and then we have the Cary Nelsons decide whose wall we should tear down: a plagiarist, a cop-killer, the president of a fascist organization, the anti-Semite president of a country, or a student who writes an ugly racist epithet. Who benefits? Not the plagiarist or the cop-killer. Not the Rockwells or Ahmadinejads. And certainly not the student.
Labels: higher education
Human endeavor is by its nature imperfect. History is often tragic, but unresolved, it can be a heavy weight. Each country must work through its past. And reckoning with the past can help us seize a better future. I know there's strong views in this chamber about the terrible events of 1915. And while there's been a good deal of commentary about my views, it's really about how the Turkish and Armenian people deal with the past. And the best way forward for the Turkish and Armenian people is a process that works through the past in a way that is honest, open and constructive.The St. Petersburg Times says that Obama is trying to have it both ways. After criticizing the Bush Administration's decision to fire John Evans, former ambassador to Armenia who dared use the g-word in public, you might want him to say the word. But in Turkey? It calls for a level of courage that no previous president has shown. The phrase "terrible events of 1915" are unmistakeable in their reference, and to include "the Turkish people" in its reference does much more than any of President Bush's lame Armenian Rememberence Day proclamations made safely from Washington. Most of us would have preferred he'd've just skipped it.
I would not view the promise as kept, but I think Obama deserves an "incomplete" rather than calling this a failure. He gets another chance on April 24.
Monday, April 06, 2009
As a former city council member, I will attest that �Truth in Taxation� hearings provide an invaluable opportunity for a specific meeting dedicated to discussing the budget and to hearing directly from citizens regarding the tax policy of local governments.MN House of Representatives Research shows what a Truth-inTaxation hearing is intended to do:
Ending �Truth in Taxation� hearings at a time in history when we need more citizens involved with their government and paying more attention to tax policy in Minnesota is simply wrong.
It appears at least you'll still get the notices that tell you whether your property taxes are going up because of a change in spending, change in valuation, state aid, etc. But your local elected officials will no longer have to hear from you as they set spending targets. The PiPress spoke against SF3's repeal of TnT already. I guess the DFL only likes listening tours when they know who they will listen to.
Under the law prior to TnT, the main avenue for taxpayer involvement was on the valuation side of the system. Taxpayers received their market value notice early in the year, and then no further information was sent to the taxpayer until the property tax statement was received the following February or March�almost a whole year later. The legislature felt that TnT would improve local accountability by focusing taxpayers on the relationship between the budget process and property taxes.
The main purposes of TnT were:
- to enhance public participation in Minnesota�s property tax system,
- to educate the public on how property taxes are determined,
- to encourage the public to understand the local government�s budget process,
- to encourage the public to become involved in helping local officials set spending priorities.
Although there are some exceptions (i.e., referendums, court costs, etc.) the local government�s final levy can not be increased above the proposed levy amounts reflected on the TnT notices.
- Q-Comp is failing to improve student achievement. I could be persuaded this is true, but wouldn't you then look to end it?
- The school district signed up in good faith believing it would work, though it never put in the pay for performance provisions that are at the heart of Q-Comp.
- Clark does not want to impose any penalty on the St. Cloud school district while she decides whether it works or not. This while there's a state budget deficit greater than $6 billion.
Average tax burden per person: $3,203Here's the background story. Taxes included are "property, individual income, sales, alcoholic beverages, tobacco, motor vehicles, hunting and fishing, motor fuels, death and gift taxes, as well as insurance premiums. Adding up total receipts and then dividing by the number of citizens, we arrived at our tax-burden-per-person metric." Data for July 2007 to June 2008. The article discusses the cyclical nature of state budgets as well. On how to decrease the cyclical nature of state budgets, see this and in particular Finding #9.
Most states either have high income taxes or high sales taxes, but in Minnesota, residents are treated to the pleasure of both. When average Minnesotans look over their yearly bills, individuals will find $1,495 gone away to pay income tax and $1,429 thanks to sales tax.
We show that capitalism is not common around the world. Outside the US and a small group of rich countries, regulations, leftist rhetoric and interventionist beliefs flourish. We argue that the lack of capitalism is connected to the presence of corruption. For example, we find that within a country, people who perceive more corruption are more likely to favour regulations, government ownership of business and to self-place on the left of the ideological spectrum. As the level of regulation is held constant within a country, this finding is inconsistent with a theory that assumes the only channel connecting these two variables is one where regulation causes corruption. We present a model where corruption reduces the demand for capitalism. This occurs because corrupt capitalists are disliked and voting for left wing policies is a form of punishment that is available to voters (even when the judicial system is weak). Evidence on emotions supports this explanation: the frequency with which people report experiencing anger is positively correlated with the perceived amount of corruption, but this correlation is significantly weakened when business is heavily regulated.From a new paper being presented at the spring Brookings Papers on Economic Activity conference. It's a challenging read. Many successor countries in the former Soviet Union went through an early period of 'market romanticism' in which Russia, for one, ran fast towards freer markets and paid little attention to the graft going on behind it. The result was a lost election and a stop to reforms in the country, from which it seems never to recover. (See Michael McFaul, for instance.) To imagine that there is a "demand for capitalism" and think about what shifts the demand curve (and to wonder what's on the vertical axis?) is intriguing. This paper goes in the summer reading pile for further thought.
The simple answer is trade. Whenever I exchange with someone else, I give up something I value less for something I value more. Same is true for the other person to the trade, when the trade is voluntary. I emphasize that point for something I want to say below, but let's deal with the basic idea first.
I could quote any number of economists to make that point, and I'll choose in this case Murray Rothbard from his (timely!) "What Has Government Done to Our Money?"
Clearly, a voluntary exchange occurs because both parties expect to benefit. An exchange is an agreement between A and B to transfer the goods or services of one man for the goods and services of the other. Obviously, both benefit because each values what he receives in exchange more than what he gives up. When Crusoe, say, exchanges some fish for lumber, he values the lumber he "buys" more than the fish he "sells," while Friday, on the contrary, values the fish more than the lumber. From Aristotle to Marx, men have mistakenly believed that an exchange records some sort of equality of value�that if one barrel of fish is exchanged for ten logs, there is some sort of underlying equality between them. Actually, the exchange was made only because each party valued the two products in different order.This really is key, and it's something I picked up in graduate school -- what we really trade are values, and we are motivated to trade because we expect to get more value from the trade. It's that insight that solves the diamond-water paradox and my Twilight Zone story I try to solve with my class as a way to teach marginal analysis. (My view was shaped largely by the writings of James Buchanan, particularly here and here.) Because we are different, trade allows us to specialize in that which we do better than we do anything else; the more we can exchange that good or service with others, and with more people, the wealthier we become.
Why should exchange be so universal among mankind? Fundamentally, because of the great variety in nature: the variety in man, and the diversity of location of natural resources. Every man has a different set of skills and aptitudes, and every plot of ground has its own unique features, its own distinctive resources. From this external natural fact of variety come exchanges; wheat in Kansas for iron in Minnesota; one man's medical services for another's playing of the violin. Specialization permits each man to develop his best skill, and allows each region to develop its own particular resources. If no one could exchange, if every man were forced to be completely self-sufficient, it is obvious that most of us would starve to death, and the rest would barely remain alive. Exchange is the lifeblood, not only of our economy, but of civilization itself.
This provides insight to our post last week about potholes, which seems to have irked one side of the debate. A private exchange increases wealth in part because the two parties to it have all the information needed to assure this is so. Government does not exchange values; it moves goods from one person to another without knowledge of the values each person attaches to them. It seldom can do better than voluntary exchange, and often does worse. When it does worse, it destroys wealth.
When I trade a Mickey Mantle baseball card for a Tony Conigliaro baseball card, I know what I value, and so does the other person. You, standing outside, may say "what the heck? Mantle was such a better player! Beckett's price guide says that Mantle card is worth four times the Conigliaro card! That guy is ripping you off!" But you don't know Tony C, and how kids of New England of the mid-1960s loved him and cried for him when he was hit by a fastball in 1967 and never was able to play again with the same power and elan he had before. I was one of those kids; that card has value to me, and it would be nigh impossible for a government bureaucrat to know this.
That is one reason government harnesses businesses in those NGOs. The money that philanthropists give to a hot breakfast program in D.C. are dollars that those charities value more as breakfasts than other uses. The tax dollars collected from a D.C. shopper who earns $15,000 a year, perhaps not. The government cannot know that. Markets provide information that governments cannot obtain without them. The company that makes potholes trades a value called profits today for advertising today that hopefully becomes greater profit tomorrow.
Critics rail that transactions are riddled with "behind-the-scenes extortion" and that my thinking is an apologetic for firms to "set rivers on fire, exploit labor, fill your chicken with hormones and then declare bankruptcy if too many people squawk." But this is exactly what Milton Friedman said the social responsibilty of business is not. A corporate leader is the employee of his or her shareholders, and has a responsibility to maximize the lifetime profits of the firm. For her or him to pollute, exploit, poison and then declare bankruptcy is highly immoral, as any classical liberal would argue. The critics erect a strawman born of ignorance with this example. From Capitalism and Freedom,
There is one and only one social responsibility of business�to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.That men are not angels, and that some will run businesses in reckless and irresponsible ways, is not a secret, nor is it a secret that those same people would rather run government than business, if you give government more power.
Sunday, April 05, 2009
Friday, April 03, 2009
On the Final Word this week (beginning at 3pm) you will hear The Nihilist In Golf Pants, who has wanted for some time to get an hour to grill me on economics; he'll get to do the questioning and I will try to answer. Chime in via Twitter. Both shows are as always on AM 1280 the Patriot, and between those two times you'll get John and Brian, the First Team, and then Ed and Mitch, the Headliners. (NARN podcasts are always available here, usually posted 24-48 hours after the show. We also replay on Sunday nights on the Patriot beginning at 7pm.)
Anyway, later for that. Much more to discuss here.
Barbara writes (links added):
Although school board members are elected to make decisions on behalf of the population, pecuniary decisions are best left to the people. This has been a guiding principle in our laws, as shown by the requirements that other excess levies require voter approval.The conversation at the Times website today is animated on this subject. Check it out.
However, the Legislature is now moving further with rules that circumvent the ballot box. If a levy passed and opponents could get 15 percent of the school district�s voters to sign a petition, a school district could face a revocation of that levy.The recall allows some mechanism to demand accountability from school districts. But the Senate E-12 Education Budget and Policy Division has now sent forward a bill that would kill the petition option.
And it�s not just at the school board. Rep. Paul Marquart, DFL-Dilworth, introduced a bill to allow a county to raise sales taxes to �make up� for reductions in state aid. While some cities have made hard choices and found budget savings, Marquart�s bill would allow the others to avoid those choices and impose new taxes on a recessionary economy.
Most readers will want to lay this at the feet of the financial crisis, but Jim Hamilton has another potential explanation: Oil prices. I'm intrigued by that, but I don't see how a supply shock explains inflation behavior over the last year. I'll have to read his paper to see if there's an answer to that.
Meanwhile Mark Perry notes the flip from earlier recessions in terms of gender: Male unemployment is 2% above female. I suspect that is due to the sectors in which employment is weakest -- manufacturing and construction lost 43% of total job loss while representing under 20% of the work force. I don't have data on share of construction and manufacturing employment that is male (I'm sure friends at BLS could find it for me) but I'd be shocked if it wasn't heavily male.
Thursday, April 02, 2009
A class studying civil rights activist Dorothy Irene Height�s life and legacy stood up to the person who perpetrated the most recent act of cowardly graffiti on the St. Cloud State University campus.This is the very same bulletin board we discussed last year; I know the professor and the class, and saw the board before the graffiti and the response. The display had once again the amateur drawings, but in this case laying out the life of a woman whose story wasn't very well known, and perhaps did need to be more known. Unlike last year's, this display had the quality of telling a biography in an informative way. (I'll suggest someone from that class should spiff up her Wiki page; they seem to have learned enough to improve on this.)
Several students in a class called Race in America, without prompting from university administrators, banded together to immediately and publicly denounce a racist message posted on a bulletin board honoring Height�s accomplishments. They left the racist vandal some graffiti of their own.
�Not true. Not funny. Not OK in my community,� read one.
�Racism is ignorance,� read another.
�Man up,� another read. �Do you talk to your mother with that mouth?�
The student-driven outcry spread through text messages, e-mails, Twitter and Facebook early this week and continued Wednesday. By Wednesday evening, students had left more than 100 notes for the unknown racist.
There's no doubt that the person who chose to scrawl graffiti on that display deserves condemnation. One hopes that the student would receive instruction on why that's not the way to engage those with whom you disagree.
But really, "the unknown racist"? Isn't this a bit extreme? I saw a couple of groups, lead by faculty, walking past the display. (UPDATE: Stepped out for a few minutes and found the professor with some of her class, filming statements around the display: They've announced they will be put up on Facebook and Twitter.) The notes pasted up are by and large of the "that ain't cool, man" variety, but a few would suggest something more angry. One of the short stories I read in an English class (I think in high school) was The Lottery. Does anyone assign this any more? Do students have an appreciation of how groupthink can lead sometimes to mob violence? The question is, does one graffito make a racist, known or unknown?
It intrigued me that in this story -- unlike any stories ever written about crime, for instance -- the race of each student quoted in the story is identified. Sure, I understand the reason being to show solidarity, unity in opposing racism. But have we now reached a point where journalistic standards will include a style sheet saying when it's OK to recognize race and when it's not OK?
A few days ago James Taranto commented on a similar story, an AP report that despite the existence of President Obama not all jokes about race have stopped whizzing over the internet. He traces out the history of the United States and notes:
Like all colleges, our university has many young people, learning about what it means to be an educated person, engaging in self-expression. We have classes that teach about race mandated for every student, but reacting with this mass expression to any dissent to it. Our university's goal may be to reduce racism in one place, but a policy of zero expresssions of racial slurs is a chimera. We are human beings, fallen from Eden. Most of us resist sin some of the time; none of us resist all sin all the time. How should a university treat one of its students -- if indeed that's who it is -- who falls, who fails?
How far does America still have to go to bridge its centuries-old racial divide? Liz Sidoti answers the question:
Even in 2009, a black man cannot become president of the United States without some knuckleheads sending stupid emails about him.
To be sure, America has made some racial progress. But the dream of equality will not be truly and fully realized until President Obama's political detractors treat him with the same respect George W. Bush's detractors showed him.
SCSU may think it is overcoming racism with its hallway displays. But if we're ever going to really overcome racism, it will be when we stop looking for the guy who drew the graffito with stones in our hands or fury in our pens and markers, and can instead embrace him or her with the same love and discipline (law and gospel, if you will) that we show any other wayward child, and it stops being a news story.
...we find substantially smaller government spending multipliers than those used by Romer and Bernstein. For example, the multiplier associated with a permanent increase in government spending by the end of 2010 lies between 0.5 and 0.6. In other words, government spending does not induce additional private spending but instead quickly crowds out private consumption and investment.Volker Wieland on Tuesday, commenting on estimates of the effects of fiscal stimulus. He argues for quantitative easing in the EU. The model uses the New Keynesian methods now popular in policy analysis (for one small example, see this paper on their use in Armenia.) While CBO does not project the Fed funds rate, it does foresee a 4% T-bill rate average for 2012-2015 (as do OMB and the Blue Chip consensus.) I do believe that looking at T-bill futures will help us see which story is right. As for now, it's August 2010 before the market expects Fed funds to get above 1%.
We also provide an assessment of the impact of the American Recovery and Re-investment Act. This legislation implies measures amounting to $787 billion and spread over 2009 to 2013 but peaking in 2010. Our estimate of the total impact is closer to 1/6 of the effect estimated by Romer and Bernstein. By 2010 we project output to be about 0.65% higher. Using the same rule-of-thumb as Romer and Bernstein, this increase in GDP would translate to about 600,000 additional jobs rather than three to four million.
Why is our assessment of government spending multipliers so different? Well, first of all Romer and Bernstein constrain the Fed to keep interests rates constant at zero forever.
Such an interest rate peg would lead to explosive behaviour and instability in New Keynesian models. Instead we allow the Fed to raise rates eventually, starting in 2011, or more realistically, in 2010. Committing to 1 or 2 years of zero interest rates still implies much additional monetary stimulus. Furthermore, people out there worry about the future. Thus, the models we use take into account that forward-looking households and firms will modify their expectations and change their behaviour in response to the new fiscal policy measures.Finally, at least some people out there realise that higher government spending and debt today ultimately require raising more taxes in the future. Such households will consume less today....
In light of these findings, European policy makers are well-advised to question the usefulness of further stimulus packages. They ought to carefully monitor the impact of decisions already taken on the burden imposed on future taxpayers. The available funds and remaining borrowing capacity should be utilised where it is still most needed � to prevent a collapse of the financial system and finance the necessary re-capitalisations and toxic asset removals. If governments exhaust their fiscal space in measures that have little aggregate effect, they will instead stimulate scepticism of their capability to back up the financial system.
Westover wrings yet one more post out of the notion that progressives fight dirty because they fail to acknowledge "threshold economic principles." This forces conservatives to argue about the details of tax and spending plans, where they lose because... well, free market economic principles have not had a great record when it comes to fixing potholes and helping poor little kids get breakfast.Actually, Advertising Age reports that the free market is doing a very fine job in fixing potholes, at least in Louisville.
Don't be surprised if you see Col. Sanders out filling potholes. In an unusual cause-marketing push, KFC is tackling the pothole problem in Louisville, Ky. in exchange for stamping the fresh pavement with "Re-freshed by KFC," a chalky stencil likely to fade away in the next downpour.And private generosity feeds kids in DC schools, but that's apparently not enough for Quimby. The fact is that government cannot produce a single breakfast unless it removes the value of that breakfast from someone else. It's not just lunch that there is no free production of; it applies to the other meals of the day. It can only choose to do so by deciding that someone's breakfast is worth more to society than someone else's breakfast. And it's highly unlikely that this animates the chooser as much as the thrill up the leg of the person who gets to do the choosing. As Craig replies, one wonders if the fear of free market solutions is really the fear of freedom itself.
UPDATE: John LaPlante published a few weeks ago on the Mercatus Center's alternative ranking of the states. Minnesota did far worse in that index. How can these things flip around so much? Read my book.