Tuesday, June 30, 2009

Come home, little donut 

Tim Horton's is returning to its roots, and it's taxes that done it:
In a clear indication that Canada is starting to be considered a low-tax place to do business, Tim Hortons Inc. announced yesterday plans to shift its base of operations from Delaware to Canada for tax purposes.

Further, analysts indicate this is also a sign of unease among corporations regarding the U. S. business environment, where taxes are likely heading upward to deal with trillion-dollar deficits and proposed health-care reforms and the White House is looking to crack down on companies that invest abroad.

The move by Tim Hortons makes good on a promise contained in the company's filing with U. S. securities regulators earlier this year, in which it said it was exploring such a reorganization because it could potentially drive down its effective tax rate closer to Canadian statutory levels.

In Canada, the federal corporate tax rate is headed to 15% in 2012, and the federal Conservative government has called on the provinces to get to a 10% business levy by the same time frame--for a combined 25% rate on corporate income. Alberta is already at 10%. British Columbia will be there in 2011, Ontario by 2013, and New Brunswick will go down further, to 8%, in 2012.

In the United States, the top corporate tax rate is in the mid-30% range. As a result, the United States now has about the highest combined corporate tax rate, second only to Japan, among industrialized countries.
And note that, thanks to outsized budget deficits, we're probably heading higher. The Canadians are noticing:
The retailer said in recent filings it expects its effective tax rate to be in the 32%-to-34% range in 2009. In 2008, it paid US$139.2-million in income taxes.

With the reorganization, Tim Hortons could generate "quite a bit" of savings on taxes paid because the income earned in Canada would be taxed at the lower Canadian rate, said John Wonfor, national tax partner at BDO Dunwoody. Its income from U. S. operations would still be taxed at U. S. rates.

Plus, Mr. Wonfor said Canada's fiscal framework looks much healthier compared with the United States, which means the country's policy-makers can likely maintain its lower tax rates. Meanwhile, U. S. taxes are bound to climb, he added.

Finally, there is the current White House proposal to remove the incentives for U. S. companies to invest overseas, and curb the use of offshore jurisdictions by companies and investors.

"If the U. S. tightens up on the tax treatment on foreign income, many Canadian companies -- as well as other foreign entities operating in the U. S. -- might look to put headquarters and holding company functions in Canada since dividends from foreign affiliates are not taxed by Canada," said Jack Mintz, a public-policy expert from the University of Calgary and a renowned tax expert.
Rust never sleeps, and capital is quicksilver. It's not going to wait around for our rapacious Washington elite to feast upon it.

UPDATE: Ed posted the article this morning and comments:
Eventually, American companies will either have to withdraw from global competition and compete solely at home, or they will have to move out of the US in order to return to an equal tax position as their competition, whose governments only tax them on domestic earnings.
The more I think of this, the less I think it's the tax rate that matters as much as the Obama Administration's spending plans. Suppose they cut the corporate tax rate but leave the spending alone. Does anyone think it wouldn't lead to an increase in individual income taxes? An increase in the tax on dividends would hurt corporations as much as an increase in their corporate income tax. A VAT without a cut in income taxes would kill US businesses. So too would increasing interest rates through more government borrowing, or inflation if they print money to pay deficits. What matters is spending. Pawlenty is right: They need to stop.

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May you be blessed to be born into the right institutions 

Regardless of what one thinks of his music or his life choices, it is easy to recognize how enormously productive Jackson was. He broke all the records for album sales, put MTV on the map and propelled music videos into the mainstream.

He created something out of nothing. He used his talent, hard work, and creativity to please the ears and eyes of consumers around the globe. If Jackson--or any entrepreneur for that matter--had asked a certain kind of economist whether he should pursue this line of work, this innovation, he would have been told it was foolhardy. "If there really was a market for that kind of stuff, someone would have done it already," they would say. But this is a static view of the world.

In reality, the economy is dynamic. And what allows that dynamism, what creates the environment for entrepreneurship, is the institutional framework--property rights, the rule of law and even the level of common trust among citizens. These factors cannot be quantified or easily measured, so they are often overlooked.

And yet without these social attributes great talent goes wasted around the world. The U.S. is blessed in countless ways, but do we really think we are just "lucky" to have so many talented people who live here? Would Michael Jackson have been just as successful if he had been born in France or Ghana? Of course not.

The good news is that singers like Shakira, who is from Columbia, and movies like Slumdog Millionaire, based on a book by an Indian novelist, suggest the environment necessary for success is spreading--even in the developing world.
Brian Wesbury and Robert Stein yesterday. My mind turns to these things while traveling. Canada is a great country, but how much of its greatness comes from its proximity to the US? How much of Mexico's growth? How do these institutional frameworks spread?

Please note that this week and next, postings will be at odd times due to time shifts. I will update via Twitter whenever possible, so be sure to follow me there.


Monday, June 29, 2009

New Quarterly Business Report out 

The news story on our new Quarterly Business Report is out. Not a pretty picture: Because the St. Cloud economy went into recession much later than the national economy, and because there's not yet anything to indicate a bottom in the national economy, we think the St. Cloud economy stays in recession until at least winter. I'm only a bit more optimistic than my co-author Rich MacDonald on this forecast, but for me to be right we need to see some real signs of turnaround soon. Anecdotal stories aren't encouraging based on what I've heard around town the last week. Any place someone can pinch spending, they are still doing. Whatever stories you hear about consumer confidence, they aren't evident to business owners in spending patterns yet.

Note to media: If you want an interview on this one, send me an email rather than trying to call my phones. I'll have trouble with those up in Canada. I'm going to try out Skype for the first time.

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The government that can give you everything you want... 

While on my way to the Western Economics Association meetings this year (sitting in the airport ready to visit Vancouver for the first time in 14 years), I run across this statement from our president courtesy PowerLine:
The list goes on and on, but the point is this: this legislation will finally make clean energy the profitable kind of energy.
Note the definite article "the". It makes one type of energy at the expense of another. And how does it propose to do this? He's already told us once.
So, if somebody wants to build a coal plant, they can � it�s just that it will bankrupt them, because they are going to be charged a huge sum for all that greenhouse gas that�s being emitted.
That was January 2008. As of last week energy experts were determining the likelihood that cap-and-trade will favor natural gas over coal. This government is engaged in picking winners, an industrial policy that more and more represents the second Carter Administration. That didn't turn out so well, as I recall.

But 25 senators (soon 26) represent states that produce more than average amount of energy from coal sources. If we can't rely on the sensible economic advice that Obama supposedly is receiving -- perhaps not listening -- maybe we can appeal to those who have used government to give their states something in the past to oppose having it taken away now.

Thanks to President Ford for the title to this post.

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Friday, June 26, 2009

How big a tax? 

Last night Janet posted at True North about the cost of cap-and-trade legislation and her call to Colin Peterson, a Minnesota Democrat from a declining region of farms, lakes and empty nests. Heritage has posted a calculation of the costs of the Waxman-Markey bill by congressional district. Districts have roughly the same number of people of voting age, but can differ greatly in the type of economies they have and the incomes earned by the people of the district. To correct for that, I adjusted each cost applying to the district for year 2012 as Heritage estimates by my estimate of how much each district creates in personal income. The variation goes from under $18 billion in CD-7 (Peterson) to over $31 billion in CD-3 (Paulsen). Here's what I get:

Congressperson Lost personal income % 2012 Lost jobs 2012
Walz 2.35% 3871
Kline 1.09% 3835
Paulsen 1.41% 4496
McCollum 2.31% 3984
Ellison 1.60% 3819
Bachmann 1.24% 4127
Peterson 2.41% 4174
Oberstar 1.46% 3340

This is a tax therefore that varies but bears down hard on Collin Peterson's district. It will cost CD-3 more jobs, but the impact there is less as a share of income.

Let there be no doubt that this is a huge tax increase: taking 2% more of one's income when the government takes about 12.6% of your income in the federal individual income tax for the average taxpayer. In a poor district with a large farm sector, it's worse. I know that Peterson says he got "concessions". It's dubious whether the concessions mean much even to Peterson's constituents. For them, it's unlikely to be less than an across-the-board 20% tax increase. If Peterson does vote for this stinker, someone should take that fact to the debate as his opponent next year.

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In but not of finance 

Johnny Roosh, honorable mayor of the MOB, finds this really incredible quote from Treasury Secretary Timothy Geithner.
JIM LEHRER: Finally, President Obama said yesterday that the real cause of all of this was a culture of irresponsibility. You�ve worked in and around the financial industry for years. How would you describe that, what that culture was? What caused it?

TIMOTHY GEITHNER: I�ve never worked in the financial industry, just to say. I�ve always worked in public service and the government.
Let's review the resume, shall we? He was at the New York Federal Reserve as its president before joining the Obama Administration. So he is the president of the place where Fed open market operations happen. Before that he's at Treasury holding a bunch of positions, including as undersecretary for international affairs (which was the position Larry Summers held before ascending to secretary after Robert Rubin) and his years at the IMF that confounded TurboTax. It's hard for someone to read this history or these comments during his NYFed times and not think he's in the financial industry; you can understand Jim Lehrer's question.

No, what I think Geithner means is that he never worked to earn money for a financial firm. I don't think this makes much of a difference unless you think that somehow makes you more noble. It is very telling the distance he puts between himself as regulator and the financial industry in this comment from 2008:
Let me just finish by saying that confidence in any financial system depends in part on confidence in the individuals running the largest private institutions. Regulation cannot produce integrity, foresight or judgment in those responsible for managing these institutions. That�s up to the boards and shareholders of those institutions."
I knew several people within the industry who were questioning the closeness of Hank Paulson to the financial industry; Geithner seems to want the exact opposite pole. I'm not sure either place is where we want our regulators.


Thursday, June 25, 2009

The Case AGAINST Socialized/Obama-ized Medicine 

When I first saw this post by my friend, David Thul, I couldn't believe it. Well, it's true. One of our great soldiers, Sgt. Dan Powers, took a 4" knife stab to his head. He was keeping Iraqi citizens away from a bomb scene. Powers actually grabbed the insurgent who stabbed him, yet was unaware that he had a 4" blade in his skull.

What happened next could only happen with a nation that values life, innovation, technology and ingenuity. Powers' survival relied on the Army�s top vascular neurosurgeon guiding Iraq-based U.S. military physicians via laptop, the Air Force�s third nonstop medical evacuation from Central Command to America, and the best physicians Bethesda National Naval Medical Center in Maryland could offer. The entire story is here and the video is here.

I listened to Stephen Forbes on the radio a couple of days ago. He mentioned a critical point I'd not considered in the socialized medicine debate (or lack thereof). While we spend a substantial amount of money in the last 6 months of life, (and one must decide whether or not to pursue all alternatives), a benefit of pushing the last six months is this: we learn (because we Americans make a point of learning and asking questions, etc.) what does and does not work. Compiling what we discover in extensive treatments has lead to advances in medicine, for all to benefit.

Yes, there are times when extraordinary measures are not wise. But there are other times when, perhaps, extraordinary measures should be taken. If what we learn from these extraordinary measures turns out to extend lives by years for future patients, then is the extraordinary measure worthwhile? Perhaps these measures save lives in the future. And, perhaps, Obama and the Democrats just might want to consider what knowledge they will be missing by forcing the rest of us non-elites to settle for less medicine and a shorter life. I agree that we need to do something to address our medical costs but is rationing and a two-tier (one for thee but not for me) the answer? I don't think so. The Brits, Canadians, etc. don't really think so, either. Finally, what if tort law were changed, nationwide, to "loser pays"? Just how much would we save in reduced insurance costs, court costs and the avoidance of frivolous lawsuits?

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Obamacare: Just for Thee, Not for Me 

This Obama answer from last night's Heathcare Infomercial sponsored by ABC says all you need to know about "fairness" and "social justice" - key mantras of the Democrats. Dr. Divinsky, a neurologist from NYU raised the fear (legitimate, I might add) that proposed public healthcare solutions limit access, etc. for the general public but not the elite. Obama was asked if he would use the public (restricted) solutions for his daughters and wife:

Obama's answer: �it�s my family member, if it�s my wife, if it�s my children, if it�s my grandmother, I always want them to get the very best care.["]

So, Obama and his wealthy, influential cronies won't use the public healthcare system. Do you think Ted Kennedy did? Nah, I didn't think so.

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If you're a Twin Cities MOB blogger, go! 

I wish I could join in this but St. Cloud commitments will keep me away. Nevertheless, go see Ed and Mitch:
We�ve talked about the brilliant new movie from Mpower Pictures, The Stoning of Soraya M, for the last couple of weeks. It opens on Friday in selected theaters across the country. How �selected�? Only one theater in the Twin Cities will show it during its opening week � the Landmark Uptown in Minneapolis.

Mitch Berg and I thought this would make a great occasion to get the Minnesota Organization of Bloggers (MOB) together for an evening. We plan to attend the 7 pm showing at the Landmark Uptown on opening night, one of the great, classic theaters of Minneapolis, and get the word of mouth going on this powerful film. If you want to join us, just show up at the theater on June 26th. If you�re a MOB blogger, be sure to put the invite up on your blog. We want to get a big crowd to make a splash � and to get together, too.

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Unallotment powers 

The DFL continues to make claims about the unallotment process that Governor Tim Pawlenty is using to balance the budget that the Legislature chose not to. Leading this charge has been DFL state Senator Tarryl Clark of St. Cloud. From her latest newsletter:
It has been just over one month since the Governor announced he was ending negotiations and would go it alone on budget cuts. We thought it was unwise then and it remains so now to do budgeting behind closed doors. Unallotment is meant to be a scalpel, not an ax and it is meant to be used at the end of the two-year budget cycle, not the beginning. It is for unanticipated budget shortfalls, not ones created by vetoes and a refusal to negotiate.
This is wrong on at least two levels. First, the DFL legislature had in fact created the budget in private, asking next to no help from either the governor or the Republican caucus. It did so on May 8, and then did so on the last night of the legislature, passing a bill barely by midnight. It is rather rich for Clark to argue that the governor will go it alone when they did not take his wishes into account (something Rep. Gene Pelowski understood.) Gary Gross is correct in saying that Clark and her colleagues assumed they could get Pawlenty into special session, where the pressure would bear down on him as much as them. She is upset that the Governor side-stepped that box.

Second, Clark has misrepresented the nature of the unallotment process. Luckily, a review of the process was done only last October. The House Research document on unallotment speaks to the issue of timing:
The statutory duty to reduce allotments is mandatory to the extent needed to make up a projected deficit not solved by use of the budget reserve account. However, the statute does not specify a timetable. The authors presume unallotment would have to occur in time to make up the projected deficit within the biennium. Arguably, the Commissioner of Finance must unallot immediately once the conditions that require unallotment have been determined to exist, and the commissioner has approval of the governor and has consulted the LAC. However, in the past, it has been a common practice of commissioners of finance and governors to wait until the legislature had time to rewrite the budget before unallotting. The requirement to obtain the governor�s approval and to consult with the LAC may imply that the commissioner has some discretion in the timing of unallotment. (pp. 4-5)
The governor notified the legislature of his intention to use the power if he did not receive a plan from them. They chose not to act on that power except to run forward a last-minute bill that had already been vetoed once (and had that veto sustained.)

The Minnesota Supreme Court also spoke on the unallotment process in Rukavina v Pawlenty (684 N.W. 2nd 525 [2004]), finding it constitutional for the Legislature to have ceded that power.
Although appropriation of money is the responsibility of the legislature under Minn. Const. Art. XI � 1, it is an annual possibility that the revenue streams that fund those appropriations may be insufficient to actually realize each appropriation. For that purpose, the legislature, by statute authorized the executive branch to avoid, or reduce, a budget shortfall in any given biennium. Minn. Stat. � 16A.152 does not represent a legislative delegation of the legislature's ultimate authority to appropriate money, but merely enables the executive to deal with an anticipated budget shortfall before it occurs.

Although purely legislative power cannot be delegated, the legislature may authorize others to do things (insofar as the doing involves powers that are not exclusively legislative) that it might properly, but cannot conveniently or advantageously, do itself. (cite omitted). It does not follow that, because a power may be wielded by the legislature directly or because it entails an exercise of discretion and judgment, it is exclusively legislative. (cite omitted). Pure legislative power, which can never be delegated, is the authority to make a complete law--complete as to the time it shall take effect and as to whom it shall apply--and to determine the expediency of its enactment. We conclude that Minn. Stat. � 16A.152, does not reflect an unconstitutional delegation of legislative power, but only enables the executive to protect the state from financial crisis in a manner designated by the legislature.
Indeed, to the extent possible Governor Pawlenty has delayed most unallotments to not take place until July 1, 2010, to both hope for more revenue from an improved economy and to allow the Legislature time to make changes in cooperation with the Executive. The door isn't closed: The governor offers the chance to find a better solution, and makes plain the consequences of not compromising.

Clark notes that Pawlenty has used unallotment three times, and in one of those cases the legislature had sought an opinion from the Supreme Court. It therefore had full knowledge of the law. If it did not want to permit the executive the power to "protect the state from financial crisis" through the current law, it only needed to pass a law amending the process. Certainly if the executive is expanding power unduly, the DFL could find a few GOP representatives to vote to defend their prerogative.

I encourage you to read Gary's post for more on what's wrong with Senator Clark's e-letter. But the point here is to make it plain that the DFL continues to mischaracterize Pawlenty's use of powers the Legislature delegates to him. They knew the issues, they did not address them by legislative initiative, and they continue to be hypocritical over who didn't bargain in good faith with whom.

UPDATE: Gary has a second post. Key point I would highlight:
It isn�t accurate to say that the DFL didn�t submit a balanced budget. It�s accurate, though, to say that the first balanced budget they submitted to Gov. Pawlenty passed the Senate with minutes left in the session. It�s equally accurate to say that the Tax Bill that passed was a hodgepodge bill, filled with a litany of tax increases and spending shifts.
And let's not forget that this was trotted out at 10:30pm for passage before midnight in an uncivil manner. Senator Clark should also answer for that clusterfarg.

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Obama uncreates and unsaves 495 jobs 

I'd rather have had that harridan who badgered President Obama about his difficulties stopping smoking asked this question instead: Do you have any comment on the closing of the Hav-A-Tampa plant that died thanks to your insatiable need for revenues?
Tampa will lose part of its cigar heritage in August when Hav-A-Tampa shuts its factory near Seffner and lays off about 495 employees, closing a factory that has been operating since 1902.

The company announced the closing today.

Many employees there make Hav-A-Tampa's iconic Jewels, inexpensive machine-made cigars known for their birchwood tips. Some workers have labored there for two decades or longer, including one who's been there for 50 years, said Richard McKenzie, a senior vice president of human resources for Altadis USA, which owns Hav-A-Tampa. ...

Employees on Tuesday were digesting how they would find work in an economy where more than one in 10 people in the area already are unemployed.

"I've been here 12 years. I know someone's who's been there 20 years, 22 years," said Denise Harrison, an office manager at Hav-A-Tampa. "I'm sure we'll all land on our feet, but it will be harder for some people other than me who may have done nothing else."

...Several things conspired to hurt Altadis' sales, McKenzie said, including the recession and the growth of indoor smoking bans. The bans have especially hurt sales in cold-weather states, where it's impractical to smoke a cigar outdoors in the winter, he said.

However, the company attributed much of its trouble to the State Children's Health Insurance Program, or SCHIP, a federal program that provides health insurance to low-income children. It is funded, in part, by a new federal tax on cigars and cigarettes. McKenzie couldn't say how much sales of Hav-A-Tampa cigars had fallen off, but the numbers have dropped significantly, he said.

Previously, federal excise taxes on cigars were limited to no more than a nickel, said Norman Sharp, president of the Cigar Association of America trade group. The tax increase, which took effect April 1, raises the maximum tax on cigars to about 40 cents, Sharp said.
I used to carry those Jewels around the golf course back in my 20s, when I needed a cheap smoke that kept the flies off and tasted half-decent. They are a poor person's cigar, and putting an excise tax per cigar was bound to hurt cheaper cigars smoked by modest-income folks more than hurt your $10 stogie. Indeed, most of the cheap cigars you see behind the cashier at your Walgreens or Thrifty Drug are made in the States (the better ones, even those made by U.S. firms, are handrolled with cheaper labor in the Caribbean.

Way to go, Democratic Congress and President Obama! You've just uncreated 495 jobs!

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Wednesday, June 24, 2009

Reading two FOMC statements 

This afternoon's versus the previous statement on April 29:
The inflation hawks can't be happy, and perhaps as much as the statement's disappointment for them will be the absence of a dissenting vote. The April meeting's minutes indicated some discussion of the balance sheet expansion and "contacts who had expressed concerns that the expansion of the Federal Reserve�s balance sheet might not be reversed in a sufficiently timely manner and hence that inflation could rise above rates consistent
with price stability." That discussion might have moved the last sentence as indicated in my last bullet point. But the Fed isn't moving as fast as some would like. �If there was a surprise, then maybe it was the fact that there was no mention of the exit strategy,� said one trader as stock and bond markets reacted badly.

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A letter from Tehran 

Sent to me by a friend, this is a letter from someone running an ashram in Iran (a brave task in and of itself.)
A letter from Iran: Please Help

Dear friends,

These days our hearts are bleeding, and we can not stop crying for the lives being lost so brutally in this land once again. People you see on the media are risking their lives for the most basic human right, freedom to be. This has been taken away from us in a violent and bloody manner one way or another for the past thirty years. Once you walk with people in protest, it is inevitable to feel the depth of this yearning and the dimension of the pain they have endured by having it suppressed decade after decade. We have lost brothers, sisters, friends, children, students, fellow activists, writers, poets, Sufis, yogis, homosexuals, Kurds, Turks, Baloochis, Jews, Armenians, Muslims, Assyrians, Bahais, and other so called �minorities� to this simple quest for the right to be and live as we are in our society. We have been jailed, whipped, and publically humiliated for simple things like listening to music, socializing with the other sex, having parties, wearing jeans, growing hair, not covering our hair and body with the Islamic dark dress code. Our women, not our men, have been stoned to death for having extra-marital affairs. In our legal system women are officially treated as second class citizens, being worth half of a man�s voice when it comes to submitting evidence to a court of law as a witness. They can easily be divorced by men, but can not divorce as easily, and have no right to their children after divorce. They can not leave the country without written permission of their husbands/fathers.

Friends, the list is as endless as the degrees we differ from one and other. We have been suffering from this systematic utterly inhuman intolerance being forced at every level of our society down to our own families. No wonder young and old, men and women are out there walking surrounded by heavily armed and aggressive police, hit squads, and snipers on the roof shooting them down at random.

We are confronting religious intolerance and fantaicism of its worst kind in this land. Past thirty years tens of thousands have been lost, raped, and jailed for standing tall against this current. Its vibrations of hatred, war, and aggression have reached your home anywhere in the globe. There is no doubt that we are a global family being interrelated to one another closer than we know. This, we have experienced the hard way past few years.

I am writing to beg for your attention and assistance in any way possible. An innocent, peaceful, historic momentum, unprecedented in recent history, has come alive in our world that is being brutally put down with violence, lies, and dirty politics for power and riches. You, no matter where you are, have been inflicted by the evil nature of this current going round in our globe.

My brothers and sisters, come together in any way you can. Join the arms of our innocent people whose blood is being shed for peace and human rights which you may be blessed with elsewhere. Our hands are stretched out, reaching out for your support from outside. We are confronting a formidable power as ancient and infectious as hatred, tyranny, intolerance, prejudice and racism. We need your help.

If your heart prompts, please send this letter to your local newspaper, members of parliament, offices of your country�s Prime Minister or President. Let it be heard what we are facing and how important it is that we as the human body must shoulder this together. I can not do it alone, but we can do it.

We as a nation are pleading desperately to the world that we MUST not recognize this regime legitimate. We need to use all our strength and unity to pressure it to leave the office before our voice is shut down.

I hope you join us in prayers and firm peaceful steps towards a global village where we all can live in peace and harmony.

With love to all,
[name redacted]

Updates this morning from Tehran via Gateway Pundit show increased repression, shooting around the Majlis. I have been following Twitter feeds of ABC news reporters Lara Setrakian and Jim Sciutto since the beginning, and they confirm a massive crackdown going on at this moment. I agree with Mitch on the comparisons to Solidarity in Poland, but the key there was how long it lasted. You needed years to move Solidarity to power. It will take almost that long in Iran. (I now have the one pre-condition Obama should ask for: He will meet with Ahmadinejad only if he gets a meeting as well with Mousavi. There is a parallel there too with Poland.)

We can debate weenies all we like, but let's not lose sight of the larger story here. Meanwhile, don't forget to go see The Stoning of Soraya M this weekend (theater listing).


Tuesday, June 23, 2009

Don't save them just yet! 

Bill Easterly finds the concept of Millennium Villages as tourist attractions where you're not supposed to feed the natives:
I decided to look more into the MV tourism project, not to pile on, but because I believe patronizing attitudes towards Africans is a BIG issue in aid. The web site gives this introduction:

The Millennium Village Tour is a unique experience that introduces the � poverty traps in south-eastern Rwanda and the successful intervention package of the UN Millennium Villages Project.
I agree with Wade that it is dehumanizing that the villagers are just exhibits for tourists teaching them about abstractions like �poverty traps,� and are also to be used as propaganda for the MVs� �successful intervention.�

The brochure that bothered Wade really is cringe-inducing, including also this line:
Please do not eat in drink in public. Many people in Bugesera Distract are still suffering from malnutrition�
If the MV is so successful, why are people still starving? Instead of worrying about hiding their food, why don�t the tourists pitch in on some MV project that helps the starving get food and nutritional supplements?
I think the answer to that might be found in a famous early Sam Kinison sketch (NSFW) about world hunger. Easterly's larger point, to me, ties to a connection he made years ago in which we continue to believe sending foreign aid helps poor countries grow even though the evidence doesn't support that claim any more. Indeed, as Harford and Klein point out, the aid becomes something to fight over, much like the Coke bottle in The Gods Must Be Crazy.

Oh well, it could be worse:

(You have to watch to the end of this for full effect. There's at least one NSFW word in there, but it's not Kinison style.)

If Maine can do it, why can't we? 

Eighteen months ago the Lady Logician wrote about her new home Utah which has a flat income tax and wondered whether it would be time for one in Minnesota. You might want to say that you can't do this when we're in a recession. But that's not stopping Maine:
This month the Democratic legislature and Governor John Baldacci broke with Obamanomics and enacted a sweeping tax reform that is almost, but not quite, a flat tax. The new law junks the state's graduated income tax structure with a top rate of 8.5% and replaces it with a simple 6.5% flat rate tax on almost everyone. Those with earnings above $250,000 will pay a surtax rate of 0.35%, for a 6.85% rate. Maine's tax rate will fall to 20th from seventh highest among the states. To offset the lower rates and a larger family deduction, the plan cuts the state budget by some $300 million to $5.8 billion, closes tax loopholes and expands the 5% state sales tax to services that have been exempt, such as ski lift tickets.

This month the Democratic legislature and Governor John Baldacci broke with Obamanomics and enacted a sweeping tax reform that is almost, but not quite, a flat tax. The new law junks the state's graduated income tax structure with a top rate of 8.5% and replaces it with a simple 6.5% flat rate tax on almost everyone. Those with earnings above $250,000 will pay a surtax rate of 0.35%, for a 6.85% rate. Maine's tax rate will fall to 20th from seventh highest among the states. To offset the lower rates and a larger family deduction, the plan cuts the state budget by some $300 million to $5.8 billion, closes tax loopholes and expands the 5% state sales tax to services that have been exempt, such as ski lift tickets.
It seems like everyone's running for governor here in Minnesota; support of a flat tax would be one way to distinguish the candidates. And it doesn't have to be just Republicans:
One question is how Democrats in Augusta were able to withstand the cries by interest groups of "tax cuts for the rich?" Mr. Baldacci's snappy reply: "Without employers, you don't have employees." He adds: "The best social services program is a job."

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Monday, June 22, 2009

Born of high means 

Let's suppose that everybody gets their income by random chance. Suppose that random chance is approximated by a draw of one ball from a bag. The bag contains balls that are one of five colors, and these correspond to five income levels (let's say $20,000, $40,000, $60,000, $80,000 and $100,000.)

There are parents and children. Let's suppose that the children's draws of balls are independent of the parents. If Mom draws a $20,000 ball, what are the odds that Junior will draw something better? It would be 4/5, or 80%. If Mom draws a $40,000 ball, there's a 20% chance Junior ends up worse off, 20% chance Junior is the same, and 60% chance he's better off. Etc. For those children whose parents drew the $100k ball, 20% will do as well, no more. Spread the balls out over more categories than five, and you'd get finer gradations, but the logic is the same. Be born to a higher-income person, and there's a higher chance your income will be less, if income is randomly distributed.

Now look at the two strands of data Russ Roberts extracts from a recent Pew study on generational income mobility. At the bottom end of the income distribution we get a result that would appear to be pretty well drawn from random chance. It looks like race matters; you can speculate all you want about it, I don't have much to add based on the graphs except that the ratio of black to white income rises from 44% to 53%. It's better in relative terms, but I couldn't argue with you if you said it wasn't "better enough". But I'm more interested in the top quintile. 44% of those whose parents where in the upper fifth of the income distribution exceed their parents' income; on average, their income is 2% less than their parents'. And on my random draw exercise, you'd expect no more than 10% to be better off rather than 44%.

So for those at the bottom, your children are likely to do better off, though no more so than if all incomes were drawn randomly. For the rich, there's some persistence over generations. Inherited traits do matter, be it height or brains or beauty. If you think 44% is too many, how do you do something about it without killing the incentive of the most productive to work on their children's behalf?

And, more importantly: Would this "chance distribution" story in my first two paragraphs be anybody's idea of what the "right" amount of generational income mobility is? If not, what is? (For more, see Mueller, Tollison and Willett [1974].)


Democrats Know Words Matter - Check This 

There have been a number of posts on this site regarding global warming, or lack thereof.Now we discover that the Democrat Party think tanks are warning their Congressional representatives to play down the term "global warming" and others. Hmm Why? Could it be that the global warming push isn't as critical as the media and Democrats have portrayed it to be? Could it be because the public is wising up to the fact that there is another side to this supposed catastrophe? (Check this site for a readable summary of the GW components, many of which are ignored by the media and people who have already drawn their conclusion.)

Regardless, here's what the Democrat think tank advisers are asking their Democrat supporters of major government "reform" to address this GW "problem" to do:

In a strategy memo, Democratic think tank Third Way and top party strategist Stanley Greenberg warned Democrats that swing voters don't care about fighting global warming, and said terms like "cap-and-trade" are useless. Instead, the memo suggests that Democrats tap into Americans' optimism that clean energy can help improve the faltering economy.

"For most voters, global warming is not significant enough on its own to drive support for major energy reform," the memo says. "So while it can be part of the story that reform advocates are telling, global warming should be used only in addition to the broader economic frame, not in place of it."

Thus, the words the Democrats and their media microphone chose to use will be changed. Watch for new vernacular regarding GW. It seems they are more concerned about wording than accuracy. Reading this, one sees that the Democrat agenda to control more of our lives via taxes and energy restrictions is alive and well, but it is also an admission that the terms they have been using no longer carry the necessary clout (fear?). Now we are to be guilted into buying into the Democrat agenda about global warming because we need "clean energy to improve the faltering economy?" (Hint, there are other ways besides DC to "fix" our economy.)

I was once asked if it would be wise for us to do nothing about GW and find out we should have? The reverse to that question is this: Would it be wise to spend money on something that is highly debatable, possibly unprovable (earth has been around for a very long time; civilizations about only 3000 years), and would add even more $n,000,000,000,000s of debt to our kids for a theory that may well prove to be false or may fix itself?

For the record: Animals exhale CO 2, plants inhale it; plants expel oxygen, animals inhale it. My 4th graders knew this - this normal exchange keeps plant and animal life in balance. Gee, maybe we should just let Mother Nature do her thing and get out of the way.

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It's called corporatism, Jonah 

Jonah Goldberg has a great editorial this weekend that only misses the name of that he wants to criticize.
The absence of free markets isn�t necessarily Bolshevism, or even socialism. Capitalism�s death can come in many forms, by many different hands.

...Whether that�s more accurate, it certainly seems a more fitting declaration as the coup de gr�ce of capitalism�s murder is at the hands of its most successful child: big business.

Everywhere we look we see the great and once-great beneficiaries of free markets running to the state for protection from the cruel bullying of competition. On health care, insurance companies and others repeat the mantra that they want to be �at the table rather than on the menu,� all the better to be positioned as a tax collector of the welfare state. General Motors and Chrysler have gone from being pimped-out prostitutes of the state to outright chattel more akin to the leather-bound gimp in Pulp Fiction, eager to do the bidding of the president and the UAW.
&c. I have thought for awhile about where the line is between rent-seeking and corporatism. As the rent-seeking piece written by David Henderson states, rent-seeking is really privilege seeking. The privilege to operate in the economy under protection of government.

But corporatism is a bit more than that. It desires to have a grand bargain rather than regulatory capture by one side or the other. I don't necessarily see the Obama Administration as hostile to big business so much as trying to co-opt it. (Thus this morning's announcement of a "deal" with pharmaceutical firms to help the Administration's health care plan.) �

So think about this 2005 interview with Andrei Illarianov, former Putin economic advisor. �What do you call the type of economic system created by Putin? �How do you distinguish the Russian government's actions with its gas industry from the Obama administration's actions with the car industry? �In my discussion on this topic last week, I thought it important to make these distinctions clear. �What Jonah Goldberg is trying to say in this article is that the government is pursuing corporatism. �But is it different from the usual rent-seeking behavior that happens in all market economies where the commitment to economic freedom is imperfect? �I don't know.


Your interest rate stimulus is fading, fading, fading... 

Markets remain jittery ahead of Tuesday and Wednesday's Federal Open Market Committee meeting.
Chairman Ben S. Bernanke has to convince investors the Federal Reserve can take back more than $1 trillion it pumped into the U.S. banking system to pull the economy out of the longest decline in more than six decades.

...�The markets don�t understand the Fed�s exit strategy; they�re confused,� said Lyle Gramley, a senior economic adviser with New York-based Soleil Securities Corp. and former central- bank governor. �That�s contributed to the rise in long-term rates.�

The risk is that higher rates will hold back the budding economic recovery by lifting borrowing costs for homeowners and buyers. Economists surveyed by Bloomberg forecast growth of 0.5 percent in the third quarter after gross domestic product shrank for four consecutive quarters -- the first time that�s happened since 1947.

�It�s not good for the economy,� said Michael Feroli, a former Fed official who�s now an economist at JPMorgan Chase & Co. in New York. �It pushes back the housing rebound.�

The yield on the 10-year Treasury note ended trading at 3.78 percent June 19, up from 2.21 percent at the end 2008.

The average 30-year mortgage rate rose to 5.59 percent earlier this month, the highest since November, before slipping to 5.38 percent in the week ended June 18, according to Freddie Mac, the McLean, Virginia-based mortgage-finance company.
It doesn't help that the Treasury is pushing another $104 billion of supply into the bond market this week either. �Increased supply of bonds will of course push down bond prices and thus push up bond yields, carrying other interest rates with them.

Now Paul Krugman is arguing hard against the view that deficits are pushing up interest rates. �But he hand-waves the exchange rate issue (in the first link.) �OK, so let's look at spot commodity prices. �While they've drifted a bit over the last few weeks, there's no doubt they are above their March levels. �Wouldn't that be because of inflation fears? �I think you'd be hard pressed to find Fed officials who don't at least think there's inflation possible here. �So does Kansas City Fed president Thomas Hoenig:
As soon as you introduce methods to deal with the crisis, as we did, that are out of the norm, you should very quickly begin to think about what your exit strategy is. And that is the process we are in right now and we're thinking it through...

We have put an enormous amount of liquidity into the system ... If it is allowed to remain indefinitely, and we keep a very low (interest) rate for an extended period of time, then we do risk an inflationary outbreak.
So this puts the Fed in a bit of a box this week. While tightening now is probably not in the cards, there may come a time they want to do so. �Failure to signal this week that the value of the dollar is a concern to them -- one they are willing to invest in -- will probably start the process of higher inflation. �Either higher nominal rates (through higher inflationary expectations) or higher real rates (in defense of the dollar) means the interest rate cycle has begun the process back up, which is bad news for housing.

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Sunday, June 21, 2009

Safety versus Risk Taking 

Today I read a wonderful article on risk taking in the Sunday Parade Magazine. The author, Jamie McEwan, won a bronze medal in white-water slalom in the 1972 Summer Olympics. What caught my eye was Mr. McEwan's comment, "To avoid all risk is to become immobilized."

How true! We have had it so good for so long that we are letting the risk averse mindset control much of what we do and teach our kids. We deny them basic activities at school so no one gets hurt. We often do their chores. We teach them that things will always be good, come out their way or that someone else is really at fault.

What we're really teaching them is to avoid life. As I've told my students, "Life is not risk free so get over it." You have to push yourself; try something outside your comfort zone. When you push yourself, you will discover that you can do more than you thought you could do.

Avoiding risk is not safe, anyway. We take risks every day: driving a car, walking down the street, etc. Risks simply must be faced: the risk of failure, humiliation, hurt. We cannot protect our children from the world so we need to teach them how and when to be rational risk-takers.

I remember a cartoon from my youth. The strip, Nancy, had a character Sluggo who woke up on Friday the 13th, and decided to stay in bed, just to play it safe. What happened? The ceiling fell on him!

We owe it to our children, our students, and ourselves, to take risks. Evaluate the odds, put a plan in place, then just do it. We will learn if we fail but will experience previously unknown joy if we succeed.

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Friday, June 19, 2009

All I know about cars... 

... I learned at the MSRA's Back to the Fifties rally last year. �So I'm glad we're doing this again this year.

Memories will also be evoked by a special reunion broadcast 11-1 with Mitch, Ed and me. � Anything nostalgic will also have the possibility of a Lileks sighting, possibly around 2. �I'll take a break in the usual Headliners period finding food (without Michael, this will be easier) and be back at 3 trying to tell a Buick Phaeton from a VW Phaeton. �

All this happens at the State Fairgrounds, with our tent set up on Dan Patch near the Snelling entrance. �If you like cars, Americana, or just a nice day looking around the Fairgrounds, come on out and see us please! �If you cannot make it, start listening at 9am CT to AM 1280 the Patriot for the David Strom Show and then let NARN tell you all that you're missing.

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How much of what you know is out of context? 

When I do my work well, one thing that happens is I put some facts people "know" into context so that you understand as well as know. Here's a couple examples of recent writings others have on this subject:


Here are some good questions 

I'd just like to repeat a simple question I asked at the beginning of the Obama administration: which would you rather have, the fiscal stimulus or $775 billion in public health programs?

Even better, how about $300 billion in stimulus -- the immediate stuff like aid to state governments -- and $475 billion in public health programs?

At the time no one except a few progressives thought such a question was particularly relevant.

Note that the economy has seemed to stabilize, more or less, and well under ten percent of the stimulus money has been spent to date. Moving forward, if no further major programs will be put into place, how would you like to spend the rest of that cash?

Tyler Cowen this morning. I'd vote for a simple rescission, and offer Mr. -- oh yes, Barb, you're right, President Obama -- a mulligan. We always offer those on the first hole.

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Thursday, June 18, 2009

Media alert: The Ed Morrissey Show 

I will be on the Ed Morrissey Show at 2pm Central Time. Click that link and follow directions to listen in!

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"We won't push it, but they're evil" 

There's something about this interview with Ron Paul that sticks in my craw. �First he says he is not interested (yet) in a discharge petition for H.R. 1207, the Fed audit bill.

Then he says "The main job is to wake the American people up and if we get closed out it will be proof positive that they are not very anxious for the American people to know what they're doing." Who is "they"? The Fed does not vote, it has no legislative initiative. It is the creation of Congress, and has reporting responsibilities already from the Humphrey-Hawkins Act of 1977. �The chair is on the Hill twice a year, and will be next month. �You got a question, Representative? �Ask it.
The comment seems positively conspiratorial. �

I recall this behavior from another Texas congressman, Henry Gonzales, who retired in 1998. �Indeed, so too was Wright Patman, another longtime critic at the Fed. �U.S. central banking has always had this tension between the U.S. Midwest and farm interests and the money centers on its coasts. �Think back to the "cross of gold" speech of William Jennings Bryan in 1896. �It riles up populist anger and has historically been used by politicians who thrive on populism, particularly those from Texas. �The only difference this time is that the populist is a Republican.

It is ironic that these calls for greater transparency at the Fed are pointed against Ben Bernanke, who for all his other flaws has been the most open chairman of the Fed in history.�

So it is interesting to me that this whole debate has been over getting exposure for Rep. Paul and his war on the Fed. �One wonders why the other 200+ co-sponsors of this legislation have signed on.


Excellent fakes of fantasy bonds 

There's been bewilderment over the story from Italy where two Japanese "nationals" tried to smuggle in $134 billion in U.S. Treasury securities, including some Kennedy bonds of $1 billion denomination. �Now to my knowledge the largest denomination on a Treasury bond is $1 million. �Moreover, for these to be used in a transaction they would almost have to be bearer bonds, a bond that pays to whomever holds the bond, i.e., they're unregistered. �If I'm reading this document right, it appears there's only about $105 billion of those still in existence.

So it comes as no surprise to me that the bonds turn out to be fake.
�They�re clearly fakes,� said Stephen Meyerhardt, a spokesman for the U.S. Bureau of the Public Debt in Washington. �That�s beyond the fact that the face value is far beyond what�s out there.�

Italy�s financial police last week said they asked the U.S. Securities and Exchange Commission to authenticate the seized bonds, with a face value of more than $134 billion. Colonel Rodolfo Mecarelli of the Guardia di Finanza in Como, Italy, said the securities, seized in Chiasso, Italy, were probably forgeries.

Meyerhardt said Treasury records show an estimated $105.4 billion in bearer bonds have yet to be surrendered. Most matured more than five years ago, he said. The Treasury stopped issuing bearer bonds in 1982, Meyerhardt said.

Had the notes been genuine, the pair would have been the U.S. government�s fourth-biggest creditor, ahead of the U.K. with $128 billion of U.S. debt and just behind Russia, which is owed $138 billion.

According to the Italian authorities, the seized notes included 249 securities with a face value of $500 million each and 10 additional bonds with a value of more than $1 billion, as well as securities purported to be �Kennedy� bonds. Meyerhardt said no such securities exist.
I have looked for days for examples of a Kennedy bond but found none. So the questions become: who forged these bonds and towards what end? Who would have been willing to accept them as payment? How did these two persons come into possession of them, if they were not the forgers?

J.S. Kim also raises a good point here:
According to a brief Bloomberg article regarding this story, the seized bearer bonds allegedly were dated as of 1934. Since bearer bonds in denominations of $500 million did not exist in 1934, the bonds were deduced as fake, though the Italian police are still waiting for a declaration regarding the bonds� authenticity from the SEC. There is something truly �off� about this declaration. How can the quality of the forged bearer bonds be so meticulous that they �are indistinguishable from the real ones�, yet the people involved in the alleged forgery so ill-informed as to not date the bearer bonds with a more recent year that would not immediately identify them as fraudulent? How hard would it have been to date the bearer bonds with a more recent year? An equivalent analogy would be if an expert art forger meticulously re-created a Picasso oil canvas and then erroneously signed the work with the wrong artist�s name. This story just does not add up.
If it's a fraud, the best guess is that it's the North Koreans that have done this. �There are also stories that the $500 million notes are marked Federal Reserve Bonds from 1934, which is another type of bond that does not in fact exist. �These bonds may instead be something invented by a weird Asian cult (one of the two "nationals" appears to be Filipino.) �I suspect in the end it's much ado about nothing -- two cranks fly to Europe to pass off some excellent fakes of fantasy bonds.

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Wednesday, June 17, 2009

Judge Sotomayor and the All-Female Club 

Thanks to Powerline for the following paragraph to which I'll pose two questions:
Judge Sotomayor has disclosed to the Senate that she belonged to an all-female club called the Belizean Grove. She claims that her club "did not discriminate in an inappropriate way."
If Judge Sotomayor had been a Republican, would the mainstream media, dominated by independents who vote for democrats, have ignored this [sexist] membership?

Secondly, does Judge Sotomayor's comment, highlighted above, mean that they discriminated in an appropriate way?

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First look at bank reform -- not impressed 

Above (please click to enlarge) is Table 5 from Chapter 2 of Frederic Mishkin's The Economics of Money, Banking and Financial Markets, 8th edition.* It maps for you the variety of regulators currently in the U.S. banking system. There's an interesting passage in the book much later on regarding multiple regulatory agencies:
Commercial bank regulation in the United States has developed into a crazy quilt of multiple regulatory agencies with overlapping jurisdictions. The Office of the Comptroller of the Currency has the primary supervisory responsibility for the 1,850 national banks which own more than half of the assets in the commercial banking system. The Federal Reserve and the state banking authorities have join primary responsibility for the 900 state banks that are members of the Federal Reserve System. The Fed also has regulatory responsibility over companies that own one or more banks (called "bank holding companies") and secondary responsibility for the national banks. The FDIC and the state banking authorities jointly supervise the 4,800 state banks that have FDIC insurance but are not members of the Federal Reserve System. The state banking authorities have sole jurisdiction over the fewer than 500 state banks without FDIC insurance. (Such banks hold less than 0.2% of the deposits in the commercial banking system.)

If you find the U.S. bank regulatory system confusing, imagine how confusing it is for the banks, which have to deal with multiple regulatory agencies. Several proposals have been raised by the U.S. Treasury to rectify this situation by centralizing the regulation of all depository institutions under one independent agency. However, none of these proposal has been successful in Congress, and whether there will be regulatory consolidation in the future is highly uncertain. (pp. 249-50)
That last bit is amusing (Mishkin has a new edition out next month, and I can't wait to see what he does with that second paragraph now!) So as we look at the new draft from the White House, what do we see? In their words (p. 2)
It appears to me you get two new agencies plus that oversight coordination council in the first bullet. You would in essence kill off the federally-chartered savings and loan, an idea that's been around for ages (here's a history of that from 1998, which on first blush reads like a foretelling of the problems we face now.)

It will take days to read and digest what's in there. For example, I'm quite concerned about the reduction in Federal Reserve independence that is reflected in the proposal (on p. 14) to force the Fed to get a signature from the Secretary of the Treasury before it could invoke its emergency powers (under Section 13(3) of the Federal Reserve Act) to prevent a financial crisis. I'm sure there are other little noxious nuggets among the 85 pages in this thing.

Let me make two points though. First, I showed the structure above and the quote from Mishkin to point out that most of us have thought the regulatory system was, if anything, too unwieldy. We were hoping for simplification. At first reading this proposal drops one regulator (the Office of Thrift Supervision, within FDIC) but puts two in its place, one for consumer finance protection and one for insurance firms. That just feels like it's going in the wrong direction, based on what we've taught in money and banking for the 25+ years I've done it.

Second, I fully agree with Arnold Kling that the Fed does see systemic fragility of the financial system as within its purview. I wrote several weeks ago that the Fed has basically two modes of conduct: in normal mode it fights inflation (with some eye on "high employment" as its goals insist -- the degree to which it looks at that varies by Fed chairman); in emergency mode it will act as a lender of last resort without regard to inflation in the short run. I am not yet sure there's any discussion in this draft of the connection between regulation and lending of last resort, or the connection between each of those and deposit insurance. (See Kahn and Santos [2005] for more.)

Kling also notes the Treasury brief is mute on housing policy. Can't imagine why.

*See also this from the Federal Reserve.

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What's the objective function? 

When you teach a graduate course in price theory, you typically are teaching solutions to a "constrained optimization" problem. �Thus the calculus along with Lagrangean multipliers and all that. �Those who think there's too much math in economics don't deny that this is the problem; they only think that forcing the problem into a calculus form oversimplifies and ignores some real, important issues.

All would agree that part of the problem has to be an agreement on what it is you are trying to maximize or minimize. �You are either maximizing profits subject to some constraints on cost or quantity of inputs, or you are minimizing cost subject to some level of output. �We believe people make decisions this way even if they can't write a function down on paper. �They're impelled to do so by the never-ending quest for more. �

I got to thinking about this today after reading Megan McArdle's important post on health care costs being the Laffer Curve of the Left. �In doing so she takes a shot at the original Laffer curve:
It is also true that some countries have cut marginal tax rates, and thereby actually raised the tax revenue they collected. For all the derision about the Laffer Curve, it is absolutely correct--indeed, it has to be; it's basically just an identity. Tax revenues peak somewhere. If you're to the right of that peak, you could raise revenue by lowering rates.

What's left is the empirical question: are we to the right of that peak? Empirical answer: no we are not. It was not unreasonable for Ronald Reagan to believe that we might be, since the world didn't have all that much experience with lowering 70-90% marginal tax rates.
But notice what she's maximizing: Tax revenues. Why on earth would we want to do that? What I am interested in is a tax system that maximizes economic growth, not revenue. �The growth-maximizing tax rate is, we can pretty easily show, below the revenue-maximizing tax rate (I know I had seen this in a seminar at Claremont many years ago, I think by James Buchanan.) �If I could cut marginal tax rates by 10% and increase the long-run growth rate of per capita GDP from 1% to 2%, that's a great increase (living standards would double in America every 35 years rather than every 70). �If the deficit rises from the tax cut and I could cut spending to rebalance without damaging that long-term rate, I've maximized the right thing.

So let's turn to health care. �The entire debate is framed, as McArdle does, on health care costs. �The New York Times reported yesterday that Obama is emphasizing cost minimization:
The president�s emphasis on reducing health care costs over expanding insurance coverage, which dates to his campaign, reverses Democrats� priorities of recent years. Obama advisers say the focus on cost savings has appeal for all Americans, not just the uninsured. Some advisers, including veterans of the Clinton administration, say President Bill Clinton�s emphasis on covering the uninsured helped doom his health care plan in 1994.

�We have made cost control a coequal objective, just as important as the expansion of insurance coverage, which has traditionally been the dominant goal for Democrats,� said Rahm Emanuel, the White House chief of staff. �The entire discussion has to be centered on controlling or reducing costs.�
McArdle takes this thinking to task:
�We have been trying to control health care costs since the 1970s made it clear that Medicare was going to get really, really expensive. And any idea that you care to name, from comparative effectiveness research to healthcare IT to preventive medicine . . . these have all been on the table for more than thirty years, under one name or another. They haven't happened.
But it's asking still the wrong question. If we minimize cost of health care, what is being held constant? The quantity of health care. There is no other way to do this; all choices on scarce goods involve competing claims only some of which will be fulfilled. You cannot simultaneous reduce cost and increase quantity. �And what do we want from health care if not maximize health for the most people? �Sure, you still have the aggregation problem of whose health, how do you make the interpersonal comparisons, but that is a problem in every public policy question we try to answer. �

There needs to be a reframing of the health debate. �Conservative solutions should run away from cost minimization because it necessarily involves controlling the level of health people can have. �That should be abhorrent to them. � �Instead ask: what system maximizes health of the citizens, properly measured.

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Tuesday, June 16, 2009

Net and gross 

It's worth remembering that the CBO scoring of the Kennedy-Dodd health insurance bill -- from which everyone is saying $1 trillion over 10 years for 16 million net uninsured people -- measures the change in the deficit, not the cost of provision. CBO and the Joint Committee on Taxation assume that businesses who would offload their employees to the government option will pay $257 billion over the ten years in taxes (really, a kind of fine). Those covered will make some nominal payment, assumed by CBO to be $100 per person per year. So the gross cost of coverage of a net 16 million people is about $7,993 per person per year. A recent survey by Towers Perrin suggests corporate health care costs of $9,660 per employee, but an employee may cover several persons. (The cost for an employee only is $4,860.)

It's hard to see how this thing saves money.

For more, see Keith Hennessey.

UPDATE: Also, from a blogger conference call attended by Gary Gross:
I asked whether these gentlemen would agree with my characterization that single-payer is a �race to the bottom�. Jack Kingston cited two startling comparisons on cancer survival rates.

The survival rate for breast cancer in the United States is 84%; in Britain, it�s 69%.

The survival rate for prostate cancer in the United States is 92%; it�s only 51% in Great Britain.

That last statistic was a jaw-dropper for me. Think of the difference between 9 men in 10 surviving in the United States vs. 1 in 2 men dying of prostate cancer in the UK.

I don't know that Kennedy-Dodd is the British system, but you could argue it's one giant step towards it. Fighting back with data like that above can be effective.

UPDATE 2: K-D might already be dead.

UPDATE LAST: �Maybe it's more, but we're trying to hit a moving target here. �The bill now being discussed is different from the CBO-scored bill. �As I said this morning, there's a heckuva fight going on over how to pay for this, and there's going to be more trial balloons floated here than an Albuquerque fiesta.

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Review: The Stoning of Soraya M 

I confess: I tend to be emotional at movies. If you don't want to sit next to a man that cries, don't take me to a sad movie in a theater. It seems in fact that the sappier ones are the ones that make me cry more.

So when I was given an opportunity to screen Cyrus Nowrasteh's "The Stoning of Soraya M", I wanted to watch it alone. Surely the story, of a woman in 1986 Iran who is stoned to death for a crime she did not commit and, even if she had, would seem so out of proportion to the crime (at least to us in the West) would be done with enough sadness and emotion to get me to shed tears.

Amazingly, not a one. (And this was after I had read Ed's review from last September.)

The vehicle for the story is a woman, Zohra, Soraya's aunt, who tells the story to a French Iranian journalist, Freidoune Sahebjan, who takes the story out of the village in Iran and writes Soraya's memoir. (I have not read the book.) Zohra is played by Shohreh Aghdashloo, of "House of Sand and Fog" fame (and, for long readers here, Dina Araz in Season 4 of '24'.) A widow who lives on her own -- itself a rarity in 1980s Iran -- Zohra is the mentor of Soraya, who is in a cruel marriage to Ali. He has a position of power in the Revolution though no title and no sign of how he earns his money. You're left to assume that. They have four children, two sons and two daughters.

Ali wants to be rid of Soraya to marry another woman, and schemes with a man who wears clerical robes but was once a prisoner of the Revolution. It turns out in Iran that owning your own priest has its advantages. Ali makes use of that to finally scheme to use the law to condemn Soraya to death by stoning. (I am told by a friend that Ali and the two eyewitnesses were sent to prison later for obstruction of justice -- I find nothing on the Internet to verify this.)

Soraya is played by Mozhan Marno, a newer actress last seen in Traitor. Her character is engaging in the movie. She is kind and bears her burdens of having her sons turned against her by Ali and her sole care of the two daughters. The scenes with them are tender and gut-wrenching, knowing as you do what their fate will be. Ali, played remarkably by Navid Negahban (an absolutely perfect villain), turns her sons against her. I felt the most emotion for the two boys who too late seem to understand the injustice done their mother.

But somehow the movie is not maudlin. Nor is it an indictment of Islam. The mayor Ebrahim will remind almost everyone of Pilate, unsure throughout whether the decision to stone Soraya is just. (Ed describes him as "a good man who refuses to stop an injustice," but I think he's more torn by custom and religion than Ed's description suggests.) Zohra is as devout a Muslim as anyone in the film, surely more than the local mullah. The corruption belongs to a village caught in a time when women are chattel. As much as the women of the village try to accept that the stoning is just, the scene eventually turns them all away. Soraya is not even permitted a proper burial; the women take her body to a riverbank instead.

The movie's premiere in very limited theaters starts June 26 (including the Edina Landmark 4), and obviously could not come at a better time. Mir Hossain Mousavi's wife, Zahra Rahnavard, was insulted by Ahmadinejad in a public debate. Much of Mousavi's based of power is female, urbane, the very antithesis of the women of Soraya's village. Soraya will stand as the image of women as seen by the rural base of Ahmadinejad's popularity. Aghdashloo's Zohra will be instead the image of modernity. Because that's really what's at stake in Iran and the protests: Before you can expect them to be part of a solution to the Middle East's violence, you have to make them part of the modern, connected world. Soraya's village was not -- the final scenes show how the story gets out.

Sunlight is the best disinfectant. And this movie needs more screens, if it is to work best.


Sounds right to me 

From my distant perch out here in Fairfax (and Arlington), I believe this means health care reform is falling apart. It means the unions won't let them tax health insurance benefits and the CBO won't let them punt on the issue of finance.
Tyler Cowen, on the news that the Congress is contemplating VAT to pay for the health insurance plan. I wrote about VAT here three weeks ago. I think Obama too has been stung enough on the deficit question that he has to pay for health care somehow, ergo his PAYGO pledge.

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Monday, June 15, 2009

What Media Bias???? 

Just another day showing the media support of Democrats. Cindy Sheehan stages her own protest and the media is everywhere. What mainstream media covers 600 protesters of Nancy Pelosi? The latter happened in Houston on Friday, January 12. Did you see anything about this in the media?

Zip, nada, zero, etc. Why? Maybe the media doesn't want the American people to know what is really happening in the US. But, thanks to Politico, we have a video.

Americans are being cheated when their news is filtered through the lens of a media beholden or whatever to one political party. Our mainstream media has become so enamored (?) with the Democrats that they refuse to show anything that portrays their ignorance, arrogance or negative attitudes. This omission is unfair and unjust to all of us. Freedom of the press means the good, bad and ugly of BOTH sides is covered as evenly as possible. Silly me, I thought the First Amendment meant that.

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Clarification and interventionism 

I am actually pleased that I've gotten so much email -- most of it negative -- about my broadcast Saturday on what the term socialism means. I had wondered if I was wasting my time, that most people were wise enough to know that socialism and what is happening right now in America are sufficiently different so as to make it necessary to call the Obama Administration's current economic policy something different. I had settled on "interventionism" based on one of Mises' shorter works, because it illustrates something I had tried to explain.

There are only two systems of economic order: Planned systems (which we call "socialism") and spontaneous systems ("capitalism"). He says, in this classic reprinted by the Joint Economic Committee back in 1994,
Production can either be directed by the prices fixed on the market by the buying and by the abstention from buying on the part of the public. Or it can be directed by the government's central board of production management. There is no third solution available. There is no third social system feasible which would be neither market economy nor socialism. Government control of only a part of prices must result in a state of affairs which -- without any exception -- everybody considers as absurd and contrary to purpose. Its inevitable result is chaos and social unrest.
Mises argued that socialism takes two forms. Many of you who wrote to me after the show pointed out that socialism did not require direct bureaucratic control of the economy. That, as Mises argued, is one form. The other he characterizes by the German word Zwangswirtschaft, or "economic compulsion". While there are still private owners hiring workers, buying goods and making profits, they are directed by the state:
The government tells these seeming entrepreneurs what and how to produce, at what prices and from whom to buy, at what prices and to whom to sell. The government decrees at what wages laborers should work and to whom and under what terms the capitalists should entrust their funds. Market exchange is but a sham. As all prices, wages, and interest rates are fixed by the authority, they are prices, wages, and interest rates in appearance only; in fact they are merely quantitative terms in the authoritarian orders determining each citizen's income, consumption, and standard of living. The authority, not the consumers, directs production. The central board of production management is supreme; all citizens are nothing else but civil servants.
There is a fair amount of this beginning in the economy today, I agree. GM and Chrysler are but two examples. The directed lending from the Federal Reserve is another. What may happen in health care may be a third. (We don't know yet; they won't show their cards.)

But it is important to be taken seriously: We cannot argue for turning back this policy unless we properly identify it. And what we identify as socialism, in either the bureaucratic or compulsory forms, will demand proof that we don't yet have. And I don't think it helps to create a new term like "liberal fascism" or "fascism with a happy face" to do battle with those who we want to persuade. It's like comedy, as Johnny Carson used to say: Buy the premise, buy the bit. The word is value-laden and perjorative, putting people off before I can even start an argument. I need something different. So...
The interventionists emphasize that they plan to retain private ownership of the means of production, entrepreneurship and market exchange. But, they go on to say, it is peremptory to prevent these capitalist institutions from spreading havoc and unfairly exploiting the majority of people. It is the duty of government to restrain, by orders and prohibitions, the greed of the propertied classes lest their acquisitiveness harm the poorer classes. Unhampered or laissez-faire capitalism is an evil. But in order to eliminate its evils, there is no need to abolish capitalism entirely. It is possible to improve the capitalist system by government interference with the actions of the capitalists and entrepreneurs. Such government regulation and regimentation of business is the only method to keep off totalitarian socialism and to salvage those features of capitalism which are worth preserving.
There is an area in-between which is an unstable equilibrium. Its character is the black line between the two poles:
Many countries find themselves on the black line, including ours. But what do you call it? It's that area that Mises called "interventionism." It's worth noting that Mises did not think we would move inexorably towards Socialism; it's the lie that socialists use to defeat those who advocate market order to call their preference "progressive." Mises was not optimistic that the battle would be won, but he thought it could be.
Even in this country which owes to a century of "rugged individualism" the highest standard of living ever attained by any nation, public opinion condemns laissez-faire. In the last fifty years thousands of books have been published to indict capitalism and to advocate radical interventionism, the welfare state and socialism. The few books which tried to explain adequately the working of the free market economy were hardly noticed by the public. Their authors remained obscure, ... It is a well-known fact that the legitimate stage as well as the Hollywood industry are no less radically critical of free enterprise than are many novels. There are in this country many periodicals which in every issue furiously attack economic freedom. There is hardly any magazine of opinion that would plead for the system that [has made America better off].

...What we need is neither anti-socialism nor anti-communism but an open positive endorsement of that system to which we owe all the wealth that distinguishes our age from the comparatively straitened conditions of ages gone by.
I've used several times this almost offhand comment from Milton Friedman in 1975 as well:
"There's a strong argument to be made that a free society is a fundamentally unstable equilibrium, in the language of the natural sciences....There's a great deal of basis for believing that a free society is fundamentally unstable--we may regret this but we've got to face up to the facts....How often and for how long have we had free societies? For short periods of time. There was an essentially free society in 5th-century Greece. Was it able to survive? It disappeared. Every other time when there's been a free society, it has tended to disappear."
That period in the U.S. was 1789-1929, he later said. Nobody said an unstable equilibrium couldn't last for a long time. But its death began in earnest with FDR, and continues to this day. Once Republicans accepted that you could intervene even on a limited basis, the gravitational pull on my graphic above is all to the left.

It will not do, I argue, to just toss the label "socialist" towards Obama, Pelosi, et al. Et al. includes a LOT of people, not all of whom wear the scarlet D, if you confuse interventionism with socialism. It will do better to argue the positive position that ending intervention will result in a more prosperous and more free society. To do so will win you no friends, now and forever. Daniel Hannan, recalling Margaret Thatcher and the Left's hatred of her:
Anti-Thatcherites tell you that it's because she closed down the old industries. (She didn't, of course: she simply stopped obliging everyone else to support them.) Yet it must surely be obvious by now that nothing would have kept the dockyards and coalmines and steel mills open. A similar process of deindustrialisation has unfolded in every other Western European country [and the U.S. --kb], ...

No, what Lefties (with honourable exceptions) find so hard to forgive is the lady's very success: the fact that she rescued a country that they had dishonoured and impoverished; that she inherited a Britain that was sclerotic, indebted and declining and left it proud, wealthy and free; that she never lost an election to them. Their rage, in truth, can never be assuaged; for it is the rage of Caliban.
Will it do for supporters of free markets to battle rage with rage, epithet with epithet, or shall we instead build a better argument for why our world will be better than theirs? A free society may be unstable, but it isn't accidental.

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Not all forecasters are alike 

I don't record news programs (except for Special Report, to feed my Krauthammer addiction) but between Twitter and friends I know some things about what happens on the Sunday shows that church keeps me from. �Apparently my favorite VPOTUS was on the air yesterday, and Mark Halperin provides some key quotes.
"No one realized how bad the economy was. The projections, in fact, turned out to be worse. But we took the mainstream model as to what we thought -- and everyone else thought -- the unemployment rate would be."
"Everyone guessed wrong at the time the estimate was made about what the state of the economy was at the moment this was passed."
Two things about that: First, we were forecasting in a period where there was little good past experience to work form. Almost all forecasting involves taking a set of data that you think represents the state of the economy, looking at the most recent experience and finding "comparable" periods of history where the same conditions essentially occurred. Now of course the data is never identical -- we don't live in test tubes. I refer to macroeconomic data as "in the wild", impure, contaminated by hundreds of other influences that we never measure. You assume the stuff you're not measuring isn't important. Good emphasis on this comes from Ed Leamer, whose book "Macroeconomic Patterns and Stories" includes this paragraph:
You may want to substitute the more familiar scientific words �theory and evidence� for �patterns and stories.� Do not do that. With the phrase �theory and evidence� come hidden stow-away after-the-fact myths about how we learn and how much we can learn. The words �theory and evidence� suggest an incessant march toward a level of scientific certitude that cannot be attained in the study of the com plex self-organizing human system that we call the economy. The words �patterns and stories� much more accurately convey our level of knowledge, now, and in the future as well. It is literature, not science.
This was the essence of what I was trying to say Thursday. We try to express that lack of certitude by providing a confidence interval, which when done properly makes most of the so-called "created or saved" jobs into something that could well be just noise. �But even confidence intervals give the forecast a patina of scientism that has no business in economic forecasting. �I'm not confident of confidence intervals (in short, here's a one sentence explanation: I have to have some degree of knowledge of the shape of the distribution of the errors I make in forecasting ... and I question whether or not I can possibly know that.) �When Biden also said�""The bottom line is that jobs are being created that would not have been there before" or that it "clearly has had an impact", we have to respond that we don't know that.

Second, it's foolish to think nobody knew the recession would get as bad as this. �Think about the WSJ Board of Economists forecast, for instance. �The June unemployment rate median forecast from there in Feb 2009 (pre-stimulus) was 8.3%, then 8.7% in March (taken about two weeks after signing of ARRA) and 9% in April. �The forecast has been catching up to reality -- as is true in just about every recession. �In February, at least six forecasters had unemployment forecasts at 8.9% or 9%. �In March, David Rosenberg of BankAmerica (since moved to Canada) was at 9.3%. �Many had forecasts of unemployment in February at or about 10% for the December 2009 report.

All of this from the Obama Administration has been to provide some justification for the size of the stimulus package, which has scared market participants into fears of inflation via monetization. �I don't think any of the tacks taken by the team so far have gained traction.

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Friday, June 12, 2009

Why I have a man-crush on Bill Simmons 

Because he says things like this:
The thing that everyone forgets about this season is that because of the economy, nobody improved their team at the trading deadline. Cleveland, Boston, L.A., San Antonio, Denver, Houston, Dallas�all of them had holes and all of them were terrified of fixing them because they didn�t want to take on any money. Only Orlando swung a deal that had them adding money (Rafer Alston); they didn�t have a choice because they lost their point guard. The biggest loser was Cleveland: They could have added Shaq, Antwan Jamison, Vince Carter, Richard Jefferson, even Zack Randolph; instead, they basically said, �No thanks, we�re good.� And they weren�t. So we had a flawed playoffs to some degree, and even the Finals feels flawed. Ideally, the Lakers would have added one more quality shooter and Cleveland would have gotten LeBron more help (so we wouldn�t have even seen Orlando). Didn�t happen. That�s why I wrote a column calling the N.B.A. �The No Benjamins Association� last February. Just wait until this summer; you will see guys worth $60 million in the old market settling for short-term, $20 million deals. Every flag at every Ferrari dealership will be hanging at half-mast.
He's been saying this for quite a while. I wonder how the Minnesota Twins feel about having their new stadium open next season? Think the Pohlads stuck that extra $50 million into the field for nothing? �(And did you know that the Twins are selling their outfield bleacher seats based on the price of the Dow? �No, me neither.)

Anyway, reading Simmons has been a Boston pleasure for many years. �He says the new basketball book (I'm already clearing Kindle space for it; please, please let it be on Kindle!) will be the best thing he's ever written. �I doubt it. �

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I hadn't realized the size of the bailout in these terms before reading...
European governments have approved $5.3 trillion of aid, more than the annual gross domestic product of Germany, to support banks during the credit crunch, according to a European Union document.

The U.K. pledged 781.2 billion euros ($1.1 trillion) to restore confidence in its lenders, the most of any of the 27 EU members, according to a May 26 document prepared by officials from the European Commission, the European Central Bank and member states and obtained by Bloomberg News. Denmark, where 13 of the country�s 140 banks were bailed out by the central bank or bought by rivals last year, committed 593.9 billion euros.

...The U.S. government and the Federal Reserve had spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, as of March 31.

A majority of new member states including Slovakia, the Czech Republic, Estonia and Lithuania have not taken public measures to support their financial markets, the draft said. Many banks in the region are foreign-owned. More than 80 percent of bank loans in central and eastern Europe come from lenders owned by six western European EU countries, according to Moody�s Investors Service.
While I was prepping my Money and Banking course I taught the last three weeks, I had run across this database of credit crises, last updated in 2003 by the World Bank. �I find myself looking at the size of these numbers and the size of the output losses during, say, the Latin American debt crisis in the early 1980s and wondering whether this will exceed those losses. �In particular I wonder if the output loss, when we finally get around to measuring that, will exceed 10%. �If it did, would we want to call what happened a depression? �Do we use that term to describe what happened in Argentina in 1981-83? �Indonesia 1997-2002? �

I have no good answer to those questions. �But I think the language we use to describe this episode will influence the policies we develop in response to the crisis.

Postscript: �David Strom (whose show I will visit tomorrow at 10am CT on AM1280) argues that the U.S. bailout (he puts it at $15T rather than the $12T in the above article) is symbolic of "lemon socialism". �Question we should ask after looking at the database: Do we see any signs of where the bailout did NOT happen and did it reduce the output loss? �Or is David's pique over who gets the money and who pays?

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Thursday, June 11, 2009

Regarding the Laffer spike 

...I outsource my comments to David Altig:
...we know that the payment of interest on bank reserves�which we have discussed in this forum many times (here and here, for example)�means a higher demand for reserves in the future than in the past. This change, of course, means that levels of the monetary base that would have seemed scary in the past will become the new normal. How big can the "new normal" be? That's a good question, and one I will continue to contemplate. But the assertion in the Laffer article that "a major contraction in monetary base" is required cannot be supported by either current evidence or simple economic theory.
You currently get 0.25% on excess reserves, roughly what is paid on a six-month T-bill. Banks are holding more T-bills too, further indicating their desire for liquidity at present. I wrote three months ago:
We write about the wall of monetary base as if it is an excess supply of bank reserves; it's almost certainly not in the present environment. When it is, only then can it be inflationary.
cf. the Banaian spike?

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Admitting you don't know 

I may be a member of a small group, but I find Joe Biden endearing. During a conference call with media Monday he expressed his own confusion over the "saved or created" meme and said "I'm sorry, I'm not an economist."

During the call, Biden said that the stimulus package, which was signed into law in February, saved or created 150,000 in its first 100 days, and he outlined White House plans to accelerate the pace so that 600,000 more jobs will be saved or created in the second 100 days this summer.

Asked by Jonathan Riskind of the Columbus Dispatch to explain how the White House determined these numbers, Biden said that the Council of Economic Advisers makes its estimates based on measuring what the U.S. employment level would have been without the stimulus, and then comparing it to the nation�s actual employment level.

�I�m sorry I�m not an economist,� Biden said as he was describing the methodology. �My background is foreign policy and the constitution. �

The White House estimates also consider the number of jobs needed to complete certain projects funded by the stimulus, and take into account the �spinoff effects� of spending programs. For instance, tax credits and subsidies for weatherization of homes and wind farms boost contracts for businesses that may not be receiving stimulus money directly, the vice president, who is spearheading the implementation of the program, said.

�I�m a little above my pay grade here as I try to explain in more detail how they count spinoff effects of actual jobs created, � Biden said.

�It�s complicated,� he acknowledged. �But the fact is that there has been no challenge to the methodology the Council of Economic Advisers has come up with, known to national economists as being reasonable to the estimates we have as to the actual jobs saved or created.�

I don't blame the Vice President for being too busy to read this humble blog, but I think I already did that. The calculation is from CEA chair Prof. Christina Romer's testimony:
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.
That comes out to $93,333.33 in outlays per job created. Since the Administration has since spent another $32 billion (and obligated another $71 billion), why are they stuck on 150,000 jobs saved or created? If they believed the methodology Prof. Romer testified in April, the number should be significantly higher. This is the nature of Ed Morrissey's first paragraph here this morning. (I think, unlike the Vice President, Ed reads here occassionally.)

Let's then tie this to the unemployment rate: How can they claim this "created or saved" figure as the unemployment rate continues to rise as the new "hockey stick" graph says? People making that tie in either direction -- to support or refute the claims of the Obama Administration -- should treat the data with care. Unemployment rates come from a household survey which first has to establish who is in the labor force and who is not. You could be creating jobs and have more people unemployed (and a higher rate) because that nascent job growth got a lot of people off the couch and into job search. For example, last month the payroll survey says 345,000 fewer people were on U.S. payrolls, but the household survey says 787,000 more people were looking for work. Some of that is differences in surveys, but part of that is the household survey's finding that 350,000 more people were looking for work in May than April. Make that last number zero, and the unemployment rate only goes up to 9.1% rather than 9.4%. You could claim that last 0.3% is the 'hope' that stimulus created.

Joe's right: It's complicated.

It's too simple therefore to go from employment levels or employment rates to unemployment rates. The mistake with the new hockey stick graph is one made by Romer and Biden economic advisor Jared Bernstein back during the transition. The "saved or created" claim is a different claim. (Their report is the one with the "spinoff jobs" that Biden talks about.)

On the other side, though, 150,000 in a total employment pool of 140,000,000 is barely more than 0.1%, which is the relative sampling error of the employment survey. (See technical notes.) I don�t see how the Administration could prove in a statistical sense that job levels are higher than where they�d be in the absence of the stimulus. If you know a little statistics, what I�m saying is that the confidence interval � margin of error, when done with polling data you may know better � is too wide to say we know with 90% or 95% confidence that there are more jobs. Any job level they claimed would have happened without the stimulus so far could be random variation or sampling error to be corrected when they benchmark the employment rate next year.

I say again what I've been telling anyone who'll listen for the last two months: You can't say the stimulus has worked, and you can't say it hasn't. You don't know yet. It won't take as long as the French Revolution to figure out if it worked, but I think it's better for supporters and critics of the plan to admit they don't know than to start firing off their rhetorical guns wildly.

Take the summer off and get back to me in October on this. We may be able to put a reasonable guess on ARRA's efficacy by then, but not before. You're better off worrying about the bills to come than the ones that are behind us.

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What the buck(nell)? 

A group of conservative students on a college campus decide to create a flier to hand out to other students. To attract attention to it, they shape it like money. In place of a dead president they put a live one, in fact the fellow currently holding the job. On the back they make their point: "Obama's stimulus plan makes your money as worthless as monopoly money." It helps that the acronym for this group, the Bucknell University Conservatives Club, sounds like a slang term for a dollar bill. They start to pass them out, and the Foundation for Individual Rights in Education (FIRE) tells us what happened next.
Bucknell administrator Judith L. Mickanis approached the students and told them that they were "busted," that they were "soliciting" without prior approval, and that their activity was equivalent to handing out Bibles.

The students protested, but despite the fact that Bucknell's solicitation policy explicitly covers only sales and fundraising materials, Mickanis insisted via e-mail that prior permission was needed to pass out any materials"anything from Bibles to other matter."

"Distributing protest literature is an American free-speech tradition that dates to before the founding of the United States," said Adam Kissel, Director of FIRE's Individual Rights Defense Program. "And why is Bucknell so afraid of students handing out �Bibles [or] other matter' that might provide challenging perspectives? Colleges are supposed to be marketplaces of ideas, but Bucknell is betraying this ideal."

As is always the case on this blog, I point out that as a private university Bucknell can decide whatever they want on what can be handed out and what cannot by students. FIRE collects and posts a university's statements on free speech to its students, and for Bucknell they note this passage from the 2008-09 Student Handbook.
Freedom of speech here is understood not to be absolute: it must be integrated with other protections provided for the community in the Code of Conduct (such as the right to be free from harassment) and it must concord with the principles embodied in the Pledge of Student Responsibility. For example, the individual who directs epithets or threats at another cannot claim immunity under a perceived right of absolute free speech.
It should be noted that this statement parallels a statement on academic freedom that includes another qualifier (that academic freedom does not include the freedom to plagiarize.) That construction tells me that the writers of this student handbook meant there to be both academic freedom and free expression with provisions against unreasonable use of those terms (in their eyes.) So the question is whether or not it's unreasonable to think a student group can make a handout to give others that questions any social issue.

FIRE's press release goes on to discuss suppression by Bucknell of BUCC's attempts to hold an "affirmative action bake sale." While I don't find these sales to be particularly effective vehicles, Bucknell's prior censorship of the event intrigues me. Many women's groups use a candy bar handed out as a way of highlighting their perceived injustices in the rates of pay for men and women. Would Bucknell deny its Women's Center the right to hold such an event?

But it gets worse. Bucknell's administrators go so far as to require BUCC's free speech rights to take a particular form:
BUCC members filed an application to hold the same [bake sale] event two weeks later, but were then told that they would have to obtain the permission of the Dean of Students to hold a "controversial" event. No such permission is required by Bucknell policy. When the students nevertheless attempted to get this special permission, [Assoc. Dean of Students Gerald] Commerford rejected the request. In a recorded conversation, Commerford said that such a bake sale would violate Bucknell's nondiscrimination policy, even with satirical recommended (not actual) pricing, and that the only event he would approve on the topic would be a debate in a different forum altogether. This novel restriction also does not exist among Bucknell's official policies.

"Using this absurd logic, Bucknell would have to require its College Democrats to say nothing political on campus unless they give equal time to Republican candidates at their events, or its Catholic Campus Ministry to remain silent about abortion unless it holds a debate and invites pro-choice activists to speak at its events," Kissel said. "While students are free to host debates, they must not be required to provide a platform for their ideological opponents. Rather, those opponents must be free to spread their own messages and host their own events."

Bucknell's fear is that some student's discomfort with a conservative viewpoint will become vociferous, vile and potentially violent. So it tries to prevent that. But it has a student handbook that requires its students to sign a pledge of respect ALL other students:
As a member of the social community, I will respect individual differences and the rights of all others. I understand that bias on the basis of gender, handicapped status, national origin, race, religious belief, or sexual orientation, whether expressed in word or action, is repugnant, and that Bucknell will not tolerate harassment, discrimination, or violence against any person for any reason.
Is it as willing to enforce this against students who don't like cookies or funny money as it appears to be against conservative students?


Wednesday, June 10, 2009

Commanding building codes 

The Washington Post makes a good point here about the forthcoming cap-and-trade bill debate:
The bill would give the federal government power over local building codes. It requires that by 2012 codes must require that new buildings be 30 percent more efficient than they would have been under current regulations. By 2016, that figure rises to 50 percent, with increases scheduled for years after that. With those targets in mind, the bill expects organizations that develop model codes for states and localities to fill in the details, creating a national code. If they don't, the bill commands the Energy Department to draft a national code itself.

...Is the best way to achieve that, though, to federalize what has long been a matter of local concern? And if the point of cap-and-trade is to change market incentives, why does Congress, and not the market, need to dictate these changes?
To the extent our textbooks ever support tradeable pollution permits, it is that the market does better for deciding the efficient way to reduce pollution than does command-and-control. But efficiency is only interesting to the regulator if the regulator stands to gain from it, or can be made interested in it by good contracts, electoral check, etc. Absent that, government will always prefer to use command and control so that they have their electoral fate in their own hands.

I say this to those who are persuaded by manmade global warming hypotheses -- your case is improved to the extent you get command-and-control measures like this with building codes out of the bill.

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Can competitors make you unionize? 

Yes, if they have an Alinskyite with power as a friend. �Business Week reports:
FedEx hopes to harness taxpayer ire sparked by the word "bailout" to kill legislation in Congress that would help nearly 100,000 of its workers to unionize more easily. FedEx argues the bill would hobble it with higher costs and less reliability across its network and represents unfair government aid for its chief rival, UPS.

The dispute involves the FAA Reauthorization Act of 2009, which contains a provision that would change the labor law covering FedEx workers. Language introduced in the bill by U.S. Representative James Oberstar (D-Minn.) would subject FedEx workers to the same rules as those performing similar work for Atlanta-based UPS. The measure affects employees of FedEx Express, which along with FedEx Ground, FedEx Freight, and FedEx Office comprises FedEx, but not the status of FedEx Express workers who are air-based, such as pilots and airplane mechanics. The bill passed the House on May 21 and is now in the Senate, where a similar House measure failed in 2007.
Of course the push for FedEx to "union up" doesn't come from Big Brown itself but from the Teamsters, who have a long and rather cozy relationship with the Community Organizer in Chief as well as with Mr. Oberstar, who has gotten over $85,000 from the union and almost as much from UPS.
Here's the�Brown Bailout website that has a satirical take on the famous UPS ad of the guy drawing on an easel. �My brother (who in the interest of full disclosure is a FedEx salesman) forwarded the clip to me this AM. All FedEx wants to do is to compete in the marketplace for shipping; Morgan Reynolds writes about unions and their anti-competitive nature:
According to Harvard economists Richard Freeman and James Medoff, who look favorably on unions, �Most, if not all, unions have monopoly power, which they can use to raise wages above competitive levels� (1984, p. 6). Unions� power to fix high prices for their members� labor rests on legal privileges and immunities that they get from government, both by statute and by nonenforcement of other laws. The purpose of these legal privileges is to restrict others from working for lower wages. As antiunion economist Ludwig von Mises wrote in 1922, �The long and short of trade union rights is in fact the right to proceed against the strikebreaker with primitive violence.�

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Two clips from the Minneapolis Beige Book page 

Service sector looks quite weak:
Services sector activity decreased overall since the last report. Preliminary results of the Minneapolis Fed's annual survey of professional services companies in May showed decreased levels of sales revenue, employment and profits from a year ago; profits are expected to fall further over the next year. Respondents indicated that labor is more available, but input costs are increasing.
Usually strong health care sector in Minnesota is also experiencing weakness:
In Minnesota, a medical devices firm recently announced plans to eliminate 600 jobs by the end of June, and a cabinetmaker laid off 200 employees during the first few months of 2009. Two health care providers in Minnesota recently announced plans to cut 240 and 100 jobs, respectively. Meanwhile, a Minnesota hospital will eliminate 75 to 100 positions by the end of June.
One big plus: Compared to a year ago, gasoline in Minnesota was $1.38 cheaper in May. A smaller plus is an increase in "staycationing", with reservations at campgrounds this summer a bit up. The district is said to have "moderating contraction", which is like saying the Vikings improved because they only lost to the Bears by ten points as opposed to 24 the last time they played.


Tuesday, June 09, 2009

Why DID Carter lose? 

I came up for air long enough to scan a transcript of the Bradley Symposium, "Making Conservatism Credible Again." (h/t: Arnold Kling.) It turns out to have much more to do with making the GOP credible again rather than conservatism. Art Brooks (president of the American Enterprise Institute) puts the question to the panel "How do we make conservatism accessible?" and the answer comes back that the Republican Party is the vehicle that does that.

What was most striking to me was the quote Kling stuck in his post, from Rich Lowry:
despite all of his incredible political skills, [Ronald Reagan] wouldn't have won election if it weren't for inflation, if it weren't for gas lines, if it weren't for the reigning hostage crisis, if it weren't for Afghanistan, if it weren't for the entire litany of Carter administration failures. And when you are as far as Republicans were in the late 1970s, and as far down as they are today, you need the other side to fumble, and for its vision to be discredited. And at the moment, Barack Obama has the ball, and he is going to have the ball until he commits some sort of turnover.
I was a first-year grad student in the spring of 1980, and I had to go back and check, but Carter was down to Reagan by the end of the primaries by a fair amount, and this had to do primarily with his handling of the economy. Reagan slid in the summer and early fall. He hadn't done a very good job in the early campaign. The hostage crisis had not even moved to the stage of the abortive rescue attempt. Reagan of course won by more than most people expected (it even lead to questions about polling -- guess they've been around for a long time!) The attacks on Reagan were the Goldwater strategy (without Daisy) and the snobbish appeal that he was an actor, a lightweight.

Michael Barone a few years ago remembered what had pushed people towards Reagan:
Those of us who remember the 1980 campaign sometimes forget how dire things seemed as we entered that election year. Busch begins his narrative with an account of Jimmy Carter's July 15, 1979 "malaise" speech (which, as he notes, never included that infamous word), and quickly sketches how we'd come to that point. He reminds us that in the 1970s, Time magazine featured cover stories like "Can Capitalism Survive?" Keynesian economics, which had promised us endless low-inflation economic growth, had in fact produced high-inflation economic stagnation�"stagflation," as it came to be called.
My professors at the time (except for the fellow that taught second-semester macro, who seemed impervious to the times) offered pieces on post-Keynesianism, incomes policies, and all manner of early third-way economics. None of it, we thought, seemed to work.

There are many times in life, though, where things that don't seem to work nonetheless dazzle us, bring us some good emotions that we consume. Indiana Gov. Mitch Daniels says later that voting Obama was a "luxury purchase" and a "fashion statement." We live in a country that can afford a few foolish purchases (yes, even now). But frugality almost always follows frivolity because to continue in extravagance is disastrous. Carter was, as Obama is in Daniels' estimation, "the natural desire for change after a period of poor results", but the results so far are like a rebound romance. Eventually one moves on.

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Campuses and food 

One more day of grading then I'm done. In the meanwhile, two blogs I haven't visited in a while are back up and putting out good things:
  1. I haven't visited the National Association of Scholars blog in awhile and after reading there have decided they need to be in the RSS reader. Let me in particular encourage those of you with high school juniors and seniors to consider putting this list of questions in your pocket. If you want to be non-confrontational or a bit sarcastic (your voice will make all the difference here), try "Do you have a tunnel of oppression?" or "What family planning services do you provide?" Or, if you like the more in-your-face approach, you could ask "Is this a right to carry campus?" (Mitch, I expect you to do this next year.) If you don't have such a college-ready student, give a read to what's going on at Macalester.
  2. My colleague Ming Lo travels each summer, and each summer he blogs (then goes dormant for about ten months, a shame.) Ming and I both love Anthony Bourdain, and as a single, younger guy Ming is able to visit some pricier restaurants that Littlest's scholarship fund will not permit. From Las Vegas, He writes about Bouchon:
    Bouchon has a wonderful selection of fresh seafood. James and I love oysters, and we got a handful. For the main course, the other two picked the daily special pork tenderloin. I opted for the bistro favorite, steak-frites. Unlike an American steak house, French bistros do not offer different cuts. Primier cuts are usually offered at restaurants, a more formal eatery than bistros. But this is why certain cuisine is more highly regarded in terms of skill--how to make less desirable ingredients into great food. The steak at Bouchon was not too tender, more like a flank steak. The problem with lean and chewy meat is that it lacks either the taste (from the fat, like rib-eye) or the tenderness. But the chefs at Bouchon managed to make it as tender as possible while keeping the juice inside. Of course, the sauteed onion (almost mashed, in butter and red wine) definitely helped to enhance the experience.
    I'm not sure if Ming is misspelling or inventing with the word "primier", but works for me either way. Vegetarian moi gives most bistros a miss, but if you're a fan of the Paris cafe scene, this sounds like one more example of how Vegas recreates every other part of the world, which is the point of Ming's post.

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Monday, June 08, 2009

Ratings shopping 

Since June 2007, the creditworthiness of structured finance products has deteriorated rapidly. The number of downgrades in November 2007 alone exceeded 2,000 and many downgrades were severe, with 500 tranches downgraded more than 10 notches. Massive downgrades continued in 2008. More than 11,000 of the downgrades affected securities that were rated AAA. This paper studies the credit rating crisis of 2007-2008 and in particular describes the collapse of the credit ratings of ABS CDOs. Using data on ABS CDOs we provide suggestive evidence that ratings shopping may have played a role in the current crisis. We find that tranches rated solely by one agency, and by S&P in particular, were more likely to be downgraded by January 2008. Further, tranches rated solely by one agency are more likely to suffer more severe downgrades.
Abstract of a new paper by Benmelech and Dlugosz. Ungated copy appears to be here. If it turns out, as seems to be from this article, that ratings agencies were competing for business by fudging the grades they gave to CDOs and SIVs, regulators had best start thinking about whether they should rely on those ratings in deciding on, for instance, what constitutes acceptable collateral. For example, the new lending facility by the Fed against commercial mortgage-backed securities requires the collateral to be rated by TWO agencies.


Does a human rights violation require a violator? 

Bill Easterly says so.
The only useful definition of human rights is one where a human rights crusader could identify WHOSE rights are being violated and WHO is the violator. That is what historically has led to progress on human rights. The government officers of the slave-owning antebellum US and the slave-owners were violating the rights of slaves � leading to activism against such violators that eventually yielded the Emancipation Proclamation. The local southern government officers were violating the civil rights of southern blacks under Jim Crow, leading to activism against these violators that yielded the Civil Rights Act and the Voting Rights Act. The apartheid government officers in South Africa violated the rights of black South Africans, and activism against these violators brought the end of apartheid.

Poverty does not fit this definition of rights. Who is depriving the poor of their right to an adequate income? There are many theories of poverty, but few of them lead to a clear identification of the Violator of this right. Moreover, human rights are a clear dichotomy � someone violates your rights or they do not. But the line between poor and not-poor is arbitrary � it is different in different countries, and on a global scale, many still argue what is the right dividing line that constitutes poverty. So calling poverty a �human rights violation� does not point to any concrete actions that the �violator� must stop in order to restore rights to the �violated.�
Easterly gives Amnesty International a chance to respond. Their response concludes:
Human rights abuses cause poverty and keep people poor � and living in poverty makes you more likely to suffer violations of your human rights. So human rights must be part of any solution to poverty.
We argue in many places that poverty results from a lack of property rights (see here for example.) Would one expand the term human rights to include the right to use, exclude, and exchange private property as a human right? I'm going to guess Amnesty won't go that far. But if you increase the security of someone's private property rights, you may get both an increase in economic growth (which usually decreases poverty) and a reduction in human rights violations. So it was argued by Bagus [2008] and Cheneval [n.d.].

So who violates property rights? Governments, which at one time human rights groups fought to allow the poor to keep their land. (For the U.S. roots of this, see the discussion in Nedelsky [1994].)

UPDATE: Chris Blattman comes down on the same side.

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Keynes' Law of consequential testing 

We wrote a week or so ago about the abandonment of the MCA-II math test as a consequential exam for Minnesota high school students to graduate. Much of the discussion was over whether the test was too hard, given barely more than a third of 11th graders were found to be proficient. But this year that percentage rose to 42%, with 57% meeting the math standard that the state has now abandoned.

Kate Pechacek, a math teacher at Stillwater Area High School, said her district is seeing success.

An increasing number of junior high students have been enrolling in higher-level math courses in the district since Pechacek started teaching there about four years ago. Now, about 50 percent of seventh-graders are enrolled in algebra, she said.

"If we're adhering to the standards, I think that's going to give us the results we're looking for," Pechacek said. "Although the standards have been around for a while, people are paying much more attention to them."

But racial performance gaps persist -- white students pass the test at three times the rate that students of color pass it -- which has pushed for many the desire to stop a consequential comprehensive test and use end-of-year course-specific tests instead. (Noted in the article, all students will have to take Algebra II ... by 2015.)

Most economics students learn Say's Law: supply creates its own demand. But there's also a Keynes' law, which is the reverse. If we demand students pass these tests, there is a reaction from those students that will demand the coursework necessary to learn what is needed to pass them. Why would anyone think that incentive is less for students of color or students from lower-income families than for students without color? There's almost as many programs to improve math skills for students of color as there are colleges of education in America. (Here's ours.) Are they not working? Why not?


Should I stay or should I go? 

According to the New York Times, new frictions have broken out between the Obama administration's economic team:
By all accounts, much of the tension derives from the president�s choice of the brilliant but sometimes supercilious Mr. Summers to be the director of the National Economic Council, making him the policy impresario of the team. The widespread assumption, from Washington to Wall Street, was that the job would be Mr. Summers�s way station until the president could name him chairman of the Federal Reserve when Ben S. Bernanke�s term expires early next year.

But Mr. Bernanke�s aggressive response to the crisis has so improved his reputation that people close to Mr. Obama increasingly suggest the president could well reappoint him in the interests of financial stability � just as Presidents Ronald Reagan and Bill Clinton retained Fed chiefs who had been picked by predecessors of the other party.
This comes atop repeated reports (most lately here) that the economic advisory council created for Paul Volcker has not given him access or even much respect from Goolsbee, Summers and the like. �

Summers has long been known to be a man who doesn't suffer fools gladly. �He once characterized himself thus:�"[I]f you thought about my speech pattern, you'd go through a lot of other adjectives before you got to 'restrained' and 'unprovocative."' �I honestly think he would not be the best fit at the Fed, because it's a place that tends to want consensus, and that doesn't appear to be Summers' long suit. �

Over on the sidebar you will see a new poll we'll run for at least a week (shorter if someone leaves, longer if interest builds.) �Who will be the first economist�kicked out who wants to spend more time with his family? �I tweeted with David Strom last night that I thought it a crime Volcker has had to watch the legacy of low inflation that he paid for (dearly, you will do well to recall) be squandered in such a short period, and by such an immature bunch. �Volcker's appearance with this group reminds me mostly of the poorly-run sports team that faces a crisis and chooses to bring back a former superstar of that franchise. �The superstar, now with flecks of gray in his hair and maybe beard, and with the same athletic swagger he had when he played, takes the job out of loyalty. �But the ownership has provided that hero as cover for its continued mediocrity which continues to disappoint the team's fans. �The former player must now figure out when is the best time to go. �

For Volcker, maybe now is the time, before the inflation that is almost surely coming stains his otherwise glorious career at the Fed. �But reading between the lines, you could easily bet it's Summers who might be first out the door. �What do you think? �Please vote in our poll.


Saturday, June 06, 2009

Today is the Anniversary of D-Day 

From a good friend - says it all:

Today is 06 Jun 2009, the 65th Anniversary of D-Day. A day which many of us have only read about in textbooks or seen news releases on television.
We hear personal testimonies and stories of which we an only imagine what took place on that day, which was a personal hell on earth for many within our fine military forces, and their families back home.
They gave all they had to give, and many gave their all.
There are yet but only a few of these brave men and women walking amongst us today, as many of their friends were killed in war or have passed on through the coarse of time.
If your path should cross that path of one of these veterans, or any veteran, please give them a hug of friendship and tell them thank-you for giving us the freedom which we yet enjoy today.
God Bless these Veterans, and God Bless America.........

It is the American soldier who keeps our press and the rest of our beliefs free. Thank you to all the families, heirs, and supporters of our military.

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Friday, June 05, 2009

Obama's chance to create the ownership society 

Two Republican senators, Lamar Alexander of Tennessee and Bob Bennett of Utah, released yesterday a bill titled The Auto Stock for Every Taxpayer Act, which would turn over the government's stake to GM and Chrysler by a distribution of shares to citizens. �The act would
The restriction is for people who paid taxes, but I think we can do better. Let's distribute shares to EVERY American, even the more than 40% who don't pay income taxes. But those are exactly the people we need to be interested in their personal finances, to develop good savings behavior, and to feel included in American capitalism (while we still have American capitalism.) There is hardly any better way to have this than to get people to feel the benefits via some kind of privatization plan. �Senators Alexander and Bennett have proposed the first privatization counteraction to Obama economic policy.

Let's have full distribution to all citizens. �Those who want the cash quickly will have the opportunity to sell to those who would want the shares to gain control of GM or Chrysler through tenders. � Those who want to hold onto their property, can. �What you will get, very quickly, is private decisionmaking in the auto industry, which will be the best way to get rationality into those two firms and their best hope of surviving as going concerns.

There's an opportunity here for Obama. �If he's serious about not wanting to control GM, he can ask Congress to pass the Alexander-Bennett bill and counsel Americans about the need to save and the opportunity to start building stable portfolios. �A silk purse out of a sow's car, if you will.


Mrs. S writes 

Today it's about the local TEA party and whether we need another.
When laws are passed or implemented, it's difficult to remove them. We don't get rid of laws � we just keep adding. The number of pages in the Federal Register � which contains rules, proposals for new or changes to existing rules, and notices of meetings � was 2,620 pages when first issued in 1936. It has averaged over 75,000 pages in this decade. Economist Milton Friedman argued in 2004 that increases in the size of the Register corresponded with decreases in individual liberty. The burden of regulation may be greater than the burden of taxes.

...Like the Boston Tea Party that protested taxation without representation, TEA Parties are a reminder of the importance of economic freedom. The staggering national debt is our crucible and challenge, and the greatest obstacle to the future that we face.

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Thursday, June 04, 2009


I guess I should have seen it coming, and people told me it was conventional wisdom, that Governor Pawlenty would decide not to seek a third term. �I have only two personal thoughts about him to reflect on; speculation about Governor2010 can wait for another day.

Bloggers should probably give a nod to Governor Pawlenty for having held in 2005 a reception for new media. �Seems like ages ago, and nowadays blogger access is taken for granted. �I had three blogger conference call invites today alone. �But Pawlenty did this at a time where it was easy to dismiss bloggers, and not just from screedy columnists. �You could have seen it in the group there at the time: not so much awe but appreciation of being appreciated. �My sense was that he is a guy that respects hard work and passion, which is two of the three qualities that make a good blogger. �(The other is, you have to know how to write.) �Paid for out of his pocket, and more importantly the governor was generous with his time and thoughtfulness. �All questions were answered. �In case we didn't say thanks enough for that bit of validation in 2005, I hope this puts a small credit on my tab.

We had Governor Pawlenty on Final Word twice by my count, last in March last year. �We expected him at 3:30 and he came in early and sat down like a guy sitting at the lunch counter with people he knows in athletic clothes you'd expect anyone to wear while doing Saturday errands. �He starts the conversation right away. �We were told thirty minutes and he stays to 4. �Now any time we get someone of his stature -- look, he's the governor, we're two guys with a weekend radio show, this is HUGE for us! -- we always invite them to stay longer. �I fully expect him to say no, particularly since we already got an extra five minutes. �Pawlenty answers, "hang on, I'll see." �We go to the break, and he makes a call, then comes back and says he can stay. �Turns out he's between his daughters' volleyball game down the road. He called to see if their next match had started yet. �Family before us, and us before getting out of there and relaxing. � It's a side we don't see, didn't expect to see.

Both those memories form fundamentally my impression of the man.

Mitch has already written that Pawlenty isn't a movement conservative, and I'm not going to argue the point. �What Pawlenty represents to me, though, is the kind of person conservatives see Americans being: �quiet, unassuming, family-first, unafraid to disagree without being disagreeable, frugal, generous. �The guy, who didn't have to show up at all, shows up at Talk the Vote last October by surprise wearing a Coleman t-shirt. �When he's not the show, he gets out of the limelight (I hope he never runs for U.S. Senate, because he may lose that quality). �He does the Everyman thing really, really well. �He's�likable,�in a way few politicians pull off. �And likability takes you a long way these days. �


"the best way you hurt rich people is by turning them into poor people" 

Source. Of course companies that get access to government cheese will be winners in the short run. But will they in the long run? If the GM boycotters would like to do some serious damage, how about shorting that index?

(Post title courtesy Billy Ray Valentine.)


On boycotting GM and Chrysler 

I read and hear my friend Hugh Hewitt bemoan the socialization of GM and Chrysler's profits and losses, and calls for a boycott. Most of the time it's the Left that calls for economic boycotts -- Cesar Chavez in the Seventies, South Africa in the Eighties, Israel nowadays. But lately the American conservative has decided it's cool to boycott French wines, and now is going to get into calling GM Government Motors.

Freedom of contract mean we get to buy and sell goods with anyone we choose, for whatever reasons we want to. That right to choose means the right to discriminate against certain folks we don't want to buy from, or in favor of those we do. So it's right for Hugh or anyone else to try to persuade us not to buy GM, and it's right for someone to try to persuade me not to buy Israeli products because they're sold by people who (the boycotter says) oppress others. And I'm free to agree or disagree. You're free to hire cute blondes (even Latvian blondes!) to try to persuade me to buy a Corvette, and my wife is free to persuade me to pay that blonde no nevermind or else it's the couch for me! Free markets work by persuasion.

What is the purpose of a boycott? Typically to change behavior of the people against whom you are boycotting. In his interview with Paul Rubin of White Bear Lake Superstore -- where both Hugh and NARN* have broadcast in the past -- Hugh argues that a successful boycott will get the government to divest of GM. He also argues that if the GM socialization is successful it will breed other socializations of private firms. But we cannot force them to do this: All we can do is to make the political calculation of the costs and benefits of socialization work in favor of divestment of GM and Chrysler. That does not require votes; adding $50 billion to a $1.8 trillion deficit isn't going to create any pain upon the White House. It will put pain on Paul Rubin; Hugh's calculation is that Paul's pain is a necessary cost to meet Hugh's goals.

So how is it that Hugh's boycott will work? It's worth noting that the "Freedom Fries" boycott was estimated to reduce French imports to the U.S. by 15% and U.S. exports to France by 8%. Not too big an effect there. And the apartheid boycott of South Africa didn't do much good either. The boycott will make great radio and vociferious editorials, but the impact of them is unlikely to do much good. Particularly when the UAW and other union leaders will funnel millions in campaign contributions to keep the government money coming.

And lastly, what has happened at GM and Chrysler (the latter temporarily, though it will maintain a minority interest for the foreseeable future) is that the government is accepting a bigger share of the gains and losses those two places make in the market. The impact of losing the entire $50 billion invested in GM will be about $362 per taxpayer (there were about 138 million in 2007.) If more of us crowd Ford and Toyota the price of those cars go up; the GM and Chrysler lots will be more inviting thanks to elbow room and lower prices. Selling at a loss is not an issue for government, which can always tax to make up those losses. (It does for Amtrak already.) Socializing profits and losses -- I used that term in the first sentence for a reason -- means that using an economic means to make a political point will be ineffective because the losses are spread throughout the populace, not focused on the Obama team.

The boycott will make some people feel good. But if you want to stop the socialization of American business, take it out at the ballot box, not on the dealer caught in the middle.

*--Full disclosure: I have been part of those broadcasts in the past, but have not been at the Superstore since creating the Final Word segment of NARN.

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Wednesday, June 03, 2009

Then and now 


The Fed chairman spent most of his time defending the proposed bailout for financial institutions. He brushed aside concerns that the bailout would aggravate inflation or the government�s budget deficit, saying that the government would be acquiring assets that it could eventually resell.

�The net fiscal cost to taxpayers will certainly be much less than $700 billion,� he told lawmakers. �I think the debt markets will recognize that this debt will be offset by the assets we are buying.�


The increases in spending and reductions in taxes associated with the fiscal package and the financial stabilization program, along with the losses in revenues and increases in income-support payments associated with the weak economy, will widen the federal budget deficit substantially this year. The Administration recently submitted a proposed budget that projects the federal deficit to reach about $1.8 trillion this fiscal year before declining to $1.3 trillion in 2010 and roughly $900 billion in 2011. As a consequence of this elevated level of borrowing, the ratio of federal debt held by the public to nominal GDP is likely to move up from about 40 percent before the onset of the financial crisis to about 70 percent in 2011. These developments would leave the debt-to-GDP ratio at its highest level since the early 1950s, the years following the massive debt buildup during World War II.

Certainly, our economy and financial markets face extraordinary near-term challenges, and strong and timely actions to respond to those challenges are necessary and appropriate. Nevertheless, even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance. Prompt attention to questions of fiscal sustainability is particularly critical because of the coming budgetary and economic challenges associated with the retirement of the baby-boom generation and continued increases in medical costs. The recent projections from the Social Security and Medicare trustees show that, in the absence of programmatic changes, Social Security and Medicare outlays will together increase from about 8-1/2 percent of GDP today to 10 percent by 2020 and 12-1/2 percent by 2030. With the ratio of debt to GDP already elevated, we will not be able to continue borrowing indefinitely to meet these demands.

Addressing the country's fiscal problems will require a willingness to make difficult choices. In the end, the fundamental decision that the Congress, the Administration, and the American people must confront is how large a share of the nation's economic resources to devote to federal government programs, including entitlement programs.

"What's it gonna be, boy?" ain't just Jessica Simpson, Ben.


Tuesday, June 02, 2009

Outsource my day 

Morning meetings with advisees, afternoon class, and evening for Husky Night at the Dome. No time to write, so let me send you in two directions:
  1. Mike Munger is experiencing what our tax regime might look like in a few years;
  2. Russ Roberts sees the Obamas' date night as a Keynesian might.

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Monday, June 01, 2009

Minnesota negotiates algebra away (UPDATED) 

In economics we have this argument about how much math our students should have when they take the principles, and how much they will need if they decide to become professional economists. Even among our majors, a majority go into jobs where little more than algebra will be required of them. Our experience in Minnesota has been that our students seem less well prepared in mathematics than ten to twenty years ago. In Minnesota we had planned to increase the amount of testing we did of students graduating high school. They would get a test (called the MCA-II) that is mandatory to pass in order to receive a high school diploma. Last year, pass rates on the 11th grade test were quite low, and there was concern that the standards would be watered down.

Buried in the omnibus education bill that was signed into law, those concerns were well founded.

...the Legislature recently decided that students no longer have to pass the 11th-grade math test -- many educators think it's too difficult -- and would have caused a precipitous drop in graduation rates next year.

Juniors already took their graduation math test this spring, and the statewide results for how well students performed come out in the next week or two.

The solution passed by the Legislature and signed by Gov. Tim Pawlenty, however, could raise a few eyebrows: Students either have to pass the test once, or fail it three times, to graduate.

"They had to do something," said Don Pascoe, director of research, assessment and accountability for the Osseo schools. "They [had] set an extraordinarily challenging target for individuals to meet in order to graduate."

On the other hand, the short-term solution could send long-term mixed messages to kids about math, said Jim Bartholomew, the education policy director at the Minnesota Business Partnership.

"You're saying that we want and expect people to get to this level, to be able to pass this minimum competency test," he said. "Then on the other hand, you're saying 'But it doesn't really count.' "

That's right: three fails equals a pass. As if to help assure that it's too hard! the STrib reproduced four questions on the MCA-II practice test. I'll guess these to be cherry-picked; you can see a SAT math practice question from here; go here for the ACT. The questions the STrib chose are a little harder, but not unreasonable. (I'm having my 9th grader take these questions tonight; I'll report back what I find.)

It's worth noting that the passing standard for this test could have been adjusted if they thought it was a bit more challenging than expected. There are processes for norming a test to measure what you want. But the article makes it clear that you've got some social engineering going on behind these changes:
Last spring, only one-third of juniors were proficient on the state test. And the numbers were significantly worse for many low-income students and students of color.
Emphasis added. The soft bigotry of low expectations, anyone?

[Don] Pascoe [director of research, assessment and accountability for the Osseo schools] said Minnesota's math test is asking for too much. His own research has estimated that a student who just barely is proficient on the state math test would score in the 75th percentile on the ACT.

"One student's life goal was to be a cosmetologist, and the school she wanted to go to required a high school diploma," Pascoe said. "It would have been a real sin for her not to go to cosmetology school because she didn't have really strong math skills."

If his research was borne out, did it not make more sense to re-norm the test rather than pitch it away? And more disturbing: Does your 17-year-old ever get to aspire to something different than being a cosmetologist? Pascoe's reasoning is that this student should never have the tools for college because she made a decision to first try out for a cosmetology certificate.

Kent Pekel of the University of Minnesota says at the end of the article: "When we decide that every kid doesn't need to be educated to that level, we really make the decision for that kid about what they want to do, long before they can make it for themselves."

We've had this discussion before: Algebra is not negotiable. I wrote then:
...we in economics have debates over how much math students should know. And we do negotiate over calculus. But "the ability to manipulate values by a set of logical rules" is not negotiable. If we wish to have a workforce that can compete globally, we must have workers who can think about values and symbols and perform some analysis on them.
Is there any reason to believe, in the three years since I wrote that, that the need for those workers has gone down?

UPDATE: �So Littlest takes the four questions, knocks off 1, 2 and 4 rather quickly (she was a bit longer on #2) and then is flummoxed by #3. �In the comments on the STrib site some commenters noted this too. �The problem is a typo that made a + 2 at the end of the question a - 2. �You should get the suggested answer then. �Still, as "bleak" notes in comments, that's a maximization problem that is usually solved with the calculus; I'm only guessing that they teach how to solve the particular problem of a quadratic by a formula in Algebra II. �If they don't, a kid without calculus has to resort to trying all four answers and taking the highest one. �Not that this is bad; I'd hope my students could figure that out. �But it is a reach. �Do I have any math teacher readers here who can explain how this shows up on MCA-II?


Phantom of the income operator 

Personal income rose in April, but let's look at where the money came from.
The purpose of these funds is to increase spending from consumers, but so far it has done no such thing: Personal outlays fell $9.7 billion in April, after falling $33.5 billion in March. Personal saving rose to $620.2 billion in April from $488.7 billion in March. The savings rate continues to climb. Is it possible that, like the credit markets, the American consumer is understanding that the bill for ARRA is coming due? The Administration's economists are still trying to persuade you they've put out the fire, but the American consumer hasn't moved away from the hydrants yet. If families are starved for cash, it's to repair their portfolios. (Perhaps the recent rise in consumer confidence will change this; too soon to say.)

Meanwhile, Russ Roberts updates the spending from ARRA: $37 billion as of this morning. That site includes in the figures payments for Social Security, so it's part of the transfer payments and not part of government purchases.

I await my visit from Norman Eisen now.