I noticed Hugh has asked that we slow down on the Frank-Dodd housing bill. I got a press release from Rep. Michele Bachmann stating the bill is "deeply flawed".

"The bill even includes a $35 million dollar slush fund for trial lawyers. And according to the Congressional Budget Office, the bill would help refinance the loans of only 500,000 people – less than 1% of homeowners – at the expense of the 51 million homeowners who pay their loans on time, however much they may be hard-pressed to do so.

"The bill is so broad that homeowners covered could deliberately default on their loans to cash-in on the taxpayer bail-out. In others words, a taxpaying single mother working extra hours to pay her mortgage on time could be asked to help pay the loans of someone who intentionally defaulted.

"Lenders and servicers can game the system as well. The bill invites them to cherry-pick only their worst loans to dump onto American taxpayers – including loans people secured through outright fraud.

Hugh's request that we need more time to look at it would be met by the CBO report on the bill that Rep. Bachmann mentions. They estimate the subsidy at $1.7 billion, or $3400 per household refinanced. That on top of the Heritage report on the bill should be enough to convince most that it's a bad idea.

Unfortunately it passed, and thus gives the banks yet another fillip in return for bad decisionmaking. And, as Dean Baker points out, it is just delaying the needed price adjustment in housing.

For those Minnesota congresspeople who voted for the bill (read, all the Ds plus Rep. Ramstad), ask this: Do you think this money should be used to bail out the Parish Homes development? Are you sure it wouldn't be?

Labels: economics, housing

By now most of you probably heard of the 23-cent-pizza promotion that Papa John's put up after one of its franchisees in DC printed "Crybaby 23" t-shirts for a Wizards-Cavaliers playoff game after Lebron James (#23 of the Cavs) was accused of whining too much about rough play and not getting foul calls. The lines stretched on for about three hours, leading some to wonder why people wait in line. If the pizza costs $12 normally and you wait three hours standing in line to pay $.23 for it, what's your implied wage? Matt Ryan argues that standing in line is not a cost of the pizza but part of the experience.

...sure, I had to wait in line for 3 hours to get a cheap pizza, but how can I possibly value being able to tell my friends for the indefinite future? I don't believe it's entirely separate from betting longshots at the racetrack-- the story has value, and maybe because it's indeterminate exactly how valuable it is, you end up with individuals massively mis-pricing it.

I don't know how it is we know it's mispriced, though. Any good that I purchase with unknown benefits has some ex post accounting of benefits and costs, but I don't usually call that some mistake in price. For example, I'm forced by my convalescence to listen to a lot more of my purchases on iTunes. (Embarrassingly, in the eight months since I bought my iPod, I have purchased over 150 songs. In this way, I've never grown up.) Some of them are fills for playlists I write, and often I've pulled them out as bad ideas after sinking my $.99 into the song. But this was true when I bought albums, 8-tracks, cassettes and CDs. And some I get a great deal on; I've ended up playing the absolute hell out of Neverending White Lights, which I kind of stumbled on one night and bought two CDs worth after hearing three songs. Are all of these misprices ex ante? I think not.

OB LeBron, who's playing against my C's right now: It's natural in most superstars' careers that they begin to expect some respect from the refs. I obviously didn't get much time to see the Wiz-Cav series, but roughing up the one superstar when the rest of the team looks suspect isn't unusual, and it challenges the league office to see if they'll blatantly cover for the superstar they wish to promote by suspending the other teams' hackers. (They did in this case.) The problem for LeBron against the C's is twofold. First, he is playing against a much better defensive team that uses its own semi-superstar (Pierce) to guard him. Second, he's encouraged to do this by his coach's constant whining about calls, and that coach's insistence on running a 1-4 set for LeBron at the top of the key, basically saying "here, drive by Pierce and then meet Mr. Garnett." LeBron can't expect calls there, and he knows it. It's nice to see there's one coach in the league worse than Doc Rivers. When the Cavs lose this series, Mike Brown should go.

And LeBron isn't even the worst whiner. I think someone vintner needs to market $.21 Timfandel.

Labels: Celtics, economics, sports

A very interesting article on the use of a machine by the famous economist Bill Phillips (of Phillips curve fame).

It is 2 metres (7ft) tall, 1.5 metres wide and a metre deep. It runs on water and most of the time it is screened off at the back of a lecture room in Cambridge. But when the nine members of the Bank of England's monetary policy committee announce their latest decision on interest rates today they will owe a debt of gratitude to the computer built in a garage in south Croydon by Bill Phillips - an engineer turned economist from New Zealand - almost 60 years ago.

A sensation when it was unveiled at the London School of Economics in 1949, the Phillips machine used hydraulics to model the workings of the British economy but now looks, at first glance, like the brainchild of a nutty professor. Where the Bank's team of in-house economists are equipped with state-of- the-art digital computers, the profession's first stab at modelling was very much a do-it-yourself affair with a whiff of the Heath Robinson about it.

The prototype was an odd assortment of tanks, pipes, sluices and valves, with water pumped around the machine by a motor cannibalised from the windscreen wiper of a Lancaster bomber. Bits of filed-down Perspex and fishing line were used to channel the coloured dyes that mimicked the flow of income round the economy into consumer spending, taxes, investment and exports. Phillips and Walter Newlyn, who helped piece the machine together at the end of the 1940s, experimented with treacle and methylated spirits before deciding that coloured water was the best way of displaying the way money circulates around the economy.

Irving Fisher also used hydraulics to model an economy because he didn't think the math was there to work out the general equilibrium (Gerard Debreu finally worked this out in the 1950s.) Hydraulics worked for Phillips, however, to demonstrate a coordination problem of policy:

...one early demonstration of the machine displayed the difficulties that can arise when monetary and fiscal policy are not synchronised. Phillips asked one of his students to be chancellor of the exchequer and control taxes and spending; the other to be governor of the Bank and control interest rates. Predictably, the policies were uncoordinated and the upshot was that water overflowed on to the floor.

Now if they could work out that the two people pouring the water are engaged in a game...

(h/t: Tyler Cowen)

Labels: economics

Rankings of things tend to annoy me. I would always prefer to know the actual values involved, but we tend to like lists. But they get you in trouble when people try to change how their measuring things.

Today's example is from our local paper. It takes exception with the Tax Foundation's rankings, largely because the Foundation thinks tax efficiency is a proper goal of public policy. The Foundation adds federal taxes to its ranking of the states, though as the link points out, removing federal taxes changes Minnesota's ranking not at all for 2007. Of course the letter writer forgot to tell you that.

He then switches to a report issued by the Minnesota Taxpayers Association, which includes both data based on taxes per capita and taxes per $1000 personal income. Using the latter measure, and using all state and local taxes, he finds that Minnesota ranks 23rd. Of course, he is now comparing apples and oranges. But he says "That one state has higher-income residents than another has nothing to do with the level of state and local taxes."

But the reason for his letter, that Rep. Steve Gottwalt (R-St. Cloud) has proposed the state corporate income taxes are too high, is belied by his own report use. The state ranks 8th in corporate income taxes per $1000 personal income. The letter writer uses a measure of all taxes to rebut a specific point about one tax, by playing fast and loose with which rankings one uses. Our top marginal corporate tax rate, 9.8%, is sixth-highest in the nation.

He also plays a little fast and loose with his choice of who is a non-partisan by quoting at the end lovingly from something published by the Economic Policy Institute. If you are going to call the Tax Foundation "extreme conservative", then you don't get to use an institute run by folks like Robert Reich and Robert Kuttner as being unbiased.

Charlie Quimby pointed out something similar in the Mn2020/Mn Free Market Institute spat over Matt Entenza's 32nd ranking. It's not a fruitful debate (and I say this as a fellow of the latter, with some trepidation.) The question is whether taxes effect people's willingness to truck, barter and exchange in Minnesota, and choosing between Minnesota and other states. Rankings and arguments over what's in the numerator or denominator of this or that ratio won't help solve that debate.

Labels: economics, Gottwalt, Minnesota

Paul Mirengoff says Obama is the favorite now, and by more than a little:

I consider Obama the favorite. One can usually predict the outcome of the general election, and come pretty close on the margin, by considering just a few variables: how the economy is doing, whether we're at war and how popular the war is, which party holds the White House and how long it has held it, and how popular the president is.

This year, these "fundamentals" point to a Democratic victory of at least 10 percentage points.

I actually know a thing or two about such models, having written a dissertation on political business cycles and a couple of papers regarding electoral behavior. A model many of us use as a reference is Ray Fair's Predicting Presidential Elections. It's written by an economist so it favors some of the same variables Paul is using, including measures for war. Fair assumes the war variable currently registers as a zero, so hang on there for a minute while we check everything else and then see whether or not the belief that America is in a war matters for the calculation.

Fair has a calculator you can use to test your own prediction. I plugged in 0.9% for GDP growth forecast for the first three quarters of this year, based on last week's announcement of a 0.6% first quarter growth rate, assuming zero for Q2 and 2.1% for Q3 (these are approximately the WSJ Economist survey data from April; it's possible some of the Q3 growth gets pulled into Q2 because the stimulus checks seemed to come out earlier than we thought, but for this calculation that's a wash.) Inflation over the second Bush administration has averaged 2.8% per year. I'm leaving it there as the baseline; we'll play with that in a bit. The last thing you need is a measure of "good news", or the number of quarters real per capita GDP growth was over 3.2% on an annual basis. I see three such quarters (2005q3, 2006q1 and 2007q3). Using those values, I get 48.61% as the Republican share of the two-party vote total. If you'll guess Barr, Nader and the other fringe candidates draw 1% of the total vote, that gives McCain 48.1% of the vote and Obama 50.9%, a difference of only 2.8%, not 10%.

Inflation doesn't matter too much to this, given that the equation calls for all 15 quarters to be factored in and 13 quarters are in the books. If I add an additional 1% to q2 and q3, it cuts McCain's vote share only by about 0.1%. Inflation this summer may make us feel crabby towards government, but I'm not inclined to believe voters will visit the sins of the Fed on McCain.

Could the war matter, and if so how much? Douglas Hibbs has long been the father of the "bread and peace model", and he reports a comfortable 6-8% Democrat margin. But his model only ascribes a loss of .75% to the cumulative fatalities in Iraq; the rest is his estimation of smaller impact of the Bush expansion than Fair's. Fair tested his model using shift variables for WW1, WW2, and Korea (not Vietnam, a story for some other time). I'm inclined to use that 3/4% adjustment from Hibbs.

I think thus that the margin is much less pessimistic than Paul has painted it. McCain probably starts, ceteris paribus, in a four-point hole, but not a ten. There's work to do, but given the unpredictability of the campaign so far, I wouldn't start heading for the exits just yet.

Labels: economics, elections

The Minneapolis Board of Realtors put out today a report on the number of sales they estimate have been either foreclosures or "short sales". It is partially an attempt to get people to understand that the market for traditional sales -- where the owner is selling the house and the bank is a passive party -- has not fallen in prices nearly as fast as suggested in the aggregated data.

Not surprisingly, lender-mediated homes have seen a substantial increase in total market share over the last 24 months. The percent of total new residential listings in the Twin Cities 13-county region that are flagged as foreclosures or short sales using our methodology has shown steady growth, rising from 2.9 percent in Q1 2006 to 7.1 percent in Q1 2007 and 21.7 percent in Q1 2008.

...The actual number of traditional seller new listings has fallen by 27.4 percent over the last two years, with only 19,675 in Q1 of this year compared to 27,116 in Q1 of 2006. So clearly, homeowners are holding steady in their current residences with greater frequency and home builders are producing far less new inventory.

The market share picture is similar for home sales, with foreclosures and short sales comprising a larger portion of overall sales than they have before. In Q1 2008, 27.6 percent of total residential closed sales were mediated by a financial institution, up substantially from the first quarter of the two years prior. And the number of traditional closed sales fell from 8,896 in Q1 2006 to 4,790 in Q1 2008, while the number of bank mediated sales increased from 324 to 1,828 for the same time period comparison.

So people putting homes on the market has fallen, but the number of homes put up by traditional sellers and which sold fell by much, much more. 1828 houses either through foreclosure or through short sales has a very depressing effect on homeowners "holding steady" in their homes. They may be holding, but they're not steady.

More of the short-sale and foreclosed homes are lower-price homes, so if the rate of those homes being put into the market accelerates, the report is right to point out, that makes the value of houses look like it's falling faster than it is. But there may be many more homes out there with people not able to sell, not able to make their payments, and not able to get out of the game. Even if traditional sale prices have only fallen 3.5% over the last two years, that still means a lot of homes with mortgages repricing this year are about to be in big trouble.

Labels: economics, housing, Minneapolis

That's my verdict on the windfall profits tax versus gas tax holiday discussions you hear from the news today. I base this on the analysis at the Tax Foundation last week reminding us that taxes get shifted.

We distribute a $9 billion windfall profits tax (assumed to be borne by domestic owners of oil companies) and a $9 billion gas tax holiday. We show the results of the gas tax holiday under two scenarios: (1) the assumption made by Hillary Clinton and John McCain that the reduction in the tax will be fully passed forward to consumers and (2) the assumption of most economists that a temporary gas tax holiday would merely increase the profits of the oil industry due to the inability of domestic supply to respond to increased demand in the short run.

So it would just be a method of how the tax gets paid. Now at least one candidate wants to stop the shift,

It should be pointed out that Clinton attempts to reconcile these two assumptions with a provision that would force the Federal Trade Commission to mandate that the tax cut be reflected in the price at the pump. This is the worst provision of them all: essentially, she wants to control the economic incidence of a tax via legal mandate. Such a policy is economically equivalent to price controls.

And you wonder why we don't trust her with health care! But aside that, it's the legal incidence that is changing, not the economic burden, between the Obama and Clinton/McCain plans. (I know I just gave my GOP friends a heart attack joining those names. Tell me, aside the above, what are the differences between their plans?)

One curious point from the earlier link on windfall profits:

Amy Myers Jaffe, a fellow in energy studies at the James A. Baker III Institute for Public Policy just finished a two-year study looking at oil companies and how they spend their money.

The study found that for the five big international oil companies - ExxonMobil (XOM, Fortune 500), Royal Dutch Shell (RDSA), BP (BP), Chevron (CVX, Fortune 500) and ConocoPhillips (COP, Fortune 500) - spending on share buybacks went from under $10 billion a year in 2003 to nearly $60 billion a year in 2006.

Spending on developing their existing oil fields, however, went from about $35 to $50 billion, while spending on finding new oil fields went from about $6 billion to $10 billion.

"These companies are spending a very small amount of their operating cash flow on exploration," she said. "They are spending the majority of their funds buying back stock."

And that might or might not be a bad thing. If it was to indicate the stock was undervalued, buybacks are good as a signal of economic value. Or, it could be that free cash flow is high and that, in order to prevent managers from spending unwisely, the stockholders have money returned through buybacks. But it is also the case that buybacks might indicate slopping up the exercise of options by insiders (short story: CFO Mr. Big exercises 10mil in options on stock at a strike price of $10; to keep earnings from being diluted, the company buys back 10mil in stock -- perhaps but not necessarily from Mr. Big -- at the current market price of $25.) The buyback is in essence part of Mr. Big's compensation.

If you think that Mr. Big makes too much, you may prefer the windfall profits tax to discourage this practice. But the burden of the tax is borne by all shareholders, not just him.

Labels: economics

The morning paper brought a story that local food vendors and restaurants -- and we have many Asian markets here for a community St. Cloud's size, one reason I love the place -- haven't experienced the widely reported shortages of rice that have pushed Sam's and Costco to set purchase limits to prevent middlemen making runs on their rice supplies.

“I believe I have enough stock," said Kim Nguyen, manager at Viet-Tien Market in St. Cloud.

When Nguyen first heard about rising prices of rice and rationing at warehouses, she was concerned that the market would not have enough stocks on the shelves.

“Then I thought it was a short-term shortage," Nguyen said, referring to a state of consumer panic surrounding the warehouse rations.

Viet-Tien Market has not rationed any of its sales on rice.

Cub Foods is not rationing rice either, spokeswoman Lee Ann Jorgenson said. Neither is Coborn's.

“We have seen prices go up, but we don't see any need to ration our stock right now," Coborn's spokesman Steve Gottwalt said.

Restaurants, such as China Restaurant and Hong Kong Restaurant in St. Cloud, also are in the clear for now.

Nguyen said some specialty rices, such as jasmine, are still easy to get. However, she is limited by her supplier to 10, 10-pound bags of basmati rice per order.

Prices go up to help ration supplies, but that's not the only thing at play here. Rice is rice, pretty much a staple and where prices aren't going to be the competitive margin on which suppliers operate. Ms. Nguyen has alternatives to where she can buy her rice. If she cannot be sure that her supplier will be with rice each week, she may seek alternative suppliers. The suppliers of course bring rice and lots of other products on which their profit margins may be higher. So a rationing in their case might help assure Ms. Nguyen that the rice will be there, and keep her loyal to her current supplier.

The Costco/Sam restrictions are another matter. Those larger chains are seeking price information, and in a noisy market they would like several transactions to confirm a change in market conditions. One speculator running out a store on a very large purchase not only inconveniences that store's other customers but also might provide bad price information to the larger distributors.

Labels: economics

Ed Morrissey is right in pointing out that the private sector works in how the I-35W bridge might now be open in September rather than in December.

Perhaps at some point, people will learn to harness the power of the private sector more completely for future public efforts as well. If we started to apply this lesson to non-emergencies as well as emergencies, perhaps we would have fewer of the latter. When we incentivize success, we succeed. When we incentivize bureaucracy, we get red tape, delays, and frustration.

I hope the planners of the DeSoto bridge reconstruction are paying attention. They might want to invite Flatiron to bid on the project. (If they could also reopen the old Flatiron Tavern, it'd do this St. Cloudian's heart good after I get done recovering.)

What the STrib article made very interesting to me was how they structured the incentives in the I35 contract to get faster delivery from Flatiron:

Flatiron-Manson was awarded the project under a MnDOT formula taking into account construction costs, time to completion and factors such as aesthetics and public-relations efforts. At the time of the award in September, critics assailed the agency for choosing the most expensive contract and the longest construction time

Now, if the bridge is finished in 337 days instead of the 437 in Flatiron's proposal, the construction period will be shorter than any that were proposed -- but will widen the cost gap.

One of the four bidders, Maple Grove-based C.S. McCrossan, offered to build a steel bridge in 367 days at a cost of $177 million. The second-shortest time was proposed by the team of Ames/Lunda, also based in the Midwest, which proposed 392 days for $178 million. The fourth bidder, Walsh/American bridge, proposed the same time frame as Flatiron, 437 days, but a lower cost, $219 million.

...State officials said last fall that the bridge closure is costing Minnesotans $400,000 a day in travel-related expenses alone. The $200,000 daily incentive was arrived at by dividing that number in half.

Gutknecht says the estimate of $400,000 a day, which was based on drive times and fuel costs, is a minimum. "When we figured it out,'' he said, "fuel was quite a bit cheaper."

So the value to Minnesotans of having the bridge done sooner is higher now than before; those additional benefits will accrue to drivers. In some sense, the incentive's value is greater when the date of completion is further into the distance. Once you cross the 368th day, there's no incentive for the low local bidder McCrossan to move any faster, unless penalties were imposed. I don't know the terms on the other contracts in re: incentives, so let's assume they all had the $200k/day incentives. It changes how I think about the contracts.

Labels: economics, Minnesota

You could have seen this from a mile away. The local school board, in the midst of hiring a new superintendent, has released a document that describes "a glimpse of what may happen if St. Cloud school district voters defeat a property tax increase Nov. 4."

The cuts could include school closings, mass layoffs, reductions in activities and special education, and spending reserve dollars. More ideas are funneling in as Superintendent Bruce Watkins shares the proposals throughout the district.

The ideas represent more than $6 million in cuts. When the list is put before school board members in late May, it will be whittled to $4.3 million.

"They look terrible. When we look at them, there isn't a single thing on the list that is a reasonable alternative that would not affect the education of children," board Chairwoman Deb Lalley said.

A graphic (here in .pdf from the Times) leads with closing schools. Of course that's what they want you to see; "give me my levy or we'll shoot this school." In public finance, it's known as the Washington Monument strategy.

Within the article are the seeds of the fight.

Voters in 2007 rejected a request to renew a tax passed in 2003 that provided $4.8 million a year. That caused a budget shortfall for 2008-09 that the district plans to fill with $1.5 million in reductions and $3.3 million in reserves.

...In 2007, the district was more cautious about mentioning possible reductions until later in the campaign. The philosophy has shifted to determining potential reductions about a year before they would be made.

So they said no, but the school district's reply is "you didn't really mean that, did you?" When you think about what the 2003 tax levy was for...

One possibility eliminates the 30 teacher positions that were added with money from the property tax increase in 2003. Each teacher costs the district about $45,000. One proposal suggests laying off 30 to save $1.4 million.

Note that this saves more money than closing both of the junior highs, according to the graphic. This is what school districts should be saying: We can either close a school and keep student-teacher ratios at current levels, or we can keep the schools open and lay off some teachers and let ratios rise. We've discussed that point here before, and the evidence that ratios matter for learning is tenuous. So if people want to have neighborhood schools, and they've voted against the levy last time, why not accept the word of the voters and make the layoffs?

Because teachers make lousy Washington Monuments.

Labels: economics, education, St. Cloud

Many people are talking about Larry Bartels new book, Unequal Democracy. Paul Krugman talks about the differences in inequality between GOP and Democrat administrations, but he can't figure out why that happens. Dani Rodrik seems to accept Bartels' explanation of why voters still vote for Republicans when they keep giving us recessions and income inequality, which is that voters are myopic. (Russ Roberts calls the data into question -- well worth considering, but not my point.)

Alex Tabarrok makes the key point: We've known this result for some time.

In a nutshell, the theory of partisan business cycles says that Democrats care more about reducing unemployment, Republicans care more about reducing inflation. Wage growth is set according to expected inflation in advance of an election. Since which party will win the election is unknown wages growth is set according to a mean of the Democrat (high) and Republican (low) expected inflation rates. If Democrats are elected they inflate and real wages fall creating a boom. If Republicans are elected they reduce inflation and real wages rise creating a bust.

A certain economist wrote his dissertation on political business cycles in the 1980s and considered partisan cycles. I didn't have at that time the nice chart that Alberto Alesina and Howard Rosenthal (Am Pol Sci Rev, 1989) drew that Alex has updated, but I had noted what they note in their introduction. Democratic and Republican candidates have "polarized policy preferencs" in that Democrats have a higher tolerance for inflation and a lower tolerance for unemployment than do Republicans." (pp. 374-75) There are also economic frictions caused by the presence of wage contracts, that must be set during the period where we don't know whether the Republican or Democrat will win. Because these contracts can be rewritten after the election, most of the shock that occurs when one side or the other wins an election happens in the first half of the new administration; ergo, partisan cycles are the result of settling electoral choices. Unlike earlier political business cycle models, you can generate these results while still having completely rational voters. What they lack is only knowledge of how everyone else in the economy will vote.

Labels: economics, elections

So we've had the state house now pass cap-and-trade. Leo notes comments by Rep. Kate Knuth about the transformative nature of cap-and-trade.

"Cap-and-trade will change the jobs that we have in Minnesota -- I think it will change the jobs for the better," said Knuth, DFL-New Brighton. "It will bring clean-energy jobs."

CBO director Peter Orszag, commenting on federal cap-and-trade proposals, notes that this is simply giving revenue to those who get the allowances under the cap. Proposals currently exist in S. 2191 to give away allowances that CBO values at $145 billion. We don't have a similar number for Minnesota. And if the feds pass their cap-and-trade proposal, what happens to Rep. Knuth's bill?

Orszag's idea instead: Have government sell the allowances, and use the revenues to reduce taxes. Did anyone in the DFL legislature come up with this idea of reducing taxes? Naw, they're happy to give away your air rights for a better Minnesota!

Labels: economics, Minnesota

The same people who wanted you to use biofuels now are telling you they are bad. The worldwide shortage of food because of demand for a substitute leads to rising prices and, because in the short run you can't grow more rice, runs on rice supplies here and abroad.

I make part of my lecture on supply and demand a "second law of supply". Big shifts in supply or demand will lead to large initial changes in price. Elasticities are always greater in the long-run than the short, as some fixed prices become variable and some investment opportunities take time to build. When Ed Morrissey says,

Perhaps turning food into transportation fuel would make sense if massive amounts of grain spoiled every year from a lack of demand...

he's only half right. All surpluses are eliminated by falling prices, and all shortages are eliminated by rising prices, in a free market. The grain will spoil for one year, and then we grow less grain.

'Tis from this logic that the theory of cobweb cycles grew in the 1940s. Cobweb cycles make sense as a theory for the movement of corn prices if two conditions apply: There's a significant lag between the decision to produce and the delivery of the product (true for most agricultural products) and supply decisions are based on current prices. Of course, corn has a futures market. At the time of this writing, the spot price for corn was $5.77 but the price for delivery in December 08 is $6.07. That price is driving the decision to plant X acres as corn, valued in comparison to the prices of soybeans, wheat, and whatever else you might grow on that land. What happens after about June 15 to that market doesn't matter so much, as most corn is already in the ground by then in the Northern Hemisphere.

It is also interesting to note that, while the price of corn futures rises steadily, the price of ethanol futures declines as we go to more distant dates on the contract. The rising price of corn induces more corn into the market, which creates more ethanol and reduces its price. Prices adjust in the long run back towards the initial price. Far better than the Terror for allocating goods and services.

Ed continues:

Farmers love the higher prices that come from the new demand to fill gas tanks, but higher prices have consequences for poorer nations that have just begun to be felt. Morally speaking, shouldn’t we feed people before we feed cars?

Esther Duflo is also arguing that we need price insurance for the world's poor.

The traditional method used by developing country governments – maintaining large stockpiles of grain by buying when the price is low and selling when the price is high – has its share of problems. In India, it was said that at some point that there were enough bags of rice in those storage facilities to go to the moon and back. The losses in storage and to corruption were important. Alternatively, the governments can manipulate prices using taxes and subsidies. Or perhaps it is time to be creative and make the international financial services actually work for the poor: governments could provide price insurance for the poor (in the form of transfers to some when price are high, and others when price are low). Countries that are neither net sellers nor net buyers could do this internally, and countries that are either net sellers or net buyers should be able to sell this insurance on the world market.

But isn't this what speculators do? We have seen what public insurance in financial markets does: We get too-big-to-fail. We get political pressure overriding contracts and even the law, letting banks and brokerage houses skirt financial regulation because it would be too disruptive to let them fail. Should we trust those same mechanisms with our food?

Labels: economics, food

Hunger Stalks Millions of Poor Americans blares the headline in the Financial Times of London. The article itself, however, turns out to be a combination of rank speculation and advocacy journalism for more welfare spending, triggered by pending congressional consideration of the farm bill.

The real story behind the farm bill, of course, is this astonishing observation by Ronald Bailey:

The amount of food being burned because of government mandates and subsidies for biofuels would feed nearly 450 million people. [My paraphrase]

That’s right, folks. We could feed every person on the entire North American continent with the food we burn because of well-intentioned but foolish government intervention in agricultural markets.

Over at National Review Online, Deroy Murdock notes the resulting Global Food Riots: Made in Washington, DC occurring in such places as Haiti, Mexico, Egypt, Pakistan and the Ivory Coast. His excellent article pulls together a wide range of relevant factual information on the biofuels mess, linked to the sources.

Contrast the opening sentences of the FT story:

An escalating global food crisis could bring the problem of hunger home to the US and other developed countries. Millions of poor Americans risk going hungry if food prices continue to rise and food agencies struggle to cope with rising costs, dwindling resources and a huge increase in demand. Already more and more poor people in the US are turning to charity and government assistance as they struggle with rising food costs and soaring fuel bills.

The only factual information here is that the US has a social safety net, consisting of a variety of government programs and private charities that help poor people with food, fuel bills and similar problems. Food prices are up, and the social safety net appears to be doing what it is supposed to do. The rest is speculation.

All of the remainder of the FT article consists of quotes from “campaigners” who seek “to broaden eligibility for food stamps and increase emergency food provision”: the California Women Infants and Children Program Association, the Food Research and Action Center, the Cleveland Food Bank, the Greater Chicago Food Depository, America’s Second Harvest, and Martha’s Table.

It is neither news nor interesting analyis that such organizations want more of our tax dollars devoted to their government rent-seeking activities.

We used to subscribe to the Financial Times, the Economist, Scientific American and National Geographic, all of which once consistently published excellent material with analysis based on well-sourced facts. We watched with dismay as each began to devote more and more of their limited resources to shallow advocacy pieces like this. We canceled our subscriptions, one by one, with regret.

Labels: economics, Energy, food, Media

Tyler Cowen notes that Italy's largest electric utility is converting a power plant from oil to coal, in spite of Europe's stated intentions on reducing greenhouse gases. I forwarded that post to a student of mine in the energy industry, who notes:

I believe it was last year the German government passed a law decommissioning all nuclear facilities by 2020. As of today, roughly 30% of the German grid is supplied by nuclear generation. The other alternative to coal is natural gas but the problem there is the Germans, and virtually all of Europe, doesn’t feel comfortable becoming more dependable to the only supplier of gas in the region. That being Mother Russia herself. With the EU ETS getting over its honeymoon phase with serious haircutting to carbon allocations, this should cause some volatility in the carbon and power markets. Exciting times…

He's right about Germany. And decommissioning is expensive.

Labels: economics, Energy

Two nights ago Mrs. S started shouting to me down the stairs (where I was in NBA playoff bliss) "we need to buy more gasoline." I realized she meant to bank more gasoline. We keep an account at First Fuel, where we have approximately $1500 socked away, purchased at $2.699. The newspaper blared yesterday morning that we had struck a record. Mrs. S, I've concluded, is a momentum investor.

Humor aside, it's worth wondering what is going on right now. We know that records should be corrected for inflation and for changes in taxes, but that won't explain everything. The recent state tax increase should have added only $0.02 so far, and Federal taxes haven't changed. The tax proposals of some (including John McCain) to have a Federal tax holiday doesn't help that much, as Menzie Chinn points out. Half of that shifts back towards oil companies. I'm not looking to tax windfall profits, but there's little sense boosting their profits further at this time. And Chinn notes "to the extent the lower price spurs gasoline consumption, this should increase the petroleum and petroleum products component of U.S. imports, and thence putting further upward pressure on the price of oil..."

Another issue is that these reports come out every spring. Last year we were talking about gas boycotts around this time. Two years ago it was ethanol, another pitch of the tax holiday etc. Three years ago it was evidence of stagflation. Like first pitch, it happens every spring. Here's a chart to show what I mean:
The technical term for this graph is that it is the Census X-12 seasonal factor for the price of a gallon of regular unleaded gas (all formulations, source.) If it matters to you, I estimated it with EViews 5.0 and estimated it over 1980-2007. I'm only showing you the last three-plus years. For the layman, the vertical scale is the multiplicative factor set to equal 1 when the month is normal. 1.04 says the month on average has prices 4% higher due to the season it is; a 0.92 says the price is 8% below a normal month. As you can see, the high months begin every April, tending to peak in May and then coast to the fall, where they fall to a nadir in December and January. Naturally, that's when I put money in the fuel bank. Most of my friends know this by observation; I of course have to use an econometric package to get the same answer, proving I'm not smart, just methodical.

That same analysis also generates an underlying pattern of the trend and cyclical movements of the gas price. Now this picture should scare you if you're worried about gas prices, but it also puts the emphasis back into mid-2007, where I think it really belongs.
The vertical axis is cents per gallon. This process takes the noise out of series and the seasonality to look for shorter trends, and no doubt the trend is straight up lately. If you extrapolate that trend, even with the decreasing seasonality, a $4 gas price is just slightly less than a 50-50 proposition. I get $3.976 for a July forecast using this very crude estimate. The drop in late fall and winter will only have the price slide back to about $3.65 by December. Why that upsurge is happening isn't really so clear, though Jim Hamilton's contention that it's Fed policy feels pretty right to me. Not that I'm a gold bug, but the price of gold on a monthly chart has about the same pattern.I think that if you took the prices of all commodities -- which may or may not be simply a representation of a weak dollar -- and combined it with the gas seasonal factor, you go a long way to explaining the price of gas. And if you do believe this, you should take Mrs. S's advice. You're not likely to see a price at this level again until December at the earliest. And maybe not even then.

Labels: economics, gas

I wonder if the post on generosity could be expanded by some information from the Pew "Inside the Middle Class" poll. This paragraph I think tells us a great deal:

Some two-thirds (68%) of middle class respondents say that "having enough free time to do the things you want" is a very important priority in their lives. That's more than say the same about any other priority we asked about in this survey including: having children (62% said that is very important), being successful in a career (59%), being married (55%), living a religious life (53%), doing volunteer work/donating to charity (52%); and being wealthy (12%). Upper and lower class respondents give essentially the same answers. The demographic groups most inclined to say they highly value free time are the ones least likely to have it -- such as the employed, the middle-aged, and mothers of young children. In recent years, a number of public opinion surveys have documented Americans' growing sense of feeling rushed, and this perception tracks with the growth in the number of mothers who are employed outside the home and in the number of two-earner couples. However, recent research on whether Americans in fact have less leisure time has produced mixed findings. At least one major report, which relied on five decades of time use logs kept by different groups of survey respondents, found that no matter what most people may perceive, Americans today have more leisure time now than they did several decades ago. Other reports find that many middle class families have maintained their lifestyle only by becoming two-earner households, with all the attendant time stresses.

Notice where charity and volunteering rank on that list, relative to being wealthy. People jealously guard their time, perhaps due to the perceived stresses of having both parents work outside the home.

In short, what we are contemplating are long-run changes in labor supply. Real wages having been roughly constant, what else can be causing the labor-leisure tradeoff to change as it has. The intensive margin -- the number of hours worked per employee -- hasn't changed greatly in the US since 1980, but the extensive margin -- the share of the active population working -- has increased. So fewer people have time for volunteering, but everyone has the same (or actually a little more) time than before. (See this recent paper about aggregate hours across the OECD.) Perhaps we need models that involve joint optimization for two-adult households that choose to give volunteer time as well as work. I don't know any of those; sounds like a good thesis.

Labels: economics

The housing boom hits much of Minnesota, but in a series running the last two days in the StarTribune the most dire area is Wright County, where there is see-through housing.

Some houses in the subdivision have been empty or unfinished for more than a year. Garage doors are missing, unopened mail clogs mailboxes, and dormant lawns have turned into tangled masses of weeds. Some homes are priced for $80,000 to $100,000 less than their original price.

"A lot of the prices that people were paying for property in Wright County had no basis in reality," said George Schmidt, a real estate agent with Remax in Anoka. "They were destined for foreclosure."

Blogger and frequent Scholars commenter 'bleak' argues that these homes in the exurbs had imaginary value.

What were the bogus justifications for the housing bubble? Prices only go up? No more land being made? (There's plenty of land in Wright County.) Baby Boobers were going to buy investment properties?

Humbug! Within a blink of the eye, all of that 'home equity' everyone was banking on is gone. It was never really there in the first place.

I have written articles locally about "the corridor", that area between Interstate 94 and U.S. Highway 10, which largely runs through Wright and Sherburne counties. It is an area that has filled in dramatically with businesses and housing as homeowners sought more room and escape from the tax burdens and land restrictions of the metro counties. Demographic estimates show an expected increase in population in these areas of 18-19% between 2006 and 2010. (The comparable number here in Stearns county is under 7%.) The answer to bleak's question of what justifications being made were "people are moving there". And not just from the east.

In the early days of the current housing crisis, the state implemented two new laws which placed restrictions on the mortgage market. No one is a fan of liar loans or the subprime market more generally, and everyone would like to require every one else's mortgage banker to be licensed under stricter laws. But the effect of these laws has been to signal that lending is to be restricted, and it is, and that is leading to difficulty of sellers finding buyers.

Undoubtedly, as the STrib stories tell you, there are stories of fraud (by sellers) and greed (by buyers). At least one of the buyers in today's story is holding on to his underwater properties because "if I can't get rid of these for a profit in five years, then I'm in trouble." There's enough blame to go around many places. But the value isn't imaginary. That area will eventually fill in. Cleaning up after this episode will mean that takes longer, as some land and housing is misallocated and the government continues to impede the unwinding of those positions. But it will unwind.

The STrib indicates that tomorrow's article will include the response of area cities and townships.

Labels: economics, Minnesota

Janet and I will be at the MAS annual meeting tonight. Its feathered speaker is Peter Wood, the national association's new president, who was recently at the APEE meeting.

I rather suspect I am the only member whose academic credential is a Ph.D. in social anthropology. I joined APEE to attend its annual convention, held this year (and most years) in Las Vegas. And I stood out like a walnut in a game of marbles. Economists, at least APEE-style economists, speak a language of efficiency. The goal is to figure out how to conjure human behavior from a parsimonious set of premises. If all goes well, the marbles roll smoothly. Anthropologists, by contrast, spend their time examining the rough texture of human affairs, delighted if a pattern emerges from the crisscross purposes of culture, but never expecting it.

Brother Wood, welcome to my life in MAS. I have yet to meet a fellow economist in the group, and suspect I won't. Perhaps it is because the "parsimonious set of premises" we use, while allowing for the average economist to be a moderate Democrat, doesn't have people working daily in departments with people who have surrendered reason to emotion. There is no such thing as "post-modern economics" and I believe there never will be. So when I go to MAS or other such organizations, it is often to hear of departments and university administrators that seem to me a fiction.

Wood challenges me:

At least to me as an outsider, the participants in the APEE conference seemed quite frequently ready to put paid to ideas they found fallacious—simply by pronouncing a logical refutation. I tried without success to detect a spirit of combativeness that would carry the fight further. When I pointed out that Arizona State University had established a degree program in Sustainability and had appointed several economists to its faculty, an economist complacently replied, “But they aren’t in the Economics Department.”

That was a revelatory moment. I suppose all academics perform with a particular peer group in mind: a body of experts whose good opinion matters more than the views of other scholars and intellectuals. APEErs seemed to draw that circle fairly tightly.

But it's not just the more Austrian economists that do this. Where economists do participate more broadly in the life of the university, they are either the 5% of economists who are leftist radicals or someone who decided to chuck the whole notion of academic life and pursue administration. There was a sharp undertone of "told'ja so" to Larry Summers demise at the hands of the feminists of Harvard from his more academic economics brethren. (Oh yes, and "sisteren".)

But the language and culture of these Scholar meetings -- which I started attending around the time this blog was formed, and from which the blog's name is drawn -- are very different from the language of the meetings I attend with fellow economists. I just came back to home from a seminar in which a colleague (who reads here I believe) tried to analyze why movie studios keep making R rated movies when it's G-rated movies that sell well. The answer tends to have more to do with what foreign movie-going audiences purchase: they want Pulp Fiction, not Return of the King. Any talk of why they want that is not part of the discussion, as preferences are taken as a given. It's where we economists stop and where the anthropologists begin.

And I usually stay in my place, except for one night of the year. Which is tonight, so off I go to be a walnut.

Labels: economics, higher education

The first was a picture Krugman drew yesterday of median family income in the Midwest vs the rest of the nation:
The other comes from a 2006 Midwest Economy entry from the Chicago Fed:I'm going to say those two are related. Is it any accident that the convergence of the midwest's median income the the nation coincides with the beginning of the slide in manufacturing? The question is, what can be done about it?

Labels: economics

From this morning's St. Cloud Times,

Local single family home sales were down 4 percent in first quarter 2008 compared with first quarter 2007, according to data released this week by the St. Cloud Area Association of Realtors.

That's a slightly larger drop from last year around this time, when first-quarter home sales decreased 1 percent from first quarter 2006.

Local home sale prices have dropped almost $20,000. The median price of a home was $143,000 in first quarter 2008 compared with $162,650 in first quarter of 2007. And the average number of days a home remains on the market is now 111, according to first quarter 2008 data. That's six days longer than first quarter 2007.

Here's the sales report. Homes were discounted more than $6000 from their listing prices, and 13% fewer homes were listed in the first quarter of 2008 vs first quarter of 2007. It appears the mix of homes sold had something to do with the downturn, as single-family home prices fell 10%, but more condo, townhouse and patio home sales occurred this year than last.

Meanwhile, local gas prices hit a high. It happens every spring, as we change blends for the Clean Air rules, but it's hard to argue with $115 oil.

Labels: economics, housing, St. Cloud

I've mentioned the book, which on Monday got its cover design (thank God my co-editor is a visual thinker). I'll reveal it when we get back the mock-up in a month or two, because I think it's a neat idea that Bryan had. My role was "looks good!"

One of the chapters is on the various ways in which we measure governance and what these mean. A basic theme of the book is that the measurements are amalgamations, atheoretical and often ill-considered. Measuring governance seems to be one of those areas.

So two posts around a World Bank conference this week got my attention. First, Larry Summers is provocative:

Mr. Summers’s predecessor at Treasury, Robert Rubin, ventured that “effective government” was the key for growth. But Summers wasn’t buying that one either. Government are often seen as effective because the countries are growing fast, he said. Then when they stop growing, the governments are dismissed as lame and corrupt – Indonesia under Suharto, for instance.

The first three words out of my mouth were "Lee Kuan Yew". How does one classify Singapore's governance? If you say "must be good, look at its growth", Summers is right. If you say "horrible, it's authoritarian", you have a harder time making the link between governance and growth. Take a sheet next to your desk and write a 2x2 matrix. Along one dimension write "growing" and "stagnant"; along the other write "good governance" and "poor governance". Pick about 20 countries at random and put them in one of the four boxes based on what you know. Now since many readers will know some economics they probably get the growth/stagnation classifications roughly right. But watch how you decide the governance question.

At the same conference I think, and somewhat relatedly, the maddeningly brilliant Dani Rodrik writes,

So good governance is both an end and a means. It is a key goal of development, broadly construed, and it is also an instrument for achieving better policymaking and improved economic outcomes. Any sensible discussion of governance must be clear about the distinction. And it must clarify in which of these two senses governance is “the problem” we are trying to fix.

I make the following points below. First, economists have very little useful to contribute to governance-as-an-end. Second, while they have more to say about governance-as-a-means, what they do say is often not what they should say. Where economists can be useful is in designing institutional arrangements for specific policy reforms targeted at relaxing binding growth constraints--what one might call “governance in the small.” This agenda differs quite a bit from the broad governance agenda on which much ink is being spilt. And third, there are sometimes tradeoffs between governance-as-an-end and governance-as-a-means which policymakers and advisors need to be conscious of.

I have to read the paper to see what those tradeoffs are, but I'm going to guess that they relate to Summers' observation.

Labels: economics

Cato's Center for Trade Policy Studies has a neat tool that looks at the voting records of Congresspersons to determine their stances on trade issues. It's neat because it divides their records between votes for trade barriers and trade subsidies. Those voting for low barriers and no subsidies are free traders. There are those who are for low barriers but subsidize domestic producers -- these are classified as "internationalists" and not free traders. I have written down the results for the three presidential candidates remaining, plus for Senator Norm Coleman:

• Clinton -- very much the interventionist. She only opposed nine of 29 trade barriers in her Senate career, and only one of seven trade subsidy bills.
• McCain is more the free trader. He opposed trade barriers 35 times out of 40 votes on such issues, and eight out of ten votes were against trade subsidies. The latter fits his profile as a crusader against government waste, as most trade subsidy programs are corporate pork.
• Obama, 36% of votes opposed trade barriers (4 of 11). He only voted twice on trade subsidies and supported them both times. An interventionist, though there's not as much of a record here as you might like to make that call.
• Coleman is the internationalist. He is very much for keeping trade barriers at a minimum, voting 16 of 22 times to keep barriers down, but has supported trade subsidies in four different votes (two were farm bills, the other two for the Byrd Amendment.)

Wellstone! by the way was the closest thing to an isolationist as we've had.

P.S. This opposition to trade subsidies should also be applied when thinking of tax breaks to dissuade airlines from taking jobs to other states. Use of the public fisc this way is a lousy deal for both small airports and large. It's all the same logic.

Labels: Coleman, economics, politics, trade

Al Franken thinks your stimulus check is a mistake. I could buy that, if he was going to say that it just implies higher taxes later so it won't really stimulate. But no, that's not what he's saying.

As he embarked on a tour of Minnesota focused on the economy, Franken said he was "not thrilled" with the $168 billion economic rescue package Congress approved in February.

While stopping short of saying he would have voted against the plan, Franken said he would have preferred more emphasis on helping states and municipalities move ahead with deferred repairs to highways, bridges and sewer systems.

"It would have the benefit of putting people to work, which is what you need to do in a recession," Franken told reporters at a state Capitol news conference. "And it would have the added benefit of actually repairing some infrastructure, which is also good for our economy."

Dollars spent put people to work, but dollars drained to pay for those workers puts other workers out of work. Which ones does he favor? The ones that are in the construction industry. These are both temporary jobs and they are unionized. Those ads playing on Twin Cities television right now blaring how good unions are for us all, are the friends of Al Franken.

Which makes him not the friend of those of us who have to pay those workers.

Labels: economics, Franken, unions

Responding to something I said on air Saturday, Speed Gibson wonders why we don't have a simpler tax form for state income taxes (perhaps x% of the federal taxes paid.) The answer is quite simple: To do so means that the Legislature forgoes its ability use the tax code to favor its political supporters and harm political opponents. Filling out my own last night I noted the various credits offered for certain kinds of expenses. Luckily I have a child in a private school; I make too much to get a credit for that, but I do get a deduction. That tax policy makes it cheaper to send children to private schools, or to piano lessons, or for public schools to shield the cost of its extracurriculars from taxpayers. In Minnesota as much as any state, taxes can be much more burdensome if you don't spend your income in the ways the legislature has decided is socially desirable.

Labels: economics, Minnesota, taxes

Brazil has discovered what could be the third biggest oil reserve in the world, according to the head of the country's National Petroleum Agency.

The deep-sea find by state-run oil firm Petrobras could yield 33 billion barrels in reserves.

Further tests are required to assess the scale of the find, off the coast of Rio de Janeiro, but analysts say it could have significant implications.

Brazil announced sizeable new gas and oil discoveries last year as well.

Source. It was once said:

The cause of these new discoveries, or the cause of applying ideas that were discovered earlier, is the "shortage" of copper -that is, the increased cost of getting copper. So increased scarcity causes the development of its own remedy. This has been the key process in the supply of natural resources throughout history. (...Even in that special case there is no reason to believe that the supply of energy, even of oil, is finite or limited.)

Labels: economics

I had just finished writing a chapter on central bank independence when Bill Greider's Secrets of the Temple came out. People were shocked, shocked, to find out that Paul Volcker was running the economy. Volcker was a secret because, well, he decided to avoid publicity (even the Volcker report on corruption in the UN didn't do much for his visibility.) Having a visible central banker might draw attention to its status, I thought at the time. At that particular point, central banks were still musty old places thought about mostly by people who worked in them and a few Fed-watchers and other academics.

Now in that very same year -- as I was reminded yesterday, taking a walk and listening to an Econtalk podcast with Tyler Cowen -- New Zealand was fed up with its experience of high inflation. It had had what was the norm: A central bank that answered to its government, not subject to much outside scrutiny, designed to support that government in many ways. Through the 1980s it had an inflation rate greater than 10% per year on average. So it hires a governor for its Reserve Bank named Don Brash and says "get the inflation rate down to 2% and keep it there, or you're fired." Brash does the job until 2002 when he decides to go into politics. (I know very little about NZ politics, but it appears his run as RBNZ governor has been overshadowed by his political career, not necessarily for the better.)

As Cowen notes, people begin to look at New Zealand as an example and emulate it. The idea that central banks should be independent -- temples where the monks chant behind an icon wall -- gained hold. We monetary economists begin to talk about inflation targeting. And one by one, central banks begin to change. Whereas in 1989 there were only three central banks generally agreed to be independent -- the Bundesbank in West Germany, the Swiss National Bank, and the Fed -- there are now many more, leaving the Fed almost a laggard behind its ECB brethren.

Important to note, as I did in a forthcoming paper, is that where the New Zealand model was adopted you could not call those central banks independent. They have a contract with the government.

So what's better, a central bank that runs itself without accountability to the government but without any inflation bias, or a central bank that's dependent but with a contract that makes inflating the economy costly to both? I wondered that reading Robert Reich's rediscovery of the secrets of the Fed:

Five years ago the Fed decided to make money so cheap lenders shoved it out the door to anyone capable of standing up, and Alan Greenspan pooh-poohed the idea that regulators should be especially vigilant. What happened? We had a housing bubble, millions of Americans are losing their homes, tens of millions are watching their major asset (their home) drop in value and their pensions shrink.

So does this mean the Fed should be more accountable? Are its decisions so important that citizens have a right to more say in what it does? Problem is, most people don't understand what it does, and have no idea how it makes decisions. And partisan politics could do terrible damage. Yet we don't want the Fed to refrain from doing what it's doing. Paul Volcker to the contrary notwithstanding, government has to make sure there aren't runs on our banks and that our financial system is strong.

The first step in reconciling democracy with the Fed is for people to become better educated about it. Most Americans don’t even know where the Fed is located. (It’s on 20th Street and Constitution Avenue in Washington.) And most have no idea who runs it. (Besides the chair, now Ben Bernanke, are openings for six other members of the board of governors, each appointed for fourteen years. Five regional bank presidents join them on the Open Market Committee. Who appoints the regional bank presidents? If you don’t know, you ought to find out.) These twelve people have more power over your daily life than your congressman and Senator, maybe even your president.

Jim Hamilton wonders whether we have allowed the Fed too much leeway with the new lending facilities they have, which implicitly put the taxpayer at risk of holding some really lousy securities in return for the Treasuries the Fed is lending. And Volcker himself is suggesting the current occupant is dancing on the edge of the Fed's legal authority.

I don't know where the legal limit on what the Fed can do with its portfolio is or whether the Congress can order him to stop. But the Fed is a creation of Congress and, if Congress wanted the Fed not to make these alphabet-soup lending facilities, it could just introduce a bill to stop it. One thing to note is that when Cukierman, Webb and Neyapti coded central bank structures in deciding which ones might be more independent than others, there was a code for the width of borrowers that could borrow from the central bank. The Fed was shown to have the most narrow circle of borrowers -- only the federal government. But there are no limits on how much, or at what interest rate, or whether the Fed could lend in primary markets, who decided terms, etc. If the Fed now chooses to widen the circle of borrowers, there are many other types of controls that could be in place but which were never considered as I understand and remember the Fed's history. What Volcker and Hamilton would seem to assert is that the narrow circle is important for keeping a structure of the Fed that has independence. If that circle is to be widened, other changes to the Federal Reserve Act may be considered.

Labels: economics, Federal Reserve

The latest WSJ survey of economic forecasters is out today and finds three of four economists are saying the U.S. economy is in recession, and almost as many say the bottom is yet to come.

When asked what the biggest downside risk to their forecast was, 35% said further deterioration in the credit markets, while 25% said it was a sharp drop in consumer spending and 13% said continued housing weakness.

...After three consecutive drops in nonfarm payrolls, the economists said they now expect the economy to shed an average 1,625 jobs a month over the next year. They expect the unemployment rate, now 5.1%, to rise to 5.6% by December. Meanwhile, just 21% of the economists expect home prices to hit bottom this year, while 67% see the bottom next year and 12% say it won't be until 2010.

The respondents on average expect U.S. gross domestic product, which grew at a slim 0.6% annual rate in the fourth quarter, to expand by an anemic 0.2% in the first quarter and 0.1% in the second, followed by a 2.1% increase in the third quarter. Most of the economists said they expect a contraction in the first half, but those expecting growth pushed the average into positive territory.

Consistent with their view that the economy will hit bottom soon, the economists said they expect the Fed to trim its benchmark federal-funds rate by another half percentage point from the current 2.25% by June -- and then to keep rates unchanged for the rest of the year.

I cannot figure from the graphs a median on the quarterly GDP forecasts, but the report indicates they are negative. Dan Laufenberg of Ameriprise has a forecast of 3.6% growth in Q2, a full percent higher than any other forecaster. (Dan is a frequent panelist at the St. Cloud Area Economic Outlook each February, but missed us this year due to a pressing engagement elsewhere.)

If someone asks me if the national economy is in recession, my answer is "I think so." There are some looks at me that suggest they think I'm hedging -- surely you've heard the news today oh boy, the story of an economy that's tanking. And the Fed! Oy vey! But the truth is we don't really know and don't have a negative GDP quarter yet, and we might not. I'm persuaded by the monthly data, but until we see the Q1 figure at the end of the month a small amount of doubt must remain.

That the survey showed little concern over inflation gives some reason to think that, if the economy looks a little worse than we currently think, there's at least a couple bullets left in the Fed's holster. I'll use a separate post to discuss the criticism the Fed's getting right now.

Labels: economics

Recently John Palmer and William Polley and others debated whether the Solow growth model was a good subject for teaching macroeconomics. When I was in grad school, the first half of my second macro course consisted of working through Solow's monograph (and Harrod, and Domar.) And while so much of the rest of our macroeconomics textbooks have changed, the basic Solow model sits there almost untouched (some books will have some Romer at the end, like an appendix that can be removed just as soon as that goes out of fashion.)

The reason to teach it, I think, is simple: Growth is just too damn important to be pushed aside in an intermediate textbook. As Romer says here, possibilities don't add up, they multiply. Why they multiply is what students should learn. I often use Easterly's Elusive Quest for Growth with this because Easterly's organization is very close to what John says is the problem with Solow -- it doesn't tell us much. But it does help us shoot down some bad ideas in development, like project aid and population control. It makes you focus on the A in AF(K,L) and get away from the K and the L. The property rights, entrepreneurial culture, the transactions costs, the quality of government -- those are all in the A. That's where the action is, and you can use Solow to get you there.

Bill and I teach that section of the course in roughly the same way. I've pretty much given up the golden rule portion of Solow (like anyone ever made policy that way!) and Harrod and Domar are gone completely, but it's an easy entrance to the good stuff, until someone makes a better one.

Labels: economics

Arthur Laffer and Stephen Moore have issued a study through the American Legislative Exchange Council on which states are rich or poor. Minnesota ranks 26th for 50 states for economic performance and 35th for economic outlook. Performance is a combination of income and employment growth plus net domestic migration. Outlook is a "forward-looking forecast based on the state’s standing (equal-weighted average) in the 16 important state policy variables." The study runs through 2006. Minnesota fares worst in corporate tax rates (45th of 50), rising tax burdens (43rd), and marginal personal income tax rates (39th). So far, it doesn't appear those numbers have been changed so perhaps backsliding in other states will improve Minnesota's score for 2007.

The report emphasizes that progressive personal income taxes exacerbate the cyclicality of state revenues. During booms, the states spend too much:

The analysis and case studies discussed in this chapter have shown that states often find themselves in fiscal trouble because they spend far too much during economic expansions. They are like the scorpion that is carried on the back of the frog across the river that then stings the frog causing them both to drown. “Why,” asks the frog in his dying breaths. “I couldn’t help myself,” responds the scorpion. “It’s in my nature.” It seems that overspending when the coffers are flush is in the nature of state legislators.

The most advisable path to avoid future fiscal crises is to keep spending and tax receipts at a manageable and justifi able rate, usually population growth plus inflation.

Minnesota's population grew faster than the national average between 1992-2000 (10% vs. 8.8% nationally). The additional families created demand for government services but also more revenue. Their analysis suggests the state received a windfall of $701 in revenue per person, above and beyond the revenue needed to keep real per capita tax revenues constant. Only three states had higher "excess" revenue taken from taxpayers: Michigan, Vermont and California. For the country as a whole, state tax revenues above inflation and population growth rose $108 billion between 1992 and 2000.

As Governor Pawlenty and the Legislature both look at tax reform, these trends should be considered. Laffer and Moore are fans of the Colorado tax limitation amendment (TABOR) which may not fly here. But weaning government off its addiction to income tax revenues does provide a more stable tax revenue stream. Now would be a good time to start.

Labels: economics, legislature, Minnesota, taxes

MN Chair in Real Estate Steve Mooney sent me a copy of his report along with the press release that surveys graduates of his program to determine conditions in the real estate industry as discussed earlier. The survey was of 141 graduates, with 42 of them having three or fewer years of experience. Here are a few interesting tables:

Table 1 – How Do You Rate the Market?

2005						2007
	Very Good	Good	Average	Poor