Just wonderin', as have several people who've emailed me about this cover. There were a stack of these in my office this AM. There's a suggestion that I should now work for free instead. I prefer the infinite price idea to justify my constant complaint of being underpaid and overworked.

Thanks to our local communications staff who put that together; I wasn't as enthused about the cover as others, but it seems to have gone over well. I am deeply grateful to this university that has given me plenty of opportunities to be successful and in my corner when I am. When I do write critically of the school on this blog, I hope readers understand it's the disappointment one feels when a loved one doesn't meet the ideal vision one has of it. It has long been populated with wonderful people, most of whom are friendly even when in deep disagreement. One can hardly ask for more.

Labels: economics, SCSU

This graph shows the unemployment rate compared to the stress test economic scenarios on a quarterly basis as provided by the regulators to the banks (no link).

This is a quarterly forecast: the Unemployment Rate in Q2 was higher than the "more adverse" scenario.

Note also that the unemployment rate has already exceeded the peak of the "baseline scenario".

From Calculated Risk, hat tip to Henry Blodget, who correctly adds:

The larger story here, unfortunately, is that the Obama administration continues to blow its credibility on the economy. By being too optimistic from the get-go, the administration is opening the door for critics and opponents who are already arguing that the Obama plan has failed.

The only surplus this administration has is in hubris. See my posts here and here for more on overselling your forecast.

Labels: economics, Obama

...about the gold standard. I was surprised she decided to do this topic, and when she sent me a draft of it I was quite surprised how much she had learned.

But after World War I came the Great Depression. Country after country abandoned gold standard after the Depression. During World War II the allies held a meeting at Bretton Woods, N.H., to establish that the dollar was fixed to gold and everyone fixed to dollar. But that ended in 1971 because the United States didn’t want to play by those rules either.

I asked [St. John's economics professor Louis] Johnston if the gold standard made sense for today, and he argued that it would not. “Governments have no better sense of what a currency ‘ought’ to be than anyone else, so there is no case to give a government a monopoly in this area. Let markets determine what the value of a currency will be.”

It turns out the value of our currency is not assured by government promising to convert money to gold. Instead, it depends on government doing those things that a gold standard would require. If we have the gold standard and no discipline, it fails. If we have the discipline, we don’t need a gold standard to tell us what our dollar will be worth 20 years from now.

Do we have that discipline now?

See also, as always, the Concise Encyclopedia of Economics.

Labels: economics, money

Did someone pinch about 17,500 ounces of gold from the Canadian mint?

The Royal Canadian Mint is missing about C$18.8 million ($16.2 million) worth of gold and has not ruled out theft even as it continues to try to solve the mystery, according to an official on Tuesday.

An independent review by of the Mint's records found a discrepancy of 17,500 troy ounces of gold -- worth about C$18.8 million at current prices -- between the Mint's accounting and its physical count of precious metal done at the end of 2008.

The Mint refines 5.4 million troy ounces of gold a year, turning raw metal and scrap jewelry into 400-ounce bars.

The bars that the Mint makes out of scrap gold weigh about 27.5 pounds (12.5 kilos). It's a bit heavy to sneak out under a skirt or coat. And you'd have to take out 44 such bars for a theft that large. Mint officials say they had a lot of gold come in when prices rose above US$1000 an ounce. Hard to believe they'd end up with an explanation "we were swamped."

The mint's management has been told by government it will not get any bonuses until they find the gold. That should be reassuring. Wouldn't firing someone be the normal thing?

Labels: economics, money

Canada spends about $3600 per person on health care. That's about half what the US spends, and some think we need to spend less and be more Canadian. Well, some Canadians want to be more American, too.

"Any wait time was an enormous frustration for me and also pain. I just couldn't live my life the way I wanted to," says Canadian patient Christine Crossman, who was told she could wait up to a year for an MRI after injuring her hip during an exercise class. Warned she would have to wait for the scan, and then wait even longer for surgery, Crossman opted for a private clinic.

As the Obama administration prepares to launch its legislative effort to create a national health care system, many experts on both sides of the debate site Canada as a successful model.

But the Canadian system is not without its problems. Critics lament the shortage of doctors as patients flood the system, resulting in long waits for some treatment.

"No question, it was worth the money," said Crossman, who paid several hundred dollars and waited just a few days.

So without denial of any service to anyone else, Ms. Crossman spends $700 to get her treatment. She upgraded her health care, of her own volition, with her own resources. I would not have thought anyone could object. But,

"Private clinics don't produce one new doctor, nurse, or specialist. All they do it take the existing ones out of the public system, make wait times longer for everybody else while people who can pay more and more and more money jump the queue for health care services," said Natalie Mehra, member of the Ontario Health Coalition.

..."One can understand that this is evolving and a mix of private and public seems to be favorable in some context. On the other hand, we need to be really careful that we're not treating health care the way we treat a value meal at McDonalds," Dr. Michael Orsini from the University of Ottawa told FOX News.

Ms. Mehra is economically illiterate. An increase in demand for doctors -- by paying them more -- will increase their income and induce young, smart people into medicine who now go elsewhere. (That is, if the medical profession allows medical schools to admit however many they want.) The fixed-pie thinking of Mehra -- if you get one more doctor in your private clinic I get one less doctor in my public medical factory line -- is a static thinking that fails to understand incentives. If you would just allow them to work, you could have as many doctors as you'd like.

But Dr. Orsini thinks there's something entirely different about health care. That appears to be the dominant thinking in Canadian public policy. They should talk to more Ms. Crossmans. Health care is a scarce good: People economize by seeking value for their dollar. The only reason someone would not want a patient to seek value is that that person -- the doctor, the government, the bureaucracy -- doesn't want to cede the power of being able to make that choice for them.

Labels: economics, health care

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.

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.

Labels: donuts, economics

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.

Labels: economics

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.

Labels: economics, St. Cloud

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.

Labels: economics, Energy, Obama

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.

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.

Labels: economics

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.

Labels: cigars, economics, taxes

This afternoon's versus the previous statement on April 29:

• Now says "pace of contraction is slowing", a second derivative kind of assessment. Last time they qualified with contraction "appears to be somewhat slower."
• Sees progress in getting inventories under control relative to sales. (See this for data.) I don't see any other optimism in the statement relative to April than this.
• Recognizes that "prices of energy and other commodities have risen of late" but "substantial resource slack" means they still think inflation fears are "subdued". Anyone looking for statements about concern over future inflation will be disappointed by the middle paragraph.
• Actual policy is the same, both on the rate side and in terms of quantitative measures.
• Drops reference to "facilitating the extension of credit to households and businesses" that was in the April statement. Not sure whether this signals they are done with creating new facilities. The new statement concludes by saying that after monitoring its balance sheet it will "make adjustments to its credit and liquidity programs as warranted," which might be their signal that they are thinking about how to unwind their balance sheet expansion.

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.

Labels: economics, Federal Reserve, money

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].)

Labels: economics

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 grâce 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.)  

Labels: economics

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.

Labels: economics, Federal Reserve

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:

• Business Insider reports on a Carbon Counter. What does it measure, a stock or a flow? Why does that matter? Turns out the people who put the counter up don't understand that question.
• Greg Mankiw discusses health statistics in the discussion of Obamacare, with an explanation of ceteris paribus. "To make comparisons in health outcomes, you need to control for other variables. Without such controls, the simple correlations have little meaning." So when you find studies that use the controls (like the Lancet cancer study that Gary Becker refers to in Mankiw's post), we do well. See also Glen Whitman from 2008.

Labels: economics

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.

Labels: economics, Obama

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.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.

Labels: economics, money

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)

• A new Financial Services Oversight Council of prudential regulators to identify emerging systemic risks and improve interagency cooperation.
• New authority for the Federal Reserve to supervise all firms that could pose a threat to financial stability, even those that do not own banks.
• Stronger capital and other prudential standards for all financial firms, and even higher standards for large, interconnected firms.
• A new National Bank Supervisor to supervise all federally chartered banks.
• Elimination of the federal thrift charter and other loopholes that allowed some depository institutions to avoid bank holding company regulation by the Federal Reserve.
• The registration of advisers of all hedge funds and other private pools of capital with the SEC.

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.

Labels: banking, economics, Federal Reserve, housing

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.

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.

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.  

Labels: economics, health care

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.

Labels: economics, health care

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.

Labels: economics, health care, Obama

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.

Labels: economics, Final Word, NARN

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.

Labels: Biden, economics, forecasting, Obama

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.)

Labels: economics, sports

I hadn't realized the size of the bailout in these terms before reading...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?  

Labels: banking, economics

...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?

Labels: economics, Federal Reserve

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.

Labels: Biden, economics, Obama

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.

Labels: economics, global warming

Yes, if they have an Alinskyite with power as a friend.  Business Week reports:

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.”

Labels: economics, unions

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.

Labels: economics

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.

Labels: Carter, economics, elections, Reagan

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.

Labels: economics

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.

Labels: economics, rule of law

According to the New York Times, new frictions have broken out between the Obama administration's economic team:

Labels: economics

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

• Prohibit the Treasury from using any more TARP funds to bailout GM or Chrysler.
• So long as the government holds stock in these companies, require that the Secretary of the Treasury and his designee have a fiduciary responsibility to the American taxpayer to maximize the return on that investment.
• Not later than one year after each company emerges from bankruptcy, require that the Treasury distribute its common stock holdings in that company evenly to every American who paid taxes on April 15.

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.

Labels: economics

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.)

Labels: economics

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.

Labels: AM1280, commissioner, economics, NARN

Then:

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.”

Now:

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.

Labels: economics

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.

Labels: economics, SCSU

Personal income rose in April, but let's look at where the money came from.

• "Private wage and salary disbursements decreased $1.3 billion in April, compared with a decrease of $39.1 billion in March. Private wages and salaries had been reduced by an adjustment of $20.0 billion at an annual rate in January, in February, and in March to reflect smaller-than-usual bonus payments." Private wages are half of personal income. Government wages and benefits, unsurprisingly, rose in March and April.
• "Personal current transfer receipts increased $45.7 billion, compared with an increase of $34.3 billion. Provisions of the Federal Additional Compensation Program of the American Recovery and Reinvestment Act of 2009 boosted the level of personal current transfer receipts by $11.8 billion at an annual rate in April and $5.7 billion in March. The provision provides an additional $25 per week unemployment payment." That's right: Of the $58.2 billion increase in personal income overall in April, more than 3/4 comes from increased spending on unemployment checks. That's change we can believe in!
• "Personal current taxes decreased $63.6 billion in April, compared with a decrease of $34.1 billion in March. The Making Work Pay Credit provision of the American Recovery and Reinvestment Act of 2009 reduced personal current taxes $49.8 billion at an annual rate in April and $11.2 billion in March. The provision allows a refundable tax credit of up to $400 for working individuals and up to $800 for married taxpayers filing joint returns." Disposable personal income -- income after taxes -- rose $121.8 billion, of which more than 80% comes from unemployment insurance payments and the tax credit -- which is really a spending program, since many of those receiving the credit have a zero tax liability without it.

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.

Labels: economics

A project that costs $100 million (though I'd guess this number probably doesn't include the land costs) to save almost $1 million a year? There's a name for that—a lousy investment. And creating 200 jobs? Not really. The project employed 200 people. Not the same thing.

Russ Roberts discussing this solar panel project that is supposed to also reduce the same amount of pollution as 4,000 new cars, out of a total cars sold in the U.S of over nine million annually. (Hey, I thought government was trying to sell more cars?) I originally spotted this on David Strom's Twitter feed.

Continental Paving, Mark Charbonneau's family-run business, landed a $10 million contract to reconstruct and pave a section of the F.E. Everett Turnpike in Bedford, as part of a larger project to connect the highway with Manchester-Boston Regional Airport.

Continental's contract came out of a $130 million package of stimulus money targeted to build and repair highways and bridges in New Hampshire.

The $10 million contract and the ability of similar companies to land stimulus-funded work enabled Continental to keep its 300-person staff intact, Charbonneau said. Without any stimulus-driven projects, the many companies in the state's road construction industry would have been competing for fewer contracts, and Continental would have had to lay off 75 workers, he said. ...

Continental Paving is only one of a few New Hampshire companies that at this time can concretely measure whether the economic stimulus package will keep as many as 16,000 people working in the Granite State.

I drove that road very recently. The road is there, it works just fine. NH has a 6.3% unemployment rate, well below the national average.  And how long will that work last?  What's the added value of the repaved, reconstructed road?  And why do we believe Mr. Charbonneau has "concretely measured" the impact of the economic stimulus?  He really was laying 75 workers off?  For how long?  The money comes out to $133,333 a job "saved".  Again, like the solar panels, seems like a lot of money for a job that probably takes a few months, to reconstruct and pave a road that already works.

...a move made possible in part by the tax credit for energy-efficient home improvements. Andersen Windows also cites the first-time homebuyer credit as another factor, as this tax credit helps to get existing homes off the market so that builders can start building again.

At best, the restoration projects will keep union people already working for Amtrak busy a little while. Because people understand that the money that’s spent on this project is onetime money, the efffect will be limited. People that get this type of money understand that this money won’t come in month after month.

He's right, and that's good work, Padewan.

Labels: economics, Obama

My dear friend Ed Morrissey opines yesterday that perhaps, just perhaps, the end of the "American Economic Era" is at hand.

Warning signs abound. Earlier this month, the Treasury discovered that demand had significantly decreased for its long-term bonds. In order to get buyers at its regular auction – the device by which the United States runs on deficit spending – it had to hike the interest rates it pays the bondholders. It signaled a lack of confidence in America's ability to sustain its debt expansion, which has the effect of worsening it through heavier debt service payments on the bonds they managed to sell.

That reinforcing cycle of cascading debt has analysts worried enough to openly discuss downgrading U.S. debt. Financial Times reported this week that Standard and Poor has already done that for Great Britain's foreign debt, issuing a “negative” rating that will require more generous interest terms in order to sell bonds in international markets. The same kind of deficit spending in the United States will eventually trigger a re-evaluation of the U.S. credit, as the United States and United Kingdom face similar debt spirals with no end in sight.

Now to be fair, Ed explains back on HotAir that "I allowed my imagination to run" and "I like to engage in a little speculative thinking," and that's great. I suppose I've done some of that on this blog.  But it's worth kicking the tires on this idea to understand what happened and why.

Looking at the 12m change actually understates the swing in central bank demand. In the first quarter of 09, the outstanding stock of longer-term Treasuries rose by $278 billion. Central banks – according to the Treasury data – only bought $25 billion of longer-term Treasuries (all in March, and likely mostly short-term notes). China only bought $15 billion (all in March). Over that time period, central banks bought $85 billion in short-term Treasury bills, including $32 billion from China.

Labels: banking, economics, Federal Reserve

Winners of the Council for Economic Education's Economics Challenge 2009.

Phillips Academy and Little Falls High School defeated more than 2,000 teams from across the country to become the champions in the 2009 National Economics Challenge Finals sponsored by the Council for Economic Education and the Goldman Sachs Foundation.

Student teams from high schools across the country competed as finalists and traveled to New York to compete to win in one of two divisions. Students enrolled in advanced placement, international baccalaureate and honors economics courses were quizzed in the Adam Smith Division, while those enrolled in single semester general economics classes faced-off in the David Ricardo Division. The teams had each previously won state and regional competitions. Over 8,000 high school students in 34 teams competed in the Spring of 2009 to advance to the championship series.

"Teams were required to answer rigorous questions about complex economic concepts and theories of micro- and macroeconomics, international economics, and current events in an oral quiz bowl tournament style." Congratulations to Luke Leblanc, Elizabeth Hauer, Cody Richner, Jacob Devine and their teacher Tom Stockard for bringing the trophy to Central Minnesota!

Labels: economics, Minnesota

While I was a graduate student I was a "gopher" for a conference on Reaganomics. One of my assignments was to drive Jerry Jordan, then a member of the Reagan Council of Economic Advisers, to the airport after his speech. I had decided that as part of my job I should try to know something about each person I was driving around, have some questions prepared. The value-added tax was a topic at that time, so I asked him whether the Council was doing any work on VAT. His reply was no, because while there might be some sympathy for it within the administration, they would only propose it as a substitute for the income tax. Their fear, he said, was that Congress would use it as a complement to the income tax.

He was just off by 27 years or so...

With budget deficits soaring and President Obama pushing a trillion-dollar-plus expansion of health coverage, some Washington policymakers are taking a fresh look at a money-making idea long considered politically taboo: a national sales tax.

Common around the world, including in Europe, such a tax -- called a value-added tax, or VAT -- has not been seriously considered in the United States. But advocates say few other options can generate the kind of money the nation will need to avert fiscal calamity.

(h/t: Andy.) As a substitute, the VAT has advantages and disadvantages. Technically, VAT works like a tax on production: the amount of GDP produced in an economy is equal to the value added by humans at all levels of the production process. since in the aggregate total production should equal total income

VATs tend to be rather messy in practice; many flat tax proposals have descended from the original Hall-Rabushka tax plan from the early 1980s. (It was, in fact, part of the discussion at the Reaganomics conference.) William Gale from the Urban Institute has a short primer. One should note that flat tax, VAT and the Fair Tax are three entirely different proposals. But unlike the other two, the proposal of VAT here would be a complication of the tax system that doesn't create any tax reform. There is unlikely to be any tradeoff of income for VAT, since it appears the reason the Obama administration is exploring it is to get additional revenue.

Labels: economics, Obama, taxes

The FDIC reported out first quarter bank results, including these for Minnesota. Twin Cities Business Journal is reporting a drop in profits of 65% over first quarter 2008, but this should be taken with some caution. When banks report income, they must include in their figures any charge-offs they take for anticipated loan losses.

Return on assets, though, fell in Minnesota to 0.56% from 1.18% a year ago. Yields on loans are falling faster than their cost of funds, which is squeezing profits somewhat, and then you add to it larger charge-offs (for the uninitiated: a bank puts money aside in anticipation of losses on loans that are deteriorating; it then draws on that fund if the loan defaults as anticipated.)

The quality of loans held by Minnesota’s banks continued to decline. Net charge-offs as a percentage of total loans and leases were .94 percent, compared to .74 percent in the fourth quarter of 2008 and .48 percent in the first quarter of last year. Noncurrent loans and loans as a percentage of total loans and leases was nearly 3 percent, compared to 2.6 percent in the fourth quarter of 2008 and 1.5 percent in the first quarter of last year.

Total loans of Minnesota banks fell from $80 billion a year ago to $54 billion now (deposits fell much less, from $62b to $56b.) The share of assets that were mortgages fell from 42% to 21% in the period. Equity capital has fallen from $8.2 to $7.1 billion in the same time.

This isn't bad, and it certainly isn't WaMu bad. But it isn't good for Minnesota when loans at its banks decline by a third. (That's different than saying credit in Minnesota declined by a third -- many of us get credit from institutions in other states.)

What is interesting about this period is that we have had only 8 commercial banks close, so many banks are restructuring while their leverage ratios have not moved very much. It appears that, as much as anything, the banks are going through this process in an orderly fashion. Bloomberg reports as well that banks' riskiness is now being better perceived by other market participants, so that weak banks are being charged higher rates than healthier ones. This is improving credit conditions:

U.S. companies have sold a record $600 billion of bonds so far this year, up from about $500 billion in the same period of 2007, according to data compiled by Bloomberg. Rates on 30-year fixed mortgages are about 1.8 percentage points more than 10- year Treasuries, down from 3.27 percentage points in December. ...

While financial markets are improving, more than 60 U.S. financial institutions have collapsed over the past two years, according to Bloomberg data. In its latest quarterly survey of senior loan officers, the Fed found that more than 70 percent of respondents said bad loans will rise should the economy progress “in line with consensus forecasts.”

And if all this talk about green shoots doesn't pan out... perish the thought.

Labels: banking, economics, Minnesota

Even after recent turbulence, the Dow Jones Industrial Average is up roughly 30% since its low in March. It is natural for you to feel happy or relieved about that. But Benjamin Graham believed, instead, that you should train yourself to feel worried about such events.

At this moment, consulting Mr. Graham's wisdom is especially fitting. Sixty years ago, on May 25, 1949, the founder of financial analysis published his book, "The Intelligent Investor," in whose honor this column is named. And today the market seems to be in just the kind of mood that would have worried Mr. Graham: a jittery optimism, an insecure and almost desperate need to believe that the worst is over. ...

Stocks have suddenly become more expensive to accumulate. Since March, according to data from Robert Shiller of Yale, the price/earnings ratio of the S&P 500 index has jumped from 13.1 to 15.5. That's the sharpest, fastest rise in almost a quarter-century. (As Graham suggested, Prof. Shiller uses a 10-year average P/E ratio, adjusted for inflation.)

Over the course of 10 weeks, stocks have moved from the edge of the bargain bin to the full-price rack. So, unless you are retired and living off your investments, you shouldn't be celebrating, you should be worrying.

Jason Zweig today. Graph source Doug Short.

Labels: economics

A city in Rhode Island -- state unemployment rate: 11.1% -- is finding out stimulus dollars don't really stick in their town.

Paula Daigneau makes $18.60 an hour directing traffic for the repaving of Main Road in Tiverton, a town of 15,000 in eastern Rhode Island. She says that’s twice what she would have earned doing chores on a friend’s farm.

“The jobs were getting pretty limited,” said Daigneau, 51, a flagger who signals drivers with a sign she pivots from “Stop” to “Slow.”

Daigneau and 31 full-time co-workers are beneficiaries of President Barack Obama’s $787 billion spending program aimed at reviving the U.S. economy. To Michael D’Ambra, president of the construction company that landed the $2.4 million contract, the Main Road project shows the effort is succeeding.

“It appears that the stimulus is doing its job,” D’Ambra said. “It’s putting people to work.”

To critics, the Tiverton project, which is scheduled to end in September, illustrates the stimulus program’s weaknesses: They say it may be creating too few jobs, too slowly, for too short a time.

Once the stimulus money is spent, “that’s the end of it,” said Harry Staley, chairman of the Rhode Island Statewide Coalition, a group that advocates responsible government spending. He said he’s concerned that the money is going to “projects that are not in fact critical” and won’t provide a long-lasting boost to the economy.

How much of the $2.4 million stays in Tiverton?  A lot of this depends on how much add-on spending goes into the project.  A road gets torn up, so local businesses lose work in the short run.  

National Grid Plc, which distributes electricity and natural gas, is doing gas line maintenance as Main Road is resurfaced, but that work would have been done anyhow and hasn’t required any new hiring, said company spokesman David Graves. National Grid’s U.S. headquarters is in Westborough, Massachusetts.

The road workers, from Rhode Island and nearby Massachusetts, aren’t spending much money in Tiverton because most pack their lunches for their 30-minute lunch break, said D’Ambra, the construction company’s head.

Aside from renting an office and buying fuel, “I don’t think we really bring a lot of dollars and cents into that town,” said D’Ambra, whose company is based in Warwick, Rhode Island, about 35 miles from Tiverton.

“What the project’s going to mean to me is short-term, we may lose business,” said Doreen Rapoza, co-owner of the Hair Reflections salon. “But after, it may do well because more people will be walking with sidewalks.”

Many people driving I-94 this month have begun to experience road delays as well (one trip to Plymouth from St. Cloud at midday was 45 minutes longer due to construction near Rogers), a cost which is not factored into the multiplier calculation.  Neither is the lost business of Ms. Rapoza.  The federal government isn't as worried about where the job creation happens (Massachusetts and Rhode Island voters both vote for president) but the impact on towns is very uneven.  

Labels: economics, Obama

Leading economic indicators were up 1% for April, and some reports indicate that this means the recession will ease. Not so fast. We are better off than many other countries (as James Kwak noted), but out of the woods is a stretch. We would want to see a sustained increase in LEI for a few months before we even forecasted an end to the recession is "soon". CBO director Doug Elmendorf is still pouring cold water on the economic outlook. I'm a little confused over his statement that somehow we get growth in the second half of 2009 but no improvement to unemployment until the second half of 2010. You can only get GDP growth by an increase in some inputs or by an increase in productivity, and their last economic forecast included a deceleration of productivity growth to 1.4% from 1.8%. What's going to increase GDP if not a pickup in employment? Investment?

The Fed forecast for GDP continues to revise downward, by the way.

Labels: economics

Bloomberg reports on the trickle-down of Bear Stearns.

Cavonberry’s, Yang’s 46th Street shop near the headquarters of the New York firm taken over by JPMorgan Chase & Co., once bustled with finance workers jostling to buy a barbeque chicken chopped salad and bottled water for $12. “They used to be turning them away at the door,” Irace said.

Last week, slow enough that one cashier instead of the usual two operated the register at midday, Yang tallied up the ripple effect of the financial slump that cost Bear Stearns its independence: He negotiated a $4,000 monthly decrease in rent with Sierra Realty Corp., to $17,000, and is spending 35 percent less a week with Fischer Foods of New York Inc. for such things as artichokes and ham.

“Since January, everything’s dead,” said Yang, 52.

The biggest Wall Street crisis since the Great Depression isn’t just a setback for New York or bankers. The finance industry’s contraction may wipe out $185 billion in wages and profits, or $600 for every man, woman and child in the U.S., according to Thomas Philippon, a finance professor at New York University’s Stern School of Business. The trail of reduced income affects car mechanics, waiters, sports teams, hair stylists, jewelers, housecleaners and watch repair shops.

Says one person in the story, "“The higher your income, the more in services you consume. You don’t iron your own shirt.” But what if some of that income is coming from reasons other than one's own skill? Philippon's research shows for example that maybe half of the wage premium in financial services was due to deregulation (greater returns to skill in exploiting a more risky environment), so that the share of financial services in GDP rose more than expected by historical experience. He argues that roughly 700,000 jobs needed to be lost in insurance and finance to get back to those levels. The data in the graph above are not strictly comparable because they include real estate, which Philippon doesn't seem to include.

My colleague Rich MacDonald and I have puzzled over this for awhile: How is it that the bottom seems to fall out of finance, and yet only 5% of jobs in the area have been lost from the Dec 2007 peak in the business cycle? Based on what I see in the BLS data, insurance employment has not even fallen 50,000, and the Bloomberg article puts finance job losses at about 250,000. So we have a ways to go to get back to a 2001-level financial world, at least in terms of employment.

Labels: economics

When you limit credit cards, you can expect that fewer people will get credit cards.  And which people will that be?

Labels: economics

There were many great comments made on my reflection on the bishops' letter. It's not an easy thing to discuss, and I would point out that those who disagree with many of my posts are on conventional ground in arguing against me there. Let me add a couple of points made to me from outside that chat.

My former producer Matt Reynolds pointed me to the story of Zacchaeus (from Luke 19.) Worth remembering that Jesus called him by name and asked to stay with him without any demands made. Zacchaeus was a tax collector (a private function in the Roman empire; Zacchaeus probably was a subcontractor for one rather than one himself: on this the Bible isn't so clear) but who wants to hear Christ's teachings. When called he repents of his sins of his own volition, consistent with the observation I put forth for the rich man in Matthew 19.

An ELCA pastor notes for me Luther's doctrine of the two kingdoms; I'd heard of this before but not spent much time reading it. The kingdom of the left is the worldly kingdom, ruled by law and man's reasoning powers. The kingdom of the right is God's, ruled through faith and His grace. Government is therefore divinely ordained, but operates in a world where the Devil also roams. We can't just accept every government action as being the result of God's left hand. So we should ask the bishops: What is it about requiring non-Christians to pay taxes that allows us to preach Christ crucified and resurrected and the grace of God?

He also tells me to look at Philippians 4:17, in which Paul thanks the church in Philippi for the gifts they send him, which had been the most generous of all of his churches. "Not that I seek the gift, but I seek the fruit that abounds to your account." Paul clearly is laying out how he is not collecting the money for himself (Paul too having the experience of tax collection is certainly sensitive to the perception!) but that it develops a generous heart in the people who give. Is it possible that paying taxes creates character in the citizenry? I dare say not.

Many thanks to Mitch for his notice of my earlier article; their discussion was equally enlightening.

Labels: economics, Minnesota, religion

I’m advocating 6 percent inflation for at least a couple of years. It would ameliorate the debt bomb and help us work through the deleveraging process.

Ken Rogoff, who with Greg Mankiw is advocating higher inflation. Rogoff was the IMF's chief economist until recently.

There is certainly something to be said for allowing inflation to work through a financial crisis; Charles Kindleberger thought as much. But in a world where many countries have central banks using inflation targeting, what would it mean for a central bank to explicitly raise the target for the purpose of financial stability? Presumably the inflationists would not agree with Marvin Goodfriend's comment in the article that raising inflation means you get a recession later to move the target back to 2% or what-have-you. But I'm not convinced Rogoff or Mankiw have really thought that through yet.

Labels: economics

Third quarter 2008 data for gross job gains and gross job losses is out this morning. The only sector that added jobs in Q3 was health and education (which is a strong sector up here in St. Cloud as well.) What is telling in the data for Minnesota (see Tables 5 and 6 infra.) is that the rate of gross job creation collapsed in 2008 from 6.5% of the workforce in September 2007 to 5.7% in September 2008. In the 2001 recession, the rate of gross job losses increased by much more (from 7.3% in 2000Q4 to 8.1% in 2001Q3; so far we've gone from 6.5% in 2007Q4 to 6.9% in 2008Q3.) The rate of gross job losses is relatively constant over the period.

Firms are not hiring more; could it be their expectations about future tax liabilities? We don't have data before 1992, so it's hard to do more than wonder.

Labels: economics

A number of people have been commenting on the new graph that's shows how the outturn of the unemployment rate compares to what the Obama Administration forecasted back when they were pushing for passage of the stimulus bill. (For a different way to tell the same story, look at Jim Hamilton's post this weekend on industrial production.) I like how Greg Mankiw tells this story best:

What does this mean? One interpretation is that the fiscal stimulus has failed to achieve what Team Obama thought it would. Another interpretation is that the baseline was worse than they believed at the time. I am confident the report authors would adopt the second interpretation. If so, that fact is consistent with what I said in a previous post: In light of the shifting baseline, it is impossible to hold the administration accountable for whether its policies are achieving their intended effects.

To be clear, this lack of accountability is not a feature on this specific administration but is, instead, a reflection of the inherent uncertainties associated with macroeconomics. The administration, however, has not been particularly forthright in admitting to this lack of accountability. Indeed, the act of releasing quarterly reports on how many jobs have been "created or saved" gives the illusion of accountability without the reality.

As somebody famously said, it's difficult to make predictions, particularly about the future. Anyone who has done economic forecasting would tell you how many pitfalls there are in providing precision from which to make a "created or saved" statement. Ed Leamer in his EconTalk interview with Russ Roberts made the case forcefully that the most important part of the forecast isn't the point estimate but the error band around the forecast. And it's even more difficult to define that 95% confidence interval when the size of the stimulus dwarfs by 3 or 5 sigmas any stimulus within the sample for which you estimated your multiplier of 1.56 or whatever. The Administration's estimates said only that there was "substantial" variability about the forecast, and yet it continues to use a $93,333 of government spending = one job calculation as if jobs were something you could buy off a shelf.

(And speaking of shelves, next time I teach graduate forecasting, I will take off the shelf and the class will read Leamer's new book. I'm only up to page 120 or so, but it's tremendous.)

Labels: economics

I obtained last night a copy of a letter that reinforces the Lutheran Coalition for Public Policy in Minnesota's bishops' letter from March. It was sent out to all Lutheran pastors in at least one synod this week. "Lutheran" in this case represents the ELCA branch, so you LCMS and WELS folks can relax, or shake your heads, or both. From the first link (the second letter):

All six Minnesota bishops of the ELCA signed on to a letter encouraging Minnesota legislators and the Governor to “allow us all to be a part of determining a future for Minnesota in which dignity and value of each one of us is upheld. The challenge is not just yours – it’s ours.” ... They followed up with an April 16 visit with legislative leaders and Governor Pawlenty to convey with their presence that “the budget is a moral document that reflects the choices we make for our life together. The measure of our moral fiber as a people is how we treat those who need our help the most.”

As I pointed out in the post this morning, the budget at some point becomes Governor Pawlenty's responsibility, in particular at that moment when the Legislature discharged its duties and sent bills forward to him. There were listening tours, testimony and negotiations, and then a swift tax bill that Pawlenty vetoed. Given the tone of the rest of the LCPPM's letter, I daresay they would not agree with the veto:

Join the chorus of concerned people of faith and voice your support for a moral budget. Here’s how:

1. Contact your state representative and state senator and say that “We are not afraid of tax increases if it means poor people who are sick can get health care, families who lose their homes find shelter, and children are cared for.” ...
   
2. Pass this message along to your friends and family and urge them to take action.
   
3. Write a letter to the editor and submit it to your newspaper and/or your church newsletter. If you or someone you know relies on Minnesota’s network of health and human services, tell that story.

Now let me not pretend to be a religious scholar. But I sit in church each week and attend Bible study. I've worked as well as a church treasurer. If we had members, or neighbors, or recent immigrants to our town that we thought were in need, what would we do? There would be a sermon, and then there would be the offering. If we wanted extra money to help, we may pass the offering plates around a second time and designate those funds for those in need. It would be reinforced with the many, many verses in the Bible that ask us as believers to help the poor.

If the bishops thought the best way to help the poor was to give the state more revenue, I do not see any restriction that would prevent them from passing the plate while saying "our government needs more money. We are told to render unto Caesar that which is Caesar's, and so we think at this time you should as a believer give more to our government. We will mail it in for them." As the treasurer, I could send a check to the state. (Here's a form you'll need. You're welcome.)

But this is not what the bishops seek. They wish to ask the state to compel non-believers into contributing to causes believers seek to fund. They remind me of the quote that inspired Amity Shlaes' great book, as written many years ago by William Graham Sumner.

The type and formula of most schemes of philanthropy or humanitarianism is this: A and B put their heads together to decide what C shall be made to do for D. The radical vice of all these schemes, from a sociological point of view, is that C is not allowed a voice in the matter, and his position, character, and interests, as well as the ultimate effects on society through C's interests, are entirely overlooked. I call C the Forgotten Man. For once let us look him up and consider his case, for the characteristic of all social doctors is, that they fix their minds on some man or group of men whose case appeals to the sympathies and the imagination, and they plan remedies addressed to the particular trouble; they do not understand that all the parts of society hold together, and that forces which are set in action act and react throughout the whole organism, until an equilibrium is produced by a re-adjustment of all interests and rights. They therefore ignore entirely the source from which they must draw all the energy which they employ in their remedies, and they ignore all the effects on other members of society than the ones they have in view. They are always under the dominion of the superstition of government, and, forgetting that a government produces nothing at all, they leave out of sight the first fact to be remembered in all social discussion - that the State cannot get a cent for any man without taking it from some other man, and this latter must be a man who has produced and saved it. This latter is the Forgotten Man.

Bishop A and Bishop B (and W, X, Y, and Z, in the case of this letter) want to compel nonbeliever C to do for poor D what they won't ask believers F, G, H &c. to do by the offering plate. They do so under the guise that "a budget is a moral document".

And my budget is, in fact, a statement of the morals of my own family. My church's budget is a statement of the morals of my church. The government is not a church, or a family. The government's budget is not a statement of the entire society's morals. It is a compulsion of the majority upon the minority.

Where, dear bishops, is that compulsion a "moral statement" directed in the Bible?

I recall only that when the rich man heard he could not enter the kingdom of heaven without sacrificing all his earthly possessions, "he went away sad, because he had great wealth" ... and Christ let him go. The bishops are not so inclined.

Labels: economics, Minnesota, religion

A little humor to end the day. We had wondered if they curved the test, and it turns out the answer is "yes".

Labels: banking, economics

In barely four months, Barack Obama has nudged the United States toward a future in which government will be bigger and more assertive -- where taxes will be higher and government unions more powerful -- where legal rights are less secure and contracts more uncertain.

In California, he is pushing a state toward the fiscal edge in order to favour a union ally. At Chrysler, he has put at risk the security of every contract in the country to please another union.

David Frum this morning. And now let's see what Obama does to 16,000 Chrysler retirees who aren't in the union. Not sure they'd all fit in Rattner's interrogation room.

Labels: economics, Obama

We have had a little fun poking at the "save or create" distinction, and I expect more now given CEA chair Christina Romer's note that the administration does not expect positive job growth in 2009. But what is lacking in my view is a context for what 150k jobs means.

In short, the 150,000 jobs is a gross number. That is, the employment change reported last Friday represents a net figure; it represents the total number of workers hired minus the total number of jobs lost (through either separations -- layoffs or firings -- or through workers quitting.) BLS collects that data. It is reported more slowly than the Current Employment Survey and Current Population Survey that form the unemployment rate and the payroll employment estimates. They are, in fact, the way we check to see if those two surveys need any correction.

One of those is JOLTS, for Job Openings and Labor Turnover Survey. It tells us that 4.36 million workers were hired into a job in February and 4.825 million workers separated from their jobs in that month. 150,000 jobs is 0.15 million, so that it represents 3-4% of one month's total jobs generated by ARRA. It appears from the most recent data that the problem is not job shedding but that most businesses simply stopped hiring in the fourth quarter. (Why? Interesting question that we should defer.)

The other survey is Business Employment Dynamics, which comes from a quarterly census of employers. It has a much longer lag time, so the most recent data comes from the first half of 2008. These are quarterly measures, and the same institution can expand in one month and contract the next so there are many cancellations in the lower-frequency series. Nevertheless, in the second quarter of 2008 there were 7.3 million jobs created in expanding or new businesses and 7.8 million jobs lost in contracting or closing businesses. And as I showed on Friday this is a pretty shallow period for job losses.

Ed Morrissey points to this chart that the stimulus is not helping as the Romer CEA argued three months ago and calls for a new CEA. It's a shame -- Prof. Romer most certainly knows how to tell the story of gross versus net jobs. Why won't she explain? I expect it's because to show how little government can really do to change the jobs picture would damage the omnipotence that the Administration tries to project. The concession today is at least a beginning to provide some of that context, but she has much, much more to do.

P.S. In the New York Times article linked in the first paragraph Robert Reich argues that we would need a 4.5% GDP growth rate to reduce unemployment. Yet the CBO is saying the potential GDP growth rate is 2.7% and slowing. Reich's number seems high to me.

Labels: economics

Many are commenting on the fact that this month's employment figures were boosted by temporary government jobs for Census workers. Let us look instead at one-month changes in private employment, above. We're still losing jobs, and while we're beginning to lose at a slower rate we're still shedding at a much faster rate than last October. This isn't the same thing as stabilizing, as Richard Moody of Forward Capital noted. Industrial durable goods were hardest hit in the manufacturing sector, while we're also seeing a decline in general office work:

The professional and business services industry lost 122,000 jobs in April. This industry has shed an average of 139,000 jobs per month since October 2008. Half of the April decline occurred in temporary help services.

Casey Mulligan notes that productivity is still rising, which he believes will end up creating an upward revision to first quarter GDP. Meanwhile, James Hamilton looks at the initial unemployment claims data and thinks there's about an 85% chance the worst is behind us. That could mean just that Tufnel's amp is back to 10.

Labels: economics

The group of non-TARP creditors to Chrysler is dead.

“After a great deal of soul-searching and quite frankly agony, Chrysler’s non-TARP lenders concluded they just don’t have the critical mass to withstand the enormous pressure and machinery of the US government,” Thomas E. Lauria, ... the lead lawyer for the group. “As a result, they have collectively withdrawn their participation in the court case.”

Thomas Cooley asks "Why would private capital get involved when the rules of the game are so capricious?" Megan McArdle dispenses with several other arguments than that the Obama Administration screwed everyone to make Chrysler a present for the UAW. At least, Cooley responds, they'll now have to eat their own cooking. When it comes to teachers' unions, it's the kids who get the short end.

Labels: economics

When it's Barry Bear, you'd think the answer was "any place he wants." And given they don't want to get treated like a non-TARP creditor, network executives are trying not to say this too loudly. But we get a lesson in opportunity costs from today's Hollywood Reporter:

By and large, they personally forked out for his campaign, they voted for him, and they know he is capable of boosting TV ratings just by making an appearance.

But executives at the Big Four broadcast networks are seething behind the scenes that President Obama has cost them about $30 million in cumulative ad revenue this year with his three primetime news conference pre-emptions.

Now top network execs quietly are hoping that Fox's well-publicized rejection of the president's April 29 presser will serve as precedent for denying future White House requests for prime airtime.

"We will continue to make our decisions on White House requests on a case-by-case basis, but the Fox decision gives us cover to reject a request if we feel that there is no urgent breaking news that is going to be discussed," said one network exec, who, like all, would not speak for attribution fearing repercussions from the administration.

"If the president wants to make it tough for your network, he can," the exec added.

Another network executive confided, "Nobody wants to take on the White House, so we'll have to tiptoe through this."

The graph shows that there are diminishing returns to the press conferences as well, but the exclusives on talk shows are quite valuable for them, so you have another reason to not anger the Obamas.

Clearly the networks carry press conferences for something other than revenue maximization. Network news is mainly for prestige. But like any other good, prestige competes for resources with other goods, like profit. Fox has a #1 cable news station that allows it to try to serve both goals better than the other networks can, so its loss of prestige of the news conference is lower.

They put Michelle Obama in soft places like Sesame Street. Why you wouldn't parade her around on the bigger shows is beyond me. I would think the ad revenue books would be enough to keep the President's spin show on prime time.

Labels: economics, Obama

"I'm ready for my 'personalized' tax rate now." -- Cliff Asness, whose $20 billion business in portfolio management is likely to be as threatened as these nine remaining Chrysler holdouts. No names or phone numbers, but the nice Ohio DMV lady should be able to help.

UPDATE: Foreshadowing?

FURTHER UPDATE: Don Boudreaux posts from Federalist #44 (Monroe):

The sober people of America are weary of the fluctuating policy which has directed the public councils. They have seen with regret and indignation that sudden changes and legislative interferences, in cases affecting personal rights, become jobs in the hands of enterprising and influential speculators, and snares to the more-industrious and lessinformed part of the community. They have seen, too, that one legislative interference is but the first link of a long chain of repetitions, every subsequent interference being naturally produced by the effects of the preceding. They very rightly infer, therefore, that some thorough reform is wanting, which will banish speculations on public measures, inspire a general prudence and industry, and give a regular course to the business of society.

From your mouth to Barack Peron's ear!

Labels: economics

Bloomberg reports that the group of dissidents holding Chrysler debt that are being compelled to surrender their legally obtained rights is shrinking.

JPMorgan Chase & Co., the largest lender on the loan, found the holdouts last week held about 10 percent of its value, less than $700 million. Now those still in the group, who plan to oppose the auction at a hearing today, own only about $300 million, the holdouts said in a bankruptcy court filing.

In the filing, the lenders told the judge in charge of Chrysler’s bankruptcy that the carmaker’s plan to auction its best assets later this month was unfair because it prevents creditors from using claims like a loan to make a non-cash bid.

“The proposed sale is not an arms’ length bargain but rather is tainted by government domination and control,” the group said in the filing in U.S. Bankruptcy Court in New York....

The group asked U.S. Bankruptcy Judge Arthur Gonzalez not to reveal the identities of its members, after he ordered them yesterday to do so by today. Thomas Lauria, a lawyer for the group, told the judge some of his clients had received death threats after being identified.

Those named publicly include OppenheimerFunds Inc., Perella Weinberg Capital Management LP’s Xerion hedge fund and Stairway Capital Advisors. Perella withdrew its sale objection last week.

In their request, filed today in Manhattan court, the lenders said some joined only with the promise of anonymity and would leave if they were forced to reveal their identities.

It appears the Administration is using the ACORN bus tour trick to good effect. (Remember these guys? The Administration has now upgraded its posse to the White House press corps.)

Labels: economics, Obama, rule of law

Tom Steward of the Freedom Foundation of Minnesota has been making some noise with his scorecard of municipal golf courses.  Many of them make losses, and if one was to use the yellow pages test developed by Stephen Goldsmith of Indianapolis you certainly wouldn't think muni courses were a good use of public dollars.

Labels: economics, golf, Minnesota

A friend sent me this link to a video report of a Ford plant in Brazil. It's quite impressive in its integration of suppliers and even shipping; there's practically no inventory. The most striking line in the video is the last: Ford would like to build this kind of plant in America, but can't because of the UAW.

Stephen Karlson describes how the Chrysler bankruptcy is going to harm the ability of Ford or any other car company from engaging in this kind of innovation:

...this is bad for employees of other companies that will not grow as rapidly as resources those companies might otherwise have claim on flow instead to the legacy car companies; this is also bad for younger employees of the legacy car companies, who will have to face yet another round of difficulties thirty years from now. We see the people spared termination notices at Chrysler. We do not see the job offers from employers that never start up. We do not see the tax collections from those businesses, in the states that are more conducive to business than Michigan.

Obama's quick sale has at least been put on 36 hour hold. (UPDATE: Ed Morrissey posts the motion filed to delay the quick sale.) Irwin Stelzer points out one way in which Atlas might shrug after this latest end-run around the rule of law:

Obama is pressuring the some 20 "speculators" who are holding out to accept the crumbs that he's offering. But there is more here at stake than the money immediately involved. As George Schultze, managing member of Schultze Asset Management, a hedge fund, told The Wall Street Journal, "This is about contract and bankruptcy law, and upholding agreements -- which is important in the grand scheme of things."

It certainly is. For one thing, the president is counting on some of these "speculators" to partner with the Treasury and take a big stake in the toxic assets that are preventing the big banks from resuming normal lending. Unprotected by a rule of law, these investors will sit on their assets, rather than partner with a government that might some day decide, after the fact, that they made too much money, or should bear a larger portion of any losses than they had signed on to do.

More broadly, if lenders know that any deals they strike can be overturned by a president who, like Langella/Nixon, can do things that are otherwise illegal because he decides "they are in the interest of the nation," they'll raise the price they charge for their money -- and not only when lending to the government.

And let me remind, this is not about some principle Obama is upholding. He decided to vilify these senior creditors for $250 million. Bloomberg reports:

Obama’s team had first offered secured lenders $2 billion for their $6.9 billion in loans, and then raised the offer to $2.25 billion. In a game of chicken, the holdouts asked for $2.5 billion, and Obama’s patience ran out.

As "Francisco D'Anconia" once observed, "It's the person who would sell his soul for a nickel, who is loudest in proclaiming his hatred of money..." As to the claim of one lawyer that his people were threatened, the White House denies it, but John Carney doesn't buy the denial.

P.S. On a more local, Minnesota note, see Speed Gibson on another group of NIMPPs (Not In My Pension PlanS)

Labels: economics, Obama

Sports leagues have been trying to clamp down on the drafting of too-young men to play professionally. We expect that any attempt to behave in this cartelized way is defeated by someone outside the cartel taking advantage of either too-high prices for output or too-low prices for the inputs. The NBA not long ago instituted a rule that required players to spend a year after high school graduation before they can be drafted. Thus, for example, Derrick Rose spent a year in college before joining the Chicago Bulls. Having watched him almost destroy my Celtics single-handed (and I agree with Bill Simmons that the only thing that kept him from doing it was his own coach), is there any doubt that the year at the University of Memphis was a transfer of wealth from Rose to Memphis?

One guy has figured out a way not to pay the freight for some university. Meet Jeremy Tyler, a high school junior who is a very gifted 6'11" hoops star:

Tyler... announced that he was going to not only forgo college, but also to skip his senior year of high school, to turn pro. And I'm not talking about the NBA. Tyler is heading to Europe to play professional basketball and is expected to earn a six figure starting salary. His plan is to gain professional experience until he is eligible for the NBA draft in 2011.

On a cost-benefit-analysis, Tyler is making a great decision. He is giving up zero income for his senior year of high school, and missing out on a measly scholarship package (worth approximately $50,000) from the college of his choice, which he certainly doesn't intend to graduate. During those two years, Tyler will earn at least $150,000 more (probably closer to a quarter million) than he would have if he played another year of high school and a year in college -- due to the NBA's rule that you have must sit out one year post-high school. Not to mention the fact that he stands a good chance to improve his pro stock by playing against better talent in international pro ball, as opposed to dominating high school kids, as well as potential paydays from endorsement deals.

If you'd like to see Tyler's talent, he has (like most HS stars) a video of his prowess on YouTube. I'd call that "dominating". He's got feelers from teams in Spain, Italy and Israel. And he and his family have thought this through.

He and his father are bracing for an establishment backlash that fails to appreciate their motivation, determination and appreciation of the intrinsic value of education. They think most of it will be designed to protect the billion-dollar business of amateur basketball.

“It’s just the old way of doing things and no one wants to swallow the pill of change,” [father] James Tyler said. “Basketball is an American sport and they want the kids to go through the channels. And I think there is so much money generated in collegiate sports that they don’t want that interrupted.

“It’s a double standard.”

It's not without risk. The risk of injury is everywhere (and I can't tell you if the medical care Tyler would get in Europe if he was injured would be better or worse than in the States), so the relative risk here is that he cannot hide his shortcomings by playing against weaker competition, since the European professional leagues are largely better.

Keep your eyes out for Brandon Jennings in next month's NBA draft -- he too went to Europe. But at least he played his senior year of high school in the States. If Tyler is successful, Jennings may regret that lost year of income.

Labels: economics, sports

I found utterly contemptible this statement from President Obama yesterday while addressing the filing of bankruptcy by Chrysler.

While many stakeholders made sacrifices and worked constructively, I have to tell you some did not. In particular, a group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout. They were hoping that everybody else would make sacrifices, and they would have to make none. Some demanded twice the return that other lenders were getting. I don't stand with them. I stand with Chrysler's employees and their families and communities. I stand with Chrysler's management, its dealers and its suppliers. I stand with the millions of Americans who own and want to buy Chrysler cars. I don't stand with those who held out when everybody else is making sacrifices. And that's why I'm supporting Chrysler's plans to use our bankruptcy laws to clear away its remaining obligations so the company can get back on its feet and onto a path of success.

The group was spooked enough yesterday to put out an unsigned statement of their position. Today in the filing in bankruptcy court we know something of who these thugs who "held out for the prospect of an unjustified taxpayer-funded bailout" are:

• Yale University's endowment;
  
• the University of Kentucky's endowment;
  
• the Bill and Melissa Gates Foundation.

Many others bought the debt on the prospect of making money. In so doing they enabled those who might have been burdened by Chrysler debt to receive something now for their bonds: Those buyers provided liquidity to an illiquid market. Those investors are now being vilified by an administration who wanted to use political muscle, having Congressmen call them "vultures" who "will now be dealt with accordingly in court."

Many bought the debt knowing that bankruptcy was possible. They did so under the expectation that the rule of law would apply in America, that their place in line under bankruptcy law was purchased with that debt. President Obama's ire over their unwillingness to give away that place in line -- a place purchased by those endowments and foundations and pensions not for themselves but for students, pensioners and grant recipients -- is an indication that the president thinks his noble ends are superior to theirs. And Rep. Dingell joins him in hoping for what? the equivalent of hoping these creditors end up in a cell with a guy named Butch? And for what? The Journal explains:

The Chrysler creditors at least represent teachers, pensioners and retirees, among others. The Administration is advancing its own social and political agenda through its ever-deeper entanglement with Chrysler and General Motors. That explains why the government is giving 55% of the new Chrysler to the UAW's retiree-benefit trust, a junior creditor, while those ahead of the trust in line get a mere 30 cents on the dollar.

The president is trained in the law and understands the rights senior creditors have. He may hope he gets a better deal in bankruptcy court, but if the creditors are able to force liquidation, the 2012 Republican nominee can remind Detroit that Obama let this go to bankruptcy court because he wouldn't give these creditors an extra $250 million for a right they had paid for.

Labels: economics, rule of law

...what would it cost to return to full employment?

During our conversation yesterday about the President's claim that he has "saved or created" 150,000 jobs, we highlighted a quote from yesterday's testimony from CEA chair Christina Romer:

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.

Many have pointed out in comments to that post that this comes out to $14,000,000,000/150,000 = $93,333.33 per job. And assuming as we did yesterday that they are connecting government spending to jobs via a multiplier and some imputation of GDP growth to job creation, it got me to wonder, what would it take to create full employment?

The full employment rate of unemployment (technically, NAIRU or the Nonaccelerating Inflation Rate of Unemployment) is 5.2%. (Their calculations are in spreadsheets found here.) The last data on the size of the labor force is for 154,048,000 workers, so 5.2% of that is 8,010,496. Current estimate of unemployment from that same source is 13,161,000, so we have about 5.1 million people who we would call "excess unemployment".

If spending $14 billion of some future taxpayers' money "creates or saves" 150,000 jobs, then is the path to full employment just spending enough to "create or save" 5,100,000 jobs? If the CEA chair really believed her calculations, why would she not ask for the immediate expenditure of $480.7 billion? The president could then hold a press conference and say "we have restored full employment", and she can do the math for JEC the next morning. Seems simple enough to me; she is welcome to the above script if she would like the help, gratis. What's wrong with that calculation?

(Of course, they spent much more than that. This is because they think that without stimulus more job losses are in the offing. They need to "create or save" those too. They're from the Obama Administration, of course, so they're here to help save or create a job you didn't even know you were losing yet. It's in the math donchaknow.)

Labels: economics, Obama

Mitch Pearlstein:

What's the main thread in these disparate stories? It's the brilliantly acute insight that running an organization — be it commercial or otherwise — is hard. Remaining afloat is hard. Making payroll can be extra hard.

Let's say you own a new business. Every dollar you have may be tied up in it. Sure you fantasize about getting rich, but for the time being at least, just about everything in your life is consumed by your dream. Your employees also rely on your success for their own families to stay fed and sheltered. Sleepless nights aside, you take satisfaction in contributing to your community in the most tangible ways you can: providing products, services and jobs. Not incidentally, you also generate a reasonably steady stream of tax revenues.

But then you fire up your computer one morning and read that DFLers in the Minnesota Legislature — on the off-chance your business has a decent year despite the worst economic downturn in three-quarters of century — expect you to pay one of the highest income tax rates in the country: 9 percent if their House bill prevails; 9.25 percent if their Senate bill does.

I'm not unmindful of how difficult it is to balance a biennial budget that's almost $5 billion out of whack. But I'm more mindful and admiring all the time of what it takes to run a successful business and how dependent we are on the men and women who do so here — as opposed to the overwhelming majority of other states with lower tax burdens. (Note: The personal income taxes of many business owners are based on their companies' revenues.)

Link added. How hard is it to run a company? So hard that people who naturally would have an affinity for government are fuming over the intrusions of President Savoir-Faire (or is that Savior Faire?)

As of last night’s deadline, we were part of a group of approximately 20 relatively small organizations; we represent many of the country’s teachers unions, major pension and retirement plans and school endowments who have invested through us in senior secured loans to Chrysler. Combined, these loans total about $1 billion. None of us have taken a dime in TARP money.

As much as anyone, we want to see Chrysler emerge from its current situation as a viable American company, and we are committed to doing what we can to help. Indeed, we have made significant concessions toward this end – although we have been systematically precluded from engaging in direct discussions or negotiations with the government; instead, we have been forced to communicate through an obviously conflicted intermediary: a group of banks that have received billions of TARP funds.

What created this much-publicized impasse? Under long recognized legal and business principles, junior creditors are ordinarily not entitled to anything until senior secured creditors like our investors are repaid in full. Nevertheless, to facilitate Chrysler’s rehabilitation, we offered to take a 40% haircut even though some groups lower down in the legal priority chain in Chrysler debt were being given recoveries of up to 50% or more and being allowed to take out billions of dollars. In contrast, over at General Motors, senior secured lenders are being left unimpaired with 100% recoveries, while even GM’s unsecured bondholders are receiving a far better recovery than we are as Chrysler’s first lien secured lenders.

Ayn Rand once noted that "The American businessmen, as a class, have demonstrated the greatest productive genius and the most spectacular achievements ever recorded in the economic history of mankind. What reward did they receive from our culture and its intellectuals? The position of a hated, persecuted minority."

It is these people that some want leading the charge to combat swine flu.

Labels: economics

In the press conference marking his first 100 days, President Obama said:

We began by passing a Recovery Act that has already saved or created over 150,000 jobs ...

...and I wanted to know, how do you know that? John Kartch (h/t: Gary) notes a comment on such calculations by Sen. Max Baucus (D-ID):

You created a situation where you cannot be wrong. If the economy loses 2 million jobs over the next few years, you can say yes, but it would've lost 5.5 million jobs. If we create a million jobs, you can say, well, it would have lost 2.5 million jobs. You've given yourself complete leverage where you cannot be wrong, because you can take any scenario and make yourself look correct.

So where do they get away with a number like that?

Actually, I thought this was easy. The administration has claimed that ARRA ("the stimulus bill") will "save or create" 3.3 million jobs in 2 years. So I thought perhaps what they were doing was taking the date of signing, Feb. 17, computing how much of two years had passed (71/730 ~= 9.7%) and ... well, that doesn't work, because on a pro-rated basis they would get to claim 321,000 jobs.

I thought then maybe he had specific numbers. I recall him saying that he was told Caterpillar would call back "some of" the 20,000 in layoffs it had originally called for. (UPDATE: Added the words some of, as stated in the transcript. I apologize if I implied he meant "all of" those jobs.) But that doesn't work out either, because Caterpillar is still laying off. Initial filings for unemployment insurance have risen through the first 100 days, though today's number is a hopeful step downward.

As most people have mentioned, the bill has a ramp-up in spending, so that much of the money happens in FY 2010. Maybe he's projecting less. But doesn't someone in the White House owe us an explanation of that number? Don't we get to see a projection here? Why 150k and not 200k or 300k? They've hired more economists than Allan Iverson hires posse, so someone has to have done this number. (Tried CEA, they've done one report. I know Prof. Romer is more productive than this!) If someone in the White House press corps should happen to read about this, please ask press secretary Gibbs to get us a determination of how this number was calculated. (UPDATE after video)



UPDATE: The following morning, apparently (and after this post is written), Prof. Romer gets up before the Joint Economic Committee and pulls the same number out, as Spencer notes in comments. (I guess I was supposed to write this knowing her testimony a priori.) She says:

I have been told by the Office of Management and Budget that approximately $75 billion in spending under the ARRA has been obligated and almost $14 billion in outlays have already occurred. During the first 100 days in office, which the Administration marked yesterday, we estimate that the ARRA has already saved or created 150,000 jobs.

The nearest footnote that explains what arse she pulled that number from is the Great Multiplier Manifesto, written by her and Biden economic adviser Jared Bernstein while the Obama team was still in transition. Here's the formula (p. 5):

We take an estimate of the amount of spending related to a component and apply the relevant multiplier to estimate the likely overall effect on GDP. The total effect on jobs is then estimated using the 1% of GDP equals 1 million jobs rule of thumb.

So let's connect the knee bone to the shin bone. $14 billion is spent in current quarter (Feb. 17 to current, not a traditional quarter, but hey!), and first quarter multiplier is 1.05 (p. 13.) So impact on GDP is $14.7 billion. Current dollar GDP for 2009Q1 is $14,264.2 billion. Total change: 0.103%. Using the "rule of thumb" means 103,000 jobs. Not 150,000. The only way the other 47,000 jobs show up in a calculation is to use a long-run multiplier (the famed 1.57) that would give you 157,000 jobs. But that means the administration is counting jobs their models predict WILL SOMEDAY HAPPEN due to their spending now.

This assumes, of course, that you buy the Great Multiplier Manifesto hook, line and sinker. And that you'd like to brag that you managed to "create or save" 103,000 jobs while not saving 1,314,000 others since Feb. 1. This latter number will be updated with the April job loss figures a week from tomorrow; that number could add another 500,000 to the total of jobs not created and not saved.

Labels: economics

Let me gently suggest to my very good friend Ed Morrissey that it's not yet over for the Obama budget and the results of its stimulus plan based on today's GDP report.

This puts a big hole in the Obama administration’s economic projections for the next year, and also for the long term. The OMB based its deficit projections on an assumption that the US economy would return to growth this year, which this GDP puts in severe doubt. With the economy barely moving towards the positive from the worst quarter in 26 years, these numbers look like sheer fantasy...

As Casey Mulligan reminds us, you have to look at a 6.1% decline as it's written, as a seasonally adjusted annual rate. The actual amount GDP fell in the first quarter is 1.56%. 6.1% is the answer to the question: "what would happen if GDP fell 1.56% per quarter for four consecutive quarters?" It hasn't yet. The administration is forecasting a -1.2% change in real GDP year-over-year for 2009. In dollar terms, that's $11,512.2 billion. First quarter GDP clocked in at $11,340.9 billion. That would make real GDP on average for 2009 need to come in around $11,569 billion to make the administration's forecast come true, an average growth rate of 2.7% for the last three quarters of 2009. In contrast, the Blue Chip survey currently expects a 2.6% decline in real GDP, to $11,349 billion, so roughly flat GDP performance from here on. Which of these is true? We don't know yet. (Blue Chip, btw, had a drop of 5.1% expected for Q1; I had penciled in 5.5% in a contest my forecasting class had. Two of seventeen students beat me.)

So everyone expects some numbers to pick up. Inventories got stripped, particularly in autos where consumption of motor vehicles were up at the same time the industry had dropped production to very low levels. Both of these data would indicate that for those firms that survive, it might be safe to bring a few workers back and get production going again. Personal consumption was up overall in Q1, and leaner household budgets seemed to favor more domestic goods, as imports dropped substantially (consuming imports is a drag on GDP.) You don't have to be as optimistic as Brian Wesbury to see something to a turnaround in the offing here. If you visualize an economic cycle like a sine wave, we've moved past the point of inflection and are coasting towards a bottom.

Ed also writes:

Some will say that the stimulus package has not had enough time to work. It passed in mid-February, though, and six weeks of government spending didn’t move the needle. That highlights its greatest weakness: it doesn’t actually provide short-term stimulus. Republicans kept pointing out that most of the spending came after 2009, and half of it after 2010, when by the Obama budget projections the economy would already be in recovery.

The truth on that remains to be seen. The bill wasn't passed until half the quarter was over; projects had little opportunity to start before the end of the quarter. You might argue that there's an expectations effect of higher government spending, but I don't necessarily think that is needed. FY 2009 is supposed to put on $120 billion in new spending, meaning that amount is spent by September 30. The outside lag for fiscal spending (the multipliers) usually have their effects pretty quickly. There's also $64 billion in tax provisions (I dare not call them tax cuts, since you can't cut zero) that should further butress consumer spending. (Source for these data: CBO.) Add zero interest rates to that, and it's not at all out of the realm of possibility that the Obama budget numbers could be right.

It's this current quarter that will tell the tale. For that budget to have any possibility of working, the slide pretty much needs to stop right now. In the recession language we used here for some time, that would be a V recession rather than a U. I would not bet on a V, but I also would not say it's "sheer fantasy".

Labels: economics, Obama

Professor, what's the effect of swine flu on the economy?

I got that this morning, and then had another prof tell me the discussion in his intermediate macro course. There's both a supply and demand effect, but my guess is that the supply effect (through a growth model) is the most frequently used answer to this question. Tyler Cowen links to this NYT article from 2007 in which mortality was greatly reduced by quarantines and public transportation closings. But that disrupts production much like a terrorist attack. In both cases, the estimated impact is relatively low. (Ditto Katrina.)

It does seem though that if the effects of swine flu are widespread, you'd see more capital deepening, meaning that each worker has to become more productive because they have more capital to work with. If labor becomes more scarce, you'd see an increase in wages, and you'd probably some attempt at capital substitution. The Spanish flu story is a reminder that the numbers could get big enough to create these kinds of effects. It takes much longer to rebuild labor than capital that is suddenly destroyed.

Labels: economics

I am 61 years old. I have lived and worked in Britain all my life. Not even in the dark days of penal Labour taxation in the Seventies did I have any intention of leaving the country of my birth.

Despite a rumour put around some years back, I have never contemplated leaving Britain for tax reasons. But in the 40-plus years I have been lucky enough to work here, I've seen a bit. So I must draw your attention to what is really proposed in this Budget.

Here's the truth. The proposed top rate of income tax is not 50 per cent. It is 50 per cent plus 1.5 per cent national insurance paid by employees plus 13.3 per cent paid by employers. That's not 50 per cent. Two years from now, Britain will have the highest tax rate on earned income of any developed country.

I write this article because I fear the inevitable exodus of the talent that can dig us out of the hole we find ourselves in. It is inevitable, given that other countries are bidding for entrepreneurs.

Give up? Suppose I said "composer" rather than "author". Link below.

Meanwhile, let's consider what Senator Tom Bakk, whose bill to put up tax rates in Minnesota is now in conference with a competing bill by Rep. Ann Lencewski (she deserves her own post, which will have to be tonight), said about alcohol and income taxes:

The new income taxes would raise virtually everything Senate DFLers were looking for in new revenue to help erase a $4.6 billion deficit through the middle of 2011. They are also proposing across-the-board spending cuts and using federal stimulus dollars.

Senate Taxes Committee Chairman Tom Bakk said tax cuts of the 1990s were unsustainable and the state needs more money for priorities such as schools, even though the Senate voted to cut K-12 education.

Bakk said the reductions would be deeper without new tax dollars.

"It's a huge deficit that the state is facing. Everybody's going to have to participate in the solution," said Bakk, a Democrat from Cook who is preparing to run for governor.

...Bakk said eliminating the current mortgage interest deduction could hurt Minnesota's high rate of homeownership and higher alcohol taxes would drive some liquor shoppers across the Wisconsin border. [Both these provisions are in the House bill --kb]

Bakk said about 85 percent of taxpayers would pay more under his plan, but most of the money would come from people with the highest incomes. ...

The Senate tax bill would raise the lowest rate, 5.35 percent, to 6 percent on income of up to $31,860 for married couples filing jointly. The middle rate would rise from 7.05 percent to 7.7 percent on income between $31,860 and $126,580. The current top rate would climb from 7.85 percent to 8.5 percent on income of $126,850 to $250,000.

The new fourth-tier rate of 9.25 percent would apply to incomes starting at $250,000 for married couples, $141,250 for single taxpayers and $212,500 for single heads of household.

So people would drive across the border for alcohol if we raise the tax on booze, but if we raise the tax on work they'd stay put? Not just the top rate either. As Sen. Julianne Ortman pointed out on my show Saturday, the Bakk plan gives us two of the top ten state income tax rates in the U.S. Bakk seems impervious to the idea that life location decisions are as influenced by tax rates as booze purchase decisions.

The Briton who doesn't believe this? Andrew Lloyd Webber. H/T: Stephen Karlson. Webber notes a young entrepreneur in the stage construction industry:

Under the new tax regime, he will have to pay 13.3 per cent to employ himself before he pays himself anything. And then he will have to pay 51.5 per cent on what's left.
This is a guy at the cutting edge of his profession who works all over the world. He is in demand in every major territory where entertainment is produced. He has a young wife and two children. Last Thursday he told me that he and his wife had decided that the UK was no longer where they wanted to live.

His wife thinks the State education system is inadequate. And she fears that a bankrupt Britain will increasingly be a worse place in which to live as the horror of our present financial mess hits us all in the solar plexus.

He says that he is young enough to set up shop somewhere else. The new tax rates were the final straw. These talented young people know they will make it impossible for them to educate their kids privately in the UK.

So Britain plc loses not just the 40 per cent he would have paid in personal taxes under the old regime - plus NI and everything else - but... Come on, I don't need to explain the knock-on effect. It's obviously huge and immensely damaging ...

I realize Sen. Bakk lives on the other end of the state, but he might want to pay a bit of attention to Sioux Falls.

Labels: DFL legislature, economics, Minnesota, taxes

A local group asked me by email for thoughts on H.R. 1207, a bill that would ask GAO to audit the Federal Reserve and report to Congress. Below is my response to them (links added):

I am an economist who first wrote about governance issues of central banks in 1983. Since then I have written several articles about the central banks, including the Federal Reserve. I'm opposed to the Fed audit bill sponsored by Reps. Ron Paul and Michele Bachmann, among many others. ...

My work has centered on a central bank's independence from executive and legislative control. The received wisdom of central banking scholars over the last 25 years has been that the more independent a central bank is, the better it is at controlling inflation. Inflation works as a tax on people's holding of money; when a central bank is controlled by government, the government is better able to use money creation to augment the resources it can seize from the people. (It seizes by printing something for nothing called money and then buying goods from people for this paper. It creates a monopoly for money creation to support its ability to use this "inflation tax".) Leroy Laney, Tom Willett and I wrote one of the two first papers about this in 1983 in the Economic Review of the Dallas Federal Reserve Bank, and countless others have supported our findings since then.

Some central banks use internal auditing procedures. The Fed has an internal Office of Inspector General that provides an audit: , and that report also contains an audit statement by Deloitte and Touche. What H.R. 1207 proposes is to replace that audit with something controlled by Congress. I believe this is a mistake.

The use of an audit imposes legislative control on a central bank and reduces its independence. In the case of this bill, that audit would be a Congressional act and would invite the meddling of the Democratic majority, led by Barney Frank and Chris Dodd. I cannot see this as being a positive; they are more likely to interfere at the key moment coming up, when banks begin to lend again and the Fed must withdraw the extra reserves they injected to support the banking system over the fall and winter. They are far more likely to delay that withdrawal than speed it up. That delay will lead to extra inflation.

I'm not at liberty to quote the response from one of the supporters, but I can characterize the response as focused on some deeper issues of loss of control of the money supply to a "single world order". He also noted the loss of value of the dollar since the Fed's founding. I responded:

Thanks ... for agreeing that a more independent Fed would be better at controlling inflation. That is the only job it can do well, a lesson it has learned the hard way, at great expense to America. But it was not the Federal Reserve's decision to move us from the gold standard which would have protected the dollar's value. FDR suspended gold payments to individuals; Bretton Woods was signed by FDR; Nixon closed the gold window and ended BW. These were the decisions of Congress and the executive, the people you now want us to vest with the power to audit the Fed.

I would only reiterate that the bill puts an audit by government replaces a private audit, and permits that audit to make recommendations to Congressional leaders, including the leaders of the two banking committees, who happen to be the guys who did such a great job looking after Fannie and Freddie. As a matter of monetary policy, this is a bad idea.

Rep. Bachmann continues to focus on losses on the books of the Federal Reserve as if the money it is losing came from taxpayers, most recently on the Maiden Lane losses. Yet that money comes from funds the Fed has already gained by interest on Treasuries its collected in the past. That money was already paid out -- they are sunk costs to the government. If Rep. Bachmann and Rep. Paul would like the Fed to stop buying Treasuries, that is a different bill than the one proposed.

The audit bill is at base a stalking horse of Congress to remove the quasi-constitutional independence of the Fed. The history is quite clear, and it is to the detriment of those Republicans not named Ron Paul that they sponsor this bill. They are paving the way to higher inflation at the very time they decry the potentially inflationary impact of high budget deficits.

Labels: economics, Federal Reserve

Bill Cooper pays the ransom for his bank:

TCF Financial Corporation announced Wednesday that it had completed the repurchase of its TARP preferred stock from the U.S. Treasury. It paid a redemption price of $361.2 million plus accrued dividends of $3.4 million.

TCF Chairman and CEO William A. Cooper said the bank had maintained a strong capital position over the last year through its own operations, and it didn’t need to rely on the public capital infusion to continue its traditional lending pace. Cooper said TCF is the largest bank to pay back TARP funds to the U.S. Treasury.

TCF’s executives had complained that Treasury and the U.S. Congress had subverted the TARP program by changing its rules after banks had joined. Those rules added controls over compensation and dividends programs, and Cooper said those changes contributed to a stigma of weakness and reliance on public support – a stigma that didn’t reflect his bank’s condition.

As part of the agreement for withdrawing from the program, TCF also agreed to reduce its first-quarter dividend from 25 cents to 5 cents.

Contemplate that last sentence: The government required TCF to drop its dividend in order to repay its loan. Would a bank be allowed to make you drop your kid's allowance from $5 a week to $1 before you could pay off the auto loan early? Banks in trouble often end up in agreements with the Fed that include seeking permission to pay any dividends, but banks were brought into TARP as a matter of solidarity, even patriotism. Solidarity isn't free, I guess.

How many pints of blood will be taken from the others?

U.S. banks that get preliminary results today of U.S. government stress tests may struggle to raise money after bad assets at the biggest lenders almost tripled on average in the past year.

Pittsburgh-based PNC Financial Services Group Inc. saw nonperforming assets -- those no longer accruing interest -- jump more than fivefold in the first quarter from a year earlier. They more than quadrupled at U.S. Bancorp in Minneapolis. At 13 of the largest U.S. banks, bad assets increased 169 percent on average from a year ago, according to first-quarter data compiled by Bloomberg.

The tests on the 19 largest banks are likely to focus in part on loan quality as a measure of health. The lenders, which may need to raise $1 trillion in capital to cushion losses according to an April 23 KBW Inc. report, may have a hard time persuading investors to give them cash.

...

If the banks learn the results of the stress [tests] today, “it’s a week plus until we find out, that’s where the danger is,” said Anton Schutz, president of Mendon Capital Advisors Corp. in Rochester, New York, which manages $150 million of financial stocks. Schutz runs the best-performing financial stock mutual fund over the past year, Burnham Financial Industries. “You get market movement on what might be fact or fiction,” he said.

Even if banks say their capital levels are adequate, the government could require them to raise more money, JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said April 16 during the firm’s earnings conference call.

“I don’t know what we need to do because it may not be solely up to us,” Dimon, 53, said in response to a question about whether the firm was planning to issue new equity. “I don’t think we need it.”

Emphasis added.

Labels: banking, economics

Here's a case where I'm perhaps less outraged by the price tag than what they're trying to buy:

The Senate has agreed to spend $5 million to investigate the cause of the economic crisis as it moves toward passing a $245 million bill that would substantially increase the number of FBI agents and prosecutors working mortgage fraud.

The legislation is aimed at showing voters that lawmakers are serious about getting to the bottom of the nation's financial woes, even as they struggle to agree on how to improve the economy and prevent it from getting worse.

"We must hold those responsible for this calamity to account," said Sen. Kent Conrad, D-N.D.

You're going to investigate yourselves? And you need $5 million to do that?

OK, that might be too flip a response. But if you look beyond Congress you will never stop looking, or you will have a fight between potential sources of instability that ends up pinning blame on the basis of political connections (or lack thereof.) You cannot pinpoint one or two items and say "if not for that..." There are already books with competing claims. One thing a Congressional committee is not, is an editorial board, or a set of scientific referees.

I expect they'll do it anyway, though, and we should be grateful it only costs $5 million.

Labels: economics

Having mentioned Armen Alchian today, and having just yesterday received some old articles from a colleague who is retiring, I thought I would scan and share Alchian's "Of Golf, Capitalism, and Socialism." This was originally written in 1977 as an editorial in the Wall Street Journal.

A puzzle has been solved. Despite their intense interest in sports, no golf courses exist in the Socialist-Communist bloc. Why is golf solely in capitalistic societies? Because it is not merely a sport. It is an activity, a lifestyle; a behavior,a manifestation of the essential human spirit. Golf's ethics, principles, rules and procedures of play are totally capitalistic. They are antithetical to socialism. Golf requires self-reliance. independence, responsibility, integrity and trust. No extenuation is· granted misfortune, mistake or incompetence. No second chances. Like 1ife, it is often unfair and unjust, with uninsurable risks. More than any other sport, golf explo1ts the whole capitalist spirit.

The rest is here. Reflecting on this, John Bunzel a few years ago related the story of former Detroit Lion Alex Karras, who said "My best score is 103, but I've only been playing 15 years."

There's hope for me yet. And given the sunny day and the end of classes for me this week I take my leave.

Thanks to Bill L. for the scannable piece. I will note a html copy from Emilio Pacheco.

Labels: economics, golf

My friend Vern McKinley, a lawyer who specializes in central banks, has co-authored a new paper from Cato, arguing that there are no bright lines for deciding when a bank bailout is good policy:

The turmoil after the Lehman Brothers failure is not so much an argument for intervention in that case, but rather an indicator of the impossibility of implementing a clear bright-line rule for bailouts. Efforts to distinguish a bright line between Bear Stearns and Lehman Brothers, and the lack of a consistent policy coupled with the multiple efforts to address the crisis, contributed to the angst visited upon market participants during 2008 and 2009. Even with the economic analysis resources at its disposal, the Federal Reserve has been unable to reliably predict contagion or judge an appropriate timing or level of intervention. Like the FDIC, the Federal Reserve has also been opaque with regard to the precise institution-specific reasons for intervention, which is seemingly at odds with Chairman Bernanke’s historical emphasis on transparency regarding central bank policy.

I read a draft of this paper that Vern sent, and liked the focus on "clear evidence of contagion" for bailouts. (I think he and I agree less on whether there was clear evidence last September, but clarifying the criteria is useful.) It is not, as they say in the introduction,

...that the failure of an institution will impose losses on a broad array of creditors, shareholders, and counterparties, or that it will present a challenging or difficult receivership or bankruptcy process to work through. Even if a standard can be articulated, it is another matter to successfully implement that standard in practice. We believe that the lack of a clear standard and the shifting efforts at implementation have exacerbated the current financial turmoil by sending confusing and inconsistent signals to market participants.

There is still the problem of convincing angry taxpayers and their supporters on Capitol Hill that contagion is a clear and present danger (if it does exist.) Those that try tend to get no thanks for their efforts, but I would prefer that those who see contagion work harder to make the case than telling the naysayers like Malkin to just shut up. As McKinley and Gegenheimer argue, that case isn't easy even for experts.

As I get closer to teaching money and banking next month, I'll focus on more of these papers. This one will be on the course reading list, which I will post (I'm in fact going to replicate my 2005 intro to econ series -- example -- with the lectures from this one -- this time maybe with sound and video??) Suggestions for additional readings invited in comments.

Labels: banking, economics

While working in the Ukrainian central bank in 1996, I was witness to several practices that I took to be vestiges of the old communist order. Old habits die hard, they say. One was a bizarre ruling from the prime minister that directed the central bank to count any loan made to a coal mining company as if it was bank reserves. A bank's reserves cannot be lent out, and it can be viewed as a tax on bank activity. It was quite clearly directed lending from the government to a favored state enterprise (there were and still are relatively few private mines) and to its workers, who constituted a major portion of the prime minister's political base.

I thought this open favoritism couldn't happen here. But:

• Chrysler's four banks are being asked to take much less than expected on their Chrysler debt. Stuart Varney warned a few weeks back, "If Rick Wagoner can be fired and compact cars can be mandated, why can't a bank with a vault full of TARP money be told where to lend?" Well, who are the four banks? JPMorgan Chase & Co., Goldman Sachs Group Inc., Citigroup Inc., Morgan Stanley, and a bunch of investment funds. All four banks are on the list of TARP recipients.
• A bill in the Minnesota House blacklists a company for unfair labor practices "past and present" even though the federal agency charged with making the determination has not found any violations. Its crime? Handing its employees information about unionization that doesn't favor unions. In effect, the bill requires the company to relinquish its First Amendment right to free speech on its own premises in order to sell goods to government.
  

James Kwak wonders why banks receiving money from government should be allowed to have any say in relief efforts. But government purchases goods and services from everywhere, as the second story shows. If doing business with government means succumbing to Leviathan's heel, is there any effective limit on government power? Or is that limit reserved for our handling of terrorists and pirates?

Labels: economics

I mentioned Gordon Tullock yesterday. Don Boudreaux writes that Gordon is still alive and well:

At 87 Gordon's mind is as sharp as ever. No scholar has done more than Gordon to disabuse people of any romantic or religious notions that they might have about the nature of government. ...

Among the most important of Gordon's insights are

- his demonstration that good political decisions are public-goods no less than are the public-goods that allegedly are provided in only sub-optimal quantities on private markets;

- his demonstration that people and institutions spend resources in socially (if not privately) wasteful way seeking privileges from government;

- his demonstration that there is nothing at all special about majority rule as a means of arriving at collective decisions; that is, a supermajority rule is at least as likely -- and, probably, more likely -- to maximize welfare over time than is a rule of simple majority.

No economist still living deserves the Nobel Prize in Economics more than does Gordon -- and only Armen Alchian deserves it as much. It's a damn shame that neither Gordon nor Alchian has yet received this award.

I have several recollections of Tullock, the first of which is here. I hold out hope that I will yet get to meet Alchian. As a macroeconomist I would have put other names on Boudreaux's list of who deserves it as much -- Tom Sargent and Jagdish Bhagwati, for example -- but I'd be pleased if Alchian or Tullock went first.

Labels: economics

Brian Wesbury and Robert Stein write:

The good news is that economists can take a more dispassionate view. And the way economists contribute to the debate is with public choice theory, an idea fathered by Duncan Black, Gordon Tulluck [sic] and the Nobel Prize-winner James Buchanan. While the theory of public choice can be broadly applied, it is the ideas of "special interests" and "rational ignorance" that are useful in understanding last week's tea parties.

Here's an example of public choice at work. Let's say teachers could benefit by $2,000 each per year (in higher pay or benefits, smaller classes, etc.) from a piece of legislation currently under debate. But the cost per taxpayer averages just $15 per year.

The "special interests" (teachers and politicians) have substantial personal incentive to see that the bill is passed. Teachers, who benefit directly, will use time and money to lobby for the bill. And lawmakers will expect campaign contributions, votes or both, in exchange for their support.

But the taxpayer will remain "rationally ignorant" of the whole process. Why spend time even thinking about an issue when the cost is only $15 per year?

...This is why government will tend to grow in excess of what a true democracy really wants. At least, it will grow until those $15 hits accumulate to such a level that people have finally had enough, and in a seemingly spontaneous eruption, the average voter finds the energy to fight back.

Let me interject that I don't think that's exactly right, though in spirit I agree with Wesbury and Stein. Once you've accepted a $15 hit it becomes irrelevant to your future decision-making: It's a sunk cost. What gets you is a huge wallop, like $787 billion, then you get people's attention to that piece. Tea parties will attack that one bill, but a relatively smaller number will try to get back all the previous $15's. Going after the $15's means activating all the platoons of special interest groups that rent-seeked their fortunes in Congresses past.

The story is akin to the myth of the frog in the pot of boiling water, that if you put it in hot water it jumps out, but if you put it in cold water and gradually raise the heat it dies from the hot water. (I've heard it ascribed to both Mark Twain and Ian Fleming, and Wikipedia says it's not true, but the metaphor persists.) Our descent into European government spending levels hasn't just started with Obama. It may just be that he's going faster towards it than we are prepared to accept. If government took a few more $15's each year, you might get to Europe, just more slowly. Such a plan, I suppose, lacks audacity.

Wesbury and Stein also note:

Here is an interesting set of facts. If the government increased the top tax rate from the current rate of 35% to 100% (yes, that's right 100%), it would only collect an extra $400 billion this year. In other words, confiscating all the income that is currently taxed at 35% would not raise enough revenue to cover any of the annual deficits projected in the next 10 years. There is no way that tax hikes on the rich alone can pay for proposed spending in the current budget.

That is assuming that those people taxed at 35% will produce as much as they will when taxed at 100%. When you tax any activity at 100%, how much of that activity do you get? You don't need to be a supply-sider to answer 'zero'.

Labels: economics, Obama, taxes

One of my rules in traveling is a food variation of the "when in Rome..." aphorism: While in Albuquerque, I did not try to eat anything other than New Mexican cuisine. I had three great meals (those are links to the three restaurants) and a couple of darn good ones. Sometimes you get lucky -- there was a little bistro run by a French couple that made an omelet the way I remember Parisian omelets. OTOH, I went to a more American upscale restaurant and found the food mediocre (I'll quickly add that the service was the best of any of the places I went to.) The bread at the French bistro was apparently popular, given the traffic I saw buying it, but what I had was only OK. So where the competition was greatest -- the market for the local cuisine -- the food was best.

Tyler Cowen writing from Portugal says the rest of the restaurant market steers away from anything un-Portuguese. "The biggest mistake here is to try to replicate the kind of seafood meal you might enjoy in the U.S." Works for me, not least of which because I don't like seafood. When I decide to eat American overseas, it's usually because I hanker for something from home. When that happens, I'd rather find a Pizza Hut than Jose's Cafe Americaine.

So I wonder if it's really demand as Joseph Epstein writes in the WSJ today.

Demand has a lot to do with it. By this I don't mean demand as in the old economists' formula of supply and demand. What I mean is that New Yorkers are, and always have been, more demanding than any other Americans when it comes to what they eat. Years ago, when I worked in New York, I used occasionally to grab a quick lunch at a luncheonette, as they were then called, on the corner of Fifth Avenue and 15th Street. The place had no tables, only a long counter, so that one could hear other people's orders. I recall vividly the extraordinary specificity of customers' requests.

"I want a sardine sandwich, on rye, lightly toasted, with a very thin slice of onion -- last time the slice was a little too thick -- with a gentle rinse of lemon between the onion and the sardines. Pickle on a separate plate."

New Yorkers tend to order food as if they are spoiled children dining in their mothers' kitchens. They demand excellent service, which includes accommodation for their idiosyncrasies (that pickle on the separate plate). If they do not get what they want, they howl, return food, do not return to the restaurant, and verbally torch the place. If you open a restaurant in New York, you had better be good, or you will soon be gone.

There is something to demanding customers, certainly -- this reminds me of comments about the Chicago Cubs or the Golden State Warriors sucking because their fans are easily pleased -- but New York food is good because you have options, and a way to keep the other options nearby. Unlike the other cities Epstein names, New York restaurants are near each other; you can easily go from one to the next if a restaurant disappoints you. In Albuquerque, we were at the mercy of hosts and hostesses who fortunately showed us a good time, but there are several options in Old Town that you could pick from. In Santa Fe, that nearness of restaurants is similar to New York's.

I have sometimes violated the rule (a famous weekend in Yerevan, Armenia, where I went to a Russian and an Indian restaurant on consecutive nights and missed Barbeque Street) but usually feel the choice was a bad one. When in Rome, eat Italian!

Labels: economics, food

When I posted last week about the lack of Chinese enthusiasm for U.S. Treasuries, I thought it might indicate poor performance of the Chinese export sector. But perhaps they're doing fine with exports and buying something else. What could it be? An alum sends me a note that it could be metal:

Nobu Su, head of Taiwan's TMT group, which ships commodities to China, said Beijing is trying to extricate itself from dollar dependency as fast as it can.

"China has woken up. The West is a black hole with all this money being printed. The Chinese are buying raw materials because it is a much better way to use their $1.9 trillion of reserves. They get ten times the impact, and can cover their infrastructure for 50 years."

"The next industrial revolution is going to be led by hybrid cars, and that needs copper. You can see the subtle way that China is moving into 30 or 40 countries with resources," he said.

The SRB has also been accumulating aluminium, zinc, nickel, and rarer metals such as titanium, indium (thin-film technology), rhodium (catalytic converters) and praseodymium (glass).

While it makes sense for China to take advantage of last year's commodity crash to restock cheaply, there is clearly more behind the move. "They are definitely buying metals to diversify out of US Treasuries and dollar holdings," said Jim Lennon, head of commodities at Macquarie Bank.

John Reade, metals chief at UBS, said Beijing may have a made strategic decision to stockpile metal as an alternative to foreign bonds. "We're very surprised by Chinese demand. They are buying much more copper than they will need this year. If this is strategic, there may be no effective limit on the purchases as China's pockets are deep."

Those alarmed by the suggestion of a new world currency should relax. This Chinese behavior simply reflects a preference long held in Asia for metals other than gold. After the US and Europe moved towards gold monometallism in the 1870s, only China and India remained on a silver standard -- the loss of demand for silver moved its price to gold from around 16-to-1 (the legal standard) to near 30:1.

There is in fact nothing sacrosanct about the current fiat dollar standard even in the Constitution. A switch to a gold standard, a bimetallic standard or any other metallic standard -- which in essence makes the dollar's value a promise of government -- has been part of the U.S. history since the Coinage Act of 1792.

As for the Chinese, their behavior was well-described as being diversification. Loose money, if it leads to inflation (eventually), is often hedged by holding industrial metals.

Labels: China, economics

A reader notes from my post earlier this week that the ratings services were getting off the hook that Moody's is putting muni bonds on a blanket negative outlook.  He notes that this comes "just as their best customers are about to start bonding for stimulus projects."  As the New York Times article I've linked says, in the past Moody's didn't rate municipal bonds, issued by cities for public works, because "its analysts have in the past considered America’s tens of thousands of towns and local authorities too diverse for generalizations." But this generalization ends up raising interest rates on public programs and will make the stimulus dollars go less far.  

Labels: economics

Anyone who is contemplating the pricing of fares on Northstar should come look at the Rail Runner between Albuquerque and Santa Fe.  Open less than six months, the train carries traffic between cities about 60 miles apart and takes about 90 minutes.  When I rode up to Santa Fe this morning at 10:30 for lunch, more than half the people on the train were clearly tourists; I thought this was a waste of taxpayer money to buy me, a nonresident, a cheap ride.  But the 4pm train back to Albuquerque was full of commuters who live not in the bigger city but in northern suburbs around Sandoval and Bernalillo.  The train may have been at 70% capacity at its peak ridership.  My ride was $8 round trip, much cheaper than contemplated for Northstar.  

I'm not a transportation specialist, but I'm willing to speculate that the demand for urban rail is elastic, so higher prices decrease quantity demanded greatly.  If so, would the fares being discussed for Northstar be too high?  It seemed to me and my colleague with whom I traveled that there was enough fare on that afternoon train to more than cover the variable cost of the train.  But the question is whether the benefits of less congestion, emission, etc., are enough to warrant the $385 million spent on the route.  

Labels: economics, trains, transportation

I was last here for the same meetings four years ago, and at that time I didn't blog much because of cost.  The hotel now offers the T-Mobile plan, which I find at right at my reservation price.  (Quick principles of economics question:  Why do more expensive hotels charge for internet access but the cheaper ones advertise free internet?  Answers in comments please.)

These meetings are not just economists -- indeed, we're a minority here.  So the opening reception last night is a great bit of anthropology of social scientists, as are the book displays.  I get a better understanding of why the natural sciences view us as not up to their standards.  I'll bring pictures later.

Old Town was delightful last night, and for the vegetarians who are sometimes put off by not being able to get red or green chili no carne, let me send you to the Church Street Cafe.  We were three loud and hungry economists, and yet we got great service anyway and the vegetarian red chili sauce was outstanding on my vegetarian rellenos.  

So I missed the Tea Party.  See Leo for video and pictures and a description of the St. Cloud version.  You had to look hard to find any coverage in this morning's USA Today on my doorstep (that's why I typically toss the other three sections of that paper, keeping only sports.)  A few people have told me about this video, I'm off to watch it now then taking the taxpayer-subsidized train to Santa Fe for sightseeing, as all my sessions are tomorrow.  Thanks, taxpayers of New Mexico!

Labels: economics, higher education

I'm through reading the April update of the Minnesota budget situation. One thing we find out is, you know, that demonizing of bonuses going on in political circles isn't a free good:

Individual income tax receipts were $47 million (4.5 percent) less than forecast in February. Almost the entire income tax shortfall was due to lower than projected withholding tax receipts. While lower than expected withholding tax receipts are always a matter of concern, this shortfall appears to be due to lower than projected bonus payments, not lower wages. Withholding payments generally have tracked February’s forecast quite well except during a short period in mid-March when many firms pay bonuses depending on the firm’s performance during the past year.

Also, on the state of the economy generally, the update relies on Global Insights, who are still revising 2009 GDP downward. I agree with revising down but I probably was on a higher previous level than they were. Also:

...while the worst of this crisis may soon be over, that does not mean that the economy will quickly return to normal. Global Insight’s April baseline does not show real GDP returning to pre-recession levels until the spring of 2011. Employment takes even longer to recover, with the number of jobs remaining below the 2007 peak until early 2013.

I still think this is pressing down on the state budget more than had we hired almost any other national forecasting service to drive the state forecast. This is not the Obama Administration's forecast.

Labels: economics, Minnesota

We had an excellent presentation last night by Jouko Sipila '93, a double major in economics and finance who had worked in both reinsurance and finance on Wall Street and who managed to leave just before the worst of times last summer. His talk contained a series of slides on the nature of credit default swaps and CDOs. We got to see (and it was the first time someone had tried to seriously explain) a CDO^2, a CDO of CDOs. There were boxes and arrows flying all around the screen. "Do you find this confusing?" he asked. We all did. "So did we."

(BTW, there's a rather PG-13 rated slide show that made the rounds last fall to be found here.)

One of the places where I expect blame to be laid, complete with Barney Frank auto-da-fe, is the ratings agencies. Bloomburg's Caroline Baum, commenting on the failure thus far of the TALF program to jump-start credit markets, makes the point:

Most investors have neither the time nor the temperament to pick through individual loans that are pooled, sliced, diced and transformed into something with a credit rating and a cash flow to determine their viability. That job was designated to three credit-rating companies -- Moody’s Investors Service, Standard & Poor’s and Fitch -- which were paid by the issuer of the securities, not the investor.

That wasn’t always the case, according to Paul Kasriel, chief economist at the Northern Trust Corp. in Chicago. Prior to the 1970s, the onus was on the investor to pay for ratings.

That relationship removes the conflicts of interest inherent in the current system. Investors should be the one paying for credit evaluation, Kasriel says. “They’re getting a free ride.”

They also got what they paid for.

I wasn't aware of that history, and now want to know why we changed to having the issuer pay. Were investors just being cheap? Aren't they smart enough to understand the incentive incompatibility? It just seems very strange. It's like going to Yankee Stadium and letting the New York team hire the umpires because you don't want to pay for plane tickets for a third party arbiter.

I just did not see how ratings agencies were any more able to determine the quality of a CDO-squared than a relatively sophisticated investor.

Also, I learned from the talk that AIG's chief regulator is the New York State Insurance Department. Is there any reason to believe that they had particular knowledge to evaluate the riskiness of AIG's financial products division? I read this on that site by the state insurance commissioner, a Mr. Eric Dinallo.

The fear in 2000 was that if we regulated credit default swaps and required holding sufficient capital, the market would go where unregulated sellers could make more money. We forgot that the biggest competitive advantage of the US financial system has always been safety, security and transparency. If we destroy that perception, the long-term cost to our society is incalculable.

We're paying that cost now because rather than allowing the risky business to run offshore we decided we could rely on someone else to tell us where the risks are. It wasn't just investors outsourcing risk evaluation -- government did too.

Labels: banking, economics

My colleague Dave Switzer posts something fascinating on the decision of a consumer to buy or rent a DVD. Key grafs:

I see that there are two kinds of movies that people rent: Academy Award Nominees and crap. People wanted to watch Michael Clayton (good movie, btw) and No Country For Old Men (boring, IMO) so they could have some idea of which should win the Oscar. And people wanted to watch Good Luck Chuck (for some unknown reason) but knew based on its horrible box office performance and reviews that they would probably only want to watch it once — and even then probably only for $1 at Redbox. Baby Mama and Fool’s Gold are in this same league too.

I think it’s noteworthy that The Dark Knight was the best-selling movie of the year at the box office, as well as the best-selling DVD, but it is nowhere on the rental list. I guess when everybody has already seen the movie and everybody knows someone who owns the DVD, there’s no reason to rent it.

Of the top 20 movies sold, 9 of them can legitimately be called kid’s movies. (And yes, it can be a kid’s movie if it has The Rock in it. He’s the new Ice Cube — Ice Cube after he sold out, that is, and did Are We There Yet? and Are We Done Yet? Now The Rock does Race to Witch Mountain and Game Plan. I smell what the Rock is cookin’ and it doesn’t smell so good.) Only one of these 9 movies, Game Plan, is also on the rental list. Parents buy their kids the DVD, plain and simple.

Click his link to see the chart. I rarely rent DVDs except when I travel (and nowadays I just download a rental and toss it on the iPod.) The movies I own are ones I want to watch over and again, which are seldom on the TV. (Note: I do not buy premium movie channels with my cable.) I own about 50 DVDs, many of them TV series. When Littlest was littler, we bought all manner of movies for her. Why? Because your kid watches movies 20, 30 times in a week, and often it's just one movie. I was joking with colleagues about the one Number One Son watched one night five times, Harry and the Hendersons. Godawful crap, and every time it would end, even at 3am, he'd wake up from the couch and cry for someone to restart it (this was in the days of VCR, so someone had to rewind, and he was four and not as skilled at operating the machine as Littlest, who was potty- and VCR-trained at about the same time.)

Labels: economics, movies

If this letter doesn't get Learned Foot back to his post at KAR, nothing will.

Last week I spent hundreds of dollars at the vet on routine medical care for my aging cat.

Well yeah, if you've decided to make a pet a member of your family, you probably don't cut back Fluffy's medical care first. You do cut back on the teeth cleanings, and in a pinch you might decide to sacrifice the furniture rather than getting Missy de-clawed, but the rabies shot is probably a necessity rather than a luxury good. 40% of us would rather have our dog on a desert island than our spouse; 10% more would go for the cat.

My cat gets better health care than some people. This is an outrage.

Your threshold for outrage, madam, is different than mine. My daughter gets a ride to school in the morning in a better car than some of her classmates. Is this an outrage? I got the king-size fry at Burger King at lunch yesterday, while the kid next to me could only afford a medium. Is this an outrage? And what would you have me do about it?

If I can afford to pay these kinds of vet bills, I can afford to pay higher taxes to prevent thousands of my fellow Minnesotans from losing their health care in the current legislative effort to balance the state budget.

Well then, dear lady, be my guest! According to American for Tax Reform's Center for Fiscal Accountability, you can send a check payable to "State of Minnesota" and mail it to

Minnesota Department of Finance
400 Centennial Office Building
658 Cedar Street
St. Paul, MN 55155

Here's the statute that permits them to accept your cash. You can also put them in your will, or have your dividends from your patrician stock holdings dedicated to deficit reduction. Just give Finance a call, and they'll make it happen for you.

You're welcome. I'm glad to help you send that money along and allow you to feel better about taking care of that cat.

But wait, there's more:

Those of us who can afford higher taxes and believe in humane public policy should let our legislators know we support raising revenue as well as cutting costs and improving efficiency to balance the budget.

At last we find out the logic. Because I own a cat (voluntarily) and get him or her health care (voluntarily, without calls for providing public health insurance to millions of Fluffies and Fidos by resort to a cap-and-trade program), I am entitled to write a letter that would support "raising revenue". When the letterwriter chooses to take her cat to the vet, it's done instead of something else. She cuts back on spending elsewhere. But because she makes that choice, she has the right to demand that government confiscate your money to buy something for someone else's benefit.

Because only you have to balance a budget without resorting to force. Governments don't have to do that.

Labels: economics, other people's money

I'm intrigued by this item from the NYT today:

Reversing its role as the world’s fastest-growing buyer of United States Treasuries and other foreign bonds, the Chinese government actually sold bonds heavily in January and February before resuming purchases in March, according to data released during the weekend by China’s central bank.

China’s foreign reserves grew in the first quarter of this year at the slowest pace in nearly eight years, edging up $7.7 billion, compared with a record increase of $153.9 billion in the same quarter last year. ...

Chinese reserves fell a record $32.6 billion in January and $1.4 billion more in February before rising $41.7 billion in March, according to figures released by the People’s Bank over the weekend. A resumption of growth in China’s reserves in March suggests, however, that confidence in that country may be reviving, and capital flight could be slowing.

If you asked me what caused that, I would put it to differences in trade. Remember that a trade surplus with Country X means Country X will buy your assets (I suppose they could hold your cash, but that earns zero interest -- less, in real terms if there's inflation.) A massive slowdown of the U.S. economy in the first quarter would show up in trade volumes between the two countries, and the Chinese report they exported 17.5% less to the U.S. in January year-over-year, and the U.S. Census has reported a similarly steep drop for February. Brad Setser wraps all of this together.

China’s trade surplus was larger in the first quarter of 2009 than in the first quarter of 2008 ($62 billion v $41 billion). [This largely due to lower cost of imported oil and energy, he notes. --kb] The global shock has gotten rid of many of the world’s macroeconomic imbalances. American households are saving more and importing less, so the US deficit is down. The oil exporters are no longer running a surplus. Even Japan’s surplus has come down, as demand for Japan’s exports has fallen more rapidly than Japan’s commodity import bill. China’s surplus though has continued to rise.

He thinks China went into recession in Q4 2008. If so -- and I just don't know enough about China to judge that -- the Chinese would be pleased by the US stimulus package providing a locomotive to their economy, which will keep their demand for US Treasuries up. I expect it's got nothing to do with Chinese reluctance to purchase our bonds, just that they had less dollar reserves to invest.

Labels: China, economics

Ari Fleischer:

A very small number of taxpayers -- the 10% of the country that makes more than $92,400 a year -- pay 72.4% of the nation's income taxes. They're the tip of the triangle that's supporting virtually everyone and everything. Their burden keeps getting heavier.

As a result of the 2001 tax cuts enacted by a bipartisan Congress and signed by President George W. Bush, the share of taxes paid by the top 10% increased to 72.8% in 2005 from 67.8% in 2001, according to the latest data from the Congressional Budget Office (CBO).

...Mr. Obama is adding to this trend with his "Make Work Pay" tax cut that means almost 50% of the country will no longer pay any income taxes, up from a little over 40% today. A certain amount of income redistribution in a capitalistic society is healthy, but this goes too far. The economic and moral problem is that when 50% of the country gets benefits without paying for them and an increasingly smaller number of taxpayers foot the bill, the spinning triangle will no longer be able to support itself. Eventually, it will spin so slowly that it falls down, especially when the economy is contracting and the number of wealthy taxpayers is in sharp decline.

From the CBO Director's blog:

Higher-income groups pay a disproportionate share of federal taxes because they earn a disproportionate share of pretax income and because effective tax rates rise with income. In 2006, the highest quintile earned 55.7 percent of pretax income and paid 69.3 percent of federal taxes, while the top 1 percent of households earned 18.8 percent of income and paid 28.3 percent of taxes. In all other quintiles, the share of federal taxes was less than the income share. The bottom quintile earned 3.9 percent of income and paid 0.8 percent of taxes, while the middle quintile earned 13.2 percent of income and paid 9.1 percent of taxes.

The original report:

Much of the progressivity of the federal tax system derives from the individual income tax. In 2006, the bottom quintile’s effective rate for the individual income tax was -6.6 percent, which is to say that refundable earned income and child tax credits exceeded the income tax owed by that group. On average, households in the second quintile also received more in credits than they paid in individual income taxes. The average effective income tax rate was 3.0 percent for the middle quintile and 6.0 percent for the fourth quintile. For the highest quintile, the rate was 14.0 percent. The top percentile, on average, paid 19.0 percent of their income in individual income taxes.

Labels: economics, taxes

How much is the economy dragging down the entertainmnet industry? Enough to lower prices at Dodger games.

Tickets for the all-you-can-eat pavilion in right field are being reduced from $35 to $25 for 70 of the team’s 81 home games. The price includes unlimited hot dogs, nachos and soda.

Prices for soft drinks will be $3.75, down from $5; bottled water will be $3.75, down from $5.75; and beer will cost $6, down from $8, at concession stands.

...A free fan club for kids will be offered, and fans arriving by car will receive a free team publication. Also new are all-inclusive packages that include tickets, T-shirts, peanuts and parking starting at $99 for a family of three.

It's not because the team stinks. It's the economy there: The Angels had a hard time selling out their Opening Day and were offering 4-for-3 discounts, even though officially the game was "sold out".

Fields are getting smaller, and the need is therefore to sell out. Teams are building stadia with more variation of ticket experiences (here's one unhappy Yankee fan's view of the new stadium; pay particular attention to the two pictures of upper decks of old and new Yankee stadia) to push fans into higher-priced seating. But if you are selling scarcity value of seats to boost ticket prices, a recession like this one making 4-for-3s and price-cutting (at an older, larger Dodger Stadium) is going to have a larger impact on team revenues than if you were still trying to fill the larger caverns of the old Shea-sized stadia.

Labels: economics, sports

WIST = Wish I'd Said That. Today's hero, Price Fishback in Q&A on the stimulus package at the Council on Foreign Relations:

There seems to be a little bit of disconnect. The government has always built roads, it's always built infrastructure and things like this. I think the point that Ellen's trying to make in this context is if you're expecting it to be a big stimulus, it's not that -- it's not going to be a huge stimulus, but if you build these roads and bridges and things along these lines on the basis of what their cost and benefits look like, that makes a lot of sense to do that.

So the big question is can you move them up or move them forward? Does it make sense to actually build something that's not worth the money to do it? And what she's saying, what a lot of people are saying is no, it doesn't make sense to build a bridge to nowhere. It makes sense to build the right projects, but don't expect that you're going to get some huge extra stimulus behind it.

A couple years ago I read "ten little words" from Peter Gordon on applied economics: 1) at what cost? 2) compared to what? and 3) how do you know? Applied to the stimulus package, Fishback reminds us, you can add two questions (not so succinct, alas): 4) Do we have $787 billion of programs that you can move forward that add benefits to the economy? and 5) Did ARRA select them? I don't have an answer to 4) and I'm pretty sure the answer to 5) is 'no'. Your mileage may vary, but I find the rubric created quite helpful in organizing my thoughts on stimulus.

Labels: economics, Obama

MSNBC is running a neat tool using Moody's data to create an Adversity Index that looks at employment, construction, home prices and industrial production by MSA over a 15 year period. The methodology is described here. It appears they are using different weights on the four factors for each state or metro area, so I don't know how to replicate the results. Looking at St. Cloud, I note that my own data analysis shows a local area recession in 1996 when the larger economy was not. The Adversity Index confirms that (unsurprisingly, since two of the four elements of their index are in what I use.)

Labels: economics

Small business America is getting a little chicken feed: The stimulus bill was retroactively changed by the Obama Administration last month to kick $15 billion (less than 2% of the total package) to the SBA loan guarantee program. So where does that money go? Read carefully:

The $15 billion, coming from the U.S. Treasury Department, will be used to purchase securities backed by the SBA-guaranteed loans in an attempt to jump-start the secondary credit market for small businesses. Banks that offer SBA-guaranteed loans have hit a lending wall in recent months, as the secondary market is frozen, so banks can't get the old loans off their balance sheets to free up capital for new loans.

..."Traditionally, about half of banks offering SBA guarantees sell those loans to mortgage packagers like investment banks where they're then sold on the market to investors," says Bob Seiwert, senior vice president of the American Bankers Association. "But no one's buying those packages now, so the lenders can't make new loans."

So the guarantees don't go directly to the small businesses; all they get is a reduction in fees charged for taking out SBA-guaranteed loans. The money is to induce the big investment banks to take on these loans; the $15 billion would end up in the pocket of big banks. Will it make borrowing easier for small firms and smaller banks?

I talked to a local commercial banker yesterday after a talk I gave. He reported to me that the bank is about to be audited, in the normal course of its business. His regulator asked that all loans to non-owner-occupied commercial real estate be pulled aside. For this there had to be all manner of additional documentation to verify primary and secondary sources of funds to repay the loans. "Our impression is they don't wish us to lend any money to non-owner-occupied commercial properties." So you can guarantee all the money you want for SBA loans, but if regulators are putting up lots of barriers to transactions that money will remain parked and unused.

Labels: economics

Because I teach until 1:45 on Thursdays, I missed the opening of the Bachmann cap-and-trade event, which ended up moved to the larger Atwood Ballroom due to high interest. I did not see the Representative speak, arriving in the middle of the presentation by Chris Horner. Those who were there were Andy, Gary, and (for the loyal opposition) Eric. A few thoughts:

1. Let me lead by complimenting our students. Those who disagreed with Rep. Bachmann, or with the presenter, Mr. Horner, at the St. Cloud event used their free speech rights with due respect for the speakers, were not disruptive, and made me rather proud of my university today. Don't agree with them, not sure they understood the points Mr. Horner was making (more on that in a second) but when he asked for his turn to speak they relented with the shouting of questions and gave Horner his due. I'd rather they didn't shout, but given Horner answered them when they shouted, he agreed to that format. I agree with Andy that they were restless, but largely because they were in a minority in the crowd.
2. Horner is entertaining. If I could suggest one thing, it'd be to s-l-o-w d-o-w-n. The points were excellent but rattled off quickly because he had lots he wanted to do. So I agree with Muse on that one, though he did have a handout that I got that helped comprehension. (I hate handouts. I use PowerPoint often, and let me say to Mr. Horner -- watch Prof. Tufte for some tips.)
3. But he did change at least one person's thinking. A couple rows ahead of where I eventually sat (finally finding Mrs. S in the crowd) was a fellow professor of another social science. An excellent professor, I am inclined to think he holds views that favor the MMGW theory. After the talk I asked him what he thought and he said that he thinks we should not do cap-and-trade. That surprised me; why? I asked. It doesn't seem to do what we want, he said, and it's not clear how it would work and not clear people can actually understand it. This has long been my point on cap-and-trade. Any estimate of "what does this cost the average citizen?" comes up against the fact that it is a hidden tax. It's so well hidden, so complex in its changing of relative costs, so shifted forward and back between producer, labor supplier, capital, and consumer, that any attempt to measure the cost has to be theoretical and contentious. Horner says this, but then throws out a number anyway. DON'T DO THAT! Your best point is that you cannot know the cost of this thing. The only solid number you can generate is what you intend to sell the initial pollution rights for. All the rest is dross. If you buy MMGW theory, you should buy it with an explicit tax, openly adopted in Congress and signed by the President. Cap and trade is bad policy because it hides costs and benefits.
   

UPDATE: "Discredited"? I thought Larry wrote news, not opinion. To support his claim all he offers is a competing number from John Reilly, who is (gasp!) an economist. One economist does not a discrediting make.

The word you want is "disputed", Larry. The point I made above is that every number can be disputed. And yes, I do work as an editor from time to time, at the right price. Call my office if you would like my services.

Labels: economics, Energy, Michele Bachmann

Over the last weekend the New York Times ran a story on how $51 billion in Federal aid (along with much private generosity) has been poured into post-Katrina Louisiana, and the state has fared rather well in terms of employment. Yet take a look at Gross State Product per capita, which rose in 2006 but stagnated in 2007. (Data for 2008 is due out in June.) Now there's two ways to get more per capita income -- you can have more income in the state, or you can have less population.

You know the story: Many people were displaced from their homes and left for Texas or to the east. All that extra growth they're talking about? It's just getting back to where they were. That big drop is of course Katrina. And that is the reduction in population that lead to the increase in per capita GSP in 2006. They went nowhere in 2007, and for at least state personal income they were around the median growth for 2008.

None of this matters for the Times, though, and this leads Lawrence Reed to muse "[i]ts reasoning is so infantile, its evidence is so transparent, and its economics is so woefully deficient that one can’t help but wonder if it was printed simply to advance somebody’s big government agenda."

A blast from the past on "the broken window fallacy and Katrina."

Labels: economics

Does Paul Krugman really want to say that the Obama plan is just a year or two of extra government spending? Let us recall:
If Krugman is arguing that some of that increase in government spending is temporary, fine. I don't know that we're arguing the multiplier is zero. Just a lot smaller than CEA chair Romer is. A lot smaller.

Federal government spending as a share of GDP is threatened to go to 23%; one would be foolish not to plan that some day that blue line needs to converge on the red one. Will you be able to get all that from those earning over $250,000 per year?

Labels: economics, Obama, taxes