Socialism for the Wealthy?

The lazy misuse of the term "socialism" is something I have railed against, and I will do it here when it has been done in the other direction. This week The Economist characterized the implicit subsidies of loose monetary policy, deregulation, tax loopholes, and explicit subsidization of credit markets "socialism for the wealthy." This is a false, and irresponsible, characterization of what amounts to simple redistributive politics.

It does, however, point out a key point about the biases about Republicans and Democrats as "conservatives" and "liberals" or "pro-market" and "pro-government," respectively. The reality is that the "pro-market" label for Republicans has not been earned, just asserted. A market has two parts: Households and firms. Republicans tend to favor the firm side of the market by subsidizing investment through the tax structure and other policies. Democrats tend to favor households through transfer programs and consumption subsidies. 

Income redistribution is income redistribution and both parties' approach to it distorts markets. Republican initiatives for "incentives" are nothing more than subsidies to firms. Hence the term "Corporate Welfare," which is an apt analogy. Calling it "socialism for the wealthy" is inaccurate, incendiary, counter-productive.

Krugman Sticking To His Comparative Advantage

When Krugman stays on international linkages in the economy, his columns are very impressive, and highly educational to the layman. It also illustrates why folks should consider carefully the comparative advantage of someone like Michelle Bachmann (or Maxine Waters, if we have to give equal time) before taking her to seriously. Consider this article by Krugman. We start with an old joke about trade with China:

trade with China had turned out to be fair and balanced after all: They sold us poison toys and tainted seafood; we sold them fraudulent securities.

So, how does that relate to the inane gum-flapping on the matter China's pipe dreams of an international currency? Basically, that would be an international bailout of China's myopic (and bad) decision to finance its trade surplusses with purchases of dollar-denominated bonds. That won't happen.

I've explained it to my principles students in the past, and here's Krugman's version of the same story:

China chose instead to keep the value of the yuan in terms of the dollar more or less fixed. To do this, it had to buy up dollars as they came flooding in. As the years went by, those trade surpluses just kept growing — and so did China’s hoard of foreign assets.
...
They are, apparently, worried about the fact that around 70 percent of those assets are dollar-denominated, so any future fall in the dollar would mean a big capital loss for China. Hence Mr. Zhou’s proposal to move to a new reserve currency along the lines of the S.D.R.’s, or special drawing rights, in which the International Monetary Fund keeps its accounts.But there’s both less and more here than meets the eye. S.D.R.’s aren’t real money. They’re accounting units whose value is set by a basket of dollars, euros, Japanese yen and British pounds.And there’s nothing to keep China from diversifying its reserves away from the dollar, indeed from holding a reserve basket matching the composition of the S.D.R.’s — nothing, that is, except for the fact that China now owns so many dollars that it can’t sell them off without driving the dollar down and triggering the very capital loss its leaders fear.
So what Mr. Zhou’s proposal actually amounts to is a plea that someone rescue China from the consequences of its own investment mistakes. That’s not going to happen.

So, love him or hate him when he goes of on wonkish liberal rants, he knows his stuff when it comes down to the subject for which he won his Nobel - international economics. And he's a darn good writer (for an economist - an acedimic at that): This is the best elucidation of the double-bluff of China's surplusses and bond holdings I've seen in the mainstream. Basically, China cannot "call in" its holdings of US public debt, and if it tries to sell those bondholdings on the open market, they drive their prices (cumulatively with the value of the dollar) down. The result would be a depreciation of the dollar that allows the US to buy back debt with internationally-cheaper dollars without the consequences of inflation domestically, and potentially boost our trade balance and boom the macroeconomy in the process.

Tax Season Special

If you still don't quite get the progressive marginal tax system or if you think I've been pulling a fast one, here is a good website to play with, to see how your income tax is affected by a small change in income that "bumps" you into a new bracket (hint: not much).

Market Failures and the Banks

Economists agree that markets work, except when they don't. The philosophical debate starts when markets don't work and people wonder what should be done about it. One side says the government can intervene constructively, and the other says that the government will probably only make things worse. But the debate at this point is not over whether markets have worked well in the financial sector, it's about what to do about it now that they have not. Larry Summers was on the News Hour (audio: HERE, and video: HERE), and explains it much better (his interview starts at 4min, 55sec):
 

GWEN IFILL: At the heart of this plan that Secretary Geithner introduced today is the idea that somehow these assets, which some people call "toxic assets," but which I notice you all call "legacy assets," that they're somehow worth saving. How do you value that? How do you know that it's worth a government investment?

LARRY SUMMERS: Well, our approach is premised on the recognition of a market failure that we have right now. Traditionally and usually these assets trade all the time between people who borrow money in order to finance their purchase.

That market, where they're able to borrow money, what people call "get leverage," has broken down. And as a consequence, the assets have lost a significant part of their value, just as if, all of a sudden there was no mortgage value, houses would lose a substantial part of their value.

And so, by providing the financing that enables that market to work, we enable more realistic valuations of these assets. We enable these assets to trade again. That means that people are in a position to originate loans and sell them into the market, and that gets the flow of credit going.

The point, though, is to create enough liquidity (and, by putting well-trained econ geeks like Summers and Romer out there, confidence) so that scared banks can both retain the higher levels of excess reserves they feel they need, and still keep credit flowing to private businesses. The alternative would be nationalization of the banking sector, which, in a more fundamental way than simple income redistribution or even public health care, would truly be a step in the direction of "socialization" of the private sector. Nobody, (even this administration, contrary to what some folks believe) wants that.

The Economic Definition of "Government Expenditures"

The debate over the various government "bailouts" and "stimulus packages" really glosses over the difference between a "subsidy" (negative tax) versus true "direct expenditures" by the government. The definition is important because the impact of these components of the current legislation have different "multiplier effects." Some of them behave similar to "tax cuts" (even if they are negative taxes) and some of them behave like "government expenditures" in the Keynesian framework. Here is a brief taxonomy:
Tax cuts/Negative taxes:
1. reductions in the tax rates;
2. subsidies to struggling private firms ("bailouts");
3. transfer payments (welfare).
Government expenditures:
1. direct government production (e.g. building/repairing roads);
2. government purchases of final goods and services;
So, in terms of the economic impact (multiplier effects) TARP, the auto bailout, unemployment insurance, subsidies to private clean-energy firms, and explicit reductions in tax rates are in the "TAX CUT" category, and tend to have less impact in the short run, because firms (perhaps rationally, and to the long-run benefit of the economy) might hold back some of that form of "stimulus." The other category only includes things that directly inject expenditures into the economy, such as building a tank, repairing a road, or a direct public investment into the building of new infrastructure, such as a new energy grid. These direct expenditures MIGHT have a larger short-run impact IF AND ONLY IF they occur when the economy has substantial unemployment, and if they are enacted before the recovery. If they are enacted after the recovery begins, they will tend to be inflationary.

The Editors of the Economist should be Flogged

Printing anything that uses the terms "Calculus" or "Second derivative" should be punishable with public beatings, as exemplified by this article in the Economist.

A civil debate over policy

I do not personally advocate Socialism one bit. In fact, I would say that it is a system that is both morally defunct and internally flawed because of the extreme lack of individual incentives it implies. I also believe in markets, and in the idea of capitalism. However, there are a lot of folks out there making wild assertions about what constitutes "socialism" that are just flat wrong. When a politician or other "pundit" says "income redistribution (or public health care) is socialism" they may be trying to somehow voice an opinion that these things are bad and ill-advised, and that is a sufficiently valid point on its merits. Socialism need not be brought into it for two reasons: First, it is poor logic to conclude that because something contains some of the elements of a particular idea, that it creates sufficient evidence to conclude that the broad generalization of that idea is contained wherever those elements are present. Secondly, it brings no progress to the debate over the proper role of government because it is disrespectful to those who might agree, and is, therefore, ultimately unpersuasive.
The key feature of a socialist system of economic organization is shared, collective, or public ownership of the means of production on a national (and international according to Marx) scale. Then, workers are compensated according to the Labor Theory of Value, or their average productivity (not their marginal productivity as market theories suggest). An egalitarian distribution of income is an indirect consequence of that compensation mechanism.
Public provision of certain "public" or "merit" goods does not constitute the breadth or depth of public or shared ownership to constitute "socialism." In the field of comparative economics these systems are characterized as "mixed" economies, which generally includes every democratic industrialized country in the world these days. Public provision of one narrow sector of the economy is no more "socialism" than another. Take defense, or education. It would be false to claim that government-provided defense or a publicly-funded educational system is (by itself) socialism.
With regard to income redistribution, socialism is not the only economic system in which advocates egalitarianism, and economic thinkers (including the fiercely laissez-faire french thinker Frederic Bastiat) showed concern over income distribution well before Marx. As an example, fascism also advocates for equitable redistribution of income as a means toward building a society in which interest groups of all stripes are united by a sense of duty and obligation and a triumph over the individual. Economic organization in Fascism involved a cooperation between the State and corporate interest groups, which, in theory, could avoid the wasteful competition of market capitalism. As in Socialism, an indirect consequence of this cooperation is an egalitarian distribution of income. The key point here is that welfare programs and negative taxes do negatively impact efficiency by weakening incentives, but are not sufficient conditions for socialism.
In an interesting tangent to the role of democracy Joseph Shumpeter predicted that the ultimate demise of individual capitalism was that it led to democracies that were doomed to implementing huge welfare states and collapsing. Market economists also express concern over the tendencey for democracies to foster radical swings to the left whenever people become dissatisfied with harsh economic conditions (e.g. Venezuela).
Whether income redistribution or universal health care evolves from a socialist, fascist, democratic, or other form of political or economic system its ideological origin is not really important. What is important is that we, as a society, are able to have a civil debate over the merits of various policies. Labels and name-calling are ultimately counter-productive. Yet markets, directed by the interaction of many independently-acting agents on both sides seem to be the best starting point in terms of efficient allocation. To quote Adam Smith: "By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good."

Interesting Lecture

I got this lecture on Class Theory and Marx from Division of Labor. It's not pro-Marx, but it's open minded enough to knock the nonsense about "redistribution = Marxist = bad" on its patoot at both "=" links of the chain.

Poking fun at people smarter than me

Paul Krugman and Greg Mankiw are both brilliant. Therefore, I find some of their intellectual sparring over the stimulus and macroeconomy amusing. Anyway, a recent post by Mancow says:

After all, he is an international trade theorist rather than an empirical macroeconomist

I find this hilarious for two very, very nerdy reasons:
1. When was the last time Paul Krugman did International Trade theory?
2. While in grad school I was given the impression by Stephen Parente (who is, himself, a macroeconomist) that "empirical macroeconomist" an oxymoron.

Monetary Base versus Money Supply

Craig Depken, a great guy and former colleague when I was in Arlington, TX, is worried. I was too the first time I saw the chart he posted:

Then, I did some legwork and hopefully we can keep CADII from fleeing to Canada. The monetary base is heavily biased towards bank reserves, and if banks just are not lending, then this would be expected. Try the actual money supply on for size:

Or, try looking at non-borrowed reserves, and you might see why Bernanke went ooooohhh [expletive] around late 2008 (not the big spike into the negative):

We haven't learned a damn thing!

AAAAAAAAAAAAAAARGHHHH!

Making more Ethanol from Less Corn

Another example of technological innovation around the margins (and the institutions that support it) working to keep us from falling into the Malthusian trap. I'm not a big ethanol fan, but things that can be done to make waste byproducts more useful (e.g. the building of the first cellulose ethanol plant) to help in the short run, might just help us get closer to a long-run solution with wind, solar, geothermal, etc.

Market Imperfections & Policy Specificity

Two things I'll never understand about the debate over the current intervention package. One, why are conservatives parroting for nothing more than blanket tax cuts? Two, why are liberals doing little more than ranting about income distribution?

Financial markets are rife with potential market imperfections: asymmetric information, moral hazard, etc. When the whole crisis was getting revved up, I never understood why there wasn't more effort, not to bail out folks who were now sinking, but to secure traditionally-available lines of credit for individuals and businesses who have always been able to get loans. We did amazingly little to target the core problem then, and we're paying for it now.

So now the problem has spread. People are losing their jobs because of the same problem, and it seems to me, the most direct way to deal with that particular problem is to take this opportunity to increase investment in certain types of "public goods" - infrastructure, etc. - that will at least be there for us when we come out of this mess. It doesn't seem like 1-2 percent in business tax cuts are going to keep the private sector in business when they can't secure the tens of thousands, hundreds of thousands, or millions of dollars in short term credit they're used to taking out for day-to-day operations (the timeline for revenue streams seldom match one-to-one with costs).

It's called policy specificity. Credit markets don't work right? Direct policy towards those (not just bailing out the firms that broke those markets either). High unemployment? Direct policy towards that, and don't just give a payout to firms who may or may not need it and may or may not use it to expand production and employment.

Two Stupid Letters

There's this one by a liberal interest group, and this one by a conservative one.

Neither one really does much to add to a constructive debate over the appropriate role for government, because one is just blindly endorsing a (bad) political solution, and one is using a non-sequitor to argue against it.

I did not endorse either one.

Freakout-onomics

I've said several times that as far as "downturns" or "recessions" go, this one actually isn't as bad as it's made out to be so far. It may well get much MUCH worse, but so far it has been relatively mild in terms of changes in actual output and employment and that this particular financial crisis is not all that different or unique in comparison to past episodes in the postwar era, but don't take my word for it: Take theirs, or theirs (cross-posted via Economix). Basic idea: Times are indeed tough, but we've been through worse, and made it out. Hang in there as best you can, folks.

Small Transaction Costs and the Marginal Utility of Cafeteria Food

Trays are making college students fat. University cafeterias (all you can eat) waste about 30% less food when trays are eliminated, which essentially requires students to go through the line getting ONE plate and ONE drink instead of loading up. I like the comments on this one, especially Michael:

As someone who goes to a college that just eliminated trays, it really
isn’t a win-win situation. It might make people eat less food and waste
less, but it substantially increases the hassle when you have to carry
a plate or two plus a drink and silverware. All that isn’t easy to
carry without a tray.

Yeah, that's basically the point, Michael. That relatively small hassle, or cost, is what we call a transaction cost, and its keeping you from eating enough for a small African village for lunch.

Class Size, Practice, and Learning

Universities are starting to work harder to supply a better product to the market. Instead of cramming butts into several-hundred-seat lectures, MIT and others are reducing class sizes to try to improve their product. But the move is not just for class size: the size reduction is geared towards getting students to have a more hands-on experience - to learn by doing and create a peer-collaborative learning environment.

I certainly can't say that I'm not guilty of falling into a lecture trap of the old school, but we need to think innovatively to capture students with different strengths and learning styles, and do a better job of creating a open line of communication between students and instructors as well as among the students so that they can unlock the material for themselves.

Lessons in Opportunity Cost: Immigration

This is an important lesson in opportunity cost, focusing on the allocation of resources to immigration enforcement. As we expend more budgeted resources towards deportation, and quota enforcement, the more difficult it becomes to control the smuggling of drugs, weapons, and criminal activities across the border. Maybe a more sensible policy on quotas and their enforcement will come, say, in the next decade or so.

This is Interesting

I ran into this via the Green, Inc. blog. Basic idea: which states offer tax breaks for housholds that get renewable energy fixtures for their own use? Find your state and see what's out there.

Economic Humor

At some point it had to be done at the AEA meetings. Maybe better to save economic humor for the recovery, though?

International Education

I didn't actually know that the proportion of international students at US universities were fewer in proportion to the total enrollment than it is in other developed countries. But why should universities pay intermediaries to recruit more students, as the article suggests? It seems like many students are being turned away from the best schools, and the students already in the schools (especially foreign-born students) are reasonably well-qualified. It seems that if there is a greater number of applications from qualified students the thing to do would be to price things better, especially for out-of-state and international students, with generous subsidies for highly-qualified in-state students who do not benefit from a mountain of trust-fund wealth. Let the international students come, but also let them pay full price for the high level of enrollment demand.

Taxes and Spending

Note to Hardball: In this segment your Republican and Democratic guests are arguing over an economic point that is theoretically moot. Maybe that's the beauty of it. In terms of economic impact of a tax cut (in both the "liberal" Keynesian and "conservative" neoclassical schools of thought) is the same as an increase in transfer payments (consumption subsidies). Similarly, an increase in transfer payments is the same as a tax cut. Spending is only "spending" (in terms of having different multiplier effects) if it involves a direct government purchase of goods and services, which transfers/tax cuts/negative taxes do not. Even better if those goods and services have some theoretical possibility of being "public goods" or generating "externalities" or "network effects" as investments in education, infrastructure, or even the military and health care, might.

Visit msnbc.com for Breaking News, World News, and News about the Economy

Today's Reason the Fence won't work.

If Japan's restrictions on immigration are leading to rising illegal entries, what makes Lou think his border fence will work (hint: Japan is an island nation for the geography-impaired)?

Economists in the Economist

Summary of the Economists list of rising stars in the field (sorry, my name won't be found):

Jesse Shapiro: Some information is bad.
Roland Fryer: Cultural roots of black underachievment.
Esther Duflo: Test projects (with treatments and controls) for empirical studies of development.
Amy Finkelstein: Annuities and private information of life expectancy.
Raj Chetty: Longer unemployment benefits are optimal because people find better job matches.
Ivan Werning: Progressive subsidies for inheritances ("death subsidy," higher for small bequests).
Xavier Gabaix: Explaining "Rank-Size" and "Power Rules."
Marc Melitz: New-new trade theory on international business networks.

Name these Protectionists

Inferior Good?

Are New England Ski Resorts "inferior goods?"

Madoff

Here's Madoff's indictment: 

http://clusterstock.alleyinsider.com/2008/12/bernie-madoff-the-indictment

Governor Bag-o-Tricks

The downstate Illinois nickname for Blago. Thought I'd post a link to the text of the complaint. Most of what they actually might get him for isn't even the alleged "Senate for Sale " scheme. Those of us from Illinois know he was dirty shortly after he took office. Trouble is, when he was elected, then-governor George Ryan (a Republican) was also on trial for corruption. His deeds lead to the illegal licensing of criminals for commercial truck licenses, which ultimately (allegedly) lead to fatal accidents involving those criminals who proved to be inept and irresponsible about their driving.

Here's G-Rod's Complaint and affidavit:

http://www.scribd.com/doc/8759869/Blagojevich-Complaint

Cyclical Migration

More good news for Lou Dobbs. Not only are fewer illegals coming, more are returning. Hooray for a bad economy?

De Facto or Dejure?

Trade's shrinking. But it's unclear whether the shrinkage is because of rising protection, or because of overall declining economic activity. In particular, China is exporting less, but at the same time there are stories of increased availability of consumer goods within China, partly due to a natural decrease in demand. The Economist warns of possible increases in protectionism. They can cite for evidence is an increase in antidumping cases, but in this economic environment it may be more likely that firms will engage in actual dumping, so I'm not sure that's a good measure. I'd like to see them tell me of specific cases of actual increases in direct protection before I get too worried. Hopefully, economies will recover from the downturn before resorting to new tariff increases.

So, uh, yeah..

I just can't resist putting this up.

The Democracy Tax

Democracy is expensive, and the Economist reminds us of it in last week's special report on India. Administering the necessary bureaucratic and legislative apparatuses that make the thing go costs a lot of and usually leads to a certain amount of disappointment. In this sense, many note that an iron-fisted despot, if "benevolent" so to speak, is a more "efficient" form of government because what gets done gets done quickly and without too much hemming or hawing. Unfortunately for these regimes, the principle applies equally to good and bad ideas.

But if you were beginning to think that our own system was hopelessly corrupt, it could be worse. Even though, "every five years, over a period of a few weeks, India holds a
reasonably orderly and fair election,"  the article goes on to state that:

[India's] politicians are mostly an unsavoury
lot. Of the 522 members of India’s current parliament, 120 are facing
criminal charges; around 40 of these are accused of serious crimes,
including murder and rape. Most Indian politicians are presumed to be
corrupt...

So, mere "pay to play" schemes and cash in a freezer is actually pretty tame!

Thanksgiving Fun, A Little Late

In Thanksgiving Tradition, Bush Pardons Scooter Libby In Giant Turkey Costume

Bad things that Came out of the Seventies (other than Disco)

I heard this on "All things considered" yesterday.

We used to have this urban-planning idea that we'd have these pockets of pure-residential areas that had a buffer from almost purely commercial areas known as "drivable suburbia" or "edge cities." In the seventies,people wanted to live in little cul-de-sacs of living and concrete jungles of shopping, commerce, and bigass parking lots somewhere else. I remember in the late eighties our neighborhood had huge opposition to the building of a new commercial area near our housing development because it would bring noise and crime and (gasp!) more people.

I wish I could say this is the way the market had things turn out, but that would be hooey. (I like to say hooey now because the word I really want to say makes the little green men cry.) It was carried about using subsidies and political lobbies that worked to have things zoned the way they thought best suited their views. Some might call that democracy or "majority rule" but that would be of equal portion of hooey, since most people who thought it to be a bad idea probably didn't care as much to organize and petition the local government as the "nimby"-ites (Not In My Back Yard, "nimby").

Now, some folks are having buyers remorse. Now, we want shorter commutes, closer access to jobs, groceries, routine shopping, and even public transportation (?) and people aren't so sure that driving 20-30 minutes is the best way to go about it. Maybe in fifty years when we have flying cars that run on banana peels and composted garbage we'll want to go back to our edge cities.

I couldn't resist...

If you like recycling, and you like elephants pooping, this is for you.

Michelle Malkin, Ahead of the Learning Curve

Usually it takes a family of immigrants a few generations before they really adopt the slam-the-door-shut xenophobe-nationalist-conservative ideology of the Pat Buchanans and Lou Dobbses of the world. Michelle Malkin, Conservative columnist, TV commentator and blogger is there as just a first-generation daughter of Filipino parents who came here on student visas.

...and she blames the entire financial meltdown on Mexican immigrants, mostly the illegals. In a September 24 column, she opines,

It’s no coincidence that most of the areas hardest hit by the
foreclosure wave — Loudoun County, Va., California’s Inland Empire,
Stockton and San Joaquin Valley, and Las Vegas and Phoenix, for
starters — also happen to be some of the nation’s largest illegal-alien
sanctuaries. Half of the mortgages to Hispanics are subprime (the
accursed species of loan to borrowers with the shadiest credit
histories). A quarter of all those subprime loans are in default and
foreclosure.

Regional reports across the country have decried
the subprime meltdown’s impact on illegal-immigrant “victims.” A July
report showed that in seven of the ten metro areas with the highest
foreclosure rates, Hispanics represented at least one third of the
population; in two of those areas — Merced and Salinas-Monterey, Calif.
— Hispanics comprised half the population.

I don't even know where to go with this! Who'd like to point out the logical fallacies with me? Composition, post-hoc-ergo-proptor-hoc? This is completely off the deep end, and hypocritical toboot! Yes! It's illegal-alien mango pickers buying million-dollar McMansions! What? Someone get me off the deep end, and Ani, remind me to smack you next time I see you for elevating my blood pressure with this.

Immigrant quotas as a tax equivalent

This story on Morning Edition (NPR) got me thinking. Some folks are opposed to "selling" work visas (economists among them). Well, I'll tell you this: A quota (which is how we work it now) ain't much different. Just ask the illegal immigrants. Only difference is this: The people who get the hypothetical "tax revenues" aren't the US treasury - they're the people who are lucky enough to get visas (after about a 15 year wait for some source countries), and the coyotes who smuggle illegals over for a fee (which can run in the thousands of dollars per immigrant smuggled). That doesn't even touch on the laundry list of other externalities that quantity restrictions bring, and the fact that we spend billions of scarce treasury dollars enforcing the quota instead of collecting revenues from the auction/tax/fee.

Good News, Lou!

Louie Louie (Dobbs) must be thrilled about the recession: Check this out!

The Auto Bailout, Trade, and Policy Specificity

As a trade economist, there is exactly one thing that could convince me that a subsidy to the auto industry is worthwhile, and it's this: Give them a direct subsidy and tear down all of the trade restrictions on foreign-made autos. That way, we could increase the competitiveness of the MARKET, and increase the chances that the monies will be used productively, rather than squandered on short-sighted SUV promotions that would keep us in the energy use gluttony of the last 20 years.

Societal Collapse

This is a relevant idea from TED Talks that I think relates somewhat to some research by my colleague Atin Basu. Really Atin's research focuses on the speaker's 5th point, the ability to recognize and react to environmental changes, i.e. take a long sight of it's continuation. I think that the issues before that, related to cooperation vs. Anyway, it's an interesting little topic.

Redistribution Policy

Good a Place as Any

Watch the Results Roll In!

Republican Party Values

This one's for Atin, per his thoughts on "Republicanism" versus "Conservatism," and it comes from Joe Scarborough, who was one of the more conservative republicans of the "Contract with America Republican Revolution" of 1994-5.

Economic Crisis Forensics

We've finally traced back the cause of the crisis!

Morning Joe Entering Silly Season

Joe Scarborough, who I like, did a silly piece on folks on the upper west side of NYC supposedly saying "nasty things" to McCain-Palin supporters (specifically his "news you can't use" correspondent, Willie Geist), and take it as "representative" of some broader population. He asks, "Would the same thing happen in Nashville?" (in the other direction, against Obama supporters), since Mr Geist went to Vanderbilt for college.



While there's room to debate how "nasty" the comments of these folks really were, I can tell you that there are plenty of conservative areas where reasonably intelligent people are being just as nasty. I've heard numerous accusations of socialism directed towards friends of mine who support Obama, and really really nasty things being said about the candidate himself. It's depressing, and the total lack of intellectual diversity here really makes it isolating. Heck, people only tell a McCain supporter in the upper west side to "go to the east side." Here, they tell us to go in a different direction - the nicer ones imply that that direction is somehow farther North; the not-so-nice ones imply that that direction is more downward, and somehow involving flames that burn but do not consume.

This still all misses the point. In either event the jackasses are an irrepresentative subsample of the overall groups of supporters. Most McCain supporters are decent folks who want the best for the country. Most Obama supporters are decent folks who want the best for the country. The contention that lefties are more (or less) nasty than righties is misleading. A jackass is a jackass on either side and can't be held up to represent the whole group. The bigger question is: why raise the subject? Are McCainiacs so desperate to villify the left that it's no longer a matter of: (1) winning the ideas; (2) personally attacking the other candidate, or; (3) cherry picking facts. Now it's a matter of making personal attacks against the rank and file supporters of a candidate, party or set of ideas? Seems silly to me.

This One

John McCain and his surrogates keep asking: which economist would promote tax increases at a time like this? Well, if structured intelligently, then, THIS ONE.

What's surprising is how confused Mr. McCain is about his economice ideologies. The concept of fiddling with taxes and expenditures on the fiscal side to affect the economic equilibrium at the macro level and combat recessions is a Keynesian (read: "liberal") one. Now, for those tax cuts to be most effective, in the Keynesian framework, they should be targeted in the ways that do most to stimulate consumption (i.e. to the middle and lower classes), so that inventories are mopped up, and thus intended investments are made instead of being diverted into unplanned inventory accumulation. This is a pretty standard principles approach. A more sophisticated approach might suggest that markets and their prices are not well-coordinated between factor markets and product markets, leading to "good" (high demand) equilibria, and "bad" (low-demand) equilibria. Random events can knock a "good" economy into a "bad" equilibrium, but government can use fiscal policy to offset those distrubances.

So, let's look at the supply side. Tax cuts are good, but ONLY if the government debt is held constant. Candidate McCain's proposals would cut taxes but wouldn't reduce spending enough to control the deficit or the debt. Most studies suggest that the proposals of each side would have equal impacts on the debt, and both would actually expand our debt, and that assumes Mr. Obama gets his way on health care and other subsidy programs, which is doubtful. McCain on the other hand is more likely to get the types of spending he wants, because he has the authority to keep troops in harm's way, and thus hijack the congress into approving more spending for those wars - denying funding is a politically indefensible position for any member of congress.

So, assuming McCain's and Obama's taxation and spending proposals would have equal effects on the debt if both get the spending increases and cuts they want, there is no net long-run difference in the two candidates' impacts on the economy. However, if we look at the political realities of their spending requests, McCain is more likely to get the increases he wants. Obama is not. Expect a filibuster on health care and other types of entitlements and education spending that Obama has proposed, and for there to be compromises on these areas of his agenda. It seems to bet the case that some of these political realities have not been taken into account in the estimation of the impact of each candidate's economic plan on the long-run economy.

Taxes, the S-word, and McCain 2k8 vs. McCain 2k

Paying taxes is something we do to keep our society more civilized, to keep our "social contract" functional as a nation -- to protect ourselves from external threats; enforce the rules amongst ourselves; and to promote what one might call our common purpose as a nation. Progressive income taxes have been deemed "fair" and constitutional in the US since 1910 on the basis of the rich having a greater ability to pay for those public goods and services that help the whole thing work. But no need to wax philosophical on this...

How about we just have a look at this, and compare McCain 2008 and McCain 2000, borrowing the work of (of all places) The Daily Show:

Politics and Regulation

If most people were asked what they think of government regulation (or taxes for that matter) they'd probably tell you they don't like them. It probably has something to do with the growing mistrust of government over the last 30 years or so, and it may actually be healthy to have some mistrust.

But I'm telling you: Everyone likes regulation, just so long as it involves government controls over something that someone else is doing that I do not and that bothers me. No one really wants to make the sacrifice of being forced to constrain their own habits, but when the neighbor dog comes across to our yard to do his business, then we petition for a pooper-scooper law. Why? Because we're selfish, but at the same time we're in this whole thing called civilization (or, America) together. When it comes to unemployment insurance it's easy to say "government get off my back" as long as you have a stable job, and as long as someone else is losing theirs. But if that person loses his job and decides to drink a case of natural light or smoke a joint, there will be a long line of people wanting the government on HIS back.

And then there's taxes. Justice Oliver Wendell Holmes said "I like paying taxes. With them I buy Civilization." How true. My mother tells me that even though my grandfather was a cranky old farmer about most things, he never voted against a school bond issue. That tells us something. Schools, roads, security (police), and so on are important, and not just for the people who can buy them for themselves. And that, I think, is why a lot of rich folks (like Warren Buffet) are willing to support a candidate who has said up front that they would bear a greater tax burden at the top. One reason might be credibility - that candidate isn't playing games by trying to say he can keep the tax code flatter and lower than it was 8 years ago and still be able to lift the middle class. Another is the fact that we are simply burdened by debt and need to raise revenues to keep it in check. Yet another is simply getting that tax dollar's worth of civilization that even an independent cranky old farmer sees the value in.

Interesting Election Data Monkey Information

Gallup's description of "likely voters." Basically, they've changed their approach to account for the surge in registrations (perhaps controlling for the thousands of "Mickey Mouses" regestered by ACORN, perhaps not).

I Told You So

I posted this June 20.

I dunno, maybe someone else has already gone out on this limb, but have a look at this. I'm to cowardly to make it a prediction, but I would not be shocked one bit if gasoline is back to $3.00 within the next year.

Mark it, dude.

June 20, 2008:
............Reg.....Mid...Prem.
Curr. Avg..$4.075 $4.326 $4.482
Yesterday..$4.073 $4.325 $4.481
Month Ago..$3.807 $4.043 $4.188
1 Year Ago.$2.996 $3.181 $3.297

Data for today, and in less than half the time I predicted:

............Reg.....Mid...Prem.
Curr. Avg..$2.923 $3.049 $4.482
Yesterday..$2.954 $3.081 $3.174
Month Ago..$3.777 $3.939 $4.059
1 Year Ago.$2.824 $2.999 $3.107

McCains mortgage buyout plan: Bad policy, bad politics.

Delinquency Rates for Loans, all banks (source: Federal Reserve):

.........Real...Res...Comm.......Credit............................
........Estate..R.E...R.E...Cons..Card..Oth..Leases..C&I...AG...Total
2008 Q2:..4.21..4.33..4.24..3.57..4.90..2.80..1.54..1.67..1.10.. 3.31

Homeownership rate: 68.8

Bank Sector employment and earnings:

...........Employment...hr/wk...$/hr....$/wk....$/year
July 2008:..8,206,000...35.8...20.28...726.02...36,300

Labor force: 134 million

The point is, I got the feeling from Mr. McCain's plan to pay banks face value for mortgage assets and negotiate the principle down with the borrowers was a bad idea. It smacked of a second-best solution (like trade policy intervention), or at least one that would mess up a lot for very little gain.

Turns out, that seems to be the case. Employment in all financial services is about 8% of the workforce. Delinquent loans are at most about 3 percent of all households (less if you consider the fact that not all households who are homeowners have a mortgage). Who wins this way of doing it? 11 million people who didn't make wise decisions. Who loses? the 90% of us who were prudent. Moral hazard anyone?

Joe the Plumber and Progressive Marginal Taxes

The biggest sense I got about Joe the Plumber last night is that he has a basic misunderstanding of the progressive marginal tax system. If Joe moves a buck over 250k, he would probably pay about a nickel more in taxes under Obama's plan compared with McCain's. That's a fact. I've explained it before. It's fine to have civil disagreement over the philosophy of the sorts of changes in the tax code that the candidates would bring to the table, but the Republicans have been distorting the facts about the tax code since Reagan, and the middle class needs to stop drinking their Kool-Aid.

Just Read It

It may be the case that there has been some misleading information on both sides about policy. If there has then Mr. McCain needs to be more specific about what exactly he believes is being misrepresented rather than just throwing vague allegations out there. More importantly, Mr. Obama has been specific in addressing exactly which allegations by Mr. McCain have been misleading, and why, perhaps simply because he understands his own proposal and the issues in a broader sense better. Have a look-see.

Austan Goolsbee mops the floor with Doug Holz-Eakin's Carcass

Listen here. I love the part with a bout 5-6 minutes left where DH-E says something about paying face value for assets, and Austan says NO! That would be obscene! It would give the biggest subsidy to those who were the most irresponsible!

Money and Capital

I really wish the talking-head TV "economists would stop saying banks don't have enough "capital." They have plenty of "capital," it's just that their "capital" assets are tied up in loans that are increasingly non-performing. They just don't have enough of that type of capital which is most liquid, i.e. cash flow or MONEY. No fancy math, just basic terminology that makes sense and is correct.

Ron Paul, Awesomer by the Day

Dug this one up and thought it was pretty awesome. Wish other Republicans were more like Ron Paul, you know, except for the crazy part of his brain that doesn't believe in multilateralism or the police.

Ron Paul - Electability - Censored by Fox 1-10-08

Dilbert, The Economist, and Getting Policy Right

Scott Adams posted the results of his survey of economists about the candidates, which I've blogged on before.

Well, if a cartoonist's poll doesn't sound rigorous enough, here's the results from The Economist.

Basically, I think that Obama wins a lot of points with economists NOT because economists favor his ideology, or because economists favor government intervention. We don't - at least not blindly.

Basically, as James Heckman (Nobel Laureate in Economics from the - generally conservative - University of Chicago) puts it, "I've never worked with a campaign that was more interested in what the research shows." In other words, he listens, and for egotistical economists, that goes quite a ways. There also seems to a lot more attention to the details of what economic theories of behavior and empirical research tell us.

That's not to say that Obama's policy proposals are all good fixes, but it does say that the implementation is more likely to make sense. Good ideas on a broad philosophical level can do a lot of harm if they are poorly designed and implemented, and the lack of attention to detail is apparent in McCains "low-tax" dogma.

Politics 101

There are two things you don't want to watch being made, law and sausage. The senate bailout included:

Revisions to the AMT
Corporate tax cuts
Clean energy tax cuts
Earmarks, like something about wooden arrows for use by children

Why exactly didn't either candidate make a stand against a bill loaded with pork? For one, it's because most of the provisions amount to logrolling and earmarks designed to buy votes from his own party in the house. For the other, he needs to keep his post-partisan get-things-done image of civility and compromise. I'll let readers sort out which candidate did which.

Why not to Sweat your 401k (<45 age group)

If you're under 45, then your 401k is probably mostly growth-oriented (somewhat aggressive). Many republicans are trying to sell their changes to the bailout by scaring "average folks" ….less over their 401k's. If you're in just about any age group, fiddling with your investments now is probably a knee-jerk reaction that won't do anyone much good. First of all, most of the current volatility is fueled by panic and a general sense of uncertainty, so after the 777 drop one day, it's not uncommon to see a 550 jump the next (like we did this week). But think about it: Do you really know more than the people who do this 24/7? If you did, you'd have already jumped out of your risky investments. Right now, you have to consider yesterday's loss as sunk, as hard as that is, not panic, and think about your expectations for the next month, year, decade, etc.

For the younger bunch, the value in your retirement is still climbing a lot on the back of your (and your employer's) contributions to it. That means that your contributions are getting stocks relatively cheaper, and that can work to your advantage, looking over the window over which you'll be continuing to participate in the labor force. It's the simplest rule in economics: BUY LOW SELL HIGH.

Good One-Liner, Mr. Reich

Robert Reich had a good one-liner on This Week, this week: What do you have when you take the greed out of Wall Street? Pavement. For some, that's high praise for Wall Street; for others, not so much.

Kudos to the Republicans

Many Republicans stuck to their conservative principles, and voted "nay" and kudos to them for that. I just wanted to put that out there before you read my rant (below).

Theocratic National Socialists

When exactly did the Republican Party trade in its stripes of classic fiscal conservatism for whatever it is some of them now espouse? Many voted "nay" for the right reasons; others, like Rep. Tom Price (R-GA) mainly held out for a variety of dogmatic reasons, namely the irresponsible lowering of capital gains taxes without showing any real fiscal restraint (beginning at about 5:50 into the clip):



I'm the first (well, maybe not the first, but definitely not the last) to admit that lower capital gains taxes are a great help to investment and GDP growth in the long run. There are several problems with invoking these cuts in the current crisis. First, we are not in a debate over long run economic performance, we are in a crisis of financial liquidity to the banking sector. Second, a percent or two cut in capital gains tax rates is unlikely to have much impact on the aggregate because private investors are scared shitless (technical term). Third, as it pertains to the current problem, capital gains tax cuts are unlikely to have a substantial impact for the sector in crisis. Even if the across-the-board cuts are generally a good thing, they would do quite a bit to cut government revenue while doing little to supply private funds to the financial sector because private citizens will avoid those corporations and institutions that are vested in securitized mortgages. Finally, there are more efficient and effective ways of reforming capital gains taxes that would have a greater impact on the amount of money invested than cutting the rates would. Namely, the value basis for calculating the gains should be deflated against price changes, which would increase the level of certainty about the net after-tax returns to assets for any tax rate.

This is an issue for another day, however. The priorities for the here and now are: 1. supplying funds, and; 2. implementing warrants to hedge the government's outlays against information asymmetries whereby firms that dump the most toxic assets for prime prices will have to pay a return for the changes to make up the difference between what they got from DOT and what the toxic assets were worth.

What's more disturbing, is the fact that Republicans, in large part, are becoming less like the true fiscal conservatives they've always purported themselves to be. What they do these days, more and more, is buy your vote with: 1. tax cuts; 2. government intervention in their own pet industries, directly through spending in non-entitlement areas, and indirectly through subsidies, tax loopholes, and no-bid government contracts, and; 3. distracting middle/working class issues by raising nationalism and xenophobia while attempting to monopolize religion and morality.

Stop drinking their Kool-Aid.

Industries Where the Customer May not Always be Right

Found this on Freakonomics. Consumers who bone up on their own health may actually interfere with their own health care. Interesting. Any other applications where the customer may not be "right" and "information may actually lead to worse service? Education? Investing?

Asymmetric Information & Mechanism Design

Some thoughts on state-contingent warrants against the changes in values of bailout assets bought by the Treasury, from E40. It plays some on my previous post on the whole issue of behavioral assumptions, and the argument for this type of mechanism design is strengthened by the tendency opportunistic behavior by bailees.

Financial Crisis & Williamson's Behavioral Taxonomy

The whole crisis in the financial sector made me reflect today on Oliver Williamson's thoughts on transactions costs economics and behavioral assumptions built into various models economists employ. The basic taxononmy can be represented by looking at agents' behavior in two dimensions, rationality (maximizing, bounded rationality, and organic rationality or rationality as an evolutionary process) and self interest motivation (opportunistic, simple self-interest, or obedient).

Mostly, the relationship in the crisis comes down to a philosophical question of rationality - how well did folks figure out what kind of trap they were getting themselves into - and greed - how willing were agents to take advantage of others to get ahead.

Realistically, if agents are acting opportunistically, the type of economic organization that leads to the best outcomes is mechanism design (regulation). Unfortunately, under those circumstances, the mechanism has to be well designed. Copouts and loopholes will basically lead to another way for agents (homeowners and banks and realtors) to game the system. Furthermore, even if we're all trying to be rational the lack of information should give us more pause. Why hasn't anyone with some authority noticed this and put the brakes on this crazy rush to do "something?"

More thoughts on Marginal Tax Rates

Alan Greenspan recently alluded to the fact that he doesn't support keeping tax rates low if it means increased debt. I couldn't agree more: It's called classic fiscal conservatism, not this low-tax rhetoric of today's Grand Old (really old) Party.

There are plenty of sophisticated studies that show that there is virtually no impact on investment from higher marginal tax rates on individual income. Other studies (equally (sophisticated) say that high levels of debt are damaging to economic performance, investment, and growth. But, as my graduate econometrics professor once told me, "if you torture the data enough, it will confess." In other words, maybe these studies are doing something high-falootin that is getting the data to tell us something that really isn't there. So, take these scatterplots (pictures) on for size (longitudinal data from World Development Indicators, 1998-2006):

Investment v. Government Debt:

Negative relationship. Classic fiscal-conservative result.

Investment v. Highest marginal corporate tax rate:

Negative relationship, not so bad, but now...

Investment v. Highest individual marginal tax rate:


Nothing!!! Even if there were, it's a positive trendline! Maybe some fancy-pants regressions will help:

	Coefficients	Standard Error	t Stat
Intercept	27.33017	1.984217	13.77378
Government Debt	-0.0221	0.010433	-2.11784
Highest Marginal Individual Tax	-0.0238	0.031682	-0.75128
Highest Marginal Corporate Tax	-0.0927	0.059525	-1.55728

Whew! At least that straightens out the signs to be as expected: Lower taxes (especially on individual incomes) are only useful for stimulating investment all else equal, i.e. if they don't lead to higher debt levels (exactly what Greenspan said!). Even then the impact of the debt is significant; the effect of taxation is not significant (in a statistical sense - significance roughly requires column 3 (t-stats) greater than 2 or less than -2).

Here's the punchline: anyone who tries to sell lower individual income taxes as a boon to investment is full of hooey (technical term).

What?

The WSJ today published an opinion piece, "The Deeper the Downturn, the Quicker the Recovery." I can scarcely think of a sillier premise to start from. Has he studied history, and the economic volitility of the US and world economies prior to WWII?

If you get past the silliness of his title and basic premise, the author (Christopher Wood) makes some interesting points about moral hazard and "debt deflation," but it would be unwise to conclude from those ideas that a steeper fall will mean a quicker recovery and a better long-term outlook. If the fall is deep then most of that "quicker recovery" will be wasted just trying to catch back up to where we were before.

Tax Cuts vs. Debt Reduction

More to come on this topic, but recently Greenspan was asked if he favord across-the-board taxcuts that would result in a net loss in revenue, a la the cuts Sen. McCain proposes. His response: “I’m not in favor of financing tax cuts with borrowed money,” (which is exactly what "W" has done, and what Mac proposes). Bottom line: Debt Reduction is more important for investment and growth than willy-nilly tax cuts. See also: classic fiscal conservatism.

Global Institutions

The bloggers at The Economist apparently don't read their own posts. This institutional report card for global institutions take a pithy route to imply that these institutions have done poorly.

However, these posts and articles (1, 2, 3), most published last spring, suggest that those same institutions have done "OK." Has the world spun off it's wheels since they took these positions? Methinks not.

Voting and Economic Interests

There's some notion running around that folks aren't voting their economic interests or that they are being somehow irrational when they vote Republican. I don't know if I agree with this. I mean, it may be correct, on average, but not necessarily evidence that they are being in any way irrational. Maybe middle-class families are simply making a "high" guess at their chances of moving upward in the income distribution (becoming rich). If we think of the market economy as partly based purely on hard work, partly on ability, and partly on luck, then at least part of the outcome is based on a sort of lottery, and there's plenty of anecdotal evidence that suggests that many people overestimate their chances in a lottery. Perhaps middle class voters who support McCain's tax structure are (often wrongly) estimating that they will be one of the few who move upward into the $250,000+ income range, the top 5%.

Thoughts on Evacuations

Do people undervalue their own lives? I found this doing a google search for "evacuation fines." An interesting point rises. If people are valuing their worldly possessions over their lives (in hurricanes, etc.) and do not evacuate, then what is our responsibility to help them? Furthermore, what is their responsibility if we do? Here's thought: maybe we should announce "mandatory evacuations" with the warning that anyone for whom the authorities have to provide emergency rescue gets fined some large amount, say $5,000. This might help ensure higher evacuation rates, and also curb some of the costs of risky rescue operations.

Bayes' Rule and Tax Hikes for the Rich

This is interesting. Keep in mind it's only for the 35% bracket. I guess that's why nobody's made a "read my lipstick" comment.

CBS News - Not biased, just dumb

I can't believe this from CBS NEWS - http://www.cbsnews.com/video/watch/?id=4433164n

The family just over 200k in income owns a business, and currently fall in the 28% bracket. They estimate income for next year to be a bout 213k and they "worry" about their income going into what is currently the 33% bracket, the second-highest bracket, and the lowest bracket for which Obama's plan would raise taxes. The increase for this bracket begins to offset the increases from lower brackets at about 250,000 in income, but here's the point.

Their worry was that, with next year's cutoff for the highest bracket proposed at 200,300, that they would pay "another 8% of their income" in taxes. Not true. Most of their income is still going to be taxed at the lower-bracketed rates and only their income ABOVE 200,300 will be taxed at the higher rate. In fact, with Obama's overall restructuring plan, the TAX CUT that family would get on their incomes UP TO 200,300 would more than offset the portion of their income that falls in the higher bracket

YOU ONLY PAY THE GIVEN RATE FOR THE PORTION OF YOUR INCOME THAT FALLS IN A GIVEN RANGE. Here are the tax brackets, and we can calculate the net impact of raising the next-to-highest bracket from 33 to 36, assuming no other changes (and without applying the built in cutoff adjustments for 2009):

Marginal Tax Rate	Single	Married Filing Jointly or Qualified Widow(er)	Married Filing Separately	Head of Household
10%	$0–8,025	$0–16,050	$0–8,025	$0–11,450
15%	$8,026–32,550	$16,051–65,100	$8,026–32,550	$11,451–43,650
25%	$32,551–78,850	$65,101–131,450	$32,551–65,725	$43,651–112,650
28%	$78,851–164,550	$131,451–200,300	$65,726–100,150	$112,651–182,400
33%	$164,551–357,700	$200,301–357,700	$100,151–178,850	$182,401–357,700
35%	$357,701+	$357,701+	$178,851+	$357,701+

Under the current plan, this individual pays: $0.1*(15650) + $0.15*(63700-15650) + $0.25*(128500-63700) + $0.28*(195,850-128,500) + $0.33*(213,000-195,850) = $49,019, an average rate of about 23%. Ignoring the scheduled shift in the brackets (to account for inflation and stave off "bracket creep"), then for that same family the tax increase for the last bracket only applies to PART of their income, so they pay 49,400, 381 bucks more, but not 8% of their income more, and that ASSUMES they wouldn't benefit from the tax CUTS to the other portions of their income in the plan, which they would at a net gain to them.

Will the Fiscal Conservatives Please Step Forward?

We're at war. We're not paying for it. Will anyone have the cohones to say we might need to raise someone's taxes to pay for it? She won't. He won't.

McCain, Substance

Just wanted to go out there and say that through all the other stuff that some folks might criticize about Mac's speech, the one (maybe only) substantive idea in it that resonated with economic theory was his portion about trade, openness, and adjustment assistance. His proposal seemed to mirror what J. David Richardson of Syracuse has proposed - some wage assistance while you take a lower wage job in transition to sectors that are growing.

The rest of the speech seemed like all the others, from both conventions. That is to say, it was full of political fluff and rancor.

Bid Baby Bid

There's a lot of baloney out there about drilling. One group of dolts wants you to think it should be done at all costs because it will "crah-ate jawbs fir hurd-wurkin Amuhricans" and "rah-doos ahr dahpendens on furrin awl." Silliness. The other thinks it's being clever by pointing out that "drilling in these areas will harm the environment" and "have virtually no impact on prices." Highbrow silliness.

As Free Exchange and Tyler Cowen point out, the reason that drilling might be useful is that it generates a whole lotta money, and these fiduciary benefits may simply dwarf the costs - cost benefit, plain and simple. But really, they're missing the point too!

Drill baby drill is a silly oversimplification of what should be done. The government OWNS that land, and shouldn't simply write over the mineral rights to it to the oil companies; these rights should be sold, preferably by auction, and preferable for at least a couple hundred billion dollars (based on reserve estimates). That way, the excess benefits that can be anticipated can be captured, and redistributed towards environmental restoration, transfers, and debt reduction.

Menu Costs and Information

Are the costs of changing menus really the main barrier that makes restaurants not want to print caloric and nutritional information?

Selection Bias and the Truthfulness of Palin

Last night, Palin said Obama would raise "your" taxes. I take her at her word, assuming her words were intended only for those individuals in the halls of the convention. Chances are those convention attenders are mostly among the top 5% of Americans (those earning above $250,000) whose taxes would go up under the Obama plan. But out there in TV land, peoples' taxes would be HIGHER under MCCAINS plan. Check it out at the Tax Policy Center or play around at Obamataxcut.com.

Desks, like Lunch, is not Free

This is an interesting counterpoint to the Huckabee tear-jerking, flag-waving anecdote at the end of his speech. Publicly provided things (including the wars we fight) cost money. In the end you can't spend more and sustain tax cuts. The taxes needed to finance W's reckless spending will come, now or later. Pass it along and Bush might get the memo.

Random but Interesting

Check this out.

Markets and Sea Turtles

Interesting story on how the market and incentives can help people in poor countries be more environmentally/ecologically responsible. (Source: Deutsche Welle TV.)

Let the experts talk a little...

HARDtalk Professor Goolsbee 1

HARDtalk Professor Goolsbee 2

Name that Candidate

Who is the New York Times describing here?

From the beginning, X has sought out academic economists, rather than lawyers or former White House aides. His first economic adviser, Y, is a young University of Chicago professor who shares X’s market-oriented [Party] views. This summer, X added Z, who has a more traditional background ... but he, too, has a Ph.D. in economics, from Harvard.

As anyone who has spent time with X knows, he likes experts, and his choice of advisers stems in part from his interest in empirical research. (James Heckman, a Nobel laureate who critiqued the campaign’s education plan at Y’s request, said, “I’ve never worked with a campaign that was more interested in what the research shows.”) By surrounding himself with economists, however, X was also making a decision with ideological consequences. Far more than many other policy advisers, economists believe in the power of markets. What tends to distinguish [Party] economists is that they set out to uncover imperfections of the market and then come up with incremental, market-based solutions to these imperfections. This helps xplain the X campaign’s interest in behavioral economics, a relatively new field that has pointed out many ways in which people make irrational, short-term decisions. To deal with one example of such myopia, X would require companies to automatically set aside a portion of their workers’ salary in a 401(k) plan. Any worker could override the decision — and save nothing at all or save even more — but the default would be to save.

Friedman, Taxes and Pidgeonholing Economists

Scott Adams, Dilbert Cartoonist is funding a survey of 500 economists about which candidate they support. A comment to the unveiling of this read as follows:

Milton Friedman is the most respected economist of the 20th century.
Friedman says in all cases raising taxes and increasing government
slows down the economy. This is principle is pretty universally known
by now.
Given that Obama wants to do exactly that, if we find these 500
economists think Obama has the better way, we'll know that the fix is
in.
Why do I have the feeling it will turn out that way?

There are about 3 things wrong with this statement: (1) Milton Friedman (was) a very highly respected economist of the 20th century, but not necessarily the "most" - at the very least you would have to qualify it to only look at MACROeconomists; (2) raising taxes slows the economy, ceteris paribus, you know, assuming the money is thrown in a bottomless pit (the devil is in the details of how those taxes are structured, and how their revenues would be used), and; (3) that something that is universally known can be universally applied (the "law" of gravity works great at sea level and in a vacuum).

I'll start with point (1). Friedman was a great macroeconomist. Think of it like the difference between the 30,000 feet up that Rummy looked on Iraq from versus the ground-level view on which the troops are getting shot at. There are tons of other fields of study in economics: International trade, developing economies, labor markets, econometrics, microeconomic theory, environmental economics, economic history, game theory, public finance, political economy, etc., etc. How you feel about the candidates may depend on the issue at hand. Take for instance the environment. I've railed on the misuse of the term "incentive" as a euphemism for "subsidy," because incentives can be negative, too. In a MICROeconomic context taxes are negative incentives, and often sticks (taxes) work better than carrots (subsidies) to do the job. In the case of the environment, if your goal is reducing emissions, taxes work "better" in the sense that (a) they encourage pollution abatement to save on the cost of the tax, and; (b) they discourage output in pollution intensive industries.

Next consider the proposition about higher taxes. For starters, this comment is intended to mean that lower taxes will reduce government spending and involvement in our lives. The last 8 years have done exactly the opposite with lower taxes - Bush spends more, saddles us with more public debt, and gets in our business more than any administration in a long, long time. Also, the premise of Friedman's neoclassical model begins from a balanced budget and no debt (heroic?). Finally, just because taxes slow production, it is not universally true that either (a) the converse (lowering taxes helps growth) is true, or; (b) higher taxes are not necessary for accomplishing certain objectives. Let's look at the current situation. We have a large and growing debt and are waging a war without funding it. When the government spends (say, on a war) it is committing itself to higher taxes, now or later. Since it is the rich who also own most of the Treasury's debt, by supporting irresponsible taxcuts today's administration is screwing tomorrow's middle class for the sake of todays upper class. This is where I wish conservatives would go back to true fiscal conservatism and stop railing a dogma of "low taxes - good." Higher taxes, if used to reduce the current deficits and debt, might actually promote growth in the long run.

I think a fair argument for (3) against Joe Commenter's claim follows from the previous arguments. Still, the fact remains that the structure of the taxes is important. The taxes that are most "universally-accepted" to be harmful are those levied against capital. Therefore, it is probably true that capital gains and dividends could be taxed less with quite a bit of benefits. In particular, interest income and capital gains should, at the very least, be indexed against inflation (deflated) in terms of the basis against which the value of the asset or principal is compared. On the other hand, it is probably true that raising the tax on the highest marginal income bracket will not be very harmful. Taxes on wages and salaries have been found in both the theoretical (Ramsey, other optimal tax macro models here) models and empirical literature to be pretty benign. Taxing the million and first dollar earned from salary another percent does not drastically impact effort; taxing the 10,001st might.

I'm sorry that the world of economics is such a complicated place. Ultimately my rule, is that most politicians do a pretty good job of ignoring economic advice from pros, and neither party has a monopoly on ignorance of economic theory. So feel free to go out and vote on the basis of some banal social issue like gay marriage, guns, or which party has had more sex scandals in the last 90 days.

Terrorism and Oil

This is an interesting post on the World Bank PSD blog, with nice links to support.

Yea, Moral Hazard!

Californians Gather To Celebrate Annual Wildfire Tradition

Economics Joke (You've been Warned)

If you get this joke, seek help.

A bird in the hand is worth:

[(1+W₀)^(1+s)/p – (1 – p)W_o^(1+s)/p]^1/(1+s) - W_o

in the bush.

Optional ARM

I've moaned about the "negative amortization option" on three part optional ARM mortgages here already. Basically an optional ARM an adjustable rate mortgage that lets you pay one of three payments (not by agreeing to it in advance but on a month to month basis):
1. normal payment that (if made each and every month) amortizes the loan after X months.
2. interest only payment that (if made each month) never amortizes the loan (the bank perpetually owns your house).
3. "negative amortization" payment that doesn't even pay off the interest, and adds the difference onto the principle (I'd rather call this the "default incentive" option - do this as long as the bank will let you, default, foreclose, and rent for the rest of your life).
Now the Economist is onto the stupidity (just so you know that I'm not making this stuff up).

Two Bad Ideas

In the August 11 WSJ, Newt Gingrich & Jerry Brown proposed their ideas for how they could or would spend $10b. in public funds. One thing both authors ignore is how pitifully small the sum of $10b. is for tackling any truly problem confronting the public good.

In the Gingrich corner, there were some very good and well-focused goals that he hoped to accomplish with the money, but they were ultimately based on a bad idea: an "innovation lottery." He also ignores the fact that $10b. couldn't possibly resolve all 7 of his issues, and if it could, at least 5 of them would already be solved. For instance, "6) A method for reusing nuclear waste to make Yucca Mountain, Nevada unnecessary as a repository," would probably benefit the nuclear power industry by at least the amounts that Mr. Gingrich would award the winner of said lottery. Also, while lotteries have been shown to actually be a pretty good way for the government to meet its goals financially, they are horribly distortive of behavior. People will over-invest in trying to accomplish goals, and may reap zero payoff for their investments of personal resources. Basically, a lot of time effort and capital will go wasted.

From Brown's corner we actually see a little bit more reality by focusing on one goal, but that goal is simply too big for $10b. "Curbing our energy appetite with efficiency programs incentives," cannot be done for such a paltry amount. In fact, "incentives" may not even be the best way to do it. While incentives for producing more energy sources (even cleaner ones) may be usefull for stimulating research, they don't do the job of "curbing our energy appetite" because subsidies mean lower prices, and lower prices mean more output and use of energy. On the other hand, applying the carbon tax prescribed by the UN on coal power would stimulate wind and solar energy output AND curb consumption. Coal is now about $0.05 per kilowatt; wind is about $0.08. The UN's proposed carbon tax of about $30 a tonne would bring coals cost up to par, and energy producers, comparing the 2 sources will naturally invest in the latter. Also, it wouldn't cost the man a dime! In fact the government would generate revenues from the deal, which it could distribute as a tax rebate or use to bomb (bomb bomb, bomb bomb) Iran.

If You Can't Bring Compeitive Markets to Health Care ...

bring your health care to the competition.

Competition lowers prices and improves welfare for the average consumer. Trade, offshoring, outsourcing, immigration, privatization, etc. all tend to promote competition. But one problem with health care is that high fixed costs and localization of many markets allow the market to be dominated by a small number of providers who don't have to do much to compete, and often cross-subsidize losses on emergency care with high prices on "elective care." The Economist briefing asks, "What if elective care procedures can be performed equally well in developing countries at a cost low enough to offset the travel cost?"

Until recently most medical outsourcing was limited to hospitals reducing costs by having tests performed and analyzed offshore. But now, folks are taking it to the competition themselves. Other issues here are complex, but it provides an interesting economic analysis in three areas: competition/basic micro; trade and offshoring, and; insurance.

The first two are related and more clear cut. Insurance is an interesting aspect because one might ask what happens once insurance companies start to save a buck by allowing patients to go to India for their knee surgery? Will they begin to require patients to do so if they want that to be covered at their current rates? Will the compensate for it by lowering prices? Will insurers, foreign providers, and patients be equally informed about the benefits and costs? How will US providers respond - will they compete by lowering prices or will they try to differentiate their product by bashing foreign facilities and/or playing to nationalism? All intersting questions. I do not have the answers to them.

Ron Paul, 2002

US Politician predicted Georgia Conflict Back in 2002

Georgia, Russia, and Democracy

Democracy in Russia is very publicly flawed, at best, most Americans are aware of the wink-wink election they had to elect Medvedev. This is not a secret, but where does a former expert on Russian and Soviet Politics (Condolezza Rice) get off extolling the virtues of Democracy in Georgia? It's misleading at best to make the claim that Georgia is a well-functioning democracy. Check out the Economist "Intelligence Unit's" 2007 Democracy Index:

Rank Overall Elections Function Particip. Culture Civ. Liberty

Full democracies
Sweden 1 9.88 10.00 10.00 10.00 9.38 10.00
Flawed democracies
S. Afr. 29 7.91 8.75 7.86 7.22 6.88 8.82
Hybrid regimes
Albania 83 5.91 7.33 5.07 4.44 5.63 7.06
Kenya 101 5.08 4.33 4.29 5.56 6.25 5.00
Russia 102 5.02 7.00 3.21 5.56 3.75 5.59
Malawi 103 4.97 6.00 5.00 3.89 4.38 5.59
Georgia 104 4.90 7.92 1.79 3.33 5.00 6.47
Cambodia 105 4.77 5.58 6.07 2.78 5.00 4.41

So, uh, yeah. Georgia is a "hybrid regime" meaning that it is NOT a democracy, it is not even a FLAWED democracy, it is a mix of some democratic elements and some distinctly authoritarian elements, kind of like Cambodia, or Kenya. But funnier still, even with the publicized political shenanigans taking place in Russia, it's still more democratic than Georgia. And oh yeah, does everyone remember from all the biased reporting that Georgia attacked first? Thought not.

Pit Paradox

Damn Interesting