Deflation heats up in the UK

Troubling news wafts across the pond as the signs indicate that deflation is the biggest problem facing the British economy now. According to the Telegraph, a British newspaper, deflation is at the lowest level since 1948, just three years after World War Two ended. Leading the decline in prices is the collapse in the housing market and falling energy and food prices. The article goes on to point out that:

Deflation poses a further threat to the economy if people expect prices to fall further and put purchasing plans on hold which can, if the trend persists, lead to lower output and even more job losses.

So far, the deflationary wolf has not succeeded in entering our door. However, as the situation in the UK develops, there may be a growing chance that it will become a problem here too.

Did Obama’s team incorrectly diagnose the economic crisis?

In the April/May issue of the liberal-leaning Washington Monthly, James K. Galbraith writes that the team behind Obama’s economic recovery plans all share the same background and creed (you can find the article online here.). The problem with that, according to Galbraith, is that this leads to severe limitations in their vision of the possibilities of the economy.

Geithner, Summers, Romer, Orszag, et al. all share the underlying belief that the economy will right itself. The chief difference between Obama’s economic team and conservatives, however, is that Obama’s advisers believe that the economy needs a little help from the government to get back whereas economic conservatives assert that such help would actually do more harm than good. Galbraith argues that this could lead to a weak approach to fixing the current mess:

“If recovery is not built into the genes of the system, then the forecast will be too optimistic, and the stimulus based on it will be too small.”

Interesting point: The article claims that the hopes for a quick recovery are based on the assumption that this recession will be no worse than the 1981-82 downturn, the worst in recent history. However, if this is not the case, then the models that have been used to predict a rapid turnaround would be wrong.

If we discard as “normal,” postwar economic experience, then there might not be a near-term recovery at all. A strong argument could be made that the situation we now find ourselves in is vastly different from the postwar economic regime that we are familiar with.

Galbraith argues that Geithner, Summers, et al. are primarily concerned with restoring the pre-crash economic order, which was built on the predominance of private banks. Galbraith quotes the Treasury Secretary, Geithner as telling CNBC:

“We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system.”

In the past, economic downturns were shallow enough to permit a bank-led recovery. However, this time things are radically different, according to Galbraith. Millions of families have lost a huge proportion of their wealth. As a dire consequence, for many Americans, Social Security and Medicare represent their chief source of wealth.On top of that, the nation’s largest banks are bankrupt or nearly so. Thus, any attempt to restore the pre-crisis regime is automatically doomed to failure.

The article goes on to say much more. Galbraith is a respected economist, who holds a prestigious chair in Government/Business Relations at LBJ School of Public Affairs, University of Texas at Austin, so he is someone whose words count for something in Washington, DC.

I bring it to the class’ attention because while much of the mainstream media focuses on the conservative attacks on the Obama economic plan, there is also a liberal critique that has not received quite as much attention. Galbraith is a good example of the “loyal opposition” within the left.

RC

The Happiness Index defined– move from Callifornia to Nebraska

If it’s financial happiness you’re seeking for your next move, then the Midwest may be your best bet because according to a new study Nebraska tops the list of happiest states, fiscally.

Which state has the sunniest disposition in this gloomy economy?

The home of the Cornhuskers, Kool-Aid and the world’s largest porch swing ranked No. 1 on MainStreet.com’s Happiness Index, which used unemployment figures, foreclosures and nonmortgage debt to determine a state’s overall financial well being.

“We don’t go clear out on the edge with projects. We kind of go pay as you go. That’s more what we like to do in Nebraska. We don’t get the huge good time, but we don’t get the huge bad time either,” said Hastings Mayor Vern Powers. “We kind of stay in a little flatter area. In the long term, we think that’s what’s best.”

Financial experts said other states can learn from Nebraska’s conservative attitude toward money, as well as its efforts to grow a diversity of industries.

Its ethanol plants, in particular, have flourished and the ongoing effort to grow industry has enabled people who lose jobs to find new ones relatively easily.

In fact Nebraska’s unemployment rate in February was a 4.2 percent. It also had one foreclosure per 25,187 households.

Happy, Happy, Joy, Joy for These States
The first-of-its-kind index also included Iowa, Kansas, Hawaii and Louisiana, which followed Nebraska on the list respectively.

And according to MainStreet.com, it’s no coincidence that the nation’s three happiest states all are in the Midwest.

“I think that on the coasts — In New York and California — we have a lot of people living beyond their means. But in the Midwest that’s often not the case,” said MainStreet.com general manager Harleen Kahlon. “Maybe the take-away is that living large is not the answer.”

Take the financially savvy billionaire Warren Buffet. The frugal Nebraskan still lives in the same modest home he bought in 1958 for $31,000.

The Least Happy States: Unemployment and Foreclosures
High unemployment and foreclosure rates elevated Oregon to the moniker of the least happy state financially. The Pacific Northwest state was preceded by Florida, California, Nevada and Rhode Island with the Sunshine State fairing the best among the quintet.

The nation’s unemployment rate rose to 8.5 percent, the highest in nearly 26 years, but these states’ statistics were even dimmer.

Both Rhode Island and California’s unemployment rate was 10.5 percent in February, while Nevada had 10.1 percent. Oregon had 10.8 percent and Florida had 9.4 percent.

But MainStreet.com said it expects movement in the happiness index. Oregon is expected to climb thanks in part to its investment in the green sector, which MainStreet.com predicts will experience a great deal of growth in months and years to come.

Globalization Powerpoint

Please find the powerpoint from last Wednesday’s Globalization lecture here : globalization1

Globalization Section this Week

This week we will be wrapping up the Globalization section with a discussion of the regulation of cross border policy issues. We will address the challenges of achieving policy outcomes across sovereign states in the absence of a global government, and amidst the reality of international economic competition and the quest for economic competitiveness.

 

Depending on how much time we have, we will discuss challenges in labor and climate change as examples.

 

The readings for this week are:

 

 

(E) The Golden Straight Jacket

(E) Globalization: Crisis of Regulation or Crisis of Capital?

(E) Susan M Collins, “Economic Integration and the American Worker”

Chapters 3 & 6 from “Making Globalization Work” by Joseph Stiglitz (focus on the trade, labor and climate discussions)

Final Assignment Questions

The following are the assignment questions for the last two assignments with their respective due dates:

Compare and contrast Sen’s view of economic rationality to a public choice theorist’s (i.e., Buchanan or Niskanen) view of the same. How might any differences translate into different viewpoints regarding rational decision-making in non-economic situations (for example, voting, government agencies, etc.)? (Due April 29,2009)

In class, we discussed the views on regulation of Stigler, Downs, Arrow and others. How would their perspectives regard/assess the regulation of the financial market before it suffered a meltdown last fall? What insights might these theorists offer regarding the best way to fix the financial sector? (Due on the last day of class)

Notes from April 8th’s Lecture

Please click on the following link to access the powerpoint  slides for last week’s lecture…   public_choice_2009

Josh

Warren on the Daily Show

Elizabeth Warren, chair of the Congressional Oversight panel for TARP, was on the Daily Show explaining the oversight of TARP.

The Daily Show With Jon Stewart	M – Th 11p / 10c
Elizabeth Warren Pt. 1
thedailyshow.com
Daily Show Full Episodes Economic Crisis Political Humor

The Daily Show With Jon Stewart	M – Th 11p / 10c
Elizabeth Warren Pt. 2
thedailyshow.com
Daily Show Full Episodes Economic Crisis Political Humor

This Week’s Powerpoint

Please find this week’s power point slides  here

Regulating the environment

In class this week we’ll start regulatory policy. Of course, whenever someone mentions regulatory policy most people assume they’re talking about environmental protection. While the environment is a big piece of the regulatory puzzle in the US, it is not the only one.

Nonetheless, with Earth Day coming up in a few days, it is worthwhile to review some noteworthy trends in environmental economics. One development that has gained some attention, especially since the Obama administration has embraced it in principle, is carbon emissions trading, also known as cap and trade. In his blog, The Inspired Economist, Chris Milton writes about how the emerging carbon market can lead to a shift in current land management policies.

In another article, John Meadowcroft writing on the IEA blog, discusses the difference between stated and revealed preferences when it comes to things like protecting the environment. In the article, he uses the example of the English actress, Emma Thompson, who participated in a demonstration against expanding Heathrow airport in London (stated preference) and a few days later flew to Los Angeles to attend the Golden Globes Award ceremony (revealed preference). While most people’s stated preferences include saving the environment and reducing climate change; unfortunately, their consumption patterns, i.e., revealed preferences, tell quite a different story. In order to produce meaningful environmental change, governments must figure out a way to get revealed preferences to better coincide with stated preferences.

Finally, (at least for now) I want to draw your attention to a new world model–actually an update of the World3 model (“Limits to Growth”)--including climate change and its interaction with energy and natural resources. The inescapable conclusion reached by the authors is that we are on an unsustainable path. The model’s chief virtue, however, derives principally from the fact that it is a tool that can be used to experiment with ideas on how to solve these environmental problems. So as we celebrate another Earth Day, we can contemplate the increased role that private individuals, firms and governments must play, working together, to ensure that our children and grandchildren will be able to enjoy future Earth Days.

European Banks & Bailouts

As unpopular as bailing banks out is in the US, at least we can bail them out. Europe may be pushing for tighter regulation of the financial markets, but they have bank issues that are much more problematic than ours if you make the assumption that regulation might prevent or mitigate most crises, but it is never 100% insurance against any crisis.

We have banks that have a balance sheet of 10-15% of GDP. The biggest banks total somewhere near 50% of GDP if I have my figure straight. There are individual European banks with balance sheets 200-600% GDP of their respective country. Iceland’s banks had balance sheets totaling over 1000% of GDP – it is no wonder the country went bankrupt.

The Financial Times has very interesting graphic.

-kc

Readings for This Week

The Readings for this week:

Buchanan: “Analysis of Closed Behavioral Systems”
Buchanan and Wagner
Niskanen

Next week
Downs
Stigler
Arrow

Great Depression or Great Recession?

There is a lot of debate occurring in the blogosphere on whether we’re in a depression or recession. Some commentators, as mentioned in earlier posts here, have taken to calling our economic crisis, “The Great Recession.” Others are calling it another Depression. The excellent economics site, Vox, falls squarely in the latter camp with its most recent post. The authors support their claim by citing a number of significant trends in the data. First and foremost, they emphasize that the current situation requires a close consideration of global rather than just domestic US data. When one looks at the world economic condition, the sight is not pretty. In nearly every important indicator–industrial production, stock markets and trade–the global trends are tracking the Great Depression. However, I think this gloomy prognosis has to be qualified by two observations, one the authors make themselves and one of my own. First, the data points for the current crisis are fewer so far than the trend lines shown in the post’s graphs. Thus, it is still too early to tell whether this downturn will be as severe as the Great Depression or whether it will last as long. Second, and related to the first point, the governments of the world seem to be responding in a more proactive and effective manner to this crisis. This is the gist of their conclusion, which suggests that through a sustained, global policy response, the world’s intertwined economies can hope to weather this difficult economic storm.

Unemployment Numbers

I’ve been told as recently as this weekend that, despite what I’ve heard, this is still not as bad as the 1981 recession (I am not old enough to remember it), but the March unemployment numbers beg to differ…

Change in Payroll for Recent Recessions

Yes, there were other negatives in the early ’80s, inflation, super-high interest rates, etc. but it wasn’t a financial crisis and it wasn’t global. And that is what Eichengreen (UC-Berkley) & O’Rourke (Trinity College) assert when they call this a depression in their article on VOX… when you look at the global picture, this is as bad as 1929. They hope the difference in the policy response will mean we don’t re-live the 1930s in their entirety.

One final thought:

Compulsive optimism, otherwise known as grasping at straws, is habitual for some economists, especially if they are selling public policy or common stock. But it is also dangerous, destroying credibility and to discouraging action. Repress it. – James K. Galbraith

And I though that economics was called the dismal science…

Chart from Justin Fox at Time

-kc

Orszag & Behavior Economics

There is a brief interview with Peter Orszag, director of OMB, on NPR. Just a brief take on his view of behavioral economics in the Obama Administration.

He was also on the Daily Show last week where he discussed deficit and debt:

The Daily Show With Jon Stewart	M – Th 11p / 10c
Peter Orszag Pt. 1
comedycentral.com
Daily Show Full Episodes Economic Crisis Political Humor

The Daily Show With Jon Stewart	M – Th 11p / 10c
Peter Orszag Pt. 1
comedycentral.com
Daily Show Full Episodes Economic Crisis Political Humor

-kc

Classes For the Rest of the Semester

For the next two weeks we will be tackling  Public Choice. Later for a about a class to class and a half we will wrap-up the Globalization section.Then for the last week (and probably a half of the prior week)we will have student presentations on your papers.

JCN

Tonight’s PowerPoints

The PowerPoint slides for tonight’s class are up.

We will be finishing Sen’’s book tonight. Our discussion will focus on the last three chapters.

Globalization and the Great Recession

Back in the golden era before 2001, the International Monetary Fund (IMF) took a hands-off approach to capital controls imposed by national governments. As Sarah Anderson points out:

As part of a broader market fundamentalist agenda, the IMF and the U.S. government once galloped side by side in a crusade to eliminate these controls, which are various measures to reduce volatility by taxing or prohibiting certain cross-border investments. The IMF banned them through loan agreements, while the U.S. government severely restricted their use through bilateral investment treaties and the investment chapters in trade agreements.

The thought was if free trade worked, why not deregulate the flow of capital as well?

The problem was the countries that fare the best in times of financial meltdowns like the one we’re experiencing just so happen to be the countries with more restrictions on capital. The point was empirically proven in the Asian Crisis in the late 1990s. The IMF seemed to learn this lesson and became less dogmatic on the point of regulating capital. The same, however, could not be said for the previous administration, which followed a market fundamentalist line on this issue.

Now, the current administration has an opportunity to reverse the failed policy of the past and follow the lead of economists such as Joseph Stiglitz and Paul Krugman who favor allowing nation-states to impose tighter controls on capital flight. So far, the administration has not said too much on the subject and it is hard to read too much into previous statements on similar topics by Obama and his economic policy advisers. (Tim Geithner is on record, however, as supporting continued deregulation–another reason to suspect his good judgment at Treasury).

As the G-20 gets underway this week, one can hope that this issue will be revisited. Ideally, there will be a consensus among the world leaders to convene another meeting to tackle the question of capital controls in the near future.

BC

This Week’s Reading Assignment

This week’s reading assignment is chapters 7, 8 and 9 in Sen. See you Wednesday.

- Josh

Paul Krugman Song

For your enjoyment:

-kc

Assignment Question

Pick a policy issue and demonstrate how globalization is increasingly reducing the traditional autonomy of the nation-state in policy making, while increasing interdependence among nations. What forces are particularly behind the unfolding of the issue you have selected at the global level? What is the position of the U.S.A. on this issue? Using theories discussed in class, what is your assessment of this position? In other words, is the U.S.A.’s response appropriate or do you have other recommendations?
  
Note: while you are free to select an issue that was not necessarily discussed in class, the issue should be within the domain of public finance or should directly affect the primary concerns/paradigms of public finance.

Due date: Wed. April the 8th, 2009

Today’s Lecture

Here is today’s Lecture…sorry for the late delivery.

sen_s_inequality_reexamined_ptii12

Some businesses find the recession “sweet”

While the last few months have brought a steady stream of bad economic news–layoffs, home foreclosures, failing banks, drop in consumer demand–the list can go on and on, there is some good news that is hidden away if you look for it. One industry that has seen its fortunes move in the opposite direction of the rest to the rest of the economy is the candy business. This article in NY Times shows that it might be a smart idea to invest in a chocolate company for the duration of the recession. The sweets industry is enjoying its biggest boom since the Great Depression. It looks like the last indulgence consumers are willing to give up is feeding their sweet tooth.

Bailing out bankers rather than banks

David Leonhardt in today’s NY Times, writes a good article pointing out the fallacies in A.I.G’s claims that the bonuses the company paid out to its employees for “retention purposes.” He systematically discredits this argument on several grounds:
1) They’re totally unnecessary. He points out that almost no executive has left one company for a similar position at another company.
2) For jobs below that of CEO, it is not necessarily a bad thing for turnover to happen. After all, isn’t the case that the Financial Product division is the one most responsible for getting the company into its current mess?
Leonhardt also dismisses A.I.G chief, Edward Liddy’s claim that the bonuses are needed to keep top talent in the firm by pointing out that a) it hasn’t worked–52 employees receiving bonuses still left and b) none of the employees are truly
indispensable; all could without a great deal of trouble be replaced. The whole situation points to the need for increased government oversight of the industry, which should have been in place years before, so that the situation we now find ourselves in would probably never have happened. This is what occurs when you leave the asylum to be run by its inmates. How could anyone expect things to turn out differently?

As a side note, there is a very interesting video of a lecture by Alan Blinder at Princeton’s Woodrow Wilson School, which was given in November 2008 and is well-worth watching. The lecture is entitled “The Origins of the Financial Mess.”

Inequality Lecture

Please click on this link for today’s  ppt. slides for the inequality section.sen_s_inequality_reexamined11

This Week’s Class – Globalization session

The Globalization session of this week’s class will cover two readings. The main one is “Spreading the wealth” by David Dollar and Aart Kraay and the responses to their article, basically pages 23 – 44.In this document if you have time you can also look at the “great divide …” by Bruce R Scott from page 53.

The second one is “international Financial Stability and Market efficiency as a Global Public Good” by Stephany Griffith-Jones. You will find both documents in the eRes reading list. 

As you look through the readings, for the first one, familiarize yourself to the arguments surrounding the issue of whether globalization increases inter- country and intra country inequality and consider the methodological approaches and fundamental assumptions that the authors take/make. 

For the second reading, think of the current economic crisis and how isolated ‘economic stimulus plans’ by individual countries will be insufficient if a global stabilization program is not pursued (the G-20 was just discussing this).Particularly, think of such objectives within the current world economic order or financial architecture, and the opportunities and challenges it faces as Griffith-Jones discusses it.

 

Let me know if you have any questions.

 

Josh

Not every country is suffering

According to the Business Pundit, there are 10 countries where the economic crisis hasn’t made a dent yet. However, the posting is dated last September so I’m pretty sure that some of the countries have been hit since; China springs immediately to mind. I’d be surprised if the list was unchanged from last year. Now, maybe in terms of relative effect, these countries have been least affected. But even so China seems pretty hard hit by layoffs and the severe drop in consumer demand.

AIG (or is it the US Government?) Paying Bonuses

The New York Times reports today that AIG is paying $165 million in bonuses to the financial services unit (the origin of of the CDSs, etc. that made some really bad lending by banks affect EVERYONE). This is in addition to the $121 million paid across the rest of the company.

The US government owns 80% of AIG, having given it $170 billion (so far) in bailout money, and Geithner did “pressure” them to cut bonuses for top executives and *gasp* tie the rest to performance. But they are going ahead with it because they are “contractually obligated”…

Just as Jon Stewart pointed out on Thursday, most of the people at AIG are hardworking, honest people who should not be held morally responsible for the bad decision making of those at the top. But there are plenty of people whose only connection with the entire mess is their company can’t get its regular line of credit from lending institutions that are not only not getting their bonuses, they are having health insurance, employer contributions to retirement, pay, and even their jobs cut… all things their company was “contractually obligated” to pay until they found themselves unable to pay their bills.

Homo Economicus (AKA Greed) Examined–The Daily Show Style

A little entertainment in case you haven’t seen this “Mad Man Cramer v. John Stewart” piece (about 12 minutes) . This would be pretty funny if it weren’t so darn serious since mine and many others 401K is now a 201K. Hank Paulson (Former Treas Sec) takes a serious hit in this piece–as well he should (Schulte, 2009)

Below is the link

http://www.thedailyshow.com/full-episodes/index.jhtml?episodeId=220533

Job losses in line with earlier recessions

For all the talk about this economic downturn being the worst since the Great Depression, most economists who study this kind of thing say that the data so far resembles 1981-82 recession ( see Fox and Polley). The charts on the two sites show a close resemblance to earlier recessions. Polley says the current downturn is demand-driven. Based on this interpretation, he argues that the recession will probably last at least another year. On the bright side, he suggests that we should be back at peak employment in 24 months.

And the Banker Speaks…

Jamie Dimon, CEO of JP Morgan Chase, spoke to the US Chamber of Commerce on March 11. There are a couple of things that struck me listening to this:
(1) I wish I had listened to this before I turned in my paper; he answered the question, better than I did: we all caused the crisis by acting in our self interest by pulling our money out of bonds, etc. because we felt over exposed (whew, I thought it was all of us with too much debt, but he placed the fault squarely on the shoulders of people with money, how very populist, sort of, of him)
(2) He repeatedly says “we all know there are too many regulators” and then proceeds to suggest a new/strengthened/reinstatement of regulation.
(3) He sounds oddly confident, saying (of course) JPM will be fine, most banks will be fine and if not we can deal with that…
(4) He criticizes (albeit somewhat reservedly) compensation caps because, apparently European banks snapped up some of our “top talent” the day they were announced…
(5) He complains at some length at the unproductive, even harmful demonization of corporate America (particularly the banks) and he wants leaders and politicians (he distinction, not mine) to “stop it”, it is America’s business…
(6)Why again are we listening to the guys who were at the helm for the crash? Even if it was as unavoidable at the iceberg was for the Titanic, I don’t think NOW is the time for them to come out and tell we should have avoided the iceberg, especially after having thoroughly neglected their responsibility to provide and maintain life boats.

Where are the tar and feathers?

The cost of doing nothing

The devastation of the economic crisis grows every day. While we’ve become accustomed to hearing about plunging stocks, layoffs and bank bail-outs, we don’t see the media focus as frequently on the human costs that these economic events portend. That these costs are tremendous and growing there can be no doubt. One example of the “hidden costs” of the crisis we’re in comes from this article on a new report issued by the National Center on Family Homelessness. According to the report, one in fifty kids in the US is homeless. This is the worst figure since the Great Depression. What makes the report even more alarming is that its data comes from 2005-2006 before the downturn. Things are probably much worse today. Expect to see more stories like this one in today’s NY Times as more families lose their jobs and homes. The article goes on to question our priorities:

“It is unacceptable for one child in the United States to be homeless for even one day,” it said, slamming the US government and media for ignoring the plight of homeless children while doling out huge sums of money to help “grossly overpaid bankers, captains of industry and carmakers” in 2008.

“What does it say about our country that we are willing to bail out banks but not our smallest most vulnerable citizens?” the report asked.

In addition to tallying up the lost fortunes from investments gone bad, all of the “underwater” mortgages and foreclosures, and the sharp drop-off in the value of once blue-chip stocks, the report reminds us that we need to also consider the cost of doing nothing to reverse the situation of our most vulnerable citizens, homeless kids.

Sen on Smith’s take on the Crisis

Amartya Sen wrote a commentary in the Financial Times on what guidance Adam Smith’s writings might give us for dealing with today’s crisis. Interesting, not what you normally hear about Smith.
-kc

Nationalization For Beginners

James Kwak wrote a brief explanation of bank nationalization on Baseline Scenario. This blog is pretty useful, has a really good “for beginners” section and was founded by Simon Johnson, former IMF official — an organization that has long been in the business of forcing countries to nationalize (temporarily) financial systems with the imprimatur of the US government.

-kc

Broad restructuring of the economy occurring

Yesterday, Kathleen wrote about bank nationalization. Another clear sign that our economic landscape is undergoing a radical transformation is in this article from the Economy in Crisis blog. The writer says that many of our business icons (e.g., General Electric, General Motors and Citigroup) are plummeting in stock value. Companies, which until recently have been the models of corporate America, are struggling to stay afloat. What this suggests to many people is that a broad and deep restructuring of the US economy is underway. Titans of industry of just a few years ago are falling by the wayside. The question, as yet unanswerable, is who will replace them?

The shift has been occurring for some time. The manufacturing sector has been in decline over the entire post-war era but is in free-fall today. The average factory worker in the auto industry made over $52,000 not including benefits in 2004 according to this article in the Detroit News. By any standard, this is a decent wage for a non-college educated worker. The sector that has shown the largest increases has been the service area, mainly retail. These are largely non-unionized jobs that pay far less than union factory jobs. For example, Wal-Mart associates made a paltry $19,165 in 2008. That’s $2,000 below the federal poverty line (Wake-upWal-mart.com). On NPR, I heard that the Targets and the Wal-marts of the world are still growing–about the only businesses that are. Hence the transformation from relatively high-wage manufacturing jobs with decent benefits including health care to low-paying, few if any benefits continues, which is not the direction we as a society want to be heading in.

Blinder on Nationalization of Banks

Blinder commented on nationalization of banks in today’s New York Times. He is an opponent and offers some good arguments. There are some reasons that his qualms may not be entirely accurate. Krugman is not pleased.

First, he states we have 8,300 banks. True, a lot of those have already collapsed and had the FDIC take over (FDIC just got a $100b credit line to cover more and bigger bank failures). A lot will collapse in the future regardless of whether or not nationalization takes place. The point is that no one is advocating (to my knowledge) nationalizing ALL banks. Isn’t it a bit nonsensical to categorize Smalltown Bank in the same category as Citi, Bank of America, JP Morgan, and Wells Fargo?

Second, Citi, BoA, JPM, and WF account for 64% of commercial bank assets (check out pie chart).

- KC

Academic economists behind the curve in current situation

Economists from academic departments are behind the curve when it comes to their classroom treatment of the current economic crisis, according to an article in today’s NY Times. Most mainstream economics departments are still in the grips of the free market ideology, despite the failures of said approach to predict the current crisis. More problematic is the near exclusion of Keynesianism as a legitimate object of study in most of the elite graduate economics programs around the country. Keynes is virtually absent from the curricula of economics departments, despite serving as the theoretical underpinnings of the Obama administration’s stimulus package.

The Freakonomics blog also quotes at length a paper that criticizes the economics profession, dominated by neo-classical or free market thinking, with completely missing the current financial mess:

The economics profession appears to have been unaware of the long build-up to the current worldwide financial crisis and to have significantly underestimated its dimensions once it started to unfold. In our view, this lack of understanding is due to a misallocation of research efforts in economics. We trace the deeper roots of this failure to the profession’s insistence on constructing models that, by design, disregard the key elements driving outcomes in real-world markets. The economics profession has failed in communicating the limitations, weaknesses, and even dangers of its preferred models to the public. This state of affairs makes clear the need for a major reorientation of focus in the research economists undertake, as well as for the establishment of an ethical code that would ask economists to understand and communicate the limitations and potential misuses of their models.

According to the last article, the problem with the economics profession is its search for elegance (in model building) at the expense of empirical validation. A large reason for the financial sector’s problems, indeed, is the use of sophisticated mathematical models that had little to do with reality.

How does the graduate income tax work again?

ABC news <a href=”http://abcnews.go.com/print?id=6975547 it about people with incomes over $250,000 looking to reduce their income so as to not face increased tax rate.

63-year-old attorney based in Lafayette, La., who asked not to be named, told ABCNews.com that she plans to cut back on her business to get her annual income under the quarter million mark should the Obama tax plan be passed by Congress and become law.

“We are going to try to figure out how to make our income $249,999.00,” she said.

“We have to find a way out where we can make just what we need to just under the line so we can benefit from Obama’s tax plan,” she added. “Why kill yourself working if you’re going to give it all away to people who aren’t working as hard?”

And

“I’ve put thought into how to get under $250,000,” said Poczatek. “It would mean working fewer days which means having fewer employees, seeing fewer patients and taking time off.”

“Generally it means being less productive,” she said.

Poczatek argued that by reducing her income from her current $320,000 to under $250,000 by having her dental hygienist work fewer days and by treating fewer patients, she would avoid paying higher taxes on the $70,000 that would be subject to increased taxation if Obama’s proposal is signed into law.

Additionally, any interest from a checking or savings account or capital gains from stocks, would also count as taxable income.

“The motivation for a lot of people like me — dentists, entrepreneurs, lawyers — is that the more you work the more money you make,” said Poczatek. “But if I’m going to be working just to give it back to the government — it’s de-motivating and demoralizing.”

I couldn’t find the original article, but my understanding from Krugman’s comments is that they added significant discussion about how our marginal income tax works… you only pay the higher rate on the money falling above the $250K mark, not all of the income.

I am trying to imagine what the impact of the system that these people apparently think is in place… and what a rude awakening it might be to “work” to get your $300K+ income under $250K only to realize that you really haven’t reduced your tax burden relative to your income that much but you have reduced your income substantially. Such a system could do a lot toward restructuring our over-worked society.

However, the issue of taxing savings account interest and capital gains in another question altogether. I agree with the taxing of capital gains, it is not “work” and it is not going to taxed as such a rate to discourage people from investing anyway. The savings account interest in another issue. Right now, the increase from negative savings rate to ~5% savings is not helping the situation (prior to 1980s it was ~12%, oh those were the days…), but in the long run, doesn’t it make sense to incentivize plain ol’ regular savings to help us avoid messes like this? Maybe a cap of sorts, saving up to a certain amount are tax exempt…

Also interesting to note that the two people quoted in the interview were women. That strikes me as unusual.

-kc

This American Life – Bad Banks Episode

This American Life had another episode about the economy this weekend. This explained the whole “bad bank” phenomena. It really is a must listen. There is a part in there where the read a memo written by a Deutsche Bank economist about the US government’s options at this point. Hosts Adam Davidson and Alex Blumberg classify it is a ransom note and the bank’s economist doesn’t really disagree!

Adam and Alex speak to Simon Johnson (Baseline Scenario blog), a former IMF office who says to “stop whining” and nationalize the banks. It is was the US would have made other countries do in the 1990s with the same set of facts.

They also looked at a graph of total personal debt to GDP… the only other time it got this high (100% by the way) was 1929… This brings us back to the question of equity and is it good to have so much disparity between the high and the low.

One reason to answer “no” is the high end having a lot of money drives up the cost of living for everyone. How? Take a nice coastal community that is mixed-income, primarily low to middle. Then it becomes the new Martha’s Vineyard because you have all of these newly and increasingly wealthy (hedge fund managers, bankers, etc.) that have money to burn but can’t buy a place on Martha’s Vineyard, there are none to be had. This drives up the price of real estate: locals start to see deals too good to pass up, landlords fail to renew leases because they are upping the rent, converting to condos, or selling out. You throw in a questionable eminent domain where a low income neighborhood is bulldosed for the new promenade, and you’ve converted a low/moderate mixed income community into a high-priced second home “community” where lots of people who used to live there have to commute into work. And voila, the price of living increased for those “locals” because now they spend a lot more transportation and/or housing – that is without a spike in gas prices, not to mention that Aldi’s lost its lease, the strip mall was razed, and WholeFoods went in to the new shopping plaza that replaced it.

I won’t dispute that we spend a lot of money on “things” that are nice to have but not necessary and that is an important source of our current woe. But I question how much is due to that. To hear this discussed, it is all because low and middle income people bought iPod and McMansions. But there are a lot of people carrying a lot of debt because of (1) medical expenses and/or (2) student loans. These were not huge burdens a generation ago… a generation ago many state universities were still free or charged only a nominal fee. Now, the average (lumping staters together with ivies) undergraduate leaves college with almost $20,000 in student loan debt… some are upwards of $100,000. Medical costs are the number one reason for personal bankruptcy (note: student loans are NOT a reason for personal bankruptcy because student loans are not subject to bankruptcy). How much can these increases in debt (and decreases in savings) be attributed to increasing disparity? I think in both cases a fair amount.

-KC

The new work ethic

This blogger ponders a question that has great relevance during the current recession, namely whether there will be a change in Americans’ traditionally hard-charging work habits. He argues that

We’re giving up valuable time to earn more simply to facilitate our obsessively hard working lifestyle.

He goes on to make the following example abouta European colleague who explained the difference between America and Europe by telling the following story about academic conferences:

In America, conferences started early. You needed to wake up around 6:30 in the morning, and you would grab a donut or muffin with some coffee. Wake up, get out of bed, and get into action. Talks began at 7 and proceeded in rapid fire pace, with a single fifteen-minute break. Lunch was scheduled at 12 noon for thirty minutes. Eat a sandwich, drink something caffeinated, and get back to the conference. There was not much time to socialize. Talks would resume and continue until 6 or 7 in the evening.

In Europe, things were much different. Talks began leisurely at 9 in the morning. There would be a few talks at a relaxing pace. Lunch was served at 12 noon without a specific ending time. One beer was served. After everyone finished, there would be one or two more talks–if they decided to resume.

Now, someone will point out the American work ethic makes a difference. After all, American universities are respected worldwide. The research makes a big difference. But no one seems to ask about the cost at which the success is achieved.

One must ask if the work ethic is derived from a competitive urge to succeed or whether it’s an ingrained part of our personalities as a result of our culture and history (not that the two are mutually exclusive). I have observed something similar when I’ve traveled abroad, especially to places like Spain and Cuba. Of course, no one would ever argue that either country is particularly productive but even in dictator-led Cuba, the people I met all seemed happy despite not being well-off by our standards.

In the NY Times yesterday, one of the stories on the cover dealt with former managers who have been downsized. A constant refrain was the need many of them had to find a job–any job–or lose an important part of their sense of who they are. One of the consequences of this downturn, especially if it lasts a long time, as many predict, is the huge psychological toll who will take on the American workforce. This is a “hidden cost”, which will be both hard to quantify and likely outlast the duration of the recession. Another story is on “slowing down”. I do not believe this will happen. I think it is much more likely that once the economy starts picking up, it will be back to business as usual for the American workforce in terms of “obsessively hardworking lifestyle.”

Readings for March

We will be finishing up Okun this week and start to discuss A. Sen. For Sen, we will begin by providing some introductory material in which he attempts to show the narrowness of mainstream economics due to its absence of a moral/ethical dimension. Next, we will talk about the Preface, Introduction and Chapter One. If there is time, we will start on Chapter Two. It is a dense read and it will take us the entire month of March to get through.

Missouri’s stake in the stimulus

What Obama’s Economic Stimulus Package will mean for Missourians

Below is an article, which I just sent off to the St Louis Beacon, an online news publication.

Last month, Congress passed and President Obama signed into law a historic economic stimulus package that will spend $787 billion in the hopes of pulling the US out of the recession. The package has several parts. It will spend $260 billion over ten years to assist families with their taxes, buying a first-time home, paying college tuitions, extension of unemployment benefits and car purchases. More than $80 billion has been set aside to modernize infrastructure including transportation, federal buildings and water projects.Nearly $130 billion will be spent on expanding health care including boosting benefits for laid-off workers and to assist states with their Medicaid payments. Education receives more than $100 billion, with funds set aside for direct payments to local school districts and billions of dollars for school modernization, Pell Grants and special ed programs. The rest of the package is devoted to helping alternative energy production ($22 billion), investments in scientific research ($18 billion) and small business ($54 billion). These are all nationwide totals; what does the package mean for Missouri residents?

A new report issued by the non-partisan Missouri Budget Project estimates that the Economic Recovery Act will primarily help low- and middle-income Missouri families. The report also says the Act will help stimulate the state’s faltering economy.

The Missouri Budget Project’s analysis of the stimulus package has estimated that the state will recieve more than $4.3 billion over the next two years. This amount will be divided into three components: 1) state services, allocated by the Missouri General Assembly, 2) education, a direct transfer to local school districts, and 3) families, a direct subsidy to households hit hardest by the recession. Within each of these components, the spending stacks up this way:

1. State Services (more for health care including a Temporary Increase in the Federal Matching Rate in Medicaid, an increase in highway and public transit funding, more funds for the state to help pay for public safety, law enforcement, services for the elderly and the disabled, as well as money for Child Care services.)
2. Education (growth in spending on Title I, Education Block Grant funds and K-12 and Higher Ed funding)
3. Families (increases in Unemployment Insurance Benefits, funding for Emergency Shelters, and more money for Food Stamps.)

Not only will the billions in anticipated spending directly help Missouri families, the infusion of federal money into the state’s flagging economy will provide a much needed boost. As consumer spending dips, business profits drop off and state government revenues decline, which results in falling demand for goods and services starting the destructive cycle up again. Federal funds will produce a multiplier effect, in other words, for each new dollar invested in the state, a significant amount of new economic activity is expected.

Perhaps the best way to explain the multiplier effect of federal spending is to illustrate with an example. Imagine a currently unemployed construction worker who, as a result of the package’s infrastructure spending, is put back to work on a public transit project. With the wages earned, the worker can make a down payment on a new house, buy groceries and otherwise spend money that would go to stimulating the state’s economy, producing more jobs, more spending and more state revenues.

In sum, the Missouri Budget Project calculates that the multiplier effect will produce a $7.7 billion increase in the Gross State Product, will create 98,000 new jobs, and add $275 million to Missouri’s state revenues over the next two years.

Of course, in a plan of this magnitude there are always skeptics. The chief arguments against the package include more government spending will not end the recession and consumer, not government, spending is the way to get the economy back on track. In the case of the first one, critics assert that much of the government spending in the stimulus package will not have an immediate effect (e.g., infrastructure projects). Therefore, by the time money on these projects is spent, the economic recovery will be well underway. However, this argument assumes the typical long “start-up” times of most capital projects and ignores the fact that in many states there is already a back-log of “shovel ready” infrastructure projects, which have had to be shelved because of the states’ inability to finance them on their own and the recent federal cut-backs in funding. Furthermore, helping to rebuild the nation’s infrastructure, is a long over-due investment in our economic future. Not only does it generate new jobs by the millions, it also ensures economic growth in the years ahead.

The second argument assumes that the multiplier effect for government spending is less than one for privately-generated consumer demand. An example of this can be found in the following blog, Organizations and Markets , by four free-market economists. In a recent post, one of the authors says:

Of course, if GDP is adjusted for quality, the multipler [sic] is most likely negative, as resource allocation is directed by government officials, not consumer demands.

According to this perspective, only the production and consumption of iPods, cars, and similar private goods rather than public goods such as bridges, schools, roads, and libraries, results in “quality adjusted” GDP. Presumably, the author would take issue with Bureau of Economic Analysis of the U.S. Department of Commerce, which estimates additional economic activity that results from investments in different sectors in the $1.58 to $2.08 range. However, as the above quote indicates, free-market economics automatically discounts the possibility that public investments can have a positive effect even before the evidence is in.

It would certainly not be in the best interests of the state if the legislature were to follow the lead of the governors of some states and refuse federal money for some programs. Fortunately, Gov Jay Nixon shows every indication that he wants every federal dollar that the state is entitled to.

2010 Budget

The NYT has a brief article about the newly released 2010 budget.

There was something that caught my eye:

Before becoming Mr. Obama’s top economic adviser, Lawrence H. Summers liked to tell a hypothetical story to distill the trend. The increase in inequality, Mr. Summers would say, meant that each family in the bottom 80 percent of the income distribution was effectively sending a $10,000 check, every year, to the top 1 percent of earners.

Reminiscent of Okun’s Leaky Bucket, only I would bet that bucket isn’t that leaky… which has prompted another thought, what happens to the money “leaked” from said bucket. Borrowing from Stone, one person’s inefficiency could very well be another person’s job. So, that being said, the administrative costs of collecting money means employment for IRS agents, sales for computer companies, office suppliers, etc. How much of that actually gets funneled back into the pockets of the wealthy through those very mechanisms – computer sales, office supplies; and how much might actually continue to trickle down – a decent clerical or janitorial job for low-income, high school graduate or a secure stable job for a middle-income college graduate? Would the answers to these questions affect how much “leakiness” is deemed acceptable?

-KC

Why Keynesianism will (or will not) work

This article is a neo-classical take on Keynes. It presents the rationale behind why Keynes’ theory is supposed to work, which is the multiplier effect. In other words, federal spending for infrastructure and other things will result in additional GDP (an increase in the aggregate demand).

The article’s author does not believe this. He articulates a neo-classical response when he says that

Of course, if GDP is adjusted for quality, the multipler is most likely negative, as resource allocation is directed by government officials, not consumer demands.

I am not sure what he means by “quality” and, maybe if you read the article more closely than I, then something will immediately leap out at you. However, I believe it has to do with “consumer demands.” Again, we are faced with the issue that Galbraith raises, that is, can government produce wealth? Skeptics, such as classical economists, doubt this and so argue that only consumer demand can result in “quality” GDP. Presumably, this increase in aggregate demand would not come as the result of more bridges, roads and other public goods rather than increasing output of televisions and cars (i.e., what consumers want). Hence the author’s logic is that only private consumer goods will produce a true multiplier effect on the economy.

Why taxes aren’t so bad

Ever since the Reagan administration, the American people have been bombarded with the unrelenting message that tax increases are unacceptable. The idea is that taxes hinder economic growth and sap the incentives of individuals and families to earn more because the government will just take it all away.

In the meantime, government spending continued to grow. Entitlements like Social Security and Medicare kept expanding as a result of demographics and increased benefits. The US embarked on an expensive military venture in Iraq and Afghanistan. So while taxes have been holding steady over the last three decades, spending has continued to grow. In the simple calculation of public finance, if spending grows and revenues from taxes remain flat then deficits have to grow. As we have seen, these deficits have been financed from borrowing–increasingly from countries with more robust rates of growth than ours. See the chart from the Times article cited below:

In today’s NY Times, Dave Leonhardt writes a thoughtful piece on the “upside of tax increases.” For many Americans bamboozled by years of being told we can pay for everything we need without raising taxes, his title might seem strange. However, as he points out, there is a fundamental law of economics, known as Wagner’s Law, which says that as society matures then taxes show a tendency to grow. This law was discovered in the 19th century and recent economic research confirms that it still operates.

Taxes, as Oliver Wendell Holmes, Jr., said are the price we pay for civilization. Without them, there would be no schools, highways, defense and many other things that make life worth living today. As a society, we have accepted half of the equation: The part that recognizes that we need those things to have a properly functioning society. But we seem to have forgotten or ignored the other half, the part that says that we have to sacrifice something to get what we want.

The bottom line is we cannot keep pushing off into the indefinite future paying for things we need today. By continuing to do this, we burden future generations and reduce their opportunities for economic advancement or we risk our creditors strangling our economy with higher interest rates as demand begins to outstrip supply of capital.

Just a little humor as I sit here watching President Obama’s address to Congress.

Yikes!

I had to share this!

From DeLong

http://delong.typepad.com/sdj/2009/02/holy-monetarism-batman.html

Is Social Security in danger?

Two contrasting views on whether the Social Security program is in trouble. The first one is in the latest issue of the Regional Economist, an online publication of the Federal Reserve Bank of St. Louis. The article by staff economist, Michael Pakko, argues that the program is in need of reform as a result of the cumulative effects of climbing US debt, the growing deficit and “The retirement of the Baby Boom generation and a slowing rate of growth in the labor force will create a demographic time bomb in which entitlement growth threatens to swamp available resources.”

The second article is in the liberal newspaper, The Nation, entitled “Looting Social Security” by William Grider. Greider argues that the program is not in financial trouble as many critics claim. Instead, there is emerging, according to Grider, an attempt by 82-year old billionaire, Peter Peterson to undermine the government’s retirement program. Grider claims that Peterson’s

“most blatant distortion is lumping Social Security, which is self-funded and sound, with other entitlements like Medicare and Medicaid. Those programs do face financial crisis–not because the elderly and poor are greedily gaming the system but because the medical-industrial complex has the profit incentive to drive healthcare costs higher and higher. Healthcare reform can solve the financing problem only if it imposes cost controls on private players like the insurance and pharmaceutical industries.”

Two differing, recent perspectives on the fate of the Social Security system, a program that, no doubt, will come under increasing scrutiny in the months ahead in light of entitlements’ tremendous impact on the budget deficit.

–BC

Mortgage Crisis

After Freddie and Fannie were taken over last fall, followed shortly by the implosion of the entire credit market, it became “conventional wisdom” among some circles that Freddie and Fannie (and by extension the liberals in Congress who are lobbied by them) and the Community Reinvestment Act cause the financial meltdown. If the federal government has not forced lending to risky clientele (CRA) and artificially expanded the secondary mortgage market (Freddie and Fannie) none of this would have happened. Gordon covered this pretty well.

Well, Krugman, Thoma, and others have worked to debunk this and I have been reading a study using HMDA data from 2004. There was a very interesting set of tables (p. 20 & 22) that at least shoots some holes in that theory:

- %High priced (correlates with sub-prime) loans sold to GSE: 0.1%

- %High priced (correlates with sub-prime) loans sold to “Other Conduits”: 63.8%

- %High priced loans that are originated by CRA-regulated institutions: 16.1%

- %High priced loans that are originated by Independent Mortgage Bankers (e.g., Ameriquest): 83.4%

- %Low priced (correlates with prime) loans sold to GSE: 28.5%

- %Low priced (correlates with prime) loans sold to “Other Conduits”: 19.1%

- %Low priced (correlates with prime) loans originated by CRA-regulated institutions: 66.0%

- %Low priced loans that are originated by Independent Mortgage Bankers (e.g., Ameriquest): 26.2%

My understanding is that “Other Conduits” would include but is not limited to the MBS market where investment banks bought up mortgages, bundled and securitized them, then sold them. So this could be used to argue for “crowding out” – all that was left for other conduits was the sub-prime lot. OR since this market (for obvious reasons) was not very big prior to the early-2000s, it could be that this market was “artificially” expanded by the private sector due using the CHEAP money floating around.

-KC

DeLong and the Nature of Economics

I thought DeLong’s observations about the nature of economics especially vis-a-vis the current crisis is worth sharing:

Justin Fox Is Still Perplexed

He wonders:

Brad DeLong tutors me on fiscal stimulus :: The Curious Capitalist – TIME.com: I guess what continues to perplex me at least a little is how lacking in the customary rigor of modern academic economics the arguments for stimulus are. It’s basically just, We ran gigantic budget deficits during World War II and the economy got better. That’s the kind of argument I would make, not the kind of argument I’d expect from the chair of the Political Economy of Industrial Societies major at the University of California Berkeley. It’s just all so seat-of-the-pants. But it’s better to be approximately right than precisely wrong, I guess…

“Lacking in the customary rigor…” Justin could mean either of two things:

1. Rigorous economics should produce tightly-estimated conclusions based on statistical sieving of mountains of data, like: when Safeway cuts grocery prices by 1%, its sales rise by 1.456%.
2. Rigorous economics should involve lots of theoretical equations with sigmas and rhos and betas in them.

With respect to the first possibility, Justin’s expectations are just too high. We cannot build models up from precisely-known microfoundations–we are not chemists who can calculate how molecules should behave because we know how the electrons and the nucleons that make them up do behave. We don’t have that many past examples of large-scale fiscal stimulus programs, and so we do the best that we can–and to be up-front about the partial and uncertain state of our knowledge is part of doing the best that we can.

With respect to the second possibility–well yes, I could make a bunch of arguments with lots of theoretical equations with sigmas and rhos and betas in them, but once again these theoretical equations would not rest on any solid microfoundations. Chemistry theory is built on top of physics theory. But economic theory–it is just a bunch of people looking at historical episodes and saying: “it looks like this is what happened a bunch of times in the past; let’s build a model of it.” Economic theory is crystalized history. But when the historical episodes out of which theory is being crystalized are as rare and as scarce as they are in the case of large-scale fiscal stimulus programs, why crystalize? Why not just take the history raw?

- KC

Essay question #2

The answer to the second essay question is due on Wednesday March 11.

Essay Question #2

A key assumption underlying modern economic thought is that humanity behaves according to the rational actor model (e.g. homo economicus). Simply put, the term refers to economists’ theory that humanity is driven primarily by rational, self-interest (i.e., we respond to incentives and trade-offs). Use the rationality model to explain the causes of the current financial crisis.

Credit Crisis Video

What happened to the adage “diversify, diversify, diversify”?

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

I think now the problem is beyond the irresponsible borrowers, we are now getting into the “responsible” home buyers who bough within their incomes (and are now underwater so can’t refinance) and have lost one or both incomes – even if they save the recommended 6 months (or it is a year?) worth of living expenses, a long time to be unemployed in a normal economy, that money might be running out on that with little hope on the horizon…

And what about the irresponsible and predatory lenders?!?

Marx would have approved of banks bail-out

This tongue-in-cheek article in the Financial Post, a Canadian online publication, makes the case that Karl Marx would have endorsed last year’s bailout of the US financial sector. According to the article, Marx would have joined such stalwarts of conservative economic thought as the Heritage Foundation and the Wall Street Journal’s editorial page in applauding the $700 billion bank bailout. As we have often said in class, sometimes the current crisis makes for some interesting bed fellows.

The article itself presents a fairly standard neo-classical argument against the bailout. It goes on to say:
“At first glance, anyone who understands economics can see that there is something wrong with this picture. The taxes that will need to be levied to finance this package may keep some firms alive, but they will siphon off capital, kill jobs and make businesses less productive elsewhere. Increasing the money supply is no different. It is an invisible tax that redistributes resources to debtors and those who made unwise investments.
So why throw this sound free-market analysis overboard as soon as there is some downturn in the markets? ”

The author, who is a free-market Canadian journalist, is probably thinking that somewhere Milton Friedman is spinning in his grave.

Term Paper for PPS 612

The following is based on the University of Santa Clara’s Guide to Literature Review (http://library.ucsc.edu/ref/howto/literaturereview.html). There are others equally good available on line. However, the grading rubric for the term paper is based on this document.

Do not confuse this with a book review, a scholarly literature review is a survey of relevant peer-review journal articles, books and other scholarly sources (e.g. dissertations, conference proceedings) on a particular issue, area of research, or theory. The literature review describes, summarizes, and critically evaluates each work in order to provide an overview of the relevant scholarship in a particular area of research.

It is useful to think of a good lit review as consisting of several steps. Each one is a vital component. Structurally, the 4 major sections of a lit review include:

1.Problem statement—what is the subject, topic or field being examined      and what are its key issues?
2.Literature search—gathering the relevant materials relevant for the topic under consideration
3. Critical evaluation—which literature contributes the most to an understanding of the area of research?
4. Analysis and conclusion—what are the chief findings and conclusions of the body of scholarship under consideration

Additionally, lit reviews need to provide the reader with the following:

1. A comprehensive overview of the scholarly issue being considered; the lit review’s author should have specific objectives in mind that he/she wishes to accomplish in the lit review
2. A division of the pertinent literature into topics, categories or some other classification (e.g. lit in support of a particular position, those against, and those with entirely different points-of-view)
3. A consideration of each work in terms of their similarities and differences with the others
4. An evaluation of the literature that makes the strongest case for their position, have the most convincing analysis and findings, and contribute the most to their area of research in terms of advancing understanding of a particular topic or theory.

The purpose of the literature review in this course is that it will serve to further your thinking about a particular topic, area of research, and theory and may, later on, constitute either part of or an entire chapter in your dissertation. This, in addition, to focusing on the public finance aspect or aspects of your proposed research.

In sum, your lit review should have each of the following main elements. First, show how each work contributes to an understanding of the area of research, topic or theory under consideration. The works are arranged topically rather than organized by author as in an annotated bibliography. Second, your review should also show how each work is related to the others in the literature review. Third, discuss differing interpretations of the theory, data and analysis used in previous research as well as shed light on any gaps in, previous research. Fourth, identify areas of prior scholarship to avoid overlapping too much and to indicate the way forward for further research. Later when you do your dissertation, your lit review will place your work in the context of existing literature.

Josh N

Role of Government in Farm Technology

I haven’t come up with any hard numbers, but I did go back to Adams & Brock (1995) The Structure of American Industry, 9th edition, to the chapter about agriculture by Suits. Suits writes on page 19:

…we need not depend on the farm to develop its own technical improvements, as part of this job has been undertaken by the laboratories of state universities and agricultural experiment stations. To a far greater extent, however, improvements have arisen fromt he work of farm equipment firms, chemical manufacturers, and other suppliers to modern agriculture. [emphasis mine].

So, according to Suits, the private sector is much more responsible for the technological innovation in that sector as well. I would note, however, that Okun’s unconventional definition of joint inputs (1975, p. 60), could be used as an argument to give the government more credit. The extension systems out of the land grant universities serve as a vital means for diffusion of information and best practices. In other words, they create the pathways that private sector piggy backs off of (even unintentionally) to spread the use of their technological innovations… probably still wouldn’t reach the bar of the government being a “major” player.

-KC

TARP and Accountability

I came across a timely column in the NYT this evening that ties is closely with Okun. On page 60 & 61, Okun (1975) writes about the importance of the government making sure the public’s money is spent wisely even if it has to spend a great deal of additional money to do so “Because the government get its funds from taxpayers by mandatory, and not voluntary, decisions, there is no room for the principle of caveat emptor in the area of public services. The government must be accountable to the citizens, and accountability is as costly in resources as it is precious to the integrity of the political process. Bureaucratic red tape is neither an accident nor a reflection of bad rules or inept officials: it is the result of the obligation of political decision-makers to be cautious, to avoid capriciousness, to take account of the full range of interests and impacts of the course they adopt, and to guard against any misuse of taxpayers’ money,” (p. 60).

-KC

Text of President’s speech on foreclosures

TEXT
President Obama’s Remarks on the Homeowner Affordability and Stability Plan

Following is the text of President Obama’s remarks in Arizona, as prepared for delivery and provided by The White House.

I’m here today to talk about a crisis unlike any we’ve ever known – but one that you know very well here in Mesa, and throughout the Valley. In Phoenix and its surrounding suburbs, the American Dream is being tested by a home mortgage crisis that not only threatens the stability of our economy but also the stability of families and neighborhoods. It is a crisis that strikes at the heart of the middle class: the homes in which we invest our savings, build our lives, raise our families, and plant roots in our communities.

So many Americans have shared with me their personal experiences of this crisis. Many have written letters or emails or shared their stories with me at rallies and along rope lines. Their hardship and heartbreak are a reminder that while this crisis is vast, it begins just one house – and one family – at a time.

It begins with a young family – maybe in Mesa, or Glendale, or Tempe – or just as likely in suburban Las Vegas, Cleveland, or Miami. They save up. They search. They choose a home that feels like the perfect place to start a life. They secure a fixed-rate mortgage at a reasonable rate, make a down payment, and make their mortgage payments each month. They are as responsible as anyone could ask them to be.

But then they learn that acting responsibly often isn’t enough to escape this crisis. Perhaps someone loses a job in the latest round of layoffs, one of more than three and a half million jobs lost since this recession began – or maybe a child gets sick, or a spouse has his or her hours cut.

In the past, if you found yourself in a situation like this, you could have sold your home and bought a smaller one with more affordable payments. Or you could have refinanced your home at a lower rate. But today, home values have fallen so sharply that even if you made a large down payment, the current value of your mortgage may still be higher than the current value of your house. So no bank will return your calls, and no sale will return your investment.

You can’t afford to leave and you can’t afford to stay. So you cut back on luxuries. Then you cut back on necessities. You spend down your savings to keep up with your payments. Then you open the retirement fund. Then you use the credit cards. And when you’ve gone through everything you have, and done everything you can, you have no choice but to default on your loan. And so your home joins the nearly six million others in foreclosure or at risk of foreclosure across the country, including roughly 150,000 right here in Arizona.

But the foreclosures which are uprooting families and upending lives across America are only one part of this housing crisis. For while there are millions of families who face foreclosure, there are millions more who are in no danger of losing their homes, but who have still seen their dreams endangered. They are families who see “For Sale” signs lining the streets. Who see neighbors leave, and homes standing vacant, and lawns slowly turning brown. They see their own homes – their largest single assets – plummeting in value. One study in Chicago found that a foreclosed home reduces the price of nearby homes by as much as 9 percent. Home prices in cities across the country have fallen by more than 25 percent since 2006; in Phoenix, they’ve fallen by 43 percent.

Even if your neighborhood hasn’t been hit by foreclosures, you’re likely feeling the effects of the crisis in other ways. Companies in your community that depend on the housing market – construction companies and home furnishing stores, painters and landscapers – they’re cutting back and laying people off. The number of residential construction jobs has fallen by more than a quarter million since mid-2006. As businesses lose revenue and people lose income, the tax base shrinks, which means less money for schools and police and fire departments. And on top of this, the costs to a local government associated with a single foreclosure can be as high as $20,000.

The effects of this crisis have also reverberated across the financial markets. When the housing market collapsed, so did the availability of credit on which our economy depends. As that credit has dried up, it has been harder for families to find affordable loans to purchase a car or pay tuition and harder for businesses to secure the capital they need to expand and create jobs.

In the end, all of us are paying a price for this home mortgage crisis. And all of us will pay an even steeper price if we allow this crisis to deepen – a crisis which is unraveling homeownership, the middle class, and the American Dream itself. But if we act boldly and swiftly to arrest this downward spiral, every American will benefit. And that’s what I want to talk about today.

The plan I’m announcing focuses on rescuing families who have played by the rules and acted responsibly: by refinancing loans for millions of families in traditional mortgages who are underwater or close to it; by modifying loans for families stuck in sub-prime mortgages they can’t afford as a result of skyrocketing interest rates or personal misfortune; and by taking broader steps to keep mortgage rates low so that families can secure loans with affordable monthly payments.

At the same time, this plan must be viewed in a larger context. A lost home often begins with a lost job. Many businesses have laid off workers for a lack of revenue and available capital. Credit has become scarce as the markets have been overwhelmed by the collapse of securities backed by failing mortgages. In the end, the home mortgage crisis, the financial crisis, and this broader economic crisis are interconnected. We cannot successfully address any one of them without addressing them all.

Yesterday, in Denver, I signed into law the American Recovery and Reinvestment Act which will create or save three and a half million jobs over the next two years – including 70,000 in Arizona – doing the work America needs done. We will also work to stabilize, repair, and reform our financial system to get credit flowing again to families and businesses. And we will pursue the housing plan I am outlining today.

Through this plan, we will help between seven and nine million families restructure or refinance their mortgages so they can avoid foreclosure. And we are not just helping homeowners at risk of falling over the edge, we are preventing their neighbors from being pulled over that edge too – as defaults and foreclosures contribute to sinking home values, failing local businesses, and lost jobs.

But I also want to be very clear about what this plan will not do: It will not rescue the unscrupulous or irresponsible by throwing good taxpayer money after bad loans. It will not help speculators who took risky bets on a rising market and bought homes not to live in but to sell. It will not help dishonest lenders who acted irresponsibility, distorting the facts and dismissing the fine print at the expense of buyers who didn’t know better. And it will not reward folks who bought homes they knew from the beginning they would never be able to afford. In short, this plan will not save every home.

But it will give millions of families resigned to financial ruin a chance to rebuild. It will prevent the worst consequences of this crisis from wreaking even greater havoc on the economy. And by bringing down the foreclosure rate, it will help to shore up housing prices for everyone. According to estimates by the Treasury Department, this plan could stop the slide in home prices due to neighboring foreclosures by up to $6,000 per home.

Here is how my plan works:

First, we will make it possible for an estimated four to five million currently ineligible homeowners who receive their mortgages through Fannie Mae or Freddie Mac to refinance their mortgages at lower rates.

Today, as a result of declining home values, millions of families are “underwater,” which means they owe more on their mortgages than their homes are worth. These families are unable to sell their homes, and unable to refinance them. So in the event of a job loss or another emergency, their options are limited.

Right now, Fannie Mae and Freddie Mac – the institutions that guarantee home loans for millions of middle class families – are generally not permitted to guarantee refinancing for mortgages valued at more than 80 percent of the home’s worth. So families who are underwater – or close to being underwater – cannot turn to these lending institutions for help.

My plan changes that by removing this restriction on Fannie and Freddie so that they can refinance mortgages they already own or guarantee. This will allow millions of families stuck with loans at a higher rate to refinance. And the estimated cost to taxpayers would be roughly zero; while Fannie and Freddie would receive less money in payments, this would be balanced out by a reduction in defaults and foreclosures.

I also want to point out that millions of other households could benefit from historically low interest rates if they refinance, though many don’t know that this opportunity is available to them – an opportunity that could save families hundreds of dollars each month. And the efforts we are taking to stabilize mortgage markets will help these borrowers to secure more affordable terms, too.

Second, we will create new incentives so that lenders work with borrowers to modify the terms of sub-prime loans at risk of default and foreclosure.

Sub-prime loans – loans with high rates and complex terms that often conceal their costs – make up only 12 percent of all mortgages, but account for roughly half of all foreclosures.

Right now, when families with these mortgages seek to modify a loan to avoid this fate, they often find themselves navigating a maze of rules and regulations but rarely finding answers. Some sub-prime lenders are willing to renegotiate; many aren’t. Your ability to restructure your loan depends on where you live, the company that owns or manages your loan, or even the agent who happens to answer the phone on the day you call.

My plan establishes clear guidelines for the entire mortgage industry that will encourage lenders to modify mortgages on primary residences. Any institution that wishes to receive financial assistance from the government, and to modify home mortgages, will have to do so according to these guidelines – which will be in place two weeks from today.

If lenders and homebuyers work together, and the lender agrees to offer rates that the borrower can afford, we’ll make up part of the gap between what the old payments were and what the new payments will be. And under this plan, lenders who participate will be required to reduce those payments to no more than 31 percent of a borrower’s income. This will enable as many as three to four million homeowners to modify the terms of their mortgages to avoid foreclosure.

So this part of the plan will require both buyers and lenders to step up and do their part. Lenders will need to lower interest rates and share in the costs of reduced monthly payments in order to prevent another wave of foreclosures. Borrowers will be required to make payments on time in return for this opportunity to reduce those payments.

I also want to be clear that there will be a cost associated with this plan. But by making these investments in foreclosure-prevention today, we will save ourselves the costs of foreclosure tomorrow – costs borne not just by families with troubled loans, but by their neighbors and communities and by our economy as a whole. Given the magnitude of these costs, it is a price well worth paying.

Third, we will take major steps to keep mortgage rates low for millions of middle class families looking to secure new mortgages.

Today, most new home loans are backed by Fannie Mae and Freddie Mac, which guarantee loans and set standards to keep mortgage rates low and to keep mortgage financing available and predictable for middle class families. This function is profoundly important, especially now as we grapple with a crisis that would only worsen if we were to allow further disruptions in our mortgage markets.

Therefore, using the funds already approved by Congress for this purpose, the Treasury Department and the Federal Reserve will continue to purchase Fannie Mae and Freddie Mac mortgage-backed securities so that there is stability and liquidity in the marketplace. Through its existing authority Treasury will provide up to $200 billion in capital to ensure that Fannie Mae and Freddie Mac can continue to stabilize markets and hold mortgage rates down.

We’re also going to work with Fannie and Freddie on other strategies to bolster the mortgage markets, like working with state housing finance agencies to increase their liquidity. And as we seek to ensure that these institutions continue to perform what is a vital function on behalf of middle class families, we also need to maintain transparency and strong oversight so that they do so in responsible and effective ways.

Fourth, we will pursue a wide range of reforms designed to help families stay in their homes and avoid foreclosure.

My administration will continue to support reforming our bankruptcy rules so that we allow judges to reduce home mortgages on primary residences to their fair market value – as long as borrowers pay their debts under a court-ordered plan. That’s the rule for investors who own two, three, and four homes. It should be the rule for ordinary homeowners too, as an alternative to foreclosure.

In addition, as part of the recovery plan I signed into law yesterday, we are going to award $2 billion in competitive grants to communities that are bringing together stakeholders and testing new and innovative ways to prevent foreclosures. Communities have shown a lot of initiative, taking responsibility for this crisis when many others have not. Supporting these neighborhood efforts is exactly what we should be doing.

Taken together, the provisions of this plan will help us end this crisis and preserve for millions of families their stake in the American Dream. But we must also acknowledge the limits of this plan.

Our housing crisis was born of eroding home values, but also of the erosion of our common values. It was brought about by big banks that traded in risky mortgages in return for profits that were literally too good to be true; by lenders who knowingly took advantage of homebuyers; by homebuyers who knowingly borrowed too much from lenders; by speculators who gambled on rising prices; and by leaders in our nation’s capital who failed to act amidst a deepening crisis.

So solving this crisis will require more than resources – it will require all of us to take responsibility. Government must take responsibility for setting rules of the road that are fair and fairly enforced. Banks and lenders must be held accountable for ending the practices that got us into this crisis in the first place. Individuals must take responsibility for their own actions. And all of us must learn to live within our means again.

These are the values that have defined this nation. These are values that have given substance to our faith in the American Dream. And these are the values that we must restore now at this defining moment.

It will not be easy. But if we move forward with purpose and resolve – with a deepened appreciation for how fundamental the American Dream is and how fragile it can be when we fail in our collective responsibilities – then I am confident we will overcome this crisis and once again secure that dream for ourselves and for generations to come.

Thank you, God Bless you, and God bless America.

Obama’s plan for foreclosures

Today President Obama announces his plan to halt the tide of home foreclosures that threatens to drown the economy. The plan’s goal is to lower the monthly payments homeowners make through refinancing or restructuring their mortgages. According to TheStreet.com, more than 2 million Americans had their homes foreclosed in 2008 and up to 10 million more are expected to do the same in the coming years. As Obama’s Foreclosure Plan, another website, points out that only by effectively reducing what homeowners must pay will foreclosures be halted because mortgage payments are too high for them to afford. The Obama Administration is willing to stake its reputation on this approach because it will lay aside at least $50 billion for this purpose.

Obama to announce foreclosure plan

Tomorrow in Phoenix, AZ, President Obama is expected to unveil his plan to help the country’s homeowners who are struggling with foreclosures. His plan is expected to cost between $50 and $100 billion. The tide of foreclosures is threatening to swamp the economy. RealtyTrac is a private firm tracking foreclosures around the country. They provide some of the best data of national foreclosure trends (you have to be a subscriber to see some of the data.) However, a recent NPR report raises some questions about undercounting hard-hit rural areas.

The issue is more complicated than just foreclosures. As the website, Bankaholic, the securitization of the failed mortgages is really at the heart of the problem. At the heart of the securitization problem are the so-called toxic derivatives, which the Bankaholic site describes. A big example of the suspect financial instruments that brought us to our current mess are the credit default swaps (CDS). The following is from the Bankaholic site.

What are CDS
Let’s say you just bought a shiny new sports car for $100k. You can buy insurance on the car by paying an insurance company $500 a year. The insurance company promises to buy you a new sports car if you total your car.

The insurance is like a CDS, except CDSs insure corporate bonds in the event that a corporation goes bust.

However, with a CDS, you can buy insurance even if you don’t own the bond; this is called speculation. When you buy a CDS w/o owning the underlying bond, you are essentially betting that the corporation will go bankrupt. This is like buying car insurance for your friends shiny new Ferrari, hoping to collect in the event that he crashes. Some hedge funds even allegedly speculate in CDS while sabotaging their underlying corporate stocks to increase the chances of bankruptcy. This is the equivalent of cutting the brakes on your friend’s Ferrari.

Writing a good class essay

The elements of a good essay for this class are fairly simple to learn. Once you know them you can apply them over and over again. To a large extent, they apply to the class paper and further down the road, the comps as well.

Structure

A good essay begins with a thesis statement. This is where you state as precisely as you can what it is that you intend to write about in the essay. Use a hierarchical structure (i.e., first state the most important point you wish to make, then the second most important point, etc.) in the thesis, which can be several sentences long.

The body of the essay follows the thesis. In this section, you will marshal the evidence you will use to prove your assertions, which you made in the thesis. The evidence is your collection of facts, data and observations–which should be referenced–that support the major points you intend to make. There should be a logical flow to the argument you are making. In other words, when you organize this section, the evidence backing the major points come first followed by the secondary ones, etc.

In the conclusion, you restate in briefer form your thesis and summarize the main points you made previously in the body. This is the last opportunity you will have to drive home your points.

If you cite any article, books, etc. these are put in a references section at the end after the conclusion.

This Week’s Reading

This Week’s Reading is the Arthur Okun Book (The first two Chapters).

Arthur Okun sheds light on how conventional economic theory mainly focuses on efficiency and productivity, while the distributional effects (equality) of a capitalist society are avoided. It is to the extent that the two concepts of ‘efficiency’ and ‘equality’ are almost deemed as mutually exclusive or essentially antagonistic.
He brings up the issue of social and political rights, and categorizes social goods into those should and should not rely on the market mechanism for provision. He identifies access to nutrition, health care, and housing (among others), as such goods, and disapproves the market mechanism’s violation of these “fundamental rights of survival”. What is your perspective on this view? Are goods such as health care a right or a privilege?

As we read Okun, let’s think of the concepts of “market justice” and “social justice”. In keeping with the tradition of the course, let’s continue to think of these perspectives in the context of the major paradigms of the course.

Inequality versus poverty

We will be discussing economic inequality very soon in class. In 1999, Martin Feldstein, former senior economic advisor to Reagan, wrote this essay for the neo-conservative journal, The Public Interest. In it he argues that the problem is not inequality of income but poverty. Fundamentally, he believes that more inequality is not a bad thing if, at the same time, we can reduce the poverty rate. Whether one agrees or not with his premise, the essay is intelligently written and covers the fundamental aspects of economic inequality from Gini co-efficients to mismeasuring poverty to lack of earning ability and individual choice. I suggest this would be a good thing to read as we ponder Okun and Sen in class.

End of capitalism?

Fascinating interview with social thinker Immanuel Wallerstein to be found here. Wallerstein is not an economist but is a highly respected social thinker. This is the first time I’ve heard of Jae-Jung Suh, who is his interviewer.

Wallerstein makes several provocative statements during the course of the interview, such as the following:
“I think U.S. hegemony has been in decline ever since that time. I analyze these things in terms of what are called Kondratieff (Kondratiev) phases, and we entered a Kondratieff B phase at about that time. The world economy has been in relative stagnation for 30 years. “

“The second thing that happens when you have a Kondratieff B phase is that people who want to make a lot of money shift to the financial sphere; basically, speculation through debt mechanisms of various kinds.”

“There is a crisis of the capitalist system, that is to say we have the conjuncture of normal downturn processes. What I think of as the fundamental crisis of the system is such that I don’t think the system will be here 20 or 30 years from now. It will have disappeared and been completely replaced by some other kind of world system.”

“We can have a system better than capitalism or we can have a system that is worse than capitalism. The only thing we can’t have is a capitalist system. Now, I have given you a short version of the whole argument.”

All in all, the interview makes for fascinating, if a little dense, reading. Note that Wallenstein is not stating that capitalism’s demise, as he sees it,will lead to a Marxist future. He does not predict what will happen. He simply says the world order will be different from the one that has dominated the world for the last 100 or so years.

BC

GDP Forecast

Not pretty…

WSJ February Survey of Forecasters

Figure 1: Log real GDP, from 30 Jan 2009 preliminary release (blue), potential GDP (black), WSJ mean forecast from January survey (teal), from February survey (green), mean forecast (red) as related in RTE blogpost (2/11/09). Gray shaded area denotes recession, assuming recession has not ended by 09Q4. Source: BEA NIPA Q4 advance release [link], CBO estimates of 9 Jan 2009, WSJ survey of forecasters from January and February [link], and NBER.

From the Econobrowser.

-Kathleen

Keynesian approach might just dig a deeper hole

Digg Yahoo! Del.icio.us
<!–
function fbs_click()
{
u=’http://www.stltoday.com/stltoday/business/columnists.nsf/davidnicklaus/story/FE73CD47AC4BAC638625755900062761?OpenDocument’;
t=’Keynesian approach might just dig a deeper hole’;
window.open(‘http://www.facebook.com/sharer.php?u=’+encodeURIComponent(u)+’&amp;t=’+encodeURIComponent(t),’sharer’,'toolbar=0,status=0,width=626,height=436′);return false;
}
//–>
Facebook Reddit Drudge Google Fark Stumble It!

David Nicklaus
[More columns]
[David's Biography]By David Nicklaus

ST. LOUIS POST-DISPATCH

02/10/2009

John Maynard Keynes has never been more popular; we may be about to learn whether he was right.

Whatever you think of the $827 billion economic stimulus bill that’s scheduled for a Senate vote today, you can’t argue with one thing: It’s the biggest Keynesian experiment ever tried.

The great economist argued that massive government spending was the only way out of a severe economic crisis like the Great Depression of the 1930s. Much simplified, his idea was that when consumers and businesses aren’t willing to spend, the government must.

The folks in Washington have heard that message loud and clear. They’re all too ready to abandon all fiscal discipline. The only debate has been just how much is enough, and how to divide the largesse between tax cuts and spending increases.

Keynes himself might have grown impatient with the partisan nature of this debate. He once said that the government could stimulate the economy by paying people to dig holes and fill them back in. In other words, any spending would do, no matter how wasteful.

The problem is, no one has had much opportunity to validate that part of Keynes’ theory. Some economists think government spending eased the pain of the Great Depression; others think it prolonged the agony. In any event, we haven’t had an opportunity to repeat the Keynesian experiment on a large scale.

Until now.

To listen to the Democrats in Congress, you’d think there should be no debate about the power of Keynesian deficit spending. Just do it, they say.

Plenty of economists, though, are still willing to engage in that debate. About 200 of them, including three Nobel Prize winners, signed an advertisement declaring that the huge spending package is a mistake.

click here for the complete article

Stimulus Watch website

There is a new website devoted to keeping tabs on how the stimulus package will be spent. The following is the blurb from the website:
“StimulusWatch.org was built to help the new administration keep its pledge to invest stimulus money smartly, and to hold public officials to account for the taxpayer money they spend. We do this by allowing you, citizens around the country with local knowledge about the proposed “shovel-ready” projects in your city, to find, discuss and rate those projects. These projects are not part of the stimulus bill. They are candidates for funding by federal grant programs once the bill passes.”

Unemployment figures are under-reported

Last night, in class we talked about under-reporting of the unemployment figures. This is the subject of this Economic Policy Institute website article. The report asserts that actual employment is weaker than the official unemployment rates suggest. the real unemployment rate is probably closer to 10 %. Even at 7.6%, this is the highest unemployment rate in over sixteen years. In his address to the nation on Monday night, President Obama said that the jobs lost in January alone was equal to all of the workers in Maine. Even more startling is the fact that since November 2008, 2.8 million people have lost their jobs. Since the recession started in December 2007, 3.5 million people have become unemployed–that’s more than the total population of Chicago! Bear in mind, however, that in calculating these numbers they did not include those who have dropped out of the job market (or never entered) and it doesn’t include the under-employed.

State Budgets

Here’s to Galbraith’s quote Dr. Cropf read Wednesday evening…

States are cutting budgets, Nevada 38%.

One of the questions that came to mind is Okun’s, is there a time where we should spend money even though it is not efficient, or stimulative in today’s parlance?

- Kathleen

Today’s PowerPoints

Sorry to be a little late. Click on this link to get the slides.

We will be guided in our discussion by the following question:

1) What do economic policymakers view as the most troubling market failure and, therefore, the one that needs the most prompt corrective action on government’s part?

2) Is this a view shared by the three economic paradigms?

3) What role does production play in keeping the economy afloat?

4) What is the necessary “flip-side” of production in the current economic regime?

5) Why is the current way that GNP calculated problematic from the standpoint of sound economic policy?

Today, as you know, your first essays are due. Joshua and I will be grading them based on the following rubric.
Rubric for grading finance essays

structure:

1. What is the author’s thesis?
2. How effectively does the author state his/her thesis?
3. How organized is the essay? Does the author make his/her points in a logical manner? (take points off for rambling)
4. Does the author develop his/her thesis effectively (i.e., does he/she make a persuasive case?)
5. What is the author’s conclusion? Does he/she summarize the main points?

content:

1. Does the author quote any of the articles from class (include blog entries)?
2. Does the author attempt to incorporate any of the three paradigms discussed in class?
3. Does the author show any familiarity with the concepts discussed in class?
4. Does the author incorporate the class material into his/her answer with skill?
5. Does the essay make sense?

The above criteria will also apply to future essays. The next one will be assigned later this week and will be due two weeks from today.

Did the New Deal end the Great Depression?

Two posts ago, I mentioned that Milton Friedman declared that the Great Depression was the result of federal government mismanagement, a claim that Paul Krugman disputes. On the subject of whether government programs helped pull the country out of Depression, there has been considerable controversy. A book by Amity Shlaes called The Forgotten Man, provides a skeptical account of the Keynesian viewpoint that government spending lifted the economy out of the dumps. This blog, The Edge of the American West, makes a persuasive case, based on the data, that the New Deal improved the country’s economic condition considerably. The article also makes a very compelling case for reading carefully between the lines and paying close attention to footnotes, something every self-respecting scholar should know.

Unpacking the stimulus

NPR’s Planet Money website has a great series of short articles illustrated with maps of the USA showing how the stimulus money will be spent, which states will benefit the most, etc. Well worth reading the analysis and checking out the graphics. Clearly, the package will not provide equal benefits for all but who gets more of a particular aspect of the package might surprise you. The website also includes links to the datasets used to create the maps.

Who was Milton Friedman?

The New York Review of Books published this article in 2007, a year after Friedman went to the Great Free Market in the sky. Not only does the author, Nobel Prize-winning economist, Paul Krugman, do a good job in summarizing Friedman’s contribution to economics, he also does a nice job in recapping the history of post-war US economic policy. Read this and go back and watch the Charlie Rose interview of Friedman.

Krugman makes the point that Friedman was the anti-Keynes in his fervent belief in the power of the free market, free from government intervention. He also notes that Friedman, the economist, was a formidable force. He, for example, predicted the effects of stagflation before they actually occurred. However, according to Krugman, the man was also a polemicist for capitalism and monetarism. The latter, Krugman says, is a highly technocratic, apolitical form of government intervention in the economy. On the other hand, fiscal policy which actually requires political debate and decisionmaking, and is, therefore, inherently more democratic, is viewed by monetarists as an inferior type of intervention. Friedman was deeply skeptical of government’s role in the economy, going so far as to say in an 1976 interview, “the elementary truth is that the Great Depression was produced by government mismanagement.” In truth, the government under-managed the economy into a catastrophic depression.

Krugman’s final observations regarding Friedman are telling:

In the long run, great men are remembered for their strengths, not their weaknesses, and Milton Friedman was a very great man indeed—a man of intellectual courage who was one of the most important economic thinkers of all time, and possibly the most brilliant communicator of economic ideas to the general public that ever lived. But there’s a good case for arguing that Friedmanism, in the end, went too far, both as a doctrine and in its practical applications. When Friedman was beginning his career as a public intellectual, the times were ripe for a counterreformation against Keynesianism and all that went with it. But what the world needs now, I’d argue, is a counter-counterreformation.

–BC

Keynesian vs. Neo-Classical

In the January 30 show, “The New Boss” (Act Three), This American Life has a very clear break down of the neo-classical vs. Keynesian economists battle since World War II, culminating with the debate of the current stimulus. Includes interviews with Blinder and Cowen. Also includes a brief biography of Keynes – interesting guy.

This American Life also did two other shows in 2008 that were very helpful in outlining the whole mess that we are in. The first one was in May, “The Giant Pool of Money’, about the mortgage crisis. The second one was in October, “Another Frightening Show about the Economy”, about the credit market collapse.

-Kathleen

Flies in mens-rooms and other lessons of behavioral economics

I read this article in the Business section of today’s NY Times. It has to do with an experiment in the use of behavioral economics to solve a real-world problem. It seems that adding a fake fly to urinals reduces “spillage” by 80 percent, providing yet another example of the application of economics to urgent social problems. In seriousness though, the work of economists such as Richard Thaler (who is mentioned in the article) shows that sometimes human beings need a nudge to behave rationally. That, at least, is the thesis of a new book by Thaler and his colleague (and Obama Administration official) Cass Sunstein, entitled appropriately enough Nudge. Visit the blog by clicking on the link. They have some very “outside-the-box” type of thinking about changing public policy using “libertarian paternalism”. Eric Posner, a blogger, profiles Sunstein about the book and has this to say about libertarian paternalism: the approach that has received the most attention recently is Sunstein’s argument (with Dick Thaler) in support of what they call “libertarian paternalism,” government policies that help prevent errors that people predictably make because of cognitive biases (Sunstein is a prominent critic of the rational actor model used by economists) without interfering with the choices of sophisticated people who know their interests better than the government does (You can read the whole interview here

On a separate note, Joseph Stiglitz goes on record with his claim that “nationalizing banks is the only answer.” Read his reasons why here.

–BC

Job Losses

Speaker Pelosi’s office put out this graph on Friday:

Kathleen

The social power of “stuff”

The recent posts have been on the stimulus plan (on its way to passage in the Senate, see WSJ article here) or corporate executive pay. However, as the NY Times Magazine article from last Sunday suggests, the roots of the problem actually go much deeper than the recent economic downturn and poor corporate judgment. David Leonhardt talks about the importance of social norms and how they are frequently (always?) ignored by economists and policymakers in general. Perhaps the biggest social norm regarding the economy is growth and what fuels it, namely consumer spending. This idea is so firmly entrenched that neither Republicans and Democrats are willing to challenge it. So both sides are arguing over what is the best way to accomplish the same thing: Get consumers spending again to drive up aggregate demand, which in turn will lead to producers producing and creating new jobs, etc. The downside to all this is the overemphasis on consumerism as the engine of economic growth. That leads to the type of rumination found in this essay by the famed computer programmer, Paul Graham (inventor of anti-spam software). The idea that we don’t own stuff, stuff owns us is as old as Thoreau’s Walden and probably goes back to the New Testament. But, in light of our current economic crisis and long-term sustainability, it is useful to reflect on the wisdom of consumerism as the only way to keep our economy humming. The other alternative, as suggested by Galbraith and Krugman, is shifting capital into social investments such as improving our education and health care systems and rebuilding our nation’s infrastructure.

Executive Pay

Reed Hastings, Netflix CEO, wrote an op-ed in the New York Times today criticizing the moves to limit CEO pay in general and specifically for companies getting bailout money. He argues instead of capping pay, tax it at a much higher rate. I find this a bit disingenuous because there isn’t much argument that the nomial and real tax rate that the top 20% of the income distribution has declined precipitously over the past 30 years.

The questions I would pose to him if given the opportunity are:
(1) If all CEO pay is capped, what alternative is there for the current pool of CEOs? Retirement, something else? What else pays as well that they are also qualified to do? Or is the argument that they will simply go abroad? Might not other countries institute similar caps if the US leads? We are in fact the American in the Anglo-American style of capitalism. If we change our rules, would that not make political room for others to follow?

(2) If the current pool of CEOs is unwilling work for the new pay cap, will not a new pool be created out of the next, possibly better equipped (not married to the “old way” of doing things), generation of business people? $500K is nothing to sniff at… unless of course you’re are used to $20m.

(3) If the companies are not able to attract star CEOs with better compensation packages (note to Congress: if you want this to be effective, you have to limit TOTAL compensation), would they not be “reduced” to looking for the CEO that best meets their actual needs. Wouldn’t both sides be more concerned with finding the right fit instead of trying to attract the biggest name?

(4) Do we really like what this “star culture” has done to the business? Are the stars actually more effective or have they been more beneficiaries of good timing? For example, is a banking CEO who retired in 2007 really a star or someone who jumped ship before anyone realized there was a problem? Or is a CEO who took over in July 2008 really awful?

Thoughts anyone?

Relative prices of different liquids

I found this online. I do not know the source so I cannot say how reliable it is. The prices appear to be in the ballpark, however (although I do not know how it arrives at the price for human blood).

Relative Prices of Different Liquids

Looking at the graph, it’s no wonder that we’re so dependent on gas.

Is more spending the solution?

Hi everyone!

I thought this article was pretty interesting and relevant to what we have been talking about in class. Two local economists, David Rose and Lawrence White, challenge the assumptions of a “Keynesian cause and a Keynesian cure” regarding the current recession and advocate for a classical, free market approach to fixing the economy.

Click here for article

(I’m not sure I agree with everything they say, but it is an interesting perspective)

-Colleen

Privatizing roads

In response to yesterday’s post on previous government efforts to deal with recession, Kathleen sent in this article on the Huffington Post by Thomas Frank.

Not so long ago, before Wall Street imploded and the US automakers went bust, the article says that “Private businesses did everything better than the state, we were told. And that meant even tasks as inherently public as maintaining bridges and roads.”

Frank discusses the wisdom of privatizing a public function like highways.

How the Government Dealt With Past Recessions – Interactive Graphic – NYTimes.com

Very informative graphic with audio commentary by three noted economists.

more about "How the Government Dealt With Past Re…", posted with vodpod

If the above chart does not work you can go to this link

Obama plans executive pay ceiling

The Obama administration plans to restrict executive pay to $500,000 annually, according to this article in the New York Times. This restriction would only apply to the executives of companies receiving significant amounts of bailout money.

The article goes on to say “Executives at companies that have already received money from the Treasury Department would not have to make any changes. But analysts and administration officials are bracing for a huge wave of new losses, largely because of the deepening recession, and many companies that have already received federal money may well be coming back.”

This is a politically popular move in light of rising taxpayer fury at the recent Wall Street bonus scandal and through-the-roof executive compensation packages.

Tomorrow’s PowerPoint

Follow this link to download the PowerPoint slides for tomorrow’s class (excluding Joshua’s section on Globalization). To save trees, I will not bring hand outs to class anymore. Instead, I’ll post the slides online at least 24 hours before.

If you have trouble accessing the slides contact me or Joshua.

The Section on Globalization for this Weeks Class

The main reading for the Globalization lecture this week is “Why Revisit Public Finance Today?” For the other one “Making sense of Globalization” only read section 2 from p.17 to 32.

The learning objectives for this week’s globalization lecture will be to understand what globalization is and how global issues are increasingly affecting local policy considerations, creating a need for a broader view for public Finance (the new public finance).

National policy choices and decisions are determined by among other considerations, “public (social) goods. In a globalized world, we are increasingly hearing of the concept of “global public goods” which include several issues such as health, environment/global warming, security/terrorism, global financial stability, etc. By the end of the lecture we should grasp the complexity of providing such global public goods in the absence of a global government (with many sovereign nations), and also the fact that the global mobility of capital and labor are decreasing the degree of latitude in policy making for national governments (like the US). How should such goods be financed in the absence of global taxation? How are nations and institutions responding to these issues?

As you think about this section, consider what responses various theorists we have discussed in class so far would provide to Globalization.

For class on Wednesday

This week we will be reviewing the theories we’ve talked about so far in class. As a way of framing this discussion please read the following article by David Leohardt, which appeared in yesterday’s NY Times Magazine. As you read the article, come prepared to discuss the following:

The article discusses Mancur Olson’s work on interest groups. How does Olson’s theory fit with the three paradigms?

What is “investment-deficit disorder”? What does the author say cause this economic malady?

Why does Leonhardt think it is so important to transform as opposed to merely stimulate the economy?

Why is health care so hard to reform?

What is the connection between public education and economic growth?

Leonhardt makes reference to something in the last section of the article that takes us full circle to Heilbronner in the first class. What is it?

Last year’s “Dr. Doom” predicts worse still to come

Yesterday, I posted a link to a blog featuring a Marxian take on the economic crisis. Today, we are going the opposite route and featuring a link to a story about Peter Schiff, who predicted with uncanny accuracy, last year’s collapse of the financial markets. Schiff is an adherent of the Austrian free-market economists, Hayek and Van Mises, and a former advisor to Ron Paul, the Republican Congressman with strong libertarian leanings. In the article he says that: “We don’t save and we don’t produce anything anymore. We simply borrow from the rest of the world, and then we spend it. We’ve had a giant party. We bought all these plasma TVs and iPods. We remodeled our houses and took vacations. But you know what? The bills are coming in.”

True to his ideology, he believes that government spending will just make matters worse. Don’t expect things to get better any time soon. Schiff predicts several more years of recession. His solution to the current mess is to let the markets take their course and hope that after all the tough economic times that things will start to get better again.

A Marxian take on the financial crisis

I came across this blog post today. I skimmed it and thought it looked rather interesting in light of our class discussion last week. In particular, pay close attention to what the writer says is the importance in Marxian analysis of the word, “crisis.” Recall O’Connor’s use of the word in his article. What is being conveyed is the idea of a complete breakdown in confidence. In a capitalist economy, confidence is key (you don’t have to read Marx to believe that). Therefore, if there is a lack of confidence or declining confidence then things can go south pretty fast. That’s what happened according to the Marxian viewpoint. The conclusion is pretty scary if you believe the writer: We’ve come to the point where we are not trying to save either the poor or the rich, but the system itself! As you read this, think about how a Neo-classical of Keynesian might respond. Do you think they would predict a complete and total collapse of the entire system as readily? How would they challenge the Marxian perspective on the data?

Short essay question

Conservatives and liberals offer different views regarding the role of government in the current financial crisis. Conservatives contend that government involvement in the economy has contributed to deficit spending, over-regulation and high taxes; while liberals contend that deregulation or lack of government intervention is the leading cause of the current fiscal crisis. Given the difference between the two camps, defining/understanding government’s role in the economy is an important step in finding a solution to the current crisis.

Read the articles by Gordon and Blinder and watch the interview with Martin Feldstein and Joseph Stiglitz on Charlie Rose. What can you infer about what the writers and the interviewees think about government’s role? How do Stiglitz’ and Feldstein’s attitudes toward Obama’s fiscal stimulus plan reflect their conception of the proper role of government in the economy? Where would you classify each one in terms of the three paradigms discussed in class?

Good weekend

A little later today, Joshua will be uploading the question for the short essay assignment. I am looking for a paper that is between 700-1,000 words in length, double-spaced, and APA format. The due date is February 11. You can hand it in before class by emailing it to me or you can give it to me in class.

I came across this interesting article on income inequality. The article basically documents the redistribution that has been occurring since the 1970s, which has seen income flow increasingly to wealthy Americans. The authors note that “Excluding capital gains, the richest one percent claimed 17.4 percent of all pre-tax income in 2005, more than double what that figure was in the 1970s. (It bottomed out at 7.8 percent in 1973.) This is the greatest concentration of income since 1936, when the richest one percent received 17.6 percent of total income.”

The article, which is found on inequality.org (a project of Demos and the Institute for Policy Studies) is chock full of graphs and tables that underscore the massive transfer of wealth from middle-income and lower Americans to the well-to-do. There is also an excellent section at the end that takes the reader to the original sources for the data.

We will be discussing income inequity in some detail in a couple of weeks. This article will serve as a good backdrop for that discussion. One thing to keep in mind as you are thinking about income inequality is “How much of this transfer of wealth is a result of public policy?” “If much of the redistribution is the consequence of public policy, how much of it was supported by the voting public?

Origins of the economic crisis

Source: Jeff Frankel's Weblog Dec 5, 2008

Who killed the economy

Now you play the game that is keeping economists up late at night. Trying to figure out who is most at blame for killing the economy. Just click on this link to vote on who is the most blameworthy. Will it be Greenspan or Bush? Maybe it will be something like Hedge Funds and China instead of someone.

This is a Test Post

Testing 1, 2, can you read me?

There is class tonight

Despite the snow and ice, the powers-that-be have mandated that learning will go on! Take a look at the discussion questions from yesterday’s and the first post.

Charlie Rose – A conversation about Obama’s economic stimulus package

Martin Feldstein and Joseph Stiglitz discuss Obama’s stimulus package on Jan 27, 2009

more about "Charlie Rose – A conversation about …", posted with vodpod

Some discussion points for tomorrow’s class

In addition, the questions from last week’s first blog post, please come to class tomorrow prepared to discuss the following:

1) Which of Musgrave and Musgrave’s three fiscal functions of government is the most controversial and why?

2) What is Musgrave and Musgrave assuming about society’s current distribution of income?

Accurate Pie Chart

More useful links

The first one is called “How to Gut a Book” and is written with history students in mind bu the advice is still pertinent. You should come to every class prepared to talk about the author’s main thesis of every article or book we read in class.

The second one is called “Visualizing Economics.” If you’re like me you probably prefer a well-done graphic to page after page of complex formulae. This website provides a wealth of economic data in attractive graphical presentations.

Interesting blog post

This is an interesting blog post that uses a graph to show that over the long run, economic growth swamps short term fluctuations in the economy. The graph also tells the story mentioned in class that only the massive spending prompted by the world war pulled us out of the Great Depression. The overriding message of the post seems to be that historical trends indicate that we will pull ourselves out of this current mess; the fear that has captured the public is probably natural but that in the end long term growth will prevail.

Another great site for visualizing data is FlowingData. This example shows some interesting ways to visualize consumer spending.

Another good piece is this one in Forbes which provides a fair overview of the history of economic stimulus packages.

Checking Periodically

Thanks Chris and Kevin for your comments. And yes, Kevin, I agree that more referees are needed. Please everyone join in the discussion and don’t be shy.

I want to urge everyone to check in periodically–a couple times a week is probably about right–because I’ll update this space on a regular basis.

This column caught my attention in today’s NY Times. Tell me what you think. Do you detect any bias?

Greetings

Welcome students. The readings for next week are Friedman and O’Connor in the Peretz book. Think about how each author approaches the question of the government’s role in the economy. In some ways, both authors view the government as a threat but for different reasons…why?

How would you classify each author based on the categories discussed in class 2 weeks ago (interventionist, nonintervensionist, Marxian)? Why? How would each one view the type of fiscal stimulus package being considered by the Obama administration?

Useful Links
Milton Friedman’s Wikipedia entry
James O’Connor’s Wikipedia entry
Amazon.com’s review of O’Connor’s Fiscal Crisis of the State.
Milton Friedman on Charlie Rose

Please indicate that you have stopped by this blog by leaving a comment. It can be brief or long.