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.