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

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.

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.

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

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.”

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.

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.

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.

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.

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.”

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.

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.

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.

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.

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

Keynesian approach might just dig a deeper hole

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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

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

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

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.

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.

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.

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?

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.

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

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

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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.