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.

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

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

Which state has the sunniest disposition in this gloomy economy?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The readings for this week are:

(E) The Golden Straight Jacket

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

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

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

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

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

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

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

Josh

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

Please find this week’s power point slides  here

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.