John Dean in his 2006 book of the above title states that what has driven him is the realization that our government has become largely authoritarian. From this premise, Dean proposed and documented two key points:
1) what is currently described as the “conservative movement” bears virtually no resemblance to Goldwater’s conservatism, and has nothing to do with restraining government power or preserving historical values. Instead, it has transformed into an authoritarian movement which largely attracts personality types characterized by a desire and need to submit to and follow authority.
2) because those who submit to authority necessarily relinquish their own conscience (in favor of serving the conscience of their leader and/or their movement), those who are part of this movement are capable of acts which a healthy and normal conscience ought to preclude.
Saturday, December 29, 2007
Monday, December 17, 2007
Growth & Recession
The total US economy grows and is not in recession. Why then would a November survey by Rasmussen Reports show that 40 percent of respondents believe we are in a recession? Perhaps it is because the total hides the distribution of income. The Center on Budget and Policy Priorities finds that the share of the nation's after-tax income going to the top 1 percent of households hit the highest level on record in 2005. In contrast, the share of national after-tax income going to the middle fifth and bottom fifth of households was the smallest on record. The income of the bottom fifth increased five percent from 1979 to 2005, while the top one percent gained 228 percent. The people on the bottom have reason to believe we are in recession.
Populism
I recommend Paul Krugman's column in the New York Times Dec. 17. He is suspicious of politicians who campaign on bringing us all together. He argues that change will require confrontation and Edwards' anti-corporate rhetoric is appropriate. Krugman says, "There’s a strong populist tide running in America right now. For example, a recent Democracy Corps survey of voter discontent found that the most commonly chosen phrase explaining what’s wrong with the country was “Big businesses get whatever they want in Washington.”
And there’s every reason to believe that the Democrats can win big next year if they run with that populist tide. The latest evidence came from focus groups run by both Fox News and CNN during last week’s Democratic debate: both declared Mr. Edwards the clear winner."
Your Troublesome Economist tends to agree with Krugman.
And there’s every reason to believe that the Democrats can win big next year if they run with that populist tide. The latest evidence came from focus groups run by both Fox News and CNN during last week’s Democratic debate: both declared Mr. Edwards the clear winner."
Your Troublesome Economist tends to agree with Krugman.
Sunday, December 16, 2007
Food Safety
Are you as concerned about the safety of your food as I? There was a very scary story in the New York Times yesterday about contamination of fish grown in China's polluted waters. Over the past 10 years the number of imported food items has tripled while the Food and Drug Administration budget has not increased (just one instance of how domestic programs are suffering from spending on the pointless Iraq war). Only one percent of food imports are physically inspected.
Seafood imports have grown, but the shipments receiving laboratory tests have fallen to about a half percent in 2006. We need a risk-management system so that countries such as China with poor safety records receive more scrutiny. How hard is that? Obviously too much for an administration obsessed with Iraq.
Seafood imports have grown, but the shipments receiving laboratory tests have fallen to about a half percent in 2006. We need a risk-management system so that countries such as China with poor safety records receive more scrutiny. How hard is that? Obviously too much for an administration obsessed with Iraq.
Beholden to the Super Rich
Americans are beholden to the Super Rich. It is hard to explain why persons of average means defer to them. Cases in point:
1. The Senate recently voted to delete a House passed $250,000 limit of agricultural subsidies to a single person.
2. The Senate voted to kill a House passed removal of a tax subsidy for oil companies (as if their profits were not absurd enough).
3. Congress failed to eliminate the favorable tax treatment for hedge fund owners.
4. The income subject to Social Security tax remains capped at $102,000.
5. Michigan state income tax is not graduated.
There seems to be a dominant ideology that we working stiffs owe our jobs to the super rich so we must coddle them. I suspect part of the problem is that our new sources do not call attention to these super rich benefits. How many of the above were you aware of?
1. The Senate recently voted to delete a House passed $250,000 limit of agricultural subsidies to a single person.
2. The Senate voted to kill a House passed removal of a tax subsidy for oil companies (as if their profits were not absurd enough).
3. Congress failed to eliminate the favorable tax treatment for hedge fund owners.
4. The income subject to Social Security tax remains capped at $102,000.
5. Michigan state income tax is not graduated.
There seems to be a dominant ideology that we working stiffs owe our jobs to the super rich so we must coddle them. I suspect part of the problem is that our new sources do not call attention to these super rich benefits. How many of the above were you aware of?
Saturday, December 8, 2007
Immigration Policy
In a Becker-Posner blog, Gary Becker objected to amnesty and instead proposed that illegal immigrants should be allowed to buy their legality by paying say a $10,000 fine. This is trumpeted as the Chicago principle of markets as the answer to many problems.
Instead of asking illegal immigrants to buy the right to stay, why not ask their employers to buy the right to keep them in the country? Doing so could free employers from any legal action against them for employing illegals.
Markets are wonderful, but the question is always who is the buyer and who the seller.
Instead of asking illegal immigrants to buy the right to stay, why not ask their employers to buy the right to keep them in the country? Doing so could free employers from any legal action against them for employing illegals.
Markets are wonderful, but the question is always who is the buyer and who the seller.
Fuel Efficiency Standards
The House voted for increased fuel efficiency standards, but the Senate has not. It is hard to believe that our domestic auto manufacturers cannot meet the proposed standards. We already have cars that can get 35 mpg, they are called small and light. If Toyota can make a profit selling these cars, why can't US auto makers? As someone observed, "What exists proves what is possible."
During the oil embargo, Clinton led us to a 55 mph speed limit. Such a limit for all relieves us all of the burden of trying to get one up on our fellows by more horsepower and size. Would the quality of our lives really suffer if we were more modest? Many Europeans seem to enjoy it.
During the oil embargo, Clinton led us to a 55 mph speed limit. Such a limit for all relieves us all of the burden of trying to get one up on our fellows by more horsepower and size. Would the quality of our lives really suffer if we were more modest? Many Europeans seem to enjoy it.
Tuesday, December 4, 2007
Tomato Picker Justice
Migrant tomato pickers last week asked Burger King to pay one cent more per pound for their tomatoes in order to improve the lot of the workers. Burger King said it could not be sure the extra money would get to the workers. One suspects that if they wanted to, smart Burger King’s execs could figure out a way. I was surprised in reading comments on this story in the Naples News how many people begrudged paying the pickers more. They often said that the workers were mostly illegals and if they don’t like their pay, they can go home. So much for justice!
The workers rallied at the offices of Goldman Sachs in Miami. Goldman is a major shareholder of BK. The workers noted the irony of their pay compared to the millions about to be distributed as bonuses to Goldman’s managers. Did the clever work of any of these ever put food on our tables?
The workers rallied at the offices of Goldman Sachs in Miami. Goldman is a major shareholder of BK. The workers noted the irony of their pay compared to the millions about to be distributed as bonuses to Goldman’s managers. Did the clever work of any of these ever put food on our tables?
Corporate Board Elections
The Securities and Exchange Commission, decided last week not to change the current rules that govern corporate board elections. Incumbent boards don’t have to print the names of candidates nominated by dissident shareholders on the official proxy ballots sent to shareholders. The cost of a campaign to get visibility for their candidates means that shareholders unhappy about excessive CEO pay for example are at a disadvantage.
The way the economy works is a function of a lot of little rules that get little public debate.
The way the economy works is a function of a lot of little rules that get little public debate.
Bravo Chavez
Populist leaders have always been a scary mixture of good and bad. Chavez’s attempt to gain even more power for himself is scary as is enlarged public ownership of business. However, his championing of the cause of the poor is admirable. The proposed constitution would have shortened the workday from eight hours to six, created a social security fund for millions of informal laborers, and promoted communal councils where residents decide how to spend government funds.
You have to have some respect for a man who can say he may have been too ambitious in asking voters to let him stand indefinitely for re-election and endorse a huge leap to a socialist state. I have not heard that from our own over-reaching president.
One can be heartened to see democracy working in more of Latin America.
You have to have some respect for a man who can say he may have been too ambitious in asking voters to let him stand indefinitely for re-election and endorse a huge leap to a socialist state. I have not heard that from our own over-reaching president.
One can be heartened to see democracy working in more of Latin America.
Monday, November 5, 2007
Financial Crisis: Burst Bubble, Frayed Model
In a web post entitled “The Financial Crisis” Burst Bubble, Frayed Model,” Robert Wade succinctly points out the interdependencies in the world economy.
1. Exporters in countries running trade surpluses such as China and Japan sell the dollars they earn to their banks in return for domestic currency (to pay their workers, etc.).
2. These countries’ central banks buy the dollars from exporters to dampen their currency appreciation and domestic wages which impairs their economy’s competitiveness. This increases the supply of domestic currency which increases domestic demand and creates inflationary pressure.
3. Central banks use their stock of dollars to invest in US assets such as property and Treasury bonds. (China recently made a large purchase of the stock of the US hedge fund, Blackstone Group.) One result is higher bond prices, lower yields, lower interest rates, increased US domestic debt and imports that cause the US deficit to grow even more.
4. All of this puts downward pressure on the dollar.
5. “This mechanism has generated impressive economic growth in both deficit and surplus countries. Large trade imbalances generate larger increases in financial transactions and rising financial fragility.
6. In 2004, “Foreign banks, with still fast-rising dollar reserves meeting a smaller supply of US government and quasi-government bonds, therefore switched to … asset-backed securities.” In this context, private banks and other financial organizations developed “sub-prime” mortgages and packaged them. These were given AAA ratings by rating agencies who obtained the business by optimistic ratings.
7. All was well as long as housing prices increased and mortgagees believed that rising prices allowed them to extract equity and thus meet the higher repayment terms that developed.
8. “The bursting of the property bubble in the US in 2006 triggered a sequence in which, slowly, banking and financial operators became aware that the foundation of the debt pyramid was quicksand.” The large international banks and firms like Merrill-Lynch are now acknowledging the problem and writing off billions.
9. Wade suggests that the figure to watch is the ratio of total US Debt to GDP. It has been rising rapidly and in 2006 was 340%. “If US debt/GDP suddenly flattens, the US will experience a recession. If US debt/GDP falls, the world will experience a recession.
Source: http://www.opendemocracy.net/article/the_end_of_neo_liberalism
1. Exporters in countries running trade surpluses such as China and Japan sell the dollars they earn to their banks in return for domestic currency (to pay their workers, etc.).
2. These countries’ central banks buy the dollars from exporters to dampen their currency appreciation and domestic wages which impairs their economy’s competitiveness. This increases the supply of domestic currency which increases domestic demand and creates inflationary pressure.
3. Central banks use their stock of dollars to invest in US assets such as property and Treasury bonds. (China recently made a large purchase of the stock of the US hedge fund, Blackstone Group.) One result is higher bond prices, lower yields, lower interest rates, increased US domestic debt and imports that cause the US deficit to grow even more.
4. All of this puts downward pressure on the dollar.
5. “This mechanism has generated impressive economic growth in both deficit and surplus countries. Large trade imbalances generate larger increases in financial transactions and rising financial fragility.
6. In 2004, “Foreign banks, with still fast-rising dollar reserves meeting a smaller supply of US government and quasi-government bonds, therefore switched to … asset-backed securities.” In this context, private banks and other financial organizations developed “sub-prime” mortgages and packaged them. These were given AAA ratings by rating agencies who obtained the business by optimistic ratings.
7. All was well as long as housing prices increased and mortgagees believed that rising prices allowed them to extract equity and thus meet the higher repayment terms that developed.
8. “The bursting of the property bubble in the US in 2006 triggered a sequence in which, slowly, banking and financial operators became aware that the foundation of the debt pyramid was quicksand.” The large international banks and firms like Merrill-Lynch are now acknowledging the problem and writing off billions.
9. Wade suggests that the figure to watch is the ratio of total US Debt to GDP. It has been rising rapidly and in 2006 was 340%. “If US debt/GDP suddenly flattens, the US will experience a recession. If US debt/GDP falls, the world will experience a recession.
Source: http://www.opendemocracy.net/article/the_end_of_neo_liberalism
Hedge Fund Tax Loophole
The following excerpt from a Krugman NYT column expresses my opinion.
Money influence on Senate:
"The most conspicuous example of this influence right now is the way Senate Democrats are dithering over whether to close the hedge fund tax loophole which allows executives at private equity firms and hedge funds to pay a tax rate of only 15 percent on most of their income.
Only a handful of very wealthy people benefit from this loophole, while closing the loophole would yield billions of dollars each ear in revenue. Retrieving this revenue is a key ingredient in legislation approved by the House Ways and Means Committee to reform the alternative minimum tax, something that must be done to avoid a de facto tax increase for millions of middle-class Americans.
A handful of superwealthy hedge fund managers versus millions of
middle-class Americans,€” it sounds like a no-brainer."
Money influence on Senate:
"The most conspicuous example of this influence right now is the way Senate Democrats are dithering over whether to close the hedge fund tax loophole which allows executives at private equity firms and hedge funds to pay a tax rate of only 15 percent on most of their income.
Only a handful of very wealthy people benefit from this loophole, while closing the loophole would yield billions of dollars each ear in revenue. Retrieving this revenue is a key ingredient in legislation approved by the House Ways and Means Committee to reform the alternative minimum tax, something that must be done to avoid a de facto tax increase for millions of middle-class Americans.
A handful of superwealthy hedge fund managers versus millions of
middle-class Americans,€” it sounds like a no-brainer."
Saturday, October 27, 2007
State Children's Health Insurance
The best argument that something is possible, is that it already exists. The best argument that something can work, is that it is working. The State Children's Health Insurance Program (SCHIP) is a joint state-federal effort that subsidizes health coverage for 6.6 million people, mostly children, from families that earn too much to qualify for Medicaid but not enough to afford their own private coverage. A majority of Congress voted to extend coverage to another 4 million at a cost of $35 billion to be paid by raising the federal cigarette tax. Bush vetoed the bill arguing that it would “federalize health care,” read socialized medicine. One can argue about the extent of coverage, but Bush’s veto seems not concerned with specifics, but rather is based on simple ideological labels that seem to guide many of his decisions. The charge that some people who now buy private health insurance for their children would switch to the SCHIP does not mean the extension is not needed to help relatively low income people. Some of these people who are sacrificing a great deal to cover their children need help.
Internet Service Providers Tax Ban
Congress has voted to extend the ban on state taxes on internet service providers. This is hardly a fledgling industry that needs a tax advantage. Internet service providers say the price of Internet access could rise by as much as 17 percent if the moratorium on state taxes were allowed to expire. This is sheer hyperbole. What state would contemplate a 17 percent tax on anything?
The US Supreme Court has ruled that internet retail sellers may not be required to collect state sales taxes. This is hardly equal protection under the law, giving an advantage to out-of-state retailers. The following consequences are pointed out by http://www.newrules.com
It subsidizes the growth of distant companies, which contribute little to a community's civic and economic vitality, by giving them a 6 to 8 percent price advantage over local stores.
It undermines state and local governments by reducing tax revenue for schools, police, and other services, a revenue loss that will continue to grow as internet sales continue to displace in-store sales.
It makes a regressive tax more regressive (only those with Internet access and credit cards are able to take advantage of the tax break).
The US Supreme Court has ruled that internet retail sellers may not be required to collect state sales taxes. This is hardly equal protection under the law, giving an advantage to out-of-state retailers. The following consequences are pointed out by http://www.newrules.com
It subsidizes the growth of distant companies, which contribute little to a community's civic and economic vitality, by giving them a 6 to 8 percent price advantage over local stores.
It undermines state and local governments by reducing tax revenue for schools, police, and other services, a revenue loss that will continue to grow as internet sales continue to displace in-store sales.
It makes a regressive tax more regressive (only those with Internet access and credit cards are able to take advantage of the tax break).
Friday, October 26, 2007
Loss of Biodiversity
“Soccer moms are the enemy of natural history,” says Edward O. Wilson, Pulitizer Prize winning Harvard biologist. He is concerned about the loss of world biodiversity, and perhaps if children spent more time playing in the dirt and searching for bugs and worms, they would grow up with a greater interest and knowledge of life. He observes that we live on an unknown planet with only 1.8 million species named and partly understood. This may be only 10 percent of the total. We do not know what small organisms are out there that may be playing a vital role in our survival on earth. Loss of what we can’t readily see may be the end of us.
He suggests that a society is defined not only by what it creates, but by what it refuses to destroy. Surely, extinction of life forms has always occurred, but not at the rapid rate of today. Some of that destruction is caused by poor people putting great pressure on resources and habitat for their own survival. He believes that there is an ethical dimension to preserving biodiversity and that we must solve world poverty. More modest consumption by the rich would also help.
Lecture at Michigan State University, October 22, 2007
He suggests that a society is defined not only by what it creates, but by what it refuses to destroy. Surely, extinction of life forms has always occurred, but not at the rapid rate of today. Some of that destruction is caused by poor people putting great pressure on resources and habitat for their own survival. He believes that there is an ethical dimension to preserving biodiversity and that we must solve world poverty. More modest consumption by the rich would also help.
Lecture at Michigan State University, October 22, 2007
Tuesday, October 16, 2007
Mechanism Design: 2007 Nobel Prize
My campaign to reduce use of the mechanism metaphor in Economics has taken a hit with the awarding of the Nobel Prize to "mechanism design." The scientific background paper provided by the Swedish Academy drew a lot of "bunk" comments in the margin of my copy. On p. 1 it says, "Some markets are free of government intervention ...." Government and all markets form a nexus. The reference to Hayek and the aggregation of all relevant information is still questionable. p. 2, "The theory thus helps to justify financing of public goods through taxation." I thought the case was already made by Pigou. The assertion ignores the interests of what I call unwilling riders. p. 5, "private information precludes full efficiency." No Kidding!
p. 7 re: Groves and Clarke condition that "there are no income effects" makes the theory trivial. p. 8, the condition that agents be "expected utility maximizers is unreal. Economics must be the only field where prizes are given to people with conflicting views since Kahneman received the prize for showing expected utility to be false. The further conditions of "the set of possible allocations was unidimensional and the agents had quasi-linear references" is also unreal.
p. 9, "the probability of funding a public-goods project tends to zero as the number of agents increases." Conclusion: "classical Pareto-efficiency is incompatible with voluntary participation." Amazing what rigor produces! Every school child knows that the decision rule for most direct popular votes on public production/taxes are passed with majority votes. Some think this acceptable and others support politicians who promise to lower all taxes. The two sides are unlikely to alter their positions as a result of this rigorous analysis. If these results only "provide a rigorous foundation for Samuelson's (1954) negative conjecture about public goods" who needs it?
p. 19 with reference to social choice rules. Noting that indeterminate multiple equilibriums are to be expected, "The final outcome can then depend on negotiations and bargaining among the voters." Reference is then made to Schelling who observes that outcomes depend on "social and psychological factors." Heaven forbid that the world is explained by psychology and not mathematical deduction!
I can only conclude that the prize was given for rigor for rigor's sake and not for anything useful.
p. 7 re: Groves and Clarke condition that "there are no income effects" makes the theory trivial. p. 8, the condition that agents be "expected utility maximizers is unreal. Economics must be the only field where prizes are given to people with conflicting views since Kahneman received the prize for showing expected utility to be false. The further conditions of "the set of possible allocations was unidimensional and the agents had quasi-linear references" is also unreal.
p. 9, "the probability of funding a public-goods project tends to zero as the number of agents increases." Conclusion: "classical Pareto-efficiency is incompatible with voluntary participation." Amazing what rigor produces! Every school child knows that the decision rule for most direct popular votes on public production/taxes are passed with majority votes. Some think this acceptable and others support politicians who promise to lower all taxes. The two sides are unlikely to alter their positions as a result of this rigorous analysis. If these results only "provide a rigorous foundation for Samuelson's (1954) negative conjecture about public goods" who needs it?
p. 19 with reference to social choice rules. Noting that indeterminate multiple equilibriums are to be expected, "The final outcome can then depend on negotiations and bargaining among the voters." Reference is then made to Schelling who observes that outcomes depend on "social and psychological factors." Heaven forbid that the world is explained by psychology and not mathematical deduction!
I can only conclude that the prize was given for rigor for rigor's sake and not for anything useful.
Thursday, October 11, 2007
The Paper Economy: Credit Crunch of 2007
New inventions are not limited to physical things such as machines and electronics. Clever fellows in the financial world invent new forms of paper that give direction to the physical world of goods and services. The latest include zero down payment and adjustable rate mortgages (ARMs) and securitization of mortgages (mortgage bundles) called “collateralized debt obligations” (CDOs). Previously, home buyers obtained a mortgage from a local bank or mortgage company who evaluated the borrower’s ability to repay the loan and held the debt on the bank’s books. Now, these local firms resell the mortgages to brokers who package large numbers of loans to be sold to large national and international financial firms such as hedge funds and private equity buyout firms. In 2006, brokers accounted for 80 percent of all mortgage originations, more than twice the amount 10 years previously. The mortgage broker does not hold the debt, but is paid a commission. The more loans made, the higher the commission. This is an incentive for quantity, not quality. To obtain volume, home buyers with little savings and uncertain jobs were attracted to zero down payment ARMs. The institutional system of mortgage brokers and securitization is supposed to shift risk from local banks to those best able to evaluate and bear it. However, information is a problem. The risk of these mortgage bundles is evaluated by credit-rating firms who know that they will not get their fees if they are too critical.
Credit is at the heart of our paper economy. Hedge funds borrow money to buy these bundles of mortgages. Borrowed money is used to buy borrowed money. At the same time, borrowed money is behind a lot of the action in the stock market—private equity takeovers, leveraged buyouts and corporate stock buybacks.
One of the inventors of this new world of paper is Satyajit Das who estimates that one dollar of “real” capital supports $20 to $30 of loans. Derivatives (including CDOs) amounted to $485 trillion early this year, which is eight times the total global domestic product. In a period of rapid financial innovation and expansion, many firms profit from being highly leveraged, recently however, subprime loan default rates have doubled. Whole communities of non-maintained houses in receivership have appeared. In June, two hedge funds run by Bear Stearns went bankrupt with a loss of $20 billion. Countrywide Financial, the nation’s largest mortgage lender, is in trouble and its stock dropped 50%. Still, it makes little effort to restructure mortgages in default as it can make money on foreclosure fees.
The structure of incentives created by contemporary formal and informal institutions seems all wrong. Originators of mortgages have no incentive to seek quality, mortgage companies make money in foreclosures, and bond rating firms and real estate appraisers make fees by optimistic evaluations. Institutions structure the relationships among participants in the economy. New paper and new symbols organize production of goods and services. We know from past depressions and recessions that the physical components of the economy did not suddenly rust or freeze up causing massive unemployment and destitution. The problem lay in the institutional relationships. Institutional economists are skeptical of claims that markets automatically reach equilibrium. Rather they observe evolution and cycles. The contemporary practice of borrowed money being used to buy borrowed money is reminiscent of the stock market crash of 1929 when stock purchase on margin and purchase of the stock of holding companies was rampant. Satyajit Das sees hard times ahead as the economy deflates. I have no prediction. I certainly can’t claim to be better than Alan Greenspan who emphasizes that investment is based on expectations—a psychological phenomenon, not simply a matter of production functions. No one can really know when consumers and investors will lose confidence and withdraw. We only know that it can be quite sudden and tipped by unforeseen events of various kinds.
(Material and insights for this blog were collected from Charles Whalen, James Shaffer, Warren Samuels, Jon D. Markman, and David Ignatius.)
Credit is at the heart of our paper economy. Hedge funds borrow money to buy these bundles of mortgages. Borrowed money is used to buy borrowed money. At the same time, borrowed money is behind a lot of the action in the stock market—private equity takeovers, leveraged buyouts and corporate stock buybacks.
One of the inventors of this new world of paper is Satyajit Das who estimates that one dollar of “real” capital supports $20 to $30 of loans. Derivatives (including CDOs) amounted to $485 trillion early this year, which is eight times the total global domestic product. In a period of rapid financial innovation and expansion, many firms profit from being highly leveraged, recently however, subprime loan default rates have doubled. Whole communities of non-maintained houses in receivership have appeared. In June, two hedge funds run by Bear Stearns went bankrupt with a loss of $20 billion. Countrywide Financial, the nation’s largest mortgage lender, is in trouble and its stock dropped 50%. Still, it makes little effort to restructure mortgages in default as it can make money on foreclosure fees.
The structure of incentives created by contemporary formal and informal institutions seems all wrong. Originators of mortgages have no incentive to seek quality, mortgage companies make money in foreclosures, and bond rating firms and real estate appraisers make fees by optimistic evaluations. Institutions structure the relationships among participants in the economy. New paper and new symbols organize production of goods and services. We know from past depressions and recessions that the physical components of the economy did not suddenly rust or freeze up causing massive unemployment and destitution. The problem lay in the institutional relationships. Institutional economists are skeptical of claims that markets automatically reach equilibrium. Rather they observe evolution and cycles. The contemporary practice of borrowed money being used to buy borrowed money is reminiscent of the stock market crash of 1929 when stock purchase on margin and purchase of the stock of holding companies was rampant. Satyajit Das sees hard times ahead as the economy deflates. I have no prediction. I certainly can’t claim to be better than Alan Greenspan who emphasizes that investment is based on expectations—a psychological phenomenon, not simply a matter of production functions. No one can really know when consumers and investors will lose confidence and withdraw. We only know that it can be quite sudden and tipped by unforeseen events of various kinds.
(Material and insights for this blog were collected from Charles Whalen, James Shaffer, Warren Samuels, Jon D. Markman, and David Ignatius.)
Wednesday, October 10, 2007
Paying for Iraq War
At the beginning of the Iraq war I wondered why, if the war were so important to American security, Bush did not ask us to sacrifice and raise taxes to support it. Instead, of course, he lowered taxes, especially on the rich. Bush knew that enthusiasm would be tempered if people were asked to pay at the outset. The following column by Thomas Friedman of the New York Times explains Bush’s logic?!
October 7, 2007
Charge It to My Kids
By THOMAS L. FRIEDMAN
Every so often a quote comes out of the Bush administration that leaves you asking: Am I crazy or are they? I had one of those moments last week when Dana Perino, the White House press secretary, was asked about a proposal by some Congressional Democrats to levy a surtax to pay for the Iraq war, and she responded, “We’ve always known that Democrats seem to revert to type, and they are willing to raise taxes on just about anything.”
Yes, those silly Democrats. They’ll raise taxes for anything, even — get this — to pay for a war!
And if we did raise taxes to pay for our war to bring a measure of democracy to the Arab world, “does anyone seriously believe that the Democrats are going to end these new taxes that they’re asking the American people to pay at a time when it’s not necessary to pay them?” added Ms. Perino. “I just think it’s completely fiscally irresponsible.”
Friends, we are through the looking glass. It is now “fiscally irresponsible” to want to pay for a war with a tax. These democrats just don’t understand: the tooth fairy pays for wars. Of course she does — the tooth fairy leaves the money at the end of every month under Treasury Secretary Hank Paulson’s pillow. And what a big pillow it is! My God, what will the Democrats come up with next? Taxes to rebuild bridges or schools or high-speed rail or our lagging broadband networks? No, no, the tooth fairy covers all that. She borrows the money from China and leaves it under Paulson’s pillow.
October 7, 2007
Charge It to My Kids
By THOMAS L. FRIEDMAN
Every so often a quote comes out of the Bush administration that leaves you asking: Am I crazy or are they? I had one of those moments last week when Dana Perino, the White House press secretary, was asked about a proposal by some Congressional Democrats to levy a surtax to pay for the Iraq war, and she responded, “We’ve always known that Democrats seem to revert to type, and they are willing to raise taxes on just about anything.”
Yes, those silly Democrats. They’ll raise taxes for anything, even — get this — to pay for a war!
And if we did raise taxes to pay for our war to bring a measure of democracy to the Arab world, “does anyone seriously believe that the Democrats are going to end these new taxes that they’re asking the American people to pay at a time when it’s not necessary to pay them?” added Ms. Perino. “I just think it’s completely fiscally irresponsible.”
Friends, we are through the looking glass. It is now “fiscally irresponsible” to want to pay for a war with a tax. These democrats just don’t understand: the tooth fairy pays for wars. Of course she does — the tooth fairy leaves the money at the end of every month under Treasury Secretary Hank Paulson’s pillow. And what a big pillow it is! My God, what will the Democrats come up with next? Taxes to rebuild bridges or schools or high-speed rail or our lagging broadband networks? No, no, the tooth fairy covers all that. She borrows the money from China and leaves it under Paulson’s pillow.
Thursday, July 12, 2007
Private Equity Firm Taxes
The Bush administration warned lawmakers not to raise the tax rate of private equity and hedge funds or their managers, maintaining that it would injure the economy and discourage risk-taking. Appearing before the Senate Finance Committee, July 11, Eric Solomon, assistant Treasury secretary for tax policy cautioned against changes. Sen. Charles E. Schumer has long been critical of growing wage disparities and of Bush administration tax policies that he says favor the wealthy over the middle class. Still he has reservations about change because tax policies “provide incentives for risk-taking and entrepreneurship, because new ideas and new businesses create good jobs.”
Let's leave the slogans behind and consider the facts. Most of the risk taking we see is in financial manipulation, not in creating new products and business. These firms such as Blackstone, the Carlyle Group, and Bain Capital seldom contribute to management, except to lay off workers, reduce benefits, and sell assets. They increase the debt of acquired firms to pay themselves rather than to build new plants. The typical practice of “quick flips,” relisting the companies within a year or two of taking them private, with more leverage, but few if any operational improvements is a “contribution to the economy that we can do without and need not reward.
Let's leave the slogans behind and consider the facts. Most of the risk taking we see is in financial manipulation, not in creating new products and business. These firms such as Blackstone, the Carlyle Group, and Bain Capital seldom contribute to management, except to lay off workers, reduce benefits, and sell assets. They increase the debt of acquired firms to pay themselves rather than to build new plants. The typical practice of “quick flips,” relisting the companies within a year or two of taking them private, with more leverage, but few if any operational improvements is a “contribution to the economy that we can do without and need not reward.
Wednesday, July 11, 2007
Iraq Civil War
Bush claims that we cannot exit Iraq or it will erupt in civil war. And what does he call the daily bombings occuring now?
Oil Refinery Capacity
"Biofuels Push Causes Oil Industry To Cut Refinery Plans" read the headline in the Lansing State Journal last week and probably other papers. Wouldn't you think that some reporter would ask the refiners' spokesperson why we should believe the industry ever planned to build new refineries when they have not built any for 30 years, and are using their huge profits to buy back their own stock rather than invest in new plants? This is where our newspapers are failing the public. As long as papers just print press releases without investigation and background, the public is not well served.
Tuesday, March 27, 2007
Health Care Spending--A Social Problem?
“There is widespread concern, though to a considerable extent politically generated, with the total amount of money spent on health care in the United States. To the extent that the money is spent by individuals or firms without any public subsidy, there is no economic problem. If people want to spend more of their money on medical care and less on food or housing because they greatly value good health and longevity, that is their free, legitimate, and authentic choice. It is a sign of affluence that the nation can afford to devote so high a percentage of national income to medical care.”
From Richard Posner, Becker-Posner Blog of January, 2007
This argument supposes that individual demand is not a social phenomenon. Other people’s consumption affects the demand of an individual. Robert Frank and Daniel Kahneman have it right—our attempts to keep up with others can result in a hedonic treadmill effect. It is hard to resist the availability of an expensive heart operation for a loved one even if it will only extend life for a few months. If other people are doing it, to deny the operation is to appear niggardly and mean spirited. If a whole culture says, “enough is enough, we just do not spend astronomical sums on marginal improvements in health,” one person’s refusal to spend would not stand out for social disapproval and guilt.
Posner is correct in saying that total medical spending is driven by technology. But, it is technology plus social expectations. Preferences are socially learned and changeable.
From Richard Posner, Becker-Posner Blog of January, 2007
This argument supposes that individual demand is not a social phenomenon. Other people’s consumption affects the demand of an individual. Robert Frank and Daniel Kahneman have it right—our attempts to keep up with others can result in a hedonic treadmill effect. It is hard to resist the availability of an expensive heart operation for a loved one even if it will only extend life for a few months. If other people are doing it, to deny the operation is to appear niggardly and mean spirited. If a whole culture says, “enough is enough, we just do not spend astronomical sums on marginal improvements in health,” one person’s refusal to spend would not stand out for social disapproval and guilt.
Posner is correct in saying that total medical spending is driven by technology. But, it is technology plus social expectations. Preferences are socially learned and changeable.
Saturday, February 10, 2007
Environmental Sticks or Carrots
The buzz in environmental circles is the movement from governmental regulations to voluntary environmental improvements by business and industry. The controlling metaphor is moving from sticks to carrots. The emphasis is on the word voluntary as opposed to controls and regulation. Sounds good, we all like freedom. The metaphor misses the fact that regulation and ownership are functional equivalents. If I (or a group) own an opportunity, we can deny it to others and they therefore have a cost of doing without or buying it from me. Some have opportunities by private ownership and some have it by being the beneficiary of a regulation that keeps others from using the resource in question. The main difference between a regulation and ownership is that the beneficiary can’t sell it. It is a use value only. But, note that a group private ownership is much the same, an individual must get the agreement of all others and not just sell on their own.
So, what are the examples of so-called carrots that are motivating business and industry to be green? One, consumers are more loyal to green firms (and in some cases are willing to pay more for their products than the same product produced by a brown firm (I just made up that term). Firms selling to consumers have always responded to consumer preferences, be it speed and mileage in an automobile or the fact that it was produced in a green building with grass on the top (true of a new Ford plant for example). Is the promise of increased firm profits in response to consumer demand a stick or a carrot. The metaphor breaks down on closer examination. On the one hand the promise of greater profits looks like a carrot, but the promise of consumer exit from purchasing the brown product is punishment much like a stick.
One of the most famous contemporary consumer boycotts was of grapes organized by people wanting better wages and working conditions for migrant farm workers. The vineyard owners probably regarded the resulting lower sales as a stick. Of course, we know from behavioral economics that a dollar coded as a loss is psychologically larger than a dollar coded as a gain. When the vineyard owners gave in and paid higher wages, it was not voluntary.
A more significant boycott (or an equivalent sit-in) was that of Blacks who sat at lunch counters demanding to be served. There purchase might be called a carrot, but it was not seen as such by the store owners. It was coded as a stick and one that was resisted strenuously with the help of the police in some cities. When the store owners finally gave in, it was hardly voluntary.
A second example of a claimed carrot is when a firm improves its present environmental impact in anticipation of a future governmental regulation. It is hard to see this as fundamentally voluntary.
A third example is the trading of carbon units. This is advertised as a market solution to environmental problems. Most everyone regards market actions as voluntary and the results as desirable. But, why do these units have value? Either there is a cap on emissions in place and the firm does not already own enough units, or the firms expect caps to soon be in place. A cap is a form of ownership right. Any use of the environment for waste beyond the cap is owned by the public (make that the environmental interests within the broader pubic). The public may choose to sell some its allocation, but that depends on the rules for group action and those with high values don’t want to sell. To own is to have a stick that prevents non-owners from using the resource. The big issue that has not had enough attention is why the public accepted such a low cap allowing polluters to own a great deal of the resource. This question somehow gets lost in the celebration of voluntary market solutions. There is no market without a prior allocation of ownership sticks. In the words of Warren Samuels, a market is an arena of mutual coercion.
A fourth example are the subsidies available for some kinds of environmental practices and energy conservation such as those for hybrid cars and ethanol. This is truly a carrot, but one financed by taxpayers. And not all are willing participants—some prefer lower taxes to environmental improvement—some much for complete voluntary action.
Another example of voluntary carrots is the preference of the owners and CEOs of corporations. Some just spend the firm’s money on environmental improvement because they think it is the right thing to do—even if it did not bring new or more loyal customers. This is truly deserving of the term “voluntary.” It may be the same thing as when the CEO spends the firm’s money on the local symphony orchestra because a spouse likes classical music. This may explain the U.S. Postal Service sponsoring a team in the Tour de France—hardly the best return on its advertising dollar. Some of the stockholders of these beneficent CEO’s may not be volunteering their support, but merely going along with the separation of ownership and control in big corporations.
What is the point? It would be a mistake for environmentalists to be taken in by the myth of markets and voluntarism. The need for a well funded and authorized EPA will not disappear any time soon. I doubt that the big carbon emitters such as the coal burning electric utilities are going to volunteer to reduce emissions. I have not seen them pressuring the government to endorse the Kyoto Protocol. I read the other day that the State of North Carolina was suing the TVA because its coal burning generating plants were dumping into air reaching North Carolina. Maybe TVA customers will want to pay more for electricity and pressure TVA management to reduce emissions for the health of North Carolinians. None of us should hold their breath.
This is not to take anything away from firms such as the Interface Carpet Corporation and its CEO (and owner) Ray Anderson who has reduced its emissions of harmful chemical. Or of the pizza shop owner who has redirected the heat of its ovens to heat water.
So, what are the examples of so-called carrots that are motivating business and industry to be green? One, consumers are more loyal to green firms (and in some cases are willing to pay more for their products than the same product produced by a brown firm (I just made up that term). Firms selling to consumers have always responded to consumer preferences, be it speed and mileage in an automobile or the fact that it was produced in a green building with grass on the top (true of a new Ford plant for example). Is the promise of increased firm profits in response to consumer demand a stick or a carrot. The metaphor breaks down on closer examination. On the one hand the promise of greater profits looks like a carrot, but the promise of consumer exit from purchasing the brown product is punishment much like a stick.
One of the most famous contemporary consumer boycotts was of grapes organized by people wanting better wages and working conditions for migrant farm workers. The vineyard owners probably regarded the resulting lower sales as a stick. Of course, we know from behavioral economics that a dollar coded as a loss is psychologically larger than a dollar coded as a gain. When the vineyard owners gave in and paid higher wages, it was not voluntary.
A more significant boycott (or an equivalent sit-in) was that of Blacks who sat at lunch counters demanding to be served. There purchase might be called a carrot, but it was not seen as such by the store owners. It was coded as a stick and one that was resisted strenuously with the help of the police in some cities. When the store owners finally gave in, it was hardly voluntary.
A second example of a claimed carrot is when a firm improves its present environmental impact in anticipation of a future governmental regulation. It is hard to see this as fundamentally voluntary.
A third example is the trading of carbon units. This is advertised as a market solution to environmental problems. Most everyone regards market actions as voluntary and the results as desirable. But, why do these units have value? Either there is a cap on emissions in place and the firm does not already own enough units, or the firms expect caps to soon be in place. A cap is a form of ownership right. Any use of the environment for waste beyond the cap is owned by the public (make that the environmental interests within the broader pubic). The public may choose to sell some its allocation, but that depends on the rules for group action and those with high values don’t want to sell. To own is to have a stick that prevents non-owners from using the resource. The big issue that has not had enough attention is why the public accepted such a low cap allowing polluters to own a great deal of the resource. This question somehow gets lost in the celebration of voluntary market solutions. There is no market without a prior allocation of ownership sticks. In the words of Warren Samuels, a market is an arena of mutual coercion.
A fourth example are the subsidies available for some kinds of environmental practices and energy conservation such as those for hybrid cars and ethanol. This is truly a carrot, but one financed by taxpayers. And not all are willing participants—some prefer lower taxes to environmental improvement—some much for complete voluntary action.
Another example of voluntary carrots is the preference of the owners and CEOs of corporations. Some just spend the firm’s money on environmental improvement because they think it is the right thing to do—even if it did not bring new or more loyal customers. This is truly deserving of the term “voluntary.” It may be the same thing as when the CEO spends the firm’s money on the local symphony orchestra because a spouse likes classical music. This may explain the U.S. Postal Service sponsoring a team in the Tour de France—hardly the best return on its advertising dollar. Some of the stockholders of these beneficent CEO’s may not be volunteering their support, but merely going along with the separation of ownership and control in big corporations.
What is the point? It would be a mistake for environmentalists to be taken in by the myth of markets and voluntarism. The need for a well funded and authorized EPA will not disappear any time soon. I doubt that the big carbon emitters such as the coal burning electric utilities are going to volunteer to reduce emissions. I have not seen them pressuring the government to endorse the Kyoto Protocol. I read the other day that the State of North Carolina was suing the TVA because its coal burning generating plants were dumping into air reaching North Carolina. Maybe TVA customers will want to pay more for electricity and pressure TVA management to reduce emissions for the health of North Carolinians. None of us should hold their breath.
This is not to take anything away from firms such as the Interface Carpet Corporation and its CEO (and owner) Ray Anderson who has reduced its emissions of harmful chemical. Or of the pizza shop owner who has redirected the heat of its ovens to heat water.
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