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Keynesian Stimulus and World War II

January 28th, 2009 No comments

Professor Barro had a good WSJ op-ed recently on the historical evidence for the USA for fiscal policy. WW2 is the big example– maybe the only example of where people say it had an effect. He doesn’t think much of that as evidence. If WW2 is not a good example, then maybe there aren’t *any* good examples of the Keynesian effect.

Data from the Ec. Rep. of the President is at http://www.gpoaccess.gov/eop/2009/B79.xls . The Deficit/GDP ratio rose to 5.9% in 1934 (first year of the data there), to 30.3% in 1943, to 4.2% in 1976, to 6% in 1983, to 4.7% in 1992, to 3.6% in 2004, and was estimated at 2.7% for 2008 (I suppose this estimate is from January 2008).

A stimulus extra of $400 billion per year would add about 2.9% to the budget deficit for 2009. That would take it up to 2.7+2.9= 5.6% if we use the pre-recession estimate of tax intake and GDP for 2009. We’d reach the 1934 and 1983 levels of budget deficit. Is that enough to take us out of a recession? I’d always heard that the New Deal spending was *not* enough to have much of a Keynesian effect. In that case, the best the stimulus package could hope for would be to mildly helpful– it’s not big enough to get us out of a recession.

But was the WW2 spending helpful? It was certainly big enough–30% of GDP in 1943.
I thought I’d look at the WW2 experience in a very simple way. The first diagram shows the unemployment rate from 1923 to 1940. What would you expect to happen in the 1940s?

Here’s what it looks like to me. The normal unemployment rate is around 4%. If the 1938 recession (was that the “Capital Strike”?) hadn’t hit, it would have been reached in 1939. WIthout WW2 it would have been reached in 1944.

Here’s what actually happened:

It is worth mentioning that there was a massive government jobs program in the 1930’s, which affected unemployment. Below I graph both the civilian unemployment rate that I used above and an adjusted, higher, rate which is (Unemployed people + people in emergency govt. jobs)/(labor force). The picture is similar.

Mark Wieczorek has a graph of the Deficit/GDP ratio 1940-2007:

References:

  • Cowen:
    Did World War II end the Great Depression?

  • Paul Krugman,January 23, 2009,
    Spending in wartime

  • Cowen on Barro and Krugman
  • Rasmusen on World War II as a test of Keynesian stimulus and Robert Barro.
  • Mark Wieczorek,
    The National Budget, Debt & Deficit . Graphs and numbers.

  • Categories: Economics, history, Keynes, recession Tags:

    Game Theory and Blackmail of Politicians

    January 23rd, 2009 No comments

    The FBI had highly incriminating tapes of Martin Luther King indulging in adultery, dirty jokes, etc. This was illegal, I think, since it was not taped at his office but at home or sleeping place, so it has been suppressed by court order till 2027.

    Why, though, didn’t the FBI leak this information back in 1964? I can think of two reasons:

    1. The FBI really wasn’t trying to snoop on King’s personal life. The FBI was just doing its job, checking out his communist connections, and having found that though he did consort with communists, he wasn’t one, they figured their job was done.

    2. The FBI (i.e., J. Edgar Hoover) blackmailed King, somehow changing his behavior.

    I don’t know why the FBI would like to blackmail King, but if you think J. Edgar Hoover was anti-King, reason 2 is your only explanation. If he was anti-King, why didn’t he leak the adultery info– or somehow set up King to be exposed by a third party?

    Reason 2 might be verifiable. After the dates when the FBI adultery tapes were made, did King somehow change his behavior?

    The idea of blackmail is important in other contexts too.

    1. I had the impression that Dole was going easy on Clinton in the 1996 campaign. Was this because Clinton had info on Dole?

    2. Rep. Rangel has gotten away with tax evasion for years, it seems. Did presidents use his vulnerability to prosecution to get him to be cooperative on tax policy?

    Categories: corruption, game theory, politics Tags:

    Keynesianism

    January 21st, 2009 No comments

    I’ve started reading Professor DeLong’s “The Modern Revival of the “Treasury
    View”
    ,January 18, 2009 draft. He certainly does write well.

    [T]he silliest and stupidest arguments made against
    Keynes’s policy proposals were made by the bureaucrats of H.M.
    Treasury, with their so-called “Treasury View”1 of Britain’s economic
    problems: that each extra pound sterling of British government spending
    had to be financed by borrowing an extra pound from Britain’s savers,
    which meant a pound less for Britain’s firms to invest. Hence investment
    plus government spending was constant. So fiscal policy could never
    boost employment or production no matter what.

    Later:

    [I]t is as obvious a fallacy as you ever find in economics. If no
    government bureaucrat can boost employment and production even in the
    shortest run by deciding to borrow and spend more—as the “Treasury
    View” maintains—than an immediate corollary is that no private
    entrepreneur can boost employment and production by deciding to borrow
    and invest more in his firm’s capital stock.
    If the “Treasury View” is
    correct, then homebuilders’ and financial intermediaries’ decisions to build
    more homes were not the cause of high employment in the mid-2000s. If
    the “Treasury View” is correct, then venture capitalists’ decisions to
    finance internet startups and telecom companies’ decisions to invest in
    fiber optics were not the cause of high employment in the late 1990s.
    Similarly, the huge unemployment of the 1930s was not due to any
    unwillingness of businesses to invest produced by the panic of the stock
    market crash and the waves of bank runs and failures in the early 1930s.
    And the high employment and output in the 1920s was not driven by
    private business enthusiasm for investing in the “new era” technologies of
    radio, electricity, and internal combustion after World War I.

    Later:

    We can immediately recognize that Fama’s argument must be wrong.
    First, it proves too much: not just that government spending cannot boost
    employment and output, but also that private enthusiasm like the
    enthusiasm for housing construction in the mid-2000s or high-tech
    investment in the late-1990s cannot boost employment and output either.

    Later in the post, Prof. DeLong mentions that if Fama is willing to use a classical full employment model, his conclusion might hold, but that Fama didn’t in his original post. Let’s try going through the story now, though.

    Case 1a. Suppose that everybody in the economy is working and there is perfect information. When the entrepreneur borrows money from the bank and hires a new worker, he must hire the worker away from an existing firm. Thus, employment does not change. Output does rise, however, because the entrepreneur wouldn’t be doing this unless he had a higher-return project than the existing firms and hence can bid away the worker with a higher wage. Or, what happens is that he bids away the capital by offering to pay a higher interest rate to the bank, which calls in its loan from some other firm, which therefore cannot afford to hire the worker any more.

    The example uses labor, but what the entrepreneur hires away might be machines, real estate, or iron ore instead.

    This story is one I use in teaching my students about opportunity cost. For Silicon Valley to grow, Detroit must shrink. It is Schumpeter’s idea of Creative Destruction from The Theory of Economic Development. There is a Circular Flow of production in the stable economy, and The Entrepreneur breaks it by diverting resources to an innovation. Brahma can’t create without Shiva destroying.

    Case 1b. Now let there be full employment, but imperfect information. The entrepreneur and the public generally think that the new project is better, but it’s actually worse. The bank knows this, but also the entrepreneur has enough capital in his firm to repay the loan even if the project goes sour.

    The bank will make the loan. At first, the price of the entrepreneur’s company will rise, as will the apparent wealth of the economy. (Will the price of the existing company fall when it loses the worker? I don’t know.) Later, the failure of the project will be apparent, and it will be clear that the true wealth of the economy has fallen. The bank, however, will make a profit.

    GDP’s course is interesting. Suppose the entrepreneur uses the loan to hire workers to build houses. Those houses have high market prices, and GDP rises that year because it is measured using the price of those houses (or, perhaps, what has previously been the price of houses of that size– this works either way). Then, it becomes apparent that nobody wants to buy those houses. They have little value. The entrepreneur (or whoever bought the houses at first, if they’re not still in his inventory) gets a lot poorer. Notice, though, that GDP does not fall because of this. GDP is a flow value, and doesn’t change when the value of stocks change. Also, we don’t go back and change GDP figures just because the output turns out to be less valuable than we thought. Nonetheless, we shouldn’t think that in that mistaken year the economy was doing wonderfully. It’s as if the houses that had been built turned out to be magical castles that turn into mist when someone tries to live there.

    Something like that is what happened in the Telecom Bubble and the Housing Bubble.
    If the government did the borrowing for a stimulus package instead of the entrepreneur, then it too would have to take the worker from some existing job. Employment wouldn’t change. Output would fall, though, because projects in a stimulus package are by definition those that the government doesn’t think pass a cost-benefit test in normal times. (I’m distinguishing here between stimulus spending and normal spending.)

    We have to do these first two cases of analysis of the Treasury View to get to the more relevant cases:

    Case 2. Some of the workers the entrepreneur hires come from existing jobs, and some were not employed before. (This is the real Telecom and Housing Bubbles case, I expect.)

    Case 3. None of the workers the entrepreneur hires come from existing jobs. This is the case to understand when we come to analyze the Obama stimulus package. And, of course, we need to figure out if it is a possible case.

    I’ll need to return to thinking about Cases 2 and 3 later. I should mention, though, that I have no firm opinion on them. I do oppose the Obama stimulus, but mainly because I think the government would botch it even if it’s true that a Keynesian stimulus would be helpful now. I’m a microeconomist, so that’s what I pay most attention to. Also, though I’m a fan of Schumpeter, don’t think that I am an “Austrian School” economist. I’m not sure what that means, actually, but I associate it with a distaste for equilibrium analysis, mathematical modelling, and price theory. I am a firm believer in all those things, and proud to be part of the MIT-Chicago Synthesis which is standard among modern economists. (I’d put both DeLong and Fama in that category too, despite their disagreements about Keynesian stimulus. Their methodology isn’t all that different, just their conclusions. Though maybe I should put Fama in the old Straight-Chicago School; I’m not sure.)

    Categories: Economics, Keynes, research, stimulus Tags:

    Unemployment Insurance

    January 21st, 2009 No comments

    Why don’t we have unemployment loans instead of unemployment insurance? Right now, the government gives money to people who are unemployed, for some period of time. As I recall, the economic reason is that we don’t want people to take jobs too soon– we want them to search. But why not just loan them the money, then? That solves the liquidity problem.

    Categories: Economics, research Tags:

    Unwanted Countries

    January 12th, 2009 No comments

    From an interesting comment thread at Marginal Revolution:

    The Finnish government probably would not want reclaim the lost half of the Carelia region from Russia. The Soviet Union impoverished the area during the 60 years that followed WWII, and thus getting it back would bring Finns more harm than good. In fact, Boris Yeltsin’s goverment actually tried to sell the area to Finland in 1991, but Finns said no.

    Other examples of negative-value regions: Ulster, the West Bank, the Gaza Strip.

    Categories: Economics Tags:

    Economists Opposing Massive Fiscal Stimulus

    January 9th, 2009 No comments

    UPDATE, JANUARY 14. I discovered that Professor Miron and Congressman Boehner have already been putting together a list of stimulus skeptics, with comments by them. It’s up at: http://republicanleader.house.gov/blog/?p=399

    I think I’m going to start collecting the names of economists who oppose the Obama plan of spending $700 billion or so for a Keynesian fiscal stimulus. I hear the media saying that economists across a wide array of views have a consensus in favor of it, and I bet that’s completely wrong. There’s Eric Rasmusen, and Greg Mankiw, and Robert Lucas, and Tyler Cowen, for starters.

    I think part of the problem is that a lot of discussion by economists is about what sort of fiscal policy is best *if* we are going to spend $700 billion. That’s different from *whether* we should. In fact, even a devotedly Keynesian economist might oppose having a government stimulus if Congress and Obama get to design it, not an academic economist. If we are thinking of having a Keynesian stimulus, I suppose giving $500 to each American is a good way to do it, especially if we make it a gift certificate that they have to spend within six months or lose. But my saying that doesn’t mean I support the idea, much less that I support $700 billion in porkbarrel spending.

    I’ll add to this list as I come across names with links.

    1. David Backus
    2. Gary Becker (Chicago)
    3. Willem Buiter

    4. Tyler Cowen (George Mason)
    5. Kevin Hassett (AEI)
    6. David Henderson
    7. Robert A. Lucas (Chicago)
    8. Greg Mankiw (Harvard)
    9. Eric Rasmusen (author of this post) (Indiana)
    10. Hal Varian
    Categories: Economics, economists, media Tags:

    SAT Won’t Report Low Scores

    January 9th, 2009 1 comment

    National Review’s blog reports that the SAT is changing so that only a student’s MAXIMUM score out of all the times he takes the test will be reported to colleges. What amazing favoritism to rich, stupid, applicants!

    Or maybe not so amazing. This will be a bonanza for the SAT company, since their tests will be taken so many more times. This is especially true nowadays, when many colleges have merit-based scholarships and your $45 retest fee might have a 1/10 chance of yielding you $1000 extra in tuition breaks.

    It also raises an interesting mathematical question. Suppose everyone ends up taking the test exactly 8 times. This will cost a lot more, of course, but will it yield more accurate evaluation of the applicants? Which provides more useful information:

    1. A single test score.

    2. The maximum of 8 test scores.

    The answer depends on the distribution of an individual’s test scores for his given talent. If someone with ability X scores X on the test with probability .9 and X-y with probability .1, the Maximum is a better measure (in fact, then it is even better than the average of 8 test scores).

    If someone with ability X scores X on the test with probability .8, X-y with probability .1, and X+y with probability .1, which is better? The maximum still, I think. In almost every case, person i will end up with a maximum of Xi+y, and we can simply subtract y and get a person’s ability.

    If someone with ability X scores X on the test with probability .999 and X+y with probability .001, then I think , the Single reported score is better. It is right with probability .999, whereas the Maximum will frequently be X+y (with probability 1-.999^8) so it will be right with only probability .992. (I haven’t phrased that carefully– what we care about is not the percentage of “right” answers but the variance of the measure minus the true ability, but in this special case the two criteria give the same answer.)

    What if the distribution of test scores around ability has a normal distribution? I don’t know. The answer might depend on the variance. I’ll ask our job candidate at lunch. He’s a couple of years out of grad school already, so he shouldn’t freak out at the question.

    Categories: Economics, math, statistics, tests, universities Tags:

    Buying Religious Books from Persia

    January 8th, 2009 No comments

    I just received a book I ordered from either an American or a British company (I forget which). It came in an outer wrapper from Dubai, and the inner label is:

    New Book Sale

    PO BOX: 15875-8573
    TEHRAN-IRAN

    Is warehouse space really so much cheaper in Iran? Or is it the English-trained handling labor?

    And the book? –Philosophy of Religion- Selected Readings.

    Categories: Economics, Islam, living, religion Tags:

    Average Tax Rates by Income

    January 7th, 2009 No comments

    Prof. Mankiw reports CBO average tax figures by income level (all federal taxes included, including social security tax I suppose):

    
    Lowest quintile: 4.3 percent
    Second quintile: 9.9 percent
    Middle quintile: 14.2 percent
    Fourth quintile: 17.4 percent
    Percentiles 81-90: 20.3 percent
    Percentiles 91-95: 22.4 percent
    Percentiles 96-99: 25.7 percent
    Percentiles 99.0-99.5: 29.7 percent
    Percentiles 99.5-99.9: 31.2 percent
    Percentiles 99.9-99.99: 32.1 percent
    Top 0.01 Percentile: 31.5 percent
    
    
    Categories: Economics, taxes Tags:

    The Charity Gift to an Individual-What Is It?

    January 5th, 2009 No comments

    From Tom Smith at The Right Coast:

    Something you can do these days is give someone the gift of having given a gift yourself to some charity. So you might get a card that says, We have given a goat on your behalf to the village of Ubuti in East Ubutistan. As a follow on, you might get a picture of the villagers posing with their new goat, which is from you, sort of.

    I’m not saying this is not a nice thing. It is a nice thing. What puzzles me is just what it is. Not from a legal point of view. I’m not aware it raises any legal issues, interesting or otherwise. I just think it’s a little baffling what it is. Is it a gift? Somebody says to you, instead of giving you something you don’t really want or need, I have elected to give some people something they really do want and need. But then what does that have to do with me? Supposedly, the person sort of forgoing the gift gets the credit for it, but what credit is there, really? I didn’t give anybody a gift. Nobody asked me if I wanted to forgo a gift in order to enable the goat giving. I just get a card that says, you just gave a goat to someone, to which I might reasonably respond, I did? Maybe the idea is that the giver thinks I am such a good person I would prefer to have a goat given than to get a gift myself. Well, thanks! If you get a gift of this sort, do you write a thank you note for it?

    A commentor noted that the donor, but the not the quasi-recipient, gets the tax break.

    Categories: Economics, living, taxes Tags:

    A WASP Name for a Jewish Firm

    January 5th, 2009 1 comment

    From The American Spectator on the firm that’s gotten Gov. Richardson in trouble:

    Rubin founded the firm known for many years as Chambers, Dunhill, Rubin & Co, though there is no Chambers or Dunhill associated with the firm.

    He had to rename it, though:

    It appears that after a number of embarrassing investigations into alleged IRS investigations into back-door deals related to municipal bond financing in Atlanta and other localities in the late 1990s, the firm’s name was changed to CDR Financial.

    Categories: business, Economics, words Tags:

    Enjoying Your Tombstone

    January 3rd, 2009 No comments

    Via Clayton Cramer comes this CNN news story about Mr. Burris’s tomb:

    Under the seal of the state of Illinois and the words “Trail Blazer,” Burris, 71, has listed his many firsts in granite, including being the state’s first African-American attorney general and the state’s first African-American comptroller.

    The memorial also notes that Burris was the first African-American exchange student to Hamburg University in Germany from Southern Illinois University in 1959.

    Categories: Economics, living, politics Tags:

    The WOrst Models of Cars Sold

    December 25th, 2008 No comments

    TTAC’s Ten Worst Autos 2008 tells something about why GM and Chrysler are in trouble. Michael Barone is good too, on historical reasons.

    Categories: Economics Tags:

    Jews in Hollywood

    December 23rd, 2008 1 comment

    Via Steve Sailer comes this LA Times article. It would be interesting to look into this further. The open letter mentioned is discussed here, and it does seem that 8 execs signed and all were Jewish.

    I have never been so upset by a poll in my life. Only 22% of Americans now believe “the movie and television industries are pretty much run by Jews,” down from nearly 50% in 1964. The Anti-Defamation League, which released the poll results last month, sees in these numbers a victory against stereotyping. Actually, it just shows how dumb America has gotten. Jews totally run Hollywood.

    How deeply Jewish is Hollywood? When the studio chiefs took out a full-page ad in the Los Angeles Times a few weeks ago to demand that the Screen Actors Guild settle its contract, the open letter was signed by: News Corp. President Peter Chernin (Jewish), Paramount Pictures Chairman Brad Grey (Jewish), Walt Disney Co. Chief Executive Robert Iger (Jewish), Sony Pictures Chairman Michael Lynton (surprise, Dutch Jew), Warner Bros. Chairman Barry Meyer (Jewish), CBS Corp. Chief Executive Leslie Moonves (so Jewish his great uncle was the first prime minister of Israel), MGM Chairman Harry Sloan (Jewish) and NBC Universal Chief Executive Jeff Zucker (mega-Jewish). If either of the Weinstein brothers had signed, this group would have not only the power to shut down all film production but to form a minyan with enough Fiji water on hand to fill a mikvah.

    The person they were yelling at in that ad was SAG President Alan Rosenberg (take a guess). The scathing rebuttal to the ad was written by entertainment super-agent Ari Emanuel (Jew with Israeli parents) on the Huffington Post, which is owned by Arianna Huffington (not Jewish and has never worked in Hollywood.)

    The Jews are so dominant, I had to scour the trades to come up with six Gentiles in high positions at entertainment companies. When I called them to talk about their incredible advancement, five of them refused to talk to me, apparently out of fear of insulting Jews. The sixth, AMC President Charlie Collier, turned out to be Jewish.

    As a proud Jew, I want America to know about our accomplishment.

    Categories: art, Economics, race Tags:

    GRE Scores in Various Disciplines

    December 22nd, 2008 No comments

    From Mark Perry:

    Physicists are clearly the smartest, at a combined GRE score of 1899, then math at 1877, and then computer science and econ at 1862 and 1855. Chemistry and biology are down quite a ways. Philosophy is in the top league, with 1803. I’m surprised economists are so smart. It actually seems like a waste of talent.

    January 3. I just realized an implication of these numbers. Graduate students in pretty much any science are better with words than graduate students in English. Even engineering grad students are– though industrial and civil engineers are slightly worse. My chemistry/German double major roommate AJ would like to hear this. Also: going back to the original source, it seems these are Means, and that source has more info, including the actual number of students in the top 3% of each test score category in each discipline (which matters because some fields have many more students than others).

    Categories: Economics, universities Tags:

    Blame for the Financial Crisis

    December 18th, 2008 No comments

    It’s time to think about assigning blame for the financial crisis. I can think of two things that ought to be done:

    1. Any financial assistance should be conditioned on the CEO or other leaders of an institution being fired. To be sure, this tends to disrupt an organization, but these people have demonstrated that they make such big and stupid mistakes that their talents in everyday management aren’t important enough to outweigh them. And we need to set an example for the future.

    2. The government should decertify the major rating agencies. Their AAA certifications should no longer have any weight in deciding whether, for example, a government pension fund is investing prudently.

    This would kill the present rating agencies, but that’s okay. Replacement companies would arise instantly.

    Categories: Economics Tags:

    Bailout Political Pressure

    December 15th, 2008 No comments

    It seems we already have an example of a bank that felt pressured to make bad loans from fear of losing government support. From the American Spectator:

    Bank of America was the victim of a concerted shake-down operation that could be replicated around the country. Banks apparently now are expected to give money away to failed borrowers. This could become federal policy when Barack Obama, who supported this new example of Chicago blackmail, becomes president.

    Categories: Economics, g406, government Tags:

    Questions for Theorists

    December 14th, 2008 No comments

    From Econjobrumors, on a thread on the worst econ fields to be a candidate in:

    From the hiring side: The problem I see with many pure theorists (i.e. those who do not use any data) is the lack of connection between the research and any real-world issues. A lot of job applicants to my department and graduate students in my department have a difficult time answering (a) why is this relevant/important?, and (b) how would I know if you were wrong? If you are a theorist, you’ll do yourself a favor if you can answer those questions.

    Categories: Economics, teaching, universities Tags:

    GM and the Unions

    November 15th, 2008 No comments

    Professor Bainbridge has a big comment discussion going about the amazingly high wages the UAW union has extracted from the automakers it is bankrupting. What is really going on is that the workers own the firm. They are the residual claimants, and the company is run for their benefit. A residual claimant has a risky claim, though, and in a bad year he will earn less. The workers have avoided this so far by letting the capital of the company run down. Now they are at the point where they must take a temporary wage cut, unless they can use their political clout.

    Or so I hypothesize. This would make a good paper. Some facts are easily checkable. Has GM been investing less than the value of true depreciation? Has it been able to sell new stock? If it were freed of the unusually high pension obligations and wages, would it be in sound financial shape?

    November 16: Here is one of the many good comments from the Bainbridge post (his readers seem to be far smarter than those of other blogs!):

    
    I'm sorry, but if you try to make a point like this, and don't back it up
    with an outside source supporting your assertion, you only leave yourself
    open to people (like me) who will show you an outside source that proves
    you wrong.
    
    http://www.jdpower.com/corporate/news/releases/pressrelease.aspx?ID=2008115
    
    JD Power 3 Year Vehicle Dependability Study
    
    Problems per 100 Vehicles, by Brand, for the first 3 years of ownership,
    for cars sold in 2005, surveyed in 2008.
    
    (I'm only going to list the non-luxury brand names, since in the luxury
    brands, Lexus/Toyota has been winning this thing for the past 15 years)
    
    Mercury - 151
    Toyota - 159
    Buick - 163
    Honda - 177
    Ford - 204
    Industry Average - 206
    Nissan - 224
    Pontiac - 225
    GMC - 225
    Chrysler - 229
    Dodge - 230
    Chevrolet - 239
    Scion - 243
    Saturn - 250
    Jeep - 253
    
    A little statistical analysis:
    
    The average Ford has 1/3 more problems than the average Toyota.
    
    The average GMC, Chrysler, Dodge, and Chevrolet has 50% more problems than
    the average Toyota.
    
    The average Saturn and Jeep has 2/3 more problems than the average Toyota.
    
    
    Categories: Economics, research Tags:

    Buying Stocks in Recessions

    November 12th, 2008 No comments

    John Cochrane of Chicago has an exceptionally sensible op-ed in the WSJ on who should be buying stocks now and who shouldn’t.

    Categories: Economics Tags:

    Nikkei 1989, Dow 1929, Dow 2008

    November 7th, 2008 No comments

    Key Trends in Globalization looks like a good weblog. It has a very nice post comparing te current stock price decline to 1929-33 in the US and the 90s decline in Japan. During the Depression, the Dow dropped about 90%. The Nikkei has dropped about 80%. Both declines took place over a long period of time.

    Categories: Economics Tags:

    The Optimal Savings Rate

    November 6th, 2008 No comments

    Some people think that although people make efficient decisions about how much to save personally, the social discount rate we use is too low. The market gets it right, but government does not. I think the opposite is true.

    Individuals are too eager to consume in the present instead of the future. Think of a person as a sequence of selves over time. Most people are selfish and favor the present self over the future self. They save too little.

    On the other hand, when it comes to decisions across generations, we have to remember that future generations will be richer than we are. Thus, we should not incur too much cost now in exchange for benefits for them later.

    Categories: discounting, g406, research Tags:

    Taxing the Rich and National Savings

    November 6th, 2008 No comments

    Now that Obama has won, it is time to start thinking about raising taxes on the rich. I wonder what that will do to the saving rate?

    This is trickier than I thought. It might be that net saving by the rich is more than 100% of net national saving, if government and the poor are net borrowers. In that case, our national savings rate could actually go negative as the result of even a 5% increase in the marginal tax rate on the rich.

    Categories: Economics Tags:

    Redistribution and Forced Saving

    November 4th, 2008 No comments

    I was just thinking about Obama’s plan to increase taxes on the rich, and the recession. Contrary to what some people say, the tax increase won’t worsen the recession. Rich people save a lot, so taxing them during a recession is not especially bad. It will reduce longterm growth, though, by reducing national saving.

    If you think that people–rich and poor– do not save enough, then maybe you should oppose this tax cut. It would be better to redistribute towards the rich, so saving will go up.

    Categories: Economics Tags:

    Subsidiarity and Hierarchies

    October 26th, 2008 No comments

    The idea of “subsidiarity” came up today at a church meeting. The idea is that affairs ought to be handled at the lowest, most decentralized level. An individual congregation, for example, and not the denomination ought to discipline church members. The term is a Roman Catholic one.

    The discussion made me think of the following problem. Suppose we have a worker who is misbehaving. It makes sense for his immediate boss to discipline him, since the boss knows the situation best. His immediate boss, however, likes his employees and is reluctant to bear the emotional cost of intervening. Thus, it may actually work out better to have the top boss– or some central committee– begin the discipline process. Perhaps the immediate boss can then handle details, having been positioned as the friend of the worker rather than as the “tough guy”.

    This reminds me of the style of hierarchy models in economics. I’m not sure whether modelling is useful here or not.

    Categories: Economics, research Tags:

    The Risk of Common Investments

    October 24th, 2008 No comments

    I’m frustrated by how we economists have failed to incorporate most of wealth into our theory of asset pricing. The CAPM says that a stock needs a higher expected return if its return is more correlated with the return of the stock market as a whole. That’s a good start. It is true, too, that it is possible to hold a diversified portfolio of public stocks, whereas other assets such as private business stock can’t be held by everybody.

    I worry about other assets. How about bonds? Surely they should be in the CAPM, since they are public and easily diversified into.

    How about housing? That’s the asset most people hold. And it isn’t valued well by economists. It is a hedge against housing consumption risk. If rents rise, then if I own my house, I am insulated. But when I sell my house, I do face risk. Also, if rents rise, maybe I’d like to consume less housing. The optimal house ownership contract isn’t what we normally observe. It would involve some insurance against resale capital gains and losses, and adjustment for desired amount of house consumption.

    How about labor income? Labor is our greatest wealth– human capital, and just plain labor endowment. It’s risky, and the risk is correlated with the stock market. I’d like a stock that does well when my salary goes down.

    The Consumption CAPM is an advance. It notes that we want to have higher stock returns when we want higher consumption. That’s odd, though, because consumption is endogenous. Really, we ought to look for the correlation between a stock’s return and the return on wealth as a whole, which would be the ratio of GNP to wealth. We should look for the correlation between GNP and stock return, not consumption and stock return. But no, that’s not right. Ideally, we’d want the change in total wealth, including labor wealth, which is not the flow of GNP, but a change in a capitalized value of future GNP. I’d like a stock which is uncorrelated with other stocks, and uncorrelated with changes in the value of my labor.

    There’s another problem. THe price of stocks is determined by the kind of people who buy them. Poor people don’t. The only labor wealth that matters to stock prices is that of the people who buy stocks. So what we want to measure is the value of public stocks, bonds, private companies, housing of people who hold stocks, and labor wealth of people who hold stocks.

    Categories: Economics Tags:

    Quasiconcavity

    October 24th, 2008 No comments

    Martin Osborne has some good notes on quasiconcavity. I’m still not satisfied, though. It’s a basic enough idea that I wish I had better intuition for it, and lots and lots of pictures of functions that are or are not quasiconcave.

    October 25: Here are some key features of a quasiconcave function f(x).

    • It has convex upper level sets. The set of points x such that f(x) >= a is convex for any number a.
    • It has convex indifference curves if it is a utility function. If f(x) is strictly monotonically increasing, the function g(x) such that f(x)=a is a convex function.

    Every concave function is quasiconcave, but some quasiconcave functions are not concave. A key feature of quasiconcavity that concavity doesn’t have is that if you do an increasing transformation of a qc function, it is still qc. I wonder if the following is true:

    Conjecture: Iff function f(.) is quasiconcave, there exists an increasing transformation g(.) such that g(f(.)) is concave.

    I’d start to prove the conjecture this way. Let x and y be points in the upper level set of f(.), which means f(x)>=a and f(y)>=a. Since f(.) is quasiconcave, the upper level set is convex, which means that f(mx+ (1-m)y) >=a too. What we need to show first is that there exists some increasing function g() such that
    g(f(mx+ (1-m)y)) >= mg(f(x)) + (1-m)g(f(y)). I think we need to start by assuming that f(x) \neq f(y), and that they are both on the boundary of that convex upper level set. Then we can see how g has to affect those two levels of f differently.

    If the conjecture is true, then maybe we can think of quasiconcavity as being the equivalent of concavity for functions that are just defined on ordinal, not cardinal spaces.

    October 26. Why, though, do we worry about quasi-concavity at all in economics? Why not just assume that utility functions are concave? The conventional answer would be that utility is ordinal, not cardinal. That is a bad answer for three reasons. First, even if it is ordinal, we could say, “It’s only the ordinal properties of a utility function that affect decisions. Therefore, for convenience, let’s say that whatever function you start with, you have to use a monotonic transformation to make it concave before we start working with it.” Second, we might say, “Since only ordinal properties matter, let’s assume utility is concave for convenience.” Third, we might accept cardinality. Everybody uses von-Neumann Morgenstern cardinal utility in their models anyway, making only a brief nod, if any, to ordinality. But a risk-averse agent has concave utility. For these reasons, I wonder why it’s worth making our graduate students learn about quasi-concavity. The opportunity cost is that they’re not learning about something more useful such as the CAPM or the Coase Theorem.

    Maybe quasi-concavity comes up in enough other contexts to be important. I know Rick Harbaugh has a paper on comparative cheap talk where it comes up. In Varian, it comes up first in production functions, where it allows you to have convex input sets for a given output without requiring diminishing returns to scale, as true concavity would.

    October 27. Yet another thought. Margherita Cigola has done work on defining quasiconcavity in ordinal spaces, on lattices. Convexity has to be defined specially there. She uses a different (equivalent in R space) definition of quasiconcavity:
    f(mx + (1-m)y) >= mf(x) + (1-m)f(y)

    I like that because it is closer to the definition of concavity.

    Or another, suitable when the function is differentiable: f is quasiconcave if whenever there is a maximum (i.e., the first derivatives are zero), the matrix of second derivatives is negative definite. MR suggested that, for the single-dimensional x case. I’m not sure it does generalize that way.

    Categories: Economics, math Tags:

    Risky Borrowing

    October 20th, 2008 No comments

    When you save, you have a choice between investing in a risky asset like a stock or a safe asset like a bank account. When you borrow, there is much less choice. Usually, you just borrow at a nominal interest rate, paying back 10% regardless of the return on the stock market or the level of inflation. The only exception I can think of is the variable-rate mortgage, which at least varies with the nominal interest rate.

    Why is that? We can imagine a person being able to borrow at a lower interest rate if he agrees to bear risk. His interest rate could be 20% minus the return on the stock market, for example. If the average stock market return is 6%, his average interest rate would be 14% then. Someone who wanted a safe interest rate could borrow at 16% instead.

    Our borrower would be hedging someone else against stock market risk. This would be useful if the borrower were less risk averse than some saver.

    Yet we don’t see that. Is it because borrowers are usually more risk averse than savers? Is it because borrowers are too likely to default if they have a risky payment to make?

    October 21. At lunch I figured out a new twist. Suppose I want to borrow $100 for consumption, and I am risk-loving. I could borrow an extra $50, and invest it in the stock market. That way, I have to pay back $150 in cash, but my later wealth will be $(150-value of stocks I bought) lower as a result. Thus, even a poor person could take on risk if it weren’t for the possibility of going bankrupt.

    Categories: Economics Tags:

    Mortgage-backed Securities

    October 7th, 2008 1 comment

    Via Marginal Revolution, I found Gary Gorton’s The Panic of 2007, a long paper on the institutional details of the financial crisis. It gives particular examples of subprime mortgage bonds, tells how subprime mortgages work in detail, talks about the collateralized debt obligations that buy the bonds and issue their own securities, and so forth. It also talks about why there is a liquidity crisis. Prof. Gorton assigns blame entirely to subprime mortgages, because they are especially sensitive to housing prices (as opposed to interest rates). I only read a little of the article, and it makes difficult reading. The main impression I get is that these mortgage-backed assets are far more complicated than I had thought, and it is no wonder that they are hard to value. I’m also amazed anyone would buy them, for that very reason. It seems that they must just have trusted the rating agencies, which should not have assigned ratings to such complicated securities.

    Categories: Economics Tags:

    Fannie Mae and Freddie Mac Regulation

    September 23rd, 2008 No comments

    Charles Calomiris has a WSJ op-ed (with someone else) on Fannie Mae and Freddie Mac’s role in the subprime mortgage market and the Republicans’ attempt to stop them. The Democrats are squarely to blame, it seems. The op-ed also points out that deregulation has played no role in this crisis. The problem on Wall Street is that we’ve never regulated investment banks’ capital levels, not that we’ve deregulated them, and that financial innovations have created a need for regulation.

    Categories: Economics, elections Tags:

    Power Law– A New Gabaix Paper

    September 22nd, 2008 No comments

    Xavier Gabaix has a new paper, “Power Laws in Economics and Finance” that surveys research on when and why variables such as city size or executive pay follow the power law distribution. One gets a power law distribution if a city’s relative population (its population relative to the average city) grows proportionally to its relative population except for a small absolute increase that gives small cities a bit of an advantage. Even writing that first step is tricky, alas, and I don’t think I’ll be able to understand well enough to do research in the area. The reason the power law is useful seems to be that when it applies, the same laws are at work for big values and little values of variables, so, for example, one wouldn’t need a special theory of stock price plunges– it would just be a chance occurrence from the same distribution as small price declines.

    Categories: Economics Tags:

    Worth Its Weight in Gold?

    August 28th, 2008 No comments

    Via Marginal Revolution, Evil Mad Scientist Laboratories has a good article on “The Monetary Density of Things” . It’s about the value of things by weight. Rhodium and 50-dollar bills are worth more than their weight in gold, but marijuana and 2-dollar bills are worth less.

    Categories: Economics Tags:

    Optimal Gasoline Taxes, Given Externalities

    August 20th, 2008 No comments

    A good article on optimal gas taxes is “Does Britain or the United
    States Have the Right Gasoline Tax?” Ian W. H. Parry and Kenneth A.
    Small, The American Economic Review, Vol. 95, No. 4 (Sep.,
    2005), pp. 1276-1289. In 2000, taxes were $2.80/gallon in the UK and
    $.40/gallon in the USA. They should have been $1.34 and $1.01, in
    light of congestion, accidents, and Ramsey taxation (with minor
    contributions from pollution and CO2).

    Wikipedia says
    taxes are $5.20/gallon in the UK, $.47/gallon in the US, $7.61 in
    Germany, It is important to include value-added tax, which is done in
    those figures.

    The Inst. for Fiscal
    Studies,
    more reliable, gives the fuel duty plus VAT per liter
    in pence for different European countries as from 55 in the UK (the
    highest) to 24 in Greece (the lowest). Germany is 40; France is 46
    (second highest); Italy is 42; Spain is 28.

    Thus, it seems Greece and Spain are about at the optimum and all the
    other European countries are too high.

    Curiously, Parry and Small do not mention one of the major arguments
    for a fuel tax: paying for road construction and repair. I seem to
    remember that the effect of cars on road deterioration is trivial
    (it’s all due to trucks), but I might be wrong on that, and it seems
    as if it has to be wrong for city streets.

    Parry and Small point out that a gas tax is poorly designed for
    controlling congestion and accidents, since it is lower for fuel-
    efficient cars. Also, as implemented, it is invariant across
    locations, which vary tremendously in the cost from congestion,
    accidents, and pollution. They calculate the optimal per-mile tax,
    which does better. That is hard to enforce, though, since if the tax
    became high, odometer fraud would become common. (Maybe it could be
    based on how many miles you live from work, though, and age and sex,
    as insurance rates are.)

    What might work better would be to increase the vehicle registation
    tax, or to at least base the per-mile tax on where the vehicle is
    registered. Or, we might combine a gasoline tax with a registration
    fee based on the vehicle’s fuel-efficiency, fuel-efficient cars
    paying a bigger registration fee since they pay a lower gasoline tax
    per mile travelled.

    In practice, I think, hybrids and suchlike are actually subsidized by
    the government rather than taxed more heavily. What Parry and Small
    show is that that hybrids would be driven too much, given that they
    cause accidents just as much as other cars.

    In view of the importance of accidents as an externality, I’d like to
    see that explored more (maybe it is in the paper; I didn’t read
    carefully). A big car is safer for the occupants, but more dangerous
    to other cars. So it seems, since the effect on other cars is the
    externality, that big cars should be taxed more.

    Parry and Small find the optimal global warming tax to be very
    small, even using liberal estimates of the effect on global warming
    and the cost of it. It seems that European countries are emitting too
    little CO2 from cars, not too much. That result should be publicized.
    The conclusion is true even if other countries such as the US and
    China are emitting too much CO2, I think. The cost estimates of the
    Stern Report and others are based on “business as usual”, which means
    that the marginal benefit to the world from the UK from increasing or
    reducing emissions is based on other countries’ not changing their
    current policies. Thus, from the point of view of treating all
    countries neutrally rather than favoring some at the expense of
    others, the UK ought to emit more carbon dioxide.

    Categories: Economics, global warming Tags:

    Stern’s Ely Lecture on Climate Change and DIscounting

    August 8th, 2008 No comments

    I just finished reading Prof. Stern’s Ely Lecture ( Stern, Nicholas. 2008. “The Economics of Climate Change”, American Economic Review 98(2), pp. 1-37.). He is in favor of drastic measures to reduce CO2 emissions. Concentrations are now 430 ppm and he wants to stabilize them at 550 ppm. He is fearful of a 5 degree Centigrade temperature increase otherwise. Here are my notes.

    1. He says the most recent warm period was around 3 million years ago. Really? There have been lots of ice ages and warmings.

    2. He dismisses geoengineering in one paragraph with weak arguments.

    3. His Figure 4 from McKinsey has lots of *negative* abatement costs– things such as insulation improvement, fuel-efficient commercial vehicles, water heating, etc. We can’t believe any of that. If it saves money, why isn’t it done already? Liquidity constraints?

    4. (p. 13). He cites 1.5% as the indexed bonds rate of return on longterm government bonds, and 6-7 percent for private investments:

    In the United Kingdom and United States, we find (relatively) “riskless,” indexed lending rates on government bonds centered around 1.5 percent over very long periods. For private very long-run rates of return on equities, we find rates centered around 6 or 7 percent (Rajnish Mehra and Edward C. Prescott 2003, 892; Kenneth J. Arrow et al. 2004, 156; Sree Kochugovindan and Roland Nilsson 2007a, 64; 2007b, 71).

    He has a puzzling sentence about what discount rate to use:

    Given that it is social discount rates that are at issue, and also that actions to reduce carbon are likely to be financed via the diversion of resources from consumption (via pricing) rather than from investment, it is the long-run riskless rates associated with consumer decisions that have more relevance than those for the investment-related equities.

    This is a good question, but what is the implication? Consumers are willing to borrow at rates on the order of 10%, so is that the appropriate social discount rate?

    He makes the point that environmental goods’ prices will change (though he does not point out that those goods are a tiny part of the consumption basket):

    Suppose, however, that we persisted with the argument that it is better to invest at 6-7 percent and then spend money on overcoming the problems of climate change later rather than spending money now on these problems. The multi-good nature of the problem, together with the irreversibilities from GHG accumulation and climate change, tell us that we would be making an additional mistake. The price of environmental goods will likely have gone up very sharply, so that our returns from the standard types of investment will buy us much less in reducing environmental damage than resources allocated now (see also Section I on the costs of delay).12 This reflects the result that if environmental services are declining as stocks of the environment are depleted, then the SDR with that good as numeraire will be negative. On this, see the interesting work by Michael Hoel and Thomas Sterner (2007), Sterner and U. Martin Persson (2007) and Roger Guesnerie (2004), and also the Stern Review (Stern 2007, 60). Environmental services are also likely to be income elastic, which will further reduce the implied SDR.

    He has some useful sources on the appropriate rate of pure utility time preference:

    Indeed, the ethical proposition that delta should be very small or zero has appealed to a long line of illustrious economists including Frank P. Ramsey (1928, 543), Arthur Cecil Pigou (1932, 24–5), Roy F. Harrod (1948, 37–40), Robert M. Solow (1974, 9), James A. Mirrlees (Mirrlees and Stern 1972), and Amartya Sen (Sudhir Anand and Sen 2000). I have heard only one ethical argument for positive delta (Wilfred Beckerman and Hepburn 2007; Simon Dietz, Hepburn, and Stern 2008) that has some traction—namely a temporal interpretation of the idea that one will have stronger fellow feelings for those closer to us (such as family or clan) relative to those more distant.

    When it came to choosing a social discount rate, Stern is opposed to using market interest rates. Later, though, when it comes to choosing the appropriate amount of equality and income redistribution, he slyly switches to favoring observed amounts:

    Value judgements are, of course, precisely that and there will be many different positions. They will inevitably be important in this context— they must be discussed explicitly and the implications of different values should be examined. Examples follow of what we find when we turn to empirical evidence and try to obtain implied values (the “inverse optimum” approach). Empirical evidence can inform, but not settle, discussions about value judgements… The upshot is that empirical estimates of implied welfare weights can give a wide range of eta, including h below one and even as little as zero.

    Here he is trying to squirm out of the powerful growing-income argument against a low social discount rate. The argument goes like this. Suppose we are considering taking $1,000 away from someone earning $40,000/year so we can give $1,600 to someone else earning $107,000/year. Should we do it? Despite the increase in social wealth, it seems unfair and not calculated to increase total happiness. Yet that is what happens when we require $1,000 in abatement costs in in 2008 because it has a 1%/year return in benefits obtained in 50 years, if incomes grow at 2%/year in the meantime. This argument is particularly powerful against liberals, though it works for conservatives too, and lays out starkly the forced transfers that libertarians hate.

    There is a lot of posturing going on:

    Costa Rica, New Zealand, and Norway, declared targets of 100 percent reductions by 2050, i.e., “going carbon-neutral.” … California has a target of 80 percent reductions by 2050. France has its “Facteur Quatre”: dividing by 4, or 75 percent reductions, by 2050 (Stern 2007, 516). The United Kingdom has a 60 percent target but the Prime Minister Gordon Brown indicated in November 2007 that this could be raised to 80 percent (Brown 2007). Australia, under the new government elected at the end of November 2007, has now signed Kyoto and has a target of 60 percent…

    Costa Rica doesn’t matter of course, any more than the United Kingdom does, or anybody else but China and India:

    Even with fairly conservative estimates, it is likely that, under BAU, China will reach current European per capita emissions levels within 20-25 years. With its very large population, over this time China under BAU will emit cumulatively more than the USA and Europe combined over the last 100 years.

    “BAU” means “business as usual”.

    Barack Obama’s Economic Policies

    August 6th, 2008 2 comments

    From Obama for
    President
    website, here are some of his economic policies, with my
    commentary.

    * Provide Additional Tax Rebates to American Workers: The economy
    has continued to weaken significantly, despite congressional action to
    provide immediate tax rebates to American consumers. Stimulus: $20
    billion.

    Good. Taxes are tending to increase, so cutting them is good, even if
    the tax cut is called a rebate.

    * Establish a $10 billion Foreclosure Prevention Fund: Given the
    downturn in the economy, Obama is calling for immediate creation of
    his Foreclosure Prevention Fund that will dramatically increase
    emergency pre-foreclosure counseling, and will help families facing
    foreclosure to responsibly refinance their mortgages or sell their
    homes. Obama’s plan will not help speculators, people buying vacation
    homes or people that falsely represented their incomes. It is meant to
    help responsible homeowners through this difficult period. Stimulus:
    $10 billion.

    Bad. People who are overextended are given plenty of time by their
    banks, who lose money from foreclosures. The industry of reckless
    lending should not be subsidized this way.

    * Provide $10 billion in Relief for State and Local Governments
    Hardest-Hit by the Housing Crisis to Prevent Cuts in Vital Services:
    Because of the housing crisis and the weakening economy, many state
    and local governments are facing significant revenue shortfalls.
    Barack Obama believes that in the areas hardest-hit by the housing
    crisis we should provide immediate, temporary funding to state and
    local governments so that the decline in property values does not
    cause them to slash critical public services and cut vital
    infrastructure spending. Stimulus: $10 billion.

    Bad. Localities can raise their own taxes if they want to, rather
    than using national taxes.

    * Extend and Expand Unemployment Insurance: Barack Obama believes
    we must extend and strengthen the Unemployment Insurance (UI) program
    to address the needs of the long-term unemployed, who currently make
    up nearly one-fifth of the unemployed and are often older workers who
    have lost their jobs in manufacturing or other industries and have a
    difficult time finding new employment. Expanding UI is one of the most
    effective ways to combat economic turmoil; every dollar invested in UI
    benefits results in $1.73 in economic output. Obama is calling for a
    temporary expansion of the UI program for those who have exhausted
    their current eligibility. Stimulus: $10 billion.

    Bad. We shouldn’t encourage people to stay unemployed.

    * Provide a Tax Cut for Working Families: Obama will restore
    fairness to the tax code and provide 150 million workers the tax
    relief they need. Obama will create a new “Making Work Pay” tax credit
    of up to $500 per person, or $1,000 per working family. The “Making
    Work Pay” tax credit will completely eliminate income taxes for 10
    million Americans.

    Bad. We’ve already done too much of this. It’s good for everyone to
    contribute at least a little in income tax. Also, this plan does
    exactly what the Earned Income Credit is supposed to be doing
    already.

    * Eliminate Income Taxes for Seniors Making Less than $50,000:
    Barack Obama will eliminate all income taxation of seniors making less
    than $50,000 per year. This proposal will eliminate income taxes for 7
    million seniors and provide these seniors with an average savings of
    $1,400 each year. Under the Obama plan, 27 million American seniors
    will also not need to file an income tax return.

    Bad. Why should old people get a special tax break?

    * Simplify Tax Filings for Middle Class Americans: Obama will
    dramatically simplify tax filings so that millions of Americans will
    be able to do their taxes in less than five minutes. Obama will ensure
    that the IRS uses the information it already gets from banks and
    employers to give taxpayers the option of pre-filled tax forms to
    verify, sign and return. Experts estimate that the Obama proposal will
    save Americans up to 200 million total hours of work and aggravation
    and up to $2 billion in tax preparer fees.

    Good idea.

    * Fight for Fair Trade: Obama will fight for a trade policy that
    opens up foreign markets to support good American jobs. He will use
    trade agreements to spread good labor and environmental standards
    around the world and stand firm against agreements like the Central
    American Free Trade Agreement that fail to live up to those important
    benchmarks. Obama will also pressure the World Trade Organization to
    enforce trade agreements and stop countries from continuing unfair
    government subsidies to foreign exporters and nontariff barriers on
    U.S. exports.

    * Amend the North American Free Trade Agreement: Obama believes
    that NAFTA and its potential were oversold to the American people.
    Obama will work with the leaders of Canada and Mexico to fix NAFTA so
    that it works for American workers.

    Bad. He’s a protectionist.

    * Improve Transition Assistance: To help all workers adapt to a
    rapidly changing economy, Obama would update the existing system of
    Trade Adjustment Assistance by extending it to service industries,
    creating flexible education accounts to help workers retrain, and
    providing retraining assistance for workers in sectors of the economy
    vulnerable to dislocation before they lose their jobs.

    Bad. Boondoggle spending.

    * Invest in our Next Generation Innovators and Job Creators: Obama
    will create an Advanced Manufacturing Fund to identify and invest in
    the most compelling advanced manufacturing strategies. The Fund will
    have a peer-review selection and award process based on the Michigan
    21st Century Jobs Fund, a state-level initiative that has awarded over
    $125 million to Michigan businesses with the most innovative proposals
    to create new products and new jobs in the state.

    * Double Funding for the Manufacturing Extension Partnership: The
    Manufacturing Extension Partnership (MEP) works with manufacturers
    across the country to improve efficiency, implement new technology and
    strengthen company growth. This highly-successful program has engaged
    in more than 350,000 projects across the country and in 2006 alone,
    helped create and protect over 50,000 jobs. But despite this success,
    funding for MEP has been slashed by the Bush administration. Barack
    Obama will double funding for the MEP so its training centers can
    continue to bolster the competitiveness of U.S. manufacturers.

    Bad. This is fascist industrial policy, the kind that was widely
    ridiculed in the 1980’s. The government shouldn’t be funding private
    investment.

    * Invest In A Clean Energy Economy And Create 5 Million New Green
    Jobs: Obama will invest $150 billion over 10 years to advance the next
    generation of biofuels and fuel infrastructure, accelerate the
    commercialization of plug-in hybrids, promote development of
    commercial scale renewable energy, invest in low emissions coal
    plants, and begin transition to a new digital electricity grid. The
    plan will also invest in America’s highly-skilled manufacturing
    workforce and manufacturing centers to ensure that American workers
    have the skills and tools they need to pioneer the first wave of green
    technologies that will be in high demand throughout the world.

    Okay.

    * Create New Job Training Programs for Clean Technologies: The
    Obama plan will increase funding for federal workforce training
    programs and direct these programs to incorporate green technologies
    training, such as advanced manufacturing and weatherization training,
    into their efforts to help Americans find and retain stable, high-
    paying jobs. Obama will also create an energy-focused youth jobs
    program to invest in disconnected and disadvantaged youth.

    Bad. Industrial policy again.

    [To be continued]

    * Boost the Renewable Energy Sector and Create New Jobs: The Obama
    plan will create new federal policies, and expand existing ones, that
    have been proven to create new American jobs. Obama will create a
    federal Renewable Portfolio Standard (RPS) that will require 25
    percent of American electricity be derived from renewable sources by
    2025, which has the potential to create hundreds of thousands of new
    jobs on its own. Obama will also extend the Production Tax Credit, a
    credit used successfully by American farmers and investors to increase
    renewable energy production and create new local jobs.

    Terrible idea, and rotten economics.

    Barack Obama believes that it is critically important for the United
    States to rebuild its national transportation infrastructure – its
    highways, bridges, roads, ports, air, and train systems – to
    strengthen user safety, bolster our long-term competitiveness and
    ensure our economy continues to grow.

    * Create a National Infrastructure Reinvestment Bank: Barack Obama
    will address the infrastructure challenge by creating a National
    Infrastructure Reinvestment Bank to expand and enhance, not supplant,
    existing federal transportation investments. This independent entity
    will be directed to invest in our nation’s most challenging
    transportation infrastructure needs. The Bank will receive an infusion
    of federal money, $60 billion over 10 years, to provide financing to
    transportation infrastructure projects across the nation. These
    projects will create up to two million new direct and indirect jobs
    per year and stimulate approximately $35 billion per year in new
    economic activity.

    Infrastructure is what a lot of our porkbarrel spending has been about. This Bank would have huge patronage power and would undoubtedly be corrupt, just like Democrat-led Fannie Mae and Freddie Mac.

    * Invest in the Sciences: Barack Obama supports doubling federal
    funding for basic research …

    * Make the Research and Development Tax Credit Permanent: Barack
    Obama wants investments in a skilled research and development
    workforce and technology infrastructure to be supported here in
    America so that American workers and communities will benefit. Obama
    wants to make the Research and Development tax credit permanent so
    that firms can rely on it when making decisions to invest in domestic
    R&D over multi-year timeframes.

    I do like that.

    * Deploy Next-Generation Broadband: Barack Obama believes we can
    get broadband to every community in America through a combination of
    reform of the Universal Service Fund, better use of the nation’s
    wireless spectrum, promotion of next-generation facilities,
    technologies and applications, and new tax and loan incentives.

    I don’t know much about that.

    * Provide Tax Relief for Small Businesses and Start Up Companies:
    Barack Obama will eliminate all capital gains taxes on start-up and
    small businesses to encourage innovation and job creation. Obama will
    also support small business owners by providing a $500 “Making Work
    Pay” tax credit to almost every worker in America. Self-employed small
    business owners pay both the employee and the employer side of the
    payroll tax, and this measure will reduce the burdens of this double
    taxation.

    This sounds like a good tax cut.

    * Create a National Network of Public-Private Business Incubators:
    Barack Obama will support entrepreneurship and spur job growth by
    creating a national network of public-private business incubators.
    Business incubators facilitate the critical work of entrepreneurs in
    creating start-up companies. Obama will invest $250 million per year
    to increase the number and size of incubators in disadvantaged
    communities throughout the country.

    Sounds like pork to me.

    Obama will strengthen the ability of workers to organize unions. He
    will fight for passage of the Employee Free Choice Act. Obama will
    ensure that his labor appointees support workers’ rights and will work
    to ban the permanent replacement of striking workers. Obama will also
    increase the minimum wage and index it to inflation to ensure it rises
    every year.

    All bad. He wants to support unionized workers at the expense of poor workers who might compete with them.

    * Ensure Freedom to Unionize: Obama believes that workers should
    have the freedom to choose whether to join a union without harassment
    or intimidation from their employers. Obama cosponsored and is strong
    advocate for the Employee Free Choice Act, a bipartisan effort to
    assure that workers can exercise their right to organize. He will
    continue to fight for EFCA’s passage and sign it into law.

    I don’t know this bill, but unionizing already has lots of protection, since the 1930s.

    * Fight Attacks on Workers’ Right to Organize: Obama has fought
    the Bush National Labor Relations Board (NLRB) efforts to strip
    workers of their right to organize. He is a cosponsor of legislation
    to overturn the NLRB’s “Kentucky River” decisions classifying hundreds
    of thousands of nurses, construction, and professional workers as
    “supervisors” who are not protected by federal labor laws.

    I don’t know this decision, but my guess is that he wants to force all these people to join unions against their will.

    * Protect Striking Workers: Obama supports the right of workers to
    bargain collectively and strike if necessary. He will work to ban the
    permanent replacement of striking workers, so workers can stand up for
    themselves without worrying about losing their livelihoods.

    If a worker decides his employer is not paying him enough and goes on strike, why shouldn’t the employer be allowed to hire someone else who would be happy to get that wage?

    * Raise the Minimum Wage: Barack Obama will raise the minimum
    wage, index it to inflation and increase the Earned Income Tax Credit
    to make sure that full-time workers earn a living wage that allows
    them to raise their families and pay for basic needs.

    Bad economics.What he really wants is to get those workers fired so union workers who pay him big campaign contributions will be hired instead.

    * Create a New FHA Housing Security Program: Barack Obama strongly
    supports the efforts of Senate Banking Committee Chair Chris Dodd
    (D–CT) to create a new Federal Housing Administration (FHA) program
    that will provide meaningful incentives for lenders to buy or
    refinance existing mortgages and convert them into stable 30-year
    fixed mortgages. This plan provides an important federal backstop –
    not a bailout – to this growing national problem. Neither lenders nor
    homeowners would receive a windfall from this plan.

    I don’t know that bill.

    * Create a Universal Mortgage Credit: Obama will create a 10
    percent universal mortgage credit to provide homeowners who do not
    itemize tax relief. This credit will provide an average of $500 to 10
    million homeowners, the majority of whom earn less than $50,000 per
    year.

    * Ensure More Accountability in the Subprime Mortgage Industry:
    Obama has been closely monitoring the subprime mortgage situation for
    years, and introduced comprehensive legislation over a year ago to
    fight mortgage fraud and protect consumers against abusive lending
    practices. Obama’s STOP FRAUD Act provides the first federal
    definition of mortgage fraud, increases funding for federal and state
    law enforcement programs, creates new criminal penalties for mortgage
    professionals found guilty of fraud, and requires industry insiders to
    report suspicious activity.

    * Mandate Accurate Loan Disclosure: Obama will create a Homeowner
    Obligation Made Explicit (HOME) score, which will provide potential
    borrowers with a simplified, standardized borrower metric (similar to
    APR) for home mortgages. The HOME score will allow individuals to
    easily compare various mortgage products and understand the full cost
    of the loan.

    * Create Fund to Help Homeowners Avoid Foreclosures: Obama will
    create a fund to help people refinance their mortgages and provide
    comprehensive supports to innocent homeowners. The fund will be
    partially paid for by Obama’s increased penalties on lenders who act
    irresponsibly and commit fraud.

    * Close Bankruptcy Loophole for Mortgage Companies: Obama will
    work to eliminate the provision that prevents bankruptcy courts from
    modifying an individual’s mortgage payments. Obama believes that the
    subprime mortgage industry, which has engaged in dangerous and
    sometimes unscrupulous business practices, should not be shielded by
    outdated federal law.

    * Create a Credit Card Rating System to Improve Disclosure: Obama
    will create a credit card rating system, modeled on five-star systems
    used for other consumer products, to provide consumers an easily
    identifiable ranking of credit cards, based on the card’s features.
    Credit card companies will be required to display the rating on all
    application and contract materials, enabling consumers to quickly
    understand all of the major provisions of a credit card without having
    to rely exclusively on fine print in lengthy documents.

    * Establish a Credit Card Bill of Rights to Protect Consumers:
    Obama will create a Credit Card Bill of Rights to protect consumers.
    The Obama plan will:
    o Ban Unilateral Changes
    o Apply Interest Rate Increases Only to Future Debt
    o Prohibit Interest on Fees
    o Prohibit “Universal Defaults”
    o Require Prompt and Fair Crediting of Cardholder Payments

    * Cap Outlandish Interest Rates on Payday Loans and Improve
    Disclosure: Obama supports extending a 36 percent interest cap to all
    Americans. Obama will require lenders to provide clear and simplified
    information about loan fees, payments and penalties, which is why
    he’ll require lenders to provide this information during the
    application process.

    * Encourage Responsible Lending Institutions to Make Small
    Consumer Loans: Obama will encourage banks, credit unions and
    Community Development Financial Institutions to provide affordable
    short-term and small-dollar loans and to drive unscrupulous lenders
    out of business.

    * Reform Bankruptcy Laws to Protect Families Facing a Medical
    Crisis: Obama will create an exemption in bankruptcy law for
    individuals who can prove they filed for bankruptcy because of medical
    expenses. This exemption will create a process that forgives the debt
    and lets the individuals get back on their feet.

    * Expand the Family and Medical Leave Act: The FMLA covers only
    certain employees of employers with 50 or more employees. Obama will
    expand it to cover businesses with 25 or more employees. He will
    expand the FMLA to cover more purposes as well, including allowing
    workers to take leave for elder care needs; allowing parents up to 24
    hours of leave each year to participate in their children’s academic
    activities; and expanding FMLA to cover leave for employees to address
    domestic violence.

    * Encourage States to Adopt Paid Leave: As president, Obama will
    initiate a strategy to encourage all 50 states to adopt paid-leave
    systems. Obama will provide a $1.5 billion fund to assist states with
    start-up costs and to help states offset the costs for employees and
    employers.

    * Expand High-Quality Afterschool Opportunities: Obama will double
    funding for the main federal support for afterschool programs, the
    21st Century Learning Centers program, to serve a million more
    children. Obama will include measures to maximize performance and
    effectiveness across grantees nationwide.

    * Expand the Child and Dependent Care Tax Credit: The Child and
    Dependent Care Tax Credit provides too little relief to families that
    struggle to afford child care expenses. Obama will reform the Child
    and Dependent Care Tax Credit by making it refundable and allowing
    low-income families to receive up to a 50 percent credit for their
    child care expenses.

    * Protect Against Caregiver Discrimination: Workers with family
    obligations often are discriminated against in the workplace. Obama
    will enforce the recently-enacted Equal Employment Opportunity
    Commission guidelines on caregiver discrimination.

    * Expand Flexible Work Arrangements: Obama will create a program
    to inform businesses about the benefits of flexible work schedules;
    help businesses create flexible work opportunities; and increase
    federal incentives for telecommuting. Obama will also make the federal
    government a model employer in terms of adopting flexible work
    schedules and permitting employees to request flexible arrangements.

    * Housing: In the U.S. Senate, Obama introduced the STOP FRAUD Act
    to increase penalties for mortgage fraud and provide more protections
    for low-income homebuyers, well before the current subprime crisis
    began.

    * Predatory Lending: In the Illinois State Senate, Obama called
    attention to predatory lending issues. Obama sponsored legislation to
    combat predatory payday loans, and he also was credited with lobbying
    the state to more closely regulate some of the most egregious
    predatory lending practices.

    * American Jobs: Barack Obama introduced the Patriot Employer Act
    of 2007 to provide a tax credit to companies that maintain or increase
    the number of full-time workers in America relative to those outside
    the US; maintain their corporate headquarters in America; pay decent
    wages; prepare workers for retirement; provide health insurance; and
    support employees who serve in the military.

    Categories: Economics, elections, obama Tags:

    John McCain’s Economic Policies

    August 6th, 2008 No comments

    I’ve just been asked to sign an economists’ letter of support for John McCain’s economic plan. In general I don’t like that kind of letter unless it’s on some issue where pretty much all top economists can agree. Possibly there would be a consensus on the policy proposals mentioned in the letter itself, but McCain has some bad economic policy views not mentioned there.

    First, what’s in the letter. I’ve omitted the first and last “puff” parts.

    His plan would control government spending by vetoing every bill with earmarks, implementing a constitutionally valid line-item veto, pausing non-military discretionary government spending programs for one year to stop their explosive growth and place accountability on federal government agencies.

    Vetoing every bill with earmarks is a bad idea. He thereby throws away his bargaining power with Congress, and his ability to buy votes for important national-interest policies. Often a president needs to buy support for his foreign policy or trade policy by using earmarks.

    The line-item veto would be good.

    Pausing spending is bad. I don’t know that most agencies’ budgets have been growing too fast– the big complaint is about earmarks.

    His plan would keep taxes from rising, because higher tax rates are exactly the wrong policy to restore economic growth, especially at this time.

    His plan would reduce tax rates by cutting the tax that corporations pay to 25 percent in line with other countries, by completely phasing out the alternative minimum tax, by increasing the exemption for dependents, by permitting the first-year expensing of new equipment and technology, and by making permanent a reformed tax credit for R&D.

    That’s pretty good. I’m not sure about eliminating the AMT, though, because it’s a flat tax, which is a good thing.

    His plan would also create a new and much simpler tax system and give Americans a free choice of whether to pay taxes under that simple system or the current complex and burdensome income tax.

    That’s a good idea.

    His plan would open new markets for American goods and services and thereby create additional jobs for Americans by supporting good free trade agreements, such as the one with Colombia, and working with leaders around the world to avoid isolationism and protectionism. His plan would also reform education, retraining, and other assistance programs so they better help those displaced by trade and other changes in the economy. His plan addresses problems in the financial markets and housing markets by calling for increased transparency and accountability, by targeted assistance to deserving homeowners to refinance their mortgages, and by opposing so-called reform plans which would raise the costs of home-ownership in the future.

    Free trade is good. “Deserving homeowners” shouldn’t be bailed out. We DO need reforms to raise the cost of home ownership for the rich.

    Now for some other things from the Issues section of his website (accessible via http://www.johnmccain.com/Issues/JobsforAmerica/energy.htm.

    John McCain will put our country on track to construct 45 new nuclear power plants by 2030 with the ultimate goal of eventually constructing 100 new plants.

    Very good.

    John McCain will encourage the market for alternative, low carbon fuels such as wind, hydro and solar power. … John McCain believes in an even- handed system of tax credits that will remain in place until renewable energy has progressed to the point that it is competitive with conventional energy sources.

    Bad.

    John McCain will commit our country to expanding domestic oil and natural gas exploration. The current federal moratorium on drilling in the Outer Continental Shelf stands in the way of energy exploration and production. John McCain believes it is time for the federal government to lift these restrictions and work with states to put our own reserves to use.

    Good.

    For every automaker who can sell a zero-emissions car, John McCain will commit a $5,000 tax credit for each and every customer who buys that car. For other vehicles, whatever type they may be, the lower the carbon emissions, the higher the tax credit.

    Bad.

    John McCain has long supported CAFE standards – the mileage requirements that automobile manufacturers’ cars must meet. Some carmakers ignore these standards, pay a small financial penalty, and add it to the price of their cars. John McCain believes that the penalties for not following these standards must be effective enough to compel carmakers to produce fuel-efficient vehicles.

    Bad.

    John McCain will make greening the federal government a priority of his administration…. By applying a higher efficiency standard to new buildings leased or purchased and retrofitting existing buildings, we can save taxpayers money in energy costs, and move the construction market in the direction of green technology.

    Bad

    John McCain will lead the fight for medical liability reform that eliminates lawsuits directed at doctors who follow clinical guidelines and adhere to proven safety protocols.

    Good.

    … John McCain will give every family a refundable tax credit – cash towards insurance – of $5,000 (Individuals receive $2,500). Every family in America, regardless of the source of their insurance or how much they make will get the same help. Families will be able to stay with their current plan, or choose the insurance provider that suits them best and have the money sent directly to the insurance provider.

    This sounds crazy, so it’s probably not quite as stated. As stated, a family already receiving $8000/year in employer-provided insurance could take the government’s $5000 and top up their insurance with superduper coverage–say, for plastic surgery, air fares to exotic hospitals, etc. Probably the plan is limited to basic health insurance, in which case it might not be so bad.

    Americans need insurance that follows them from job to job. Too many job decisions today are controlled by a fear of losing health care. Americans want insurance that is still there if they retire early and does not change if they take a few years off to raise the children. John McCain will lead the reform for portable insurance.

    I’m not sure about that one. It’s a good question as to what that will do to adverse selection.

    [to be continued]

    Categories: Economics, elections Tags:

    A Good Sentence on Rescuing Banks

    August 6th, 2008 No comments

    I liked this sentence from Prof. Buiter’s blog, both in sound and sentiment:

    I will refute his argument, focusing mainly on the case against bailing out Fannie Mae and Freddie Mac, unless this involves the euthanasia of the existing shareholders of the two GSEs and a material haircut for their creditors.

    Categories: Economics, writing Tags:

    Pivotal Voting

    June 26th, 2008 No comments

    I was talking with Bernie Groffman just now and thought I’d make a record of the simple example of why apparent voting strength is not real voting strength. Suppose we have a committee on which Spain gets 50 votes, France gets 50 votes, and Andorra gets 1 vote. All have equal voting power, in fact. A winning coalition needs 2 and only 2 of the countries, and it doesn’t matter which two.

    Categories: game theory, politics Tags:

    Are the Tories Helping Gordon Brown?

    June 16th, 2008 No comments

    A prominent Tory MP recently resigned to re-fight his election in protest against an extension of the 28-day imprisonment-without-cause rule to 42 days. That in itself doesn’t make sense to me (his party already opposes the change, 28 vs. 42 seems to miss the point of suspending habeas corpus anyway, … ), but TV pundits were saying that his party leader must be angry with him for shifting news attention away from Prime Minister Brown’s unsteady position within the Labor Party.

    I wonder whether the motivation might not be just that. Perhaps the Tories like Brown being at the head of Labor and are helping him out. The very oddity of the Tory resignation helps distract attention from Brown and allows the public mood to improve for him.

    Categories: game theory, politics Tags: