November 2008 Archives

Bailout Santa and the coal dole

Here is the Mike Luckovich cartoon from Friday, November 28, 2008. We do seem to be sliding toward the lower levels of the slippery slope.

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Real estate vs. decapitation

Greg Mankiw posted this Mike Luckovich cartoon on Thanksgiving 2008. However, notice that the date of the cartoon is November 16, 2007. And I'll bet we'll be able to use this same cartoon next Thanksgiving.

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(This is a Val Lambson original.)

Old definition of "chutzpah": (n) nerve, gall, audacity, insolence, impertenence.

New definition of "chutzpah": CNNMoney.com reported on a Congressional hearing in which "Skeptical lawmakers grill[ed] auto execs... [and] portrayed the Big Three as both short-sighted... and devoid of vision."

Public Financing Problems

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I commented earlier in the week on the financial problems facing the Federal Government.  Well the states have problems too.  Its particularly interesting to think about the states that have hamstrung themselves by not having a state personal income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming, New Hampshire, and Tennessee (the last two do tax dividends and capital gains income).

These states without personal income taxes rely more heavily on sales taxes and property taxes.  Well guess what's happened to property values in some of these states:

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Mitt Romney on Detroit bailout

Mitt Romney has a brilliant and credible op-ed piece in the New York Times today entitled "Let Detroit Go Bankrupt." Mitt's proposals for helping the Big Three U.S. auto companies are credible because of his track record for turning around companies and because his father was recruited to head American Motors in the 1950s when the auto industry was facing similar conditions. This is the best proposal I have heard yet about how to deal with American auto woes.
Frank & Ernest

(Thanks to Mark Showalter for sending me this.)

Recession definition and the Clippers

The rule-of-thumb definition for a recession is two consecutive quarters of declining production,...

Or as the L.A. Clippers define it... Halftime.

(Jay Leno. Thanks to John Evans for the reference.)
Justin Lahart posted a story today on the WSJ Real Time Economics blog documenting how widely recognized was the U.S. housing bubble. He ran a Factiva search on "housing bubble" or "real estate bubble" of the top 50 U.S. newspapers. The chart below shows the number of news stories, by month, that referred to the bubble.

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Carmen Reinhart of the University of Maryland and Vincent Reinhart of AEI add support to my comments from three weeks ago about the irony of the international flight to safety in U.S. securities in their post today on VoxEU.org. They start out with this question:

"Why are investors rushing to purchase US government securities when the US is the epicentre of the financial crisis?"

Their answer is similar to mine. The U.S. still holds the position of the international economic superpower of the world, but the sustainability of that position depends on what policies we implement going forward.

Thoughts on fiscal policy

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I've been swamped lately with job market stuff, but was able to attend the Atlanta Fed's Quarterly Public Affairs Symposium last week.  The featured speaker was Larry Kotlikoff.  The focus was fiscal policy.

Here are some highlights:

Don't get John Cochrane mad

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(Thanks to Jason for sending me a link to this back in July.)

I laughed until tears were coming out of my eyes when I read this letter by John Cochrane dated July 12, 2008, in response to a protest letter circulated at the University of Chicago against the Milton Friedman Institute.  I laughed so hard that I had to stop in the middle of sentences to catch my breath. Here are some of my favorite lines.

What economics means to me

At the heart of economics is the study of outcomes based on decisions in the face of tradeoffs between costs and benefits. One of the broadest categorizations of the various fields within economics is between microeconomics (individual, household, and firm-level decisions) and macroeconomics (regional, country-wide, or world outcomes). But one quickly discovers that even these most basic categories are not terribly helpful because some macroeconomic studies begin with the microeconomic decisions of individual agents and other macroeconomic studies treat the outcomes of regions or countries as the decisions of individual agents. In fact, a large degree of overlap exists among the categories of any taxonomical description of the fields of economics. All the fields of economics attempt to increase our understanding of individual decisions and aggregate outcomes in the face of tradeoffs between costs and benefits.

More illustrative of what economics means to me is a diagram that Russell Cooper put on the board on the first day of his first-year graduate macroeconomics course in September 2003. Below is my interpretation of what he wrote.

CycleOfEcon.png

I have an easier time justifying to myself the bailout package than I do justifying the various proposals of stimulus packages. But all bets are off if the Federal Reserve and Treasury are not required to report their actions for public consumption. This Bloomberg article details a lawsuit in which Bloomberg News is suing in "U.S. court today to force the Federal Reserve to disclose securities the central bank is accepting on behalf of American taxpayers as collateral for $1.5 trillion of loans to banks." The Fed is resisting. We are in big trouble if the implementation of the many hundreds of billions of bailout dollars (over and above the $700 billion bailout package) do not have to be disclosed.

(Thanks to Scott Condie for a reference to this article.)

Best thing I've heard today

"The more I think about the bailouts in the US over the past few months the sicker I get about it.  If bankruptcy laws were reformed to be more functional, they could have avoided all of these bailouts and just let the institutions fail."

Reminded me of Why Paulson is Wrong.
As fuel to the fire of the Europe-is-in-trouble evidence and the bailout arms race idea, the Financial Times blog, Alphaville, reported yesterday on Merrill Lynch's economic risk assessment of the countries of the world. (Thanks to Scott Condie for directing me to this.) Below is Merrill's list of the 10 riskiest economies and the 10 safest economies. Note where most of the riskiest economies are located.

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Since 1929, government expenditures as a fraction of GDP (excluding the wartime spending of 1942-1945) have averaged 22.9% under both Democrat and Republican presidents.  A worry is that if the president also has the support of both chambers, he will more easily pass legislation that increases the size and role of the federal government.

When Democrats have had control of both Houses and the Presidency (1932-1946, 1949-1950, 1961-1968, 1977-1980, 1993-1994), government expenditures as a fraction of GDP have averaged 23.5%.  On the other hand, when Republicans have had control (1929-1931, 1953-1954, 2003-2006), spending as a fraction of GDP has averaged 21.1% (not statistically different).  Divided government spending averages 23.9% of GDP.  The graph below shows the size of government over time by party in control.  The most prominent trend is the fall in the size of government since the late 1960s, which is evident under Democratic or Republican controlled government and divided government over this time period.

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But the "power of the purse" resides in Congress, so does party matter in Congress?


In full disclosure, I want to say up front that I did not vote for Obama. But I am hopeful that he will be a good President. McCain's excellent concession speech last night reminded me what really makes America great. It is the characteristic that has made America one of the most durable and dynamic democracies in history. Our country's strength is its embrace of multiple ideals, national debate, opposing forces, and checks and balances.

Where'd the wealth go?

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Today I came across a link to what looks like a good FAQ on the crisis by Ivo Welch of Brown University.  One of the first questions he  asks and answers is, "The houses are still here, so how can we be poorer?".

I've been wondering the same thing for sometime now.  Since I haven't come across this question in the any of the writing on the crisis I've read previously (and often read that the crisis has caused a destruction of wealth), I'm kind of embarrassed to admit that I just don't get it.