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Brooks Wilson's Economics Blog: December 2008

Wednesday, December 31, 2008

Fighting Corruption

Yesterday, Illinois governor, Rod Blagojevich, who is under investigation for attempting to sell President Elect Barak Obama's senate seat, appointed Roland Burris to fill that seat. Burris is the first African-American to win a major statewide office in Illinois. The appointment is opposed by other Illinois Democrats.

As reported by Len Wells in the courierpress, Governor Blagojevich defended his appointment saying,

Please don't allow the allegations against me to taint a good and honest man," the governor said, turning to the smiling 71-year-old standing by his side. "This is about Roland Burris as a U.S. senator, not about the governor who made the appointment.

You can view Blagojevich's announcement on YouTube or read commentary from the New York Times. The political theater of appointing a senator is not limited to Illinois. Lesser, but still good drama is playing in New York and Delaware.

I don't want to comment on the political maneuverings, but on limiting corruption. As currently practiced, a governor that can fill a vacated senate seat has something of value to sell. It is likely to be a career appointment. Appointees gain name recognition and title, big advantages over challengers when elections are finally held.

A governor's appointment of a senator should truly be temporary, baring the appointee from running for the Senate when the next election is held. Instead of witnessing candidates insinuating themselves into consideration, we may witness governors begging qualified persons to serve.


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Tuesday, December 30, 2008

Taxes, Externalities, and Free-Riders, Oh My!

(HT Drudge) Hasso Hering of the Albany Democrat-Herald reports that Governor Ted Kulongoski of Oregon is considering a new tax on mileage driven to fund highway infrastructure.

The governor's website gives insight to his logic, which I have to say, isn't bad.

As Oregonians drive less and demand more fuel-efficient vehicles, it is increasingly important that the state find a new way, other than the gas tax, to finance our transportation system.

I am not sure that the Governor Kulongoski's belief that Oregonians will continue to drive less and demand more fuel-efficient cars is correct. Those two trends may be the result of high gas prices that eased after July 2008 and the recession, but whether temporary or long-term they do highlight a dilemma.

High gasoline prices, the desire of drivers to save money no matter the price of gasoline, cafe standards and other government policy have increased the demand for fuel efficient cars. The Toyota Prius and other hybrids damage infrastructure and cause congestion, like all vehicles, inflicting worse driving conditions on others. In economics, this is known as an externality--imposing cost on someone else without compensating the harmed party.

Fuel efficient cars largely avoid gasoline taxes that fund road construction and repair. In economics, this is known a the free-rider problem--acquiring a benefit without paying for it.

These problems will only deepen if we are fortunate enough to see even greater improvements in technology that allow us to forego gasoline entirely. Most states would lose their biggest source of tax revenue for highway maintenance. Governor Kulongoski's mileage tax would help solve both problems.


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Monday, December 29, 2008

Lewis S. Ranieri

I would not have written a post on Mr. Ranieri in August of 2008, but given the events of September, I thought some readers might be interested in his career.

In the late 1970's Lewis Ranieri, and Robert Dall of Salomon Brothers saw a vehicle in which their firm could tap into the profits of the housing market--securitization of mortgages. Mr. Ranieri became fabulously wealthy as he rose to prominence becoming a vice chairman with the firm.

He was not born into a life of power and privilege, the type of person we expect to win an important job at powerful investment bank. In a flattering article written by BusinessWeek on November 29, 2004, he is described as follows,

A less likely financial engineer would be hard to imagine. Ranieri, a Brooklyn native, set out to be an Italian chef until asthma ruled out work in smoky kitchens. A part-time job in Salomon's mail room set him on the path to trading...Ranieri also recognized that "mortgages are math." He hired PhDs who developed the "collateralized mortgage obligation," which turns pools of 30-year mortgages into collections of 2-, 5-, and 10-year bonds that could appeal to a wide range of investors. The homeowner in Albuquerque could now tap funds from New York, Chicago, or Tokyo, a change that Ranieri figures cuts mortgage rates by two percentage points. Soon everything from credit-card balances to auto loans was being repackaged.

At least as late as 2004, Mr. Ranieri's innovation was seen as a good thing, lowering the cost of home ownership. It may also have set the stage for what Arnold Kling describes as the suits vs geeks divide. In testimony before the House Committee on Oversight and Government Reform, Kling describes the divide and the problem it causes.

In my opinion, the innovations in mortgage finance over the past twenty years have gone beyond the ability of industry executives[suits] and regulators to manage. Financial engineers [geeks] and key decision-makers were not on the same page concerning the new financial instruments. This suits vs. geeks divide meant that executives were making decisions based on a distorted assessment of the risks involved.

According to Kling's timeline, Mr. Ranieri is off the hook for the financial crisis. He may have hired the geeks, but there was apparently not an information divide between the suits and geeks during his tenure. As reported in the New York Times by Michael Quint on July 15, 1987, Mr. Ranieri resigned as vice chairman of Salomon because of a personality conflict with John Gutfreund, the firm's chairman, twenty-one years before Kling testified.


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Phat Phee Two

As James Queally of the Stanton Island Advance phrased it, New Yorkers "stoutly oppose" the Phat Phee, an 18% tax on sugary soda drinks. NY1 news reports that 60% are against the tax to 37% in favor.

Elizabeth Benjamin of The Doctor Is In (Cyberspace) reports that State Health Commissioner Richard Daines has stoutly supported the phat phee despite thin support, noting that the phee is more of a health policy than a phee. Benjamin reports that the Phat Phee,

according to Daines, is to disincentivize sugary drinks, which research shows are the top culprit in the childhood obesity epidemic, and encourage people to return to 1970s-era levels of consumption of other, less fattening beverages like milk and water. The side benefits, according to Daines, include the fact that cutting down on soda saves money for consumers and whittling the state's collective waistline could save money for taxpayers in the form of fewer obesity-related health problems that need to be treated - particularly for Medicaid recipients.

Yikes! Let the state pay for a little health care for the poor and they will then want to control your diet. I would have preferred the measure as a simple money raising tax. Apparently, the goal of the state is to prolong life, decrease liberty, and allow the pursuit of happiness only if it is safe. I hope Health Commissioner does not learn about motorcycles, skiing, or sky diving. Imagine what would happen if we taxed every food or activity that was less healthy than average. I like Assemblyman Felix Ortiz's proposal better. Let's just tax phat people.

While New Yorkers got the Phat Pee right, they got the millionaire tax wrong, with 84% supporting the tax and 13% opposing. If someone had suggested a tax on Jews or Blacks, we would properly be offended, but tax the rich simply because they are rich and the majority support the tax.

"Ah ha," you say, "you cannot help being a Jew or Black," and you are right. For most it is a genetic or social characteristic given at birth by our parents. But for most, being rich is better than a genetic trait, it is a virtue. Most of the rich earn their wealth by hard work and diligence. Like anything else, if you tax a virtue, you will get less of it.


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Sunday, December 28, 2008

Metric Martyrs

(HT Drudge) Seinfeld brought us the Soup Nazi, now England brings us the Veggie Nazis.

David Harrison of the Telegraph.co.uk, tells the story of Janet Devers, 64. She was brought up on 13 criminal counts of selling vegetables using traditional measures such as pounds, ounces, and bowls. What a desperado! She insisted on a jury trial. The court dropped the four charges that would allow her to appear before a jury, and convicted her on eight of the remaining charges. Mr. Harrison writes,

Mrs Devers...was ordered by Thames magistrates to pay £5,000 in costs and received a criminal record after being convicted of eight charges of using imperial measures and selling vegetables by the bowl, under the Weights and Measures Act.

Not mentioned in this quote is her brother, Collin Hunt, 60, who has similar legal difficulties. But the story gets better. For whatever reason, the "police" at Weights and Measures were after Mrs. Devers and her brother. In a follow-up article, Mr. Harrison writes,

Council chiefs are to launch an independent investigation into allegations that street market inspectors were ordered to target a convicted "metric martyr" and his sister while ignoring other traders who sold goods in pounds and ounces.

As in the U.S., legal defense is expensive, and the Metric Martyr Defense Fund has been established to help Mrs. Devers and others convicted under the Weights and Measurement Act. Mrs. Devers is seeking to get her convictions overturned. Unfortunately, her brother and she are not the only victims of this abusive law. Christopher Booker, also of the Telegraph.co.uk writes,

The final goal, as Neil Herron of the Metric Martyrs Defence Fund insists, must then be a pardon for the late Steve Thoburn and the four other original "martyrs" who were found guilty in 2002...of breaking laws so ridiculous that the EU Commission has even denied they existed (but which are still on the statute book).

Good luck and best wishes from friends of freedom across the pond.


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Saturday, December 27, 2008

Vaclav Klaus

Vaclaz Klaus is set to become the new EU President. Chris Bowlby of the BBC writes,

For Mr Klaus, a steely, bespectacled economist who came to sudden prominence after the Czechoslovak revolution against communism, is a vehement Eurosceptic. He believes the EU has echoes of the old Soviet bloc he used to live under...And he is also an enthusiastic challenger of European and international policy on everything from climate change to relations with Russia.

I cannot say that I know much about Mr. Klaus, but what I do know, I like. He is an economist, and what is better still, a free-market economist.

The scary quote in the article was delivered by Vaclav Havel, the man he replaced as President of the Czech Republic, who said,

Either he's afraid of someone. Or he's out to humiliate him.

That sounds vaguely Nixonian to me, and I cannot like that. Well, Mr. Havel must be wrong, because Mr. Klaus is an economist, and an economist would never be Nixonian.


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Friday, December 26, 2008

The Pope and Selfishness

In a My Way article, Frances D'emilio reported that Pope Benedict XVI said in his Christmas message,

"Wherever an increasingly uncertain future is regarded with apprehension, even in affluent nations...In each of these places may the light of Christmas shine forth and encourage all people to do their part in a spirit of authentic solidarity...If people look only to their own interests, our world will certainly fall apart."

The Pope has an obligation to speak on moral issues. I dispute the economic order that may be implied in, or insinuated into his statement by others.

I assume that "a spirit of authentic solidarity" refers to generous behavior towards others as taught by Christ. Let's now assume that we double our authentic solidarity by cutting selfishness in half. How would this alter economic institutions?

I would guess that little would change in the market oriented Western world, and that poor nations would institute economic reforms that would make them more like us.


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Why Illegals Don't Respect Our Laws

On Sunday, a good friend and I began talking about illegal aliens and the law. My friend is very bright, and understands the economic magnet that draws so many to cross our border, but he also has a deep and abiding respect for the legal process established in the constitution and the laws that develop through that process. He believes in the rule of law, the principle that nobody is above the law, and in crossing our border illegally, these people put themselves above the law. What he does not understand is why so many illegal aliens unabashedly demand rights once established within our country.

I have heard the same question voiced by others and I would like to take a crack at answering it. Like many deep questions in life, it reminds me of a conversation between Spock and McCoy in a Star Trek movie. Through a series of movies, Spock dies, but transfers is "katra" the essence of his soul, to McCoy's body. His body is laid to rest on a planet undergoing the rapid evolution to life through the Genesis technology. The process not only creates life on this dead planet, but brings back a Spock that does not have his soul. Our heroes are able to transfer Spock's katra to his body. McCoy asks the obvious question, "What is it like being dead?" Spock answers by telling him that they cannot discuss this question because they do not have a common experience, death, on which to base their discussion.

We do not share a common experience, the rule of law, with most people living in our country illegally. Largely, they come from countries that North, Wallis, and Weingast refer to as a limited access order. The most powerful groups form a dominant coalition that rules the country. It doles out economic benefits to coalition members roughly in proportion to the violence each group could bring to the coalition if not rewarded. Economic benefits are distributed, not earned.

Groups and individuals outside the ruling coalition have resources, and attempt to use them to earn profits or income to better their lives, but their ability to use these resources is limited by the ruling or dominant coalition. The dominant coalition will protect the economic distribution of benefits they establish because disrupting it could plunge the country into something akin to a civil war.

Hernando De Soto wrote an influential book titled, El Otro Sendero, or The Other Path, in which he describes the plight of many Peruvians, most of whom are indigenous, and outside the dominant ruling coalition. They have resources and energy, but the law is against them. The law makes it hard for them to migrate to the cities where there are better economic opportunities, and better access to health care and education. When the book was written, they could not build homes, obtain business licenses, or otherwise legally engage in production or retail trade.

They responded by operating outside the law in informal markets exercising what our founders believed were God given rights of life, liberty (economic and otherwise) and the pursuit of happiness. These illegal activities improved their lives, increasing their economic prosperity, and access to better health care and education for their children. They would like to live within the law, but the law as currently constituted is stacked against them. They would like to change their country through elections, but this is dangerous because it challenges the dominant coalition that limits violence, bringing peace.

When people from these countries cross our borders illegally, their frame of reference is a land of limited access, where the law was designed to punish them. Before they arrive, they know that they will be acting illegally, but for them, it is no different than their current existence. Their law and our law punishes them. They don't understand how our constitution provides opportunity to all citizens operating within the law. It is beyond their experience.


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Thursday, December 25, 2008

Wednesday, December 24, 2008

Bah Humbug

(HT Drudge Report)

From Australia

SCIENTISTS have warned that Christmas lights are bad for the planet due to huge electricity waste and urged people to get energy efficient festive bulbs.

I wonder what other parts of my spending offends these scientists.

Dr. Glenn Platt, said the nation's electricity came from "centralised carbon intensive, coal-based power stations" which were responsible for emitting over one third of Australia's greenhouse gas emissions.

The hot air put out by Dr. Platt exceeds greenhouse emissions from Christmas lights.


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Monday, December 22, 2008

Roots of the Financial Crisis

This post is in response to a question by "M" in a comment to Two Views on Housing Policy. M asked for my take on a ReasonTV production, Peter Wallison on the Roots of the Financial Crisis. Wallison believes that government actions were largely responsible for the housing bubble and the ensuing financial crisis. The culprits were the Community Reinvestment Act in 1977, signed by President Carter, and strengthened during the Clinton administration by the Interstate Banking and Branching Efficiency Act of 1994 to encourage lending in under served areas, and Fannie Mae and Freddie Mac, the government sponsored agencies (GSEs) which were tasked with increasing home ownership in general but particularly in under served areas.

The ReasonTV production posted on the Powerline blog was a response to a New York Times hit piece on the Bush administration titled, White House Philosophy Stoked Bonfire. The authors go out of their way to focus on administration failures while deflecting blame from others. For example, the authors comment,

The president did push rules aimed at forcing lenders to more clearly explain loan terms. But the White House shelved them in 2004, after industry-friendly members of Congress threatened to block confirmation of his new housing secretary.

The obvious questions are which members of Congress? and Why were they trying to block the confirmation of a new housing secretary? Could it me that these members of Congress did not view him as friendly to their pro GSE agenda?

While I understand the frustration of my fellow blogers at such investigative reporting, but I have not found a consensus among economists writing about the financial crisis that agrees with Wallison's position. In a useful article, Brad Delong says that all explanations involve a "great deal of hand waving," and I certainly agree, but common bits and pieces seem to be surfacing.

The views expressed by Wallison are shared by others, but many assign the GSEs a small role of just another business organization whose weak internal standards or minimum capitalization were overwhelmed by events. I am somewhere between the two groups but closer to the latter. I believe that while correctly documenting the decline in underwriting standards at the GSEs, and the spread of those lower standards, that they overstate their role in the the financial crisis.

I would begin my analysis with Glaeser and Gyourko who demonstrate that policies of local governments in restricting the supply of housing inflated prices in the coastal areas of California, New York, Massachusetts, and a few other areas. The strong demand with the restricted or inelastic supply interacted to dramatically raise prices.

The private sector stepped in, developing subprime loans and new securitized products to meet a market segment blocked by law from the GSEs. The Congress eased GSE lending standards and the Clinton administration and later the Bush administration mandated that the GSEs provide more loans to under served markets. The new policies were designed to help buyers who did not qualify under traditional standards; they stimulated demand further inflating the bubble. But the crisis is not limited to the United States or solely due to government policy. The competition escalated. Prior to the bursting of the bubble, the private sector was gaining market share previously held by the GSEs.

Underwriting standards deteriorated worldwide and it takes a huge leap of faith to believe that other countries copied our policies carried out through the GSEs. Brunnermeier suggests that an expansion of the "originate and distribute" market organization whereby banks or other originators make loans, and then sell the loans through securitization as MBSs and CDOs was a cause of the decline in standards. Lenders passed on risk to buyers who believed that the diversification of risk that these instruments offered were sufficient to make more thorough investigation unwarranted. This explanation works for a worldwide crisis much better than the GSE explanation.

The fed also kept interest rates low. James Hamilton of Econbrowser suggests that the GSEs, the private sector and the Fed were engaged a game of chicken

And I think the obvious answer is that investors were happy to lend to the GSEs because they thought that, despite the absence of explicit government guarantees, in practice the government would never allow them to default. And which part of the government is supposed to ensure this, exactly? The Federal Reserve comes to mind. I'm thinking that there exists a time path for short term interest rates that would guarantee a degree of real estate inflation such that the GSEs would not default. The creditors may have reasoned, "the Fed would never allow aggregate conditions to come to a point where Fannie or Freddie actually default." And the Fed says, "oh yes we would." And the market says, "oh no you wouldn't."

This has been a very short explanation of the financial crisis that has left out credit default swaps, rating agencies, and many other mortgage market participants. When all is said and done, I am a supporter of markets and believe that they are almost always a better way to organize economic activity than top-down government organization. I cannot excuse their nearsighted behavior. As Delong writes, and oh how I wish I had written it first,

as your mother says: “If Freddie jumps off a cliff is that a good reason for you to follow him?”


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Saturday, December 20, 2008

Congressional Raises

Jordy Yager of The Hill reports that lawmakers are set to receive a 2.8% automatic raise, half of what social security recipients are set to receive.  The increase amounts to $4,700 annually.  The system of automatic pay increases was established by Congress to avoid the periodic spectacle of granting themselves a raise. 

Like the Wizard of Oz, Congress would tells us to "pay no attention to the 'formula' behind the screen," advice which Dorothy and her companions promptly ignored.  Daniel O’Connell, chairman of The Senior Citizens League (TSCL), a legally non-partisan, but fiercely pro-senior group observed,

As lawmakers make a big show of forcing auto executives to accept just $1 a year in salary, they are quietly raiding the vault for their own personal gain.  This money would be much better spent helping the millions of seniors who are living below the poverty line and struggling to keep their heat on this winter.

I do like the irony of Congress taking heat over their raises after humiliating auto and bank executives over their salaries as if Congress knows what they should make, but otherwise I support the pay increase for two reasons.  Given the importance of their jobs, they are not overpaid, and if we do not give them raises, they are likely to find other ways to pad their wallets, some legal and some not.

Gary Becker, the winner of the 1992 Nobel Prize winner in economics writes in his blog

I do believe the evidence is that better paid officials are less corrupt. Rank both corruption and the pay of officials (relative to the average in their countries). I believe the correlation between these ranks would be strongly negative, although I have not seen such an approach carefully done.

I agree with Becker.  Of course, another way to limit corruption is limit what Congress has to sell.


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Friday, December 19, 2008

Two Views on Housing Policy

Yesterday, Greg Mankiw linked to two articles commenting on a Treasury Department proposal to issue mortgages at 4.5%; Glenn Hubbard and Christopher J. Mayer approved of the plan, Edward L. Glaeser and Joseph Gyourko do not. While Mankiw's observation is correct, I offer a second--Hubbard and Mayer are recommending a short term solution to the current crisis and Glaeser and Gyourko are recommending a long term solution to regional housing problems.

Glenn Hubbard and Christopher Mayer

Recent news articles suggest that the Treasury Department is considering a plan to offer a 4.5% mortgage for home buyers for a period of time. Let's hope it does. It would help arrest the decline in house prices that is at the base of the ongoing financial crisis and recession...Raising the demand for housing makes sense now.

Edward L. Glaeser and Joseph Gyourko

These are two distinct problems that require two different solutions — neither of which involves subsidized lending...The first problem, the shortage of housing for the poor, is best solved by providing more housing vouchers... [The second problem], the fact that homes in San Francisco and New York [and other coastal areas] remain extremely expensive by historical standards. Prices are far above construction costs because robust housing demand, fueled by rising economic productivity, has collided against barriers to supply, like minimum lot sizes and height limits...The only path towards widespread affordability is to build more, which requires reducing NIMBYist [Not In My Back Yard] regulations. Localities tend to put their own interests ahead of the nation’s interest by restricting building in order to keep prices up and reduce congestion. The federal government should increase its efforts to counter this tendency.


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A Good Question

Alfred Marshall (1842-1924)

Do you mean Government all wise, all just, all powerful; or Government as it now is?


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Thursday, December 18, 2008

Barro, Krugman and Taxes

I recently read the transcript of a discussion between Robert Barro and Paul Krugman moderated by Peter Robinson of the Hoover Institute for the program, Uncommon Knowledge. The episode was titled, Dubyanomics, but was really a critique of the economic policies, particularly tax policies, of several administrations. It was filmed on January 4, 2004 and can be viewed here. Both economists are at the top of the profession. Barro is often considered a conservative and Krugman is a self proclaimed liberal. He wrote a book titled, The Conscience of a Liberal.

I went through the transcript in an attempt to objectively measure their opinions about topics covered in the transcript. My score is shown below.

Action

Barro

Krugman
Credits Markets

2

2

Blames Markets

0

0

Credits Reagan

5

2

Blames Reagan

0

1*

Credits Clinton

2

1

Blames Clinton

0

0

Credits Bush (W)

2

0

Blames Bush (W)

4

4

Credits Fed

2

2

Blames Fed

0

0

Overall, Barro seemed more willing to criticize conservatives and praise liberals than Krugman to criticize liberals and praise conservatives. Barro made seven positive and four negative statements about Republicans, and two positive statements about Democrats. Krugman made two positive and five negative statements Repulicans and one positive statement about Democrats.

In particular, Krugman was generally positive about the Reagan administration, but said that markets were more responsible for the good economic performance during the Reagan years than tax policy. Barro believes that the tax cuts successfully encouraged investment and growth and set the stage for growth into the 90s.

Barro was positive about the Clinton administration, particularly about trade policy, but said that markets were largely responsible for the good economic performance during the Clinton years. Krugman was positive about the Clinton administration.

Both economists were tough on the Bush administration. Barro generally liked Bush tax cuts, but offered some criticism, and was generally critical of trade policy. Krugman did not like the Bush administration's tax cuts, but focused most of his criticism of the honesty of the administration's salesmanship of the cuts.

Krugman made a valuable and humorous description about his differences with Barro and Reagan, and it had less to do with their positive views about economics--how the economy works than their normative views--what goals that society should pursue. He said,

But the question [about tax policy] is...a value judgment. That's not about economic growth. That's about do you think that the things that were under pressure should have been under pressure...We have by far the smallest government, smallest revenue base relative to the size of the economy of any advanced country. I'm a conservative. I want to preserve these programs we have and that unfortunately requires more revenue than we're collecting after the Bush tax cuts.


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Wednesday, December 17, 2008

OPEC Cuts Production and Prices Fall

When oil prices rise, it seems like OPEC is in control of oil markets. When prices fall, it does not. Today, OPEC announced a 2 million barrel a day cut in production beginning in January of the new year and oil prices are falling. If other variables affecting the oil market do not change, prices rise as supply falls.

But other variables are changing. As the economy slides deeper into recession, businesses and households demand less oil based products. The Energy Information Administration announcement a 1.3 million barrel increase in gasoline stocks, and a 2.9 billion barrel increase in distillate stocks that are used to make refined oil products. The same buildup of stocks is probably occurring world over. As demand decreases, prices fall.

OPEC's ability to cut production is also suspect, particularly as prices fall. The cartel suffers from the prisoners' dilemma problem. OPEC members earn higher profits if they all cut production. If one country cheats by not cutting production, and the rest do not, the cheating country benefits at the expense of the others. If they all cheat, oil prices and profits continue to fall.

Oil trades apparently believe that oil stocks demand is likely to fall faster than oil supply. I hope they are right.


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Civil Society

One important characteristic of democratic society is civility, the ability to express our ideas and hear those of others without being subject to or threatening intimidation. Non democratic and often illegal incidents always occur around elections and should be condemned.

An accelerant was poured around Governor Sarah Palin's church and then ignited. If done by an individual, it is an ugly criminal act. If done by a group, it is reminiscent of the KKK or Nazi brownshirts both notorious for attacking churches.

The philosophy contained in the sentence, "I disapprove of what you say, but I will defend to the death your right to say it" (The quote is often attributed to Voltaire but first written by Hall.)should be the rule in free lands.

My readers should know that they can politely disagree with anything that I write. Frequently, these comments are the most fun and enlightening, introducing other arguments. For example, see the comment 7 by M to my post, $650 Million Did Not Buy Obama The Election!

Also making the rounds today is an interchange between John McCormick of the Chicago Tribune and President Elect Obama. I thought that both the question and the response were good.


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Tuesday, December 16, 2008

Steven Chu as Energy Secretary

President Elect Obama has named his new Energy Secretary, Steven Chu a brilliant man who won the Nobel Prize in Physics in 1997 for cooling and trapping atoms using lasers. His selection signals a shift in priorities for the department from development of nuclear weapons and spent fuel disposal to alternative energy development and reduction of greenhouse gas emissions and therein lays my disagreement with the president elect.

For now, I will set aside any discussion of externalities such as greenhouse gasses, and focus on economic organization. It is the same disagreement that I have with my father-in-law, an engineer and former employee of the International Atomic Energy Agency who held diplomatic rank with the United Nations. He's a smart guy to and a good man. He believes more in a top-down organization of society in which politicians have broad visions for society's direction. They present these visions to physicists, engineers, and others even if they are not workable today. In the long run, ten to twenty years, scientists overcome the barriers and implement the politicians' vision.

I believe in a more spontaneous organization. When traditional energy sources become expensive, individual consumers acting in their own interest, change consumption habits, switching to more efficient vehicles, refrigerators, insulating homes, etc. Companies selling these products are incentivized by profit to increase their efficiency. Energy consuming firms also demand more energy efficient equipment, and their suppliers are incentivized by profit to provide it.

Simultaneously, energy producing businesses are incentivized by high profits to expand energy production. If one source of energy, say oil, becomes expensive they will find the next best source and when it is cost efficient bring it to market.

When push comes to shove, I trust the private sector's ability to produce cheap alternative energy through self interest more than the government's ability to produce it through benevolence.


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Monday, December 15, 2008

Phat Phee?

In a Timesunion.com article, James M. Odato described New York's governor, David Paterson's, first budget plan (HT to Drudge). Given the troubled economic times, it contains a mixture of spending cuts and tax increases designed to close a $12.5 billion dollar deficit. Among the tax increases is a $404 million tax on non-soda drinks that some are calling an obesity tax and which I shall call a phat Phee in a probably vain attempt to be more hip.

I find the article interesting for a couple of reasons. First, President Elect Obama is contemplating $1 trillion stimulus package of tax breaks and spending cuts. Economists have long recognized that state budgetary constraints at times force state governments to work at cross purposes with the federal government. Even if the incoming Obama administration successfully enacts a stimulus package, its effectiveness will be limited by state governments attempting to balance budgets.

Even on a micro level the New York seems to be working at cross purposes with the federal government: one likes domestic sugar growers, the other does not, but both seem aimed at punishing sugar consumers.

The federal government protects domestic sugar producers through a system of quotas that limit the amount of sugar that foreign countries can sell in the United States. These quotas raise the cost of all goods that use sugar and sugar substitutes (I shall refer to both as sugar, the reasoning doesn't change). The benefits of the quotas accrue to a few sugar growing states and are paid for by consumers in sugar consuming states. The federal governments favors sugar growers over consumers.

New York does not like sugar growers. Why should it? It doesn't have many. By taxing a product with a lot of sugar, New York mitigates the flow of federal dollars leaving the state. Its consumers are hurt yet again.

I recommend that people who prove that they lost weight through diet and exercise deserve a tax break. It would be the Phat Pharm Phat Phree Phat Phee tax break.


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Saturday, December 13, 2008

Bush Blinked

Thursday night, Republican senators torpedoed a $14 billion bailout deal for GM and Chrysler.  The bill was killed by a few senators, mostly Republican, who were demanding union concessions before signing onto the plan.  Many of the senators were from states that have healthier non unionized automakers. 

In a policy reversal, the Bush administration announced that it may use TARP bailout money originally intended to shore up the ailing financial sector.  Bush blinked.  As an aside, perhaps the government should hire union negotiators to represent us when dealing with the Iranian or North Korean governments. 

According to Tom Krisher and Kimberly S. Johnson, the unions accused senators not supporting the bill of trying to kill the unions because unions gave $1.9 million to the Democrats and only $11,500 to Republicans in the last election cycle and to protect their states automakers who hire non unionized workers.  Mike O'Rourke, president of a UAW local at a GM factory in Spring Hill, Tennessee,

"What this is is the Southern conservative senators trying to destroy the United Auto Workers, trying to destroy unions.  It's a sad day in America when the senators turn their back on Main Street."

Mr. O'Rourke does not represents Main Street.  He represents the union, and is properly concerned with its and its workers welfare.  As a consumer, I want a high quality vehicle at a low price.  Currently, non unionized automakers are doing a better job at producing those cars.  I don't see how unionizing the other automakers helps the country or me.

The Krisher and Johnson article also noted that

Many Democrats support the Employee Free Choice Act, which would take away employers' rights to demand a secret ballot on whether workers will join a union. Instead, workers could form unions by getting a majority of employees to sign a card in support of it.

In an earlier post, A Love-Hate Relationship, I predicted, mostly in jest,  that Congress would force non unionized workers to unionize.  Little did I not know about the Employee Free Choice Act when I made the prediction.  For the life of me, I cannot see how taking away a secret ballot is democratic.  It sounds like a bill to authorize intimidation to me. 


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Friday, December 12, 2008

Winds of Creative Destruction

The Internet has dramatically changed the newspaper industry.  Rather than wait for the morning paper to check out sports scores, and then be disappointed that the paper does not contain the scores of late night west coast games, I go online and read ESPN.  For news, I rely on the Drudge Report, The New York Times, Pajamas Media, The Washington Post, blogs and many other sources.  Circulation is down, but readership is up.  Through the Internet search engines, I find information faster and in more depth than in the past.  For example, if you want a good description of the changing print media, you might try, Reflections of a Newsosaur--a blog.

Competition is up, circulation is down, but readership is up.  It is a dynamic industry, and many traditional newspapers are making the transition to the Internet.  Some are distressed.  According to Alan Mutter of Newsosour, operating earnings are falling as circulation and sales decline.  Great institutions like the New York Time's profits are down, the Tribune Co declared bankruptcy. 

I'm not distressed, nor are you.  The winds of creative destruction are bringing a better product at a lower price. Markets are cool. 


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Thursday, December 11, 2008

The Car Czar

The auto industry bailout legislation proposes a "car czar" who would oversee the implementation of the Detroit automakers' sweeping restructuring plan.

I wonder who will be the car czar? He or she will need more knowledge about the auto industry that thousands at GM, Ford and Chrysler who have spent their careers and considerable talent trying to make cars Americans want to buy at affordable prices.

In addition to extensive information about auto production, and consumer tastes, David M. Herszenhorn, of the New York Times, that the Democrats’ legislation calls for the czar and his or her team to have "appropriate expertise in such areas as economic stabilization, financial aid to commerce and industry, financial restructuring, energy efficiency and environmental protection."

Congress seems to believe that the automakers don't desire to capture the profit that a truly innovative product would bring, that other automakers have also purposely avoiding making or cannot make a green, fuel efficient car, that the knowledge to make such a vehicle is readily available to Detroit automakers, but not their rivals, if they just try a little harder.

With all that knowledge, the czar will also need to be a benevolent souls with a strong hand, able to sit down with interested parties, automakers, unions, creditors, suppliers, auto dealers etc., and hammer out agreements to implement the plan.

The same New York Times article also quoted Dana M. Perino, the White House Press Secretary who said "Mr. Bush would insist on aiding only those automakers that can survive long term."

Gee, the car czar must be near to all knowing, all powerful, and benevolent. I wonder who that could be?

A Few Side Notes:

1. Russ Roberts of Cafe Hayek has two great quotes, one by Hayek and the other by Adam Smith about knowledge and economic organization.

2. Russ Roberst also of EconTalk interviewed Jonathan Rauch, of the Brookings Institution and the Atlantic Monthly, about the Chevy Volt, GM's planned electric car. You can listen to the podcast.

3. Mark Phelan of the Freep.com writes 7 myths about Detroit automakers. Detroit's cars are not as bad as many believe.


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Wednesday, December 10, 2008

$650 Million Did Not Buy Obama the Election!

A spate of news stories and blogs are declaring that President elect Barak Obama bought the presidency for $650 million, a point I dispute (see Big Money Bought Obama the White House or £500m election fund 'bought Obama victory').

The stories are of two types, by raising so much money Mr. Obama was able to bamboozle voters with tons of TV, radio and other advertising, or that the money was somehow illegally raised. As to the second point, illegally raising money, I will only comment briefly. Mr. Obama should comply with the law no matter how difficult the compliance and stupid the law. Without any evidence, I believe that when all is said and done, Mr. Obama will be shown to have complied with the law about as well as anyone else.

Money and votes seem to be correlated, but the question is one of causality. Does money buy votes or do good candidates raise more money. Steven Levitt and Stephen Dubner answer that question based on Levitt's peer reviewed work in their best seller, Freakonomics, certainly a valuable and entertaining read. Levitt looked at elections in which the same congressional candidates ran against each other in consecutive elections. This happened a lot, over 1,000 times in his sample.

Levitt then compared the votes and money raised in the two elections. He found that a candidate can cut his or her spending in half and only lose about one percent of the votes. Candidate Obama won by a 7.2 percent spread. It wasn't even close. Mr. Obama won because, given the economic and social conditions, he was the better candidate.


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Tuesday, December 9, 2008

What Can Regulators Regulate?

In an important article titled, "What Can Regulators Regulate? The Case of Electricity" written in 1962, George Stigler and Claire Friedland observe,

The literature of public regulation is so vast that it must touch on everything, but it touches seldom and lightly on the most basic question one can ask about regulation: Does it make a difference in the behavior of an industry?

As the House Committee on Oversight and Government Reform hearings begin, the washingtonpost.com reports that

Internal Freddie Mac documents show that senior executives at the company were warned years ago that they were offering mortgages that could pose dangers to the firm, hurt borrowers and generate more risky loans throughout the industry.

The documents also suggest that the GSE's executives knew their firms were falling behind private sector firms in product innovation and market share. Parenthetically, this suggests that the GSE's were not the culprit of the housing bubble, its bursting, or the ensuing financial crisis, but rather a somewhat late player. Fannie's CEO, Daniel Mudd expressed concern in 2005 that

A business presentation in 2005 expressed concern that unless it didn't [push into new markets], Fannie could be relegated to a "niche" player in the industry. Mudd later reported in a presentation that Fannie moved into this market "to maintain relevance" with big customers who wanted to do more business with Fannie, including Countrywide, Lehman Brothers, IndyMac and Washington Mutual.

In a wonderful Cato Policy Report touching on the social value of free markets and the impact of regulation, titled, "Are We Ailing from Too Much Deregulation," David R. Henderson notes that the GSE's were important players in the mortgage industry

Of the more than $15 trillion in mortgages in existence in early 2008, about one third were owned by, or were securitized by, Fannie Mae, Freddie Mac, Ginnie Mae, the Federal Housing and Veterans Administration and other government agencies [GSE's] that subsidize mortgages.

Despite falling behind private financial companies, the GSE's knew their importance in the industry. The washingtonpost.com reports that

The documents suggest than Fannie and Freddie knew they were playing a role in shaping the market for some types of risky mortgages. An e-mail to Mudd in September 2007 from a top deputy reported that banks were modeling their subprime mortgages to what Fannie was buying.

When Representative Darrell Issa (R-Calif.) who said (washingtonpost.com) that the executives at the GSE's need to take responsibility for their actions and the companies failure, and other members of Congress who have said similar things should remember with some humility their institution's failures to oversee their creations. Regulators, both those at the Office of Federal Housing Enterprise Oversight (OFHEO), and in Congress were unable to successfully regulate Fannie Mae and Freddie Mac. Particularly egregious were members of Congress who blocked regulatory reform.

Why did regulation fail? Henderson suggested two reasons: regulators have little incentives to regulate well, and regulatory agencies are often captured by the industry they regulate. Slate's Jack Safer beautifully illustrates political capture by Fannie and Freddie in, "Fannie Mae and the Vast Bipartisan Conspiracy." Let me suggest a third reason regulators, congressional or otherwise, fail: they do not have the knowledge needed to control a spontaneously and organically growing market, nobody does.


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Great New Products

The current financial crisis and economic downturn has caused many to question the wisdom of market based economies. I must point out that, despite the downturn, the goods and services we enjoy are produced by markets. PCWorld lists and describes The 100 Best Products of 2008. Not one was produced by the government. These are of course technology products. There are a great many non-tech innovative products as well. Can anyone name a new government product that is as innovate, useful or fun?


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Monday, December 8, 2008

Menzie Chinn Sounds Off

Menzie Chinn, a former Senior Economist for International Finance on the President's Council of Economic Advisers serving President Clinton from 2000-2001, who blogs at Econbrowser adds his voice to those who believe the Bush administration listens less to professional advisors than past administrations. His criticisms sounds very similar to those made by Stephen J. Dunbar writing for Freakonomics and cited in my earlier posting, Economic Advisors and the Presidency. Menzie uses the appointment of General Eric Shinseki to lead the U.S. Department of Veterans Affairs as a springboard to write

While this is not an economics issue in and of itself, it does relate to economic policymaking. Many of the critics of Obama's choices for his economics team have centered on the fact that some of the choices were in the Clinton Administration, or have been associated with the centrist wing of the Democratic party, and hence could not represent "change" (e.g., [0]). But I think this all misses the point. The "change" we need is not so much ideological in nature, but the return to policy authority of people who have expertise, and are willing to look to past experience and (most importantly to me) analysis to make their judgments about how best to proceed -- in economics as well as in issues of war and peace. So I'm happy with the developments thus far (on my previous posts on Shinseki vs. Rumsfeld and the Iraq debacle...

Unlike Menzie, I have never advised a president, but I do know that there is little reason to conduct analysis if it will not affect prior belief.


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Friday, December 5, 2008

Football Ranking Model

The ugly turn of events in the Big 12, the loss of OU to Texas, Texas to Tech, and Tech to OU has yet again placed the BCS in a predicament. Two teams play for the "National Championship" and only one has a perfect record. The remaining top ranked teams have a loss. Texas, Florida, OU, Tech, USC and Penn State can all make a claim that they should have a shot at the title game. Even a couple of undefeated teams with weak schedules will tell you that they should be in the championship.

Lacking a playoff system, the BCS relies on a combination of human rankings and computer rankings to select teams that play in the championship bowl.

But my question is not whether you prefer human rankings or computer rankings, but if you had to construct a computer model to rank teams, which variables would you use?


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Thursday, December 4, 2008

A Love-Hate Relationship

Reading the Drudge Report, my eye was caught by three related stories. "Man Says Wife Was Accidentally Shot During Sex..." This is the seedy story of an abusive, love-hate relationship. This was not the first violence suffered by the wife, Carolyn suffered at the hands of her husband, Tim. On another occasion, Tim spent 60 days in jail and attended anger management classes for beating his wife. According to the 911 call Tim said, "We were having sex, and it [the gun] went off." Doggone gun! It just went off when an otherwise loving couple were engaged in an act of congress.

The second article informed me of the consensual nature of the relationship, "The Big Three Drowning in Red, But Still Give Millions to Politicians..." Fifty million in lobbying, and another $15 in campaign contributions by those close to the industry--no surprise here. You didn't think that the our elected representatives would give away $34 billion for nothing did you?

Finally, I read, "Driving For Dollars: GM Chief Hits Road To DC" informing me that the relationship was love-hate. GM's CEO, who had the audacity to fly to DC in a corporate jet and ask for bailout money in November was being humiliated into driving in a hybrid car in December. Senator Richard Shelby, a Republican Senator from Alabama drew chuckles from the Banking Committee hearing room when he took time off from judiciously guarding taxpayer money to quip, "I wonder if they're going to drive back?" I'll bet ya that Senator Shelby wishes he had access to a fleet of Congressional jets. Congress keeps telling Detroit how to build cars that we want to buy; it's so good of them, the auto makers bleeding bottom lines were not sufficient warning. Cafe standards, law favoring unions, quota protection--love-hate. Doggone bankruptcy! It just goes off when otherwise well managed businesses and Congress were otherwise engaged in the people's business.

You can only push an analogy so far. An Act of Congress may save Detroit for now, but it is the taxpayer that is getting shot and in the wallet.

A Few Side Notes.

1. Don Boudreaux (The only stake here should be through the heart of any bailout proposal) and Russ Roberts (Do the car companies have a good plan?) from Cafe Hayek have two good posts pointing out that it appears easier to get money from politicians than investors.

2. Dr. B believes that Congress will protect taxpayer money by forcing foreign auto producers to unionize and thereby leveling the playing field for Detroit.


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Tuesday, December 2, 2008

Economic Advisors and the Presidency

Students sometimes ask if the presidents of one party have better economic advise than those of the other. Paul Krugman incorrectly makes this claim in a recent post for the New York Times, referring the outgoing economic advisors to President Bush as hacks and those of the incoming advisors as grownups. Krugman, whose economics are sublime, discredits only himself by insulting colleagues so unfairly.

In a post made December November 27, 2008, Greg Mankiw defends himself and other advisors to President Bush writing,

But are they really in a different class than those in the previous administration? Based a standard ranking of economists' academic accomplishments as of October 2008, here is where these three stand (out of more than 18,000 economists), together with the rankings of all the CEA chairmen appointed by President Bush:


11. Larry Summers
21. Greg Mankiw
35. Ben Bernanke
99. Eddie Lazear
132. Glenn Hubbard
249. Harvey Rosen
391. Christy Romer
653. Austan Goolsbee


Judging by this objective criterion, it looks like the two adminstrations are drawing economists from roughly the same talent pool.

The real question is do presidents and their political advisors listen to the good economic advise that they receive? Stephen J. Dunbar deals with this question writing for Freakonomics. Dunbar provides solid evidence that President Clinton, and President Elect Obama place economists in more prominent positions than President Bush and opines that the bad economy may force the incoming administration to listen more closely to their economists.

Dunbar then quotes Steve Levitt who offers a hypothesis as to why economists off all administrations seem to get short shrift,

Politicians don’t listen to academic economists because the solutions economists favor are rarely politically popular. Although Obama is one of the most intellectual presidents that we have had in a long time — which might predispose him to listen to economists — the policies that economists favor tend to be free-market oriented, which likely won’t sit well with his inner circle.

Presidents and their non-economic advisors, or more likely, the people who elect them may suffer from what Brian Caplan in his book, The Myth of the Rational Voter, calls the antimarket bias, "a tendency to underestimate the economic benefits of the market mechanism.


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