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Brooks Wilson's Economics Blog: February 2009

Saturday, February 28, 2009

Leon Panetta, the CIA and Argentina

In a news conference earlier this week, CIA director Leon Panetta told of meeting "someone from Latin America" who had told him of "some serious problems ... that involve economic instability." He later identified those countries as Argentina, Venezuela, and Ecuador (Moffett, Mat. "Argentina Raps U.S. Over Critical Words," Wall Street Journal, February 28, 2009. )."

At the direction of the president of Argentina, Cristina Kirchner, Foreign Minister Jorge Taiana blasted Panetta ("Argentina expresa profundo malestar por declaraciones de director de la CIA," La Nacion, February 26, 2009.).

Hemos tomado conocimiento con sorpresa y con profundo molestar de las declaraciones efectuadas por Leon Panetta, director de la Agencia Central de Inteligencia, la tristemente célebre CIA, de los Estados Unidos, en donde se refiere a aspectos de la situación y evolución económica de nuestro país...[Eso es] una inaceptable injerencia en los asuntos internos del país, mucho más proviniendo de una agencia que tiene una triste historia de interferencia en los asuntos internos de países de la región" latinoamericana.

I could not find a translation of this quote online, but with a little help from an online translator, and my knowledge of Spanish, I came up with the following translation.

We have been surprised and deeply disturbed surprise by the statements of Leon Panetta, director of the Central Agency of Intelligence, the tragically famous CIA, of the United States, where he refers to aspects of the situation and economic evolution of our country…This is an unacceptable interference in the internal matters of our country, stemming from an agency that has a sad history of interference in the internal matters of countries in the region.

In his denunciation of Panetta's statement, Taiana called for a meeting with U.S. ambassador, Earl Anthony Wayne. The meeting was described as cordial. The above cited Wall Street Journal article quoted Argentine analyst Federico Thomsen who said,

Mr. Taiana's complaints were largely directed at a domestic, political audience, but that Mrs. Kirchner likely isn't interested in roiling the waters with President Barack Obama.

The incident is reminiscent of a more significant and longer running battle between the United States and the Argentine government headed by Juan Peron. In an election cycle ending with the election of Peron, the Assistant Secretary of State for Western Hemisphere Affairs, Spruille Braden, openly campaigned against Peron, and issued a report known as the Blue Book which, among other things, accused Peron of fascist ties.

Peron responded by issuing the Blue and White Book, the title coming from the colors of the Argentine flag. Peron campaigned on the slogan, "Braden or Peron" riding it to electoral victory.

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Friday, February 27, 2009

News On the War On Drugs From Mexico

The AP reports that many universities are advising students not to travel to Mexico for spring break ("Students warned on spring break in Mexico," Austin American-Statesman, February 27, 2009).

Universities around the country are warning college students who plan to go to Mexico for spring break that there has been a surge in drug-related mayhem south of the border.

More than 100,000 high school- and college-age Americans typically travel to Mexican resort areas during spring break each year. Tourists generally haven't been targeted in the drug violence, though there have been killings in the spring-break resorts of Acapulco and Cancun.

The University of Arizona in Tucson is urging its approximately 37,000 students not to go to Mexico. Other universities — including Texas A&M, Penn State, Notre Dame, the University of Colorado and the University at Buffalo — are calling students' attention to a travel alert issued Feb. 20 by the U.S. State Department.

President Calderon of Mexico denies that Mexico is losing the War on Drugs and is sending 5,000 troops to Ciudad Juarez to combat warring drug cartels. Over 6,000 people were killed in Mexico last year in drug related violence. That is more than were killed in the September 11, 2001 terrorist attacks, or the number of U.S. soldiers killed in Iraq (President denies Mexico losing drug wars,, February 27, 2009).

MEXICO CITY–President Felipe Calderon yesterday rejected U.S. fears Mexico is losing control of its territory to drug cartels.

In an interview with The Associated Press, Calderon said his government has not "lost any part – any single part – of the Mexican territory" to organized crime. He also called "absolutely false" the idea that Mexico is in danger of becoming a failed state if the violence continues.

Earlier yesterday, Mexico's top prosecutor said more than 1,000 people have been killed in drug violence this year, but that he believes the worst is nearly over.

Attorney General Eduardo Medina Mora said 6,290 people were killed last year – about double the 2007 toll.

Medina Mora said the world's most powerful drug cartels are "melting down" as they engage in turf wars and fight off a countrywide crackdown.

The government, meanwhile, is sending up to 5,000 new troops and federal police to Ciudad Juarez, where law and order is on the brink of collapse in a war between drug gangs. The army said yesterday the deployment could take the number of soldiers and federal police to more than 7,000 in the city located across the U.S. border from El Paso, Tex.

Associated Press, Reuters

The war on drugs directly costs Mexico in resources that must be used to combat cartels, and indirectly through the loss of tourists' dollars.

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Thursday, February 26, 2009

Brad DeLong On The Stimulus As It Passed

To my recollection, there has never been an issue as contentious between economists as the merits of the stimulus bill. I began posting about economists supporting some type of stimulus package, followed by a spate of posts by skeptics. I thought that it was time to post on an economist supporting the stimulus bill as it passed Congress. Brad DeLong is a macroeconomist who gracefully and persuasively crafts words. He writes,

Will the Obama deficit-spending plan work? Will throwing $800 billion—$500 billion in extra government spending, and $300 billion in tax cuts—at the economy produce a world in which production and employment are higher and unemployment lower than would otherwise have been the case?

The short answer is yes. The short reason is that spending works—eras in which some group or other gets excited about future prospects and starts madly spending money are eras in which production and employment are high and unemployment is low. And the government, in this respect, is just like any other group of starry-eyed optimists whose eagerness to spend pulls the economy into a high-employment, high-pressure boom...

DeLong provides three examples of spending sprees increasing employment: the 2003-2005 housing boom supported by an easy money policy of the Fed, the 1996-1998 Internet boom, and the 1982-1986 boom led by monetary easing, increases in defense spending and tax cuts.

In a small gotcha moment, DeLong quotes Mankiw, a leading skeptic of the Obama stimulus bill, presumably supporting the Reagan fiscal stimulus, who said in 1983, "There is nothing novel about this. It is very conventional short-run stabilization policy: You can find it in all of the leading textbooks."

Many economists opposing the stimulus claim that the large debt will lower future growth. DeLong address these concerns with the typical serenity of an empirical economist waiting for data.

But there is a relevant question outstanding: Will there be some sort of a hangover after this Obama spending binge—some debt-induced, groggy morning after? And if there is a hangover how bad will it be? For the answer to that, we will have to wait and see.

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Wednesday, February 25, 2009

The War On Drugs

The role of government in regulating the lives of the citizens it serves should be limited, seeking mainly to protect people violence, and property against damage and theft. The war on drugs presents a difficult problem in maintaining a small role for the state while protecting citizens from the actions of drug users.

The demand for drugs is probably inelastic, meaning that prices must increase a lot to reduce the quantity that people wish to consume a little. The supply of illegal drugs is probably elastic, meaning a small increase in price results in a large increase in supply. Small increases in demand or decreases in supply tend to dramatically drive up prices. Currently, the United States and Europe import drugs and Latin and South America produce them.

Hernando Henrique Cardoso, a former president of Brazil, Cesar Gaviria a former president of Colombia, and Ernesto Zedillo, a former president of Mexico delivered a unified message to the American public in a Wall Street Journal opinion article titled, "The War on Drugs Is a Failure."[1]

The war on drugs has failed. And it's high time to replace an ineffective strategy with more humane and efficient drug policies. This is the central message of the report by the Latin American Commission on Drugs and Democracy we presented to the public recently in Rio de Janeiro.

They conclude that the war on drugs has failed because of maintained demand in the United States and Europe, and supply the growing destabilizing influence that drug cartels exercise in Latin America. Many Americans seem to believe that Latin American countries have not made an effort to combat drug traffickers, but this belief is tragically false. Chris Hawley, writing for USA Today, describes the violent chaos caused by drug cartels battling each other and the Mexican government for control of routes into the United States.[2] Hawley notes that

The U.S. Drug Enforcement Agency has credited his actions with a steep reduction of cocaine supply in many U.S. cities. Calderon says the vast majority of those killed have been drug gang members, and his approval rating remains high at about 60% — a broad enough mandate to keep pursuing the cartels for now, Shifter says.

The battle is far from won. Hawley describes the difficulty of the battle.

The story is similar across much of Mexico's 2,000-mile-long northern border: a wave of beheadings, grenade attacks and shootouts as drug cartels battle each other for supremacy and lash out against Mexican President Felipe Calderon's drive to destroy their smuggling operations. The death toll from drug-related violence in Mexico last year surpassed 6,000, more than double the previous year, raising questions about whether Calderon's government can prevail against a brutal and often better-armed enemy without additional help from the U.S. government.

The three former presidents paint a similar picture of efforts and results in Columbia.

Over the last 30 years, Colombia implemented all conceivable measures to fight the drug trade in a massive effort where the benefits were not proportional to the resources invested. Despite the country's achievements in lowering levels of violence and crime, the areas of illegal cultivation are again expanding. In Mexico -- another epicenter of drug trafficking -- narcotics-related violence has claimed more than 5,000 lives in the past year alone...

The alarming power of the drug cartels is leading to a criminalization of politics and a politicization of crime. And the corruption of the judicial and political system is undermining the foundations of democracy in several Latin American countries.

The cartels are growing despite intense efforts to eradicate them.

They propose a different strategy to lower the cost of drug use in countries that demand drugs and well as those that supply them.

In this spirit, we propose a paradigm shift in drug policies based on three guiding principles: Reduce the harm caused by drugs, decrease drug consumption through education, and aggressively combat organized crime.

More drug users could maintain employment if drug use were simply stupid, and not illegal too, reducing users' need to resort to crime to support dependency. Treatment and education would reduce demand, but by how much. Demand would shift inward, the equilibrium price and quantity purchased would fall, but again, by how much. Fighting organized crime, if successful, would decrease supply, increasing price but yet again decreasing the quantity consumed, but the cartels would resist and violence from this source would remain. Given the complexity of the problem, the lack of success of the current policy, I believe that their proposals deserve consideration.

[1] The article is based on the "Drugs and Democracy: Toward a Paradigm Shift," produced by the Latin American Commission on Drugs and Democracy.

[2] Hawley, Chris. "Mexican drug gangs wage war," USA Today, February 24, 2009.

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Tuesday, February 24, 2009

What Did You Think Would Happen?

Lori Montgomery and Ceci Connolly of the Washington Post reported yesterday in "Obama's First Budget Seeks To Trim Deficit," that the Obama administration is seeking to improve the budget process, and to close a budget deficit estimate at $1.2 trillion.

The improvement in the budget process would come through "honest" reporting and forecasting of revenues and expenditures. This is not a new goal. The party out of the White House decries the expenditures swept under the political rug, and the exaggerated projections of future revenues reached through rosy economic assumptions as every administration attempts to claim progress in battling out-of-control expenditures while doling out pork to allies. The Obama administration should receive good karma and tons of accolades if they reach this goal. Montgomery and Connolly report on the administration's view of the Bush administration's budgeting process.

For years, budget analysts complained that former president George W. Bush tried to make his deficits look smaller by excluding cost estimates for the war in Iraq and domestic disasters, minimizing the cost of payments to Medicare doctors and assuming that millions more families would pay the costly alternative minimum tax.

Closing the estimated $1.2 trillion deficit, in part a result of the new administration's stimulus bill is a daunting task. The authors state,

President Obama is putting the finishing touches on an ambitious first budget that seeks to cut the federal deficit in half over the next four years, primarily by raising taxes on businesses and the wealthy and by slashing spending on the wars in Iraq and Afghanistan, administration officials said.

Reducing spending on the wars in Iraq and Afghanistan, given that President Obama is sending 17,000 more troops to Afghanistan will come exclusively by cutting expenditures in Iraq. Given the timetable for withdrawal, and the reduced role of the U.S. military in Iraq, that would have happened anyway.

The administration also hopes to reduce expenditures on Medicare and Medicaid by modernizing record keeping and improving incentives doctors face, rewarding outcomes not procedures. The biggest target may be the Bush-era Medicare Advantage program.

by reducing spending on some health programs so the administration would have money to devote to initiatives to expand coverage. The biggest target is bonus payments to insurance companies that run managed-care programs under Medicare, known as Medicare Advantage.

The Bush-era program has attracted nearly a quarter of Medicare beneficiaries to private health insurance plans that cover a package of services such as doctor visits, prescription drugs and eyeglasses. But the government pays the plans 13 to 17 percent more than it pays for traditional fee-for-service coverage, according to the Medicare Payment Advisory Commission, which advises Congress on Medicare financing issues.

Eliminating this program will be unpopular with participants if they were attracted to the program rather than pushed into it.

Revenue will be raised by allowing Bush-era temporary tax cuts on the rich, those earning more than $250,000 annually, to expire.

Obama also seeks to increase tax collections, mainly by making good on his promise to eliminate some of the temporary tax cuts enacted in 2001 and 2003. While the budget would keep the breaks that benefit middle-income families, it would eliminate them for wealthy taxpayers, defined as families earning more than $250,000 a year. Those tax breaks would be permitted to expire on schedule in 2011. That means the top tax rate would rise from 35 percent to 39.6 percent, the tax on capital gains would jump to 20 percent from 15 percent for wealthy filers and the tax on estates worth more than $3.5 million would be maintained at the current rate of 45 percent.

Obama also proposes "a fairly aggressive effort on tax enforcement" that would target corporate loopholes, the official said. And Obama's budget seeks to tax the earnings of hedge fund managers as normal income rather than at the lower 15 percent capital gains rate.

Two hundred and fifty thousand is a very low threshold for rich. I doubt that taxpayers in New York, Boston, San Francisco, Seattle or Los Angeles would consider themselves rich with that income. Nor do I like the segregation of the rich into a socially undesirable group. If the administration would have talked of raising taxes on blacks or Jews, people would have properly been offended, why are we not? People respond to incentives. If you want less of something, you tax it. In this case, the something is investment and wealth creation.

The Dow responded to the proposal Monday by shedding another 250 points (3.4%). Sure, part of the fall might be connected to other concerns, but investors cannot be happy knowing that the firms they own and the dividends they are paid will be taxed at higher rates.

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Monday, February 23, 2009

Bittlingmayer and Hazlett on the Stimulus

Bittlingmayer has written frequently on antitrust activity, and Hazlett, on cable television and other telecommunication issues. Both are keen observers of the interaction of the relationship between stock markets and economic and political events, and they have frequently collaborated to the benefit of their readers. Their latest collaboration, "The Market Is Shorting Obama's 'Stimulus'," examines investors' reaction through the DJI to the Obama stimulus bill as it passed through Congress. By increasing government spending through deficit spending, the administration hopes to boost economic activity by more than the spending itself through a multiplier effect. Bittlingmayer and Hazlett emphasize that investors aren't buying the economic theory; at least they are not buying its political manifestation.

Government deficits are nonetheless being sold as doctor’s orders, an elixir that – while it looks ugly and tastes bitter – will propel us back to economic health. Yet the best forecast currently on the table is the one made by investors risking their own money. They are shorting the “stimulus.”

The skepticism is huge.

[K]ey political victories for the Team Obama spending plan have not been viewed as buying opportunities on Wall Street. A string of negative market reactions began with the December 18 announcement of a stimulus bill of $700 billion (Dow down 2.5%), continued with the January 7 announcement that the actual plan would be “on the high side” (-2.7%) and continued with last week’s 61-36 Senate vote supporting the Administration’s fiscal plan. The White House victory and the new bank bail-out plan announced the following day by Treasury Secretary Geithner were met with a 5% wipe-out in the DJI, and a decline in Treasury bond yields, indicating a “flight to quality.”

Are investors truly the best forecasters? Economists place a great deal of value in betting and prediction markets. They have been more accurate in predicting the outcome of elections and sporting events than experts, presumably because investors have money in the game and their earnings are dependent on correctly predicting outcomes. Experts are paid for expressing their opinions whether they are correct or not.

A skeptic will note that investors did not do well in predicting the value of housing and stock market in the recent past, but neither did our elected representatives and government regulators, who created perverse incentives in the housing and banking industry.

Bittlingmayer and Hazlett suggest a reason for investors' doubt.

How do economists know that, while a deficit amounting to 6% of GDP budget was sufficient to spur the economy back to health in 1983, it will take more than twice that federal borrowing to do the same now? They don’t. Economic models are all over the place in their projections. Indeed, Prof. Barro’s cutting edge analysis of fiscal policy finds no historical stimulus from peacetime deficits. Of course, we’ve never seen so massive a deficit – one that would bar the U.S. from membership in the European Union, on grounds that our government finances are a mess -- and so we lack empirical evidence to inform the precise experiment we’re running today.

We do, however, know the accounting trends: our government faces massive new spending increases as Baby Boomers retire and their Social Security and Medicare bills come due. Market investors are wary of new spending, guaranteeing either future tax increases or inflation, as a run-up to the demographically guaranteed spending spiral. The quest for “shovel-ready” projects makes one think, Where’s Senator Ted Stevens when we need him? In any event, this fiscal bridge to nowhere is not spurring markets.

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Campbell Soup and Progresso Battle to Produce Healthy Soups

In an earlier post, "The Salt Hath Lost His Savour," I commented negatively on Mayor Bloomberg's plans to pressure restaurants and food processors to reduce salt content. Campbell Soup and Progresso have demonstrated that markets react to consumer demand, and that government leaders continue to arrogantly overvalue their role.

The Food Business Review Soup reports in "Campbell to reduce sodium levels in some soups," quotes Douglas Conant, Campbell's CEO as stating,

Campbell continues to expand our lower sodium soups and in the process we are lifting the entire category to new heights. Our innovations in soup are making a food that is already nourishing even better for consumers and more compelling for customers. This is especially important now as consumers are equally focused on eating well while trying to stretch their food budgets.

Mr. Conant is discrete, avoiding mention of competition with Progresso and other soup processors. Peter Van Allen, writing for the Minneapolis St. Paul Business Journal, in "Progresso’s, Campbell's soup war reaches boiling point," describes the two food processors' competition for consumers.

“The ‘soup battle’ is a long standing one. MSG is the ‘villain’ these days as the public has become more aware. But Progresso and Campbell have been duking it out for years,” said industry consultant Lonny Strum, president of Strum Consulting Group Inc. Strum was a management representative on the Campbell account at advertising giant BBDO in the early 1980s...

The stakes are high: Sales of soups, sauces and beverages totaled $3.674 billion in the fiscal year ended Aug. 3, a 5 percent gain. Campbell’s overall sales last year were $7.9 billion.

“The back of the label is the new focus for an increasing number of people,” Michael Barkley, a Campbell’s vice president of marketing, said at the time.

Businesses expend considerable effort to satisfy their consumers. If consumers want healthy products, they will get it, if they want unhealthy products, they'll get that too. If they do not provide goods and services their consumers' desire, their competition will. Government's role as an intermediary for consumers is very small.

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Saturday, February 21, 2009

Replacing the Gasoline Tax? Not Now!

( Two HT's Drudge). Joan Lowy of the AP, writing for in an article titled, "Obama nixes plan to tax motorists on mileage," reported that President Obama, through his press secretary, rejected his transportation secretary's plan for a vehicle miles-traveled tax (VMT).

President Barack Obama on Friday rejected his transportation secretary's suggestion that the administration consider taxing motorists based on how many miles they drive instead of how much gasoline they buy. "It is not and will not be the policy of the Obama administration," White House press secretary Robert Gibbs told reporters, when asked for the president's thoughts about Transportation Secretary Ray LaHood's suggestion, raised in an interview with The Associated Press a daily earlier.

In an article written earlier the same day, "AP Interview: Transportation secretary says taxing how much we drive may replace gasoline tax," Lowy provides details of the rejected plan to replace the gasoline tax in the not too distant future.

The system would require all cars and trucks be equipped with global satellite positioning technology, a transponder, a clock and other equipment to record how many miles a vehicle was driven, whether it was driven on highways or secondary roads, and even whether it was driven during peak traffic periods or off-peak hours.

The device would tally how much tax motorists owed depending upon their road use. Motorists would pay the amount owed when it was downloaded, probably at gas stations at first, but an alternative eventually would be needed.

Transportation Secretary LaHood believes that new tax revenues will become necessary as drivers switch to hybrid or electric vehicles that create wear and tear on roads and highways, but largely avoid the gasoline tax. The administration seeks to reduce oil use, and the more successful they are in encouraging drivers to switch to alternative fuel vehicles, the greater the shortfall in funds raised by the gasoline tax.

I believe that most economists would like the VMT tax. Like a gasoline tax, it taxes high mileage drivers more. It can also be administered to tax less small vehicles that are kind to roads, and all vehicles. Finally, it can be set to tax those who drive at peak traffic hours more.

As a peak hour driver, the tax would not be kind to me, but it would be good for society. It would create incentives to drive during non-peak hours, reducing congestion, pollution and commute times. For example, employers would have incentives to alter work days to reduce taxes they pay on their vehicles, and their employees pay driving to work. Doctors' offices might open earlier or stay open later. Some employers may switch to ten hour, four day work weeks.

I might add that taxing snarky hybrid drivers who avoid much of the gasoline tax that support highway maintenance is commendable also an advantage of the VMT tax. Taxing non-snarky hybrid drivers not enjoyable, but it is fair.

Why is the Obama administration unwilling to consider taxes that will be necessary if their efforts to reduce oil consumption succeed? I offer two guesses. First, the tax would be unpopular with voters who fear loss of privacy, and an additional tax on driving. Second, the gasoline tax is a type of carbon tax, subtly reducing the cost for those who have switched to alternative energy powered vehicles relative to those who have not.

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Thursday, February 19, 2009

Obama Supports Freedom of Speech Over Fairness Doctrine

Michael Calderone reports in Politico (Obama opposes Fairness Doctrine) reports that President Obama opposes the Fairness Doctrine.

Until now, the Obama administration has remained mum when it comes to the Fairness Doctrine. But now, White House spokesperson Ben LaBolt tells Fox News that "as the president stated during the campaign, he does not believe the Fairness Doctrine should be reinstated."

Indeed, that was candidate Obama's position last June.

LaBolt's announcement of President Obama's position is encouraging but could have been made better by adding the phrase, "or anything like unto it," eliminating a backdoor regulation of talk radio through localism. For now, I am basking in the light of the President supporting freedom of speech.

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Tuesday, February 17, 2009

New York State's Proposed Tax on Porn

I have written a couple of posts blasting nanny taxes coming from the city or state of New York. Drudge links to an article titled "Adult download tax proposal awaits climax in Albany" and written by Stephanie Gaskill for the Daily News that describes a new porn tax.

A state proposal to add a 4% tax for downloading movies and music will also apply to Internet porn.

Gov. Paterson recently suggested the so-called iPod tax to help close a $15 billion budget deficit, but few realized the levy would also apply to XXX-rated material.

Being a libertarian, and preferring spending cuts to tax increases. Let me suggest firing the state workers who came up with the sugary soda tax as a proper place to begin spending cuts. I still have to acknowledge that if you are taxing downloads, you might as well tax porn as well as music and movies. This puts me at odds with Conservative Party Chairman Michael Long who said,

By taxing it you're legitimizing it [porn]. If you're taxing it - how can it be wrong? I don't know how you can sink much deeper.

He also said that the government shouldn't profit by porn. His arguments are normative, and neither right nor wrong, but I would like to make a couple of points in favor of including porn in the tax. First, almost everybody does things that I don't like, and some of those things I consider immoral. My opinion about the value or morality of a good or service does not depend on its tax status or even its legality. Second, by not taxing porn while taxing other movies, the state is providing an implicit subsidy to the porn industry.

The state expresses its displeasure with a good (goods producing significant externalities excluded) by outlawing it or placing a tax above and beyond the tax paid by favored goods. It is the process of selectively picking proper goods for its citizens to consume that a state becomes a nanny state. I prefer getting my moral advice from great philosophers like Adam Smith and religious leaders.

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Were the Smothers Brothers Treated Fairly?

While preparing my post, "The Fairness Doctrine," I read a paragraph in Hazlett's Public Interest article about the Smothers Brothers that I thought was wrong. The key part of the paragraph reads,

The bipartisan coup de grace came when the highly rated but politically liberal "Smothers Brothers Comedy Hour" offended Rhode Island's Democratic senator Frank Pastore, the chairman of the FCC's oversight committee, by mockingly bestowing upon him the "Flying Fickle Finger of Fate" award. The Senator was unamused, and CBS quickly cancelled the profitable show.[1]

As I recalled, and verified through the Internet, Dan Rowan presented weekly the Fickle Finger of Fate award on Laugh-In. Out of respect for Hazlett, a mentor, I did not point out his apparent error. Knowing the care he takes to get the details right, I did a little more Internet research, and found a post on EconLog by David Henderson [2],[3] that explains the discrepency and vindicates Hazlett.

It is true that CBS had a lot of difficulty with the Smothers Brothers' edgy looks at politics and religion. But that's only part of what got the show yanked. The other part was a humorous bit done by guest Dan Rowan. Rowan gave the "fickle-finger-of-fate" award (i.e., the finger) to John O. Pastore, a U.S. Senator from Rhode Island. Why did Rowan single out Pastore? Pastore was the chairman of United States Senate Subcommittee on Communications. In that role, he had a great deal of power over the Federal Communications Commission, the federal agency that censors radio and television. In other words, Rowan "fingered" a man who had a great deal of power over television content.[4]

I wonder if Rowan and Martin asked the Smothers Brothers to appear on Laugh-In?

[1] Hazlett, Thomas W. "The Fairness Doctrine and First Amendment," The Public Interest, Num. 96, Summer 1989.

[2] Henderson, David. "Smothers Brothers: The Missing Story," EconLog, December 7, 2008.

[3] Pastore was an important political patron of PBS, and Henderson explains that PBS protected Pastore's reputation in a recent broadcast, "The Censorship Struggles of the Smothers Brothers Comedy Hour," and posits a reason for the protection.

[4] Yes, I did notice that Hazlett refers to Pastore as Frank, and Henderson refers to him as John. No, I have not been able to verify that Frank was John's nickname.

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Monday, February 16, 2009

The Fairness Doctrine

Michael Calderone at Politico has done yeoman's work describing recent exchanges between left-leaning politicians and right-leaning radio talk show hosts on the Fairness Doctrine. Their bantering may be a tale of sound and fury, whipping up audiences, signifying nothing, as Calderone suggests, but I will treat the threats of a new fairness doctrine as if the speakers delivered them seriously because it provides the opportunity to introduce excellent scholarly work on the subject.

Over the past several weeks, there has been a drum beat of Democratic politicians calling for more balance on the airwaves, or the implementation of a modern fairness doctrine. Calderone quoted Senator Debbie Stabenow [1], Senator Tom Harkin [2], and former President Bill Clinton [3] as supporting some type of Fairness Doctrine. Right wing talkers have vowed to fight the imposition of anything resembling political control over speech.

In the Public Interest, Hazlett [4] presents a brief history of broadcasting and its regulation. Broadcasting began in the U.S. in 1920. Spectrum assignment was based on first-come, first-served basis. In 1927, Congress and the Coolidge administration nationalized the spectrum out of what Hazlett described as, "mostly fear of private solutions to the spectrum-assignment problem." And thus political interference in broadcast speech began. Hazlett writes,

Instead of selling broadcast-spectrum rights, Congress and the FCC chose to assign them without dollar payment, while using the assignment power to help friends, punish enemies, and promote favored socioeconomic views.

The Federal Communication Commission, (FCC) which would eventually administer and enforce the Fairness, was created in 1934 to manage access to the airwaves in the public interest through the licensure process. The Roosevelt administration quickly realized that licensing could be a mechanism to punish radio stations that expressed anti-New Deal views. The Truman administration attempted to restore some controversial programming through the Fairness Doctrine (FD). Hazlett writes,

The Fairness Doctrine was cooked up by the regulatory chefs at the Federal Communications Commission (FCC) in 1949. The Doctrine required radio and television licenses "to provide coverage of vitally important controversial issues of interest to the community...and...a reasonable opportunity for the presentation of contrasting viewpoints on such issues."

The Fairness Doctrine orwellianly clothed the naked political aggression of administrations seeking political gain in the public good of free speech. Hazlett and Sosa, in a Journal of Legal Studies article, explain the enforcement mechanism granted by the Fairness Doctrine.

Enforcement of the FD was triggered by a complaint filed by a private party alleging an FD violation. The Commission would then request that the licensee in question respond to the complaint. The process would occasionally lead to a formal hearing by the Commission, during which the licensee's programming choices would be scrutinized in great detail. Most typically, FD complaints were filed either at the time of license renewal or license transfer. The cost (to the licensee) associated with the FD complaint ranged from the legal and lobbying expense involved in responding to the initial accusation, to the award of free airtime to complainants. The most potent weapon the FCC wielded, the capacity to revoke a license or refuse renewal (or transfer) for an uncooperative licensee, was rarely used. Nonetheless, the threat of loss of license was a powerful motivation for dispute settlement as well as behavior modification (as an "electronic publisher") to avoid programming likely to provoke complaints in the first place.

In the two referenced papers, Hazlett, and Hazlett and Sosa provide non-exhaustive examples of abuses of the Fairness Doctrine. Abuse was bipartisan. The Eisenhower administration awarded television licenses to GOP businessmen. The Kennedy administration used the Fairness Doctrine through the Democratic National Committee (DNC) to stifle right-wing broadcasters who might oppose their nuclear test-ban treaty. The DNC during the Johnson administration harassed unfriendly stations. License harassment of unfriendly stations was a regular agenda item during the Nixon administration, and in one thirty day period, twenty-one presidential directives were issued to follow up on unfair news reporting.

Hazlett and Sosa demonstrated the constraints that the Fairness Doctrine had on speech by measuring changes in radio programming before and after it was revoked by the FCC in 1987. The news, newstalk, and public-affairs radio format expanded from 7% of AM formats in 1987 to 28% in 1995; these formats expanded from 3% of FM formats in 1987 to 7% in 1995. Re-instating the Fairness Doctrine would lower the quality of programming, and, consequently, lower radio revenues. The real cost is the chilling impact on political speech, a cost that politicians from both parties who wish to reinstate the Fairness Doctrine understand.

[1] Michael Calderone, "Sen. Stabenow wants hearings on radio 'accountability'; talks fairness doctrine," Politico, February 5, 2009.

[2] Michael Calderone, "Sen. Harkin: 'We need the Fairness Doctrine back,'" Politico, February 11, 2009.

[3] Michael Calderone, "Clinton wants 'more balance' on airwaves," Politico, February 12, 2009.

[4] Hazlett, Thomas W. "The Fairness Doctrine and First Amendment," The Public Interest, Num. 96, Summer 1989.

Hazlett, Thomas W. and David W. Sosa. "Was the Fairness Doctrine a 'Chilling Effect'? Evidence from the Postderegulation Radio market," The Journal of Legal Studies, Vol. 26, No. 1, January 1997.

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Sunday, February 15, 2009

Europe Is Hurting Too

(HT Drudge) Eric Pfanner of the International Herald Tribune in "Europe's economic slump deeper than expected," writes

Europe sank even deeper into recession than the United States in the closing months of last year, according to figures published Friday, as finance ministers of leading industrialized nations gathered in one of the worst-affected countries, Italy, for discussions on the crisis.

In the fourth quarter, the economy of the countries sharing the euro declined by 1.5 percent, according to the European Union's statistics office. That is even worse than the 1 percent decline in the U.S. economy during that period, compared with the previous quarter.

"Today's data wipes out any illusion that the euro zone is getting off lightly in this global downturn," said Jörg Radeke, an economist at the Center for Economics and Business Research in London.

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Cardinal Cormac Murphy-O'Connor On Capitalism

Writing for Timesonline, in an article titled, "Cardinal Cormac Murphy-O'Connor: recession may be jolt that selfish Britain needs," quote Cardinal Murphy-O'Connor on the recession, capitalism and greed.

It's the end of a certain kind of selfish capitalism. This particular recession is a moment - a kairos - when we have to reflect as a country on what are the things that nourish the values, the virtues, we want to have ... Capitalism needs to be underpinned with regulation and a moral purpose.

As an ongoing crusade on economic education, I recommend leaving out the word capitalism. Greed predated capitalism. It is part of human nature.

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Friday, February 13, 2009

What Should Have Been Done

The stimulus bill has been a controversial topic in the economics profession. Given that it has probably been a done deal since President Obama was elected in November, I hope my colleagues supporting the stimulus are right about its impact. I believe that most observes have some problems with the way the bill was shaped and passed, and I will only make one irrelevant comment about what should have been.

According to, in an article titled, "Democratic Senator Predicts None of His Colleagues 'Will Democratic Senator Predicts None of His Colleagues "Will Have the Chance' to Read Final Stimulus Bill Before Vote',"

The final bill, crafted by a House-Senate conference committee, was posted on the Website of the House Appropriations Committe late Thurday in two PDF files.
The first PDF was 424 pages long and the second PDF was 575 pages long, making the total bill 999 pages long. The House is expected to vote on this 999-page bill Friday, and the Senate either later Friday or Saturday. [Editor's note: The first PDF, as posted on the House Appropriations Committee website as of 8:20 AM Friday morning, had grown by 72 pages to 496 pages, increasing the length of the total document to 1,071 pages.]

The same article quotes Senator Frank Lautenberg (D-N.J.) as predicting

[N]one of his Senate colleagues would "have the chance" to read the entire final version of the $790-billion stimulus bill before the bill comes up for a final vote in Congress.

Alec MacGillis, writing, "Democrats Among Stimulus Skeptics," for the Washington Post reports that Alice M. Rivlin, President Clinton's budget director, suggested splitting the plan by implementing immediate stimulus components now and taking more time to plan the longer-term transformative spending. I wish that Congress had listen to her.

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Ants, Markets and Spontaneous Order

One of the difficult ideas to explain in economics is how a spontaneously ordered markets result in such a marvelous outcome: the greatest benefit to society.  Markets, with proper laws and foundational regulations, guide self-interested or greedy agents into creative, innovative actions that are not only good for the involved economic agent, but society as a whole.

It is not easy to convey the efficiency of spontaneously ordered markets to students. They seem to understand how self-interest or greed orders an individual’s activities profitably, but not how this benefit extends to society. Russ Roberts, in his EconTalk interview with Deborah Gordon, "Gordon on Ants, Humans, the Division of Labor and Emergent Order," discovers a brilliant example to describe spontaneous order—ant colonies.

Ant colonies are well ordered and appear to operate under some sort of central command, but it is not so.  The colonies have no central planner.  Each ant secretes pheromones and hydrocarbons based on conditions surrounding the colony.  Other ants smell the pheromones and hydrocarbons, and use these scents to guide their actions into digging, patrolling, and foraging.  As the scents change, ants alter their behavior and the colony adapts and prospers.

Imagine the confusion that would result if a queen ant did order activity in the colony.  How would the queen know the conditions around the colony?  Should the ants dig, and how deep?  How many ants should patrol and where?  Once patrolling is accomplished, how many ants should forage and in what direction?  Each reporting function would be new to the colony, time consuming, contain less information than spontaneously ordered functions, and be totally unnecessary. 

Humans behave in a manner similar to ants.  Each has an infinitesimal knowledge about the overall functioning of the economy.  The best home builder (brightest, hardest working and most honest) probably has no idea how roof tiles are produced, let alone how automobiles are assembled.  Each individual collects information provided by prices and profits and directs his or her activities accordingly.  As prices and profits change, economic activity through individual action changes.  Resources are reallocated, products are innovated, and the economy adapts and prospers.

Collective behavior in a human colony creates confusion based on insufficient information if colony planners attempt to alter the reallocation of resources and innovation within society.  Planners just don’t have the information possessed by thousands of economic agents. Diverting resources to information gathering and planning is time consuming and costly; diverted resources cannot be used to produce goods and services.

It is here I believe that the analogy between ants and humans breaks down.  Ants follow secreted chemicals that dictate their actions.  The human brain allows for a wider range of behavior that may profit the individual but be destructive to others and the entire human colony.  Foundational rules such as the prohibition on theft and definition of property rights support the spontaneous ordering of resources and innovation.  While there is disagreement among economists just how broad these foundational rules and regulations should extend, it is clear that nearly all economists believe that society should maintain through collective actions the greatest freedom possible on resource allocation and innovation.

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Thursday, February 12, 2009

A Political Scientist and the Great Depression

I have made many posts featuring economists who offer opinions about economic policy and its impact on resolving the Great Depression.  I asked Mike Campenni, who teaches government at McLennan Community College, and is trained as a political scientist for some thoughts about the Roosevelt administration and its policies.  Mike comments are expressed below. 

Economics is a science. Its subject matter consists of proven theories, theories in various stages of development and testing and the search for better understanding. And just as economics is far removed from economic punditry, politics is also both a topic of study and the domain of pundits. Luckily for economists their subject seems too complex for superficial discussion. If only political scientists were so lucky!

To the dismay of all the US, and indeed the entire world, we are falling into a severe economic downturn. Economists would point out that it is a well proven point that markets constantly enter periods of adjustments. In simpler times, the adjustments were shorter and often passed below the radar screen of most people. Today, we live in an increasingly complex world with ever greater economic interdependency. Subsequently, market adjustments take longer and are usually more painful for wider swaths of society. Our present situation is just one such adjustment.

But today we live in a far different world. Governments who allow too much pain to fall on their citizens often fall politically in a democracy, and by revolution in more authoritarian societies. Subsequently, it has become the norm for governments to intervene and attempt to mitigate economic pain.

So here we are today in the midst of one of the most severe economic downturns in recent history. By most accounts it is the worst downturn since the Great Depression. Popular history would say that the Great Depression was cured by the heroic efforts of FDR with his New Deal legislation. Economists studying the New Deal would probably say that the New Deal at best had a mixed record. They would probably point out the Great Depression was only cured by the huge stimulus package known as World War II. Maybe the New Deal didn’t end the Great Depression and it did take a war, but people only remember FDR and his policies. They say that he saved the country. And maybe he did.

It is hard to make people understand today about the Great Depression. Imagine 25% un-employment rates and 30% under-employment rates. Imagine banks going bankrupt where customers lose all their savings overnight. And imagine a time when people didn’t have any safety nets like social security, welfare or un-employment compensation. Imagine betting on a local church group setting up a soup line to feed your family. It was just these kinds of things that made FDR and his New Deal Legislation successful. It really saved the US from potentially system changing political dynamics.

Did the New Deal work in terms of economics? Perhaps it did not. But widespread news coverage of hundreds of thousands of Americans working on dams and roads, and more still building parks and buildings and electrifying the countryside made people think that things were getting better. Retirees getting a check from social security helped take the edge off because they mostly still lived with the family—and any income helped. Mothers getting welfare to feed their kids helped and a new thing called unemployment compensation gave people a chance to get on their feet. And regulating Wall Street made people get their faith back in the financial institutions of the country. And just as hope keeps people from despair, confidence is something to build upon.

That’s the real message that needs to come from Obama and his team. We are doing the things that need to be done to give people hope and to restore confidence in our economic system. It really doesn’t matter too much if they are the right prescriptions economically—they key is that they need to be politically correct. And that’s why we need to put politics aside. We need to build confidence…and hope. That’s what politics is all about.

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Acemoglu, The Financial Crisis and The Stimulus

In a recent post, "Acemoglu on Greed," I tried to highlight the difference between economists and others on the impact of greed on society.  His paper, "The Crisis of 2008: Structural Lessons for
and from Economics," is the best of two worlds: short on words but long on economic content, and I wish to share with my students and other readers a few of this thoughts, and recommend the entire paper.  To cut to the chaff, he gives guarded support for the stimulus as a way to avoid an "expectational trap" in which consumers and policymakers turn away support from a market system.

Acemoglu believes that preserving and strengthening market institutions and regulatory underpinnings of free markets is more important than escaping from the current recession.  

[I]t is obvious why we should heed issues of economic growth. Barring a complete meltdown of the global system, even with the ferocious severity of the global crisis, the possible loss of GDP for most countries is in the range of
a couple of percentage points, and most of this might have been unavoidable given the overexpansion of the economy in the prior years. In contrast, modest changes in economic growth will accumulate to much larger numbers
within one decade or two. Thus, from a policy and welfare perspective, it should be self-evident that sacrificing economic growth to deal with the current crisis is a bad option.

In an expectational trap, consumers and policymakers become pessimistic about "future growth and the promise of markets." 

We may see consumers and policymakers start believing that free markets are responsible for the economic ills of today and shift their support away from the market economy. We would then see the pendulum swing too far, taking us to an era of heavy government involvement rather than the needed foundational regulation of free markets.  I believe that such a swing and the anti-market policies that it would bring would be the real threat to the future growth prospects of the global economy.  Restrictions on trade in goods and services would be a first step. Industrial policy that stymies reallocation and innovation would be a second equally damaging step. When the talk is of bailing out and protecting selected sectors, more systematic proposals on trade restrictions and industrial policy may be around the corner.

He offers guarded support for the stimulus package.

A comprehensive stimulus plan, even with all of its imperfections, is probably the best way of fighting off these dangers, and on balance, there are sufficient reasons for academic economists as well as concerned citizens to support current efforts as insurance against the worst 0utcomes we may face.  Nevertheless, the details of the stimulus plan should be designed so as to cause minimal disruption to the process of reallocation and innovation. Sacrificing growth out of our fear of the present would be as severe a mistake as inaction.

In addition to the paper, interested readers would profit from listening to Russ Roberts interview with Daron Acemoglu. 

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Tuesday, February 10, 2009

Starbucks and the Economy

Amended February 10, 2009 at 1:01 pm.

The economy is hurting and so is the economy. The Dayton Business Journal reports, "Starbucks launches discount breakfast 'pairings," in an attempt to woo customers leaving the chain for cheaper coffee elsewhere.

The pairings run through March 3 at Starbucks U.S. stores. They include a tall latte with oatmeal or coffee cake, and tall brewed coffee with various breakfast sandwiches.

Starbucks is under growing financial pressure and faces competition from fast-food chain McDonald’s, which now offers espresso-based coffee drinks.

The Seattle Times informs that "Starbucks loses third top exec since Schultz took the helm."

One of Starbucks' top executives, Gerry Lopez, gave notice last week that he will resign Feb. 20, according to a securities filing today.

He is the third top executive to leave Starbucks since Howard Schultz reclaimed the CEO spot last year. At that time, former CEO Jim Donald was pushed out, and last fall Chief Financial Officer Pete Bocian departed after a year to become Hewlett-Packard's chief administrative officer.

The Los Angeles Times reports that "Starbucks to cut 6,700 jobs."

Starbucks Corp., the Seattle-based company that turned coffee into a high-priced daily indulgence, announced today that it will eliminate about 6,700 jobs because of the difficult economy.

In a prepared statement, the company said its profit dropped 69% in its fiscal first quarter. Starbucks said it will close 300 underperforming stores in addition to the 600 it already planned to close in the United States. The company had planned to open 200 stores in the United States but said it will scale back to 140.

Starbucks mirrors the national economy.
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Monday, February 9, 2009

Acemoglu on Greed

One of my favorite economists, Daron Acemoglu of MIT, was interviewed by Russ Roberts on EconTalk today. Their discussion was based on an Acemoglu paper, "The Crisis of 2008: Structure Lessons for and from Economics," January 11, 2009. At 20:47 minutes, Roberts and Acemoglu discuss a quote on page five of the paper and provided below.

Acemoglu highlights the difference between economists' evaluation of the impact of greed on society and just about everybody else's. Greed is a constant and part of the nature of humankind. Societies create wealth by building sound laws, regulations, and institutions.

A deep and important contribution of the discipline of economics is the insight that greed is neither good nor bad in the abstract. When channeled into profit-maximizing, competitive and innovative behavior under the auspices of sound laws and regulations, greed can act as the engine of innovation and economic growth. But when unchecked by the appropriate institutions and regulations, it will degenerate into rent-seeking, corruption and crime. It is our collective choice to manage the greed that many in our society inevitably possess. Economic theory provides guidance in how to create the right incentive systems and reward structures to contain it and turn it into
a force towards progress.

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Saturday, February 7, 2009

The Informants Are Guilty, Not A-Rod

Selena Roberts and David Epstein of Sports Illustrated, reported in an article titled, "Sources tell SI Alex Rodriguez tested positive for steroids in 2003," that Alex Rodriguez used two types of steroids in 2003 while playing for the Texas Rangers.

The evidence of steroid use came from four independent and anonymous sources who said that his name was on a list of 104 players who tested positive for performance enhancing drugs as part of a survey by Major League Baseball (MLB) of their players. The players union agreed to the testing so long as names of participating players remained anonymous.

The MLB Players Association (MLBPS), the union representing the players, confronted with questions of Rodriguez steroid use, issued a statement which read,

Information and documents relating to the results of the 2003 MLB testing program are both confidential and under seal by court orders. We are prohibited from confirming or denying any allegation about the test results of any particular player[s] by the collective bargaining agreement and by court orders. Anyone with knowledge of such documents who discloses their contents may be in violation of those court orders.

Roberts and Epstein have an economic incentive to protect sources violating a court order. It is similar to the position of a player considering the use of steroids. A player can improve his game and future income being just a bit stronger and faster. If the player doesn't use steroids, another will. If Roberts and Epstein hadn't run with the story, another would, and the other reporters would have earned the big pay check.

I don't blame Roberts and Epstein just as I don't blame Rodriguez, unless they paid their informants to violate the court orders, and I have no evidence to suggest they did. But if they did not, only the informants are guilty. I recommend Senate hearings in order to protect MLB and the integrity of our courts.

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Robert Barro On The Economic Stimulus And Other Topics

On January 22, 2009, the Wall Street Journal published "Government Spending Is No Free Lunch: Now the Democrats are Peddling Voodoo Economics," by Robert Barro. The article touched off a small maelstrom between economists who support the stimulus and those who do not.

Barro's disagreement is with multipliers estimated using a Keynesian model and used by Team Obama to justify the $800 billion stimulus package winding its way through Congress. The administration claims that every dollar of stimulus spending will have a multiplied effect, increasing GDP by 1.5 dollars. Barro begins by examining multipliers from the wartime fiscal expansion and explains why.

Because it is not easy to separate movements in government purchases from overall business fluctuations, the best evidence comes from large changes in military purchases that are driven by shifts in war and peace. A particularly good experiment is the massive expansion of U.S. defense expenditures during World War II. The usual Keynesian view is that the World War II fiscal expansion provided the stimulus that finally got us out of the Great Depression. Thus, I think that most macroeconomists would regard this case as a fair one for seeing whether a large multiplier ever exists.

He estimates the WWII multiplier at .8; a dollar spent on wartime activities produces only an 80 cent increase in overall economic activity. The resources used by the government must come from somewhere, and that is from other productive uses. Barro then describes what he believes is a flaw in the model used to support the administration's stimulus plan.

The theory (a simple Keynesian macroeconomic model) implicitly assumes that the government is better than the private market at marshaling idle resources to produce useful stuff. Unemployed labor and capital can be utilized at essentially zero social cost, but the private market is somehow unable to figure any of this out. In other words, there is something wrong with the price system.

Barro ends with several suggestions for a stimulus plan.

Much more focus should be on incentives for people and businesses to invest, produce and work...Eliminating the federal corporate income tax would be brilliant. On the spending side, the main point is that we should not be considering massive public-works programs that do not pass muster from the perspective of cost-benefit analysis.

His critics believe that WWII was not a good choice for estimating multipliers. Matthew Yglesias gives a clever and oft cited criticism on his Think Progress post, "Multipliers and Diminishing Returns".

I think this is running together two separate issues. One is “whether a large multiplier ever exists” and one is whether such multipliers suffer from diminishing returns. World War II spending was enormous relative to GDP. Wartime spending on that kind of scale goes way beyond the conversations we’re having right now about fiscal stimulus—the equivalent today would be something like a $5.2 trillion package rather than the $800 billion or so we’re talking about...The 0.8 multiplier is probably the result of diminishing returns.

Conor Clarke of the Atlantic, in "A Brave New Deal" conducts an interview with Barro, providing a forum to defend his research against blog attacks.

Most economists haven't really been thinking about this issue, they haven't really focused on it. It's not their specialty. Most economists today, they haven't really been thinking about this kind of multiplier issue. Which goes back to that first question you asked about how come now we're so worried about this. I don't think most economists are focused on this, or that they're familiar with the empirical evidence. I don't think they've really worked on the theory. So I don't know, maybe they have some opinion that they got from graduate school or something.

I think my sense is that the sentiment has been moving against this kind of approach both within the economics profession and more broadly. I think the initial view was that "yeah, this is a terrible situation" -- which I agree with -- "and we've got to do something about this, and maybe this will work." I think there was support in that sense.

I would fall into the group of economists who are trying to dredge up old memories from graduate school. Being a micro guy, there isn't too much to dredge. He also states that more can be done with monetary policy.

There are things that they can still do...The Federal Reserve is buying up all kinds of other assets, like long-term government bonds. But they are also buying a lot of private stuff, and that will presumably have a substantial impact. I mean there's a downside to doing all this, but it should certainly have effects. So in that sense they haven't run out of ammunition.

He expresses the view that the recession will not end until credit markets are fixed and praises the appointment of Jeremy Stein.

Larry Summers did bring in Jeremy Stein, who is probably one of the best people in the area. I think he's going to have a lot of impact on that design. I hope so. That's another person they hired recently. Summers brought him in to advise particularly on the financial and housing issues, the design of the new regulations structure. That was an excellent appointment. That's the stuff that's really going to count.

Because I am not a macroeconomist, I will keep my observations brief. I think Yglesias' comments are valuable, but for Barro's critics, it is a Goldilocks argument. Peace time deficit spending during the Great Depression was too small to be effective, and the effective war time expenditure was too big to have a big multiplier. If this argument is correct, the peace time multiplier must be large. The problem is one of measurement. The multiplier impact of expenditures could easily be overwhelmed by other economic events.

I am concerned about the quality of WWII data. But if Robert Higgs is correct, and real GDP was overestimated during the war period [1], possible multipliers would be overestimated as well. The mismeasurement of GDP might also have inflated the value of war production and deflated he valued of consumer production. In this case, the crowding out impact of war expenditures would be smaller than Barro estimated.

[1] Higgs, Robert. "Wartime Prosperity? A Reassessment of the U.S. Economy in the 1940s," The Journal of Economic History, 1992.

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Friday, February 6, 2009

Friedman, Donahue and Greed

I heard this old exchange between Milton Friedman and Phil Donahue on greed and capitalism on the Mark Levin Radio Show. Critics of the capitalism, like Donahue, criticize it for being based on greed without recognizing or at least acknowledging that greed exists in all cultures. The question is how best to organize society to make greed productive and non-harmful, and Friedman claims that capitalism does it best. It is very clear that Friedman won this exchange.

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George W. Bush's Free Market Presidency

I am a free market sort of guy who Joseph Stigltiz might brand a free market fundamentalist. Critics of the Bush administration believe that it was marked by massive deregulation of the economy, laissez faire run amok. Free markets did not run amok. The Bush administration frequently imposed its will on markets rather than let markets allocate resources spontaneously.

Arianna Huffington expresses the typical, but incorrect view that President Bush was an unbridled market enthusiast. Writing for the Huffington Post (Laissez Faire Capitalism Should Be As Dead As Soviet Communism, December 22, 2008) she opines,

It's time to drive the final nail into the coffin of laissez-faire capitalism by treating it like the discredited ideology it inarguably is...

In a comprehensive piece on what led to the mortgage crisis and the subsequent financial meltdown, the New York Times shows how the Bush administration's devotion to unregulated markets was a primary cause of our economy to ruin.

The link to the New York Times article (White House Philosophy Stoked Mortgage Bonfire, December 21, 2008) was in Huffington's article. The substance of the article does not support the view that the Bush administration favored markets. Its premise is that

Eight years after arriving in Washington vowing to spread the dream of homeownership, Mr. Bush is leaving office, as he himself said recently, “faced with the prospect of a global meltdown” with roots in the housing sector he so ardently championed.

A pro market, laissez faire administration might try to remove government restrictions on building in some parts of the country, but would not vow to "spread the dream of home ownership." That is a decision that individuals make through markets. The authors write that,

He pushed hard to expand homeownership, especially among minorities, an initiative that dovetailed with his ambition to expand the Republican tent — and with the business interests of some of his biggest donors. But his housing policies and hands-off approach to regulation encouraged lax lending standards.

Pushing hard to expand home ownership is not "hands-off." Housing policies that encourage or impose lax lending standards are a type of bad over regulation in which the government's goal to extend home ownership takes presidence over the lender's goal to make a good loan. They then write,

The president also leaned on mortgage brokers and lenders to devise their own innovations. “Corporate America,” he said, “has a responsibility to work to make America a compassionate place.”

And corporate America, eyeing a lucrative market, delivered in ways Mr. Bush might not have expected, with a proliferation of too-good-to-be-true teaser rates and interest-only loans that were sold to investors in a loosely regulated environment.

I would not absolve mortgage brokers of as much guilt as the authors, but to the extent that President Bush "leaned" on mortgage brokers, he was regulating the industry.

Finally, they claimed that President Bush deregulated the banking industry by removing state authority over national banks. They miss the main point. The Bush administration was replacing one set of regulations for another; those that advanced their agenda.

Nick Gillespie, in an oped piece for the Wall Street Journal (Bush Was a Big-Government Disaster, January 24, 2009), exposes the Bush administration's regulator zeal. Please not that Gillespie gives objective measures about government's growth, and does not make unsubstantiated claims. Certainly, one could question his measures and subsequent conclusions, but at least he provides evidence, and the evidence supports his claim.

The most basic Bush numbers are damning. If increases in government spending matter, then Mr. Bush is worse than any president in recent history. During his first four years in office -- a period during which his party controlled Congress -- he added a whopping $345 billion (in constant dollars) to the federal budget. The only other presidential term that comes close? Mr. Bush's second term. As of November 2008, he had added at least an additional $287 billion on top of that (and the months since then will add significantly to the bill). To put that in perspective, consider that the spendthrift LBJ added a mere $223 billion in total additional outlays in his one full term.

If spending under Mr. Bush was a disaster, regulation was even worse. The number of pages in the Federal Registry is a rough proxy for the swollen expanse of the regulatory state. In 2001, some 64,438 pages of regulations were added to it. In 2007, more than 78,000 new pages were added. Worse still, argues the Mercatus Center economist Veronique de Rugy, Mr. Bush is the unparalleled master of "economically significant regulations" that cost the economy more than $100 million a year. Since 2001, he jacked that number by more than 70%. Since June 2008 alone, he introduced more than 100 economically significant regulations.

Laissez faire capitalism may or may not work, but it was not tried during the Bush administration.

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Thursday, February 5, 2009

A plague o' both your houses

Amended February 5, 2009 at 1:07 pm.

The confirmation process for Democrat nominees of the Obama administration has demonstrated that three have had minor to sever conflicts with the IRS. Members of the Senate from both parties are missing the main points, and as Mercutio curses the families whose feuding cost him his life, I write, "a plague o' both your houses."

A plague o' the Democrats for continuing to support high tax rates that they try to avoid. It's not the attempt to avoid taxes, that's the duty of every good American; it's the moralizing about the duty of upper income American's to pay more taxes that irks me. For the record, I am not near the top tax bracket although I would love to be. Jonah Goldberg in Democrats are hypocrites when it comes to paying taxes writes of a particularly ironic example of such language.

Now, whatever the best articulation of liberal attitudes toward taxation may be, reasonable people can agree that they inject a lot of moralizing, righteousness and finger-wagging into the issue. As one leading Democrat put it: "Make no mistake, tax cheaters cheat us all, and the IRS should enforce our laws to the letter. That Democrat was then-Sen. Tom Daschle in 1998. The same Tom Daschle, we've since learned, who failed to pay more than $100,000 in back taxes...

A plague o’ the Republicans for playing gotcha politics rather than dealing with the real issue--high tax rates and a cumbersome tax code. Apparently, they believe that shooting down Obama nominees as tax cheats is more meaningful to than using these travails as justification for tax reform that they say they have supported for years.

The Republicans in Congress should do as they preach, and try to introduce real tax reform. They could have started by asking Mr. Daschle if his experience with the IRS has given him some insight into the complaints about high taxes by many Americans.

Since when did Republicans trust the IRS? For that matter, Democrats often complain about abusive IRS tactics. Many Republicans support a "fair" tax that would eliminate the IRS in part because they do not like their power. Now the IRS is a trusted institution whose judgements are beyond scrutiny.

I have put a little background information about the nominees and their tax problems beginning with Timothy Geithner. He survived the confirmation process and is now the Secretary of the Treasury. As an aside, I like the idea of a Secretary of the Treasury who has had a run in with the IRS and believe that this is fundamentally sound training for the job. The Wall Street Journal describes his tax problems in an article written by Jonathan Weisman and titled, "Geithner's Tax History Muddles Confirmation."

The tax issue relates to Mr. Geithner's work for the International Monetary Fund between 2001 and 2004. As an American citizen working for the IMF, Mr. Geithner was technically considered self-employed and was required to pay Social Security and Medicare taxes for himself as both an employer and an employee.

In 2006, the IRS audited Mr. Geithner's 2003 and 2004 taxes and concluded he owed taxes and interest totaling $17,230, according to documents released by the Senate Finance Committee. The IRS waived the related penalties.

Tom Daschle's problems seem a little worse in size and nature. They are described by the Internet Free News, in an article titled, "Tom Daschle Withdraws As Nominee For HHS," in these terms,

Daschle, a former Senate majority leader, had come under pressure since Friday, when it was reported that he did not pay $146,000 in back taxes, primarily for the use of a car and driver given to him by an associate. He met Monday with members of the Senate Finance Committee to explain the omission and apologized. Some Republicans had questioned whether the nomination should go forward, and his confirmation vote had been postponed until at least the middle of next week.

Killefer's tax problems are insignificant in size, less than $1,000 including penalties of $600. It saddens me that a qualified candidate must resign over a paltry sum. Michael Sniffen and Liz Sidoti, Writing for the AP in an article titled, "Official: Obama's performance czar, facing tax questions, withdraws candidacy," writes,

When Killefer's selection was announced by Obama on Jan. 7, The Associated Press disclosed that in 2005 the District of Columbia government had filed a $946.69 tax lien on her home for failure to pay unemployment compensation tax on household help.

That sum included $298 in unpaid taxes, $48.69 in interest and $600 in penalties. The lien was filed March 7, 2005, but Killefer didn't get the lien extinguished for almost five months, not until July 29.

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Tuesday, February 3, 2009

Majority View of Economists on the Great Depression?

In recent weeks, I have heard many non-alarmist economists use the describe our current economic state as a depression. In a recent post, titled, "Deficit Spending on Infrastructure in a Depression--Posner," Richard Posner frequently refers to the current depression. At the Myron Scholes Global Markets Forum, Robert Lucas at one point stated that the current economic situation is not as bad as the Great Depression, and at another, referred to it as a depression.[1] Now dubbed Dr. Doom for predicting the financial collapse, Nouriel Roubini at the World Economic Forum in Davos was described by Bloomberg [2] as,

...more pessimistic than economists elsewhere. The IMF forecasts global growth of 0.5 percent this year and bank losses from toxic U.S.- originated assets of $2.2 trillion. By contrast, Roubini sees the global economy shrinking this year, and banks writing down at least $3.6 trillion -- compared to the $1.1 trillion disclosed so far.

The Great Depression has probably been studied more by economists than any other event in U.S. history, and with the unraveling of the financial system and deepening of the recession, it is again of interest. I believe that Harold Cole and Lee Ohanian, writing for the Wall Street Journal summarize the majority opinion of the affect of policy on the economy during the Great Depression.[3]

The goal of the New Deal was to get Americans back to work. But the New Deal didn't restore employment. In fact, there was even less work on average during the New Deal than before FDR took office. Total hours worked per adult, including government employees, were 18% below their 1929 level between 1930-32, but were 23% lower on average during the New Deal (1933-39). Private hours worked were even lower after FDR took office, averaging 27% below their 1929 level, compared to 18% lower between in 1930-32.

Some New Deal policies certainly benefited the economy by establishing a basic social safety net through Social Security and unemployment benefits, and by stabilizing the financial system through deposit insurance and the Securities Exchange Commission. But others violated the most basic economic principles by suppressing competition, and setting prices and wages in many sectors well above their normal levels. All told, these antimarket policies choked off powerful recovery forces that would have plausibly returned the economy back to trend by the mid-1930s.

[1] I am not aware of any economic distinction between the words depression and recession. While taking an undergraduate history of economics class, the professor, who shall remain nameless in case my memory is faulty, said that the word glut was used to describe a downturn in the business cycle until a particularly bad downturn at which point it was replaced by the word depression. Similarly, after the Great Depression, the depression fell into disrepute and was replaced by recession. I don't know if the history is correct, but I like it.

[2] Kennedy, Simon. "Roubini Sees Global Gloom After Davos Vindication (Update1)" Bloomberg, January 30, 2009.

[3] Cole, Harold and Lee Ohanian. "How the Government Prolonged the Depression," Wall Street Journal, February 2, 2009.

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Monday, February 2, 2009

A Nanny State That Doesn't Like Children

Two headlines were juxtaposed yesterday on the Drudge Report: "Czech president attacks Al Gore's climate campaign,"[1] and "Two children should be limit, says green guru."[2]

In the first, Czech President Vaclav Klaus, a free market economist, and global warming sceptic voiced his opinion about global warming in Davos at the World Economic Forum.

"I don't think that there is any global warming, I don't see the statistical data for that.  Environmentalism and the global warming alarmism is challenging our freedom...I'm afraid that the current crisis will be misused for radically constraining the functioning of the markets and market economy all around the world...I'm more afraid of the consequences of the crisis than the crisis itself."

In the second, Jonathon Porritt, who chairs British government’s Sustainable Development Commission, and is not a global warming sceptic, views population control as an integral component of any plan to avert global warming.

I think we will work our way towards a position that says that having more than two children is irresponsible. It is the ghost at the table. We have all these big issues that everybody is looking at and then you don’t really hear anyone say the “p” word.”

Sarah-Kate Templeton, the author of "Two children should be limit, says green guru," wrote,

Porritt...says the government must improve family planning, even if it means shifting money from curing illness to increasing contraception and abortion.

I was intrigued, and investigated further.  I searched the Internet for additional statements by Porritt, and found his blog, JonathanPorritt.  In a post titled, "Population: boom and bust," he wrties,

I can’t recall any environmental or climate change organization ever suggesting that “births averted” is probably the most single most substantial and cost-effective intervention that governments could be using. Just to give another example, the Chinese government calculates that since the introduction of the One Child Family Policy in the early 80s, at least 400 million births have been averted. 

Porritt does not suggest such freedom restricting policies for Britain as the Chinese maintained, but simply praising it suggest a disregard for civil rights.  He not only wants government in the bedroom, but the womb.

Choice over procreating is a civil right rather than an economic right but given Klaus' concern about the global warming cure in restricted freedom being worse than the problem, I read further, trying to find evidence of policies that would restrict economic freedom.  I found posts suggesting that society should be ordered differently than it currently is, but very few specific suggestions on how to get there.  I eventually found a very small smoking gun, or perhaps a small piece of cork from a popgun, in a post titled, "Low Impact Food," in which he writes, 

The Cabinet Office's recently published 'Food Matters' recognised that dilemma, and seeks all sorts of different ways of finessing it. For instance, it proposes a new "Healthier Food Mark" to promote healthier, "low-impact" food in the public sector – without quite spelling out that low-impact must (presumably?) mean less meat-intensive.

Good idea, but if it's promoted with the same laissez-faire spinelessness as the current Public Sector Food Procurement initiative, it will achieve precisely nothing. Hence the excellent recommendation from the Green Alliance (in its timely and very accessible new paper "Cutting Our Carbs: Food and the Environment") that the Government should make compliance with the Healthier Food Mark compulsory for all public sector bodies by 2012. For once, this would mean leading by example and by clear, unambiguous regulation.

What would Porritt recommend if Britons ignored government instruction, and continued eating meat? 

[1]  "Czech president attacks Al Gore's climate campaign,", January 31, 2009.

[2]  Sarah-Kate Templeton.  "Two children should be limit, says green guru," Timesonline, February 1, 2009.

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Sunday, February 1, 2009

WWII And The Economy

In one of my first posts, I criticized Paul Krugman and George Will over their description of depression era economic policy and its effectiveness. Although I believe my reading of the economic literature is correct, I wish I had offered my opinion as another hypothesis of events that had some empirical support.

I also disagree with their assessment that WWII was a great public works program that ended the Great Depression. After reviewing a few sources, I am less sure that the opinion I will offer is the majority opinion, but I believe that it is correct.

War is never good for an economy. It may be the least bad alternative or it may be the morally right action, but it is never good for the economy. I am not only worried about an incorrect interpretation of WWII, but the implication that if war can be good for the economy once, then it might be good again.


Those who argue the economic virtues of WWII generally point to two apparent economic accomplishments of the war: unemployment fell and gross domestic product grew. The graph, "U.S. Economy: 1938-1945", a nostalgic "guns and butter" graph for those of us who studied economics during the Vietnam War, illustrates this position. This graph has made up numbers and breaks down production into two goods, guns representing armaments, and butter representing consumer goods. In 1938, the nation was in the interior of the frontier. As the war progressed, unemployment fell, and production increased. We ended up at a point labeled 1945. The expansion of the production frontier from the blue line to the red line represents economic growth.

Why is this analysis flawed? Value in exchange occurs only when it is voluntary. When another country threatens our physical safety, or our way of life, we have been denied our freedom to select the mix of guns and butter that we desire. We do not build armaments or go to war because we enjoy it, but because we must. I hope that I am correctly stating American values.

Unemployment did decrease during the war. In 1939 between 7 and 8 million workers were unemployed. In part that was accomplished by drafting a big chunk of our labor force. By the ended of the war, approximately 12 million men were in uniform. I doubt that hundreds of thousands of the newly unemployed are lining up at recruiters offices. They apparently value their unemployed civilian activities more than their potential employed military activities.

War is also tough on resources. Output did increase as illustrated on the graph, but those resources were used to make goods that are only desirable if we are threatened, tanks, artillery, bombers, etc. Furthermore, use of these resources generally leads to their destruction. They might add to GDP, but they add little to national wealth. We have also failed to mention what I believe to be the biggest loss, about 400,000 dead and 1,000,000 injured.

Growth in our economy should be measured by the increase in the value of goods and services we wish to consume. The production of consumer goods did not grow during the war, and a large number of those goods were rationed. Because we could not purchase goods that we wished to consume and we were compelled to produce goods we did not wish to produce, it could be argued that the price mechanism was not functioning and GNP was improperly measured.

Three conditions must be met to conclude that war is good for the economy. It must be fought in foreign lands, must be won, and a low value must be placed on American dead. Unemployment is growing and production is declining. Certainly we could find a war that meets the first two conditions, and if we are careful, we could minimize American deaths. Should we reinstitute the draft and expand the War on Terrorism as part of a stimulus package?

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