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Brooks Wilson's Economics Blog: March 2009

Tuesday, March 31, 2009

Union Violence in Europe

In “Angry French Workers Detain 4 Bosses at Caterpillar Plant,” on March 31, 2009, a AP story picked up by Fox News, the AP reports that,
Angry French workers facing layoffs at a Caterpillar factory detained four of their bosses Tuesday at the U.S. manufacturer's plant in the Alps and refused to let them leave the premises, union representatives said.
It is the third time in several weeks that French workers have seized their bosses to protest job losses as a result of the global economic crisis.

Last week, workers at a 3M plant held the company boss for two days, and earlier this month workers at a Sony plant held a similar protest.

Unions representing the workers say they want new talks on Caterpillar's layoff plans at the site in Grenoble. The plant that produces building equipment is supposed to cut 733 jobs in two of its factories in France.

"There is no violence or sequestration, but simply pressure so they restart negotiations," said Pierre Piccarreta, a representative from the CGT union.
"At a time when the company is making a profit and distributing dividends to shareholders, we want to find a favorable outcome for all the workers and know as quickly as possible where we are going," Piccarreta said.

Caterpillar France says the layoffs are justified. In February, the company said it was facing a 55 percent loss of orders between 2008 and 2009.

In response to the worsening economic prospects, Caterpillar in January announced job cuts that will ultimate

Pierre Piccarreta’s claim that there was “no violence or sequestration,” is Orwellian doublespeak. Detaining” management is a form of intimidation and violence that I would not like to see imported by our country.

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Monday, March 30, 2009

Congress Should Be More Like College

I n recent weeks, I have read or heard members of the House and Senate attempt to exculpate voting for bad portions of important legislation by confessing that they did not read it in its entirety. I hear such excuses from students to whom I respond that it is not necessary to complete required material to take an exam, just to pass it. Students who continually fail to complete required work are placed on academic probation. If students do not remedy bad performance, they are dismissed from college.

Congress should be more like college. Upon presenting legislation before the House or the Senate, senators and congressmen presenting the legislation would be required to take an exam demonstrating that they know what it proposes. Exams should be given as legislation passes through committee and as it is placed before each chamber. I recommend one question per page of legislation. Representatives who do not pass the test at any stage cannot vote on the legislation. A bill would require a majority vote of all members on a committee or the full chamber regardless of the number or representatives that fail the exam. Representatives that do not pass at a rate of 70% will be placed on probation and all registered voters will be notified via public announcements and mail. Representatives that do not improve their performance to a 70% pass rate or above will not be able to run for another term.

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The Constitutionality of the EFCA

As an economist, I write about how policy proposals would affect economic agents and if those affects are good or bad for society. The veiw that constitutional limits on the power of government and the executive augment economic growth appears to be the dominant position of economists. I generally feel comfortable talking about what kind of relationships between economic agents a constitution should encourage or forbid, but I have little knowledge about how courts interpret laws to determine constitutionality.

I have written about the Employee Free Choice Act (EFCA); I don't like it. It should not be constitutional. Should not does not mean isn't. For readers interested in the law, I have linked to several article expressing legal opinions. I found the first article in the Wall Street Journal today. I did a quick Google search and found several attorneys expressing opinions against but only one for on the first thirty references. This probably says more to about who writes on the Internet than it does about majority legal opinion.

Rivkin and Casey write that the EFCA is unconstitutional in "Why the Card Check in Unconsitutinal," Wall Street Journal, March 30, 2009.

Epstein writes that the EFCA is unconstitutional in "The Employee Free Choice Act Is Unconstitutional," Wall Street Journal, December 19, 2008.

Janson writes a brief reply in "Card Check Is Not Unconstitutional," Wall Street Journal, December 26, 2008.

Gottesman writes a longer reply in "The Improbable Claim That EFCA Is Unconstitutional," ACSBlog, February 4, 2009, and Epstein (and others) replies in the same blog as comments.

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Friday, March 27, 2009

A Survey of Americans about a Drift Toward Socialism

I found an article by Raghavan Mayur that had been pushed under my door. The article is titled, "How Americans Are (Or Are Not) Coming To Grips With 'S' Word," and was published to the Internet by Mayur is president of TechnoMetrica Market Intelligence, which directs the IBD/TIPP Poll. Mayur claims that the poll was the most accurate in the 2004 and 2008 presidential elections.

Mayur observes that "the mdeia bridle when the 's' word is brought up." Well, I do as well. Most of the time, it is used incorrectly. Considering wording in the questions in his survey, I would prefer he use welfare-statism, or some other term rather than socialism. Even with these criticisms, the survey results are interesting. Mayur finds that,

Socialism in the U.S. appears to be in a formative stage. For most Americans, the idea is fairly new, and many have yet to take a firm stand on policies such as income redistribution and government control of industries.

Yet, we've come a long way in just seven months. Last August, only 25% of Americans surveyed in our IBD/TIPP Poll agreed with the statement, "The U.S. is evolving into a socialist state." But when asked again this month, the number jumped to 39%.

This included leaps to 63% from 35% for Republicans and to 47% from 23% for Independents. Only 13% of Democrats, on the other hand, agreed with the statement vs. 20% in August.

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Thursday, March 26, 2009

AIG, Property Rights, Demagoguery, and Hate

My original interest in the AIG story was spurred by the expropriation of contractually specified bonuses. This is an abrogation of property rights and is bad for the AIG employees, employees in everywhere, and economy as a whole. The popular hate and ignorance as well as the blatant political demagoguery have expanded my interest.[1] In “Misguided Angst about AIG Bonuses,” I suggested that people expressing anger about the payment of contractual bonuses, be they residents of Main Street, activists or politicians, did so without establishing a link between the executives that made bad decisions that drove the company to financial despair and the bonuses. The link does not exist. The employees receiving the bonuses were not those that drove the company into a dysfunctional government receivership as Edward Liddy, the Treasury appointed CEO of AIG testified before Congress (Jenkins, Holman. “The Real AIG Disgrace,” Wall Street Journal, March 24, 2009).

Our elected representatives and their political appointees have known that the executives receiving the bonuses were not guilty of corporate malfeasance, yet they have treated them as if they had. Jenkins writes about the actions of several elected officials. I quote his article on three, New York Attorney General Andrew Cuomo, Treasury Secretary Geithner, and President Obama.

As far back as October, New York Attorney General Andrew Cuomo had summoned the Treasury-appointed Mr. Liddy to hammer out a deal on AIG's pay practices. Said Mr. Cuomo in a statement afterward: "These actions are not intended to jeopardize the hard-earned compensation of the vast majority of AIG's employees, including retention and severance arrangements, who are essential to rebuilding AIG and the economy of New York."

On March 3, Mr. Geithner himself was quizzed during a congressional hearing in detail about the AIGFP retention plan by Democratic Rep. Joe Crowley -- a week before Mr. Geithner now says he heard of the plan.

It may be that the full picture was kicked up to him only when a political decision was needed, but by then his one decent choice was to insist on the bonuses' legality. However politically inopportune the bonuses may be, the president only dirtied himself by authorizing a feel-good, bipartisan hate storm aimed at innocent AIG employees. And it's hard to believe Mr. Obama would have done so, or the subsequent spectacle would have unfolded as it did, without Mr. Geithner's seminal prevarications (and we say this fully acknowledging that he's had a rough ride in an inhumanly difficult job).

It is difficult to measure the size of the hate storm. After all, some people may not like the high levels of executive compensation but not support legislation mandating lower compensation or taxing high compensation at exorbitant rates. But if hate mail is a good measure of the intensity of feelings, our elected representatives have poured gasoline on a raging fire. Andrew Pergam, representing the Connecticut/News in “Threats to AIG: ‘We Will Get Your Children,’” (HT Drudge) gives many examples of hate mail received by AIG employees.

-- All you motherf***ers should be shot. Thanks for f***ing up our economy then taking our money.

-- Dear Sir: Ya'll should have the balls and come clean and give back the bonuses. I know you would never do this so the gov't ought to take you out back and shoot everyone of you crooked sonofb****es...I would be very careful when I went out side. This is just a warning. If I were ya'll I would be real afraid. Thanks, Bill.

-- I don't hope that bad things happen to the recipients of those bonuses. I really hope that bad things happen to the children and grandchildren of them! Whatever hurts them the most!!

And my favorite,

-- We will hunt you down. Every last penny. We will hunt your children and we will hunt your conscience. We will do whatever we can to get those people getting the bonuses. Give back the money or kill yourselves.

The emphasis added is mine, and I must ask if the author received inspiration from Senator Grassley of Iowa.

Jake DeSantis, an executive vice president of AIG’s financial products unit, defends his and many of his coworkers actions in “Dear A.I.G., I Quit!,” NYTimes, March 25, 2009.

I am proud of everything I have done for the commodity and equity divisions of A.I.G.-F.P. I was in no way involved in — or responsible for — the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage…

Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down.
DeSantis, like so many others, has been hurt b AIG employees who participated in the failed unit of AIG.

I never received any pay resulting from the credit default swaps that are now losing so much money. I did, however, like many others here, lose a significant portion of my life savings in the form of deferred compensation invested in the capital of A.I.G.-F.P. because of those losses. In this way I have personally suffered from this controversial activity — directly as well as indirectly with the rest of the taxpayers.

The popular and political hate are having an impact on AIG employees.

As most of us have done nothing wrong, guilt is not a motivation to surrender our earnings. We have worked 12 long months under these contracts and now deserve to be paid as promised. None of us should be cheated of our payments any more than a plumber should be cheated after he has fixed the pipes but a careless electrician causes a fire that burns down the house.

Many of the employees have, in the past six months, turned down job offers from more stable employers, based on A.I.G.’s assurances that the contracts would be honored. They are now angry about having been misled by A.I.G.’s promises and are not inclined to return the money as a favor to you.

The only real motivation that anyone at A.I.G.-F.P. now has is fear. Mr. Cuomo has threatened to “name and shame,” and his counterpart in Connecticut, Richard Blumenthal, has made similar threats — even though attorneys general are supposed to stand for due process, to conduct trials in courts and not the press.

DeSantis is not returning his bonus, nor is he keeping it.

I know that because of hard work I have benefited more than most during the economic boom and have saved enough that my family is unlikely to suffer devastating losses during the current bust. Some might argue that members of my profession have been overpaid, and I wouldn’t disagree.

That is why I have decided to donate 100 percent of the effective after-tax proceeds of my retention payment directly to organizations that are helping people who are suffering from the global downturn.

[1] I would like to thank a coworker who listened to me sound off at the political injustices foisted on AIG employees, and rightly pointed out that I needed to cool down, at least a little.

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Wednesday, March 25, 2009

Henderson Reviews Taylor’s New Book

David Henderson reviews John Taylor’s new book, “Getting Off Track,” in “Taylor Rules,” for Forbes (March 24, 2009). A link to Taylor’s curricular Vitae is found here. I have only quoted a small section of the review; it is worth reading in its entirety. Henderson writes,
Taylor, one of the leading New Keynesian economists in the U.S.--and, indeed, in the world--is a senior fellow at the Hoover Institution and an economics professor at Stanford University. He carries serious credentials as a practitioner of economic policy: From 2001 to 2005, he was Bush's Undersecretary of the Treasury for International Affairs. Virtually all of his impressive academic papers have been in macroeconomics, many of them on monetary policy.

And how many economists besides Taylor can claim that a rule for conducting monetary policy has been named after them? Answer: none. The famous Taylor rule is one that a large percent of macroeconomists of various persuasions agree should guide a central bank's monetary policy, assuming that a central bank is a good idea. So when John Taylor speaks or writes, people should listen or read.

Taylor writes that the Federal Reserve Bank, Fannie Mae and Freddie Mac caused the crisis, the Bush administration misdiagnosed the problem, and, because of the misdiagnosis, the bailout made the problem worse.

Throughout 2007 and 2008, Fed Chairman Ben Bernanke and others in policy-making positions assumed that the problem was that the financial system lacked liquidity, and virtually all their actions were calculated to inject more liquidity. But Taylor gives evidence, which he garnered with economist John Williams, that liquidity was not a problem. The problem, writes Taylor, was "counterparty risk." Taylor compares finance to the game of Hearts. In Hearts, you don't want to get stuck with the queen of spades. The queens of spades in finance, he writes, "were the securities with bad mortgages in them" and "people didn't know where they were." Increasing liquidity by increasing the money supply does nothing to solve that problem.

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Who Is Right?

Carter Dougherty describes differences in monetary policy between the orthodox European Central Bank and less orthodox central banks in the United States, Britain and Japan in “European Central Bank resists rush to print money” (The International Tribune, March 24, 2009).
FRANKFURT: At the European Central Bank, being a maverick means holding steady as others bow to the prevailing winds.

With its peers in the United States, Britain and Japan cranking up monetary printing presses in a bid to prevent their economies from falling into deeper holes, the E.C.B. is resisting the rush into the least orthodox central banking policies in contemporary history.

"Exaggerated swings without perspective," Jean-Claude Trichet, the E.C.B. president, said recently, "would delay the return of sustainable prosperity because they would undermine confidence, which is the most precious ingredient in the current circumstances."

When others sharply cut interest rates, the E.C.B. was slower to act. When others stepped in to bail out financial institutions, the E.C.B., constitutionally limited in its powers, left that to national governments.

And now, with other central banks acting to create money out of thin air because they cannot prime the lending pumps by lowering short-term interest rates any further, the E.C.B. remains wary of the specter of future inflation.

Beneath it all is an aversion to anything that smacks of "printing money," a phrase that evokes Europe's worst economic nightmares, everything from kings debasing their currencies so they could fight endless battles to the hyperinflation and currency collapses in Germany after it lost two wars in the 20th century.

Which policy course will more effectively restore economic activity?

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Tuesday, March 24, 2009

More Good News from Markets

Lynn Thomasson and Adam Haigh report for in "U.S. Markets Wrap: S&P 500 Caps Biggest 10-Day Gain Since 1938," that major stock indexes in the U.S. rose dramatically on news of the Treasury plan to buy up to $1 trillion of distressed assets, increasing oil prices, and 5.1% increase in existing home sales.  The two week rally was the biggest since 1938 for the S&P 500. 

The S&P 500 gained 7.1 percent to 822.92, its biggest increase since Oct. 28. The Dow Jones Industrial Average jumped 497.48 points, or 6.8 percent, to a five-week high of 7,775.86. The MSCI World Index climbed for the ninth time in 10 days, adding 5.4 percent. Twenty-one stocks rose for each that fell on the New York Stock Exchange, the broadest rally since at least July 2004.

Financial institutions were big winners.  I hope the increase in value is due to investor confidence that the Treasury plan will loosen "frozen" markets and not just recognition that the Treasury will buy a big chunk of their bad decisions.

Bank of America Corp. and Citigroup Inc. both soared at least 19 percent as the U.S. Treasury said it will finance as much as $1 trillion in purchases of distressed assets.

Oil stocks increased on continued strength in oil prices.

Crude oil for May delivery rose $1.73 to $53.80 a barrel at 2:43 p.m. on the New York Mercantile Exchange, the highest settlement since Nov. 28. Prices are up 21 percent this year...Exxon Mobil Corp. and Chevron Corp. jumped more than 6.7 percent after oil rose to an almost four-month high.

Ylan Mui and Renae Merle report for the Washington Post in "Treasury's Bank Plan Sparks a Broad Rally," that stock related to the housing market also did well.

...home builders benefited from the broad-based stock market rally yesterday. Toll Brothers jumped 11 percent, to close at $18.84. D.R. Horton spiked 18 percent, to $9.89, while Pulte Homes rose 13 percent, to $11.08.

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Monday, March 23, 2009

Violence and Economic Growth

Douglas North, John Wallis, and Barry Weingast believe that economists do not properly include controlling violence in models that explain economic growth. Barry Weingast explains their theory on the EconTalk podcast, “Weingast on Violence, Power and a Theory of Nearly Everything.”

They divide countries into three types of societies or orders. The first is the hunter-gatherer or primitive order. It has very little specialization, an engine of economic growth, and a great deal of violence. Primitive orders are poor, producing less than $400 per capita GDP.

The next order is the limited access order and it solves the problem of violence by trading economic favors to specialists in violence for foregoing violence. The size of the payoff is directly related to the ability of commit violence. The government creates monopoly rents and uses the power of the state to quell competition. Per capital GDP in these orders ranges between $400 and $8,000. The limited access order is similar to Hernando DeSoto’s mercantilist society. North, Wallis and Weingast include countries as diverse as Bolivia, India and Russia as limited access orders.

The final order is the open access order. Economic competition is over price and quality, not violence. In an open access order, Schumpeterian competition through creative destruction permits new groups to spontaneously form to exploit new ideas, products and organizational forms. Open access orders are maintained by open access to a plethora of organizations including economic, political, social and religious. Normative beliefs in these societies promote the inclusion of new groups, and equality before the law. Constitutions that limit government power are also important. Open access societies begin at $8,000 per capita GDP, and goes up from there. In fact, the average per capita GDP exceeds $20,000.

Why don’t the limited access orders reform, adopting rules that will make them more like open access orders? Attempts to reform invite violence from previously favored groups that might be losing privilege. Reform would bring greater wealth over time if violence was avoided. But avoidance is not a given. The government might attempt to buy out the privileged, but this is also a difficult policy to implement. Can you promise the privileged a bigger payoff than they already realize? Furthermore, other groups may demand reform without payoffs, escalating the probability of violence.

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Sunday, March 22, 2009

Misguided Angst About AIG Bonuses

The news has been replete with stories of political and popular indignation over the bonuses being paid to AIG executives.  Some of the political discontent is hypocritical.  Many of the harshest critics of the bonuses have been recipients of AIG political contributions.  As noted in "AIG Bonuses," Chris Dodd of was AIG’s largest single recipient of $103,000 in campaign donations during the 2008 election cycle.  Other major recipients of campaign donations include President Obama and Senator Schumer, both critics of the bonuses (Mullins, Brody and T.W. Farnam.  "Critics Got Donations From Insurer," Wall Street Journal, March 19, 2009.).  As an aside, to be fair to Democrats, John McCain, and Mitt Romney are also on the list of top ten recipients.  Dodd, McCain, Obama, and Schumer voted for the Emergency Economic Stabilization Act, which was used to bailout AIG.  Dodd placed a provision into the stimulus bill that exempted contractually obligated bonuses.

News broadcasters on television and radio, talk shows hosts, and newspapers columnists are full of stories about popular discontent with the bonuses.  John Christoffersen, an AP writer gives body to the specter of popular discontent in "Protesters visit AIG officials' lavish Conn. homes," myway, March 22, 2009 (HT Drudge).

FAIRFIELD, Conn. (AP) - A busload of activists representing working- and middle-class families paid visits Saturday to the lavish homes of American International Group executives to protest the tens of millions of dollars in bonuses awarded by the struggling insurance company after it received a massive federal bailout.

About 40 protesters sought to urge AIG executives who received a portion of the $165 million in bonuses to do more to help families.

"We think $165 million could be used in a more appropriate way to keep people in their homes, create more jobs and health care," said Emeline Bravo-Blackport, a gardener.

She marveled at AIG executive James Haas' colonial house, which has stunning views of a golf course and the Long Island Sound. The Fairfield house is "another part of the world" from her life in nearby Bridgeport, which flirted with bankruptcy in the 1990s and still struggles with foreclosures and unemployment."

So the envious want the greedy to repent!  According to MariAn Gail Brown, in "AIG executives at the center of firestorm,", March 21, 2009, the protest was organized by Connecticut Working Families, a small political party and ACORN.  Perhaps these activists have different motives than others in the mosaic of popular discontent but I imagine that there is a great deal of overlap.

Ignoring the maneuverings of politicians caught in the crossfire of their previous statements, actions and campaign donations, protecting the employee contracts was the right course of action even if the recipients were the bad actors who brought down AIG, and I have not seen an attempt to make that link.  Taxing the bonuses away is wrong.  It weakens contracts, an important part of property rights, for short term political gain. 

Krugman and Wells write in "Microeconomics," Worth Publishers, 2009, page 314,

...the effectiveness of markets comes down largely to the power of two features of a well-functioning market: property rights and the role of prices as economic signals.

Property rights are a legally enforceable bundle of rights associated with a property.  Salary contracts have been and should remain an enforceable property right.  If the government's bailout gives it the right to set wages after the contracts expire, by all means, set lower wages, fire employees involved with the financial collapse, and do away with bonuses.  Even if these actions are wrong, I believe their impact will be small compared to the abrogation of property rights through an act of attainder, a punitive law aimed a specific individual or groups of individuals. 

The protesters and others who want to take away the bonuses and help the downtrodden miss a couple of important points.  As Armen A. Alchian ("Property Rights," Concise Encyclopedia of Economics) explains, critics in the United States and throughout the Western world have complained that “property” rights too often take precedence over “human” rights, with the result that people are treated unequally and have unequal opportunities. Inequality exists in any society. But the purported conflict between property rights and human rights is a mirage. Property rights are human rights.

Punitive actions against financial institutions may kill the goose that laid a lot of gold eggs, even if most recently it laid a rotten one.  Financial Times reporter write in "Banker fury over tax ‘witch-hunt’,", March 20, 2009,

Bankers on Wall Street and in Europe have struck back against moves by US lawmakers to slap punitive taxes on bonuses paid to high earners at bailed-out institutions.

Senior executives on both sides of the Atlantic on Friday warned of an exodus of talent from some of the biggest names in US finance, saying the “anti-American” measures smacked of “a McCarthy witch-hunt” that would send the country “back to the stone age”...

“Finance is one of America’s great industries, and they’re destroying it,” said one banker at a firm that has accepted public money. “This happened out of haste and anger over AIG, but we’re not like AIG.”

Some policymakers expressed concern that banks may try to break out of the government’s embrace by paying back public capital even if the price is a more severe credit squeeze.

They also fear that financial institutions may decide not to take part in public-private partnerships to finance credit markets and acquire toxic assets.

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Saturday, March 21, 2009

A Union I Could Support

Richard Vedder and Matt Denhart propose a union that I could support in "The Real March Madness," (Wall Street Journal, March 20, 2009). The NCAA is a cartel that was organized in part to establish rules across universities that exploit its most productive workers--male athletes. Using NCAA basketball as an example, the authors explain,

In a competitive market, companies cannot exploit workers in this way for long, as rival firms will hire them away at higher salaries. In basketball, however, the NCAA cartel prevents that, dictating limits on pay (essentially college costs) and even penalizing transfers to other schools. Strict rules also prevent college athletes from signing lucrative endorsement deals or accepting gifts beyond a certain amount.

Amazingly, the NCAA convinces its fans that athletes are treated fairly. In particular, male college athletes are paid remarkably little for the revenue they bring to their universities.

Take Kevin Durant, for instance. After a stunning freshman season with the Texas Longhorns in 2008, Mr. Durant elected to forgo his final three years of college and entered the NBA draft. Selected by the Seattle Supersonics (now the Oklahoma City Thunder), he agreed to a contract paying $3.5 million in the first year. By contrast, his yearly compensation (in the form of room, board, books and tuition fees at Texas) amounted to about $33,120, less than 1% of what was offered by the Supersonics...

Soon after entering the NBA, Mr. Durant further augmented his earnings by signing a $72 million deal with Nike; he inked other endorsement contracts with Gatorade, EA Sports and Upper Deck.

Of course, most athletes don't end up signing big contracts to play in the pros. But these athletes don't make out well either,

They may not even end up with the basic skills necessary to succeed in other workplaces, since only a minority of student-athletes in major sports even graduate (25% in top-ranked University of Connecticut men's basketball, for example). Long practices and missed classes make it difficult to succeed academically. A recent study funded by the Andrew W. Mellon Foundation shows the academic performance of athletes is lower than non-athletes even at Division III schools.

Why don't college athletes organize?

First, the "workers" are around for only three or at most four playing seasons, making it hard to build up much of a movement. Second, coaches control playing time and enormously influence career success, so it is the rare college kid who will incur the coach's wrath to form any kind of insurrection. Finally, most players don't have a lot of contact with the members of other teams. But if you see them whispering before the tipoffs this weekend, you'll know why.

An Additional Observation

The authors note that coaches' and administrators' salaries account for 32% of total athletic department expenses. Without presenting empirical support, I believe that a few profitable sports subsidize the others, both in men's athletics and women's. Are cross country teams money makers? As a former cross country runner, most parents don't even show up to meets.

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Alan Blinder on Socialism, and the Obama Administration

In a previous post, "Amartya Sen on Capitalism," I noted that President Clinton would be an adherent of capitalism under Sen's definition. This post notes that Alan Blinder, a member of President Clinton's first Council of Economic Advisors, and a former Vice Chairman of the Board of Governors of the Federal Reserve System, does not count President Obama among the ranks of socialists, and is positive about the administration's early policy actions. His Curriculum Vitae is here. Blinder writes in "Obama Is No Socialist," for the Wall Street Journal that,

Socialism means public ownership and control of businesses, right? So which industries does the president propose to nationalize?

Banking? Well, no. Secretary of the Treasury Timothy Geithner has made it clear that he opposes nationalizing banks, despite much outcry from the political left -- and even some from the right -- to do just that...

What about health care? Doesn't Mr. Obama want "socialized medicine"? No. He wants to reform the current system so that it costs less and covers more people.

In the article, he supports the administration's budget, tax code changes, and, to a lesser extent, the less explicit financial sector reform. He ends the article,

So where does all this leave us on the road to socialism? If Mr. Obama is able to get all of these proposals through Congress, the U.S. will have a fully private banking system, propped up with temporary government support; a uniquely American health-care system that covers virtually everyone; and a somewhat more progressive income tax.

If this is socialism, then let's make the most of it.

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Friday, March 20, 2009

Education and Unemployment

Edward Glaeser notes that New York City has experienced a relatively small increases in unemployment compared to the rest of the country and provides various hypotheses to explain the circumstance in "Why Is New York’s Unemployment Rate (Relatively) Low?," for the New York Times. The hypotheses are interesting and should be read, but I linked to the article because Glaeser highlights the role of education as insurance against unemployment. I hope his observation inspires and motivates students to extend their educations beyond high school.

Despite the abundance of front-page stories with headlines like “Ivy League financier is now unemployed and homeless,” unemployment is remarkably concentrated among the least-educated Americans. Today, the seasonally unadjusted numbers show that 15.1 percent of high school dropouts are unemployed; the comparable number for college graduates is 4.2 percent.

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Elaine Chao on Labor Rights

Elaine Chao, the 24th U.S. Secretary of Labor, wrote "Two Steps Back on Labor Rights," for the Wall Street Journal. In various posts, I have expressed concern that the Employee Free Choice Act would strengthen unions through a mechanism that will allow intimidation (The Employee Free Choice Act). Chao has similar concerns. She begins by describing several steps the Obama administration has taken to support unions, including possible budget cuts to the agency that oversees union conduct.
Efforts are also underway to cut the budget of the lone federal agency charged with protecting union members' rights and ensuring union integrity. In January, the Department of Labor's Office of Labor-Management Standards implemented a rule requiring that relevant information on union finances be provided to rank-and-file union members to better ensure transparency and accountability, as required by the Labor-Management Reporting and Disclosure Act of 1959. In the rush of actions after the inauguration, the Obama administration delayed the effective date of this rule. It remains to be seen if other union transparency and accountability rules will be gutted or revoked.

She expresses a second concern--that traditional U.S. support for free trade will be compromised in order to strengthen unions.

Americans should also be concerned about the protectionist impulses -- as evidenced by the "Buy American" provision of the stimulus package -- of those now in charge, which run counter to one of the painful lessons of the Great Depression. Impeding international trade will ignite retaliation by America's trading partners, deepening and prolonging the economic downturn. Policy makers should also resist closing America's doors to skilled workers from overseas, many of whom are educated in our universities and whose talent can help make our economy stronger. Yet provisions like the "Employ American Workers Act" in the stimulus package limits banks that receive government funding from employing skilled foreign workers.

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Thursday, March 19, 2009

The U.S., Mexico and Trucking

Like virtually all economists, I like trade. It doesn't matter if the trade is between my neighbor and me, or a Mexican and me, trade benefits me and by extension, all of society. President Clinton wisely and at some political risk signed the legislation creating NAFTA; it was one of his crowning achievements. Trade has benefited both nations.

Protectionist elements within the U.S. have slowed the implementation of NAFTA. Arturo Sarukhan, Mexico's ambassador to the United States, explains a long standing dispute that recently flared and in which the U.S. government has not acted in good faith (Sarukhan, Arturo. "Congress Doesn't Respect NAFT," Wall Street Journal," March 18, 2009).

Nobody can argue that Mexico hasn't worked tirelessly for more than a decade to avoid a dispute with the United States over Mexican long-haul trucks traveling through this country. But free and fair trade hit another red light this past week. The U.S. Congress, which has now killed a modest and highly successful U.S.-Mexico trucking demonstration program, has sadly left my government no choice but to impose countermeasures after years of restraint and goodwill.

Then and now, this was never about the safety of American roads or drivers; it was and has been about protectionism, pure and simple.

Are Mexican trucks and drivers really as safe at ours? Sarukhan reports on an experiment run jointly between the U.S. and Mexico.

[I]n 2007 an agreement was reached that included the implementation of a demonstration program in which up to 100 carriers from each nation would be allowed to participate. This program was designed precisely to address the concerns voiced by those opposed to cross-border trucking. The demonstration program, launched in September 2007, was an unmitigated success. During the 18 months that the program was in operation, 26 carriers from Mexico (with 103 trucks) and 10 from the U.S. (with 61 trucks) crossed the border over 45,000 times without any significant incident or accident. Moreover, according to reports of both the Department of Transportation's inspector general and an independent evaluation panel, Mexico's carriers participating in the program have a safety record far better than that of all other carriers operating in the U.S.

The people we elect to represent us should act more like they are governing the world's lone superpower and an international beacon of freedom by honoring the trade agreements that we have signed. We should hold them accountable at the ballot box when they do no

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AIG Bonuses

On the way to the gym, I heard a Foxnews account of Senators expressing indignation over AIG paying bonuses to executives.  While running on a treadmill at the gym, I watched a CNN account that was similar in tone and substance.  They got the story wrong, but many economists got it right.  Those that signed the Emergency Economic Stabilization Act (TARP), members of Congress and President Bush, should have been more careful in writing it.  They did not have the knowledge and incentives to run AIG and other recipients of bailout money, nor does the Department of the Treasury, nor does the Federal Reserve.  The members of the Congress who are expressing indignation should be ridiculed for hypocrisy, demagoguery, and foolery. 

Over two hundred economists signed an open letter to the Congress prior to the signing of the Emergency Economic Stabilization Act (TARP).  They are named at the end of the letter.  They wrote,

To the Speaker of the House of Representatives and the President pro tempore of the Senate:

As economists, we want to express to Congress our great concern for the plan proposed by Treasury Secretary Paulson to deal with the financial crisis. We are well aware of the difficulty of the current financial situation and we agree with the need for bold action to ensure that the financial system continues to function. We see three fatal pitfalls in the currently proposed plan:

1) Its fairness. The plan is a subsidy to investors at taxpayers’ expense. Investors who took risks to earn profits must also bear the losses.  Not every business failure carries systemic risk. The government can ensure a well-functioning financial industry, able to make new loans to creditworthy borrowers, without bailing out particular investors and institutions whose choices proved unwise.

2) Its ambiguity. Neither the mission of the new agency nor its oversight are clear. If  taxpayers are to buy illiquid and opaque assets from troubled sellers, the terms, occasions, and methods of such purchases must be crystal clear ahead of time and carefully monitored afterwards.

3) Its long-term effects.  If the plan is enacted, its effects will be with us for a generation. For all their recent troubles, America's dynamic and innovative private capital markets have brought the nation unparalleled prosperity.  Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted.

For these reasons we ask Congress not to rush, to hold appropriate hearings, and to carefully consider the right course of action, and to wisely determine the future of the financial industry and the U.S. economy for years to come. 

Their foresight in opposing the ill considered, rushed legislation should earn them respect and a larger policy voice in the future.

The best A good example of hypocrisy and demagoguery is Chris Dodd, as we learn from FoxBusiness via Russ Roberts at Cafe Hayek ("Awkward").  Dodd voted for the TARP legislation.

Senator Chris Dodd (D-Conn.) on Monday night floated the idea of taxing American International Group (AIG: 0.9468, 0.1667, 21.37%) bonus recipients so the government could recoup the $450 million the company is paying to employees in its financial products unit. Within hours, the idea spread to both houses of Congress, with lawmakers proposing an AIG bonus tax.

While the Senate constructed the $787 billion stimulus last month, Dodd unexpectedly added an executive-compensation restriction to the bill. That amendment provides an “exception for contractually obligated bonuses agreed on before Feb. 11, 2009,” which exempts the very AIG bonuses Dodd and others are seeking to tax. The amendment is in the final version and is law.

Also, Sen. Dodd was AIG’s largest single recipient of campaign donations during the 2008 election cycle with $103,100, according to

Senator Charles Grassely graciously provides the best example of foolery, calling on AIG executives receiving bonuses to resign or commit suicide.  Grassely also voted for the TARP legislation.  Like Dodd, he voted for the TARP legislation.  Because I quoted and linked to Russ Roberts yesterday, I will only provide the link today ("Grassely is Unhappy").

Did your representatives vote for the Emergency Economic Stabilization Act?  The Senate vote is here.  The House vote, here.

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Wednesday, March 18, 2009

The Cost of Cap-and-Trade

The Obama administration plans to establish a cap-and-trade system to reduce carbon emissions. Economists generally consider a cap-and-trade system[1] or a Pigovian tax[2] to be the best methods to correct market failures caused by externalities[3]. Both methods purposefully increase the cost carbon dioxide producing goods and services. Commitment to carbon dioxide emissions seems to come at a time when many climate scientists are expressing skepticism about the link between carbon dioxide emissions and global warming, and about the anthropogenic contribution to climate change.
Tom Lobianco, writing for the Washington Post in “Obama climate plan could cost $2 trillion,” reports that,
President Obama's climate plan could cost industry close to $2 trillion, nearly three times the White House's initial estimate of the so-called "cap-and-trade" legislation, according to Senate staffers who were briefed by the White House.
At the meeting, Jason Furman, a top Obama staffer, estimated that the president's cap-and-trade program could cost up to three times as much as the administration's early estimate of $646 billion over eight years. A study of an earlier cap-and-trade bill co-sponsored by Mr. Obama when he was a senator estimated the cost could top $366 billion a year by 2015.
Paul Fuhr reports for the in “More than 700 scientists discredit man-made global warming fears,” that
According to a new report, the 700-plus scientists are “now more than 13 times the number of U.N. scientists who authored the media-hyped IPCC 2007 Summary for Policymakers.” Many of the scientists are “affiliated with prestigious institutions” including NASA, the U.S. Navy, the U.S. Defense Department, Princeton University, as well as countless others.
Skeptical scientific voices are enjoying more and more company in past weeks, especially in light of a recent article published in The Australian that says Japanese scientists are largely rejecting man-made global warming claims. Japanese Geologist Dr. Shigenori Maruyama, professor at the Tokyo Institute of Technology’s Department of Earth and Planetary Sciences, said this month that “there was widespread skepticism among his colleagues about the IPCC's fourth and latest assessment report that most of the observed global temperature increase since the mid-20th century 'is very likely due to the observed increase in anthropogenic greenhouse gas concentrations.'"
According to a report published by the U.S. Senate Committee on Environment and Public Works, Maruyama noted that when this question was raised at a Japan Geoscience Union symposium last year, "the result showed 90 percent of the participants do not believe the IPCC report.”
I am not a climate scientist, but I do know something of the collection and reporting of data. Linking of climate change to carbon dioxide emissions is extraordinarily difficult. The only forecast of which I am familiar, discussed in “A Prediction Market for Global Warming,” finds that a forecast of no climate change more predictive over long periods than the .03 degree Celsius benchmark set by the IPCC. Meanwhile, at Hubdub, Armstrong leads Gore 64 to 36%.
[1] A cap-and-trade system would establish a permissible level of carbon dioxide to be emitted per year. The permissible level of emission would be below current levels. The government would sell the permits to polluters. To maintain production, polluting firms would be forced to adopted or create technologies to reduce carbon dioxide emissions or curtail production. The government could continue to reduce emissions by attaching a periodic reduction of emissions to permits, or by buying back permits.
[2] A Pigovian tax, named after Cecil Pigou, would attach a per unit tax on fuels that release carbon dioxide into the atmosphere. Greg Mankiw is a leading supporter of a carbon dioxide based Pigovian tax (See “The Pigou Club Manifesto”).
[3] An externality is the byproduct or spillover of the production, sale or consumption of a good or service that affects a third party who did not a participant in its production, sale or consumption.

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A Little More Good News

Two good economic events broke into the news yesterday, one concerning the housing sector, and the other, the financial sector. The Commerce Department reported yesterday that building permits and housing starts in the U.S. increased in February (New Residential Construction in February 2009).

Privately-owned housing units authorized by building permits in February were at a seasonally adjusted annual rate of 547,000. This is 3.0 percent (±3.5%)* above the revised January rate of 531,000, but is 44.2 percent (±1.2%) below the revised February 2008 estimate of 981,000.

Single-family authorizations in February were at a rate of 373,000; this is 11.0 percent (±2.1%) above the January figure of 336,000. Authorizations of units in buildings with five units or more were at a rate of 156,000 in February.

Privately-owned housing starts in February were at a seasonally adjusted annual rate of 583,000. This is 22.2 percent (±13.8%) above the revised January estimate of 477,000, but is 47.3 percent (±5.3%) below the revised February 2008 rate of 1,107,000.

Single-family housing starts in February were at a rate of 357,000; this is 1.1 percent (±11.0%)* above the January figure of 353,000. The February rate for units in buildings with five units or more was 212,000.

The notes of the Commerce Department news release cautions readers to take care in interpreting changes in seasonally adjusted monthly data. It is subject to wide swings and several months on data is needed to establish a trend.

Cristina Alesci and Mark Shenk report for Bloomberg in "U.S. Markets Wrap: Stocks Rise on Homebuilding Data, Oil Climbs," that U.S. stocks advanced Tuesday based on February's increase in building permits and housing starts and expectations that the Federal Reserve will explain plans to support the economy. The gains were concentrated in the financial and building supply sectors.

Citigroup Inc. and JPMorgan Chase & Co. rose at least 7.7 percent as the KBW Bank Index extended its gain since March 6 to 46 percent. KB Home, the fourth-largest U.S. homebuilder, rallied 9.3 percent and Home Depot Inc. rose 6.7 percent as housing starts unexpectedly increased 22 percent in February, the most since 1990. Apple Inc. added 4.4 percent to help lead technology shares higher after updating its iPhone software.

The S&P 500 added 3.2 percent to 778.12, led by a 6.6 percent gain in financial companies. The Dow Jones Industrial Average advanced 178.73 points, or 2.5 percent, to 7,395.7. The Nasdaq Composite Index surged 4.1 percent. About eight stocks rose for each that fell on the New York Stock Exchange.

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Tuesday, March 17, 2009

Russ Roberts at Cafe Hayek

I intended to write a post about the political uproar over bonuses paid by AIG, but Russ Roberts post, "Grassley is unhappy," at Cafe Hayek is so good, I thought that I would provide a teaser, and link to his full post.

Senator Grassley of Iowa is unhappy. I have made some modest changes to this article on his happiness. My additions are in italics:

“Sen. Charles Grassley is so angry over AIG bonuses the Senate's oversight of the various bailouts and giveaways that he says the executives Senators should resign or kill themselves.”
“In a comment aired this afternoon on WMT, an Iowa radio station, Grassley (R-Iowa) said: ‘The first thing that would make me feel a little bit better towards them if they’d follow the Japanese model and come before the American people and take that deep bow and say I’m sorry, and then either do one of two things — resign, or go commit suicide.’”

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Monday, March 16, 2009

Amartya Sen On Capitalism

Amartya Sen is an Indian professor of economics at Harvard University and the 1998 Nobel Prize winner for Economics. His curriculum vitae is impressive. He cannot vote in U.S. elections, but considered himself a supporter of Barak Obama's candidacy for president of the United States. Amit Roy in "All for Obama, Amartya counts the gains," for the Telegraph of Calcutta India reported,

New York, Nov. 5: Amartya Sen today told The Telegraph he was delighted with Barack Obama’s victory and that it had important consequences for India.

“It was a big night. I went to bed late. It’s an excellent result. I obviously don’t have a vote in America — I am an exclusively Indian citizen — but I have been a supporter of Barack Obama’s candidature right from the beginning,” the Nobel laureate, who teaches at Harvard, said from his home in Boston.

In "Economic Systems" I observe that many political pundits are calling President Obama a socialist. I then describe several economic systems and let the reader decide how to classify the president. Based on his article, "Capitalism Beyond the Crisis," (The New York Review of Books, Vol. 56, Num. 5, March 26, 2009.), I believe that Sen would classify Obama as an old-fashioned adherent of capitalism. His description of the role of government in a capitalist system comes very close to President Obama's agenda.

Sen begins by describing fundamental features of a market system.

It seems to be generally assumed that relying on markets for economic transactions is a necessary condition for an economy to be identified as capitalist. In a similar way, dependence on the profit motive and on individual rewards based on private ownership are seen as archetypal features of capitalism.

He notes that Adam Smith, the founder of economics who wrote on the efficiency of markets, also expressed concern about what markets leave undone, including alleviation of poverty and education.

The most immediate failure of the market mechanism lies in the things that the market leaves undone. Smith's economic analysis went well beyond leaving everything to the invisible hand of the market mechanism. He was not only a defender of the role of the state in providing public services, such as education, and in poverty relief,...he was also deeply concerned about the inequality and poverty that might survive in an otherwise successful market economy.

Sen also finds support for regulation of financial markets in Smith's writing.

If we were to look for a new approach to the organization of economic activity that included a pragmatic choice of a variety of public services and well-considered regulations, we would be following rather than departing from the agenda of reform that Smith outlined as he both defended and criticized capitalism.

Sen goes beyond Smith and finds support for government actions in dealing with economic psychology and externalities like pollution in the work of Cecil Pigou. He expresses the need of government to provide public goods. Few economists would deny the importance of government in dealing with externalities and public goods.

Sen ends by supporting capitalism moderated by government actions to ameliorate its shortcomings.

The present economic crises do not, I would argue, call for a "new capitalism," but they do demand a new understanding of older ideas, such as those of Smith and, nearer our time, of Pigou, many of which have been sadly neglected. What is also needed is a clearheaded perception of how different institutions actually work, and of how a variety of organizations—from the market to the institutions of the state—can go beyond short-term solutions and contribute to producing a more decent economic world.

Although nearly all economists see the need for markets in providing goods and services and allocating resources, and most see some role for the government in correcting market failures, there is often a chasm between economists on these issues. Like Cole Sear in "Sixth Sense," some economists see market failures,...they're everywhere, and others see very few.

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Jonathan Jarvis and the Financial Crisis

Jonathan Jarvis is a designer based in Los Angeles. He is practicing in the Graduate Media Design Program at the Art Center College of Design. He constructed a great introduction to the financial crisis. It can be found at "The Crisis of Credit Visualized."

He omits the role of the government, which I would not, but the omission is understandable given the time frame devoted to the topic. If you make it too long, nobody will watch it.

I also find it valuable because it explains how markets can misfunction, and I believe that it comes very close to describing the origin of the financial crisis in England, Ireland, and several other European countries where the government's influence in the housing market was less significant than in the U.S.

I give it four and a half stars out of five.

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Obama and the NEA

The Obama administration's policy regarding unions seems schizophrenic. As a senator, Obama voted for the Employee Free Choice Act. The stimulus package he signed contained language supportive of unions. The president proposed merit pay for successful teachers, a recommendation I support (Martin, Jonathan, "Obama takes on teachers' unions," Politico, March 10, 2009).

After weeks of pleasing Democrats by overturning policies set by the previous administration, President Barack Obama Tuesday for the first time confronted a powerful constituency in his own party: teachers’ unions.
Obama proposed spending additional money on effective teachers in up to 150 additional school districts, fulfilling a campaign promise that once earned him boos from members of the National Education Association.
“Good teachers will be rewarded with more money for improved student achievement, and asked to accept more responsibilities for lifting up their schools,” he said in a wide-ranging education speech before a meeting of the U.S. Hispanic Chamber of Commerce in Washington.

It seems President Obama opposes unions in the industry he knows best, unions. Teachers' unions generally oppose merit pay.

Teachers’ unions say merit pay causes teachers to compete against each other, rather than collaborate, and is unfair to those who work in disadvantaged areas where it can be harder to boost student performance.

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Sunday, March 15, 2009

John Nash

John Nash was a math genius whose contribution to economic game theory was great enough to earn a Nobel Prize in economics. He was also a paranoid schizophrenic. It is the stuff of which books are written (Nasar, Sylvia. "A Beautiful Mind," Simon and Schuster, 1998.) and movies made ("A Beautiful Mind," Universal Pictures.). View an interview of John Nash by Marika Griehsel for The Interview is 29 minutes.

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Friday, March 13, 2009

The Good, The Bad And The Ugly

Yesterday, Shobhana Chandra reported government news releases for Bloomberg ("U.S. February Retail Sales Decline Less Than Forecast," Bloomberg, March 12, 2009.).

Here is the good,

March 12 (Bloomberg) -- Sales at U.S. retailers in February fell less than forecast and January’s gain was almost double the previous estimate, indicating the biggest part of the economy may be starting to stabilize.

Purchases decreased by 0.1 percent, led by the slump in demand for cars, following a revised 1.8 percent jump in January, the Commerce Department said today in Washington. Excluding automobiles, sales unexpectedly climbed 0.7 percent.

The bad,

A separate report today showed claims for unemployment insurance rose to 654,000 last week from 645,000 the previous period, the sixth straight week above 600,000.

And the ugly,

Sales at automobile dealers and parts stores slumped 4.3 percent, the most since October.

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Economists Supporting the Employee Free Choice Act

Through the Economic Policy Institute a number of excellent economists have signed an open letter supporting the Employee Free Choice Act ("Noted economists: The Employee Free Choice Act is needed to restore balance in the labor market," Economic Policy Institute). All of the economists whose names I recognize have international reputations and several are Nobel Laureates. A key portion of their statement reads,

..from 2000 to 2007, the income of the median working-age household fell by $2,000- an unprecedented decline. In that time, virtually all of the nation’s economic growth went to a small number of wealthy Americans. An important reason for the shift from broadly-shared prosperity to growing inequality is the erosion of workers’ ability to form unions and bargain collectively.

A natural response of workers unable to improve their economic situation is to form unions to negotiate a fair share of the economy, and that desire is borne out by recent surveys.

Only a wool-headed fool would disagree with a large number of prominent figures in his field, each more successful than himself, so here I go. I do not like the selection of 2000-2007 as a measurement period. It ends with a recession and more importantly, it does not cover the period of union decline.

A second problem is that households are smaller than in the past. A possible explanation is that individuals are wealthier than in the past, and able to form smaller household units. As an example, take a household earning $120,000 annually that has three workers, the youngest being a twenty something child of the two other workers. If the child moves out average household income has fallen to $60,000. Thomas Sowell addresses the trend toward smaller households on EconTalk with Russ Roberts in "Sowell on Economic Facts and Fallacies." The podcast highlights for the first five minutes read,

Over about 30 years, average household income rose only by 6%, but over that same period, per capita income rose by 51%. More meaningful figure. Failure to compare apples to apples in many statistical analyses. Today, not only fewer children per household but also more divorces. Top 20% of the household distribution has twice as many people as the bottom 20%, seems impossible. 39 million people in bottom 20% of households vs. 64 million in the top 20% of households, so household size is very different.

Gary Becker does not like the card-check provision and does not believe that the decline in union membership that began in 1954 will be reversed with the passage of the act ("Will the Decline in Union Membership be Reversed? Becker," The Becker-Posner Blog, January 25, 2009.)

This act would provide, among some other things discussed by Posner, public voting by employees on whether they want to form a union. I do not like public voting since workers might then be intimidated into voting in favor (or against) a union. Secret voting gives a truer picture of worker attitudes toward unions. While public voting and other pro-union legislation would tend to increase the number of union members, the economic and social forces are aligned against any major comeback by unions.

Union membership has been declining ever since 1954 when it peaked at 28% of total employment -unions' share of nonagricultural employment was then 35 %. During the subsequent half century the union share declined more or less continuously, and now is only about 11%. A mere 7% of private sector employees are unionized. The one bright spot in the union picture is the growth in their share of government employees to about 37%.

Union activity increases unemployment. Lawrence Summers writing for the Concise Encyclopedia of Economics in "Unemployment" observes,

Another cause of long-term unemployment is unionization. High union wages that exceed the competitive market rate are likely to cause job losses in the unionized sector of the economy. Also, those who lose high-wage union jobs are often reluctant to accept alternative low-wage employment. Between 1970 and 1985, for example, a state with a 20 percent unionization rate, approximately the average for the fifty states and the District of Columbia, experienced an unemployment rate that was 1.2 percentage points higher than that of a hypothetical state that had no unions. To put this in perspective, 1.2 percentage points is about 60 percent of the increase in normal unemployment between 1970 and 1985.

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Thursday, March 12, 2009

Obama On Trade: One Tiny Step Forward, Two Steps Back

The Obama administration is taking one tiny step forward on trade and two steps back. Arthor Brice writing for CNN in "U.S. loosens restrictions regarding Cuba," (March 11, 2009) reports that the Congress passed and President Obama signed a $410 billion budget bill that liberalizes travel restrictions and trade with Cuba. On travel restrictions, Brice writes,

Under the new provisions, relatives will be able to go once a year and stay for an unlimited time. In addition, the definition of relatives has been broadened to include uncles, aunts, nephews and nieces. The new measures also increase the amount of money visitors can spend.

According to the AFP ("Despite bill, Cuba trade rules mostly unchanged: Geithner," March 11, 2009), expands on trade changes. He writes that Secretary of Treasury Geithner assured that the changes in trade were small.

...Treasury Secretary Timothy Geithner stressed in a letter last week to US lawmakers that the practical impact of many of the changes will be negligible.

Geithner's March 5 letter to US senators Robert Menendez of New Jersey and Bill Nelson of Florida, a copy of which was obtained by AFP, stressed that "current financing rules" remain in place when Cuba pays for imports of US products...

The bill also eases some restrictions on food and medicine sales to Cuba -- but Geithner said it "will seek to ensure that only travel for credible sales of food and medical products is authorized."

It is unfortunate that the administration must ensure Senators that the loosening of restrictions on Cuba is "negligible" immediately before President Obama attends the Fifth Summit of the Americas to demonstrate our willingness to "change." The President appears to believe in a trickle-down theory of diplomacy rather than bottom up through trade. Is the relationship between (Raul) Castro in Havana and Obama in Washington more central to a thaw than thousands of relationships that trade would foster between businessmen and consumers across the breadth of both countries?

Other news on trade is bad. Anthony Faiola writing for the Washington Post ("U.S. to Toughen Its Stance On Trade," Washington Post, March 10, 2009.) reports,

The Obama administration is aggressively reworking U.S. trade policy to more strongly emphasize domestic and social issues, from the displacement of American workers to climate change...

The shift underscores the mounting pressures confronting any effort to expand trade during the economic crisis. Even before the global economy went code red late last year, talks aimed at expanding global trade stalled as Western countries warred with emerging giants like China and India over how to further open markets.

Those divides appear to be more unbreachable than ever as world leaders move to protect their domestic industries from the ravages of the financial crisis, embracing new trade barriers aimed at imported goods and other measures meant to restrict the flow of capital outside their borders. In the United States, more Americans are blaming cheap imports for job losses at home and congressional leaders pressed successfully to include a "buy American" provision in the $787 billion stimulus program to give an edge to U.S.-made products.

The administration does not seem to understand how comparative advantage works. He wants poor nations to be like us on issues like labor relations and climate change to establish a level playing field before trade can occur. I thought that the Obama administration wound no longer dictate to the rest of the world (Kligman, Aimee. "The New Diplomacy: listen and don't dictate - will it work in Pakistan?,", January 27, 2009.), but maybe that change only applies to the Muslim world.

Even in the midst of the current recession, we have the most successful economy in the world; if any nation has an advantage in trade it is us. The desire of the administration to have other nations look like us robs them of their comparative advantages and all nations of many of the benefits of trade. It would be like Tiger Woods forceing other golfers to use his clubs and club selection as they played.

Rather than creating new reasons to limit trade, the Obama administration should remember history, specifically how President Hoover widened and deepened the Great Depression by signing the Smoot-Hawley Act in what is known as the beggar thy neighbor era.

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Wednesday, March 11, 2009

The Economist and Barak Obama

Last fall, the Economist endorsed Barak Obama for president in these words, "America should take a chance and make Barack Obama the next leader of the free world "It's time," The Economist, Print Edition, October 30, 2008.

Last week, the same periodical titled an article about the Obama budget as "Wishful, and dangerous, thinking" (The Economist, March 5, 2009). Much like Clive Crook, who wrote for The Economist at one time, they describe the budget as ambitious and costly expansion of the government’s role in the lives of Americans. Its centrepiece is a big expansion of state-provided health care—for which he has budgeted $634 billion over the next decade while admitting that yet more will be needed. He will fill in the details in coming weeks (see article) while insisting the plan meets several criteria: it must extend insurance to the 15% of Americans who now lack it, it must help slow the growth in costs, and it must be paid for.

Add increased spending on education, energy and other initiatives, and federal expenditures, excluding defence, would rise to a new high of 18% of GDP in the coming decade....

Sadly, these plans are deeply flawed. First, Mr Obama’s budget forecasts that the economy will shrink 1.2% this year then grow by an average of 4% over the following four years. It might if the economy were to follow a conventional path back to full employment. But this is not a conventional recession. The unprecedented damage to household balance sheets could well result in anaemic economic growth for years, significantly undermining the president’s revenue projections. The economic outlook continues to darken and the stockmarket has already tumbled to 12-year lows. Mr Obama may either have to renege on his promise to slash the deficit to 3% of GDP in 2013 from more than 12% now, rein in his spending promises or raise taxes more.

Second, Mr Obama’s scattershot tax increases are a poor substitute for the wholesale reform America’s Byzantine tax code needs.

People who are not economists might believe that The Economist has recanted its support of the new administration. I do not believe that this interpretation is correct. Economists are a critical lot. Criticism should be viewed in relative terms. Until they write about the good old days of the Bush administration, or speak glowingly of an Obama competitor, I believe that their endorsement stands.

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Union Violence

Stan Maddux writing for The News-Dispatch in "Olive Garden picketing escalates," describes union violence against a firm that won a bid against union workers.

MICHIGAN CITY - Union members Monday continued picketing an Olive Garden restaurant construction site, and again things turned ugly...

Since the picketing began about five weeks ago, vehicles have been dented and some tires have been slashed, he said...

Derek Engineering General Contractors, Cincinnati, was awarded the contract to build the restaurant.

"The unions bidded on this job and their bid was too high. Don't take it out on us," said Dolata...

Recently, Campbell vowed the demonstrations would continue until the union tradesmen are working jobs at the site.

"They got to do what they got to do and we got to do what we got to do. We're just exercising our rights," Campbell said.

Do we really want to see noncompetitive bidders intimidate the businesses that would hire them or the workers that would compete against them? Do we really want to pay higher taxes to support police who now must supervise work sites? Do we want to pay higher prices for products that must be made by union workers or products that have higher prices because nonunion firms must protect workers from union violence?

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Fixing The Financial Sector

George Bittlingmayer and Thomas Hazlett are at it again, criticizing the stimulus by looking at its impact on capital markets ("The markets do not believe the 'stimulus'," Chicago Tribune, March 8, 2009.). I will highlight two points from the article and make an additional observation.

It is sometimes difficult to interpret market swings. They are the combined reactions of thousands of thousands of buyers and sellers. With that caution in mind, forward looking markets would respond positively to policies or events that signal a resolution to the financial crisis and negatively to policies or events that signal continued turbulence.

Many factors move markets, but investors would respond enthusiastically to signs the government was solving the economic crisis. Indeed, news that the experienced, moderate Timothy Geithner would be Treasury chief lifted the Dow 6.5 percent Nov. 21 (and an additional 4.9 percent when the choice was confirmed by Obama Nov. 24). Geithner's glow has since dimmed; the Dow dropped 300 points when his Feb. 10 news conference revealed that little progress had been made in crafting a solution to the banking crisis. And today the evidence is that investors do not believe that the massive new debt will spur economic growth.

Event studies are a type of opinion pool by people who have money in the game and politicians realize their value in forecasting policy outcomes.

The point is not that economic policies should be crafted to benefit shareholders. It is that financial markets offer important evidence about the effect of different choices on the overall health of the American economy. Former President Bill Clinton harks back to the good times in the 1990s when equity valuations were booming. Last fall, conversely, House Republicans and Blue Dog Democrats blocked the banking bailout requested by Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke, only to see the Dow decline nearly 7 percent on Sept. 29. That was a signal. House opposition quickly collapsed and the bill passed.

The Obama administration has much to blame on its predecessor. But its own fiscal strategy is highly leveraged on a theory that has not scored well in previous runs. Markets are dubious that the "stimulus" will stimulate. And investors are losing patience with the federal fixes offered for the banking crisis. If the warning signs of the Dow are not heeded by policymakers, they will be by others. Ask Sen. John McCain.

Investors also respond to unexpected market driven events such as Citigroup turning a profit (Lepro, Sara and Paradis, Tim, AP Business Writers. "Dow ends up nearly 380 on Citigroup profit news," Yahoo Finance, March 10, 2009.)(HT Drudge.)

NEW YORK (AP) -- Wall Street has had its best day of the year, storming higher after some good news from Citigroup. Citigroup Inc. says it operated at a profit during the first two months of the year. That energized financial stocks and in turn, the entire stock market. Surprised investors drove the major indexes up more than 5.5 percent to their biggest one-day rally of the year. The Dow Jones industrials shot up nearly 380 points.

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Tuesday, March 10, 2009

Clive Crook and Laura D'Andrea Tyson

Two economists, both supporters of candidate Obama, express their thoughts on his administration to date. Clive Crook ("Why Obama’s left leaning is no tactical feint," Financial Times, March 8, 2009) believes that the administration is leaning too far left, and Laura D'Andrea Tyson ("In Defense of Obamanomics," Wall Street Journal, March 9, 2009), that it is left of course.

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The Employee Free Choice Act

Labor Unions are cartels like OPEC that have been granted legal privileges by the government. They are free from taxation and antitrust law. They can compel their employers to provide property for union use and nonmembers to pay dues.

Union workers earn higher wages by limiting employment at unionized facilities, forcing others with skills similar to union workers into nonunionized jobs. The increased supply of workers in the nonunionized facilities suppresses wages. Because the union wage is above the equilibrium, there are surplus laborers, and the unions must decide who is employed and who is not. Often race was used to exclude workers from unions.

Noncompetitive markets allow unions to thrive and often governments protect them from both domestic and foreign competition. If the protection disappears, the higher wage paid to union workers also disappears, or the industries that hire them fade away.

For generations, unions have supported Democrats over Republicans. Now that the Democrats hold the White House and large majorities in both chambers of Congress, the unions are expecting advantageous legislation. The Employee Free Choice Act (EFCA) is an example.

The "card-check" provisions of the EFCA have been widely debated. George McGovern appearing in a YouTube video for explains that he opposes the bill because it takes away the rights of workers to express their preferences for representation through a secret ballot, permitting union organizers to sign-up workers through forms authorizing union representation, the "card-check."

Groups like American Rights At Work, in "Lies and Distortion on the Secret Ballot," claim that charges made by McGovern and others about taking away the secret ballot are false.

Business special interest groups have launched a $120 million campaign to derail reform of the nation's broken labor law system by lying about the Employee Free Choice Act. Their only line of attack - that the bill somehow takes away so-called "secret ballot" elections for joining a union - is blatantly false.

The Employee Free Choice Act not only strengthens the current process for workers forming unions, but also provides for a more fair and democratic method for men and women to join unions.

By clicking the link, "more fair and democratic method," in the quote above the American Rights At Work explains their differences with groups complaining of the loss of a secret ballot.

Careful Democratic majority sign-up procedures are the most effective way to determine the wishes of a majority of employees. Under majority sign-up procedures, employers are only allowed to recognize a union if a majority of employees has signed valid written forms authorizing union representation. Any employee who does not sign an authorization form is presumed not to support union representation.

They believe that the card-check is more democratic than a secret ballot and go on a length explaining why.

For the curious, I have included wording from the Employee Free Choice Act of 2007 (Engrossed as Agreed to or Passed by House), which is presumably similar to the bill that will soon be introduced in Congress. The key paragraph of section 9 dealing with card-check supplanting secret ballots reads,

(6) Notwithstanding any other provision of this section, whenever a petition shall have been filed by an employee or group of employees or any individual or labor organization acting in their behalf alleging that a majority of employees in a unit appropriate for the purposes of collective bargaining wish to be represented by an individual or labor organization for such purposes, the Board shall investigate the petition. If the Board finds that a majority of the employees in a unit appropriate for bargaining has signed valid authorizations designating the individual or labor organization specified in the petition as their bargaining representative and that no other individual or labor organization is currently certified or recognized as the exclusive representative of any of the employees in the unit, the Board shall not direct an election but shall certify the individual or labor organization as the representative described in subsection (a).

The Congressional Research Service describes this portion of the EFCA.

Employee Free Choice Act of 2007 - Amends the National Labor Relations Act to require the National Labor Relations Board to certify a bargaining representative without directing an election if a majority of the bargaining unit employees have authorized designation of the representative (card-check) and there is no other individual or labor organization currently certified or recognized as the exclusive representative of any of the employees in the unit.

There are several reasons I don't like the bill. It supports cartels, who will demand higher wages that consumers will pay for through higher prices or lower quality goods. It supplants a secret ballot with a procedure that opens union formation to intimidation, and can anybody doubt that unions would fail to utilize that tool? It takes from entrepreneurs the management of labor, and how it will interact with capital and other resources, with scant empirical support for the notion that labor is somehow disadvantaged compared to management in wage negotiation. Does anyone doubt that research and development, innovation and product quality will decline? Finally, it places the federal government at the wage negotiating table. I do not want to see a presidential or senatorial campaign centered discussing the appropriate wage that should be granted by the National Labor Relations Board. Both Democrats and Republicans would bid up union wages to win votes. Wages would be based on political power and not productivity. Does anyone really want to see the politicization of wage negotiation?

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Monday, March 9, 2009

Economic Systems

Radio talk show hosts, blogs, and other forms of news dissemination, noting the growth of government in the first two months of the Obama administration have been calling President Obama a socialist. I even heard one talk show host refer to his supporters as Obamunists. Such complaints made their way through a New York Times reporter to the president, who gave a dismissive answer. Joe Curl writing for the Washington Post in "Obama makes Oval Office call to reporters," explains that President Obama has become concerned that his answer was inadequate.

President Obama was so concerned that he had appeared to dismiss a question from New York Times reporters about whether he was a socialist that he called the newspaper from the Oval Office to clarify his policies.

"It was hard for me to believe that you were entirely serious about that socialist question," he told reporters, who had interviewed the president aboard Air Force One on Friday.

Below I have provided definitions of several economic systems and a little information about the economists providing the definitions. You can decide which system best describes the collection of policies thus far expressed by the Obama administration.

From the Concise Encyclopedia of Economics, in an article titled "Socialism," Robert Heilbroner defines socialism

Socialism—defined as a centrally planned economy in which the government controls all means of production—was the tragic failure of the twentieth century. Born of a commitment to remedy the economic and moral defects of capitalism, it has far surpassed capitalism in both economic malfunction and moral cruelty.

The "About the Author" section of the article states,

Robert Heilbroner, a socialist for most of his adult life, was the Norman Thomas Professor of Economics (emeritus) at the New School for Social Research and author of the best-seller The Worldly Philosophers. He died in 2005.

Milton Friedman the Nobel Prize Laureate in Economics who supported capitalism in the popular press in Capitalism and Freedom (The University of Chicago Press, 1962, pg. 5.) writes,

As it developed in the late eighteenth and early nineteenth centuries, the intellectual movement that went under the name of liberalism emphasized freedom as the ultimate goal and the individual as the ultimate entity in society. The kind of economic organization that provides economic freedom directly, namely competitive capitalism, also promotes political freedom because it separates economic power from political power and in this way enables the one to offset the other. History suggests only that capitalism is a necessary condition for political freedom. Clearly it is not a sufficient condition.

Robert Hessen, who writes on business and economic history, and is a senior research fellow at Stanford University’s Hoover Institution writes in the Concise Encyclopedia of Economics ("Capitalism") that

Capitalism,” a term of disparagement coined by socialists in the mid-nineteenth century, is a misnomer for “economic individualism,” which Adam Smith earlier called “the obvious and simple system of natural liberty” (Wealth of Nations).

Sheldon Richman, the editor of The Freeman: Ideas on Liberty at the Foundation for Economic Education, writes for the Concise Encyclopedia of Economics ("Fascism")

As an economic system, fascism is socialism with a capitalist veneer.

Where socialism sought totalitarian control of a society’s economic processes through direct state operation of the means of production, fascism sought that control indirectly, through domination of nominally private owners. Where socialism nationalized property explicitly, fascism did so implicitly, by requiring owners to use their property in the “national interest”—that is, as the autocratic authority conceived it.

George Reisman, writing for the Mises Daily in "What is Interventionism?," describes interventionism,

Interventionism is any act of government that both represents the initiation of physical force and, at the same time, stops short of imposing an all-round socialist economic system, in which production takes place entirely, or at least characteristically, at the initiative of the government. In contrast to socialism, interventionism is a system in which production continues to take place characteristically, at the initiative of private individuals, including private corporations, and is motivated by the desire to earn private profit. Interventionism exists in the framework of a market economy, though, as von Mises puts it, such a market economy is a hampered market economy.

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The Nanny State In The Doll House

L.A. Johnson writing for the Pittsburgh Post-Gazette in "West Virginia state lawmaker proposes ban on Barbie just before she turns 50," reports that

West Virginia Democratic Delegate Jeff Eldridge Tuesday proposed a bill to ban the sale of Barbie and similar dolls that promote physical beauty to the detriment of girls' intellectual and emotional development.

There are many things wrong with the proposal. The smallest is that he reversed causality. I doubt many girls, shopping for a new calculator, innocently happen by Barbie and are transformed by her hypnotic beauty into girls obsessed with their own physical imperfection, and drained by their inability to match hers. It is more likely that girls interested in physical beauty and fashion select dolls that match their interests. It is more likely still that the intellectual and emotional development of girls is simply not affected by playing with Barbies.

More significantly, when did anyone begin to believe that we, through our elected representatives, had the right or wisdom to dictate the types of dolls parents purchase for their children? What kind of people could elect a delegate in West Virginia who would make such an arrogant proposal let alone elect a sufficient number of representatives in Montpelier, Vermont to ban Barbie (2006)? I hope that the voters in West Virginian and Montpelier were fooled and that their representatives soon find themselves looking for other employment.

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