Please turn on JavaScript

Brooks Wilson's Economics Blog: April 2010

Wednesday, April 28, 2010

Happy Meal Toys Under Assault by the Fat Police

Freedom is again under assault!  Ken Yeager, the president of the Santa Clara County Board of Superviosrs (CA), proposed a ban on toys in restaurant meals that contain high amounts of some fats, sugars or salt.  The measure passed 3 to 2 last night, a night that will live in fast food infamy.  Read Sharon Bernstein's excellent article ("Happy Meal toys could be banned in Santa Clara County") that was published in the Los Angeles Times for more details. Mr. Yeager describes the logic of banning parents from buying products that their children like.
"People ask why I want to take toys out of the hands of children," said Yeager, who is president of the Santa Clara County Board of Supervisors. "But we now know that 70% of the kids that are overweight or obese will be overweight or obese as adults. Why would we want to burden anybody with a lifetime of chronic illness?"

"We're responsible for paying for healthcare in the whole county," Yeager said. "We pay close to $2 billion annually on healthcare, and the costs have done nothing but rise." A big part of the increase, he said, is costs related to obesity.
Mr. Yeager, children's weight, other than your own, is none of your business.  Parents know the needs of their children and love them more than you do.  The logic of claiming a right to regulate diet because taxpayers are forced into paying healthcare costs of others is backwards.  The federal government limits taxpayers' freedom by forcing them to pay for the healthcare of others and you top it off by limiting the freedom that people have to buy products from fast food restaurants?  Two wrongs don't make a right.  A better response would be to oppose healthcare reform because it restricts freedom.Taxpayers also fund education.  Does that mean that you should limit the sale of televisions, computers, game systems, software and other products that would conflict with society's goal to educate its citizens?  By the way, limiting access to these products would also give children more time to exercise to fight obesity. 

Your arguments are unconvincing on lesser grounds as well.  According to the Center for Disease Control and Prevention, only 11% of children ages 2 to 5 were overweight (all data is from 2005 to 2006).  In your effort to take the freedom of parents with overweight children, you are taking the freedom of the majority of parents, approximately 79%, who do not have overweight children.  Sixty seven percent of American adults are overweight.  If 70% of the 11% of children who are overweight will be overweight as adults, then 66% of the 89% of children who are not overweight will also be overweight as adults.  The difference is thin and the problem is with adults, not children. 

Finally, and least of all, you may wish to observe the eating habits of children whose parents buy these meals.  They often open the box, pull out the toy, eat a fry or two and run to the play equipment for lots of good exercise.  They come back with the toy and play with it.  The parents end up eating most of the meal.  That is why the parents are fat and not the children.

Read more!

Tuesday, April 27, 2010

National Association for Business Economists on the Stimulus

As the economy improves, economists will ask if the Obama administration's policies including the American Recovery and Reinvestment Act of 2009 (the stimulus) contributed to the revival or simply happened concurrently.  The National Association for Business Economists (NABE) is a respected organization of business economists.  As reported by Hibah Yousuf of, a survey of 63 NABE economists reported no causal link between the stimulus and the recovery.  Seventy three percent believe that the stimulus did not affect their company's employment.  Nor do they believe that a new jobs bill will increase employment.
NEW YORK ( -- The recovery is picking up steam as employers boost payrolls, but economists think the government's stimulus package and jobs bill had little to do with the rebound, according to a survey released Monday.

In latest quarterly survey by the National Association for Business Economics, the index that measures employment showed job growth for the first time in two years -- but a majority of respondents felt the fiscal stimulus had no impact.

NABE conducted the study by polling 68 of its members who work in economic roles at private-sector firms. About 73% of those surveyed said employment at their company is neither higher nor lower as a result of the $787 billion Recovery Act, which the White House's Council of Economic Advisers says is on track to create or save 3.5 million jobs by the end of the year.

That sentiment is shared for the recently passed $17.7 billion jobs bill that calls for tax breaks for businesses that hire and additional infrastructure spending. More than two-thirds of those polled believe the measure won't affect payrolls, while 30% expect it to boost hiring "moderately."

Read more!

China's Impending Population Bust

I have been on something of a freedom kick over the last couple weeks.  Many articles in the news of public efforts to limit freedom in the name of some social good convinces me to keep writing.  For years, China has attempted to limit Chinese women to one birth through forced abortions, sterilizations and infanticide.  China is now facing a huge projected decline in population.  Alexa Olesen of the AP describes the magnitude of the problem in "Long-hated one-child rule may be eased in China."

A people shortage may seem unlikely in a country of 1.3 billion, the most in the world. The concern, though, is not with the overall number. Rather, as the population shrinks, which is projected to begin in about 15 years, China may find itself with the wrong mix of people: too few young workers to support an aging population.

It is a combination that could slow or, in a worst-case scenario, even reverse China's surging economic growth. The government and families will have to tap savings to care for the elderly, reducing funds for investment and driving up interest rates. At the same time, labor costs probably will rise as the work force shrinks and squeeze out some industries...

Family size has dropped dramatically since the 1970s, when the average Chinese woman had five to six children. Today, China's fertility rate is 1.5 children per woman. Most families have just one, but exceptions allow multiple children for ethnic minorities and a second one for rural families whose first baby is a girl.

If that fertility rate holds, China's population will peak at 1.4 billion in 2026 and then start shrinking, according to the U.S. Census Bureau. By the end of this century, China's population would be cut almost in half to 750 million, according to a model developed by Wang Feng, a demographer at the University of California, Irvine. That would still be two and a half times bigger than the U.S. today.

Wang says the government's focus on slowing population growth has dangerous side effects.

In just 10 years, the age 20-24 population is expected to be half of today's 124 million, a shift that could hurt China's economic competitiveness by driving up wages. Over the same period, the proportion of the population over 60 is expected to climb from 12 percent — or 167 million people — to 17 percent.
The one child policy has had a second unintended consequence.  Boys are more valued than girls so parents have aborted female fetuses. 
Another concern is a surplus of males. Sonograms became more widely available in the 1990s, and some parents who wanted a son aborted their baby if they learned it was a girl.

Though the practice is illegal, statistics make clear that it is widespread. The male-female ratio at birth was 119 males to 100 females in 2009, compared with a global average of 107 to 100.

Experts fear that, in the years to come, the gender imbalance will create a frustrated generation of men unable to find spouses. That in turn could fuel the trafficking of women and girls to be sold as brides.
Would the country's citizens be better off if the government had stayed out of Chinese bedrooms and allowing them the freedom to plan their own family size?  Almost certainly yes, but it certainly would have been a freer country.

Read more!

Monday, April 26, 2010

Missouri Powerball

Chris Shaw won the Missouri Powerball lottery.  His winnings were reported as $258 by the state.  The figure is misleading; it is the future value of an annuity with annual payments over thirty years.  The lump sum or present value of his winnings is $125 million and this is the proper method of valuation. 

Truth in Lending laws prohibit lenders from misquoting the true interest rate on a loan by attaching up front fees on the loan and then lowering the quoted interest rate.  The laws require that lenders calculate and report the annual percentage rate which is calculated by a standardized formula that takes into account up front fees. 

The government at all levels seems preoccupied with practices of firms operating in a competitive market but never question their own actions.  In this case, the state of Missouri established a lottery, limited competition, advertised the lottery as a way to win millions and encouraged or at least tolerated misreporting of winnings.  Lotteries are a regressive taxes paid almost entirely by the poor and uneducated.  Almost all lottery participants are net losers.  The lottery as a tax fails to meet any criterion of fairness proposed by economists.  They are popular with users be better served if they were run in a competitive market environment that forced firms to pay out a larger percentage of its revenues to lottery participants. 
Replace this text with...
Read more!

Thursday, April 22, 2010

Glaeser and the Pure Vs. Pragmatic Libertarian

Edward Glaeser of Harvard wrote a wonderful article titled "Pragmatic Libertarians" for the New York Times.  In the article, he compares beliefs of the pure libertarian with the pragmatic.  The pure libertarian might be used as a straw man, but not as a whipping boy.  The entire article is worth reading.  I have taken a highlight.
The pragmatic libertarian yields to no one in love of liberty, but also recognizes that liberty is not always preserved by the most minimal state.   In the United States, even pure libertarians are rarely anarchists.  They accept that the state is needed to protect property and enforce contracts.    But once you have accepted that the state should stop strangers from burning down your house, then it is a small step to also thinking that the state may also protect you against people who would befoul your water and pollute your air.

To the pragmatic libertarian, the question of whether to act or not on global warming comes down to costs and benefits, not any philosophical objection to restricting pollution.

The libertarian belief in freedom is accompanied by a realistic appreciation of the limits of government.     Markets aren’t perfect, but the state isn’t either.

The financial market fiasco of the past four years reminds us that Wall Street and housing markets are prone to wild excess.  But those events also clearly illustrate the very public folly of Fannie Mae and Freddie Mac and the mistake of bribing Americans, through the home mortgage interest deduction, to leverage themselves to the hilt to bet on housing markets.

Replace this text with...
Read more!

The Political Sale of Liberty

Libertarians, originally known as liberals, value liberty or freedom above other political objectives and more than other political groups.  In "The Road to Serfdom", F.A. Hayek defined liberty as
...freedom from coercion, freedom from the arbitrary power of other men, release from the ties which left the individual no choice but obedience to the orders of a superior to whom he was attached. 
Milton Friedman made the same point and tied individual liberty with competitive capitalism (Milton Friedman, "Capitalism and Freedom").
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 one to offset the other.
The title of liberal had value and was wrested from the original philosophers who supported freedom and liberty by a political philosophy that valued state intervention to achieve desired outcomes. Milton Friedman observes in "Capitalism and Freedom"
Beginning in the late nineteenth century, and especially after 1930 in the United States, the term liberalism came to be associated with a very different emphasis, particularly in economic policy.  It came to be associated with a readiness to rely primarily on the state rather than on private voluntary arrangements to achieve objectives regarded as desirable.  The catchwords became welfare and equality rather than freedom.  The nineteenth century liberal regarded an extension of freedom as the most effective way to promote welfare and equality as either prerequisites of or alternatives to freedom.  In the name of welfare and equality, the twentieth-century liberal has come to favor a revival of the very policies of state intervention and paternalism against which classical liberalism fought. 
In today's lexicon, yesterday's liberals are libertarians.  The first economists, with the exception of Marxists, were libertarians and used their influence to replace mercantilist paternalism, including slavery, with freedom.  Historian Thomas Carlyle dubbed economics as the dismal science for their opposition to slavery and argued that slavery was a superior form of economic organization because replacing slavery with labor markets caused a decline in the moral and economic lives of former slaves. 

Economic research begun by Robert Fogel and Stanley Engerman in "Time on the Cross" does support the claim that slave agriculture was economically viable and that the material conditions (food, housing, hours worked) of slaves compared favorably with industrial workers in the decades preceding the Civil War.  The authors did not support slavery but believed that the intervention of one government against another was necessary to end slavery and establish freedom for slaves.  There work is widely accepted as fundamentally correct (Whaples, Robert, "Where Is There Consensus among American Economic Historians? The Results of a Survey on Forty Propositions" Journal of Economic History 55 (1): 139–154, 1995).   

Many Americans seem willing to trade their freedom for economic comforts and simultaneously bind their neighbors who would maintain their freedoms and yet evidence of that enslavement is abundant.  We have given the federal government power to dictate to us the type of health insurance we buy, the fuel efficiency of cars we drive, the water flow of toilettes we flush, the light bulbs we switch on and the salt we eat.  What freedoms will we lose in the coming year in the name of collective progress?

Read more!

Tuesday, April 20, 2010

The Nanny State and Salt

Principles textbooks teach that markets are generally the best way to organize economic activity but that markets sometimes fail because of externalities, public goods, market power and informational asymmetries.  In these cases, government intervention may increase societal welfare.  The Food and Drug Administration is about to regulate the sodium content of food. 
The Food and Drug Administration is planning an unprecedented effort to gradually reduce the salt consumed each day by Americans, saying that less sodium in everything from soup to nuts would prevent thousands of deaths from hypertension and heart disease. The initiative, to be launched this year, would eventually lead to the first legal limits on the amount of salt allowed in food products.

The government intends to work with the food industry and health experts to reduce sodium gradually over a period of years to adjust the American palate to a less salty diet, according to FDA sources, who spoke on condition of anonymity because the initiative had not been formally announced.

Officials have not determined the salt limits. In a complicated undertaking, the FDA would analyze the salt in spaghetti sauces, breads and thousands of other products that make up the $600 billion food and beverage market, sources said. Working with food manufacturers, the government would set limits for salt in these categories, designed to gradually ratchet down sodium consumption. The changes would be calibrated so that consumers barely notice the modification.
What market failure justifies the "complicated" (and expensive) government intervention into the food processing market?
Replace this text with...
Read more!

The Tea Party and the Ricardian Equivalence Hypothesis

People in the Tea Party movement believe that the government has grown too large and that taxes are too high.  Their interpretation of Bush and Obama administrations' policies has created consternation among most democrats and many republicans.  Most recently, President Obama described his frustration with tax protesters ("Obama says he's amused that Tea Partiers haven't thanked him for tax cuts").
MIAMI – President Barack Obama said Thursday that he's amused by the Tea Party tax protests that took place around Tax Day and that contrary to claims of demonstrators, he has cut taxes.

"You would think they'd be saying thank you," he said at a fundraiser in Miami.
Setting aside any debate about the impact of the administration's policy until now, the president does not seem to be as farsighted as members of the Tea Party who realize that tax rates must rise to pay for a sustained increase in government expenditures. 
In 1974, Robert Barro published the "Ricardian Equivalence Hypothesis" which states that interest rates and aggregate demand do not change based on funding of government expenditures by taxes or debt.  A tax cut today will create a deficit that must be paid in the future and tax payers respond to cuts in taxes with an equivalent increase in savings. 

Today's economic outlook differs from the conditions in the hypothesis.  We have not replaced tax funding of government expenditures with debt funding.  Instead, the administration and the Congress have dramatically raised government spending and expanded healthcare entitlements creating what appears to be a permanent increase in government expenditures.  Under these conditions, a permanent increase in government expenditures would increase interest rates and not increase aggregate demand.  Tea Party members rationally conclude that their taxes will increase in the future.

Read more!

Thursday, April 15, 2010

Comparing Unemployment and Initial Claims of Four Recessions

The economy is growing at a moderate rate according to testimony given by Fed Chairman Ben Bernanke (Greg Robb, "Fed's Bernanke sees moderate recovery ahead," Market Watch, April 14, 2010). 
In testimony before the Joint Economic Committee of Congress, Bernanke said private demand would be sufficient to replace the diminishing government stimulus and inventory adjustment that have spurred growth in the past six months.

"On balance, the incoming data suggest that growth in private final demand will be sufficient to promote a moderate economic recovery in coming quarters," the top U.S. central banker said.

Continuing high unemployment is the fly in the recovery honey.  Today's "Unemployment Insurance Weekly Claims Report" added another data point suggesting that improvements in the job market will be at a snails pace. 
In the week ending April 10, the advance figure for seasonally adjusted initial claims was 484,000, an increase of 24,000 from the previous week's unrevised figure of 460,000. The 4-week moving average was 457,750, an increase of 7,500 from the previous week's unrevised average of 450,250.
The three graphs at the top of the post compare the movement of the unemployment rate and four-week moving average of initial unemployment claims of the current recession with each of the previous three recessions.  The graphs begin six weeks before each recession began and show that the three previous recessions had lower unemployment rates and initial claims than the current recession after 125 weeks. 

Read more!

Wednesday, April 14, 2010

The NBER's Business Cycle Dating Committee

Economists at the National Bureau of Economic Research have long conducted research on the business cycle that included dating the beginning and end of recessions using a large number of economic indicators.  Overtime, their more sophisticated statistically driven dating process has replaced a rule of thumb that defines a recession as two or more consecutive quarters of contraction of GDP that ends with a resumption of growth of GDP.  They are notoriously careful and slow at the dating process, in this case an indicator of good science.  The act of not pronouncing the end of the recession does not mean that it is not over.  When they do name a date for the end of the recession, the announcement may say that it ended a year earlier.  The NBER April 12, 2010 memo reads       
The Business Cycle Dating Committee of the National Bureau of Economic Research met at the organization’s headquarters in Cambridge, Massachusetts, on April 8, 2010. The committee reviewed the most recent data for all indicators relevant to the determination of a possible date of the trough in economic activity marking the end of the recession that began in December 2007. The trough date would identify the end of contraction and the beginning of expansion. Although most indicators have turned up, the committee decided that the determination of the trough date on the basis of current data would be premature. Many indicators are quite preliminary at this time and will be revised in coming months. The committee acts only on the basis of actual indicators and does not rely on forecasts in making its determination of the dates of peaks and troughs in economic activity. The committee did review data relating to the date of the peak, previously determined to have occurred in December 2007, marking the onset of the recent recession. The committee reaffirmed that peak date.

Replace this text with...
Read more!

Tuesday, April 13, 2010

Doctor Shortage

HT Drudge Report)  Suzanne Sataline and Shirely S. Wang, Wall Street Journal writers report that recently passed healthcare reform legislation will result in a 150,000 doctor shortage by 2025 in "Medical Schools Can't Keep Up." 
The greatest demand will be for primary-care physicians. These general practitioners, internists, family physicians and pediatricians will have a larger role under the new law, coordinating care for each patient.

The U.S. has 352,908 primary-care doctors now, and the college association estimates that 45,000 more will be needed by 2020. But the number of medical-school students entering family medicine fell more than a quarter between 2002 and 2007.

A shortage of primary-care and other physicians could mean more-limited access to health care and longer wait times for patients.

Proponents of the new health-care law say it does attempt to address the physician shortage. The law offers sweeteners to encourage more people to enter medical professions, and a 10% Medicare pay boost for primary-care doctors.
The article states that the number of medical resident positions will be a bottleneck in minting new doctors but misses a major point.  Long term shortages in the production of any good or service is a sign of government regulation.  The government should not need to offer "sweeteners" to lure students into medical school.  Wages should be sufficient sweetener.  The shortage of doctors will result in non price rationing of healthcare.  One cost is that those who value the service the most are not necessarily those who end up with the rationed service.  Queuing will almost certainly be a rationing mechanism.  Waiting is time and time is money.  Healthcare reform will cost middle income households. 

Read more!

Monday, April 12, 2010

Can Reduction in School Funding Cost Taxpayers?

(HT Drudge Report)  Government budgets from the local to the federal level are bleeding red ink and many new proposals are being considered.  The Klamath County School District in Klamath Falls, Oregon is considering a four day school week as a way to save $6.3 million dollars or about 10% of the budget.  Apparently, the budget cuts would largely come from wages paid to classified staff: teaching assistants, cooks, custodians, secretaries, bus drivers, etc.  These workers are understandably concerned about the proposed cuts.

I have a somewhat different concern.  While the district will reduce expenditures students, parents and other taxpayers may be made worse off.  The student work week has evolved to fit around a traditional nine to five, Monday through Friday work week.  Has evolved efficiently?  If it has, then some thought was given to the length of time that children can learn during a day.  I am not sure students can remain focused during a longer school day.  It also seems plausible that the new school week will cost parents, the tax payers, more in increased baby sitting costs and loss wages than the district saves in expenditures.  Productivity of workers outside of the school district may decline as parents struggle to mange their children's activities from work.  Finally, if learning does decline, society may lose some of the positive externalities associated with education such as more skilled workers earning higher incomes. 
Replace this text with...
Read more!

Friday, April 9, 2010

Shughart on Healthcare Reform

William Shughart of the Beacon has written a very good article titled "ObamaCare will Make Employees and Employers Worse Off" about the impact of recently enacted healthcare reform on low skilled workers and their employers.  The Beacon is the blog of the Independent Institute and students of economics, law should spend time at the site.  Shughart describes the reforms as a constraint on the wage and benefit negotiations between employer and employees.  This discussion should have a familiar ring to principles students who have studied price floors and ceilings; they too are constraints. 
The costs of the mandate will fall most heavily on employees now earning incomes at or near the minimum wage. Since their pay cannot be cut, some will be priced out of jobs altogether if their employer also is required to provide health insurance for them.

Employees – especially younger workers in good health – likewise will be prevented from choosing jobs that pay high wages but do not offer a health insurance benefit they often rationally do not value highly. And they will be forced to pay for coverages they do not need and for which they otherwise would not be willing to pay.

The compensation package heretofore determined in a competitive labor market has resulted from mutually agreeable bargains between employers and employees. Depending on worker preferences over wage and non-wage benefits, employers had incentive to offer mixes of the two that allowed them, at least cost, to attract and retain people in the numbers and skills of which maximized their profits.

At least one element of that package – health insurance – no longer will be subject to negotiation. Labor markets accordingly will be less able to match workers with jobs efficiently. Both therefore will be made worse off. We can thus expect permanently higher unemployment rates and an economy that is less able to adapt to the socialist policy initiatives that still loom on the Obama administration’s agenda.
I agree with his economic analysis but if I were to use a word to describe The Obama administration's healthcare policy it would be fascist rather than socialist.  Robert Higgs provides a useful definition of fascism in "Crisis and Leviathan."  I retain his italicization; the quotations in the paragraph are from Charlotte Twight, "America's Emerging Fascist Economy."
Alone among collectivist systems. fascism preserves private property, but "capitalism is turned inside out in this unlikely union."  Fascism recognizes people's desire to possess privated property and admires the strength of the profit motive, but it "uses these features of capitalism [only] insofar as they do not conflict with the national interest as formulated by fascism's political authorities."  Every part of economic life is ideologically, constitutionally, and legally vulnerable to governmental control.  Hence "fascism tolerates the form of private ownership at the government's pleasure, but it eliminates any meaningful right of private property."  It is "a bogus capitalism indeed, a sham deferral to individual economic rights readily nullified whenever political leaders deem it expedient."
Wether socialism or fascism best describe the policy, the policy is the abrogation of individual economic freedom in favor of state directed collectivist actions, and, in the words of Hayek, it is "The Road to Serfdom."

Read more!

Thursday, April 8, 2010

Growing Deficits

As is often the case, the financial crisis is morphing into a government debt crisis which is made worse by America's aging population.  At both the federal and state level, our elected officials have enticed our votes by making promises of services that they cannot deliver.  A study commissioned by Governor Arnold Schwarzenegger and prepared by graduate students at Stanford University estimates that California's public pension funds are underfunded by more than $500 billion ("Study: California Public Pensions Underfunded by Over $500B").  The 2009 Social Security and Medicare Trustees Reports show combined unfunded liability of almost $107 trillion dollars ("Social Security and Medicare Projections: 2009").  General revenue transfers to Social Security and Medicare were projected to rise from 13% of tax revenues in 2010 to 27% in 2020 before health care reform. 

Federal Reserve Chairman Ben Bernanke said that voters faced a choice between higher taxes or lower services ("US faces 'difficult' tax choices: Bernanke").
"Inevitably, addressing the fiscal challenges posed by an aging population will require a willingness to make difficult choices,"

"To avoid large and unsustainable budget deficits, the nation will ultimately have to choose among higher taxes, modifications to entitlement programs such as Social Security and Medicare, less spending on everything else from education to defense, or some combination of the above."
Solutions that introduce strong market elements such as medical savings accounts and a private retirement option funded from social security payments are the only type of options that can both reduce costs and improve products.  Markets produce better products at a lower cost over time.  Compare mp3 players to a transistor radio, or a 1985 Ford to a 2010 Ford as examples.  Solutions that rely on government directed programs will either reduce services by political choice or, given the reluctance of elected representatives to cut services, increase government deficits.  Higher taxes combined with bigger deficits will limit economic growth. 
Replace this text with...
Read more!

Tuesday, April 6, 2010

Barro on Economic Recovery: Market or Government Led?

Markets trump government in the ability to create wealth and prosperity through individual liberty and responsibility.  That is the reason that nearly all economist strongly support reliance on markets for the provision of goods and services.  It is ironic that many who profess a desire to see our nation rely more on market and less on government ordering of resource allocation do not fully understand the vitality of markets.  True the unemployment rate has stagnated at 9.7% as the recession is ending but rather than taut the ability of markets to adapt, they instead focus on problems government policies have caused and argue that the economy will not recover.

The economy will recover because of market adaptation.  Entrepreneurs will find profitable opportunities.  Investment will increase.  Unemployment will eventually fall and full employment will be reached.  Market led growth is not the question.  The question is did the Troubled Asset Relief Program (the bailout), the American Recovery and Reinvestment Act (the stimulus), health care reform, and other measures helped or hindered the recovery?

Robert Barro, one of the nation's best macroeconomists, provides some insights gleaned from studying how policy impacted economic recovery and growth during the Great Depression and WWII in "The Lessons of the Great Depression" published by FiveBooks

The first histories, often written by New Dealers, summarize the Great Depression as starting with the market crash that was greeted by a hands laissez-faire guided inspired policies of the Hoover administration, and ending with the transformation of the economy by the Roosevelt administration.  A variation of this history is that Roosevelt's fiscal policy was sound but too small and that the large deficits created by WWII finally lifted us out of the Great Depression.  Is a sound economy as simple as active fiscal policy?
Barro offers a different view.
It’s clear that a lot of the policies that were put into place were negative, but as to sorting out how important they were, that’s a much more challenging question. And I think Roosevelt at the time recognized ex-post that some of the things he tried were failures and then his attitude was, “OK, it’s a failure. I’ll stop doing it.” Which is actually pretty positive.

For example, some of the things he did was try to organize labour unions and also businesses essentially promoting monopoly – I don’t think that was a plus. He was trying really hard to keep wages and prices from falling with direct influence and that was a negative. The effect of the expenditure programs is less clear. In the mid-1930s with the New Deal there was an unusual amount of infrastructure-type of expenditures. But it’s not actually big enough to sort out in a statistical sense – to figure out how much it mattered in terms of the recovery after the trough in 1932-33. I don’t think we know that that was a mistake, but it’s not clear that it was all that important.
He notes that war expenditures were large enough to be statistically measurable. 
I don’t think you can reliably say what the effect is. But conceptually you’d expect the wartime spending to have a bigger effect for various reasons on the GDP than the equivalent amount of expenditure in a non-war situation. And the wartime effect you can estimate pretty precisely, and the multiplier is clearly less than one, even in World War Two – it’s in the order of 0.6, 0.7, something like that.
Barro does not believe that the stimulus was good policy.
I think the stimulus package was very stupid; it was awful. It’s just a tremendous waste of money and it’s going to cause some trouble in terms of a bigger public debt; it’s just wasting resources. But the more important thing is the financial system, and the housing related aspects. So on that, despite a lot of floundering around, mostly I think what they were doing is in the right direction. I think they made a big mistake by not bailing out Lehman Brothers – I think they recognized that two days later. That was Paulson’s individual fault and responsibility from what I can gather.

Read more!

Thursday, April 1, 2010

The Obama Energy Plan

The last few days have had interesting news regarding climate change and the regulation of carbon dioxide.  I will start with President Obama's new energy plan.  Yesterday, the president announced his administration's new energy program that potentially could increase drilling for offshore oil.  He explains that limited drilling is a bridge to the future as new energy sources are developed.  It is a Goldilocks plan that allows or restricts drilling in areas depending on environmental sensitivity.  He claims the plan walks a nonpartisan, science driven line toward energy independence while chiding critics from the left and right who are apparently neither nonpartisan or scientific.  A few paragraphs from President Obama's speech are provided below.  The full transcript is found in "Obama’s Remarks on Offshore Drilling" provided by the New York Times.
There will be those who strongly disagree with this decision, including those who say we should not open any new areas to drilling. But what I want to emphasize is that this announcement is part of a broader strategy that will move us from an economy that runs on fossil fuels and foreign oil to one that relies more on homegrown fuels and clean energy. And the only way this transition will succeed is if it strengthens our economy in the short term and the long run. To fail to recognize this reality would be a mistake.

On the other side, there are going to be some who argue that we don't go nearly far enough; who suggest we should open all our waters to energy exploration without any restriction or regard for the broader environmental and economic impact. And to those folks I've got to say this: We have less than 2 percent of the world's oil reserves; we consume more than 20 percent of the world's oil. And what that means is that drilling alone can't come close to meeting our long-term energy needs. And for the sake of our planet and our energy independence, we need to begin the transition to cleaner fuels now.

So the answer is not drilling everywhere all the time. But the answer is not, also, for us to ignore the fact that we are going to need vital energy sources to maintain our economic growth and our security. Ultimately, we need to move beyond the tired debates of the left and the right, between business leaders and environmentalists, between those who would claim drilling is a cure all and those who would claim it has no place. Because this issue is just too important to allow our progress to languish while we fight the same old battles over and over again.

For decades we've talked about how our dependence on foreign oil threatens our economy -– yet our will to act rises and falls with the price of a barrel of oil. When gas gets expensive at the pump, suddenly everybody is an energy expert. And when it goes back down, everybody is back to their old habits.

The speech seemed condescending and relied on a demagogic call for energy independence.  Despite decades of subsidies for "clean" energy, it isn't expanding as a percentage of our total energy production.  Subsidizing "clean" energy is a bridge to nowhere, not to a brighter future.  I for one don't want "clean" energy if it is more expensive when factoring in environmental costs and this is the rub.  My guess is that a great many environmentalists believe that carbon emission is a bigger environmental danger than spills from drilling and shipping oil.  The IPCC, Nobel laureate Al Gore, and Obama administration officials have warned of catastrophic economic consequences of environmental inaction. 

From the right, critics claim that increased carbon emissions are not harmful, that data has been compromised, misused and tortured.  The evidence of higher concentrations of carbon dioxide leading to catastrophic warming are unquestionably less robust than six months ago (For an example of data problems see Christopher Horner, "Climategate: Three of the Four Temperature Datasets Now Irrevocably Tainted," Pajamas Media).  If being an environmentalist means that you are concerned with having a healthy and beautiful environment, I am one, but I believe that in the United States we should focus on reducing traditional pollutants and better forest management. 

The production of "clean" energy ignores an important fact.  Every type of energy production pollutes.  I don't like the land intensive nature of ethanol production and wind turbine electrical power.  I am not sure that we have good enough data to monetize our tastes. 

Read more!