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Brooks Wilson's Economics Blog: December 2010

Thursday, December 30, 2010

Michelle Malkin and the Nanny State

Michelle Malkin hits the nail on the head in the second paragraph of “Government Duties vs. Big Nanny Moralizing.”

-- New York City Mayor Michael Bloomberg. Two feet of snow paralyzed trains, buses, plows and emergency vehicles in the Big Apple this week. Perhaps if Bloomberg -- the nation's top self-appointed municipal food cop -- spent more of his time on core government duties instead of waging incessant war on taxpayers' salt, soda, trans-fat and sugar intakes, his battered bailiwick would have been better equipped to weather the storm.

Besides Bloomberg, Malkin names of other officials who know how those they represent should live their lives and are willing to spend taxpayer money to force Americans into that straight jacket lifestyle.  Her list includes Transportation Secretary Ray LaHood, the city of Cleveland, the architects of Obamacare, Michelle Obama, Republican Mike Huckabee.   

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Carbon Regulation

Kimberly Schwandt, a FoxNews writer, reports on Obama administration efforts to control carbon emissions through EPA mandates rather than through legislation in “White House Plans to Push Global Warming Policy, GOP Vows Fight”.  The path was cleared for the EPA to regulate carbon emissions by the EPA’s “endangerment findings” as required by the Clean Air Act.  (I provide some thoughts on the “endangerment findings” here.).  The EPA mandates are controversial because the advocates of carbon regulation, including the administration, were unable to pass legislation to establish regulatory authority and because the Clean Air Act was not designed to regulate climate change.  Schwandt reports
After failing to get climate-change legislation through Congress, the Obama administration plans on pushing through its environmental policies through other means, and Republicans are ready to put up a fight.

On Jan. 2, new carbon emissions limits will be put forward as the Environmental Protection Agency prepares regulations that would force companies to get permits to release greenhouse gases under the Clean Air Act.

Critics say the new rules are a backdoor effort to enact the president's agenda on global warming without the support of Congress, and would hurt the economy and put jobs in jeopardy by forcing companies to pay for expensive new equipment.
She later quotes Ken Green of the American Enterprise Institute who claims that carbon regulation will kill jobs, and Dan Howells of Greenpeace who argues the opposite.  Green is aiming at the right target but misses the bull’s eye when he said,
They are job killers. Regulations, period -- any kind of regulation is a weight on economy. It requires people to comply with the law, which takes work hours and time, which reduces the profitability of firms. Therefore, they grow more slowly and you create less jobs.
The first issue is one of semantics and is probably not important.  The creation of property rights can be considered regulation, and I would bet dollars to donuts that Green would agree that good property rights are important.

The second issue is of more weight.  Green is correct in observing that carbon regulation makes firms less profitable by increasing the cost of producing goods and services.  That is exactly what the regulations are designed to do.  Howells is also correct in stating that the regulations will add jobs.  Companies and industries that find adjustment costly will shrink and those that find it less costly will grow. In the long run, we will experience full employment.

The real question is whether carbon regulation makes us better off.  If carbon pollution is a real threat to future wealth creation and the regulation effectively reduces our carbon emissions and other countries do not free ride off our efforts by increasing their carbon emissions, then carbon regulation will make us better off.  I have problems with all three clauses, particularly the last two.

The timing of the new carbon regulations is also bad.  Unemployment is still high, many businesses were financial weakened from the Great Recession, and those same business are attempting to internalize health care reform.  Others are trying to digest regulatory reform of the financial sector, regulatory reform of the food sector, and possibly new regulation of the Internet.  While carbon regulation may not kill jobs, it will certainly delay our return to something akin to full employment.

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Wednesday, December 29, 2010

The Japanese Fiscal Crisis

My thoughts are the outcrop of reading Megan McArdle’s article “Japan and the Limits of Keynesianism” and following her links.  The post war Japan economy experienced strong economic growth culminating in the 1980’s.  Real estate and stock prices tripled.  Like China today, Americans both marveled and feared its strength but weaknesses of an underdeveloped financial sector unraveled the Japanese mystic.

In late 1989, the Japanese Finance Ministry raised interest rates and asset prices collapsed, beginning Japan’s “Lost Decade.”  The financial weaknesses of many highly indebted, poorly run corporations were exposed but they were sheltered from the winds of creative destruction by a government that deemed them and the backs that loaned to them as too big to fail.    The government responded with Keynesian deficit spending to try to kick start the economy, but with little positive effect.  The private sector financial crisis turned into a government sector fiscal crisis. 

How bad is the Japanese fiscal crisis?  They have the highest debt-to-GDP ratio in the developed world and over half the current budget is debt financed.  Megan quotes views of two other writers, Felix Salmon and Matt Iglesias, and then gives her own.Salmon implicitly assumes that cutting deficits is the proper policy and cannels one of my biggest fears.
The lesson here, I think, is that it’s very, very hard for a government to enact a serious fiscal adjustment unless and until the bond market forces its hand. The Brits are trying, of course — and we’ll see whether or not the coalition government can succeed. But as we saw with George W Bush, the fiscal rectitude of one administration can be more than wiped out during the course of the next.

Even now, with the attention of the world more concentrated on sovereign fiscal issues than ever, the Japanese government can still contrive to raise agricultural subsidies by 40% and send child-care payments soaring, including payments to families who don’t need the money. It’s even getting rid of highway tolls. Oh, and it’s cutting the corporate tax rate.

From a bond-market perspective, this basically just means an ever-greater supply of JGBs: we’re still a very long way from any real credit risk, given the political power of the owners of those bonds. But as a lesson in fiscal political economy, Japan is much more worrisome. Everybody agrees that the budget must be cut and the country put onto a sustainable fiscal course. But no one is capable of doing that, and instead they go in the opposite direction entirely. It’s the see-no-evil easy choice to make. And I suspect that we’ll see continue to see similar choices being made in other highly-indebted countries around the world. Including the US.
Matt Iglesias pushes for increased immigration and printing money.
Normally, though, we expect human beings and the organizations they run to respond to incentives. If people cease wanting to buy Japanese debt, then the Japanese government will find ways to issue less debt. But demand for Japanese debt is high, so why wouldn’t the government keep issuing more?

That’s not to say these endless debts are optimal policy for Japan. What they ought to be doing is trying to have more economic growth. Finance their government with a bit less debt and a bit more printing of yen. That’ll create elevated inflation expectations and spur growth. More immigrants wouldn’t hurt either. I think the real mystery is why unconstrained governments are so reluctant to really put the pedal to the metal.
I agree that pushing immigration could help Japan’s aging population with the infusion of a little young blood.  The population is declining and the median woman is 46 years old.  I hope that he is correct in assuming that the government will solve the budget puzzle when Japanese stop buying debt and don’t agree with his “helicopter drop” plan to print money.  Having spent a couple years in Argentina during an inflationary binge, I have little confidence that inflation will produce growth, even in a deep recession.  It will lower long run growth.  I do believe that Japan pushed the pedal to the metal, but instead of unleashing 400 horse power of policy muscle, found instead 120 horses pulling an economy with four flat tires. 

McArdle focused on the limits of Keynesian fiscal policy.
Japan has simply reached the limits of Keynesian policy in an economy which has never managed to jolt itself back up to a healthy rate of growth.  Demographics is obviously a big contributor to that slow growth, and there are a whole host of secondary factors one could nominate, but whatever the reason, they have now had two decades of anemic growth, which they have fitfully attempted to address with stimulus.  Maybe not enough stimulus, maybe badly designed, but they've certainly tried to follow the basic Keynesian playbook:  borrow money and spend it when times are bad, in the hopes that you can bring back growth.

But for Japan, at least, the growth has not materialized.  Few economists would advise undertaking a fiscal adjustment, on the scale that Japan requires, in the face of the current crisis.  The problem is, there hasn't been a good time for retrenchment in 20 years.  I can't blame the politicians for trying to restore some semblance of normal growth in the run-up to elections.  But at some point, they're going to have to cut back, whether or not it's a good time. 
All the authors offered insights into policy that our policymakers should consider to avoid a lost decade.

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Tuesday, December 28, 2010

Various Economists on Scrooge, Charity and Coercion

Paul Krugman began “The Humbug Express” with an allusion to Dickens’ "A Christmas Carol” in which he compared Newt Gingrich and other Republicans to the old Ebenezer Scrooge because they oppose various programs that program supporters claim help the needy.  It is an unfortunate allusion because Krugman gets it wrong, distracting from his main point that the Obama administration has not created an explosion of government jobs as claimed by the “well-developed right-wing media infrastructure in place to catapult the propaganda’…to a wide audience where it becomes part of what ‘everyone knows’.”.  Scrooge’s sin was a personal lack of care and attention to friends and family as well as the poor and not a lack of support for government programs. 

It is foolhardy to try to impute twentieth century sense and sensibility into a nineteenth century man, but I will “rush in where Angels fear to tread.”  The old Scrooge was ungenerous and believed that paying taxes to support government programs relieved him of the responsibility of assisting the poor.  When Scrooge was asked by two gentlemen to give to charity, he replied,
`Are there no [debtors] prisons?' asked Scrooge.

`Plenty of prisons,' said the gentleman, laying down the pen again.

`And the Union workhouses?' demanded Scrooge. `Are they still in operation?

`They are. Still,' returned the gentleman, `I wish I could say they were not.'

`The Treadmill and the Poor Law are in full vigour, then?' said Scrooge.

`Both very busy, sir.'

`Oh! I was afraid, from what you said at first, that something had occurred to stop them in their useful course,' said Scrooge. `I'm very glad to hear it.'

…`I don't make merry myself at Christmas and I can't afford to make idle people merry. I help to support the establishments I have mentioned -- they cost enough; and those who are badly off must go there.’
Did the unrepentant Scrooge support the government programs to aid the poor or did the state coerce his contributions?  Dickens does not describe his political opinion beyond having Scrooge observe that “they [welfare programs] cost enough.  I am inclined to believe that his participation was coerced.  David Henderson distinguishes between coercion and compassion in “The Lesson of Ebenezer Scrooge.”
Indeed, the modern Scrooge, instead of asking, “Are there no prisons?” would ask, “Is there no Medicaid? Are there no food stamps?” The modern Scrooges, in short, are those who advocate government programs for the poor rather than charity for the poor.

But aren’t government programs for the poor a form of charity? That issue came up in the sales-tax controversy. The short answer is no. But the longer answer is worth stating also. During the campaign over the measure to increase the sales tax, my co-leader, Lawrence Samuels, and I were in a debate with two doctors from Natividad Hospital, which was to receive the large subsidy if the sales tax measure passed. The 200-person audience was composed almost entirely of Natividad workers and their families and friends. As you might expect, they were fairly hostile to Lawrence and me. At one point Melissa Larsen, one of the doctors on the other side, said that increasing the tax and giving the money to the hospital was “the compassionate thing to do.” I ignored her gall in calling “compassionate” a tax that would clearly have benefited her personally. Instead I responded, “No, it’s not. It has nothing to do with compassion. If you gave your own money to the hospital, that would be compassionate. But taking other people’s money without their consent is not compassion; it’s coercion.”
There is an argument to be made for coercion.  The poor and destitute create a negative externality.  Many feel compassion for their suffering; others may wish to avoid seeing the poor out of a feeling of revulsion.  If most citizens experience this negative externality but free ride off the compassion or revulsion of others who donate to the relief of the poor then coercion may be justified. 

In “Tea Partiers and the Spirit of Giving” Arthur Brooks claims that there is a measurable correlation between a person’s belief in the redistributionist role of the state and a charitable giving.

When it comes to voluntarily spreading their own wealth around, a distinct "charity gap" opens up between Americans who are for and against government income leveling. Your intuition might tell you that people who favor government redistribution care most about the less fortunate and would give more to charity. Initially, this was my own assumption. But the data tell a different story.

The most recent year that a large, nonpartisan survey asked people about both redistributive beliefs and charitable giving was 1996. That year, the General Social Survey (GSS) found that those who were against higher levels of government redistribution privately gave four times as much money, on average, as people who were in favor of redistribution. This is not all church-related giving; they also gave about 3.5 times as much to nonreligious causes. Anti-redistributionists gave more even after correcting for differences in income, age, religion and education.
The unrepentant Scrooge may not have been a Democrat but he certainly was not a small government antiredistributionist Republican. 

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Monday, December 20, 2010

Cogan, Taylor and Wieland on the Stimulus

Economists have been busy measuring the impact of fiscal stimulus on the economy.  In September, John Cogan, John Taylor, and Volker Wieland summarize empirical research in a Wall Street Journal article “The Stimulus Didn't Work.”  They examine two aspects of the American Recovery and Reinvestment Act of 2009, transfer payments and tax cuts, and government spending; they find that neither provided much stimulus. 

The transfer payments and tax cuts fail to cause a sustained increase in consumption.  They write
This is exactly what one would expect from "permanent income" or "life-cycle" theories of consumption, which argue that temporary changes in income have little effect on consumption. These theories were developed by Milton Friedman and Franco Modigliani 50 years ago, and have been empirically tested many times. They are much more accurate than simple Keynesian theories of consumption, so the lack of an impact should not be surprising.
The authors also observe that the Bush administration’s Economic Stimulus Act of 2008 failed for the same reason.
Indeed, one need not have looked any further than the Bush administration's Economic Stimulus Act of 2008 to find plenty of evidence that temporary payments of this kind would not jump-start consumption. That package made one-time payments and rebates to people in the spring of 2008, but, as the chart shows, failed to stimulate consumption as had been hoped. Some argued that other factors such as high oil and gasoline prices caused consumption to fall during this period and that consumption would have been even lower without the stimulus, but no significant impact of these rebates is found even after controlling for oil prices.
They say less about government expenditures because, at the time they wrote, those expenditures were small.
Direct evidence of an impact by government spending can be found in 1.8 of the 5.4 percentage-point improvement from the first to second quarter of this year. However, more than half of this contribution was due to defense spending that was not part of the stimulus package. Of the entire $787 billion stimulus package, only $4.5 billion went to federal purchases and $17.7 billion to state and local purchases in the second quarter. The growth improvement in the second quarter must have been largely due to factors other than the stimulus package.
In a second article by Cogan and Taylor, “The Obama Stimulus Impact? Zero,” also published in the Wall Street Journal but with fifteen months more data, examines federal spending and transfers to state and local governments.  They conclude that government expenditures have done little to stimulate economic activity.  They provide an explanation for the program’s lack of efficacy.
Recently released Commerce Department data show that of the $862 billion stimulus package, the change in government purchases at the federal level has, thus far, been extremely small. From the first quarter of 2009 through the third quarter of 2010, government purchases have increased by only 3% of the $862 billion ($24 billion). Infrastructure spending increased by an even smaller amount: $4 billion. In a $14 trillion economy, these amounts are immaterial.
Of the effectiveness of transfers to states and local governments they write
The bottom-line is the federal government borrowed funds from the public, transferred these funds to state and local governments, who then used the funds mainly to reduce borrowing from the public. The net impact on aggregate economic activity is zero, regardless of the magnitude of the government purchases multiplier.

This behavior is a replay of the failed stimulus attempts of the 1970s. As Gramlich found in his work on the antirecession grants to state and local governments: "A large share of the [grant] money seems likely to pad the surpluses of state and local governments, in which case there are no obvious macrostabilization benefits."

The implication of our empirical research and Gramlich's is not that the stimulus of 2009 was too small, but rather that such countercyclical programs are inherently limited. The lesson is to beware of politicians proposing public works and other government purchases as a means to stimulate the economy. They did not work then and they are not working now.
Those economists supporting the stimulus will find evidence of its success, but I do not believe that it will counterbalance evidence showing its limitations.  The bulk of economic research long ago concluded that fiscal stimulus was ineffective in recessions of average length and depth.  It looks as if new research will find that fiscal stimulus is also ineffective in longer deeper recessions, but the price is real.  The deficit is wider and more difficult to close and the debt is mounting. 

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Wallison and Pinto on the FHA

There were many factors contributing to the housing bubble, some by the private sector and others public.  One mistake made by the federal government was encouraging loans to unqualified buyers.  The Clinton administration actively worked to lower lending standards for home loans. The administration also imposed mandates on Freddie Mac and Fannie Mae, two government sponsored enterprises, that forced them to purchased subprime loans and mortgage backed securities built from subprime loans.  The Bush administration strengthened the mandates. 

Congress also played a major role, keeping regulation of the GSEs weak and encouraging loans in their districts ignoring risks to the financial sector.  Has the bursting of the financial bubble, financial crisis, and impending fiscal crisis given incentives to lawmakers to act in a more circumspect manner?Peter J. Wallison and Edward J. Pinto offer evidence that Obama administration and lawmakers have learned little in “How the Government Is Creating Another Housing Bubble.”  In part, they write
Since the federal takeover of Fannie and Freddie in 2008, the government-sponsored enterprises’ (GSEs’) regulator has limited their purchases to higher-quality mortgages. Affordable housing requirements Congress adopted in 1992 and the Department of Housing and Urban Development (HUD) administered until 2008 have been relaxed. These had required Fannie and Freddie to buy the low-quality mortgages that ultimately drove them into insolvency and will cause enormous losses for the taxpayers.

The latest regulatory change does not reduce the total losses that taxpayers will suffer from HUD's policies; those losses, estimated at about $400 billion, are baked in the cake. But the higher lending standards now required of Fannie and Freddie should reduce future losses.

Not so for the FHA. While everyone has been watching Fannie and Freddie, the administration has quietly shifted most federal high-risk mortgage initiatives to FHA, the government's original subprime lender. Along with two other federal agencies, FHA now accounts for about 60 percent of all U.S. home purchase mortgage originations. This amounts to more than $1 trillion and is rising rapidly. The administration justifies this policy by saying it is necessary to support the mortgage market, yet borrowers are once again receiving high-risk loans…

The Dodd-Frank Act, however, exempts FHA and other government agencies from appropriate standards on mortgage quality. This will give low-quality mortgages a direct route into the market once again; it will be like putting Fannie and Freddie back in the same business, but with an explicit government guarantee.

For example, thanks to expanded government lending, 60 percent of home purchase loans now have down payments of less than 5 percent, compared to 40 percent at the height of the bubble, and the FHA projects that it will increase its insured loans total to $1.34 trillion by 2013. Indeed, the FHA just announced its intention to push almost half of its home purchase volume into subprime territory by 2014-2017, essentially a guarantee to put taxpayers at risk again.

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Thursday, December 16, 2010

A Review of Levitt’s Book Review

Steven Levitt’s “Review of Drug War Heresies by MacCoun and Reuter” published in the Journal of Economic Literature (June 2003) is a great example of a critical review by an economist.  Levitt displays good writing, knowledge of the topic, enthusiasm for good scholarship and a critical eye. 

Levitt ranks the quality of the book.
MacCoun and Reuter’s book turns out to be first-rate scholarship. It is an incredibly carefully researched, thoughtful book—far and away the best scholarship I have ever encountered on the subject. This is a book I would recommend to economists interested in researching the area, to those just generally interested in the topic, and to cocktail party bores who mindlessly preach either the necessity of legalization or the inevitability of social ruin if legalization were to occur.
A good economist must be critical, even of highly valued work.
Their conclusions are both prudently and disappointingly guarded. I cannot blame them, as scholars, for being unwilling to go far beyond their data in speculating as to what optimal drug policy should be. Nevertheless, having read this far I was hoping for more, if only so that I could criticize it as pure conjecture on their part.
Levitt discusses cocaine use and regulation to illustrate the difficult tradeoff society faces between the violence resulting from prohibition and decriminalization.  Although he discusses some costs of the War on Drugs in an earlier part of the review, but does not explicitly address cost of prohibition for cocaine; it is assumed.  He also argues that “lightly regulated decriminalization” would result in a much lower price and initial usage.  To illustrate the human cost, Levitt quotes James Q. Wilson.
…tobacco shortens one’s life, cocaine debases it. Nicotine alters one’s habits, cocaine alters one’s soul. The heavy use of  crack, unlike the heavy use of tobacco, corrodes those natural sentiments of sympathy and duty that constitute our human nature and make possible our social life…
Levitt tentatively endorses a policy recommended by Becker, Grossman, and Murphy. 
There is, however, another policy alternative advocated by Becker, Grossman, and Murphy (2002) that appears sensible from an economist’s perspective, even though it has no demonstrative proponents in the public debate: legalization accompanied by very high taxes (designed to keep the price of cocaine at or above its current full price (i.e. monetary cost plus social stigma plus criminal justice risk) and increases in expected punishment for those who attempt to circumvent the taxes by selling illegally.  Such a regime would have the benefit of keeping consumption at or below current levels, but almost certainly with less violence associated with distribution, greater government oversight, less overall government expenditure on criminal justice, and the potential to raise substantial government revenues. Such a policy is not addressed in this book, but deserves to be.
MacCoun and Reuter owe Levitt a small thank you.  Based on the review, I bought the book.

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Wednesday, December 15, 2010

The Stool Pigeon

Wendy McElroy, a research fellow at the Independent Institute, shares my concern about the use of radio-frequency identification tags (RFID) being used to track a person’s recycling (“Big Brother Is Watching You Recycle”).  Cleveland, Ohio, is following the British example by distributing 25,000 RFID outfitted garbage bins.  The justification is a cleaner environment through recycling, but this logic is flawed—the cost to recycle exceeds the value of the recycled material for any reasonable value of labor.(1)  City managers are not concerned with the off budget value of our time.  They see our work as free labor, and as soon as fines are applied for noncompliance, their free labor becomes our forced labor.

McElroy concludes that cities are “in it for the money” based on Cleveland’s target of issuing 4,000 citations this year.  The RFIDs make noncompliance easier to detect.  I wonder what next year’s target will be.  

As bad as trash monitoring is, city managers’ intrusions will grow more bold.  From their perspective, they are wasting an opportunity for additional revenue enhancement.  Americans are too fat.  We also use too many drugs, both legal and illegal.  Our life styles drive up the government’s cost of our medical care.  Cities could install RFIDs into each household connected to the sewer system.  Equipped with chips to measure fat, sugar, salt, and drug use these chips could incentivize Americans with fines to lead healthier lives and increase revenues to our cities.  I propose that these chips be called stool pigeons, and the electronic information based citations, stool-Es. (1)  Hilary Benn, the UK’s Environment secretary noted that aluminum cans are worth $782 per ton.  If the average household member earns $20 per hour and is able to recycle a .5 ounce can every 5 seconds, the curbside cost of a ton of aluminum valued at $782 is $1,778.  This does not include the city’s cost to transport and sell the aluminum.
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Tuesday, December 14, 2010

Vernon Smith on QE2

Vernon Smith is a Nobel Laureate in Economics and one of my favorite economists.  He has written on the root causes of the housing bubble which ties into his experimental research on asset pricing.  In his Wall Street Journal article, “What Ben Bernanke May Be Thinking,” he identifies a common feature of the Great Depression and the Great Recession, questionable housing loan assets that have not been revalued, and suggests that Fed Chairman Ben Bernanke may be attempting to deal with this problem with Quantitative Easing 2 (QE2).
In both the Depression and the post-World War II era, recovery from a recession has been regularly signaled by an increase in housing investment. But new housing construction expenditures have remained stubbornly flat since the Great Recession was declared over in the second quarter of 2009.

Housing and aggregate demand have not recovered because nearly 15 million owners are estimated to owe about $771 billion more on their homes than they are worth. The banks are on the other side of this crunch, holding overvalued mortgage assets. This fuels doubt about the balance sheets of the big banks… …QE2 just might work if it is implemented as a surgical strike at the still-unresolved problems of negative equity in housing and banks. Mr. Bernanke's first round of quantitative easing in 2008-09 lifted about $1.2 trillion of shaky assets off the balance sheets of banks, replacing them with nearly a trillion dollars in excess reserve deposits. The second round will further expand these deposits.

So perhaps the Bernanke message here is for the banks to deploy those excess reserves to reset the value of their loan assets to current housing prices. They could do so by issuing new mortgages with lower principal amounts. While they would take short-term losses, this action could allay doubts about the value of the assets on bank balance sheets and would help the balance sheets of homeowners as well.

Is this what Mr. Bernanke is thinking? The rollout of QE2 was coupled with a Nov. 17 Fed announcement requiring the large banks to undergo another review of their capital and ability to absorb losses.

There is good reason for Mr. Bernanke to be worried.

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Monday, December 13, 2010

Student Loan Debt Consolidation

Following is a guest post by Emily Jones who can be contacted at debt consolidation.

Should students focus on debt consolidation to beat their credit hangover?

If you’re like any other American who is drowning in student loan and credit card debt, you need not fret. You just found the right site with the right information that can serve as a guide to eliminate all your debt problems. As the economic crisis continues to start forcing people to come across dire financial straits, a huge number of students are struggling to meet their financial obligations. The average college graduates in the US have bore $24,000 in student loan debt in the year 2009. But 2010 has turned USA into a debt-wracked place and there are some students who even carry a larger amount on their educational loan debts.

With the rise in the student loan defaults in the US and the rise in the unemployment rate, an increasingly large number of students are finding it tough to get through jobs. If you’re looking for ways to save money on your already existing debt, you require seeking help of debt consolidation strategies. But before taking the plunge, you need to know how it works. Read on to educate yourself on the details of debt consolidation and the reasons why it is considered as the most successful way of dealing with debts.

How does the Federal debt consolidation process work?

The US Department of Education is well-versed and experienced in the field of consolidating unpaid educational loan bills into a single and affordable monthly payment. Students are more vulnerable to facing financial crisis as most of them use their credit cards impulsively while shopping. With the rising educational costs in the US, there have been lots of students and parents who have financed their educational courses with the help of legal help from the US federal government. If you seek the help of federal student debt consolidation loan, you can consolidate all your master educational loans into a single loan, thereby reducing your monthly payments.

Are there any factors to be considered while deciding if debt consolidation is right for you?

While you’re taking a financial decision, it should always be a measured and an informed one. Yes, there are some factors that should be considered before deciding whether or not debt consolidation is right for you.

• Can you manage your monthly payments?

This should be the first consideration before consolidating your debts. If you see that you have trouble arranging your monthly payments and that you cannot use your deferment options, you may consider getting your loans consolidated by the Federal direct consolidation loan.

• Are multiple monthly payments stressing you out

If you have taken multiple educational loans and you are finding it difficult to manage the multiple due dates, you can seek help of the direct consolidation loans. This will restrict you to a single lending company.

• What are the interest rates on your loans like?

If the educational loans that you had taken carried variable interest rate, you may want to consolidate it through the Federal student consolidation loans. The interest rate on these loans is same throughout the term of the loan.

• How many payments are left on your educational loans?

If you check that you’re almost done with your payments or one or two more monthly payments may eliminate your debt burden, there’s no point in consolidating your debts. However, if you have lots of payments left, you can certainly look for debt consolidation.

How does a student benefit by consolidating his student loan debts?

A student can soon get back grip on his finances by taking help of the federal debt consolidation loan. This way he can contribute to the US economy in raising the number of students who can keep up with their monthly payments. Have a look at the benefits.

• Various repayment options: The borrowers of this kind of loan are usually students and hence they are bestowed with flexible repayment options. The students can easily choose from a number of repayment options as well as terms. The two most common plans used are Income Based Repayment Plan and Income Contingent Repayment plan. These plans are tailored to meet the needs of the students. They are even allowed to switch from one plan to another whenever they find it necessary.

• Single and affordable monthly payment: As you take the debt consolidation loan from the US Department of Education, you will only be liable to make the payments to the department of education. Thus, you’ll be relieved of the worries of multiple payments to multiple lenders.

• No minimum amount required for consolidating: While you will go for debt consolidation help, most often you will come across lending institutions that will require a minimum amount of accrued debts to qualify for consolidation. But with a Federal loan, there is no such option. With any amount of debt, you can consolidate them.

• Multiple deferment options: There are many student borrowers who have exhausted the deferment options on the educational loans that they had taken from the Federal government. You can easily renew the deferment benefits by consolidating your bills through federal debt consolidation loan.

• Revised monthly payments and interest rates: By taking a consolidation loan from the US Department of Education, you can ease out the stress on your budget by lowering your monthly payments. The minimum monthly payments that are charged by the feds on the consolidation loan are usually less than the combined minimum monthly payments on the government educational loans that a student has taken.

The economic downfall in the US has suddenly boosted the number of student loan borrowers who are finding it difficult to arrange their minimum payments. The USA Funds prevention program has been initiated with the aim of helping these struggling borrowers to avoid defaulting on their educational loans. This program is making them aware of the various repayment plans and how they can be benefited by Federal debt consolidation. They have also invested resources that will counsel the borrowers about the various options of consolidating their educational loan debts.

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The Tax Cut Compromise

The United States is mired in the drag ends of the recession caused by the financial crisis.  Our slow motion recovery has left labor markets week; unemployment currently flat lines at 9.8% with few prospects of rapid improvement.  The Fed has been aggressive in pursuing easy money policies, and thus far, the Obama administration and its Congressional allies have used fiscal stimulus, deficit spending, to combat low demand.  The November elections gave Republicans voice, and they prefer policies that keep marginal tax rates low, a long term growth plan.  Both the administration’s and Republicans’ plans would expand the deficit and national debt.  

The financial crisis, the ensuing bailouts, and the attempt to stimulate the economy through fiscal stimulus created a yawning deficit at a time when aging baby boomers’ demand on Social Security and Medicare are expected to create unsustainable deficits.  Most(1) economists agree that the government must bring the budget under control to avoid a fiscal crisis similar to that facing several European countries.  There is disagreement as to how to achieve this goal, but the government has three tools: it can cut benefits, raise taxes, and reform the programs to increase efficiency.  Economists who deem traditional fiscal policy effective generally believe that raising taxes or cutting benefits slow economic activity.

Policy makers and the economists who advise them must decide how to deal with the two problems.  Many economists believe that the government has a one to two year window of opportunity to use fiscal policy to boost demand for goods and services.  A great many other economists believe that the government should focus on the deficits and growing national debt first. The Obama administration and Congressional Republicans compromised on extending Bush era tax cuts for an additional two years.  The administration agreed to extend tax cuts for all Americans, including the wealthiest 2%, and lower the increase in the estate tax from 45% to 35% on estates greater than $5 million.  In return, Republican negotiators agreed to extend unemployment for an additional 13 months and lower employee taxes 2% for two years. 

The administration has placed its chips on stimulating demand by running deficits.  I believe this policy is risky because empirical support for fiscal stimulus is weak, and it creates even larger deficits and national debt as we enter a period of unsustainable levels of deficits and debts. 

The Republican negotiators have placed their chips on low marginal tax rates, a desirable condition for long term growth.  Many conservative pundits have suggested that the increased growth from the tax cuts will generate sufficient tax revenue to compensate for lost revenue from the tax cuts.  Few economists, even among those who favor extending the tax cuts, believe that they will generate net revenues.

Like most economists, I have problems with details of the compromise; after all, we like our ideas best.  I prefer low tax rates, institutional reform of Social Security and Medicare designed to strengthen market incentives, and budget cuts—large budget cuts. 

I could support the compromise if legislators avoid attaching other pork filled measures to the legislation that would further widen the deficit and expand our national debt.  It currently does not.  The Senate bill includes a one year extension of renewable energy grants that subsidize renewable energy companies (“Senate bill includes clean energy grant renewal”).  The bill also includes an extension of the 45 cent-per-gallon tax credit for blending ethanol and gasoline (“Senator Feinstein: Ethanol Tax Credit Included in Tax Compromise”).  If these renewable energy sources were worthwhile, they would not need subsidies from the government.  American economic might cannot be built on high cost energy.  

(1)  This is a weasel word alert.  I have been free with my use of weasel words like “most” and “many” because I have no idea as to where the consensus rests, but I believe that all the positions I describe are mainstream.

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Friday, December 10, 2010

A Rising Tsunami Capsizes All Boats?

President Kennedy said, “A rising tide lifts all boats,” to describe how an improving economy helps all economic agents.  The financial crisis of 2008 proved that the converse may be true as well; a tsunami of economic destruction capsizes all in its path.  The impact of the financial crisis on the Irish economy illustrates the destructive power of the crisis.  Ireland can be viewed both as a country and as a “state” within the European Union.  To add dimension to the comparison, I will briefly describe the governmental structure of the European Union and compare its economic size to United States and the size of the Irish nation to a state within our union.  Finally, I will suggest tentative lessons that voters in the United States might learn in dealing with the aftermath of our own financial tsunami. 

To paraphrase the CIA World Fact Book, the European Union less than a federation but more than a trade union.  It is beginning to show characteristics of a nation.  Like the United States, it has executive, legislative and judicial branches but their authority to impose policy on its constituent countries is much more limited than in the United States.  There are 27 countries in the European Union and these countries have a combined GDP of $14.43 trillion (Purchasing power parity, 2009 estimated), and population of 492 million.  The GDP of the United States is $14.12 trillion (Purchasing power parity, 2009 estimated), and its population is 310 million. Describing Ireland’s economy requires a bit of national accounting detail.  Peter Boone and Simon Johnson explain that Ireland used the tax code and a low corporate tax rate of 12.5% encouraging many global corporations to establish “ghost” corporations that do not produce goods or services in Ireland (“Irish Miracle — or Mirage?”) but do manage to avoid taxes in their home countries, including the United States.  Most international comparisons use GDP as the common measure.  Boone and Johnson suggest that researchers use GNP, a similar measure for most countries, to adjust for the tax haven affect.  For Ireland, GNP is at least 20% lower than GDP.

Ireland’s stated GDP is $172 billion, approximately the same as Alabama which ranks 25th among the states.  It has a population of 4.6 million, approximately the same as North Carolina which ranks 25th among the states.  Its per capita GDP of $37,000 would also rank 25th among the states.  Using Boone’s and Johnson’s adjustment of 20%, Ireland’s GNP is about $138 billion, just a little bigger than Iowa’s, which is the 30th largest state in the union.  Its per capita GNP is approximately $29,900, a little lower than Mississippi’s, the state with the lowest per capita GDP.  

A commercial building boom in Ireland paralleled our housing boom during the first years of the new millennia.  The boom turned into a bubble, distorting prices, misallocating resources and setting the stage for the financial tsunami.  Built on cheap credit and reckless lending standards Ireland’s three largest banks’ assets grew to 2.5 times Irish GDP.  The bubble burst.  Commercial property values fell 50%.  Good loans turned bad, crashing onto banks’ financial position, upending assets, and drowning profit in a sea of red ink.   

The Irish government became the first country to bailout its banks with a promise to guarantee all bank liabilities setting the stage for a fiscal crisis.  Today, one-third of bank loans are non-performing or under surveillance but bank creditors are protected by the government’s bailout so long as the government can fulfill its promises. 

Prior to the financial crisis, Ireland seemed the poster child for prudent and responsive government.  The national debt to GDP ratio stood at 25% in 2008, among the lowest of developed nations.  When the crisis hit, the government cut public sector wages and increased the tax base.  But the poster child was posterized.  Attempts to balance the budget proved fruitless as declining revenues and increasing social welfare obligations widened the budget deficit to 11.7%, one of the biggest deficits in the world.  The fiscal tsunami caused by the bailout overwhelmed the  government’s debt repayment capacity as the national debt to GNP ratio will climb to a projected 97% in 2010 and 109% in 2011. 

The EU, International Monetary Fund, and to a lesser extent, the U.S., have bailed out the Irish government to the tune of $113.  The bailout is relatively small, but will increase the indebtedness of countries that have extended aid to Ireland.  Some worry that Portugal and then Spain will ask for bailouts, and that Spain may be too big to save.  Currently, the financial crisis has created a tsunami that has toppled Greece and Ireland, and threatens other weak states in the EU.  Continued bailouts could threaten the EU itself. 

Is the United States in a better financial situation than Ireland or the E.U.?  Our budget deficit stands at 10% of GDP and our national debt to GDP, at 53% and climbing rapidly.  While it looks as if TARP may have “saved” the soundness of our financial system, some financial risk has been transferred from the private sector to the public.  Like many European countries, our future deficits from generous social programs like Social Security and Medicare programs threaten to swamp the budget and raise the national debt to unsustainable levels.  There are three solutions that will increase the sustainability of these programs.  We can raise taxes that fund them, cut benefits to recipients, or alter their structure to make them more efficient. 

Like countries within the EU, our federal government may decide to bailout financially strapped state and local governments.  Several states have debt to GDP levels that are comparable to Ireland’s prior to the financial bailout.  Kentucky’s, Rhode Islands’, Massachusetts’, and New York’s ratios are projected at 27.51%, 27.02%, 26.74%, and 26.18%.  States are unlikely to engage in funding financial bailouts with debt, but many have large, unfunded obligations that could push them towards insolvency.  If the federal government starts to bailout states, they will create a moral hazard.  Knowing that their state may be bailed out, state legislators will grow fiscally lax.  The United States is in the early stages of a fiscal crisis.  It can be avoided but fiscal discipline will be required.

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Thursday, December 9, 2010

Three Pronged Support for Ethanol

As a fuel, corn based ethanol is a dog that strangely enough provides rich pork for its producers.  It uses about as much energy in its production as it yields in consumption.  It diverts agricultural land from other crops, decreasing their supplies and increasing prices to consumers.  It is not environmentally friendly in its production or consumption.1  With no apparent beauty, corn based ethanol has been protected with three programs by the government: mandated use, subsidies, and tariff protection. All three harm the economy by inefficiently allocating resources and increasing fuel costs without a corresponding improvement in the environment.

The mandated use forces consumers to buy 13.8 billion gallons of ethanol, a product that they normally would purchase in smaller quantities or forgo.  Ethanol producers, not satisfied with mandated use alone, have legislatively secured a 45 cent-per-gallon blending tax credit at a cost of $6 billion annually to American taxpayers.  American corn based ethanol has foreign competitors that produce ethanol from sugar, a more energy rich crop.  To ensure that American consumers do not benefit from the low cost production, and that American corn growers have a guaranteed market, ethanol producers have legislatively secured a 54 cent-per-gallon tariff on imported ethanol. 

The political battlefield may be shifting in the Senate.  The current fracas concerns the extensions of the blending tax credit, and tariff on imported ethanol.  It pits Senators from corn producing states against everybody else.  Two competing letters to Senate Majority Leader Harry Reid illustrate that this is not a right vs. left conflict but geographic.The first letter, signed fifteen Senators, nine Democrats and six Republicans supports an extension of both the blending subsidy and the tariff.  While the support for the bill is bipartisan, it is not geographically dispersed.  Only 7.5% of Senators signed the letter, but 60% of the Senators from the top ten corn producing states signed.  The three Senators who signed the letter represent states that were 12th and 13th in corn production.  In the letter, the Senators argue that ethanol frees the country from dependence on foreign oil.  As a consumer, I don’t feel “freed” from foreign gasoline costing $2.50 a gallon when I am forced to buy ethanol blended gasoline costing $2.75.  As an American taxpayer, I do not feel safer knowing that hostile foreign governments can secure cheaper fuel to help power their economies.

The second letter, signed by seventeen Senators, nine Democrats and eight Republicans oppose an extension blending tax credits and tariffs.  Opposition to the extensions is bipartisan but dispersed.  Only 8.5% of Senators signed the letter and no Senator from the top 15 corn growing states signed.  In the letter, the Senators site studies that conclude that “ethanol tax credits cost taxpayers $1.78 for each gallon of gasoline consumption reduced, and $750 for each metric ton of carbon dioxide equivalent emissions reduced,”  and that a “one-year extension of the ethanol subsidy and tariff would lead to only 427 additional direct domestic jobs at a cost of almost $6 billion, or roughly $14 million of taxpayer money per job.”  

Tables 1 and 2 list the signatories, their party affiliation, the bushels of corn produced in their states, and their states ranking as a corn producer.  The bipartisan natures of those who support and oppose the extensions suggest that ideology is not an issue.  The sciences, both environmental and economic suggest that corn based ethanol is an inferior fuel.  The three pronged support for ethanol producers that not only mandate use, but use of American corn based ethanol combined with the other two inferences suggest a fourth and fifth: corn producers care more for their own wellbeing than that of the nation, and elected officials in their states from both parties are happy to indulge them. 

Table 1.  Senators Signing Letter to Support Extension of Ethanol Subsidies


Corn Production (000 bushels)

Tom Harkin


Charles Grassley R-IA

Mark Kirk R-IL

Ben Nelson D-NE

Mike Johanns D-NE

Amy Klobuchar D-MN

Al Franken D-MN

John Thune R-SD

Tim Johnson D-SD

Sam Brownback R-KS

Christopher Bond R-MO

Claire McCaskill D-MO

Debbie Stabenow D-MI

Kent Conrad D-ND

Byron Dorgan D-ND


Table 1.  Senators Signing Letter to Oppose Extension of Ethanol Subsidies


Corn Production

Richard Burr R-NC

Bob Corker R-TN

Benjamin Cardin D-MD

Tom Coburn R-OK

Diane Feinstein D-CA

Barbara Boxer D-CA

Jim Webb D-VA

Mark Warner D-VA

Chris Coons D-DE

Mike Enzi R-WY

Jon Kyl R-AZ

John McCain R-AZ

Bob Bennett R-UT

Jack Reed D-RI

Sheldon Whitehouse D-RI

Susan Collins R-ME

Jeanne Shaheen D-NH


1.  See for example, Sierra Magazine, “Bio-Hope, Bio-Hype” by Frances Cerra Whittelsey.
…corn is the source of 95 percent of the United States' ethanol. Although politically popular in farm states, corn is a problematic source of fuel: It requires good land and petroleum-intensive cultivation and fertilization, and it can also readily feed both humans and livestock. (Food prices are already increasing because of competition with ethanol.) If the mill processing the corn is powered by coal, ethanol produces more net greenhouse gases than gasoline does.

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Saturday, December 4, 2010

Unemployment: December 2010

Today’s U.S. Employment Situation Report was bad.  The unemployment rate rose from 9.6% to 9.8% while the labor-force participation rate remained unchanged.  The private sector created a meager 50,000 jobs. 

The economy is seventeen months into a modest recovery but labor markets are frozen solid in recession.  Policy makers in two administrations have reached some sort of consensus: throw money at the problem.  We have spent trillions through fiscal policy (TARP, the ARRA, etc.) and monetary policy (QE1 and QE2) with little impact on employment.  I hope that the election was a manifestation of wisdom by the electorate, the realization that government does not have all the answers and is not all powerful. 

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