Monday, March 23, 2009


It's too early to mean a lot, but it is something that the incoherent messageless Republicans lead the Democrats in a new Rasmussen poll 41-39% in a General Congressional vote. It's just one poll, but the average of recent polls seems to show a statistical tie. Republicans are also poised to take back Kirsten Gillibrand’s old House seat in New York and are polling well early to pick up Governorships in Virginia and New Jersey.

I view this as a positive development, if for no other reason, the United States needs a strong opposition party to check the excesses of the majority party. Now, it would be nice if the GOP could put together a strong critique of current policy that shows some understanding of economics and the financial system. Of course, why would you expect them to be any better than the current crooks and fools.

Sunday, March 22, 2009

The Audacity of Incoherent Banking Policy

In October, the Treasury Department strongly encouraged sound banks to take government TARP funds, along with the troubled firms. Predictably, the government is now is forcing banks to focus on the priorities of the relevant politicians rather than those of the financial system. Even though many banks did not even want to accept government capital, there are now being forced to comply with the same rules placed on the banks that needed the money. Naturally this is ingenuous, but it is also harmful to the economy. The New York Times reports: take note

Financial institutions that are getting government bailout funds have been told to put off evictions and modify mortgages for distressed homeowners. They must let shareholders vote on executive pay packages. They must slash dividends, cancel employee training and morale-building exercises, and withdraw job offers to foreign citizens.

Now, the banks that took government funds and can afford to pay them bank are attempting to do so. This signals to the market which are the stable banks. Perhaps this is useful, but when the Treasury persuaded the nine biggest banks to accept capital investments in October, it signaled that the whole banking sector was weak. Chairman of Wells Fargo (One of the strongest banks) Richard Kovacevich asked Monday at Stanford “Is this America? When you do what your government asks you to do and then retroactively you also have additional conditions? …If we were not forced to take the TARP money, we would have been able to raise private capital at that time”* Kovacevich also argued that requiring Wells to take the TARP money made it impossible to raise funds from the private capital market. As a result, Wells was forced to cut its dividend 88% to build up capital so that it will be able to repay TARP. Wells is representative – JPMorgan Chase, US Bank, Goldman Sachs, & SunTrust have also cut dividends and decided to repay TARP funds. Cutting dividends is probably a good business decision for most banks, but it would be nice if they decided to do so in order to expand their businesses – not to avoid giving the government it’s pound of flesh.

Thus far in the financial crisis, the government has signaled an intention to become heavily involved in the financial sector. However, it will not do so with a coherent/stated plan. Many of banks are showing slight signs of recovery (dead cat bounce?), but without much help from the government. The financial sector is extraordinarily complicated, so what would my plan be to fix the high level of instability. Well, it’s pretty simple: 1.) The government needs to organize an orderly bankruptcy of the zombie banks – probably Bank of America, Citigroup, and some regionals. 2.) The government should then take some of the bad loans off the books, creating a “Bad Bank” 3.) Finally, the Feds should sell off the good parts to those banks still existing – A nice reward to them for running responsible institutions. 4.) Withdraw from involvement in the financial sector as quickly as possible.

Let me know if I’m missing something.

* Couldn’t leave this Kovacevich quote out: "We do stress tests all the time on all of our portfolios. We share those stress tests with our regulators. It is absolutely asinine that somebody would announce we're going to do stress tests for banks and we'll give you the answer in 12 weeks."

Thursday, February 19, 2009

Libertarian Populism

Rick Santelli

It's nicer than statist populism. Of course, can it be populism if he's speaking to traders?

Monday, January 26, 2009

New Links

I reorganized the blog a little bit lately and added a few new links. The most important is perhaps the most self-recommending new blog to date William Easterly's new blog 'AidWatch'. In his inaugural post, Easterly cites the blog's purpose as "to be brutally honest when aid is not helping the poor, but also praising it when it is."

Also, some older blogs added to the role:
Secular Right
Marc Ambinder
Middle East Strategy
Mark Thoma
Cafe Hayek

CAFE Standards vs Carbon Tax

It would be very difficult and/or expensive for U.S. government policy to help the not-quite-bankrupt U.S. auto industry. The Obama Administration has taken the apparently contradictory position of supporting a bailout of unprofitable U.S. automakers, while simultaneously trying to destroy their business model. In this second point, I am speaking of Barack Obama’s decision today to mandate high CAFE standards (at least 35 miles per gallon) by 2011. Generally, the more profitable vehicles sold by U.S. automakers are the ones that consume more fuel – This is where they seem to have a slight comparative advantage over their foreign competitors. It is conceivable that if CAFE standards were lifted, Ford and GM would be able to survive as specialized producers of larger vehicles, ceding the small car market for Japanese and European competitors. As I understand it, Ford and GM currently lose money producing small fuel efficient cars in order to make their fuel efficiency numbers meet the current CAFE standards. Raising CAFE standards will further distort the companies, making them even more ridiculously unprofitable.

To me, corporate fuel efficiency standards just seem like confused/bad government policy. If one is worried about the United States using too much gasoline, it would make sense to directly raise the price of gasoline until the point where you think the country is using the correct amount. Ideally, you should come up with a value of the harm caused to the country by carbon emissions and dependence on foreign oil and turn it into a unit cost tax on sales of fuel. Under such a carbon tax system, people who use gasoline would bear the appropriate whole cost of their decision. People would make rational decisions based on the new prices: In the short-term, they might drive less or buy more fuel efficient cars (remember 6 months ago?). In the long-term, there would be incentives to move closer to work and for communities to be less spread out. The cost would be born directly and proportionally by users of gasoline, rather than indirectly by all members of society. Also, the government would raise some money out of it and would be able to use these funds to provide relief in any number of ways (such as slightly lower income taxes). So, in total, there is no net cost to society, but a net gain from more rational and transparent decision making.

Federal fuel efficiency standards due not create the incentives for such market adjustments. They just make it much more difficult to buy new less fuel efficient cars, no matter how many kids you have to transport to a soccer match. So, the price for vehicles will go up, but because the amount of fuel used per vehicle will go down (more fuel efficient cars use less), the price of fuel will fall and it will be cheaper for everyone to drive extra miles. So, a significant percentage of the fuel savings from more efficient cars will be eaten up by additional driving. The added expense for new cars will mean there will be more old cars staying in use longer. These cars may burn fuel and pollute more, but they would now have a relatively cheap upfront cost, and cheap fuel. So, we’ll end up with more and older cars on the road, which we would expect to intensify other highway problems like congestion and accidents.

So, with CAFE standards there will be somewhat less gasoline used, but this will be outweighed the deadweight loss to auto-producers and consumers. Also, there is no money raised by the government to compensate the relative losers from this policy. Of course, the government will bail-out the auto producers anyway, but the funds for this will come from other sectors of our already ailing economy. Perhaps the hike to CAFÉ standards is good politically in that it provides cover for the auto bailout, but it is definitely bad policy. Barack Obama told reporters today “Our goal is not to further burden an already struggling industry; rather it is intended to help the auto industry prepare for the future.” If the auto industry emerges in a few years, it will be because an incredible amount of money will have been spent on this concentrated special interest. It will be good for it to look different, so politicians can claim they have reformed it, even at the cost of a huge waste of public resources.

Sunday, January 25, 2009

What Are Macroeconomists Saying

Will Ambrosini actually tracks the public opinions that have been voiced by macroeconomists on the stimulus and finds the consensus (as much as one exists) being in opposition to the current plan:

Will Wilkinson has words for macro economists. He got me thinking about the political affiliations of macroeconomists. Here’s what I’ve found:

Macroeconomist’s name IDEAS rank Political affiliation Views on fiscal stimulus
Robert J. Barro 3 Republican?, no political appointments Tax-cuts not spending
Robert E. Lucas 5 ? Con, but concerned about sudden drop in consumption
Edward C. Prescott 7 He signed a statment opposing Obama’s tax/trade policy ?
Martin S. Feldstein1 8 “conservative” Pro, likes military spending
Daron Acemoglu2 10 ? Con, worries about long term consequences
Olivier Blanchard 13 ? Pro
Mark L. Gertler 14 ? ?, but he says monetary policy can still be effective
Thomas J. Sargent 17 ? Con
Lars E. O. Svensson 21 ? ?, but has written on the effectiveness of monetary policy when interest rates are zero
N. Gregory Mankiw 22 Republican Con
Jordi Galí 25 ? ?, his research is the only legitimately modern macro that shows fiscal stimuls can work
Ben S. Bernanke 33 Republican appointee His public statements are Pro, but I’m not sure what his private opinions are. His research is all money all the time.
Michael Woodford 34 ? ?, but in a survey has said the consensus is “fiscal measures are not suitable for accurate ‘fine-tuning’, even if it is not agreed that they have little effect.”
John B. Taylor 49 Republican appointee Pro, but has shown the recent tax rebate was ineffective at stimulus

It seems most macro folks are conservative or Republican. The Gali paper on effective fiscal policy seems like it might be worth taking a look at.

You’ll notice Delong and Krugman (and Alesina, Becker, Cochrane, Fama, Murphy, and Zingales) are missing from this list of MACROeconomists. This is because they are not macroeconomists.

It seems to me the historians were calling the finance people boneheads for their ideas on macroeconomics. I wonder what the planetary scientists think about the exobiologist’s views on theoretical cosmology.

  1. Feldstein has a short NBER paper on fiscal policy (with no model) and he’s also written against Ricardian equivalence but he doesn’t usually write on macro stuff. []
  2. Technically Acemoglu is a growth economist, but he writes about everything. EVERYTHING. []

Thursday, January 22, 2009

Kevin Murphy on the Stimulus

John Huizinga, Robert Lucas and Kevin Murphy discuss the stimulus plan at the University of Chicago. Kevin Murphy’s talk (17:20 to 31:37) has made a bit of a splash on the economic blogisphere and does an excellent job at clarifying the debate.

According to Murphy there are four factors to consider in accessing the value of a stimulus plan:

1. The Efficiency of Government Spending
2. The Size of the Multiplier Effect from Government Spending
3. The Leisure Value of Idle Resources
4. The Deadweight Cost of Future Tax Increases Required to Finance Government Spending

Most supporters of the stimulus would argue that 1 & 2 and 3 & 4 are low to non-existent. If this is the case, the stimulus is a good deal. Murphy argues (and I tend to agree) that 1 & 2 are lower, 3 exists, and 4 is substantial. Depending on the size of these factors, if Murphy is correct the stimulus is a waste.

Update: The perpetually incredulous Brad DeLong responds, kinda.

(HT: Megan McArdle)

Wednesday, January 21, 2009

Every Street is Dark And Folding Out Mysteriously

There is an emerging majority in Washington supporting an economic stimulus plan principally via spending increases. The current proposal is an $825 billion spending bill. One third of this money is to be spent on infrastructure.

The problem with this is that infrastructure spending provides little short-term stimulus. New roads take years to plan and mass-transit systems take longer. This is because here are all kinds of environmental, traffic, and neighborhood concerns to take into account, as well as lots of interest groups. There are not enough projects through this stage, just waiting for funding, to provide a significant stimulus. Even if there were, with the planning all in order, it takes much longer to actually build. The spending would be spread out over years or (for most major projects) decades. The Associated Press reports findings from congressional economists: “Overall, only $26 billion out of $274 billion in infrastructure spending would be delivered into the economy by the Sept. 30 end of the budget year, just 7 percent.” By that time, hopefully, the economy will be starting to recover. So, while it may be worth-while to increase infrastructure spending, it would hardly be a short-term stimulus. Mike Huckabee was rightly criticized in the primaries for proposing it as such.

I am of the opinion that the federal transportation system would see a greater benefit from a more efficient allocation of resources than from another 600 Bridges to Nowhere.

So, at best, new infrastructure spending would be relatively well-planned but insignificant as a stimulus. At worst, it will be wasteful, inefficient, pork-spending, that will lock the country into bad long-term solutions, and will still be insignificant as a stimulus.

How to Judge the Obama Administration

In order to judge the new Administration's success or relative lack of success in office, it's important to set some guidelines and expectations. Robin Hanson sets the bar at a reasonable level:

We've heard a lot of hyperbole about how Bush was the "Worst. President. Ever." and Obama's inauguration is the most exciting in a half century. So to avoid future bias, this is a good time to ask yourself: where do you set Obama's bar? That is, what does Obama have to do for you to consider him a "good" president, or even better than Bush? It is enough for you that he is (part) black and a Democrat? Or does he actually have to do something? Or are those already insurmountable barriers to you?

For most any president today, odds are that we'd:

be mostly out of our moderately deep recession in four years,
add some symbolic financial rules that mostly lets old games continue,
mostly watch as Israel, Russia, and China throw more weight around,
mismanage another Katrina because governments are just bad at that,
go deeper in debt "stimulating" and "bailing" because politicians love to spend,
not much relax homeland security or immigration because we're still scared of terrorists,
mildly pull out of Iraq since the war has been going well lately but we don't like to look weak,
do little on carbon emissions or the coming Medicare train wreck as those are very expensive, and
not reform medicine or education or welfare more than Bush's Medicare drug benefit and "no child left behind," or Clinton's welfare reform, as those were unusually big changes.
So will Obama be great (or terrible) if he just follows this least-resistence path and adds a few cheap symbolic moves on stem cell research funding, gay marriage, torture definitions, wiretap limitations, or foreign abortion funding? And would that be enough for a non-black or non-Democrat?

Four (and probably eight) years from now we should judge his performance in office by what he has done beyond or short of these items. Naturally, most voters will not. I predict he will be re-elected due to the first item – I put the probability of a decent recovery by 2012 around 90%.

One quibble: I would not include the item on Hurricane Katrina, because events like that are quite rare. Remember, George W. Bush helped his re-election chances by appearing to respond well to the less severe 2004 Florida Hurricanes – ‘Responding well’ consisting mostly of being photographed touring disaster areas with sleeves rolled up. I can easily see a similar less-severe incident occurring during the new administration for which Obama’s response will be compared favorably to Bush’s.

Tuesday, January 20, 2009

The Audacity of Unfulfilled Promises

On my Economic Scorecard for the Candidates before last year’s election, the category I gave Barack Obama the most credit on was Taxing Energy Consumption. So, it is with great (although not entirely unexpected) sadness that I report Obama regression on the issue, pointed to by Greg Mankiw:

Obama rejects the Pigou Club
The Washington Post's Steve Mufson reports:

Goodness knows, President-elect Obama has his legislative hands full. Maybe that explains why he has taken the idea of increasing gasoline taxes off the table, saying that Americans had enough economic burdens at the moment. Nominees like Steven Chu, the Nobel Prize winning physicist who will become Energy Secretary, dutifully echoed Obama's view even though in Chu's case he has long supported higher fuel taxes.