Entries Tagged as 'economics'

To Govern Better, GOP Should Work From Reality

November 4th, 2011 at 12:00 am 104 Comments

In my previous blog post, I discussed how many Republican criticisms of the Obama administration’s policies are not backed up by data.

Republicans don’t just have a problem with specific critiques, they also have a view of America that doesn’t match with how the country actually is. Their view disagrees with the reality of many important socio-economic problems. In some cases, such as America’s lack of upward mobility, some deny the problem exists.

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The Alternative to Rick Perry: Trickle Up

October 26th, 2011 at 8:05 am 53 Comments

Perhaps the greatest single threat to both conservatism in American life and the nation’s economic vitality is not Ivy League professors or Hollywood elites or a sinister “progressive” conspiracy but the economic decline of the middle class. Take away hope in the churning of the free market, and you push many citizens considerably closer to the state as a provider.

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What if No One Gets Credit for the Recovery?

September 13th, 2011 at 12:24 pm 14 Comments

Seth Masket writes:

The upcoming presidential election is the most important election in a generation. . . . we are in the middle of (and hopefully on the tail end of) a truly catastrophic recession. The economy will recover, although that may not happen for several years. It seems fair to say that the economy will not be roaring again any time soon, meaning that Obama will at best win by a squeaker. If it dips back into recession, he’s toast. Most likely, it will end up just being a really competitive and interesting race on par with 2004.

The party occupying the White House when the economy does finally start booming will get the credit among the public for saving the country. It doesn’t matter so much who was in power when the recession hit or whose policies helped or hurt the recovery. To a large extent, it’s simply a matter of being in the Oval Office at the right time.

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Gov Romney: Here’s Your Jobs Speech

David Frum September 6th, 2011 at 2:24 pm Updated46 Comments

But seriously, here’s the way I would have expected a keen analytic mind like Mitt Romney’s to approach the jobs issue.

The analysis would begin with the question: why is recovery so slow from this sharp and deep recession?

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Why My Generation (Wrongly) Fears Inflation

David Frum June 20th, 2011 at 8:03 pm 44 Comments

If you were born in, say, 1930, what was your best way to get rich before you turned 50?

Answer: borrow as much money as you possibly could, then borrow some more, and use the money to buy hard assets with maximum leverage. It almost didn’t matter what the asset was — real estate, pork bellies, Old Masters, oil and gas contracts, antique postage stamps.

This was the road to wealth if you started in 1969. It worked almost as well if you started in 1972. Or 1975. Or 1978.

And yet despite abundant examples of the success to be gained by following this advice, the record shows: most people did not seize the opportunity. They did not seize it because they did not believe it. They had endured the Great Depression as children. The urgency of saving, the dread of debt, had been seared into their very souls. Even when the world capsized every childhood lesson, they could not adjust. They continued to act upon the wisdom of the past long after the wisdom had been rendered obsolete.

Something like this dead hand of inherited wisdom lies upon those of us who were young in the 1970s. We grew up haunted by inflation. I wrote a whole book about it. I still remember the five cent bag of potato chips dwindling away, to be replaced by the 10 cent bag, the 15 cent bag until … until there is no longer even a cent symbol on my computer keyboard!

When we see the Federal Reserve creating massive quantities of new money, we have to believe that the money creation portends a price surge just as surely as it did in 1977. M . V = P. Q was our QED. We may see the “Velocity” in that equation drop away in a massive deleveraging. But we cannot believe it is happening even when we see it.

And yet it is happening. The Fed keeps creating money, and yet no inflation appears. The lessons we need to learn are those our grandparents knew. Money does not create inflation if every new dollar is used to extinguish debt rather than buy goods and services.

Those straining their eyes as they scan the horizon for signs of non-existent inflation should consider the economic applications of the wisdom of C.S. Lewis:

We direct the fashionable outcry of each generation against those vices of which it is least in danger and fix its approval on the virtue nearest to that vice which we are trying to make endemic. The game is to have them running about with fire extinguishers whenever there is a flood, and all crowding to that side of the boat which is already nearly gunwale under

Is Larry Summers a Scientist or a Politician?

May 14th, 2011 at 3:54 pm 10 Comments

A couple things in this interview by Andrew Goldman of Larry Summers currently irritated me. I’ll give the quotes and then explain my annoyance.

1. Goldman: What would the economy look like now if $1.2 trillion had been spent?

Summers: I think it’s an artificial question because there would have been all kinds of problems in actually moving $1.2 trillion dollars through the system — finding enough bridge projects that were ready to go and the like. But the recovery probably would have proceeded more rapidly if the fiscal program had been larger.

. . .

2. Goldman: You’re aware of — and were making light of — the fact that you occasionally rub people the wrong way.

Summers: In meetings, I’m more focused on trying to figure out what the right answer is than making everybody feel validated. In Washington and at Harvard, that sometimes rubs people the wrong way.

OK, now my reactions:

1. Not enough bridge projects, huh? I don’t believe it. We’ve been hearing for decades about America’s crumbling infrastructure. Summers (and, more generally, Obama’s economic team) had a staff, right? If they had put in the effort I think they could’ve found lots of bridges, water pipes, etc., that needed repair.

I also find it a bit annoying that Summers tries to have it both ways on this: (a) there weren’t enough projects on which to spend the money, (b) a bigger stimulus plan would’ve been better. It’s no surprise that people were skeptical of (b) given that the government’s most prominent economist was claiming (a)!

2. I think Summers is missing the point here. If everything had gone OK with the economy, nobody would be complaining about his style in meetings. But the economy has not gone so well so it’s natural to think that maybe he and the rest of the Obama team could’ve done better. And given the financial crisis of 2008, it seems reasonable to wonder whether Summers, Greenspan, et al. really “figured out what the right answer is.” Even at the time those policies were enacted there were many dissenting voices.

If being “focused on trying to figure out what the right answer is” actually gets you the wrong answer, then maybe you question your strategy.

Why does this bug me?

Politicians and pundits say silly things all the time and I usually just let it go (unless it happens to hit one of my pet peeves). But I hold academic social scientists to a higher standard.

It seems to me that Summers is torn between his two roles. As a researcher, he wants to admit his uncertainty and think about how to do better. As a politician, it’s all about Never Surrender, Don’t Give an Inch, etc.

I don’t know the best solution here, but if I were in this position, I might limit my public pronouncements to my area of expertise and defer to others on theirs. For example, Summers could say, “As a macroeconomist, my judgment is that a stimulus plan of $1.8 trillion would’ve been best. But other government experts told me there weren’t enough bridges to repair etc. Even so, etc.” Whatever credibility Summers has on the macroeconomics is diluted by his willingness to express certainty on any other topic that he’s asked about. Again, this looks to me like a worst-of-both-worlds combination of the academic’s freedom to speculate and hypothesize and the politician’s air of certainty.

P.S. Goldman has a talent for getting people to say things that make them look bad, as did Deborah Solomon (his predecessor in this NYT magazine column). Or could you make anybody look bad by taping them for long enough and then stringing together some of their more embarrassing statements? An interviewer could probably make me look pretty foolish in that way.

Originally posted at The Monkey Cage.

Japan’s Economic Aftershocks

March 26th, 2011 at 12:28 am 12 Comments

This is Part 1 of a Two-Part Series on what the long-term consequences of the Japanese earthquake will be on America and Japan’s economies.

The aftershocks from the earthquake that struck Japan have not stopped and can stretch well into the summer months, not from seismic tremors but from electric power shortages. Newswires are reporting that TEPCO, the electric power company which manages the Fukushima nuclear reactor is expecting rolling outages in Japan throughout the summer and well into July as demand for air conditioner use increases.

This will likely hurt the GDP output of Japan. The Japan Times reports on the estimates for how far GDP will be driven down:

“If power outages or efforts by large corporate users to spare electricity continue for a lengthy period, then production would inevitably come under strong downward pressure,” said Lee Chiwoong, economist at Goldman Sachs Japan Co.

In the event power rationing lasts through April as scheduled, real gross domestic product will be pushed down by 0.5 point. If it lasts through June, real GDP will be driven down 0.8 point, Lee said.

A natural disaster can cause immediate and sudden shocks to the economy, but they usually don’t cause protracted macro-economic problems. It’s in this respect that the Japanese earthquake would cause more damage compared to previous disasters.  Dr. Robert J. Shapiro, the co-founder of Sonecon, an economic advisory firm, wrote about this:

When Katrina crippled New Orleans in August 2005 and exacted $81 billion in property damages on Louisiana and Mississippi, it didn’t puncture investment or growth in the rest of the country. For a natural disaster to upend an economy, the damage has to touch most of the nation and endure for a considerable time.

In an interview with FrumForum, Shapiro described the most “unusual” aspect of Japan’s earthquake being that it has damaged the energy sector so significantly.

The Japan Times has an excellent report noting that manufacturing industries in Japan are being hampered by the blackouts, even though they are expected to come at predictable intervals:

Renesas Electronics Corp., a major semiconductor maker, has production sites in Takasaki, Gunma Prefecture, and Kai, Yamanashi Prefecture, that have not been able to operate due to the power outages implemented by Tokyo Electric Power Co.

“For the wafer treatment process, a 24-hour electricity supply is generally needed,” said Renesas PR officer Makie Uehara.

Tepco has been implementing rolling power cuts in Tokyo and seven other prefectures. Each prefecture has basically been divided into five groups, each experiencing a maximum three-hour outage per day.

Uehara said an incredible amount of equipment in factories is needed for the wafer treatment process, and it takes about a week to restart operations after turning the power on, as they require a great deal of checks.

“It is difficult to start operations if the planned power outage takes place,” Uehara said.

Some have spoken about whether the Japanese earthquake will lead to a reexamination of the utility of nuclear power because of health and safety concerns. An equally valid question might be whether the tight partnership between the energy industry and the Japanese Government has, in hindsight, led to the country being too dependent on just one source of power.

Follow Noah on Twitter: @noahkgreen


The Fair Trade Racket

March 9th, 2011 at 12:57 pm 23 Comments

“Fair Trade” coffee is promoted everywhere, from companies such as Starbucks to my university’s campus. Its advocates argue that the premium paid helps support the livelihoods of farmers and the quality of life in their communities. In reality “fair trade” hurts farmers by distorting the prices of the markets they work in and locking poor farmers out.

Imagine you are a farmer in Vietnam or Kenya deciding what market to get into. There is a vast excess of coffee suppliers so the price of coffee should be low and discouraging further entrants into the market. However, “fair trade” coffee is subsidized, and is sold at an artificially high price, and this entices more farmers to get into coffee production. This further feeds the already injurious surfeit of providers.

We’ve seen what happens when markets get distorted like this. The Coffee Crisis of the 1990s was characterized by plummeting and unstable prices. Coffee-producing nations rigged prices and subsidized local industry until the bubble eventually burst to the detriment of farmers worldwide.

The negative impacts of “fair trade” would not be mitigated by its universal adoption. Rather, this would compound the problems. Not only would supply increase but fewer farmers would be able to partake in the program. High entry fees (roughly $1600) and first world intermediaries taking almost 90 percent of premiums keep out the poorest farmers. Typically fair trade contracts are sent to areas that are already developed. A 2008 report by the Adam Smith institute sums it up well: “In practice, then, Fair trade pays to support relatively wealthy Mexican coffee farmers at the expense of poorer nations.”

Overall, by its nature, “fair trade” coffee creates a harmful set of incentives, luring the world’s poor into an already bloated market – the recurring trap of good intentions.


Help Wanted From Economic Experts

David Frum March 8th, 2011 at 11:36 am 36 Comments

I’ve been brooding on a hypothesis rattling around in my head. I’m fairly certain I did not invent the hypothesis, but I can’t remember where (or if) I heard it from somebody else. Can anybody direct me to the true author? And for a bonus point: to any research that tends to confirm/disprove the hypothesis?

As follows:

Loose monetary policy translates into general price inflation when purchasing power is relatively equal. When incomes are highly unequal, loose monetary policy translates into asset bubbles instead.

Anyone? Anyone? Bueller? Anyone?


The Olympic Games Money Pit

March 7th, 2011 at 2:03 pm 4 Comments

Back in 2009 the media was fast to lash out against Barack Obama’s failed pitch for Chicago’s 2016 Summer Olympics bid. However Obama’s failure might have been a lucky break.

The Olympics today are a ready-made spin machine.  They’re expensive, but staging the games enables regimes to put a positive spin on other problems, such as say a questionable human rights record. China in 2008 is clearly the best and most recent example of this phenomenon.

Up and coming Brazil will get an opportunity in 2016 to show off to the world. Furthermore, Russia will be able to blind its western counterparts with winter madness from Sochi in 2014. There seems to be an unspoken rule amongst BRIC states that Olympics, world football championships and other big sporting events are the best PR out there; a good way to unite many people while simultaneously keeping politics out of the equation.

But ignoring the political element, the finances also raise many questions.  It seems as if the character of the Olympic Games has changed over the past decade. Today a simple refurbishment of existing stadiums and sport venues is not enough. Cash has to be splashed and even the most low-profile sports must be housed in Philippe Starck-like arenas.

All this has made the Olympics as sustainable as a Hummer H2. Greece’s 2004 Olympic bonanza ended up costing the Greek state a whopping $8.6bn, driving the national debt up to 5.3% in 2004. In addition it managed to kick-start the Greek debt spiral, which culminated last year.

China’s expenditures on its 2008 games amounting to $40.9bn alone in the Beijing area. Current projects are no different: Sochi’s 2014 winter Olympics expenditures are already rising out of control, with some reports suggesting final costs in the double-digit billion area.

London’s 2014 games are no stranger to this cost frenzy. Apart from astronomical expenditures on security precautions, the London 2012 Summer Olympics are set to have detrimental effects on society at large. London housing prices are expected to hike by nearly 40% in the wake of increased building construction.

In light of spiralling costs, security expenditures, failed sustainability and minimal payback, Americans should be happy that Chicago will not host the 2016 Olympics.


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