Wednesday, September 30, 2009

Bush Deficits and Projections

The Bush-era deficits were bad. I know. I spent eight years complaining about the president’s lack of fiscal responsibly (here and here for instance).
First, while President Obama is fond of promoting what he calls a "new ethic of responsibility"—in fact he named his first budget, for fiscal 2010, "A New Era of Responsibility"—that is a misrepresentation of his actual budget plan. For each of Obama’s years in office, the deficit is projected to be larger than any year during Bush’s terms.
Second, Obama is right to note that he inherited a large deficit in fiscal 2009. But as we can see here, he is responsible for growing the deficit beyond expectations in fiscal 2009 and thereafter...
Third, Obama’s deficits are frightening but they promise to get worse. Each month that goes by the president adds spending to the deficit. The August 2009 projections for instance, do not include any of the president’s healthcare reform spending and they assume that the “temporary” stimulus spending will not be prolonged past fiscal 2011. Finally, they also assume that the economy will recover soon and that it will grow enough to generate increasing tax revenue, in spite of the president’s plan to impose new taxes and regulations on the private sector.

The Economics of Cheating

The obvious reason why people cheat is that they gain some kind of benefit from it...

So why not cheat all the time? Because with these benefits come costs. Let’s examine what these costs are. The most obvious cost that people think about is punishment for getting caught. So when people consider cheating, what they consider is the perceived chance of getting caught multiplied by the perceived punishment.

I use the word “perceived” here to emphasize that this is probably the area that potential cheaters are the most likely to misjudge. It is a known fact that people are very bad at judging probabilities...

Another cost of cheating is opportunity costs. Cheating often takes effort, and such effort could otherwise be used for other pursuits...

The final cost of cheating, and the most interesting because it’s the least rational, is the moral pain people feel when doing something wrong. Because of the moral pain involved, people will often avoid cheating even when the benefit of cheating far outweighs the opportunity costs and there is zero chance of getting caught.

When society tells you that something is wrong, you internalize the moral lesson and feel moral pain, or guilt if you prefer to call it that, while doing and after doing a wrongful deed. Some people feel moral pain more strongly than others...

In conclusion, we learned that a person’s net benefit from cheating is equal to the benefit he gets from cheating, minus the opportunity costs, minus the perceived probability of being caught times the punishment, minus the social stigma, minus the moral pain. A person will cheat if the net benefit exceeds zero. But because people have differing abilities to correctly ascertain the probability of being caught and because people have differing sensitivities to moral pain, when faced with the same cheating temptation not all people will behave the same way: some will cheat and some will not.


Cheating is not socially efficient. Those cheating consider only the costs and benefits to themselves. They ignore the external costs they impose on others. And others are harmed. Non-cheating students suffer by comparison on exams, and taxpayers, who are paying much of the financial freight of education, end up with graduates who are less knowledgeable than advertised.


Cartoon: Michael Moore's Hypocrisy

47% of Households Have on Federal Income Tax Burden

When considering federal income taxes in combination with payroll taxes, the percent of households with a net liability of zero or less is estimated to be 24% this year, according to the Tax Policy Center's estimates.

A key reason why there is a zero-liability group at all is because the U.S. tax system is progressive. Those who bring in more money pay more than those lower down the income scale to support government functions such as national defense and social safety nets like Medicaid for those in need. That progressivity can be dialed up or down.

Cartoon: Too Big to Fail


Tuesday, September 29, 2009

Keynes, Pharoahs, and the Economy

On one side, are the forces of a natural market correction…following a long, long period of expansion. The easier money gets, the more people tend to misspend and mis-invest it. Then, inevitably, their mistakes must be corrected. That’s what bear markets and recessions are for.

But the feds don’t like bear markets or recessions. And at least since the Keynes outlined his general theory back in the early 20th century, they’ve believed that they don’t have to put up with them. Keynes took a page from the Old Testament. Government should act like an enlightened Egyptian Pharaoh, he didn’t say, but should have. It should run surpluses in the fat years and deficits in the lean years…thus flattening out the pattern of boom and bust.

Pharaoh was no dope. He stored up grain for seven years, when the harvests were bountiful. Then, when the seven lean years came, he released the grain to the people. Problem solved.

Keynes believed that modern government could do the same thing. But Pharaoh was not running a democracy. He had no voters to answer to. So, if he wanted to store grain in the fat years, he could do so.

In theory, the US government could do the same. But, in fact, it never runs significant surpluses. There are too many people who want too much bread and too many circuses. And you don’t win votes by denying the voters what they want. So, in practice, the feds run deficits even in the fat years!...

But Bernanke didn’t see the famine coming. Neither did Geithner. Or Greenspan. Or any of the other savants Pharaoh interpret his dreams. None of them expected hard times. None of them warned the public. None of them encouraged the government to save money for the recession. Nassim Taleb asks why Bernanke was reappointed after he clearly failed the most critical test.

read the entire essay

What Causes a Depression?

…how does it all work? We’re doing some serious thinking this week. What is it that actually causes a depression? A stock market collapse? Or too much debt? How come government can appear to cure the problem sometimes – 2001-2007 – but not other times? How come the Japanese were not able to increase consumer prices? Even now…Japan’s inflation rate is negative. And why is it, despite the most massive effort at monetary inflation ever undertaken, the US bond market still forecasts an inflation rate of less than 2%?...

A friend made the mistake of asking us what to expect from the economy. We said it would go do down.

“You mean, you expect a W-shaped recovery,” he said… “A double-dip recession?”

“No…we expect no recovery at all. It’s a ‘W’ without the last stroke…”

Of course, we were exaggerating. But not much. We do not think that the economy of the Bubble Era can ever be revived. It will never recover…because it is dead....

“But when will it come to an end?” you ask.

“When it is over.”

A depression ends when it has done its work. It must correct mistakes. It must punish errors. It must destroy the bubble economy…and the mindset of the Bubble Era. Only then can new real, sustainable growth begin again...

Here’s how it works. The Fed lends the bankers money. Then, the bankers turn around and lend it back to the feds. The banks are happy; they’re making money on a risk-free trade. The regulators are happy; what could be safer in a bank’s vault than US Treasury bonds? Investors are happy; it looks like the financial sector is making money again. And the feds are happy; they’re able to finance their deficits.

Who’s not happy? So far, so good. But hold on…

“This is not a sustainable recovery,” says fund manager Crispin Odey in The Financial Times.

read the entire essay

Cartoon: Retirement Planning

Friday, September 25, 2009

Health Care Solution: Do Nothing

The second-best solution for the health-care crisis? Do nothing.

Of course, that drives the interventionists crazy. “Do nothing?” they cry! “Don’t you realize that we’re in a crisis? We can’t afford to do nothing!”

What they fail to realize is a fundamental principle about interventionism: It produces more crises. Therefore, any new health-care intervention, whether termed “reform” or “modification” or “improvement” is only going to make things worse than they already are. New interventions will produce new and bigger crises, thereby producing calls for more “reform” in the future.

What ultimately happens is that as the crises and interventions grow in number and intensity, people get so frustrated that they end up supporting a complete government takeover of that particular segment of society. In fact, that’s already happening in the health-care debate...

That, of course, leads us to an opposing diagnosis — that it’s not freedom and free enterprise that have caused America’s health-care crisis but instead the socialism and interventionism that have infected every aspect of the health-care field...

Thus, the prescription is obvious: radical surgery by removing all of this cancerous material from the body politic. No reform. Simply an immediately repeal of Medicare, Medicaid, health-care and insurance regulations, and medical licensure. End all government involvement in health care. Given the positive power of the free market and the enormous resiliency of human beings, the body politic will immediately begin recovering.

read the entire essay

Wednesday, September 23, 2009

The Fed on the Economy

The Federal Reserve kept interest rates near zero on Wednesday and said the economy is improving. But the Fed also pointed out ongoing job losses could dampen a recovery.

At the conclusion of its two-day meeting Wednesday, the Federal Open Market Committee said that the government's stimulus and economic rescue actions have helped to stabilize the financial markets, which will help generate economic growth in the future.

"Economic activity has picked up following its severe downturn. Conditions in financial markets have improved further, and activity in the housing sector has increased," the Fed said in a statement. It was the first time since August 2008 in which the FOMC said the economy had improved from its previous meeting.

Meanwhile, the Fed said consumer spending is stabilizing, but that rampant job loss and tight credit has restrained overall household consumption. The Fed added that although the housing sector has begun to make a comeback, home sales and new home construction are coming off of historic lows.

As a result, the Fed kept its federal funds rate, an overnight lending rate that guides rates on various consumer and business loans, in a range of 0% to 0.25%. Rates have been at that level since December.

Monday, September 21, 2009

To Serve, Protect, and Generate Revenue

A new study to be published in next month's Journal of Law and Economics finds statistical evidence that local governments use traffic citations to make up for revenue shortfalls. So as the economy tanks, motorists may be more likely to see red and blue in the rearview.

Study authors Thomas Garrett, assistant vice president at the Federal Reserve Bank of St. Louis, and Gary Wagner from the University of Arkansas Little Rock, examined 14 years of revenue and traffic citation data from counties in North Carolina. They found that the number of traffic citations issued goes up the year following a revenue drop.

"Specifically, a one percentage point decrease in last year's local government revenue results in roughly a 0.32 percentage point increase in the number of traffic tickets in the following year," Garrett and Wagner write.

That number may sound small, but it's a statistically significant correlation, the authors say.


Thursday, September 17, 2009

The Stimulus Failed

Is the American Recovery and Reinvestment Act of 2009 working? At the time of the act's passage last February, this question was hotly debated. Administration economists cited Keynesian models that predicted that the $787 billion stimulus package would increase GDP by enough to create 3.6 million jobs. Our own research showed that more modern macroeconomic models predicted only one-sixth of that GDP impact. Estimates by economist Robert Barro of Harvard predicted the impact would not be significantly different from zero...
Incoming data will reveal more in coming months, but the data available so far tell us that the government transfers and rebates have not stimulated consumption at all, and that the resilience of the private sector following the fall 2008 panic--not the fiscal stimulus program--deserves the lion's share of the credit for the impressive growth improvement from the first to the second quarter. As the economic recovery takes hold, it is important to continue assessing the role played by the stimulus package and other factors. These assessments can be a valuable guide to future policy makers in designing effective policy responses to economic downturns.

Debt Ceiling

Congress has raised the debt ceiling four times in the past two years and will probably have to do it again in the next month.

With the government borrowing record amounts of money, the nation's current debt ceiling of $12.1 trillion will be pierced soon.

That ceiling is the cap on how much the country allows itself to have in debt. In credit card parlance, the ceiling is the U.S. credit limit. At the end of August, U.S. debt totaled $11.8 trillion. That's roughly $349 billion shy of the statutory limit.

The ceiling is meant to serve as a brake on spending because lawmakers would have to think very seriously before they breach the limit and take a very difficult political vote to do so. In reality, lawmakers really don't have a choice but to raise the ceiling and they know it.

Put simply, if they don't raise the ceiling, the country will go into default on its debt. The domino effect would be painful, to say the least.

read the CNN article

Wall Street Journal INterviews Ron Paul

Ron Paul's new book End the Fed was released today.

Here is part of the interview:

Q: What would a world without the Fed look like?

A: You’d go back to the day that if you wanted to borrow money to build a house, somebody would’ve had to save some money. You wouldn’t have zero savings and all the credit in the world. That’s just a total distortion of capitalism. Capital comes from savings. The part you don’t use for everyday living which you have left over, you reinvest and you save or you loan it out. We were living with something absolutely bizarre that had nothing to do with capitalism. We had no savings whatsoever yet there was all the credit in the world.

Q: Don’t you think the Fed has moderated the business cycle over the past century?

A: Yes, I think they did smooth things out. The market’s always demanding the correction of the malinvestment and the excessive debt. … Since Bretton Woods broke down, I think every recession has been moderated by the Fed. That’s why the trust kept being built. That’s all a negative. You have to get rid of the mistakes. Moderating it means that we have slowed up the correction. The fact that they have been successful is probably the worst part about it. They’re moderating the rapidity of the crash and the correction by holding the mistakes in place.

Q: Do you think the Fed will be abolished during your career?

A: I always thought the day would come… This economy is going to get worse and this dollar is going to get a lot worse. It’ll take care of itself. My real goal is educating people to the nature of money so that when this system fails, that they’ll know what to do and not just say ‘Well, we need a better manager.’

read the rest

Wednesday, September 16, 2009

Ben Bernanke on the Economy

In his first speech since he was reappointed, Federal Reserve Chairman Ben Bernanke said the recession is "very likely over" but detailed the tough road ahead for the economy.

Bernanke also said that despite delays, he is confident that Congress will pass changes to financial rules to ward off future collapses.

He hit hard on the "challenges" for the Fed and all policymakers in dealing with a sluggish unemployment rate as the economy recovers from a recession that began in December 2007.

"That's one reason why, even though from a technical perspective, the recession is very likely over at this point, it's still going to feel like a very weak economy for some time," Bernanke said. "As many people will still find their job security and employment status is not what they wish it was."

Bernanke's speech to experts and Washington insiders at the Brooking's Institution in Washington on Tuesday was a repeat of the one he gave to economists in Jackson Hole, Wyo., last month, when he cautioned the economy would start growing again, although slowly...

"There's little debate that the decisions we have made and the steps we have taken have helped stop our economic free fall. In some places, they've helped us turn the corner," Obama said. "It's going to take some time to achieve a complete recovery."

read the article

Cartoon: Helicopter Ben and the Recession

Tuesday, September 15, 2009

Jim Rogers on the Economy

Speaking to CNBC Wordwide Exchange today Rogers said "All the government officials and bureaucrats loved the fact Lehman failed, because they could all jump in and support banks."
"This whole problem was not caused by Lehman Brothers or Lehman Brothers failure. Lehman was an effect not a cause."

"The real problem over the past 10-15 years has been that regulators have not let people fail. Had they let people fail we would have solved this problem a long time ago. I don't know why they're not in jail," Rogers said.

Reiterating his view about US monetary policy and their effect on the Dollar, Rogers warned. "I would expect there to be a currency crisis or a semi-crisis this fall or next year. It's crony capitalism, Bernanke and Greenspan have brought crony capitalism to America … but that's not going to solve the world's problems."

"We're going to have zombie capitalism for the next 15-20 years. How long are you going to let the bureaucrats run the thing so we can't have a clean system?," he added.

"Banks have been going bankrupt for a few hundreds years. The way the system works is when somebody fails you let him fail. What we're doing now is we're taking the assets away from the competent people and giving them to incompetent people and telling them now you can compete with competent people with their money."

read the article

Monday, September 14, 2009

National Debt and the Debt Ceiling

Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren,” Obama said in a 2006 floor speech that preceded a Senate vote to extend the debt limit. “America has a debt problem and a failure of leadership.”


My thoughts: Administrations may have changed, but words still ring true.

Cartoon: National Debt

Cartoon: Teaching Economics

Sunday, September 13, 2009

Tyler Cowen on Politics and the Economy

Tyler Cowen's When Politics Don't Belong
FOR years now, many businesses and individuals in the United States have been relying on the power of government, rather than competition in the marketplace, to increase their wealth. This is politicization of the economy. It made the financial crisis much worse, and the trend is accelerating...

But we are now injecting politics ever more deeply into the American economy, whether it be in finance or in sectors like health care. Not only have we failed to learn from our mistakes, but also we’re repeating them on an ever-larger scale.

Lately the surviving major banks have reported brisk profits, yet in large part this reflects astute politicking and lobbying rather than commercial skill...

President Dwight D. Eisenhower warned of the birth of a military-industrial complex. Today we have a financial-regulatory complex, and it has meant a consolidation of power and privilege.

We’ve created a class of politically protected “too big to fail” institutions, and the current proposals for regulatory reform further cement this notion. Even more worrying, with so many explicit and implicit financial guarantees, we are courting a bigger financial crisis the next time something major goes wrong.

We should stop using political favors as a means of managing an economic sector...

read the entire essay

Barry Ritholtz comments on Cowen's essay

The large banks and brokers lobbied for special treatment and got it; they manipulated government legislation for their own ends; They asked for and received special treatment. This is a unique dispensation that almost no other businesses have enjoyed — certainly nowhere near the degree the finance sectors has received. Instead of earning their way via market place competition, these financials were uniquely treated in terms of regulation, legislation and tax policy.

Indeed, many people still seem wed to the wrong belief — it was not too much regulation that caused the problems. Rather, it was the special exemptions from regulation that in reality led to the crisis. From leverage to derivatives to lending standards to interest rates, the government acquiesced to the wants of the banking sector.


My thoughts: Ritholtz likes to talk of "radical deregulation." This is not what we have. Deregulation would apply across the board to all players. Ritholtz correctly points out that "these financials were uniquely treated in terms of regulation, legislation and tax policy." This is exactly what Cowen point out when he states, "Today we have a financial-regulatory complex, and it has meant a consolidation of power and privilege." This disagreement is more about terminology that facts.

Friday, September 11, 2009

Keynesianism Fails Again

From the beginning, our representatives in Washington have approached this economic downturn with old-fashioned, Keynesian economics. Keynesianism—named after the British economist John Maynard Keynes—is the theory that you fight an economic downturn by pumping money into the economy to "encourage demand" and "create jobs." The result of our recent Keynesian stimulus bills? The longest recession since World War II—21 months and counting—with no clear end in sight. Borrowing close to a trillion dollars out of the private economy to increase government spending by close to a trillion dollars does nothing to increase incentives for investment and entrepreneurship.

The record speaks for itself: In February 2008, President George W. Bush cut a deal with congressional Democrats to pass a $152 billion Keynesian stimulus bill based on countering the recession with increased deficits. The centerpiece was a tax rebate of up to $600 per person, which had no significant effect on economic incentives, as reductions in tax rates do.

Learning nothing from this Keynesian failure, which he vigorously supported from the U.S. Senate, President Barack Obama came back in February 2009 to support a $787 billion, purely Keynesian stimulus bill...

The fallacies of Keynesian economics were exposed decades ago by Friedrich Hayek and Milton Friedman. Keynesian thinking was then discredited in practice in the 1970s, when the Keynesians could neither explain nor cure the double-digit inflation, interest rates, and unemployment that resulted from their policies...

U.S. economic recovery and a permanent reduction in unemployment will only come from private, job-creating investment. Nothing in the Obama economic recovery program, or in the Bush 2008 program, helps with that.

Producing long-term economic growth will require a fundamental change in economic policies—lower, not higher, tax rates; reliable, low-cost energy supplies, not higher energy costs through cap and trade; and not unreliable alternative energy surviving only on costly taxpayer subsidies...

Expect an eventual return to 1970s-style economic results instead.

read the entire essay

Bernie Madoff and the Failure of the SEC

Lawmakers took the Securities and Exchange Commission to task Thursday for failing to prevent Bernard Madoff from perpetrating one of the largest financial frauds in U.S. history.
"Because the SEC failed to do its job, Madoff stole $50 billion," said Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee. "There can be no excuse for that colossal failure."

Dodd's remarks came at the beginning of the committee's second hearing to investigate the SEC's shortcomings in the Madoff case and how to improve the agency's performance in the future.

Madoff, 71, was convicted of operating a Ponzi scheme and defrauding thousands of investors. He pleaded guilty and was sentenced to 150 years in prison in June. Prosecutors have said it was the largest investor fraud ever committed by a single person.

Cartoon: Healthcare Reform and Costs

9/11 Remembered

Tuesday, September 8, 2009

Economic Contractions in the United States: A Failure of Government

Seeking 'not to let a crisis go to waste', left-leaning politicians and old-style Keynesian economists want to remedy the alleged failure of capitalism with a rising tide of big government. Let the budget deficits rip, empower the unions, socialise healthcare, increase trade protection, go green, and socialise the financial and industrial base.

The irony, as Charles Rowley and Nathanael Smith show in this timely monograph, is that the Keynesian policy prescriptions that are serving as the pretext for this programme have already been tried. Expansionary fiscal and monetary policies by the Bush administration and the Greenspan Fed were implemented to deal with the recession of 2001, and are precisely what caused the current crisis.

Applying sound economic reasoning and cutting-edge public choice theory, Rowley and Smith show that both the Great Depression and the current economic contraction were caused by failures not of capitalism, but of government. While monetary policy was the primary culprit in the 1930s, the interventionist policies of the Hoover and Roosevelt administrations exacerbated the downturn and stifled recovery. Fortunately, the monetary policy of the independent Fed is much better now (thought the Fed has unduly widened its role), but elected politicians are pursuing problems of intervention and re-regulation similar to those pursued in the 1930s. If these adverse trends are not reversed, the dynamic laissez-faire capitalism of the United States will be assimilated to the state capitalism and economic stagnation of Western Europe.

The authors outline a radical free-market approach to policy reform, designed to restore the United States economy to its stellar performance during the final fifteen years of the 20th century.

read the entire paper

Sunday, September 6, 2009

Economic Crisis: Blame Capitalism or Politicians

Politicians often find scapegoats for America's economic woes. It is rare - if ever - that they point the finger at themselves. Yet, the basic cause of the current severe economic problem lies in the machinations of government.

It is clear to even a casual observer that Congress has abused its power to tax and spend. It has taxed success to subsidize failure. It has purchased votes by enacting an unending stream of entitlement programs, financed by taxation, foreign debt and a progressive degradation of the U.S. paper dollar.

This cynical boosting of consumption at the expense of production has resulted in the American consumer now accounting for some 70 percent of United States GDP. By consuming three times what it produces, America has become the largest debtor in history. The Administration now forecasts annual deficits of trillions of dollars for the next decade. This is all the direct responsibility of Congress...

No, this crisis is not a failure of capitalism, but the result of a sustained attack upon our capitalist system. If we allow it to be used as a pretext for more government control, we will endure a 'lost decade' like the 1990s in Japan.

To avoid this fate, taxes must be lowered, especially corporate rates. Instead, we are increasing taxes on businesses and individuals. The government must cease its corporate bailouts which subsidize failure at the expense of success. Instead, we are now giving away money not just to failing giants, but to reward those with less efficient vehicles - when they didn't even ask for it...

It takes years to dissect the myriad ways in which the federal government cripples the economy. After all, politicians spend most of their time obscuring their true intent. Do your own research if you have the time and interest, but at the very least, do not uncritically accept the party line. Capitalism is to blame for the government's financial crisis like a house is to blame for an arsonist setting it aflame.

read the entire essay

My thoughts: The problems the economy facces will never be solved until politicians are more concerned with peace and prosperity than power and popularity.

Cartoon: Labor Day

Friday, September 4, 2009

Cartoon: 401k Statements

August Unemployment 9.7%

The nation's jobless rate jumped from 9.4 percent to 9.7 percent last month, the highest rate since June 1983 but still more than a full percentage point short of the post-World War II high of 10.8 percent reached in late-1982, as employers remain cautious about hiring, unsure as to the strength of the economic recovery.

Tax Increases and Tax Revenue

Tuesday, September 1, 2009

ISM Manufacturing Index

The Institute for Supply Management reported that, for the first time in 19 months, the U.S. manufacturing sector expanded last month, the ISM manufacturing index rising above the 50-level separating contraction and expansion, from 48.9 in July to 52.9 in August.