The Labor Department today reported that business productivity surged to a revised 4.3 percent annual rate in the second quarter of the year. That's impressive. It's nearly double the 2.2 gain previously reported. It's also well ahead of forecasts. So why did stocks tumble and the Dow Jones Industrial Average fall more than 300 points?
Because it's finally dawning on investors that Americans don't have the purchasing power to keep the economy going. A separate report today from the Department shows a steadily weakening labor market. The number of U.S. workers filing new claims for jobless benefits jumped by 15,000 last week, to a seasonally-adjusted 444,000. That's much higher than anticipated. We'll know tomorrow whether employers continued to shed jobs in August, as they've done in the prior seven months.
Remember, productivity measures hourly output per worker. When firms lay off their workers or cut the number of hours they work, the firms often get more output per hour from them. This is often because employees are pushed harder to generate more output in fewer hours -- understanding that if they don't, they'll be the next ones on the chopping block. Or because each who remains is overseeing more machinery than before. (This may result in lower-quality products and services, but the productivity figures don't measure quality of output.)
Higher productivity keeps inflation in check. When companies can produce more stuff with fewer workers, their unit costs drop. And they face even less pressure to raise wages -- even in the face of rising costs of living -- because average employees have virtually no bargaining power. This also helps boost corporate profits.
But this also means less purchasing power by consumers whose paychecks are getting even smaller and jobs even less stable, and who have reached the end of their lines of credit because the housing bubble has burst. The result? Employers can't sell as much as before, so they reduce their payrolls by cutting hours and laying off more workers.
Retailers are the canaries in this mine. Their sales are sharply down. (Today Nordstrom and other retailers posted big disappointments for August sales.)
Unless or until America's broad middle class has more money in its pockets -- because we get a more progressive tax system, because unions become more powerful and push prevailing wages upward, because employers finally understand what Henry Ford understood a century ago (unless workers have enough money to buy the products they're making, the products won't sell) -- this downturn is likely to last a long time.
Friday, October 31, 2008
Thursday, October 30, 2008
Who's Paying For Your Fix?
by Kate Duncan
May/Jun 2003 Issue
Unless your morning latte was a fair trade blend, it probably cost more than what the farmer who picked the beans earns in a day.
Conventional coffee prices are at their lowest in a century, even below the cost of production. Farmers have been leaving the fruit to rot on the tree, pulling the kids out of school, abandoning the family land and pouring into the cities to find non-existent work. That’s why, as the most heavily traded commodity after oil, and the most common beverage after water, coffee is a major focus of the fair trade movement.
If your morning latte was a fair trade brew, it means the person who farmed the beans is earning enough to support his family. This is all well and good, but the way fair trade is usually explained - with prices, numbers and statistics - ignores it’s lasting benefits. The true point of fair trade is the cultural, communal, and environmental stability it bolsters.
A farmer who sells through fair trade is a member of a cooperative that is a vehicle for community empowerment. And not just a neighborhood watch: The people typically organized via fair trade are those whom the free market has filtered to the lowest economic stratum. Rather than maneuvering them into a position where they’re forced to take what they can get, fair trade recognizes farmers as equal partners, a platform from which they can command more control over their business and lives.
'Fair trade is a different kind of business relationship between the producer and buyer, which has been an inspiration to help these communities pull together instead of caving to the pressure of all the things trying to blow them apart,' says Monika Firl. Monika heads up producer relations for Cooperative Coffees, and as such, led half a dozen coffee roasters and me (as a grateful representative of Idyll Development Foundation, one of Cooperative Coffee’s funders) on a buying trip to farmers’ co-ops in Nicaragua, Guatemala, and Mexico in February, where we were able to see the effect for ourselves. [Clamor]
Wednesday, October 29, 2008
A bash for confidence indexes
Every month the University of Michigan and the Conference Board conduct a survey of households’ confidence on the state of the economy. Each pollster asks several questions and summarizes the results with an index, which is closely watched for signs of consumer distress. Last November, the Michigan index fell by 4.8 points from October; the Conference Board Index dipped by 7.9 points. Supposedly this is bad news because worried consumers are thrifty consumers. Don’t let the surveys fool you: they are almost complete rubbish — unless you know how to use them.
At first glance, both the Michigan index (MI) and the Conference Board index (CI) are correlated with the business cycle: they sink around the beginning of a recession and rebound near the end (see chart nearby, originally published by the Wall Street Journal). They even seem to track the quarter-to-quarter growth of consumption expenditures. Look a bit closer, however, and you’ll see that confidence and reality get out of synch sometimes. For instance, both the MI and the CI were abnormally low relative to consumption growth in 1992-1993, and again during 2002 and 2003. The indices dipped during the Asian crisis of 1998, but consumption growth didn’t budge; conversely, expenditure growth fell dramatically in early 1995 even though sentiment didn’t change.
Formal statistical analyses have found that consumer sentiment says very little that forecasters don’t know already. That is, once this quarter’s spending, interest rates, etc. are known, it does not help much to predict future spending growth. Confidence and expectations matter. The issue, I reckon, is that these particular indices fail to capture them.
A cursory look at the guts of the MI and the CI will convince you that they are literally meaningless. Each of them is a mishmash of five opinions — which, by the way, are not the same for both surveys (see table below). The questionnaires represent but the pollster’s guess of what determines spending. There’s no guarantee that the questions are the ones that actually matter.
For instance, the MI doesn’t include questions on job security, whereas the CI doesn’t ask about present personal finances. The potential irrelevance of the surveys becomes painfully clear when one examines the first question of the MI: “Do you think now is a good or bad time for people to buy major household items?” With such a specific wording, that question should predict expenditures on cars, appliances, furniture and such, i.e. durable goods. But once past purchases are included into the forecasting model, confidence and expenditures are barely correlated. [1]
Even if one of the indexes had the right composition, there’s no reason why all the questions should be given equal weights. Personal finances and availability of jobs, for example, may influence a consumer’s expenditures more than overall business conditions; short-term prospects should matter more than distant ones. In both the MI and the CI, however, every question counts the same.
Despite my bashing of the indexes, the surveys are worth keeping. Each of them contains some question that can help predict one or other component of expenditures. More specifically, the Conference Board’s questions about job prospects help forecast expenditures on durable goods: sentiment about the current job situation (question number two in the table) significantly predicts purchases of vehicles and other durables; expectations about future jobs (question four) predicts expenditures on vehicles only. [1] The Michigan survey, on the other hand, contains questions which are not used in the indexes. It would be worth exploring whether they are useful for forecasters.
Unfortunately, the component questions are not accessible to most people. If they are, it’s only with significant delay. And even if they were published timely, most people wouldn’t be able to use them because they can’t handle the number crunching. So here’s my advice for the everyday news consumer. First, don’t draw any conclusions from month-to-month changes of the indexes, no matter how large they are. Start believing them only after several months of consecutive rises or declines. Second, the Conference Board index is a better predictor than the Michigan index, because the latter doesn’t include any question about jobs. Third, rather than sentiment indicators, pay attention to data on the labor market: the unemployment rate and the payroll numbers, for example, averaged over at least three months. Not only do they gauge consumers’ confidence more accurately than the confidence indexes themselves: they influence spending decisions directly (the more unemployment, the less disposable income).
In all fairness, the intention of the MI and the CI was never to forecast any specific variable. They were designed over 40 years ago as a rough measure of the households’ view of the state of the economy. Even if the surveys captured expectations correctly, it should be up to economists, not statisticians, pollsters or newspapers, to figure out how those expectations translate into realized outcomes. Some day we’ll know how to do it. I’m pretty confident.
References and further reading:
[1] Bram and Ludvigson (1998) Does consumer confidence forecast household expenditure? A sentiment index horserace (pdf)
[2] Carroll, Fuhrer and Wilcox (1994) Does consumer sentiment forecast household spending? If so, why? (pdf)
[3] Croushore (2006) Consumer confidence surveys: can they help us forecast consumer spending in real time? (pdf)
Technorati tags: economics, consumer confidence, consumer sentiment, forecasting, expectations
At first glance, both the Michigan index (MI) and the Conference Board index (CI) are correlated with the business cycle: they sink around the beginning of a recession and rebound near the end (see chart nearby, originally published by the Wall Street Journal). They even seem to track the quarter-to-quarter growth of consumption expenditures. Look a bit closer, however, and you’ll see that confidence and reality get out of synch sometimes. For instance, both the MI and the CI were abnormally low relative to consumption growth in 1992-1993, and again during 2002 and 2003. The indices dipped during the Asian crisis of 1998, but consumption growth didn’t budge; conversely, expenditure growth fell dramatically in early 1995 even though sentiment didn’t change.
Formal statistical analyses have found that consumer sentiment says very little that forecasters don’t know already. That is, once this quarter’s spending, interest rates, etc. are known, it does not help much to predict future spending growth. Confidence and expectations matter. The issue, I reckon, is that these particular indices fail to capture them.
A cursory look at the guts of the MI and the CI will convince you that they are literally meaningless. Each of them is a mishmash of five opinions — which, by the way, are not the same for both surveys (see table below). The questionnaires represent but the pollster’s guess of what determines spending. There’s no guarantee that the questions are the ones that actually matter.
Click to enlarge
For instance, the MI doesn’t include questions on job security, whereas the CI doesn’t ask about present personal finances. The potential irrelevance of the surveys becomes painfully clear when one examines the first question of the MI: “Do you think now is a good or bad time for people to buy major household items?” With such a specific wording, that question should predict expenditures on cars, appliances, furniture and such, i.e. durable goods. But once past purchases are included into the forecasting model, confidence and expenditures are barely correlated. [1]
Even if one of the indexes had the right composition, there’s no reason why all the questions should be given equal weights. Personal finances and availability of jobs, for example, may influence a consumer’s expenditures more than overall business conditions; short-term prospects should matter more than distant ones. In both the MI and the CI, however, every question counts the same.
Despite my bashing of the indexes, the surveys are worth keeping. Each of them contains some question that can help predict one or other component of expenditures. More specifically, the Conference Board’s questions about job prospects help forecast expenditures on durable goods: sentiment about the current job situation (question number two in the table) significantly predicts purchases of vehicles and other durables; expectations about future jobs (question four) predicts expenditures on vehicles only. [1] The Michigan survey, on the other hand, contains questions which are not used in the indexes. It would be worth exploring whether they are useful for forecasters.
Unfortunately, the component questions are not accessible to most people. If they are, it’s only with significant delay. And even if they were published timely, most people wouldn’t be able to use them because they can’t handle the number crunching. So here’s my advice for the everyday news consumer. First, don’t draw any conclusions from month-to-month changes of the indexes, no matter how large they are. Start believing them only after several months of consecutive rises or declines. Second, the Conference Board index is a better predictor than the Michigan index, because the latter doesn’t include any question about jobs. Third, rather than sentiment indicators, pay attention to data on the labor market: the unemployment rate and the payroll numbers, for example, averaged over at least three months. Not only do they gauge consumers’ confidence more accurately than the confidence indexes themselves: they influence spending decisions directly (the more unemployment, the less disposable income).
In all fairness, the intention of the MI and the CI was never to forecast any specific variable. They were designed over 40 years ago as a rough measure of the households’ view of the state of the economy. Even if the surveys captured expectations correctly, it should be up to economists, not statisticians, pollsters or newspapers, to figure out how those expectations translate into realized outcomes. Some day we’ll know how to do it. I’m pretty confident.
References and further reading:
[1] Bram and Ludvigson (1998) Does consumer confidence forecast household expenditure? A sentiment index horserace (pdf)
[2] Carroll, Fuhrer and Wilcox (1994) Does consumer sentiment forecast household spending? If so, why? (pdf)
[3] Croushore (2006) Consumer confidence surveys: can they help us forecast consumer spending in real time? (pdf)
Technorati tags: economics, consumer confidence, consumer sentiment, forecasting, expectations
Tuesday, October 28, 2008
Housing Bubble Sites
National Sites
Regional Sites
- The Housing Bubble
- The House Bubble
- Housing Panic
- Paper Economy a US Real Estate Bubble Blog
- Housing Doom Housing Bubble
- Doctor Housing Bubble
- Bubble Markets Inventory Tracking
- Priced Out Fovever
- HousingTracker
- Matrix
- The Real Estate Bloggers
- The Mortgage Lender Implode-O-Meter
- Housing Bubble Casualty
- Housing Bubble Bust
- Bubble Pictures
- Bubble News Network
- Lawrence Yun Watch
- Is There a Housing Bubble
- Real Estate Comments
Regional Sites
- DC Home Prices
- Greater Northern VA Housing Bubble Fallout
- Frankly Realty (Virginia)
- Baltimore Metro Area Housing Blog
- Baltimore Housing Bubble
- Chicago Bubble Blog
- Irvine Housing Bubble
- The Jersey Shore RE Bubble
- New Jersey Real Estate Report
- Socket Site (San Francisco)
- Patrick.net (San Francisco)
- Bay Area Real Estate Blog
- Burbed (San Francisco)
- Marin Real Estate Bubble
- Sonoma Housing Bubble
- Seattle Bubble
- Calgary Contrarian
- Vancouver Housing Market Blog
- SoCal Real Estate Bubble Blog
- Flippers in Trouble (Sacramento)
- Portland Housing
- Proffesor Piggington (San Deigo)
- Pacific Beach Bubble
- Boston Bubble
- California Housing Forecast
- Massachusetts Housing Market
- Vancouver Condo Info
- New York City Housing Bubble
Monday, October 27, 2008
Vetting
Having been through the process of “vetting” prospective cabinet members, I can tell you it’s time-consuming, detailed, and thorough. I’d like to think the vetting of a vice presidential nominee would be more so – especially one whose odds of becoming president, should she be elected, are somewhat higher than that of the normal vice president.
Sixteen years ago, Bill Clinton’s “vetting” team asked me and other prospective cabinet members for (1) our tax returns, going back at least five years, (2) our bank records, (3) a detailed listing of our assets, (4) the names and places of everywhere we had lived, and the names and phone numbers of neighbors whom they could call about us, (5) a description of every job we had ever had, every client we had ever served, and the names of employers and clients with whom they could check, (6) the names of our family members, their ages, their occupations (if any), (7) a description of any civil or criminal investigations or prosecutions in which we had been involved (8) and – perhaps most importantly – “anything we should ask you about, the answer to which might cause you or the administration any embarrassment.”
It didn’t stop there. Investigators checked our answers, interviewed our friends and neighbors and former employers, asked for more records if uncertain. Agents from the Federal Bureau of Investigation did their own background checks. Staff members of the relevant congressional committees, representing both parties, looked over the files and added questions of their own.
It didn’t even stop there. I recall two large, three-ring black binders containing passages from books and articles I had written that might prove troubling to some of the Senators. My vetting team suggested I be prepared to answer questions about them.
The process took well over a month, not including the Senate confirmation hearing. I don’t recall doing anything during that interval except responding to questions from the vetting team, the FBI, and oversight committee staffers, both Republican and Democrat.
Do you believe Sarah Palin was put through anything remotely like this before John McCain decided she would be his vice presidential candidate, and possible President of the United States?
Sixteen years ago, Bill Clinton’s “vetting” team asked me and other prospective cabinet members for (1) our tax returns, going back at least five years, (2) our bank records, (3) a detailed listing of our assets, (4) the names and places of everywhere we had lived, and the names and phone numbers of neighbors whom they could call about us, (5) a description of every job we had ever had, every client we had ever served, and the names of employers and clients with whom they could check, (6) the names of our family members, their ages, their occupations (if any), (7) a description of any civil or criminal investigations or prosecutions in which we had been involved (8) and – perhaps most importantly – “anything we should ask you about, the answer to which might cause you or the administration any embarrassment.”
It didn’t stop there. Investigators checked our answers, interviewed our friends and neighbors and former employers, asked for more records if uncertain. Agents from the Federal Bureau of Investigation did their own background checks. Staff members of the relevant congressional committees, representing both parties, looked over the files and added questions of their own.
It didn’t even stop there. I recall two large, three-ring black binders containing passages from books and articles I had written that might prove troubling to some of the Senators. My vetting team suggested I be prepared to answer questions about them.
The process took well over a month, not including the Senate confirmation hearing. I don’t recall doing anything during that interval except responding to questions from the vetting team, the FBI, and oversight committee staffers, both Republican and Democrat.
Do you believe Sarah Palin was put through anything remotely like this before John McCain decided she would be his vice presidential candidate, and possible President of the United States?
Sunday, October 26, 2008
Sugar Giants Shove Their Sweetener
by Chris Tenove
Jul/Aug 2003 Issue
What does anybody know about the sugar industry? The people who put the frosting on the frosted flakes keep a low profile and are happy when folks are too busy eating to ask a lot of questions. Now, though, a dust-up with the World Health Organization (WHO) has flushed them into the limelight, where they're pitting profits against public health.
The conflict was inflamed by a new set of dietary guidelines drawn from two years of research by the WHO and the UN Food and Agricultural Organization. The guidelines are part of a worldwide strategy to tame the swelling epidemic of obesity, diabetes, osteoporosis and cardiovascular diseases. One recommendation is that free sugars (i.e. sugar added to foods) should make up no more than 10 percent of our daily caloric intake. The sugar lobby reacted to that suggestion like a toddler asked to hand back his Halloween booty...
'It was particularly stupid for them to put in writing that they're going to try to get Congress to take away WHO's money,' says Michael Jacobsen, executive director of the Center for Science in the Public Interest. 'It gave consumers a chance to see the kind of bullying that is usually done behind closed doors.' [Adbusters]
Saturday, October 25, 2008
The burden of spending
Over the 12 months to October 2007, home prices in the 20 largest metropolitan areas declined by 6.1 percent. And they have fallen every month since January. With less equity to borrow from, homeowners could cut their spending. As a second whammy, a large volume of adjustable rate mortgages are scheduled to reset to higher interest rates between 2008 and 2012. The burden of higher monthly payments could force households to reduce their expenditures too.
Economic growth and consumer debt are inextricably connected in the U.S. And it’s been that way for so long that it’s easy to forget why and what that implies.
Spending has outpaced personal income since the mid 1980s. Households saved ten percent of disposable income in 1985, five percent in the mid 1990s, and then nothing in 2005. (See chart 1, maroon series, scale on the left axis.)
Chart 1 (click to enlarge)
Economic growth and consumer debt are inextricably connected in the U.S. And it’s been that way for so long that it’s easy to forget why and what that implies.
Spending has outpaced personal income since the mid 1980s. Households saved ten percent of disposable income in 1985, five percent in the mid 1990s, and then nothing in 2005. (See chart 1, maroon series, scale on the left axis.)
Chart 1 (click to enlarge)
Low interest rates motivated the consumption ramp-up. Loose monetary policy played its part, but it would be incorrect to blame it all on the Fed. The massive accumulation of wealth by developing countries lowered the opportunity cost of spending, as Alan Greenspan has explained.
Interest rates motivated it, but the borrowing spree was made possible by innovations in the financial sector that increased the supply of debt. The introduction of the FICO score in the early 1990s improved the assessment of a borrower’s creditworthiness – or at least lenders believe so. By pegging interest rates to an index, instead of offering fixed rates, lenders transferred some financial risk to borrowers. Securitization of debt balances shifted some more of that risk off the lenders’ balance sheets.
The problem with a growth path based on borrowing and spending is that it has a natural end. An individual’s debt limit is determined by her creditworthiness, income capacity and collateral. That limit may be high relative to current income, and it may even be unknown to the borrower — after all, it’s up to the lender to draw the line. But once debt balances reach that limit, spending can grow only as fast as income (minus debt payments). Consumption is pinned to the vagaries of income. At the aggregate level, that means that economic growth is more vulnerable to unemployment and to the swings of the stock and real estate markets.
For instance, back in 2001 unemployment was rising, investment fell sharply, and share prices crashed. But overall the economy held up better than expected. Why? One explanation lies in real estate wealth. That year house prices rose by nine percent and consumers borrowed against home equity.
As a gauge of the current level of indebtedness, households now spend almost 15 percent of their disposable income on interest payments, including mortgages. (See chart 1, blue series, scale on the right axis.) If you include repayment of principal, the fraction of debt payments is much larger. Debt repayments are linked to interest rates, and hence subject to unforeseeable increases. Hence the worry about mortgage resets.
The main variables that determine spending and access to debt are outside the policymaker’s control. The cost of borrowing depends on the world level and distribution of savings. Lenders will continue to improve their assessment and management of risk, thus reducing the cost of credit. And central banks are capable of controlling inflation, but not of preventing asset bubbles or stimulating long-run growth.
But don’t despair: tax policy can mend our spending ways. First of all, do no harm. Tax laws can distort the cost of borrowing. The Tax Reform Act of 1986 partially addressed this issue by getting rid of the deduction for interest paid on consumer debt (credit card and uncollateralized loans). The deduction for mortgage interest should go next. I concede that there’s a (weak) case for subsidizing home ownership. But these days a house is much more than a place to live: it’s a piggy bank to draw from. There is no reason why the government should subsidize that.
Second, replace the personal income tax with a tax on consumption. A basic tenet of economics is that if you tax something you get less of it. An income tax punishes work. Instead, the government could levy a tax on the difference between income and contributions to savings. The new tax could be progressive, rather than flat, and could include personal deductions, just like the current personal income tax.
The main obstacle to those tax policies is political. The mortgage interest deduction is popular, and a consumption tax is still regarded as an oddity. No presidential candidate who actually cares about being elected would make such proposals. Perhaps in 2012, if the then incumbent president can afford it. Changing the nature of American economic growth is a cause worthy of spending political capital on.
Technorati tags: economics, consumption, consumer debt, consumer expenditures, economic growth
Friday, October 24, 2008
Googling "recession" from United States has Tripled in the Past Year
Graph of the number of times the word "recession" was googled from United States over the last year. As one can tell it has triple in the past year.
Thursday, October 23, 2008
McCain, Palin, and the Important Difference Between Boldness and Riskiness
At this perilous juncture, America needs boldness. But it does not need to take unnecessary risks. The distinction between boldness and riskiness is critical, as evidenced by the events of the last two days.
Barack Obama has laid out a bold plan for reforming the economy and redirecting foreign policy -- a plan whose boldness is directly proportional to the scale of the problems we face. On Thursday night he restated it in detail. As someone who has had a very modest role in developing it, and who served as a cabinet officer under Bill Clinton and therefore knows something about public policy and about the challenges we face, I can attest to the appropriateness and boldness of Obama's plan.
John McCain’s plan, on the other hand, is the reverse of boldness. Whatever you think of it, there is little disputing that McCain would continue Bush’s economic and foreign policies and even enlarge upon them – adding even more tax cuts for corporations and the wealthy, injecting even more belligerence into foreign policy.
McCain’s choice of vice president is termed “bold” in today’s headlines but it is not at all bold, if we understand boldness to be the equivalent of courageous and appropriate to the times. To the contrary, the choice suggests that McCain caved to the religious right within the Republican Party, using his pick as a political ploy to
stir their enthusiasm while perhaps attracting a few women who are attracted to a female on a ticket regardless of her views.
Yet his choice is risky – not just for McCain’s campaign but for America’s future. Yesterday McCain celebrated his 72nd birthday; he has a history of skin cancer; if elected, he would be the oldest American ever to serve. Hence, his choice of vice president is critically important because the odds are much higher than normal that such a person would have to assume the office of the presidency.
Sarah Palin has been a governor of state inhabited by more moose than people for twenty months, and before that mayor of a town with a population smaller than two blocks of downtown Manhattan. Although she has barely exercised power, she is already under federal investigation for abuse of it. And while Ms. Palin is perfectly entitled to believe that evolution is a myth, that women should be barred from choosing to have abortions, and that global warming has yet to be proven, these views all run counter to the views of mainstream America.
Palin’s defenders say that she is no less experienced than Obama, but that is false. Barack Obama has served as a United States Senator and an Illinois state legislator; he has also been a community organizer in Chicago. He knows how Washington works and does not work; he knows the ways our cities and metropolitan regions function and do not; his breadth and depth of experience around the world – both personally and officially – is impressive. Obama can lead the nation at a time of crisis; Sarah Palin cannot. Until very recently she did not even know what a vice president does. (Last month, on Larry Kudlow’s CNBC program – a predictable den of conservative Republican thought on which I am a token Democrat – Palin asked “what is it exactly that the V.P. does every day?”)
In choosing Sarah Palin, John McCain has subjected the nation to an unnecessary risk, at the very time when America can least afford to take unnecessary risks. His choice of vice president should not be mistaken for boldness. It is irresponsible.
Barack Obama has laid out a bold plan for reforming the economy and redirecting foreign policy -- a plan whose boldness is directly proportional to the scale of the problems we face. On Thursday night he restated it in detail. As someone who has had a very modest role in developing it, and who served as a cabinet officer under Bill Clinton and therefore knows something about public policy and about the challenges we face, I can attest to the appropriateness and boldness of Obama's plan.
John McCain’s plan, on the other hand, is the reverse of boldness. Whatever you think of it, there is little disputing that McCain would continue Bush’s economic and foreign policies and even enlarge upon them – adding even more tax cuts for corporations and the wealthy, injecting even more belligerence into foreign policy.
McCain’s choice of vice president is termed “bold” in today’s headlines but it is not at all bold, if we understand boldness to be the equivalent of courageous and appropriate to the times. To the contrary, the choice suggests that McCain caved to the religious right within the Republican Party, using his pick as a political ploy to
stir their enthusiasm while perhaps attracting a few women who are attracted to a female on a ticket regardless of her views.
Yet his choice is risky – not just for McCain’s campaign but for America’s future. Yesterday McCain celebrated his 72nd birthday; he has a history of skin cancer; if elected, he would be the oldest American ever to serve. Hence, his choice of vice president is critically important because the odds are much higher than normal that such a person would have to assume the office of the presidency.
Sarah Palin has been a governor of state inhabited by more moose than people for twenty months, and before that mayor of a town with a population smaller than two blocks of downtown Manhattan. Although she has barely exercised power, she is already under federal investigation for abuse of it. And while Ms. Palin is perfectly entitled to believe that evolution is a myth, that women should be barred from choosing to have abortions, and that global warming has yet to be proven, these views all run counter to the views of mainstream America.
Palin’s defenders say that she is no less experienced than Obama, but that is false. Barack Obama has served as a United States Senator and an Illinois state legislator; he has also been a community organizer in Chicago. He knows how Washington works and does not work; he knows the ways our cities and metropolitan regions function and do not; his breadth and depth of experience around the world – both personally and officially – is impressive. Obama can lead the nation at a time of crisis; Sarah Palin cannot. Until very recently she did not even know what a vice president does. (Last month, on Larry Kudlow’s CNBC program – a predictable den of conservative Republican thought on which I am a token Democrat – Palin asked “what is it exactly that the V.P. does every day?”)
In choosing Sarah Palin, John McCain has subjected the nation to an unnecessary risk, at the very time when America can least afford to take unnecessary risks. His choice of vice president should not be mistaken for boldness. It is irresponsible.
Wednesday, October 22, 2008
There Was a Reason They Called It... The Casino Economy
by Thomas Croft
02 Jul 03
In the last three years, a 'perfect storm' of rising energy costs, record consumer and corporate debt and massive trade and current account deficits joined with unsustainable investment practices, and resulted in an economic collapse. The first recession since 1929 to be primarily caused by over-investment, these 'collateral damage' investing schemes-in overseas boondoggles and sweatshops, extreme mergers, absurd dot-coms and derivative scams-all came home to roost. Enron used all of these investment tricks and more. The corruption scandals of 2001-2 completed the melt-down. Now, the world is probably in a double-dip recession, thanks partly to the scandal and continuing international disruptions.
The problem with casino bets and Russian Roulette is that somebody always loses. [CounterPunch]
Tuesday, October 21, 2008
The fiscal stimulus: ineffective or wrong?
The latest economic data show that output growth has weakened and unemployment is creeping up. The government is worried, with good reason, that the economy is going through a pronounced slowdown, perhaps even a recession. To limit the damage, Congress yesterday approved a battery of fiscal measures. By my reckoning, however, the plan will at best provide a short-lived nudge to consumption, but not employment; at worst, it’ll do nothing.
Starting in May, the government will send $600 checks to individuals ($1,200 for couples and an extra $300 for each child). People who earn too little to pay income taxes, but make more than $3,000, will receive a $300 payment. Payments will total $106 billion and will add to the budget deficit.
Cash outlays are supposed to boost private consumption expenditures and accelerate overall growth. $106b may seem a small stimulus for a $14 trillion economy, but the payments are expected to have a “multiplier effect”: higher demand will prompt businesses to hire more workers, and increased employment will further stimulate private consumption, which in turn will induce more hiring. The process continues ad infinitum. The outlays, therefore, can have a final effect on aggregate demand that is many times bigger than the initial stimulus —hence the name “multiplier.”
The effectiveness of the measure hinges on two factors. First, the fraction of the government outlays that will be spent immediately. According to Bruce Bartlett, previous experiences with tax rebates in 1975 and 2001 indicate that it's small. The recent study by Elmendorf and Furman indicates that it's a 50 percent.
The second requirement, which has received less attention, is that businesses will respond to the initial surge in demand by hiring new workers. If they don’t, then the fiscal package will have no second-round impact on demand, and the stimulus to consumption will total just $50b.
Because the first two quarters of 2008 will be marked by considerable uncertainty about the course of the economy in the medium term, the announcement of the fiscal plan will not have an immediate effect on hiring. Manufacturers may ratchet up their inventories, in anticipation of the small jolt of demand in May, but they will do so by using overtime and temp workers, rather than hiring permanent employees. In the services sector, we won’t see any change in employment until the late spring, and even then employers will similarly meet spikes in demand with overtime hours and temp workers, at least initially. If, come June, forecasts have improved, we may see employment pick up over the fall. But by then the effect of the government checks will have played out. In conclusion, the fiscal package won’t provide any significant boost to employment.
A less obvious reason to reject the stimulus is that the slowdown in aggregate demand is necessary, even healthy. Most of the growth experienced between 2002 and 2006 was based on low interest rates, over-valued real estate, and loose lending standards.
Chart 1, from a story by Michael Mandel at BusinessWeek, tells it all. Mandel estimates that, “if consumer spending had tracked the overall economy over the past decade as it has in the past, Americans today would be spending about $600 billion less a year. The extra spending has amounted to a total of about $3 trillion since 2001.” That extra spending was financed with debt. Quite literally, Americans were borrowing their prosperity from the future —not exactly a sustainable growth path.
Chart 1 (left) and 2 (right). Click to enlarge.
The growth of productivity, the value of output per hour worked, confirms the hypothesis that consumer expenditures were out of line with real income gains, at least over the last five years. Robert Gordon of Northwestern University estimates that trend productivity growth peaked in 2002, and has slowed down ever since (see Chart 2, via Michael Mandel’s blog). The gap between long-term growth of GDP and consumption, on the other hand, has widened over the same period.
So, if the recent growth rate of expenditures was excessive, why is Congress rushing to prop it up? More importantly given that the stimulus will be financed with future tax increases: why are legislators borrowing even more from future prosperity? The answers to these questions have a lot to do with politics and very little with economics.
Notice the hodgepodge of enigmatic measures included in the fiscal package. Congress grants payments of $300 to low-income seniors and disabled veterans, but not to other disabled people. It allows federal housing agencies to insure jumbo mortgages, as if subsidies to the purchase of expensive homes was going to parachute the economy. And it includes specific provisions to prevent illegal immigrants from claiming payments, precluding illegals from contributing to the consumption surge, however small that may be. So, if you think about it for a minute, what Congress did is give itself a votes-buying package, which does stimulate something: re-election.
Technorati tags:
economics, macroeconomics, fiscal policy, fiscal stimulus, stabilization policy
Starting in May, the government will send $600 checks to individuals ($1,200 for couples and an extra $300 for each child). People who earn too little to pay income taxes, but make more than $3,000, will receive a $300 payment. Payments will total $106 billion and will add to the budget deficit.
Cash outlays are supposed to boost private consumption expenditures and accelerate overall growth. $106b may seem a small stimulus for a $14 trillion economy, but the payments are expected to have a “multiplier effect”: higher demand will prompt businesses to hire more workers, and increased employment will further stimulate private consumption, which in turn will induce more hiring. The process continues ad infinitum. The outlays, therefore, can have a final effect on aggregate demand that is many times bigger than the initial stimulus —hence the name “multiplier.”
The effectiveness of the measure hinges on two factors. First, the fraction of the government outlays that will be spent immediately. According to Bruce Bartlett, previous experiences with tax rebates in 1975 and 2001 indicate that it's small. The recent study by Elmendorf and Furman indicates that it's a 50 percent.
The second requirement, which has received less attention, is that businesses will respond to the initial surge in demand by hiring new workers. If they don’t, then the fiscal package will have no second-round impact on demand, and the stimulus to consumption will total just $50b.
Because the first two quarters of 2008 will be marked by considerable uncertainty about the course of the economy in the medium term, the announcement of the fiscal plan will not have an immediate effect on hiring. Manufacturers may ratchet up their inventories, in anticipation of the small jolt of demand in May, but they will do so by using overtime and temp workers, rather than hiring permanent employees. In the services sector, we won’t see any change in employment until the late spring, and even then employers will similarly meet spikes in demand with overtime hours and temp workers, at least initially. If, come June, forecasts have improved, we may see employment pick up over the fall. But by then the effect of the government checks will have played out. In conclusion, the fiscal package won’t provide any significant boost to employment.
A less obvious reason to reject the stimulus is that the slowdown in aggregate demand is necessary, even healthy. Most of the growth experienced between 2002 and 2006 was based on low interest rates, over-valued real estate, and loose lending standards.
Chart 1, from a story by Michael Mandel at BusinessWeek, tells it all. Mandel estimates that, “if consumer spending had tracked the overall economy over the past decade as it has in the past, Americans today would be spending about $600 billion less a year. The extra spending has amounted to a total of about $3 trillion since 2001.” That extra spending was financed with debt. Quite literally, Americans were borrowing their prosperity from the future —not exactly a sustainable growth path.
Chart 1 (left) and 2 (right). Click to enlarge.
The growth of productivity, the value of output per hour worked, confirms the hypothesis that consumer expenditures were out of line with real income gains, at least over the last five years. Robert Gordon of Northwestern University estimates that trend productivity growth peaked in 2002, and has slowed down ever since (see Chart 2, via Michael Mandel’s blog). The gap between long-term growth of GDP and consumption, on the other hand, has widened over the same period.So, if the recent growth rate of expenditures was excessive, why is Congress rushing to prop it up? More importantly given that the stimulus will be financed with future tax increases: why are legislators borrowing even more from future prosperity? The answers to these questions have a lot to do with politics and very little with economics.
Notice the hodgepodge of enigmatic measures included in the fiscal package. Congress grants payments of $300 to low-income seniors and disabled veterans, but not to other disabled people. It allows federal housing agencies to insure jumbo mortgages, as if subsidies to the purchase of expensive homes was going to parachute the economy. And it includes specific provisions to prevent illegal immigrants from claiming payments, precluding illegals from contributing to the consumption surge, however small that may be. So, if you think about it for a minute, what Congress did is give itself a votes-buying package, which does stimulate something: re-election.
Technorati tags:
economics, macroeconomics, fiscal policy, fiscal stimulus, stabilization policy
Monday, October 20, 2008
The fiscal stimulus: ineffective or wrong?
The latest economic data show that output growth has weakened and unemployment is creeping up. The government is worried, with good reason, that the economy is going through a pronounced slowdown, perhaps even a recession. To limit the damage, Congress yesterday approved a battery of fiscal measures. By my reckoning, however, the plan will at best provide a short-lived nudge to consumption, but not employment; at worst, it’ll do nothing.
Starting in May, the government will send $600 checks to individuals ($1,200 for couples and an extra $300 for each child). People who earn too little to pay income taxes, but make more than $3,000, will receive a $300 payment. Payments will total $106 billion and will add to the budget deficit.
Cash outlays are supposed to boost private consumption expenditures and accelerate overall growth. $106b may seem a small stimulus for a $14 trillion economy, but the payments are expected to have a “multiplier effect”: higher demand will prompt businesses to hire more workers, and increased employment will further stimulate private consumption, which in turn will induce more hiring. The process continues ad infinitum. The outlays, therefore, can have a final effect on aggregate demand that is many times bigger than the initial stimulus —hence the name “multiplier.”
The effectiveness of the measure hinges on two factors. First, the fraction of the government outlays that will be spent immediately. According to Bruce Bartlett, previous experiences with tax rebates in 1975 and 2001 indicate that it's small. The recent study by Elmendorf and Furman indicates that it's a 50 percent.
The second requirement, which has received less attention, is that businesses will respond to the initial surge in demand by hiring new workers. If they don’t, then the fiscal package will have no second-round impact on demand, and the stimulus to consumption will total just $50b.
Because the first two quarters of 2008 will be marked by considerable uncertainty about the course of the economy in the medium term, the announcement of the fiscal plan will not have an immediate effect on hiring. Manufacturers may ratchet up their inventories, in anticipation of the small jolt of demand in May, but they will do so by using overtime and temp workers, rather than hiring permanent employees. In the services sector, we won’t see any change in employment until the late spring, and even then employers will similarly meet spikes in demand with overtime hours and temp workers, at least initially. If, come June, forecasts have improved, we may see employment pick up over the fall. But by then the effect of the government checks will have played out. In conclusion, the fiscal package won’t provide any significant boost to employment.
A less obvious reason to reject the stimulus is that the slowdown in aggregate demand is necessary, even healthy. Most of the growth experienced between 2002 and 2006 was based on low interest rates, over-valued real estate, and loose lending standards.
Chart 1, from a story by Michael Mandel at BusinessWeek, tells it all. Mandel estimates that, “if consumer spending had tracked the overall economy over the past decade as it has in the past, Americans today would be spending about $600 billion less a year. The extra spending has amounted to a total of about $3 trillion since 2001.” That extra spending was financed with debt. Quite literally, Americans were borrowing their prosperity from the future —not exactly a sustainable growth path.
Chart 1 (left) and 2 (right). Click to enlarge.
The growth of productivity, the value of output per hour worked, confirms the hypothesis that consumer expenditures were out of line with real income gains, at least over the last five years. Robert Gordon of Northwestern University estimates that trend productivity growth peaked in 2002, and has slowed down ever since (see Chart 2, via Michael Mandel’s blog). The gap between long-term growth of GDP and consumption, on the other hand, has widened over the same period.
So, if the recent growth rate of expenditures was excessive, why is Congress rushing to prop it up? More importantly given that the stimulus will be financed with future tax increases: why are legislators borrowing even more from future prosperity? The answers to these questions have a lot to do with politics and very little with economics.
Notice the hodgepodge of enigmatic measures included in the fiscal package. Congress grants payments of $300 to low-income seniors and disabled veterans, but not to other disabled people. It allows federal housing agencies to insure jumbo mortgages, as if subsidies to the purchase of expensive homes was going to parachute the economy. And it includes specific provisions to prevent illegal immigrants from claiming payments, precluding illegals from contributing to the consumption surge, however small that may be. So, if you think about it for a minute, what Congress did is give itself a votes-buying package, which does stimulate something: re-election.
Technorati tags:
economics, macroeconomics, fiscal policy, fiscal stimulus, stabilization policy
Starting in May, the government will send $600 checks to individuals ($1,200 for couples and an extra $300 for each child). People who earn too little to pay income taxes, but make more than $3,000, will receive a $300 payment. Payments will total $106 billion and will add to the budget deficit.
Cash outlays are supposed to boost private consumption expenditures and accelerate overall growth. $106b may seem a small stimulus for a $14 trillion economy, but the payments are expected to have a “multiplier effect”: higher demand will prompt businesses to hire more workers, and increased employment will further stimulate private consumption, which in turn will induce more hiring. The process continues ad infinitum. The outlays, therefore, can have a final effect on aggregate demand that is many times bigger than the initial stimulus —hence the name “multiplier.”
The effectiveness of the measure hinges on two factors. First, the fraction of the government outlays that will be spent immediately. According to Bruce Bartlett, previous experiences with tax rebates in 1975 and 2001 indicate that it's small. The recent study by Elmendorf and Furman indicates that it's a 50 percent.
The second requirement, which has received less attention, is that businesses will respond to the initial surge in demand by hiring new workers. If they don’t, then the fiscal package will have no second-round impact on demand, and the stimulus to consumption will total just $50b.
Because the first two quarters of 2008 will be marked by considerable uncertainty about the course of the economy in the medium term, the announcement of the fiscal plan will not have an immediate effect on hiring. Manufacturers may ratchet up their inventories, in anticipation of the small jolt of demand in May, but they will do so by using overtime and temp workers, rather than hiring permanent employees. In the services sector, we won’t see any change in employment until the late spring, and even then employers will similarly meet spikes in demand with overtime hours and temp workers, at least initially. If, come June, forecasts have improved, we may see employment pick up over the fall. But by then the effect of the government checks will have played out. In conclusion, the fiscal package won’t provide any significant boost to employment.
A less obvious reason to reject the stimulus is that the slowdown in aggregate demand is necessary, even healthy. Most of the growth experienced between 2002 and 2006 was based on low interest rates, over-valued real estate, and loose lending standards.
Chart 1, from a story by Michael Mandel at BusinessWeek, tells it all. Mandel estimates that, “if consumer spending had tracked the overall economy over the past decade as it has in the past, Americans today would be spending about $600 billion less a year. The extra spending has amounted to a total of about $3 trillion since 2001.” That extra spending was financed with debt. Quite literally, Americans were borrowing their prosperity from the future —not exactly a sustainable growth path.
Chart 1 (left) and 2 (right). Click to enlarge.
The growth of productivity, the value of output per hour worked, confirms the hypothesis that consumer expenditures were out of line with real income gains, at least over the last five years. Robert Gordon of Northwestern University estimates that trend productivity growth peaked in 2002, and has slowed down ever since (see Chart 2, via Michael Mandel’s blog). The gap between long-term growth of GDP and consumption, on the other hand, has widened over the same period.So, if the recent growth rate of expenditures was excessive, why is Congress rushing to prop it up? More importantly given that the stimulus will be financed with future tax increases: why are legislators borrowing even more from future prosperity? The answers to these questions have a lot to do with politics and very little with economics.
Notice the hodgepodge of enigmatic measures included in the fiscal package. Congress grants payments of $300 to low-income seniors and disabled veterans, but not to other disabled people. It allows federal housing agencies to insure jumbo mortgages, as if subsidies to the purchase of expensive homes was going to parachute the economy. And it includes specific provisions to prevent illegal immigrants from claiming payments, precluding illegals from contributing to the consumption surge, however small that may be. So, if you think about it for a minute, what Congress did is give itself a votes-buying package, which does stimulate something: re-election.
Technorati tags:
economics, macroeconomics, fiscal policy, fiscal stimulus, stabilization policy
Sunday, October 19, 2008
The fiscal stimulus: ineffective or wrong?
The latest economic data show that output growth has weakened and unemployment is creeping up. The government is worried, with good reason, that the economy is going through a pronounced slowdown, perhaps even a recession. To limit the damage, Congress yesterday approved a battery of fiscal measures. By my reckoning, however, the plan will at best provide a short-lived nudge to consumption, but not employment; at worst, it’ll do nothing.
Starting in May, the government will send $600 checks to individuals ($1,200 for couples and an extra $300 for each child). People who earn too little to pay income taxes, but make more than $3,000, will receive a $300 payment. Payments will total $106 billion and will add to the budget deficit.
Cash outlays are supposed to boost private consumption expenditures and accelerate overall growth. $106b may seem a small stimulus for a $14 trillion economy, but the payments are expected to have a “multiplier effect”: higher demand will prompt businesses to hire more workers, and increased employment will further stimulate private consumption, which in turn will induce more hiring. The process continues ad infinitum. The outlays, therefore, can have a final effect on aggregate demand that is many times bigger than the initial stimulus —hence the name “multiplier.”
The effectiveness of the measure hinges on two factors. First, the fraction of the government outlays that will be spent immediately. According to Bruce Bartlett, previous experiences with tax rebates in 1975 and 2001 indicate that it's small. The recent study by Elmendorf and Furman indicates that it's a 50 percent.
The second requirement, which has received less attention, is that businesses will respond to the initial surge in demand by hiring new workers. If they don’t, then the fiscal package will have no second-round impact on demand, and the stimulus to consumption will total just $50b.
Because the first two quarters of 2008 will be marked by considerable uncertainty about the course of the economy in the medium term, the announcement of the fiscal plan will not have an immediate effect on hiring. Manufacturers may ratchet up their inventories, in anticipation of the small jolt of demand in May, but they will do so by using overtime and temp workers, rather than hiring permanent employees. In the services sector, we won’t see any change in employment until the late spring, and even then employers will similarly meet spikes in demand with overtime hours and temp workers, at least initially. If, come June, forecasts have improved, we may see employment pick up over the fall. But by then the effect of the government checks will have played out. In conclusion, the fiscal package won’t provide any significant boost to employment.
A less obvious reason to reject the stimulus is that the slowdown in aggregate demand is necessary, even healthy. Most of the growth experienced between 2002 and 2006 was based on low interest rates, over-valued real estate, and loose lending standards.
Chart 1, from a story by Michael Mandel at BusinessWeek, tells it all. Mandel estimates that, “if consumer spending had tracked the overall economy over the past decade as it has in the past, Americans today would be spending about $600 billion less a year. The extra spending has amounted to a total of about $3 trillion since 2001.” That extra spending was financed with debt. Quite literally, Americans were borrowing their prosperity from the future —not exactly a sustainable growth path.
Chart 1 (left) and 2 (right). Click to enlarge.
The growth of productivity, the value of output per hour worked, confirms the hypothesis that consumer expenditures were out of line with real income gains, at least over the last five years. Robert Gordon of Northwestern University estimates that trend productivity growth peaked in 2002, and has slowed down ever since (see Chart 2, via Michael Mandel’s blog). The gap between long-term growth of GDP and consumption, on the other hand, has widened over the same period.
So, if the recent growth rate of expenditures was excessive, why is Congress rushing to prop it up? More importantly given that the stimulus will be financed with future tax increases: why are legislators borrowing even more from future prosperity? The answers to these questions have a lot to do with politics and very little with economics.
Notice the hodgepodge of enigmatic measures included in the fiscal package. Congress grants payments of $300 to low-income seniors and disabled veterans, but not to other disabled people. It allows federal housing agencies to insure jumbo mortgages, as if subsidies to the purchase of expensive homes was going to parachute the economy. And it includes specific provisions to prevent illegal immigrants from claiming payments, precluding illegals from contributing to the consumption surge, however small that may be. So, if you think about it for a minute, what Congress did is give itself a votes-buying package, which does stimulate something: re-election.
Technorati tags:
economics, macroeconomics, fiscal policy, fiscal stimulus, stabilization policy
Starting in May, the government will send $600 checks to individuals ($1,200 for couples and an extra $300 for each child). People who earn too little to pay income taxes, but make more than $3,000, will receive a $300 payment. Payments will total $106 billion and will add to the budget deficit.
Cash outlays are supposed to boost private consumption expenditures and accelerate overall growth. $106b may seem a small stimulus for a $14 trillion economy, but the payments are expected to have a “multiplier effect”: higher demand will prompt businesses to hire more workers, and increased employment will further stimulate private consumption, which in turn will induce more hiring. The process continues ad infinitum. The outlays, therefore, can have a final effect on aggregate demand that is many times bigger than the initial stimulus —hence the name “multiplier.”
The effectiveness of the measure hinges on two factors. First, the fraction of the government outlays that will be spent immediately. According to Bruce Bartlett, previous experiences with tax rebates in 1975 and 2001 indicate that it's small. The recent study by Elmendorf and Furman indicates that it's a 50 percent.
The second requirement, which has received less attention, is that businesses will respond to the initial surge in demand by hiring new workers. If they don’t, then the fiscal package will have no second-round impact on demand, and the stimulus to consumption will total just $50b.
Because the first two quarters of 2008 will be marked by considerable uncertainty about the course of the economy in the medium term, the announcement of the fiscal plan will not have an immediate effect on hiring. Manufacturers may ratchet up their inventories, in anticipation of the small jolt of demand in May, but they will do so by using overtime and temp workers, rather than hiring permanent employees. In the services sector, we won’t see any change in employment until the late spring, and even then employers will similarly meet spikes in demand with overtime hours and temp workers, at least initially. If, come June, forecasts have improved, we may see employment pick up over the fall. But by then the effect of the government checks will have played out. In conclusion, the fiscal package won’t provide any significant boost to employment.
A less obvious reason to reject the stimulus is that the slowdown in aggregate demand is necessary, even healthy. Most of the growth experienced between 2002 and 2006 was based on low interest rates, over-valued real estate, and loose lending standards.
Chart 1, from a story by Michael Mandel at BusinessWeek, tells it all. Mandel estimates that, “if consumer spending had tracked the overall economy over the past decade as it has in the past, Americans today would be spending about $600 billion less a year. The extra spending has amounted to a total of about $3 trillion since 2001.” That extra spending was financed with debt. Quite literally, Americans were borrowing their prosperity from the future —not exactly a sustainable growth path.
Chart 1 (left) and 2 (right). Click to enlarge.
The growth of productivity, the value of output per hour worked, confirms the hypothesis that consumer expenditures were out of line with real income gains, at least over the last five years. Robert Gordon of Northwestern University estimates that trend productivity growth peaked in 2002, and has slowed down ever since (see Chart 2, via Michael Mandel’s blog). The gap between long-term growth of GDP and consumption, on the other hand, has widened over the same period.So, if the recent growth rate of expenditures was excessive, why is Congress rushing to prop it up? More importantly given that the stimulus will be financed with future tax increases: why are legislators borrowing even more from future prosperity? The answers to these questions have a lot to do with politics and very little with economics.
Notice the hodgepodge of enigmatic measures included in the fiscal package. Congress grants payments of $300 to low-income seniors and disabled veterans, but not to other disabled people. It allows federal housing agencies to insure jumbo mortgages, as if subsidies to the purchase of expensive homes was going to parachute the economy. And it includes specific provisions to prevent illegal immigrants from claiming payments, precluding illegals from contributing to the consumption surge, however small that may be. So, if you think about it for a minute, what Congress did is give itself a votes-buying package, which does stimulate something: re-election.
Technorati tags:
economics, macroeconomics, fiscal policy, fiscal stimulus, stabilization policy
Saturday, October 18, 2008
Nouriel Roubini: "clear by now that a severe U.S. recession is inevitable in next few months."
Nouriel Roubini, a leading economist at New York University, is now saying that a US Recession is almost here:
"It is increasingly clear by now that a severe U.S. recession is inevitable in next few months. Those of us who warned for the last 12 months about a combination of a worsening housing recession, a severe credit crunch and financial meltdown, high oil prices and a saving-less and debt-burdened consumers being on the ropes causing an economy-wide recession were repeatedly rebuffed the consensus view about a soft landing given the presumed resilience of the US consumer."Roubini is a smart economist who often goes against the consensus view."But the evidence is now building that an ugly recession is inevitable."
Friday, October 17, 2008
Fannie and Freddie, and the Bailout Around the Corner
Any day now -- perhaps any hour -- the plug will be pulled on Fannie Mae and Freddie Mac, and a massive government bailout will ensue. Together, they'll become the largest government-owned entities in American history, and, once again, taxpayers will pay the bill, which could come to $25 billion or more.
One question is how did we ever get to this? The Savings and Loan Bailout of the late 1980s should have taught us that when government guarantees the downside of risks and private investors reap the upside gains, there's hell to pay. The risks Fannie and Freddie took on weren't officially guaranteed by the government -- that is, by you and me -- but investors assumed they were. And so did Fannie's and Freddie's executives, who reaped a bonanza with bonuses in the tens of millions each year.
Apologists will say that Fannie and Freddie exist to make housing loans to low-income Americans, so it was inevitable that the two giants would get caught in the quagmire of the housing burst. But the fact is, Fannie and Freddie -- and the executives who ran them and still run them -- have been out to maximize profits. Period. Just the same as every other mortgage and investment bank. High-risk sub-prime loans offered a higher rate of return, so Fannie and Freddie went into them big time. And because of the implicit government guarantee, Fannie and Freddie could take on even more risks and make even more money. Until now.
It's another case of socialized capitalism, folks. The largest, yet. Along with making lots of money for investors and their executives, Fannie and Freddie corrupted our political process. They blocked any attempt to reign in the risks. Their lobbyists were and are the most sophisticated and among the most ubiquitous in Washington.
What to do now? Hope that, like the S&L fiasco, taxpayers can get back a fair portion of our dollars. But unlike the S&L fiasco, this time we should make sure we bury socialized capitalism for good.
One question is how did we ever get to this? The Savings and Loan Bailout of the late 1980s should have taught us that when government guarantees the downside of risks and private investors reap the upside gains, there's hell to pay. The risks Fannie and Freddie took on weren't officially guaranteed by the government -- that is, by you and me -- but investors assumed they were. And so did Fannie's and Freddie's executives, who reaped a bonanza with bonuses in the tens of millions each year.
Apologists will say that Fannie and Freddie exist to make housing loans to low-income Americans, so it was inevitable that the two giants would get caught in the quagmire of the housing burst. But the fact is, Fannie and Freddie -- and the executives who ran them and still run them -- have been out to maximize profits. Period. Just the same as every other mortgage and investment bank. High-risk sub-prime loans offered a higher rate of return, so Fannie and Freddie went into them big time. And because of the implicit government guarantee, Fannie and Freddie could take on even more risks and make even more money. Until now.
It's another case of socialized capitalism, folks. The largest, yet. Along with making lots of money for investors and their executives, Fannie and Freddie corrupted our political process. They blocked any attempt to reign in the risks. Their lobbyists were and are the most sophisticated and among the most ubiquitous in Washington.
What to do now? Hope that, like the S&L fiasco, taxpayers can get back a fair portion of our dollars. But unlike the S&L fiasco, this time we should make sure we bury socialized capitalism for good.
Thursday, October 16, 2008
Wednesday, October 15, 2008
Recession buzz
Chart 1 (click to enlarge)
It’s been hard for news readers to avoid the word “recession” this January. The number of newspaper stories mentioning it has certainly been overwhelming (see Chart 1). Weak economic data might seem to justify the gloom. Growth has slowed down and the labor market has weakened. Still, we haven’t seen a single quarter of negative growth, and the employment figures have been equivocal, and certainly not recessionary. So, given what we know about the state of the economy, is all this recession chatter justified, or are journalists getting carried away?
To answer that question, I have put together data on the tone of economic reporting in the newspapers, as well as on indicators of the health of the real economy. Then I have estimated a statistical model and compared the level of pessimism of the newspapers with the actual mood that one would expect based on the known state of the economy. The results are pretty exciting. So exciting, in fact, that I plan on updating and reporting my calculations every month, here on EconWeekly.
My measure of usage of the word “recession” is The Economist’s R-word index: the number of stories containing that word in the New York Times and the Washington Post. The index is a surprisingly good indicator of economic slowdowns. It never fails to rise sharply at the beginning of recessions. (See Chart 2.) And in spite of its simplicity, it captures the sentiment of the newspapers pretty well. Mark Doms and Norman Morin, of the Federal Reserve Board, constructed a much fancier recession index for a research project on the subject, containing dozens of media sources and carefully filtering the search terms. And yet, the difference between their measure and The Economist’s R-word index is almost always small. (See Figure 4.1 in Doms and Morin’s paper.)
Chart 2 (click to enlarge)
To gauge the present and immediate future of the economy, I include the following variables in my statistical model: the unemployment rate, the growth of the S&P500 index, the growth of the price of oil, the growth of personal consumption expenditures, and the spread between the ten-year bond and the one-year Treasury bill. (Econometrics jocks can find the details of the statistical model below.)
My model shows that newspapers have indeed been too gloomy this past month. In January, known economic conditions would have justified about 200 stories mentioning the word “recession”; the actual count was around 300. Up until December, however, newspaper mood was approximately in line with the actual state of the economy. (See Chart 3.) Why did newspaper sentiment diverge from economic fundamentals last month?
Chart 3 (click to enlarge)
In January we witnessed a sequence of unusual events. There was ongoing talk about the fiscal stimulus package, which is being introduced precisely to avoid an economic slowdown. The President sketched a plan on January 18, then the House of Representatives announced theirs a week later, and then the Senate considered changing it. Then there was a mini crash in the stock market, followed by the surprise cut of the Federal Reserve’s target interest rate on January 22, and then another cut at the Fed’s scheduled meeting on the 30th. Every newspaper story that reported any of these events most likely included the word “recession.”
But, at least in part, I believe that the buzz has to do with incentives in the news industry. Even when reporting facts, every media outlet strives to agree with the views of its audience. Fox News would lose its parish if it started “showing” that the Iraq surge was wrong and ineffective, and the Wall Street Journal would clash against the opinions of its readers if it started “proving” that the Bush tax cuts were a bad idea. Maintaining an audience depends vitally on conforming to their prior expectations. (Note to self: what do EconWeekly readers expect?)
Economics reporting is a bit different because the state of the economy can be measured and verified more objectively. As a result, views are more homogeneous across audiences. Still, media outlets need to take into account three factors which determine the views news consumers, and therefore the choice of tone and volume of economic reports: intrinsic pessimism, past reports on the state of the economy, and reports from other media outlets.
Bryan Caplan of George Mason University has identified pessimism as one of the four capital biases of the average Joe. (Read this summary.) People routinely see negative trends in long-term living standards, wages, inequality, etc. The gloom extends to the state of the economy at any given moment. About half of Americans have been thinking that we are in a recession, or on the brink of one, since October! Where that pessimism comes from, I have no idea. David Hume, Caplan says, thought that “the humour of blaming the present, and admiring the past, is strongly rooted in human nature.” It sounds appealing. But whichever the reason, the media recognize the appeal of worrying reports about the economy —and deliver.
Inherent pessimism influences the interpretation that the media put on any given piece of hard data. But once the newspapers set clouds in the horizon, their incentives to deliver negative news become stronger, because they need to conform to the readers’ expectations. A newspaper that changed its view on the state of the economy would go against the prior views —plus, it would be accused of the horrible crime of flip-flopping. A newspaper has therefore an incentive to keep a certain mood even on something as relatively objective as the state of the economy. Past negative reports will lead to more negative reports in the future, feeding a cycle of pessimism, unless new hard data against such views are so strong that the paper is forced to tone it down over time.
Finally, people are exposed to reports from more than one source of information, even if it’s secondhand. Any newspaper that strayed from the average mood of all other newspapers would conflict with the established view, alienating itself. Any given outlet has thus an incentive to stay in line with the tone of all the major media, resulting in “herd behavior”: the tendency to base decisions (in this case the tone of the news) on the behavior of the rest of the community (other media outlets).
The combination of natural pessimism and the need to conform to the public’s views, therefore, explains why sometimes reporting on the economy is not consistent with actual events, as is the case now. Only policymakers, animal spirits and time can determine whether we’ll see a recession in 2008. For now, skip the editorials on economics.
Statistical model:
VAR, with monthly data, from January of 1976 through the latest month available. Each equation includes six lags. The variables are: the R-word index, the unemployment rate, the change in nonfarm payrolls, the slope of the yield curve (10-year minus 1-year), the growth of personal consumption expenditures on durable goods accumulated over the current and previous two months, and the growth of the industrial production index, also accumulated over the same period. I also include a set of monthly dummies and a dummy variable that equals 1 if the NBER announced a decline in real GDP. The unemployment rate is the first release reported by the BLS. The change in payrolls mimics the one reported by the BLS, that is, it is equal to the first estimate of payrolls for month t, minus the revised (first update) figure for month t-1. Both unemployment and payroll figures come from ALFRED. The yields on the ten-year bond and the one-year Treasury bill are monthly averages, from FRED. Durable expenditures come from the NIPA accounts, via FRED, and the industrial production index is from the Federal Reserve, also via FRED.
Technorati tags:
economics, news, media bias, recession, media
Tuesday, October 14, 2008
Monday, October 13, 2008
An Ode to Labor Day
Wedged in between the Olympics, and the Democratic and Republican conventions, is a holiday we still call Labor Day, along with Labor Day Weekend, although don't expect much media attention to it or its meaning.
In truth, as a young man I never thought much about unions, or even about labor protections -- at least until my first job.
I told my friends I'd landed a job in the advertising business. But that was an exaggeration. It was what today we'd call a summer "internship" -- a kind of foot-in-the-door that might someday lead to a real job.
In truth, it wasn't even a foot in the door. More like a big toe. I was a "go-fer" -- someone who's told to "go-fer" coffee, "go-fer" sandwiches, "go-fer" this or that package. I go-ferred for weeks, running around New York City on errands.
But even though being a go-fer wasn't glamorous, I was fired with enthusiasm. I basked in the glow of the firm's worldly-wise creativity, its brand-name clients, and the important meetings I'd supply with coffee, sandwiches and packages.
After a time I got fewer go-fer assignments. I assumed this meant I was now primed for the big leagues, ready to join a full-fledged ad campaign. But the real reason was I didn't know New York well enough and got lost when I went for a package more than a few blocks away. I was so late with one of them I didn't deliver it in time for an important meeting. So they stopped asking me to go-fer.
At this point the head of the firm gave me a different assignment, but it wasn't an ad campaign. It was to take care of his dog, which he brought into the office every day. A big Irish Wolfhound named Prince, who had a bowel problem. My job was, well, you can imagine. I told myself this was a kind of promotion. After all, I was now working for the boss.
But I was actually working for Prince. And one day I was scraping Prince's bowel problem off the small terrace outside the boss's office -- for the third time that day -- in the 95-degree heat and humidity of a New York August, and I finally realized something I should have known all along. This job wasn't going anywhere.
So, I summoned the nerve to tell the boss I wouldn't take care of Prince anymore, and he summoned the indignation to tell me I had a nerve, and that was that.
I ended my first job just as I had started it -- fired ... with enthusiasm.
Labor Day should remind us how many shitty jobs still exist.
In truth, as a young man I never thought much about unions, or even about labor protections -- at least until my first job.
I told my friends I'd landed a job in the advertising business. But that was an exaggeration. It was what today we'd call a summer "internship" -- a kind of foot-in-the-door that might someday lead to a real job.
In truth, it wasn't even a foot in the door. More like a big toe. I was a "go-fer" -- someone who's told to "go-fer" coffee, "go-fer" sandwiches, "go-fer" this or that package. I go-ferred for weeks, running around New York City on errands.
But even though being a go-fer wasn't glamorous, I was fired with enthusiasm. I basked in the glow of the firm's worldly-wise creativity, its brand-name clients, and the important meetings I'd supply with coffee, sandwiches and packages.
After a time I got fewer go-fer assignments. I assumed this meant I was now primed for the big leagues, ready to join a full-fledged ad campaign. But the real reason was I didn't know New York well enough and got lost when I went for a package more than a few blocks away. I was so late with one of them I didn't deliver it in time for an important meeting. So they stopped asking me to go-fer.
At this point the head of the firm gave me a different assignment, but it wasn't an ad campaign. It was to take care of his dog, which he brought into the office every day. A big Irish Wolfhound named Prince, who had a bowel problem. My job was, well, you can imagine. I told myself this was a kind of promotion. After all, I was now working for the boss.
But I was actually working for Prince. And one day I was scraping Prince's bowel problem off the small terrace outside the boss's office -- for the third time that day -- in the 95-degree heat and humidity of a New York August, and I finally realized something I should have known all along. This job wasn't going anywhere.
So, I summoned the nerve to tell the boss I wouldn't take care of Prince anymore, and he summoned the indignation to tell me I had a nerve, and that was that.
I ended my first job just as I had started it -- fired ... with enthusiasm.
Labor Day should remind us how many shitty jobs still exist.
Sunday, October 12, 2008
Saturday, October 11, 2008
On college endowments
According to a study released yesterday by the National Association of College and University Business Officers (NACUBO), the endowment fund of Harvard University is worth $34.6 billion, a 19.8% percent higher than a year ago. 76 colleges and universities sit on endowments over $1b. Even more impressively, almost every one of the 733 institutions analyzed reports a double-digit increase in the value of its fund. (Look up the endowment of your alma mater here.)
Chart 1 (click to enlarge)
The increase in the value of the endowments has been the result of at least two factors: risk taking and stock market bonanza. First, higher-education institutions invest large portions of their wealth on high-risk, high-return securities. On a dollar-weighted average, in 2007 they held a 47.4% of their funds in equities, an 18.2% in hedge funds, a 5.4% in private equity, and a 3.6% on venture capital investments. Wealthier universities hold riskier portfolios than the average. (See Chart 1.)
Second, average stock prices have increased almost every single year for over 25 years. In spite of the burst of the dot-com bubble in 2000, the inflation-adjusted Dow Jones Industrial Average Index ended 2007 at a level five times higher than in 1982. Even the most passive portfolio manager would have achieved high returns in this stock market.
Chart 2 (click to enlarge)
No surprise then that most universities have performed so well. Over the last ten years, the return on most endowments beats the S&P 500 index, which grew at a healthy 7.1% annual rate itself. (See Chart 2.) In the case of the largest portfolios, universities beat the market by a long shot.
News of these fabulous riches has prompted some sectors to demand that universities share more of their wealth. Lawmakers remind them that, as tax-exempt institutions, “they’re supposed to offer public benefit in return for (that) exemption.” Private foundations, which are also tax-exempt, are required by law to spend 5% each year; the average for colleges is 4.6%, with little variation across levels of wealth (see data). Parents, on the other hand, don’t understand why tuition keeps going up while universities continue to amass wealth. Little do they suspect that the cost of college is stoked by the self-interest of parents and students themselves, not that of universities.
The classic explanation for the rise of tuition is that the college premium —the positive gap between the earnings of college graduates and high school graduates— has increased the demand for college education, thereby raising its equilibrium price.
More interestingly, the stock market has also made tuition rates go up, according to a paper* by my former colleague at the University of Chicago Pablo Peña (pdf). Rises in asset prices increase the amount of resources available to universities. Part of that wealth is spent on inputs that improve the quality of education: more and better qualified professors, and newer and more sophisticated facilities, such as labs, computers and libraries, for instance. Higher quality, in turn, increases the amount of human capital accumulated in college, and ultimately affects life-time earnings, i.e. the returns to education. Prestige considerations may be at work too: celebrity professors and state-of-the-art facilities increase the reputation of the institution, adding to the value of the diploma. Therefore, larger endowments spur the demand for college education, and drive up tuition rates.
Differences in the value of endowments across universities are vast: the combined value of the top ten colleges represents 35% of total endowment assets. In light of Pablo’s theory, the implications of this inequality depend on what universities and colleges spend their money on.
If they continue to use their wealth to improve the quality of the service they provide, demand for college education and tuition levels will continue to rise. Differences in tuition rates and education quality between top-notch and second-tier institutions will continue to widen too, since endowments and asset returns are highly concentrated. Also, because the ablest students —those with highest SAT scores or best records of achievement in high school— benefit the most from the quality of college education, the matching of the best students with the best institutions will intensify. Differences in the quality of students across colleges will increase.
On the other hand, universities could start using their endowments to increase capacity or subsidize the cost of college. In this unlikely scenario, the equilibrium price of higher education will probably decline, the quality of college education will drop, and the college premium —the earnings of college graduates vis-à-vis high-school graduates— will drop.
Selected institutions have recently been announcing that they will increase financial aid. Recent announcements might suggest that this could actually happen among selected institutions. Harvard and Dartmouth have eliminated loans from their aid packages and will be giving grants instead; and Yale has followed in their footsteps. These de facto cuts in average tuition rates are not going to change the system. First, they won’t change the quality of education at top universities, for which the foregone tuition revenue is peanuts. Second, they won’t reduce the cost of attendance of the average college student, because the number of institutions that can afford foregoing tuition revenues is small.
But improved aid packages at top schools will make their programs affordable to the brightest students, regardless of their financial situation. If the newfound altruism of the Harvards and Yales has any effect, that will be an even more pronounced assortative matching of colleges and applicants by quality. The scope of these developments is very limited, but it’s good news —at least for believers, like myself, in a free, merit-based education system.
More data:
Tuition rates: table of nominal rates (html), graph of real rates (pdf, Figure 1)
Technorati tags: economics, education, college, endowments, college tuition
Chart 1 (click to enlarge)
The increase in the value of the endowments has been the result of at least two factors: risk taking and stock market bonanza. First, higher-education institutions invest large portions of their wealth on high-risk, high-return securities. On a dollar-weighted average, in 2007 they held a 47.4% of their funds in equities, an 18.2% in hedge funds, a 5.4% in private equity, and a 3.6% on venture capital investments. Wealthier universities hold riskier portfolios than the average. (See Chart 1.)
Second, average stock prices have increased almost every single year for over 25 years. In spite of the burst of the dot-com bubble in 2000, the inflation-adjusted Dow Jones Industrial Average Index ended 2007 at a level five times higher than in 1982. Even the most passive portfolio manager would have achieved high returns in this stock market.
Chart 2 (click to enlarge)
No surprise then that most universities have performed so well. Over the last ten years, the return on most endowments beats the S&P 500 index, which grew at a healthy 7.1% annual rate itself. (See Chart 2.) In the case of the largest portfolios, universities beat the market by a long shot.
News of these fabulous riches has prompted some sectors to demand that universities share more of their wealth. Lawmakers remind them that, as tax-exempt institutions, “they’re supposed to offer public benefit in return for (that) exemption.” Private foundations, which are also tax-exempt, are required by law to spend 5% each year; the average for colleges is 4.6%, with little variation across levels of wealth (see data). Parents, on the other hand, don’t understand why tuition keeps going up while universities continue to amass wealth. Little do they suspect that the cost of college is stoked by the self-interest of parents and students themselves, not that of universities.
The classic explanation for the rise of tuition is that the college premium —the positive gap between the earnings of college graduates and high school graduates— has increased the demand for college education, thereby raising its equilibrium price.
More interestingly, the stock market has also made tuition rates go up, according to a paper* by my former colleague at the University of Chicago Pablo Peña (pdf). Rises in asset prices increase the amount of resources available to universities. Part of that wealth is spent on inputs that improve the quality of education: more and better qualified professors, and newer and more sophisticated facilities, such as labs, computers and libraries, for instance. Higher quality, in turn, increases the amount of human capital accumulated in college, and ultimately affects life-time earnings, i.e. the returns to education. Prestige considerations may be at work too: celebrity professors and state-of-the-art facilities increase the reputation of the institution, adding to the value of the diploma. Therefore, larger endowments spur the demand for college education, and drive up tuition rates.
Differences in the value of endowments across universities are vast: the combined value of the top ten colleges represents 35% of total endowment assets. In light of Pablo’s theory, the implications of this inequality depend on what universities and colleges spend their money on.
If they continue to use their wealth to improve the quality of the service they provide, demand for college education and tuition levels will continue to rise. Differences in tuition rates and education quality between top-notch and second-tier institutions will continue to widen too, since endowments and asset returns are highly concentrated. Also, because the ablest students —those with highest SAT scores or best records of achievement in high school— benefit the most from the quality of college education, the matching of the best students with the best institutions will intensify. Differences in the quality of students across colleges will increase.
On the other hand, universities could start using their endowments to increase capacity or subsidize the cost of college. In this unlikely scenario, the equilibrium price of higher education will probably decline, the quality of college education will drop, and the college premium —the earnings of college graduates vis-à-vis high-school graduates— will drop.
Selected institutions have recently been announcing that they will increase financial aid. Recent announcements might suggest that this could actually happen among selected institutions. Harvard and Dartmouth have eliminated loans from their aid packages and will be giving grants instead; and Yale has followed in their footsteps. These de facto cuts in average tuition rates are not going to change the system. First, they won’t change the quality of education at top universities, for which the foregone tuition revenue is peanuts. Second, they won’t reduce the cost of attendance of the average college student, because the number of institutions that can afford foregoing tuition revenues is small.
But improved aid packages at top schools will make their programs affordable to the brightest students, regardless of their financial situation. If the newfound altruism of the Harvards and Yales has any effect, that will be an even more pronounced assortative matching of colleges and applicants by quality. The scope of these developments is very limited, but it’s good news —at least for believers, like myself, in a free, merit-based education system.
More data:
Tuition rates: table of nominal rates (html), graph of real rates (pdf, Figure 1)
Technorati tags: economics, education, college, endowments, college tuition
Friday, October 10, 2008
On college endowments
According to a study released yesterday by the National Association of College and University Business Officers (NACUBO), the endowment fund of Harvard University is worth $34.6 billion, a 19.8% percent higher than a year ago. 76 colleges and universities sit on endowments over $1b. Even more impressively, almost every one of the 733 institutions analyzed reports a double-digit increase in the value of its fund. (Look up the endowment of your alma mater here.)
Chart 1 (click to enlarge)
The increase in the value of the endowments has been the result of at least two factors: risk taking and stock market bonanza. First, higher-education institutions invest large portions of their wealth on high-risk, high-return securities. On a dollar-weighted average, in 2007 they held a 47.4% of their funds in equities, an 18.2% in hedge funds, a 5.4% in private equity, and a 3.6% on venture capital investments. Wealthier universities hold riskier portfolios than the average. (See Chart 1.)
Second, average stock prices have increased almost every single year for over 25 years. In spite of the burst of the dot-com bubble in 2000, the inflation-adjusted Dow Jones Industrial Average Index ended 2007 at a level five times higher than in 1982. Even the most passive portfolio manager would have achieved high returns in this stock market.
Chart 2 (click to enlarge)
No surprise then that most universities have performed so well. Over the last ten years, the return on most endowments beats the S&P 500 index, which grew at a healthy 7.1% annual rate itself. (See Chart 2.) In the case of the largest portfolios, universities beat the market by a long shot.
News of these fabulous riches has prompted some sectors to demand that universities share more of their wealth. Lawmakers remind them that, as tax-exempt institutions, “they’re supposed to offer public benefit in return for (that) exemption.” Private foundations, which are also tax-exempt, are required by law to spend 5% each year; the average for colleges is 4.6%, with little variation across levels of wealth (see data). Parents, on the other hand, don’t understand why tuition keeps going up while universities continue to amass wealth. Little do they suspect that the cost of college is stoked by the self-interest of parents and students themselves, not that of universities.
The classic explanation for the rise of tuition is that the college premium —the positive gap between the earnings of college graduates and high school graduates— has increased the demand for college education, thereby raising its equilibrium price.
More interestingly, the stock market has also made tuition rates go up, according to a paper* by my former colleague at the University of Chicago Pablo Peña (pdf). Rises in asset prices increase the amount of resources available to universities. Part of that wealth is spent on inputs that improve the quality of education: more and better qualified professors, and newer and more sophisticated facilities, such as labs, computers and libraries, for instance. Higher quality, in turn, increases the amount of human capital accumulated in college, and ultimately affects life-time earnings, i.e. the returns to education. Prestige considerations may be at work too: celebrity professors and state-of-the-art facilities increase the reputation of the institution, adding to the value of the diploma. Therefore, larger endowments spur the demand for college education, and drive up tuition rates.
Differences in the value of endowments across universities are vast: the combined value of the top ten colleges represents 35% of total endowment assets. In light of Pablo’s theory, the implications of this inequality depend on what universities and colleges spend their money on.
If they continue to use their wealth to improve the quality of the service they provide, demand for college education and tuition levels will continue to rise. Differences in tuition rates and education quality between top-notch and second-tier institutions will continue to widen too, since endowments and asset returns are highly concentrated. Also, because the ablest students —those with highest SAT scores or best records of achievement in high school— benefit the most from the quality of college education, the matching of the best students with the best institutions will intensify. Differences in the quality of students across colleges will increase.
On the other hand, universities could start using their endowments to increase capacity or subsidize the cost of college. In this unlikely scenario, the equilibrium price of higher education will probably decline, the quality of college education will drop, and the college premium —the earnings of college graduates vis-à-vis high-school graduates— will drop.
Selected institutions have recently been announcing that they will increase financial aid. Recent announcements might suggest that this could actually happen among selected institutions. Harvard and Dartmouth have eliminated loans from their aid packages and will be giving grants instead; and Yale has followed in their footsteps. These de facto cuts in average tuition rates are not going to change the system. First, they won’t change the quality of education at top universities, for which the foregone tuition revenue is peanuts. Second, they won’t reduce the cost of attendance of the average college student, because the number of institutions that can afford foregoing tuition revenues is small.
But improved aid packages at top schools will make their programs affordable to the brightest students, regardless of their financial situation. If the newfound altruism of the Harvards and Yales has any effect, that will be an even more pronounced assortative matching of colleges and applicants by quality. The scope of these developments is very limited, but it’s good news —at least for believers, like myself, in a free, merit-based education system.
More data:
Tuition rates: table of nominal rates (html), graph of real rates (pdf, Figure 1)
Technorati tags: economics, education, college, endowments, college tuition
Chart 1 (click to enlarge)
The increase in the value of the endowments has been the result of at least two factors: risk taking and stock market bonanza. First, higher-education institutions invest large portions of their wealth on high-risk, high-return securities. On a dollar-weighted average, in 2007 they held a 47.4% of their funds in equities, an 18.2% in hedge funds, a 5.4% in private equity, and a 3.6% on venture capital investments. Wealthier universities hold riskier portfolios than the average. (See Chart 1.)
Second, average stock prices have increased almost every single year for over 25 years. In spite of the burst of the dot-com bubble in 2000, the inflation-adjusted Dow Jones Industrial Average Index ended 2007 at a level five times higher than in 1982. Even the most passive portfolio manager would have achieved high returns in this stock market.
Chart 2 (click to enlarge)
No surprise then that most universities have performed so well. Over the last ten years, the return on most endowments beats the S&P 500 index, which grew at a healthy 7.1% annual rate itself. (See Chart 2.) In the case of the largest portfolios, universities beat the market by a long shot.
News of these fabulous riches has prompted some sectors to demand that universities share more of their wealth. Lawmakers remind them that, as tax-exempt institutions, “they’re supposed to offer public benefit in return for (that) exemption.” Private foundations, which are also tax-exempt, are required by law to spend 5% each year; the average for colleges is 4.6%, with little variation across levels of wealth (see data). Parents, on the other hand, don’t understand why tuition keeps going up while universities continue to amass wealth. Little do they suspect that the cost of college is stoked by the self-interest of parents and students themselves, not that of universities.
The classic explanation for the rise of tuition is that the college premium —the positive gap between the earnings of college graduates and high school graduates— has increased the demand for college education, thereby raising its equilibrium price.
More interestingly, the stock market has also made tuition rates go up, according to a paper* by my former colleague at the University of Chicago Pablo Peña (pdf). Rises in asset prices increase the amount of resources available to universities. Part of that wealth is spent on inputs that improve the quality of education: more and better qualified professors, and newer and more sophisticated facilities, such as labs, computers and libraries, for instance. Higher quality, in turn, increases the amount of human capital accumulated in college, and ultimately affects life-time earnings, i.e. the returns to education. Prestige considerations may be at work too: celebrity professors and state-of-the-art facilities increase the reputation of the institution, adding to the value of the diploma. Therefore, larger endowments spur the demand for college education, and drive up tuition rates.
Differences in the value of endowments across universities are vast: the combined value of the top ten colleges represents 35% of total endowment assets. In light of Pablo’s theory, the implications of this inequality depend on what universities and colleges spend their money on.
If they continue to use their wealth to improve the quality of the service they provide, demand for college education and tuition levels will continue to rise. Differences in tuition rates and education quality between top-notch and second-tier institutions will continue to widen too, since endowments and asset returns are highly concentrated. Also, because the ablest students —those with highest SAT scores or best records of achievement in high school— benefit the most from the quality of college education, the matching of the best students with the best institutions will intensify. Differences in the quality of students across colleges will increase.
On the other hand, universities could start using their endowments to increase capacity or subsidize the cost of college. In this unlikely scenario, the equilibrium price of higher education will probably decline, the quality of college education will drop, and the college premium —the earnings of college graduates vis-à-vis high-school graduates— will drop.
Selected institutions have recently been announcing that they will increase financial aid. Recent announcements might suggest that this could actually happen among selected institutions. Harvard and Dartmouth have eliminated loans from their aid packages and will be giving grants instead; and Yale has followed in their footsteps. These de facto cuts in average tuition rates are not going to change the system. First, they won’t change the quality of education at top universities, for which the foregone tuition revenue is peanuts. Second, they won’t reduce the cost of attendance of the average college student, because the number of institutions that can afford foregoing tuition revenues is small.
But improved aid packages at top schools will make their programs affordable to the brightest students, regardless of their financial situation. If the newfound altruism of the Harvards and Yales has any effect, that will be an even more pronounced assortative matching of colleges and applicants by quality. The scope of these developments is very limited, but it’s good news —at least for believers, like myself, in a free, merit-based education system.
More data:
Tuition rates: table of nominal rates (html), graph of real rates (pdf, Figure 1)
Technorati tags: economics, education, college, endowments, college tuition
Thursday, October 9, 2008
Economy Slowing Says Calculated Risk
Great Blogger, Calculated Risk "Clearly the economy is slowing sharply"
Wednesday, October 8, 2008
McCain, Obama, and the Inherent Advantage of Caring More About Ends Than Means
We’ve been here before: The Republican attack machine at full throttle, spewing lies in best-selling books, on Fox News, on talk radio. The mainstream media reporting on the controversy, thereby giving it more air time and squeezing out the Democrats’ affirmative message. Followed by accusations by Democrats that Republicans are playing unfairly. Responded to by smiling shrugs and winks from Republicans, who say Democrats can’t take the heat or can’t enjoy a joke or are out of touch with average Americans who are concerned about whatever it is the Republicans are lying about. This ignites a furious debate among Democrats about how negative they should go against the Republican. “If we use their tactics, we’ll lose the moral high ground,” say the Democratic doves. “If we don’t, we’ll lose the war,” say the Democratic hawks. The debate is never fully resolved. The Democrats sort of fight back but don’t have the heart to do to Republicans what Republicans do to them. And so it goes.
The underlying problem is that Democrats care about means as well as ends, while Republicans care almost exclusively about ends and will use any means to get there. The paradox lies deeper. For most Democrats, the means are part of the ends. We want an electoral process that eschews the lying and cheating we’ve witnessed since Richard Nixon’s dirty tricks. If we use their tactics, we undermine our own goal, violating one of the very things that distinguishes us from them. Yet if we don’t stoop to their level, how can we prevail in a system that allows – even rewards – such lying and cheating?
It’s the same with governing. Right-wing Republicans detest government, so when they screw it up – failing to protect the citizens of New Orleans or returning veterans in Walter Reed hospital, or wasting billions of taxpayer dollars on non-competitive bids for the military, turning budget surpluses into massive deficits – they’re proving their own subterranean point that the public can’t trust government to do anything right. Democrats, once in power, inherit this legacy of distrust and deficit, and spend much of their time in office working their way out of it. And also inordinate time and energy promoting good governmental processes (recall Al Gore’s “making government work” crusade, which holds the record for the most arduous effort generating the least media attention).
Democrats also care about the rule of law – adherence to legal norms, rules, and precedents – as an end in itself. Republican administrations view the law as a potential obstacle to achieving particular ends. Anyone trying to chronicle the Bushie’s disregard for the rule of law is quickly overwhelmed with examples, such as violating civil service laws to fill up the executive branch with political hacks; riding roughshod over constitutional laws in firing federal prosecutors; wiretapping Americans in clear violation of law; holding prisoners of war without charge, in violation of international law; using torture. Democrats, once in power, regard laws as serious constraints on that power. (When I was secretary of labor, the department’s lawyers would instruct me about what I could not do because I was unauthorized to do it, rather than how I might reinterpret or bend the laws in order that I could. The lawyers who work in the Bush administration do the opposite.)
Those who are willing to do anything to achieve their ends will always have a tactical advantage over those who regard the means as ends in themselves. The question posed in this election, and, one hopes, by an Obama administration, is whether the moral authority generated by the latter position is itself enough to overcome these odds.
The underlying problem is that Democrats care about means as well as ends, while Republicans care almost exclusively about ends and will use any means to get there. The paradox lies deeper. For most Democrats, the means are part of the ends. We want an electoral process that eschews the lying and cheating we’ve witnessed since Richard Nixon’s dirty tricks. If we use their tactics, we undermine our own goal, violating one of the very things that distinguishes us from them. Yet if we don’t stoop to their level, how can we prevail in a system that allows – even rewards – such lying and cheating?
It’s the same with governing. Right-wing Republicans detest government, so when they screw it up – failing to protect the citizens of New Orleans or returning veterans in Walter Reed hospital, or wasting billions of taxpayer dollars on non-competitive bids for the military, turning budget surpluses into massive deficits – they’re proving their own subterranean point that the public can’t trust government to do anything right. Democrats, once in power, inherit this legacy of distrust and deficit, and spend much of their time in office working their way out of it. And also inordinate time and energy promoting good governmental processes (recall Al Gore’s “making government work” crusade, which holds the record for the most arduous effort generating the least media attention).
Democrats also care about the rule of law – adherence to legal norms, rules, and precedents – as an end in itself. Republican administrations view the law as a potential obstacle to achieving particular ends. Anyone trying to chronicle the Bushie’s disregard for the rule of law is quickly overwhelmed with examples, such as violating civil service laws to fill up the executive branch with political hacks; riding roughshod over constitutional laws in firing federal prosecutors; wiretapping Americans in clear violation of law; holding prisoners of war without charge, in violation of international law; using torture. Democrats, once in power, regard laws as serious constraints on that power. (When I was secretary of labor, the department’s lawyers would instruct me about what I could not do because I was unauthorized to do it, rather than how I might reinterpret or bend the laws in order that I could. The lawyers who work in the Bush administration do the opposite.)
Those who are willing to do anything to achieve their ends will always have a tactical advantage over those who regard the means as ends in themselves. The question posed in this election, and, one hopes, by an Obama administration, is whether the moral authority generated by the latter position is itself enough to overcome these odds.
Tuesday, October 7, 2008
The Fed and Authoritarian Capitalism
Chinese authoritarian capitalism, on display this week in Beijing, has me thinking about America’s democratic capitalism and how we practice it.
Start with the U.S. economy’s most powerful government agency: The Fed, of course. Its decision this week to hold short-term interest rates steady was wrong, in my view; it should have lowered them because recessionary forces continue to increase while wage-price inflation doesn't exist. Wages are dropping in real terms. But my opinion and your opinion count for nothing. The Fed is not directly accountable to American voters, or even to Congress or the President.
Months ago the Fed decided to bail out major investment banks. That put billions of taxpayer dollars at risk without so much as a single act of Congress. Lately the Fed has been looking into the capital assets of these banks and telling them how to bolster their liquidity. Probably a good idea, but here again, nobody authorized the Fed to do this.
Now the Fed is issuing proposed regulations governing the credit-card industry – specifying when credit card issuers can increase interest rates on existing balances, and barring late fees on customers who weren’t given a reasonable amount of time to pay. Personally, I’d also want to stop them from marketing credit cards to people under age 21, and imposing extra charges for paying online.
But what I or you may want is irrelevant. The Fed’s proposal has draawn nearly 56,000 comments, yet the Fed isn’t compelled to read a single one of them. You see, the Fed is acting without congressional authority. Two weeks ago a congressional committee reported out a Credit Cardholder’s Bill of Rights with many of the features of the Fed's regulation, but the banking industry mounted such a lobbying effort against it there’s no way it will get enacted this year, or maybe ever.
In other words, Congress is so immobilized we have to rely on the Fed -- which operates mostly in secret, whose chair is appointed every four years but whose other governors have fourteen-year terms, and which doesn’t even depend on a congressional appropriation for its own funding but draws interest on the portfolio of Treasury securities it controls.
This isn’t Chinese-type authoritarian capitalism, of course, but nor is it, strictly speaking, what we’ve come to expect from a democracy.
Start with the U.S. economy’s most powerful government agency: The Fed, of course. Its decision this week to hold short-term interest rates steady was wrong, in my view; it should have lowered them because recessionary forces continue to increase while wage-price inflation doesn't exist. Wages are dropping in real terms. But my opinion and your opinion count for nothing. The Fed is not directly accountable to American voters, or even to Congress or the President.
Months ago the Fed decided to bail out major investment banks. That put billions of taxpayer dollars at risk without so much as a single act of Congress. Lately the Fed has been looking into the capital assets of these banks and telling them how to bolster their liquidity. Probably a good idea, but here again, nobody authorized the Fed to do this.
Now the Fed is issuing proposed regulations governing the credit-card industry – specifying when credit card issuers can increase interest rates on existing balances, and barring late fees on customers who weren’t given a reasonable amount of time to pay. Personally, I’d also want to stop them from marketing credit cards to people under age 21, and imposing extra charges for paying online.
But what I or you may want is irrelevant. The Fed’s proposal has draawn nearly 56,000 comments, yet the Fed isn’t compelled to read a single one of them. You see, the Fed is acting without congressional authority. Two weeks ago a congressional committee reported out a Credit Cardholder’s Bill of Rights with many of the features of the Fed's regulation, but the banking industry mounted such a lobbying effort against it there’s no way it will get enacted this year, or maybe ever.
In other words, Congress is so immobilized we have to rely on the Fed -- which operates mostly in secret, whose chair is appointed every four years but whose other governors have fourteen-year terms, and which doesn’t even depend on a congressional appropriation for its own funding but draws interest on the portfolio of Treasury securities it controls.
This isn’t Chinese-type authoritarian capitalism, of course, but nor is it, strictly speaking, what we’ve come to expect from a democracy.
Monday, October 6, 2008
Sunday, October 5, 2008
Income mobility and education
As goats on a tree, reaching for the best leaves, we all strive to be the ones at the top. But even in America, the land of opportunity, only good climbers make it. And lately even the fittest seem to be having a hard time.
The table below shows the percentage of people who moved from a given group in the income distribution to any other one, between 1994 and 2004. (The data come from the Panel Study of Income Dynamics, and the income measure is household taxable earnings.) The lowest degree of income mobility occurs among the poorest and the wealthiest: 58% of households in the bottom 20% of the distribution stay there, and 60% of those in the wealthiest quintile don’t move either.
Pooling people from all ages together, however, can be misleading. The typical earnings profile over a lifetime is hump-shaped: earnings start low, rise up until the individual is in her 50s, then begin a slow decline, and fall sharply with retirement. Because of this non-monotonicity, movements up and down the earnings distribution may have little to do with climbing the social ladder.
As an example: suppose the economy is populated by two individuals, one of whom is 35 and earns $45,000, and the other one is 55 and makes $75,000. So the older person is at the top of the distribution. Ten years later, the young individual has accumulated experience and earns $65,000, whereas the older person, now 65, has retired and doesn’t earn any labor income. The younger individual is at the top of the earnings distribution now. If we were oblivious to the age of these individuals, this two-person society would look remarkably mobile: the poorer person moved to the top and vice versa. In reality, the observed mobility is the product of the normal course of earnings over peoples’ lives.
The fortunes of a person are more likely to change early in life. Twentysomethings are less likely to be attached to a house, a family, or a job. They job-hop, experiment, go back to school. Over time, some people land a dream job —or a “comfort job”— and stay there. And some others simply grow roots: they have mortgages to pay, and spouses and kids to drag along. We also become more risk averse with age.
The data bear these intuitions: 67% of households whose head was between 22 and 29 in 1994 had switched quintiles ten years later; 54% of those between 30 and 39 did so, about the same as among the 40-49 age group.
Things get much more interesting when I look at mobility within education groups. Schooling is probably the single most important factor determining a person’s chance to “make it.” People with less education are less employable. They also experience smaller changes in productivity, so their earnings curve is less steep. And they have fewer opportunities to fill high-powered positions —the sort that provide a pay boost if one is successful. In this, however, the evidence doesn't support my expectations.
Between 1975 and 1985, and within the group of college graduates, 61% of households moved to a different economic class, whereas 59% of high school graduates were mobile -barely a difference. And twenty years later, 54% of college grads and 60% of people with a high school degree were mobile. (See chart.)
Click to enlarge
What made the economic ladder more slippery for college grads? Following the reasoning above, maybe people have less appetite for risk, and are taking jobs that are safer but also offer fewer opportunities to leap-frog over income classes. Starting up a business, for instance, is one of the riskiest endeavors one could pursue. But statistics show that animal spirits have not subdued —the fraction of entrepreneurs and self-employed has risen over the last 30 years.
A second explanation is that unobserved ability, not education, is behind opportunity. A couple of decades ago earning a college degree was a major feat. Only the well-off, highly-motivated and bright ever put their feet in a University. Nowadays going to college is almost a given. As a result a college degree has become a weaker signal of one’s competence. Highly capable individuals still get ahead, but the vast majority of college graduates do not belong to that breed.
Finally, but not less importantly, it might be a problem of too many grads chasing too few jobs with incentive-based pay. In spite of all the talk about stock options, the number of positions with (significant) variable compensation has grown more slowly than the body of individuals with a University diploma. More well-educated people land jobs without the power or the incentives to rise fast on the pay scale.
This calcification of the white-collar society is worrying. More and more individuals go to graduate school in order to earn that M.B.A., M.A., or even Ph.D., that will give them an edge over their peers. That behavior is perfectly rational, and yet self-defeating. The latest batches of college grads remind me of hamsters on a wheel rather than goats.
Technorati tags: economics, income mobility, inequality, income inequality, upward mobility
Subscribe to:
Posts (Atom)
