Wednesday, September 28, 2011

History matters

Paul Krugman makes a great point in his blog today about the importance in macroeconomics of understanding economic history.  And he does not just mean the business cycle in the US over the last 40-50 years.  Instead there is much to be learned, he argues, from the experiences of Germany after World War I and the issues faced in developing countries such as Mexico, Indonesia and Argentina.  The current financial and economic crisis has some unique factors, especially the role of derivatives and the shadow banking system, but it was largely created by an age-old factor -- too much debt that was too highly leveraged. 

Krugman and I are rarely on the same page concerning what should be done in the current crisis (he thinks the jobs bill proposal is too modest), but his warning should be taken to heart:

Tuesday, September 27, 2011

NYT columnist takes field trip to NC

Joe Nocera has a NYT piece today about his factory field trip to Charlotte and Winston-Salem to visit new plants built by Siemens and Caterpillar.  The most interesting takeaway is that these two companies decided to build in NC instead of China because (1) NC technical colleges do a great job partnering with industry to provide training; (2) for skilled labor, the cost differential between the two countries is not all that large; and (3) shipping costs for the types of products Caterpillar makes play an important role in plant location decisions. 

Is there a manufacturing renaissance on the horizon?  The good news is that construction of new plants has picked up.  The less good news is that the new plants are very capital-intensive and generate modest numbers of new jobs: 800 in Charlotte and 500 in Winston-Salem.  Cat is getting $14m in state and local incentives for those 500 jobs, a tidy $28k per job -- a much better bang per buck than the President's jobs bill, as I noted recently on this blog. 

Sunday, September 25, 2011

Tough to be a millionaire

Interesting WP op-ed piece entitled "Five Myths About Millionaires" ran last Friday.  The article makes a few points that often seem forgotten in popular discussions about the well-to-do.  One key distinction is what does it mean to be a millionaire.  Over a hundred years ago, it meant a net worth of $1m or more.  Today, a person with net worth of $1m would do well to generate $40-50k of income from such an endowment.  If this were to be used in any tax on millionaires, it would turn out to be a very broad-based tax.

The article does a good job of clearing up confusion on tax rates.  Using a more proper definition of millionaire (annual income of $1m), these households pay 23 percent of their income in federal tax.  As shown in a recent WSJ piece, those making between $100-200k pay 12.7 percent and those making $30-50k pay 7 percent.  Economists rarely focus on these ratios of taxes paid to income, instead focusing on the marginal tax rate -- which is how much of an extra dollar earned gets taxed.  Millionaires (like everyone else) pay vastly different marginal tax rates on capital gains (15 percent) and salaries (35 percent). 

Would taxing millionaires help the economy?  Although the Obama administration has advocated this course, my take is they know this would never get approved by either house of Congress.  They must think it will play well with voters.  Time will tell. 

Wednesday, September 21, 2011

Should the U.S. worry about a Greek default?

According to most recent press accounts, it is no longer a matter of whether Greece will default on its sovereign debt.  Instead it is a matter of when the default will take place and how much collateral damage will there be.  Gretchen Morgenson of NYT had a good writeup on Sunday about how this could play out.  Losers in a world with no bailouts: those holding Greek bonds and those who wrote credit default swaps to protect those bondholders that elected for insurance against default.  Because these swaps are not traded publicly, no one knows if the insurers have the capability of covering their debts.

One more complication: Portugal, Italy, Ireland, and Spain (with Greece known collectively as the PIIGS) are not in dramatically better shape than Greece.  Morgenson notes that European banks are holding a much higher percentage of their assets in sovereign bonds than did American banks hold in mortgage-related securities three years ago.
Regulators encouraged European banks to hold huge amounts of European government debt by letting them account for these investments as if they posed zero risk. That meant the banks didn’t need to set aside a single euro in capital against those holdings.

Now, according to an analysis by Autonomous Research, 43 large European banks hold debt in troubled sovereigns that is equal to 63 percent of those institutions’ book values.
Why should we care about European banks?  Quite simply because many of them have a large presence here in the US and their difficulties will translate into a reduction in the availability of credit. 

Monday, September 19, 2011

Trade and jobs

Interesting bipartisan WSJ op-ed last week focusing on how trade boosting measures would lead to more jobs here in the US.  The authors note that growth in overseas economies such as Brazil, China, and India is much higher than domestic growth, so any steps that would allow American companies to tap into that growth would pay economic dividends domestically.  The authors make three key points: (1) the US should more aggressively recruit firms from outside the US to invest here and open facilities, (2) the US should focus its trade deals on countries that are in the best position to generate job creation (of the deals that are awaiting Congressional approval, Korea makes sense, Colombia and Panama not so much, what about a deal with Brazil?), and (3) the US needs to rethink how it prepares workers for global competition (instead of paying unemployment benefits to workers who have lost their jobs to overseas competition, why not try to retrain them for newly emerging opportunities?). 

Sunday, September 18, 2011

No, we really are not running out of oil

So says expert Daniel Yergin in this weekend's WSJ.  The key point (especially relevant to this week's discussion of cost in MBA 505) is that the price of oil drives incentives for discovery and recovery.  We may be out of $25/barrel oil, but as technologies for exploration and extraction develop AND as higher prices make some oil fields economically viable (that would not have been viable at lower prices), the market provides the incentives to find the juice we need to keep our SUVs rolling.  Yergin shows that the "sky is falling, we are running out of fossil fuels" claims go back as far as the 1880s, when production mostly took place in Pennsylvania and it was common knowledge that there was no oil west of the Mississippi River. 

Please note that I am not saying that we should sit back and let the price system solve all of our energy worries.  What I am saying is that the claims that we are facing some sort of energy shortage are economic nonsense.  As long as prices are allowed to adjust, the market will make sure that buyers and sellers in the petroleum market are able to work with each other. 

Wednesday, September 14, 2011

More on the jobs bill

My post on simple jobs bill arithmetic generated all time highs in visits and comments for this blog (thanks to Greg Mankiw for the link).  The post, which suggested that we take the proposed $447b jobs package and spend it directly on job creation for unemployed workers, was meant to be tongue in cheek.  There definitely would be problems identifying who the eligible workers would be.  Lots of people who are not currently searching for work would all of a sudden be interested if there were a "free" job for them.  Also, my suggestion of a flat check of $32k to all does not consider a wage structure where some people work full-time at minimum wage and make roughly $15k whereas others earn considerably more than $32k.

Since President Obama is currently giving a speech touting his jobs bill on NC State's campus today, here are a few more thoughts about his proposal:
(1) The President's proposed stimulus is poorly targeted in terms of its economic impact.  Most of the temporary tax cut will be saved by a household sector that is still trying to work down debt.  That is why so much has to be spent on the tax cut to generate a single job.
(2) The President's plan is smartly targeted in terms of political impact.  Everyone paying FICA taxes gets a break; the rich (or at least those who are employed) do not get as big a break as they would from a similar across the board cut in the income tax. 
(3) The plan does precious little to invest in the human capital of the long term unemployed (a subject of this previous post).  Vouchers for education or training programs that are targeted at job losers should have been a bigger part of the package.  People who have been out of work for a year or more need more help than a UI check.

Sunday, September 11, 2011

Employers say jobs bill won't affect hiring

So says the lead story in yesterday's NYT.  The main reason the jobs bill won't much matter is quite simple: people are not buying enough stuff to warrant hiring additional workers.  The article points out that the companies that are hiring now (NC State MBAs take note: many of them are technology and energy companies) are those where consumer demand is strong.  Reduced payroll taxes and bonuses for hiring the unemployed will often be used, the article points out, to lower the cost of people who would have been hired anyway. 

Saturday, September 10, 2011

Some jobs bill arithmetic

Economist Mark Zandi is quoted in yesterday's N&O:

I entered these numbers into a spreadsheet along with the cost of each program (based on WSJ) of $175b, $70b, and $140b respectively.  You can then calculate how much it costs (in lost revenue or greater expenditures) to create a job.  The numbers are sobering: $233k per job for the payroll tax cuts and $350k per job for the infrastructure spending.  And these jobs would only be around for the duration of the new stimulus package!


Friday, September 9, 2011

Thoughts on the new stimulus, er, jobs plan

Most press attention on the $447 billion package has focused on four major components: a one year cut in the FICA tax for workers ($175b), a one year FICA cut for employers accompanied by additional incentives for those with growing payrolls ($70b), another extension of unemployment benefits along with a few new programs for the unemployed ($62b), and a package of "infrastructure" projects ($140b) that includes funds to rehire teachers, firemen and policemen for one year.  A few reactions, based on economic research:
1) There is a large theoretical and empirical literature that shows that temporary changes in the tax code have very little effect on economic activity.  Households will save most of the tax savings.  In sectors of the economy where jobs do not last more than a year, the tax cut may provide some boost in hiring but in sectors where jobs are expected to last longer, the tax cut pales against the likely future rising cost of health insurance.
2) Economic research also shows that extending the duration of unemployment benefits is highly correlated with unemployed people staying out of work longer.  In my ideal world, recipients would have to start government-supported training programs after six months or more of benefits; paying people not to work creates an obvious disincentive and does not address the shortages of labor in many technical and health-related occupations.
3) Although this was not publicized by the media, there are some original ideas on how to help the unemployed which, if scaled properly, might actually help.  These include tax credits for hiring the long-term unemployed or unemployed veterans, prorated unemployment benefits for those on reduced hours (which would encourage work-sharing over layoffs), and wage insurance to provide a buffer for the unemployed who find new jobs at vastly lower salaries compared to their previous jobs. 
4) State and local governments have already gone through wrenching decisions to pare down education and other government functions as Obama's original stimulus bill has wound down.  The Obama plan would allow these governments to bring back some employees for one more year, but then they would still have to be laid off again unless the stimulus, oops sorry, jobs bill were to become permanent.  Recent research on the 2009 stimulus package showed that giving money to cities and states does not always translate into job creation; it might mean less borrowing or larger payments to pension funds. 
Full details on the President's proposals can be found here.

Wednesday, September 7, 2011

Time for a post office bailout?

The US Postal Service is scheduled to run out of money sometime early next year.  We all know this will not actually happen, because Congress will intervene before then.  But what can be done?  Thanks to the internet, the volume of mail has decreased by 22 percent over the last five years.  UPS and FedEx have taken away most of the USPS market share on parcels.  Labor contracts and political pressure make downsizing difficult.  So far USPS has adjusted by raising rates every year or two; it's a good bet that another rate increase is not too far away.  

Megan McArdle raises the fundamental issue here:

This is, to put it mildly, lunatic.
Congress will make it difficult to close post offices or reduce service.  Unions (and some Congresspersons) will make it difficult to lower costs to become competitive. 

Should there continue to be a government monopoly on first class mail?  I don't know about your first class mail, but most of mine consists of catalogs and solicitations.  FedEx, UPS and other services could step in and figure out a way to make a profit.  Why not give them the opportunity?

Friday, September 2, 2011

NYT op-ed: US should mimic Argentine economic policy

So says Ian Mount, a freelance journalist with two degrees in English who has a forthcoming book about making malbec and was able to convince the NYT editors that he was a serious person.  Mount argues that because the Argentine economy has been growing rapidly since 2002, other countries should take a serious look at its policies.  The two most recent Argentine presidents (the late Nestor Kirchner and his wife Christina) raised taxes (especially on agricultural exports) and then overspent the proceeds on a wide range of government programs.

Mount ignores three inconvenient truths.  First, the World Bank statistics do show a remarkable turnaround in recent years as Argentine GDP per capita rose from $2708 in 2002 to $7626 in 2009.  He perhaps is not aware of the fact that Argentina still has not caught up to its standard of living in 1998 when GDP per capita was $8279.  In other words, living standards in Argentina have improved over the last 10 years but they have fallen since 1996. 

Second, ever since the days of Juan and Eva Person, Argentina has had a cycle of booms driven by expanded government activity funded by debt followed by devastating busts.  The current boom is being driven by exports and government spending funded through printing money.  The chickens will come home to roost again; the only question is what will happen first -- a drop in commodity prices or inflation rates topping 50%.

Third, and most importantly, Argentine economic growth has been abysmal.  In 1900 Argentina had a standard of living close to that of the US, it has since fallen very very far behind.  The real Latin American success stories are Brazil and Chile, both of which lagged significantly behind Argentina until the mid 1970s.  Chile adopted free market economic policies at that time and caught up with Argentina by 1989 and surged ahead since 2000.  Brazil became more market-oriented as well in the 1990s (although not as much as Chile), caught up with Argentina in 2002 and was 8% ahead in GDP per capita in 2009. 

Hard to see how we can learn much about economics from a country that jails its own economists who dare tell the truth.

Thursday, September 1, 2011

Maybe the future does not belong to electric cars

Argues Toronto Globe and Mail columnist Margaret Wente, after Ontario plowed $50m into Magna International for R&D.  A few of the more serious issues: Are customers prepared to pay a premium of $20k for a vehicle "that doesn’t go very far, isn’t very convenient, and runs out of juice as soon as you turn on the air conditioner."  (Caveat: maybe Canadians won't need a/c, but wait, there's global warming, scratch that.)  Wente interviews Manitoba professor Vaclav Smil, who points out that unless all the juice generated to run these cars comes from carbon-neutral sources, there will not be any savings on the carbon front.  Smil also points out that if Ontario were to meet the 2020 target of having 10% of all cars be electric, they better start expanding the grid ASAP.