Economics – Page 169 – artdiamondblog.com

Stimulus Statement to President Obama that I Signed

Source of image of stimulus statement: http://www.cato.org/fiscalreality

My name appeared on the list of economists supporting an open statement addressed to President Obama questioning the wisdom of the huge government spending package recently passed by Congress. The statement was published in full-page ads paid for by the Cato Institute that ran on p. A11 of the Weds., Jan. 28, 2009 New York Times and on p. A14 of the Mon., Feb. 9, 2009 Wall Street Journal.

You can download a PDF of the statement, along with the initial list of signatories, at:
http://www.cato.org/special/stimulus09/cato_stimulus.pdf

Government Monetary Excess Caused Financial Crisis

Source of the book image: http://ecx.images-amazon.com/images/I/51-z6te6nKL._SS500_.jpg

Stanford economics professor John Taylor’s book Getting Off Track: How Government Actions and Interventions Caused, Prolonged and Worsened the Financial Crisis is scheduled to be published in late February 2009.

(p. A19) Many are calling for a 9/11-type commission to investigate the financial crisis. Any such investigation should not rule out government itself as a major culprit. My research shows that government actions and interventions — not any inherent failure or instability of the private economy — caused, prolonged and dramatically worsened the crisis.

The classic explanation of financial crises is that they are caused by excesses — frequently monetary excesses — which lead to a boom and an inevitable bust. This crisis was no different: A housing boom followed by a bust led to defaults, the implosion of mortgages and mortgage-related securities at financial institutions, and resulting financial turmoil.
Monetary excesses were the main cause of the boom. The Fed held its target interest rate, especially in 2003-2005, well below known monetary guidelines that say what good policy should be based on historical experience. Keeping interest rates on the track that worked well in the past two decades, rather than keeping rates so low, would have prevented the boom and the bust. Researchers at the Organization for Economic Cooperation and Development have provided corroborating evidence from other countries: The greater the degree of monetary excess in a country, the larger was the housing boom.
. . .
The realization by the public that the government’s intervention plan had not been fully thought through, and the official story that the economy was tanking, likely led to the panic seen in the next few weeks. And this was likely amplified by the ad hoc decisions to support some financial institutions and not others and unclear, seemingly fear-based explanations of programs to address the crisis. What was the rationale for intervening with Bear Stearns, then not with Lehman, and then again with AIG? What would guide the operations of the TARP?
It did not have to be this way. To prevent misguided actions in the future, it is urgent that we return to sound principles of monetary policy, basing government interventions on clearly stated diagnoses and predictable frameworks for government actions.
Massive responses with little explanation will probably make things worse. That is the lesson from this crisis so far.

For the full commentary, see:

JOHN B. TAYLOR. “How Government Created the Financial Crisis.” Wall Street Journal (Tues., February 9, 2009): A19.
(Note: ellipsis added.)

Mankiw Warns that Economic Forecasting Would Not Be Able to Give Much Advance Warning of a Depression

(p. 1) According to the economic historian Christina D. Romer, a professor at the University of California, Berkeley, the great volatility of stock prices at the time also increased consumers’ feelings of uncertainty, inducing them to put off purchases until the uncertainty was resolved. Spending on con-(p. 6)sumer durable goods like autos dropped precipitously in 1930.
. . .
Less successful were various market interventions. According to a study by the economists Harold L. Cole and Lee E. Ohanian, both of the University of California, Los Angeles, and the Federal Reserve Bank of Minneapolis, President Roosevelt made things worse when he encouraged the formation of cartels through the National Industrial Recovery Act of 1933. Similarly, they argue, the National Labor Relations Act of 1935 strengthened organized labor but weakened the recovery by impeding market forces.
. . .
What’s next? Perhaps the most troubling study of the 1930s economy was written in 1988 by the economists Kathryn Dominguez, Ray Fair and Matthew Shapiro; it was called “Forecasting the Depression: Harvard Versus Yale.” (Mr. Fair is an economics professor at Yale; Ms. Dominguez and Mr. Shapiro are at the University of Michigan.)
The three researchers show that the leading economists at the time, at competing forecasting services run by Harvard and Yale, were caught completely by surprise by the severity and length of the Great Depression. What’s worse, despite many advances in the tools of economic analysis, modern economists armed with the data from the time would not have forecast much better. In other words, even if another Depression were around the corner, you shouldn’t expect much advance warning from the economics profession.

For the full story, see:
N. GREGORY MANKIW. “Economic View; But Have We Learned Enough?” The New York Times, SundayBusiness Section (Sun., October 26, 2008): 1 & 6.
(Note: ellipses added.)

UNO Economics Students Embrace Entrepreneurship

“The company was founded with the thought that a recession would happen,” said Grant Stanley, founder of marketing analytics firm Contemporary Analysis.” Source of caption and photo: online version of the Omaha World-Herald article quoted and cited below.

Grant was a student in my Economics of Technology and Economics of Entrepreneurship classes; Tadd was a student in my Honors Colloquium on Creative Destruction; Luis was a student in my Principle of Economics–Micro class. They have chosen an exciting path, and I wish them well!

(p. 1D) Grant Stanley was studying economics at the University of Nebraska at Omaha last year when he identified a business opportunity in the deteriorating economy.

A company making use of econometrics – a field that combines math, statistics and economics – could help small and midsize businesses make decisions in areas such as hiring, and sales and marketing techniques. Econometrics is widely used in education, government and large companies, Stanley said, but usually isn’t applied to smaller businesses.

Stanley thought the need for business forecasting and marketing analytics firms would grow as companies looked for help developing long-term strategies in order to survive an economic downturn.

So Stanley, who was only 20 years old at the time, started Contemporary Analysis, a marketing analytics firm, in March 2008.

“The company was founded with the thought that a recession would happen.”

Stanley courted classmate Tadd Wood, who also was 20 and studying economics, to help start the business, but it wasn’t an easy task. Wood already had a part-time job and was helping out in his family’s business.

“Tadd took months of, ‘Hey, want to hang out?'” before he agreed, Stanley said.

The young men met their third partner – Luis Lopez, 20 – through a friend over the summer, and the trio hit the ground running.

For the full story, see:
STEFANIE MONGE. “Pitching a startup in a downturn.” Omaha World-Herald (Monday, February 2, 2009): 1D & 3D.

“Members of the Contemporary Analysis team at a conference table in the home of Paddy Tarlton. From left are Luis Lopez, Nancy Jimenez, Grant Stanley, Tarlton and Tadd Wood.” Source of caption and photo: online version of the Omaha World-Herald article quoted and cited above.

The Future Is “a Whirlpool of Uncertainty”

(p. B1) Nearly all of us try forecasting the market as if each of the past returns of every year in history had been written on a separate slip of paper and tossed into a hat. Before we reach into the hat, we imagine which return we are most likely to pluck out. Because the long-term average annual gain is about 10%, we “anchor” on that number, then adjust it up or down a bit for our own bullishness or bearishness.

But the future isn’t a hat full of little shredded pieces of the past. It is, instead, a whirlpool of uncertainty populated by what the trader and philosopher Nassim Nicholas Taleb calls “black swans” — events that are hugely important, rare and unpredictable, and explicable only after the fact.

For the full commentary, see:

JASON ZWEIG. “THE INTELLIGENT INVESTOR; Why Market Forecasts Keep Missing the Mark.” Wall Street Journal (Mon., January 24, 2009): B1.

The reference for Taleb’s book, is:
Taleb, Nassim Nicholas. The Black Swan: The Impact of the Highly Improbable. New York: Random House, 2007.

A brief, idiosyncratic review of Taleb’s book, is:
Diamond, Arthur M., Jr. “Review of: Taleb, Nassim Nicholas. The Black Swan.” Journal of Scientific Exploration 22, no. 3 (Fall 2008): 419-422.

Democratic 1997 Tax Break Fed Housing Bubble

Source of graph: online version of the NYT article quoted and cited below.

(p. A1) “Tonight, I propose a new tax cut for homeownership that says to every middle-income working family in this country, if you sell your home, you will not have to pay a capital gains tax on it ever — not ever.”
— President Bill Clinton, at the 1996 Democratic National Convention
Ryan J. Wampler had never made much money selling his own homes.
Starting in 1999, however, he began to do very well. Three times in eight years, Mr. Wampler — himself a home builder and developer — sold his home in the Phoenix area, always for a nice profit. With prices in Phoenix soaring, he made almost $700,000 on the three sales.
And thanks to a tax break proposed by President Bill Clinton and approved by Congress in 1997, he did not have to pay tax on most of that profit. It was a break that had not been available to generations of Americans before him. The benefits also did not apply to other investments, be they stocks, bonds or stakes in a small business. Those gains were all taxed at rates of up to 20 percent.
The different tax treatments gave people a new incentive to plow ever more money into real estate, and they did so. “When you give that big an incentive for people to buy and sell homes,” said Mr. Wampler, 44, a mild-mannered native of Phoenix who has two children, “they are going to buy and sell homes.”
By itself, the change in the tax law did not cause the housing bubble, economists say. Several other factors — a relaxation of lending standards, a failure by regulators to intervene, a sharp decline in interest rates and a collective belief that house prices could never fall — probably played larger roles.
But many economists say that (p. A22) the law had a noticeable impact, allowing home sales to become tax-free windfalls. A recent study of the provision by an economist at the Federal Reserve suggests that the number of homes sold was almost 17 percent higher over the last decade than it would have been without the law.
Vernon L. Smith, a Nobel laureate and economics professor at George Mason University, has said the tax law change was responsible for “fueling the mother of all housing bubbles.”

For the full story, see:
VIKAS BAJAJ and DAVID LEONHARDT. “1997 Tax Break on Home Sales May Have Helped Inflate Bubble.” The New York Times (Fri., December 19, 2008): A1 & A22.
(Note: ellipses added.)
(Note: the online version of the article is dated December 18, and has the somewhat different title: “The Reckoning; Tax Break May Have Helped Cause Housing Bubble.”)

“Ryan J. Wampler made nearly $700,000 on three sales of his own homes in eight years.” Source of caption and photo: online version of the NYT article quoted and cited above.

Stimulus Bill Causes “Burden from Higher Taxes Down the Road”

In the op-ed piece quoted below, Nobel-prize winner Gary Becker, along with Kevin Murphy, express reservations about the recently-passed stimulus bill, although they apparently do not go quite as far as Harvard economist Robert Barro, who believes the multiplier may be close to zero (which would imply no stimulus from the stimulus bill).
Although Becker and Murphy believe that there will be some stimulus, they emphasize that the costs will be substantial:

(p. A17) The increased federal debt caused by this stimulus package has to be paid for eventually by higher taxes on households and businesses. Higher income and business taxes generally discourage effort and investments, and result in a larger social burden than the actual level of the tax revenue needed to finance the greater debt. The burden from higher taxes down the road has to be deducted both from any short-term stimulus provided by the spending program, and from its long-run effects on the economy.

For the full commentary, see:
GARY S. BECKER and KEVIN M. MURPHY. “There’s No Stimulus Free Lunch.” Wall Street Journal (Tues., February 10, 2009): A17.

Harvard Economist Barro Calls Stimulus Bill “Garbage”

(p. A17) Harvard economist Robert Barro being interviewed on the stimulus bill by the Atlantic:

Barro: This is probably the worst bill that has been put forward since the 1930s. I don’t know what to say. I mean it’s wasting a tremendous amount of money. It has some simplistic theory that I don’t think will work, so I don’t think the expenditure stuff is going to have the intended effect. I don’t think it will expand the economy. And the tax cutting isn’t really geared toward incentives. It’s not really geared to lowering tax rates; it’s more along the lines of throwing money at people. On both sides I think it’s garbage. So in terms of balance between the two it doesn’t really matter that much.

For the full excerpt of the Atlantic interview with Barro, see:
Robert Barro. “Notable & Quotable.” Wall Street Journal (Tues., February 10, 2009): A17.
(Note: italics in original.)

Ending Capital-Gains Tax Would Encourage Funding for Entrepreneurial Ventures

(p. A15) In virtually all economics classes, including those taught by the many excellent economists on the Obama team, the idea of government spending as an engine for growth is not a popular topic. Yet despite their skepticism of Keynesianism in the classroom, when it comes to public policy, these economists happily endorse a large stimulus package that could bring our deficit to 10% of GDP. Why?
One explanation is that these economists think this recession is an extraordinary one.
. . .
But this particular recession is unique not in its dimensions, but in its sources. First, it is the result of a financial crisis that severely affected stock-market valuations. The bad equilibrium did not originate in the labor market, but in the credit market, where investors are reluctant to lend to risky firms. This reluctance is making it difficult for these firms to refinance their debt, forcing them to default on their credit, further validating investors’ fear. Thus, the problem is how to increase investors’ willingness to take risk. It’s unclear how the proposed stimulus package would help inspire investors to do so.
. . .
So how do we stimulate the economy without increasing the already large current-account deficit? It’s not easy, but here is an idea: Create the incentive for people to take more risk and move their savings from government bonds to risky assets. There is no better way to encourage this than a temporary elimination of the capital-gains tax for all the investments begun during 2009 and held for at least two years

For the full commentary, see:
ALBERTO ALESINA and LUIGI ZINGALES. “Let’s Stimulate Private Risk Taking.” Wall Street Journal (Weds., JANUARY 21, 2009): A15.
(Note: ellipses added.)

Stimulus Bill is “Big, Messy, Largely Off-Point and Philosophically Chaotic”

(p. A11) The final bill was privately agreed by most and publicly conceded by many to be a big, messy, largely off-point and philosophically chaotic piece of legislation. The Congressional Budget Office says only 25% of the money will even go out in the first year. This newspaper, in its analysis, argues that only 12 cents of every dollar is for something that could plausibly be called stimulus.

What was needed? Not pork, not payoffs, not eccentric base-pleasing, group-greasing forays into birth control as stimulus, . . .
. . .
I think there is an illness called Goldmansachs Head. . . . When you have Goldmansachs Head, the party’s never over. You take private planes to ask for bailout money, you entertain customers at high-end spas while your writers prep your testimony, you take and give huge bonuses as the company tanks. When you take the kids camping, you bring a private chef. Goldmansachs Head is Bernie Madoff complaining he’s feeling cooped up in the penthouse. It is the delusion that the old days continue and the old ways prevail and you, Prince of the Abundance, can just keep rolling along. Here is how you know if someone has GSH: He has everything but a watch. He doesn’t know what time it is.
. . .
But you don’t have to be on Wall Street to have GSH. Congress has it too. That’s what the stimulus bill was about–not knowing what time it is, not knowing the old pork-barrel, group-greasing ways are over, done, embarrassing. When you create a bill like that, it doesn’t mean you’re a pro, it doesn’t mean you’re a tough, no-nonsense pol. It means you’re a slob.
That’s how the Democratic establishment in the House looks, not like people who are responding to a crisis, or even like people who are ignoring a crisis, but people who are using a crisis.

For the full commentary, see:
PEGGY NOONAN. “OPINION; DECLARATIONS; Look at the Time.” Wall Street Journal (Sat., JANUARY 30, 2009): A11.
(Note: ellipses added.)