Monday, July 20, 2009

Recommended Readings

Turning point in the crisis?

Anna Schwartz on the bailouts and Big Ben.

As someone who might go to economics graduate school, I think universities should respond to this by increasing the number of tenure track econ professors (h/t Matt Yglesias).

like CIT's bond holders are going to throw it a lifeline.

Jamie Dimon, BSD (h/t Baseline Scenario).

Cuomo goes after Chuck

The WSJ Reports:

In an official notice sent to Charles Schwab & Co. Friday, Attorney General Andrew Cuomo warned that his office plans to sue the largest online brokerage firm for civil fraud over its marketing and sales of auction-rate securities to clients. Emails and testimony cited in the letter show Schwab's brokers had little idea of what they were selling and later failed to tell clients that the market was collapsing.

Auction-rate securities -- short-term debt instruments whose prices reset in periodic auctions -- caused billions in losses for investors after the $330 billion market collapsed in early 2008.

Mr. Cuomo writes in the letter that his office would be open to a settlement with Schwab, but it must agree to buy back the securities from investors still stuck with them.

More than a dozen Wall Street firms and small brokerages agreed to pay more than $60 billion to buy back the securities from investors.... Schwab is among a handful that haven't settled.

"The Attorney General's allegations are without merit," Schwab said in a statement. "They unfairly lay blame on our company for an illiquid market and improper behavior by the large Wall Street firms that created" and then stopped supporting the market....

The attorney general's investigation of Schwab found that brokers were unaware of and misleading about the risks of the securities -- promoting them to customers as cash-like investments, according to the letter. It also found that some traders and executives knew the market was cracking as early as the autumn of 2007 and took steps to protect the company, but didn't disclose those problems to customers....

Charles Schwab executives received daily reports showing in the fall of 2007 that demand for the instruments was declining rapidly, but it didn't make that information available to clients, said the letter.

I'm not entirely sure how I stand on Cuomo's Spitzer-esq activism. On the one hand, the market collapsed and people a lot smarter than Schwab's retail brokers misread it. There was a pervasive view in the financial community that "innovations" like ARS's and sub-prime MBS's were relatively safe investments. I'm not sure how fair it is to sue Schwab for giving wrong advice. After all, they were in some pretty good company with that one.

However, there's an admittedly hazy line between simply being wrong and negligently wrong. It's one thing if they were sold as pretty safe, and should give you a good return, and a much different thing if they were sold as " cash-like investments." I suspect most of them were sold with a line similar to the first, and Cuomo cherry-picked a particularly bad statement to include in the press release.

Also, the fact that the company "took steps to protect the company, but didn't disclose those problems to customers" should surprise no one. The company made the decision to protect themselves instead of their customers, and I don't know if that warrants state and court intervention.

Was it bad business to protect the company instead of the investors? Maybe. Was it wrong to sell the ABS's to relatively unsophisticated investors? Probably. To the extent that they told them the investments were "cash-like" or near risk free the company should be held liable. Anything past that and I'm not sure why stupid advise should leave them liable in court. I'm not a lawyer, but this seems like a pretty thin case mainly designed to help Mr. Cuomo in his gubernatorial run.

Ryan Avent calls out Mankiw

Ryan Says:

Basically, Greg Mankiw is just about the least interesting economics blogger out there. I always know where he’s going to come down on an issue, and I never learn anything from his explanations of why he winds up at that position. He seems to care more about getting it Republican than getting it right, which makes for lousy econoblogging.

Pretty harsh rhetoric.

Thursday, July 16, 2009

Recommended Readings July 15, 2009

The WSJ Editorial Board complaining that Goldman's gains are due in large part to federal baking, CIT shouldn't get money, and a call for taxing leverage. Should I be worried I agree so much with a WSJ Editorial on three (somewhat) controversial financial issues?

Krugman on deficits (hint, he thinks they can/will save us)

"A Reader's Guide to Econoblogs," by the WSJ's Real Time Economics. MR and Megan McArdle are at 21 and 23 respectively, so this is purely for entertainment and should not be taken seriously.

Tipping Point or Racism: Take 2

California near a deal to avert obliteration?

Firefox 3.5 is very good, but Chrome and Safari are catching up. Internet Explorer, unsurprisingly, still lags far, far behind.

Wednesday, July 15, 2009

Menzie Chinn takes on stimulus and forecasting: Part 2

I linked favorably to a post by Menzie about the stimulus a little while ago and said:

I'm not sure if I agree with the last parenthetical sentence. If GDP is a percentage point lower than what was expected conditioning on the expected passage of the stimulus, why does that mean that "individuals who ascribe the worse-than-expected performance of the economy to the stimulus package cannot look to the ex post GDP realizations for support for their arguments"? In fact, I don't see how it supports either a pro or anti-stimulus argument. GDP could be worse than expected because the economy was worse than the consensus, the stimulus did not live up to the Obama administration's expectations, or the very, very small chance the stimulus had a negative effect (none of these are mutually exclusive). Menzie makes a good point when he states that very little of the stimulus was spent in Q1, and thus should have little effect on Q1 GDP. I can see how that means it's not right to look at Q1 numbers and conclude the stimulus was ineffective, but not the logical conclusion Menzie makes.

Menzie replied via the comment board on his blog and said this:

As of early Feb., one has an information set incorporating passage of the stimulus bill, if not with 100% certainty, then pretty high. Then you have the actual realization of GDP. You can decompose the "surprise" into a part that it "new" information regarding the state of the economy, and "new" information regarding stimulus composition and effectiveness. I set the new information regarding the latter at near zero. You could try your own decomposition; I'd welcome finding out your conclusions.

Thanks to Menzie for the reply. I understood the major point of his augment, but got a little confused with his conclusion. I said, "... he states that very little of the stimulus was spent in Q1, and thus should have little effect on Q1 GDP. I can see how that means it's not right to look at Q1 numbers and conclude the stimulus was ineffective..." From what Menzie said in his reply, I take it that's about what he meant (ie that GDP was lower that what was anticipated was due to errors in forecasting, and not an ineffective stimulus). Sorry Menzie, I guess I misunderstood what you wrote.

Income Inequality

Matt Yglesias says:

And you really don’t want to find yourself suggesting, as I think people sometimes do, that we ought to be monomaniacally focused on the income gap question. After all, consider an African-American woman working as a nurse in North Carolina in the late 1950s relative to a white male executive at North Carolina’s largest bank. There would have been a substantial gap in their incomes. But if you flash forward to today and compare an African-American woman working as a nurse in North Carolina to a top executive at Charlotte-based Bank of America you’ll find a much larger gap.

Thinking about the issue more comprehensively, though, it’s of course clear that the overall gap in social equality between two such people is smaller today than it was in the days when the African-American woman would be explicitly excluded from a wide range of social practices and opportunities open to the banker. I don’t think there’s any reason to believe that the decline of Jim Crow caused income inequality to grow thus forcing us to make an explicit tradeoff, but it’s still worth understanding which aggregate sets of social changes have and haven’t been for the better.

I credit Matt for making the point that there is a smaller difference between the two today then there would have been 60 years ago, even if there is a larger real difference in income. However, this brings up a larger point that is one of my big pet peeves in regards to income inequality. The pure difference between the richest among us and those farther down on the income spectrum is a very misleading stat. To explore why this is so, let's go through a very simple thought experiment. Suppose Town A has 100 families, half of which have an income of $100,000 a year, and the other half make $5,000. Additionally, there is little to no interaction between the two groups, including through charities. Now suppose Town B has 100 families, half make $1,000,000 and the other half mark $50,000. Town B has higher income inequality in the most literal sense of the word, but no one in the lower half of Town B would trade places with someone in the lower half of Town A, all else being equal.

This is obviously an unrealistic situation, but it shows us the absolute difference in income is a misleading way to look at inequality. The fact that the richest portion of the population saw there income grow far more than the middle class means relatively little. What matters is how much better (or worse) off the middle class and poor are today than they were back then. If there are policies that can capitalize on the increased incomes of the richest to help the poorest, then that matters. Not that there is a bigger difference.

There may be a larger difference in income between the nurse that Matt mentioned in his post and the banker, but the nurse is still far better off now than the one from the 1950s. In addition to the improved (albeit no where near acceptable) race relations, the nurse saw her income grow and can afford a lot more luxuries today. She probably lives in a far better neighborhood, has access to technological improvements like air conditioning, and while she may not be able to pay for college access for her kids fully out of pocket (assuming she has them), they still face better life prospects than they would have in the 50s. The correct question is not what is the difference between the middle class and rich today compared to the middle class and rich of yesteryear. The correct question is how much better is the life of the middle class today compared to the past, and how can we share some prosperity with people in the lowest income brackets.

Income inequality is still a big issue today, and we need better policies from various levels of government to address it. But to look merely at income differences, and not what incomes of various groups of people can buy them, misses the point and will lead us to the wrong policies.

Healthcare spending and innovation

Greg Mankiw quotes a post he wrote a couple of years ago. The normative analysis is pretty much what I wrote about in a post a couple of days ago:

The reason that we spend more [on healthcare] than our grandparents did is not waste, fraud and abuse, but advances in medical technology and growth in incomes. Science has consistently found new ways to extend and improve our lives. Wonderful as they are, they do not come cheap. Fortunately, our incomes are growing, and it makes sense to spend this growing prosperity on better health.

Ezra Klein talks about innovation and healthcare spending today, but comes down on the opposite side of Mankiw in terms of his positive analysis:

Like Kevin Drum, there's one objection to a national health-care system that I find kind of interesting. As the argument goes, the United States overspends on health-care insurance. But that overspending has a point. It supercharges innovation. The rest of the world, in fact, free rides off of the high prices we pay for new drugs and ingenious technologies. That's not a great deal for us, but it's better than the grim future that awaits us in a world where the United States is not massively overpaying, and innovation thus grinds to a global halt.

The problem with that objection is that it's all theory. I've never seen empirical evidence quantifying the benefits of domestic overpayment, nor the cost to innovation of, say, a government health-care system that cut spending by 15 percent. Similarly, you'd also want to consider whether further drug innovation was the most productive use of those dollars. Out of every $100 we spend paying more for drugs and devices than other countries, would those last $8 do more good contributing to "innovation" (along with profits, advertising, me-too drugs, etc) or funding early childhood education? Or cutting taxes?

Nor do proponents of this theory seem to take it particularly seriously. They'll use it as a cudgel against single-payer, but never as an argument to increase domestic spending. But why not? If the benefits to innovation are really so grand, why shouldn't we double our spending? Or increase it by 20 percent? It seems unlikely that fortune has delivered us to the optimal point on the curve. If the need to better fund global medical innovation were truly so persuasive, you'd imagine that it would cease being a convenient objection to universal health care and be built into an affirmative policy proposal in its own right.

I'm more with Klein on this point, but don't agree fully with what he says. Like I said a couple of days ago, some reduction in costs is necessary to make sure the federal deficit doesn't explode to ridiculous levels, as well as to ensure all people have access to the care they deserve. However, that reduction comes a price that manifests itself in may forms, most notably, reduced innovation. Some of the slack will (hopefully) be picked up by other researchers (ie universities), but innovative, if very expensive, life-saving technologies will not come to market as quickly, if at all. I don't think the ever increasing healthcare costs are the most efficient use of money (especially when an alternative use of money is covering people in the lowest income bracket), but cost inflation reduction is not a free lunch.

Veterinary Spending Part 2

I liked to a graph a couple of days ago showing pet and human healthcare spending and their remarkably similar growth rates. I found the graph pretty interesting but ultimately useless since I didn't know the growth rate of pets. Well, Zubin Jelveh over at The Stash ran the numbers and came up with a very rough graph of per-capital vet and human healthcare spending:

[O]ne source (to get the needed data) is the American Veterinary Medical Association (AVMA), which puts out a survey roughly every five years on the pet population in the U.S. going back to 1983. (And possibly earlier, but I couldn't recover earlier surveys.) Using figures from those surveys on the population of cats, dogs, birds, and horses -- which grew from 125 million to 172 million between 1983 and 2007 -- and Biggs' veterinary services spending, I calculated per-capita expenditures for pet care between 1984 and 2006. I did the same for humans and rebased everything to $1 in 1984:

As you can see, pet care grows at a much slower than humans. My original caveats about per-capita spending are still applicable and given the models limitations (ie he lumped many different types of animals together) I still think this is has limited relevancy. Ideally, it would weigh the various animals given how much they contribute to the overall spending, but even that wouldn't solve everything.

Tuesday, July 14, 2009

Obama at the Allstar Game: "We're out of money"

From the Fox telecast of the MLB Allstar Game talking about the how NL has not won the game since 1996:
Joe Buck: No bailout money for the NL?
Obama: No, we're out of money

Think he's going to regret saying that?

Recommended Readings for July 14

"Effects of Changes to the Health Insurance System on Labor Markets" from the CBO's blog

Experts debate banking, finance, and stocks in the developing world in a discussion sparked by a column by the chief economist at the World Bank in the Economist.

"Does Stock-Market Data Really Go Back 200 Years?" (h/t Greg Mankiw)

Tipping point or just plain racism?

Jan Hatzius chief economist at Goldman on how much of the stimulus is out there simulating.

Dreier's going to jail

Jay-Z, The Game and International Relations (h/t Matt Yglesias and Ezra Klein)

Menzie Chinn takes on stimulus and forecasting

From my former Econ Prof's very good blog:

There's been a lot of breast beating over the fact that the Administration underestimated the severity of the downturn.... I'll dispense with the clearly economically illogical arguments and try to tease out what is the "surprise" element in the 2009Q1 figures, and from that infer how much worse the economy was relative to what private sector forecasters predicted, conditional upon the passage of the ARRA.

First, define "surprise" as the deviation of the ex post value of X from the ex ante value:

Xt - ε(Xt | Ω t-1)

Notice the information set Ωt-1 does not include information that arrives between date t-1 and date t. Further note, I've used ε to denote subjective rather than mathematical expectations. If subjective expectations equal mathematical expectations, then one is using the rational expectations hypothesis, so that forecast errors are i.i.d. The rational expectations hypothesis is not an uncontroversial assumption (for instance, the efficient markets hypothesis is a joint hypothesis combining a particular asset pricing model and rational expectations), but for the sake of exposition, I'll use it here.

Xt - E(Xt | Ω t-1)

Now, let X be GDP....

In order to get a feeling for the information and views roughly contemporaneous with the analysis of ARRA's effects, let's examine measured GDP as of 30 January, and the mean forecast from the WSJ survey of forecasters for early February. The early-February forecast incorporates the data and information used in the Administration's forecast -- actually a little more, since their data set ended in January (see this discussion of the Troika forecasting process here). Crucially, by this time, it was pretty well acknowledged that some sort of stimulus bill in the $800 billion range would be passed. Now, compare against actual GDP recorded as of the end-June 2009 in the 2009Q1 final release. The difference between the February forecast and the actual reported is the output surprise (relative to early February 2009 data).

The gap between actual and expected was 0.85 ppts (calculated as a log difference). In other words, GDP turned out to be lower by nearly one percentage point than expectations conditioning on the passage of the stimulus bill. That is a quantification of how much worse the economy was (in GDP terms) than anticipated, according to private sector forecasters. (This means that individuals who ascribe the worse-than-expected performance of the economy to the stimulus package cannot look to the ex post GDP realizations for support for their arguments.)

Very interesting stuff, but I'm not sure if I agree with the last parenthetical sentence. If GDP is a percentage point lower than what was expected conditioning on the expected passage of the stimulus, why does that mean that "individuals who ascribe the worse-than-expected performance of the economy to the stimulus package cannot look to the ex post GDP realizations for support for their arguments"? In fact, I don't see how it supports either a pro or anti-stimulus argument. GDP could be worse than expected because the economy was worse than the consensus, the stimulus did not live up to the Obama administration's expectations, or the very, very small chance the stimulus had a negative effect (none of these are mutually exclusive). Menzie makes a good point when he states that very little of the stimulus was spent in Q1, and thus should have little effect on Q1 GDP. I can see how that means it's not right to look at Q1 numbers and conclude the stimulus was ineffective, but not the logical conclusion Menzie makes.

Following the portion of the post I quote above, he goes into a rough econometric analysis of forecasting and what that means for the stimulus and direction of the economy. If you have basic knowledge of econometrics and a decent understanding of macroeconomics, I highly suggest you check it out.

In related news, Eric Cantor's shameless and wrong:

“I do think it is fair to day [sic] that the stimulus is a flop,” said House Minority Whip Eric Cantor , R-Va. “The goal that was set when we passed it was unemployment wouldn’t rise past 8.5 percent, and what we see now is businesses just aren’t hiring. Even the best projections have us losing 750,000 more jobs this year.”

I think it is fair to say that the stimulus might not have worked or that it might not have worked, but to say its a flop? There's no way to tell right now, and maybe ever. I think the effects of the stimulus will be debated in economic literature for a long time, and I'm not sure we will ever know what the effects were with any certainty. If you buy the Keynesian theoretical basics that Menzie taught me as a student of his (and I do), then I think you'll largely see the stimulus as helping. If the economy recovers or stays flat, then you will point to the stimulus as a major factor. If the economy gets worse, you'll probably claim it should have been larger. If you didn't agree with the rational for the stimulus in the first place then what happens to the economy probably won't change your mind. If the economy gets better, you might claim it would have anyways or the situation would have been even better without the spending extra money. If it gets worse, then flop it is.

Update 12:27pm 7/14/09: Menzie replies, "As of early Feb., one has an information set incorporating passage of the stimulus bill, if not with 100% certainty, then pretty high. Then you have the actual realization of GDP. You can decompose the "surprise" into a part that it "new" information regarding the state of the economy, and "new" information regarding stimulus composition and effectiveness. I set the new information regarding the latter at near zero. You could try your own decomposition; I'd welcome finding out your conclusions."

I'll have a reply soon but wanted to post his reply.

Monday, July 13, 2009

Heath Care: Europe vs. the US

Megan McArdle and Kevin Drum have a little debate about which system is better.

Megan first:
Since private systems have so far found it virtually impossible to deny many treatments for long, this will mean that millions of budget constrained people will find themselves with less available treatment than before.

(I say this assuming arguendo that we think a public plan can and will control costs by limiting treatment--a thesis of which I am actually pretty skeptical.)

This is not a crazy worry. What America is best at is delivering a lot of complicated care in extremis, and "quality of life" treatments. What European countries are best at is delivering a lot of ordinary care for the sorts of things that afflict people from 0-50, which is why most of the Europhile journalists writing about Europe genuinely have very good experiences to report. I'd rather be here to have a hip replacement, but I might rather be in the Netherlands to have a baby. Doing something moderately ordinary here is a hassle. Doing something extraordinary there is often not possible for the overwhelming majority of citizens, though that depends on what, and in what system.

Kevin responds:

Boy, I'd sure like to see some backup for that. If by "extraordinary" Megan means the most extreme 0.001% of procedures, then maybe she's right. Maybe....

No system is better at everything than any other system. There are always tradeoffs. But the overall evidence is crystal clear: European state healthcare systems, taken as a whole, provide better care than America's hodgepodege system at about half the price.

Maybe? You have to be kidding me. The question as to what system is better is up for debate, however, at the extreme, to quote Mr. Drum, the overall evidence is crystal clear: the US is far better. There is a reason we have the best doctors in the world many of which are immigrants.

Take as a whole, it is not at all clear the European state healthcare is better. More on that below.

Megan responds:

[C]ontrary to what Mr. Drum has apparently read--cancer survival rates in Europe lag those in the US. (Although this is complicated: we catch cancer earlier, because we're screening-test-mad, and some cancers just hang out for decades without killing you). At the highest macro level, life expectancy, Europe generally outperforms us. But it's not clear how much of that is health care, and how much things like our murder rate, and our famously sedentary lifestyles. When you drill down into many diseases, we outperform them. And many argue that we outperform them on hard-to-measure "lifestyle" issues: how fast your torn ACL gets repaired, how quickly (or whether) you get a hip replacement, etc. Such quality of life issues are nearly impossible to measure, though this hasn't stopped many people from trying. But I don't really trust the figures they generate.

Europe gets a great deal out of all of this. We figure out what works, then they adopt it. But we get a great deal too--we get earlier access to controversial treatments, and our future generations get all the treatments we've discovered so far.

Europe has cheaper healthcare that may or may not be better overall. They have access to largely American life-saving innovations later than we do thanks to their system. Also, due to price restrictions and other factors, the innovation paid for by US healthcare consumers is available to Europe at a reduced price. If we were to somehow switch to a system comparable to theirs, overall life expectancy on both sides of the Atlantic would stop increasing as fast. Treatment used in Europe is paid for by us because of our high costs. Big Pharma and biotech companies are able to pay for their life saving research because they know if the produce something worthwhile, they can market in the US. It then gets exported to Europe because these firms are profit maximizing and realize that even if they get fractions on the dollar on what they do in America, it costs almost nothing to produce something like a pill once the research has been done. But if they can't sell it for high prices in the US it reduces the incentive to innovate, and less useful medication and other technologies are invented. While this may be a worthy trade off, it means Europe can pay less for world class treatment than we do even if they get it later than Americans do.

As Americans, we like the absolute best treatment almost regardless of what it costs. If treatment A is 10 times as expensive as treatment B, and is 5% more effective, most of us, based largely on the recommendation of our doctors, choose treatment A. Often, we aren't even informed of treatment B because treatment A is "far superior" to all other options and only some irrational individual would choose B. Also, if coverage is provided by an employer or the government, there's not much reason to go with B. This is not necessarily a bad thing, a marginal improvement in care could mean the difference between life and death. Additionally, if the government is in the business of supply the poor with coverage, many people would be repulsed at the idea of providing them with inferior care to save a few dollars. This thinking dives innovation, as well as rapidly increasing healthcare costs that will potentially explode our national debt.

Healthcare cost inflation is a very difficult issue that is inseparable from innovation and treatment. While "treating the person not the disease", reducing the gold-plated treatment for very minor issues, improving healthcare IT, rooting out inefficiencies in administrative costs, preventive care etc. may make a dent in costs, they are not going to solve the problem. We, as a society, have to recognize the desire for the best treatments avaliable, innovation, and other prefrefences of ours cost a lot money. If we move to a system more like Europe (again, not necessarily a bad thing) the rate of innovation will decrease and some of the population will not have access to the absolute best medical technologies. Maybe more importantly, the next big medical invention might not get invented or get significantly delayed.

Some reduction in costs is obviously necessary, but it comes at a price, and we need to be honest about and aware that price.

Goldman's Back!!! (or maybe this means time to short banks)

From Deal Journal:

So just where does a $2 billion profit fit into Goldman Sachs Group’s profit-making history?

If, as The New York Times reports today, Goldman will clear $2 billion in net income this quarter, it would make it the bank’s eighth best quarter since 1996, according to data compiled by CapitalIQ.

There have been 49 quarters reported since then, with the high-water mark being the fourth quarter of 2007 ($3.22 billion). Back then, Goldman was churning out profits by trading credit derivatives, speculating on currencies and oil and placing big bets the roaring stock market. (By contrast, Goldman had net of $2.33 billion in the second quarter of 2007.)

To put it into context, Goldman stands to earn more money than it did in such periods as the dot-com boom and the early years of the now dearly deceased leverage-finance boom.


This sounds like a Peter Schiff sick fantasy

From Free exchange:

AS YOU are no doubt aware, California is in the midst of a major budget crisis. With the state budget seriously out of whack structurally and cyclically, budget deficits illegal, and political institutions unable to agree on spending cuts and tax increases sufficient to close the gap, the state has been forced to issue IOUs to employees and creditors. Interestingly, the government seems prepared to allow citizens to pay state obligations—including taxes—with these IOUs, and private markets may be sprouting up to buy and sell them. In effect, California may have created its own currency.

In related news, this seems like good new for Chris Dodd.

Love live Gold and 2,000,000% inflation. Screw that whole worst economy since the Great Depression and unprecedented deflationary pressure thing.

Veterinary Spending

Megan McArdle has an interesting post:

Veterinary spending is rising just about in line with human medical spending. Kudoes to AEI for publishing a graph that seriously undercuts one of the major conservative arguments about health care: that the main problem is consumers who don't bear their own costs. Veterinary spending is subject to few of the perversities that either left or right suppose to be the main problems afflicting health care spending. Consumers pay full frieght most of the time. They are price sensitive, and will let the patient die if keeping him alive costs too much. There is no adverse selection. There is no free riding on mandatory care. Government regulation is minimal. Malpractice suits are minimal, and have low payouts. So why is vet spending rising along with human spending?

Two reasons, presumably: technological change and rising income. As we get wealthier, we spend more of our income on former luxuries, like keeping our pets healthy--nineteenth century veterinary care for sick cats consisted of a sack and some stones to weight it down with. And improvements in health care technology are giving us more things to spend that money on. With the help of my family, I bought my dog five extra years of life with an MRI that diagnosed his slipped disk; without it, we'd have had to put him to sleep when he was three. Worth it? I think so. But in 1950, I couldn't have afforded it, even if it had been available.

Interesting for sure, but I'm not sure how much the correlation between the veterinary spending and healthcare spending means. In addition of the total amount spent on veterinary care, I would like see numbers on pet ownership. It's possible that most (but probably not all) is explained by an increase in pet ownership. However, that too may be misleading because if life expectancy of say dogs is increasing that would increase pet ownship becuase people who might not replace a pet would keep one for a long time and some might get a younger one to compensate for an old dog that just sits around.

The AEI post Megan links to is here. And below is the graph she references.

Update: Veterinary Spending Part 2 can be found here.

BREAKING: Rattner's Out

The AP is reporting that Steven Rattner, the head of the auto task force is leaving the Obama administration. Ron Bloom will replace him. For more on Rattner, check out his Wikipedia page here. For more on Bloom check out this short profile on Real Time Economics.

Update 4:46 EDT: The WSJ has a larger AP story here. Not much info, just the typical wanting to spend more time with wife/kids argument, but it does say:

Authorities have said that Mr. Rattner, an investment banker, was unlikely to face charges in the investigation, which involved a giant state pension fund that provides retirement benefits for more than one million government employees.

Given the abrupt resignation, it certainly seems like something's up. The most likely culprit is the pension scandal, but I'm hoping for something more interesting.

Update: 4:55 EDT:
Better story from Politico here. Look's like we know all we're going to for awhile, but if something breaks, I'll update this post with links.

(h/t Ben Smith)

Do We Need Another Stimulus?

The Washington Post collects opinions from various "experts" including former Clinton advisor Lanny Davis:

As a liberal Democrat, I favor a new stimulus. Unemployment of 9.5 percent is too high. And things could be getting worse. Try this: Dedicate the stimulus package to a massive national public works project that rebuilds every broken-down bridge, railroad and highway in America, and mandate that the building begin within weeks: One week for every state to submit their lists of bridges and highways that need fixing; the second week, offer the contracts for bid by bridge- and road-building companies; and the third or fourth week, hundreds of billions of dollars in checks get mailed to the states, which will administer and pay for the projects -- with some of the money used to pay for new state jobs to run the rebuilding projects.

But how will we pay for it? I don't want the government to borrow or print any more money. So how about a surtax for everyone -- a little for lower-income, more for middle-income, even more for wealthy people? I admit: Seems to defy economic logic. But so far economic logic hasn't worked.

The whole thing is worth a read. Contributors include: Donna Edwards (D-MD); John Boehner (House Minority Leader); Mark Zandi (Moody's, oft cited by Dems during the winter stimulus debate because he was an advisor to McCain even though he's actually a Dem); Martin Feldstein (conservative Harvard economist who came out in favor of fiscal stimulus in theory but not the actual winter bill); and Douglas Holtz-Eakin (a conservative economist and former McCain advisor)

(h/t Free exchange)

Recommended Readings for July 13

Larry Summers is apparently getting tired of stories like this and did an interview with his former employer

Felix Salmon and Brad DeLong go at it about the effectiveness of the stimulus and if there should be a thrid

Drake Bennett profiles some up-and-coming conservative thinkers including one of my favorite bloggers, Megan McArdle. Sadly, no Palin.

Who says the House isn't bipartisan? All those criticizing the 60 vote threshold should realize while it may slow down the bill-making process, it has the potential to stop stupid things that come out of the House like the pork fest linked and the AIG bonus caps from a few months ago.

New tax brackets for the rich? (h/t David Leonhardt at Economix)

Productivity and the crisis

Thursday, July 9, 2009

What Will the Recovery Look Like (assuming there is one)

Robert Reich says (emphasis mine):

The so-called "green shoots" of recovery are turning brown in the scorching summer sun. In fact, the whole debate about when and how a recovery will begin is wrongly framed. On one side are the V-shapers who look back at prior recessions and conclude that the faster an economy drops, the faster it gets back on track. And because this economy fell off a cliff late last fall, they expect it to roar to life early next year. Hence the V shape.

Unfortunately, V-shapers are looking back at the wrong recessions. Focus on those that started with the bursting of a giant speculative bubble and you see slow recoveries. The reason is asset values at bottom are so low that investor confidence returns only gradually.

That's where the more sober U-shapers come in. They predict a more gradual recovery, as investors slowly tiptoe back into the market.

Personally, I don't buy into either camp. In a recession this deep, recovery doesn't depend on investors. It depends on consumers who, after all, are 70 percent of the U.S. economy. And this time consumers got really whacked. Until consumers start spending again, you can forget any recovery, V or U shaped.

Problem is, consumers won't start spending until they have money in their pockets and feel reasonably secure. But they don't have the money, and it's hard to see where it will come from. They can't borrow. Their homes are worth a fraction of what they were before, so say goodbye to home equity loans and refinancings. One out of ten home owners is under water -- owing more on their homes than their homes are worth. Unemployment continues to rise, and number of hours at work continues to drop. Those who can are saving. Those who can't are hunkering down, as they must.

My prediction, then? Not a V, not a U. But an X. This economy can't get back on track because the track we were on for years -- featuring flat or declining median wages, mounting consumer debt, and widening insecurity, not to mention increasing carbon in the atmosphere -- simply cannot be sustained.

The X marks a brand new track -- a new economy. What will it look like? Nobody knows. All we know is the current economy can't "recover" because it can't go back to where it was before the crash. So instead of asking when the recovery will start, we should be asking when and how the new economy will begin. More on this to come.

I certainly agree that there's a low (close to zero) probability that we will see a "V" shaped recovery. Consumers are loaded with debt, including those with negative equity in their houses, and so are companies.

I'm more in the "U" camp, although I don't the letter accurately describes my position given I don't expect a slow recovery that eventually becomes gangbusters. Reich does not do justice to the position and makes what I believe is a somewhat logical misstep. He correctly points out the reasons why a "V" does not appear likely, but that does not mean a slow recovery that features GDP growth below "potential" but non-zero and eventually easing unemployment numbers. Consumers and firms are in trouble, but that may ease and lead to a slow but not an absolutely terrible economy. Conditions may slowly improve because people and companies recover from their poor boom-time decisions.

I stress may because, as I noted in an earlier post, there are still dangerous obstacles to overcome. California and other states, corporate real estate, decreasing help from the stimulus, to name a few. I think the most probable outcome is slightly positive growth for a the foreseeable future. I agree there is a real chance we take one or more nose dives before this is over and don't see how there will be a rapid recovery. Just because there are problems that limit future growth, does not mean we "can't 'recover.'"

I agree with Professor Reich that the economy has reached an inflection point. To grow the way we want to and to open up the economy to more people, we are going to have to find a new source of growth. That does not mean we can't have the slow growth I've mentioned for what seems like the 100th time without changing much. But to get true robust and substantial growth that will lead to better lives and lower poverty, somethings has to give.

Finally, just like the Great Depression affected they way my Grandparents spent money and invested, I think my generation will be scared by this mess (though less so than my mattress stuffing Grandparents). Its sounds pretty good right now that my peers may have been scared into more responsible saving and investing than my parents generation, but that is not necessarily so. Will it still sound good in a few years if we recover from catastrophe and people are complaining that investors are too risk adverse and our economy is not reaching its potential? Also, I'm not sure how lasting the effect will be. It sounds reasonable to say few will want to touch the ARM's, MBS's, covenant light, etc for a long time. However
, it also seems reasonable to say new, yet-to-be-toxic "innovations" will come along and my generation has gotten used to a certain level of luxury and will forgo responsibility. This will leave an impression on us all, and I doubt we will return to the debt crazed glory days for quite sometime. Then again, we should never underestimate the American consumer.

Big Ben's future

Brad DeLong links to a WSJ piece that I've been meaning to comment on since it showed up on my RSS feeder last night. I was a little disappointed by the article (potentially because it's behind the WSJ subscription block and I spent 10 minutes looking around the web for a copy n' pasted version until I realized that my student subscription that "expired" and the end of the semester apparently still allows me access to the online Journal). The gist of the article is:

1) The Obama administration does not know if they'll reappoint Bernanke and will likely wait to make a decision until we know more about the direction of the economy and the BAC/Merrill issues are forgotten/cleared up; 2) In addition to King Larry, "The White House also is expected to look at other economists, including Roger Ferguson and Alan Blinder, former Fed vice chairmen; Janet Yellen, president of the San Francisco Federal Reserve Bank; and Christina Romer, chairman of Mr. Obama's Council of Economic Advisers."; and 3) there's a lot of bipartisan support for him and a fair amount of crazy people that think we should return to the gold standard or adopt socialism don't like him (OK it didn't mention that last part, just my reading on it).

Brad says:

The complaints about Bernanke seem... incoherent. And the consensus judgment appears to be the correct "outstanding but not flawless."

And, yes, Larry (or Janet, or Roger, or Allen, or Christy) would in all likelihood be very, very good at the job as well.

I agree on the first part, but not sure about the second. Brad knows the potential replacements far better than I do, but I'm not sure if we can say they would be "very, very good." Summers has a well chronicled past of being a prickly person who has to have his hand in everything. Maybe that is permissible as the top econ advisor to Obama, but Fed Chair, not so sure about that. I don't know anything about Ferguson or Blinder, and what I do know about Yellen is good but not enough to give an informed opinion. Romer certainly has the intellect and knowledge base to be qualified. Additionally, she seems to carry herself well and I think would act in a pragmatic and nonpartisan fashion at the Fed. I would say she would likely be a "very, very good" Fed Chairwoman.

I understand that political considerations will play a large role in the Presidents decision, but I hope he casts them aside and reappoints Bernanke.

Meriwether Strikes Again

From the WSJ:
John Meriwether is winding down another hedge-fund firm, though this time his woes aren't shaking the financial system.Mr. Meriwether, best known for the 1998 implosion of his famously aggressive Long-Term Capital Management, has returned money to investors with the firm he started just a year later, JWM Partners LLC, according to people familiar with the matter....

In 1998, Long-Term Capital lost $4 billion and triggered a market crisis after Russia defaulted on its debt. Wall Street firms and regulators organized a bailout of the hedge fund to keep its troubles from spreading. The debacle showcased how a single hedge fund's losses could threaten the global financial system.

Mr. Meriwether re-emerged in 1999 with JWM and over several years earned back a degree of investor trust. But last year, JWM lost hundreds of millions of dollars in its funds, including a 42% drop in the flagship fund's investments. Mr. Meriwether and his deputies capped withdrawals at year-end and scrambled to raise new money....

The Relative Value fund eked out a roughly 1% gain during the first couple of months of 2009 before it suspended trading, a person familiar with the fund said.

Anyone who is familiar with the LTCM debacle should not be surprised in this (investors in JWM included). I will always be thankful to Meriwether for playing a supporting role in the thoroughly enjoyable Liar's Poker and the main character in When Genius Failed.

Wednesday, July 8, 2009

Oil Prices

Paul Krugman thinks the recent run up in oil is speculation based:

This time, however, oil inventories are bulging, with huge amounts held in offshore tankers as well as in conventional storage. So this time there’s no question: speculation has been driving prices up.

Now, “speculation” isn’t a synonym for “bad”. If the underlying assumptions that seem to have been driving oil markets were right — namely, that a vigorous recovery is just around the corner, and demand will shoot up soon — then it would be perfectly reasonable to accumulate oil inventories right now. But those assumptions are looking less reasonable by the day.

For the most part, I agree. While what drives oil prices is very complicated (I don't think anyone fully understands it), the strength of the world economy is certainly a factor. To me, it looks like the recent run up is due to a bet by speculators (which, I might add, is not a bad word) that the international economy is going to pick up and the demand for oil in the near future is going to be far higher than it is right now. I believe the fundamentals of the economy are better than they were a few months ago. Traders and companies may very well agree with me and are bidding up the price.

With that said, I don't think the actual economy has improved all that much, just that now there's a lower probability of absolute and prolonged catastrophe. So maybe a little bit of the increase is justified by a partially stabilized economy, but I'm not sure all of it is. The economy is still very weak and will likely continue to be for quite some time. It looks like the economy is not going to return to what it was last September in the next couple of months. Anything longer than that is anyone's guess. California and other states are in a terrible situation and future commercial real estate losses loom large. People are reining in their balance sheets and even if we see slightly positive growth from here on out, I don't think we'll see a robust economy for at least for a couple of years.

To the extent oil prices reflect economic strength, some increase is probably justified. However, it'll be a long time before we see oil near $150 a barrel like it was at its peak and the doubling of oil from its low seems a bit excessive to me.

(picture from Calculate Risk via Matt Yglesias)

Sunday, July 5, 2009

Carbon Tariffs

Whenever people with as diverse opinions as Tyler Cowen and Matt Yglesias agree on something for essentially the same reason, I'm strongly inclined to favor whatever they do. Their argument in regards to the carbon tariffs included in Waxman-Markey is basically that if we slap them on to even out the costs of cap and trade levied on domestic and foreign industries, we anger the international community (importantly China, the EU and India). They argue it weakens our position in international negotiations to reduce green house gasses, and may cause inaction and angry foreign governments. For the most part, I agree with their reasoning. Without major action and international consensus, there will be little impact on climate change even if we significantly reduce our carbon output. In addition to the impact on green house gases and the effect on our economy, any climate change bill should be analyzed to see if it helps our hand in international negotiations. Waxman-Markey will likely only slightly reduce our carbon input and will impose a tax at a time when our economy is already very weak. Some proponents of it recognized its weaknesses while the bill was still in committee. They told us something was better than nothing and it would help us on convince other nations to reduces their carbon usage. I was not a big fan of the logic before the carbon tariffs, since weakening our economy at this time while not reducing our carbon usage by much is a tough price for better standing internationally. Now, the whole better standing thing is no longer there and thus do not support Waxman-Markey. I could see how after going through the traditional international negotiation steps adding threatening a tariff may be a needed tactic, but right now, let's do the rational thing and keep our options open.


I am an undergraduate Economics and Math major at the University of Wisconsin - Madison. Please forgive me for writing the blog anonymously, but I will be applying for full-time jobs and/or grad school this fall, and do not want a Google search to yield a record of my political views and poor grammar.

I chose to start a blog this summer about economics, current events and politics for several reasons. First, I am intensely interested in public policy and politics, and wanted a way to express my views outside of informal conversations with friends and the traditional avenue of student groups. Second, I am generally pretty busy during the semester and this will likely continue in the form of a job or grad school after I graduate, so it's kinda now or never to do something I've been meaning to do for quite sometime. Finally, while I have well defined views on certain topics, I tend to go back and forth on others and hope that writing about these will help me (and hopefully readers) see the options and ultimately take a position.

I encourage you to join the discussion or send me feed back by posting a comment or sending me an email at bascomhillexchange at gmail dot com.