Battlepanda

This piece on the Irish bailout is very close to my heart.


Why? First of all, we explained the Irish banking crisis with leprechauns and Riverdancers. Illustrating economics and international relations with crude national stereotypes is an NMA specialty. But the real reason is because I got to slip in a reference to Father Ted, my favorite television sitcom of all time.

Labels: BehindtheLOLs, economics, Ireland, TV

This is too good not to post.

The economist who participated in the project is Russ Roberts of George Mason University. No prizes for guessing where his loyalties lie when it comes to the battle between Keynes and Hayek. Having said that, the video was just amazingly informative and funny and even-handed. Well done to all involved. Except I think Keynes would have liked some male hotties in his entourage as well.

Labels: economics, Hayek, Keynes

It used to be the conventional wisdom that "Republicans are better for the economy." Now the pendulum have swung the other way, big time:

In Illinois' 13th district, an exurban Chicago seat where veteran Rep. Judy
Biggert (R) is running for re-election, Belcher found that voters trust
Democrats to fix the economy more than Republicans by a 19-point margin. They
gave Democrats a 15-point edge on energy issues and an 11-point advantage on the
broad question of which party "shares your values." And that's all in a district
where President Bush won by 10 points in 2004 and 13 points in 2000.

The story is similar in the neighboring 6th district of freshman Rep. Peter Roskam
(R). The seat has long leaned Republican -- Bush won it by 6 points in 2004 --
but now, Belcher found, Democrats have a 14-point edge on the economy and a
15-point lead on energy.

What I'm curious about is, when did the conventional wisdom change? Of course, the fact that Bush presided over the enormous economic crisis probably had a big impact, but the swing is so dramatic that the Republicans must have been eroding credibility on that front for quite a while. When did the Republicans last have an edge on the Democrats in the eyes of the electorate when it comes to the economy?

Labels: economics, polls

In wake of yesterday's failure of the House to pass the Emergency Economic Stabilization Act, everyone is pointing fingers at everyone else, blaming each other for the financial crisis, and the very real prospect of financial meltdown followed by severe recession.

Well, there's no point in assigning blame to just one party when there's plenty to go around. Here's who I'm blaming, in order from least blame to most.

16. Richard Rorty. No, not really. He didn't have anything to do with the financial crisis. But his baleful influence on philosophy continues to be felt, and I didn't want to pass up the opportunity to get a bit of Rorty-hatin' in.

15. People who bought more house than they could afford and now can't make their mortgage payments. This category includes the real-estate flippers. Seriously, what were you thinking? But you get the least blame, because you thought you were only gambling with your own financial well-being, not that of the entire country.

14. Crooked mortgage brokers who sold people more house than they could afford and then passed off those shaky loans to the banks. You're just a bunch of crooks who took advantage of people on both sides of the transaction. For some reason though, I'm not able to work up that much contempt for you. It's probably a personal failing.

13. Banks who bought these shaky loans to people who bought more house than they could afford. You get more blame than the people who you were lending to, because you were gambling with the money of your shareholders.

12. Alan Greenspan. "American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage." I don't know whether anyone actually took this remarkably bad advice in February 2004, but just saying this earns you a spot on my blame list. And in retrospect, it seems pretty clear that you should have popped the housing bubble before it got too big.

11. Conservative populist douchebags who would rather have the country go through a painful recession than have the government do something "socialist".

10. Libertarian populist douchebags who would rather have the country go through a painful recession than have the government do something "socialist". I blame you more than the conservatives, because for the most part - with the exception of Objectivists, anarchists, and gold bugs - you are more intelligent than they are.

9. Liberal populist douchebags who would rather have the country go through a painful recession than bail out some rich Wall Street banker. The politics of resentment is particularly ugly, and I blame you most because you make the rest of us sensible liberals look bad.

8. Lou Dobbs. In a sane world, you'd be distributing your revolting brand of nativist populism in photocopied newletters, instead of having a job at CNN.

7. George W. Bush. You're right about the need for government action in this crisis, but you've screwed up so many times that you have no credibility left, and now no one is listening.

6. Henry Paulson. You brought a terrible, unacceptable bill before Congress, but even after it had been made into an acceptable bill by the Congressional Banking Committees, the American public could only remember how bad the original bill was. And letting Lehman Brothers fail is looking like a really bad judgment call now.

5. John McCain. While trying to shore up your bad poll numbers on the economy, you injected Presidential politics into the bill negotiations at exactly the wrong time.

4. The 133 Republicans who voted against the EESA bill, for putting politics ahead of the good of the country. You're all a bunch of mouth-breathing yahoos.

3. The 95 Democrats who voted against the EESA bill, for putting politics ahead of the good of the country. I blame you more than the Republicans, because I expect better from you. John Conyers, I'm looking at you.

2. House Republican leadership, who couldn't pull together the votes you promised for the EESA, and then blamed Nancy Pelosi for giving a "partisan" speech in support of the bill.

1. House Democratic leadership, who couldn't get 12 more Democratic votes on something this important. For crying out loud, Pelosi, you allowed your committee chairs to vote against the bill! This is not leadership!

I hope I haven't left anyone out.

Labels: economics

To everyone out there - conservative, libertarian, and liberal - who looks at the economy as a morality play in which the Just are rewarded and the Wicked are punished, and who opposed the bailout bill on the grounds that a deep recession is exactly what America deserves for its profligate ways: you can all go straight to hell.

That goes double for the 133 Republicans and 95 Democrats in the House of Representatives who voted against the bill. You've played politics with people's jobs and lives, and if there were any justice in this world you'd all be out on your sorry asses after this election.

Congratulations, though, to Megan McArdle for being the only libertarian blogger I've seen who gets it right. I only agree with Megan about 50% of the time, but I give her a lot of credit for dissenting from her fellow libertarians on this.

Maybe the House will turn around and pass something; or maybe Bernanke can pull off a miracle. But if not, we're going to look back and see today as one of the most spectacular failures of democracy since the trial of Socrates.

Labels: economics

Al Gore comes up with the perfect rhyming slogan for Greg Mankiw's Pigou Club:

"The answer is to end our reliance on carbon-based fuels," he said in a speech in Washington.

"When you connect the dots, it turns out that the real solutions to the climate crisis are the very same measures needed to renew our economy and escape the trap of ever-rising energy prices."

To secure this green revolution, Mr Gore said the single most important policy change would be to "tax what we burn - not what we earn".

I want that on a bumper sticker.

Labels: economics, environment

UK Foreign minister Lord Malloch Brown is opposed to legalizing production of opium for medical use in Afghanistan. Part of his justification is a either a wonderful example of economic ignorance, or pure bullshit.

"Those cultivating and purchasing opium for medical usage would be in direct competition with illegal traffickers, which could drive up the price of opium and encourage increased cultivation.

"Farmers who do not currently grow poppies would abandon legal crops to meet the market's demand.

"Ultimately, the area of land under poppy cultivation could increase. Quite simply, farmers would grow more to supply an additional purchaser."

(Emphasis added.)

You read that right. Increased competition and production will increase the price of opium.

Labels: economics, war on some drugs

As an unreformed free-trader, I cringe whenever the presidential campaigns focus on Ohio, because of the inevitable NAFTA-bashing that arises. I'm in 100-percent agreement with Matthew Yglesias when he writes

I should also say that as someone who thinks NAFTA was a smart policy and an important-though-oversold policy achievement of Bill Clinton's administration, I find it kind of painful to watch. Hillary Clinton's husband's administration had a perfectly defensible record on trade policy and that is why she defended it in the past -- she ought to keep defending it now. Instead, we get these weird contortions from her and Obama pressing a very dubious line of attack that Clinton won't challenge on the merits.

But, of course, this is politics, and just as Iowa's importance in the primary race guarantees we'll never see the end of ethanol subsidies, Ohio's position as a swing state guarantees that we'll be treated to a good show of protectionist rhetoric every four years. Andrew Leonard at Salon sums up the situation well.

How the World Works is sympathetic to economists who argue in favor of bulking up the social safety net and making investments in infrastructure and education, rather than attempting to micromanage corporate behavior, as a way of addressing the inequities catalyzed by trade. But if Willem Buiter ran for political office in Ohio with a stump speech that included a lecture on how the winners from trade outnumber the losers and how "Bill Clinton’s greatest achievement as President was his remarkable and unstinting support for a liberal international economic order" and therefore Ohioans need to stop moaning about NAFTA, he would lose. He would be pummeled. Economists pride themselves on understanding how the world is. But doesn't that imply that their calculus include political reality? The political reality is that voters in Ohio do not feel as if they have benefited from a liberal international economic order. And the political reality is that the voters of Ohio may well determine who the next president of the United States is.

And, of course, if Tennessee became an important state in a presidential election, we'd see no end of pandering to the cotton farmers.

This makes me wonder: If I were in charge of arranging the primaries, and could somehow designate a handful of states as swing states in the general, what would be the least harmful states to designate as the states that get pandered to?

Labels: economics, politics

Martin Wolf:

Nationalising Northern Rock was the right decision. It should have happened months ago. As soon as it became evident that the stricken bank could only survive with generous public sector guarantees, any so-called “private sector solution” was a mirage. This has finally become evident to the government itself, albeit far too late.

Fortunately, many of the lessons of this debacle have already been learned. These are three: first, regulation of banks needs to pay far fuller attention to the management of liquidity; second, the deposit insurance system of the UK needs to be more generous; and, finally, the UK must have a special insolvency regime for troubled banks that guarantees insured depositors immediate access to their money.

My bold. That sentence strikes me as containing a lot of applicable wisdom, even though I have not properly followed all the in and outs of the Northern Rock disaster.

When businesses are bailed out by the government, big time, a moral hazard is created. The profits remain private while the downsides are assumed by the public. No wonder people take big risks.

Labels: economics, moral hazard, public/private

Is he right?

WE’RE sliding into recession, or worse, and Washington is turning to the normal remedies for economic downturns. But the normal remedies are not likely to work this time, because this isn’t a normal downturn.

The problem lies deeper. It is the culmination of three decades during which American consumers have spent beyond their means. That era is now coming to an end. Consumers have run out of ways to keep the spending binge going.

The only lasting remedy, other than for Americans to accept a lower standard of living and for businesses to adjust to a smaller economy, is to give middle- and lower-income Americans more buying power — and not just temporarily.

On an intuitive level, I agree with Reich to the extent that Americans are going to be hurt by the housing bubble more than they are by the dot com bubble. This one is hitting us where we live, literally. However, I have no idea if he is correct in his assertion that this recession is different in kind as well as magnitude from previous recessions.

Labels: economics, recessions, Robert Reich

...So claims Alex Tabarrok.

His claim seems to based on two points:

(1) House prices have not dropped down to anywhere near the historical average.

(2) Alex does not think the house price will drop down to anywhere near the historical average.

I agree with the first, and the second is kinda hard to refute since it's just what he thinks. I think he's a mighty brave man for making such a bold prediction in the age of the internets and searchable archives.

Is there an easy way for me to remind myself to review his predictions in 2010?

Labels: bubble, economics, housing

When we hear about marginal taxation, it is almost always in the context of the wealthy. There has been a lot of arguments over whether or not very high marginal taxes on the wealthy discourages them to work to a degree significant enough that it is adverse to society. That is an interesting, complex question in itself that people often simplify in such a way as favor their own foregone conclusions.

Now, what we hear less about is the effective marginal taxes on the poor. It's true that those earning very little pays little or no income tax. However, they do lose benefits as their income increase, meaning that some end up in the ridiculous situation of ending up losing more in benefits then they gain in a pay raise. A marginal tax rate of more than 100 percent. Now I think we can all agree -- that's a strong incentive to distort behavior. Via the Unpronounceable One:

“Despite the EITC and child credit, the poverty trap is still very much a reality in the U.S. A woman called me out of the blue last week and told me her self-sufficiency counselor had suggested she get in touch with me. She had moved from a $25,000 a year job to a $35,000 a year job, and suddenly she couldn’t make ends meet any more. I told her I didn’t know what I could do for her, but agreed to meet with her. She showed me all her pay stubs etc. She really did come out behind by several hundred dollars a month. She lost free health insurance and instead had to pay $230 a month for her employer-provided health insurance. Her rent associated with her section 8 voucher went up by 30% of the income gain (which is the rule). She lost the ($280 a month) subsidized child care voucher she had for after-school care for her child. She lost around $1600 a year of the EITC. She paid payroll tax on the additional income. Finally, the new job was in Boston, and she lived in a suburb. So now she has $300 a month of additional gas and parking charges. She asked me if she should go back to earning $25,000. I told her that she should first try to find a $35k job closer to home. Also, she apparently can’t fully reverse her decision to take the higher paying job because she can’t get the child care voucher back (the waiting list is several years long she thinks). She is really stuck. She tried taking an additional weekend job, but the combination of losing 30 percent in increased rent and paying for someone to take care of her child meant it didn’t help much either.

I think everybody, right and left, agrees that this case is a damned shame and something should be done. Of course, we'll probably disagree on what should be done.

Labels: economics, income distribution

Oh, just a beautiful takedown by Barry Ritholtz of the recent piece of disingenuousness from Cox and Alm arguing that we should be looking at something called the "consumption gap" instead of the income gap when assessing inequality. The consumption gap is smaller, argues Cox and Alm, thus showing that inequality is not as great in this country. But their point is an unbelievably mundane one -- poor people spent more and save less than the rich as a percentage of their income.

The rest, including a secondary point about how po' folks get TeeVees nowdays, is just hoary. I'll let Barry take over from here.

This is, of course, classic economic misdirection.

What the authors are revealing here are not rising incomes or societal similarities of wealth. Rather, their data and cost discussion are about Technology adoption lifecycle (Joe M. Bohlen and George M. Beal, 1957), later refined in Everett M. Rogers' Diffusion of Innovations. New technologies and products come down in price over time, regardless of the state of economic equality in the broader society.

This is the oldest dodge in economics. That two Fed economists either fail to understand technology adoption cycles -- or worse, have chosen to willfully ignore it -- simply boggles the mind. If this is the best that Federal reserve researchers can produce, it does go a long way in explaining why our financial system is near crisis.

By the way, I love "economic misdirection" so much I'm starting a whole new label catagory for it.

Labels: economic misdirection, economics, inequality

Okay, recessions suck, but discussion about who should do what to make them milder is fascinating. To me, anyway. And this week there has been a whole smorgasbord of macroeconomic policy reading on the internet.

First, via Greg Mankiw, eminent monetary historian Anna Schwartz, co-author with Milton Friedman of Monetary History of the United States, has issued a scathing rebuke of recent Federal Reserve monetary policy.

"The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.

"They need to speak frankly to the market and acknowledge how bad the problems are, and acknowledge their own failures in letting this happen. This is what is needed to restore confidence," she told The Sunday Telegraph. "There never would have been a sub-prime mortgage crisis if the Fed had been alert. This is something Alan Greenspan must answer for," she says.

According to Schwartz the original sin of the Bernanke-Greenspan Fed was to hold rates at 1 per cent from 2003 to June 2004, long after the dotcom bubble was over. "It is clear that monetary policy was too accommodative. Rates of 1 per cent were bound to encourage all kinds of risky behaviour," says Schwartz.

She is scornful of Greenspan's campaign to clear his name by blaming the bubble on an Asian saving glut, which purportedly created stimulus beyond the control of the Fed by driving down global bond rates. "This attempt to exculpate himself is not convincing. The Fed failed to confront something that was evident. It can't be blamed on global events," she says.

Federal Reserve Chair Ben Bernanke spoke to the House Budget Committee today, saying that a fiscal stimulus enacted by Congress could help economic growth, but cautioned legislators about its form.

A number of analysts have raised the possibility that fiscal policy actions might usefully complement monetary policy in supporting economic growth over the next year or so. I agree that fiscal action could be helpful in principle, as fiscal and monetary stimulus together may provide broader support for the economy than monetary policy actions alone. But the design and implementation of the fiscal program are critically important. A fiscal initiative at this juncture could prove quite counterproductive, if (for example) it provided economic stimulus at the wrong time or compromised fiscal discipline in the longer term.

To be useful, a fiscal stimulus package should be implemented quickly and structured so that its effects on aggregate spending are felt as much as possible within the next twelve months or so. Stimulus that comes too late will not help support economic activity in the near term, and it could be actively destabilizing if it comes at a time when growth is already improving. Thus, fiscal measures that involve long lead times or result in additional economic activity only over a protracted period, whatever their intrinsic merits might be, will not provide stimulus when it is most needed. Any fiscal package should also be efficient, in the sense of maximizing the amount of near-term stimulus per dollar of increased federal expenditure or lost revenue. Finally, any program should be explicitly temporary, both to avoid unwanted stimulus beyond the near-term horizon and, importantly, to preclude an increase in the federal government's structural budget deficit.

Kevin Drum sees Bernake's speech before Congress as a refreshing change from the evasive, cryptic style of his predecessor.

This is remarkably clear and direct, especially for those of us used to 18 years of impenetrable Greenspanese. Bernanke is saying, as clearly as he can, that a temporary economic downturn shouldn't be used as a cynical excuse to pass new long-term tax cuts or to make existing tax cuts permanent. Not only would that have no effect on the economy right now, but it would likely make future economic problems even more intractable.

In other words, Bernanke isn't nuts: he thinks tax cuts reduce revenue and make long-term deficits worse. What's more, unlike Alan Greenspan, he has the guts to say so in plain English instead of disingenuously tap dancing around the issue and then pretending later that he had done as much as he possibly could have to endorse fiscal discipline. That's progress.

I won't pretend to be any sort of expert on macroeconomics, but I can't argue with Kevin's preference for Bernanke's straightforward communication.

Okay, so what form should the fiscal stimulus take? Greg Mankiw comments on a suggestion by the Congressional Budget Office that it could take the form of a temporary increase in food stamp benefits.

In standard macroeconomic theory, the business cycle is symmetric. That is, stimulating an economy that is suffering from insufficient aggregate demand should be the opposite of cooling off an overheated economy to reduce inflationary pressures. Would anyone seriously propose a temporary cut in food stamp benefits in an overheated economy? I don't think so. Food stamps seem the wrong tool to address the business cycle.

By contrast, the first line of defense against short-run economic fluctuations--monetary policy--is applied symmetrically. You cut money growth and raise interest rates in an overheated economy, and you increase money growth and lower interest rates in a lackluster one.

Since one of the main problems with using fiscal policy to smooth out the business cycle is the inevitable slowness of Congressional action, Mankiw proposes creating a fiscal policy that will automatically shift with the economy.

If we are going to use fiscal policy to smooth out the business cycle on a regular basis, then we should think harder about improving the economy's automatic stabilizers. For example, imagine we enacted an investment tax credit, the size of which was a function of the unemployment rate. Firms would have an incentive to time their investment projects toward those periods when the economy was weakest and most needed a shot in the arm.

I can more easily imagine, when the economy starts to overheat, telling corporations that their investment credit has shrunk or disappeared than telling poor families that their food budget has been cut.

Interesting.

And the mysterious knzn weighs in with a warning to Democrats in Congress.

If Congress passes a stimulus package full of new programs and all sorts of bells and whistles and tinsel and lights and stars and angels and golden balls with glitter on them, one that President Bush is almost certain to veto, and one that he, given his ideological preferences, could very easily justify vetoing, and indeed would have a hard time justifying signing, then it will be your fault, not his fault, if the recession turns out more severe than expected. I will hold you responsible. I suspect that voters will hold you responsible too.

If, on the other hand, Congress passes a simple if imperfect stimulus program that works on the revenue side -- say an across-the-board one-time tax rebate -- one that President Bush may not be happy with but will have a hard time justifying a veto, then if he does end up vetoing it, that will be his fault -- and all the more reason to elect a Democratic president. And if he signs it, well, I guess you'll just have to take the risk that the stimulus will actually work and that it will make things look a little better on election day than they otherwise would. A non-recessionary economy in 2008 -- seems to me that's a risk worth taking.

(Though I'm not sure why knzn writes "This means you, Senators Edwards and Clinton," when John Edwards retired from the Senate in 2004. Perhaps he meant "Senators Obama and Clinton.")

UPDATE: knzn has struck through "Edwards and" in his post, and added,

I guess I should include Senator Obama in my warning, too, but his suggestions have come closer to the sort of thing of which President Bush would have trouble justifying a veto, so I kind of felt he didn't need to be warned.

Labels: economics

The UK has surpassed the US in per capita GDP for the first time since the 19th century.

And no, that's not just because of the recent decline of the dollar relative to the pound, although that gave it the final boost.

That socialized medicine is really holding Britain back, isn't it?

Labels: economics

Prof. Tyler Cowen at Marginal Revolution links to a summary of a debate on "wealth and happiness" in which he was a participant. But the interesting bit was what followed the debate:

Justin Wolfers of the Wharton Business School spoke on Pascal's Wager, saying that if one believes in religion then the greatest risk is choosing the wrong one. And how to hedge against such a risk? Mr. Wolfers advises the following: Have lots of children and bring each one up under a different faith. That way, if people don't get into heaven themselves, at least they will have maximized the chances that one of their children will.

Now usually the comments at MR are worthless, but there are quite a few funny ones in that thread. I especially liked this one:

What kind of degenerate excuse for economics is that? Where are the covariances of the kids' doomed immortal souls? Where is the higher-order game theoretical intractability proof? Where are the nonlinearities of utility functions under the possibility that an omnipotent God can create payoffs so large that even he can't compare them? It sounds as though it might have involved no Greek letters at all...

Labels: economics, philosophy

The mysterious knzn contemplates the incentive effects of progressive taxation on entry into risky professions, i.e. those which produce a great deal of income for a lucky few, but not so much for the vast majority.

Does progressive (labor) taxation at the high end reduce the incentive to engage in high-value activities? It seems to me that (to the extent that highly lucrative activities really are high value) it actually increases the incentive. Most of the people with the highest compensation -- movie stars, star athletes, CEOs of large corporations, successful hedge fund managers, successful entrepreneurs, etc. -- have that high compensation not just because of decisions to engage in (ostensibly) high-value activities but because of a combination of an intentional occupational choice decision and unpredictable outcome of success in that occupation. The ones who made the same occupational choices but weren't so successful -- ordinary actors, minor league athletes, middle managers of large corporations, hedge fund managers without a lot of assets under management, entrepreneurs with limited or no success, etc. -- don't get that ultra-high compensation.

In essence, knzn argues, progressive taxation acts like a form of insurance for those entering the risky profession.

If you're successful, you make gobs of money, and you have to pay a lot in taxes, but you still end up with gobs of money; if you're not so successful, you don't make so much money, but you get an insurance payment in the form of a reduced tax bill. If the government were explicitly providing an at-cost insurance policy for actors, athletes, business people, hedge fund managers, and so on, I don't think there would be much question that the policy would encourage, rather than discourage, entry into these occupations.

(For obvious reasons, such an insurance system has to be mandatory. No insurance company will ever offer "failed rock musician" insurance.)

If the tax rates were flat or regressive, so that the failed rock musician had to pay as high a rate as the successful one, there would be fewer people entering the profession. The aspiring rock musicians wouldn't quit their secure day jobs for a shot at the big time.

Of course, if you're a Dark Satanic Millian, this is a feature of flat/regressive taxation, not a bug.

Labels: economics

Because at the Mars Hilton, they don't take American Express.

Scientists have come up with a new currency designed to be used by inter-planetary travellers.

It is called the Quasi Universal Intergalactic Denomination, or Quid.

Why a special currency for space?

"None of the existing payment systems we use on earth - like cash, credit or debit cards - could be used in space," said Professor George Fraser from the University of Leicester.

"Anything with sharp edges, like coins, would be a risk to astronauts while the chips and magnetic strips used in our cards on Earth would be damaged beyond repair by cosmic radiation," he added.

Using any sort of technology that involved sending and receiving information from Earth would also be impractical because of the distances involved.

And the all important question: what's the exchange rate?

It is currently quoting the currency at £6.25 to the Quid.

Labels: economics

My very first post on blogspot. Seems apropos given the recent news. Awww, memories.

Thursday, April 07, 2005

Bubble, bubble...[housing trouble]

I've been hanging out a lot at the Angry Bear and other econ blogs lately, and I'm starting to get the feeling, my friends, that we're in for a world of hurt. There's been talk for months and months that the housing market is unsustainable. But now the gloomy sentiment is becoming mainstream. I heard not one, but two stories on NPR yesterday about impeding trouble in the housing sector. Prices in 'hot' markets on the coasts have gone completely insane. The housing boom was initially fueled by rock-bottom interest rates, but now speculation is rearing its ugly head, with 85% of condo sales in Miami going to investors. Meanwhile, even ordinary people are throwing caution to the wind and buying the most house they could, even if it means stretching themselves to the limit financially. They've seen their friends and family refinance their way to the good life, and now they want to get in on the action themselves, just as those who are in the know are starting to worriedly mouth the dreaded word -- 'bubble'.

With so many potential customers clamoring for home loans, the financial industry have come up with many new 'creative' products so that marginal clients who would have been turned away in staider times can grab their piece of the American dream. 35-year morgages. Interest-only payments for three or even five years. Despite historically low interest rates, people are eschewing fixed-rate morgages for adjustable-rate morgages because, in the short term, the payments are lower. You don't have to be Alan Greenspan to foresee that many of those American dreams are going to end in the nightmare of foreclosure and bankruptcy. The banks don't care because as soon as they make the loan they turn around and flip them to Fannie Mae and Freddie Mac -- government sponsored enterprises that buys the loans, no questions asked. Government sponsored -- meaning that if their overstuffed portfolios of questionable quality causes those quasi-corporate behemouths to go down, they're probably going to get bailed out with tax-payer's dollars.

What I did not foresee: that the fallout from the US sub-prime crisis is going to have such a direct domino effect worldwide. Investor's teeth are on edge in this part of the world after the events of the past few weeks, when the markets have first flushed from foreign investment and then quickly blanched as the subprime crisis rocked the US markets. It might actually be a good time to buy local stocks now.

Labels: blog, economics, economy, housing, market

Mark Thoma and Brad DeLong quote extensively from Paul Krugman's latest NYT column, in which he argues that Democrats should abandon Rubinomics. Krugman writes:

Now that the Democrats have regained some power, they have to decide what to do. One of the biggest questions is whether the party should return to Rubinomics -- the doctrine, associated with former Treasury Secretary Robert Rubin, that placed a very high priority on reducing the budget deficit. The answer, I believe, is no. Mr. Rubin was one of the ablest Treasury secretaries in American history. But it's now clear that while Rubinomics made sense in terms of pure economics, it failed to take account of the ugly realities of contemporary American politics. And the lesson of the last six years is that the Democrats shouldn't spend political capital trying to bring the deficit down.

I wish that Profs. Thoma and DeLong had offered some commentary on this column, because (a) I admire both of them as liberal economists, and (b) this Krugman column makes absolutely no sense to me. It sounds like some sort of Bizarro World version of the "starve the beast" hypothesis, and makes just as little sense.

Republican version of "starve the beast": A high budget deficit is a good thing for the Republican Party, because it will prevent the Democrats, when they inevitably come to power, from enacting their dangerous, expensive right-wing agenda.

Democratic version of "starve the beast": A high budget deficit is a good thing for the Democratic Party, because it will prevent the Republicans, when they inevitably return to power, from enacting their dangerous, expensive right-wing agenda.

Let's set aside any arguments that a high budget deficit is actually a good thing economically, since it's clear that Krugman doesn't believe that. He thinks it's a somewhat bad thing, although not a terrible thing, but that the positive political ramifications of the budget deficit for the Democrats override its inherent badness.

Let me first observe that given the situation of divided government that we find ourselves in, at least one of the two "starve the beast" hypotheses presented above must be false. A high budget deficit can't prevent both the Republicans and the Democrats from enacting their expensive agendas, as it can only block the expensive agenda of the party that takes control in 2008. (If the government remains divided in 2008, neither party will be in a position to enact its expensive agenda.) Krugman seems to be betting that the Republicans will be the next party to control both Congress and the White House, whether that's in 2008, 2010, or further down the road. Given the turn of the 2006 elections, should we Democrats put all our bets on that possibility?

Second, let me ask what the most disastrous Republican policy of the past six years has been, and what the most disastrous policy is likely to be during the next period of Republican dominance, whenever that is. I'm sure Krugman would agree that the greatest recent failure of Republican Party has been in foreign policy, between the senseless Iraq War and its "What, me worry?" attitude toward nuclear proliferation that allowed North Korea to obtain nuclear weapons, and has Iran on the verge of obtaining them. And the greatest danger we face the next time the Republicans take power is that they will start another senseless war based on lies and self-delusion.

If I thought that a budget deficit could prevent another senseless war, I'd be in favor of it, even if it meant spending the money on abstinence programs and bridges to nowhere. But the warmonger faction of the Republican Party has proved that the cost of a war -- whether in lives, money, or American standing in the international community -- is no object to their crazed plans of remaking the world through American military power. The only thing that stands in their way is the good sense of the American public, which was in seeming short supply in 2002 and 2004, but appears to be making a comeback.

At the risk of committing the Pundit's Fallacy, let me suggest that the next few years represent the Democratic Party's best chance to claim the mantle of responsibility in fiscal affairs, just as we have the chance to claim the mantle of responsibility in foreign affairs. It won't keep the Republicans out of power forever, but it may buy us enough time to partially undo the damage that the Republicans have done on the international stage. It would be a shame to throw that chance away on this half-baked left-wing version of the "starve the beast" hypothesis.

UPDATE: Prof. Thoma offers some commentary on Krugman's column.

Labels: economics