Where Fun Comes to Die

Here we have a graph, posted by the blog Innocent Bystanders, showing the difference between the Obama camp’s projected unemployment rates with and without the stimulus package in addition to actual unemployment rates.

So the Obama camp was just a little off. And looking here, there seems to be a rather linear trend of unemployment that has gone beyond what was predicted would happen without the recovery plan. Maybe we’ll be able to make a picture from connecting the dots soon.

In light of their uncanny ability to predict economic stability and change with their accuracy and conveniently long-term graphs, maybe other changes in policy should just be put on hold. We can add this to the list of Obama predictions disproved that already includes other maybe-interesting topics like the national deficit.

But really, it’s time to lose the fantasy. Obama’s New Deal seems to be not so new or helpful. And  if he doesn’t want to stoop to asking people like Mitt Romney for advice, he should at least give the card readers a shot instead of the camp who has exhibited so much fortitude in econ.

Click here for the link to the article with the graph used above.

The New York Times reports $70B in tax cuts for the recently signed stimulus bill.  At recovery.gov, the new website intended to promote transparency by allowing taxpayers to track the stimulus spending, the cited number is $288B for tax relief.  Why the discrepancy?  By examining the fine print you can read that “tax relief” includes “$15 B for Infrastructure and Science, $61 B for Protecting the Vulnerable, $25 B for Education and Training and $22 B for Energy, so total funds are $126 B for Infrastructure and Science, $142 B for Protecting the Vulnerable, $78 B for Education and Training, and $65 B for Energy.”  It’s not clear why these figures were all lumped under “tax relief” instead of being under their respective categories, but it is certainly misleading.  But what is politics without a few misnomers?  “Operation Iraqi Freedom,” “Patriot Act,” and now “recovery.gov” with $288B in “tax relief.”  New regime, old rules.

Courtesy of the Washington Post, a great breakdown of how the stimulus money would be spent.  Interestingly, although some have complained that Republicans are being extremely partisan in not supporting the package, compromises appear to have trended to more spending and fewer tax cuts.  Obama’s own goal of having 40% of the money be immediately injected into the economy via tax cuts has dwindled to 22% with the peak of stimulus injection not occurring until 2010.  This stimulus proposal also misses the administration’s goal of having 75% of the money spent by September 30, 2010.

I almost thought President Obama’s op ed piece in the Washington Post was an internet hoax, it seemed so ill-advised for reasons explained here:

President Obama signed an op-ed this morning in the Washington Post, and it’s a quick hit that would have been better left unwritten. In it, he overpromises results from a bill that hasn’t been finalized and is still having amendments added in the Senate as I write this. But he says the stimulus bill will be “swift, bold and wise enough for us to climb out of this crisis.” How does he know that? Maybe it will, but none of us really knows yet what is going to happen.

The president promises more than a fix for housing, jobs and banks-he guarantees massive government involvement in many sectors of our economy-from energy to healthcare to schools to access to the internet. He goes on to promise “unprecedented transparency and accountability, so Americans know where their tax dollars are going and how they are being spent.” That’s a big deal if he can deliver it. We’ve been waiting for that for years.

The president would have been wise to invite the loyal opposition to join him in supporting the bill, or at least to acknowledge that reasonable minds can disagree on the road to compromise. But instead, he rejects criticism of the stimulus plan and reminds readers that his side won. He seems to blame Republicans for everything causing our country to fall apart. . . .

Anyone opposing the current stimulus package is engaging in “old ideological battles,” “narrow partisanship,” “bad habits,” and “the same old partisan gridlock that stands in the way of action,” he writes. I guess that includes not only the House Republicans, but economic experts Martin Feldstein and Alice Rivlin, the other 250 economists who have publicly stated their reservations.

Most of Washington is engaged in a battle of ideas, for the first time in a long time, about the meaning of capitalism and free markets and government intervention. The future of our economy is at stake, and the president would have been better off not engaging in overblown rhetoric and name-calling on the op-ed page. He came across as partisan and strident about the future, instead of inclusive and thoughtful. Someone else should have signed that op-ed.

I’m particularly disturbed by the president’s alarmist tone, appeal to crowd hysteria, and the pervasive feeling of extortion in the piece, but then i am always wary when a charismatic leader is able to whip up the masses to blindly follow using the carrot of prosperity and the stick of castrophe.   See, e.g., fascist leaders of the 20th century and most recently the current Iraq war which, like G.W. Bush, was extremely popular at the time.   But now I’m just fighting fear mongering with fear mongering.

Today U.S. automakers go back to Congress asking for a handout.  In hopes of currying favor with lawmakers, the auto workers union has decided to make its own paltry concessions.  Under the headline, “Auto Workers Give Up Notorious Featherbed“:

The union is suspending its most ridiculed perk, called the JOBS bank. That program, set up as part of a contract agreement reached between Detroit’s Big Three and the union decades ago, pays auto workers 85% of their pay while furloughed. Some workers reported for years to meeting rooms where they would sit and wait for an assignment or be sent to clean public parks. All the while, they would get paid most of their wages.

The JOBS bank had the effect of paying some employees 85% of their wages for years of unemployment.  The inefficiencies of such an approach are astounding.  Not only are we paying people for doing nothing (the perverse incentives of which were previously discussed here), as the article notes:

By making labor a fixed cost, it altered their manufacturing strategy. For most of the past 10 years, the car companies preferred to discount models with big rebates rather than cut production, because they had to pay workers no matter what.

The union is complaining that it had to make any concessions at all:

Because of the environment we’re in, we face difficult challenges.  I use to cringe from the word ‘concessions.’ But that’s what we did. The important thing is to secure these jobs.

Really?  Is that the most important thing?

Meanwhile, U.S. automakers have upped their bailout price tag from $25M to $34M.  Their previous attempt to solicit money from the government was laughed out of Congress for not explaining how the money would be used to slim down operations and make them competitive with their foreign counterparts when their labor costs are $18 more an hour than Toyota‘s.

Due to stiff opposition (despite a bipartisan agreement in favor), the vote on the auto industry bailout has been delayed until December 8th.  As Nancy Pelosi puts it:

It is all about accountability and viability.  We [need to] see a plan where the auto industry is held accountable. Until they show us the plan, we cannot show them the money.

The big three auto manufacturers have turned into that homeless drug addict that we pass by every morning: we want to help them out, but we don’t want to give them money if they’re just going to spend it on fueling their addiction.  In fact when I was watching the Allison episode of A&E’s “Intervention” yesterday, I couldn’t help but draw parallels between drug addicts and the auto industry.

Intervention is a reality TV show profiling addicts.  In this episode, Allison is a former pre med Boston U student who huffs 10-12 cans of electronics cleaner a day.  She’s most famous for her drug induced catch phrase, “It’s like I’m walking on sunshine,” parodied here.  Her intervention specialist explained to the family that she will never get better until she hits rock bottom:

There’s nothing we won’t do to help you get together, but there’s nothing we will do to help this continue one more second.  This is done.  Ok, and she can say, “screw you” and go be an addict by herself.  But the truth is, most addicts, if it was just up to them, do not have the resources in and of themselves to even be an addict: somebody’s paying the bills, somebody’s making excuses, somebody’s bailing them out.

We want to help.  Of course we want to help.  But is a $25 billion bailout going to help?  Or will it just get shot up like the rest of the cash the auto industry is burning through at a dangerous rate?

And whatever we do, we can’t trust anything the big three say because we all know addicts will say anything to maintain their current lifestyle.  As Allison said,  “I don’t care if I sacrifice the life of another, I need it now.”

An LA Times article wonders what happened to the reparations movement:

Just a few years ago, at roughly the turn of the millennium, slavery reparations seemed the coming thing. A New York Times article in June 2001 reported that the movement to obtain compensation for slaves’ descendants had “taken on substantial force” and was “gaining steam” both in the nation’s universities and in the black community.

All the major black organizations had signed on, including the NAACP, the Urban League and the Southern Christian Leadership Conference. Randall Robinson’s book, “The Debt: What America Owes to Blacks,” had hit the bestseller lists in 2000. Many state and local Democratic politicians started to talk up the idea.

Then: nothing. Today, reparations seem to have completely disappeared from the national agenda. Few mention them anymore. What happened?

With the election of Barack Obama, many have hoped for a reopening of the reparations discussion, however Obama himself opposes monetary reparations:

I have said in the past _ and I’ll repeat again _ that the best reparations we can provide are good schools in the inner city and jobs for people who are unemployed.

This response reminds me of those houses that give out toothbrushes and raisins for Halloween. The implicit acknowledgment in Obama’s statement is that this country owes reparations to ancestors of slaves, just that it shouldn’t be money. What is Obama so afraid of? People spending money on things they want instead of things he thinks they need? In the current economic climate, that might not be so much of a worry. Most people could probably find a lot of “needs” to put the money towards – mortgage payments, food, paying off debt, etc.  But is there anything wrong with people spending the money on wants as well? In the reparations scenario envisioned by the movie Barbershop, Cedric the Entertainer’s character argues that reparations “ain’t gonna do nothing but make Cadillac the number one car dealership in America.” Wouldn’t we rather have that than an American auto industry bailout?

The phrase was coined by a series of sketches in Monty Python’s Flying Circus, parodying the actual Spanish Inquisition.  In these sketches, a character would exclaim in frustration, “I didn’t expect the Spanish Inquisition!” at which point the Inquisition cardinals would burst onto the scene shouting, “Nobody expects the Spanish Inquisition!”

“Spanish Inquisition” type events are unexpected because they are singular.  But as we stand on the brink of another singular event, one that the Bank of England Deputy Governor Charles Bean referred to on Friday as “a once in a lifetime crisis, and possibly the largest financial crisis of its kind in human history,” one wonders whether it might not be a good idea to start regularly factoring in the possibility of a Spanish Inquisition after all.  But if so, how?

Is it smart to factor in the possibility of a Spanish Inquisition type event?  On the one hand, even a very small chance of a great calamity can be significant.  On the other hand, they are infrequent and difficult/impossible to predict.  Of course, Nobel winning economist Paul Krugman has been praised for predicting the current housing-bubble crisis.  But as fellow Chicago grad Megan McArdle pointed out, “If you keep predicting a recession, eventually you will be right.”  Still, expecting calamity can be profitable.  I know a guy who has been shorting the market since late 2007.  When I spoke with him in April, he felt certain that the market would continue to decline through December when most of his puts expired.  I questioned his judgment then, but can only imagine how much money he has made this month.  Anecdotally, it seems smart to expect a Spanish Inquisition event, but so does playing the lottery.

Still, many suggest that we could and should plan for such calamities.  The problem is, how?  If these calamities result from systemic failures, could we rely on the same system to predict and prevent them?  Regulation may work when the problem is confined to a few power players and firms, but in something like the current financial crisis, the problem extends past that small group and spreads to the general populace.  Like a typical zombie movie, the infection spreads until all succumb and become part of the problem.  At that point, might it be better to let the disease run its course?  The weak may die, but the strong will be inoculated against another similar calamity, as was arguably the case with the Great Depression generation.  Anything else we could do would not be a cure, but rather just an attempt to alleviate symptoms.  Until we discover a vaccine, we may have to live with the occasional Spanish Inquisition.

So the Monty Python boys were mainly right: no one expects a Spanish Inquisition, except the people who always expect a Spanish Inquisition (useless) and those who have lived through a similar calamity before (inoculated).  Once someone expects it, they would be hypervigilant to prevent it, which involves its own problems including (wasted?) energy, effort, risk averseness, paranoia, and being a cantankerous grandparent.  The more accurate phrase then is perhaps “The Spanish Inquisition only occurs when not expected, but expecting it can be its own version of torture.”  But, that’s decidedly less catchy.

The headline says it all: “EU takes a €2 trillion financial gamble”:

The governments of Europe yesterday embarked on their biggest financial gamble since the launch of the euro single currency with the boldest financial rescue scheme ever seen. They are pledging to buy up tottering banks, underwrite their lending, and flood the markets with liquidity in a package that could run to a staggering €2tn in total across the EU.

Interestingly while the main focus of the bailout in the United States was on whether it would work or not, the Euros seem more interested in showing up the United States:

The scale, ambition and potential costs of the programmes announced yesterday suggested that European leaders such as Gordon Brown, President Nicolas Sarkozy of France and Germany’s chancellor, Angela Merkel, were determined to rise to the challenge of the financial crisis through concerted action, displaying a degree of leadership that put Washington, the global economic leader, in the shade.

“United Europe has pledged more than the US,” said Sarkozy, chairing the EU, as he announced a €360bn package for France. “European policymakers are racing ahead of the US in their efforts to solve the crisis,” said Italy’s Unicredit bank.

It’s more, for sure, but not that much more.  Only €1 trillion is coming from the actual EU, which has a GDP of a little under $17 trillion, compared to the U.S. contribution of $700 billion with a GDP of a little over $13 trillion.  While the EU’s contribution of 5.8% of its GDP is slightly higher than the U.S.’s contribution of 5.4% of its GDP,  I don’t know if that necessarily puts the U.S. “in the shade.”  And in any case, are we sure that a bailout is the right solution?  I didn’t realize we had all reached a consensus about that, even when taking into account today’s stock market rally.

If there’s one good reason to not fret too much about the (potentially) looming financial crisis, it’s the following graph (from here). The little blips down in recent years are recent recessions. The one big one is the Great Depression followed by the WWII build-up. Do these affect the overall growth path? Sure doesn’t look like it.

Why is this line so straight? The standard economic answer is that the growth trend reflects producitivity increases, or, in more lay terms, the rate at which we get new ideas. As long as we keep getting good ideas about building better cars, or new iPhones, or shipping steel, or just about anything, we should expect this growth to keep on trucking.