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.

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.”

Let’s say you manage a fair-sized division in a regular Office-Space scenario. You have a large number of employees and were responsible for their final products. Let’s say you bargained with those employees, sometimes without recourse, over how they wanted their office environment to be kept – just so that you could personally assure the completion of their final product, and hence, your pay check. You really didn’t take into account the interactions between your employees, between your employees and other teams in your company, how the current environment might affect future productivity. You just got paid – that’s all that was important to you. Sure you liked to give some morning pep talks about how the office was making some green-friendly moves – recycle bins in every cubicle, energy saving through unplugging the computers every night. But in reality, your bottom line was all that matter. Let’s say over time the public doesn’t like your product as much – for what ever reason you can imagine. You have competitors that tend to make other versions of your product better – at least in the eyes of the public. How should you be held accountable? Does it make a difference if you are the major employee for Small Town, USA? For a state? At what point does your company then deserve some assistance? Now extrapolate out… A little further… And a little more…

Yes, the automobile industry has been poorly managed. Yes, they have spent ridiculous lobbying dollars. Yes, they have perpetuated somewhat destructive labor relations, and are still nowhere near their foreign competitors as far as benefits. Yes, there have been multiple missteps over many years. But how do we protect those workers who are currently struggling in the current recession situation? Do we just let the industry go bankrupt – and risk their jobs in the process? Do we fault the industry – or just the managers instead?

We already have a bailout plan in place. If we are willing to help out the many banks that have also selfishly been led by their spa-going CEOs for the sake of national economic security, why would we not also include the automobile industry, one of America’s most fundamental industries? We need to protect our own American industries – and by allowing the automobile industry to supposedly regulate themselves through the bankruptcy option, there will continue to be very little oversight over their already misdirected handlings. Through the bailout plan, we can provide more detailed directions – in fact, we can REQUIRE the development of future strategic planning concerning management, employment, health care, and energy saving.

“What Washington must ensure is that Detroit is never able to return to business as usual. If the Big Three are to survive, there must be fundamental changes…” (New York Post, November 19, 2008) Like President-Elect Obama says, forget the blank check – let’s get the real negotiations on…

Congrats to Obama, here’s hoping for strong and enlightened leadership over the next four years.  But will somebody please explain to me the following statement from Obama’s acceptance speech:

Let us remember that if this financial crisis taught us anything, it’s that we cannot have a thriving Wall Street while Main Street suffers – in this country, we rise or fall as one nation; as one people.

Is this a normative or positive statement?  In other words, is Obama saying that Main Street’s suffering led to Wall Street’s collapse?  Or is he saying that we shouldn’t allow Wall Street to do well if Main Street is suffering?  If the former, I’d like to understand what the theory of causation is.  If the latter, what would be the method of enforcement?

According to their facebook statuses, most people I know are very eager to have the elections done with.  Without the elections, though, we might never have learned how easy it is to amend the California constitution or about the existence of refundable tax credits.

Shocking revelation for me: you can receive a bigger tax refund check than the total amount of money you paid in income tax.  With refundable tax credits, you can owe negative income taxes and actually get the government to pay you the difference.  According to this article:

For the most part, the government enacts tax credits to encourage certain behavior. For instance, the Saver’s Credit is designed to give low-income workers incentives to fund retirement accounts.

Making tax credits refundable allows lower-income workers to take advantage of them, said Robert Greenstein, executive director of the left-leaning Center on Budget and Policy Priorities. Since many lower-income workers pay little or no tax, a non-refundable credit such as the Saver’s Credit isn’t much use to them. Obama wants to make the Saver’s Credit refundable.

McCain calls refundable tax credits an expansion of welfare because,

Republicans oppose sending money without restrictions on its use to people who don’t pay tax, said Douglas Holtz-Eakin, McCain’s senior economic policy adviser. And the GOP doesn’t like paying for it by increasing taxes on wealthier Americans, which they say is another example of Obama’s ideological drive to redistribute wealth, he said.

If you believe a penny saved is a penny earned, then there seems to be no distinction between a tax credit of $200 to someone who doesn’t owe taxes and a tax credit of $200 to someone who does owe taxes.  Tax credits target and reward certain behavior, whereas welfare benefits target and reward need.  I think that is the better argument for the Obama camp to make, rather than the argument they do make:

Obama supporters . . . take issue with the Republican view that the refundable credits would go to people who pay no tax. Those who don’t pay income taxes still support their state and federal governments through payroll taxes for Social Security and Medicare, sales taxes, property taxes and gas taxes.

Can’t you make the everyone-pays-taxes argument for anyone who has ever bought groceries or gas?  The problem is literally everyone pays taxes, Including everyone on welfare.  It’s not necessarily true that people who pay sales tax are supporting the government vs. being supported by the government.  If that is the justification for Obama’s increase in the number and amount of refundable tax credits, I can see why it looks a lot like welfare to the McCain camp, particularly with quotes like this from the above-mentioned Robert Greenstein:

If you are a millionaire, you get the child care tax credit. But if you make $20,000, you are denied it because you don’t make enough. It ends up going to the least needy.

It’s one thing to argue that the person making $20,000 will probably derive greater utility from the tax credit than someone making $200,000, but “the least needy”?  I know the target audience for that sort of statement is probably not libertarians, but how can people not get a little nauseous from reading such blatant paternalism?

I am not even sure if the utility argument is legitimate.  Yes the government may be getting a bigger bang for its buck by giving a tax credit to people who don’t earn enough to pay income tax than to people who earn $200,000.  But the biggest bang for the government’s buck would be to give the credit to those in the lowest tax bracket.  If my income is just under the tax cut off, I have very little incentive to make a little more money because then my entire income gets taxed.  In a normal tax credit world, you could at least argue that there is some marginal benefit to people who begin to pay taxes because they can start to access the various tax credits.  Tax credits, unlike tax deductions, can offset additional income many times larger than the amount of the credit itself, adding even more benefit to the taxpayer.  For instance, each couple hundred dollars in tax credits could mean another thousand dollars or more in income a taxpayer could earn tax free.  The value of the tax credit then is not only the money given and the utility received, but also the added incentive for the worker to earn maybe 5-10% more of their income than they otherwise would.  In a refundable tax credit world, there would be no such incentive to earn enough to enter the lowest tax bracket. If we made all tax credits refundable, it would conflict with some of the desired purposes of the tax credits themselves, e.g. the “making work pay” credit.  It could also arguably over-incentivize tax credits such as the child/dependent tax credit.

Most shocking/sickening revelation of the entire article:

“Most people pay more in Social Security taxes than in income taxes,” said John Irons, research and policy director at the liberal Economic Policy Institute.

Luckily the wealthy still benefit from the social security cap, right wealthy? (wicked laugh, twist of capitalist mustache)

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.

Paul Krugman won the Nobel Prize in Economics today, and it is well-deserved. Krugman’s most important work, called new trade theory, solved the puzzle of why most trade is between very similar countries, like the U.S. and Canada.

Why is this a puzzle? Well, the historical justification for trade followed Ricardo and comparative advantage. If the U.S. is good at producing cars and China is good at producing clothing, then there are gains from trade to be had if the U.S. specializes in making cars and trades them to China, where production is being focused on clothes. This basic idea was refined in the 1920′s, so that what’s actually important is the proportion of inputs each country has. If the U.S. has a bunch of capital (relative to people to work) and China has a bunch of people, then, again, there are gains from the U.S. specializing in producing goods that require capital and China producing goods requiring labor.

OK, so good so far. The only problem is, that most real world trade doesn’t work like this! The U.S. trades primarily with Canada and Europe, while China did most of it’s trading with poor, undeveloped countries. This pattern, dubbed “North-North trade” doesn’t fit the traditional trade story at all.

This is where Krugman comes in. He pulls two ideas together to solve this apparent puzzle. First, people like variety. We enjoy having several different types of cars to choose from, and having 30 differents restaraunts instead of 5. Second, firms have what we call returns to scale, which implies that, the smaller a market of consumers is, the fewer firms will exist to produce goods.

Therefore, when the U.S. opens its doors to Europe, the market base for firms drastically increases (because of scale returns) which allows us to get way more variety than we had before. Voila! Trade happens and it is good for everyone.

Along with new trade theory, Krugman also made several seminal contributions in understanding currency crises and in the resurgence of economic geography. Although he has spent the past 10 years or so as a public intellectual with all the political baggage that entails, this Nobel is justly deserved for his economic contributions.

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.