Thursday, December 30, 2010

Peter Orszag: From Middle Class to Millionaire

President Barack Obama picked Peter Orszag to head OMB (Office of Management and Budget), made famous by David Stockman under President Ronald Reagan.

In announcing Orszag’s appointment in November 2008 shortly after the election, Obama promised that Orszag would go through the federal budget line by line and scrub it free of waste.  Orszag served a relatively short time as head of OMB, resigning his position on July 31, 2010, to get married (anew).  He subsequently took up a position in December 2010 as Vice Chairman at Citigroup’s Strategic Advisory Group.

Orszag’s salary at OMB in 2009 was $193,400 a year ($199,700 in 2010), with another $60,000 or so in benefits.  That put him at the upper end of the middle class category of up to $200,000 for an individual and $250,000 for a couple (excluding fringes).  His salary at Citigroup is reportedly in the range of $2-3 million.

How much waste did Orszag scrub out of the budget during his 19 months at OMB.  The Fiscal Year 2010 Budget sought to end or eliminate 121 programs for a one-year savings of about $17 billion.  Congress approved $6.8 billion of the proposed $17 billion in cuts, which amounted to less than 1% of the $828 billion stimulus package that added to the deficit and debt.

The Budget of the U.S. Government for Fiscal Year 2011 (October 1, 2010, to September 30, 2011), included a 131-page report entitled “Terminations, Reductions, and Savings” that itemized each termination, reduction, administrative savings, and program integrity savings. If approved by Congress, $23 billion in waste would be cut from expenditure.

The federal budget has been on continuing resolution from the beginning of FY 2011 and will remain so until March 4, 2011.  It is highly unlikely that all the president’s proposed savings will materialize in FY 2011.

At the end of 2010, less than $7 billion in waste has been scrubbed from the budget.  The most thorough attempt to scrub waste has achieved a trivial fraction, 0.0018% of $3,834 billion of proposed outlays.  So much for ending waste, fraud, and abuse in the federal budget!

Monday, December 27, 2010

Fixing California's Finances

California is in bad fiscal shape.  Its projected budget deficit over the next 18 months amounts to a staggering $28 billion.  The state’s public finances worsened under Governor Schwarzenegger, who promised to fix the cycle of boom and bust but left the state worse off.  Governor Jerry Brown, after a long absence from the governorship, is back at the helm.  He will need all the help he can get.

Here is my suggestion.  Replace the state constitution with the Basic Law (mini-constitution) of Hong Kong, a Special Administrative Region of Hong Kong.  Chapter V, Economy, stipulates that Hong Kong shall maintain low taxes, balanced budgets, free trade, and other liberal economic measures.  These requirements are the antithesis of California practices.

Thursday, December 16, 2010

Democratic Stability in Iraq: What About Christians?

On March 20, 2003, the U.S. invaded Iraq and overthrew Saddam Hussein.  At that time about 1.4 million Christians lived in Iraq.  Since then, about half have left the country, and a new wave of departures is likely following targeted killings of Christians and church bombings.  Apart from occasional condemnations, the U.S. has failed to protect Iraqi Christians from Muslim attacks.

This sounds like ethnic cleansing to me.  The liberation and pacification of Iraq has come at the cost of more than a trillion dollars, more than 4,400 U.S. troop fatalities, and 32,000 wounded.  Worse still, most of the killed and wounded U.S. troops were Christian and most of the taxes expended were collected from Christian Americans.

If and when Iraq achieves some measure of democratic stability and allies itself with U.S. security concerns, will Christians be allowed to live and work in Iraq?

The Clinton administration took stern action against Serbian ethnic cleaning of Bosnian Muslims?  Are Iraqi Christians to be sacrificed on the altar of Muslim outreach?

Wednesday, December 15, 2010

Chinese Yuan Supplanting U.S. Dollar is Good for America

China’s yuan (its dollar), also known as renminbi (people’s currency), is increasingly becoming a means of savings, payments, and financial instruments outside China.  Yuan deposits in Hong Kong banks have doubled in the second half of 2010.  China and Russia have agreed to conduct trade in yuan and rubles.  China has negotiated yuan payments in trade with countries in Southeast Asia and elsewhere.

The yuan is not yet fully convertible.  China controls the amount of yuan that is allowed to circulate outside its borders.  It is, nonetheless, steadily removing barriers to the use of the yuan outside China.  This trend is likely to accelerate, but it is hard to say how fast.

At some point in the future, the yuan will become convertible and acquire the status of reserve currency for countries that want to diversify away from the dollar, euro, and yen.  Reserve status for the yuan is good for the United States.

As the dollar loses its status as the world’s chief reserve currency, the global demand for U.S. treasuries will decline.  China and other Asian countries will no longer fund U.S. deficits.  To offset reduced demand for American paper, the U.S. government will have to pay higher interest, making it more costly to issue debt.  Higher interest means higher taxes to service and repay debt, or higher inflation if the fed prints money to buy bonds.  Losing reserve status for the dollar will pressure the U.S. government to live increasingly within its means.

Kosovo and Kurdistan

The global community enthusiastically supported the separation of Muslim-dominated Kosovo from Serbia and its establishment as an independent state.  On December 12, 2010, Kosovo held its first general election since independence, which went relatively smooth.  One surprise was considerable support for a party that wants to unify with Muslim Albania.

Iraqi Kurdish leader Massud Barzani recently called for self-determination.  Sunni and Shia leaders, along with the United States, oppose the breakup of Iraq into several nations, each for their own reasons.  A case can be made for self-determination or a unified Iraq.

Why support for the one but not for the other?

Sunday, December 12, 2010

Thoughts on the Health Mandate

Assume the courts uphold the health insurance mandate in Obamacare, with the IRS as its enforcer.  Reasons for the mandate are broader coverage and lower costs, among others.  If so, what is to stop the mandate from being extended to:

Diet: Forced eating of fruits and vegetables, fish and chicken, whole grains, and limits on red meats, pasta, and bakery products.  Let the IRS enforce this too.

Retail: Strict mandates on what can be sold in food stores.  Ration coupons for purchases of unhealthy foodstuffs.

Ditto for restaurants, daily exercise, public transportation, water, electricity, housing size.

Are there any limits to what a progressive government and supportive courts can mandate?  Think it can’t happen here?  Just asking...

Wednesday, December 8, 2010

Will The U.S. Be Able To Compete With China? Yeah, Sure

A New York Times article of December 8, 2010 was headlined Top Test Scores From Shanghai Stun Educators.”  It is must reading for all those concerned about the future competitiveness of the U.S. and the poor achievement of our K-12 students.

On seeing the data, Chester E. Finn, Jr., who served in President Reagan’s Department of Education, commented that “...if they can do this in Shanghai in 2009, they can do it in 10 cities in 2019, and in 50 cities by 2029.”

Shanghai students were first in math, reading, and science, surpassing previously first Singapore, Korea, and Finland respectively.  The students were, admittedly, a select group of China’s brightest, but the results portend a bleak future for U.S. students who ranked 23rd or 24th in most subjects.

Tuesday, December 7, 2010

Waiting for China to Crash

Since 1981, China’s economic growth has been the most rapid in world history.  Despite this fact, my colleague Michael S. Bernstam and I are constantly amazed by the sheer volume of stories, reports, and blogs warning of China’s impending crash.

Google “China economic crisis.”  The result is 1,020,000 results (Dec. 6, 2010).  “China economic crash” yields 118,000.  “China economic problems,” 193,000.

In contrast, “China economic growth” turns up 121,000 hits.  “China economic opportunity” 94,900.

The ratio of crisis to growth is 8 to 1

The “daily China crash” is a wondrous, never-ending, daily outpouring of bad omens and prospects.  In defiance of this prognosis, an increasing number of firms are moving their headquarters and top people to Shanghai, Beijing, or Hong Kong.  Wait and see.

Monday, December 6, 2010

The Fed Can’t Print New Money

A shocking revelation was reported on Monday, December 6, 2010, that the $110 billion in newly-designed $100 bills has been put under lock and key in vaults in Forth Worth and Washington, D.C.  They are unusable due to a printing malfunction that left part of the bill face blank.

The new bill, with greater security, was the first to be signed by Treasury Secretary Tim Geithner.  To make up the shortfall in $100 notes, the Fed has instructed the Bureau of Printing and Engraving to produce more of the old-design $100 bills signed by Henry Paulsen.

Instead of printing new money, the Fed is printing fresh stocks of old money.

I still recommend, as previously blogged, that the Fed put $500 and $1000 notes back into circulation.

Congratulations to Jim Harbaugh and Stanford

As my four-and-a-half year old granddaughter would say “You did it!”  Everything’s coming up oranges at Stanford.

Whoduvthunkit!  An Ivy League school, one of the top three in the country, has just become a football power.  To maintain Stanford’s football status, athletic director Bob Bowlsby has just made a preemptive offer to Harbaugh to keep him on the farm.  Stanford sports enthusiasts hope he accepts.

Two other football comments.

Have you noticed that every player, in college or the pros, is labeled a superstar or underrated, despite half being under average by definition?

Would ESPN kindly instruct its female sideline reporters to ask intelligent questions?  For example, why not ask about offensive or defensive schemes, rather than such inane questions about why your team is ahead or behind, and what are you going to tell the team at halftime.  And so on.

Friday, December 3, 2010

Obama and Clinton Have Lost Their Oomph

On December 2, 2010, the International Football Federation awarded Russia the 2018 and Qatar the 2022 World Cup.  Russia beat out England and Qatar trumped the U.S.

The 2010 World Cup was held in South Africa.  The 2014 is set for Brazil.  Brazil and Russia are two of the BRICs (with India and China) and Qatar reflects the importance of the Middle East.

Ditto for the Olympics.  President Obama tried to help secure the 2016 Olympics for Chicago but lost out to Rio de Janeiro (Brazil).

Its hard to blames these losses on Bush.  Obama’s Muslim outreach did not help Chicago’s 2016 Olympics bid.  Clinton, perhaps the best speaker in the Western world after Pericles, did not win the World Cup for the U.S.

Do these results reflect America’s decline in world affairs?

Thursday, December 2, 2010

Double Taxation in Bowles-Simpson Tax Reform Plan Vitiates Lower Corporate Tax Rate

Erskine Bowles and Alan Simpson released their revised report, entitled “The Moment of Truth,” on December 1, 2010.  Section II deals with tax reform.

Most tax reform plans aim to broaden the tax base by eliminating tax expenditures (deductions, exemptions, credits) and lowering marginal tax rates.  Bowles-Simpson fits this mold.  The illustrative fully phased in individual and corporate tax reform plans appear in figures 7 and 9.

The individual plan calls for three brackets of 12%, 22%, and 28%; the latter is a reduction from the current top marginal rate of 35% or 39.6% if the Bush rate reductions are permitted to expire on December 31, 2010.  Lower rates reflect the elimination of itemized deductions and reductions in the tax benefits of employer provided health care insurance, mortgage interest, and charitable giving.  Taxes would rise on capital gains, dividends, and interest (municipal bonds), which are treated as ordinary income.  (Other details are discussed in the report.)

Corporate tax reform establishes one bracket of 28%, down from the current 35% for large enterprises.  Another benefit is that corporate taxes would be assessed on a territorial system, which means that income of foreign subsidiaries is not subject to U.S. tax.

The international competitiveness of a lower corporate rate is not what it appears to be.  A corporation is simply a legal entity that allows the income of the owners of the business to be taxed and collected at the business level.  Taxing that income at 28% means that after-tax income is 72%.  If the corporation pays all its income as dividends, that income would be taxed a second time, as high as 28% for top-rate taxpayers.  Multiplying 28% times 72% yields another 20% in tax, for a total of 48%.  Similarly, if the business retains all earnings, capital gains tax of 20% is the equivalent of a second tax on retained earnings (72% times 20% equals 14.4%), yielding a potential top rate of 42.4% on corporate income.

The current top rate on corporate income is 35% on profits.  The preferential treatment of capital gains, assuming all earnings are retained, is 15% (individual capital gains rate) times 65% (after-tax income), which equals another 10%, for a total of 45%.  The same calculation applies to dividends if all after-tax earnings are distributed.

For top-bracket taxpayers, the Bowles-Simpson combined corporate and individual reforms do not improve the after-tax return on corporate income.

Monday, November 29, 2010

Memo to Stanford Faculty and Administration re: Harbaugh

Stanford University clings to the principle of excellence.  When it hires a full professor, that individual is reckoned to be in the top three in his/her field.  Admission to Stanford is highly competitive, with one in thirteen applicants admitted to the freshman class.  Stanford routinely wins more NCAA championships than any other university despite its relatively small undergraduate student body.

Except in football!

I’ve been watching Stanford football since 1971.  This year’s team is the best I’ve seen, compiling the most wins in Stanford history.  Coach Jim Harbaugh is probably the most coveted coach in the nation for college and pro teams looking for new leadership.  He is likely to receive several multi-million dollar offers to leave Stanford and take up a new head coaching position.

When a professor receives an offer from another university, Stanford usually tries to match or beat that offer.  Stanford tries to attract the best students by matching or exceeding financial offers they receive from other schools.

But Stanford does not treat its football coach the same way.  Paying millions to a football coach, even one of the top three in the country, is not in keeping with Stanford’s educational values, even though Stanford football competes against top national programs.  Don’t the players deserve the same first-rate instruction in football that students receive in the classroom?

Why this departure from excellence?  I suspect it is faculty jealousy over highly-paid athletic coaches at an Ivy League quality academic institution.  Harvard, Yale, and Princeton do not pay their coaches seven-figure salaries, but neither do their football teams play national powers.

I have little doubt that John Arrillaga would happily pick up whatever cost it would take to keep Harbaugh at Stanford.  Barring a change in policy, Stanford is not likely to try to match or beat a multi-million dollar offer.   Too bad.  Maybe the students can start a petition drive to help keep him.

Tuesday, November 23, 2010

TSA Tomorrow

The Fourth Amendment to the U.S. Constitution is quite clear in its language, at least to me. Perhaps litigation will halt or modify TSA search procedures currently in place at airports (Nov. 23, 2010). Perhaps not.

If not, it’s only a matter of time until an attempted or successful terrorist incident in a crowded venue that would have, or in fact, killed and injured large numbers of Americans leads to extending airport search procedures.

Possible venues include train stations, bus stations, harbors, shopping malls, office buildings, stadiums, theaters, universities, and other places of congregation. Think it can’t happen because of enforcement costs and inconvenience. Who would have imagined current pat-down procedures just a few short years ago?

Assaults on the Bill of Rights are standard fare in American politics and jurisprudence. A change in one vote could vitiate the Second Amendment. The Fourth is currently under challenge. The Ninth and Tenth have been whittled down in scope. McCain-Feingold, upheld by the Supreme Court, eroded a measure of free speech.

Friday, November 19, 2010

Bernanke Speaks Out: High U.S. Unemployment Is Not My Fault

It’s China’s fault.  So said Fed Chairman Ben Bernanke in a speech in Frankfurt on November 19, 2010.  The failure of China to allow its currency to appreciate more rapidly is the reason for global economic imbalances and high U.S. unemployment.

No more Mr. Nice Guy.  In defense of the Fed’s announced $600 billion quantitative easing to stimulate growth and job creation in the U.S., Bernanke also accused Congress of failing to do its part.  He said that Congress needs to adopt growth-enhancing short-run measures as it also lays out a path of long-run deficit reduction.  It would appear that Bernanke cares little if Congress refuses him another term as Fed chairman or demands his resignation.  Nor does he display any knowledge of China.

China is an old, proud civilization.  Having emerged from the humiliation of Western intrusion and occupation of Chinese territory, having endured the madness of the Cultural Revolution, having achieved the greatest economic progress in world history in the past 30 years, and having bought more than a trillion dollars of U.S. government securities and other real and financial assets, China is in no mood to kowtow to Bernanke.

It’s not too late for Ben, but he needs to take an intensive immersion course in Chinese culture and history. I suggest he begin with the Analects of Confucius, followed with a crash course on Chinese history.  He should then invite Chinese officials to instruct him on why China’s economy has performed so well since 1981, despite China’s reluctance to follow the guidance of Western professors who typically visit China for two weeks, diagnose its problems, and warn of a serious crash unless China does A, B, and C based on the professors’ models.

Doing so requires a certain measure of humility.  This may be difficult given the reputation that Fed chairmen have developed over the years as the most important figure in the global economy.

Thursday, November 18, 2010

Will India Surpass China?

Not anytime soon.

A growing number of commentators are pushing the argument that India will overtake China in the coming years.  Their belief rests on the fact that India is a democracy, that its system of government is better suited to coping with the ups and downs of economic dislocation and political unrest.  Although China currently outproduces India, they posit that China’s authoritarian system is more fragile and that China’s economy is due for a serious crash.

One suspects that the pro-India crowd is guided by ideology.  Here are a few 2009 statistics to consider.

China exports, $1,294 billion.  (China population, 1.3 billion)
India exports, $177 billion (13.7% of China).  (India population, 1 billion)
Shenzhen exports, $162 billion. (Shenzhen population, 10 million)

Two more comparisons:

Taiwan’s exports, $203 billion.  (Taiwan population, 23 million)
Malaysia’s exports, $158 billion.  (Malaysia population, 28 million)

China leads India, by large margins, in almost every category of economic activity.

In 2010, for the first time, more Chinese than Indian students are enrolled in U.S. universities.

Democracy is preferable to authoritarian rule in many respects, but facts are facts.

(Source: For exports, CIA Factbook.)

Wednesday, November 17, 2010

Confused About Fed Policy?

On November 15, 2010, Republican-oriented think tank e21 published an open letter to Federal Reserve Board Chairman Ben Bernanke, urging him to discontinue the Fed’s announced $600 billion large-scale asset purchase program (known as quantitative easing, QE II, or, more colloquially, printing money).  The 23 signatories included economists or economic historians Michael J. Boskin, Charles W. Calomaris, Niall Ferguson, Kevin A. Hassett, Douglas Holtz-Eakin, Ronald I. McKinnon, John B. Taylor, and Peter J. Wallison.  International criticism has come from Germany’s finance minister and heads of the central banks of China and Brazil.

Supporters of Bernanke’s purchase program include economists Paul Krugman, Alan Blinder, Tyler Cowen, Greg Mankiw, Scott Sumner, and Brad DeLong.  New York Fed president William Dudley and Bank of Israel head Stanley Fischer, Bernanke’s dissertation supervisor, have voiced their support.

Those on both sides include distinguished professors at prestigious universities, with equal IQ and knowledge of economic models and data sources.  Yet, two groups propose opposite policies.

Given the stakes, it would be nice to know who is right and who is wrong, or at least who is more right than wrong.  Maybe consult the Oracle at Delphi?  A duel at 20 paces?  Some form of majority vote among professors and business economists?  Draw straws?  An intrade contract?  A tag-team wrestling match?  These sound facetious, but there seems to be no objective economic standard by which to decide.

Monday, November 15, 2010

What Some Chinese Are Doing With All Their Dollars

Mainland Chinese, with the fourth-largest number of high net-worth individuals in the world and growing rapidly, are stepping up their purchases of residential properties in major urban markets.

(HT:  Barry Ritholtz, The Big Picture)

The Mortgage Interest Deduction Brouhaha

On November 10, 2010, Erskine Bowles and Alan Simpson, chairmen of President Obama’s deficit reduction commission, presented suggestions for spending cuts and tax increases to the 18 member group.

Several personal income tax changes were included in the package.  One proposed eliminating all current deductions in exchange for sharply lower rates.  The two biggest are the home mortgage deduction (the subject of this post) and employer provided health insurance.

The IRS has released its preliminary report on personal income tax returns for 2008.  About 140 million individual tax returns were filed in 2008.  (All numbers are rounded off for ease of reading.)  Of these, 92 million (66%) took the standard deduction, totaling $699 billion.  The remaining 38.5 million (34%) took MID of $462.5 billion.

Tax filers with adjusted gross income (AGI) over $200,000 constituted 9.7% of all returns, yet took 46.6% of all MID.  The size of the average deduction increased with each higher income bracket.  Filers with AGI of $100,000-200,000 took an average MID of $13,900.  Those with AGI of $1-1.5 million took an average of $32,000.  Those between $5-10 million AGI took an average of $37,000.

The benefit of the MID depends on the filer’s tax rate. Those in the $100,000-200,000 bracket pay a marginal rate of 25-28%, which means that each MID dollars saves 25-28 cents in taxes..  Those over $374,000 pay a marginal rate of 35%, saving 35 cents on each dollar.  For the 18 million filers with AGI under $75,000, most save 15 cents of each MID dollar because their tax marginal tax rate is 15%.

Back of the envelope calculations of tax savings (MID times tax rate) indicate that the top 10% of filers received about 60% of MID tax benefits.

As previously blogged, the home ownership rate in the U.S. is below that in many Western countries without a MID.  Eliminating the mortgage interest deduction (MID) in exchange for lower [a flat] tax rates makes sense.

Another interesting post on this subject can be read here.

Sunday, November 14, 2010

Currency Wars: China vs. U.S.

The greenback is in for the fight of its life.

(HT:  Economicrot)

CFBC: China Makes it Faster, Better, Cheaper

You have doubts?  Watch this time-lapse video.  Chinese construction workers build 15-story hotel in just six days.  (HT:  Mark Perry, Carpe Diem)

Sunday, November 7, 2010

Mao Zedong and Rick Santelli

After several decades of writing and fighting, Mao Zedong led his Chinese Communist party and army to take over China in 1949.  Among his important early papers, published in 1930, is “A Single Spark Can Start a Prairie Fire.”

Similarly, Rick Santelli may have earned his place in history with his famous rant on CNBC.  The Tea Party has honored him accordingly.

"Tea Party Patriots wishes to extend a special thank you to Rick Santelli for his rant on February 19, 2009, which started this entire movement. Without Rick’s rant, this movement would never have started. Many others will try to take credit but don’t be fooled. He was the spark that began this fire."

Mao and Santelli, an unlikely duo.  One for socialism, the other for liberty.

Sunday, October 31, 2010

High Taxes Matter

You doubt that high taxes matter?  Then visit Monaco.  A small strip of land, 0.78 square mile, inhabited by some 30,000 residents, flourishes as a tax haven.  The little principality levies no income tax on individuals, no capital gains tax, and no inheritance tax on direct family line members.  It assesses value-added tax on purchases, social insurance tax on employees, and a modest stamp tax on the sale of a business or real estate.

As a refuge from high taxes, Monaco became famous when Bjorn Borg and Ingmar Bergman decamped from Sweden for Monaco.  So many others have taken up residence in Monaco for tax purposes that the principality reclaimed 374,157 square meters of land on which to build more apartments.

To gain residency in Monaco, one has to live there six months a year. Monaco has plans for another 275,000 square meters when the global economy recovers.  Modest apartments rent for $10,000 a month and higher for larger units.  Purchase prices for small units run in the millions.

Have a look at the benefits high tax states provide for low tax territories.

(Photo credits:  Katonams)

Friday, October 29, 2010

China FBC - More Evidence

News of the day is that China has built the world’s fastest supercomputer, supplanting the U.S. as number one in this important field of high technology.

Also, China will pass the U.S. and Japan with the largest number of patents in 2011.

Both these trends will continue, and in other fields of scientific and productive endeavor.

Thursday, October 28, 2010

End the Mortgage Interest Deduction?

Last February, President Barack Obama appointed the National Commission on Fiscal Responsibility and Reform (Bowles-Simpson Commission).  Consisting of 18 members, the commission is supposed to report its recommendations to Congress for consideration by December 1, 2010.

To balance the budget in 2015, the commission needs to find $1.2 trillion in savings ($240 billion a year).  Potential big items are “tax expenditures,” that is, deductions from gross income.  Being discussed are the mortgage interest deduction and pretax payments of health-insurance premiums.  Reducing or eliminating the mortgage interest deduction and treating health insurance payments as taxable income would raise substantial revenue.

The housing and health insurance industries will fiercely lobby against these changes.  The housing industry will argue that reducing or ending the mortgage interest deduction will lower housing values by reducing the tax benefit of interest payments.  The evidence is questionable.  Moreover, the bulk of the benefit goes to upper-income households.

An international comparison of home ownership rates among 26 OECD economies places the U.S. 17th.  Most of those ranking above the U.S., including England, Australia, Canada, and England, do not permit deduction for mortgage interest.  Reducing or ending the mortgage interest deduction is not likely to have a large downward effect on housing values.  Indeed, one can argue that the mortgage interest deduction contributed to the subprime crisis by making ownership more attractive than renting.

I suggest we also end the tax-free treatment of employer-provided health insurance premiums, expand the expensing provision to all business investment, reduce the AMT to 19%, and apply the AMT to all taxpayers. In so doing, we will have largely made the transition to the flat tax.

(HT:  Mark Perry)

Wednesday, October 27, 2010

FBC - Get Used to This Acronym

FBC refers to China, its ability to make everything and provide every service faster, better, and cheaper than any other country.  Whether the product or service originates in China, is imported from another country and copied and enhanced, China will make or provide it faster, better, and cheaper.

The acronym applies to low-tech and high-tech alike, to agricultural and industrial produce, to wholesale and retail (including financial) services, and increasingly to inflow of foreign investment.

I strongly recommend watching the following short video about China in 2030, except that I believe it will occur much faster, as early as 2020.

Two Kinds of Inflation

Inflation can be observed and measured in two ways. One is changes in the Consumer Price Index (CPI), a representative basket of goods and services that excludes financial assets, but measures the rental value of owner-occupied housing and rental housing. A second is asset price inflation, which includes changes in the prices of stocks, commodities, houses, and precious metals.

The U.S. Federal Reserve Board looks at CPI-based inflation, which is further segregated into core and non-core inflation. Core inflation excludes food and gasoline. The Fed may glance at asset-price inflation, but does not give it the same attention in setting monetary policy.

The Fed prints money when it purchases financial assets (quantitative easing). Most analysts forecast another half-trillion or trillion dollars of additional fed purchases in the coming year. Where does (will) this money go?

If banks don’t want to lend when they can borrow from the Fed at zero interest and buy long-term treasuries at 4%, why should they undertake more risky lending? If business firms with lots of cash on their balance sheets don’t want to invest, which would mean more jobs, why will additional money matter (so long as the Fed gives the impression that deflation is a bigger risk than inflation)? That leaves precious metals, commodities, and equities to absorb the additional cash, as money will not flow into housing given the foreclosure mess.

If this line of thought is correct, by the time fears of deflation have been fully arrested, and the Fed begins to offload the financial assets it has purchased over the past few years, a new bubble may have formed in the financial markets. To arrest that bubble without popping it could be the next exciting adventure in the world of money.

Monday, October 25, 2010

Tax Rate Increases Worsen the Distribution of Income

A growing body of academic literature suggests that uneven distribution of economic gains may be troublesome for democracy.  Using IRS data, Professors Thomas Piketty (Paris School of Economics) and Emmanuel Saez (UC Berkeley) plot the share of pre-tax income flowing to the top 1% of earners between 1913 and 2008.  The graph (Figure 2) shows that the share peaked in 1928 at 24%, after which it underwent a steady decline to 9% in 1975 (with some ups and downs along the way in the 1930s and 1940s).

The share accruing to the top 1% remained steady during 1976-80.  It then rose to 16% in 1988 at the end of Reagan’s presidency.  After falling slightly to just over 14% under President George H.W. Bush, it shot up sharply under President Clinton, peaking at 22%.  The dot-com bust reduced it to 17% in 2003, thereafter rising to 23% in 2007, settling at 21% in 2008 at the end of Bush’s second term.

Taking the starting and ending points of the Clinton and Bush presidencies, the share of income flowing to the top 1% under Clinton rose 57%; under George W. Bush, it actually fell.

Why are these gains and losses important?  Some commentators have argued that President Bush’s tax-rate reductions worsened the distribution of income by giving tax breaks to the top 2%.  In fact, the top 1% did worse at the end of the Bush’s presidency.

In stark contrast, the top 1% flourished under President Clinton.  Recall that two new rates of 36% and 39.6% were added to the previous rates of 15%, 28%, and 31% in the Clinton years.  On this evidence, it’s hard to argue that restoring the Clinton rates is required to improve the distribution of income.

Thursday, October 21, 2010

China Flexes its Muscles: Wait Till 2020

Global buyers of rare earth metals complain that China is restricting its exports to Japan and other countries.  Rare earth metals are vital inputs in telecommunications equipment and other high-tech products.  China has suspended shipments to Japan during the past month over a dispute of offshore islands claimed by both countries.

Since 1990, China has supplanted the U.S. and increasingly dominated the production of rare earth metals, now producing 97% of global output.  It will take the U.S. three years to begin mining and processing large quantities of rare earth metals to reduce dependence on China.

If China is willing to punish Japan over several uninhabited offshore islands, image how it might react to the U.S. Treasury naming China a currency manipulator (not to mention China’s massive holdings of U.S. treasuries).

These measures pale against what will be China’s ability in 2020 and beyond to initiate or take retaliatory economic actions against countries that threaten China’s interests.

Tuesday, October 19, 2010

Is There an Iraqi Government Somewhere in Our Future?

Seven months and counting since the March 7, 2010, election in Iraq, a new government has yet to form.  As if that weren’t bad enough, Nouriel al-Maliki, leader of the Shi'a bloc, flew to Iran on October 18, 2010, to meet with Iran’s President Mahmoud Ahmadinejad, Supreme Leader Ayatollah Khamenei, and Moqtada al-Sadr, a powerful Shi’a cleric, who wants all U.S. forces out of Iraq immediately.  Maliki stressed that Iraq’s ties with Iran is at the top of Iraq’s relations with other countries.

Eight years since the 2003 invasion, a trillion dollars, five thousand dead soldiers, several tens of thousands wounded, and the remaining 50,000 U.S. troops scheduled to leave Iraq by the end of 2011, the prospect of a stable democracy in Iraq supportive of U.S. interests appears increasingly dim.  What may emerge in its place is greater cooperation between Iran and a Shi’a-led government in Iraq that includes al-Sadr’s bloc.  Such an outcome would be a severe setback for U.S. foreign policy.

A Great Decision?

Sunday, October 17, 2010

Die Luft der Konservatismus weht

The composition of Stanford’s student body has dramatically changed since I first set foot on the campus on September 4, 1971.  The student body, both undergraduate and graduate, was largely white.  Campus activism arose from opposition to the Vietnam War and the draft.

During the next 30 years the complexion of Stanford steadily changed, reflecting increased enrollment of female and minority students and gradual hiring of female and minority faculty.  During this period, faculty and California resident students overwhelmingly registered as Democrats, routinely voting four-to-one for Democrats in national elections.  Students actively organized during national elections and  brought candidates to campus.

All is quiet on the Western front this year.  Walking around the campus yields little evidence that this is an election year.  Moreover, drab blue jeans have given way to skirts and floral dresses among the student body.  Students from Asia and of Asian descent constitute two-fifths of the student body, who tend to be more conservative and less active in politics.  While the faculty still largely supports liberal progressive policies and causes, the student body shows less and less interest in the message.  The recent Stanford Daily editorial board rant against Victor Davis Hanson, and by implication the Hoover Institution, brought forth hundreds of responses, almost all critical of the editorial board.

Did Bob Dylan make a secret visit to Stanford?  The Times They Are A-Changin’

Friday, October 15, 2010

TI Liveblogging From the White House, November 3, 2010

A day before his long postponed visit to Indonesia, President Obama made a brief statement in the White House Rose Garden.

“Selamat pagi. Big Republican gains in Congressional and state elections  are not a repudiation of my policies. Rather, they reflect the weak economy and high unemployment. But poor economic conditions are not the fault of my administration.”

“I acknowledge one mistake. We underestimated the severity of the recession we inherited from the Bush administration. As a result, my team overestimated the speed of the recovery from the stimulus and other incentive measures.”

“I pledge to the American people that I will continue working to achieve comprehensive energy and immigration reform among other important issues. I invite Republicans to work with me in a bipartisan spirit. But let me be clear. I will push ahead in any case.”

Republican leaders rushed to their microphones to state support for policies based on common ground. However, Republicans heard the voters loud and clear, meaning that Obama would have to respond to the peoples’ concerns. He would be wise, they stated, not to push unpopular policies through a lame duck Congress if he wanted Republican support during the next two years.

Friday, October 8, 2010

India Catching China?

The political-economy blogosphere is replete with arguments that India’s economy will catch, and perhaps surpass, China because of India’s democratic political system. Who’s kidding who?

Take electricity production. In 2009, China produced 3,714 billion kWh compared with India’s output of 665.3 billion kWh. Total installed electricity capacity in China was 874 GW vs. India’s 162 GW. China’s output and grid are both five times greater than in India.

In 2009 China’s increase in electric grid capacity was 93 GW compared with 31 GW in India. China’s one-year increase equals 57% of India’s entire grid.

To this comparison can be added transportation indicators, industrial output, and so on. There is nothing wrong with stating a preference for democracy, but it is quite another matter to claim its superior economic performance in the China-India comparison.

Thursday, October 7, 2010


In apparent response to NATO forces killing three Pakistani soldiers (for which Hillary Clinton has now apologized), and perhaps to Hillary’s demand that rich Pakistanis pay more taxes, Pakistan has closed the Torkham border crossing into Afghanistan through which 70% of ground supplies are delivered to NATO forces. In the past seven days, 127 fuel tankers have been blown up.

Strange behavior from Pakistan, which is supposed to be an ally of the U.S. and NATO in the fight against Al-Qaeda and the Taliban, don’t you think?

When will a shortage of fuel tankers develop?

When will the reduction in fuel deliveries hamper NATO operations?

Who is paying the insurance and compensation for property destruction and to families of killed and wounded drivers?

What will it take for Pakistan to reopen the border crossing? Money? An end to NATO incursions into Pakistani territory? An end to complaining about lackluster efforts to root out Taliban fighters on its territory?

Monday, October 4, 2010

Another Failed Stimulus

Some economists and politicians advocate more stumulus on the view that more government spending is necessary to increase aggregate demand to create jobs and reduce unemployment.

Critics of further stimulus worry that cranking up the government printing press to print more dollars risks inflation.  The critics can put their hearts at ease.  The Federal Reserve Board was set to release the new $100 bill on February 10, 2011. Unfortunately, the special paper on which the currency was printed creased during passage through the Bureau of Printing and Engraving's high-printing machine. On October 1, the Fed issued a press release announcing the problem and delay until further notice.

No matter.  The Bureau cannot print $100 bills fast enough to stimulate aggregate demand, as a majority of them ultimately  circulate overseas.  To really stimulate demand, the Bureau should resume printing $500 and $1,000 bills to put real purchasing power in the hands of American consumers.

Saturday, October 2, 2010

Shenzhen: Then and Now

China’s great economic reformer, the late Deng Xiaoping, launched his country on a path of three decades of 10% annual economic growth when he established the first Special Economic Zone in Shenzhen in 1980. The Shenzhen SEZ has just celebrated its 30th anniversary of success.

I traveled to Hong Kong almost annually between 1976 and 1994. In Hong Kong’s rural New Territories, there are vantage spots from which one can catch a glimpse of Shenzhen.  What I saw in the 1970s was a small fishing village.

Contrast that with an ultra-modern city today of 9 million, the richest city in China with per capita income of US$13,600. A comparison of the photos shows what 30 years of sustained high growth can produce. Put your imagination to work and you may be able to visualize what most of China will look like 20 years from now.

Thursday, September 30, 2010

Maybe Let the Bush Tax Cuts Expire?

Republicans used the Congressional mechanism of reconciliation to pass the Bush tax cuts. Reconciliation required that the tax cuts automatically expire on January 1, 2011. This is the law.

Democrats want to extend the Bush tax cuts for families making less than $250,000 (singles under $200,000). Republicans want those making over $250,000 included in the extension (never mind the merits or arguments of either side). But Members of Congress in both parties that voted for the Bush tax cuts knew the day of reckoning would arrive on January 1, 2011, now just three months away.

What’s different in 2011 as against 2001? For one, annual budget deficits are in the trillions, not hundreds of billions. For another, the public debt is approaching dangerously high levels, especially if interest rates should rise in the next few years and increase the cost of debt service.  Extending the cuts would add trillions more to the deficits and debt.

Perhaps we should let the law takes its course and see what happens. After all, those who predicted doom and gloom from the 1993 Clinton tax increases were wrong. Those who predicted that the economy would prosper due to the Bush tax cuts failed to foresee the Great Recession. Who can absolutely guarantee that letting the Bush tax cuts expire will spell Armageddon? The same people who warned that Clinton’s tax increases spelled disaster, when, in fact, they were followed by a stock market boom and budget surpluses?

Sure, other factors affect economic activity (e.g., monetary policy, labor markets, regulation, etc). But this is exactly the point.  A singular focus on increases or decreases in marginal tax rates, to the exclusion of other economic factors, does not necessarly result in hard times or prosperity.
Besides, extending the Bush tax cuts will remove pressure for real tax reform (e.g., the flat tax).

Wednesday, September 29, 2010

Warren Buffett, Obama Adviser

Legendary investor Warren Buffett was an adviser to Barack Obama’s presidential campaign. From time to time he continues to talk with Obama.

One of Obama’s signature campaign themes was the development of green technology to shift America and the world from heavy use of polluting carbon-based power to electric power. Electric vehicles promise a massive reduction in carbon emissions.

Warren Buffett is in China today (September 27, 2010). His first stop is Shenzhen, a city of 9 million that was formerly a small village, which Chinese leader Deng Xiaopong commissioned as China’s first Special Economic Zone in 1982. Shenzhen is headquarters of BYD, a Chinese electric vehicle manufacturer, in which Buffet thas taken a 9.89% stake for $230 million. Buffet said that he believes that the battery and car maker will play an important role in new energy technology.

Is there some reason that Buffett, an Obama adviser, has made this strategic investment in China, America's economic rival in green technology?


Tuesday, September 28, 2010

America in Decline

Several scholars, most prominent among them Niall Ferguson, have written on America’s declining power in global strategic, economic, and cultural affairs. Their theme is not so much that America is undergoing a sharp decline in absolute terms, but that it is declining relative to its post-World War II superpower status and to the rising powers of China, India, Russia, and Brazil. America’s imperial overreach in the Middle East continues to drain resources, China, in contrast, is investing heavily in building relations with resource-rich nations around the globe.

Words have meaning. Ronald Reagan saw “Morning in America.” Confronting the Soviet Empire, he borrowed a pre-battle phrase from Maximus: “Strength and Honor.” His successor, George H.W. Bush sought a kindler, gentler America, implying that Reagan was too harsh. George H. Bush promised compassionate conservatism, implying that previous conservatives lacked compassion.

“Strength and Honor” anyone?

Monday, September 27, 2010

Americans Prefer Sweden

No. This is not a post about Swedish blondes. Rather, it is a survey of public opinion in the United States on the politically salient issue of the growing inequality in the distribution of income and wealth in the past decade or so.

In December 2005 two professors from Harvard and Duke conducted a survey of 5,522 Americans in 47 states asking respondents for their views on the distribution of income in America. An overwhelming 92% said they would prefer to live in a society with far less income inequality than the United States. The responses cut across all demographic and political lines. If given a choice, respondents said they would prefer a distribution which mirrors that in Scandinavia, especially Sweden.

Given the well documented disproportional gains in income and wealth accruing to the top 1% of U.S. households, it’s reasonable that 92% of those surveyed believe that too few are collecting and accumulating too much.

Opinions are cheap. Actions are costly. Statistics Sweden publishes data on immigrants to and emigrants from Sweden by country of birth and citizenship. In 2005, the net inflow of persons born in the U.S. immigrating to Sweden (inflow over outflow) was 372. Only 79 immigrated for work and 38 to study. Most was for (unspecified) family reasons.

It is noteworthy that the net outflow of Swedes in 2005 was 6,800 and 5,167 in 2004. The largest numbers of incoming arrivals replacing them were Poles, Germans, Russians, Serbs, Iraqis, Iranians, and Thais.

What about Swedes moving to America? The U.S. Office of Immigration Statistics publishes periodic reports on persons seeking legal permanent resident status by region and country of birth. Except for 2003, when the number was 963, more than a thousand Swedes requested permanent resident status every year between 2000 through 2009. (Only one married Tiger Woods).

Americans may prefer the distribution of income and wealth in Sweden to that in America but few are willing to work or study there. Sure, there are barriers of language, culture, climate, and other obstacles. But if the distribution of income and wealth are so important to decisions about where to live, why do thousands of Swedes pack up and leave every year.

Perhaps the two professors might consider conducting a survey of Swedes who have moved to the U.S. to find out why.

Thursday, September 23, 2010

Stimulus Evaluated with Facts

On September 19, 2010, the Business Cycle Dating Committee (chaired by my colleague Robert E. Hall) of the National Bureau of Economic Research (NBER) declared that the trough in business activity occurred in June 2009. That trough marked the end of the recession that began in December 2007 and the economy began to recover in July 2009, i.e., the start of the rising phase of the business cycle. The BCDC weighs several indicators of economic activity to reach its conclusion.

The stimulus, the American Recovery and Reinvestment Act of 2009 (ARRA), was signed into law on February 17, 2009, a month after Barack Obama was sworn in as president. The law authorized $787 billion as follows: $288 billion in tax cuts and benefits, $275 billion for federal contracts, grants, and loans, and $224 billion for education, health care, and entitlements.

The web site for ARRA shows that $158 billion in funds had been awarded for federal contracts, grants, and loans, but only $36 billion had been received by applicants between February 17, 2009, and September 30, 2009. Even if all $36 billion had been spent by June 30, 2009, its effect on the economy would be almost unmeasurable.

A large chunk of the tax cuts consists of making work pay credits against social security payments. Tax withholding tables adjusted to reflect less withholding means that no more than one-seventh of the total found its way into private hands for spending by June 30, 2009. The effect of making work pay tax credits on the economy would also be almost unmeasurable.

There is broad agreement that monetary policy played an important role providing financial resources to banks through lower interest rates and purchase of treasuries and other financial assets.

Some prominent economic figures (e.g., Warren Buffet) and politicians complain that the BCDC’s formula does not reflect the ongoing economic misery. But those emotive statements reflect personal judgments, not the official declaration.

Tuesday, September 21, 2010

Questions Seeking Answers

While Iraqis are being blown to pieces and America continues to spend borrowed money trying to build democracy in Iraq, where oh where is the new Iraqi government?

While Americans are being killed and injured and America continues to spend money building a viable Afghanistan, when oh when will Afghanistan have an honest election and an honest government?

If Republicans only care about tax cuts for the top 2%, how do Republicans ever win elective office?

If President George W. Bush was the decider and Karl Rove the political adviser, why did Democrats win the Congress in 2006 and the White House in 2008?

Did the stimulus lose jobs, create no new net jobs, create 350,000 jobs, create a million jobs, save or create 3.3 million jobs?

Why do intellectuals so dislike Sarah Palin and the Tea Party? Do the Tea Party and its candidates lack gravitas? Are they simpletons? Did the Tea Party cause the financial crisis and “Great Recession.” How has it taken down seven Republican establishment candidates?

Wednesday, September 15, 2010

Memo to Raul Castro

As you begin to shift from a command-and-control to a market economy, I suggest you stay clear of the IMF, IDB, WB, and Harvard University for advice.  Instead, send your team of economists to Estonia and Slovakia whose officials will be happy to share with you their success in transforming their economies after the collapse of the Soviet Empire.

In particular, you should study the flat tax as a good way to install a new revenue system.  Even Russia, your former benefactor, has flourished due, in part, to its 13% flat tax on personal income.

Best wishes for success in your reform program.

Alvin Rabushka

Tuesday, September 14, 2010

Modernizing China's Currency

China's currency, the renminbi (people's money), has been largely unchanged since the founding of the People's Republic of China in 1949.  It is issued in denominations of yuan (dollars), jiao, and fen (pennies).  It has been printed in two designs, the second with Mao Zedong's portrait on the obverse side and various scenes of China on the reverse.

Deng Xiaoping is the great mastermind of China's post-Mao economic reforms, which have transformed China from a backward to a modern country in three decades with a large and growing middle class.

To honor Deng, the People's Bank of China (China's central bank) should issue a new bank note denominated as 200 yuan (about $30) or 500 yuan (about $75).  Deng's portrait should appear on the obverse side with a picture of the Shenzhen Special Economic Zone on the reverse.  This would be especially timely given the 30th anniversary of the Shenzhen SEZ, an important step kicking off China's modernization, celebrated in early September 2010.

Monday, September 13, 2010

The Bond Vigilantes

A fiery horse with the speed of light,
A cloud of dust and a hearty Hi-Yo Silver!
The bond vigilantes ride again.  (HT: Lone Ranger)

Proponents of additional stimulus and/or further Fed easing have pointed to low interest rates to claim that "deficit hawks" and "inflation mongers" have no clothes.

That was ostensibly correct on August 31, 2010, when the rate on the 10-year U.S. treasury note closed at 2.48%. Ten days later, on September 10, it closed 32 basis points higher at 2.80%.

Why? Who’s to say. Nor does it matter why. What matters is that interest rates can almost turn on a dime.  What is not a serious concern today about deficits, debt, and inflation can become a Greek-like problem tomorrow.

Wednesday, September 8, 2010

Democratic Stability in Iraq: Unity, Federation, Confederation, or Dissolution?

My Hoover colleague, Victor Davis Hanson, hits upon a growing divisive trend afflicting Europe in his column of September 6, 2010.

“Take Europe. The decades-old vision of a united pan-continental Europe without borders is dissolving. The cradle-to-grave welfare dream proved too expensive for Europe's shrinking and aging population.

“Cultural, linguistic and economic divides between Germany and Greece, or Holland and Bulgaria, remain too wide to be bridged by fumbling bureaucrats in Brussels. NATO has devolved into a euphemism for American expeditionary forces.

“Nationalism is returning, based on stronger common ties of language, history, religion and culture. We are even seeing the return of a two-century-old European "problem": a powerful Germany that logically seeks greater political influence commensurate with its undeniable economic superiority.”

The key word is “divides.” Culture, language, religion, and history are pushing Europeans apart. If this is happening in Europe, think Sunnis, Shias, Kurds, and other tribal groups in Iraq. I believe the best that can be hoped for is Swiss-style confederation, but even that may be too optimistic.

Tuesday, September 7, 2010

Stalemate in Iraq, Stealing in Kabul

Six months and still no government in Iraq. This is the new American-allied democracy in the Middle East that Americans have bled and paid for.

Improper off-the-books loans to friends and relatives of Afghanistan President Hamid Karzai to spirit money out of the country have put Kabul’s largest bank and financial system in danger. For this Americans are ramping up troop levels and spending?

Monday, September 6, 2010

Stimulus Vultures

President Obama plans to announce several additional packages this coming week to assist economic recovery. As the word “stimulus” has become toxic in Congress, look for other words to describe his proposals.

Proponents of additional stimulus, who wanted but did not get a bigger stimulus the first time around, complain bitterly that “deficit hawks,” who have found religion against more spending, are harming the economy. I think we might call these critics “stimulus vultures,” who eat up borrowed money (from foreigners and Americans) and taxes for payouts to political friends. Given the disagreement among economists on whether the stimulus was beneficial, or largely irrelevant and wasted, feeding more stimulus to the vultures can be dangerous to the nation’s health as it runs up more debt and increases future debt servicing costs.

Sunday, September 5, 2010

Baseline Schmaseline

In her final speech as head of the Council of Economic Advisers, Dr. Christine Romer said that she underestimated the severity of the Great Recession. Thus, while her forecast of the beneficial effects of President Obama’s stimulus was correct, it was based on the wrong baseline (state of the economy at the time she did her analysis). Had she correctly anticipated the severity of the recession, she would not have forecast unemployment remaining below 8%, instead of 9.6%.

If, on the basis of her economic expertise, she got the baseline wrong, why should we suppose she would get the forecast right? Just asking...

Friday, September 3, 2010

Memo to Tea Party Supporters

The original Boston Tea Party and follow-on dumping of tea in other colonies reflected anger at increasingly dictatorial British rule. I think it is important to be well informed about the Tea Party and related events leading up to the American Revolution.

To that end I recommend you buy a copy of my book, Taxation in Colonial America. The front cover is a contemporary depiction of the Boston Tea Party. Reading my book will help you fend off critics who say the American Revolution was not about higher taxes and bigger government.

Allons enfants de la Patrie!

Monday, August 30, 2010

Congressional Budget Office Says the Stimulus Created Several Million Jobs

On August 24, 2010, the CBO released its estimate of the number of jobs funded through the American Recovery and Reinvestment Act of 2009 (ARRA) in the second quarter of calendar year 2010. The estimates are based on the number of jobs funded by ARRA reported by most grant and loan recipients, contractors, and subcontractors.

By way of background, the Great Recession cost the U.S. economy 7.88 million jobs between July 2007 and July 2010, while the adult population grew by 6 million.

CBO’s estimate of the increase in the budget deficit due to ARRA during fiscal years 2009-2019 is $814 billion, a modest increase of $27 billion in the projected deficit of $787 billion when ARRA was being considered. (Readers may recall that Senator Susan Collin’s vote was secured by agreement to reduce ARRA’s size by some $100 billion.)

The Director’s Blog summary can be read here and the full report here. The CBO estimates are qualified for several reasons stated in the blog and report, producing a wide spread in each result.

ARRA raised the real level of GDP between 1.7%-4.5%.

ARRA lowered unemployment between 0.7-1.8 percentage points.

ARRA increased the number of people employed between 1.4-3.3 million.

ARRA increased the number of full-time equivalent jobs by 2.0-4.8 million compared with what would have been otherwise in its absence.

The effects of ARRA are projected to diminish during the second half of 2010 and beyond.

For purposes of discussion, assume that ARRA produced the maximum result in each of the four preceding estimates. This means that about $800 billion or so of stimulus increased employment by 3.3 million jobs. News reports state that some in the government, such as CEA head Christina Romer, wanted a larger stimulus package of $1.2-1.4 trillion, but were advised that $800 billion was the politically feasible maximum.

Suppose the stimulus had been doubled to $1.6 trillion. Assuming a linear response, a double-sized ARRA could have increased employment by as many as 6.6 million jobs. A tripling to $2.4 billion could have yielded 9.9 million jobs. The latter number would have recovered almost all the jobs lost in the last three years and produced an unemployment rate as low as 5.9%. Even taking the midpoint of each estimate would have produced a large improvement in employment and output.

Given the tens of trillions of dollars cited as the long-term unfunded liability of the federal government for such entitlements as Social Security and Medicare, $2.4 trillion in one-time stimulus pales in comparison.

Let me be clear on one point. I’m not recommending a fresh stimulus package of another $1 trillion and more. Neither I nor anyone else can predict how the bond market would respond to such legislation. But, and it’s a big but, if the bond vigilantes were to remain quiescent during another big stimulus, who’s to say....

Friday, August 27, 2010

Potpourri For a Friday

1. On all prior trips to China, I tried to find something to buy with my renminbi (RMB) bank notes, lest I return home with “funny money.” That appears to have been a mistake. I should have kept them for future use. RMB notes will steadily increase in value against the dollar and become more widely used as a means of payment around the globe.

2. Economists and government officials are in a tizzy about the unwillingness of banks to lend money to small businesses that are the engine of job creation in America. (Large corporations are flush with cash and don’t need to borrow.) The September 2010 “Monetary Trends” newsletter of the St. Louis Fed is titled “The Monetary Base and Bank Lending: You Can Lead a Horse to Water...” A better characterization might be that lecturing banks on the need to lend money to jump start the economy is akin to lecturing rats about the benefits of proper hygiene to prevent plague.

3. The federal government has heavily involved itself in the U.S. economy during the past decade. Its interventions includes banks, vehicles, health care, financial regulation, and so on. This represents a creeping (accelerating) collectivization of society. Star Trek devotees would say that we are becoming Borg, being assimilated into the collective. Resistance is futile. The Borg does not allow for individual identity.

Thursday, August 26, 2010

Disseminating Public Policy Ideas: 1969 vs. 2010

I first got into the public policy business in 1969 consulting on several aging projects for the former TransCentury Corporation in Washington, D.C. At that time there were three important newspapers (Wall Street Journal, New York Times, Washington Post), three business magazines (Forbes, Fortune, Business Week,), three national television networks (ABC, CBS, NBC), a handful of prominent columnists who wrote on public policy, and a small number of influential think tanks (e.g., AEI, Brookings, Hoover, CSIS). Getting coverage in this small network of ideas gave one a good chance of being heard.

Fast forward to 2010. There are still only a handful of important newspapers. Business magazines have seen their page count fall by 80% or more to less than a hundred of which half is advertisements (the magazines are now principally digital). The number of columnists is well in the hundreds (Drudge has a long list). There are more than a hundred cable channels of which several are 24/7 policy and news oriented. There are some 600 talk radio shows with tens of millions of listeners, There are a thousand or so think tanks focusing on international, federal, and state and local government topics. An equal or larger number of policy centers have been established in America’s colleges and universities. The Internet and Blogosphere add hundreds of thousands more sources of information and chatter on public policy. Google’s rapid translation facility makes it possible to search foreign language sites.

The volume of digital publications is growing exponentially while sales of print books are slowly declining. Borders and Barnes & Noble are losing sales to Amazon and have responded by establishing their own e-book readers. Public policy institutions rely increasingly on the Internet to disseminate the ideas of their fellows, using Twitter, Facebook, YouTube, RSS feeds, and other links. The number of people who have signed up to receive tweets or join a particular facebook page is an indication of the outreach of digital marketing efforts.

The following numbers represent a sampling of networks of political and media personalities and conservative (or center-right) and liberal (or center-left) think tanks as of August 20, 2010. (n.a. means not available on the web site.)

Name                   Twitter           Facebook

Newt Gingrich    1,309,088             81,454
Karl Rove              164,455             32,923
Bill O’Reilly            36,583            118,459
Glenn Beck            272,939        1,375,443
Sean Hannity           64,794           509,017
Rush Limbaugh             n.a.          454,000
Huffington Post      138,916           651,746
Daily Beast              56,454             35,057
MoveOn                  12,619             97,314
Daily Kos                 32,590              6,366
Brookings                    n.a.              2,035
Urban Institute          2,714               1,293
Economic Policy Inst.   216                  468
Heritage Found.       62,583            240,621
Cato Institute           51,292             64,927
Hoover Institution      3,855              1,900

The above numbers show that a handful of political personalities can overwhelm the think tanks in communicating with the policy-interested public. Should think tanks try to embed their research into these communication networks to reach a larger audience?. Not clear. There is a danger that the scholarly-based policy work emanating from think tanks embedded in the networks of prominent personalities would be instantly politicized and rejected out of hand by the broader public as biased or tainted.

What then becomes the business model of the research-based think tank? The pre-high tech model of transmitting a clear signal through static, itself difficult. has been replaced by pointing decision makers in the direction of finding diamonds in mountains of ore. Much harder. Moreover, in the next five to ten years, new technologies will be developed that further clog the arena of ideas. Much as the Internet helped elect Barack Obama as president, the fleet afoot will have a disproportionate influence on policy, while those clinging to the old approach will languish.

Those with the most creativity and innovation, coupled with good ideas that are easy to explain and understand, will emerge at the top of the policy pile. The contest in the space of ideas will become more vigorous and more interesting. Let the games continue.

Wednesday, August 25, 2010

Modernizing the American Economic Association

Professors of economics have displayed their prowess at constructing elaborate mathematical models in seeking to explain economic phenomena. They have also developed elegant econometric methods to analyze reams of data produced by governments or private associations to confirm, reject, or modify their models. Too few economists get their hands dirty in “reality.”

To that end, the time is ripe to modernize the American Economic Association. The next annual meeting is set for January 7-9, 2011, in Denver. The preliminary program can be viewed here.

Given the failure of most economists to anticipate the financial crisis and Great Recession, now would be a good time to include a new series of economic “reality” panels. Here are six possible titles for inclusion in January:

1. So you think you can forecast the economy and the effects of economic policies.
2. So you think you can dance around bad numbers and spin the results.
3. Top chef economists cooking up numbers.
4. The real economists of New Jersey.
5. Extreme makeover of economics.
6. Back to reality.

If reality panels prove popular, they can become a regular feature in the annual meeting.

Tuesday, August 24, 2010

Deflation? Inflation? What’s the Government to Do?

The great American poet Robert Frost posed a serious question when he wrote “Some say the world will end in fire, some say in ice...”

Today the question plaguing the economics community is whether (1) the U.S. economy will suffer deflation, a double dip recession, or worse, or (2) an accelerating inflation due to burgeoning deficits, banks withdrawing excess reserves from the Fed for lending, and corporations spending their large cash holdings all at the same time. Each outcome is trumpeted by distinguished economists in rival camps.

The first team cites falling interest rates on treasuries issued to finance trillion dollar deficits, noting that the “bond vigilantes” are nowhere in sight. Unemployment and underemployment totaled 18.3% of the work force in mid-August. More fiscal and/or monetary stimulus is needed to keep the economy from falling into a deeper hole.

The second team cites historical instances which show that when public debt passes 90% of GDP, or some other important statistical ratio, governments resort to inflation to eliminate unsustainable debt burdens and/or economies go into periods of decline.

We cannot conduct a controlled experiment dividing the economy into Solomonic halves. What we can do, in the future, is try to understand what happened and which of the two teams had the better argument. It could even be that both teams were off the mark.

One thing appears to be missing from the debate. The vast majority of professional economists and investors, save a few (although like Bobby Thomson’s winning home run in the 1951 playoff, twice as many claim to have seen the “shot heard round the world” as there were seats in the Polo Grounds), failed to anticipate the financial crisis and consequential Great Recession. Such an event was not supposed to happen. The outcome represented the tiny tail in the distribution of possibilities, ignorance of history, incomplete or inapplicable theoretical models, closing eyes to reality—whichever you want. The list of “mea culpas” is impressive.

What’s to stop the bond vigilantes from erupting overnight in volcanic fashion, transforming U.S. debt into a Greek-like crisis? Mao Zedong wrote a letter to his colleagues on January 5, 1930, stating that “A Single Spark Can Start a Prairie Fire.” The failure of Lehman Brothers was a spark that almost brought down the U.S. financial system. Can the “don’t worry about deficits” team prevent or stop a prairie fire?

Just asking.....

Monday, August 23, 2010

Democratic Stability in Iraq: Who really won?

The withdrawal of the Army 4th Brigade from Iraq on August 19th ended the U.S. combat mission there. The remaining 50,000 troops, due to withdraw at the end of 2011, are to provide support and training for the Iraqi army.

Seven years, one trillion dollars, more than 4,000 U.S. troops dead and thousands more wounded, the success of U.S. military intervention depends on the Iraqis forming and maintaining a democratic stable government. The matter remains in grave doubt.

From Foreign Policy comes a lead story: “The King of Iraq.” Who might that be? A previous arch enemy of U.S. forces and the previous al-Maliki government, none other than Moqtada al-Sadr, a potential kingmaker of any new Iraqi governing coalition. Would his centrality in a new Iraqi coalition be considered a mission accomplished?