hearing aids and contact lenses

my loony bun is fine benny lava

You too can buy a senate seat!

Supply and Demand

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Bank of America Scum

This is standard procedure now. Employees are actually instructed to mislead grieving family members:

Paul Kelleher: Yes, I'm calling to inform you that my mom died on the 24th of January.

Bank of America Estates representative: I'm sorry. Oh, it looks like she never even missed a payment. That's too bad. Well, how are you planning to take care of her balance?

PK: I'm not going to. She has no estate to speak of, but you should feel free to just go through the standard probate procedure. I'm certainly not legally obligated to pay for her.

BOA: You mean you're not going to help her out?

PK: I wouldn't be helping her out -- she's dead. I'd be helping you out.

BOA: Oh, that's really not the way to look at it. I know that if it were my mother, I'd pay it. That's why we're in the banking crisis we're in: banks having to write off defaulted loans.

Brownfield Solar

Gregor:

Somewhere between the massive strength of utility grade solar and the small scale chic of personal, home solar there is perhaps yet another solution: brownfield solar.

What’s intriguing about brownfield solar is that it leverages land that would otherwise cost too much to clean-up. And, unlike utility grade solar, it uses PV panels. This combination, less expensive solar materials paired with vacant land in an urban setting, seems like a solution that brings long-standing issues into alignment.

Today I reviewed two PV systems of comparable size, but that are on opposite coasts of the country. The first is the Sunpower installation at the Microsoft campus in Silicon Valley (not a brownfield project, but useful for comparison of scale). The second is the Brightfield project in Brockton, Massachusetts. It appears each is going to generate a similar level of revenue (or savings) annually. And that payback will take at least 10 years, depending on the future price of electricity.

I maintain the projections of the future price of electricity are actually far too low. Many solar systems are currently projected to pay for themselves after 15~ years, but may wind up as cash cows after just 10 years. For example, what if average national rates for electricity, currently around .12 cents per kWh before delivery charges, go up 7 times by 2020? How about 10 times? After all, the entire economy will be much more electrified by then as the migration away from the automobile accelerates. Owning a large array PV system paid for in today’s dollars may turn out to be a quite the asset in 2020. Coal will be much more expensive by then, either through scarcity or carbon taxation or both. Natural gas and hydro-powered power generation will also cost more. Alot more. And demand will be enormous.

Todays dollars investing in tomorrow's energy? Clever.

speak out with ken sanders

Flirting with disaster

Krugman:

There has been a distinct change in tone from the Obama team today, as they seem to have become suddenly aware that there’s a real risk that the stimulus plan will either fail to pass, or be emasculated to the point that it doesn’t come close to doing the job. Obama himself has warned of catastrophe if we fail to act, and — finally!– denounced the tax-cut philosophy. Meanwhile, Larry Summers has finally made the point I’ve been pushing for a while — that we’re at major risk of falling into a deflationary trap.

I thought it might be useful to present a bit of evidence behind that concern. The figure above plots an estimate of the output gap — the difference between actual and potential GDP, as a percentage of potential — and the change in the inflation rate. Both series are taken from the IMF WEO database, for convenience, and use data from 1980-2007.

It’s not a perfect fit — this is economics, not physics, and anyway stuff besides the output gap bounces inflation around from year to year. But still, there’s a clear correlation, driven largely but not entirely by the deep slump and disinflation of the early 1980s, and an implied slope of about 0.5 — that is, every percentage point by which real GDP fall short of potential tends to reduce the inflation rate by about half a point over the course of the year.

And right now the CBO is saying that in the absence of a policy action the average output gap will average 6.8 percent over the next two years. Do the math: if anything like the historical relationship between output and inflation holds, we’re looking at major deflation.

OK, maybe that relationship won’t hold — getting to actual deflation may take a deeper slump than merely reducing the inflation rate. And maybe a regression driven in part by 80s data isn’t a good guide to current events. But deflation is a huge risk — and getting out of a deflationary trap is very, very hard.

We truly are flirting with disaster.

Mankiw's Fix

Greg Mankiw:

Regular readers of this blog have a pretty good sense of my policy preferences. But for those occasional readers who might be stopping by, let me reiterate what I would do right now if I were the fiscal king.

I would institute an immediate and permanent reduction in the payroll tax, financed by a gradual, permanent, and substantial increase in the gasoline tax. I would make the two tax changes equal in present value, so while the package results in a short-run budget deficit, there is no long-term budget impact. Call it the create-jobs, save-the-environment, reduce-traffic-congestion, budget-neutral tax shift.

I recognize that some state governments are now struggling in light of the macroeconomic crisis. For the next two years, I would let each state governor have the authority to divert a portion of the payroll tax cut in his or her state and take the funds instead as state aid. This provision would essentially be giving governors the temporary authority to impose a payroll tax on his or her citizens, collected via the federal tax system. Those governors who think they have valuable infrastructure projects ready to go would take the money. When designing a fiscal stimulus, there is no compelling reason for one size fits all. Let each governor make a choice and answer to his or her state voters. It is called federalism.

Any further federal spending projects should be evaluated on the basis of cost-benefit analysis. That analysis would take time, but it would ensure that the projects are not a waste of taxpayer dollars.

Some traditional Keynesians would object on the grounds that government spending has a larger multiplier than tax cuts. Even though that is the prediction of standard Keynesian models, the evidence is not completely consistent with that conclusion, as I have discussed here in previous posts. In addition, given the lags inherent in large spending projects, and the risks inherent in hasty spending at the federal level, the case for taxes over spending as the fiscal instrument of choice is compelling. To me, at least.

None of this should be viewed as a substitute for fixing the banking system and trying to come up with a better process for homeowners and banks to work out mortgage loans in default. Housing and finance are the real sources of the macro problem. Any fiscal stimulus, such as the one I propose above, is only an attempt to mitigate the symptoms. Those symptoms are severe, so mitigation is fully appropriate. But fiscal policy is not a panacea for what now ails the economy.

Oh brother!

Since September it now seems that the bailout conversation has once again come full circle and we are back to discussing equity injections! WSJ:

The Obama administration's financial-rescue plan is shaping up to include capital injections with tougher terms than the first round and an expansion of an existing Federal Reserve lending facility that could potentially buy up toxic assets ...

Instead of buying preferred shares, as it did before, the government is discussing taking convertible preferred stakes that automatically convert into common shares in seven years.

To deal with the toxic assets at the heart of the financial crisis, the administration is considering expanding the Fed's consumer-lending facility, known as the Term Asset-Backed-Securities Loan Facility.

This is a great idea (relatively speaking). Why did it take so long for the conversation to come back to this? And why don't we just get things over with and pre-privatize the banks!

spoons: "what are they?"

Buy American? (pt 2)

Professor Douglas Irwin, Dartmouth:

WORLD trade is collapsing. The United States trade deficit dropped sharply in November as imports from the rest of the world plummeted in response to the financial crisis and global recession. United States imports from China, Japan and elsewhere declined at double digit rates. The last thing the world economy needs is for governments to give a further downward shove to trade. Unfortunately, wemay be doing just that.

Steel industry lobbyists seem to have persuaded the House to insert a “Buy American” provision in the stimulus bill it passed last week. This provision requires that preference be given to domestic steel producers in building contracts and other spending. The House bill also requires that the uniforms and other textiles used by the Transportation Security Administration be produced in the United States, and the Senate may broaden such provisions to include many other products.

That might sound reasonable, but history has shown that Buy American provisions can raise the cost and diminish the effect of a spending package. In rebuilding the San Francisco-Oakland Bay Bridge in the 1990s, the California transit authority complied with state rules mandating the use of domestic steel unless it was at least 25 percent more expensive than imported steel. A domestic bid came in at 23 percent above the foreign bid, and so the more expensive American steel had to be used. Because of the large amount of steel used in the project, California taxpayers had to pay a whopping $400 million more for the bridge. While this is a windfall for a lucky steel company, steel production is capital intensive, and the rule makes less money available for other construction projects that can employ many more workers.

American manufacturers have ample capacity to fill the new orders that will come as a result of the fiscal stimulus. In addition, other countries are watching closely to see if the crisis becomes a general excuse for the United States to block imports and favor domestic firms. General Electric and Caterpillar have opposed the Buy American provision because they fear it will hurt their ability to win contracts abroad.

They’re right to be concerned. Once we get through the current economic mess, China, India and other countries are likely to continue their large investments in building projects. If such countries also adopt our preferences for domestic producers, then America will be at a competitive disadvantage in bidding for those contracts.

Remember the golden rule, or the consequences could be severe. When the United States imposed the Smoot-Hawley Tariff in 1930, it helped set off a worldwide movement toward higher tariffs. When everyone tried to restrict imports, the combined effect was a deeper global economic slump. It took decades to undo the accumulated trade restrictions of that period. Let’s not make the same mistake again.

Broder continues to fade into irrelevance

Paul Krugman:

Josh Marshall gives us David Broder talking about stimulus — which he says failed to achieve the predicted results the first time. It’s not clear whether he was referring to the TARP or the early 2008 stimulus package, but either way it’s a poor comparison. The TARP isn’t stimulus; the early 2008 package was 1/5 the size of the Obama proposal, and contained nothing but tax cuts.

But the part that really got me was Broder saying that we need “the best ideas from both parties.”

You see, this isn’t a brainstorming session — it’s a collision of fundamentally incompatible world views. If one thing is clear from the stimulus debate, it’s that the two parties have utterly different economic doctrines. Democrats believe in something more or less like standard textbook macroeconomics; Republicans believe in a doctrine under which tax cuts are the universal elixir, and government spending is almost always bad.

Obama may be able to get a few Republican Senators to go along with his plan; or he can get a lot of Republican votes by, in effect, becoming a Republican. There is no middle ground.

What Michael Phelps should have said

Dear America,

I take it back. I don’t apologize.

Because you know what? It’s none of your goddamned business. I work my ass off 10 months a year. It’s that hard work that gave you all those gooey feelings of patriotism last summer. If during my brief window of down time I want to relax, enjoy myself, and partake of a substance that’s a hell of a lot less bad for me than alcohol, tobacco, or, frankly, most of the prescription drugs most of you are taking, well, you can spare me the lecture.

I put myself through hell. I make my body do things nature never really intended us to endure. All world-class athletes do. We do it because you love to watch us push ourselves as far as we can possibly go. Some of us get hurt. Sometimes permanently. You’re watching the Super Bowl tonight. You’re watching 300 pound men smash each while running at full speed, in full pads. You know what the average life expectancy of an NFL player is? Fifty-five. That’s about 20 years shorter than your average non-NFL player. Yet you watch. And cheer. And you jump up spill your beer when a linebacker lays out a wide receiver on a crossing route across the middle. The harder he gets hit, the louder and more enthusiastically you scream.

Yet you all get bent out of shape when Ricky Williams, or I, or Josh Howard smoke a little dope to relax. Why? Because the idiots you’ve elected to make your laws have, without a shred of evidence, beat it into your head that smoking marijuana is something akin to drinking antifreeze, and done only by dirty hippies and sex offenders.

You’ll have to pardon my cynicism. But I call bullshit. You don’t give a damn about my health. You just get a voyeuristic thrill from watching an elite athlete fall from grace–all the better if you get to exercise a little moral righteousness in the process. And it’s hypocritical righteousness at that, given that 40 percent of you have tried pot at least once in your lives.

Here’s a crazy thought: If I can smoke a little dope and go on to win 14 Olympic gold medals, maybe pot smokers aren’t doomed to lives of couch surfing and video games, as our moronic government would have us believe. In fact, the list of successful pot smokers includes not just world class athletes like me, Howard, Williams, and others, it includes Nobel Prize winners, Pulitzer Prize winners, the last three U.S. presidents, several Supreme Court justices, and luminaries and success stories from all sectors of business and the arts, sciences, and humanities.

So go ahead. Ban me from the next Olympics. Yank my endorsement deals. Stick your collective noses in the air and get all indignant on me. While you’re at it, keep arresting cancer and AIDS patients who dare to smoke the stuff because it deadens their pain, or enables them to eat. Keep sending in goon squads to kick down doors and shoot little old ladies, maim innocent toddlers, handcuff elderly post-polio patients to their beds at gunpoint, and slaughter the family pet.

Tell you what. I’ll make you a deal. I’ll apologize for smoking pot when every politician who ever did drugs and then voted to uphold or strengthen the drug laws marches his ass off to the nearest federal prison to serve out the sentence he wants to impose on everyone else for committing the same crimes he committed. I’ll apologize when the sons, daughters, and nephews of powerful politicians who get caught possessing or dealing drugs in the frat house or prep school get the same treatment as the no-name, probably black kid caught on the corner or the front stoop doing the same thing.

Until then, I for one will have none of it. I smoked pot. I liked it. I’ll probably do it again. I refuse to apologize for it, because by apologizing I help perpetuate this stupid lie, this idea that what someone puts into his own body on his own time is any of the government’s damned business. Or any of yours. I’m not going to bend over and allow myself to be propaganda for this wasteful, ridiculous, immoral war.

Go ahead and tear me down if you like. But let’s see you rationalize in your next lame ONDCP commercial how the greatest motherfucking swimmer the world has ever seen...is also a proud pot smoker.

Yours,

Michael Phelps

Try both

Brad DeLong:

WHEN an economy falls into a depression, governments can try four things to return employment to its normal level and production to its 'potential' level. Call them fiscal policy, credit policy, monetary policy and inflation.

Inflation is the most straightforward to explain: The government prints lots of banknotes and spends them. The extra cash in the economy raises prices. As prices rise, people don't want to hold cash in their pockets or their bank accounts - its value is melting away every day - so they step up the pace at which they spend, trying to get their wealth out of depreciating cash and into real assets that are worth something. This spending pulls people out of unemployment and into jobs, and pushes capacity utilisation up to normal and production up to 'potential' levels.

But sane people would rather avoid inflation. It is a very dangerous expedient, one that undermines standards of value, renders economic calculation virtually impossible, and redistributes wealth at random. As John Maynard Keynes put it, 'there is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose...'

But governments will resort to inflation before they will allow another Great Depression. We just would very much rather not go there, if there is any alternative way to restore employment and production.

The standard way to fight incipient depressions is through monetary policy. When employment and output threaten to decline, the central bank buys up government bonds for immediate cash, thus shortening the duration of the safe assets that investors hold. With fewer safe, money-yielding assets in the financial market, the price of safe wealth rises. This makes it more worthwhile for businesses to invest in expanding their capacity, thus trading away cash they could distribute to their shareholders today for a better market position that will allow them to reward their shareholders in the future. This boost in future-oriented spending today pulls people out of unemployment and pushes up capacity utilisation.

The problem with monetary policy is that, in responding to today's crisis, the world's central banks have bought so many safe government bonds for so much cash that the price of safe wealth in the near future is absolutely flat - the nominal interest rate on government securities is zero. Monetary policy cannot make safe wealth in the future any more valuable. And this is too bad, for if we could prevent a depression with monetary policy alone, we would do so, as it is the policy tool for macroeconomic stabilisation that we know best and that carries the least risk of disruptive side effects.

The third tool is credit policy. We would like to boost spending immediately by getting businesses to invest not only in projects that trade safe cash now for safe profits in the future, but also in those that are risky or uncertain. But few businesses are currently able to raise money to do so.

Risky projects are at a steep discount today, because the private-sector financial market's risk tolerance has collapsed. No one is willing to buy assets and take on additional uncertainty, because everyone fears that somebody else knows more than they do - namely, that anyone would be a fool to buy. Although the world's central banks and finance ministries have been devising many ingenious and innovative policies to stimulate credit, so far they have not had much success.

This brings us to the fourth tool: fiscal policy. Have the government borrow and spend, thereby pulling people out of unemployment and pushing up capacity utilisation to normal levels. There are drawbacks: the subsequent dead-weight loss of financing all the extra government debt that has been incurred, and the fear that too rapid a run-up in debt may discourage private investors from building physical assets, which form the tax base for future governments that will have to amortise the extra debt.

But when you have only two tools left, neither of which is perfect for the job - credit policy and fiscal policy - the rational thing is to try both, at the same time. That is what the Obama administration in the United States and other governments are attempting to do right now.

Its about what women want, not what men want.

Images speak louder than words sometimes. Here are two photographs juxtaposed against one another showing the two most important woman's rights bills being signed into law.

Kenyes 6 Friedman 0

"Refuted" economic doctrines. John Quiggin:

#1: The efficient markets hypothesis

#2: The case for privatisation

#3: The Great Moderation

#4: individual retirement accounts

#5: Trickle down

Buy American?

Brad DeLong:

If there's little excess capacity in the U.S. steel industry--so that the price of steel is high enough to induce people to look outside for suppliers--then a stimulus won't be much needed. If there's a lot of excess capacity so that a stimulus is needed, then steel customers should be able to bargain prices down to marginal cost--in which case foreign producers will have an extremely difficult time competing on price given that steel is heavy and distances are great. "Buy American" seems mostly designed to allow the steel producers to collude and push their profits up--at the expense of American taxpayers.

And Brad is right. Lawmakers (and even many economists) seem to be missing the underlying points. What is the purpose of a fiscal stimulus? The Keynesian answer is to fill the excess capacity gap. In the long run we know that idling factories and an unemployed workforce are far more detrimental to long term growth than a short-term deficit boost.

What we need now is to avoid inducing ourselves into a protectionist mantra. Instead, we need carefully crafted policy intended to help the economy regain its footing. I fear, however, that the protectionists will win, the economy will be marginally stimulated, and a handful of politically connected groups will profit exorbitantly from it.

get it on

Back in the U.S.S.R.

Are we more similar than we're comfortable to admit? David Leonhardt:

Richard Freeman, a Harvard economist, argues that our bubble economy had something in common with the old Soviet economy. The Soviet Union’s growth was artificially raised by massive industrial output that ended up having little use. Ours was artificially raised by mortgage-backed securities, collateralized debt obligations and even the occasional Ponzi scheme.

The boys at FreeExchange (The Economist) follow-up with:

There are three sources of economic growth—labour, capital, and productivity—but there exist diminishing returns to labour and capital, at least in the short and medium run. Thus, a sustained level of growth comes only from increases in productivity, brought on by innovation. Russia experienced so much growth in the postwar era because it acquired lots of capital, but it ultimately could not sustain prosperity because the marginal value of adding more capital diminished after a certain point. Increased capital and labour also explain the impressive growth rates of the Asian tigers.

The mortgage backed securities in Mr Leonhardt’s example constitute innovation, not capital. Much of the financial innovation of recent years did facilitate sustained growth. It gave firms the means to acquire productive capital. But the innovation outpaced the necessary regulation and capital was misallocated. That doesn't mean we are fundamentally doomed to economic failure.

Mr Leonhardt goes on to say that growth comes from investment, which is correct. But, as the Russian example illustrates, the simple addition of more capital cannot provide growth indefinitely. Investment that leads to sustainable growth targets things that enhance productivity. The market ultimately determines which innovations are useful and can be successfully adopted.

Mr Leonhardt believes government investment is the way forward. He cites the infrastructure projects of the 1950s and 1960s as examples. That was productive capital accumulation and it provided the institutions necessary to let market based innovations thrive. It certainly contributed to growth, but was not solely responsible for it. As we learned from command economies, government spending on capital does not provide long term prosperity. Government investment is often necessary, but not sufficient, for growth. The investment must provide incentives and support for innovation in the marketplace, which is why investments in education (which he mentions), infrastructure, and R&D are so important.

Mr Leonhardt is critical of the flagrant consumption habits of Americans. But according to Amar Bhide the appetite for new and better goods actually gives Americans a comparative advantage. It means that new innovations (developed at home or abroad) can thrive in America moreso than elsewhere—innovation can't spur growth if there is not a market for it. But too much consumption can indeed harm growth, via reduced saving and eventually less capital accumulation. American consumers need to save more, but their “venturesome consumption habits” should be encouraged

It is dangerous to presume that government investment is generally a better engine of growth than the private sector. Government investment can lead to high rates of sustainable growth, but that investment must enhance a market place where private investment thrives as well.

Before you take a sigh of relief, remember that The Economist is full of "very serious people" who were dead certain there was no housing bubble in 2005. FreeExchange rests their entire argument upon the presumption that we were making financial innovations. What isn't addressed in their response is that these so called "financial innovations" worked by distorting risk valuations, scrupulously avoiding regulation, and were poorly understood by the investors who purchased them. And when you look at it that way it seems a lot less like a "financial innovation" and more like a 21st century mega-scam. And indeed, it was.

Think of it this way: Is it innovation to take a group of 9,000 subprime mortgages and turn it into a capital structure pyramid where even the equity trenches are sometimes given AAA ratings?

Not innovation we can believe in.

Grownups needed

Andrew Sullivan speaks his mind and echoes my thoughts on the Michael Phelps debacle:

Yes, Michael Phelps took a few hits from a bong at a party. He also threw back a great deal of alcohol, maybe made a few passes at a few girls and bonded with a few dudes. This is news?

And yet this absurd ritual takes place in which Phelps has to pretend he did something dreadful and we all have to tut-tut and frown and furrow our brows, and the sponsors cluck and the press preens - while the only conceivable news is that a 23 year-old had a good time at a party, breaking no professional rules since he was not competing when he was goofing off.

And, seriously, does anyone think that smoking pot would give him an unfair advantage in the pool? Please. When on earth are we going to grow up as a culture?

The hysteria that never dies

Paul Krugman on social security fanatics:

A while back Jon Chait wrote a great piece about the peculiar insistence of many people in DC that Social Security is a looming crisis, despite the fact that the numbers say it ain’t so. I can’t find a link to the original, but there’s a good summary here. The key graf:

Ten or 20 years ago, you could plausibly deem Social Security’s finances among the most pressing national problems. Those who were willing to take on the problem were admired for their farsightedness, bipartisanship, and seriousness of purpose. Social Security’s place on our list of national problems has long since been overtaken, but, among Washington establishment types who remember those days, the issue retains its totemic significance. Entitlement hysteria has become less a response to a crisis than an expression of statesmanship.

And to prove their seriousness, people are ready to repeat any number they’ve heard about Social Security’s problems — or, worse yet, a number they think they’ve heard, which isn’t remotely correct.

George Bush launched his political career campaigning upon the vow to "fix" social security. He said, in 1978, that social security would be bankrupt by 2000. He also said we'd find weapons of mass destruction... uh oh. I'm not even going to go down that road again.

Democracy works more slowly when one party is intellectually bankrupt

"Not in the history of mankind has the government ever created a job."

-Michael Steele; Chairman of the Republican National Committee.

yes I'm a gummy bear

Recess

Busy weekend. Updatese to follow tomorrow morning