Perhaps now it will all become clear

When the Bush administration and numerous supporters found time to focus on things other than pursuing needless wars, placing political hacks into positions they were not vaguely qualified for and various ways to expand presidential fiat at the expense of civil liberties, they often complained about how Bush was not getting enough credit for the supposedly burgeoning economy.

For all the economic growth which took place during the Bush year's according to various economic measures, people consistently reported that, on the whole, they were dissatisfied with their lot. The Bushies never seemed to figure out why, even though economists such as Paul Krugman repeatedly explained to them all that extra money was either going to corporations or being amassed in the hands of a very limited few, and not, in fact, "trickling down" the the citizenry as a whole.

Today, the Associated Press had an article laying out the numbers about as clearly as they can be presented, comparing data from 3 million households a year in the years 2005-2007 to data collected during the 2000 census. The key findings in the article:

* Median household income dropped in 79 percent of the cities and towns. Incomes dropped in the wealthiest communities as well as the poorest. Charleston, Ill., home to Eastern Illinois University, saw the biggest drop - 31 percent - to a median household income of just under $21,000.

* Nationally, incomes dropped by 4.3 percent during the period, to $50,007.

*The poverty rate increased in 70 percent of the cities and towns. Athens, Ohio, home to Ohio University, had the highest poverty rate, at 52.3 percent, in the 2005-2007 period.

Nationally, the poverty rate increased from 12.4 percent to 13.3 percent since the start of the decade.

* The unemployment rate increased in 71 percent of the cities and towns. Muskegon, Mich., a city of about 40,000 near Lake Michigan, had the highest unemployment rate, at 22.1 percent.

Nationally, the unemployment rate increased from about 4 percent in 2000 to 6.6 percent in the 2005-2007 period.

* Median home values increased in 92 percent of the cities and towns studied - doubling and tripling in many cities, mainly in California. Nationally, the median home value increased 26 percent, to $181,800.

Let's see ... lower incomes, higher unmployment, greater poverty ... no, I can't possibly see why people would think the great Bush economy wasn't helping them. Of course, all those negatives were offset by large gains in home values.

How's that working out?

Bailout Follies

To no one's surprise, after voting down the first bill and seeing the Senate put pressure on them by passing a bailout proposal, the House went along last Friday and passed a similar bill itself. Arizona's delegation, which had unanimously voted against the original bill split 4-4 the second time around (Giffords, Mitchell, Pastor, Shedagg were the yes votes).

I am not opposed to some form of throwing taxpayer money into the system. The situation is clearly dire, and by all accounts Federal reserve Chairman Ben Bernanke, one of the chief originators of the bailout proposal, is an expert on the Great Depression ... so I accept the thesis something needed to be done, as galling as that is on many levels.

What I don't accept is that this was the only approach to be tried. While there has certainly been a great number of modifications added, the original framework - give $700 billion to the Treasury department to spend as it deems best - remains. As far as I can tell from what I have read, no other approach was ever considered at all, much less considered seriously.

Why not? Numerous other bright, well-respected economists have, since the original proposal came out, giving variations of the line "Well, it's better than nothing, but X would be a better approach". I am no economist, so take anything I say below with a large heaping spoonful of salt, but two other proposals which seemed reasonable to me included:

* Give money directly to the commercial banks. The idea was to encourage the commercial banks to lend money to each other again, thus unlocking the "credit crunch" which is supposedly breaking down the commercial gears.

* Use the money to purchase actual foreclosed homes. The idea was that by purchasing these assets outright it turns the bad investments into good ones. The money eventually would make it's way back to the companies holding the mortgage notes. Hey, if trickle-down economics is supposed to be so great, what's wrong with a trickle-up approach? As an added bonus, families would get out from under mortgages they can't sustain.

Either of these approaches (and others I have seen as well) would be more palatable to me than throwing money directly at the Wall Street companies that got themselves in trouble in the first place.

I'd be more understanding if the entire affair had been proposed and voted on in a 48-hour period. As things went, however, there was time (maybe not plenty of time, but time) to consider alternatives ... but apparently this never occurred.

What does it say about the Bush administration that it's first response to a crisis is a proposal that basically says "Give the Secretary of the Treasury $700 billion no strings attached" and the response of the Democratic Congress is to attach a few strings and then go along? Nothing good about either.

Market analysis

I've written about prediction markets before, and with the start of the primary season officially upon us, and the race on the Democratic side expected to be tight, I couldn't resist revisiting Intrade to see what the speculators think will happen in the Iowa primaries.

As I write this, the market is trading Obama shares at 66.1, meaning the feeling is there is just about a 2/3 chance Obama wins tonight. Clinton shares are at 19.3, Edwards at 15.0. Also interesting is the change just today - Obama closed last night at 56, so he's up 10.1 points. Most of that has come at the expense of Clinton, who is down 9.2 from yesterday's close, while Edwards is down 2.1

I suspect the fairly steep change is in reaction to a Reuters/C-Span/Zogby poll which shows Obama moving out to a four-point lead over Edwards, with Clinton another three points back. Looking at the history, Obama shares were down to about 30 as recently as Dec. 31, meaning traders are extremely bullish about his chances.

Obama's had some good news this week, particularly in light of the Reuters poll and Des Moines Register poll yesterday which also showed him taking the lead. Still, that's a huge surge in Obama confidence, and seems much more "reactive" than I would have expected from a predictions market.

It's also worth noting that investors have far less confidence in Edwards than his polling results would seem to merit. He might be a good investment, if anyone is so inclined.

On the Republican side, investors are heavily backing Huckabee, who is trading at 70.1, up 11.1 today and also the beneficiary of a large surge in confidence over the past five days or so. Romney shares are at 29.7 (down 8.3 today) and no one else is given a chance - McCain is third favorite at 0.9, and looks like good value at that price, to be honest.

Looking ahead at upcoming primaries, I see shares of Fred Thompson winning in Nevada are currently trading at 8.9. I suggest you sell, quickly.

Greenspan, Rand and Reality

NY Times columnist and economist Paul Krugman has a piece up today the housing bubble. I found it an interesting read, particularly this passage discussing Ayn Rand's influence on Alan Greenspan:

In a 1963 essay for Ms. Rand’s newsletter, Mr. Greenspan dismissed as a “collectivist” myth the idea that businessmen, left to their own devices, “would attempt to sell unsafe food and drugs, fraudulent securities, and shoddy buildings.” On the contrary, he declared, “it is in the self-interest of every businessman to have a reputation for honest dealings and a quality product.”

I have read before about Greenspan's allegiance to Rand's philosophies, particularly her belief in "unfettered capitalism" (Krugman's term). Krugman goes on to discuss how such a belief might have led Greenspan to discourage economic regulation in general and encouraged the bubble to develop.

Greenspan's belief in the honesty of businessmen seems naive to me. Yes, there is some level of truth to it when one is thinking about small, local businesses. It might also be true if all businesses always weighed long-term benefits/cost with the same care they weigh short-term gains.

In an ideal world this would extend to large, faceless corporations as well .... but it doesn't of course.

In an ideal world, where everything is transparent, maybe all businesses and businessmen could be trusted to do the right thing. However, in the real world (you know, the world where we don't "make our own reality"), given enough leeway large businesses inevitably seem to find a way to push beyond the boundaries. Ultimately, when everything goes bad, it never seems like those who most contributed to the problem end up being those who suffer most.

In an ideal world, unfettered capitalism might work, and markets might be perfectly efficient, and everyone might earn rewards in proportion to their hard work, and life would always be sunny and bright.

In the real world, market-based incentives are not always best, incompetence and nepotism thrive ... and sometimes capitalism needs to be fettered. Unless there is some realistic expectation of suffering consequences, businessmen have, with sad consistency, demonstrated a willingness to engage in improper behavior in order to rake in immediate profit, as long as it was others who were suffering any costs which might be entailed.

Rand herself was never able to live up to the ideas her philosophy espoused. Why Greenspan would expect "every businessman" to be rise to these standards, I don't know. I do know history had already demonstrated many counter-examples to his claim when he originally made it, and is in the process of showing to him once again just how misguided his beliefs were.

Recent interesting stuff

Some posts from other sites I have found particularly interesting:

1. x4mr has a terrific post on some of the issues with for-profit prisons.

2. ThinkRight, who has experience in the mortgage lending field, has been making a number of posts about the recent crisis and some possible approaches to dealing with it. The most recent are here and here.

However, the most interesting, and horrifying, doesn't deal directly with the crises itself, but rather a victim of mortgage-related fraud. The post is here. Make sure you click through the link he provides and read the full Seattle Times piece.

3. How The World Works provides a pair of YouTube clips of British comedians discussing the subprime lending crises, it's causes, potential impacts, etc. Quite funny in the typical dry, British way, and educational as well. (Note: you will likely have to sit through small Salon.com ad to access the post, it's well worth the inconvenience.)


I'd like to include something from Arizona8th, but they, like I, have been in hibernation the last few days. Wake up! :)

Economic Falacies

Rudy Giuliani recently became the latest Republican advocate of supply side economics when, during the last Republican debate, he said of his stint as mayor of New York:

"I lowered income taxes by 25 percent. I was collecting 40 percent more from the lower income tax than from the higher income tax."

Not surprisingly, this statement was met with loud applause. Conservative sites such as ThinkRight soon had postings up showing Rudy in all his glory, explaining to us poor, benighted liberals why cutting taxes actually increases tax revenue, while raising taxes will surely crush economic growth.

Of course, what Rudy doesn't mention is that, in the time he was busily creating this miracle of modern economics, the stock market was in a huge boom. Tax revenue was, of course, going to go up regardless.

What Rudy also fails to mention is that virtually no economist, of any stripe, seriously argues that supply side economics actually leads to increased tax revenue. At best, it creates enough economic growth to offset some small amount of the revenues lost by lowering taxes. Tax cuts do not "pay for themselves". Nothing is free.

Don't take my word for it, poke around some on your own, try to find any paper in reputable economics journals which claims enough tax revenue will be generated to offset that lost by the tax cut. Make sure you allocate a fair chunk of time for it - it's going to take a while, if you manage to find one at all.

Let's look at a modern example. In 2001, the Bush administration pushed through significant tax cuts, primarily for corporations and the wealthy. From 2001 to 2003 tax revenue declined significantly. Even with recent increases in revenue, once inflation and population growth are accounted for we are only just now back at the revenue level we had in 2000. That's roughly 0% growth in revenue. Meanwhile, we have lost the considerable amount of revenues which would have been brought in had the tax rates stayed at their higher values.

In the 1980's, after the Reagan tax cuts, tax revenues dropped the next two years. It wasn't until four years later that they returned to their original levels (adjusting for inflation and population growth, you actually have to extend to year five), despite a growing economy. Meanwhile, the national debt skyrocketed. Clearly, the cuts did not "pay for themselves".

Meanwhile, in both 1990 and 1993 (the first under Bush I, the second under Clinton) taxes were raised, primarily on corporations and the wealthy. There was widespread grumbling this would harm the economy.

Instead, tax revenue (not really surprisingly) increased at double the rate it had in the 1980's. Economic growth in general remained roughly the same. However, while overall growth remained the same, growth in personal incomes was considerably higher in the 1990's than it was in the 1980's, or has been in the first decade of this century. The rich are getting richer, while the average worker is not seeing benefits from the "booming" economy, either in the bottom line of their pay check or in the form of increased government services.

When Giuliani insists you can increase tax revenues by lowering taxes, he's living in Fantasyland. Unfortunately, a lot of people who either don't have the time or don't have the inclination to actually research the validity of these claims end up believing this wonderful, magical land actually exists somewhere other than in conservative pipe dreams or Disneyland.

Oriental thoughts

While visiting China the last 10 days I managed to see lots of terrific sites: The Great Wall, Forbidden City, the terra cotta warriors, Shanghai History Museum and more ... all worth seeing. However, what most caught my eye from a blogging persepctive were a couple pieces of economic news.

1) There was a great deal of discussion about China's burgeoning trade surplus with the US and the various effects of it. Chinese leaders are concerned enough about it they seem willing to broker deals for materials they don't necessarily need (such as a recent agreement to purchase $4.3 billion in high-tech goods) just to help keep the trade difference closer.

What really got my attention, though, was several articles discussing China's trade surplus also mentioned China's monetary reserves. I.e., unlike the US and it's vast national debt, China actually has money in the bank (unfortunately, the articles I saw didn't give a figure -- the only one I have seen was from 2003, at which time the amount was $46 billion).

In my lifetime there have been a handful of individual years when the US ran a surplus, but the nation has never had an overall net surplus. I can think of some drawbacks -- you could argue you would rather have the money working for you on, say, freeway building rather than sitting around in the bank, for example. However, it must also be nice to not be paying billions of dollars a year in interest payments, and to have funds available for an emergancy -- like, say, a hurricane destroying the city of Anshan.

All-in-all, I don't think I would mind too much struggling with the inherent problems of having an overly large national surplus as opposed to having an overly large national debt. I suspect the problems which might come with having a surplus would be easier to deal with. Sadly, they are unlikely to be problems our nation will ever have to deal with in my lifetime, esepcially if we keep ending up with bozos in office who insist on instituting tax cuts while simultaneously instigating unjustified wars.

2) There's been a lot of angst in recent years about jobs moving to China. Many of those jobs are industrial, but it extends across to professional fields such as accounting, software development, biomedical research, etc. as well. The general perception in this country (at least, in the circles I run in) seems to be of a never-ending horde of Chinese workers willing to fill roles at lower wages.

The view in China is different.

Recent studies there show the labor pool drying up by 2009 or 2010. So far, the Chinese economy has prospered by basically being able to throw more manpower into any field where additional manpower might be needed. Labor costs have remained largely static, because there were always more laborers available.

This upcoming squeeze in labor is generally attributed to the maturation of China's Birth policy, which has been successful in limiting population growth. This squeeze will cause further increase in labor wages (which are already rising slowly, but sufficiently to cause some manufacturers to move positions from China to even cheaper locales) and will likely force Chinese industry to invest in more advanced production methods (which will allow more to be done with less manual labor).

Most interesting to me, nothing I read discussed possibly changing China's retirement policy. White-collar women in government companies or institutions have a mandatory retirement age of 55, 60 for men, For blue-collar jobs, it's 50 for women, 55 for men. You would think raising these ages (particularly for women), or simply not making retirement mandatory, would add tens of millions of potential laborers back to the pool.