New School Politics

If you're a first time visitor, you may want to subscribe to our RSS feed, which will keep you up to date with all the latest New School Politics posts. Thanks for visiting!

George Will’s latest column in Newsweek consisted of a series of questions he would like to see Senator Obama answer during this campaign. It is worth reading the whole thing, but here are a few of my favorites:

• ExxonMobil’s 2007 profit of $40.6 billion annoys you. Do you know that its profit, relative to its revenue, was smaller than Microsoft’s and many other corporations’? And that reducing ExxonMobil’s profits will injure people who participate in mutual funds, index funds and pension funds that own 52 percent of the company?

• You say John McCain is content to “watch [Americans'] home prices decline.” So, government should prop up housing prices generally? How? Why? Were prices ideal before the bubble popped? How does a senator knowideal prices? Have you explained to young couples straining to buy their first house that declining prices are a misfortune?

• Michelle, who was born in 1964, says that most Americans’ lives have “gotten progressively worse since I was a little girl.” Since 1960, real per capita income has increased 143 percent, life expectancy has increased by seven years, infant mortality has declined 74 percent, deaths from heart disease have been halved, childhood leukemia has stopped being a death sentence, depression has become a treatable disease, air and water pollution have been drastically reduced, the number of women earning a bachelor’s degree has more than doubled, the rate of homeownership has increased 10.2 percent, the size of the average American home has doubled, the percentage of homes with air conditioning has risen from 12 to 77, the portion of Americans who own shares of stock has quintupled … Has your wife perhaps missed some pertinent developments in this country that she calls “just downright mean”?

• You favor raising the capital gains tax rate to “20 percent or 25 percent.” You say this will not “distort” economic decision making. Your tax returns on your 2007 income of $4.2 million show that you and Michelle own few stocks. Are you sure you understand how investors make decisions?

• You denounce President Bush for arrogance toward other nations. Yet you vow to use a metaphorical “hammer” to force revisions of trade agreements unless certain weaker nations adjust their labor, environmental and other domestic policies to suit you. Can you define cognitive dissonance?

Most of these questions capture economic illiteracy that is commonplace in politics. It especially suggests the arrogance of a politician who think that he can make economic decisions better than individuals can in the free marketplace. The second question really gets to the heart of it–could you even imagine him trying to answer?

Popularity: 8% [?]

An article in today’s NY Times chronicles a dental clinic operating in rural Alaska, without any certified dentists and without the sanction of the dental unions.

The dental clinic in this village on the edge of the Bering Sea looks like any other, with four chairs, a well-scrubbed floor and a waiting area filled with magazines.

But to the Alaska Dental Society and the American Dental Association, the clinic is a place where the rules of dentistry are flouted daily. The dental groups object not because of any evidence that the clinic provides substandard care, but because it is run by Aurora Johnson, who is not a dentist. After two years of training in a program unique to Alaska, Ms. Johnson performs basic dental work like drilling and filling cavities.

Some dentists who specialize in public health, noting that 100 million Americans cannot afford adequate dental care, say such training programs should be offered nationwide. But professional dental groups disagree, saying that only dentists, with four years of postcollegiate education, should do work like Ms. Johnson’s. And while such arrangements are common outside the United States, only one American dental school, in Anchorage, offers such a program.

The number of dentists in the United States has been roughly flat since 1990 and is forecast to decline over the next decade. A study last year from the Centers for Disease Control showed that Americans’ dental health was worsening for the first time since statistics began to be kept …

…[T]he A.D.A. continues to oppose allowing therapists to operate anywhere in the lower 49 states. Currently, therapists are allowed to practice only in Alaska, and only on Alaska Natives.

Unions are historically ruthless and effective in pursuit of their political interests, even when they consist of dentists. Its no surprise, of course, that dentists want a closed industry especially when non PHDed dental workers earn a third to a half as much.
The obvious effect of regulations that mandate certain standards for dental servants is to limit the supply of labor in a sector where training and education is already expensive and time consuming. The consequences are manifest in the number of dentists remaining stagnant for almost two decades as well as the fact that “100 million Americans” can’t afford coverage (100 million seems to be an absurdly high amount, but upon further research it does appear that around 150 million don’t have insurance at all, so the number may be realistic).
The case-study may also tell us something about the problems in the healthcare industry, where the American Medical Association uses its weight to limit the supply of medical workers–as well as the amount that certain non-PHDed workers are allowed to do.
A review of the book Profession and Monopoly gives examples:

“…in the United States the number, curriculum, and size of medical schools are restricted by state licensing boards controlled by representatives of state medical societies associated with the AMA. The book is also critical of the ethical rules adopted by the AMA which restrict advertisement and other types of competition between professionals, it points out that advertising and bargaining can result in expulsion from the AMA and legal revocation of licenses. The book also states that before 1912 the AMA included uniform fees for specific medical procedures in its official code of ethics. The AMA’s influence on hospital regulation was also criticized in the book.”

While I assume that some regulations may have arisen in recent years, most have been in place for years and do not explain the overall climb in healthcare prices of late. However their rollback would still be a positive step toward making healthcare a more a affordable and more competitive industry, allowing low-priced medical practices, such as the dental practice in Alaska, to do business.

What I propose is neither dangerous nor radical really–all it is is an opportunity for the price system to operate. When prices rise, demand falls, which is impetus for supply to surge and bring prices back toward equilibrium. But because supply of health service is relatively inelastic (especially because of how expensive and capital intensive it is in both the human-educational sense, and the physical-technological sense), and various policies disable lower priced service to compete, a price floor is essentially created.

Popularity: 8% [?]

From the NYT, regarding his proposals on taxes and spending:

The problem is that the campaign has been far, far more detailed about its tax cuts, which would worsen the deficit, than its spending cuts, which would reduce it. Mr. McCain has proposed the elimination of the alternative minimum tax (at a cost of $60 billion a year), new child tax deductions ($65 billion), a corporate tax cut ($100 billion) and faster write-offs for corporate investments in new equipment ($50 billion to $75 billion).

On the spending side, the senator talks broadly about cracking down on pork barrel projects and holding agencies accountable for their budgets. These steps, Mr. Holtz-Eakin told me, could eventually bring $150 billion a year in savings. He added that given Mr. McCain’s history of fighting against wasteful spending, he deserved the benefit of the doubt.

It would be easier to give him that benefit, though, if he weren’t so vague. For decades presidential candidates have been promising to cut waste, fraud and abuse, and no one has yet made a noticeable dent in the federal budget.

As Mr. McCain’s plan currently stands, The Economist magazine concluded that it “will not come anywhere close to paying for the tax cuts.” Most telling, I spoke over the past week with several other economists who admire Mr. McCain and have advised him over the years. None would defend his current fiscal package (or be quoted).

Neadless to say, there is a hole at least $150 billion wide in McCain’s economic agenda. At least, however, McCain isn’t using the old “the tax cuts will pay for themself” defense–didn’t work so well in the past eight years.

For a myriad of reasons though, I have relative confidence that McCain will attempt to control spending proportionately to the Bush and would-be McCain tax cuts. However, it will take much more than crusading against pork barreling, which accounts for about $30 billion of the budget if my memory serves me.

What it will take is addressing much, much bigger programs including the great third rails–Social Security and Medicare, whose costs are rising at an alarming rate (already SS is the biggest government program in the history of mankind). On his website he at all specific about how he will address these issues or control spending other than eliminating earmarks and freezing non-military discretionary spending.

Much of McCain’s credibility centers around the idea that he speaks his mind and does what he believes regardless of the political convenience. In this case, he is not living up to that. We have seen McCain’s specifics on tax cuts, but that’s the easy stuff. What really matter’s is how–and if–he will cut spending, but it is also not a very popular topic.

If McCain really believes what he says about spending and the size of government, he will begin thinking hard about how he will squeeze the budget. After all, if you don’t propose any cuts in spending, you shouldn’t expect the deficit to narrow any time soon.

Popularity: 19% [?]

Just prior to closing my computer tonight I had remembered I wanted to share an article I read from the front page of today’s Wall Street Journal.

Russian oil production, for years a vital source of new supplies for world markets, is showing signs of a slump, adding to uncertainties that have helped push oil prices to record highs.

Russian output fell for the first time in a decade in the first three months of this year, according to the International Energy Agency, which represents industrialized oil-consuming countries. It said Russian production averaged about 10 million barrels a day, a 1% drop from the first-quarter of 2007.

The article also contained a troubling comment by CitiGroup analysts, “Russian oil production growth is no longer to be taken for granted.”

Bloomberg is showing that oil closed on the New York Mercantile Exchange at $113.58. Current crude prices seem to be out pacing Goldman Sach’s March predictions for future oil prices.

Tacking on $15 a barrel to all of its oil estimates, Goldman now sees average selling prices of $95 a barrel for 2008, $105 a barrel for 2009 and $110 a barrel for 2010. The high end of its range is now $135 a barrel — but Goldman hinted that prices could be headed even higher.

While Goldman believes their oil forecast to be bullish, compared to current market trends they may actually have been quite conservative. Only time will tell where future commodity prices go, but I would be highly skeptical of anyone who anticipates a large slump in demand or a sudden miraculous increase of supply.

To read the rest of the WSJ article please follow this link, you will however need a WSJ account to access it and other pieces located in the online archives.

Popularity: 22% [?]

It appears that the US press is finally beginning to catch onto the global food crisis. I have been following the situation since last year seeking alpha sent me an email regarding the rise in commodity prices. Indeed, within certain industries and areas of interest (foreign policy and human development) the rapidly rising global commodity prices have been troubling for some time.

Until this past week, however, the only two sources I found even covering the ever worsening situation were Foreign Policy Magazine, and the Financial Times (which in my estimation is one of the best papers in the world). The global food crisis has many route causes, one of which is overpopulation. In fact the emerging food shortage is occurring because of rising living standards and increased demand (mainly fueled by growth in Asia).

In addition, climactic events such as droughts and flooding (whether or not they can be associated with climate change is irrelevant) are also decreasing the amount of arable land, along with political instability are only intensifying problems. Finally, energy prices are also undercutting production capabilities by raising prices in everything from cultivation to transportation.

In fact, ForeignPolicy.com has been posting almost daily updates about food related riots happening around the world.

Now the FT is reporting that the situation has worsened:

“The global food crisis intensified on Tuesday as Kazakhstan, one of the world’s biggest wheat exporters halted foreign sales and rice prices shot to a record high after Indonesia stopped its farmers from selling the grain abroad.”

“Indonesia – which joins Vietnam, Egypt, China, Cambodia and India in banning foreign sales – was expected to export the grain this year due to a bumper crop. Corn futures prices in Chicago last week hit a record $6.16 a bushel, up 30 per cent in the past three months.

Indonesia’s export ban boosted the price of rice futures in Chicago to a all-time high of $22.17 per 100 pounds, up 63 per cent since January. Wheat prices moved higher to $9.11 a bushel and traders warned prices could rise further as the Kazakhstan ban together with restrictions in Russia, Ukraine and Argentina have closed a third of the global wheat market.”

The rising commodity prices and the trillion dollar financial industry meltdown are bad enough, add a global food crisis to the mix and we could find ourselves within the midsts of a full fledged depression.

To stay up to date on the worsening news I suggest www.FT.com, www.foreignpolicy.com, and the only two US news sources that have been covering the situation for some time-Bloomberg and the Wall Street Journal.

On a related note-it may be worth following the worsening water situation. If the world finds itself struggling for capital and credit along with shortages of food and potable water, we will be in an awfully poor situation.

Popularity: 20% [?]

Not unexpectedly, there has been a sufficient amount of crowing from the left about the need for more financial regulation in light of the credit crunch. Their reasoning seems to encompass little more than the idea that deregulation or underregulation was the source of our current problems (which makes even less sense when you consider that there is no significant repeal in mortgage or lending laws to my knowlege).

This essay, however, directly refutes that idea:

The most striking fact about the ongoing financial mayhem is that it is concentrated not in lightly regulated hedge funds but in more heavily regulated commercial and investment banks. It is banks that created subprime mortgage securities. It is banks that mispriced them. And it is banks that filled their own coffers with this toxic paper, losing hundreds of billions of dollars. A somewhat breathless March 31Financial Times article proclaimed the closing of the worst month for hedge funds since the collapse of the infamous Long Term Capital Management in 1998. But the average fund tracked by the Chicago-based firm Hedge Fund Research declined by a mere 2.4 percent in March, bringing the cumulative fall for the first quarter of 2008 to 2.7 percent. By contrast, the bank-heavy financial services component of the S&P 500 fell 12.3 percent in the first quarter.

Hedge funds, for the most part, have weathered the storm remarkably well.

Simply put, if underregulation was the problem we would logically see worse performance from hedge funds than investment banks seeing that hedge funds are relatively unregulated financial vehicles.

While I blame the present problem on years of overly exuberant credit expansion by the Fed, I think it is an economic mystery why loose credit disproportionately funded a bubble in the mortgage market versus any other area of the economy (in the same way that it is mysterious why technology was overextended in the late ’90s). Put simply, we do not know why the mortgage markets bore the brunt of the Fed’s policy, but hopefully we can at least be resolved to do two things: a) not let the central banks devalue our money to the extent they have been doing this decade and b) avoid government bail-outs participants in these financial markets, which will create the same incentives to make bad investments that cause the problem in the first place.

Popularity: 25% [?]

The notable economist Greg Mankiw had a very sensible article in the Economic View column of the New York Times regarding Nafta, trade, and this campaign. Its main contentions include:

1. That economists are far more fond of free trade than the general public. For instance:

A 2006 poll of Ph.D. members of the American Economic Association found that 87.5 percent agreed that “the U.S. should eliminate remaining tariffs and other barriers to trade.”

On the other hand, a minority of the general public (around one in four according to many polls including one mentioned in the article) think that free trade is beneficial to the economy.

2. John McCain has been a constant champion of free trade throughout his career and is the only of the three candidates who will stand strong for the concept as president.

3. The issue of trade has become mired by populism recently and divorced from economics which could lead us towards more protectionist policies.

Its a good article which reaffirms one of the themes that I have been focusing on especially during this campaign: how populism and economic illiteracy is driving protectionist rhetoric and proposals from politicians not entirely limited to the left (will Mike Huckabee please stand up).

Popularity: 33% [?]

This from today’s NYT:

For years, William Zammer Jr. has relied on 100 seasonal foreign employees to turn down beds, boil lobsters and serve cocktails at the restaurants, golf course and inn he owns on Cape Cod and in nearby Plymouth.

This summer, however, the foreign workers will not be returning, and Mr. Zammer, like other seasonal employers across the nation, is scrambling to find replacements.

“It’s a major crisis,” he said. “We’re very short on work force. We’ll be looking at opening a little later, closing a little earlier, looking at how we do our menus.”

Mr. Zammer is caught up in a Congressional standoff over immigration overhaul that is punishing employers who play by the rules and that, advocates of change say, could cost small companies billions in lost business.

In an effort to win support for a comprehensive immigration overhaul, the Congressional Hispanic Caucus and its allies have blocked voting on legislation that would allow employers to rehire foreign seasonal nonagricultural workers independent of a 1991 quota.

As a result, the government is limited to issuing the 66,000 seasonal work visas set when the visa program, known as H-2B, became law — 33,000 for winter workers and 33,000 for summer workers. Last year, more than 120,000 foreign workers entered the country on H-2B visas.

The consequences of stricter quotas on immigration are pretty clear but not often talked about in political debate regarding the issue. Less immigration, be it legal or illegal (in this case its legal), will mean a smaller, less diversified labor force and rising costs for businesses. Economist (and food critic) Tyler Cowen attributes the growth in quality and value in the restaurante industry in recent years to the immigration boom.

In the more macro sense, more immigration makes our economy more productive by making more labor available and enhancing our ability to divide labor in this country. Simple enough, no?

But now rising anti-immigration sentiment is beginning to take its toll at a troublesome time for the economy, and it will take its toll directly on the pocketbooks of American consumers in the form of higher prices of goods and services.

Weighing the value of illegal immigration is a matter of costs and benefits: how the productive labor reaped by the economy compares to the losses attributed to wealfare benefits, etc. The thing is that the complaint about illegal immigration from Republicans generally amount to “it’s illegal.” But then, if it were legal would it be okay? The Democrats don’t even take much of a stand on the issue, which is why businesses such as the one in the article are in trouble now.

As far as I see it, as long as immigrants don’t consume a large amount of welfare benefits they unequivocally add to our economy and legislative stalemates should not stop that from happening. The result is that we feel the worst of consequences–the ones that no one is even talking about.

Popularity: 29% [?]

One of the reasons Steven Landsburg, a professor of economics from the University of Rochester, is one of my favorite economists around today is because he writes articles like the one he wrote this week called, The Case for Foreclosures. Here is part of his explanation:

I predict with great confidence that when I say that foreclosures create new homeowners, a sizable chunk of my readers will scoff that “the people who can afford them would have been able to afford nice homes anyway.” I could use economics to explain why those readers are mistaken (a glut of homes on the market leads to falling prices, etc.), but that’s unnecessarily complicated. All it takes is the simple observation that there cannot be more homeowners than there are homes, and if one home becomes vacant, then there can be one new homeowner. Call it the law of conservation of homes.

Its nothing more than a logical consequence of the price system that as people cannot pay their mortgages and demand goes down, prices will also go down to compensate and reestablish equilibrium in the housing market. The alternative, such as a freeze in foreclosures or interest rates as proposed by Hilary Clinton, could not change the fact that many residents cannot afford to pay their mortgages under the presently readjusted, the peril of which would be that more lenders would go bankrupt and less lenders would be able to initiate new mortgages for buyers looking to purchase homes on the market at reduced market prices.

Indeed it is contrarian to encourage foreclosures, but that’s not exactly what Landsburg is doing; Landsburg is, in reality, encouraging market forces and the price system as a means of achieving the optimal outcome in a below-average situation and warning against the unintended and unseen consequences of manipulating those natural forces. Indeed, much of my blogging on economics aspires to have the same effect whereby it defeats anti-market conventional wisdom by enumerating all the possibly hidden or misunderstood effects of anti-market policies.

Hahvahd professor Greg Mankiw also pointed out that it should come as no surprise that such an economist would be making a case for something as indefensible and callous as home foreclosure, considering he has also praised Ebenezer Scrooge. Of course this too sounds unfathomable considering the way the very name has become a household admonishment on any individual accused of selfishness.

In this whole world, there is nobody more generous than the miser—the man who could deplete the world’s resources but chooses not to. The only difference between miserliness and philanthropy is that the philanthropist serves a favored few while the miser spreads his largess far and wide.

In many ways his approbation of the miser is not only a approbation of the classical principles of savings and thrift, but also a rebuke of consumptionist-Keynsian thought. Either way, it is particularly brilliant in the tradition of “pop economics,” which dates back to Fredric Bastiat and Henry Hazlitt, for looking at “that which is seen, and that which is unseen.”

Today, popular economics has reached its apex, namely in the fame of the book Freakonomics. But what most don’t recall is that in modern times, before there was Steven Levitt–or anyone else for that matter–there was Steven Landsburg who wrote The Armchair Economist written in the late ’80s with a greater emphasis on logic, incentives, and larger economic trends, compared with Levitt’s nuanced microeconomic empiricism.

Finally, I found this video of Professor Landsburg on John Gibson’s Fox News show from a couple of years ago. He was brought on to talk about trade and a rising protectionist inclination among the American people, and in the face of those sentiments he makes the case that protectionism is xenophobic, irrational, and not dissimilar to racism. The exchange is heated but Landsburg sufficiently owns Gibson on his own show. And with trade and NAFTA emerging as a leading issue in this campaign cycle, the video is particularly relevant.

You can watch it by clicking the link directly below:

Lire le reste de cet article »

Popularity: 40% [?]

In front of a House committee on Wednesday Ben Bernake claimed that lagging growth is the central bank’s chief concern.

This means only one thing: that the Federal Reserve will cut rates again in the relatively near future. His claim that growth is the chief concern also indicates that climbing inflation and the falling dollar are of secondary concern. The reality of both economic slowdown and climbing prices are beginning to revive worries of impending stagflation, which could be revealing itself for the first time since the 1970s and early 80s. The dilemma for Bernake is balancing these two inverse herrings. At this point, if he is indicating that he will cut rates to bolster short-term growth he is willingly accepting more inflation and a weaker dollar.

Yet there is still another side-effect that the fed is accepting: the stifling of long-term growth. This never gets talked about much on the news or by economically illiterate congressmen, but for the simple fact that more rate cuts encourage consumption at the cost of savings, we will be capital accumulation for usage of our economic resources in the short term. Its a simple matter of distorting time prefferances.

Additionally, unanswered is how rate cuts will actually revive the economy’s real capacity to produce and grow. While easier money encourages more spending, and thus creates the image of more growth by boosting aggregate demand in the immediate, it does not actually represent a real or sustainable spike in productivity. If rate cuts did boost real output then there would be no reason for the Fed to stop at 3%, they would just keep cutting and cutting the FFR down to 1% or less, and then keep it there. But the fact is that loose banking policy does little more than increase the money supply–which is the reason we are presently seeing more inflation–not wealth, contrary to the Keynsian and Mercantalist doctrines which apparently survive still today.

Another issue rarely addressed is the possibility of reinflating any bubbles in the economy by repeated rate cuts. Recall the slowdown in ‘01/’02 and how the Fed aggressively debased interest rates all the way to one percent by 2003. One of the consequences of the absurdly low rates was that investors that went bust in the tech bubble of the late nineties were to an extent bailed out by easy money and thus a standard of incentives were set which said that ‘even if you make bad investments, you will not be made to bear the full burden of your decision-making.’ Today, we may be seeing the deja vous in the housing market.

Henry Hazlitt once said, “The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.” Currently, I think many in the public eye are not acting as “good economists” by this measure. Even many economist have jumped on the fiscal/monetary stimulus bandwagon without enumerating all the costs and benefits of those policies. Until and unless many more Americans, economists, and policymakers start heeding Hazlitt’s advice, we should all become accustom to the patters of moderate booms and busts that we have witnessed in recent history.

Popularity: 29% [?]