New School Politics

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A WALL STREET JOURNAL ONLINE NEWS ROUNDUP

U.S. stocks looked set to enter a bear market Tuesday, with stock futures pointing to losses of roughly 5% after two days of relentless selling pressure in overseas markets on fears over a U.S. recession.

Less than two hours before the start of trading, Dow Jones Industrial Average futures dropped 516 to 11590. The S&P 500 futures sank 63.8 to 1261.5, and Nasdaq 100 futures fell 77.25 to 1772.25. Changes in futures do not always accurately predict early market moves after the opening bell.
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For the best coverage of the global recession I suggest the Financial Times, the Wall Street Journal, and Bloomberg for up to date information and accurate analysis.

Popularity: 26% [?]

Why do we have a entitlement program for the wealthiest of Americans?

Think I am sounding like a liberal? Well, actually I am talking about social security, which I don’t see reason for, especially considering that the elderly are far wealthier than the average American.

Popularity: 24% [?]

The award goes to Steven Landsburg:

Mike Huckabee is not my favorite candidate, though I relish the irony of an evolution-denier whose basic appeal is to voters’ most apelike instincts.

Here’s the entire article, which actually concentrates on Mike Huckabee’s notably outside-the-box tax plan, better known as the “FairTax,” which basically replaces all federal taxes in favor of a national sales tax. Landsburg, a professor at the U. of Rochester, comes to the defense of shifting taxation toward consumption in light of a Huckabee’s plan being lambasted by pundits (most notably, Bruce Bartlett) and media (AP story) lately. BU professor, Laurence Kotlikoff, also comes to the FairTax’s defense.

Like Landsburg, I applaude Huckabee for his support of the FairTax. Not only do I think that it shows the Governer is willing to think for himself–which I don’t suspect he often does–but I also believe that the plan, which was first proposed ten years ago, could be economically beneficial. I am inclined towards a national sales tax essentially because:

1. It shifts the tax burden from overall income (personal and corporate) to consumption, which enhances the incentive to save and invest. This is especially important to the US economy whose savings rate is particularly low, and whose current credit crunch can be strongly connected with insufficient accumulation of real wealth.

2. It eliminates the IRS, which costs taxpayers about $20 billion. Even more expensive, however, is the $200 billion plus that Americans spend on filing their federal taxes each year, which would also be eliminated.

3.  It eliminates the complication of the 60,000+ page tax code, which is riddled by all sorts of loopholes. The incentives the code creates encourages the diversion of resources from productive activity to evasive activity. Some, including to the GAO, estimate these costs to be anywhere from two to five per cent of GDP.

My reservations on the FairTax include:

1. The potential menu costs of a massive alteration of taxes and costs (costs would likely rise in the short term because while the sales tax would kick in immediately it would take longer for prices to come back to normal levels as the embedded costs from income and corporate taxes go away).

2. Proposals for a national sales tax include a monthly rebate from the government to lower income earners to compensate for their new tax burden. However, this would require massive bureaucracy to execute the measure. The question is, how much would it cost and how would it compare to that of the current tax code.

3. Tax evasion would probably be easier under a sales tax given taxed monetary exchanges are much smaller and plentiful than under an income tax. Once again, this is more of a question than a statement–more inquiry is necessary, but logic leads me to initially believe it.

Popularity: 22% [?]

From his Economic View column in the NYT, Tyler Cowen writes:

There has been plenty of talk about “predatory lending,” but “predatory borrowing” may have been the bigger problem. As much as 70 percent of recent early payment defaults had fraudulent misrepresentations on their original loan applications, according to one recent study. The research was done by BasePoint Analytics, which helps banks and lenders identify fraudulent transactions; the study looked at more than three million loans from 1997 to 2006, with a majority from 2005 to 2006. Applications with misrepresentations were also five times as likely to go into default.

This fact, however, falls upon the deaf ears of the Democrats, all of who touched upon the issue in Tuesday’s Nevada debate:

Edwards said, “We need a national law cracking down on predatory and payday lenders that are taking advantage of our most vulnerable families.”

Clinton argued that, “…because of the way the interest rates are going up, and many of the fraudulent and predatory practices that got people into them in the first place…” we need to extend credit and loosen bankrupcy laws for those in trouble.

Obama agreed, “Hillary’s exactly right, but we’ve got to modify some of the fraudulent practices, predatory lending practices.”

It sounds wonderful to the economically illiterate, but this season’s buzzword–“predatory” lending–does not so much as pass the smell test. The fact is that the phenominan–if you can call it that–is easily explained by the price system. If the price of credit goes down, and lenders have access to a greater supply of funds then demand from consumers goes up as they are able to borrow more then they previously could. With more credit, consumers are able to buy higher end goods, which they otherwise wouldn’t have access to–such as homes–and the price for those goods grows.

In reality, neither the lenders nor borrowers were “predatory.” Each demanded more credit as credit became cheaper. Unfortunately for both, the credit bubble burst and they are suffering the consequences of unsustainable financing. But the fact remains, it makes no sense to call either party “predatory” considering they both got screwed. And I believe that is the point that Professor Cowen would ultimately make.

In the same column, Cown spoke on lethal cold fronts:

Spells of extreme cold kill over 27,000 Americans each year, or about 700 people each very cold day. Heat waves may receive more publicity, but it turns out that cold periods — days with an average temperature below 30 degrees —have more significant and longer-lasting effects on human mortality. More people die in cold periods than in homicides.

Extreme cold brings cardiovascular stress as human bodies struggle to adjust to the temperature; many of the deaths in these periods come through heart attacks. Heat waves tend to kill people who were already weakened and would have died soon anyway; cold periods bring additional people to the verge of death.

When retired people move to a warmer state, their life expectancy rises dramatically. In fact, 8 to 15 percent of the increase in American life expectancy over the last 30 years comes from people moving to warmer climates, according to research done by two economics professors, Olivier Deschenes at the University of California, Santa Barbara, and Enrico Moretti, at the University of California, Berkeley.

Much is made of how a warming trend could hurt us, but, not only do I assume that those are under the most severe of scenarios, not much is made of if and how warming can help. Not only do many more humans die from the cold than from the heat, but productivity also flurishes when it is warmer. For instance estimates generally hover around the consensus that warming and greater CO2 has contributed to a 15% growth in crop yields since 1950.

This wisdom regarding warming is certainly unconventional, but it is worth discussing openly. I believe the reason we never hear about it is that global warming skepticism is strongly condemned by the mainstream.

Popularity: 42% [?]

Unfortunately, most politicians don’t have much of an economic pedigree, but some at least think more like economists than others. My inclination is that Obama fits the bill among Democrats, although all the talk of “taking on the drug companies,” “predatory lending,” the illusions to protectionism, etc. is enough to conclude that the Democrats are not really to be trusted on big economic issues in general.

Many of the Republicans leave a lot to be desired also, but some do make sense from time to time. The South Carolina debate on Thursday night demonstrates this.

I think among Republicans, Ron Paul and John McCain tend to distinguish themselves. Ron Paul, I believe, has consistently established himself as the most economically-minded of candidates although he is out of the mainstream. Perhaps I am partial to him because he is reads von Mises, Rothbard, and Hayek, however any politician who actually takes the time to read treatises on economics by such thinkers deserves credit.

He also deserves credit for putting the immigration issue into an economic context which none of the other candidates seem think of–ever. Here was his response to an immigration question:

I think this whole thing should be thought of more in economic terms. Maybe I think about economics too much. But there is something said in economics that, if you subsidize something, you get more of it.

And this is what we do. We encourage it by giving free medical care, and free education, and the promise of amnesty. And no wonder more will come.

We have a weakening economy and now immigrants, especially the illegals, are seen as a threat because they come and they undermine our tax system. And some of our hospitals are being closed and some of our people won’t work because of the welfare state.

You can’t solve this problem if you don’t deal with the terms of welfarism. And, besides, you know, some of our border guards are over in Iraq. I think they would be better off on our borders, you know, protecting our borders, not in Iraq.

Immigration is one of the issues on which I disagree to a certain extent with Rep. Paul–I think that immigration laws should be very lax–but he is right with regard to the welfare aspect of it, which must be curtailed. Most of all, he deserves pops for observing that immigration is fundamentally an economic phenomenon, and to analyze any economic phenomenon you must look at incentives.

Zach may be right that Ron Paul sounds about as confusing to the average voter as Sean Paul sounds to–well–me, but at least he speaks in a more rational and candid manner–something which I would rarely accuse the other candidates of doing.

John McCain also made some sense in the debate with regard for the potential recession (especially with regard to the loss of manufacturing jobs in Michigan, which has the next primary):

Well, the first thing we need to do is stop the out-of- control spending. Out-of-control spending is what caused the interest rates to rise. It causes people to be less able to afford to own their own homes.

We need to stop the spending. And that way we can get our budget under control and we can have a — basically a strong, fundamental fiscal underpinnings.

The second thing that we need to do, of course, is stop spending $400 billion a year overseas to oil-producing countries that come right out of our economy immediately. Some of that money goes, unfortunately, to fund terrorist organizations.

We’ve got to — and we can use Detroit for this, where there’s tremendous technology in the state of Michigan, and tremendous abilities to develop technologies to reduce this dependency on foreign oil, and eventually eliminate it, and stop this outflow of some $400 billion a year. Education and training is obviously important, but stop the spending. As president, I know how to do it. I’ll wield that veto pen, and I won’t let another pork-barrel earmark spending bill cross my desk without vetoing it. And I’ll make the authors of it famous.

It was generally a good statement because its theme was that spending more than you have is bad for the economy. Hence, hes giving an economic–not a political (i.e. “deficit” sounds bad, so lets stop it)–reason to tighten fiscal policy, and eliminate the deficit. He also deserves high marks for alluding to the price system and how more spending means less savings and higher interest rates.

His comment on foreign oil was not so good, however. His claim about the $400 billion spent on foreign oil does not compute. Even if we stopped spending that money on foreign oil altogether, we would still have an unfulfilled $400 billion dollar demand for energy. Where would we get it? Its not like “alternative” energies can provide us with nearly the same energy for the same cost.

Additionally, if we stop spending on Middle Eastern oil it wont really hurt those producer–at least, not nearly as much as it will hurt us economically. The oil market is a global market, and if we remove our demand from the marketplace, the price will immediately go down, but that will cause demand from elsewhere to rise and the price to rise, although not quite as high as original levels. The US on the other hand will be spending its energy dollars elsewhere, which will make non-MidEastern energy more expensive and, again, shift spending from the rest of the world back to Middle Eastern oil to off-set the imbalance.

Among the other candidates, there wasn’t much to write home about. Thompson and Giuliani, who have both proposed similar tax cuts, which they insisted would also raise revenue. This is not necessarily true as it is difficult to tell where we are on the Laffer Curve and how much it applies. Additionally, their saying that spending need not be cut reminds me of the Bush deficits.

Mitt Romney kind of surprises me. I see him posturing for public opinion on economic issues more than I hear him making sense–for instance, he was making an obvious appeal to MI voters on the recession question when he talked about how he “created jobs” as Governor. I expect more from such a successful executive and investor.

I have little evidence that Mike Huckabee speaks economics.

Lastly, the Wall Street Journal recently conducted a survey of economists regarding everything from the future of the economy to the presidential race.

when asked their personal preference, the economists favored Republicans. Sen. McCain led the field with 39% of the forecasters’ votes, compared with 11% for Mr. Giuliani and 7% for former Massachusetts Gov. Mitt Romney. Among Democrats, Sen. Obama edged Sen. Clinton, 14% to 11%, while former North Carolina Sen. John Edwards took 4%.

“People are looking for change,” said Susan Sterne of Economic Analysis.

Some 56% of the economists disapproved of President Bush’s stewardship of the economy, while 44% approved. That is especially startling considering 59% of the economists said the stock market performs better under Republican presidents, compared with 28% who said it favored Democrats. Most economists who disapproved of Mr. Bush cited an increase in government spending. Many praised the president’s tax cuts.

The economists polled, as I understand, were generally mainstream ones which is probably one reason why they tended towards mainstream candidates, especially moderate conservatives. McCain led the field by a lot, which suggests that he does sound good on economic issues as I suggested. Ron Paul apparently doesn’t register, which isn’t a surprise because he is so radical, but is disappointing nevertheless.

Popularity: 60% [?]

News this week was released indicating that the unemployment rate surpassed 5%. This along with $100/barrel oil, a very weak dollar, and growing inflation (here and here) are probably the consequences of the Federal Reserve cutting interest rates to the extent they have in the face of the credit crunch.

I surmise that this policy is probably creating more problems in the long run although it may calm the nerves of Wall Street in the immediate. Credit problems were the perril of loose credit, so it makes little sense to keep credit too loose in response.

Its sounds good, politically, to encourage the stimulation of investment with new money. However, economic laws still apply and by lowering interest rates against market forces we will reduce the incentive to save and essentially cause a shortage of investment capital.

Once again, there is a disparity between popular opinion and reality.

Popularity: 28% [?]

Milton Friedman, Nobel laureate in economics has said that, “History suggests only that capitalism is a necessary condition for political freedom.” However, individual and political freedoms are on the decline in Russia, even as Russia has been reaping the rewards of a capitalist market economy under the leadership of President Putin. This trend toward less political freedom in Russia, if left unchecked, may result in a return to the authoritarian rule Russia endured in the Soviet era. So, what can the United States and the international community do to stop this?

Before Putin became President, Russia had been subjected to drastic economic and political reforms under President Yeltsin. This shock therapy resulted in the Russian government defaulting on loans worth billions of dollars, the value of the ruble dropping precipitously, and unemployment becoming rampant. As a result of this turmoil, many Russians desired a stronger central government that could offer them stability. Stability was the stated goal of Yeltsin’s successor, Vladimir Putin, and he achieved this through the consolidation of state power on all levels. While the internal security and stability have markedly increased during Putin’s reign, personal freedoms, including both political and economic freedom, have been declining. Economic freedom is now dismal; Russia ranks 120th out of 157 in the Index of Economic Freedom, a product of the Heritage Foundation and The Wall Street Journal.

Prominent businessmen have been put in prison, journalists bullied and sometimes killed, and privately owned companies, including media outlets and energy conglomerates, are being gobbled up by the State. This lack of political freedom is directly related to Russia’s lack of economic freedom. Indeed, Milton Friedman has said, “Restrictions on economic freedom inevitably affect freedom in general, even such areas as freedom of speech and press.”

Fortunately, for Putin, there have been dramatic increases in oil and natural gas prices. Russia has the most proven reserves of natural gas in the world, and this has been the main driving force of Russia’s economy. The wealth pouring into Russia’s coffers through its energy industries have made it possible for Putin to distract the Russian populace from the lack of personal freedoms. As such, political and economic freedoms have been on the decline, despite economic prosperity.

Establishing economic freedom in Russia is the key to increasing political freedom. Rather than punitive economic or diplomatic sanctions, the United States and the international community should attempt to use the forces of the market to compel economic, and thus political freedoms on Russia. Reduced energy prices would make the economic shortcomings of Russia more apparent to its own people. There are two ways to reduce oil and gas prices in a market economy: increase energy supplies globally, or reduce gas and oil demand through development of alternate energy sources or through conservation. Utilizing these market forces would be a long-term endeavor, but in a climate of lower energy prices, Russia’s economic prosperity would then more accurately reflect its lack of economic freedom. There would then be a chance for internal pressures to force Russia to make true economic reforms, and, hopefully, to create the right environment for political freedoms to take hold and flourish.

Popularity: 34% [?]

Along the same lines of voter irrationality, especially on economics, here is a link to a compilation of polls on issues of international trade. Despite the fact that economic theory such as the logic of comparative advantage demonstrates how global trade is omni-beneficial–that the relative majority of economists agree that freer international trade is healthy–and that all the evidence points to more international trade corresponding with higher living standards, most people in America still believe it is a detriment. The most recent of the polls give you an indication of public opinion: 

NBC News/Wall Street Journal (12/14-17/2007)  

Do you think the fact that the American economy has become increasingly global is good because it has opened up new markets for American products and resulted in more jobs, or bad because it has subjected American companies and employees to unfair competition and cheep labor? 

Good: 28%

Bad: 58%

Equal 11%

Unsure: 3%   

Popularity: 31% [?]

According to a CNN/Opinion Research poll this week 57% of Americans believe we are currently in a recession. But, of course, we are not actually in a recession as a recession would connotate at least one (by most definitions, two) quarter of negative economic growth. This is another example of the economic illiteracy of the general public.

Bryan Caplan, a professor of econ at GMU, talks a lot about this, including in his recent book. Remember these Americans are the very ones who will be going to the polls very soon to vote for the next leader of the free world and decide future economic policy. The dichotomy between economic wisdom and conventional wisdom can at times be stark, which is why the policies of democracies and majorities can often be unwise.

Popularity: 22% [?]

In a House hearing Congressman Ron Paul took issue with the basic logic of the Federal Reserve as well as this Fed’s recent cuts in interest rates in an Austrian inspired manner. Given, the Chaimen did not have much time to respond but I was surprised with how inadequate his response was in the time given. There were two main questions posed to Bernanke: a) what justifies the Federal Reserve’s inflationary nature (given, it this was somewhat a loaded issue) and b) why cut interest rates assuming that the current problem is provoked by an inflationary monetary policy.

To the first issue, Bernanke gave a weak one sentence answer regarding how the Fed is just doing the job that the Congress authorized them to do. His answer escapes the entire issue of what justifies that authorization in the first place. To the second issue the Chairman only alluded to how the Fed must factor both inflation and employment to achieve an optimal balance. Basically, it was clear that the two men were not on the same page. The exchange illuminated the simple differences in how mainstream economists and radical ones (Austrians for instance) see the subject.

Here is the video:

Popularity: 30% [?]