Chile's Rainy-Day Fund

Reader Jacob Grier sent along this article from the Wall Street Journal which describes Chile's rainy-day fund and how useful it is at the moment. Here is an excerpt:

By MATT MOFFETT
SANTIAGO, Chile -- During the emerging economies' commodities boom a few years back, Chilean Finance Minister Andrés Velasco was a wet blanket at the fiesta. Chile, the world's largest copper producer, was reaping a bonanza from the quadrupling in the metal's price. Mr. Velasco insisted on squirreling away a large chunk in a rainy-day fund.

As the savings swelled above $20 billion -- more than 15% of Chile's economic output -- Mr. Velasco faced growing pressure to break open the piggy bank. In September, protesters barged into a presentation by Mr. Velasco, carrying an effigy of him and shouting, "The copper money is for the poor people."

The 48-year-old Mr. Velasco, wary that a flood of copper income could generate lending and consumption bubbles, stood his ground, even as the popularity of the center-left government withered. Latin American history, he cautioned, was full of "booms that had been mismanaged and ended badly."

Finance Minister Andrés Velasco built Chile's rainy-day fund. Today Mr. Velasco looks like a prophet. Since the onset of the global economic crisis, copper prices have fallen by 50%, in line with the sharp decline in other commodities. Emerging economies that got too giddy in the good years are now coping with nasty hangovers. Soybean-dependent Argentina is facing a possible debt default while oil-rich Russia has been stuck bailing out banks and companies that got in over their heads in debt.

Thanks to Mr. Velasco's caution, Chile is now in a position to try to bootstrap its own recovery from the global recession. Mr. Velasco's preemptive moves have kept Chile's government from having to spend a single peso on bank bailouts. Having paid down foreign debt during the fat years, Chile is now a net creditor nation, with a debt rating that was upgraded by Moody's Investors Service in March.

And now Chile is pouring some of its copper savings into a massive stimulus plan, consisting of job-creating public-works projects, tax breaks for business, investments to keep mines operating and other goodies. Chile's plan is one of the largest stimulus packages in the world relative to the size of its economy. The Chilean program is the equivalent of 2.8% of gross domestic product, versus 2% in the U.S.

As a result, economists expect the nation's annual economic output to decline a very slight 0.5% this year, compared with much steeper declines elsewhere.

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The moral of this story is, of course, you should always defer to the economists! (Velasco has a PhD in economics from Columbia). Such a fund would be pretty nice to have in Oregon right now, huh?

Eco-nomics: More Roads or Fewer?

Busy day again today, so I'll pose this as an open question rather then a soliloquy: are more roads better or worse for the environment and climate?

Those who oppose the bigger Columbia Crossing project and the Oregon transportation bill saying that more roads will lower the cost of driving and thus encourage more of it are certainly correct in general (though I am sure there is a diversity of opinion about how much this matters) . But it is also true that congestion is terrible for the environment: all those cars idling in stop and go traffic are belching emissions at a hugely greater rate per mile than free flowing traffic.

So where is the balance? How much do we want to encourage congestion as a way to reduce driving?

My view has always been that the problem is carbon emissions so we need to address carbon emissions through a gas tax. Full stop. So let's reduce gas consumption, but work to alleviate congestion (congestion pricing is a good idea for this as well). What are your thoughts?

Oh and the fact that the transport bill includes a gas tax is good, but don't confuse this bill with stimulus as I think backers are trying to do (though they don't say it directly). Stimulus comes from borrowing from the future to stimulate the economy today. Tax and transfer schemes are different. It is possible that this is a good investment in the growth of the Oregon economy, but the emphasis on jobs created is misguided and confuses these types of investments with stimulus.

Barça!

I have always liked Barça for their refusal to sell the front of their shirt to corporate sponsors. After two European championships in three years, perhaps the gods like that too.

Congratulations on a well-deserved chapionship.

Housing Markets: Inventories

Busy day, so I'll punt to the Calculated Risk blog. Here is a nice graph of changes in home inventory levels. Now, of course, there are homeowners waiting on the sidelines and new foreclosures driven by unemployment to come, but it good to see movement in the right direction:



This is also why new housing permits/starts are a good sign of economic activity but this activity doesn't really help market for residential housing.

Portland Home Values: The March Case-Shiller Update

From the Case-Shiller Home Price Index for March 2009, some lovely pictures.  First the raw data:

Still shows a serious erosion of home values in the winter of 2009.  Here is the year over year percentage change in home prices:

These are still declining for Portland and Seattle but the 20 city composite may be leveling off and even turing upwards.  These data are too old to assess the current situation with summer approaching and mortgage rates incredibly low.  But again, unemployment is very high, so where is the demand going to come from?

The Wall Street Journal article has a nice interactive graphic and also reports on the jump in consumer confidence - which with the increase in the leading indicator improvement give optimists like me some small hope that the end of the decline may be here by the end of the year.  Then it'll just be the digging out that we'll have to worry about (and probably for years).

Good News, Bad News and the Effects of Cap and Trade

...were all topics touched on briefly last night as I once again risked public embarrassment and ridicule for the benefit of all humankind by appearing on KGW's Live @ 7.

Economist's Notebook: Some Random Friday Observations

Now they may be right, but it seems pretty clear to me that a group that is facing increased competition would have an incentive to stifle that competition, so I would not put too much weight on their analyses:

Lodging Group Pans Mayor’s HQ Hotel Plan

Perhaps some people need a lesson in incentives and behavior...


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Megan McArdle thinks that increased fuel efficiency standards are a bad way to cut down on auto pollution mainly because efficient cars induce people to drive more. This is true (to some extent) and a carbon tax would be better, but she completely ignores the benefits of induced innovation: by making the price of poor fuel efficiency higher for auto makers, you prompt investment in and development of better, cleaner technologies. So it is not nearly as bad as she claims.


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There is a whole political economy literature about how a small, focused interest group can subvert the common interest. I think about this a lot as a group of architects without any viable plan for the building, have managed to prevent the demolition of the Memorial Coliseum. Now we have a much more questionable proposal to put a stadium in Lents Park wallowing in the mud.


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Some more small glimmers of good news: credit markets continue to improve.

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Have a great holiday weekend, I am headed off to visit me mum so please wait until I arrive to hit the interstate! It's all about the externalities...

Beeronomics: An Economist's Preferred Honest Pint at Belmont Station

This escaped my attention until now. Via John Foyston, a message from Belmont Station:

A FULL 16 ounce PINT EVERY TIME. You asked for it, we're delivering. We are now using oversize glasses with a 16 ounce line. Be patient. Let it settle a moment. If it's not 16 ounces we'll top it up. More beer for you. Less waste!

Yeay! Kudos to them for going to marked glassware. I have not seen them, but I can only hope that the mark looks a little something like this:

The Economics of Senioritis

Ah, late May, when the students look at you with rapt attention glazed and vacuous eyes, wondering "when, oh lord, when will it all end?" And "can I take any more economics lectures before I slip into catatonia?"

But perhaps it is entirely reasonable:  Benjamin Chimenti, a student in my international economics course, has attempted to make sense of 'senioritis' from an economics perspective.  I think it is fantastic and asked him to let me share the result.  [I especially like it because I can convince myself that it is not my stultifying lectures that are causing the vacuous stares] Enjoy...

Publish at Scribd or explore others: Essays & Theses School Work

Searching for Some Light at the End of the Tunnel

Let's forget about the other dismal stuff and take some solace in the fact that the Conference Board's index of leading economic indicators is up for the first time in many months (graph from the New York Times):

Credit Cards, Asymmetric Information and the Role of Government in Preventing Bad Choices

The new credit card (and guns) bill is about to be signed into law and it begs the question: what is the market failure that this government intervention is suppose to correct?  After all, credit card contracts are full information - all the facts are there for credit card applicants to review - and if a private citizen in the United States wants to enter in a legal contract with another entity, why should the government prevent this?

The answer lies in whether you believe that by making extraordinarily dense and complicated contracts an asymmetric information problem exists despite this 'full disclosure.'  Most consumers cannot make sense of the contracts, supporters of the bill say, and companies deliberately make contracts dense and confusing so that they can slip all kinds of nasty little provisions designed to take advantage of customers once they are in debt to the company.  

If this is true than a bill that regulated the type of contract language that can be used, how explicit the terms must be, how accessible the language is to an average person not trained in the law is justified.  But if this regulation was successful in making consumers informed about what type of contract they sign, does the government have any role in regulating the type of contract they sign?  As an example, what if the contract very clearly stated: interest rate may be changed at any time by the issuer without prior notice.  If I was quite happy to agree to this provision, why should the government prevent me from entering into a contract such as this.  The bill just about to become law does precisely this.

The answer from some circles is that you have to protect people from their own tendencies to make bad choices.  But is this really the role of government?  Some bad choices impose serious costs to society like not wearing a seat-belt - in a crash your are more likely to be seriously hurt and many people will rely on public assistance to pay their medical bills and even those insured will have to pay higher premiums on average. Do bad choices in the credit card market impose such social costs?  I doubt it.  I know we are in an economic crisis partly fueled by just such credit shenanigans, but again the lack of full information is a main culprit and I am supposing that this part of the problem is solved through regulation.

I like, therefore, the parts of the credit card bill that stipulate more transparency, but I dislike the restrictions on the type of contracts that will be allowed.

I think that we need to be careful that government does not start to try and explicitly guide behaviors that have no or little social cost.  I am fine with mandating that nutrition information be available to customers of restaurants upon request but if we required restaurants to include such information on menus as some have suggested, I think we cross the line in this regard.  The private costs of poor choices are enough to ensure efficient market outcomes.

Now, where is that double cheeseburger with king sized fries I ordered?...  

Green Shoots...

...of the economy economics department. From my office window at OSU. My own little green shoot growing happily in the spring sunshine. Too bad it is a weed...

Eco-nomics: Green Conundrum

From the 'what is the point?' department: organic potatoes found in a Portland Safeway store - individually wrapped in plastic and labeled. The good news? They are 'easy open'!

Taxes, Revenues, Spending and Oregon

Update: I have made a correction to an unfair criticism that I did not really intend. Sloppy writing on my part, sorry.

Mark Thoma on Sunday had an Op-Ed piece in the Oregonian treading over some old territory for this blog: suggesting a sales tax. I only wish Mark had done his due diligence emphasized spending stability rather than revenue stability. A while ago I wrote a series of posts in which I tried to find out what I could about the reality of sales tax and income tax volatility.

The conclusion: sales taxes are not much less volatile than income taxes and the two are highly correlated. They may add a tiny bit to stability but they won't solve the problem. We need only to look at our neighbors to the north to see that sales taxes are not then answer to volatility questions. Sales taxes cratered a bit before income taxes, but they will likely recover faster too.

While in the long term we may want to think about appropriate revenue levels it is important to remember that trying to tax our way out of a recession is only a recipe for prolonging the recession. We need to be very careful during this recession to be sure that any new temporary taxes are used to preserve only the most essential services and avoid the temptation to enact a host of new taxes to fill the budget gap.

The real problem looking to the future is not revenue instability but spending instability. Mark is right about this: a permanent rainy-day fund is an absolute necessity. A rainy day fund that is 5% of state GDP and filled by withholding kicker refunds until the fund is full. 5% of GDP is, admittedly, a lot and I'd settle for less (3%?), but 7-8 billion would come in pretty handy right now, wouldn't it? The fund can be invested conservatively and excess returns can be refunded to taxpayers as well. It is true that strict rules will have to be enacted to assure that the rainy day fund is not used in the sunshine. But such rules are relatively simple to write down and enact.

What is important now is to think about the appropriate level of revenues in the long term. I don't know the answer to this off hand, but I do know that Oregon is a relatively low-revenue state. According to the Tax Policy Center of the Urban Institute and the Brookings Institution we raise about $3,360 per person in Oregon which places us 35th in a ranking of states. Compare that to Washington which collects almost $4,000 per person and California, which collects more than $4,500 per person.

This leaves us with some serious issues, most notably the abysmal funding of K-12 education. From the Tax Policy Center's data on expenditures we can see that in a list of state expenditures on K-12 schools Oregon is 41st in the nation at $1,394 per person. However, overall expenditures on all services in Oregon is $6,866 per person which puts us in 22nd place which begs the question, why are we so low in school funding? By the way, the difference in the revenues and expenditure numbers is, I assume, mostly federal transfers for things like medicaid as well as timber payments and the like.

I am far from ready yet to say that revenues should increase, and we know we have no sales tax, but what about corporate taxes which have received so much attention? Are they really so low? Again, according to the Tax Policy Center a little less than 2% of all state revenues comes from corporate income taxes which places us 3oth among states. Per capita, according to the Tax Foundation, we are in 39th place with $109 raised in corporate income tax per person.


Finally two last points about sales and corporate taxes. We are one of the very highest income tax states, meaning that adding a sales tax would have to involve a lowering of the income tax without overburdening Oregon households. Also as companies have to compensate employees for high taxes to keep them from fleeing to other states, income taxes can be seen as an indirect tax on businesses. Food for thought.

This is intended to start a discussion and exploration into these issues and, as always, I welcome your thoughts, opinions, knowledge, etc.

Passwords and Externalities

This story on NPR about the proliferation of passwords and software products to help you keep track of them, along with a recent threatening e-mail from the computer folks at OSU promising to cut off my access to e-mail if I do not change my password within 7 days got me thinking about the ridiculousness of passwords.

I am deliberately lazy with my passwords, I choose simple, easy to remember and closely related passwords - precisely what the IT folks hate.  Well, come on, just what is the probability that: one, someone will take the time to try and hack my e-mail; two, that if they do they will get anything at all of any use for anything; and three, that they will then try and figure out other accounts I have to do something that is profitable to them and harmful to me?  Practically zero.  What is the cost to me of trying to keep track of all these complicated passwords? Very high.  In fact what you end up doing is writing them down (big no no to the IT types) or using one of these programs that keep them for you under a single password.  So the whole endeavor is wasted anyway.

No, I am convinced that the only reason I have to do this is because it is convenient for the IT folks to make me jump through hoops.  Why?  Well, just one whiny OSU professor (of the hundreds they serve) that has had his e-mail hacked into is a huge headache for them, and the probability of one in hundreds having problems is much higher then my individual probability.  On the other hand, they don't have to pay any of the cost of making all of us change our passwords all the time.  So in their desire to avoid some extra work, they quite gladly impose an external cost on all of us.  

Which of course calls for us to create rules that limit passwords ridiculousness.  Why don't these happen? Probably because the IT folks have us over a barrel.  We have no idea what they do and why, and could not possibly do it ourselves, so we are afraid of annoying them.  Imagine the pain and suffering they could cause.  

So change our dang passwords we do - curse you IT devils!

Note on Blog

Last week I received an e-mail from the Oregon Senate Democrats announcing their new web-site and asking if I would consider including it in the blogroll. I had a look, deemed it a useful resource, and have created a new set of links of Oregon Government Resources to which I will add a few of my regular sites. But this is an open invitation to other groups (e.g. Oregon Republicans) that would like for me to add them to the links. I am too busy/lazy to go searching for myself so I leave it up to you to make a request.

The Governors Make-Work Plan and the Minimum Wage

I have been asked by a couple of readers for my take on the governors plan to temporarily employ 12,000 people who are currently unemployed. The short answer is (Grinch that I am): I am not sure I get it. Presumably many/most of the people employed by this plan will be ones that are currently getting unemployment insurance and who have time to look for work, try and get training for new marketable skills, and can cut child care costs by taking care of their children themselves. When jobs become available the best matches for each opportunity will be hired and the job market will unravel itself efficiently.

What this system creates is a system of 'winners' who will get more than the unemployment insurance benefit, but who will have less time to look for permanent jobs, may have to get additional child care and will not be available for new, better matched opportunities; and 'losers' who will get the standard unemployment insurance (until it runs out).

Why should 12,000 of the 250,000 unemployed in Oregon get lucky? What about the rest? And is this the best way to spend unemployment insurance money? I think the answers are that the system should not be altered to create winners and losers and that it is not an efficient use of unemployment insurance money. In short, this smacks of a policy completely devised for political aims not one for economic progress.

With all that said, I am not insensitive to the plight of distressed Oregon families and I understand that those that would get these jobs would be made better off. But if you are going to spend extra money, why not spend it on education and retraining so that these workers can have better job prospects int he future? Or extend unemployment insurance for folks who find themselves in long-term jobless spells? Or even increase the average payment?

And by the way, we can't escape the elephant in the room: Oregon has a relatively high minimum wage. This also creates winners and losers. We can expect that, relative to having a lower minimum wage, fewer people will be employed in Oregon, but those that are will do better. Economic estimates in the past have shown very small effects on unemployment from minimum wages, but in such a distressed economy, there are probably many people willing to work for, say, $6 and perhaps many places that would employ them at that wage. So I imagine that in times such as these the minimum wage actually bites off many more jobs than in a 'normal' economy. Is is right to deny these struggling people the right to work at this wage? I mention this because too often I think we conveniently forget about the trade-offs, especially when times are good and these trade-offs are small or virtually non-existent. But times are bad, unemployment is rampant, and this plan and the minimum wage creates distortions that make the labor market less efficient and this will likely lead to more suffering

Oregon Unemployment: 12%

Big relief: Oregon's April unemployment is essentially unchanged at 12% (the March figure was revised to 11.9%). I had expected much worse - but this does not mean the end, it will still probably get worse before it gets better.

Notes: the number of people classified as unemployed fell by 10,000. This can, of course, come from people who find a job, stop looking for work or leave the state. Leisure and hospitality added jobs as the summer vacation season starts getting into gear. Overall the non-farm payroll numbers sunk by 9,500 jobs, but compared to recent months, this is a big improvement.

Update: Now that classes are over for the day, I can think a little bit more about these numbers:


The labor force continues to grow, but the unemployed population shrinks - however it is not non-farm payroll employment as that has shrunk. So our agricultural sector and the self-employed that are absorbing a bunch of workers is the essence of these numbers as they ramp up for the summer. This is one note of caution - without the idle capacity in the state becoming active, we ware not going to see any improvement for a while. And if the non-farm sectors continue to shed jobs, we will see increased unemployment in the near future.

Are Hipsters Driving Up Portland Unemployment?

Yes, says the Wall Street Journal. However, it is probably these folks (see graph below) that will drive the recovery and future growth of the region - so thanks young, educated and talented immigrants. If we can't create our own at least we can get them from elsewhere.



Of course, with unemployment in Oregon so high we may see a reversal of this trend soon.

The Verdict: $3.6 Billion

The state economist's official revenue forecast is in: $3.6 billion shortfall over the next two years. This is grim but not as grim as I expected. So I suppose that is some solace.