Thursday, November 27, 2008

Happy Thanksgiving

Somehow the holiday goes unnoticed in Brazil...go figure.   So what am I thankful for today?  In the heart of the Sao Paulo business district the is a small but delightful little park, Parque do Trianon (Tenente Siqueira Campos)‎‎, that reminds you that you are not in America or Europe.  A tiny bit of the jungle amongst a cavalcade of cars and people that is a peaceful spot for contemplation and rest.  And so I did.

Two Thanksgiving thoughts from an economist:

One, today is the day for time inconsistent preferences - you eat too much even though you know that later you'll regret it.  And more power too you!

Two, spare a thought though for those across the world with not enough to eat - close to 1 billion by some estimates or almost 1/6th of the world.  And it is not because the world does not have enough food.  I am not saying this to be a downer on this festive day: not eating in America will not fix things precisely because it is not a shortage of food, but largely a shortage of proper institutions, mechanisms and peace to distribute food to those in need.  The solutions are not easy, but we mustn't stop trying.

Happy thanksgiving everyone.  I shall celebrate with a Feijoada.

Wednesday, November 26, 2008

The Best iPhone App Ever

Google Mobile App.  Go get it.  You can thank me later.  Of course it is quite likely that I am the last to know about this and you all already have it.  Such is my life.

Oregon Home Prices: OFHEO Data

The OFHEO has come out with its latest house price data. Remember that these cover much more of the US than the 20 cities of the Case-Shiller report, but are based home sales only with conventional mortgages. Anyway, we can see the data for Oregon cities, Oregon and the USA.

Here (a bit messy) is the raw data since Q1 of 2004:

Here (even more messy) is the quarter to quarter % change in home values:

Here is the overall depreciation (so positive numbers are bad in the sense that they represent loss of value) since Q1 of 2007 when the market in Oregon really turned:

Overall, it is bad, especially for Bend and Medford which are seeing collapses of California proportions, but overall the state is not doing too badly in relative terms.

Here is a nice picture from their summary report that shows the national picture. Oregon is the 35th best state in terms of home value appreciation (or limited depreciation):

Tuesday, November 25, 2008

Now That's a Bridge!

You want to spend on infrastructure? How about this for a new interstate bridge in Portland?

Ponte Estaiada Octávio Frias, São Paulo - Brazil

Another Look at the Case-Shiller Numbers

Is Deferred Maintenance Spending a Good Idea?

Our Governor has proposed to President-Elect Obama that the federal government give us some dough to spend on deferred maintenance at our state universities.  Is this a good idea?

Well, if it means that outside construction contractors that are otherwise out of work would be employed to do a lot of it then it seems like a pretty good idea to me. Especially because right now with labor and machines being idle, we should be able to do the work at a pretty good price. If it is true that there is no advance planning that needs to be done ad that work could start tomorrow, then again, it seems like a god idea.  If it helps with the education of the state's college students, then its even better (it is not clear to me how much, but if science labs and such are a part of this then I can see some benefit). I am happy to volunteer my office to be the starting place.  

However, if the money is just transfered to universities who will use their already employed staff and divert other monies elsewhere, it is probably a bad idea.  Why, because then the multiplier effect of this spending will be severely muted and universities might benefit but not so much the Oregon economy.

Even better, I would like to see a discussion of the entire range of possible projects - university deferred maintenance, roads and bridges, scholarships, etc. -  the positive impacts of the projects themselves and the expected multiplier effect of the spending.  Let's make sure that if we spend money, we do it wisely.

Housing Market and Credit

The feds are still worried about the housing market (see post below for an idea of why).  So now they have another new plan to get credit going again, especially mortgages. Above is a chart of national average mortgages rates for 30 year fixed conventional mortgages.  This is the one credit market that has done fairly well all things considered (after the Fannie and Freddie bailout - oh, and don't blame Fannie and Freddie for the subprime crisis, the evidence clearly shows it was not they that caused the huge sub-prime glut) 6% historically is a great rate.  But clearly the feds think it needs to be even better to finally put a floor under the free-fall of the housing market.  

The bailout was in the beginning of September and you can see how mortgage rates responded sharply.  Then came Lehman Brothers bankruptcy in mid-september and the credit markets went nuts.  Mortgage markets have struggled since, but have mostly been pretty calm in November.  The bigger problem is that banks are unwilling to loan without a lot of collateral and fantastic credit, so the rate is only part of the story.

Anyway, the point of all this is that the plan today is supposed to try and staunch the bleeding in the housing market as exposed by Case-Shiller.  I wonder if it is a coincidence that they announced this today - the day of the C-S report?

Portland Housing Prices: New Case-Shiller Data

Here are the latest Case-Shiller home price data.  Portland is back to values last seen in February 2006, but is much better off than other cities.  All bets are off for the period ahead. In a normal slowdown I would not be worried, but this is not normal and I am very worried about everything.   

So, to give a little moderating perspective, here is the entire Portland Case-Shiller history:

So, what this shows is what we all know about real estate - it is almost always a good long term investment. We have had a bad year, but one year is but a blip in the grand scheme of things. It also suggests that we might be near the bottom based on long-term trends. But who really knows? Remember, however, that the near complete halt in new construction is providing a very strong supply response which helps prices recover. So though poor housing stars is bad news for jobs and growth, it is good news for the housing market (save for the fact that jobs and growth show up on the demand side as well).

Economist's Notebook: Helicopters

From my office at the Fundação Getulio Vargas in São Paulo, I look out on this view. Fortunately, I have a window that opens.  I am on the 13th floor and so I can hear the faint hum of the horrendous traffic below.  It soft and unintrusive.  What is intrusive is the noise of the multitude of helicopters flying all around (there is one on the top of the apartment building in the picture but a bit too small to see perhaps).  As FGV is right in the central business district, just off the Avenida Paulista, we are in seriously rich businessperson land.  And what do the super-rich do when the traffic in a city becomes too much?  Take to the air, of course!  As I flew into the small airport in the city you could see hundreds of helipads on the apartment buildings.  Its all about the marginal cost, marginal benefit calculation.  The marginal cost of helicopter travel is high and always has been, but the marginal benefit (avoiding hours stuck in traffic) is now very high as well.  So, yes, I can confirm that the legend is true - there are lots of helicopters flying around São Paulo.

Ironically, I was told that one of the most uncorrupt agencies here is not the police, who are corrupt but not too bad (unlike the ones in Rio who are pretty badly corrupt), but the traffic bureau who have a type of traffic cop who can issue tickets, etc. They are everywhere, making sure nothing happens to disrupt traffic.  Traffic is such a politically radioactive topic here, no politician can afford to have a corrupt and inefficient traffic bureau.  Again, its all about the incentives.  And they are efficient: an illegally parked car was causing a bit of a jam yesterday and so I saw the traffic bureau swoop in with a flatbed tow truck and remove it in seconds flat (with alarm screaming) they left a big sign on the curb that said "ILLEGALLY PARKED CAR HAS BEEN REMOVED." No ticket, no warning - boom - car gone.  

Note to self: never rent a car in São Paulo.

Monday, November 24, 2008

Economist's Notebook: From the Southern Hemisphere

Greetings from Sao Paulo. Two interesting snippets from yesterdays O Estado do Sao Paulo (one of the Sao Paulo daily newspapers).

First this for my students of international economics and money and banking:

Luckily for me, the US Dollar has appreciated against the Real considerably - making my stay here much cheaper. Each of my dollars buys more stuff here than it did a few months ago. For example the 50 Reais meal I had yesterday would have cost me $31 at the beginning of September and now costs me about $21. Here is the Dollar-Real exchange rate history for the last three months:

This appreciation of the Dollar is bad for US exporters to Brazil, because now the same goods are more expensive to a Brazilian. It should be good for Brazilian exporters for the opposite reason. But much of Brazil's trade is in primary products (65% of the total value of Brazil's exports according to the article below) and while the Real has been depreciating, the worldwide economic crisis has caused commodities prices to plummet. So Brazil is hurting, here is the banner headline from the Sunday paper:

Crise em países ricos e queda de preços abalam exportação
Valor de matérias-primas, que lideram venda externa, caiu 42% desde julho

By the way, currency depreciations for developing countries are usually bad news if they have dollar denominated debt (which many do), but defending currencies is usually an expensive and risky game.  This, however, is a topic for another time.  

A couple of side notes. I was amused that the newspaper headline called the economic crisis a "crisis in rich countries," this is true, the banking crisis did originate in the US and Western Europe, but, as is noted by this article, the crisis will affect everyone. It is also amusing that they would use the term rich countries as we are so careful to use euphemisms like "developing countries" instead of "poor countries."

Second, as a soccer fan I was very interested to see an article on the latest hot youth bands in Sao Paulo include pictures of two very hip new and hot bands wherein one member of each band was wearing a soccer jersey from the US's Major League Soccer. For those that wonder what non-pecuniary benefits an MLS team might have for Portland, here it is - worldwide exposure. And, by the way, this is why I think MLS is a good long term investment for the Mssrs. Paulson - entering into a global sports marketplace in a way that even the NBA does not have a prayer to match has got to be a good bet.

Friday, November 21, 2008

What's So Bad About Deflation?

Economists are starting to freak out about the possibility of price deflation. The October CPI showed a 1% drop in price level from the previous month. This, in itself, is no big deal and might give consumers a little confidence to spend a bit more, but it can become problematic if it persists and starts seeping into expectations. What we are worried about now is exactly this - expected deflation. But why is this a problem?

When businesses expect prices to be lower in the future, they pull back on investment and output and this leads to lowering employment and (where possible) wages. This will, of course, decrease demand which will put further downward pressure on prices. This becomes a downward spiral and the very scary part is that it is not clear how to make it stop. Generally, to manage inflation the Fed changes its target federal funds rate and if it wants to spark inflation they lower the federal funds rate. But right now the Fed is not really able to do this. Though the target rate is at 1% the demand for treasuries is so high that the effective rate on T-bills is already close to zero. In essence, what the Fed wants is for people to take dollars and use them and is offering a very low price of borrowing, but right now people are so freaked out that they don't want to borrow at any price, in fact they are close to PAYING the US government to keep their dollars safe. Yikes.

There is another aspect of deflation that fuels the spiral: loans (like mortgages) are generally in nominal terms so deflation actually increases the real interest rates on outstanding debt. In other words you give up more consumption of everything else. This leads to lower consumption as well.

So what level of inflation is good? Well, most central bankers like the 1 to 2 percent range.

Thursday, November 20, 2008

Economist's Notebook: Risk

Nobel winner Michael Spence gave a talk on the current crisis that inspired this rumination on risk.

Risk in the case of the meltdown of the balance sheets of the world’s most important financial institutions is quite different than the type of risk that financial institutions and insurance agencies were used to dealing with. What characterizes what we might term “normal risk” are three things: it is exogenous, stationary and uncorrelated. What this means is that risk is not affected by the actions of the participants in the market, that the risk is not changing through time and that the risks are not correlated with each other. House insurance is like this. Consider an insurance market for hurricane risk in the Gulf of Mexico. The risk of Hurricanes is not affected my the actions of participants (though the risk of loss is due to moral hazard – those with insurance are less likely to do things to prevent damage when there is severe weather –but this is fairly straightforward to deal with), global warming aside, the risk of a hurricane is fairly stationary meaning it is not changing through time very much, and risks are uncorrelated (a hurricane in Florida does not make a different hurricane in Texas more likely) thus the market works through diversification (no company should concentrate on only one location like, e.g., Homestead Country in south Florida).

The risks involved in securitizing assets and insuring them had none of these aspects. They were endogenous – the behavior of participants in the market significantly altered the risk profile of the assets, from underwriters to credit rating agencies to the institutions themselves. They were non-stationary – the risks were getting worse and worse through time (and quite rapidly). And they were correlated – more risky MBSs made for more risky CDOs and on and on. Thus these institutions were faced with new and non-standard risks that one could argue they were simply not able to deal with. But I think the true answer was that there was such strong short-term pressure to be willfully ignorant that this is what they remained. The profits made on these new securities were so large that to not take part in the market or to pull back at or near the peak would have been very difficult (especially for publicly held companies). This risk was also poorly understood by credit rating agencies and regulators - even when some in the industry raised the alarm, they were largely ignored. Understanding this mew type of risk is key to understanding the way forward.

Even in Brazil: Bad Economist Humor

Befitting the dominant theme of the conference.

Overheard and translated from the spanish - two  Argentinean economists encounter the line for the mens room:

"Oh! It's a traffic jam..."

"Yes, it is a liquidity crisis..."


Wednesday, November 19, 2008

Worlds Old and New

A little travel weary but in Rio (here is a photo from my hotel on Ipanema beach, but of course I got a room through the conference - and conference rooms are always the cheap ones so I get a view in the opposite direction - no matter, Rio is beautiful wherever you look). One thing that strikes me is how easy it is to speak of third world or developing or low-income countries (to follow the lexicon through its progression over the last few decades) as all one group. And there are many similarities: poverty, infant mortality, inequality, low education, etc. But it strikes me at once upon arrival in Brazil how different are the countries of Latin America to those of South Asia where I also have a lot of travel experience, especially in India, and it sheds a little light (as travel always does for me) about my own country.

India's ancient civilization seems to me to be ever-present there, at once a source of strength and a source of inertia.  Old social rigidities like caste and color cast shadow over everything, and while clearly an entrepreneurial spirit has awoken in the sub-continent one wonders just what it would be like without the burdens of history.  Maybe like Brazil.  Brazil strikes me as new-world through and through.  As a west-coaster who shudders at the thought of the east-coast structured society of his Boston Brahmin clan, I am drawn more to Brazil than any other country I have visited.  Free, liberal society has perhaps contributed to the immense inequality, but also perhaps creates an entrepreneurial spirit here that will help drive its economy in the 21st Century.  

I think an analogy can be made of the US and Europe in this regard, but these differences are starting to be eroded by the market-based reforms that have happened in Europe.  Combine that with a higher education system that is quickly catching up to ours and, who knows, maybe European economic growth will hit high gear in the next few decades.

Of course, maybe I am just jet lagged. 

Oregon's $950 Million Hole

While I am off in Brazil, back home the Oregon economy is in free-fall. See what happens when I leave?

Seriously, things were okay as long as there was strong demand for our exports, but when global demand did a 180 I knew we were in for it.  2009 is going to be a year to forget, but we must not mortgage our future again like has been done in the past. Education (as I have been harping on incessantly) is absolutely essential to protect.  Especially, but not only, K-12.  

I hope a federal fiscal stimulus package includes huge transfers for states, because this is where the negative feedback loops are going to occur.  States are hurting so, as they are constrained by budgetary rules to engage in deficit spending, they cut spending and raise taxes causing it all to get much, much worse.

Tuesday, November 18, 2008

On the Road: Brazil

I am off to Brazil for a conference in Rio where I am presenting some research and from there I am off to do research in Sao Paulo.  I will be in Brazil for most of two weeks (missing my favorite but uniquely American holiday).  Though this is the OREGON Economics Blog, one of the current themes running around my head these days is how much are fortunes are all intertwined, so posting about Brazil, development, etc., I think is fair game.  Besides, it's my blog, I make the rules.  So, I'll report next time from Ipanema beach in Rio.


Should Detroit Declare Bankruptcy?

I own a GM car.  It is a 21st Century beast however, built in Sweden on a platform that is shared by Chevrolet, Saturn, Opel and others.  It is a good car, I have no complaints, well designed, fairly well built (though a far cry from the quality that Japanese car manufacturer's produce) and wonderfully fuel efficient yet with plenty of zip thanks to a smallish four cylinder engine that is turbocharged.  In short, it should be a pretty darn good car for toady's marketplace.  But sales of my car in the US have been abysmal.  And herein lies the problem with GM in my view.  Too many brands, too many dealers, too many cars - all leading to not enough focus on a core set of cars and research supporting new innovation.  

It is tempting to blame the relics of the strong labor movement for GMs downfall, as I have seen done many times in the last few days in the press, but closer scrutiny reveals that this is more a function of the past labor contracts and not the current labor contracts that are pretty much in-line with those of foreign manufacturers that are doing business in the US (though the effect of these contracts is still lagged). So don't blame labor for this mess.  GM's web site lists 13 brands!?!  Apparently they have over 7000 dealers to Toyotas 1000, this is just too many irons in the fire, no wonder they have not been able to remain dynamic and competitive.

Many observers are saying that Detroit's problems are of its own making and the cure is Chapter 11 bankruptcy.  This would allow them to renegotiate union contracts, get out of pension obligations (at great expense to the US taxpayer presumably), and renegotiate with creditors.   I was of this opinion at first blush.  The problem with this solution is that the traditional device of this type of bankruptcy is the ability (under chapter 11 protection) to secure commercial credit, and this type of credit is not now available - meaning that chapter 11 would quickly turn into chapter 7 and the liquidation would begin.  Perhaps this is all for the best, but in a time when the economy is in a deep, deep nosedive and shedding jobs like crazy the hit that this would deliver may just be a knock-out blow.    I am fairly well persuaded by this line of thought.

But maybe there is a middle way.  Perhaps a government bailout of GM, for example, could be a part of a chapter 11 filing, in the form of a credit guarantee.  Or perhaps some of the provisions of chapter 11 could be imposed on a bailout (insisting on a renegotiation of labor contracts and pensions, for example).  Why must it be a $25 billion hand out or a potentially disastrous chapter 11?  Let's provide them the opportunity to shed dealers, discontinue brands (which is hard with outstanding dealer contracts) and refocus on a core set of products.  

I believe preventing the collapse of Detroit is vital to our efforts to dampen the blow of the economic crisis right now, but lets do it in a way that leaves Detroit dynamic and competitive when it is all over.

Monday, November 17, 2008

Friday, November 14, 2008

The Law of Unintended Consequences

Property tax limitation referenda have been appealing to Oregonians who have passed them in the past.  Most notable of these were Sizemore's Measure 47 and the subsequent Measure 50 which decoupled property taxes with current market values.  Seemed like a great idea at the time, especially when values boomed, but now that values are crashing, it doesn't seem like such a great thing to those in places like Deschutes County which have seen deep declines in the market value of their property.  

What is interesting about this measure is that it is turning out to be a bit of a nice counter-cyclical revenue mechanism in this time of deep downturn.  So though it was never meant to provide such counter-cyclical, pro-revenue protection from a deep recession, it is. 

Which, of course, still doesn't mean it is good policy.  Mechanisms that tie the hands of government reduce government's ability to provide flexible and creative policy solutions during the ups and downs of the economy.  It all suggests that our referendum system needs to be reformed to preserved good governance in Oregon.

Beeronomics: Whither Green Dragon?

There has been a TON of traffic in the beer-o-sphere about the Rogue takeover of The Green Dragon.  Angelo did break the story correctly - kudos Angelo - with some minor arguments in points-of-fact between he and the Rogue folks.  But lament what is to become of the GD if you will, but the economic reality is that the GD is not financially viable as it currently stands.   With the worsening economy, this situation will only get worse.  The Green Dragon, without an outside investor, is going to die.

So an open question: why are we not hailing Rogue as a savior of a beloved pub rather than a destroyer?  Rogue has the resources and brand to turn this into a viable enterprise.  I lament any loss of independent pubs, but we must be honest with ourselves and admit that there are substantial economies when a brewery runs such a place versus an independent businessperson.  The economic realities for pubs right now are not good - and I, for one, have been expecting closures for some time now (and I don't think this will be the last).

Perhaps it is true that many of us feel that Rogue needs to get a little bit better at running its pubs, but as an economist I have to concede that the market has spoken and it loves what Rogue does.   

Rogue is also one of the least corporate of the breweries (you ever notice how much advertising Rogue does relative to the rest? - basically none) and I suspect that the reason they may not have as many independent taps at the GD after the takeover as it does now has more to do with the incredible array of beers they themselves offer than any anti-competitive motive.  

So lament the passing of the independent Green Dragon, but don't turn Rogue into a villain. Rogue is perhaps THE most Oregonian of breweries: willfully independent in spirit and business, unafraid of risk and creative to a fault.  Only a CEO out of his or her mind would approve the number and variety of brews Rogue produces.  I love some of them, detest a few and find others mediocre, but I love the brewery and what it represents.  

Thursday, November 13, 2008

Beeronomics: Omens?

Over at the Brewpublic blog comes this shocker: The Green Dragon is going to be taken over by Rogue. Are we seeing the first evidence of the economic downturn hitting the Portland pub scene? Are we seeing the effects of the hops shortage (did the GD ever start brewing its own)? Or are we seeing evidence that the pub scene in Portland is over-saturated? Hmmm...I am not sure if this is an omen of the rough times ahead or just a one-off. Thoughts?

Brewpublic seems to really hate Rogue [update: Angelo of Brewpublic objects to this characterization and I agree, he really hates the idea of loosing the Green Dragon and the potential of its staff loosing their jobs, but hating Rogue is not accurate - my apologies], and while I agree that my experience in their pubs has been one of extraordinarily expensive food and indifferent service, I remain a big fan of the company and (much of) the beer. I don't like this though - I lament any decline in independent tap rooms in Portland. In my neighborhood the Oaks Bottom Public House was bought by the Lompoc folks to the great detriment of the pub. Fortunately there is still the Muddy Rudder. And Portland still has Bailey's Taproom (please serve food!), Henry's, Concordia, Belmont Station and others.

Ah well, at least you don't have to walk far from the Green Dragon to Roots, where they have finished a remodel and now serve lunch! Hey, that reminds me, I'm gettin' a little peckish myself...

Payday Loans in Oregon: An Update

I received an e-mail from a group called the Consumer Credit Research Foundation. This is a non-profit group, funded by payday lenders, that sponsors research on credit markets. They were touting a new study by Jonathan Zinman of Dartmouth College that looks that the effect of the restriction on payday loans in Oregon.

I have posted before with a typical economist's take on the issue: I believe that restricting access to credit (expensive or not) is misguided. If there is a problem with access to credit then do things to enhance access not cut it off. The idea that you are 'helping' people avoid their own bad decisions is government regulation at it worse. What you are really doing, in my view, is punishing the already economically stressed by giving them less flexibility to weather economic turmoil.

So I was really excited that we may have good evidence that these assumptions are correct. Zinman is a young economist with an already stellar research record - he is no hack. Unfortunately Zinman's paper does not provide what I had hoped for. It is not a bad paper, there is no academically dishonest statements, but there are a number of vague and misleading statements that appear to be clearly designed to give the impression to a lay audience that positive evidence is found when it is not.

The study compares pre- and post-restriction surveys in Oregon and Washington of payday loan users. Oregon imposed restrictions while Washington did not. The similarities among the states suggest that these two populations are reasonable for use as treatment and control groups. He finds that payday lending went down significantly in Oregon compared to Washington, which is not a big surprise. Then he finds that former payday loan users shifted:

partially into plausibly inferior substitutes. Additional evidence suggests that restricting access caused deterioration in the overall financial condition of the Oregon households. The results suggest that restricting access to expensive credit harms consumers on average.

First notice the academic-speak: "plausibly inferior," "evidence suggests," "results suggest." Why does he use these terms? Because none of his statistical tests of these effects turn out to be significant. I am quite ready personally to believe that these suggestive results are actually revealing an underlying fact because I believe theoretically that this is likely the case, but it does nobody any good to read ones prior assumptions into a set of results that are not statistically significant - and not just statistically insignificant but with tiny point estimates that are not plausibly different from zero.

Overall there are four serious problems with this study:

1. The data are a set of surveys conducted by the payday loan funded non-profit. This naturally leads to questions about explicit or implicit bias. The questionnaire is not reproduced in the paper and it should be.

2. Respondents to such a survey (especially the ones now excluded from the payday loan market) are likely to be predisposed to suggest that it has adverse effects on their financial situation. Thus the results would be biased toward findings that suggest restrictions lead to financial hardship.

3. The author finds, it turns out, that Oregon and Washington payday borrowers are not good treatment and control groups - the people that utilize payday loans in the two states turn out to be quite different. Efforts to control for these differences are unconvincing, which leads to biased results. [Note, however, that it is not clear in which way the bias would work and may in fact be a cause of the insignificant point estimates]

4. All statements about the adverse consequences of the decline in payday loans in Oregon are not supported by the evidence - they are suppositional.

I believe that restricting access to payday loans is bad policy, but I am still looking for good objective evidence to bolster my theoretical argument. This is a provocative start, but in my view, falls well short.

Wednesday, November 12, 2008

Goodbye TARP

Today, Secretary of the Treasury Hank Paulson announced that they are scrapping the plan to buy troubled assets from banks. It appears that they started to realized three things. One, the ability to come up with a true value for the assets was going to be very hard and take a long time (and speed is of the essence). Two, the amount of leverage used to buy these assets meant that the affect on banks balance sheets was going to be minimal. Three, these banks have not been using the government money they have received so far and instead have been hoarding it - this would likely be even worse if they bought the assets. Other problems included the incentive for banks to only sell their worst assets, the problem of a huge and costly program needed to resell the assets and the continued deterioration of the housing market on which these assets are based.

[By the way, to give credit where it is due, I was on OPB with Earl Blumenauer right after the TARP was first announced and his opposition to it was partly based on the amount of time it would take to do it. Off air, I disagreed arguing that the announcement itself would be enough to restore enough confidence to get markets unstuck. He was right, I was wrong. I have been consistently too optimistic about the crisis until recently...and now I am just depressed.]

Injecting cash into banks directly through the purchase of preferred stock is a better solution for all three problems - but there needs to be more than persuasion used to get banks to not sit on the money they get, something the government realizes and is trying to address. It is also a very good idea to exert more effort to stem the erosion of the housing market which is both at the heart of the crisis and where most less-affluent Americans are having serious trouble as well as shore up consumer credit where things like the drying up of funds for student loans is both immediately troublesome but also exceedingly worrisome for the future if students are being prevented from getting a college degree.

Tuesday, November 11, 2008

Fiscal Stimulus: Smart and Dumb

With all due respect to Governor Kulongoski, (and the Oregonian's Editorial Board) while fiscal stimulus in the form of government spending on public works projects is probably a good idea in this time of deep economic malaise, you can do it in a smart way or in a dumb way and, well, let's just say that his plan does not make a lot of sense.

Before I get too negative, I will admit that it is partly not is fault. State fiscal rules that insist on balanced budgets leave no room for real counter-cyclical policy. [The legislature did a tremendous favor for Oregonians in establishing the rainy-day fund, which allows for exactly this kind of counter cyclical fiscal policy but the ability to run a deficit would be much better] He is also a skilled politician and knows more about the reality of policy implementation than I. That said, just where in "fiscal stimulus 101" does it make sense to tax in one part of the economy and spend in the other? Taking money out of consumers hands in one area and putting it into another set of hands does not necessarily boost the economy. I suppose that there is a marginal propensity to spend argument: that the extra money collected from car registrations, for example will lead to a lower negative impact on consumer spending than the positive impact on spending that will come from employing construction workers who will likely spend it all. But I don't buy it. Think of the raw material purchases, equipment rentals, etc., that coincide with road and bridge projects. This is money that is going to businesses that may not lead to any extra spending than would leaving it with car owners. As a make-work project, it may help employ a particular population, but I am skeptical that overall employment will be much affected.

My other problem with his plan is the focus on road infrastructure. Again, this may be politically expedient as a job creation mechanism, but it is not terribly inspired. Investing in infrastructure to support automobiles is just plain short-sighted and will hamper our efforts to become more energy independent. Energy independence is perhaps the one thing Americans can agree on (if not how to go about achieving it): it is the trifecta of being critical to our economy, our environment and our national security - in other words to our future. Equally important to our future is a population of well educated and skilled workers. So why can't we invest in mass transit projects, renewable energy projects and education? It is true that new mass transit projects (as an example) take a long time to plan and get going, so this might not be appropriate for an immediate boost from fiscal policy, but renewable energy projects can be done quickly. So can things like tackling deferred maintenance in schools, more school programs and a longer school year, projects at public universities and tuition grants to those wanting to attend college. The common link to all of this is the eye on the future. Fixing essential transport links is fine and necessary but building bigger and more roads just creates an incentive to drive more in cars. [As a contrast, Portland Mayor-elect, Sam Adam's plan seems to be a lot better in its focus on the future - though he has a head start in mass transit projects that are already planned]

Here is an idea: how about a new tuition credit for college? This would get a lot of potentially unemployed young Oregonians in school, which would not only reduce unemployment (they would not be looking for jobs) but be an investment in their future productivity which will benefit all Oregonians long into the future.

Here it is in a nutshell. Fiscal stimulus 101 calls for deficit spending in the time of recession to add new money into the economy, not for shifting money around through taxes and transfers. Without the ability to do deficit spending, any tax and transfer policy should emphasize investment that will pay off in the future, not just the employment of same at the expense of others. It is pretty clear what the high priorities for investment are in the 21st Century: education and energy independence. If we are going to fight this recession, lets do it in a smart way.

Note: it turns out that persons more eminent than I are pretty smart as well.

Monday, November 10, 2008

Econ 101: Inferior Goods

Inferior goods are those good for which demand rises when incomes fall. It looks like McDonald's is lovin' the economic crash. Evidence that McDonald's meals are inferior goods.

Full service restaurant meals, on the other hand, are normal goods (and sometimes luxury - those whose demand rises faster than rises in income).

Makes me start to worry about what is going to happen to Portland's thriving restaurant scene...

By the way, a person in the business suggested to me that in an economic downturn bottled beer sales may go up while pints of beer served in pubs and brewpubs might see a significant decrease in sales. It will be interesting to see if bottled beers are inferior and fresh pub-served pints normal.

A New World Order?

It is hard not to see the astonishing success of the Democratic Party in Tuesday’s election, at a time when the world is reeling from a massive and sudden economic downturn, as a watershed moment in an economic revolution that started some thirty years ago. Though voters have many motives and it would be wrong to ascribe all of the democratic success to the failing economy, clearly there is a strong sense of dissatisfaction with the failures of unregulated credit markets and unfettered markets in general. After years of success in which people saw the type of efficiency and growth free markets can bring, it is now becoming clearer that there are limits to the extent to which markets can answer all of society’s problems. It is quite possible, then, that we are about to enter a new era – an era in which the government takes a more active and interventionist role in the design and functioning of markets.

The world underwent a transformation of similar magnitude in the eighties after the economic malaise of the late seventies left citizens of the United States and Western Europe feeling that the weight of heavy government intervention in the economy was largely to blame. The seventies were characterized by heavy regulation in the United States and Europe and government ownership or control of major industries in many European and developing countries. The eighties saw a remarkable shift toward free markets and private ownership, not just in practice, but in public sentiment. And the market delivered. By the nineties, the freeing of markets, restraining of regulation and emphasizing private ownership became a pathway to heretofore unheard of level of growth and prosperity in the world. Many developing nations, most notably China and India, pursued these market based polices and saw astonishing growth. After decades of very little progress in the developing world, economists finally saw real results from market-based reforms. The so-called neo-liberal (in the economic sense) revolution had taken hold and its spread across the globe was akin to wildfire. The debate appeared to be over: free-market based capitalism was the superior form of economic organization. And in this new era of intertwined neo-liberal economies, we may have not always liked the consequences, but we became accustomed to live in a world of globalization.

To economists, that providing more freedom to markets, emphasizing private ownership and opening up to world trade should create efficiencies and growth was not surprising. One of the first lessons a student of economics learns is the efficiency of free and complete markets. But economists should not be surprised at the failures of markets. Failure to self-regulate, to provide equitable distribution of the proceeds of growth, and to provide public goods and deal with the challenges of global climate change are limitations of markets are well known in economics (though underemphasized in most curricula).

At this moment of renewed distrust in markets, we should not be too quick to dismiss the enormous progress humanity has made in the last decades of neo-liberal reforms. Millions of people have escaped abject poverty thanks to the growth experience of the developing world under such policies. The United States, for almost two decades, experienced unprecedented growth and prosperity – low unemployment, and low inflation, once though to be in fundamental conflict, have become the norm. But we should also not be naïve and believe that the current economic crisis is an aberration. The inability of markets to achieve efficient outcomes in the face of uncertainty, incomplete information and externalities is not a surprise, nor is the inability of markets to ensure equity.

What is called for at this moment and time is a careful re-evaluation of our markets and our polices, not based on either faith in, or fundamental distrust of, markets - but on economics. Despite the public perception, modern economics has made enormous strides in understanding the functioning of markets, and this understanding can guide us through a period of careful adjustments to the way that we create and regulate markets. To withdraw inside a protectionist and regulatory shell is not a viable way forward. Neo-liberalism is not dead, but is in need of a serious tune-up. Governments need to harness the power of markets to address the challenges of growing inequality, climate change and social upheaval. Economic growth is not the problem, but the only serious solution to the global challenges of poverty, inequality and climate change. We do not need to return to the seventies, but to move forward to a new era of market-led, but government directed economic growth.

Friday, November 7, 2008

Free Fall

The Bureau of Labor Statistics released its latest jobs report and the news is grim, grim , grim. Above is the unemployment rate over the last ten years for the US. I believe that we will get to and quite possibly surpass 8% before this crisis is done with. I wouldn't be surprised if we approached 10%. The US has lost over 500,000 jobs in the last two months. Keep in mind we need to add upwards of 100,000 jobs a month to keep up with population growth. Unemployment is especially bad among Hispanic and Black populations and average weekly wages have plummeted as well - so those that work are doing so for less. There is a spike in the number of underemployed - part time workers looking for full-time work - and job losses in manufacturing are especially large and troubling (manufacturing jobs tend to be a bit slow to recover).

I think two things are called for and quickly: fiscal stimulus in the form of increased unemployment insurance and a transfer of federal funds to states for investments in infrastructure and other such projects. We have to let go of our conventional thoughts about how best to manage an economy and immediately come to terms with the fact that we are in full-blown crisis and every day that we delay we risk risk extending the crisis by months. Also troubling are the potential effects on the more serious long-term challenges that face the world: climate change. Willingness to address these problems will wane in the face of economic hardship across the world. This is why yesterday I argued for an alignment of the spending on infrastructure and on things that will improve our energy consumption: in other words invest in mass transit, not roads. Many economists, myself included, have been quite astonished at how quickly this deterioration in the economy has happened. For my part, I have generally more focused on long term challenges like education and the environment and less focused in short term challenges. But everyone now understands how serious a situation we are in and we simply must act immediately, failure to do so threatens sending us in to a real depression.

Thursday, November 6, 2008

Now What?

Now that the Obama and Merkley have won, the reality of the enormous challenge of the current economic catastrophe is sobering. With respect to John McCain, the fundamentals of the economy are not strong and Oregon, along withthe rest of the country, is facing the real prospect of a deep and long resession that will bring with it large scale unemployment and crashing state revenues. [And by the way, to reference an earlier debate on tax structure, consumer spending declines and job losses are happening concurrently, so it is not clear that sales taxes would help that much] We are well along in the process of economic meltdown, and pretty far along in attacking the issue at the forefront of the problem: the credit crisis.  Progress has been slow, but it is happening: the LIBOR is down, the TED Spread is down, the A2P2 spread is down (a measure of the health of the commercial paper market), but Treasuries are still too low (indicating a lingering flight to safety urge).  However, there are still a lot of serious problems with the financial health of major banks and corporations, and consumer confidence has completely fallen off a cliff.

So what is the federal government to do?  A number of prominent economists are now urging ramping up fiscal spending on domestic projects (think WPA and CCC).   Some suggest that this should be done through transefers to states for infrastructure projects to help stabilize state budgets.  The basic idea behind such spending (besides the direct benefit of helping out unemployed families and the like) is that by getting money into the hands of consumers you provide a boost to spending, allowing revenues to flow to firms who can invest and create new jobs, etc. Essentially it is to stop the downward spiral we are currently in of a contraction in spending, thus a contraction in jobs, thus a further contraction in spending in spending...

I think that the idea is essentially correct, though I am cautious about the scale of such an enterprise. But I think it can also be done with the goal of improving the future economy in mind. Investments in renewable energy projects, mass transit, education - especially through support for university tuition - could yield not only a quicker and more robust recovery, but could also create an asset that yields dividends long into the future.

I think it is also necessary to resist the appeals to populism that could negatively impact future growth in Oregon and in the US. Jeff Merkley's increasingly populist protectionist rhetoric makes me worried that democrats will use their newfound power to reverse some of the progress we have made. We need more intelligent trade policy for sure, but we do not need less trade.

This will be a trying couple of years for the democrats as they try to steer the US out of the economic doldrums, they can do so two ways - they can use this period of adjustment to make fundamental changes in the economy that will ensure a brighter future, or they can return to the failed policies of the past that will leave us more isolated and further behind. Let's hope they get it right.

Monday, November 3, 2008


As an economist, I can't offer you much of a rationale to vote in terms of your marginal impact; but as a citizen, the utility I get from voting comes from the responsibility I feel about participating in our democracy. A true democracy represents the interests of all citizens, not just the mobilized fringes. So, though Oregon has a mail-in ballot system, it is not too late to vote: you can drop-off your ballot by 8pm Tuesday night. Here is a list of drop-off locations throughout Oregon.