Success Breeds Failure

Robert Samuelson finds a parallel between the BP disaster and the financial crisis: Our very success over a long period of time led to carelessness and complacency, which led to disaster. Every silver lining has its cloud!

One of the problems with human beings having the power to change the earth is that we really aren't very good, by and large, at calculating probabilities and acting appropriately. There seem to be built-in biases toward optimism or pessimism which have very little to do with any objective measure of risk. This is, in large part, why the mass of investors buy at the top of the market and sell at the bottom. They aren't ready to change their behavior until there has been a long trend in one direction, which is actually an indication that the forces driving the trend are nearing exhaustion.

Another problem lies in the phrase "a long period of time." Humans don't do well at evaluating processes with time dimensions outside the human lifetime. One of the underlying drivers in the global warming debate is our inability to deal with time. On the one hand, I think we have too little data, over too short a time period, to be as certain as some people are of the consequences for the climate. Climate operates in cycles of hundreds of thousands of years. On the other hand, some people give far too much weight to a record cold day in their town as indicating that global warming isn't happening. There is a lot of randomness in the weather system.

This is sometimes called, I believe, the local fallacy. That is, people give far too much weight to proximate events, occurrences close to them in time or space, and far too little weight to more distant phenomena.

Ignatius on European Finances

Daniel Gross laid out some of the opportunities and pitfalls for the U.S. in the European debt crisis. (See my previous post.) David Ignatius writes about the roots of the panic, and the key statement may be this: "Investors keep pounding Europe in part because they don't yet see the mechanisms that will enforce discipline."

Ignatius asserts, with the backing of Italian President Napolitano, that much of the problem is that Europe has a single currency, the Euro, in use by 16 countries with independent fiscal policies. The need to enforce consistent policies to support the Euro and make the market-wide economy work confronts the nationalist feelings of the people.

We saw this in the Greek riots, in the signs condemning the IMF and the EU. Well, Greece joined the Euro because they Greeks thought they'd get the advantages of a strong, well-managed currency, without having to change their lax fiscal policies. Now they get the pain of fiscal discipline, and the currency in question is hitting new lows against the dollar. Such is life!

The Silver Lining in the Greek Cloud

There is an old, old saying: "Every cloud has a silver lining."

Years ago I came up with my own variation, "Every silver lining has a cloud."

Daniel Gross is looking at the silver linings in the Greek debt crisis, and then at the clouds behind those silver linings. Because of the European reaction to the Greek (and Portuguese, and Spanish) debt problems, the price of oil is down. This could be why we did not see the usual Memorial Day hike in gasoline prices, at least, not here in Colorado. So that's good for the U.S. economy.

But a lot of our recovery has been based on exports, and a weakening Euro means that U.S. goods are more expensive in Europe. More Italian wine may be imported, and less California wine exported, than might have been the case without the Euro's recent problems.

Cloud, silver lining, cloud, silver lining - out of all this alternation and uncertainty, some sort of balance has to arise.

The Greek Riots and the Markets

Daniel Gross provided a quick reaction to the response of the financial markets to the deadly riots in Greece. What I don't get is the extent to which the markets were apparently surprised by the reaction of the pampered Greek people to the idea that they were going to have to adjust to a new reality. Greece had a system under which people could retire on full pay at age 53, there were lots of cushy government jobs (the technical term is "sinecures"), and tax laws were only loosely enforced. Now the government is cutting jobs and subsidies, promising to enforce the tax laws, moving out retirement ages, and cutting pensions.

Say you're a 45-year-old Greek looking forward to retiring on full pay in only eight years. Now they tell you that you can't retire for several more years, and when you do retire you're not going to take home as much, and the government is going to take more out of your pay in taxes than they have in the past. This is supposed to be make you happy?

You Can't Get from Here to There Via a Tea Party

As I said over on my Facebook profile, I mostly post articles by smart people, that is, by people who agree with me. This column by Douglas Schoen and Pat Caddell is an exception. I think there are a lot of things wrong with Schoen and Caddell's argument, but I'd really like to pick on one paragraph. I think the following indicates both their cynicism and their wrong-headedness.

"[Democrats] must adopt an agenda aimed at reducing the debt, with an emphasis on tax cuts, while implementing carefully crafted initiatives to stimulate and encourage job creation."

In other words, pander to the Tea Partiers by telling them the same lies that the Republicans are trying to sell. Let me repeat this so you'll know it is true:

You cannot reduce the deficit by lowering taxes.

You cannot reduce the deficit by lowering taxes.

You cannot reduce the deficit by lowering taxes.

The mechanics here are pretty clear: The additional economic activity stimulated by a tax cut may generate additonal tax revenue, but it won't generate enough revenue to make up the losses caused by the tax cut itself.

So what about the Laffer Curve? What about supply-side economics? What about the Kennedy tax cuts?

It has become a shibboleth on the right that cutting taxes raises revenue because of the increased economic activity. But this isn't true at all times and in all places. The law of diminishing returns applies to tax cuts, as well as to a lot of other human activities. When the marginal top rate of Federal income tax was 90%, as it was in the Roosevelt and Truman administrations, cutting taxes released a lot of activity and it diminished the amount of tax evasion that had been going on. Cutting taxes from 90% to 71% made it less profitable to hide income, and it provide people with money that they were eager to spend. The postwar boom didn't ride on tax cuts alone, though. During the war demand had been suppressed by forced savings - all those war bond drives with Deanna Durbin and Betty Grable stored up a lot of money, and by rationing. After the war all that stored-up money was turned into cash and used to by newly-available houses, automobiles, and business opportunities.

Similarly, the Kennedy tax cut of 1962, when the top marginal rate dropped from 71% to around 52%, reinforced, but did not cause, a boom that was really led by the German economic miracle, and the recovery of the other countries devastated by World War II. This recovery would eventually turn around and bite the U.S., but in the early 60's we were busy selling stuff to satisfy the recovering demand around the world. And, again, lowering tax rates tends to diminish tax evasion and fraud. Moreover, the Kennedy tax cut was overridden by the stimulus package of the 1960s - Vietnam plus Great Society equaled overheated economy and booming inflation, which made it looks as if tax revenues rose enough to make up for the cuts.

We could go through a lot of economic history, some of it quite contentious. Here's the truth, the whole truth, and nothing but the truth. Taxes are low enough now that we can't hope to release a store of pent-up demand and hidden income by lowering them a little more. Instead of a pile of forced savings on hand, people and companies are serious in debt. The demand isn't there to be released by lower taxes. So cutting taxes will simply reduce government revenue and increase the size of the deficit. Thus endeth the lesson.

(By the way, in the interest of full disclosure, Pat Caddell, who was President Clinton's favorite pollster, was a consultant to the TV show The West Wing. Helen and I watched every episode of The West Wing and loved it. On that basis, I hold a certain affection for Caddell. That doesn't mean I don't think he's serious wrong on the present topic.)

Saving the Opposite of Debt

Some of you might have found the title of my last post obscure, or even confusing. I hope not, but just in case, here's the deal. In economics, debt is negative savings (and savings are negative debt). This makes perfect sense is you think back to Mr. Micawber, who pointed out that if your income exceeds your outgo, you have a happy situation, but if your outgo exceeds your income, you will be in misery.

So, if you started out with neither debt nor savings, and you make $100 per week more than you spend, you will save $100 per week. If you make $100 per week less than you spend, you're going to have to borrow $100 from somewhere.

Where it gets a little tricky is if you already have some debt. Suppose you have a mortgage in the amount of $150,000. All other things being equal, if you reduce that mortage by $10,000 per year, this is the equivalent of saving $10,000 per year. So, when people pay down their credit cards, pay off their car loans, and accelerate their mortgage payments, they are increasing their saving just as if they were pouring that money into a savings account.

The Illusion of Cost Control

Just as people are starting to notice that both the Republicans and the Democrats are off in never-never land about the fiscal deficit, so Robert Samuelson thinks that the Obama administration is dealing in illusions about cost savings in the health care reform package.

Here's the thing, and I've said this before (and I'll probably say it again), you can't reduce prices by increasing demand. According to the fundamental rules of economics, increasing demand (all other things being equal) causes increased prices. One of the reasons that health cares costs are as high as they are is that Medicare, Medicaid, and various employer-paid insurance plans have increased the demand for medical services. Providing another 30 million people with health insurance will increase demand that much more, and that means higher prices. Samuelson goes into this at a more detailed level.

In an article in the Atlantic I recently read (November 2009 issue, I believe), the author pointed out that the insured and the uninsured spent about the same amount of their own money on health care each year. The insured, however, spent about three times as much of other peoples' money than the uninsured. So, you can expect spending by those 30 million to quadruple once they have insurance, and that, together with the provisions disallowing "pre-existing conditions" clauses is going to push up costs.

How Economic Prediction Worked on the Olympics

This article is a follow-up to an earlier column in which Daniel Gross presented predictions by Daniel Johnson of Colorado College on how various countries would do in winning Olympic medals. So now we know the results. The US was predicted to take 26 medals (2nd) and finished with 37 (1st). Canada was predicted to take 27 and took 26, though they did better than predicting in gathering gold. Germany was supposed to fall from 29 in 2006 to 20, but the Germans took away 30. The model predicted Austria would take 25, but the actual result was 16, so reported Austrian unhappiness wasn't just subjective. Russia also underperformed, winning 15 medals (3 gold) instead of the projected 23. This could explain Russian President Dmitry Medvedev's hints of a purge of the country's Olympic program.

By the way, it appears that President Medvedev may be getting his wish.

The Anniversary of the Stimulus: Is It a Success?

Daniel Gross is in no doubt, and neither are a lot of economists. The stimulus has been successful, at least in averting the worst consequences of the financial crisis of 2007-2008.

Why are the Republicans so determined to portray the stimulus, the Recovery Act, as a failure? First, this is the Obama administration's only major legislative accomplishment of 2009. If this was a failure, then the administration has had no successes at all.

Second, these people are trying to reject the judgment of Richard Nixon that "we are all Keynesians now." John Maynard Keynes had a couple of profound and very useful insights, but the main idea for which he is both praised and condemned is that the government can become the spender of last resort. Some of the voices on the right are trying to destroy the concept of government as a useful tool for dealing with human problems. If the stimulus worked, then Keynes is somewhat vindicated, and the government role in the economy is legitimized. That's what they mean by "socialism," these people who have no idea what socialism might be, a system in which government activity is a vital part of the economic life of the country.

John H. Makin had a pretty good article in the October 2009 issue of Commentary, in which he concedes that Keynes was right, while asserting that there was something to the doctrine of efficient markets. It's a far more reasonable presentation than one usually sees from the right side of the aisle.

O! Canada!

It's Daniel Gross, again, and this time he's found another Daniel who makes predictions on Olympic medals based on economic factors. Daniel Johnson predicts that Canada will take home the most medals from this Winter Olympic Games, just ahead of the United States and Norway. We'll see how it turns out, but I think it's interesting that the predictive factors Johnson uses - population, GDP per capita, climate - are also predictive of success in other fields.

Good News or Schadenfreude?

It's another column by Daniel Gross. I really need to start adding more original content. For one thing, I'd like to take off on Agim Zabeli's comment on an earlier post and get into questions about taxes and deficits. But, for the moment, Gross has some good comments about how the Japanese superiority in quality manufacturing, and the European superiority in social solidarity may have been just as illusory as the American economy that could grow forever. I'm not sure this is so much good news for the United States as it is glorying in the misfortunes of others.

The thing is, the EU is doing to the profligate nations in its ambit what the U.S. probably ought to be doing to profligate institutions: cutting them off and forcing them to make hard choices. But the EU has the advantage of national boundaries. For all the work that's been done on unification, they can still force Greece into an austerity program and limit the damage to other countries in the union. If the U.S. gets too tough with California or General Motors, the effects will come around and bite the rest of us in the ass.

Are You Rich?

Are you rich? Am I rich?

One of the features of President Obama's fiscal policy has been that he would not impose new taxes on middle-class Americans. Of course, in America, we're all middle-class, so there has to be a cut-off point for such a determination. President Obama has set that point at $250,000 per year of income. A lot of people who make that much (or even more) contend that they aren't rich: They, too, are middle-class.

Daniel Gross provides a nice analysis here, showing that people making $250,000 annually are indeed rich. It's a nicely written piece, and Gross doesn't bother us with statistical analysis, but he does point out that $250,000 is about five times the national median income.

I, for one, think it would be good to allow the Bush tax cuts to expire in their entirety, and for the estate tax to come back in full force, but I'll settle for having those cuts taken away from the rich.

Optimism on the Employment Front

Daniel Gross is at it again. One could argue that Mr. Gross's reasoning is flawed: he is extrapolating from recent trends to reach his conclusions. But he's tentative enough that we can give him that one. If he is right, then the underlying trend to re-employment may be stronger than the published figures indicate. After all, the figures keep being revised upward, don't they?

I believe that I previously flagged this article over at my Facebook account; if it seems familiar, maybe you saw it there.

In any event, I hope this article provides you and yours with some Christmas cheer.

What Hath the 2000s Wrought?

Daniel Gross's piece is really, really depressing. It confirms my wife's feeling that the economy, at least as far as ordinary people are concerned, has been spinning its wheels for a long time. Gross is asserting that America's "lost decade" isn't the next ten years, but the decade that began with January 1, 2000, and will end in six weeks. He gives lots of examples of economic and market indicators that are, today, at the same levels they were at in 2000.

I think it's worth reading, even if it isn't exactly cheerful. I also think that it may, just may, reveal a deeper problem. There's a tendency to measure performance by the measures you have, the ones that are convenient to collect. Sometimes that leads you to overestimate the importance of easily-determined indicators, and to ignore problems that don't show in the metrics you're using. A lot of companies have gotten into trouble trying to manipulate the markets to elevate their stock prices. The Bush administration got into trouble trying to elevate the home ownership numbers.

From Gross's piece, I'd have to say that such efforts to game the markets were not only misguided, but futile. We're back to square one.

The Magazine Market

The attached column by Daniel Gross is about Conde Nast's decision to close several of their magazines. I'm sure that there are people who will miss Modern Bride, Elegant Bride, and Gourmet. None of those has broken into my list of periodical subscriptions, but Gourmet might have had a chance of the occasional supermarket purchase, now that Helen and I are devoted watchers of Top Chef.

I think Gross's key point, that the magazine market might already have bottomed out when Conde Nast woke up and smelled the coffee, is both important and quite possibly correct. As noted above, I receive a number of periodicals. Over the past couple of years, I saw page counts diminish dramatically. I see this as a result of two related forces. First, there are fewer advertising pages. Second, because the magazine is selling fewer ads, it is forced to cut back on content. Information Week, which ran around 60 pages an issue a couple of years ago, has been down in the 30s and 40s more recently. The Economist produced a lot of issues under 100 pages in 2008 and dipped into the low 80s a few times. Even Commentary slimmed down for a while.

Of course, the biggest change on my list was to U.S. News and World Report. The venerable weekly cut back to alternate weeks in early 2008 and then became a monthly. It also became thinner, and each issue has become a mini-book on a single issue: health, the economy, retirement, education, and so on. That a drop in advertising revenue would lead to cutbacks is obvious. A little more subtle is that by focussing each issue on a single topic, the magazine is trying to recruit a lot of advertisers interested in that topic.

So, in 2008 and early 2009 a lot of the magazines I see, from The Atlantic to Wild Bird put out thinner editions and made other changes to react to the economy. But that trend may be over. I'm now reading the October 3rd issue of The Economist, and it hits 122 pages, plus a lengthy special report on the world economy. So Gross may well be right, and the magazine trade may have hit bottom, or at least a bottom.

On the other hand, some publications may be in death spirals. Advertising has dropped, so they've cut content, so fewer people read the paper (in fact, some publications have set out deliberately to cut circulation), which limits advertising rates, so revenue falls even more, so there are more cuts, and so on to the ghastly end. Information Week may be in that boat and sinking fast. Our local newspaper, the Gazette, has shrunk to three sections, and it seems to be shrinking to invisibility. It is also becoming even more parochial than it has been. Even major sports stories have to have a local angle. I'll miss the Gazette a lot less than Gross misses Gourmet.

A Tale of Two Bailouts - II

"The bad news? While the government has pacified the commercial finance, savings, and plain-vanilla banking sectors, it's sending reinforcements into the vast, restive region where the trouble began: housing."

Isn't that just too depressing?

What's worse is that the FHA, the only lending organization in the country to retain some shred of sanity over the past few years, is now buying subprime loans. "In the second quarter, about 14.4 percent of the FHA's loans were at least one month past due."

There may be another shoe waiting to drop in the housing/financial crisis. Can anyone say "Double-dip recession?"

A Tale of Two Bailouts - I

Daniel Gross that we'll be all be out a few hundred billion dollars from the bailouts of the financial system. But what's a few hundred billion dollars among friends? At least, according to this column a lot of money has been collected from the banks in the form of fees and charges based on the amounts the Federal government guaranteed for them. Bank of America, for example, paid $425 million as a fee for a guarantee of $118 billion in loans, which it has now dropped as no longer needed.

I suppose that's the real good news: The banks are doing well enough that they no longer need some of these guarantees. Until the next time.

Was Lehman to Blame for the Fall in World Trade?

Was the collapse and bankruptcy of Lehman Brothers a year ago the cause of the abrupt shrinkage in global trade? Daniel Gross thinks so, and he gives his reasons in the accompanying article. (Click on the title of this post to go to the article.)

Catching Up with Health Care

Tomorrow is the first day of Autumn, officially, which means that today is the last day of summer. I've had a good summer, generally speaking, including two very good vacation trips - one to Tennessee and one to the Four Corners region. But I have been neglecting my blog, and my e-mail, periodical, and other reading has piled up. So I've been playing catch-up here in September. Earlier today I posted on a column by Daniel Gross, who writes for Slate and Newsweek. Today I have Mr. Gross's column from September 10, which is only (only!!!) eleven days ago.

This column should be a sobering reminder to those of us who rely on employer-provided health care programs that change is coming, with or without the reforms being pressed by President Obama and the Democrats in Congress.

The Economics of the Cupcake

Remember those pictures from the Depression of men in threadbare coats selling apples on street corners? Daniel Gross has spotted a trend that may be the Bush Recession equivalent: cupcakes. I haven't seen this locally, but maybe the north end of Colorado Springs is just too suburban for such a trend to catch hold. Gross has a number of reasons for thinking that the cupcake boomlet is too sweet to last.