Category: Economics

These are the things that one needs to bring front and center to get people off their asses and start pressuring whoever they can pressure (congressmen etc). These are also the kind of stories that one needs to help people understand that in our world there is only THE STREET no main street and wall street. We are all in it together.
from Paul Krugman here:

Previously, undertakers would pay for the cost of funerals and wait to be reimbursed by the State, but the lack of credit in the banking system means many firms can no longer afford to do so.

thanks to henry abott of truehoop for the pointer.
As prof Brad Delong say if you ask people from high school if its okay to tax rich people more they would be fine by that because back in high school nobody knew who was going to be rich. It seems the people who make money and not inherit it tend to be more thankful and more ready to share.
Cheers to Tyson Chandler!

It was just amazing to hear this man speak. He so much reminds me of my grandfather, the way he’s so soft-spoken, and respectful, and poised, just a man of honor. I told my wife that he reminds me of an educated version of my grandfather. And that’s not a knock on my grandfather. Obviously, he grew up in a time where he didn’t get an education, but it says a lot about the way I feel about Barack, because I respect my grandfather more than any man walking on this Earth. And for me to compare Barack to him says a lot.
It’s funny, because when Obama was giving his speech, he said he was gonna give a tax cut to 95 percent of the people. He says, “If you make under $250,000 a year, raise your hand.” And everybody there raised their hand, except for this one small section of guys. That was our section. And everybody around us was laughing.
But you know what, it’s a bigger cause. And the way I look at it is that I can afford to pay more in taxes. But my parents, my grandparents, my cousins … with what they make, they can’t afford to cut back in their household with what they’re trying to survive with. I can afford to make cuts and still survive. They can’t take that knock.
I think that’s what’s going on now and the reason why the middle class is struggling so much. The upper class, we can take that hit. Obviously, nobody wants to take it, but we still can. And we can afford to live nice lives.
I’ve lived in both situations. And not only that, I’m obviously the only one in my family that can say that I’m a millionaire. I’ve seen my entire family struggle. So, would I rather see my whole family struggle while I get a break, or have me not get a break while the rest of my family gets one? I’ll take my entire family getting a break.
Witnessing History in NBA Player Blogs in Fan Voice.

I’ve always felt that the volume of businesses that get started is lower than it should be. It seems just nont as optimal, especially in my country where there is are no social safety nets. Lower the bar for starting and then gradually phasing them out I think is a push in the right direction.

October 2, 2008, 9:44 am
An Incentive to Open and Close With Haste
By Daniel Hamermesh
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Before going to a Thai restaurant near my German apartment, I asked a long-time resident how it is, and she said it’s brand new. It was a Texas barbecue (!!) joint for a few months, and something else before that.
Why the turnover? Of course, being unable to cover variable costs matters generally, as always; but the German government apparently gives a small business an incentive to open up, and an incentive to close quickly if it cannot cover its costs: certain taxes are waived if the business is small, but only for a short period of time; thereafter, the tax break phases out.
Thus the risks of opening a new business are reduced; and, if the business is not very successful, the impending loss of the tax break provides an incentive to close it down within the time period necessary to escape these taxes.
I have grave doubts about this policy and about subsidizing small businesses generally: if there are scale economies naturally, why should the government try to offset them? And it’s hard to imagine that there are too few new small businesses — or that people are so unwilling to take risks that the government should offer subsidies.
I see no good economic rationale for these policies, but they are widespread in Germany — and in the U.S. too.
An Incentive to Open and Close With Haste – Freakonomics – Opinion – New York Times Blog.

This surprised me, It seems that I’m swinging between feelings of how easy and hard achieving the MDGs  is.

01 October 2008
What could a development economist buy for $700 billion?
Duncan Green puts the bailout in an international perspective:
To put the proposed Wall Street bailout into perspective. $700bn:
* Would clear the accumulated debt of the 49 poorest countries in the world ($375bn) twice over
* Is almost 5 times the annual amount of extra aid needed to achieve all the Millennium Development Goals on poverty, health, education etc ($150bn a year)
* Is about 7 years of current global aid levels ($104bn in 2007)
* Is enough to eradicate all world poverty for over two years (UNDP calculates it would take $300bn to get the entire world population over the $1 a day poverty line).
On the other hand it’s:
* only a quarter of the cost of the Iraq war ($3 trillion on Joseph Stiglitz’ calculation )
* a half of annual global military spending ($1339 bn)
Chris Blattman’s Blog: What could a development economist buy for $700 billion?.

Let’s see. Is this part of the 5B deal with warren buffet, do some lobbying for the bailout.

Adding to the pressure on Congress to act were some of the nation’s biggest corporations, including Verizon Communications Inc., Microsoft Corp., and General Electric Co. GE Chief Executive Jeffrey Immelt is actively lobbying politicians and finance officials in Washington to complete the financial-rescue bill, said a company spokesman. To back up his message, Mr. Immelt directed his staff to compile evidence of the “negative ripple effects” throughout America from the crisis on Wall Street, including information on what is happening to customers and employees in all 50 states.
The Price of Disgust – Freakonomics – Opinion – New York Times Blog.

History Repeating itself watch!

A petition was signed by 1028 economists in the United States asking President Hoover to veto the legislation, organized by Paul Douglas, Irving Fisher, James TFG Wood, Frank Graham, Ernest Patterson, Henry Seager, Frank Taussig, and Clair Wilcox.[5] Automobile executive Henry Ford spent an evening at the White House trying to convince Hoover to veto the bill, calling it “an economic stupidity”.[6]J.P.Morgan’s Thomas Lamont said he “almost went down on my knees to beg Herbert Hoover to veto the asinine Hawley-Smoot tariff,”[7]
Smoot-Hawley Tariff Act – Wikipedia, the free encyclopedia.

September 21, 2008, 11:12 am
Thinking the bailout through
What is this bailout supposed to do? Will it actually serve the purpose? What should we be doing instead? Let’s talk.
First, a capsule analysis of the crisis.
1. It all starts with the bursting of the housing bubble. This has led to sharply increased rates of default and foreclosure, which has led to large losses on mortgage-backed securities.
2. The losses in MBS, in turn, have left the financial system undercapitalized — doubly so, because levels of leverage that were previously considered acceptable are no longer OK.
3. The financial system, in its efforts to deleverage, is contracting credit, placing everyone who depends on credit under strain.
4. There’s also, to some extent, a vicious circle of deleveraging: as financial firms try to contract their balance sheets, they drive down the prices of assets, further reducing capital and forcing more deleveraging.
So where in this process does the Temporary Asset Relief Plan offer any, well, relief? The answer is that it possibly offers some respite in stage 4: the Treasury steps in to buy assets that the financial system is trying to sell, thereby hopefully mitigating the downward spiral of asset prices.
But the more I think about this, the more skeptical I get about the extent to which it’s a solution. Problems:
(a) Although the problem starts with mortgage-backed securities, the range of assets whose prices are being driven down by deleveraging is much broader than MBS. So this only cuts off, at most, part of the vicious circle.
(b) Anyway, the vicious circle aspect is only part of the larger problem, and arguably not the most important part. Even without panic asset selling, the financial system would be seriously undercapitalized, causing a credit crunch — and this plan does nothing to address that.
Or I should say, the plan does nothing to address the lack of capital unless the Treasury overpays for assets. And if that’s the real plan, Congress has every right to balk.
So what should be done? Well, let’s think about how, until Paulson hit the panic button, the private sector was supposed to work this out: financial firms were supposed to recapitalize, bringing in outside investors to bulk up their capital base. That is, the private sector was supposed to cut off the problem at stage 2.
It now appears that isn’t happening, and public intervention is needed. But in that case, shouldn’t the public intervention also be at stage 2 — that is, shouldn’t it take the form of public injections of capital, in return for a stake in the upside?
Let’s not be railroaded into accepting an enormously expensive plan that doesn’t seem to address the real problem.
Thinking the bailout through – Paul Krugman – Op-Ed Columnist – New York Times Blog.

Need to read this book and it seems that I have something to occupy my mind with during the hour long commutes.
This was strangely invigorating for me. Ok maybe not so strangely.

Mark Blyth’s book, Great Transformations has a theory of the relationship between economic crises and economic ideas. Very roughly speaking, when a crisis occurs that is difficult or impossible for the prevailing wisdom to explain or deal with, intellectual entrepreneurs have an opportunity to create a new (partly self-reinforcing) collective wisdom. We’re most likely in just such a crisis now. Which set of intellectual entrepreneurs are going to succeed in reshaping a new collective wisdom – economic nationalists like Sarkozy and Putin, social democratic globalizers like Dani Rodrik, or some other crowd entirely – I have no idea.
The end of global deregulatory reform — Crooked Timber.

On another note, one of the puzzling underlying findings in this paper is the relationship between moderate alcohol consumption and increased lifetime earnings. For men and women alike, people who report downing two or fewer drinks a day earn slightly more than teetotalers do, on average. Heavy alcohol use tends to negatively impact earnings, as you might imagine, but not as much as abstinence. Sloan and Ostermann aren’t clear on the mechanics of this relationship, but the science seems solid.
Does drinking lead to higher earnings, or vice versa?
Can Binge Drinking Save Social Security? – Freakonomics – Opinion – New York Times Blog.