Tuesday, December 23, 2008

Ecological Knowledge vs. Economic Knowledge

You may remember the name of Dr. John Holdren from an earlier post on this blog. Former summer fellow John Macek had written a letter to the editor in response to Holdren's claim that anyone who doesn't tow the line on global warming is "dangerous."

Now NYT columnist John Tierney is reporting that Obama has named Holdren as his science advisor. Tierney has more on Holdren's troubling past here.

It looks like John has more work to do.

Sunday, December 21, 2008

Currently reading: Robert E. Kelly's The National Debt of the U.S., 1941 to 2008

No book can be more timely than Robert E. Kelly's The National Debt of the United States, 1941 to 2008.

Kelly, a retired CPA, corporate executive and management consultant is currently a contributing columnist to The Salem News. In this second editon, Kelly once again deploys an accountant's eye to the hard facts and government sources with illustrative tables. With the financial crisis wrecking global markets, the news is most certainly discouraging. But long before October 2008, Kelly sounded the alarm about the behemoth national debt. Before over-leveraged firms collided with the subprime disaster, Kelly paid ample attention to the debt clock.

In the past, public debt served as a handy credit card in the hands of sober political leader,s particularly in times of national emergencies when tax revenues were insufficient for the task at hand. Even President Franklin Delano Roosevelt, whom Kelly blames for redefining the role of the federal government in the lives of American, reluctantly turned to borrowing to finance World War II, mostly because tax revenues alone couldn't fund the effort. In the aftermath, Truman realized a slightly public debt less than the one he inherited. This rare, and perhaps illusory, feat was repeated by the end of Clinton's second term which, with its surplus, which enable a fleeting idea of paying down the debt. The assault on 9/11 disabused many of the resilience of new economy and its surpluses. Wars in Afghanistan and Iraq and a generous expansion of the welfare state under a Republican administration have brought us to the edge.

By Fiscal Year 2008, the United States had amassed a $9.9 trillion dollar debt, of which $5.6 trillion is owned by the public (presumably including foreign governments.) The remaining $4.3 trillion owed by "U.S. Government bodies" could theoretically be canceled out according to some observers. The "money that we owe ourselves" argument does not solve the problem says Kelly. He's worried the news will only get worse.

Kelly adeptly outlines the massive growth of public debt starting with FDR. But the real problems began with the arrival of the welfare state under Lyndon Baines Johnson, the first modern "guns and butter" president. Johnson's Great Society was the Second -- or perhaps Third -- American Revolution, a most unwelcome event.

"Shrouded though it might be in the language of compassion, Lyndon Johnson's Great Society was nothing more or less than the most recent bureaucratic quagmire, which, when successful, reduces them to the status of dependent cogs in a well-oiled centralized machine."

What came into full play during this upheaval was the rise of the American judiciary, a common theme stressed by Kelly. The activist judiciary, reading the election returns and finding socialism in the penumbra of the constitution aided the explosion of the public debt. The use of debt to finance public goods -- roads, national defense, the court system -- evolved into a blank check for welfare spending. Legislators and a few presidents resisted. But the legal march emancipated the nation from more stringent ways.

Ronald Reagan who best understood the problem at hand, that government was in fact the problem and not the solution was a mild -- if disappointing -- improvement. He had to fight the Cold War and knew that economic growth and innovation could help topple the Russian bear without so much as a direct shot. Yet the debt grew under Reagan notwithstanding arguments designed to obscure such as the debts relative size to the GDP.

The Great Society has been joined rather robustly by the Great Bailout of 2008 a paroxysm of corporate welfare that will do more than change America's attachment to now-quaint notions of limited government and free markets. The managed economy is now all the rage; the pendulum has swung violently toward a governance of "smart-set" who believe they can best allocate the scarce resources in society. Today credit markets, tomorrow consumer behavior.

A political and fiscal conservative, Kelly takes us back to the founding fathers who round out his ideal government. He ends the book with a warning from Jefferson who distrusted excess debt. "Though I am enemy to the using of our credit but under absolute necessity, yet the possessing a good credit I consider as indispensible in the present system of carrying on war. The existence of a nation to have no credit is always precarious."

George W. Bush has had the severe misfortune of making tough but wrong choices. He closes his term by launching a bailout out of the nation's foremost manufacturers in Detroit and beyond. The founder of American public debt, Alexander Hamilton could not even begin to make sense of how we are impoverishing our children today.

Friday, December 19, 2008

Bush Crowding Out

President Bush does like to stick by his word, as we have seen.
“I've abandoned free-market principles to save the free-market system ... I feel a sense of obligation to my successor to make sure there is not a, you know, a huge economic crisis,"
Less then a week after making this statement to CNN, the Bush administration offered $17.4 billion in taxpayer earnings to GM and Chrysler, in order to prop up companies that are producing items that currently no consumers wants, and have not wanted for some time.

In April 2008, before the government begin handing out money, Honda's sales were up 4.2% and Nissan's were up 3.6% yet Detroit's big three car companies sale's were down 10.4% (HT: International Herald Tribune)

The opportunity cost here is seen in two major areas. First, that $17.4 billion could still be in the hands of taxpayers, encouraging spending. Secondly, these companies are putting capital to use in inefficient ways. Should they be allowed to go bankrupt, the capital would be allocated, by the invisible hand of the market, to much more efficient sources. This would in-turn create more jobs then are being protected.
"If we were to allow the free market to take its course now, it would almost certainly lead to disorderly bankruptcy and liquidation for the automakers,"
Too bad President Bush did not see this quote as a good thing.
(minus "disorderly," but bankruptcy is a government regulation, if it was "disorderly" would a better fix be to adjust the regulation, as opposed to throwing money at companies?)

Tuesday, December 16, 2008

Record Low Rate

The Federal Open Market Committee again reduced interest rates, setting the target between 0 and 1/4 percent.

This reduction now leaves the committee without any room to cut further, reducing its policy options to help the country cope with the recent economic issues. In the committee's statement different policy measures are referred to, such as;

- Supporting financial markets,
- Purchasing agency debt and MBSs, and
- Implementing the Term Asset-Backed Securities Loan Facility (loans to households and small companies).

The committee also states that, due to low inflationary pressures, the rate could remain low "for some time."

Friday, December 12, 2008

Infrastructure Spending

Reading that close to 1 million people are currently without power, a posting by Alex Tabarrok at Marginal Revolution came to mind. In his posting, he notes how when people typically think of government spending on infrastructure, new bridges and highways come to mind and he makes a persuasive argument for a different type of spending.
"Even more valuable than transportation infrastructure would be greater investment in electricity infrastructure, a smart grid."
This could include numerous national projects to put in place a "smart grid." This type of grid would be able to have "smart pricing" enabling prices of electricity to go up when demand is high, a basic economic requirement, reducing the maxium load on power stations at peak times. Additionally, this grid would be much more robust then the current system, allow at least some of the people currently effected by the ice storm to have heat and lights.

Mr. Tabarrok states that power outages cost the U.S. $100 billion a year, suggesting there could be gains if the incoming administration thinks outside the box. Additionally, a "smart grid" would be a requirement for the transportation of energy, a key pillar for the expansion of green power.

The validity of government spending and its effect effect (or multiplier) has been debated recently, including this interesting article that places the Multiplier at 1.0, but looking into the short term, I suspect there will be an expansion of federal spending, in an attempt to shorten the current resession.

Wednesday, December 10, 2008

How Much Would You Pay?

Governor Blagojevich stands accused of attempting to sell President-Elect Obama's vacant seat in the U.S. Senate. Among other things, he asked for a very plum position at a non-profit or union job. His wife was part of any prospective deal.

Obviously a U.S. Senate seat has its value to each person and, in the case of Blagojevich, his spouse. Andrew Roth takes a crack at calculating the value of this open seat and comes out with a NPV (Net Present Value) of $6.2 million. However, this number is underestimates the what can be termed as the going price, considering in the 2004 election candidates for Illinois senate seat collectively spent $17.25 million.

There's another problem with this estimate. In accounting for only possible benefits, Mr. Roth makes a mistake similar to those made by environmentalists touting the economic returns of green power such as the number of jobs. If jobs were a benefit employees would pay their employers for them. For me the costs of a political career (including the deal-making with high-maintenance peers on a daily basis) would signal that the costs are much higher than the benefits.

This might be one of the many reasons that I was not asked to place a bid on the senate seat.

Thursday, December 4, 2008

Biodieseling: the mirage of energy independence.

In May 2005, President Bush signed legislation creating federal subsidies for domestic biodiesel production. Along with supporters of biofuels, the President argued:
“... every time we use homegrown biodiesel, we support American farmers, not foreign oil producers.”
The reduction of baseline oil imports was a goal of the $1 per gallon tax credit, funded mainly though debt and the income tax payments. However, as is the case with most government-induced price distortions, unforeseen consequences came into play.

In 2007 almost 60% (291 million gallons out of 490 million gallons) of domestic production was exported. In the first eight months of 2008, an estimated 511 million gallons out of the 600 million gallons of biodiesel were exported rather than consumed domestically.

This means that $600 million was spent to replace 89 million gallons of oil. Since we import about 60% of our oil, we reduced our "foreign oil dependence" by 52 million gallons or a cost of about $11.54 per gallon, which seems to be hardly cost-effective.

HT: The Houston Chronicle