Wednesday, January 28, 2009

BHI economists oppose stimulus bill

President Barack Obama on January 9, 2009:
There is no disagreement that we need action by our government, a recovery plan that will help to jumpstart the economy.
Not so fast, Mr. President. Plenty disagreement can be found here including BHI economists David G. Tuerck and Ben Powell.

Governor Patrick releases House 1 Budget Recommendations

Citing the current economic downturn and declining state revenues, Governor Deval Patrick this morning released his House 1 budget. The $28 billion budget raises registry fees and meals and hotel taxes, draws from the state's rainy day fund and expands the state's bottle bill. The governor also reaffirmed a recent plan to cut $128 million from this year's local aid and $220 million in the next fiscal year.

Flanked by members of this cabinet at the State House, Patrick outlined the "multi-pronged solution" including a fix to the current FY 2009 budget. One part of that effort includes the elimination of sales tax exemptions on certain foods and beverages such as candy and alcohol. This change is expected to generate $25 million this year and $121.5 million next year with funds to be earmarked for public health and wellness programs.

Throughout the press conference, Patrick stressed his efforts to strike a balance between competing interests, long-term goals and commitments and the sharp downturn in revenues.

"The national recession is inflicting serious pain across Massachusetts, from household budgets to the state's balance sheets, and like many residents throughout the Commonwealth, we have to make do with less," said Governor Patrick. "At the same time we also have opportunities. The Economic Recovery Plan leverages reforms and responsible budgeting that could help alleviate the mounting pressure on our communities now and in the future."

Patrick said the the budget may call for more layoffs of state employees. He noted that some programs faced severe reductions "to prevent deeper cuts" down the road.

A portion of the governor's proposed budget relies on federal aid dollars yet to be approved by Congress. The Governor said he was optimistic that the Obama administration would provide states with funds from the stimulus package.

Patrick also unveiled a second Municipal Partnership Act which calls for the an increase in the meals tax and an option for cities and towns to levy their own 1 percent sales tax. It also calls for the ability of local government to tax telecommunications property, a measure that will raise approximately $26 million according to budget documents. The act urges cities and towns to shift more of their retirees to Medicare, a move which won legislative approval last year.

Patrick also suggested that cities and towns could achieve efficiencies from regionalization particularly in the area of contract advertising.

"I anticipate there will be vigorous debate," the governor told reporters. "But endless debate is not acceptable. We need action."

During a question and answer session, Patrick said the state will move to direct all capital gains tax revenue to rainy day fund. In the past, capital gains tax revenue, because of their volatile nature, have made estimates used for planning budgets unpredictable and complex.

New revenue for the FY2010 budget include proposals for:
Meals and hotel taxes ($150 million from a 1-cent statewide increase dedicated to taking the sting out of local aid cuts and $200 million for a 1-cent local option)

Commonwealth Wellness Fund: Earmarking $121.5 million for public health initiatives by eliminating sales tax on alcohol, candy and sweetened beverages.

Expanding the state's bottle bill: Earmarking $20 million for recycling and water and and sewer rate relief by including once exempt beverages such as water, juice, sports and coffee-flavored drinks into the bottle bill program.

Registry fees: Earmarking for the state highway fund an expected $74.5 million from "updated and consolidated Registry of Motor Vehicle fees."
More on the governor's budget recommendations here, here and here.

Press coverage Globe/AP; Herald and Boston Business Journal

Who Turned Down the Heat?

As goes California, so goes the rest of the nation.
"Next year in California, state regulators are likely to have the emergency power to control individual thermostats, sending temperatures up or down through a radio-controlled device that will be required in new or substantially modified houses and buildings to manage electricity shortages."
That's according to the New York Times. This latest intrusion into our personal consumption preferences is reminiscent of a masterpiece that I have just re-read. If California regulators are so wise and efficient, why stop there? It could also deploy its technology to regulate the amount of cold water in my shower or the temperature in my oven. It could even turn off my alarm clock in the night to save power during a brownout!

The California Energy Commission's argues that the new technology allows it to adjust house temperatures in response to price changes.

People respond to incentives on their own without government requirements. Heating costs are no different than those associated with gasoline prices. People consume less when prices are high and they measure those costs and the benefits (in this case, a warmer house) because that's their preference, not the state of California's.

Tuesday, January 27, 2009

Monday, January 26, 2009

Bill Easterly continues the argument

Bill Easterly taking on the conventional wisdom in developmental economics by setting up his own blog. Our review of his classic, The Elusive Quest for Growth: Economists' Adventures and Misadventures in the Tropics was published here in 2003.

Wednesday, January 21, 2009

Wall Street Journal cites BHI study on prevailing wage laws

Some good advice for President Obama should he take it.
President Obama said in his Inaugural Address yesterday that government must spend to rebuild roads and bridges, but that those "who manage the public's dollars" must also "spend wisely" and "reform bad habits." With that ambition in mind, here's an idea to save tens of billions of taxpayer dollars in the months ahead: Repeal Davis-Bacon superminimum wage requirements for construction projects.

We're referring to the 1931 law that requires contractors on all federal projects to pay a "prevailing wage." In practice, this means paying the highest union wage in every part of the country. Over the years nearly every analysis -- by the Congressional Budget Office, the Government Accountability Office and Office of Management and Budget -- has concluded that Davis-Bacon tangles projects in red tape and inflates federal construction costs.

A 2008 study by Suffolk University and the Beacon Hill Institute examined local wage data for construction workers and found that the Department of Labor estimates for the "prevailing wage" in cities are about 22% above the actual wages paid in these cities. It estimates that Davis-Bacon adds slightly less than 10% to federal building costs, or $8.4 billion a year.

Tech Community to Obama: Repeal Sarbox!

In many respects, PC Magazine's John Dvorak speaks for Silicon Valley, which is fed up with the unintended consequences of Sarbanes-Oxley.
Sarbanes-Oxley makes it nearly impossible for an American start-up to make a public offering and survive it. Designed to curb the excesses and crookedness that lurked behind the Enron scam, MCI, and other financial catastrophes that took place in the early part of the decade, this law contributed to the out-and-out financial meltdown we are now witnessing. And how did it benefit anyone?

What Sarbanes-Oxley has done is add an outrageous reporting burden, which costs an estimated 4 percent of revenue to implement. All American corporations are immediately put at a disadvantage to the tune of 4 percent off the top. And what's the point of these new requirements? Simply to get accounting firms off the hook for cooked books or criminal activity. It has nothing to do with protecting the public, just protecting the accounting firms.

Venture capitalist Tim Draper once told me that a company has to make $300 million a year to be able to afford the overhead required to comply with Sarbanes-Oxley. Less than that and public corporations just bleed to death.

No matter what you think of Sarbanes-Oxley, one thing is very noticeable: Since the law's inception, the number of little Silicon Valley start-ups that went public is close to nil. This is the worst IPO market in years, and it's stifling the country. IPOs have been a traditional form of wealth creation and corporate protection unlike anything else. And you've seen what has happened without them. It's no coincidence that the economy is tanking. Sure, you can blame the housing bubble. But I blame the whole financial collapse on Sarbanes-Oxley and a moribund Silicon Valley.

If any savvy business people can manage it, they need to get Obama to lead the way in repealing this stifling and corrupt law immediately. It's done us no good whatsoever and promises to continue to slow progress. The country will be perpetually in a recession unless we realize what's at the root of the problem.
In today's pro-intervention environment, peeling away the major showpiece legislation of last meltdown might be wishful thinking.

Advice for Obama from Professor Phelps

Those willing to give the new President advice are certainly not in short supply. But Professor Edmund Phelps's advice is always worth taking.
I welcome the announced projects for more and better infrastructure -- roads, bridges, airports, broadband, and the electric grid. This initiative -- even if taken by every country -- will contribute a net increase to employment in the capital goods sector and to aggregate employment in the U.S. In contrast, global tax cuts to households, to the extent they stimulate a world-wide increase in consumer demand, will drive up world interest rates and could thus damage employment.

I confess, though, that investing in infrastructure does not make my heart soar. Glaringly omitted from President Obama's announced plans is the idea of boosting another kind of social investment. In his victory speech after the North Carolina primary win, he spoke feelingly of the centrality of work in everyone's life, recalling how much his father-in-law's job had occupied his thoughts and given him pride. He spoke of "rewarding work," the title of my 1997 book on using tax credits to induce companies to employ more low-wage workers.

Instead, a proposed cut in the payroll tax rate -- up to a certain earnings level -- is planned. Low-wage earners will get their piece of it. But that will not be enough of a pay boost to create careers of self-discovery and transform neighborhoods and cultures among the least advantaged. My hope is that it is not too late to revert to the ideas expressed in North Carolina.

Our review of Rewarding Work can be found here.

Tuesday, January 20, 2009

'More Jesse James than Wyatt Earp'

The following remarks were delivered by Economics Chairman David G. Tuerck this morning at a Suffolk University Alumni Association program at Sargent Hall, Suffolk University Law School titled, “The New Sheriff in Town” to mark the inauguration of President Barack H. Obama.

Good morning and my thanks to Laura Piscopo and Eliza Parrish for putting this program together.

I understand that we are about to witness is widely seen as a transformative event in American history. That it is. But the transformation that we will get, as I see it, will not be the one being celebrated all over the world. Rather, it will be one that undermines the Constitution to the end of making social policy, that undermines national security to the end of placating the anti-war left and that ends up eroding a large swath of the private economy to the end of effecting a vaguely socialist policy agenda. There’s a new sheriff in town all right, but he’s more Jesse James than Wyatt Earp.

Obama’s predictable assaults on the Constitution and on national security are perhaps the most serious harm that we can expect from his administration. In connection with today’s panel, however, it is important that we not underestimate the harm that his policies will inflict on an already faltering economy. During the campaign, Obama promised to promote green energy, redistribute income, punish corporations, empower unions, expand government and restrict foreign trade – an agenda that, if implemented, would reduce productivity and living standards. That the public would elect a presidential candidate intent on implementing this agenda stands as a great mystery to me. Far less mysterious is the harm that these policies will inflict on the economy.

Now I suspect that many of my fellow economists who supported him have told themselves that Obama couldn’t have possibly have meant to implement the policy prescriptions that got him elected. And, indeed, but for the current financial crisis, there is the possibility that, having won the election, he would be listening to the saner voices around him and forgetting most of what he promised during the campaign.

But the financial crisis means that this is not to be. With the economy in a downward spiral, Obama knows, as do his handlers and sponsors on the left, that he has a mandate to try everything under the sun in order to put things right. Which is why we can expect him to advance a much heralded trillion-dollar recovery plan. When the attitude is that the country must do something – anything – to speed recovery, we can expect that something to be what bought votes during the campaign.

Let’s first consider the baseline projections against which we can assess the likely effects of Obama’s policies. I have surveyed a number of forecasts, ranging from relatively optimistic to highly pessimistic and reached the conclusion that the economy, as measured by real GDP, will continue to decline straight into 2010. This is bad news for two reasons: First, it means we’re in for at least a four-year stretch before employment, the housing market and equity prices recover significantly from the current collapse. Second, it means that Obama administration will be driven by political considerations to take increasingly desperate measures, many of which will make things worse rather than better, to right the economy.

To be sure, most economists now seem to favor a fiscal stimulus consisting of a combination of tax cuts and spending increases. You can accept their advice if you wish, but I think it is the result of a new kind of derangement syndrome, perhaps to be classified by psychologists someday as Obama mania or just plain Obama nuttiness.

One clue as to the temporary insanity that is now sweeping through the economics profession is the renascent popularity of Keynesianism. Otherwise sensible economists are re-branding themselves as Keynesians, as if applying that label will lend scientific authority to nostrums, which just a few months ago they would have considered laughably naïve.

You probably remember Keynes from your Principles of Economics class where you were shown how a dollar of deficit spending will deliver three, four or even ten dollars of new GDP. Keynes laid out this doctrine 73 years ago in his book The General Theory of Employment, Interest and Money. While the idea of magically expanding the size of the economy by just running deficits has an obvious appeal, the fact is that Keynes’s ideas began to undergo serious challenge in the 50s and then fell into utter disrepute in the late 60s and early 70s, with the onset of stagflation and the productivity slowdown.

In the intervening years, defenders of orthodox Keynesianism had become as rare among economists as creationists among biologists – and, for good reason: Until just a few weeks ago, new theories, developed by the last two generations of macro economists, had relegated Keynesian orthodoxy to a historical curiosity. Now, all of a sudden, Keynes is all the rage because we find ourselves in a protracted slowdown and because Obama’s policy pronouncements need some kind of intellectual justification. It’s as if Einstein, on discovery relativity, decided to return to pre-Newtonian theories of gravity in order to put the right spin on his ideas.

If we want just one example of how contemporary economics argues against Obamanomics, we need look no further than a July 2007 paper by Christina and David Romer, published as a National Bureau of Economic Research Working Paper. There, the authors find that fiscal measures of the kind being advanced by the Obama team “have been largely unsuccessful” at stimulating the economy, just as other critics have warned.

One reason why such countercyclical policies don’t work, say the Romers, is that “it is difficult for fiscal policy to respond to economic developments.” What makes this article particularly interesting is that co-author Christina Romer is slated to become Chairman of the Council of Economic Advisors in the new administration.

Another implication of Romer’s paper is that tax cuts of the kind undertaken during the Reagan and Bush administrations -- that is, tax cuts aimed at promoting economic growth -- are, unlike the cuts proposed by Obama, highly effective for expanding the economy. If Professor Romer were up to the Herculean task of disabusing her boss of his spread-the-wealth philosophy and of imparting some understanding of contemporary economics to his thinking, then perhaps we could put hope in this administration after all.

But back to Keynes. Another economist, Robert Higgs, has pointed out that World War II was the nation’s one great experiment with a Keynesian remedy – unintended though it was. And what happened during the war is just what modern economic theory, as opposed to antiquated Keynesian theory, would suggest. The expansion in government spending crowded out private investment almost dollar for dollar. Meanwhile the expansion of consumption, which the Keynesian multiplier is supposed to bring about, didn’t take place.

Franklin Roosevelt, also now being elevated to godly heights by the Obamamaniacs, in fact never took Keynes seriously. And ironically, it is Keynes himself who provided what is probably the best rationale for why his recommendations would appeal to a Roosevelt or an Obama. In his foreword to the German version of The General Theory, Keynes admitted that his ideas could “be much easier adapted to the conditions of a totalitarian state” than a free-market economy. When a reporter asked an incredulous Joe Biden whether he and Obama were advancing a Marxist agenda, she was on to something.

Earlier I said that the current crisis bodes ill for any hope that the new President’s economic policies will redound to the benefit of the nation. There is simply too much opportunity and too much pressure to accommodate his electoral base for him to do anything short of what he promised. Thus we will have four years of the various recovery-killing measures that he promised the electorate: cap-and-trade, union card check, NAFTA revision, higher minimum wages and all the rest. And there’s nothing in today’s $150 million extravaganza that can offer any comfort over these realities. This new sheriff is going to make us long for the days when the hombre from Texas was in charge.

Friday, January 16, 2009

Economics Department Spring 2009 Seminars

Each academic year, the Economics Department at Suffolk University hosts several seminars featuring the work of faculty, students and visiting scholars. The seminars usually take place in the large conference room on the sixth floor of 1 Bowdoin Square in Boston and typically run from 1:05 p.m. to 2:20 p.m.

The schedule, which is expected to expand over the course of the semester, lines up as follows:

Thursday, Jan 22
Henry Kim
"Fiscal Policies in DSGE Models"

Thursday, Feb 19
Randall Holcombe (Florida State University)
Topic: Public Choice

Tuesday, Feb 24 C
Cagdas Sirin
"A Double Hurdle Model: Workplace Restriction, Prices,
Income Level and the Demand for Cigarettes"

For samples of past seminar topics visit the Economics Department's news page.

Wesbury: "Inflation is not dead; it is just hibernating."

Don't let today's lower inflation rate fool you. All those newly printed greenbacks sloshing around mean that sooner or later the big inflation is coming. So says Brian Wesbury.

Thursday, January 15, 2009

Oil, where is it going?


Any belief that energy prices had bottomed out were wiped away early in the day as crude plumbed new lows for the year and more government data suggested the economy may be worsening.

"The bull oil era is officially over," said Phil Flynn, an analyst at Alaron Trading Corp.

Light, sweet crude for February delivery fell more than percent, or $2.78, to $34.50 a barrel Thursday on the New York Mercantile Exchange. At one point prices fell as low as $33.20.

Crude prices have fallen so fast, the cost for retail gasoline has yet to catch up. Pump prices nudged up again overnight, but is likely to fall.
Some of us might want to rethink the end of the bull market in oil.

The nifty gadget above tracks the latest price in oil in near real-time. Oil was priced 34.69 a barrel today (January 15, 2009).

Congress thinks big, very big!

Not to let a crisis pass by without throwing caution to the wind, Congress is proposing an $825 billion stimulus.

Full text (all 258 pages) here.

Thursday, January 8, 2009

Against the grain! A trillion here or there won't help.

A new year of magical thinking.
"The best thing the federal government could do now is avoid the phony Obama tax cut and not increase spending at all. It's time for the Senate Republicans to step up."
David Henderson explains why in Forbes. The rest of us may know why the Republicans can't step up.

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