"The Comeback Continent" - Krugman 1/11/08

I truly am behind the times in getting to this excellent column by Krugman last week.
An all to common belief in America is that Europe's economy cannot compete due to high taxation, social safety net, and too much regulation. As Krugman points out, this may have been true thirty, or even twelve, years ago - but those days are passing away. Today's European Union is a vibrant economic actor on the global stage. The Euro zone's economy is already competing closely in size and scope with America's. So what has happened in Europe over the past ten years?

What European countries definitely haven’t done is dismantle their strong social safety nets. Universal health care is a given. So are a variety of programs that support families in trouble, helping protect Europeans from the extreme poverty all too common in this country. All of this costs money — even though European countries spend far less on health care than we do — and European taxes are very high by U.S. standards...

According to the anti-government ideology that dominates much U.S. political discussion, low taxes and a weak social safety net are essential to prosperity. Try to make the lives of Americans even slightly more secure, we’re told, and the economy will shrivel up — the same way it supposedly has in Europe.

If the EU where to bring the UK into the Euro zone (very unlikely), establish a more integrated (deeper) union via a strong constitution or supplant the dollar as the preeminent global currency a lot of things could change very quickly. I would argue that Europe's economy is in prime position to make a strong surge to the top of the global economy. With a strong social safety net in place, there is a lower risk of severe disruption of a large swath of the population's lives due to globalization when compared to America. Re-training programs, retirement benefits and health insurance are all issues that the majority of governments on the continent deal with in some manner.

Our American blend of exceptionalism has gotten us a long way, but our resistance to accepting the positives of the European model may just be our most exceptional mistake.

"From Hype to Fear" - Krugman 1/7/08

On Monday, Krugman discussed the GOP fear mongers and their take on the economy.

He hits the nail on the head when he discusses the flip flops this group does when the economic climate changes.

When the economy is doing reasonably well, the debate is dominated by hype — by the claim that America’s prosperity is truly wondrous, and that conservative economic policies deserve all the credit.

But when things turn down, there is a seamless transition from “It’s morning in America! Hurray for tax cuts!” to “The economy is slumping! Raising taxes would be a disaster!”

My economic thinking has always been informed by a progressive ideal, by which the affluent support the economic system from which they are the primary beneficiary. Therefore, if there is a concern about the current level of economic security for the middle and/or lower socioeconomic classes, the first place to look is the affluent. As Krugman points out, however, there are a number of folks out there who will do anything to keep this issue from being framed in this manner.

But there’s a powerful political faction in this country that understands very well that any real change will create losers as well as winners. In particular, any serious progressive reform of health care, let alone a broader attempt to reduce middle-class insecurity and inequality, will have to mean higher taxes on the affluent. And members of that faction will do whatever it takes to scare people into believing that change means disaster for the economy.

I have often been confounded by the success of this group (the have mores) of playing the middle and upper middle classes against the lower middle class. I would argue that the current highest rate is not sufficient and that the threshold is too low. Maybe a $1M top bracket at 40%? I'm not sure of the exact values, but the current system allows too many of the upper middle to fear being moved into the upper bracket(whether or not that fear is justified is debatable).

"The Great Divide" - Krugman 12/31/07

The last day of 2007 saw Krugman continue his recent fixation on anti-Obama positions. The column focuses on the GOP candidates economic policies generally, and the transmogrification of McCain specifically. The overall tenor of the piece, however, is a rebuke of the "transcending partisanship" argument promoted by the Obama campaign. Krugman discusses how the GOP nomination process shows that every contending candidate (with the notable exception of Huckabee) for the nomination has fallen in line with Bushonomics.

If [bipartisan solutions] were possible, Mr. McCain, Mr. Romney and Mr. Giuliani — a self-proclaimed maverick, the former governor of a liberal state and the former mayor of an equally liberal city — would seem like the kind of men Democrats could deal with. (O.K., maybe not Mr. Giuliani.) In fact, however, it’s not possible, not given the nature of today’s Republican Party, which has turned men like Mr. McCain and Mr. Romney into hard-line ideologues. On economics, and on much else, there is no common ground between the parties.

It is amusing that a scant four years ago, there was significant discussion about whether or not the Dems were going to create an unelectable partisan out of a brutal nomination process, and now it appears that the GOP is actually heading down that road. The economy is struggling -- though analysts say it could go either way -- and the average American is feeling the pinch of falling home prices and stagnant wages. Cozying up to the Bush administration's policies doens't seem to be the most intelligent general election move, but I tend to agree with Krugman's assertion that this is what is to be expected out of the current Republican Party and it's blind "free market" economics.

"Trouble With Trade" - Krugman 12/28/07

I find it refreshing that Krugman does not shy away from the issue of international trade by falling back on an exclusively economics argument. It is mostly true from a "pure" (whatever that means) economic argument that trade is a net benefit at the highest aggregation of stakeholders. It is, however, also true that even if the trade maxim that "trade will occur when it is mutually beneficial for both sides," does not offer guidance with respect to the component parts of the two sides involved in a trade. If the USA trades with Vietnam, economic theory says that both will gain something (The US gains cheaper goods, Vietnam gains the wages) -- but what it doesn't do is consider the effects on the individual within both units of analysis. Consider to whom the biggest benefit accrues in the case of a lower cost computer component. The less educated, lower wage American who used to make this part is a net loser as he/she doesn't have a job -- and their only benefit is to get a computer cheaper (which probably isn't high on the unemployed person's list). The more educated, higher wage American keeps his or her job, even if they are in the industry, because this is where R&D are done -- and they get a lower cost computer. This lower cost computer may only cost them 1.7% of their gross annual income instead of the 2.0% it would have otherwise.

I want to be careful not to sound overly protectionist, because I think that possibility is effectively off the table and that it unneccesarily rejects the basic economic rights of the individuals in lower wage countries. I think Krugman sums it up well with the following:

So am I arguing for protectionism? No. Those who think that globalization is always and everywhere a bad thing are wrong. On the contrary, keeping world markets relatively open is crucial to the hopes of billions of people.

But I am arguing for an end to the finger-wagging, the accusation either of not understanding economics or of kowtowing to special interests that tends to be the editorial response to politicians who express skepticism about the benefits of free-trade agreements.

It is tiring to listen to the "you don't understand" economics folks chanting at the thrown of free markets, and though I do not espouse all of the solutions proposed by the competing interests - I find this pulk-pull to be critically important for the contemporary political arena to hash out. Let us make sausage!

Friedman is on book leave...

Today's NYT proclaimed that one of the duo on which this blog is focused is on book leave. This means a refocusing of the DBT is needed. I would love to proclaim that this has been the reason for my laxity in posting recently, but alas that was fecklessness. Hope the holiday/seasonal period is going well for all.

"After the Money's Gone" - Krugman 12/14/07

If the subprime/credit/liquidity crisis is of interest, I would recommend reading Krugman's column from this past Friday. There are a lot of angles to be considered in the current market shake-up and Krugman focuses his column on some of the long term impacts and why they can't be fixed by the Fed's rate cut presription.

Krugman describes two of the biggest problems with the current crisis in succinct manner:

First, we had an enormous housing bubble in the middle of this decade. To restore a historically normal ratio of housing prices to rents or incomes, average home prices would have to fall about 30 percent from their current levels.
Second, there was a tremendous amount of borrowing into the bubble, as new home buyers purchased houses with little or no money down, and as people who already owned houses refinanced their mortgages as a way of converting rising home prices into cash.

This means that when (probably not if) house prices return to the historical norm then those who borrowed for a lot of the house cost (i.e. subprime borrowers) will be left with a house that is worth less than the mortgage on it. This is negative equity, which can lead to more foreclosures-- which are less likely to be able to recoup the costs to the lender-- which means more bank right offs of bad loans. (The financial blog Calculated Risk mentioned by Krugman is a helpful site to peruse to understand the size and scope of the coming negative equity crisis.) This is another example of a vicious cycle argument of economics and I believe shows how a free market will from time to time go to far. I'm not sure what the end of this crisis will look like, but if home values fall 10-30% there will be a lot of problems for homeowners, lenders, borrowers, and the economy in general. (A potential positive side effect may be to inform homeowners that home equity loans to support personal consumption aren't a good idea in the majority of cases.) In addition, this will hopefully teach some a lesson that these bad lending, borrowing, and consumption practices can't always be fixed in a reactionary method by the Fed... we either need to regulate up front or accept these severe consequences as a part of the free market in real estate transactions...

Markets won’t start functioning normally until investors are reasonably sure that they know where the bodies — I mean, the bad debts — are buried. And that probably won’t happen until house prices have finished falling and financial institutions have come clean about all their losses. All of this will probably take years.

Meanwhile, anyone who expects the Fed or anyone else to come up with a plan that makes this financial crisis just go away will be sorely disappointed.

On Vacation

AM donkey is on vacation this week. Enjoy your early December. Remember the Neediest!