Friday, July 31, 2009
Education, natural resources and corruption
Poor countries are cursed by corruption, low human capital and an economy mostly based on natural resources. These three factors have often been treated as exogenous to GDP and in particular to each other. But could they be linked? The correlation is certainly there, what about causation?Iván Aldave and Cecilia García-Peñalosa make the argument that the "blessing" of natural resources gives the
Thursday, July 30, 2009
How to discount time for climate change policies
If you ever tried to argue with a biologist about the pros and cons of conservation, of climate change or habitat encroachment, for example, the debate will pretty fast narrow down to whether the future should be discounted or not. For an economist, this is a nonsensical debate, as the present value of anything is infinity if there is no discount rate and a possibly infinite lifetime. But among
Anil seeks probe into RIL's 'huge scandal' in gas investments
NEW DELHI: Questioning clearance by junior Oil Ministry officials to the near four-fold hike in costs to Rs 45,000 crore for gas fields by Mukesh
Ambani-led RIL, Anil Ambani today demanded a probe into the "huge scandal."
"I am deeply concerned that RIL's capital expenditure of nearly Rs 45,000 crore on KG-D6 fields as confirmed in Parliament by the
Petroleum Minister and which is nearly 33 per cent of India's total defence budget was cleared by a management committee..." he said.
"The committee comprised of one junior level official each from the Petroleum Ministry and Director General of
Hydrocarbon and two representatives of the contractor (RIL)... talk about conflict of interest," he said, adding that any expenditure above Rs 150 crore by any arm of government goes to the Cabinet Committee of Economic Affairs for approval.
Given the incredibly high stakes involved, the Comptroller and Auditor General and Central Vigilance Commission should examine relevant facts and find out if capex was overstated, Anil said, pointing that budgeted expenditure of RIL for peak production of 40 mmscmd was only Rs 12,000 crore in 2004.
Anil alleged that Petroleum Ministry, particularly after the changes in 2006 (when Murli Deora took over as minister), was colluding with RIL in its quest to make "super-normal profits of Rs 50,000 crore" at the cost of power and fertiliser sectors.
"I am deeply concerned that RIL's capital expenditure of nearly Rs 45,000 crore on KG-D6 fields as confirmed in Parliament by the
Petroleum Minister and which is nearly 33 per cent of India's total defence budget was cleared by a management committee..." he said.
"The committee comprised of one junior level official each from the Petroleum Ministry and Director General of
Hydrocarbon and two representatives of the contractor (RIL)... talk about conflict of interest," he said, adding that any expenditure above Rs 150 crore by any arm of government goes to the Cabinet Committee of Economic Affairs for approval.
Given the incredibly high stakes involved, the Comptroller and Auditor General and Central Vigilance Commission should examine relevant facts and find out if capex was overstated, Anil said, pointing that budgeted expenditure of RIL for peak production of 40 mmscmd was only Rs 12,000 crore in 2004.
Anil alleged that Petroleum Ministry, particularly after the changes in 2006 (when Murli Deora took over as minister), was colluding with RIL in its quest to make "super-normal profits of Rs 50,000 crore" at the cost of power and fertiliser sectors.
Govt stake sales to please market; no deficit cure
UMBAI: Power firm NHPC Ltd will kick off a $1.25 billion IPO next week in the first share sale by a state company since the Congress party's
unexpectedly strong re-election in May spurred investor hopes for pro-market reforms.
Despite opposition from labour groups and leftist parties, the government is forecast by some watchers to offload roughly $5 billion a year in state shares, which could hearten a bond market worried about fiscal responsibility but do little to address a yawning deficit and $90 billion borrowing plan.
Uncertainty over how stake sale proceeds can be used also clouds the outlook for any benefit to government finances.
"It is not a huge amount given the size of the government borrowing. But I think it could substantially change sentiment in the debt market," said Abheek Barua, chief economist at private sector lender HDFC Bank.
"What the market is likely to price in is the prospect of larger disinvestments going forward," he said.
Investors are expected to lap up shares in government firms, given attractive pricing, a record of outperformance relative to IPOs by private firms, and a roaring stock market run since March that has been fueled by an influx in foreign funds.
NHPC opens its IPO on August 7 in what would be the first for a state firm in India since Feb. 2008. Oil India is expected to follow with a $500 to $600 million issue in September.
Also in the works could be a multi-billion-dollar IPO by telecoms firm Bharat Sanchar Nigam Ltd and secondary offerings by power equipment maker Bharat Heavy Electricals, Rural Electrification Corp, trading firm MMTC Ltd and mining firm NMDC Ltd.
"Government deals typically have done well. Government a couple of times has been credited with reopening the IPO markets," said Vedika Bhandarkar, head of India investment banking at JPMorgan.
The pipeline of equity from state firms promises to top the record $6 billion raised from government asset sales between 1999 and 2004 when the pro-business Bharatiya Janata Party (BJP) was in power. During that period, shares were sold in firms such as Oil and Natural Gas Corp and Maruti Suzuki.
Since then, the government raised just $1.4 billion as allies of the ruling coalition and labour unions thwarted plans for stake sales.
"We could see issuances in infrastructure, power, mining and agricultural sectors followed by banks and insurance companies," said A. Murugappan, executive director at ICICI Securities.
Despite opposition from labour groups and leftist parties, the government is forecast by some watchers to offload roughly $5 billion a year in state shares, which could hearten a bond market worried about fiscal responsibility but do little to address a yawning deficit and $90 billion borrowing plan.
Uncertainty over how stake sale proceeds can be used also clouds the outlook for any benefit to government finances.
"It is not a huge amount given the size of the government borrowing. But I think it could substantially change sentiment in the debt market," said Abheek Barua, chief economist at private sector lender HDFC Bank.
"What the market is likely to price in is the prospect of larger disinvestments going forward," he said.
Investors are expected to lap up shares in government firms, given attractive pricing, a record of outperformance relative to IPOs by private firms, and a roaring stock market run since March that has been fueled by an influx in foreign funds.
NHPC opens its IPO on August 7 in what would be the first for a state firm in India since Feb. 2008. Oil India is expected to follow with a $500 to $600 million issue in September.
Also in the works could be a multi-billion-dollar IPO by telecoms firm Bharat Sanchar Nigam Ltd and secondary offerings by power equipment maker Bharat Heavy Electricals, Rural Electrification Corp, trading firm MMTC Ltd and mining firm NMDC Ltd.
"Government deals typically have done well. Government a couple of times has been credited with reopening the IPO markets," said Vedika Bhandarkar, head of India investment banking at JPMorgan.
The pipeline of equity from state firms promises to top the record $6 billion raised from government asset sales between 1999 and 2004 when the pro-business Bharatiya Janata Party (BJP) was in power. During that period, shares were sold in firms such as Oil and Natural Gas Corp and Maruti Suzuki.
Since then, the government raised just $1.4 billion as allies of the ruling coalition and labour unions thwarted plans for stake sales.
"We could see issuances in infrastructure, power, mining and agricultural sectors followed by banks and insurance companies," said A. Murugappan, executive director at ICICI Securities.
Initial Claims Down, Retail Up, Foreclosures Fall
This week produced another "good news Thursday."
Initial claims continued their downward spiral. As hiring picks up, new claims for unemployment dropped to their lowest levels since the January 24th weekly report.
Consumers were flashing the buy-sign again in May. The Commerce Department said that sales at U.S. retailers rose 0.5% last month. According to Rasmussen Reports, consumer confidence is now up ten points from the beginning of the year. Investor confidence is up seventeen points from the first reading of the year.
The May foreclosure figures were also released on Thursday and the number of filings in the U.S. dropped 6%. That had a majority of economists stroking their chins in disbelief. Some areas of the country actually reported double digit drops April to May. Foreclosure filings in Illinois dropped nearly 20%. Foreclosure filings in Illinois also dropped nearly 20%. There were even year over year drops. Foreclosures in Rhode Island for the month dropped 26.9% compared with May 2008. And in Massachusetts foreclosures were down 45.7% from the same period last year.
Look for continued improvement in employment, retail, mortgage activity and housing sales as this new growth cycle gets underway.
Initial claims continued their downward spiral. As hiring picks up, new claims for unemployment dropped to their lowest levels since the January 24th weekly report.
Consumers were flashing the buy-sign again in May. The Commerce Department said that sales at U.S. retailers rose 0.5% last month. According to Rasmussen Reports, consumer confidence is now up ten points from the beginning of the year. Investor confidence is up seventeen points from the first reading of the year.
The May foreclosure figures were also released on Thursday and the number of filings in the U.S. dropped 6%. That had a majority of economists stroking their chins in disbelief. Some areas of the country actually reported double digit drops April to May. Foreclosure filings in Illinois dropped nearly 20%. Foreclosure filings in Illinois also dropped nearly 20%. There were even year over year drops. Foreclosures in Rhode Island for the month dropped 26.9% compared with May 2008. And in Massachusetts foreclosures were down 45.7% from the same period last year.
Look for continued improvement in employment, retail, mortgage activity and housing sales as this new growth cycle gets underway.
Jumbo Mortgage Activity Increasing
As this recovery begins, all eyes will be on the housing markets as a gauge for just how strong this return to growth will be.
Of particular note is the jumbo mortgage market which is now springing back to life.
A jumbo mortgage is a home loan with a lending amount above the industry-standard definition of conventional conforming loan limits. With some exceptions, this means an amount above $417,000. A loan in excess of $650,000 is typically referred to as a super jumbo mortgage.
Banks have now resumed underwriting wealthy clients in both of these categories. In fact jumbo activity seems to be brewing even with a limited secondary market for these large payback notes.
For instance, Bank of New York Mellon’s wealth management division reports a resurgence in its high-end lending activity. "We’ve seen significant growth," says Erin Gorman, their national director of sales. Through the end of May 2009, BNY Mellon's jumbo lending activities are up 32% by dollar volume compared to that same period in 2008. In the first quarter of 2009, BNY's average loan balance bounced by 23% compared to the first quarter of 2008.
Another example is found over at Coldwell Banker Residential Brokerage. In the Boston market alone 36 properties of $1 million and up went under contract in March. That figure nearly tripled in May, jumping to 105 mega residential deals.
Mellon's Gorman currently is observing that her competitors are indeed returning to the jumbo market as the economy recovers. She notes that during the recession, "we earned a reputation as the go-to player in jumbo mortgages. And that puts us in a strong position as other lenders gingerly move back onto the field."
BNY Mellon (BK) is one of the 10 large banks announcing that they will begin repayment of their TARP bailout monies to the US Treasury.
Of particular note is the jumbo mortgage market which is now springing back to life.
A jumbo mortgage is a home loan with a lending amount above the industry-standard definition of conventional conforming loan limits. With some exceptions, this means an amount above $417,000. A loan in excess of $650,000 is typically referred to as a super jumbo mortgage.
Banks have now resumed underwriting wealthy clients in both of these categories. In fact jumbo activity seems to be brewing even with a limited secondary market for these large payback notes.
For instance, Bank of New York Mellon’s wealth management division reports a resurgence in its high-end lending activity. "We’ve seen significant growth," says Erin Gorman, their national director of sales. Through the end of May 2009, BNY Mellon's jumbo lending activities are up 32% by dollar volume compared to that same period in 2008. In the first quarter of 2009, BNY's average loan balance bounced by 23% compared to the first quarter of 2008.
Another example is found over at Coldwell Banker Residential Brokerage. In the Boston market alone 36 properties of $1 million and up went under contract in March. That figure nearly tripled in May, jumping to 105 mega residential deals.
Mellon's Gorman currently is observing that her competitors are indeed returning to the jumbo market as the economy recovers. She notes that during the recession, "we earned a reputation as the go-to player in jumbo mortgages. And that puts us in a strong position as other lenders gingerly move back onto the field."
BNY Mellon (BK) is one of the 10 large banks announcing that they will begin repayment of their TARP bailout monies to the US Treasury.
More Recession Proof Jobs at Wal-Mart
Last year Wal-mart added close to 30,000 jobs to it's domestic labor force. In 2009 it now predicts it will add another 22,000 positions nationwide. In fact in some hard hit states like California, Florida and Michigan, Wal-Mart plans to add over 1,000 jobs in each.
Wal-Mart is the largest private-sector employer in the US with a labor force of 1.45 million workers. Wal-Mart's strong retail sales outlook for 2009 continues to highlight a significant rebound in from discount and value retailers since the dismal Q4 of last year.
Expect similar hiring metrics from 10 top retailers that have also experienced strong than expected Q1 results.
"We're proud to be able to create quality jobs for thousands of Americans this year," said Eduardo Castro-Wright, vice-chairman in a company statement.
New Wal-mart employees have found jobs this year in a wide swath of disciplines including pharmacists, human resource managers, and customer service associates.
Separately new data from Challenger, Gray & Christmas, shows that corporate layoffs in May have free fallen 55% from their January high. The reported levels are now close to rates that could almost be considered "normal."
On Thursday the government reported that the number of continuing claims for state unemployment benefits has now started to decline. This is one of the last indicators to mark the stabilization of the labor market following a recessionary period. First-time claims also continued to fall, reaching the lowest level since early May.
Now that the recession has ended, the rate at which these labor level indicators continue to fall will be an additional indicator on how strong this new growth cycle will be.
Wal-Mart is the largest private-sector employer in the US with a labor force of 1.45 million workers. Wal-Mart's strong retail sales outlook for 2009 continues to highlight a significant rebound in from discount and value retailers since the dismal Q4 of last year.
Expect similar hiring metrics from 10 top retailers that have also experienced strong than expected Q1 results.
"We're proud to be able to create quality jobs for thousands of Americans this year," said Eduardo Castro-Wright, vice-chairman in a company statement.
New Wal-mart employees have found jobs this year in a wide swath of disciplines including pharmacists, human resource managers, and customer service associates.
Separately new data from Challenger, Gray & Christmas, shows that corporate layoffs in May have free fallen 55% from their January high. The reported levels are now close to rates that could almost be considered "normal."
On Thursday the government reported that the number of continuing claims for state unemployment benefits has now started to decline. This is one of the last indicators to mark the stabilization of the labor market following a recessionary period. First-time claims also continued to fall, reaching the lowest level since early May.
Now that the recession has ended, the rate at which these labor level indicators continue to fall will be an additional indicator on how strong this new growth cycle will be.
Three Clear Markers: The Recession is Over
We now have three very reputable markers that signal the recession's end.
1. According to the U.S. Weekly Leading Index published by the Economic Cycle Research Institute (ECRI), that index growth has steadily risen to a 36-week high.
2. You've seen the pointer here for several weeks now that the "lagging peak" in new claims for unemployment is shown to be quite accurate in predicting past business cycle rebounds. With current continuing claims declining again last week, it is almost certain that we've now seen the lagging peak of this recession.
3. The ISM Manufacturing index that we've been following since the beginning of Feb, shows a likely return to GDP growth. The ISM reported that index at 42.8% on Monday. You may want to go back and check our trend-line from our March 2 post remembering that according to the ISM an index reading "in excess of 41.2 percent, over a period of time, generally indicates an expansion of the overall economy."
It is increasingly obvious that the 'green shoots', have grown leaves, and no doubt will blossom this summer. Professor Hirschey got it just right.
1. According to the U.S. Weekly Leading Index published by the Economic Cycle Research Institute (ECRI), that index growth has steadily risen to a 36-week high.
2. You've seen the pointer here for several weeks now that the "lagging peak" in new claims for unemployment is shown to be quite accurate in predicting past business cycle rebounds. With current continuing claims declining again last week, it is almost certain that we've now seen the lagging peak of this recession.
3. The ISM Manufacturing index that we've been following since the beginning of Feb, shows a likely return to GDP growth. The ISM reported that index at 42.8% on Monday. You may want to go back and check our trend-line from our March 2 post remembering that according to the ISM an index reading "in excess of 41.2 percent, over a period of time, generally indicates an expansion of the overall economy."
It is increasingly obvious that the 'green shoots', have grown leaves, and no doubt will blossom this summer. Professor Hirschey got it just right.
Wednesday, July 29, 2009
Can migration be Pareto optimal?
Immigration policy is a continuous hot potato, probably because there are winners and losers from any change. Could we then not devise some compensation scheme so as to obtain a Pareto improvement? Clearly, migrants benefits from moving, as they chose to move. In the receiving country, some gain, some lose, but on can assume that on aggregate the country wins, as it lets people in, but not too
Tuesday, July 28, 2009
Marc Lavoie - Quite Fierce
I think I downloaded Marc Lavoie's paper, "Neoclassical Empirical Evidence: On Employment and Production Laws as Artefact" from some conference proceedings. It's downloadable from his site, but I'm not sure for which recent conference it was presented.
Lavoie summarizes the orthodox response to the Cambridge Capital Controversy and the counterexamples:
And he also mentions how some react to the arguments of such economists as Franklin Fisher and Anwar Shaikh:
Lavoie summarizes the orthodox response to the Cambridge Capital Controversy and the counterexamples:
- "Neoclassical authors minimize the capital paradoxes, making an analogy with Giffen goods in microeconomics, which do not question the entire neoclassical edifice;
- They look for the mathematical conditions that would be required to keep production functions as 'well-behaved', or they claim that this is a simple aggregation problem that can be resolved;
- They claim that Walrasian general equilibrium theory is impervious to the critique;
- They claim that they have the faith, or they plead ignorance;
- Empiricism (It works, therefore it exists)."
And he also mentions how some react to the arguments of such economists as Franklin Fisher and Anwar Shaikh:
"I have discussed some of these issues with a few of my neoclassical colleagues - those that I thought would be most open to dialogue. Amazingly, their response has been to fake that they did not understand the implications of the Shaikh or McCombie papers that I emailed them. The most genuine answers have been that without these elasticity estimates they could not say anything anymore. But they would rather continue making policy proposals based on false information than make no proposition at all. In other words, they would rather be precisely wrong than approximately right."
Forecasting with DSGE models
Dynamic Stochastic General Equilibrium (DSGE) models are designed to do policy analysis. They are based on microfoundations and calibrated or estimated to provide quantitative answers to policy scenarios and in particular study environments for which there is no historical precedent. These model are not designed for forecasting, traditional statistical tools, where ad-hoc models with minimal
Monday, July 27, 2009
Credit markets and the persistence of unemployment
Some literature has established that the presence of credit constraints can have an impact on the unemployment rate. It can reduce by making it impossible to find credit when unemployed and thus urging unemployed workers to find a job as fast as possible. But it can also increase it, either because structural change in the economy needs investment (and credit) or because search frictions on the
Friday, July 24, 2009
A large US current account deficit is normal
The recent decades have seen a steady decline of the net financial asset position of the United States. As of 2006, the current account deficit of the US amounts to 1.6% of world GDP, US net foreign asset correspond to -5% of world GDP. Mostly everyone sees that as a huge problem and a sign the US is on the decline.Enrique G. Mendoza, Vincenzo Quadrini and José-Víctor Ríos-Rull argue that this is
A Massive Refinancing Boom - Seriously
No doubt thousands of Americans were contacting their mortgage brokers today.
For those paying attention, news about the Federal Reserve's decision to cut its key interest rate to nearly zero, had them rushing to refinance to something lower than 5.5 percent.
Many reports have folks locking in rates almost a full percentage point lower than yesterday's quotes.
Across the country, mortgage brokers are reporting a surge of calls from borrowers seeking to take advantage of the Fed's historic decision. Brokers were routinely quoting mortgage rates of close to 4.5 percent for people with good credit.
It was a continuation of the good news since late November for anyone looking to lock in a 30-year, fixed-rate mortgage. In the past 3 weeks alone, mortgage applicatons have surged by the greatest amount in history.
"We're going to see just a massive refinancing boom," said Mark Zandi, chief economist at Moody's Economy.com, who estimates that up to 10 million U.S. borrowers will wind up refinancing their existing notes.
Inter-bank lending rates in free-fall since October
Why are Libor rate declines a good thing?
1) Back in October, all we heard was that banks would not loan money to each other... that the credit markets were "frozen." Well, that is no longer the case -- short term lending is on the rise as indicted by the falling international LIBOR rates.
2) Many adjustable mortgages and home equity lines of credit (HELOC) are set by the LIBOR as their INDEX.
Let's say that one fine borrower has a HELOC on her home for $50,000 and that her interest rate payments are set by the LIBOR index + 2%.
See the charts below. Back in October her interest rate would have been 6.3%. But this month her rate will be somewhere south of 4.3%...
On her $50K note, her interest payment was $263 on October 15. But on her payment due today she only owes $179. That's $84 more for her pocket this month.
Will she save it? Pay down the principal on her note? Or buy me a nice Christmas gift?
I'd say any of those senarios are good news to her.
12 month Libor
6-month Libor
Remembering 1975 - The Majority was Wrong
Does anyone remember the stock market crash of October 1973? Over the next 15 months world stock markets collapsed. In the UK the FT 30 index fell by 70%. The holidays of 1974 into the new year of 1975 was not merry. President Nixon decided not to light the National Christmas tree!
All the talking heads agreed: the end was near. Oil was about to be rationed, thermostats were turned down in all federal buildings to 68 degrees, and 55 mph speed limits were imposed to save gas. An energy crisis was upon us. And the Department of Energy got a Cabinet level position in the White House.
But what happened next? In January 1975, the FT index jumped 25% and in the next 12 months was up over 100%.
And what are "they" telling us now? "Things are bad right now, but they're going to get a lot worse. Apparently it'll be as bad as the Great Depression."
So why does this post offer a "good news" perspective? Because history continues to tell us that when it comes to economics, "the majority is always wrong."
Remember it has been less than 6 months since all the financial experts were predicting rampant inflation, oil over $200 a barrel, and gold over $2,000 an ounce. Yet now the same experts tell us deflation is the problem, oil and gold have plummeted. And every news outlet has a new story on economic bad news.
The majority was wrong in Jan 1975 -- one of the best buying opportunities ever in the stock market. Now the majority is wrong again.
Sounds like good news for 2009!
All the talking heads agreed: the end was near. Oil was about to be rationed, thermostats were turned down in all federal buildings to 68 degrees, and 55 mph speed limits were imposed to save gas. An energy crisis was upon us. And the Department of Energy got a Cabinet level position in the White House.
But what happened next? In January 1975, the FT index jumped 25% and in the next 12 months was up over 100%.
And what are "they" telling us now? "Things are bad right now, but they're going to get a lot worse. Apparently it'll be as bad as the Great Depression."
So why does this post offer a "good news" perspective? Because history continues to tell us that when it comes to economics, "the majority is always wrong."
Remember it has been less than 6 months since all the financial experts were predicting rampant inflation, oil over $200 a barrel, and gold over $2,000 an ounce. Yet now the same experts tell us deflation is the problem, oil and gold have plummeted. And every news outlet has a new story on economic bad news.
The majority was wrong in Jan 1975 -- one of the best buying opportunities ever in the stock market. Now the majority is wrong again.
Sounds like good news for 2009!
More Good News in the Housing Market
The National Association of Realtors (NAR), brought us continued good news in the housing market today. Despite the turmoil in the economy, the overall level of pending home sales has been remarkably stable over the past year, said Lawrence Yun, NAR chief economist. “...access to safe, affordable mortgages will bring more buyers into the market.... NAR’s housing affordability index is likely to remain quite favorable in 2009."
An additional government report released today also claims that despite all the dire conditions reported in most news outlets, "the majority of markets continue to show growth in home values over the last five years." In fact in the last half decade, the following markets did quite well:
- Honolulu was up 78.7 percent
- Virginia Beach was up 72.6 percent
- Flagstaff, Ariz.: up 66.5 percent
- Bellingham, Wash.: up 65.6 percent
- Wilmington, N.C.: up 62.1 percent
- Baltimore: up 60.6 percent
- Virginia Beach was up 72.6 percent
- Flagstaff, Ariz.: up 66.5 percent
- Bellingham, Wash.: up 65.6 percent
- Wilmington, N.C.: up 62.1 percent
- Baltimore: up 60.6 percent
Further, the NAR now predicts that the 30-year fixed-rate mortgage will probably decline to at least 5.6 percent in the first quarter of 2009. (Remember we already blogged about the surge that is now occuring in mortgage applications)
And if all that wasn't enough good news for one day, Yun further observes that "California in particular has seen an exceptional turnaround in buying activity. Many foreclosed homes have enticed buyers to take advantage of deeply discounted prices. 'Fence sitters' are beginning to do a lot more home searches. That will result in a large set of potential buyers for the upcoming spring buying season."
Good news?
And what about jobs? "
"President-elect Barack Obama is focusing his economic recovery strategy on making the biggest investment in the nation’s infrastructure since Eisenhower's plan for the interstate highway system.
Speaking yesterday at a Chicago news conference and on NBC’s “Meet the Press,” Obama said state governors have many such projects that are “shovel ready,” meaning they could be undertaken swiftly and have an immediate impact on jobs." - Bloomberg.
For those of you not familiar with the history leading up to FDR taking office: From 1929-1933, unemployment in the U.S. increased dramatically from 4% to 25%. In addition, manufacturing output was reduced by approximately a third from its historical peak. Prices fell drastically causing a deflation of currency values, which made the repayments of any debts much harder. The mining, lumber, and agriculture industries were hit especially hard by the drop in values. The outgoing Hoover administration claimed, "There is knowing more to be done. We have done all that we can do."
But in the first 120 days of 1933, the FDR administration and Congress past all 34 initiatives proposed by the new leaders. Have a look at the results:
With the statements of Obama yesterday and throughout the campaign, the next 8 years look extremely bright.
Now that's good news!
Spread Good News By Sharing This Article With Your Friends. Click the Orange Plus Sign...
Speaking yesterday at a Chicago news conference and on NBC’s “Meet the Press,” Obama said state governors have many such projects that are “shovel ready,” meaning they could be undertaken swiftly and have an immediate impact on jobs." - Bloomberg.
For those of you not familiar with the history leading up to FDR taking office: From 1929-1933, unemployment in the U.S. increased dramatically from 4% to 25%. In addition, manufacturing output was reduced by approximately a third from its historical peak. Prices fell drastically causing a deflation of currency values, which made the repayments of any debts much harder. The mining, lumber, and agriculture industries were hit especially hard by the drop in values. The outgoing Hoover administration claimed, "There is knowing more to be done. We have done all that we can do."
But in the first 120 days of 1933, the FDR administration and Congress past all 34 initiatives proposed by the new leaders. Have a look at the results:
With the statements of Obama yesterday and throughout the campaign, the next 8 years look extremely bright.
Now that's good news!
Would you believe consumer spending is up?
Yes, the title is correct. According to reports out this past week, consumer spending was up over last year for both Black Friday and Cyber Monday.
Market Watch reported that "strong discounts brought U.S. consumers to the stores on 'Black Friday' -- the traditional first day of the holiday shopping season -- with estimated sales rising 3% from last year."
And consumers kept the momentum going on Cyber Monday... according to comScore, "Online shoppers spent $846 million on Dec. 1, a 15% increase over the Monday after Thanksgiving last year." It was the second largest online spending day on record.
Oh yes, and while we were finding great deals online, gas prices continued to fall.
Market Watch reported that "strong discounts brought U.S. consumers to the stores on 'Black Friday' -- the traditional first day of the holiday shopping season -- with estimated sales rising 3% from last year."
And consumers kept the momentum going on Cyber Monday... according to comScore, "Online shoppers spent $846 million on Dec. 1, a 15% increase over the Monday after Thanksgiving last year." It was the second largest online spending day on record.
Oh yes, and while we were finding great deals online, gas prices continued to fall.
What went down, must come up
Would you believe that housing prices are on the rise?
Believe it or not, in the third quarter of 2008 according to the National Association of Realtors, "28 out of 152 metropolitan statistical areas showed increases in median existing single-family home prices." That is over 18%. Said another 
way, one in five major metropolitan areas are experiencing a rise in the value of their homes.
way, one in five major metropolitan areas are experiencing a rise in the value of their homes.If you don't believe me. Read the whole story here.
And, as the chart to the left suggests, the national decline in home values is beginning to level off.
Further evidence of a this housing market turn-around was reported on Wednesday (12/3). Mortgage applications surged by the largest amount on record in the last week of November as a new Federal Reserve program pushed interest rates down to their lowest level in more than 3 years. The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended November 28 "soared a by a record 112.1%"
You heard that right my friend. Mortgage applications are soaring. I doubt they are sub-prime.
It's December 2008, Ho, ho, ho.
Bottom Feeding...
And the market keeps testing the bottom.
Tomorrow folks will wake up and see that alas, the market is way oversold yet again.
So two more developments seem highly likely.... much lower mortgage rates as the powers that be consider plans to lower long term rates to 4.5%. I never dreamed I would see that in my lifetime. It is surreal.
Looks like next week short term rates will come down another 1/2 percent. For folks with adjustable rate mortgages and any type of debt tied to the prime rate, monthly cash flow should be better right now than at any time in the last several years.
So, gas prices are way down. Mortgage payments are way down. Credit card payments are way down. Credit to the consumer, home buyers, and investors is flowing nicely.
This is not the great depression my friends. This is a buyers' market. Buy some stock. Buy some investment real estate. Buy oil if if you must, but buy something of tangible value. You will probably never see it's price this low again.
While others are lamenting their paper losses and moving their 401Ks into bonds and money markets, the time is ripe to move money in to depressed assets.
I am betting that 2 years from now you will be incredibly glad you took the counter-intuitive risk.
It's good news.
All business eyes on the macro market
With the election behind us, all industries, including recession-proof sectors have their eyes on the macro market. Despite the continued volatility in the stock market, some positive macro economic market indicators have emerged.
With oil prices continuing to fall, the
The business credit markets continue to thaw. According to Bloomberg, borrowing volumes are up by more than 10 times what they were in early October. In a further indication of a world market economy on the mend -- large international banks like Chase and Citigroup are lending to their counterparts like HSBC Bank of
And the market for commercial paper — the unsecured debt that companies sell for short-term financing — continues to improve. Just a few weeks ago, even the strongest companies like AT&T were having trouble selling paper for longer than overnight. Now, investors are starting to step back in and buy paper with 30-day and 60-day maturities.
And surprisingly in a Reuters report released on 11/14,
October was tough. A recession is already likely. But significant economic engineering on the global market scene has already produced some positive results.
Thursday, July 23, 2009
Unemployment insurance and work ethic
Why is the average unemployment rate so high in Europe? This question has kept economists busy for some time and various explanations has been proposed: the type of shocks Europe faces combined with the type of education, the generosity of unemployment insurance, tax rates, "culture", measurement. All these explanations have some merit, but I like to see the bigger picture, especially as these
Wednesday, July 22, 2009
When to bribe with sex
There are these times where you need to bribe and you do not know what kind of bribe to use: cash or sex? Luckily, José Rodrigues-Neto has just produces a handy and rigorous guide for your decision making. Clearly, sex as a bribe is less efficient than money, for reasons related to the deadweight loss of Christmas. However, sex may be less detectable. Also, and the author does not take this into
Tuesday, July 21, 2009
Risk aversion is learned behavior
We often consider preferences to be given and unchanging. I reported earlier about risk aversion to be found to be changing according to external circumstances. But this can still be rationalized as invariant preferences if one increases the state space over which preferences are formed to include these circumstances. But could preferences be learned? There is no doubt about this. Look around you
Unsent Letter
Others have already commented on the three articles on the breakdown of macroeconomics and financial economics in the July 18-24 issue of The Economist.
SIR - You write:"[Macroeconomists'] framework reflected an uneasy truce between the intellectual heirs of Keynes, who accept that economies can fall short of their potential, and purists who hold that supply must always equal demand. The models the epitomise this synthesis ... incorporate imperfections in labour markets ('sticky' wages, for instance, which allow unemployment to rise)..."But the idea that persistent unemployment is the result of wages sticky downward is a pre-Keynesian idea. Keynes explicitly rejected this explanation of the cause of unemployment:"...the Classical Theory has been accustomed to rest the supposedly self-adjusting character of the economic system on an assumed fluidity of money-wages; and, when there is rigidity, to lay on this rigidity the blame of maladjustment... My difference from this theory is primarily a difference of analysis." (John Maynard Keynes, The General Theory of Employment, Interest and Money, "Chapter 19. Changes in Money Wages"Apparently neither saltwater nor freshwater macroeconomists follow Keynes.
Sunday, July 19, 2009
Woodstock Thirtieth Anniversary
They did not hold the 30th anniversary concert at Woodstock. They held it in my backyard.
 |
| Crowd for Dave Matthews. Dave Did "Watchtower" |
 |
| Naked Man and Photographer |
 |
| The man in the purple shirt is Ken Kesey's business partner. |
 |
| Salesman |
 |
| What With The Arson, That Didn't Work Out So Well, Did It? |
Saturday, July 18, 2009
Now, Judge, I Had Debts No Honest Man Could Pay/The Bank Was Holding My Mortage And They Were Gonna Take My House Away
1.0 Introduction
This example illustrates one aspect of how Sraffa analyzed natural resources. In this case, natural resources consist of land of various qualities or grades. The quantity of each grade is given; more land cannot be produced. Land is not destroyed either. Appropriate production processes yield as much land as a joint output as given as input. So this sort of model does not incorporate a natural resource like oil that is used up in production.
This example demonstrates that owners of less efficient (productive) natural resources can receive a greater rent.
By the way, Sraffa introduces a distinction between basic and non-basic commodities. Lands with positive rent are non-basic, and therefore their rent is a candidate for taxation.
2.0 Technology
This is a simple economy in which only corn is produced. Table 1 shows the available processes that have corn as an output. Each process requires the use of one grade of land, and no more than one process is known for each grade of land. (This is an example of a model of extensive rent.) Suppose this economy has available 150 acres of land of grade I, 162 acres of grade II land, and 210 acres of grade III land.
3.0 Prices
The question to be addressed is what prices and distribution of income are compatible with a long-period position, given the technology. The amount of corn required for net output is a parameter that must be known to answer this question.
3.1 When Only One Grade Of Land Is Cultivated
Suppose the requirements for use for corn in this economy can be satisfied by cultivating any one of the three grades of land. Two grades, and maybe some of the third grade, can lie fallow. So at most 90 bushels are produced each year, after replacinging up the seed corn.
And suppose that the wage is 1/2 bushels per person-year. The wage is paid out at the end of the year. These assumptions are enough to derive the factor-price curves shown in Figure 1. These curves are drawn under the assumption that all grades of land paid no rent.
Since the beta factor-price curve is rightmost (on the outer frontier) at the given wage, all corn is produced on land of the second grade, and this land pays no rent. The wage and the rate of profits must satisfy the following equation:
Under the given assumptions, the cost of producing a bushel corn on the first grade of land, even if that land were to pay no rent, is 7/5 bushels. Since this cost exceeds the revenues from selling a bushel of land, no capitalist would want to produce on the first grade of land. The reader can check that the cost of producing a bushel corn on the third grade of land also exceeds unity.
3.2 When Two Grades Of Land Are Cultivated
Now suppose the requirements for use are such that two grades of land must be cultivated. The net output of this economy is between 90 and 180 bushels corn. The wage remains 1/2 bushels per person-year. In this case, the first and second grades are cultivated, with the second grade paying rent. The price equations are:
The cost of producing a bushel corn on the third grade of land, accounting just for outlays of seed corn and labor, is 9/7 bushels. Capitalists will not want to cultivate the third grade of land, even if it is free.
3.3 When Three Grades Of Land Are Cultivated
Finally, suppose the requirements for use for use require all three grades of land to be cultivated. The price equations are:
3.4 Orders Of Efficiency And Rentability
The above analysis has identified a definite order in which different grades of land will be cultivated as greater quantities of output are required to be produced. This is the order of efficiency. In this example, the order of efficiency, from most efficient to least efficient, is: Grade II, Grade I, Grade III.
One can also rank the grades of land from high rent to low rent, when all three grades of land are cultivated and the wage is 1/2 bushels per person-year. The order of rentability, from highest rent to zero rent, is: Grade I, Grade II, Grade III.
The orders of rentability and efficiency differ. It is possible for a less productive, that is, the less efficient, resource to provide its owner with a greater rent than the more efficient resource.
This example is not driven by the existence of switch points.
Reference
This example illustrates one aspect of how Sraffa analyzed natural resources. In this case, natural resources consist of land of various qualities or grades. The quantity of each grade is given; more land cannot be produced. Land is not destroyed either. Appropriate production processes yield as much land as a joint output as given as input. So this sort of model does not incorporate a natural resource like oil that is used up in production.
This example demonstrates that owners of less efficient (productive) natural resources can receive a greater rent.
By the way, Sraffa introduces a distinction between basic and non-basic commodities. Lands with positive rent are non-basic, and therefore their rent is a candidate for taxation.
2.0 Technology
This is a simple economy in which only corn is produced. Table 1 shows the available processes that have corn as an output. Each process requires the use of one grade of land, and no more than one process is known for each grade of land. (This is an example of a model of extensive rent.) Suppose this economy has available 150 acres of land of grade I, 162 acres of grade II land, and 210 acres of grade III land.
| Inputs | Process | ||
| Alpha | Beta | Gamma | |
| Labor (Person-Years) | 2/5 | 1 | 2/7 |
| Grade I Land (Acres) | 1 | 0 | 0 |
| Grade II Land (Acres) | 0 | 3/2 | 0 |
| Grade III Land (Acres) | 0 | 0 | 1 |
| Corn (Bushels) | 2/5 | 1/6 | 4/7 |
| Output (Bushels) | 1 | 1 | 1 |
3.0 Prices
The question to be addressed is what prices and distribution of income are compatible with a long-period position, given the technology. The amount of corn required for net output is a parameter that must be known to answer this question.
3.1 When Only One Grade Of Land Is Cultivated
Suppose the requirements for use for corn in this economy can be satisfied by cultivating any one of the three grades of land. Two grades, and maybe some of the third grade, can lie fallow. So at most 90 bushels are produced each year, after replacinging up the seed corn.
And suppose that the wage is 1/2 bushels per person-year. The wage is paid out at the end of the year. These assumptions are enough to derive the factor-price curves shown in Figure 1. These curves are drawn under the assumption that all grades of land paid no rent.
 |
| Figure 2: Factor Price Curves |
Since the beta factor-price curve is rightmost (on the outer frontier) at the given wage, all corn is produced on land of the second grade, and this land pays no rent. The wage and the rate of profits must satisfy the following equation:
(1/6)(1 + r) + w = 1where a bushel corn is the numeraire. For a wage of 1/2 bushels per person-year, the rate of profits is 200%.
Under the given assumptions, the cost of producing a bushel corn on the first grade of land, even if that land were to pay no rent, is 7/5 bushels. Since this cost exceeds the revenues from selling a bushel of land, no capitalist would want to produce on the first grade of land. The reader can check that the cost of producing a bushel corn on the third grade of land also exceeds unity.
3.2 When Two Grades Of Land Are Cultivated
Now suppose the requirements for use are such that two grades of land must be cultivated. The net output of this economy is between 90 and 180 bushels corn. The wage remains 1/2 bushels per person-year. In this case, the first and second grades are cultivated, with the second grade paying rent. The price equations are:
(2/5)(1 + r) + (2/5)w + ρ1 = 1
(1/6)(1 + r) + w + (3/2)ρ2 = 1
ρ1 ρ2 = 0
ρ1, ρ2 ≥ 0The equations specify that no land can have a negative rent and that at least one grade of land must have a rent of zero. The rate of profits is 100%, when the wage is 1/2 bushels per person-year. Land of grade I pays no rent, and the rent on land of grade II is 1/9 bushels per acre.
The cost of producing a bushel corn on the third grade of land, accounting just for outlays of seed corn and labor, is 9/7 bushels. Capitalists will not want to cultivate the third grade of land, even if it is free.
3.3 When Three Grades Of Land Are Cultivated
Finally, suppose the requirements for use for use require all three grades of land to be cultivated. The price equations are:
(2/5)(1 + r) + (2/5)w + ρ1 = 1
(1/6)(1 + r) + w + (3/2)ρ2 = 1
(4/7)(1 + r) + (2/7)w + ρ3 = 1
ρ1 ρ2, ρ3 = 0
ρ1, ρ2, ρ3 ≥ 0The rate of profits is 50%, when the wage is 1/2 bushels per person-year. The rent on land of grade I is 1/5 bushels per acre. The rent on grade II land is 1/6 bushels per acre
3.4 Orders Of Efficiency And Rentability
The above analysis has identified a definite order in which different grades of land will be cultivated as greater quantities of output are required to be produced. This is the order of efficiency. In this example, the order of efficiency, from most efficient to least efficient, is: Grade II, Grade I, Grade III.
One can also rank the grades of land from high rent to low rent, when all three grades of land are cultivated and the wage is 1/2 bushels per person-year. The order of rentability, from highest rent to zero rent, is: Grade I, Grade II, Grade III.
The orders of rentability and efficiency differ. It is possible for a less productive, that is, the less efficient, resource to provide its owner with a greater rent than the more efficient resource.
This example is not driven by the existence of switch points.
Reference
- Alberto Quadrio-Curzio, "Rent, Income Distribution, and Orders of Efficiency and Rentability", in Essays on the Theory of Joint Production (Edited by L. L. Pasinetti), Columbia University Press, 1980.
Tuesday, July 14, 2009
Elsewhere
- Benedict's encyclical letter, "Charity in Truth". (Comments on the encyclical at Open Economics.)
- James Galbraith's "No Return to Normal: Why the economic crisis, and its solution are bigger than you think", in the Spring 2009 issue of Democratic Left, the national magazine of Democratic Socialists of America (DSA).
- Steve Keen's "The Creative Destruction of G8 Economics: A plan to shift the theoretical foundations of our global system", in the current issue of Adbusters. (The September/October issue will explore alternatives to the neoclassical economic paradigm.)
- A Warning label: "This economics textbook is for entertainment purposes only..." for your mainstream economics textbook.
Saturday, July 11, 2009
Labor Demand Curves Slope Down?
Consider the consequences of capital-reversing. I like to say that one is that explaining wages and employment by well-behaved supply and demand functions for labor is of doubtful logic. Here's what some others have had to say:
"the pattern of activities adopted in the face of long-run factor-price changes can be complicated and counterintuitive. Consequently, the long-run demand for factors can be badly behaved functions of factor prices." -- Michael Mandler (1999) Dilemmas in Economic Theory: Persisting Foundational Problems of Microeconomics, Oxford University Press.
"However, as was argued in Section 3 with regard to 'perversely' shaped, that is, upward sloping, factor-demand functions, this possibility would question the validity of the entire economic analysis in terms of demand and supply." -- H. D. Kurz and N. Salvadori (1995) Theory of Production: A Long Period Analysis, Cambridge University Press
"The essential point of the criticism concerns the factor demand curves. The discovery that factor demand curves may be positively sloped in the relevant range, not negatively..." -- Bertram Schefold (1990) "Joint Production, Intertemporal Preferences, and Long-Period Equilibirum," Political Economy: Studies in the Surplus Approach, V. 6, 1990, pp. 162-163.
"there is not necessarily an inverse monotonic relation between the cost-minimizing quantity of an input and its price... Figures 6.17a-6.17c can be interpreted as demand curves for labour... in Figure 6.17b, ...the sectoral demand curve is upward-sloping... I have shown in Figure 6.17c that the aggregate demand curve is not downward-sloping in the presence of reswitching: indeed, like the sectoral demand curve, it is not even monotonic. Reswitching is sufficient, not necessary, for the aggregate demand curve for labour not to be downward-sloping: to see this, consider Figure 6.18..." -- J. E. Woods (1990) The Production of Commodities: An Introduction to Sraffa, Humanities PressIt is a theme of this blog that mainstream economists have yet to integrate this challenge into their theories and teaching.
Tuesday, July 7, 2009
Principles of Neoliberalism
Some of these strike me as too absurd (e.g., 7, 9) to bother refuting:
(I've miscategorized this post since neoliberalism encompasses more than economics.)-- Philip Mirowski, "Postface", in The Road from Mont Pelerin: The Making of the Neoliberal Thought Collective (edited by Philip Mirowski and Dieter Plehwe), Harvard University Press (2009)
- "...contrary to classical liberal doctrine, [the neoliberal] vision of the good society will triumph only if it becomes reconciled to the fact that the conditions for its existence must be constructed and will not come about 'naturally' in the absence of concerted political effort and organization...
- ...'the market' is posited to be an information processor more powerful than any human brain, but essentialy patterned on brain/computational metaphors... The market always surpasses the state's ability to process information...
- ...for purposes of public understanding and sloganeering, market society must be treated as a 'natural' and inexorable state of humankind...
- A primary ambition of the neoliberal project is to redefine the shape and functions of the state, not to destroy it...
- ...Neoliberals treat... politics as if it were a market and promoting an economic theory of democracy...
- Neoliberals extol freedom as trumping all other virtues, but the definition of freedom is recoded and heavily edited within their framework... Freedom can only be 'negative' for neoliberals (in the sense of Isaiah Berlin)...
- ...capital has a natural right to flow freely across national borders. (The free flow of labor enjoys no similar right.)...
- ...pronounced inequality of economic resources and political rights [is] not ... an unfortunate by-product of capitalism, but as a necessary functional characteristic of their ideal market system...
- Corporations can do no wrong, or at least they are not be blamed if they do...
- The market (suitably reengineered and promoted) can always provide solutions to problems seemingly caused by the market in the first place...
- The neoliberals have struggled from the outset to make their political/economic theories do dual service as a moral code..."
Saturday, July 4, 2009
Four Papers On Henry George
I have never been enamored of Henry George. But for those who like him, the recent History of Economics Society Annual Conference (Denver, CO, 26-29 June 2009) had a session on "Henry George and the Concept of the Commons", with four papers:
- Lew Daly, "Creation Ethics and the Distribution of Wealth from Genesis to Cyberspace"
- Neil B. Niman, "Henry George and the Intellectual Foundations of the Open Source Movement"
- William S. Peirce , "Allen Ripley Foote and the Revenues for the Progressive State"
- Francis Peddle, "Henry George and the Open Knowledge Commons"