Business/Economics Links (16 June 2009)

Advertising is Good for You:
How restaurants get you to spend more


Angry Bear:
Context for Trade Deficit

Trade Deficits Resume Upward Climb


Crooks & Liars:
President Promises 600K New Jobs This Summer

Report: The Employed Are Hurting, Too. Meanwhile, Heritage Foundation Blames Unemployment Checks for Unemployment.


Dilbert:
"Dogbert the Pirate." ("That's a different business model." Hah!)

"Job Interview"

"Pretend you don't know that."

"Dogbert the CEO"


Econbrowser:
The Dollar as a Reserve Currency: Apres le Deluge

Do you see what I see? ("I'm still looking for, and still not seeing, the economic recovery that everybody is talking about.")

How Important Is China to World Growth?


Economist's View:
Chinese Manufacturers Accused of Predatory Pricing in India

"Cultural Authenticity and the Market" (This was slightly off the beaten track for Thoma, but if you have any interest in archeology, you might find this post of interest.)

Rogoff: Rebalancing the US-China Economic Relationship

Fed Watch: Rate Hike? ("Seriously, a rate hike in this environment? Or anytime before the end of 2009? At the moment, I just can't see it happening. That said, long rate are higher, and inflation expectations in some corners of the market are rising. What is going on?")

2009 Reith Lectures: Markets and Morals ("After my piece ran, The Times was flooded with scathing letters - mostly from economists (LAUGHTER), some from my own university. I utterly failed to understand the virtue of markets, they said, or the efficiencies of trade, or even the most elementary principles of economic rationality. Amidst the torrent of criticism, I did receive a sympathetic email from my old college Economics Professor. He understood the point I was trying to make, he wrote, but could he ask a small favor: would I mind not publicly revealing the identity of the person who had taught me Economics? (LAUGHTER)")


Robert Reich:
The Great Debt Scare: Why Has It Returned?


The Bonddad Blog:
Volcker on Recovery

Flow Of Funds Charts, Part I ("Consider the following charts from the Flow of Funds. Then ask yourself, will the consumer be able to lead us out of recession?")

Consumer Confidence Up

Is the Debt Binge Over?

More Signs of Bottoming

It's Looking Like a Jobless Recovery ("Right now there is no reason to hire -- and there won't be for awhile." This is not a surprise.)

Economics Links (9 June 2009)

Angry Bear:
Untitled post on the Unemployment Report

Current Recession vs the 1980-82 Recession


Econbrowser:
DeGlobalization: Transitory or Persistent?

Not a Robust Recovery

James Pethokoukis: "An Improving Job Market"

Output, Employment and Industrial Production in the "1980-82 Recession"

More on Bank Lending Data

High Anxiety (about Interest and Inflation Rates)


Economist's View:
Too Big to be Restructured (The theme of this essay ties in very well with my post on Mikhail Gorbachev's essay from the other day, "We Had Our Perestroika. It's High Time for Yours.".)

Contributions to the Change in Nonfarm Payroll Employment

Shiller: Home Prices May Keep Falling

Uneven Unemployment Rates

"VAT Time?"

Bank Mergers

"Reducing Inequality: Put the Brakes on Globalization?"


Financial Times:
The ‘part-timezation’ of America


Reuters:
China influence to grow faster than most expect: Soros


Real Property Alpha:
California Home Prices in Ounces of Gold


True/Slant:
NASCAR helped GM down its path of self-destruction ("Better equipped to compete? How ironic, given NASCAR’s role in helping the auto industry race down its path of self-destruction. Major auto companies used NASCAR for years to push cars and trucks with poor fuel economy numbers. The sport, in some ways, came to symbolize America’s embrace of consumption.")


VoxEU:
Why is Japan so heavily affected by the global economic crisis? An analysis based on the Asian international input-output tables

Does climate change affect economic growth?


Washington Post:
Book Review: The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street

Is the Recession Over? Flip a Coin.

James Hamilton at Econbrowser has been looking over initial claims for unemployment insurance the past few weeks. His most recent post suggests a 50% chance that the recession may end by June. Remember that unemployment is a lagging economic indicator so that, if we really are nearing the end of the recession, then this decrease in initial unemployment insurance claims is a very good sign. On the other hand, as Dr. Hamilton points out, there's still a very good chance (50% historically) that unemployment claims could go back up again, something that's readily apparent in the first graph in my post back in February on US unemployment levels.

The Labor Department reported today that initial claims for unemployment insurance fell by 14,000 during the most recent available week. That brings the 4-week average down for the third consecutive week and puts it 3.3% below the peak reached April 9.

Black line: seasonally adjusted new claims for unemployment insurance, weekly since January. Blue line: average of 4 most recent weeks as of each date.


That ongoing drop in the 4-week average is noteworthy because in each of the last 5 recessions, once the new claims number began declining from its peak value reached during the recession, the NBER subsequently dated the recovery from that recession as beginning within 8 weeks.

...

If we leave out the 1970 recession, there are 230 weeks in which the NBER declared the economy to have been in recession during the 5 recessions of 1974, 1980, 1982, 1990, and 2001. In 22 of these weeks, we saw as big a drop as we've seen this month, namely, the 4-week average dropped by more than 3.3% over a 3-week period. Of these 22 favorable readings, 11 turned out to be part of the final move out of recession, while in the other 11, new claims turned back up to reach a subsequent higher peak. Thus, if all you had to go on was the data on new unemployment claims and its behavior in previous recessions, you might conclude that there's a 50% chance that an economic recovery will have started by the beginning of June.

For some other possible signs of "green shoots," check out Bonddad's post on inventory levels in the 1Q09 GDP report.

Update: Economist's View reposted an article by Robert Gordon that was originally published on VoxEU. Gordon has been a member of the NBER Business Cycle Dating Committee since 1978, although this article is his own work and was not written in collaboration with any other member of the committee. The article is a little long and technical, but the quotation below comes from the conclusion:

It is always too early to make definitive conclusions, but the recent 2009 peak in new claims looks sufficiently similar to previous recession peaks to allow a conclusion that it is highly probable that the new claims peak has now occurred. The evidence provided here suggests several differences between the recent peak and previous false peaks in earlier recessions. The recent peak occurred much later in the recession than previous false peaks, and the run-up of new claims in the two months prior to the recent peak was substantially faster than in previous false peaks.

To this point I have examined a single indicator to see if it is useful in predicting the end of recessions without any consideration of what is going on in the rest of the economy. Our conclusion is supported by the fact that previous false peaks occurred when new claims were at 80 to 90% of the level at the ultimate true peak. For the peak of 4 April 2009 to be false by this historical precedent, the ultimate future peak would have to be in the range of 730,000 to 800,000. As the weeks go by, such a sharp future increase in new claims looks increasingly implausible.

Bottomline – The US turn-around will come in May or June 2009

My reasoning leads me to conclude that the ultimate NBER trough of the current business cycle is likely to occur in May or June 2009, substantially earlier than is currently predicted by many professional forecasters.

(Emphasis author's.)

Which Moms Stay at Home?

Real Time Economics, a blog at the Wall Street Journal, looked at a forthcoming Census Bureau report about "...the phenomenon of women voluntarily leaving the workforce after having kids." That the report finds both the poorest and richest families are the ones whose mothers leave the workforce doesn't seem too surprising; what isn't addressed but seems more significant is that the child care industry relies almost solely upon the middle class for its customer base. (What does that say about American family values?)

One of the potential problems with this blog post it that it only addresses the economic factors in this type of decision (more specifically, family income levels); It doesn't address any non-economic reasons for why women might stay at home to raise their children. Likewise, as one woman commented, the report (at least as commented on by the WSJ) only talks about women who stay at home and not about any men who might do the same.

...[M]ost working women return to the work force a year after having a child. With women’s earnings making up a significant chunk of household income, the demographers say, families may find it too costly to punt on a second paycheck or an additional retirement account.

The Census study found that women at the highest income levels (those above $200,000), or whose husbands are at the highest income levels, are slightly more likely than median income earners to opt out of the labor force — meaning that, indeed, some rich women bail out on work to raise their kids.

Another group that was more likely to opt out were women with household incomes less than $50,000 — and among that group the opt-out effect was largest among those with household incomes less than $20,000. In other words, they can’t afford child care so they stay home instead of working.

HT: Economist's View

The Big Money: China's Stimulus is Working

A very short but interesting - and I dare say important - article from Slate's The Big Money. Important for two reasons: first, because it reinforces Paul Krugman's argument that the size of the stimulus package matters and that the recently passed economic stimulus bill is most likely too small; secondly, because it refutes the noise coming from the hysterical wing of the Republican party as to why the stimulus bill needed to be passed in the first place.

Many commenters, including TBM's Charles Wallace, have argued that the Chinese stimulus package is superior to America's. Partly that's because it represents a larger proportion of GDP and partly because it is more focused on housing and infrastructure, which can create jobs quickly and thereby circulate money through communities. Those points will continue to be debated.

But there's a case to be made that the Chinese stimulus package is now working, both on a psychological level and an economic level. A Reuters story yesterday pointed out that the mere promise that China will increase its stimulus if it needs to boosts confidence and might therefore paradoxically make more stimulus unnecessary. Now comes today's Wall Street Journal, reporting that both housing sales and construction starts are on a mild upswing in China. This is crucial because the world's metal and oil markets are dependent on Chinese demand; not surprisingly, reports the Financial Times, both experienced a jolt yesterday.

True, the Chinese economy will not grow in 2009 at the dizzying pace of the last decade or so. But it's also not going to shrink, and that will provide a needed cushion for the drops occurring elsewhere. The bottom line, as David Leonhardt wrote in yesterday's New York Times, is: "Yes, stimulus works." Critics can say it's too expensive or doesn't stimulate fast enough or deeply enough. But consider the alternatives.

HT: Economist's View

Update: Robert Reich's most recent post reinforces the message above, that the American government needs to work harder on the stimulus package, saying that the amount allocated so far, $787 billion (as huge a number as that may seem), is not enough. What makes Reich's post important is the second half, where he makes a number of very good concrete suggestions as to how the money should be spent:

All this means that the real economy will need a larger stimulus than the $787 billion already enacted. To be sure, only a small fraction of the $787 billion has been turned into new jobs so far. The money is still moving out the door. But today's bleak jobs report shows that the economy is so far below its productive capacity that much more money will be needed.

This is still not the Great Depression of the 1930s, but it is a Depression. And the only way out is government spending on a very large scale. We should stop worrying about Wall Street. Worry about American workers. Use money to build up Main Street, and the future capacities of our workforce.

Energy independence and a non-carbon economy should be the equivalent of a war mobilization. Hire Americans to weatherize and insulate homes across the land. Don't encourage General Motors or any other auto company to shrink. Use the auto makers' spare capacity to make busses, new wind turbines, and electric cars (why let the Chinese best us on this?). Enlarge public transit systems.

Meanwhile, extend our educational infrastructure. So many young people are out of work that they should be using this time to improve their skills and capacities. Expand community colleges. Enlarge Pell Grants. Extend job-training opportunities to the unemployed, so they can learn new skills while they're collecting unemployment benefits.

Finally, accelerate universal health care.

Study Confirms Local Governments Use Traffic Citations to Raise Money

This isn't surprising; I remember a time my dad got a ticket when we were heading north on the Interstate one year. "You won't receive any points," the cop said. Yeah, no points to be added to your driving record; we just want your money.

Got a lead foot? Hold on to your wallet.

A new study to be published in next month's Journal of Law and Economics finds statistical evidence that local governments use traffic citations to make up for revenue shortfalls. So as the economy tanks, motorists may be more likely to see red and blue in the rearview.

Study authors Thomas Garrett, assistant vice president at the Federal Reserve Bank of St. Louis, and Gary Wagner from the University of Arkansas Little Rock, examined 14 years of revenue and traffic citation data from counties in North Carolina. They found that the number of traffic citations issued goes up the year following a revenue drop.

"Specifically, a one percentage point decrease in last year's local government revenue results in roughly a 0.32 percentage point increase in the number of traffic tickets in the following year," Garrett and Wagner write.

That number may sound small, but it's a statistically significant correlation, the authors say.

The study controlled for demographic and economic differences in the sample, which contained data from 96 North Carolina counties collected from 1990 to 2003.

The finding adds credence to something many drivers have long suspected: Safety isn't the only motive in traffic enforcement efforts. Since many municipalities retain the money generated by traffic fines, perhaps traffic enforcement also acts as a bit of a fundraiser.

"There is ample anecdotal evidence that local governments use traffic tickets as a means of generating revenue…," Garrett and Wagner write. "Our paper provides the first empirical evidence to support this view…."

And don't expect to be able to throttle up when the economy recovers. The study found no significant drop in tickets when revenues increased.

HT: Economist's View

VoxEU: Quo Vadis Islamic Finance?

A good article on Islamic finance (if you're interested in the subject) at VoxEU, the European economics blog. The three authors, all of whom work for the International Monetary Fund (IMF), give a brief analysis of the state of the Islamic finance market, a listing of significant challenges facing the industry, and some concluding remarks. Below are some excerpts, primarily from the introduction and the conclusion; the section on challenges is significant and noteworthy, but I'll let my readers go to the original post to read it if they're interested.

BTW, in case you're unfamiliar with the Latin phrase, "Quo Vadis?", it means, "Where are you going?"

Since the summer of 2007, the global financial system has undergone a period of dramatic turbulence, which has caused a widespread reassessment of risk in both developed and emerging economies. The global financial turbulence appears to have had a limited impact on the Islamic finance industry, which has been in an expansionary phase in recent years (Economist, 2008; Financial Times, 2008). This rapid growth has been fueled not only by surging demand for Sharia’ah compliant products from Muslim financiers but also by investors around the world, rendering the expansion of Islamic finance a global phenomenon. In fact, there is currently over $800 billion worth of deposits and investments lodged in Islamic banks, mutual funds, insurance schemes (known as takaful), and Islamic branches of conventional banks.

...

...[P]erhaps the most striking has been the growth of sukuk, the most popular form of securitized credit finance within Islamic finance. sukuk commoditize capital gains from bilateral risk sharing between borrowers and lenders in shari’ah-compliant finance contracts into marketable securities without interest rate charges.

The sukuk market has held its own amid groundswell concern about the credit crunch and dysfunctional money markets. Although the current level of issuance remains a fraction of the global volumes of conventional bonds and ABS, the sukuk market had soared in response to growing demand for alternative investments before the first episode of severe market disruptions in 2007 showed first effects (Jobst et al, 2008). Gross issuance of sukuk has quadrupled over the past few years, rising from $7.2 billion in 2004 to close to $39 billion by the end of 2007, owing in large part to enabling capital market regulations, a favorable macroeconomic environment, and large infrastructure development plans in some Middle Eastern economies (see Figure 1).

By 2008, however, sukuk volumes dropped to $15.2 billion (about 50%) while the structured finance market dried up with just $387 billion issued (down by about 80%) during the same time. Factors contributing to this decline include the presentation of new rules on sukuk, the global financial crisis, and Gulf states’ currency risk. The slowdown in issuance was most pronounced in Malaysia, where fewer domestic transactions at smaller volume have balanced the market shares of Gulf Cooperation Council and Southeast Asian countries.

The rapid evolution of Islamic finance activities points to the available profit opportunities that beckon. This in turn has prompted a vetting process among a number of jurisdictions around the world to establish themselves as leading Islamic financial centres. In this regard, the case of London is perhaps the most remarkable insofar as it has managed to extend its leading position in world financial markets to become a center for Islamic finance. Similarly, Hong Kong, New York, and Singapore are also making important advances to accommodate Islamic finance within their jurisdictions and aspire to join the ranks of the more established Islamic centers such as Bahrain, Dubai, and Kuala Lumpur.

...

Islamic finance faces many challenges, including recent regulatory changes, illiquidity issues, liquidity risk management concerns, need for harmonized regulation, regulatory disparity amongst national supervisors, and a potentially unlevel playing field.

...

Despite the number of challenges outlined above, the long-term prospects look promising for Islamic finance. Financial institutions in countries such as Bahrain, the United Arab Emirates, and Malaysia have realized considerable demand for shari’ah-compliant assets and are gearing up for more shari’ah-compliant financial instruments and structured finance. In addition, financial innovation, driven by both domestic and foreign banks, will promote alternatives modes of intermediation and contribute to further development and refinement of shari’ah compliant derivative contracts.

As Islamic finance comes into its own, greater regulatory harmonization will be inevitable. Recent efforts have addressed legal uncertainty imposed by Islamic jurisprudence, discrepancies of national guidelines, and poorly developed uniformity of market practices. The Islamic Financial Services Board has moved ahead with its standardization efforts of the Islamic financial services industry that will foster the soundness and stability of the system. Globally accepted prudential standards have been adopted by the Islamic Financial Services Board that smoothly integrate Islamic finance with the conventional financial system.

Finally, despite the declining global sukuk issuance in 2008, emanating from both the Accounting and Auditing Organization of Islamic Financial Institutions decision and the impact of the financial crisis, the sukuk market will regain momentum, driven by demand from financial institutions, insurance companies, and pension funds across Islamic and non-Islamic countries. Many challenges still lie ahead, but the banks’ search for profitable opportunities and the ensuing financial innovation process in tandem with favorable regulatory developments at domestic and international levels will ensure that the Islamic finance industry will continue to develop at a steady pace in the long-run. The jury is still out how Islamic finance will be affected in the short-run by the repercussions of the global financial crisis.

HT: Economist's View

al-Ghazali, Economist

I was a bit surprised to find a link to a blog post on ancient Islamic economics over at Economist's View, but that's exactly what the post is about: the famed Muslim theologian al-Ghazali (1058-1111), author of The Incoherence of the Philosophers and other works, had written on the topic of the division of labor that is mirrored by the writings of Adam Smith, author of The Wealth of Nations, which was published well over 650 years later, in 1776.

The post highlights several examples where al-Ghazali's writings are mirrored by Smith's, including a comparison between al-Ghazali's 25-step process for the making of needles vs. Smith's famous example of 18 steps in the manufacture of pins. However, a more interesting comparison is where al-Ghazali writes about the vertical division of labor; for example, How many people does it take to make one loaf of bread?

For a bread, for example, first the farmer prepares and cultivates the land, then the bullock and tools needed to plough the land. Then the land is irrigated. It is cleared from weeds, then the crop is harvested and grains are cleaned and separated. Then there is milling into flour before baking. Just imagine – how many tasks are involved; and we here mention just only some. And imagine the number of people performing these various tasks, and the number of various kinds of tools, made from iron, woods, stone, etc. If one enquires, one will find that perhaps a single loaf of bread takes its final shape with the help of perhaps more than a thousand workers.

Smith provided a similar example for the question, How many people does it take to manufacture a woolen coat?

How many different trades are employed in each branch of the linen and woollen manufactures, from the growers of the flax and the wool, to the bleachers and smoothers of the linen, or to the dyers and dressers of the cloth!:

Observe the accommodation of the most common artificer or day-labourer in a civilized and thriving country, and you will perceive that the number of people of whose industry a part, though but a small part, has been employed in procuring him this accommodation, exceeds all computation. The woollen coat, for example, which covers the day-labourer, as coarse and rough as it may appear, is the produce of the joint labour of a great multitude of workmen. The shepherd, the sorter of the wool, the wool-comber or carder, the dyer, the scribbler, the spinner, the weaver, the fuller, the dresser, with many others, must all join their different arts in order to complete even this homely production. How many merchants and carriers, besides, must have been employed in transporting the materials from some of those workmen to others who often live in a very distant part of the country! how much commerce and navigation in particular, how many ship-builders, sailors, sail-makers, rope-makers, must have been employed in order to bring together the different drugs made use of by the dyer, which often come from the remotest corners of the world! What a variety of labour too is necessary in order to produce the tools of the meanest of those workmen! To say nothing of such complicated machines as the ship of the sailor, the mill of the fuller, or even the loom of the weaver, let us consider only what a variety of labour is requisite in order to form that very simple machine, the shears with which the shepherd clips the wool. The miner, the builder of the furnace for smelting the ore, the feller of the timber, the burner of the charcoal to be made use of in the smelting-house, the brick-maker, the brick-layer, the workmen who attend the furnace, the mill-wright, the forger, the smith, must all of them join their different arts in order to produce them.

Could Smith have read al-Ghazali's work prior to his writing The Wealth of Nations? Allahu alim; I have no idea.

The full post can be read here.

Muhammad Yunus: Casino Capitalism

The German magazine Der Spiegel has a short interview with Muhammad Yunus, founder of Grameen Bank and co-winner of the 2006 Nobel Peace Prize. Mr. Muhammad is asked about his take on the current financial crisis, but these two answers below are the real money quotes. You can read the entire interview here.

SPIEGEL ONLINE: Who do you think is guilty for the current financial meltdown?

Yunus: The market itself with its lack of adequate regulation. Today's capitalism has degenerated into a casino. The financial markets are propelled by greed. Speculation has reached catastrophic proportions. These are all things that have to end.

SPIEGEL ONLINE: The current financial crisis began as a credit crisis -- homeowners in the US could no longer pay down their mortgages. At Grameen Bank, which provides microloans, the repayment rate is close to 100 percent. Do you think your bank could be a model for the entire finance world?

Yunus: The fundamental difference is that our business is very connected to the real economy. When we provide a loan of $200, that money will go to buy a cow somewhere. If we lend $100, someone will maybe buy some chickens. In other words, the money goes to something with concrete value. Finance and the real economy have to be connected. In the US, the financial system has completely split off from the real economy. Castles were built in the sky, and suddenly people realized that these castles don't exist at all. That was the point at which the financial system collapsed.

The latter answer is also addressed in another recent blog post of mine; see I Hate to Say I Told You So...

HT: Economist's View

Want a Job? Vote for a Democrat!

A couple of interesting posts on unemployment today, the first being from Spencer at Angry Bear:

So much for Sarah Palin's claim that Republican tax cuts create jobs. In the post WW II era every Democratic President has left office with a lower unemployment rate than they inherited from their predecessor while only one Republican president left office with a lower unemployment rate than they inherited. That was Ronald Reagan, but his first term still holds the record for the highest average unemployment rate of any post - WW II four year Presidential term.

George Bush inherited a 3.9% unemployment rate and the results of all his tax cuts has been a rise in the unemployment rate to 6.1%, so far. By contrast Bill Clinton inherited a 7.4% unemployment rate and with his prudent fiscal policy left Bush a 3.9% unemployment rate.

Leave it to Team Bush to be the only American President to throw a war that failed to stimulate the economy.

Another scary graph comes from Economist's View:

A grim morning: Double plus ungood news on multiple fronts this morning. The credit crunch is getting worse: LIBOR jumped again, the TED spread is at a new record. Bad news on employment: payrolls down 159,000, average work week down, official unemployment rate flat at 6.1 percent but broad measure (U6) up from 10.7 to 11.

We are going over the edge.

The track record: This chart shows U6, the broadest measure of unemployment and underemployment from the Bureau of Labor Statistics. (No data available before 1994.)

The More Things Change... Sarah Palin and Petroleum Export Bans

The McCain/Palin strategy on economic talking points appears to be one of turning molehills into mountains: focusing on rather small issues and blowing them up dramatically in the hope that most people will take the Republicans' word for it. However, as Economist's View pointed out the other day, issues like the amount of budgetary earmarks may sound like a lot of money, but they constitute less than one percent of the federal budget. Likewise, the idea that we can start offshore drilling for oil now and that it will help us in any way today is completely bogus. Americans are being sold a bill of goods by the Republicans, but many people don't care. P.T. Barnum knew the American attitude all too well. The more things change...

Now there's a new issue where Sarah Palin shows her "expertise," that of petroleum export bans:

Of course, it's a fungible commodity and they don't flag, you know, the molecules, where it's going and where it's not. But in the sense of the Congress today, they know that there are very, very hungry domestic markets that need that oil first. So, I believe that what Congress is going to do, also, is not to allow the export bans to such a degree that it's Americans who get stuck holding the bag without the energy source that is produced here, pumped here. It's got to flow into our domestic markets first.

Oh, dear! We Americans are exporting our own oil to other countries when we need it first. Surprisingly enough, that's true. Considering the ferocious appetite Americans have for petroleum, one would think that all domestically-produced petroleum would never be exported outside of the country, but it does. OK, so how much is exported?


If you look at the EIA's Energy Flow chart [pdf] above, you'll see that, in 2007, the US produced 10.80 quadrillion BTUs (QBTU) of its own crude oil, imported 28.70 QBTUs of petroleum and exported 2.93 QBTUs of petroleum. So, 2.93/39.50 = 7.4%. That's how much oil is being exported out of the country. Seven percent.

Let's get into the nitty-gritty even further. The seven percent above includes both crude oil and other petroleum products. However, if you look at the US imports and exports of crude oil and other petroleum products, you'll see that only 26,000 barrels per day were exported (as of this writing) compared with the 12,498,000 barrels per day that were both produced domestically and imported into the U.S. That's a grand total of 0.2% of the daily supply.

In principle, I don't have a problem with the U.S. setting up an export ban on domestically-produced petroleum, although there may be some very good reasons why that oil is being exported to begin with that are not being addressed by the Republicans. But what I do want to point out, yet again, is that this is a very small issue. Crude oil exports make up a tiny, tiny, tiny fraction of the total amount of crude oil that America uses on a daily basis. But Republicans would rather focus on the inconsequential than deal with the more serious economic matters at hand.

Economist's View: John McCain's "Big" Economic Plans

Classic. You're a damn fool if you believe anything John McCain says about the economy. From Economist's View:

Here's John McCain's big plan for the budget: make a whole lot of noise about eliminating of the piece of the budget pie representing earmarks (and remember that most earmarks simply mandate where monies will be spent, they don't create any new spending):

[Note: The OMB estimates earmarks to be 16.9 billion in 2008. Current federal expenditures for 2008 are not yet available, so the chart uses the 2007 value of 2880.5 billion from the BEA (the ratio is approximately one half percent, i.e. 0.59%). Since federal expenditures for 2008 will exceed those of 2007, this means that the area for earmarks shown in the diagram is overestimated, i.e. it is larger than the true value. The NY Times also notes that "earmarks ... make up less than 1% of the federal budget."].

All the recent controversy over McCain lying about Palin's earmark requests, as he did most recently on The View, is noteworthy for what is says about McCain's (lack of) character, but more generally it is misdirecting us from more important issues. Earmarks are only a minor part of the overall budget, and issues such as health care reform are much more important since rising health care costs will absolutely dwarf any savings from earmarks.

Here's the centerpiece of McCain's economic plan: drill for oil, then pretend like it will help at the pump:


[via]
I can't even see the sliver of yellow until after 2015, and even after that it's not much of a contribution. That's supposed to lower gas prices?

With such a solid foundation for the policy proposals - a couple of slivers of pie - I can't imagine why the McCain campaign would resort to lies, deceptions, misdirection, and misleading characterizations to sell these "big" plans.

Update: I've expanded further on this thought with my post, The More Things Change... Sarah Palin and Petroleum Export Bans.

The Moral Content of Economic Terminology

Some of these are amusing in a subtle sort of way. I'll explain below.

The moral content of economic terminology in the popular press: A guide

Foreign direct investment (inbound): Good
Current account deficit: Bad
Trade deficit: Catastrophic
Capital account deficit: Not used. Presumably bad.

Weak national currency: Bad
Exports: Good
Imports: Bad

Rising house prices: Good
Falling house prices: Bad
Affordable houses: Good
Unaffordable houses: Bad

Free trade: Neutral
Unfettered free trade: Bad
Fair trade: Good
Outsourcing: Evil
Buying local produce: Divine

Pay rises: Good
Low interest rates: Good
Inflation: Bad

Communism: Very Bad
Socialism: Bad
Capitalism: Bad

Three sets of these terms and their "moral content" strike me as humorous if you understand the ramifications of economics. (When I've taught Econ I've stressed to my students that one change in the system often leads to other changes, frequently in a specific pattern.)

Weak national currencies are "bad," but they help to increase exports, which are "good," and reduce imports, which are "bad." That, in turn, helps to reduce a country's current account deficit ("bad") and trade deficit ("catastrophic"). So are weak national currencies necessarily "bad?"

Rising house prices are "good," but in the long run they create unaffordable houses, which is "bad." Likewise, falling house prices are "bad," but create affordable houses in the long run, which is "good." So, which is more important, rising house prices or affordable houses?

Last, pay rises are "good" (I certainly wouldn't complain), but they also lead to inflation (of the price/wage spiral variety), which is "bad." Likewise, low interest rates are "good" (they help to stimulate the economy by increasing the amount of loans businesses ask for), but that increases the money supply, which causes inflation. So, are pay rises and low interest rates both "good?"

Originally posted at Bluematter; HT: Economist's View

State Rankings by Social and Economic Liberalism/Conservatism

This is an interesting graph showing where the states in the continental U.S. rank in terms of social and economic liberalism vs. conservatism. The data used to make this graph is somewhat old (from the 2000 election season).

Here's a graph of the 50 states (actually, I think Alaska and Hawaii are missing), showing the average economic and social ideology of adults within each state. Each of these is scaled so that negative numbers are liberal and positive are conservative; thus, people in Massachusetts are the most liberal on economic issues and people in Idaho are the most conservative:


West Virginians are on the liberal side economically but are extremely socially conservative, whereas Vermont is about the same as West Virginian on the economic dimension but is the most socially liberal of all the states. Coloradans are economically conservative (on average) but socially moderate (or, perhaps, socially divided; these are averages only).

Read the rest of the post here.

HT: Economist's View

A question that would interest me is, by how much do states shift in terms of their economic and social beliefs over time? One would think that they do to a degree, but not by that much. However, a recent article in The Economist (The Big Sort), discusses how Americans are segregating themselves into geographical areas by political beliefs:

Americans move house often, usually for practical reasons. Before choosing a new neighborhood, they drive around it. They notice whether it has gun shops, evangelical churches and “W” bumper stickers, or yoga classes and organic fruit shops. Perhaps unconsciously, they are drawn to places where they expect to fit in.

Where you live is partly determined by where you can afford to live, of course. But the “Big Sort” does not seem to be driven by economic factors. Income is a poor predictor of party preference in America; cultural factors matter more. For Americans who move to a new city, the choice is often not between a posh neighborhood and a run-down one, but between several different neighborhoods that are economically similar but culturally distinct.

...

Because Americans are so mobile, even a mild preference for living with like-minded neighbors leads over time to severe segregation. An accountant in Texas, for example, can live anywhere she wants, so the liberal ones move to the funky bits of Austin while the more conservative ones prefer the exurbs of Dallas. Conservative Californians can find refuge in Orange County or the Central Valley.

Over time, this means Americans are ever less exposed to contrary views. ... Americans were the least likely of all to talk about politics with those who disagreed with them.

Intriguingly, the more educated Americans become, the more insular they are. ... Better-educated people tend to be richer, so they have more choice about where they live. And they are more mobile. One study that covered most of the 1980s and 1990s found that 45% of young Americans with a college degree moved state within five years of graduating, whereas only 19% of those with only a high-school education did.

There is a danger in this. Studies suggest that when a group is ideologically homogeneous, its members tend to grow more extreme. Even clever, fair-minded people are not immune. ... Republican-appointed judges vote more conservatively when sitting on a panel with other Republicans than when sitting with Democrats. Democratic judges become more liberal when on the bench with fellow Democrats.

Residential segregation is not the only force Balkanizing American politics, frets Mr Bishop. Multiple cable channels allow viewers to watch only news that reinforces their prejudices. The Internet offers an even finer filter. Websites such as conservativedates.com or democraticsingles.net help Americans find ideologically predictable mates.

And the home-schooling movement, which has grown rapidly in recent decades, shields more than 1m American children from almost any ideas their parents dislike.

...

Voters in landslide districts tend to elect more extreme members of Congress. Moderates who might otherwise run for office decide not to. Debates turn into shouting matches. Bitterly partisan lawmakers cannot reach the necessary consensus to fix long-term problems such as the tottering pensions and health-care systems.

America, says Mr Bishop, is splitting into "balkanized communities whose inhabitants find other Americans to be culturally incomprehensible." He has a point. Republicans who never meet Democrats tend to assume that Democrats believe more extreme things than they really do, and vice versa. This contributes to the nasty tone of many political campaigns.

This last paragraph also helps to explain why most non-Muslim Americans are so Islamophobic and xenophobic: Not knowing any Muslims they are more susceptible to believing the lies spread by the haters.

State Coincident Indexes

Every month, the Federal Reserve Bank of Philadelphia produces a "State Coincident Index" that allows economists to see how well each of the individual states are doing economically:

The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). The trend for each state’s index is set to the trend of its gross domestic product (GDP), so long-term growth in the state’s index matches long-term growth in its GDP.

What the graphs below show is a state-by-state analysis of the economy. The first three maps show the month of January for 2005, 2006 and 2007, respectively. (Note that in these maps, a five-point scale is used with dark blue being the best and dark red being the worst.) The last six maps are for the last six months available, December 2007 through May 2008. While the scale has been increased from five points to seven points, the same basic color scheme is still used; i.e., dark blue is the best, dark red is the worst.

As you can see, the American economy has gotten quite bad over the past six months, especially in the Northwest and, to a slightly lesser degree, in the Midwest and South. Some of the states in the Mountain West and Northeast are doing well, with the best state currently being Texas. (I'd be tempted to say that Texas is doing well because of the multiplier effects from higher oil prices, but if that's the case, then why isn't Alaska doing well too?)










HT: Economist's View

Robert Reich: "No" to Further Offshore Drilling

The other day, in my update about how much oil the U.S. imports, I wrote:

...[S]hame on you ... if you believe either McCain or Cheney that drilling for oil offshore or up in Alaska will make a significant difference. Two reasons: "drop in the bucket" and "long-term projects," neither of which will lower your gas prices.

On the same day that I wrote the above, Robert Reich, former Secretary of Labor during the Clinton administration and currently a professor at the University of California (and a blogger), had a similar post on why the U.S. should not do further offshore drilling for oil. His first and second reasons are identical to what I wrote above, just further developed:

First, the crude oil market is global. Oil companies sell all over the world. The price of crude is established by global supply and demand. So even if 3 million additional barrels a day could be extruded from lands and seabeds of the United States (that sum is the most optimistic figure, after all exploration is done), that sum is tiny compared to 86 million barrels now produced around the world. In other words, even under the best circumstances, the price to American consumers would hardly budge.

Second, whatever impact such drilling might have would occur far in the future anyway. Oil isn't just waiting there to be pumped out of the earth. Exploration takes time. Erecting drilling equipment takes time. Getting the oil out takes time. Turning crude into various oil products takes time. According the the federal energy agency, if we opening drilling where drilling is now banned, there'd be no significant impact on domestic crude and natural gas production until 2030.

Third, oil companies already hold a significant number of leases on federal lands and offshore seabeds where they are now allowed to drill, and which they have not yet fully explored. Why then would they seek more drilling rights? Because they want more leases now, when the Bushies are still in office. Ownership of these parcels would serve to to pump up their balance sheets even if no oil is pumped.

Last but by no means least, environmental risks are still significant.

HT: Economist's View

Darn Baseball Terrorists!

Mark Liberman at Language Log notes that Faux News isn't too concerned about the fifth column of terrorist baseball players that has infiltrated our great country:

Pat Burrell (left) congratulates Ryan Howard on his first-inning home run, one batter after Chase Utley's solo blast. Burrell followed Howard with a homer of his own. Howard hit another shot later in the game in St. Louis.

Fox News has apparently let their semiotic guard down on this one, because a search of their site turned up no evidence of concern that the "terrorist fist jab" may have infiltrated the national pastime.

My question: Did E.D. Hill come up with this ridiculous assertion because she works for Faux News, or was it just because she's a blond? (Inquiring minds want to know.)


HT: Economist's View
Photo credit: TOM GANNAM / Associated Press

Update:


Turns out the old man (George H. W. Bush) is a terrorist, too, along with former tennis star, Anna Kournikova. More at Wonkette.

HT: Things More Muslim Than Obama

On Global Cities

The following appeared in ShanghaiDaily.com. Read the article first; I have some comments down below.

Is there anything negative about a global city?

Sassen: Global cities are two-edged swords. They bring economic dynamics - and that means jobs, life on the streets at night, vibrant restaurants, and so on.

But they do create 20 percent of the population which is extremely prosperous and a risk that they will take over key areas of the city with luxury office buildings, luxury housing and consumption spaces. This displaces smaller shopkeepers, the old modest middle classes. They lose.

My research suggests that ultimately cities are better off being dynamic (and hence global cities) but they do need political and civic leadership to balance out the extreme outcomes that markets left to themselves can produce.

European cities are much better than US cities. New York, the ultimate market town, has the highest share of very rich people and very powerful firms in the US and the highest share (over 20 percent) of officially counted poor ... and, according to the most recent count, over 100,000 homeless. That shows something about matters left to markets.


Will a global city lose its historic identity?

Chen: There is a tendency for cities to lose their historical identities and cultural traditions as economic forces push them to become more important centers in the global arena.

Cities like Mumbai and Dubai are doing what Shanghai is doing. They are all in the same race, running in the same direction, and trying to get to the same destination.

In doing so, these cities tend to lose their distinctive features and identities as they tear down traditional neighborhoods to build modern skyscrapers.

Shanghai has already gone far down this road. But global cities don't have to lose their historical and cultural identities.

In fact, some of Shanghai's traditional features are resilient enough to survive and even thrive in the face of penetrating global economic and cultural forces.

Some of the research I and a Fudan University collaborator have done has demonstrated a mixed local consumer lifestyle that reflects an interesting blend of being conscious of global brands and traditional motives. This will be shown in my work ''Shanghai Rising'' which will be published in Spring 2009.

Saskia Sassen is the Lynd Professor of Sociology and member of The Committee on Global Thought, Columbia University. Chen Xiangming is director of the Center for Urban and Global Studies and professor of Sociology and International Studies at Trinity College, Connecticut.

For most of my life I've lived in large cities (Phoenix, Arizona; Busan, South Korea, and Singapore) although, of the three, I think only Singapore classifies as a "global city." Both Phoenix and Busan try hard to be global cities, but neither succeeds, IMO, especially when compared to their larger neighbors, Los Angeles and Seoul, respectively.

Given the trade-off between vibrancy vs. pollution, I'd go with vibrancy any day. A town or city that cannot provide for its inhabitants economically is not worth living in. Pollution can be a problem, although, ironically, the cities I've lived in didn't have pollution problems so much of their own making, but due to either natural causes or from someone else's making (the winter temperature inversion in Phoenix and the "yellow dust" in Busan, blown in from the Gobi desert; the "haze" in Singapore that blows in from the Sumatran forest fires, where the Indonesians continue to practice slash-and-burn farming; likewise, in Hong Kong, the air pollution that blows in from the Chinese factories in the Pearl River delta).

The problem of the homeless seems to be more of a problem due to high costs of living. Granted, I haven't been to a whole lot of countries, but those countries that I've been to with the worst homeless problems were Japan and the US, both of which have very high costs of living. In Korea, Malaysia and Singapore, where the costs of living are lower, homelessness isn't much of a problem. When Dr. Sassen said, "That shows something about matters left to markets," from my own observations, the problem of homelessness is primarily due to the markets. The markets have priced people out of homes. People aren't able to cope with the high demands made on them by the markets, and they fall by the wayside. Those who think that the markets are the end all and be all, the panacea for every economic problem a society faces, are naive.

As for losing historic identities, I don't think this is much of a problem if local governments keep on top of the issue. Archaeology magazine had a recent article about how people in Beijing have been working to save the residential neighborhoods known as hutongs ("alleyways" flanked by courtyard houses). However, in my three cities, maintaining historic identities hasn't been a problem. The business districts weren't expanding to the point where they threatened older neighborhoods (as in the case of Beijing). However, I do think communities need to balance between creating the best business, industrial and residential facilities available, preserving one's past as best one can, and maintaining the heartlands (as we call the residential neighborhoods here in S'pore) so that all can live affordably.

HT: Economist's View

Keepin up with the van den Bergs?

An odd economics study about Dutch lottery winners, what they do with their money and, most interestingly, how non-winning neighbors react when a winner lives nearby:

Each week, [the Dutch Postcode Lottery (PCL)] allocates a prize to participants in a randomly chosen postcode (containing 19 households on average). About one third of the Dutch population participates in the lottery. A participant wins €12,500 per ticket. In addition, one of the participants wins a BMW. From an experimental design perspective, the lottery provides PCL participants in the winning code with an unexpected temporary income shock equal on average to about eight months of income, while leaving all other households’ incomes unchanged. In addition, a randomly chosen subet of those households receive a significant part of their transfer in kind (in the form of a new BMW).

...

[W]e find that the vast majority of BMW winners trade their BMW for cash, despite significant tax or transactions costs associated with this. Consistent with a simple life-cycle model of consumption, we do not detect any own effect of winning the postcode lottery on most components of households’ expenditures, including food at home, transportation, and total monthly outlays. Own effects are, however detected for durables expenditures and car consumption.

Meaning, winning the lottery doesn't necessarily change how much food the winners eat at home, the amount of travel - presumably local - that they do, or how much money they spend in any given month. However, they do use their lottery winnings to buy durables (cars, refrigerators, stoves, furniture, etc.).

We also detect an effect of temporary income shocks on food expenditures away from home

Lottery winners also eat out at restaurants more often.

Turning to social effects, we detect statistically significant effects of neighbors’ lottery winnings on car consumption and exterior home renovations. For example, PCL nonparticipants who live in winning codes are more likely to acquire a new car in the six months after the lottery win than nonparticipants living in non-winning codes. Further, we find that non-winning households who live next door to PCL winners are significantly more likely to purchase a car in the six months after the lottery than non-winning households located elsewhere, and that non-winning households living in postcodes where a large number of households won the PCL are more likely to start a major exterior home renovation in the six months since the lottery than non-winning households located elsewhere.

...

In addition to the monetary prizes, one of the street-prize winners wins a new BMW. The BMW winner is chosen by randomly selecting one of the winning lottery tickets. BMW winners have the option of receiving the cash value of the BMW in lieu of the car itself. This however involves a substantial tax penalty, since the PCL authority pays the 25% lottery tax for winners who accept the BMW in kind, but not for those who choose the cash equivalent (about €25,000). Of course, winners also have the option of selling their new BMW, and incurring any associated transactions costs.

What I find interesting is that despite having a car that is, presumably, less expensive and less "nice" than a BMW, most winners of the BMW trade in that car for cash, even though it costs them more money to do so (in the form of a 25% tax and transaction costs), even though they could have chosen to take all of the money (instead of the car) without any penalty. Why is this? Are the BMWs too expensive to operate over time (e.g., gas, insurance, maintenance, etc.)? Are the BMWs more subject to theft? Or are the winners "bored" of the Beemer after the neighbors (and themselves) have been sufficiently impressed?

We do detect social effects of lottery winnings, but only for two goods: car consumption and exterior home renovations, both of which are likely to be easily, and repeatedly, visible to a household’s neighbors. While we observe a strong cross-sectional association between (non-lottery) income and self-reported happiness in our data, lottery winnings do not make households happier, nor do they make neighboring households less happy. Together, these results are consistent with a scenario in which (a) happiness is more linked to permanent than to short-term increases in income, and (b) at least in the short term, income comparisons with one’s residential neighbors do not affect happiness.

What simple models of consumer behavior might explain the social effects estimated in our data? While it is tempting to interpret our estimates as reflective of a psychological need to (be seen to be?) “keeping up with the van den Bergs”, we note that they could also be driven by other factors. For example, our results for home renovations are also consistent with a scenario where a simultaneous lottery win provides a focal point (and perhaps eases liquidity constraints) for voluntary contributions to the local public good of neighborhood (or even building) appearance. Social spillovers in car consumption in our data could be driven by information-sharing about cars and/or dealers..., or by something as simple as households passing money to immediate neighbors, who might be family members. Also, it is worth reemphasizing that our estimates do not distinguish ‘imitative’ consumption patterns (I buy a car because you buy one) from more general effects of neighbors’ incomes on a household’s consumption. Still, we do find that households’ consumption of visible, durable goods (and only such goods) are affected by genuinely exogenous shocks to their neighbors’ incomes. We find these effects intriguing and deserving of further study using lottery-based or other research designs.

I don't know. On the one hand, I agree that there are probably a lot of other factors that may be influencing the purchase behavior of the non-winning neighbors. On the other hand, I think there's a lot to be said for the idea of "keeping with the Jones" (or, as the authors of this study put it, "keeping up with the van den Bergs") as a psychological motivator.

HT: Economist's View

The Church vs. The Mall: The Case for Blue Laws

Starting in the 1950s, American states began to repeal "blue laws" that prohibited retail activity on Sundays. A new study by Jonathan Gruber of MIT and Daniel M. Hungerman of Notre Dame shows that the repeals of blue laws nationally has created both social and economic problems as a result.

The basic hypothesis of the study is that, with the repeal of blue laws, churches must now compete with secular activities, both from the perspective of time allocation (Do I go to church this morning or do I work, play or shop?) and of goods allocation (Do I spend my money at the mall or do I donate to the church?). Results from the survey show that the church suffers from both perspectives. In economics-speak, the opportunity cost of going to church has risen. With the blue laws, there was not as much opportunity cost to attending church. If you didn't go, you didn't have more options available to you (e.g., going shopping; the stores were closed). However, with the blue laws' repeal, now people had more options open to them. If you didn't want to attend church, then you could go shopping instead. One hour of worship at church meant that you had lost one hour's worth of secular activity.

Not surprisingly, church attendance has decreased, and donations to churches have fallen although, interestingly enough, donations to non-church charities didn't fall after the repeal of blue laws. The people who have stopped going to church were what the authors called "initially religious." Meaning, they used to be go to church but, with the repeal of the blue laws, they drifted away from the church. (However, as the authors also noted, the initially religious didn't become less religious, they only worshiped in a church less.) These "initially religious" are also the people who had the biggest increases in substance abuse. The authors found that among the initially religious, the more often they attended church in the past, the more likely they were to begin heavy drinking. For example, those who attended most frequently were 6.5% more likely to drink than those who didn't attend, which corresponded to about one-third of the difference in heavy drinking between weekly attendees and non-attendees. Likewise, those who who attended somewhat frequently were 3.3% more likely to drink. Results for marijuana consumption were very large (10.5% and 6.7%, respectively), while cocaine consumption increased somewhat less than alcohol consumption (4.1-4.3% for both very and somewhat frequent attendees).

The authors conclude with the following:

Absent strong negative externalities, there seems little argument for restricting the days of the week that commerce can take place. But religious participation may be one of those activities with such externalities. As such, secular regulations such as blue laws which promote religious participation can have external effects. Whether those external effects are sufficiently large to justify restrictions on commerce is an excellent question for future research.

In other words, should blue laws be put back onto the books? I would argue that there is a case for doing so. The Qur'an tells us several times to enjoin what is right, forbid what is wrong, and believe in Allah (e.g., 3:104, 3:110, 3:114, 22:41). Would not society benefit by encouraging religious participation, by having American Christians going back to church on Sundays, by donating money to churches (instead of spending it at the mall), and by reducing the amount of substance abuse (and hypocrisy), especially among those who used to be the best attendees? I would think so.

The National Bureau of Economic Research (NBER) and MIT's Quarterly Journal of Economics both have the final draft of the report available for download, but only for a fee; you can read an earlier draft of the paper here [pdf].

HT: Economist's View

Update: "Macro and Other Market Musings" has More on the Opportunity Cost of Religion.