Who Is To Blame?

The present financial crisis has prompted widespread recognition of the need for better regulation of the financial system. Even the Republican nominee is currently claiming to be for it (before, he was against it). "Modern History's Greatest Regulatory Failure," says Clinton-era Treasury official Roger Altman. While excessive zeal for deregulation is a prototypically Republican failing, it should be noted the Clinton administration was hardly immune to the zeitgeist, as this example from John Judis of the New Republic reminds us (though David Blake pins the blame on a certain Rand-ite erstwhile Fed "Maestro"). Enough to go around, I suppose.

Survey Says

Economists prefer Obama, by a wide margin:

Overall, 59 percent of our economists say Obama would be best for the economy long term, with 31 percent picking McCain, and 8 percent saying there would be no difference.

That's according to Scott "Dilbert" Adams, who commissioned a survey of over 500 American Economic Association members. No word on who economists thought would be best for the economy short term (since in the long run, we're all dead, of course). Hat tip: Mankiw.

Textbook Case of Market Failure

An interesting feature from the Times on the proliferation of free, on-line textbooks:

SQUINT hard, and textbook publishers can look a lot like drug makers. They both make money from doing obvious good — healing, educating — and they both have customers who may be willing to sacrifice their last pennies to buy what these companies are selling.

It is that fact that can suddenly turn the good guys into bad guys, especially when the prices they charge are compared with generic drugs or ordinary books. A final similarity, in the words of R. Preston McAfee, an economics professor at Cal Tech, is that both textbook publishers and drug makers benefit from the problem of “moral hazards” — that is, the doctor who prescribes medication and the professor who requires a textbook don’t have to bear the cost and thus usually don’t think twice about it.

“The person who pays for the book, the parent or the student, doesn’t choose it,” he said. “There is this sort of creep. It’s always O.K. to add $5.”

In protest of what he says are textbooks’ intolerably high prices — and the dumbing down of their content to appeal to the widest possible market — Professor McAfee has put his introductory economics textbook online free. He says he most likely could have earned a $100,000 advance on the book had he gone the traditional publishing route, and it would have had a list price approaching $200.

“This market is not working very well — except for the shareholders in the textbook publishers,” he said. “We have lots of knowledge, but we are not getting it out.”

He's right. I have moved away from using a textbook for macro principles and I sometimes fantasize about ditching them altogether.

It is not clear what Prof. McAfee himself is maximizing; his behavior seems to be maximizing social rather than personal welfare... He is acting suspiciously like the "social planner" we periodically encounter in economic theory. And not for the first time - see this earlier post on his attempt to fix the academic publishing process.

Fight for Your Right

to party? This is embarrassing:

Four people were arrested during a gathering that drew thousands Monday night to protest Miami University's decision to hold classes Tuesday.

The protest outside of Miami President David Hodge's home drew an estimated 3,000 and agencies throughout Butler County — including nearly 70 officers — were called in to assist, according to the Oxford Police Department.

Fortunately, I am teaching graduate students this semester, so I did not have to deal with any complaints about having to work during the power outage. I would have been unsympathetic, particularly given the light provided by the star we orbit, and the availability of such non-electricity using technologies as the pencil (and the library was open!). Of course, such lack of sympathy would have killed my teaching evaluations, and that would be duly noted by the Dean and Provost, etc... Our incentives are to respond with indulgence, and this little disturbance (4 misdemeanor arrests) seems a logical consequence of the "customer satisfaction" mentality universities too easily slide into...

I never thought I'd agree with Sheriff Jones, but I do:

Butler County Sheriff Richard K. Jones said he was disappointed to hear about the protests Monday night "because there are people out there really suffering."

"I have a place for them to stay that does have electricity, and I will make room for them," Jones said referring to the Butler County Jail. "We don't have time right now to deal with spoiled little kids."

Update (9/17): To be fair, I should note that none of my colleagues who are teaching undergrads this semester have reported any power outage-related whining or excuse-making.

Deficit Update

The federal deficit will be over $400 billion for fiscal year 2008, according to the Congressional Budget Office:

CBO estimates that the deficit for 2008 will be $407 billion, substantially higher than last year’s $161 billion. As a share of the economy, the deficit is projected to rise to 2.9 percent of GDP this year, up from 1.2 percent of GDP in 2007. That 1.7 percentage point increase as a share of GDP is roughly evenly split between a 0.9 percentage point decline in revenue relative to GDP (reflecting the impact of lower corporate tax revenue and the rebates enacted as part of stimulus legislation this year) and a 0.8 percentage point increase in spending relative to GDP.

As a share of GDP, that is not as bad as the Reagan-era deficits (which peaked at 6% of GDP in 1983).

Including the $184 billion borrowing from the social security trust fund (i.e. the "on-budget" deficit), the 2008 deficit is $592 billion, or 4.2% of GDP.

Of course, that's a significant deterioration from the picture eight years ago - remember when we thought the problem would be what to do with all those surpluses? What happened?

Comparing the CBO's most recent forecast for 2009 with the one it made in January 2001, the Center on Budget and Policy Priorities made this breakdown: According to the CBPP, the total deterioration of the fiscal picture is $1.256 trillion; the chart is based on the parts due to tax and spending policy ($1 trillion), and doesn't include the $256 billion due to the economic slowdown. (Hat tip: Ezra Klein).

Al Gore's "lockbox" is looking pretty good right now...

Glazed Intervention

The NY Times' Dealbook reports on the latest measure to address the credit crunch, from Krispy Kreme.

Competition in the Antitrust Business

The Times reports:

The Justice Department laid out a broad policy on antitrust enforcement on Monday that drew an unusually sharp rebuke from three federal trade commissioners, who said it would protect monopolies from prosecution.

A 215-page report from the Justice Department, coming after nearly a year of public hearings, was originally meant to lay out a governmentwide approach to combating anticompetitive business practices. Instead, it exposed a rift between the Justice Department and the Federal Trade Commission over whether the government was protecting consumers or big businesses.

In a quick response to the Justice Department report, three of the four commissioners on the F.T.C. issued a statement saying that the policy was “a blueprint for radically weakened enforcement” against anticompetitive practices. They said the Justice Department guidelines allowed monopolies to act “with impunity” and “would make it nearly impossible to prosecute a case.”

This is far outside my bailiwick, but it sure sounds like a good thing that the Justice Dept. does not have a monopoly on antitrust. Hm... I wonder would Cournot or Bertrand be more appropriate to model this duopoly? (And that's all the I.O. I know..)

Unemployment vs. Output

Last week's employment report from the BLS had unemployment rising from 5.7% to 6.1% in August. As Brad DeLong, James Hamilton and others note, it sure looks like a recession:But past recessions have also been clearly visible in data for output growth:The "recovery" looks pretty anemic by historical standards, but there is not the sharp drop in output growth (yet?) that we've seen in past recessions. As Krugman puts it:

[T]his is an odd slowdown, by historical norms: no clear decline in GDP, no months of 6-digit job losses. Instead, the economy is being slowly ground down.

What I suspect, however, is that this is what the 21st-century business cycle looks like. The sharp slumps of the past partly reflected an inflation-prone environment, in which the Fed occasionally had to slam on the brakes; it also reflected a mainly goods-producing economy, with lots of inventories, in which recessions had a lot to do with inventory adjustments.

Among other things, rising output and falling employment implies that labor productivity is doing well (indeed, the BLS reported 4.2% growth in the second quarter). Usually, that's good news. Hm...

Equal Time

Not really, but I should point out that Martin Feldstein and John Taylor, eminent economists both, make the case for McCain's tax proposals in the WSJ.

Some debunking here. See also the Tax Policy Center's study.

Also, Feldstein and Taylor recycle the misleading claim about the US corporate tax rate being the "second highest among all industrial countries," which is debunked here.

Fundamentally Sound?

In the Times, a useful reminder from Louis Uchitelle of the inadequacy of Gross Domestic Product as a proxy for economic well-being. He writes:

While the G.D.P. has continued to rise, wages have stagnated, pensions have shrunk or disappeared and income inequality has increased. Other shortcomings have become apparent. The boom in prison construction, for example, has added greatly to the G.D.P., but the damage from the crimes that made the prisons necessary is not subtracted. Neither is environmental damage nor depleted forests, although lumbering shows up in government statistics as value added. So does health care, which is measured by the money spent, not by improvements in people’s health. Obesity is on the rise in America, undermining health, but that is not subtracted.

Those are some of the bigger issues, but last week's upward revision of the second-quarter growth rate up to 3.3% (from 1.9%) illustrated the disconnect that sometimes exists between economic statistics and perceptions in the short run.

At Econbrowser, Menzie Chinn looked into the numbers, asking "why does it feel like recession?" As he notes, much of the growth is coming from net exports (i.e., NX in the equation GDP = C + I + G + NX); with both increasing exports and decreasing imports. That is, in part, the declining dollar at work... the price deflator for exports rose at a 10.9% rate, and import prices were rising at a 28.5% pace (!!; the second quarter included a big run-up in oil prices, which has since partly reversed...). Hence a divergence between inflation for gross domestic purchases (C+I+G), at 4.2% and overall (GDP deflator) inflation of 1.2%.

The news on output growth was too good to be credible for some - the conspiracy theories appear to focus on the deflator calculations. Devotees of Okun's law will note that a 3.3% real GDP growth rate does not appear consistent with unemployment rising from 5.1% to 5.5% during the quarter.

Update (9/3): Macroblog on the deflator issue.