Today's Buggy Topic

As before --- no surprise, is it? --- prof bug has been commenting on the current financial mess . . . and more specifically, on the causes and political implications of yesterday's Congressionial vote against the amended Treasury bailout bill for our financial institutions.  As before, too, prof bug left his comments --- today's are three in number, two of them pretty lengthy --- at another web site: the Marginal Revolution, a libertarian web site run by a flexible libertarian economist, Tyler Cowen.  And, not coincidentally --- the reason for prof bug visiting it --- the most popular of all the economic sites on the Internet.

Click here for the thread, initiated by a post of Tyler Cowen, for the buggy comments and replies to other posters.  (Professor Cowen, it's only fair to add, has been quite nice --- as has his student, Professor Mark Perry of the University of Michigan (his site is Carpe Diem--- in letting prof bug comment at length.)

Today's Buggy Topic

That title above gets to the core of the buggy commentary, left at Carpe Diem --- provided prof bug adds that he discusses some alternative or supplemental schemes that others, far more knowledgeable them himself, have vented in the media or on the web.

Click here for Prof Mark Perry's original post and the lengthy bugged-out reply.  And be sure, if you want to get some handle on what's at stake, that you read the articles linked to in that reply.

Today's Buggy Topic

Read the title above, and you get a pretty good working-idea of today's bugged-out analysis . . . with one exception.  The lengthy buggy comments, posted yesterday in a thread at Carpe Diem --- the impressive data-driven web site of Professor Mark Perry of the University of Michigan --- also set out a fast, top-skimming analysis of where the US economy went wrong in the last 29 years of de-regulated markets: in effect, since the start of the Reagan era (with some deregulation carried out near the very end of the Carter presidency).

Deregulation of Industry and Services vs. Financial Institutions

Prof bug has always regarded the financial side of capitalism as its major destabilizing influence --- mainly because of the boom-bust nature of financial investments since the end of the 18th century.  Yes, even more so than external disruptions like wars or supply-side problems like surging oil prices in the 1970s and in this decade . . . at any rate, in American history.  More important yet have been the waves of excessive enthusiasm and then --- sooner or later --- excessive pessimism that have marked major financial investors in the stock market or bond market, whether the financial institutions involved are commercial banks, investment banks, brokerage houses, insurance companies, and (a real odd-ball innovation of this decade), independent real-estate brokers.  

A Period of Semi-Tamed Financial Markets 

In the 1930s era of FDR, all sorts of regulations were put in on the existing financial institutions.  The result? 

Though recessions continued after WWII, the financial causes were limited and more restrained, and so the recessions that disrupted American economic growth in the 1950s and 1960s were fairly frequent, but generally shallow . . . thanks in large part to government regulators and the Federal Reserve doing what they were supposed to do.  That changed in the late 1970s.  A period of sudden rising unemployment and rising inflation --- caused on the supply side of the economy by the huge burst in oil prices in that decade --- badly dislocated the US economy. 

Lacking a macro-economic theoretical guide how to deal with the rise of both --- until then, the Phillips curve followed by mainstream economists postulated a trade-off between the two --- the Carter administration started a new wave of deregulation, especially in service industries like trucking and air service and telephone-communications, with a limited de-regulation of financial markets.

Then Came the Reaganite Economic Revolution 

Guided by new classical free-market theories, a wholesale deregulation of more service industries and above all financial ones was implemented in the 1980s Republican era that, it's important to note, were furthered by the Clinton era in the 1990s . . . in ways discussed in the buggy comments that appeared in prof bug's posts at Carpe Diem.   

The wider consequence? 

Add in the big tax cuts on the income of the rich and super-rich in the George W. Bush decade.  Add further the tremendous sums of footloose capital in the hands of utterly corrupt gangster regimes in oil-rich countries and the huge sums of US dollars in the hands of the utterly corrupt Communist-controlled Chinese economy . . . sums that they didn't invest in domestic economic development such as improved infrastructure, better education, better environmental policies, better health-care for their people (or in the Chinese case, where 50% of GDP is saved! --- in more consumption power for the average Chinese household), or sums that couldn't be absorbed in the tiny Persian Gulf oil-glut countries even with better economic policies.  Add these together with the financial deregulations and innovative fancified financial derivatives and house-mortgage repackaging in this decade, and what do you have?

Yikes!  We all know now, nicht wahr? .

No Need to Say More: The Linked Buggy Commentary Deals with All These Points

Well, maybe one more thing is worth tossing in. 

Until the 1980s, an average investor in financial instruments --- say, the stock market or the corporate bond market --- could make sense of what he was investing in, even if, as with all investments, there was risk attached.

Suppose you were interested in investing in a big manufacturing company like GE.  You'd look at its profits over recent years; examine whether it was committed a decent slice of those to R&D and to training their employees; look at their own projections for future profits; and decide whether --- given what its stock prices were compared to its profits and its recent stock market performance --- it was a good investment with acceptable risk. 

Nowadays, it's all different.  We're in a of financial world of Alice-in-Wonderland investment instruments that few, if any, average investors can even make sense of, and --- worse --- that few so-called investment experts or advisers can explain clearly in simple-to-understand English.  And who knows?  Quite possibly, the vast majority of these experts have only a half-garbled idea of what they're touting.

An Example:

Consider, by way of illustration, what one knowledgeable investment adviser says apropos of the new-fangled allurements :

"... But try explaining a credit default swap -- the financial instruments now collapsing -- to your neighbor. Here is how one popular website defines the strategy:

"A credit default swap is a credit derivative contract between two counterparties, whereby the 'buyer' or 'fixed rate payer' pays periodic payments to the 'seller' or 'floating rate payer' in exchange for the right to a payoff if there is a default or 'credit event' in respect of a third party or 'reference entity.' " At what point in this elaborate series of maneuvers is the economy enhanced and American workers' standard of living increased?..."

Nor Is That All. 

Because, you see . . . even GE, which was a model company in the 1980s and 1990s, became partly a financial company as well.  And yes, in all sorts of financial areas, such as complex credit-loans in Europe that, in effect, act as surrogate mortgage-loans for house buyers as in France who --- staying in a house for only 7 years or so on an average --- want a shorter-term way of becoming the (highly indebted) house-owners. 

These substitute, half-disguised mortgages have a variable interest rate too --- like variable real mortgages.  Such financing has its advantages.  For GE, it brings a steady flow of credit-payments . . . as with GE financed refrigerators in this country, only for $200,000 and not $1000.  And since the French house, say, is lien-free, GE has a housing asset behind its loans to (half-disguised) house-buyers.  For the takers of these loans, they get a bargain --- or so they hope: possible full home ownership (if they can complete the credit payments over time) or, so they probably hope even more, the ability to reap capital gains from a housing price increase, sell off, and buy a new house . . . maybe financed in the same way. 

Of course, as with real variable 15- or 20- or 30-year mortgages, GE can hike the interest payments at will.  From the little prof bug knows about this system in France, it may not hike the interest due from, say, 4.0% in 2004 to 6.3% in 2007, but GE will try to keep ahead of general price-inflation and will hope --- as banks, insurance companies, and others stuck with huge packages of good and bad mortgages, amid following house prices --- that their asset-based gamble will still pay off.

Will it? 

And Believe Me, There Are Even Harder-To-Understand New Instruments

Click here for the Buggy commentaries on US economic strengths and vulnerabilities, with an effort (dashed off very rapidly, and touching on some highlight-causes --- nothing more), along with the initial post by Prof. Perry to which prof bug was responding.

Time was, to put it tersely, financial institutions in this country --- commercial banks, investment banks, brokerage houses, and insurance companies --- were able to allocate capital with a fair amount of efficiently and manage risk decently over the entire business cycle.  That was in the era of effective regulation, roughly from the middle of the 1930s until the early part of the 1970s. 

Today's Buggy Commentary

Not surprisingly, what with the continued headline news about the current financial crisis --- not yet a meltdown, but threatening to be one --- the bugged out comments continue to look at the US economy's fortunes: recently, at present, and into the murky near-future.

Topic One

The comments actually encompass two topics: The first: how has increasingly open trade --- and flows not just of goods, but services, technology, multinational activity, and other investments --- influenced the US economy, for good or bad? 

Note here right off: if there is one subject on which virtually all economists outside Marxist circles agree on --- whether liberal or conservative or libertarian --- it is on trade, and in particular on the overall benefits of ever freer trade in goods and services to a country's mid-term and long-term economic growth and prosperity.  And this much is true: no country these days, other than a few wretchedly corrupt, rentier gangster-regimes in the Middle East --- all small in population: under 22 million, and usually much less than that.  (Even oil-rich Iran, with 66 million, is a very poor country for 90% of its people, with a per capita income of $10,800, high unemployment, and high levels of poverty).  All other countries with a per capita income of at least $20,000 are all solidly democratic, have a large scope for market activity (with regulatory controls varying), and engage in extensive trade with the rest of the world.  Found in West Europe --- with the newer East European countries generally prospering and growing steadily from very low levels at the end of Communist control in roughly 1990 --- and the English-speaking world, plus Israel in the Middle East, and Japan, Taiwan, and South Korea (Singapore, a tiny Chinese city-state ruled by a dictatorship, is the exception to democracy)(.

But Note:

None of these countries industrialized or became democratic by practicing free-trade with the exception of Britain in the 19th century.  Most of West Europe practiced free-trade in the middle of that century, but they soon deserted the practice, erected trade barriers and various kinds of state-subsidies, and prospered under such protection.  The same was true of the United States: we had various kinds of trade barriers protecting industry throughout most of the 19th century.  And all the rich East Asian countries, starting with Japan in the late 19th century, practiced various forms of neo-mercantilist export-oriented trade as an engine of long-term growth.

And so --- the real question for economic development is this: when, in its development --- to judge by the history of the last two centuries --- is it desirable for a country to open up ever more?  And, by extension, will China's half-statist, half market-oriented economy --- dominated by a large and corrupt state-bureaucracy and headed by a self-aggrandizing Communist Party leadership --- open up to far more open trade in the form of industrial imports from abroad . . . which really means a shift away from export-led growth toward domestic consumption, infra-structure development, and a sustained campaign to deal with its horrific levels of environmental destruction.

Then, too --- as always --- there is the politically charged issue that emerges: will ever more capitalist development in China of a more balanced sort --- including far more openness to imported goods and services from abroad --- lead first to ever more international cooperation in economics that, in turn, will increase mutual interdependence with the democratic rich countries and promote over the long run peaceful relations with them?  It's a pivotal issue in international relations theory, and prof bug promises to look at it in detail later on.

For today, it's enough to say that his comments ---- left at a lengthy post at Carpe Diem, a good libertarian economic site run by Professor Mark Perry of the University of Michigan --- deal with the benefits of ever greater globalization of the US economy, but the political and economic problems of how the benefits of such openness have not been used to compensate the ever larger numbers of those who have been hurt by such openness as well as by the related introduction of revolutionary information and communication technologies that have, among other things, accentuated the rapid growth of globalizing forces world-wide.

Click here for these ranging buggy views.

Topic Two, As It Happens, Is Found in the Same Carpe Diem Thread

It was induced by the thoughtful comments of a poster who agreed with prof bug that the benefits of ever greater globalization and hence ever freer trade with dynamic industrializing countries in Asia have not been used to at least partially help the losers within the US economy . . . one upshot of which is the new surging populist reaction in public opinion.  When 80% of Americans agree in public opinion polls --- as they have for over a year now, even before the current financial crisis --- that the economy has been performing "very poorly" or "fairly poorly", you know that you are facing the recurring backlash in much of the US population to the dominant economic changes going on . . . largely or wholly seen as "unfair", advantaged only for the rich, special interests serving them, and politicians indifferent, so it's charged, to the rest of the public.  So what's to be done?

The thoughtful poster in question was among the "losers", his well-paid professional job sent abroad.  Needless to add, the libertarian enthusiasts in the Carpe Diem thread weren't sympathetic.  Some ridiculed him; others offered simple-minded advice; hardly anyone engaged his arguments head-on.  So he protested, noting the failures to take on his views fairly in an open-minded way, backed by evidence.  It's here, at the end of the thread --- which began two or three days ago --- that prof bug intervened again, supporting that poster's criticisms and adding some buggy stuff of his own.

And so click on the above link, set out in red.

Today's (Continuing) Buggy Topic:

Well, to be candid, there are lots of people and institutions to blame the shenangigans on that have brought us the worst financial crisis since the Great Depression of the 1930s . . . so far, fortunately, contained by the actions of two or three key power-holders: Henry Paulson at the Treasury and Ben Bernanke at the Federal Reserve. 

Paulson --- unlike the first two Secretaries of the Treasury appointed by President Bush-W --- actually knows something about finance, having been, among other things, a partner in one important investment bank and the head of another.  And Ben Bernanke, unlike 99% of economists who seek to navigate through a complex, ever-changing economic, financial, and political world by means of gut-level inferences drawn from their hobby-horse theoretical bent --- including ever more convoluted statistical models to justify their inferences, all contested by those of a different bent --- actually has done decades-long study in the financia-l and credit-meltdown of the Great Depression and hence knows something very concrete and helpful as a guide to dealing with the current crisis.

The Culprits?

Start with the financial institutions themselves:

• First and foremost, those who allowed our solid regulatory agencies and institutions --- including the Federal Reserve in the Greenspan era --- to alter in favor of ever more free-wheeling financial innovations way beyond the ability or willingness (or both) of the regulators to clamp down on those innovations:
• Complex derivatives probably understood by less than 2% of the financial institutions involved in them;
• The proliferation of hedge funds despite the huge collapse of Long Term Capital Management (run by two Nobel prize-winning economists) in the late 1990s that required a Federal Reserve bail-out;
• The widespread use of "naked shorts", ostensibly banned in 2005, in which speculators in forward markets hoping to buy securities at a knock-down price and sell them for a higher price bargained for in the present; but who never actually took possession of the purcchased securities in the present or future, instead just leveraging themselves with banks and brokerage houses and others simply moving figures around on balance-sheets;
• New independent mortgage brokers, utterly indifferent to the credit-worthiness of the home-buyers whom they sold houses to;
• Investment banks that happily lent money to any hedge-fund group or other agent without carrying out credit-worthiness analysis and assessment of the risks;
• And the geniuses at commercial banks --- now allowed since the late 1990s (in the Clinton erea) to have investment-subsidiaries that were outlawed from the early 1930s until then --- who lent money directly to home-buyers or mortgage brokers by worrying only about the asset involved (a house), whose price would, of course, continue to rise endlessly, and who then passed on the risk involved to the brokers and other banks and hedge funds after slicing and dicing and repackaging thousands of these loans;

Then add to the morass political agent:

• Politicians in both parties who catered to these institutions for whatever reason, and not, let us say, out of a sense of duty tol the public interest . . . with Republicans the worst (such as those in Congress who got the scalp of a Bush-appointed SEC head who was forced out in 2005 because he actually wanted to regulate the new financial excesses);
• And not least, the ever infallibile appointment by the Bush-W administration of people to head regulatory positions as at the SEC in 2005 who saw their main job as not regulating and curbing such excesses, but encouraging them.

Not to overlook the huge imbalances in savings and capital world-wide:

• Yes, not to forget the huge amounts of footloose capital that flowed into the hands of utterly corupt gangster regimes' heading countries with lots of oil and natural gas, who had little or no interest in using that capital for domestic economic, educational, infra-structural, and business development --- rather, to invest the funds in the allegedly sophisticated financial markets in the EU and the US, plus a few others that looked enticing at the time. 
• With similar huge footloose capital in neo-mercantilist countries like China, whose thoroughly corrupt Communist leadership at all levels --- engaged in an orgy of self-aggrandizement equal to that of the gangster-regimes in Russia, Iran, Saudi Arabia, the other Persian-Gulf states, and Chavez-'s Venezuela --- invested well over a trillion dollars in US Treasuries and other financial assets rather than use the largesse for dealing with their huge domestic problems and needs.

And, however much Europeans are enjoying the quasi-nationalization of our financial system --- who could blame them for some shivers of delightful schadenfreude? --- the fact is that:

• EU banks, private and public, are extraordinarily leveraged and vulnerable compared to the US financial system . . . not least because their banks (again, private and public like their central banks) have enormous sums of dubious investments on their books as well. 

A Brief Clarification of EU Banking Vulnerabilities: the US Fed to the Rescue?

Consider this summary by two European specialists, just published today:

"Too big to fail and too big to save?

"The key problem on this side of the Atlantic is that the largest European banks have become not only too big to fail but also too big to be saved. For example, the total liabilities of Deutsche Bank (leverage ratio over 50!) amount to around 2,000 billion euro, (more than Fannie Mai) or over 80 % of the GDP of Germany. This is simply too much for the Bundesbank or even the German state to contemplate, given that the German budget is bound by the rules of the Stability pact and the German government cannot order (unlike the US Treasury) its central bank to issue more currency. The total liabilities of Barclays of around 1,300 billion pounds (leverage ratio over 60!) surpasses Britain's GDP. Fortis bank, which has been in the news recently, has a leverage ratio of "only" 33, but its liabilities are several times larger than the GDP of its home country (Belgium). . . ."

However you view them, these leverage ratios are simply staggering . . . something still hard to believe even after you've read these figures two or three times.

And Now To Today's Buggy View:

As usual, it's been left at a libertarian web-site, the Marginal Revolution . . . a high-quality economic blog, even if prof bug isn't a libertarian (always concerned about de-regulation in the financial realm, as opposed to it in the real world of industry).  And needless to add, a web site --- as libertarians are bent to do ---where the causes of the current financial crisis are allegedly the fault of government and non-market initiated regulatory changes, including in legal accounting rules.

Huh? Really?

Click here for the more historical, wide-ranging buggy view of the current crisis and, so far, its containment by a tiny group of knowledgeable policymakers in Washington D.C. and New York. 

Today's Topic

Busy on a couple of projects, prof bug has still found time today --- as over the previous days --- to bang out some bursting commentary on our current financial crisis.  Those who have been his posted analyses here on this topic for several days now should be well situated to follow up and comprehend his latest two commentaries, each left at a well-known libertarian site.

The Two Bugged-Out Sources 

The first is at Carpe Diem, run by Professor Mark Perry of the University of Michigan.  It's in response to Prof. Perry's quoted paragraphs from an op-ed left at the Wall Street Journal today (September 16, 2008).  Click here.

The second source is at the Marginal Revolution, a site run by Tyler Cowen, a professor of economics at George Mason University in Virginia . . . the new citadel of libertarian economics, many of whose economists find the University of Chicago economics school soft on the proper workings of free markets.  The Chicago school, you see --- even James Buchanan, who is at George Mason now at an advanced age and pioneered (along with three or four other economists) "public choice" theory, for which he won an economics Nobel prize a couple of decades ago --- admit that there might be market failures, only they are convinced government efforts to deal with the failures will usually fail to improve things and will likely worsen them.  The hard-nosed libertarians at George Mason rely instead on some dead Austrian economists in the early and middle decades of the 20th century . . . though not, strikingly, the one Austrian economist who is recognized as important in mainstream economics thought: Joseph Schumpeter, whose impressive work on the driving forces of economic growthin clustered bursts of revolutionary technologies even 50 to 60 years since the industrial revolution of the late 18th century, ended his distinguished work at Harvard in the 1930s and 1940s. 

Click here for that second buggy commentary on our current financial dislocations.

Please Note

Even if you're not a libertarian --- which prof bug is decidedly not --- you will find the posted comments of Professors Perry and Cowen very illuminating whether you agree with them or not.  A more middle-of-the-road economic site, Econbrowser is also very good, though it does require at least a background in intermediate-level undergrad economics.  Another middle-of-the-road site, no less highly recommended, is Economists View.  And the blogs at the Wall Street Journal, the Economist (and its articles), and the Financial Times are almost always illuminating and easy-to-follow. 

Today's Buggy Topic

No need for an elaborate introduction to today's bugged-out commentary --- on the major financial innovations in the world, especially the USA since 1980, many of which have helped the US make a quick transition from an industrial manufacturing country to a knowledge-based economy, which produces information- and idea-laden products.  Yet, simultaneously, many of which have produced one financial excess and economy-wide dislocation after another . . . requiring, to boot, government intervention to stave off a giant collapse of the entire financial system.

Click here for the buggy analysis, left at the Marginal Revolution . . . a ranging and intelligent web site run by Professor Tyler Cowan of George Mason University, the new citadel of libertarian thought: with a N.Y. Times article by Cowen the stimulus to the thread at his web site where prof bug left his lengthy comments.  Those comments finishing, as you'll note --- in a typical buggy manner --- on an effort to tease out the political implications of his analysis.

Today's Topic

If the title of this buggy commentary surprised you, it actually responded to a post left at Carpe Diem, the libertarian site run by Professor Mark Perry of the University of Michigan, and a couple of posted comments left by others in that thread. 

Prof. Perry wondered whether his data-driven web-site --- which I admire, even though the buggy prof is decidedly not a libertarian --- could explicitly tackled political subjects or not. 

That led prof bug to post his original comments, which included a few personal references to how he taught political science courses in international relations for decades at UC Santa Barbara until his recent retirement.  A couple of fellow posters queried a couple of those references.  Prof bug then replied at length, indicating that in his view it was possible --- referring to examples drawn from his own courses --- to teach politically controversial subjects like the causes of war or the pros and cons of globalization or even the war on terror with a certain fair-handed balance in the readings and lectures that contrasted with the indoctrinating thrusts of politically correct professors, relying on a hodge-podge of various post-modernist theories ( all suspect intellectually) to rationalize their propaganda in classes . . . never mind their efforts, in way too many cases, to stifle contrary views in coercive ways: hate-speech codes (rejected by the faculty at UCSB fortunately), kangaroo courts to decide on such cases --- a covert way to enforce pulpit-pounding orthodoxies --- in which the judge, prosecutor, and jury are one and the same, support for student efforts to drive off campus any speakers to the right of Al Gore (or tolerance of them anyway), and so on.

Click here for the original Perry post and prof bug's and other comments.

A Specific Bugged-Out Case

In the winter of 2004, not long before prof bug retired that summer, he taught a course that dealt with the war on terror.  The syllabus, its readings, the course objectives, and the requirements can be found here: click now.

Today's Buggy Subject

At Carpe Diem, a good libertarian economic web site --- yes, even for a decidedly non-libertarian like prof bug --- a thread was started by Prof. Mark Perry, who runs the site, on the recent strengthening of the US$ against a basket of other countries' currencies, each of them weighted by the importance of a country's trade with the US. Prof bug quickly posted a fairly lengthy commentary, which roamed widely over a variety of related subjects . . . some of them, as you'll see, no doubt surprising to most of you.

And as usual, prof bug tried to widen his economic comments to envelope some important political subjects, domestic and international alike. Click here for Prof. Perry's post and prof bug's wide ranging reply.

Is the Government Take-Over of Fannie and Freddie a Good Decision? 

The buggy answer: Yes, and likely to have a fairly swift beneficial effect on the fortunes of the US economy. Click here for a perceptive analysis by a Wall Street specialist, who sets out the optimistic case, looks at pessimistic criticisms, and argues convincingly that the optimists are likely to prevail.   By today, please note (September 11, 2008), we already know that the government take-over has lower mortgage rates back to where they were in April, and much lower than they were a year or so ago.  

But will banks start lending to house-buyers even if more house-buyers line up and are qualified for the loans?

Almost certainly --- not least because Fannie and Freddie underwrite about half of the country's mortgages.  Banks need to lend to make money.  With the government behind the mortgage-market, they will very likely find that they need do only ordinary credit-analysis to find plenty of qualified buyers.  Even in the greater Los Angeles area, house prices outside the city itself --- in surrounding suburbs --- have plunged to the point that housing sales have been up between 20% to 30% over a year ago.

Will the US Economy Stay Out of Recession? 

 Note that there is no official definition of a recession --- with the NBER, a private research group (National Bureau of Economic Research) using a variety of indicators, coming the closest in the US to an authoritative source on the subject.  Its indicators cover numerous economic trends: not just GDP growth trends over three quarters or so, but changes in employment, per capita income, consumption, industrial production, retail sales, and so on.  And it only voices its assessment at the end of those three quarters, retro-actively.  Click here for a good, fairly up-to-date analysis that probes these trends in the US economy (late July 2008).

Right now, it's doubtful if we're in a recession --- unlike most of the EU or Japan . . . this, despite the growth of unemployment to around 6.1%.  

Note though: that's a definition for many specialists  of a "growth recession": GDP has grown, not dipped negatively for two quarters or so, but the growth hasn't been high enough to stop some lay-offs by businesses and to furnish jobs for new entrants into the labor market.  Maybe so.  It's not an encouraging sign, that's for sure.

Whether we fall into a full-fledged recession as defined eventually by the NBER hinges largely on two trends: on our trade balance --- the growth of exports (and a slowdown, if it occurs, in imports) --- and on a revival of the housing market, along with investment in export-oriented industries, and eventually, if we're lucky, a resumption of consumer confidence and buying and hence wider business investment across the economy. Then, too, if oil prices continue to fall --- today, they've dipped to just about $100 a barrel --- then we'll be doubly lucky: the value of imports will decline, consumers will find lower prices at the gasoline station, and the Federal Reserve will likely be more reassured about inflationary trends in the US economy . . . this, even though the core indexes it looks at (not least, core-CPI) exclude volatile food and energy prices as unreliable guides.

In that case, interest rates will likely stay low and help consumption and investment. 

The Longer-Run Health and Future of Our Economy 

So much for the short-run fortunes of the US economy.

In the long-run, as prof bug's comments at Carpe Diem today indicate, our economic future --- and our power, influence, and security in the world as a country --- will depend in no small part on our finding ways to become energy independent in the next decade or so.  

If we could, then --- quite apart from reducing our dependence on vulnerable countries as sources of oil and helping our trade-balance --- we would stop fueling the aggressive behavior of Russia, the nuclear weapons programs of Iran, the Saudi export of Wahhabi extremist Islam, Venezuela's demagogy, and China's backing genocidal regimes in the Sudan and elsewhere that are engaged in something like mass-murder of minorities.

The Security Spillovers of Costly Oil: Ignored by 99.99% of Economists 

All these countries (minus China) are basket-case economies, or would be without their huge oil imports.

And the future of our energy usage lies in electricity --- yes, even for vehicles . . . electricity itself able to be produced by a variety of energy sources, some of which can't be exported and hence would be shielded from the growing demand for energy resources by China and India: hydro-electric, wind-power, nuclear power, geo-thermo, and solar cells; plus eventually hydrogen.  

For a while, in the transition, a growing use of natural gas (we have plenty as a country, and it is much more benign for the environment than oil) and domestic coal --- again, we're well endowed --- would be needed as well.  And yes, coal can burn clean with proper existing technologies, plus sequestering its carbon dioxide . . . a technology that exists so far only on paper.  It requires capturing the C02 and burying it deep underground or under the oceans.  

Even the EU, observe carefully, has committed itself to building 50 new coke-burning power-sites in the near future.  China, which is burning only dirty coal-generating power at about 550 electricity-generated sites, is building a new power-site a week.  And though there's a commitment to building a new cleaner coal-power site that's under way right now, it appears that the Chinese government remains largely indifferent to the huge side-effects of massive smog and environmental deterioration.  

Just Added Later in the Day: A Very Informative Read on Innovation 

What Should Taxpayers Do for the Big-3 US Auto Companies?

That's the topic covered by a series of comments that prof bug left in two different threads at Carpe Diem, the libertarian web site run by Professor Mark Perry of the University of Michigan . . . and a site always worth visiting, even if (like prof bug), you're no libertarian yourself.

Two Related Issues 

The first buggy comment deals with the request by the Big-3 for a government-backed loan worth $25 billion, mainly for retooling . . . with a concentration by Ford and GM not just to bring out gas-saving vehicles like more hybrids, but more advanced technologies like lithium-ion batteries and GM's Volt engine --- which would be a plug-in electrical system.  Electricity has the big advantage that it can be produced from a variety of sources: not just oil, but natural gas (far cleaner, and with the US abundantly endowed with it), hydroelectric power, coal (again, lots and lots of it in the US, and yes, it can be made into an environmentally safe energy with added costs), wind-power, geo-thermo power, nuclear energy, and ultimately solar power . . . the sun the source of all energy in the universe (save for nuclear power itself).

And unlike oil, coal, and natural gas, these other sources of energy can't be easily exported, and hence the growing interest of China and India, among other countries desperate for new energy resources, wouldn't raise the US price to international levels.  So yes, with these commitments in mind by Ford and GM, prof bug supports the request for $25 billion underwritten by the US government (and hence ultimately tax-payers) . . . another $25 billion already provided for in the recent energy bill passed by Congress and signed into law by President Bush.

With one more proviso: it is unseemly for the top executives at Ford, GM, and Chrysler to reward themselves so richly after making managerial decisions the last ten years --- as the price of gasoline has surged steadily upward (until the last 6 weeks) --- to concentrate so heavily on gas-guzzling SUVs, sedans, trucks, and vans even if the profit-margins were higher.  Higher?  Yes . . . but then why have Toyota and Honda been so much more nimble than their American competitors in anticipating the shifts in consumer demand for gas-saving vehicles?

The Second Buggy Comment Tries to Reply 

It has to do, as prof bug tries to point out, not just with bad managerial decision-making at Ford and GM and Chrysler, but also the ways in which German and Japanese car companies are financed compared to US companies.  

Specifically, if you click here, you'll find the answer . . . as well as the pros and cons of the US system of major corporations in this country depending heavily on stock-market finance, as opposed to bank-loans used mainly by Japanese and German corporations.

A Reminder 

When anyone considers the pros and cons of US governmental subsidies in the energy sectors --- and technological changes in the car industry are intimately involved with those sectors --- he needs to keep in mind three facts in any cost/benefit calculus:

• The international oil industry is not a free competitive market.  OPEC, by dominating oil exports --- 40% world-wide --- is a cartel that determines production levels and hence the prices of exported oil for other big exporters like Russia, Norway, Canada, Venezuela, Indonesia, and Mexico.  To analyze it as a competitive market is simply wrong.

•  The entire energy industry in the US has been heavily subsidized by the Federal and state governments for generations now: whether oil, natural gas, coal, nuclear, hydro-electric . . . what have you.  The same is true of highways built by taxes on which gasoline and oil are delivered to gas stations and your home; and port facilities for importing oil imports; and certain limits on liabilities for nuclear energy, as well as tax write-offs.  That further interferes with analyzing energy markets generally as competitive free markets.

• Not least --- and totally ignored by 99.9% of economists --- our country's dependence on imported oil from the Middle East and elsewhere (remember, it's an integrated market price-wise and it doesn't matter if we get only 60% of our daily 10 million barels of oil from OPEC) has entangled us way too deeply in the political and security affairs of corrupt gangster regimes in the Persian Gulf, North Africa, and Iran . . . just as the huge surge in oil prices has emboldened and fed the militaristic and aggressive policies of Russia and Iran, otherwise basket-case economies, and Saddam Hussein's WMD programs of the 1980s and 1990s, and (on a different level) the demagogy of Chavez in Venezuela.  

Today's Topic: How the US Government Tracks Inflationary Pressures 

The debate about how the US government BLS (Bureau of Labor Statistics) --- filled with hard-working, unusually competent professional economists and statisticians, tracks various kinds of price movements in the US --- continues to flare on some very good economic sites on the Web . . . the economists themselves almost always, and rightly, defending the use of BLS indexes and lots of non-economists or non-statisticians or just plain uninformed people attacking the CPI and its varieties that the BLS publishes monthly. Lots of these uninformed people are also prone to extravagant conspiratorial theories.  

Two-Kinds of Moon-Baying Paranoia

For left-wing radicals, the US government and its agencies are in the pockets of big corporations and banks and can't be trusted to do anything sound or publish any non-ideologically informed statistical indexes: GDP, per capita income, the Gross Domestic Product deflator (to get "real" GDP growth once overall price increases are subtracted from nominal GDP), the CPI (the consumer price index, which tracks over 250 important components of average household purchases, the components weighted for importance and in terms of budget constraints for households), core CPI --- which, unlike the CPI (really, the CPI-U as it's called) --- excludes food and energy prices as too volatile to guide the Federal Reserve's decisions about interest rates, and so on. Remember in this connection: if the Fed had looked only at CPI-U --- which does include volatile price movement in food and energy --- it might have panicked in the late spring, fearing that a 30% increase in oil price between early April and mid-July was setting off a new inflationary binge that had to be combated by higher interest rates. In the process, higher interest rates would have almost certainly sent unemployment surging and driven the US economy into serious recession. As it turned out, the Fed didn't raise rates, and its judgment was sound. Oil prices started plunging in late July and have almost fallen back by the same 30% as of Friday.

The second kind of radical paranoids are almost always zealous libertarians, followers of Ayn Rand, the novelist --- Atlas Shrugged, full of one-dimensional characters, heavy-handed dialogue, an implausible plot, and didactic homilies --- who is considered by them not just a great novelist ignored for conspiratorial reasons by pro-government literary critics, but also a great and original philosopher . . . ignored by 99.99% of all philosophers around the world for similar reasons. Conspiracies everywhere, you see . . . with the government of the US and all other democratic capitalist countries the enemies of freedom and economic efficiency as concocted in the writings of a handful of free-market economists --- usually dead Austrian economists hardly referred to by 95% of the profession here or in Europe, but along with Rand the greatest thinkers in the 20th century.  

Note quickly: it's not just the US government that is the enemy of all true-believing libertarians. Government in Canada, West Europe, Australia, Canada, Israel, and Japan are even worse, you see --- statist aggrandizers, out to smash both the little guy and the big rich guy (the latter the savior of the little guy, if given free reign in economic life) for selfish political and bureaucratic reasons.

The Result of Such Paranoia? 

Tersely put, it preys on the lack of economic knowledge of the average person, worried about rising energy and food prices, job security, stagnant wages since 2000 --- the only time in US history that wages have not grown in the boom phase of the business cycle's upswing (6 years between October 2001 and October 2007) --- and growing and justified worries about energy and food prices, job security, mortgage payments, and health-care costs.  
  

A Clear Example

Today's Buggy Topic 

Earlier today, September 3rd, 2008, prof bug left a fairly extensive commentary in a thread at EconBrowser . . . a well-visited economic blog run by Prof. James Hamilton of UC San Diego and Prof. Menzie Chin of the University of Wisconsin.  It's a good site, with middle-of-the-road economic analysis, and generally speaking, it requires a decent grounding in, say, intermediate level undergrad economics.

The topic left by prof Hamilton referred to the new oil contract that the Chinese government has signed with the Iraqi government --- a favorable sign according to Hamilton.  Prof bug didn't disagree, but he noted --- as he has when he has posted on the international oil market and US (and EU) dependence on it --- how even the best of economists aren't trained to deal with the foreign policy and security spill-overs of our dependence.  Click here for the Hamilton post and the buggy riposte.

The Dangers of Such Dependence

Prof bug has spelled them out before: click here and, a day earlier (August 15, 2008) here.  No need to say any more.  If you're interested, go to the Hamilton post and the buggy reply today, and --- if you want to pursue your knowledge --- click on the two earlier buggy links.

Keep in mind that when talking about energy independence and how costly it will be --- for your standard-model economist it's pie-in-the-sky talk --- the trillions of dollars the US has spent in military use alone in the Middle East, not to mention our entanglement in the affairs of corrupt gangster-regimes and how the huge price of oil has emboldened the menacing behavior of authoritarian Russia and Iran --- both otherwise basket-case economies --- is never taken into account.  It's as though growing trade and investment interdependence is always for the good, an extension of market-logic across state-boundaries, with no wider consequences for global or regional stability or the growth of real or potential threats to basic American interests and values around the world. 

And the notion that growing interdependence between, say, the Chinese economy and the American economy will invariably promote not just mutual cooperation but growing democratic trends rests essentially on flimsy premises, with no clear evidence for the assumptions.  When, for instance, a rapidly growing if still half-backward China is devoting only 40% of GDP to its people's consumption --- the equivalent in Japan and the EU as well as the US is well above 60% --- then you know that there are motives driving Chinese development in the minds of its dominant Communist Party elites that don't mesh with standard economic assumptions about economic growth.

None of This Means, Please Note, Growing Globalization Is Bad Per Se

It has its clear desirable side --- not least in adding to the competitive pressures that have enabled the US to be in the vanguard of pioneering a shift from an industrial to a post-industrial knowledge-based economy . . . the major driving force technological change, manifested in the enormous mushrooming of communications and information technologies that didn't exist two decades ago.  But that said, the blithe, almost blasé assumptions in the minds of most economists when analyzing growing economic interdependence --- with a narrow focus on limited economic gains and costs --- have to be continually questioned, a form of conventional wisdom that has already created the menaces of an aggressive Russia in its former imperial colonies, a defiant Iran bent on developing nuclear weapons and missile delivery systems, and a zealous Wahhabi Islamist government in Saudi Arabia that spreads hateful anti-Christian, anti-Jewish, misogynist propaganda world-wide in competition with the Shi-ite oil-rich zealots in Iran.

Today's Buggy Topic: US Poverty 

At Carpe Diem --- the libertarian economic site run by Prof Mark Perry of the University of Michigan, where prof bug has been posting frequently of late --- prof Perry posted a chart, some links, and comments about the measures of US poverty levels.  The Perry post and buggy prof's reply, set out at length, can be found if you click here. 

The Buggy Take 

As you'll see, one of the deficiencies in the poverty measures is the omission of non-cash subsidies: rent subsidies, food stamps, medicaid, and school lunches.  Taken together, these reduce official poverty from about 12-13% right now by about a third in cash equivalents.  As you'll also see from prof bug's comments, census bureau studies of consumer households yearly find that for every $1.00 of reported income, Americans in the poverty ranks spend $2.40 . . . and the buggy analysis explains why.  It also shows the diferences in poverty across ethnic/racial lines, and finally it notes that --- in the opposite direction --- poor working Americans (not necessarily in poverty) pay transportation costs and, especially if a single mother, costly day-care that aren't considered in the poverty measures or in final disposable income for the bottom 20% of income-earners. 

And as with all low-income Americans who aren't covered by health insurance, or even if covered by medicaid, out-of-pocket expenses for medicine and treatment have to be considered a problem for disposable income too.

Today's Topic: The US Economy in the Clinton and Bush Era

At Carpe Diem, the libertarian web site run by Mark Perry, a talented economist at the University of Michigan, prof bug posted three long commentaries that differed with a chart and comments on it posted by prof Perry.  Together, they tried to show that how average unemployment in the Clinton and Bush eras have been the same -5.2% in each case.  This disagreement led prof bug to widen his criticisms of the economy's performance in the Bush era, and on a variety of scores: job creation, rises or stagnation in average wages, and the large increase in national debt beginning in 2001 and sustained ever since then.  Click here for the Perry post and buggy replies.

More Criticisms

As you'll see, the comparisons in average unemployment during the two eras is particularly misleading.  In particular, Clinton inherited an economy where unemployment was 7.0% or so, whereas Bush started office when it was below 5.0%, and curiously --- even after the short and shallow recession in the first three quarters of 2001 ended --- unemployment continued to rise over the next 21 months until it reached 6.2%. 

On a wider scale, prof bug returned to a theme he has hammered away at Carpe Diem for the last several weeks: tersely put, despite an impressive macro-economic performance in the US for the last 27 years or so --- the US pioneering the new post-industrial knowledge-based economy, and so far the only rich industrial country to reap the full benefits of the Internet age in productivity growth --- US average wages have stagnated (a real rise of only 2.0% since 1979), and at the same time income inequality has markedly grown.  To make matters worse, though it's no fault of the Bush presidency, the Consumer Price Index has risen rapidly the last year to over 5.0%, mainly owing to the big jump in energy and food prices. 

True, the Federal Reserve in deciding what to do about interest rates --- raise them, say, which would harm economic growth and add to unemployment (now rising to around 5.5%) --- doesn't track the CPI itself, rather core CPI that eliminates energy and food prices as being too volatile.  For instance, if the Fed had followed CPI and not the core CPI, it might have been panicked by the 30% increase in oil prices to close to $150 by mid-July and raised interest rates a good percent or two.  Since mid-July, of course, oil prices have plummeted and are now heading to $110 a barrel.  (The Fed, by the way, watches other core price indexes, like the Personal Consumption Expenditures --- a chained link index --- and the Producers Price Index, plus a few more exotic indexes.

The Wider Political Fall-Out

The gap between the performance of the US economy's macro-performance --- the US having a per capita income lead in PPP terms (purchasing power parity) now of $47,000 to Germany's and Japan's $34,000 --- and the growing discontent of the American public with our national economy and the direction of our economy is a big political problem.  Right now, survey polls show that 80% of the US public think that our economy has been performing very poorly or fairly poorly.  A similar percentage thinks that our country is on the wrong track, just as somewhere between 73% and 80% find that George W. Bush's performance as president has been disappointing too. 

What's Going On?

Essentially this: ever since the start of the American Republic in 1789, a populist rebellion against business, financial, and political elites has erupted every few decades --- and quite simply for a widely shared sentiment: to wit, that the economy's functioning has gradually been operating unfairly, at their expense and for the benefit of a small group of business leaders, financial institutions, investors, and speculators, as well as for political elites who respond to these rich and powerful interests. 

The first populist upsurge was the Whiskey Rebellion of the early 1790s.  The next one erupted in the 1828-1836 era of the Jackson presidency, when Andrew Jackson initiated all sorts of programs aimed at curbing the influence and power of bankers and well-to-do business firms.  In the 1880s and 1890s, a new agrarian populist rebellion emerged in the Mid-West and plains states as well as in parts of the South, all aimed at the growing power of new financial institutions --- the stock market, brokerage firms, investment banks --- and giant manufacturing corporations.  It was then replaced by the more middle-class progressive movement, led eventually by Theodore Roosevelt after his reform presidency ended in 1909.  A similar grass-roots rebellion among small farmers and industrial workers flared in the 1930s Great Depression, leading to FDR's New Deal. 

The Recurring Causes of American Populist Outbreaks