Category: Uncategorized

This may be the classiest thing you ever see in sports:

From the Associated Press, here's what happened:

MONMOUTH, Ore. (AP) - A senior with a .153 career batting average hits her first home run, a three-run blast, to help Western Oregon move closer to a spot in the NCAA's Division II softball playoffs.

That was improbable. To 70-year-old Central Washington coach Gary Frederick, what happened next was "unbelievable."

Sara Tucholsky, the 5-foot-2-inch right fielder, sprinted to first as the ball cleared the center field fence Saturday in Ellensburg, Wash. Given that she had never hit a ball out of the park, even in practice, she was excited. So excited she missed first base.

A couple yards past the bag, she stopped to go back and touch it. But she collapsed with a knee injury.

"I was in a lot of pain," she told The Oregonian newspaper on Tuesday. "Our first-base coach was telling me I had to crawl back to first base. 'I can't touch you,' she said, 'or you'll be out. I can't help you."'

Despite the agony, Tucholsky crawled back to first.

Western Oregon coach Pam Knox ran onto the field and talked to the umpires. The umpires said the coach could place a substitute runner at first. Tucholsky would be credited with a single.

"The umpires said a player cannot be assisted by their team around the bases," Knox said. "But it is her only home run in four years. She is going to kill me if we sub and take it away. But at same time I was concerned for her. I didn't know what to do."

An opponent did.

Central Washington first baseman Mallory Holtman, the all-time home run leader in the Great Northwest Athletic Conference, asked the umpire if she and her teammates could carry Tucholsky around the bases.

The umpires said nothing in the rule book precluded help from the opposition.

Holtman and shortstop Liz Wallace lifted Tucholsky and resumed the home-run walk, stopping to let Tucholsky touch the bases with her good leg.

There's video at the link. The picture is also part of ESPN.COM's Freeze Frame feature this week.

From the desktop of Brad DeLong, a very good synthesis of the evolving state of Federal Reserve policy:

We now have two precedents. If the Federal Reserve judges that a major financial institution:

• is too big to fail in that its failure will generate systemic risk
• has followed portfolio strategies that have produced inappropriate and excessive leverage
• requires immediate action

then the Federal Reserve will intervene to structure and support a deal that leaves principals and investors in the offending systemic risk-creating institution with effectively zero entity. Counterparties will be rescued. Principals and investors will not--even if normal more lengthy legal and bargaining processes would give principals and investors a share of the equity value on the table.

This is not the arms-length equal-treatment impersonal-rule-of-law ideal to which a government should aspire. This does, however, seem to get the incentives about right.

Charlie Kindleberger once wrote, in Manias, Panics, and Crashes, that the key to avoiding both depression and moral hazard was for the lender-of-last-resort to always show up in a crisis but for its appearance to always be doubted until the very last moment. These two precedents suggest that the Federal Reserve is evolving a case-law-of-twenty-first-financial-crisis that is somewhat different: in a crisis the lender-of-last-resort will always show up, but investors and principals in individual institutions that need to be specially rescued will discover that the lender of last resort is not their friend.

It is the "too big to fail" characterization of an institution that precludes the ideal arms-length equal-treatment impersonal-rule-of-law conduct of monetary policy. Given that characterization, however, the Fed's evolving policy goes directly after moral hazard in two places. First, by (very nearly) wiping out the value of the equity, the Fed sends the strongest message it can to these institutions that you don't want the Fed to have to get involved. Second, by moving control of the financial decisions away from the insiders who now hold little equity, the Fed sets up reasonable conditions for more prudent behavior after it leaves the scene.

Yesterday, I came across two very good pieces of commentary on Demopalooza 2008, which is my new name for this extended primary:

1. Charlie Wheelan gives the best analysis I've seen of the subject of Senator Obama's infamous San Francisco remarks in "Small Towns, Big Problems." I wish I could write that well. Charlie will be teaching again this summer in the Public Policy Minor at the Rockefeller Center at Dartmouth.
2. Thomas Palley holds forth on "The Curse of the Clintons." For the record, I do not begrudge Senator Clinton for staying in the race against long odds. I do fault her for her tactics. It's hard to come up with a better explanation for them than Palley gives.

Enjoy!

Stan's post this morning brought to mind the old joke with the punchline in the title of this post. When there's a panic, you need to make sure you are at the front of the line to get out. Japan is the largest external holder of federal debt, but it's not the only one. The financial meltdown scenario is one I posted about last year at Vox Baby, in response to a poorly elocuted (though certainly not discredited) speech given by Senator Clinton after a stock market selloff. Here's what she said:

I have long argued that a great source of vulnerability is the fact that other countries, including China, own so much of our debt. Today, foreign nations according to the most recent Treasury statistics hold over $2.2 trillion or 44% of all publicly held United States (U.S.) debt with Japan and China alone holding nearly $1 trillion. In essence, 16% of our entire economy is being loaned to us by the Central Banks of other nations. Having so much debt owned by other countries can be economically unsound. Yesterday it was the sell off of foreign stocks that had reverberations in U.S. markets. But if China or Japan made a decision to decrease their massive holdings of U.S. dollars, there could be a currency crisis and the U.S. would have to raise interest rates and invite conditions for a recession. While it can and will be debated whether yesterday's market disruption was just a blip or a larger indicator of our economy's vulnerabilities, it is clear that interdependence between our economy and that of other nations can pose a risk if we do not pursue smart policies. Precipitous decisions by any country with our debt could create much graver economic problems than what we saw yesterday. The writing may not be on the wall, but yesterday, the writing was on the Big Board.

And here's how I replied:

Her "in essence" sentence is not a sensible comparison. It does not make sense to compare a stock of money--the total holdings of U.S. federal debt by foreign investors--with the flow of money that is U.S. GDP. A sensible comparison might be the flow of interest that we pay to these foreign investors, a much smaller number as a share of GDP. (For example, I don't get too worried about the fact that a bank has lent me more than 100% of my income in the form of a mortgage. The reason is that the interest on that mortgage is a very reasonable fraction of my income.)

The statement in green above is a true statement. Not only would the problems be more grave--they might actually be problems and be related to what the creditor nations did. But even this scenario that she discusses is, in Mankiw's word, alarmist. There would have to be a reason why China or Japan would intentionally precipitate a selloff of their holdings of U.S. debt, particularly since the Chinese and Japanese holders of the debt would be the first ones to suffer the capital loss due to this action. It couldn't simply be that their own economies faltered--the U.S. debt they hold is an asset to them. When my income falters, I am typically quite grateful for the assets I have in the bank (somebody else's liabilities). Their economies would have to falter so badly that they needed to liquidate their holdings of U.S. debt to pay off some of their own debts. Not too likely, unless, perhaps, we close our markets to them.

Clinton's rhetoric, particularly these statements about being "held hostage" or "losing our economic sovereignty," suggest that she's thinking about a scenario in which a policy maker in Beijing or Tokyo decides that the U.S. debt is overvalued and wants to unload it en masse. About the only thing that could really convince me to do this, were I the policy maker in Beijing, is a credible belief that my counterpart in Tokyo was about to do the same thing.

While that is something over which Washington has very little control, even in that case, all that would happen--unless you think the U.S. government wouldn't pay the interest or principal on its obligations--is that the U.S. dollar would depreciate and domestic interest rates would rise. Exports would pick up a bit, and the government would find deficits more costly to finance. I'd prefer if that didn't happen, but in the grand scheme of things, it's neither very likely to happen nor very severe in its real consequences if it does.

That said, I don't think the facts reported in the Bloomberg article to which Stan links necessarily reflect the start of a panic. For now, at least, the magnitudes are pretty small and, as they say, only one domino has fallen.

I've been busy this past week with my day job as director of the Nelson A. Rockefeller Center at Dartmouth. The year 2008 marks two anniversaries for us: 100 years since Nelson Rockefeller was born and 25 years since the Center was founded at Dartmouth. We are using the coincidence of the Centennial with the 2008 elections to examine Rockefeller's legacy in the three decades since he retired from public office.

This week, we hosted public lectures by two people with a lot to say on the matter. Yesterday, Richard Norton Smith gave a wonderful discussion of the biography he has been writing on Rockefeller for the last several years. On Thursday, Governor Christie Todd Whitman visited campus. She may be the only unabashed Rockefeller Republican with any political prominence today. A brief writeup of her talk is in the campus paper. She articulated as well as anyone I've heard recently the case for decentralized, responsible, and effective government. If she were running this year, she would have my vote.

So I started to wonder whether she might be a viable candidate. She would be an odd pick as McCain's running mate in 2008, particularly if Obama is the Democratic nominee. But what about 2012 against a Democratic incumbent? She seems to have recovered from her frustrating years at the EPA and has parlayed her success with It's My Party, Too into a PAC, which has now merged with the Republican Leadership Council (an odd name for a centrist organization given today's Republican leadership at the national level). She's clearly still active. Maybe the opportunity will present itself.

The impact of rising jet fuel costs on the airline industry's bottom line has been substantial. From yesterday's Washington Post:

Faced with skyrocketing fuel bills, major U.S. airlines have announced nearly $1 billion in losses for the first three months of the year, a financial toll that is forcing carriers to slash flight schedules, cut jobs, add passenger fees and even seek potential merger partners.

It would be nice if the tone of the article were a little bit different. When the price of an input rises, then of course less of the output will be produced. This is one of the least subtle lessons in introductory economics, right along with the rise in the price (here, the fees) of the output. But when it's the airlines, we're now "slashing" and "cutting." It's a supply curve shifting. Chill.

If you run the numbers, you see that the airlines can't possibly be making money with the fares their charging and the costs they're paying. Fuel costs have nearly tripled since 2000. What's disappointing--as a reasonably frequent flyer and a would-be admirer of the industry--is how its leaders seem to be distracted in making the changes that need to happen. I'll give them two pieces of advice.

First, stop looking to mergers to reduce capacity. There is plenty of redundancy within each hub-and-spoke carrier's route system to make the reductions. And that can happen without getting the DoJ involved.

Second, go find an airline that's doing well and copy it. In terms of performance, Southwest is the industry leader. Do what they do. It's good stuff. Yes, Southwest will be subject to the cost pressures from jet fuel purchases. But is there anyone who doesn't think it will hurt them less than the rest of the industry?

Both pieces of advice go to the industry's confusion of size for profitability. It is much better to make "small" profits than "large" losses.

Greg Mankiw directs us to David Leonhardt's article on John McCain's chief economic advisor, Doug Holtz-Eakin. I've known Doug for a number of years and admired his scholarship and his policy work. It's got to be frustrating to be pushing the McCain economic agenda. From the article, here's the crux of the problem:

In all, federal taxes now equal about 19 percent of the nation’s economic output, which is in line with the historical average. But the costs of Medicare and Medicaid, on their current path, would require that number to rise to an unmanageable 30 percent, and beyond, in coming decades.

“We as a nation cannot tax our way out of this problem,” Mr. Holtz-Eakin says. “It’s just not an option.”

It is true that we cannot tax our way out of all of this problem. But we could untax ourselves today into a bigger problem tomorrow. As I've said before in the context of entitlement reform, all dollars matter:

If concern over tax burdens on future generations is what motivates you, then it is completely inconsistent with that motivation to pass a Medicare prescription drug bill that generates a projected unfunded obligation that is bigger than the projected unfunded obligation in Social Security. It is also completely inconsistent with that motivation to run General Fund deficits that are not balanced by later surpluses, raising the debt burden on future generations. This sort of inconsistency will doom any chance at prudent reform of any of the programs.

Transportation Secretary Mary Peters announced an acceleration in the CAFE standards this afternoon. I think a gasoline tax is superior to the CAFE standards as a policy mechanism to reduce CO2 emissions. From the Vox Baby classic, "Don't Linger in this CAFE:"

The first issue, as I've alluded to earlier, is that the problem we care about is total usage of gasoline. Total use is the amount of miles driven divided by fuel economy. CAFE standards, at best, address fuel economy, but they provide no incentive to economize on the number of miles driven. This is why a gas tax is better--it allows people to decide how they want to conserve on fuel usage, fewer miles or fewer gallons per mile.

The second issue is that the CAFE standards operate at the level of a fleet of vehicles produced by one manufacturer. I have never heard of a rationale for regulating a company's whole product line. The more economy cars a company makes, the more fuel-inefficient cars it can make without penalty. Why provide an incentive for Toyota to make larger cars just because it happens to make good small cars? If the objective is to regulate the average fuel economy of all cars on the road, then there ought to be a tradable permit system established. We would get a better variety of cars on the market, though not at any one particular dealer. Pure welfare gain.

The third issue is that the CAFE standards operate in a hidden fashion, and as a result there have been plenty of abuses. CAFE standards are negotiated behind the scenes with a few entities (the manufacturers). They lobby for complexity and then exploit loopholes, like the different standards for cars and light trucks or, as I fear, all these new flavors of SUV. Lack of transparency is the enabler of bad policy. Is there anything more transparent than a gas tax at the pump?

Keep it simple. Scrap CAFE, set a higher gas tax, and return the aggregate revenues from that gas tax through lower income taxes in a progressive fashion.

We can do better. All it takes is leadership.

Last week, while campaigning in Pennsylvania in anticipation of Tuesday's primaries, John McCain unveiled his economic plan with this as the objective:

Today In Pennsylvania, John McCain Outlined A Pro-Growth, Pro-Jobs Strategy To Get Our Economy Back On Track. John McCain's strategy includes taking the near-term actions needed to provide immediate help to American families while also taking the longer-term steps necessary to secure America's economic prosperity and leadership in the world.

The strategy excludes any mention of fiscal responsibility per se, confirming our earlier suspicions that is is not a top line priority. For this transgression, Pete and Stan will have a lot to say in their posts.

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My task is to consider the economics of the plan. Presidents don't have a magic wand that creates a growing economy out of thin air with a simple wave. In truth, the best anyone can hope for is to improve the economic environment a bit at a time through sensible changes to policy. The frustrating part of that task is that it takes time for good policies to have an impact. And my conclusion is that time is not on McCain's side.

I'll follow the plan as the McCain campaign laid it out:

1) The High and Rising Cost of Living

The McCain plan proposes three reforms. A summer gas tax holiday, a hiatus in filling the Strategic Petroleum Reserve, and ending ethanol subsidies and other barriers to trade.

a) The summer gas tax holiday is ridiculous. As others have noted, prices are likely to rise in order to make up the difference given the way the oil industry runs at full tilt over the summer months. Besides, in order for this to work as a campaign pledge, McCain would have to win in November and then go back in time to May to remove the tax.

b) If you think you've heard this argument about the SPR before, you have. Then as now, you could file it under "every little bit helps," but by only a little bit at most.

c) I'm not in favor of ethanol subsidies or tariffs or sugar quotas either. These existing policies do not improve the economic environment for growth. They restrict trade or distort it in favor of particular technologies that are themselves unproven. I view just about every departure from free trade as patronage to politically influential domestic interest groups.

2) Housing and Student Loans

There are two elements here. The first is the "HOME Plan," in which mortgage borrowers with a particular combination of characteristics (e.g., non-conventional loan, primary residence, after 2005, in or soon to be in arrears) can switch to a new 30-year fixed rate mortgage. The second is a task force at the Justice Department to investigate abuse by lenders.

I think that the first principle of a bailout--where laws are changed after the fact to ease someone's burden at someone else's expense--should be that the entity being bailed out has all of its equity wiped out. This is to avoid the moral hazard problem in dealing with other borrowers later on in this crisis or the next one. This is why I like Dean Baker's Own-to-Rent plan.

McCain's plan is typical of what Presidential candidates propose: a set of fairly complicated conditions for eligibility and then a limited amount of relief for those who are eligible and apply. It doesn't seem big enough to do much harm or offer much help. Judging this plan versus others requires immersion in the details, which is something of a pointless exercise considering that most of the remaining fallout from the crisis will occur during the 9 months between now and the date it could first be signed into law.

I'm all for investigating bad lending practices, and there were many in this environment.

There is also a statement in the plan about calling on student loan providers and the states that backstop them to anticipate and overcome disrputions to the program in the fall semester. I have often said that if young people voted, student loans would be the third rail of American politics. This is another policy that would require a time machine to work as a campaign proposal.

3) The "Pro-Growth, Pro-Jobs" Tax Agenda

I'll leave most of the heavy lifting on the details of this to Pete. There's a cornucopia of reductions in the tax burden across the economy: AMT relief, personal exemptions, capital expenditures, capital income, corporations, the internet, cell phones, R&D, and Medicare premiums. Suffice it to say that there is absolutely no suggestion that anyone in the economy is going to be taxed at a higher rate.

Stan will point out that this blows an enormous hole in the deficit for years to come. So the question left for me is simply, "Are any of these objectives so important that we should burden taxpayers of the future to pay for them?" In general, my answer is "no." Just about all of these tax reductions are attempts to giver more resources to groups of the population of taxpayers today. Those that do have an impact at the margin (like expensing equipment investment) are not targeted to meet an identified need. If the deficits were for repair of critical infrastructure, then I would be more inclined to support them.

In its particulars, this is a Pro-Today Tax Agenda, not a Pro-Tomorrow Tax Agenda.

There are two other elements of the Tax agenda worthy of comment. First, the proposal to require a 3/5 majority vote in Congress to raise taxes would be better applied to a 3/5 majority vote in Congress to deviate from a responsible budget policy. Second, the notion about tax simplification--that taxpayers should be able to opt into a very simplified tax code--would be okay under the proviso that almost everyone would pay more under the simple code than the current code.

4) Trade and Competitiveness

There is some good stuff here, if like me you are most receptive to the Milton Friedman view of microeconomics.

First, there is a pledge to open up international trade, with the goal of lowering the cost of living for American families. That's the right goal to have. If it can stand up to interest group pressure, that will be a great improvement.

Second, there are pledges to enable parents to have more choice in where they send their children to school. (More from McCain here.) Unfortunately, the federal government has little direct role to play here, since primary and secondary education is the province of state and local governments. If McCain were looking for a better way to make an impact using tools at the disposal of the federal government, he'd make private school tuitions tax-deductible, just like the state and local taxes that fund public schools (or make available a tax credit). More from me on this here.

5) Reforming the Unemployment Insurance System

There is some good stuff here, too. The McCain plan recognizes that the current system of assistance for displaced workers is a patchwork that suffers from both gaps and redundancies. It also borrows the very good idea from some work about a decade ago by Martin Feldstein and Dan Altman about unemployment insurance accounts. The basic idea is to get displaced workers to economize on the time spent unemployed by letting them keep some of the foregone benefits if they find a job sooner rather than later.

6) The Big Omissions

Big Omission #1: In the "plan," health care reform receives only a scant mention at the end. There's more here. In the more detailed version, there is an acknowledgement that health insurance should be portable across jobs. Health security should be decoupled from job security. A candidate who proposed constructive changes in that regard, but almost only in that regard, would get my support.

Big Omission #2: In the "plan," energy reform also receives only a scant mention at the end. That mention does acknowledge the need for reducing consumption, which is a positive sign.

Big Omission #3: In the "plan," there is no mention of immigration reform. McCain lays out his views here. I summarize mine here.

So what can we make of all this? There are some parts of the McCain economic plan that are silly or irrelevant. There are some good points on microeconomics and international trade. But I would be surprised if these got any attention at all, given the enormous fiscal burden that this plan shifts to future generations. Since they cannot vote, I'll turn the blog over to Stan and Pete for their expert commentary.

Via the AP, it seems that thrift is finally catching on in the Under-20 crowd:

NEW YORK - The souring job market and rising costs of the usual teenage indulgences - a slice of pizza, a drive to the mall, the hottest new jeans - are causing teens to do something they rarely do: be thrifty.

It's a far cry from the freewheeling spending of recent years, when teens splurged on $100 Coach wristlet handbags, $60 Juicy Couture T-shirts, and $80 skinny jeans from Abercrombie & Fitch.

Now jobs for teens are less plentiful, and parents who supply allowances are feeling the economic pinch.

Stalwart retailers of teen apparel, such as Abercrombie and American Eagle Outfitters Inc., are reporting sluggish sales, defying the myth that teen spending is recession-proof.

It's even becoming cool to be frugal.

Better late than never, I suppose. Read the whole thing for examples of how teens are tightening their designer belts.