Category: Uncategorized

A new word has entered the lexicon, courtesy of Capital Gains and Games, with a little help from the boys at Bear Stearns:

Jimmy Cayne, a one-time travelling salesman who became a paper billionaire last year as chief executive of Bear Stearns, has sold his entire stake in the investment bank for a little more than $61m.

According to a filing with the Securities and Exchange Commission, Mr Cayne sold 5.6m Bear shares for $10.84 each on Tuesday, a day after after JPMorgan Chase agreed to raise its bid for the stricken investment bank fivefold to $10 a share. Mr Cayne’s wife, Patricia, sold 45,669 shares at the same price.

The sale by Mr Cayne, who helped build Bear into a maverick Wall Street powerhouse during four decades at the company, suggests he does not believe JPMorgan will have to raise its $10 a share bid. Shares in the stricken bank fell 5.6 per cent to $10.60 in after-hours trading.

$61 million, plus a legacy in language. Not too bad, I guess.

I try to keep nationalist sentiments out of economic commentary, but Tata's purchase of Jaguar and Land Rover from Ford has to make some folks in India smile. Two of the UK's biggest brands will now be owned by a former colony that is still catching up economically.

Unsurprisingly, Ford lost money on its purchase and subsequent sale of the two companies. In my view, acquisitions seldom lead to big improvements for the firm making the acquisition. The market seems to recognize this, as announcement effects are often negative for the acquiring firms.

So do we expect the same fate for Tata--value destruction through the acquisition? Perhaps, perhaps not. Here is some interesting commentary from the Economic Times of India.

Brad DeLong linked to my post on Social Security yesterday, which set off the usual round of criticisms of a non-liberal's views of Social Security and its reform in the comment section. Here's a summary and the next installment in the conversation.

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1) Isn't the 3.2% projection good news?

As Bruce Webb points out, the projected imbalance of 3.2% is down from earlier years. Social Security's estimated financing gap has been falling year-to-year as projections are revised due to updated data or methodology. That's particularly good news for a small-government advocate like me. It means that the fix can be accomplished with smaller benefit cuts or smaller tax increases relative to current law.

2) Why not quote the 75-year gap of 1.7% rather than the Infinite Horizon gap of 3.2%?

Again, in reference to a comment by Bruce Webb, I think it should be those who truncate the horizon to 75 years who have to explain their reasoning. Truncating the horizon at 75 years ignores the persistent deficits after the 75th year. Why do that? Why count the taxes that a worker pays during that period but not the benefits that worker will receive in retirement after that period? We should choose a measure of the system's solvency that is as comprehensive as possible. That the uncertainty in the projection increases with the horizon is not a reason to treat the projected deficits as if they are zero.

3) Social Security is only one part of fiscal policy, and not necessarily the one in the most dire straits. Why focus on it?

I focus on Social Security because the fiscal imbalances in the long-term projections have been apparent for decades. Critically, I do not focus on Social Security to the exclusion of other aspects of fiscal policy. Nor do I dismiss the implications of reform on the intra-generational distribution of taxes and benefits in the population. Here's a blog post from about a year ago that summarizes my views.

This is a site that is long overdue in my profession:

The goal of this site is to encourage instructors to take price into account when shopping for texts.

Like doctors prescribing drugs for their patients, college instructors selecting textbooks for their classes have little incentive to pay attention to prices that they themselves do not pay.

Textbook publishers do not advertise their prices. Often it is even difficult to find prices on their websites. Nowhere have we been able to find current price lists for a full selection of competing texts.

Introductory Economics and Intermediate Micro and Macro texts commonly retail for more than $150. Over the past twenty years, despite reduced production costs, real prices have climbed by about three percent per year.^[1] By all reasonable estimates, publishers' net revenue per sale is several times larger than marginal cost. While it is true that publishers' revenues must cover fixed as well as variable costs, there is little doubt that successful textbooks are enormously profitable and would be so even at much lower prices.

As economists, we are not surprised that publishers seek to maximize profits. Economic theory predicts that the ratio of a seller's price to marginal cost will be high if demand is inelastic. While publishers are unlikely to respond to moral suasion, they are likely to respond to increased price elasticity. Thus we hope that this website will have two beneficial effects. The direct effect is that it may help you find a better deal for your students. An indirect effect is that the more attention that consumers pay to prices, the more elastic will be demand, and hence the lower will be the profit-maximizing prices.

When I teach, I assign this one. I suspect that most students resell them, and so they are renting, rather than owning, for some (probably sizable) fraction of the sticker price. But more competition would be good for consumers.

Picking up on Pete's post about the 2008 Trustees Report, I always go first to this table, Table IV.B7, which shows the present value of Social Security's unfunded obligations over an infinite horizon. The number is $13.6 trillion, or 3.2% of taxable payroll or 1.1% of gross domestic product over the same horizon.

I've blogged extensively about these summary numbers over at Vox Baby. For the present post, I'd like to make two quick points.

1) I tend to focus on the middle number--3.2% of taxable payroll--when describing what needs to be done to Social Security to remove its projected shortfall. The number itself means that if we increased payroll taxes by 3.2 percentage points, from 12.4 to 15.6%, and invested the near-term surpluses at the rate of return projected on Treasuries, there would be enough funds available to pay all projected benefits in perpetuity. That doesn't mean we have to follow that strategy, but it does indicate the size of the projected shortfall. Since the deficits come in future years, I don't see any good reason why we don't change the rules for future contributions and benefits to remove them.

2) Pete points out, as others like CBO Director Peter Orszag have, that the projected increases in per-capita medical expenditures in Medicare and Medicaid become a much larger fiscal challenge than the demographic-driven changes in both Social Security and Medicare expenditures. This is well captured by this chart, available in the Trustees Report summary:

Social Security's costs increase to 6% of GDP as the Baby Boomers move from the workforce to retirement. That shift in costs is permanent, even as the Baby Boomers expire, because of longer term trends toward longer lives and fewer children. That projected increase is swamped by the impact of projected medical expenditure increases. And unlike Social Security, there is very little in the way of projected revenue sources that aren't general revenues, as shown in the next chart:

Everything above that purple sliver is money that will come from future taxpayers beyond the tax rates that current workers are paying through the HI payroll tax.

Given pictures like these, I think it is important to discuss comprehensive reform. The sooner, the better. On Social Security, I've put my name on a plan that could serve as a compromise. On Medicare, I think the best option is to raise the age of full eligibility for future beneficiaries, allowing younger retirees to pay their way in. But that's a blog for another day.

Monica Prasad, a sociology professor at Northwestern, holds forth on the successes and "failures" of carbon taxes in Europe in an op-ed in today's New York Times. She makes two key points about implementation in Denmark, the country where emissions actually fell after the tax was imposed. I think Prasad is mistaking sufficient conditions for necessary conditions. Here is the main part of her argument:

First, you prevent policy makers from turning the tax into a cash cow. Carbon tax discussions always seem to devolve into gleeful suggestions for ways to spend the revenue. Reduce the income tax? Give the money to low-income consumers? Use it to pay for health care? Everyone seems to forget that the amount of revenue is directly tied to the amount of pollution that is still going on.

Denmark avoids the temptation to maximize the tax revenue by giving the proceeds back to industry, earmarking much of it to subsidize environmental innovation. Danish firms are pushed away from carbon and pulled into environmental innovation, and the country’s economy isn’t put at a competitive disadvantage. So this is lesson No. 1 from Denmark.

The second lesson is that the carbon tax worked in Denmark because it was easy for Danish firms to switch to cleaner fuels. Danish policy makers made huge investments in renewable energy and subsidized environmental innovation. Denmark back then was more reliant on coal than the other three countries were (but not more so than the United States is today), so when the tax gave companies a reason to leave coal and the investments in renewable energy gave them an easy way to do so, they switched. The key was providing easy substitutes.

On the first point, if you raise tax rates and don't change behavior, you have an inelastically demanded (or supplied) activity. Optimal tax theory tells you that you should raise that tax rate and lower other tax rates, to collect the same amount of revenue with a smaller excess burden or deadweight loss of the whole tax system. This is true regardless of what you are taxing, but it may be tempered by concerns about the distribution of the tax burden.

On the second point, it is true that the availability of easy substitutes will increase the elasticity of demand for fossil fuels, encouraging more use of alternatives. Prasad's point seems to be that Denmark hit the sweet spot--the revenues from the tax at a particular level were large enough to fund public alternatives to the point where switching was feasible. So that's why I describe it as a sufficient arrangement.

But that's just one approach to reducing emissions, so it may not be necessary to follow the Danish approach. Another approach would be to raise the carbon tax rates even higher--using the proceeds to reduce all other distortionary taxes even further--until the firms and consumers in the economy make the switch to alternatives without public subsidies.

Read the whole thing, as well as the longer paper on which the op-ed is based.

Dean Baker provides a clear and concise description of this "Own to Rent" plan in the most recent issue of Economists' Voice. The key advantages of this plan:

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It is worth contrasting this own to rent proposal with President Bush’s plan to freeze some subprime mortgages at the teaser rates. The plans differ along three dimensions. First, they will apply to somewhat different groups of homeowners. Second, the “teaser-freezer” plan may still leave many homeowners unable to pay their mortgages. And third, the own to rent plan is intended to be an actual change in the rules of foreclosure that is binding, not a commitment that is made or withdrawn at the discretion of mortgage holders.

I have been a fan of this plan since I first read about it. (Read a number of earlier posts here and an op-ed Dean and I co-authored here.) To summarize why, I don't think that equity holders should come out with positive equity in a bailout. The plan sets the starting point for negotiations to zero equity for the "homeowner" but doesn't put them out on the streets.

Read the whole thing.

I confess: I get annoyed beyond measure when I read articles like this one from Alan Zibel and J.W. Elphinstone of the Associated Press, which ran in my local paper this week. It manufactures drama where none is warranted. Here's the hook:

Just when consumers and the U.S. economy need banks to lend more freely, the mortgage industry is making it harder to borrow — even for those with good credit.

Mortgage insurers, whose backing is required for borrowers who can't afford the traditional 20 percent down payment on a home, have already flagged nearly a quarter of the nation's ZIP codes where they refuse to insure some home loans.

I'm already annoyed in three ways, and it's just two sentences in:

1. Consumers and the U.S. economy do NOT need banks to lend more freely. Banks lending too freely is what got us into the current mess.
2. The traditional 20 percent down payment for a home exists in part because mortgages are nonrecourse loans--the property is the only security the lender has in the transaction. While some reductions of that number may be appropriate, it was the abandonment of sensible lending standards that got us into the current mess.
3. The word "some" in the last sentence smuggles in quite a lot. If the meaning of "some" were made plain early in the article, we would stop reading and disregard the article as not worth our time.

We do find out what "some" means later on in the article:

In recent weeks, mortgage insurers have flagged more than 9,600 ZIP codes in at least 34 states where they won't insure certain types of home loans — those for investment properties or second homes, those with riskier adjustable-rate or interest-only mortgages, or for buyers making down payments of less than 3 percent.

"Some" home loans are now revealed to be loans that are extremely risky--loans whose pervasive use are what got us into the current mess--in areas where house prices are declining the most. So a shorter version of the article is that mortgage insurers are now not willing to insure loans that they shouldn't have been insuring earlier. That this is a good thing has completely escaped the notice of the two authors.

 

Cross-posted at Vox Baby.

I suppose I'll have to let ideology slide for the sake of expediency. I will not stand in the way of Stan calling Steve Forbes a capitalist tool.

Picking up the more recent thread, we should keep in mind that fiscal policy is always being used for stimulus during an economic swoon. This is the notion of automatic stabilizers. When the economy falters, there is less activity to tax. Revenues fall. When the economy falters, there are more people claiming benefits from the social safety net, even with no changes in the rules. Expenditures rise. Both of them serve to widen the deficit. Collectively, we take a bit of a breather from paying for the government services that we consume. And that breather gives the economy a boost relative to what would happen if we insisted on paying for what we consumed period by period.

What's nice about automatic stabilizers is that they tend to get repaid as economic activity picks up--more activity to tax, fewer folks claiming benefits.

What's reprehensible about the current policy discussions of economic stimulus is the belief that tax cuts and spending increases done now for the sake of moving us from "somewhat negative" to "maybe positive" economic growth don't have to be paid back in the near term. I went on a couple of rants about this in January during Round 1 (here and here). Even the normal watchdogs for the federal budget gave them a pass.

I think of our current fiscal policy as akin to my going into my kid's room while he's sleeping and raiding his piggy bank because I'm having trouble scraping together enough change for another six-pack.

If I had any confidence that the federal government would balance the budget over a complete business cycle, I would be much more willing to support an active fiscal policy to counter the downturn.

I would agree with Stan and Pete in their assessment of Steve Forbes' remarks on CNBC today, but only if they agree to drop the word "capitalist" from the title of their posts. His blessedly brief phone interview did nothing to promote a capitalism as a system. It only served to promote the interests of those who are seeking to evade the consequences of making bad choices in a capitalist system.