Obama’s pledge to cut $100M from the budget is certainly theater… I’m glad he’s at least talking about it, but in the grand scheme of things this is meaningless. Here’s a video illustration of how little money that is:

This 11-minute video is the best description of the crisis that I’ve seen yet:

After watching this, I finally feel like I could describe it to someone else for the first time.

This chart from 538 shows how different income brackets fared

Nate goes through all the caveats in his post, so I won’t reiterate the obvious parts. One important point he included:

In general, however, the fates of different economic classes are linked. Since 1967, the correlation in the change in year-over-year income between the 10th and the 90th percentiles is .63.

This latter characteristic is something that I think a lot of liberals tend not to have a good appreciation of. There is sometimes a tendency among liberals to see the economy as a zero-sum game, but this is not really the case. When the economy is doing well, everyone tends to do well, unless the President is trying really, really hard (as Reagan did) to steer that growth only toward certain income classes. And when the economy is doing poorly, everyone tends to do poorly. The poor did awfully under George W. Bush, but the wealthy didn’t perform all that well either.

This may be a result of the tendency of liberal thinkers focus their attention on the rich-poor gap, usually measured as a ratio. This can certainly tells us something valuable, but if the goal is to look after the economic well-being of the least well-off, it is probably better to look instead at how the least well-off are performing relative to themselves.

Yeah

One of my problems with economics is that it seems that there are so many fundamental aspects of macroeconomic theory on which large numbers of credible experts disagree. Much of this stems from the fact that it’s nearly impossible to perform economic experiments with a control group. With the stimulus, for example, we can’t have half the country get the stimulus and half the country not get it and compare the results in 10 years.

Greg Mankiw recently posted a list of things on which most economists agree. Here’s the list, along with the surveyed economist agreement rate:

1. A ceiling on rents reduces the quantity and quality of housing available. (93%)
2. Tariffs and import quotas usually reduce general economic welfare. (93%)
3. Flexible and floating exchange rates offer an effective international monetary arrangement. (90%)
4. Fiscal policy (e.g., tax cut and/or government expenditure increase) has a significant stimulative impact on a less than fully employed economy. (90%)
5. The United States should not restrict employers from outsourcing work to foreign countries. (90%)
6. The United States should eliminate agricultural subsidies. (85%)
7. Local and state governments should eliminate subsidies to professional sports franchises. (85%)
8. If the federal budget is to be balanced, it should be done over the business cycle rather than yearly. (85%)
9. The gap between Social Security funds and expenditures will become unsustainably large within the next fifty years if current policies remain unchanged. (85%)
10. Cash payments increase the welfare of recipients to a greater degree than do transfers-in-kind of equal cash value. (84%)
11. A large federal budget deficit has an adverse effect on the economy. (83%)
12. A minimum wage increases unemployment among young and unskilled workers. (79%)
13. The government should restructure the welfare system along the lines of a “negative income tax.” (79%)
14. Effluent taxes and marketable pollution permits represent a better approach to pollution control than imposition of pollution ceilings.(78%)

I was relieved to find that these are all things I agree with, too (except for #10, as I’m not sure what that means). Reforms for #12 and #13 would have to be done together, but I think it would create a much more sane and workable system. Wikipedia’s primer on Negative Income Tax is a pretty good place to start if you’re not familiar with the concept.

Eliminating subsidies to sports franchises (and other companies) makes sense to me. I don’t blame the companies for trying to get the best deal possible, but having governments give them breaks is a classic case of local optimization creating a globally sub-optimal result.

I wonder what the poll numbers would look like if the same questions were asked of the general public, or of politicians.

Fareed Zakaria points out how well Canada is doing economically:

In 2008, the World Economic Forum ranked Canada’s banking system the healthiest in the world. America’s ranked 40th, Britain’s 44th.

Canada has done more than survive this financial crisis. The country is positively thriving in it. Canadian banks are well capitalized and poised to take advantage of opportunities that American and European banks cannot seize. The Toronto Dominion Bank, for example, was the 15th-largest bank in North America one year ago. Now it is the fifth-largest. It hasn’t grown in size; the others have all shrunk.

So what accounts for the genius of the Canadians? Common sense. Over the past 15 years, as the United States and Europe loosened regulations on their financial industries, the Canadians refused to follow suit, seeing the old rules as useful shock absorbers. Canadian banks are typically leveraged at 18 to 1—compared with U.S. banks at 26 to 1 and European banks at a frightening 61 to 1. Partly this reflects Canada’s more risk-averse business culture, but it is also a product of old-fashioned rules on banking.

He also describes how they provide a good model for immigration of skilled workers:

The U.S. currently has a brain-dead immigration system. We issue a small number of work visas and green cards, turning away from our shores thousands of talented students who want to stay and work here. Canada, by contrast, has no limit on the number of skilled migrants who can move to the country. They can apply on their own for a Canadian Skilled Worker Visa, which allows them to become perfectly legal “permanent residents” in Canada—no need for a sponsoring employer, or even a job. Visas are awarded based on education level, work experience, age and language abilities. If a prospective immigrant earns 67 points out of 100 total (holding a Ph.D. is worth 25 points, for instance), he or she can become a full-time, legal resident of Canada.

Seems like a good idea, eh?

[via]

Nate Silver makes an appeal to favor experts over ideology. Excerpt:

3. I’m sorry, but somewhere between 99.9% and 99.999999% of us are severely underqualified to be making policy recommendations on this particular issue. And I’m certainly in the majority on this one. My anecdotal experience for the past several months has been that the more someone knows about the economy, the more they know (or at least are willing to admit to) what they don’t know. Anyone who is professing with certainty that this or that will work — nationalizing the banks, for instance — is an idiot.

4. So if I’m telling you to lay off the ideological smelling salts (not that you will) and that your ideas on policy are probably not contributing very much to the discussion (don’t worry — neither are mine) then what, exactly, do I want you to do?

What I’m asking you to do is to clear the playing field. This is neither the time nor the place for mass movements — this is the time for expert opinion.

Agreed.

(The rest of the post is really good, too)

The Senate amendment to strip the stimulus package of “Buy American” requirements failed, Greg Mankiw has a list of the senators who voted for it. It’s all Republicans and Joe Lieberman. I think I’d have voted with them, unless an economist could convince me to do otherwise.

This Daily Show segment from Thursday was funny, but made me sad:

There’s an important debate that we should be having here. It’s a debate about whether or not Keynesian stimulus will work, and if the proposed models are close enough to have the intended effect. The most recent episode of This American Life had an excellent overview of the big issues involved, as well as the historical context. This sentence from the overview of that segment made me laugh:

Our crack economics duo, Producer Alex Blumberg and NPR International Economics Correspondent Adam Davidson, on how a dead, slutty, elitist British man, John Maynard Keynes, is about to take over the American economy.

But that’s not what we’re talking about. We’re talking about stupid, petty things. Instead of the focusing on the big issues, Republicans have focused on picking small parts of the bill out and labeling it wasteful, while Democrats have just focused on describing the dire state of the economy. (Note: I know this isn’t true of all of them, but I think it describes the debate as a whole.) Congressional Republicans released a list of things they found to be wasteful in the bill. Take a look at the list, and remember that this isn’t just spending they didn’t think was appropriate for stimulus, they described it as “wasteful”. Now, I don’t disagree that some of those things may be wasteful, but if this were your only objection, voting no because of complaints about such a small portion of the bill doesn’t make much sense. This isn’t their real objection: the real objection is that they don’t believe in large-scale Keynesian stimulus. But, when you have a 3-minute interview on a cable news show, what would you talk about? Cherry-picking small, pork-sounding programs is a much better sound bite than describing the history and theory of stimulus.

This is broken.

Senator Chuck Grassley (R-IA) sent a letter to Microsoft telling them that they had a “moral obligation” to fire H-1B workers before Americans. He has also introduced an amendment to the TARP program that would ban H-1B workers being hired by affected companies.

This is a first attempt to share some of my thoughts about the stimulus package and the economy as a whole. I haven’t written much about it because I’ve been trying to learn enough to form an opinion, and I’m still not really there yet. This post is a bit of a hodge-podge of thoughts, links and quotes.. I’m not trying to formulate a thesis here, but instead share things I’ve found as I’ve learned about this topic.

Although it’s awkward to state in some contexts, I think it’s important to recognize that this recession is necessary. We can and should try to mitigate the abrupt pain, but some pain is inevitable. We’ve been living beyond our means, spending on credit we shouldn’t have, building fantastic houses of (credit) cards. Important segments of the economy were operating in markets with twisted and destructive incentives. Jim Manzi wrote:

Unfortunately, we need a recession. That is, consumption must decline because for some time we have been consuming more than we produce or have reasonable prospects of producing. Monetary policy has been used to inflate a series of bubbles to avoid the consequences of excess debt, and the more we try to hold it off, the worse it’s going to be. Bourbon works as a hangover cure, but only for a while.

(the whole post is worth reading, too)

I haven’t studied the Democrats’ stimulus bill in any great detail, and I don’t really care about squabbling over the details nor tactics of the bill. I’m more interested in the higher-level issues of the stimulus in general. One thing seems clear to me: nobody really knows if the stimulus will work (and anyone who claims to is probably being dishonest).

There’s a good chance that whatever happens in the next few years won’t really support or refute the ideas behind the stimulus: a post-stimulus economy may recover for unrelated reasons, and an insufficient stimulus won’t fix a terribly broken economy (even if the stimulus idea in general is good).

A recent poll shows that:

As [Americans] consider the size and scope of the $800-billion-plus economic recovery plan, 46% are worried that the government will end up doing too much while 42% worry that it will do too little

I’m not sure how I’d answer if I were asked that question. I guess I’m worried about both, really. I hate to endorse something that worsens our already-unbalanced budget, but a shattered economy isn’t a good pathway back to financial sanity.

I do think one good place to spend the money is on making the government work less like it’s in the 19th century (ok, I exaggerated- a bit). There are huge challenges in this area, but a small improvement over a large organization would have a positive effect on efficiency and quality for years to come. I’m saving that discussion for another post, though.

Megan McArdle has an interesting discussion about the speed at which a stimulus will take effect.

I’m opposed to protectionism in the stimulus bill. According to a WaPo article:

The stimulus bill passed by the House last night contains a controversial provision that would mostly bar foreign steel and iron from the infrastructure projects laid out by the $819 billion economic package.
A Senate version, yet to be acted upon, goes further, requiring, with few exceptions, that all stimulus-funded projects use only American-made equipment and goods.

The opponents to these measures may surprise you: companies like Caterpillar and General Electric are opposing it. It’s not like they’re being magnanimous, they simply recognize that American protectionism will encourage protectionism in other countries, shutting American companies out of world markets and exacerbating the global economic problems. The article says:

Nations including China and many in Europe are preparing to spend billions of dollars of taxpayer money on stimulus projects. American companies are angling for a piece of those pies, and retaliatory measures against U.S. companies, executives argue, could significantly complicate those efforts. This week, a European Commission spokesman threatened countermeasures if the Buy American provisions are approved.

Many of the links above were from blog posts by Andrew Sullivan and Greg Mankiw, two stimulus skeptics from whom I’ve learned a lot.

More posts on related topics coming whenever I find some more time…