Month: September 2010

*Adam Smith: An Enlightened Life*

That is the new book by Nicholas Phillipson from Yale University Press.  I urge all fans of Adam Smith to read this book.  It covers Smith's life and times more than his texts per se.  It is especially strong on Smith and Hume, Smith's work as a customs inspector, Smith's time in France, Smith and Quesnay, and Smith's dedication to his mother.  I like very much what it covers; my main complaint is that the book is not longer.

Here is a James Buchan review of the book.  Here is a John Gray review, more about Gray than the book.  Here is further coverage.  Here is a short piece by Phillipson.  Here is a short bio of Phillipson.

My Buffalo visit

For architecture, it is one of America's best cities.  The Guaranty building, Ellicott Square building, and City Hall are peaks of the art, plus there is lots of Frank Lloyd Wright.  There are hundreds of excellent residential homes, off of Elmwood for instance, but all over town.  Elmwood itself is a fun, walkable area.  There are two good art museums, plus a strong alternative culture scene, low rents, and lots of art galleries.  It feels more like the Midwest than say New England and the people are friendly and relaxed.  Food is not exceptional although meals can be had.  If you're not into architecture I would describe a city visit as optional, but for me it was a must.

In case you have not been paying attention

Here is a tidbit from today's news:

Among other policies, the Obama team has also placed a United States citizen on a targeted-killings list without a trial, blocked efforts by detainees in Afghanistan to bring habeas-corpus lawsuits challenging their indefinite imprisonment, and continued the C.I.A. rendition program – though the administration says it now takes greater safeguards to prevent detainees from being mistreated.

I wish to commend Kevin Drum in particular for continuing to draw our attention to these policies.

The Obama tax plan, or Austro-Obama business cycle theory

Here is one analysis:

Companies combining deductions proposed by Obama for equipment with deductions for borrowing costs would get benefits — including refunds or credits against future taxes – – that exceed the additional income they get from new capital spending, according to a 2005 report by the Congressional Budget Office. For every $1 of additional income from new capital spending, companies may be able to get benefits worth almost $1.88, according to the budget office report.

“The combination of free deductibility of interest to make a marginal investment, combined with accelerated depreciation, would lead to negative tax rates on that new investment,” Kleinbard said.

Is that a good idea?  Here is one commentator:

“It’s an invitation to arbitrage,” said Kleinbard, who now teaches tax law at the University of Southern California in Los Angeles. “You’re putting businesses in the same economic position as if you were inviting them to borrow money to buy tax-exempt bonds.”

Should we let housing prices fall?

Many smart people say we should.  It seems increasingly clear that we must.  For how long can the government prop them up?  Are we never to have a private market in mortgages again?

Yet what happens if we let them fall?  Arguably many banks would once again be "under water."  Enthusiasm for another set of bailouts is weak, to say the least.  Our government would end up nationalizing these banks and it still would be on the hook for their debts.  The blow to confidence would be a major one, especially if along the way we saw a recreation of a Lehman or Bear Stearns or A.I.G. episode.

I increasingly believe there is no easy way out of this dilemma and it is a major reason why the U.S. economy remains stuck.  Housing prices must fall, yet…housing prices must not fall.

Here is a very good Dave Leonhardt piece on two different views of housing.  It's where to go, if you are looking for the case for optimism.  I am more pessimistic than David because I see the private sector interest in mortgage securities as remaining quite weak, which suggests the market knows which way prices have to move.

China (Australia) fact of the day

In markets, speculators, unable to bet on a yuan pegged to the U.S. dollar, use the currencies of China's main trading partners instead.  That has helped make the Australian dollar the fifth-most-traded currency in the world — after the U.S. dollar, the yen, the pound, and the euro — even though Australia is the 18th largest economy.

The full story, on the China-Australia, relationship is here, in the new, revamped, and excellent Bloomberg BusinessWeek.

Should you bet on your own ability to lose weight?

Is that the stakes weren't high enough, or is the whole idea flawed?:

If obese individuals have time-inconsistent preferences then commitment mechanisms, such as personal gambles, should help them restrain their short-term impulses and lose weight. Correspondence with the bettors confirms that this is their primary motivation. However, it appears that the bettors in our sample are not particularly skilled at choosing effective commitment mechanisms. Despite payoffs of as high as $7350, approximately 80% of people who spend money to bet on their own behaviour end up losing their bets.

That's from Nicholas Burger and John Lynham.  Here is further information, from Economics Letters.  A gated copy is here.  A related paper, with similar results, is here.  The wise Alex, on same topic, is here.

Jeremy Stein on securitization

There is an alternative, more behavioral hypothesis for the fragility of the securitization market that does not rely on a predominance of short-term debt financing. This alternative hypothesis begins with the observation that a large proportion of ABS tranches–both in the traditional and subprime sectors–were rated AAA. The AAA rating may have encouraged investors such as pension funds or insurance companies to think of these securities as essentially riskless, and therefore to treat them as being equivalent to Treasury bonds when constructing their portfolios. When the problems in the subprime area became apparent, this premise was utterly destroyed, and investors who were determined to allocate a fraction of their portfolios to safe assets realized that they had to dump their holdings of AAA-rated ABS, and buy actual Treasuries instead. Thus instead of a short-term-debt-driven bank run, we have what might be called a widespread buyer’s strike. In this account, the mechanism of contagion from the subprime market to the traditional consumer ABS market is that the failures of the rating agencies with respect to subprime called into question their credibility more generally, so that any AAA-rated tranche of an ABS, be it linked to subprime or credit cards, was no longer considered to be a virtually riskless asset.

The full essay is here, interesting throughout, via David Warsh's very good column.  Stein also makes the simple yet neglected point that higher capital requirements may simply shift more financial activity into the less regulated shadow banking sector.

The history of the UCLA economics department

I loved this essay-style interview, Dan Klein speaking with William R. Allen, on the glory days of the UCLA economics department, under the leadership of Armen Alchian.

It is taken from the latest issue of Econ Journal Watch, (I haven't read the other pieces yet).  There is also a systematic look at economists' role in signing petitions.

One reason why I’m still skeptical about high-speed rail

There should be a betting market in how many of these projects actually end up being finished within, say, the next thirty years:  

But the biggest question mark hovering over the future of high-speed rail in the United States is funding. The $8 billion allocated in the stimulus package is not nearly enough, particularly because it is spread across a range of projects around the country. California’s new system alone could cost $40 billion. State governments will shoulder a substantial share of the costs, and they are grappling with budget deficits.

These days, many states are cutting or limiting spending on K-12 education.  You can argue "State and local taxes should be higher" (I don't agree), or "We should make drivers bear the full social costs of auto transport" (I do agree), but as they say "You've got to go to war with the army you've got."  So far the HSR expenditures are looking like a big white elephant.  It's very important to have a theory of public choice which consists of more than simply criticizing the politicians, parties, and voters you do not agree with.

The full story is here.

How did America pay for World War II?

Peter Schiff offers some interesting observations, via Interfluidity

But to repeat the impact of World War II today would require a truly massive effort. Replicating the six-fold increase in the federal budget that was seen in the early 1940s would result in a nearly $20 trillion budget today. That equates to $67,000 for every man, woman, and child in the country. Surely, the tremendous GDP growth created by such spending would make short work of the so-called Great Recession.

To a degree that will surprise many, the US funded its World War II effort largely by raising taxes and tapping into Americans' personal savings. Both of those avenues are nowhere near as promising today as they were in 1941 Current tax burdens are now much higher than they were before the War, so raising taxes today would be much more difficult. The "Victory Tax" of 1942 sharply raised income tax rates and allowed, for the first time in our nation's history, taxes to be withheld directly from paychecks. The hikes were originally intended to be temporary but have, of course, far outlasted their purpose. It would be unlikely that Americans would accept higher taxes today to fund a real war, let alone a pretend one.

That leaves savings, which was the War's primary source of funding. During the War, Americans purchased approximately $186 billion worth of war bonds, accounting for nearly three quarters of total federal spending from 1941-1945. Today, we don't have the savings to pay for our current spending, let alone any significant expansions. Even if we could convince the Chinese to loan us a large chunk of the $20 trillion (on top of the $1 trillion we already owe them), how could we ever pay them back?

A related question is whether the American public would consider the offsetting required restrictions on consumption, as documented by Robert Higgs.

File under "Reasons why WWII does not provide a good case for massive fiscal stimulus today."