Combo update: high MPG in trains, taxes and economic growth get along, discipline beats IQ

Freight trains have doubled fuel efficiency since 1980
Cars are the big news in fuel economy because of the recent increase in CAFE standards, but it's trains that really scoop the efficiency scores.  One ton of freight ( on a train moves 480 miles per gallon.  For comparison, and Honda Accord would have to get 320 MPG to match it).  That's probably why liberals love commuter rail, beneficiary of $9.3 billion in stimulus dollars.

High taxes don't cause growth, but they don't kill it either
A nice chart by Paul Krugman exploding the conservative-spread myth that high taxes and growth aren't good bedfellows.  Also note that the federal debt wasn't rising back then, either.

Hard work trumps natural ability
In the long run, it's hard work that matters, not innate IQ (and IQ can be increased through study).  A study of students found that "Students who were more self-disciplined and were able to delay gratification performed better than their peers who had higher IQs."  In other words, keep at it.

Fiscal Conservatism? Try stupid

Dear public radio,

When a Republican governor attempts to reject the federal stimulus dollars for his state, he is not "burnishing his fiscal conservative credentials," he is an idiot.  Basic macroeconomic theory (read: Keynes) tells us to increase government expenditures via direct spending or tax cuts to help mitigate an economic downturn.  Doing otherwise, and thus increasing the pain and suffering of your citizens by deepening the recession is not only dumb - how can politicians who claim to believe in markets have so little understanding of them? - it is immoral.

Lemon socialism

When the federal government considers a bold action into the market, there's an oft-heard complaint of "socialism."  Here's something worse: when government intervenes in a market such that the taxpayers get the risk and the capitalists get the benefits. 

Sound like a bum deal? 

Paul Krugman thinks he's hearing a lot of "lemon socialist" commentary from the Obama administration. 

Question: what happens if you lose vast amounts of other people’s money? Answer: you get a big gift from the federal government — but the president says some very harsh things about you before forking over the cash.

C'mon, I voted for change!

The paradox of thrift

NY Times economist Paul Krugman notes that the personal savings rate is rising - Americans are starting to save money again - but that incomes are falling faster, creating the thrift paradox:

Consumers are pulling back because they’ve realized that they’re too far in debt. The economy is shrinking in large part because consumers are pulling back. And the result, almost surely, is to leave household balance sheets worse than ever.

In other words, the debt to income ratio actually grows, because incomes are falling faster than spending.  What has to happen to improve the balance sheet (in the aggregate), is for incomes to rise and for people to sock away their excess earnings or pay down debt. 

Disclaimer: this is a macroeconomic problem and not an individual one.  Obviously if a household has had stable income and then cuts spending, they will save money.  What's happening is that layoffs and pay cuts are reducing income - overall - faster than Americans have reduced debt.

And nothing of value was lost

The U.S. House passed the proposed economic stimulus yesterday, rife with tax cuts to appease Republican representatives despite their proven smaller impact on the economy.  And what did this bit of conciliation buy the President and the Democrats?

Zero Republican votes.

A proof: government spending is superior to tax cuts

There's been a great deal of discussion among the nation's economists about the coming federal economic stimulus package, mostly centered around the relative economic impact of tax cuts versus pure government spending.  I think I can simplify this for them.

You're one of millions of Americans who are either unemployed, underemployed, or worried about your job.  Do you want a tax cut or a job?

QED

Recession and Stimulus 101

Sometimes I just like to let the experts have a say on how the Obama administration should handle this economic crisis.

Step 1: Give money to states to prevent severe cutbacks in state spending.  Otherwise, any federal stimulus package is being offset by "50 Herbert Hoovers."

Step 2: Focus on government spending, rather than tax cuts or private spending.  Individuals are particularly likely in a recession to either save or pay down credit, which has no stimulus effect.  But every dollar of government spending is a dollar of economic stimulus.

There are no libertarians in a financial crisis

A thoughtful post from Jeff Frankel on the rush to government intervention in the markets during this economic crisis, often led by former prosletyzers of libertarian ideals.  There are no athiests in foxholes, nor libertarians in financial crises.

Capitalism's quote of the day

A financial writer was trying to track down the source of the financial crisis, from greedy loan marketers to failures at rating agencies overseeing complex "collateralized debt obligations" (CDOs), and heard this from a hedge fund manager that had seen the problems early:

[Eisman, hedge fund manager]: ‘Where are the rating agencies in all of this? And I’d always get the same reaction. It was a smirk.’ He called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S.& P. couldn’t say; its model for home prices had no ability to accept a negative number. ‘They were just assuming home prices would keep going up,’ Eisman says.” [emphasis mine]

These are the guardians of our markets.  

A "seventh generation" look at bailouts

Tom Friedman has very cogent thoughts on bailouts and the economic stimulus these days.  On the proposed car company bailout:

You want my tax dollars? Then I want to see the precise production plans and timetables for the hybridization of all your cars and trucks within 36 months...because nothing would both improve mileage and emissions more — and also stimulate a whole new 21st-century, job-creating industry: batteries.

For energy policy, hit the supply and demand sides:

It makes no sense to spend money on green infrastructure — or a bailout of Detroit aimed at stimulating production of more fuel-efficient cars — if it is not combined with a tax on carbon that would actually change consumer buying behavior.

Many people will tell Mr. Obama that taxing carbon or gasoline now is a “nonstarter.” Wrong. It is the only starter. It is the game-changer. If you want to know where postponing it has gotten us, visit Detroit. No carbon tax or increased gasoline tax meant that every time the price of gasoline went down to $1 or $2 a gallon, consumers went back to buying gas guzzlers.  [emphasis mine]

Exactly.  If we're intending to shift to renewble energy and reduced carbon emissions permanently, there's no time to do so like the present.

McCain - sounding a lot like Herbert Hoover

Responding to the collapse of several major investment banks this week, John McCain reassured us, "I think still -- the fundamentals of our economy are strong." That move comes from an old playbook: On Oct. 25, 1929, Herbert Hoover declared, "The fundamental business of the country, that is the production and distribution of commodities, is on a sound and prosperous basis."

McCain's fault is not just a lack of perspective on the economy, but also a willful support of deregulation that caused much of today's financial crisis.

What [McCain] doesn't talk much about is how deregulation happened. It was the 1999 Gramm-Leach-Bliley Act that repealed the 1933 Glass-Steagall Act and thus eliminated the depression-era walls between between banking, investment, and insurance that made this crisis possible. Glass-Stegall erected walls between banking, investment management, and insurance, so problems in one sector could not spill over into the others, which is precisely what is happening now. The primary author of that legislation was none other than his economic advisor, former senator Phil Gramm (who thinks the country is in a "mental recession"). McCain fully supported the bill and has a decades-long track record of opposing government regulation of the financial industry. His new-found conversion to being a fan of regulation is going to be a tough sell as Obama is already pointing out that McCain got what he wanted (deregulation) and this is the consequence.

What is price gouging?

Gas is up to $5 a gallon in areas affected by Hurricane Ike, prompting a lot of people to complain of price gouging.  But what is price gouging?  Robert Rapier writes about the issue, and feels that it's a question of intent - are prices rising because...

• inventories are short?
• or, because folks get greedy?

We're better off having $10 a gallon gas if it means there's still some in the tanks, than $4 a gallon gas with empty tanks.

My idea would be that the state government should institute an emergency gas tax of at least $2 a gallon during these kinds of natural disasters.  The increased price would help reduce supply shortages and the revenue can be given back as a per capita tax rebate or used for disaster relief. 

Obama's economic message

It's not pithy or succinct, but it's insightful as only a longer essay can be:  Obamanomics.  Obama also shares that he really loves the following quote from Robert F. Kennedy, about the true measure of economic prosperity.

"Too much and too long, we seem to have surrendered community excellence and community values in the mere accumulation of material things. Our gross national product ... if we should judge America by that - counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for those who break them. It counts the destruction of our redwoods and the loss of our natural wonder in chaotic sprawl. It counts napalm and the cost of a nuclear warhead, and armored cars for police who fight riots in our streets. It counts Whitman's rifle and Speck's knife, and the television programs which glorify violence in order to sell toys to our children.

"Yet the gross national product does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages; the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage; neither our wisdom nor our learning; neither our compassion nor our devotion to our country; it measures everything, in short, except that which makes life worthwhile. And it tells us everything about America except why we are proud that we are Americans."

To the libertarian on health care: you're assumptions are wrong

Paul Krugman has a nice post about the challenge that libertarians have in accepting the evidence on health care - that their fundamental assumptions about the efficiency of markets just don't hold up.

The basic facts on health care are clear: government-run insurance is more efficient than private insurance; more generally, the United States, with the most privatized health care in the advanced world, has a wildly inefficient system that costs far more than anyone else’s, yet delivers no better and arguably worse medical care than European systems.

 See more of Krugman's post here. 

Oil market - speculative nonsense?

Economist and NY Times columnist Paul Krugman has been tackling the issue of high oil prices and he soundly debunks the notion of speculator-driven oil prices.

Any effect [of speculation] on the spot market has to be indirect: someone who actually has oil to sell decides to sell a futures contract to Joe Shmoe, and holds oil off the market so he can honor that contract when it comes due; this is worth doing if the futures price is sufficiently above the current price to more than make up for the storage and interest costs.

As I’ve tried to point out, there just isn’t any evidence from the inventory data that this is happening. (emphasis mine)

So there's no hoarding. And to boot, spot prices (what people actually are paying for oil based on supply and demand) have been higher than futures prices. In other words, it's supply and demand.

Does free trade lead to lower prices?

Maybe.

I'm no economist, so I found this analysis of free trade to be enlightening.

When a country opens up to trade (or liberalizes its trade), it is the relative price of imports that comes down; by necessity, the relative prices of its exports must go up! Consumers are better off to the extent that their consumption basket is weighted towards importables...

...And in the U.S., the Wal-Mart effect has to be qualified to take into account the fact that the relative price of the goods that the U.S. exports (including for example agricultural commodities) is higher than it would have been absent trade.

So cheap things at Wal-Mart make food more expensive. Unless you just use the credit card, that is:

Of course, if you are running a huge trade deficit like the U.S., you can have cheaper prices all around—for all to go on a consumption binge as long as the party lasts.

The last thing I found interesting was that globalization advocates tout the economies of scale in large-scale production, but Rodrik puts the kibosh on that:

Scale economies raise a whole set of new conundrums (which is why I had stuck with the standard comparative advantage story). In particular, since scale economies are not compatible with perfect competition, we find ourselves in a second-best world with all kinds of strange possibilities.

In other words, free trade can give us cheap imports (Chinese lead toys), but may make our exports more expensive, especially if we stop having trade deficits.

Bueller, Bueller... Ben Stein talks Wall Street

In Wall Street Run Amok, financial commentator and one-time sleep-inducing high school teacher Ben Stein talks about the SEC's loosening of rules for investment firms in 2004, which he calls the Bear Stearns Future Insolvency Act of 2004.

In these rules, the SEC did two things:

1. Reduced the amount of capital that firms had to have backing their investments (e.g. less money in the piggy bank).
2. Let the firms themselves value their assets, allowing them to fudge how much was in the already reduced piggy bank.

Quote of the piece?

The S.E.C. told me that all of its actions were helpful to investors and that no one could have prevented the Bear Stearns collapse because it was caused by liquidity issues, not capital issues. My respectful response is that if Bear were thoroughly well capitalized, why would liquidity issues come up at all?

Voodoo economics, anyone?

the GOP has a magic inequality spell that it chants while in office

Krugman has been examining the impact of party control of the executive (e.g. which party has the presidency) on economic inequality in the United States. He's skeptical that the executive could have so much to do with it, but the data are pretty robust: Republican presidents seem to have a magical inequality spell.

Tax cuts never pay for themselves

President Bush likes to lie about tax cuts, implying that they will magically boost revenues if they help the economy. Disagreeing with the economics is like disagreeing with gravity, sir, it doesn't make it true.

The irony is that if we know we're going to increase the deficit to provide economic stimulus, why not put it in the pockets of those who would provide the most? The poor.

The mortgage crisis: illustrated version

Trying to understand how a bunch of "subprime" loans caused a mortgage crisis? This animated mortgage crisis illustration might explain. Basically, banks sold mortgages as "securities" (think mutual funds) to other investors but dramatically underestimated the risk of widespread defaults (foreclosures).

In other words, when those crazy adjustable-rate mortgages started bankrupting people all over the country at once, the flow of cash dried up. And that meant that those securities (stocks) dropped precipitously in value. Oops.