Saturday, February 14, 2009
Protectionism Again...
Score one for organized labor in the stimulus bill with the "Buy American" provision. Although this sounds good, it potentially creates the incentive for a downward spiral of protectionist policies.
Friday, February 13, 2009
A Good History Lesson...
The Economist has a good piece on a view back at Irving Fisher's contribution to understanding depression economics. In particular is the quote:
Amazing that he was talking about this in 1933. A previous post talks about inflation fears, which are relevant, but deflation is also a problem. Greg Mankiw, however, believes that we are getting past the deflation portion of the cycle (at least that bond signals suggest an end to deflationary fears). This seems to be borne out in the gold price data in the inflation post. In mid-2008 when deflation fears were at their highest, gold dropped substantially, but has since returned supporting Dr. Mankiw's argument.
Over investment and over speculation are often important; but they would have far less serious results were they not conducted with borrowed money. The very effort of individuals to lessen their burden of debts increases it, because of the mass effect of the stampede to liquidate…the more debtors pay, the more they owe. The more the economic boat tips, the more it tends to tip.
Amazing that he was talking about this in 1933. A previous post talks about inflation fears, which are relevant, but deflation is also a problem. Greg Mankiw, however, believes that we are getting past the deflation portion of the cycle (at least that bond signals suggest an end to deflationary fears). This seems to be borne out in the gold price data in the inflation post. In mid-2008 when deflation fears were at their highest, gold dropped substantially, but has since returned supporting Dr. Mankiw's argument.
Inflation Fears??
Gold futures continue to climb and hold at historically high levels:
Given that gold is often seen as a signal for inflation, what do you think the market expects to happen?
Update: Bill at CalculatedRISK suggested to me in an email conversation that perhaps inflation fears were a bit premature and that gold was not a good indicator of inflation any more. I suspect he may be right. I think inflation is a real possibility in the not too distant future, but right now it is very muted (if deflation is not actually happening).
Given that gold is often seen as a signal for inflation, what do you think the market expects to happen?
Update: Bill at CalculatedRISK suggested to me in an email conversation that perhaps inflation fears were a bit premature and that gold was not a good indicator of inflation any more. I suspect he may be right. I think inflation is a real possibility in the not too distant future, but right now it is very muted (if deflation is not actually happening).
Chocolate Lover's Nightmare...
The report in the WSJ on cocoa prices is instructive for people interested in basic economics. Demand for chocolate products is anticipated to be down due to the recession, yet this graph shows a relatively strong rally in cocoa markets:
What gives?? Supply disruptions due to tree disease issues in West Africa are the culprit. There is always two sides to a market.
What gives?? Supply disruptions due to tree disease issues in West Africa are the culprit. There is always two sides to a market.
Psychology Matters
This from Peggy Noonan:
Politicians keep saying, "People have to begin to understand we're in bad shape," and "People should realize it's a crisis." I think they know, Sherlock. Do you? Our political leaders are like a doctor who rushes to the scene of a terrible crash, bends over a hemorrhaging woman and says, "This is serious, lady, you can't take it lightly." She looks up at him: "Help me, do something, I'm bleeding out!" The doctor, to the local TV cameras: "I hope she knows she's in trouble."Yes, Peggy...psychology matters...and so does leadership.
Food Fight....
Consumer expenditures on food down sharply...
Maybe we will get skinnier as a result of the recession??
If these data are to believed, maybe so.
Interestingly, though, what the top graph shows is food expenditures. In reality, part of what is going on (although I have no direct evidence of the magnitude) is that consumers are eating out less (spending less on each meal). Anecdotal evidence supports my hypothesis, though.
Maybe we will get skinnier as a result of the recession??
If these data are to believed, maybe so.Interestingly, though, what the top graph shows is food expenditures. In reality, part of what is going on (although I have no direct evidence of the magnitude) is that consumers are eating out less (spending less on each meal). Anecdotal evidence supports my hypothesis, though.
Thursday, February 12, 2009
Socialist Slippery Slope
Nicholas Kristoff, in his usual left-leaning fashion, provides his own set of solutions for the current financial crisis. Everyone is entitled to their opinion, of course. But consider the following passage:
Senator Claire McCaskill, a Democrat of Missouri, had it right in her recent legislative proposal: cap compensation for all employees at companies receiving bailouts at the salary of the American President, which is $400,000 a year.
So, not only are we going to partially nationalize the banks through equity purchases, we are then going to usurp the authority of the Boards of Directors of those banks. If the U.S. Government wants a seat at the table, they can get a seat on the Board. I am quite sure that if we attempt to tell the lower-income beneficiaries of "tax cuts" what color car to purchase, Mr. Kristoff would have a complaint to file...
Prospects for the Secretary of Agriculture
President Obama named Tom Vilsack Secretary of Agriculture, and Jim Harkness of the Institute for Agriculture and Trade Policy had some advice for him. Let's break some of this down:
"The last Iowan to serve as head of the U.S. Department of Agriculture (USDA), Henry Wallace, was by far the greatest Secretary of Agriculture in our nation’s history. Serving under FDR during the Great Depression, Wallace made sweeping reforms that saved farmers from the Dust Bowl and ushered in the most prosperous period in rural America’s history."Well, we know that the FDR administration did implement many changes that helped curb soil erosion and stabilize rural/farm income...but, this is a bit hyperbolic. To say that "Wallace ushered in the most prosperous period in America's history is too simplistic" for a supposed scientist. But, let's keep reading... Speaking about the Depression:
Over-production had led to a price crash, and the combination of environmentally harmful farming practices and drought had created the Dust Bowl.True...
The predicament facing Governor Vilsack is really not so different from 1932. The symptoms may seem new: climate change, global food shortages, biofuels, food safety scares. But the central challenges once again are markets run amok and the unsustainable farming practices they promote. (My emphasis added)Well, the differences between now and 1932 are both minor and quite startling. Yes, high prices have been followed by a market crash. But significant conservation measures are in place and government institutions for income stabilization are present where they were not in 1932. Further, markets CANNOT run amok. People may manipulate, rules may be bent, broken, or ill-defined. But markets cannot "fail." Misinformation such as this is what makes average Americans cynical about market economies and economics in general.
Decades of free market fundamentalism and agribusiness lobbying have gutted Wallace’s programs or twisted them beyond recognition. (My emphasis added)OK, well one could certainly argue that agribusiness lobbying has perhaps skewed things (that is, they have relative bargaining power; the extent to which that is exploited relative to the farm lobby is questionable but possible), but the nonsense about free market fundamentalism is just populist drivel.
Today, the real winners in the system are a tiny handful of agribusiness companies, who profit from the boom bust cycle and whose anti-competitive control of the market hurts farmers and consumers alike.Again, market structure considerations are real...albeit difficult to prove. This, so far, is the only bit of real economic logic in the piece.
And instead of a Dust Bowl concentrated in the Great Plains, we have an entire agriculture system that is toxic. It runs from the poisonous chemicals used to grow crops, to the unhealthy foods marketed to our children contributing to the obesity crisis, to the enormous dead zone choking the Gulf of Mexico, to the massive emissions of greenhouse gases from industrial farming.Man, and I just thought he was going to be logical...
Useful Thought for Today
"The first lesson of economics is scarcity: there is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics."--Thomas Sowell
Money Supply, Mortgage Rates, Inflation
Recent data suggest that the mortgage market is a little skittish...well, it should be. In the cited article, note the following:
Does anyone see anything wrong with this picture? The growth in M1 (available money supply) looks like someone lit off a bottle rocket. Can anyone say a closed room with gasoline vapors waiting for a match. In this case, the match is money velocity (the rate at which money turns over in the economy). At this point, no one is spending...but Katie bar the door when they decide to start...I wonder if the Fed can draw down M1 fast enough to avoid double-digit inflation???
"We're going to continue to see volatility in mortgage rates between 5% and 6%. There's a tug of war between the Fed and the Treasury trying to push rates lower, and the volume of government debt issuances that pushes rates higher," McBride said. (my emphasis added)...well, duh... $1 trillion in new debt, with over $500 billion in the next several months. Somebody PLEASE tell me the Obama administration is anticipating rates having to increase in order to entice investors to Treasuries. Meanwhile...
Does anyone see anything wrong with this picture? The growth in M1 (available money supply) looks like someone lit off a bottle rocket. Can anyone say a closed room with gasoline vapors waiting for a match. In this case, the match is money velocity (the rate at which money turns over in the economy). At this point, no one is spending...but Katie bar the door when they decide to start...I wonder if the Fed can draw down M1 fast enough to avoid double-digit inflation???
GDP Growth
Yeehaw...The WSJ survey of economists on GDP growth is out. The graph below is quite telling.
Note that the interesting issue is not the mean estimate (the little black bars in the middle), but the variance (the size of the bar from top to bottom). What these data indicate to me is that our expectations are becoming more fuzzy, not more certain, which is probably being reflected in the market volatility seen in the stock market.
Note that the interesting issue is not the mean estimate (the little black bars in the middle), but the variance (the size of the bar from top to bottom). What these data indicate to me is that our expectations are becoming more fuzzy, not more certain, which is probably being reflected in the market volatility seen in the stock market.
Protectionism rears its ugly head...
According to this story, protectionism is alive and well in Europe...actually, that is not too surprising, but does not bode well for trade in general. The political realities on the ground are likely overtaking ideological stances about trade...after all, the effects from protectionism are often subtle and difficult to cleanly identify. The US flirted with this through its "Buy American" provision of the "stimulus bill." The real fear is that global conflicts are often preceded by economic hardships often exacerbated by protectionist policies.
What Stimulus??
Daniel Henninger has an interesting op-ed in the Wall Street Journal. Central thesis..."stimulus" = politics...interesting concept. His USA Today/Gallup poll numbers cited seem to suggest that the American public is catching on...although they have not yet figured out "the details."
Chicken Coop Foreclosures?? Time for a Bailout...
An interesting little story appeared on the front page of the Wall Street Journal today (2/12/09) relating to chicken farmers losing their chicken houses to foreclosures. According to the story, the problems started with the bankruptcy of Pilgrim's Pride who has canceled many contracts with growers in an attempt to cut cost.
These are, of course, real economic hardships. But, it also points to the impacts of something called asset specificity, a theory which suggests that when you are heavily invested in an asset (in this case, a chicken coop) that cannot be effectively used for any other purpose, the owner of that asset is subject to considerable economic risk. Apparently so...
These are, of course, real economic hardships. But, it also points to the impacts of something called asset specificity, a theory which suggests that when you are heavily invested in an asset (in this case, a chicken coop) that cannot be effectively used for any other purpose, the owner of that asset is subject to considerable economic risk. Apparently so...
Ethanol vs. Food (Finale)
Ok, so the real question becomes: "In the absence of high oil prices, what happens to corn price/ethanol?" Well, here ya go:
The corn (orange) and oil (blue) do in fact follow each other quite well as suggested by studies previously cited. But look at the period after November 2008. The divergence is telling. These data suggest that while ethanol is, at the margin, driven by oil, the RFS does place a floor on corn price. If you look back at the stocks-to-use graph in part 1 below, the floor seems to be somewhere in the $3-$4/bushel range. If this is, in fact, a consistent relationship, one can safely say that the RFS is having significant effects on corn price over-and-above the other cited issues. This result would imply that, via feed and food ingredients, the RFS is having an impact on food prices.
The corn (orange) and oil (blue) do in fact follow each other quite well as suggested by studies previously cited. But look at the period after November 2008. The divergence is telling. These data suggest that while ethanol is, at the margin, driven by oil, the RFS does place a floor on corn price. If you look back at the stocks-to-use graph in part 1 below, the floor seems to be somewhere in the $3-$4/bushel range. If this is, in fact, a consistent relationship, one can safely say that the RFS is having significant effects on corn price over-and-above the other cited issues. This result would imply that, via feed and food ingredients, the RFS is having an impact on food prices.
Ethanol vs. Food (Part Deux)
A legitimate question is whether the RFS is actually "binding." See below (again, thanks to John Anderson):
The purple line represents the production of ethanol. As we can see, the RFS created in '02 was not "binding," so Congress thought it would be a good idea to increase it. In '05, it was increased and was much closer to being binding, so Congress thought, "what the heck, let's increase it again." By the '07 - '08 period, it the RFS became binding.
The upshot...early on, the RFS was not binding and ethanol production was highly driven by crude prices and other considerations as suggested by studies in my earlier post. But...
The purple line represents the production of ethanol. As we can see, the RFS created in '02 was not "binding," so Congress thought it would be a good idea to increase it. In '05, it was increased and was much closer to being binding, so Congress thought, "what the heck, let's increase it again." By the '07 - '08 period, it the RFS became binding.
The upshot...early on, the RFS was not binding and ethanol production was highly driven by crude prices and other considerations as suggested by studies in my earlier post. But...
Ethanol vs. Food (Part 1)
There has been considerable debate whether the Renewable Fuels Standard (RFS) has created as "food vs. fuel" competition. Several studies, including ones by my colleagues at Purdue University and Texas A&M University suggest that the answer is no. They conclude most of the increase in grain price is attributable to a combination of the declining value of the U.S. dollar, increased demand overseas, and increases in the price of oil. Indeed, some of our own work suggests that oil prices and exchange rates lead corn prices. But consider the following:
The graph (and thanks to my friend John Anderson of Mississippi State for "loaning" it to me) shows the relationship between the stocks-to-use ratio and corn price. As the ratio increases, stocks are increasing relative to use, so we expect a decline in price...and that is what we see. But, when you get to the 2006-2008 period, something occurs. Same basic underlying fundamentals (i.e., consistent stocks-to-use), but a huge increase in price. This graph suggests a structural shift in corn prices which are directly tied to the RFS time period...more on this later.
The graph (and thanks to my friend John Anderson of Mississippi State for "loaning" it to me) shows the relationship between the stocks-to-use ratio and corn price. As the ratio increases, stocks are increasing relative to use, so we expect a decline in price...and that is what we see. But, when you get to the 2006-2008 period, something occurs. Same basic underlying fundamentals (i.e., consistent stocks-to-use), but a huge increase in price. This graph suggests a structural shift in corn prices which are directly tied to the RFS time period...more on this later.
Welfare Reform Redux
Well, I guess I can say that I am not surprised. According to Mickey Kaus on Slate, a sneaky provision in the "stimulus bill" basically undoes the crowning achievement of the Clinton Administration...welfare reform. Work done by myself as well as many others clearly shows that the welfare reform of the Clinton era did effectively move individuals off welfare rolls. In one fell swoop, the new Democratic majority may have reversed these gains. I am no expert on the wording used in the bill and not a lawyer to judge interpretation. But, if Kaus is right, this one needs to be much more widely publicized.
Wednesday, February 11, 2009
Useful Thought for Today
"I hate to hear about "partnerships" between government and business, or between government and other organizations. When there is a partnership between an ant and an elephant, who do you suppose makes the decisions?" -- Thomas Sowell
Peanut Madness
The article discussing the owner of the peanut company shipping salmonella tainted peanut products brings up an interesting policy dilemma for people to consider:
Do we, as the Director of the testing center suggests, need to increase oversight by the FDA for what he admits is an event that is "unheard of"? At what cost? What is the benefit of such additional oversight relative to the cost? Be careful...if we consider the value (benefit) of a human life saved as "infinite," does this not imply we are willing to expend an infinite amount of money to protect it...
Before I get blasted...the behavior of this executive is morally reprehensible if what is reported is true. He should be placed in jail forthwith. But knee-jerk reactions as those proposed by the testing center Director most often lead to bad policy. In fact, if you read the Wall Street Journal version of the story, which strongly suggests that it is not regulation that is lacking, but lack of regulatory attention span. As with mortgages, banking, and other issues of late, the regulators were asleep at the wheel and unwilling to enforce regulations on the books...
Do we, as the Director of the testing center suggests, need to increase oversight by the FDA for what he admits is an event that is "unheard of"? At what cost? What is the benefit of such additional oversight relative to the cost? Be careful...if we consider the value (benefit) of a human life saved as "infinite," does this not imply we are willing to expend an infinite amount of money to protect it...
Before I get blasted...the behavior of this executive is morally reprehensible if what is reported is true. He should be placed in jail forthwith. But knee-jerk reactions as those proposed by the testing center Director most often lead to bad policy. In fact, if you read the Wall Street Journal version of the story, which strongly suggests that it is not regulation that is lacking, but lack of regulatory attention span. As with mortgages, banking, and other issues of late, the regulators were asleep at the wheel and unwilling to enforce regulations on the books...
Update:
Stimulus Schimulus
It has been an interesting couple of weeks. The largest "spending bill" in the history of the United States has cleared both the House and Senate and apparently made it through conference. But what do we get for our money? Work by cited by Ray Fair on Greg Mankiw's blog seriously questions whether we will get any lasting "stimulus" out of this bill.
The truth is I do not know. What I do know is that much of the bill is not stimulative. I do not question the need for more infrastructure investment. But those are long-term investments. The obvious short-term stimulative activities like reducing the corporate tax rate, capital gains tax rate, and, yes, even some payroll rate reductions seems to have been dismissed as "the rhetoric of failed economic policies" (I actually shudder as I quote Mr. Obama on that).
Two other "political facts" appear to be sinking in to at least some of the electorate. First, spending does not necessarily equal stimulus. Second, tax policy, while not perfect, is more easily reversible than spending programs. Can you imagine the outcry of governors a year from now when the Feds propose suspending Medicaid payments for the states??
Unfortunately, this "grandest of experiments" will have profound impacts on capital markets, interest rates, and inflation. Whew...
The truth is I do not know. What I do know is that much of the bill is not stimulative. I do not question the need for more infrastructure investment. But those are long-term investments. The obvious short-term stimulative activities like reducing the corporate tax rate, capital gains tax rate, and, yes, even some payroll rate reductions seems to have been dismissed as "the rhetoric of failed economic policies" (I actually shudder as I quote Mr. Obama on that).
Two other "political facts" appear to be sinking in to at least some of the electorate. First, spending does not necessarily equal stimulus. Second, tax policy, while not perfect, is more easily reversible than spending programs. Can you imagine the outcry of governors a year from now when the Feds propose suspending Medicaid payments for the states??
Unfortunately, this "grandest of experiments" will have profound impacts on capital markets, interest rates, and inflation. Whew...
Subscribe to:
Posts (Atom)
Posts
