Friday, March 6, 2009

More Housing

USA Today provides an interesting story and graphic on the concentration of mortgage foreclosures and defaults.  The graphic below is from the Economix blog from the New York Times, but the USA Today article breaks it down by counties and shows that 35 counties accounted for roughly half of all foreclosures in 2008.  Amazing that such a few geographic areas are responsible for such a mess.

Historical Timeline on Housing Crisis

This link to a Fox News video on You Tube actually comes out of Canada, so it has a little ancillary material at front and back, but it is useful to watch as a means of understanding the obfuscation that is taking place in Congress today about who is really behind some of the key mistakes in the lead up to this crisis.

Thursday, March 5, 2009

GM Bankruptcy

As reported in the Wall Street Journal, GM auditors question the firm's ability to continue to operate. This smacks of political blackmail for more bailout money. I have no doubt that they need additional funds to continue to operate. I just question the need to keep them afloat. Many companies file for Chapter 11 protection and come out of bankruptcy in much better shape. I would predict that GM will go bankrupt. The only question is how much money are we going to put into the company before it happens.

Interesting Question: If the government loans significant money to GM and GM files for Chapter 11 bankruptcy, is GM "protected" from its major creditor...the U.S. taxpayer?

Wednesday, March 4, 2009

Probability of a 'Depression'

Robert Barro in a Wall Street Journal editorial provides some evidence to formulate the probability of a mild "depression" as defined as real GDP decline of over 10%. Based on his data, he estimates the probability at around 20%. The probability of a major depression (real GDP decline more than 25%) at around 9%. The last statement he makes deserves repeating here:

I wish I could be confident that the array of U.S. policies already in place and those likely forthcoming will be helpful. But I think it more likely that the economy will eventually recover despite these policies, rather than because of them.
Unfortunately, I am afraid I agree with him. I hope we are wrong and our recovery is more rapid, but it increasingly seems the structural adjustments the economy is progressing through are deeper than anticipated.

Government Contracting Future???

An Associated Press story outlines plans by the Obama administration to overhaul government contracting at a savings of $40 billion per year. Sounds good, but details are scant. Here are a few quotes from the story worth mentioning.

Those new rules, officials said, would make it more difficult for contractors to bilk taxpayers and make some half-trillion dollars in federal contracts each year more accessible to independent contractors.
OK. That sounds good. But, what do they mean by "independent contractors?" Or what about:

Obama will say that his administration will stop outsourcing to private contractors many services that should be performed by government employees. He also pledged to open contracts to small businesses and eliminate "unnecessary" no-bid contracts that allow preferred contractors to take assignments even though they might not be the least expensive option.
The first sentence sounds suspiciously like more government expansion. There are certainly jobs that should be performed by government for a variety of reasons, but most of the time it is more costly and inefficient. Equally important is that the first sentence in this quote appears to contradict the previous quote.

The administration official said Obama would not, however, sacrifice national security to save pennies. The official also said the administration plans to increase transparency and accountability provisions in contracts -- a major theme of Obama's young administration. [my emphasis added]
OK. The rest was sounding OK, but the highlighted statement runs counter to our experience so far with this administration. This is just another issue to watch closely in the future.

Mortgage Pig

The guys at CalculatedRisk have an amusing technical interpretation of the S&P 500:

It helps to find some humor in the current economic environment...

Ugly Picture

Here is another ugly picture from

The accelerating pace of this is quite scary. But, all markets are new. So we shall see where we go from here.

Monday, March 2, 2009

Opportunity Costs and Budgeting

The core principle of economics is a concept called opportunity costs. Basically, opportunity cost is the value of an alternative course of action given the choice to do something else. You give up current income to go to college (the opportunity cost) in the hopes of achieving a higher lifetime income. We live in a world of scarce resources, so choosing one use of those resources necessarily means that we are giving up the opportunity to do something else. Every freshman economics student is taught this concept.

Now that the President's budget "blueprint" has been released, we get a glimpse of how he does opportunity cost calculus (or doesn't). Let's start with a media "darling"...agriculture. Farm subsidies have been a favorite political target of developing countries as well as the Wall Street Journal editorial board, among others. First, a little perspective is in order. The total cost of farm subsidies in current dollars over the last 40 years is somewhere in the neighborhood of $140 billion. Compare this to the TARP and"stimulus" packages of the past several months. But, are there opportunity costs associated with farm subsidies? Of course there are costs. The money could have been used elsewhere in the economy. The subsidies have distorted resource use away from the allocation of resources that would have resulted in the absence of government intervention (how much, of course, is a relevant question).

We have to compare this, though, with what we get in return. In the 1940s, as much as 50% of U.S. household disposable income was spent on food. Today, it's less than 10%. This relative decline means we have had more money to spend on DVD players and cars, thereby fueling economic growth. We have arguably maintained or improved the standard of living in rural areas and promoted a sector that is the only industry that has consistently fed the U.S. population uninterrupted through two world wars and countless other conflicts and economic crises.

Platitudes aside, the question is whether the benefits to society outweigh the opportunity and cash costs of the programs? Well, society, since 1933, has consistently said "yes." Now, we find in the President's budget that for some reason that calculus has changed dramatically. Why? Surely it is not cost. He argued for a $600+ billion "reserve fund" for some future undefined nationalized health care system. What is the opportunity cost of that $600 billion? What is the future economic growth drag of a system like that?

I have never been a proponent of farm programs. But, I recognize that there are social, political, and other non-economic reasons for their existence. I also recognize that our trading partners will continue to subsidize their production even if we do not (and do not be fooled; even developing countries are subsidizing their agriculture). In years past, government budget and deficit spending levels were such that we economists were concerned with the social tradeoffs between agricultural and other government spending. But today, I am not sure the opportunity cost arguments implicit in the President's budget are genuine. If we are to spend $600+ billion per year on health care, what's another $15 billion on food?