O'Donnell explains socialism

He's right that it's important to recognize that every modern economy is a blend of capitalist and socialist practices. I appreciate his characterization of unbridled capitalism as inhumane. Labeling something or someone "socialist" shouldn't be akin to calling them evil.

If there are any politicians calling for complete repeal of Medicare and Medicaid and progressive taxation schemes, I want to hear them acknowledge the inhumane consequences of such repeals.

I'm shocked...SHOCKED to find that gambling is going on in here

Roger Lowenstein's op-ed for NYT yesterday advocates for: 1) trading derivatives on exchanges and in standard contracts; and 2) banning or at least regulating credit default swaps. These seem like eminently reasonable suggestions.

Naked short selling

While driving around today running errands, I heard an interview with the author of an article in Rolling Stone about naked short selling and the market collapse of last year. Much of it was over my head, but the interviewer kept making the comment that descriptions of short selling, naked short selling, etc. that were very easy to follow and understand were in this article. So when I got home, I read it. For those of you who are all into the Fed and the market (i.e. Stephanie), this is a must read.

All I can say is...UNBELIEVABLE.

Coolest thing ever

I dreamed that someone posted something really interesting. Alas...

But maybe it was premonition, because my partner B just sent me this link which is the coolest thing ever. It's a graphical representation of the history of the Fed.

(I'm reading In Fed We Trust, so this is a nice complement.)

Update: I haven't read the text yet. B says it has a Friedmanesque perspective.

Tax brackets

Dshort.com has a graph of tax brackets through the years, superimposed with a budget deficit graph:


Update: I wonder what percentage of the population is aware of how high the highest tax brackets were from the 50s until Reagan in the 80s.

Iceland

Is anyone following what's going on in Iceland? Iceland, faced with the banking disaster of 2008, let its banks go belly up rather than bail them out. Who knows? Maybe they'll be in better shape for it in the end, but right now, things are grim there.

Iceland's gross domestic product (GDP) shrank 2.0 percent in the second quarter from the preceding three-month period for an annual contraction of 6.5 percent, preliminary data from the statistics office showed on Friday.

[JUMP]

'Contrary to other countries in the region, quarterly growth in Iceland is probably going to remain negative for the rest of this year,' he added.

[JUMP]

Although the central bank sees the economy of the island of only 320,000 inhabitants contracting around nine percent this year and shrinking still further next year, there is little scope for reducing interest rates, currently at 12 percent.

There are a lot of fascinating things about the Iceland situation. I'm just beginning to follow it. Maybe others here know more and could write about it. Letting the banks fail is clearly not the end of the story when vast sums of money are owed to other countries or citizens thereof, regardless of what the Icelanders may want. The Iceland situation makes one ponder the meaning of national boundaries and sovereignty.

Update: Here's a link to a Vanity Fair article from April 2009 about Iceland's banking collapse and its response to it.

Econ blogs

The WSJ Econ blog has produced a list of their top 25 economics blogs. (H/t Ezra.)

Unemployment rate now at 9.4%: What does that say about the stimulus?

Back in January 2009, when the administration-elect was selling its stimulus plan, it released a report authored by Christina Romer and Jared Bernstein. I mentioned the report here. (The link to the report in that post doesn't work anymore but you can find the report here.) I think it's time to see whether we can determine if the stimulus is having the projected effect. The report included an unemployment graph that (almost) allows for this kind of accountability assessment:

There are, however, some fuzzy things about making this comparison:

1) Unemployment numbers come in two varieties: regular and seasonally-adjusted. I don't know whether the projected numbers are regular or seasonally-adjusted, so I don't know which of the actual numbers to use for comparison;

2) I don't know exactly what the projected timeline is. I mean, does the hash mark for "Q1" mean January 1? or does it mean the end of Q1, i.e. March 31? One's comparison could be off by as much as 3 month, given this ambiguity. I would assume that the Q1 hashmark marks the start of Q1, except that the graph projects the effect of the stimulus beginning right at Q1 2009, before the new administration was sworn in, and weeks before a stimulus plan could or would be in place.

3) Since the stimulus plan wasn't signed into law until February 17, 2009, its effect starts later than what is depicted in the graph (unless the Q1 hash mark is supposed to designate the end of Q1).

4) As always the case with projections, maybe projected rate without the stimulus wasn't pessimistic enough and, thus, maybe the stimulus if helping more than we can see.

Given all the fuzziness, I'm not drawing any conclusions yet.

I do note, though, that the current 9.4% is much higher than the projection depicted on this graph, even without the stimulus spending. This table from the Bureau of Labor Statistics (the source for the 9.4% number) shows unemployment rates by month since 1999:

The report includes this footnote explaining that the projection in the graph might be too low:

Forecasts of the unemployment rate without the recovery plan vary substantially. Some private forecasters anticipate
unemployment rates as high as 11% in the absence of action.

I appreciate that the report didn't use the scariest prediction available to make the case for the plan, but it's looking like the private forecasters were closer to right.

[Update: I meant to note about the table that the unemployment numbers track relatively well with the projections (sans stim) in the graph until the latest number which is much higher than the projection.]

Gates following Rumsfeld’s lead?

Is it just me or does the second part of SecDef Gates’ two-part defense plan, as summarized by Austin Bay at Townhall, not echo Rumfsfeld’s, “As you know, you go to war with the army you have, not the army you might want or wish to have at a later time.”

Gates' defense plan, presented this week, seeks to embed these [the first part] capabilities ["small war" capabilities, including counter-insurgency skills, local security training programs, rule of law projects, and economic and political stabilization capacities] but also [the second part explained more below] thwart the most likely current and emerging conventional threats, what he called "the security challenges posed by the military forces of other countries -- from those actively hostile to those at strategic crossroads."

"Most likely" sounds bland, but for Congress, defense industries and many military leaders, they are fighting words. Money isn't the only reason -- legitimate debate over what constitutes adequate preparation for a "war of national survival" is not only justifiable, but a duty. The reason the United States confronts terrorist threats is that America has the combat power to win conventional force-on-force fights, and that must be retained.

Gates doesn't dispute that -- he argues for balance. Budgets are limited. Procuring the expensive "perfect" may be ideal, but acquiring sufficient numbers of "the better than good enough" is more rational.

As a specific example, Gates bets that a sufficient number of F-35s assures U.S. air dominance in the coming decades, so the Pentagon can buy fewer F-22s. Now a battle over numbers flares. Gates says 187 F-22s. I estimate the right number is around 250. Hey, it's not quite thin air. It's based on attrition and operational estimates, and posits a U.S.-China clash over Taiwan.

No one wants that conflict, but if it occurs sometime in the next 20 years we'll rue the day we didn't buy more F-22s. Gates, however, wins the bigger point -- America has less expensive systems that more than overmatch potential adversaries.

In hindsight Rumsfeld’s comments, which seemed so outrageous at the time in the context of the under-armored Humvees, really did merit the opening phrase, “As you know….” It comes down to economics like so much of life (and death). Bay continues:

Choices must be made, and Secretary of Defense Gates has made his. He has done so with an acute assessment of the long-term strategic benefits of assuring success in Iraq and Afghanistan complemented by a cool, intellectually defensible estimate of future requirements. His proposals now become a Washington budget warfighting document.

The Golden State Economy v. Lone Star State Economy

A blurb from Reason’s blog:

One cannot say the same thing about California, in many ways Texas' polar opposite. You couldn't have two states moving in more opposite directions. One is unabashedly pro-growth and aggressive in courting industry, while the other seems content to spin an ever denser spider web of laws, regulations and red tape that is driving business out of the state. One state accounts for a whopping 70 percent of all jobs created in the United States last year, while the other seems bent on increasing taxes on business and individuals to pay for an unsustainable, out of control government that wants to be everything to everyone despite the fact that it simply cannot.

This doesn't mean that Texas doesn't face very real problems in the current recession: they do, as Brendan Case at the Dallas Morning News blogs here. But even so, the silver lining for Texas is that the recession will nick the Lone Star State while it gouges the Golden State. California's addiction to funding ongoing programs through debt financing, its permanent structural deficits on the horizon, its fondness for taxation, and other governance weak suits will really hamper the economic recovery in the state, ensuring it will occur long after Texas is off to the races.

Chauncey Gardiner

James K. Glassman is the president of the World Growth Institute, which promotes global economic development. I used to read him a lot when he wrote for Tech Central Station (now TCS Daily), an online magazine he founded in 2000.

I found this bit in Commentary Magazine yesterday and couldn’t help thinking of the movie Being There:

On being presented the Nobel Prize in economics in 1974, Friedrich von Hayek devoted his Stockholm lecture to acknowledging the severe limitations of his profession. “It seems to me,” he said, “that this failure of the economists to guide policy more successfully is closely connected with their propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences—an attempt which in our field may lead to outright error.” … Said Hayek:

If man is not to do more harm than good in his efforts to improve the social order, he will have to learn that in this, as in all other fields where essential complexity of an organized kind prevails, he cannot acquire the full knowledge which would make mastery of the events possible. He will therefore have to use what knowledge he can achieve, not to shape the results as the craftsman shapes his handiwork, but rather to cultivate a growth by providing the appropriate environment, in the manner in which the gardener does this for his plants [emph. mine.]

What is that environment? First, it provides a confidence that, in a crisis, bank deposits are safe and insurance policies will be paid in full. Such confidence can be provided only by the government of the United States in its legitimate and essential role as the lender of last resort. Second, the environment supports, rather than denigrates or browbeats, productive members of society. The U.S. will not emerge from a serious recession unless businesses and investors lead it out. Third, it recognizes that Americans have undergone a financial calamity and that we need time to adjust; we cannot, like a car battery, be shocked back to life, and we aren’t in the mood to have someone blow in our ear.

Re: LJ's comments on open borders

This is in response to LJ's comment about open borders that I'll quote here because there's so much good stuff in it that it should be a post:

love johnson said...
IMHO, there isn't anything more boring or a total beating than trying to read a book about economics. They are always too complicated and while the theories always sound great, the practical applications never seem to work out.

That being said, please explain how opening the borders would make the labor market operate more "freely"? My understanding is that illegal immigrants drive down wages, so wouldn't MORE cheap labor, whether legal or illegal, drive wages down more? One always hears the arguement that these workers are doing jobs that we Americans won't. I've never agreed with that - it's that Americans won't do them because the pay is too low to sustain an average standard of living that we are accustomed to, not the specific job itself.

What I do find interesting about your question about Republican philosophy and free markets is how fluid their philosophy seems to be. Killing prisoners is fine, abortions are not. Let the free market / capitalism dictate what happens, but if cerain business's or industries fail, then it's OK to bale them out. They hate "judicial activism", but only when the case goes against their beliefs (recall the Schiavo case). They claim they want to keep the government out of our lives ("small government"), but want the government to intrude into the sex lives of Americans, to increase the profile of religion (but only Christianity) in public schools and public buildings.

I realise that I'm WAY in over my head with any economic discusion. That's why I'd rather let someone else read the book and explain it to me! :)

Scooter will correct me if I'm wrong, but I think that government regulation by definition is an unwelcome restraint on the operation of a free market economy. In the case of labor, our immigration policy limits the number of people who can come to the U.S. and work, and therefore it's a constraint on the available supply of labor, and therefore, as LJ says, it keep wages higher than they would otherwise be (and results in a higher cost to manufacture goods). Free marketeers think that's a bad thing, I believe, which is why you'd expect them to object to restrictions on immigration. I believe (without having read the book and relying on what little I gleaned from the Colbert Report interview) that Jason Riley makes the case that if you're all about the free market, then you should also want unrestricted immigration.

Don't you just hate it when your xenophobia cuts into your profits?

Hear, hear, about the schizophrenia in Republican philosophy in recent decades. But, I grant, our side can be inconsistent too as I'm sure Michael or Scooter will point out.