American Society of Civil Engineers did a report card on our infrastructure. We suck. So, whether or not the stimulus package works to stimulate the economy over the short term, our infrastructure is completely falling apart and we need about $2.2 trillion dollars of spending to fix it.
It’s starting to look like it. Check out this Times article.
Do you think without being force to that banks like JP Morgan will loan out the money we gave them? Not if they have a better options, economy be damned. From a JP Morgan exec:
“Twenty-five billion dollars is obviously going to help the folks who are struggling more than Chase,” he began. “What we do think it will help us do is perhaps be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling.”
So, rather than inject this money into the sagging economy, these predators would prefer to scoop up struggling banks, regardless of the consequence.
People, we have been duped. I hope this article is embarrassing enough to them to do the right thing and embarrassing enough to the government to force them to do the right thing. I am not optimistic.
We gave these banks a big fat carrot. Now it’s time to use the stick.
This was my Google Quote of the Day and seemed somehow relevant to the current economic crisis:
There are 10^11 stars in the galaxy. That used to be a huge number. But it’s only a hundred billion. It’s less than the national deficit! We used to call them astronomical numbers. Now we should call them economical numbers.
- Richard Feynman
So, I have another question about these bailout negotations. The latest news is that negotiations have hit some snags firstly because the Conservative wing of the traditionally Republican Party (didn’t know there was one left) is objecting to giving away $700,000,000,000 since it will result, of course, in higher taxes and probably more government regulation. Additionally, some Democrats aren’t crazy about handing over $700,000,000,000 (gotta love all those zeros), without any additional regulatory measures to prevent it from happening again and help for people who might lose their homes. Finally, it has gotten somewhat mired in the race since both McCain and Obama have gotten involved in the negotiations by actually sitting down with the President and party leaders to put in their $.02.
My question is this: is there any precedent to have candidates so intimately involved in policy at this point. I realize they are both Senators, but neither is, I don’t think, ranking member of the finance committee or anything like that. I also know that one of them will inherit this mess, but neither has yet.
I wonder if it is appropriate to have them in the room at all, other than in whatever capacity they might already serve as Senators. It politicizes the entire issue and has caused it seems, serious grandstanding, particularly by the economic conservative wing of the Republican Party who feel like they are about to get shafted and with good reason.
That said, perhaps the slowdown is a good thing. The American economy is very, very big and even if it gets a little pummeled over the next few days or weeks, that isn’t as bad a scenario as committing to a $700,000,000,000 fiasco that hasn’t been completely thought through.
Still I have to wonder if there are balance of power issues here. For example: how would this scenario have changed if both candidates were not Senators and one was, say, a governor or a hot dog salesman, whatever.
As in my last post, I am posing real questions, not rhetorical ones. Is the way this situation is being handled appropriate? I don’t really know, but it does leave me feeling a little bit uncomfortable.
The recent economic turmoil has afforded me plenty of opportunities to learn about (or try to learn about) the complexities of mortgage markets, housing markets and the U.S. economy in general. In the midst of all the coverage of the proposed $700,000,000,000 bailout, I heard a tidbit that has me a bit upset. Apparently, US banking law prevents a bankruptcy judge from restructuring a mortgage on a homeowner’s primary residence. This seems pretty harsh, but I suppose one could make the old “moral hazard” case that if a borrower knew mortgage restructuring was possible, he or she would be more likely to take out a riskier loan; theoretically, this would increase the number of failures and subsequently increase interest rates. That argument is a little shaky: if restructuring was allowed, it would still be in the hands of the courts and in no way guaranteed, so the borrower can still be on the hook and face foreclosure.
Here’s the kicker: a bankrupcy judge is allowed to restructure a mortgage on a second home or “investment” property. This pretty much blows the moral hazard argument out of the water.
My question is this: is there any rationale behind the way this law is structured other than a cynical means of preventing middle-class homeowners from being able to renegotiate with banks during hard times, but would allow heavily-leveraged reality investors to do so when property values crash? I can’t think of one. Seems like a simple case of screwing the little guy so the monied interest have golden parachutes.
I challenge anyone to correct my cynical view.
Alder at Vinography has a post today applauding the people whose long days of physical labor make wine possible for those of us who appreciate it and can afford it. He says
In the absence of a holiday celebrating wine itself, I cannot think of a better holiday for wine lovers to observe, given the pleasures we reap from countless hours of back-breaking work by mostly nameless, faceless workers.
I commend Alder for again bringing attention to a facet of the industry that goes largely undiscussed. So too, I appreciate his mention of Sonoma Vineyard Worker Services an organization which much like our own Salud! in the Willamette Valley, provides much needed services to vineyard workers.
However, I think, too, we should think about the bigger picture of what these workers represent from a social, political and (gasp!) class perspective. The people who do the most exhausting and risky physical labor in the US wine industry and for that matter the entire agricultural sector are migrant Mexicans and South Americans, often illegals, who without organizations above would not have access to basic health care or social services.
To my mind, when those who are largely responsible for bringing food and wine to our table have so much less than those for whom they bring the food and wine, a crisis is at hand. Those of us who consume these goods (nearly all of us), rely on the services that migrant agricultural laborers provide.
From the point of view of the consumer, and to a large part, even to those of us in the industry, the people who work the vineyards are “nameless and faceless”, as Alder says. I think we need to do more than just remember them. And I think we need to do more than contribute to the organizations that make up for all they lack. I believe we need to advocate for these people who, for the most part, cannot advocate for themselves.
Political visibility for migrant laborer was on the increase until political support fizzled earlier this year as we rolled into election season. I encourage each person to study this issue and think about it. To be sure, you should come to your own conclusions about what needs to be done, but don’t underestimate the importance of migrant labor to our economy or forget that the people have lives and families of their own and are as entitled to a life of dignity and security as much as those of us who were lucky to be born with both.
Modern economic dogma in a nutshell. I guess I would not have felt so bad becoming an economist if I had ended up like this guy. Watch and learn:
http://www.youtube.com/watch?v=VVp8UGjECt4
Thanks to Jess for the reference.
I realized this morning that with all this writing about food and wine, I haven’t taken a good pot-shot at Economics in a while. I feel I am long overdue. I don’t even know what set me off this time.
I have talked about them before but for those of you who need a refresher, externalities are those costs and benefits that the market does not naturally account for without intervention: things that (arguably) need to be addressed via intervention. The classic example is a factory making paper and dumping pollutants into the river. It doesn’t add to the factories bottom line at all to clean up the mess they are making or to stop polluting. However, the junk in the river is a health hazard and is causing people to get sick which requires them to go to the doctor. Those trips to the doctor cost money which is paid for by insurance which in-turn causes insurance rates to go up. The cost of the pollutants is ultimately absorbed by society in the form of higher insurance rates. In all likelihood, it would be much less expensive, society-wide, to just get the factory to stop polluting, but it would be more expensive for the company.
An economist would say that we have to internalize the negative externality by assigning properties rights. This means we would arbitrarily define the right not to drink polluted water as belonging to the individuals down-stream and if the factory wants to poison them, they have to pay per ton of pollutant they dump in the water. The water-drinkers would get to set the price. At some point it is cheaper for the factory to clean up its act and so they would do so or go out of business. Whatever their decision, the cost of polluting the stream is now internalized.
This would, of course require a fairly substantial amount of governance and enforcement. The factory could clandestinely slip the pollutants in. Presumably, this would be accounted for in the cost the water drinkers charge (they are rational actors, after all). Wait… what happened to our free-market. We already have an enforcement agency.
The point is that one relatively simple case already starts to strip a way the illusion of a free-market.The larger point is that this is just one case in millions. Economist like to think of this case as exceptional, but this is ridiculous. Everything, and I mean EVERYTHING, in our economy has negative and positive externalities. For example, let’s take the most neutral imaginable product, wheat, that is often used in Econ textbooks as a classic controversy-free product.
Well, not so much. Let’s say one farmer uses traditional diesel in his tractor and another uses lower-pollutant, but higher cost bio-diesel. The second environmentally-friendly farmer is going to have to charge a little bit more for his product. The cost of using the higher-pollutant fuel is not accounted for in the market calculus without a government subsidy for the eco-friendly farmer or a penalty against the other.
Even that is a relatively simple example. Everything we consume has social value, negative or positive and often both. There is no such thing as a social value-free commodity.
Some economists would agree with this position, but would generally qualify that agreement with, "yeah, but Economics is a model, just like physics and you don’t need to, and can’t, account for everything all the time." True, but beside the point. Economics is indeed a model, like Newtonian physics and it probably has value, but each model has its place and creating policy without taking into account the vast complexities of externalities is sort of like building a plane without accounting for the wind-resistance of the material: you might get lucky if you happen to use a material that has little friction, but generally the plane is just going to crash.
So what is the solution? We really need people trying to find a new Economics that can account for the complexities of our world. I do not believe in the command economy. Market incentives have their value and I don’t think individuals can necessarily decrypt the complexity of human behavior any better than the market. From a policy point of view, I hate to say it, but our best bet is to just muddle through. Apply models when they are helpful but throw them away when they are not.
More than anything else, however, economists need the humility to realize that they are social scientists, not scientists and they should take their orthodoxy with a grain of salt. If you think most economists have that humility, read the first ten pages of any undergraduate Economics textbook. They really think they are scientists and they like to say so often.
So that’s my complaint of the day against Economists. Expect the wine and food commentary to resume without interruption until I get another bee in my bonnet.
END RANT.
From the Guardian:
Treasury Secretary John Snow on Sunday would not rule out the idea of Irish singer Bono, an activist on debt relief and AIDS, making the short list of potential candidates to lead the World Bank even though an American is expected to get the job.
That would sure be weird. But maybe not that weird. Bono has spent a lot of time building credibility as a advocate for developing countries. He has been careful to stay away from out-right partisan politics and he is widely respected all over the world, particularly outside the U.S.
I highly doubt he will get the job however. The hard right would not be happy to have a vaguely leftist celebrity appointed to the post. I imagine he will make the short-list for PR reasons and then get passed over for one of the other candidates.
Speaking of other candidates, there are a couple of others who seem like better fits for the Bush Administration (if not the post itself). One is Carly Fiorina whose ability to alienate the HP employees and board will certainly make her qualified to bully developing nations who are resistant to sacrificing the well being of their citizens for free trade.
Then there’s Paul Wolfowitz. As one of the founders of our current neo-conservative imperialist project, he wouldn’t let minor issues of national sovereignty or good sense get in the way of the need to get cheap widgets from the developing world. Plus, he would replace James Wolfensohn. Wolfowitz. Wolfensohn. Wolfowitz. Wolfensohn. That’s fun. Europe will resist this one.
Christine Todd Whitman’s named is being tossed around, but she has been a bit on the outs with the administration, so I don’t see it happening.
Let’s hope Bono gets the job.
Something has been bothering me for a while now. Economists are all excited about this relatively new idea for dealing with negative externalities (social costs that are incurred that are not included in the price of a transaction–like the fact that a polluting company doesn’t include the cost of river cleanup in the price of the product).
The solution, apparently, is to “internalize” these externalities by granting licenses to pollute (for example) and then allowing companies to trade them.
For example, suppose the government auctions off 100 “pollution licenses”. The companies who can reduce their pollution below acceptable limits for less than the market price of a license will do so. The ones that cannot will be willing to purchase the license. The companies who can do neither will go out of business and the world will be better for it. If, at some point, a company wants to sell its license to another company, that’s fine. The market finds it’s equilibrium price and companies have incentive to find cheaper ways to lower their pollution. Everybody wins. That’s how it works in theory anyway.
Neo-classical economics has a tendency to ignore issues of power when it is not convenient. For this theory, it is not convenient.
Let’s assume that the industry in question is enormously profitable. Wildly profitable. The market price of a license grows exponentially. Suddenly, there is enormous pressure on the cash-strapped government to provide more licenses. Somehow, the government, who supposedly cannot be trusted to set pollution limits in the first place, is expected to resist the temptation to fill its coffers with cash? And if they can resist, what does this say about how “free” this “free market” is?
Secondly, as the industry gets more profitable, more attractive, the temptation to cheat grows. One has to assume, that some companies will cheat and get away with it. In response, the government can set up enforcement mechanisms to deal with transgressive companies, but, oops, there goes that small, laissez faire government.
I am not suggesting that there isn’t merit to the idea of tradable licenses. But I do think that the free market just ain’t that free. The problem with “leaving things to the market” is at some point, there’s a bill on a politician’s desk, or an engineer figuring out where to dump all that sludge. Without organization theory, political science, psychology or perhaps a bit of common sense, it’s all turtles all the way down.
So when “tradable licenses” don’t reduce pollution because the government is much more interested in filling the coffers to pay for a war than making sure their children’s children don’t all have Alzheimer’s from all the mercury they have ingested, it’s not that the theory was wrong, its that reality wasn’t cooperating.
Internalize that externality.
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