What’s Different About This Time

March 6, 2009

One benefit of bubbles: they usually leave something useful behind.  Despite the grief and anxiety wrapped with the downturn, bubbles fuel innovation at a breakneck pace and finance the infrastructure that vaults the economy forward.

Daniel Gross elaborated on this thesis in his book Pop: Why Bubbles Are Great For the Economy, citing irrational exuberance as the main factor for new commercial developments.  During the post Civil War booms, for example, companies laid out competing and often redundant rail networks.  Fifteen years later, a quarter of the companies landed in bankruptcy.  The same pattern repeated during the ’90s: each major telecommunications company strung enough wire to service the entire nation.  Collectively, they dropped over ninety percent by 2002.

But these busts were like phoenixes: new life arose from the ashes.  The Internet pop directly led to Web 2.0 (Google, Skype, Wikipedia), technologies that gained critical mass after the bubble burst.   Each directly benefited from the cheap excess capacity built during the ’90s.

This time around, the bubbles didn’t produce anything tangible which we can latch onto as consolation.  A rise in house prices reflects paper growth, lost amidst the downturn, and reshuffling CDOs doesn’t provide the country with any lasting contribution.


More on the Stimulus

January 31, 2009


Here’s a heat map that shows state-by-state allocations for the portions of the Economic Recovery and Reinvestment Act for which we could establish where the money is going (numbers from the Center for American Progress).  The darker a state, the more money it receives.

The average state receives $1707 per person, and the $825 billion package is spread out fairly evenly over the country.  There are, however, two places that benefit particularly well from the bill:  Alaska fetches $2550 per person, more than three standard deviations above the mean, and DC gets $2821 a head, nearly 4.2 standard deviations above the mean.

With this bill, Alaska continues its tradition of reaping bounty from federal coffers.  The state received $506.34 per capita in earmarks last year, according to Taxpayers for Common Sense, the highest in the country.  Number two was Hawaii at $226.86, less than half of Alaska’s tally.

Complete stimulus figures state-by-state after the jump.

Read the rest of this entry »

The CBO’s Perspective on the Stimulus

January 28, 2009

An excerpt from CBO Director Douglas Elmendorf’s testimony before Congress:

In the absence of any changes in fiscal policy…the shortfall in the nation’s output relative to its potential would be the largest—in terms of both length and depth—since the Depression of the 1930s.

And perhaps even more important, since economists from across the ideological spectrum already agree on the need for a stimulus, Elmendorf estimates the bill’s impact:

[O]utput would be between 1.3 percent and 3.6 percent higher at the end of this year, higher by a similar amount at the end of next year, and 0.5 percent to 1.4 percent higher at the end of 2011…[T]he number of jobs would be between 0.8 million and 2.1 million higher at the end of this year, 1.2 million to 3.6 million higher at the end of next year, and 0.7 million to 2.1 million higher at the end of 2011.

Essentially, Obama could accomplish his goal of saving/creating three to four million jobs through this package alone.

One more point:  Republicans have argued that the bill will not do enough to spark the economy, and as an alternative, they’re pushing billions more in tax cuts.  The CBO calculated the multiplier effect for a variety of policy options and found that direct purchases by the federal government are one-and-a-half to two times more effective than well-targeted tax cuts.  Well-targeted tax cuts are what the Obama administration originally included in the package – tax cuts targeting the lower socioeconomic brackets where no one can afford to save the money.  Less-well-targeted tax cuts are what the Republicans offer: see Mitch McConnell’s middle-class tax cut.

Aftermath of Financial Crises

January 25, 2009

In today’s Barrons, Alan Abelson summarizes a paper (.pdf) by Ken Rogoff and Carmen Reinhart:

They cite three defining elements of the aftermaths of severe financial crises. First, asset markets of just about every kind suffer a bruising and prolonged battering. On average, for instance, real housing prices plunge 35%, and the agony stretches out over six years, while equity prices lose a whopping 55% over roughly 3½ years.

Second, output and jobs take it on the chin: The unemployment rate shoots up (again, on average) 7 percentage points over four years. Meanwhile, gross domestic product suffers losses averaging more than 9%, but — scant consolation — it happens more quickly, typically in two years or so.

Third, the real value of government debt tends to explode, shooting up an average 86% in the major post-war slumps. Reinhart and Rogoff contend that the huge swelling of such debt owes not, as commonly believed, primarily to bank bailouts and handouts (see, the banks aren’t even very good at raiding the Treasury). What really kites government IOUs, they say, is the drastic shrinkage in tax revenues generated by faltering economies and the “often ambitious countercyclical fiscal policies aimed at mitigating the downturn.” (A timely, obvious example is that $825 billion stimulus package the new administration has its heart set on.)

As an example of the potential turmoil ahead, unemployment (currently teetering at a 16-year-high of 7.2%) seems destined to creep upward through this year and possibly the next, brushing up against 10% before petering out.

Meanwhile, Biden and Larry Summers echoed the same message on the Sunday talk shows, saying that there’s “no good news” on the economy and the problems “aren’t going to get solved that fast.”  This communications strategy, led by Obama’s efforts to gird Americans for a slow recovery, has filled the public with an extraordinary reservoir of patience.  According to the latest NYT/CBS News poll, two-thirds of the country think the recession will last two years or longer, yet there’s still widespread confidence that Obama can turn the economy around.  That base of support will be critical as the economy continues to struggle.

Message Mismatch

January 24, 2009

John Thain, recently ousted from his post at Bank of America, paid $1.2 million to refurbish his office suite last year — after his company’s huge losses were made public.  While redecorating, he was preaching the virtues of “cost control” to employees and advised them to cut back on entertainment and travel.

Here’s a list of Thain’s additions, which he personally approved:

Area Rug: $87,784
Mahogany Pedestal Table: $25,713
19th Century Credenza: $68,179
Pendant Light Furniture: $19,751
4 Pairs of Curtains: $28,091
Pair of Guest Chairs: $87,784
George IV Chair: $18,468
6 Wall Sconces: $2,741
Parchment Waste Can: $1,405
Roman Shade Fabric: $10,967
Roman Shades: $7,315
Coffee Table: $5,852
Commode on Legs: $35,115

Jobs Created

January 19, 2009

Obama plans to save or create three to four million jobs over the next two years.  The records of his predecessors:

Explaining Bubbles

January 10, 2009

Behavioral economics does a much better job than the standard models:

By borrowing the insights and methods of psychology, behavioral economics focuses on all the ways in which humans fail to act as the rational, self-interested beings that economic models call for – we aren’t good at thinking about the future, we’re susceptible to peer pressure, we overestimate our abilities and underrate the odds of bad things happening. It’s a set of traits that describes perfectly the behavior of many of the people who, in a cascade of self-defeating decisions, helped create the subprime crisis.