Arnold Kling has a post on the temper tantrums some progressives have been throwing and here is the concluding comments,
The important point is that Progressives are never wrong. Top-down reform is the only way to fix the health care system. Anthropogenic global warming is scientifically proven, and its solution requires strenuous exercise of political control over individual behavior. Deficit spending is necessary and sufficient to create jobs. Technocrats can make banks too regulated to fail. Markets without technocratic control are like adolescents without adult supervision. Individual happiness can be improved by political authorities using scientific knowledge. Concentrated political power is the wave of the future, and it is good.
I am not a populist. I fear the mob. But how can I fear the Progressives any less?
University of Chicago Professor John Cochrane explains the causes of the financial panic and how two mistakes turned what might have been a mild recession into a deep recession.
The short form is:
Failure to bailout Lehman Brothers after bailing out (or at least appearing to) Bear Stearns.
The chaos surrounding the TARP legislation.
Cochrane points out that the bankruptcy of Lehman was nothing special in an of itself. Many of Lehman’s operations were back up and running within days under new owners. Overall, it was unremarkable save for a few glitches here and there. What was really problematic though was that initially the government had signalled that it would bailout large financial entities under the “too big to fail” belief. Then when Lehman indicated it was in trouble the government not only didn’t act, it claimed it didn’t have the legal authority to act. Basically the belief that the government saw large financial entities were “too big to fail” was in serious doubt and people panicked.
After that the TARP mess just made things worse. As Cochrane puts it,
Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson, and President Bush got on television and said, basically, “The financial system is about to collapse. We are in danger of an economic calamity worse than the Great Depression. We need $700 billion, and we won’t tell you what we’re going to do with it. If you need a hint, we justmade it illegal to shortsell bank stocks.”
These speeches should be remembered as a case study in how to start a financial crisis, not how to relieve one. In the Washington context theymay havemade sense, and I understand and sympathize with the awful position that Bernanke and Paulson were in. I suspect that they wanted legal authority to bail out the likes of Lehman and they needed to scare Congress into giving themthemoney, even as stubborn rightwing fiscal conservatives like Barney Frank were saying impolite
things like, “No one in a democracy, unelected, should have $700 billion to spend as he sees fit.” Alas, the speeches scared everyone outside the Beltway too.
And these kinds of things did not start recently. As has been noted before this has happened before. In 1998 the government bailed out Long-Term Capital to some financial fall out. You can read about it here, but the bottom line was that a bail out was arranged because fairly large amounts of money were owed to Bear Stearns, Merrill Lynch, and Lehman Brothers.
Cochrane’s look at mortgage backed securities and how things went so wrong there is interesting as well.
Third, it hides risk and avoids regulations, which may be much of its design. An institution that issues short-term debt to hold mortgages is what we used to call a “bank.” Why call it an spv? Because the regulations assessed lower capital requirements on spvs. This structure allows investors who really do want higher risks and higher yields, but are constrained by regulations that specify types (commercial paper) and ratings of individual securities they must hold rather than focusing on portfolio risk. Thus the regulatory system ends up encouraging artificial obscurity and fragility.
It is often claimed that “free, deregulated markets failed,” bringing about the housing collapse and financial crisis. In fact, the free, relatively deregulated equities market absorbed massive losses this time, as last time, with relatively little turmoil. It was the regulated, supervised part of themarket that failed.
In a few posts I’ve noted that we can expect lower economic growth in the future and one reason is the enormous amounts of debt that the country has been taking on. Carmen Reinhart and Kenneth Rogoff layout why this is so here.
In previous cycles, international banking crises have often led to a wave of sovereign defaults a few years later. The dynamic is hardly surprising, since public debt soars after a financial crisis, rising by an average of over 80 per cent within three years. Public debt burdens soar owing to bail-outs, fiscal stimulus and the collapse in tax revenues. Not every banking crisis ends in default, but whenever there is a huge international wave of crises as we have just seen, some governments choose this route.
We do not anticipate outright defaults in the largest crisis-hit countries, certainly nothing like the dramatic de facto defaults of the 1930s when the US and Britain abandoned the gold standard. Monetary institutions are more stable (assuming the US Congress leaves them that way). Fundamentally, the size of the shock is less. But debt burdens are racing to thresholds of (roughly) 90 per cent of gross domestic product and above. That level has historically been associated with notably lower growth.
While the exact mechanism is not certain, we presume that at some point, interest rate premia react to unchecked deficits, forcing governments to tighten fiscal policy. Higher taxes have an especially deleterious effect on growth. We suspect that growth also slows as governments turn to financial repression to place debts at sub-market interest rates.
[...]
Another big unknown is the future path of world real interest rates, which have been trending downwards for many years. The lower these rates are, the higher the debt levels countries can sustain without facing market discipline. One common mistake is for governments to “play the yield curve” – as debts soar, shifting to cheaper short-term debt to economise on interest costs. Unfortunately, a government with massive short-term debts to roll over is ill-positioned to adjust if rates spike or market confidence fades.
Given these risks of higher government debt, how quickly should governments exit from fiscal stimulus? This is not an easy task, especially given weak employment, which is again quite characteristic of the post-second world war financial crises suffered by the Nordic countries, Japan, Spain and many emerging markets. Given the likelihood of continued weak consumption growth in the US and Europe, rapid withdrawal of stimulus could easily tilt the economy back into recession. Yet, the sooner politicians reconcile themselves to accepting adjustment, the lower the risks of truly paralysing debt problems down the road. Although most governments still enjoy strong access to financial markets at very low interest rates, market discipline can come without warning. Countries that have not laid the groundwork for adjustment will regret it.
This is why I’ve been seemingly wishy-washy on things like deficits and tax cuts. On the one hand tightening the belt by reducing spending could send the economy back into recession (assuming we are indeed out, if not it would just make the recession worse). If we raise taxes across the board, same thing. Yet if we keep spending as we are then we can expect lower growth for quite some time. Add on things like Social Security and Medicare and we have a very bleak picture indeed.
Rent seeking in economics is where firms or individuals seek economic rents (unearned profits) via the political process. Here is a nice example.
Senator Richard Shelby, the top Republican on the Senate Banking Committee, placed a blanket “hold” in part because of the feud pitting Airbus parent EADS and its partner Northrop Grumman against Boeing, his office said.
[...]
The European Aeronautic Defence and Space Company and its rival Boeing have been locked in a long-running rivalry to win a 35-billion-dollar contract for a fleet of new aerial refueling tankers.
The EADS/Northrop partnership would build the airplane in Shelby’s home state of Alabama but have accused the Pentagon of favoring Boeing in a draft request for proposal and warned they may withdraw from the competition.
[...]
Shelby is also “deeply concerned” that Obama may block the construction of an FBI center in Alabama to test improvised explosive devices — the “roadside bombs” that have killed hundreds of US soldiers in Iraq and Afghanistan.
And its always nice when they can put such a nice patriotic spin on it too,
“This decision impedes the US military, the intelligence community, and federal law enforcement personnel in their missions to exploit and analyze intelligence information critical to fighting terrorism and ensuring American security worldwide,” said Graffeo.
Where should we point the fingers for our current fiscal/economic mess? Keith Hennessey has a post that I tend to agree with. Hennessey looks at the opening statements from President Obama on his new budget,
The fact is, 10 years ago, we had a budget surplus of more than $200 billion, with projected surpluses stretching out toward the horizon. Yet over the course of the past 10 years, the previous administration and previous Congresses created an expensive new drug program, passed massive tax cuts for the wealthy, and funded two wars without paying for any of it -– all of which was compounded by recession and by rising health care costs. As a result, when I first walked through the door, the deficit stood at $1.3 trillion, with projected deficits of $8 trillion over the next decade.
Hennessey has a fairly long list of responses to this, but I want to try and keep this post somewhat short. Obama lists a number of reasons why the current problems we face aren’t his fault,
Medicare Drug Program
Tax Cuts
Iraq and Afghanistan
Recession (2 of them actually)
Now, how many of these are “Bush’s fault”? I’d say the first 3 can be partly blamed on Bush. But let us consider what Team Obama is going to do:
Medicare Drug Program—Keep it
Tax Cuts—Keep Most of them
Iraq and Afghanistan—Continue Bush’s policies.
Huh. Not all that much change if you ask me. What was Candidate Obama’s campaign slogan again?
And to be fair, if the Democrats were in charge during the Medicare Drug Program we’d have an even larger program than we do now. And regarding Iraq and Aghanistan, I’ve seen the claim that Obama’s first term could be considered Bush’s third term. So, even though Obama, ostensibly, could take different policy positions on several of things he claims are responsible for our current plight…he doesn’t.
WASHINGTON (AP) — The number of newly laid-off workers filing initial claims for jobless benefits rose unexpectedly last week, evidence that layoffs are continuing and jobs remain scarce.
The rise is the fourth in the past five weeks. Most economists hoped that claims would resume a downward trend that was evident in the fall and early winter.
I think that we are seeing the effects of ending Cash For Clunkers and other programs. Sure it was great for awhile where care sales were moved forward, but now that people have bought the cars, demend has become slack.
The Labor Department said Thursday that new claims for unemployment insurance rose by 8,000 to a seasonally adjusted 480,000. Wall Street economists had expected a drop to 460,000, according to Thomson Reuters.
The four-week average, which smooths fluctuations, rose for the third straight week to 468,750.
[...]
The number of people continuing to claim benefits was unchanged at 4.6 million. That data lags initial claims by a week.
But the so-called continuing claims do not include millions of people who have used up the regular 26 weeks of benefits typically provided by states, and are receiving extended benefits for up to 73 additional weeks, paid for by the federal government.
More than 5.8 million people were receiving extended benefits in the week ended Jan. 16, the latest data available, up from about 5.6 million the previous week. The extended benefit data isn’t seasonally adjusted and is volatile from week to week.
Calling the recession over may have been premature. And yes, I realize that unemployment is a lagging indicator. But consider that while personal income and disposable income are rising, personal consumption expenditures seem to be slowing down. Yes, GDP grew at 5.7% (advanced estimate) for the fourth quarter, but as James Hamilton notes, the fundamentals aren’t all that good.
Three-fifths of that Q4 GDP growth came from the fact that businesses were drawing down inventories more slowly than they had the quarter before. Firms sold $8.5 billion more goods (at a quarterly rate) in 2009:Q4 than they produced, and met those sales by drawing down inventories by $8.5 billion. This reduction in inventories counts as negative investment spending of -$8.5 billion at a quarterly rate (or -$34 B at the annual rate these numbers are typically reported) for purposes of calculating fourth-quarter GDP. Firms sold $34.8 billion more than they produced in 2009:Q3, which amounted to negative inventory investment of -$139 B at an annual rate for Q3. Since this component of investment spending went from -139 to -34, it counts as positive growth when you compare Q3 GDP with Q4 GDP. This mechanism alone contributed 3.4 percentage points to the 5.7% growth rate for real GDP reported for Q4.
In other words, investment decreased at a slower rate and made up the bulk of that 5.7% (about 60% of it). This not exactly what you call great news. Its like being on a ship and the captain comes on the intercom and says, “Great news, we are now sinking slower!” Or to put it yet a third way, suppose this was the only thing affecting a change in GDP, we’d have 3.4% growth in GDP because businesses are drawing down inventories to the tune of $8.5 billion in quarter four vs. $34.8 billion in quarter three. That isn’t something to consider great, and would be an explanation of why we see first time jobless claims rising.
Of course, we can’t continually draw down inventories without eventually starting to restocking them. So, there is hope. And as Prof. Hamilton notes, plugging in the new data into his recession indicator index the index is at 37.6% which indicates that the expansion probably started in 2009:Q3. And if the GDP numbers hold up for one more revision the index will likely fall below the 33% threshold for declaring the recession over and weak growth starting in 2009:Q3. But we can probably expect weak growth for sometime.
For quite some time now, there has been claims that autism in children has been linked to vaccines, namely the MMR vaccine. The reason for this, at least in part, was an article in the Lancet. That article has been formally withdrawn.
The scientific evidence since 1998 has been completely unable to find any link between autism and vaccines. Of course, this wont persuade any of the advocacy groups and the anti-vaccination movement will continue apace.
According to this story President Obama is planning on letting the Bush tax cuts and the ATM.
In the 2010 budget tabled by President Barack Obama on Monday, the White House wants to let billions of dollars in tax breaks expire by the end of the year — effectively a tax hike by stealth.
While the administration is focusing its proposal on eliminating tax breaks for individuals who earn $250,000 a year or more, middle-class families will face a slew of these backdoor increases.
[...]
If the provisions are allowed to expire on December 31, the top-tier personal income tax rate will rise to 39.6 percent from 35 percent. But lower-income families will pay more as well: the 25 percent tax bracket will revert back to 28 percent; the 28 percent bracket will increase to 31 percent; and the 33 percent bracket will increase to 36 percent. The special 10 percent bracket is eliminated.
Investors will pay more on their earnings next year as well, with the tax on dividends jumping to 39.6 percent from 15 percent and the capital-gains tax increasing to 20 percent from 15 percent. The estate tax is eliminated this year, but it will return in 2011 — though there has been talk about reinstating the death tax sooner.
[...]
Without annual legislation to renew the patch this year, the AMT could affect an estimated 25 million taxpayers with incomes as low as $33,750 (or $45,000 for joint filers). Even if the patch is extended to last year’s levels, the tax will hit American families that can hardly be considered wealthy — the AMT exemption for 2009 was $46,700 for singles and $70,950 for married couples filing jointly.
I don’t see how this wont be a campaign issue and it could be an expensive one for the Democrats.
Update II: And this one notes that Obama’s budget will extend Bush’s tax cuts for the middle class.
Update III: And here is part of the 2011 budget that addresses the Bush tax cuts (pages 39-40).
Allow the Bush Tax Cuts for Households Earning More Than $250,000 to Expire. In the last Administration, those at the very top enjoyed large tax breaks and income gains while almost everyone else struggled and real income for the middle class declined. Our Nation cannot afford to continue these tax cuts, which is why the President supports allowing those tax cuts that affect families earning more than $250,000 a year to expire and committing these resources to reducing the deficit instead. This step will have no effect on the 98 percent of all households who make less than $250,000.
This is what I thought the Obama Administration would likely do. Still, from a fiscal standpoint it is going to make the situation worse than better. Of course, considering the weak nature of the economy allowing the tax cuts to expire for everyone probably is not the best course either.
Once Again the CBO is bringing bad news to the Obama Administration. With the expiration of the AMT provisions at the end of 2009, an estimated 27 million people will be paying some amount of the AMT paying on average an additional $3,900 in taxes (granted the median tax increase is probably considerably less). Good news in terms of keeping the deficit low, probably bad news for the Democrats once people realize their taxes are going up solely due to inflation (i.e. you really aren’t richer, its just that inflation has pushed you into a higher tax bracket).
The number of people who will be subject to the alternative minimum tax (AMT) will increase dramatically in 2010 under current law. About 4.5 million taxpayers were affected by the AMT in 2009. That number has been kept relatively small by annual modifications to the AMT rules, but the most recent modifications expired at the end of calendar year 2009. Consequently, about 27 million taxpayers (see figure below)—one out of every six taxpayers—will be affected by the AMT in 2010, paying on average an additional $3,900 in tax. Nearly every married taxpayer with income between $100,000 and $500,000 will owe some alternative tax.
[...]
For the past four decades, the individual income tax has consisted of two parallel tax systems: the regular tax and an alternative tax, which was originally intended to impose taxes on high-income individuals who use tax preferences to greatly reduce or eliminate their liability under the regular income tax.
[...]
For most of its existence, the AMT has played a minor role in the tax system, accounting for less than 2 percent of individual income tax revenues (or 1 percent of total revenues) and affecting less than 1 percent of taxpayers in any year before 2000. Since then, the tax would have reached more and more taxpayers (because, unlike the parameters of the regular income tax, those of the AMT are not indexed for inflation), but lawmakers have intervened each year to slow that expansion. In addition, a series of reductions in the regular income tax enacted starting in 2001 would have caused even more returns to be subject to the AMT were it not for the series of temporary adjustments that lawmakers made to the alternative tax.
Now granted this is just a projection and quite a bit could happen between now and 2020. However, the idea that the Obama Administration is going to reduce the deficit by half simply isn’t all that likely without playing fast and loose with the numbers sort of reminiscent of the Bush Administration (projecting a high deficit number so that when the actual deficit comes in lower credit can be taken for reducing the deficit).
And the long term effects of this debt will act as a drag on the economy.
Those accumulating deficits will push federal debt held by the public to significantly higher levels. At the end of 2009, debt held by the public was $7.5 trillion, or 53 percent of GDP; by the end of 2020, debt is projected to climb to $15 trillion, or 67 percent of GDP. With such a large increase in debt, plus an expected increase in interest rates as the economic recovery strengthens, interest payments on the debt are poised to skyrocket. CBO projects that the government’s annual spending on net interest will more than triple between 2010 and 2020 in nominal terms (from $207 billion to $723 billion) and will more than double as a share of GDP (from 1.4 percent to 3.2 percent).
In other words, what the government spends on servicing its debt will double in real terms which means all other factors held constant the governemnt will have less money to spend on various services. Also, to the extent that the increased debt raises interest rates private investors will have to pay higher rates as well, thus on the margins various private investments that would have taken place wont. And that implies less output as well.
Moreover, CBO’s baseline projections understate the budget deficits that would arise under many observers’ interpretation of current policy, as opposed to current law. In particular, the projections assume that major provisions of the tax cuts enacted in 2001, 2003, and 2009 will expire as scheduled and that temporary changes that have kept the alternative minimum tax (AMT) from affecting many more taxpayers will not be extended.
In other words, the above graph looks the way it does, with the revenues and outlay trends being roughly the same trend and distance for most of the out years is that the Bush tax cuts are set to expire in 2010. With a sluggish recovery (if we are really in a recover) this is probably not a good idea. That is, the Obama Administration might very well be considering extending at least parts of the Bush tax cuts.
Consider what happened to the economy in 1937. Wages, profits and production were largely back at the 1929 level with unemployment still rather high by historical standards of the times. Roosevelt cut back on spending and cut WPA rolls. Unemployment jumped and the economy went back into recession. Raising taxes would have likely caused a similar result. And this was about 4 years after the end of the previous recession (i.e. the economy started growing again in early 1933). Will the Obama Administration want to risk even a moderate slow down to a weak recovery two years out from election? I’m thinking “No,” which means the deficit picture portrayed by the CBO is, if anything, optimistic.
Several months ago there was a bit of a flap between Greg Mankiw, Arnold Kling, Paul Krugman and Brad DeLong about how robust the recovery was going to be. Mankiw and Kling were pointing out that it is entirely possible the recovery might not be that robust. Mankiw cited the “unit root hypothesis” in economics and Kling explained how such a hypothesis could be seen as basically an over-investment in housing and that as a result resources needed to shift sectors which would take longer than has been typical in recessions in the past. Krugman called this view point evil. DeLong pointed to some data which someone noted relied on the economic growth after the Reagan tax cuts.
Well here we are and many economists are saying the recession is effectively over. But has the recovery been robust? I think you’d be hard pressed to find many who would make such a claim. Unemployment, while not rising is remaining stubbornly at 10%. While there was one good quarter of growth, the overall feeling is that was somewhat anomalous due to things like Cash for Clunkers (now defunct) and other policies. Also, when looking at things like business investment we see that things don’t look so good.
Now we have this article that indicates what frequent comments Drew has been seeing in his real life profession: small businesses are just not interested in expanding, hiring new workers, or doing much of anything.
A potential wave of new regulation and higher taxes may be scaring many businesses from hiring, prolonging any rebound in employment, say business groups and economists.
The prospect of increased federal and state regulation and taxes has been particularly disruptive to the hiring plans of small- and medium-sized businesses, which have historically generated about two-thirds of the nation’s jobs.
“I don’t really see the private sector hiring much in the next few months,” says Brian Bethune, an economist at Global Insight. “For the small-business sector there is just too much uncertainty about what happens beyond 2010.”
Not only is the Obama administration seeking to push through major overhauls of energy and health care policy, it is also expected to impose dozens of new workplace rules and raise income taxes.
[…]
In reporting that its small business optimism index fell for the second straight month in December, the National Federation of Independent Business Tuesday said members’ No. 2 reason for not expanding payrolls was the prospect of government policy initiatives.
Twelve percent said it was not a good time to expand because of the political environment. Over the next three months, 15 percent said they plan to reduce employment, while eight percent plan to create new jobs.
“We’re hearing it more and more from our membership,” says Bill Rys, the NFIB’s tax counsel. “At the federal level, there’s uncertainty about tax rates, health care costs, energy costs. You also have what’s going on at the state and local levels, with new fees and taxes. They’re reluctant to jump back in.”
Rys says the effect has been more pronounced in the past few months, perhaps mirroring the legislative progress of the massive health care reform bill, the highly-publicized Copenhagen climate change conference and new EPA rules on carbon emissions, as well as the approach of 2010, when the near decade-long Bush administration tax cuts are expected to expire.
[…]
According to the Bureau of Labor Statistics, companies with 1-4 employees lost 140,000 jobs in that period; firms with 10-19 employees shed 220,000 jobs. (That’s the most recent period covered by the data.)
Some of those jobs as well as new ones would normally be created in the coming year.
Coming out of the previous two recessions, companies in the two groups were responsible for net job gains relatively soon after the downturn had ended and picked up momentum as the recovery was established.
Note to the Obama Administration: You are doing it wrong. Creating more uncertainty, raising taxes, imposing more regulations and costs on employers is merely going to make them turtle up, not get moving. That last three paragraphs in particular point out that this is so and that predictions about a robust recovery were foolish. Further, the last two recoveries had significantly longer lags between the end of the recession and the recovery in employment.
I realize that as politicians a crisis is a great time to implement the changes you’ve always wanted to implement but didn’t have the support to do it, but it appears that it is hindering the economic recovery. It is prolonging the dismal outlook in the job market.
Greg Mankiw has 9 reasons on why an investment tax credit (ITC) is a good idea. The one that I think will resonate most with people is number 7,
7. So much for theory, but would it work? The cash-for-clunkers program is thought by many to have promoted, or at least accelerated, car purchases. An ITC would be similar, but it would apply to business investment rather than personal cars. Instead of targeting a very narrow, politically favored industry, it encourages investment broadly. It should have positive effects on aggregate demand in the short run and positive effects on aggregate supply in the medium and longer run.
My big complaint about cash-for-clunkers was that it mere shifted forward car purchases. It was not likely to stimulate new car purchases for people who already had a car they were happy with. At best it moved forward sales that were going to happen in the coming months.
We’d see the same thing with investment goods, but unlike cars investment is something that is productive.
Another aspect of the problem with investment that I think is not getting much attention is covered by this part,
Part of the reason is that the policy environment seems adverse to business. I am referring here to a group of policies that include higher minimum wages, the seeming retreat from free trade, proposed mandates to provide employees health insurance, higher prospective energy costs from climate change regulation, and the likelihood of higher future tax rates resulting from the huge fiscal imbalance we are now experiencing. All of these factors have worked in concert to depress business investment.
Most of these are seen as major policy goals by the Obama Administration. When the economy was strong these goals were not unreasonable. At least they are consistent with goals of past Democratic party candidates and presidents. However, the economy is not strong. Fostering an environment for robust economic growth should have been President Obama’s primary concern. Granted, failure to implement campaign promises would leave him vulnerable to attack by Republicans, but the rejoinder to such attacks is obvious: The economy was in the midst of a very bad recession, yes I put a hold on my stated policy goals as the facts on the ground changed. How do you argue with that? Its simple, straight forward, and sensible.
Mankiw also links to the WSJ article by Hal Varian. The opening lines are very good, IMO.
These days it seems like it is our patriotic duty to consume more. And if we don’t choose to spend more money ourselves, the government will do it for us.
But wait a minute. Isn’t it excessive spending that got us into this mess in the first place? Spending more now seems like drinking Scotch to cure a hangover.
This is a point that my co-blogger Dave Schuler has brought up a few times. GDP is comprised, roughly, of 70%+ consumer spending. And that part of our problem was that such a level of consumer spending was because of the run up in housing prices and easy credit. Now we have neither so how can we maintain such consumption expenditures let alone increase them?
So we need to see the recovery start somewhere else. We can’t expect it in personal consumption expenditures such as retail sales. Real estate and construction are pretty much out for who knows how long. Why not investment spending?
In the modern economy, there are four sources of demand (consumption, investment, government and exports) and two sources of supply (domestic production and imports). When a component of demand declines, supply will ultimately have to decline as well.
In the case of the U.S. economy now, the double-whammy of wealth shocks from the real-estate bubble and the stock-market crash has made consumers understandably cautious. Quite sensibly they want to consume less and save more.
In an ideal world, an increase in savings would automatically lead to an increase in investment. When consumers put more of their money in their savings accounts, the funds would be lent out to finance the production of factories, machines, computers and other forms of physical capital. These capital investments make more consumption possible in the future which is, after all, why people choose to save.
It is not just investment in physical capital that matters. Savings can also be recycled as student loans, which allow for the accumulation of human capital by increasing the supply of doctors, engineers and skilled workers of all kinds.
Unfortunately, savings are currently not getting translated into investment for three reasons. First, one of the largest categories of physical capital is real estate, and we have already overinvested in that area. Second, businesses are reluctant to invest in new plant and equipment due to the weakening economy. Third, the sorry condition of bank balance sheets has made them reluctant to lend. The net result is that money is piling up in ultrasafe assets like Treasury bills, without being invested in ways that would build a more productive economy.
[…]
That brings us to government expenditure, which is getting most of the press. The danger with this form of stimulus is twofold: First, it takes too long for the government spending to kick in, and second, spending may easily focus on pork-barrel projects that have little inherent value.
If we are going to have another round of stimulus I think it could be done much worse than implementing an investment tax credit. Yes its tossing a bone to corporate America (big and small), but here’s a hint for all of you who don’t like this: corporate America is who employs most of the people in the U.S.
UPDATE (James Joyner): An excerpt from the story for those who can’t click through or in case the story goes away:
Matthew Freeman is struggling to move on with his life, six years after being convicted of having sex with a high school girlfriend who was one year below the legal age of consent. Freeman, who is required to register as a sex offender, is facing a new criminal charge that accuses him of illegally living within 1,000 feet of a school.
His latest trouble started as Freeman was shooting hoops in his Pittsfield Township driveway Aug. 3. According to a police report, a state trooper pulled up to Freeman’s house across the street from Ann Arbor’s Carpenter Elementary School, where children were on the playground at 7:30 p.m. Freeman told the trooper Pittsfield Township police told him “it shouldn’t be a problem” to live near the school. He had registered with Pittsfield police 27 days earlier using his family’s Dalton Avenue address. Freeman told the trooper he was on the Michigan Sex Offender Registry because he had “sex with his 15-year-old girlfriend when he was 17.” He also said his girlfriend’s mother got “upset with him and pressed charges.” The trooper aimed a laser gun at the school building and determined Freeman was living 326 feet away, the report said, breaking the law.
Freeman, 23, is charged with a school safety zone residency violation, a misdemeanor punishable by up to a year in jail. He was arraigned Dec. 4 and is scheduled to return to court Friday. “I’m outside sweating hard, playing basketball, working on my drills,” he said. “I ain’t looking at no kids. I can’t even go outside and play basketball on my own hoop?”
[...]
Freeman pleaded guilty to fourth-degree criminal sexual conduct involving force or coercion and was sentenced to probation in September 2003, court records show. By pleading guilty to the misdemeanor charge, he admitted to having sex with his 15-year-old girlfriend, who was two years younger. In Michigan, the legal age of consent is 16. Freeman violated his probation by going near his girlfriend and stealing some video games from a store, records show. As a result, he was sentenced to 90 days in jail in January 2004. The two are no longer dating.
Freeman will remain on the registry until Aug. 17, 2028, according to the registry’s Web site. Had he successfully completed his probation, he could have petitioned the court to be removed from the registry after 10 years and also wouldn’t have been subject to the school safety zone violation.
Truly a bizarre case.
We can argue, I suppose, as to whether a 15-year-old has the maturity to consent to sex. Granted, 15-year-old girls in our society were commonly married with children within living memory. But we’ve simultaneously pushed up adolescence and physical maturity through diet and lifestyle changes and delayed emotional maturation by coddling kids and extending a dependent relationship with parents well into their 20s. But it’s one thing to say that a 15-year-old isn’t equipped to give informed consent when dealing with pressures from a grown man and quite another to say she can’t do it with a high school boyfriend.
It’s worth noting that Freeman is not a model citizen. He violated his probation by committing an unquestioned crime (theft). But it’s hard to see how our chances of rehabilitating him increase by labeling him as the worst form of pariah.
An economic bubble (sometimes referred to as a speculative bubble, a market bubble, a price bubble, a financial bubble, or a speculative mania) is “trade in high volumes at prices that are considerably at variance with intrinsic values”. (Another way to describe it is: trade in products or assets with inflated values.)
