Paul Krugman has taken some rather interesting stances on the fiscal situation here in the U.S. First up is a piece entitled Fiscal Train Wreck from March 2003,

With war looming, it’s time to be prepared. So last week I switched to a fixed-rate mortgage. It means higher monthly payments, but I’m terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits.

[…]

Last week the Congressional Budget Office marked down its estimates yet again. Just two years ago, you may remember, the C.B.O. was projecting a 10-year surplus of $5.6 trillion. Now it projects a 10-year deficit of $1.8 trillion.

And that’s way too optimistic. The Congressional Budget Office operates under ground rules that force it to wear rose-colored lenses. If you take into account ? as the C.B.O. cannot ? the effects of likely changes in the alternative minimum tax, include realistic estimates of future spending and allow for the cost of war and reconstruction, it’s clear that the 10-year deficit will be at least $3 trillion.

[…]

That may sound alarmist: right now the deficit, while huge in absolute terms, is only 2 ? make that 3, O.K., maybe 4 ? percent of G.D.P. But that misses the point. “Think of the federal government as a gigantic insurance company (with a sideline business in national defense and homeland security), which does its accounting on a cash basis, only counting premiums and payouts as they go in and out the door. An insurance company with cash accounting . . . is an accident waiting to happen.” So says the Treasury under secretary Peter Fisher; his point is that because of the future liabilities of Social Security and Medicare, the true budget picture is much worse than the conventional deficit numbers suggest.

What does he say today (well at least in August 2009)? Well, lets take a look,

I respect Jim Hamilton a lot, so I take his criticism seriously — and he raises questions that others raise too about my relatively sanguine assessment of the debt situation. Yet I think that he and others are quite wrong, on several counts.

[…]

But let’s take a slightly later start date: in 1950, federal debt in the hands of the public was 80 percent of GDP, which is in the ballpark of what we’re looking at for 2019. By 1960 it was down to 46 percent — and I haven’t heard that anyone considered America a debt-crippled nation when JFK took office.

So how was that possible? Was it through drastic cuts in defense spending? On the contrary: we’re talking about the height of the Cold War (with a hot war in Korea along the way), and federal spending actually rose as a share of GDP. So yes, it wasn’t entitlement programs, but it wasn’t exactly discretionary either.

How, then, did America pay down its debt? Actually, it didn’t: federal debt rose from $219 billion in 1950 to $237 billion in 1960. But the economy grew, so the ratio of debt to GDP fell, and everything worked out fiscally.

[…]

Jim gets scary numbers about the debt burden by assuming that we’ll have to pay off the debt in 10 years. But why would we have to do that? Again, the lesson of the 1950s — or, if you like, the lesson of Belgium and Italy, which brought their debt-GDP ratios down from early 90s levels — is that you need to stabilize debt, not pay it off; economic growth will do the rest. In fact, I’d argue, all you really need to do is stabilize debt in real terms.

Note that in 2003 Krugman was just fine looking at the 10 year budget predictions. Now, why that’s silly we just need to alter our perspective. And the new post mentions nothing about Social Security and Medicare whose fiscal/actuarial position has not changed appreciably since 2003.

Now some might argue, and indeed in the comments to other posts people have argued, that during the fat years you trim the deficits or best of all run surpluses and in the lean years run the deficits. Sure, that is a some what simplified version of Keynesian fiscal stimulus. My response is lets make a list of the two situations,

View from 2003:

1. The economy was in recovery.
2. The fiscal outlook was a $1.8 trillion deficit.
3. Social Security and Medicare were in serious actuarial imbalance (tens of trillions of dollars).

View from 2009:

1. The economy is in recession.
2. The fiscal outlook is $9 trillion deficit.
3. Social Security and Medicare were in serious actuarial imbalance (tens of trillions of dollars).

The view in 2003 terrified Krugman, so much so that he took personal action regarding his own finances. Switch to 2009 and, meh guys like Prof. Hamilton are just being alarmists. The view from 2009 is pretty much worse than it was in 2003, and it seems to me that yes, if one was worried about the fiscal outlook in 2003, then in 2009 it is even more worrisome. I agree with James Hamilton,

If the government tries to double taxes on people like me, it’s in real political trouble. If it doesn’t try to double taxes on people like me, it’s in real solvency trouble.

It looks like we may have a problem here.

Thanks to Scrivner.net for the links, and their article is also well worth reading. And yes, I know that this stuff is rather old, but…well Krugman is basically saying the samethings today he did in August, “No worries, we’ll grow our way out of it.”

Well looks like the entire town of New London, Conn. is going to get screwed by Pfizer.

“Look what they did,” Mr. Cristofaro said on Thursday. “They stole our home for economic development. It was all for Pfizer, and now they get up and walk away.”

That sentiment has been echoing around New London since Monday, when Pfizer, the giant drug company, announced it would leave the city just eight years after its arrival led to a debate about urban redevelopment that rumbled through the United States Supreme Court, and reset the boundaries for governments to seize private land for commercial use.

Pfizer said it would pull 1,400 jobs out of New London within two years and move most of them a few miles away to a campus it owns in Groton, Conn., as a cost-cutting measure. It would leave behind the city’s biggest office complex and an adjacent swath of barren land that was cleared of dozens of homes to make room for a hotel, stores and condominiums that were never built.

[...]

After Pfizer completed its $67 billion acquisition of Wyeth, another drug giant, in October, Ms. Power said, “We had a lot of real estate that we had to make strategic decisions about.” She said Pfizer would try to sell or lease its buildings in New London and would “continue to pay our taxes to the city as scheduled.”

The complex is currently assessed at $220 million, said Robert M. Pero, a city councilman who is scheduled to become mayor next month. The company pays tax on 20 percent of that value and the state pays an additional 40 percent, Mr. Pero said. That arrangement is scheduled to end in 2011, around the time Pfizer, which is currently the city’s biggest taxpayer, expects to complete its withdrawal.

“Basically, our economy lost a thousand jobs, but we still have a building,” Mr. Pero said. Then again, he added, “I don’t know who’s going to be looking for a building like that in this economy.”

Basically you suck Mr. Pero. Good job wrecking your town’s economy. Not only has your economy lost thousands of jobs you’ve gone out and wrecked considerale amounts of private property…for nothing. On top of this you’ve spent millions of dollars that could have been spent elsehwere.

Mr. Pero said that he was offended that Pfizer did not notify city officials about the decision before Monday or give them a chance to argue against it or even fully understand it.

Oh the irony. Hmmm how did Ms. Kelo feel?

The Urban Institute’s Eugene Stuerle is not very happy with the health care expansion legislation that is likely to be passed into law. Stuerle argues that the legislation violates the standards of equal justice.

Of course, families in this income bracket pay far more than $14,700 for health care. They get hit by uninsured expenses or covered expenses they have to share-perhaps an average of $5,100 with the $14,700 policy just noted. They also pay fairly large amounts of tax to cover others, such as retirees. In fact, Americans spend about 24 percent of monetary income (wages and interest and the like) on health care. Using a more familiar metric, the total comes to 16 percent of the gross domestic product (GDP), though GDP includes many items that aren’t typically reported as income (such as the rent you save by owning a home).

Congressional health reformers believe that most households shouldn’t pay that much. They propose something closer to tithing. That way, no more than a tenth or an eighth of household income would go to purchase health insurance. This has a nice political ring to it, but here’s the reality: the 24 percent burden is rising and can’t drop without lower cost growth. Congress can only change who pays or temporarily borrow more from China and other creditors.

The problem gets serious when these arithmetical contradictions get woven into legislation. And we’re already on a slippery slope there.
Take the Senate Finance Committee efforts at health reform that have garnered so much attention. Under one version, households with $54,000 of income would get a subsidy of almost $10,000 toward the $14,700 health insurance policy that Congress has decided that they can’t afford. The first catch 22 is that since these subsidies are so expensive, Congress plans to exclude from getting the subsidy those households that get health insurance in lieu of higher cash wages from their employer.

This is unfair. It violates the fundamental principle of equal justice. People in similar circumstances should be treated similarly under the law.

The notion of justice here that Stuerle is referring to is often called horizontal equity and holds that people in similar circumstances should be treated similarly. In this case they are not.

There is also the distorting effect that related penalty on not providing health insurance for workers. There is a $400 cap on the penalty in one case. Could this lead to employers who are in that situation dumping their workers health care and taking the penalty? And, if you have less than 50 employees you are exempt from the penalty, and this provides a subisidy to small businesses.

Then there is the tax subsidy for employer provided benefits.

Here’s yet another complication. Congress is holding fast to today’s regressive tax subsidy for employer-provided health insurance, which can be worth $2,000 to $6,000 per family. This benefit, an exclusion from tax of compensation received as health insurance, would be valuable enough to some employers—especially those with highly paid employees who aren’t eligible for the new individual subsidies—to keep them from dropping insurance coverage. It is also probably one reason why the Congressional Budget Office estimated that a Senate Finance Committee version of health reform would cause a drop of only about 3 million in employer-provided coverage over the next 10 years. John Shields and Randy Haught of the Lewin Group, in a study for the Peter G. Peterson Foundation, estimated that when fully implemented, this same Senate Finance bill would cause one set of employers to drop insurance coverage for 19 million people but another set to add coverage for 12 million.

Considering the new and old subsidies together gets complicated. Still, many low- and middle-income earners paying through an employer by accepting lower cash wages would lose out big time. They would get thousands of dollars less in subsidy than families making an equivalent amount of total compensation in cash and then getting insurance from the type of insurance exchange that the reform bills would establish.

All in all, the current legislation is going to have many bizzare incentives and it could very well result in less desirable outcomes. For example, what if small employers who grow over time simply never offer health insurance like large employers today? If the penalty is not sufficiently large then these firms will essentially be getting a subsidy as will the workers. A wealth transfer from those who do work for employers who provide health care benefits to those who do not.

And the current legislation completely fails to address the issue of cost. So when President Obama stated,

Soaring health care costs are unsustainable for families, they are unsustainable for businesses, and they are unsustainable for governments, both at the federal, state and local levels.

It wasn’t serious enough to actually warrant addressing. And if one were to look at history we see that government has a rather bad record when it comes to health care and costs. As my co-blogger Dave Schuler has noted, for the past several years Congress has failed to reduce Medicare reimbursement rates. Also, the U.S. takes up the health care issue, legislatively, about once every decade or two. So the idea that the issue of costs will be addressed later is not very reassuring considering it might be 15 years later. At which time we can probably expect health care to be consuming at least 20 – 25% or GDP and who knows how much of our federal budget. And given the inability of politicians to reduce spending it will likely add to our already large debt and growing deficits. Or to put it differently, the trillion dollar deficits? Get used to them. You thought Bush was a spendthrift, you ain’t seen nothing yet.

This is why I don’t consider the legislation passed by the House of Representatives and what the Senate is working on to be health care reform. It will expand and entrench our current system. A system that people have already agreed is broken. Will it be easier to reform the cost side of the issue when you take the current system and expand and further entrench it? Such thinking is simply delusional. Refroming any system will create losers as well as winners. My guess is that the winners will be more motivated, a smaller group, and have better funded lobbyists.

So I agree with Eugene Stuerle when we rights,

Done the right way, I believe that Congress could get more equal justice, higher levels of basic insurance coverage for Americans, and lower costs all in the same package.

I agree from a theoretical perspective this is possible, but from a politically feasible standpoint I’m more inclined to think it is impossible.

The recently passed health care “reform” noted by James below is going to have another impact some have noted, but many have not given much thought too. It will, in effect, make labor more expensive. When something becomes more expensive for firms then tend to use less of it. They will substitute away from it if possible, or failing that hire fewer workers, and in some cases simply shut down. Other firms might relocate to other countries. The bottom line effect is to make employing labor more costly. Not exactly a brilliant move when the unemployment rate has just hit 10.2%.

This will also have a further adverse impact on the fiscal situation. To the extent that the labor market takes longer to recover because of this legislation tax revenues will be lower, and thus the deficit higher and the public debt will grow faster. This kind of effect is probably not included in the CBO’s $1.1 trillion dollar cost of health care “reform”.

It looks like the Obama Administration’s brilliant political jujutsu move of using “jobs saved or created” is making its way around some of the economics blogs again. First up is Brad DeLong’s attack on Allan Meltzer. Meltzer wrote the following,

There is no greater recognition of the failure of the stimulus program to create jobs than the efforts to mislead the public into believing the program had saved thousands, or millions, of jobs. One can search economic textbooks forever without finding a concept called “jobs saved.” It doesn’t exist for good reason: how can anyone know that his or her job has been saved? The Administration can make up any number it pleases. The number has no meaning…

Brad points to this partial quote by Milton Friedman,

Suppose the [Federal Reserve] System… had accompanied the measure by purchase of government securities [for cash]… as called for by the “classic” remedy for an internal drain…. [L]et $1 billion be the amount…. What would have been the consequence?… Reserve purchases of $1 billion… would have meant an increase of $1,330 million in high-powered money… would have permitted a multiple expansion of deposits…. Even if… the deposit ratios would have fallen as much as they did–and for the deposit-currency ratio, the fall in so short a time was the largest on record–the result would have been to cut in half the decline in the stock of money…. Only a moderate improvement in the deposit-currency ratio–a decline from 8.95 to 7.10 instead of 6.47–would… have enabled the stock of money to be stable…

You might be wondering, “What the….?” Well, what Friedman is saying is that if the Fed had taken expansionary policy with regards to the money supply it would have stopped the Great Depression, or at least it wouldn’t have been Great, and probably not even a depression. In other words, isn’t Friedman doing the samething that Meltzer is saying is impossible?

Well it depends. The above quote it from The Great Contraction and I haven’t read it and so I don’t know the context in which Friedman couched his argument or what is missing in the ellipses in the quote Prof. DeLong has quoted. But, if Friedman is making an analysis given a specific model, then his argument might be valid…in the context of that model. In fact, Prof. DeLong writes,

You can critique models. You can critique parameters. You can critique parameters. You can critique how the calculations are done, but you cannot deny their existence, for the kind of counterfactualcalculations [sic] that Milton Friedman does are, of course, the steady diet of what economists and other policy analysts do every day.

This leads me to believe that, indeed that Friedman is making his statements within the context of a specific model.

Paul Krugman decides to pile on by making the following comments,

But it’s not just Meltzer — Greg Mankiw has done the same thing.

They should be ashamed of themselves.

The Obama administration’s “jobs created or saved” is just a way of saying “other things equal” in non-economese. Of course it makes sense to ask how many more people are working than would have been the case without a given policy — and every administration makes assertions along those lines. During the 2001 recession and its aftermath, how many times did the Bush administration claim that the recession would have been worse without its tax cuts? And while many of us quarreled with that claim, I don’t think I ever argued that other-things-equal arguments are nonsense on their face.
The willingness of conservative economists to fall in line behind such cheap shots says something sad about them, not about the Obama administration.

Mankiw responds,

Here is what I wrote on the topic last February:

The 4 million job number is a counterfactual policy simulation of what the stimulus will do based on a particular model of the economy. As such, I have no objection to someone citing it in a policy discussion. In fact, macroeconomists use models to generate figures like this all the time. I have even done it myself.

But as an answer to the question “how can the American people gauge whether or not your programs are working?… What metric should they use?”, citing the 4 million job figure is a non sequitur, or more likely a diversion. A metric has to be measurable, and the actual number of jobs “created or saved” by the policy will never be measurable from any data source.

That is, I do not object to claims such as,

A: “Based on our models of the economy, we believe there would be X million fewer jobs today without the stimulus.”
But it is absurd to suggest that you can say,

B: “We have measured how many jobs the stimulus has saved or created, and the number is X.”

Economists are capable of making statements such as A, but it is beyond our ken to make statements such as B. Statement B is,of course, much stronger than statement A, as it purports to be based on data rather than on models. Unfortunately, we are hearing statements like B much too often from administration officials. A good example is here, where can you “learn” that 110,185.36 jobs have been created or saved in California alone.

Yes that is right, because of Obama’s brilliant policy there is a 0.36 person employed now that otherwise wouldn’t be employed. Of course, the use of the phrase “jobs saved or created” is baloney. If the President or his spokespeople had said, “Well, according to our analysis we think it is likely that 4 million jobs will be saved or created with this stimulus package…” they’d be home free. But that isn’t what they say. This is what they say,

Question: The American people have seen hundreds of billions of dollars spent already, and still the economy continues to free-fall. Beyond avoiding the national catastrophe that you’ve warned about, once all the legs of your stool are in place, how can the American people gauge whether or not your programs are working? Can they — should they be looking at the metric of the stock market, home foreclosures, unemployment? What metric should they use? When? And how will they know if it’s working, or whether or not we need to go to a plan B?

Answer: I think my initial measure of success is creating or saving 4 million jobs. That’s bottom line No. 1, because if people are working, then they’ve got enough confidence to make purchases, to make investments. Businesses start seeing that consumers are out there with a little more confidence, and they start making investments, which means they start hiring workers. So step No. 1, job creation.–emphasis added

Whoops.

Back when talks about bailing out General Motors started one potential issue was that GM would “encouraged” to make decisions based on political considerations vs. a sound business plan. Looks like there is evidence for such concerns with this story of how Montana’s Congressional Representative and two Senators are pushing to get a contract reinstated with a Montana palladium mine.

Montana Rep. Denny Rehberg was no fan of the $58 billion federal rescue of General Motors Co., saying he worried taxpayer money would be wasted and the restructuring process would be vulnerable to “political pressure.” Now the lawmaker says it’s his “patriotic duty” to wade into GM’s affairs.

Along with Montana’s two Democratic senators, the Republican congressman is battling to get GM to reinstate a contract with a Montana palladium mine nullified in bankruptcy court. “The simple fact is, when GM took federal dollars, they lost some of their autonomy,” Mr. Rehberg says.

Translation: I might lose votes next election so whether reinstating this contract makes sound business sense or not, I’m going to use my influence to get in reinstated and screw the tax payers.

Federal support for companies such as GM, Chrysler Group LLC and Bank of America Corp. has come with baggage: Companies in hock to Washington now have the equivalent of 535 new board members — 100 U.S. senators and 435 House members.

Yes, and those 535 new board members don’t answer to shareholders, they answer to their constituents. Obviously these new board members are going to be making very good business decisions. Just look at the U.S. budget….uhhhmmm…look at Social Security….hmmm…Medicare, wait no don’t look! In fact, these aren’t the droids you are looking for either. Move along now.

Some more juicy bits from the article,

In May, even before the government’s ownership became official, lawmakers erupted when GM disclosed it planned to produce a new subcompact car at its factories in China. Under congressional pressure, GM dropped those plans and promised instead to retool an existing U.S. facility in Michigan, Wisconsin or Tennessee for the new model.

Lawmakers from those states demanded and received high-level meetings in Washington to quiz GM on the criteria for site selection and to tout their states. GM in the end picked a site in Michigan.

That same month, GM dealer Pete Lopez in Spencer, W.Va., received notice that GM was giving him just over a year to shut down his Chevy, Pontiac and Buick dealership, which he’d acquired two years earlier. GM’s move to shutter more than 1,300 dealerships — about one-quarter of its network — was central to its restructuring because it cleared out underperforming showrooms and brought the network more in line with its shrunken sales.

With an assist from his mayor, Mr. Lopez took his complaint straight to one of his state’s senators, Jay Rockefeller, the Democratic chairman of the powerful Commerce Committee.

Sen. Rockefeller sent a letter to GM headquarters on Mr. Lopez’s behalf, according to a staff aide. He arranged for Mr. Lopez to come testify before a Senate panel in early June, alongside GM Chief Executive Frederick “Fritz” Henderson. The senator introduced the two men, giving Mr. Lopez a chance to make a personal pitch.

[…]

In addition to the dealership issue, lawmakers have jumped into a union fight that pits GM and Chrysler against two trucking companies that haul new cars around the country. The auto makers want to give some of the work to cheaper nonunion contractors. But that raised the ire of lawmakers who support the International Brotherhood of Teamsters.

Rep. Dale Kildee, a Democrat from Michigan, sent letters on Sept. 30 to the chief executives of both GM and Chrysler, demanding they explain their positions and advising them to stick with their unionized carriers. At least four other lawmakers sent similar letters.

[…]

GM for years was supplied by the Montana-based Stillwater Mining Co., which bills itself as the country’s only supplier of the precious metal. In early July, Frank McAllister, the mine’s chief executive, received news that GM, as part of its bankruptcy proceedings, planned to sever its ties with Stillwater in favor of cheaper suppliers in Russia or South Africa.

“I thought, for heaven’s sake, this doesn’t make any sense,” says Mr. McAllister. “Taxpayer dollars are keeping GM alive, just so it can turn away from U.S. workers?”

[…]

“I was elected to represent the interests of Montana, not General Motors, which is something that GM should have considered before letting the federal government assume control of their company,” Rep. Rehberg said recently.

Government Motors the new welfare program of the Obama Administration.

I was reading the review of Capitalism over at Reason and at the end it had this,

One final note: Just before the film started, Moore asked the audience to turn off any recording devices because the studio did not want bootleg versions of the film getting around. Apparently this socialism stuff has its limits.

I had to laugh. Frankly I think everyone who wants to watch the movie should show Mr. Moore exactly how much they support him and download it off the internet.

While it is good news that the economy grew last quarter I think claims that the recession is over are premature. Why? Because I think the last quarter’s numbers are due to gimmicks by the Obama Administration as was discussed last night on OTB Blog Radio and also when looking at this post by Dave Shuler at the Glittering Eye. Namely the Cash for Clunkers program; when one looks closely at the Bureau of Economic Analysis’ release on GDP there is this,

Real personal consumption expenditures increased 3.4 percent in the third quarter, in contrast to a decrease of 0.9 percent in the second. Durable goods increased 22.3 percent, in contrast to a decrease of 5.6 percent. The third-quarter increase largely reflected motor vehicle purchases under the Consumer Assistance to Recycle and Save Act of 2009 (popularly called, “Cash for Clunkers” Program). Nondurable goods increased 2.0 percent in the third quarter, in contrast to a decrease of 1.9 percent in the second. Services increased 1.2 percent, compared with an increase of 0.2 percent.

In other words, remove the Cash for Clunkers program and the increase would likely be much, much smaller.

We also have this story that notes the fall in consumer spending once the Cash for Clunkers program stopped.

On a real (inflation-adjusted) basis, consumer spending sank a seasonally adjusted 0.6% in September, a reversal from the 1% gain seen during in August, the government’s data showed. It was the largest decline in spending since December.

[…]

Despite overall growth in the economy in the third quarter, incomes aren’t growing and jobs are still being lost at a rapid pace.

“The labor market remains challenging and until we see real improvement, sustained wage gains will be elusive,” wrote Adam York, economist with Wells Fargo Securities.

The way I read that is that it is likely too premature to say that the recession is over.

We can also see this by looking at the BEA’s release on personal income and expenditures. No matter how you look at the data, nominal, real, or chained 2005 dollars personal consumption expenditures have dropped in September.

Purchases of motor vehicles and parts accounted for most of the decrease in September and for most of the increase in August, reflecting the impact of the federal CARS program (popularly called “cash for clunkers”). The program, which provided a credit for customers who purchased a qualifying new, more fuel efficient auto or light truck, ended on August 24, 2009…. Purchases of nondurable goods increased 0.5 percent in September, compared with an increase of 0.9 percent in August. Purchases of services increased 0.1 percent, compared with an increase of 0.2 percent.

Note that the largest increase is for consumer durables. These are goods that last and as such the consumers who bought these goods will not be buying them again and there is no longer any subsidy for other consumers to make similar purchases.

Another gimmick is the subsidy for home buyers. A first-time home buyer can get an $8,000 tax credit when purchasing a home. While this provides a stimulus for the housing market and the related industries, it is unlikely that this sector of the economy is going to be one that provides substantial growth for the future. The past contributions from the housing/real estate market were the result of a bubble. As such, the economy is trying to move resources out of that segment of the economy. This kind of subsidy merely slows that process down and prevents those resources from being moved to whatever sectors might provide future growth.

Jeremy Siegel of the Wharton School looks at the claims that the Efficient Market Hypothesis (EMH) is the cause of the current crisis and rejects these claims. The main part of his argument is,

But is the Efficient Market Hypothesis (EMH) really responsible for the current crisis? The answer is no. The EMH, originally put forth by Eugene Fama of the University of Chicago in the 1960s, states that the prices of securities reflect all known information that impacts their value. The hypothesis does not claim that the market price is always right. On the contrary, it implies that the prices in the market are mostly wrong, but at any given moment it is not at all easy to say whether they are too high or too low.

Now, a naïve reading of this might be that markets incorporate all information that has an impact on the price of a security. This is an inaccurate reading. Consider the weak form of the EMH,

In weak-form efficiency, future prices cannot be predicted by analyzing price from the past. Excess returns can not be earned in the long run by using investment strategies based on historical share prices or other historical data. Technical analysis techniques will not be able to consistently produce excess returns, though some forms of fundamental analysis may still provide excess returns. Share prices exhibit no serial dependencies, meaning that there are no “patterns” to asset prices. This implies that future price movements are determined entirely by information not contained in the price series.–emphasis added

Note that last part. Price movements are determined by information not contained in the price series. If the failure of rating agencies to accurately reflect the actual risk of a security is not in the historical information, then it cannot be anticipated by market participants and will move asset prices in an unpredictable way, which is why the above definition of the EMH continues with, “Hence, prices must follow a random walk.”

Even a bubble, while anomalous, is permissible under the weak form of the EMH as a rare statistical event. So the mere fact that there is a bubble does not render the hypothesis moot either. Still, as Prof. Siegel notes, this does not absolve the various CEOs, regulators and politicians of responsibility. To use Donald Rumsfeld’s categorization, there are known knowns, known unknowns and unknown unknowns. It is the latter two categories that can lead you to ruin, especially if you pretend that the first category is sufficient to allow you to earn excess profits.

The New York Times has an interesting multiple choice question regarding how to spend money to help stimulate the economy,

If you wanted to help the economy and you had $14 billion to bestow on any group of people, which group would you choose:

a) Teenagers and young adults, who have an 18 percent unemployment rate.

b) All the middle-age long-term jobless who, for various reasons, are not eligible for unemployment benefits.

c) The taxpayers of the future (by using the $14 billion to pay down the deficit).

d) The group that has survived the Great Recession probably better than any other, with stronger income growth, fewer job cuts and little loss of health insurance.

The New York Times notes that the Obama Administration has decided to go with option d. And this spending will follow a 5.8% cost of living increase from this past year. Now granted, Social Security recipients are scheduled to get no cost of living increase next year, because they received such a large one this year, but still is this the best way to spend $14 billion? Give it to people who are not productive and have already gotten a nice raise? Especially when we have options a and b out there?

I have to agree with Rosanne Altshuler, this is nothing more than “pure pandering to the elderly”. Change you can believe in.

I periodically hear this during presidential campaigns and when various elected officials are trying to push a green policy, often in response to global warming.

Because of [insert environmental problem here] we need to pursue a policies that will promote [insert one or more alternative fuel/energy sources here]. And not only will it address [the environmental problem noted above], but it will also reduce our demand for foreign oil, which often goes to the terrorists, but it will also promote job growth.

I’ve always found this argument to be extremely annoying. Why? Because anyone who has sat through intermediate micro economics should know that it is just simply bunk.

Intermediate micro is where you are introduced to the concept of relative prices. Typically, it is in a “two good world”. This simplification allows the instructor to draw graphs of indifference curves and budget constraints. And the point of tangency between the budget constraint and (highest possible) indifference curve is the point where people consume various amounts of the two goods. This point of tangency is where the ratio of the prices is equal the ratio of marginal utility for each of the two goods. Change the prices and you’ll move to a new point of tangency and a new allocation of goods.

What the above argument is saying (implicitly) is that we’ll change the price ratio by subsidizing whatever green energy/fuel source they prefer, be it switch grass, tar sands, or solar power. However, we can also change the price ratio in another way: taxing the offending energy/fuel source. In most cases it is going to be a petroleum product like gasoline or maybe coal or even both. If we subsidize, for example switch grass based energy production we are in effect lowering the price of energy derived from switch grass relative to all other sources of energy.

Now, why do I say the above claim about jobs is baloney? Because we can get the same change in relative prices by taxing the offending sources of energy, but this option is never discussed. Why? Because nobody thinks raising the tax on gasoline by $5/gallon is a good way to stimulate the economy. Thus, the jobs claim is just not true. Or to put it differently, sure, you’ll get more jobs in producing energy from switch grass, tar sands and the like. But you’ll also lose jobs in the market for the offending energy source. The citing of the gross number of jobs created in the alternative energy source markets is not sufficient. The true measure is the number of net jobs created or lost. But politicians never tell you that.

Further, you’ll get an immediate price response by taxing the offending energy source so it will work even better at reducing the negative environmental impact. In short the most obvious and direct solution is never, ever discussed. This is the main reason why I scoff at people who are hysterical about global warming. If it is really the dire threat they say it is, then a tax on gasoline and other petroleum products should be the way to go. Instead of trying to jury rig up some stupid carbon credit trading scheme which in actual practice has turned out to be nothing more than corporate welfare they should be arguing for a tax on the offending energy source. But they don’t.

Note: This isn’t to say that global warming is not a problem or that we should ignore it.

James Capretta does a back of the envelope calculation on the Baucus health care reform bill and concludes that it would be like having a 70% marginal tax rate on the low income.

According to CBO, family coverage in 2016 is likely to cost about $14,400 under the so-called “silver option” in the health-care reform plan sponsored by Senate Finance Committee Chairman Max Baucus. In the Baucus plan, a family of four at the poverty line (about $24,000 in 2016) would have pay to about $1,400 toward coverage, with the federal government paying the other $13,000 on their behalf. In addition, the government would also provide $3,500 to reduce the family’s deductible and co-payment costs for health services. Thus, the new entitlement provided by the Baucus bill would be worth a whopping $16,500 for a family at the poverty line.

As incomes rise, however, the Baucus bill cuts the value of the entitlement. A family with an income at twice the poverty line, or $48,000 in 2016, would get $9,072 in federal assistance for coverage — still a substantial sum. But it’s $7,400 less than the family would get if they earned half as much. The Baucus plan thus imposes an implicit marginal tax rate of about 30 percent ($7,400/$24,000) on wages earned by families in this income range.

And that would come on top of the high implicit taxes already built into current law. Low-wage families with children also get the Earned Income Tax Credit (EITC). The EITC boosts incomes for those with the very lowest wages, but it is also phased-out as incomes rise. Past a certain threshold (about $21,400 in 2016), the EITC is reduced by $0.21 for every additional $1 earned. Throw in the individual income tax rate (15 percent) and payroll taxes (7.65 percent), and the effective, implicit tax rate for workers between 100 and 200 percent of the federal poverty line would quickly approach 70 percent — not even counting food stamps and housing vouchers.

That is a substantial marginal tax rate, and would serve as a disincentive towards working towards getting higher paying jobs. I also agree it would be a good idea if the CBO were to do a much more thorough analysis of this bill to verify these calculations.

Update: Via Greg Mankiw I see that the CBO has released some analysis on incomes, premiums, and so forth under the Baucus bill, and for the upper incomes there are marginal tax increases, not sure about low income earners. Also, if you are single you will get hit pretty hard even when your income goes from $26,500 to $32,400, the implicit marginal tax rate on that income due to the change in premiums is 24%. Then add on for payroll taxes, income taxes and so forth.

There is also this CBO policy brief that discusses the issue,

New subsidies might be created to cover the costs of private health insurance, and they could be gradually reduced over a specified income range in a variety of ways—with different implications for marginal tax rates and work incentives. Those subsidies could be gradually reduced at a uniform rate, causing implicit marginal tax rates to rise by the same amount for all recipients in the phase-out range. For example, a proposal might provide families whose income was at the federal poverty level (roughly $23,000 for a family of four in 2013, the year in which many proposals would take effect) with fully subsidized health insurance valued at $15,000. That subsidy might be gradually reduced as income increased, and families whose income was above 400 percent of the poverty level ($92,000) might be ineligible for any subsidy. In that case, marginal tax rates would go up by about 22 percentage points for all families whose income was between 100 percent and 400 percent of the poverty level.

A 22% marginal tax rate on households with income between 100% to 400% of the poverty level could reduce incentives for those households to decision on how much to work. If taking on a new job means less leisure time as well as a higher marginal tax rate a person might decide not to take the job even if the pay is higher.

And as Greg Mankiw points out, if people respond to these implicit changes in the marginal tax rates by working less, then it is possible that in the future GDP is lower and that payroll taxes are also lower. Thus exacerbating our already serious problems with Social Security and Medicare.

Or this post could be titled how doctors routinely fail to predict illnesses, diseases and injuries. It strikes me that this is one of the main problems with health care in this country. If only doctors could get better at practicing their art then we might not have such a problem with run away health care costs. Try it, go into your doctor and ask, “When am I going to get cancer? When am I going to have a heart attack? When am I going to have an ulcer? When am I going to suffer a broken leg?”

Okay, that’s a bit silly isn’t it? Well so was Paul Krugman’s article on how the economics profession got it all so wrong with regards to the recent financial crisis. In his New York Times article Krugman wrote,

Few economists saw our current crisis coming, but this predictive failure was the least of the field’s problems.

But is it the job of economists to predict when recessions are going to occur? Is it the job of the doctor to be able to answer with any degree of accuracy, “When am I going to get cancer, and what kind will it be?”

That is one of the comments David K. Levine makes in his article replying to Krugman. Levine starts right off not pulling any punches,

I was reading your article How Did Economists Get It So Wrong. Who are these economists who got it so wrong? Speak for yourself kemo sabe. And since you got it wrong – why should we believe your discredited theories?

While this initial jab is amusing Levine goes on to make several more good points as to why we shouldn’t accept what Krugman is saying without at least taking a look around. For example, Narayana Kocherlakota looks at the current state of macro economics and finds that many of the objections raised by Krugman are not accurate. Or take a look at an earlier and saner Paul Krugman who wrote very eloquently in defense of economic formalism. I would also suggest the Slate article The Accidetnal Theorist where Krugman shows the benefits of making simplified models of the real world.

The picture becomes increasingly clear to him [a famous journalist]: Supply is growing at a breakneck pace, and there just isn’t enough consumer demand to go around. True, jobs are still being created in the bun sector; but soon enough the technological revolution will destroy those jobs too. Global capitalism, in short, is hurtling toward crisis. He writes up his alarming conclusions in a 473-page book; full of startling facts about the changes underway in technology and the global market; larded with phrases in Japanese, German, Chinese, and even Malay; and punctuated with occasional barbed remarks about the blinkered vision of conventional economists.

Perhaps we should just think of Krugman as a hack journalist these days.

Yes, that headline is not an exaggeration. The Chief of the Jericho Fire Department went to court and was shot by the police for disputing two tickets requiring two trips to the court house.

JERICHO, Ark. – It was just too much, having to return to court twice on the same day to contest yet another traffic ticket, and Fire Chief Don Payne didn’t hesitate to tell the judge what he thought of the police and their speed traps.

The response from cops? They shot him. Right there in court.

Now the police chief has disbanded his force “until things calm down,” a judge has voided all outstanding police-issued citations and sheriff’s deputies are asking where all the money from the tickets went. With 174 residents, the city can keep seven police officers on its rolls but missed payments on police and fire department vehicles and saw its last business close its doors a few weeks ago.

“You can’t even buy a loaf of bread, but we’ve got seven police officers,” said former resident Larry Harris, who left town because he said the police harassment became unbearable.

But lets not be hasty, these brave men in blue are putting their lives on the line after all.

“When I first moved out here, they wrote me a ticket for going 58 mph in my driveway,” 75-year-old retiree Albert Beebe said.

Well obviously Albert Beebe was going 58 miles per hour in his drive way because why would the police lie. Oh…wait, they aren’t sure where all the traffic fine money went, hmmmm….

It was anger over traffic tickets that brought Payne to city hall last week, said his lawyer, Randy Fishman. After Payne failed to get a traffic ticket dismissed on Aug. 27, police gave Payne or his son another ticket that day. Payne, 39, returned to court to vent his anger to Judge Tonya Alexander, Fishman said.

It’s unclear exactly what happened next, but Martin said an argument between Payne and the seven police officers who attended the hearing apparently escalated to a scuffle, ending when an officer shot Payne from behind.

I’m sure it was totally justified and in line with departmental policies. After all, who knows Payne might have had a pencil or paper clip on him. Those are danerous weapons you know.

Prosecutor Lindsey Fairley said Thursday that he didn’t plan to file any felony charges against the officer or Payne. Fairley, reached at his home, said Payne could face a misdemeanor charge stemming from the scuffle, but that would be up to the city’s judge. He said he didn’t remember the name of the officer who fired the shot.

What a shock the prosecutor backs up the cop who discharges his gun at an unarmed person in a crowded room and also wounds a fellow cop in the process. Police professionalism at its highest.

Alexander, the judge, has voided all the tickets written by the department both inside the city and others written outside of its jurisdiction — citations that the department apparently had no power to write. Alexander, who works as a lawyer in West Memphis, resigned as Jericho’s judge in the aftermath of the shooting, Fairley said. She did not return calls for comment.

Meanwhile, sheriff’s deputies want to know where the money from the traffic fines went. Martin said that it appeared the $150 tickets weren’t enough to protect the city’s finances. Sheriff’s deputies once had to repossess one of the town’s police cruisers for failure to pay on a lease, and the state Forestry Commission recently repossessed one of the city’s fire trucks because of nonpayment.

City hall has been shuttered since the shooting, and any records of how the money was spent are apparently locked inside. No one answered when a reporter knocked on the door on Tuesday.

So lets do a quick recap.

• The police shot an unarmed man from behind when in scuffle with 6 other police officers.
• No charges will be brought against the police officer from the local prosecutor.
• Nobody knows where the money from the various speeding tickets went.
• The police were writing tickets outside their jurisdiction.
• City Hall is shut down.

Anyone doubt that the cops saw this as their own private racket and were using the tickets to line their own pockets? And what is up with the police officers in Jericho? Are they all totally out of shape morons that couldn’t fight their way out of a paper bag? Six of them are scuffling with one man and they can’t subdue him and the seventh feels he has the justification to shoot the “perp”?

Tyler Cowen has written several posts in favor of the bailouts. His argument goes something like this:

Note that even when the Fed “bails out” a large investment bank, or insurance company, they are checking a chain reaction which would likely spread to some commercial banks, thus bringing in deposit insurance as well, not to mention further bankruptcies. And that’s not even considering that Congress probably would have stepped in, I’m just looking at laws already on the books.

From this post here. He’s also argued that Milton Friedman would have been in favor of bailouts as way of preventing the money supply from dropping like it did at the beginning of the recession that would later become known as the Great Depression.

Problem is, this really doesn’t fit well with a recent New York Times article written about 8 months ago by Prof. Cowen. In that article Prof. Cowen argues that the bailout of Long Term Capital by the federal government created a problem with moral hazard. That upper management at similar companies felt embolden to take riskier investments so long as their failure would be perceived as threatening the global financial system.

In other words, a bailout today may very well necessitate larger bailouts in the future. In all of his recent defenses of the bailouts Prof. Cowen has side stepped the issue of perverse incentives and dynamic time inconsistency which could lead to future bailouts possibly of increasing magnitudes. These in turn could expand the size and scope of government. In other words, was the December 2008 Tyler Cowen more “libertarian” than the August 2009 Tyler Cowen or the other way around?