I'm a member of the elite monied class, or a libertarian...

Or, so I must deduce from the my favorite lefty, Mel-Anon's post today, based upon my subscription and weekly cover to cover reading of the Economist. I have spent most of my morning trying to figure out where this money may be found. I'm also enjoying the thought of my new found elite status.

Nichols at the Nation is using this endorsement to show the McCain/Palin socialist smear doesn't hold water. In making this point, he describes the Economist as "the journal of monied elites who prefer not to be lied to." I completely agree with the not being lied to portion, though once again I'm still trying to find my money and my elite status.

A newsmagazine that supports universal health care, gay marriage, significant investment in education, good governance and democracy... yeah, totally sounds like an elitist corporate shill to me...

The global economy...

The Economist offered an interesting and fairly detailed special report on the world economy in the October 9th edition. Not everyone will agree with all of their conclusions, but it is at a great disservice to yourself if you chose to not read the report.

Perhaps most enlightening for me was the section on commodities and speculators...

Contrary to what the critics of speculation suppose, the main task of futures markets has been to signal these fundamentals to firms and households, speeding up their adjustment to the changing balance of supply and demand for physical commodities. In the absence of such signals, it would have taken even bigger and more extended swings in the prices of physical commodities to bring supply and demand into balance.

In the end, the report recognizes that there is a need for additional regulation in certain areas of the economy (mostly the finance portion). It points out, however, that we should not get caught up in a nationalistic protectionist mindset, whereby many of the big net positives that have come to fruition under globalization are lost, as we retreat to an era of big tariffs and neo-mercantilism blended with government interventionism. Long, but good....

A successful multilateral strategy to staunch the crisis would also make it more likely that the world will rise to the second challenge: learning the right lessons. Too many people ascribe today’s mess solely to the excesses of American finance. Putting the blame on speculators and greed has a powerful appeal but, as this special report has argued, it is too simplistic. The bubble—and the bust—had many causes, including cheap money, outdated regulation, government distortions and poor supervision. Many of these failures were as evident outside America as within it.

New-fangled finance has its flaws, from the procyclicality of its leverage to its fiendish complexity. But the crisis is as much the result of policy mistakes in a fast-changing and unbalanced world economy as of Wall Street’s greedy innovations. The rapid build-up of reserves in the emerging world fuelled the asset and credit bubbles, and rich-world central bankers failed to counter it. Misguided monetary rigidity caused financial instability. Much though people now blame deregulation, flawed regulation was more of a problem. Banks set up their off-balance sheet vehicles in response to capital rules.

It is the same story with the spike in food and fuel prices over the past year. To be sure, commodities markets can overshoot—but rather than pointing the finger at speculators, governments should look in the mirror. Rich countries’ biofuel policies pushed up the cost of food. Poor countries’ food-export bans and fuel subsidies compounded the problems. In many ways today’s mess is a consequence of policymakers’ misguided reactions to globalisation and the increasing economic heft of the emerging world.

If markets are not always dangerous and governments not always wise, what policy lessons follow? In the aftermath of the crisis the battle will be to ensure that finance is reformed—and in the right way. The pitfalls are numerous. Banning the short-selling of stocks, for instance, makes for a good headline; but it deprives markets of liquidity and information, the very things that they have lacked in this crisis. Even if the easy mistakes are avoided, improving supervision and regulation is hard. Financial regulators must look beyond the leverage within individual institutions to the stability of complex financial systems as a whole. Wherever the state has extended its guarantee, as it did with money-market funds, it will now have to extend its oversight too. As a rule, though, governments would do better to harness the power of markets to boost stability, by demanding transparency, promoting standardisation and exchange-based trading.

Over-reaction is a bigger risk than inaction. Even if economic catastrophe is avoided, the financial crisis will impose great costs on consumers, workers and businesses. Anger and resentment directed at modern finance is sure to grow. The danger is that policymakers will add to the damage, not only by over-regulating finance but by attacking markets right across the economy.

That would be a bitter reverse after a generation in which markets have been freed, economies have opened up—and prospered. Hundreds of millions have escaped poverty and hundreds of millions more have joined the middle class. As the world reconsiders the balance between markets and government, it would be tragic if the ingredients of that prosperity were lost along the way.

Economic reality...

Leonhardt has a solid column in the Business section of today's NYT regarding the perils of ignoring economic reality. He points out that the impact of the all the bailout (or rescue, if you are JM) plans on the federal budget will likely be in the hundreds of billions over the next few years. This obviously doesn't help the federal budget deficit or debt load. So, what do we do to fix it?

The short answer is that the budget problems the country seemed to have a year ago are now even worse. Next year’s deficit (relative to the economy’s size) will probably be the biggest since 1992, and maybe since 1983. Taxes will have to rise or government spending will have to fall, if not both.

This significant increase in the deficit is importnat, but maybe isn't the area we should be focused on to avert the next big problem. There are a myriad of areas that could be seen as the next big issue for the feds, but it seems to me (and Leonhardt) that it starts with health care.

Despite everything, the biggest fiscal problem remains, far and away, health care. Based on the rate that medical spending has been rising, the Congressional Budget Office forecasts that Medicare and Medicaid will take up 10 percent of G.D.P. within two decades, up from about 4 percent now. In today’s terms, that would be the equivalent of adding at least $900 billion to the deficit every single year, in perpetuity. It makes the cost of the bailouts look like a rounding error.

When it comes to health care, we have a situation that is blatantly unsustainable. With the right choices, we can prevent that. But so far, we instead seem to be hoping that the situation will magically resolve itself, which is a recipe for big problems and perhaps even a crisis.

Let’s see. That doesn’t sound familiar, does it?

Also in today's Business section, is an article on the effect of the credit crunch on states and municipalities, which is an area of personal interest that you just don't normally see much coverage of in the NYT. The ability of less than perfectly rated municipalities, states and school districts to raise short term revenue is a huge deal, as a few failures to make payroll and a lot of stuff stops getting done. Who will bailout the government? Uh... the government?

Buffett braves the crisis...

An interesting article in today's NYT compares Warren Buffet's current actions with those taken by JP Morgan in the early 20th century. I wasn't around for JP's insights and work, but I have to admit there are few people who seem to get business better than Buffett. I've read a couple of bios on the Sage of Omaha (a new one just released is the first authorized one, so I'll have to pick that up), and it seems clear to me that the guy just gets it. You can hate on him all you want for being extremely rich and appreciating the profit motive, but it is important to recognize he isn't what you might envision when you think of the personality of the world's richest man. An example of his mindset and values can be gleaned in the final few paragraphs of the article:

As far back as 2003, Mr. Buffett had warned that the complex securities at the center of today’s troubles — once so profitable, but now toxic — were “financial weapons of mass destruction.” These securities were engineered by the math quants on Wall Street, and in the interview Mr. Buffett expressed his disdain: “Beware of geeks bearing formulas.”

To help pay for the rescue, the government should raise taxes on the wealthy, Mr. Buffett suggested. “I’m paying the lowest tax rate that I’ve ever paid in my life,” he said. “Now, that’s crazy.”

A rich guy who recognizes he isn't paying his far share and that he could pay more without the world ending? Can't be. I've been convinced that if you raise taxes on the wealthy then they will stop investing in anything, sit on their asses, and we will all suffer. Or, maybe Warren is right and the right wing pundits are wrong?

A blue economy...

The Dow Jones is off a few hundred points this morning, dropping it below 10K for the first time in almost four years. I vividly remember when the Dow crossed 10K for the first time in 1999, as I was required to track the market in high school History/Econ classes. (Ah those high school history classes, a wonderful memory. Especially when I recall a particularly astute conservative young man always pushing back against my evil liberal ideals.) It is hard to believe that in March that will have been ten years ago, and we seem to be spinning in place, at best. It is also difficult to understand how the market could have been at an all-time high of 14.1K just one year ago. Now we are down 30% from that peak, and it is entirely possible more losses are ahead.

Right Wing Orthodox...

Say what he will about the need to change Washington and how "greed" is causing the problems on Wall Street, McCain hasn't in the past and doesn't seem interested now in breaking with the right wing orthodoxy, who hold that derregulation is the answer to pretty well any economic question. Despite their resistance to government regulation, they don't seem to mind a government bailout now and again. Something like socializing the costs, while privatizing the profits.

But his record on the issue, and the views of those he has always cited as his most influential advisers, suggest that he has never departed in any major way from his party’s embrace of deregulation and relying more on market forces than on the government to exert discipline.

While Mr. McCain has cited the need for additional oversight when it comes to specific situations, like the mortgage problems behind the current shocks on Wall Street, he has consistently characterized himself as fundamentally a deregulator and he has no history prior to the presidential campaign of advocating steps to tighten standards on investment firms.

He has often taken his lead on financial issues from two outspoken advocates of free market approaches, former Senator Phil Gramm and Alan Greenspan, the former Federal Reserve chairman. Individuals associated with Merrill Lynch, which sold itself to Bank of America in the market upheaval of the past weekend, have given his presidential campaign nearly $300,000, making them Mr. McCain’s largest contributor, collectively.

History of supporting deregulation; takes advice from a key architect of the mortgage bubble (Greenspan); significant campaign donations from a failing financial firm; now that my friends is obviously setting the table for some REAL CHANGE.

I've always wondered...

how inflation effects "dollar" stores. NPR had the Last Word in Business on this topic this morning. Interesting... At some point, won't they have to go to the two dollar store? or the buck fifty?

The new world order cometh...

In case you thought globalization and the new world order were on the wane, you may wish to take note of this proposed change in Accounting standards. If you want a sure fire way to know how global integration is going, check out how we count the money... Generally, this is probably a good idea, as it will allow more comprability across nations.

The adoption of international accounting standards by the United States would move the world toward one set of standards, which should make it easier for investors to compare companies operating in differing regions, and make it easier for firms to raise capital in whatever market seems most attractive.

My primary concern, as mentioned in the article, is that the International Standards place a premium on Auditor independence and judgment.

In a world with more professional judgment, the auditors would be expected to tell companies that a given accounting treatment violates a standard because it produces a misleading result. Whether they would be willing to do that, and whether all would be equally willing, could become an issue.

This is not necessarily a bad thing, but when the American accounting industry lays claim to a number of scandals invovling auditors covering or tacitly allowing shady corporate activity, you may end up with unintended consequences...

It's the fundamentals of the economy, stupid...

Today's NYT Business section has Leonhardt offering his prognostication for the economy over the next couple months (while he will be away on paternity leave, good man). Leonhardt discusses unemployment, oil prices, education and home prices in a cogent analysis concluding with the idea that there are some fundamental problems underlying the current American (almost?)-recession.

Regarding unemployment, Leonhardt proposes viewing this issue not through an anti-globalization lens, but by noting what he (and the authors mentioned below) term the innovation deficit.

If you want to understand the causes of the innovation deficit, I’d recommend adding one serious book to your summer reading list: “The Race Between Education and Technology,” by Claudia Goldin and Lawrence Katz, two labor economists.

They argue that the American prosperity of the 20th century sprang largely from the country’s longtime lead in educational attainment, a lead that has all but vanished. Future prosperity won’t be based on saving yesterday’s high-wage jobs, as Mr. Katz told me. It has to start with smarter, more strategic investments in education, physical infrastructure and other things that can create the high-wage jobs of tomorrow.

I am a firm believer in the fact that rolling back globalization is not the answer to our problems, and that the appropriate solution to maintaining the accepted American standard of living is to increase our educational attainment levels. The continual chasing of jobs that, in the words of THE BOSS "are going boys, and they ain't coming back," is a reactionary approach to a problem that requires proactive investment in our greatest asset, our people.

Leonhardt goes on to discuss how oil prices are inflated, not by speculators as many politicians would lead you to believe, but by fundamental forces of supply and demand. The world is consuming ever more vast amounts of oil and supply is growing at a much lower rate. Anyone with a basic understanding of economics will tell you that this means an increase in price. Additionally, Leonhardt postulates that the housing values in America will continue to decline over the rest of this year and likely into next year. I know that in comparing prices relative to incomes or rents here in Madison yields a housing market that is still significantly above the historical (and sustainable?) levels.

For the first time on record, an economic expansion seems to have just ended without most families having received a raise. For the first time on record, the typical home price nationwide is falling. The inflation-adjusted value of the Standard & Poor’s 500-stock index has dropped 20 percent in the last year — and 30 percent since its peak in 2000.

I think the public has called this issue exactly right: the American economy has some real problems. Even if this summer’s downturn turns out to be mild, those problems aren’t mild — or simple — and they aren’t going away anytime soon. It’s going to take some real work.

So, as we ride out this economic downtown, let us hope that our business and political leaders recognize that this is not simply a "short and shallow" recession, but should be an economic wake up call to all of us. Our current levels of consumption relative to production will be difficult to sustain over the long term, our desire for lower oil prices won't make it a reality and a lot of people will lose significant amounts of equity in our homes (which is directly related to the inability to sustain current consumer spending, given that so much of it is reliant on home equity lines of credit). So, here's to a good summer and to hope that we are able to both individually and collectively reevaluate our consumption, spending and economic actions.

Today's sign that the apocalpyse is upon us...

So, I stole one of my favorite themes of the old Sports Illustrated (or maybe they still have it, I wouldn't know as I stopped reading it in 8th grade). But, really what else could be a better title for the fact that Dunkin Donuts has pulled ads featuring Rachel Ray because right-wing blogger Michelle Malkin wrote that it looked like a kaffiyeh. Which, in Malkin's words is

''The kaffiyeh, for the clueless, is the traditional scarf of Arab men that has come to symbolize murderous Palestinian jihad,''

I really don't know if I am more confounded by Malkin's ability to significantly overreact to an artical of clothing, or if the fact that Dunkin' Donuts responded. I guess this could be used to extrapolate the political leanings of the DD crowd? Who knows, I'm just glad I didn't buy that white and black scarf this past winter...

Organic food prices soar...

The organic food movement has taken off in the past five years in America, with sales up over 125% during that time. This same five year period saw ever growing numbers of farmers and acres of crop land going organic. According to an article in today's NYT Business section, this trend has slowed dramatically with the new heightened prices of all commodities.

The organic movement is based around the premise that consumers have a higher willingness to pay for food that is grown without the aid of chemicals, fertilizers and hormones. This premise seemed to hold true over the recent past, as the market share of organics grew significantly. The problem with this assumption now, however, is that many believe there is a likely inflection point in the food markets -- whereby, consumers will forego purchasing the organic goods due to the high absolute price. The interesting thing about this is that it doesn't appear that organics are decoupling from their normal 20-100% premium over conventional foodstuffs. Instead, the fear is that there is a pyschological barrier involved and that $7 a gallon milk is something the consumer cannot tolerate. For exmaple, two years ago a gallon of "regular" milk was around $2 and organic milk was about $4, which was a 100% price premium. Now with regular milk at $3.39 and organic at approximately $6.65 (once again roughly 100% premium), the market may begin contracting. It seems to me that in the stumbling economy, this slight (but very real to some) absolute increase, along with the aforementioned pyschological impact of the pricing, could very likely put a huge downward pressure on demand for organic goods. Another possibility proposed by a friend is related to this mindset, as he postulated that the growth in the organic food sector was due almost exclusively to the faddiness of it and the additional disposable income from a subset of the population. He may be right...

I know that at home we try to use some organic products, but have focused more on the local sourcing aspect of our food and this increase in costs has played a role in keeping us from moving more into the organic marketplace. Even with an increase in disposable income, we are often made aware of the price disparity of our food choices compared to the "cheaper" alternatives. I hope we won't have the need to leave the local food market, but I will be interested to note if there is any marked change at the big Dane County Farmer's market this year.

Smart people, what do we want with smart people...

Lexington, at the Economist, points out the idiocracy of the current limit on H-1B visas in America. The H-1B visa program has historically been used to bring highly educated and/or trained individuals to America for work. More than a few of these have worked out quite well, but in our current state - with Congress being a leader in fermenting a frothing anti-immigrant fervor - we are limiting this program to a mere 70K per year (assigned by lottery no less, which fly completely in the face of a market approach).

Thirty years ago this approach may have been acceptable, as the United States could sit back and tell the applicants to wait... There wasn't a solid substitute location. Now, however, many nations are realizing the value of opening up their borders to global talent while America sits on its laurels.

There was a time when ambitious foreigners had little choice but to put up with America's restrictive ways. Europe was sclerotic and India and China were poor and highly restrictive. But these days the rest of the world is opening up at precisely the time when America seems to be closing down. The booming economies of the developing world are sucking back talent that was once America's for the asking. About a third of immigrants who hold high-tech jobs in America are considering returning home. America's rivals are also rejigging their immigration systems to attract global talent.

There is still time to see a marked change, but this will require political will in a time where there may not be a more unpopular cause. The GOP can't touch this one, even though the business lobby is strongly in favor, because some of the squeaky xenophobic base can't even stomach the sound of the word immigrant. The Dems won't touch it either, despite the program being a keystone to any theory of broad liberal social justice (i.e. equal opportunity). The fear from the Dems come from the protectionist labor portion of the tent, which holds that these folks are taking 'Murican jobs. This bothers me quite a lot, because they either come here and do the job, while spending money and integrating in our society. Or, the company ships the job to where they are, or some other country where the company can get the talent it needs. I spent some time on this issue in grad school, and am still stupefied by the lack of political will and the, to be cliche, perfect political storm that is inhibiting any long-term fix for this problem.

A rotten deal, a rotting system...

The Business section of the times has an interesting take from Leonhardt on the lack of growth in the average family's income since 2000. Despite the years of growth since the last recession, the median income (adjusted for inflation) has dropped.

In 2000, at the end of the previous economic expansion, the median American family made about $61,000, according to the Census Bureau’s inflation-adjusted numbers. In 2007, in what looks to have been the final year of the most recent expansion, the median family, amazingly, seems to have made less — about $60,500.

This point has been made many times over the past few years, but it is imperative that the body politic understand that the "growth" during the last economic expansion went to a rather small portion of the population. This type of economic expansion is rarely tolerated for long, and the current groundswell of populist anti-globalization sentiment can almost assuredly be grounded in the fact that a lot more Americans lost ground in the past seven years (in real terms) than in previous expansions.

So, what is to be done? I could blather on, but I'll quote at length instead:

But there is still a lack of strategic seriousness to the discussion, as Bruce Katz of the Brookings Institution notes. After all, the United States spends a lot of money on education already but has still lost its standing as the country with the highest college graduation rate in the world. (South Korea and a couple of other countries have passed us, while Japan, Britain and Canada are close behind.)

The same goes for public works. Spending on physical infrastructure is at a 20-year high as a share of gross domestic product, but too much of the money is spent on the inefficient pet programs championed by individual members of Congress. Pork barrel spending does not add up to a national economic strategy.

Health care and taxes will have to be part of the discussion, too. Dr. Ezekiel Emanuel of the National Institutes of Health pointed out to me that a serious effort to curtail wasteful medical spending would directly help workers. It would spare them from paying the insurance premiums and taxes that now cover that care.

The tax code, meanwhile, has become far more favorable to high-income workers at the same time that they — and they alone — have received large pretax raises. That doesn’t make much sense, does it?

It’s a pretty big to-do list. But it’s a pretty big problem. Since the economy now seems to be in recession, and since recessions inevitably bring their own pay cuts, my guess is that the problem will look even bigger by the time the next president takes office.

The likelihood of any of these areas receiving serious attention during the campaign season is slight, since there is no easy solution for the problems we have currently. There will be hard choices and invariably unintended consequences from those choices. These issues combined with the desire to spread some pork lovin and the pressure of interest groups will make any significant large step very difficult. The real hope lies in the everyday American setting their mind to the fact that we have to address these unsustainable policies, or we will be passing on a worse America to the next generation -- something no generation should ever hope to be remembered for.

An Honest Day's Work, An Honest Day's Pay...

Well, maybe not so honest. This interactive guide to CEO's compensation plans is an annual favorite of mine from the NYT. I'm picking out American Express CEO Kenneth I. Chenault as my personal target of disdain. I am hard pressed to find even a free market economist who would argue that overseeing a 13% drop in share price is worth a 95% (yes nearly double) increase in compensation. Don't you wish you could lose 13% on the single most important indicator of your work and still pull a $50M salary? What a fleece job...

The dismal unscience...

It looks like the supply-siders will be out in full force in 2008. I will admit that I don't always think economics is the appropriate field to address some questions --- at least not exclusively -- but it looks like the supply-side economic model supporters don't even think it can fathom the benefits of lower tax rates...

But advocates see broader economic benefits from lowering tax rates, which is one of the reasons the concept has reappeared as a point of contention in this year’s election campaign, in an amended form.

“What really happens is that the economy grows more vigorously when you lower tax rates,” said Kevin Hassett, an adviser to the presumptive Republican nominee, John McCain, and the director for economic policy studies at the conservative American Enterprise Institute. “It is beyond the reach of economic science to explain precisely why that happens, but it does.” [emphasis mine]

This is, of course, merely the newest argument offered up in the succession of bunk logic promoted by the "we got the cash and we're keeping it" anti-tax crowd. The best part is that you can't prove it wrong using economics, so all of those liberal economists who keep pointing out that tax revenues grew at lower rates during supply-side eras can stick it. Take that Krugman!

Economic Data Tidbit...

My new diversion during coffee breaks is the Annual "Pocket World in Figures," published annually by The Economist and received "free" with my subscription. Today's interesting tidbit is largest companies in the world by gross sales (in billions of $)

1. Exxon Mobil $339.9
2. Wal-Mart $315.7
3. Royal Dutch Shell Group $306.7
4. BP $267.6
5. General Motors $192.6
6. Chevron $189.5
7. DaimlerChrysler $186.1
8. Toyota Motor $185.8
9. Ford Motor $177.2
10. ConocoPhilips $166.7

Anyone notice any similarities amongst this group?