Items of interest and curiousity, as detailed by an economics professor. Specializing in macroeconomic topics. Please note that the focus on The Wall Street Journal is because that is required reading for my classes.
Tuesday, November 25, 2003
President Bush is almost a lock to be re-elected in 2004. How can I make this prediction a year in advance? In my ECON 3020 class, we talk about how important the current economic environment is to Presidential elections. You can make a pretty good prediction with two concepts: 1) a good economy gets an incumbent or his successor re-elected, and 2) after a couple of terms of the same party holding the Presidency the electorate will choose to switch the party. The second point won't have much meaning in this election (although it goes a long way towards explaining why Al Gore lost in 2000). To put the first point into practice you need to define what constitutes a good economy. GDP adjusted for inflation (i.e., real or chained GDP) is the best measure of how an economy is doing. But, there's a trick. People's perceptions of how the economy is doing rely a lot on the memory of how it did in the recent past. How far does that memory go back? About 8 quarters seems to be a length that will give you a good answer. So, what you need to look at is what has the average growth rate of real GDP been over the 8 quarters preceding the election. It turns out that every incumbent President since World War II has won his re-election bid when the 8 quarter average quarterly growth rate was 3.1% or higher at the time of the election (Clinton in 1996 had the lowest growth rate and he won in a landslide). It also turns out that every incumbent President since World War II has lost his re-election bid when the 8 quarter average quarterly growth rate was 1.4% or lower at the time of the election (Bush in 1992 had the highest growth rate and he lost easily). So, there is a threshold between 1.4% and 3.1% that will determine whether an incumbent gets re-elected. So, where does Bush stand right now? Even if he gets zero growth over the next year, his 8 quarter average will be 1.6% (in the gray area). Average growth will get him up to 4.3% (landslide territory). So, the story is pretty much that a new recession has to start either this quarter or the next, or that average won't come down fast enough for a Democratic contender to have a chance.
Monday, November 24, 2003
Do you ever wonder what goes through someone's mind sometimes? About a month ago, there was an op-ed piece in The Wall Street Journal entitled "Capitalism's Savior". I saved it for my class, but didn't post a link to it right away. It was a defense of Roosevelt's New Deal policies. What also caught my eye was that it was written by a media mogul named Lord (Conrad) Black (he's English, and a knight). Hmmm, that's odd I thought. But, it was a strong defense of debatable policies so I saved it. About a week later there was a rebuttal in the letters section, and that was followed about a week later by a response from Lord Black. I wonder what Lord Black was thinking, because his publishing empire was starting to collapse around him at this time - so why was it important for him to write about Roosevelt? I don't have a clue. Anyway, the second story (not required for ECON 3020 students) is that Lord Black controlled a company called Hollinger International which owns many big newspapers (The Chicago Sun Times being the largest in the U.S.). At the time that Lord Black was engaging in a public argument about Roosevelt, it was becoming more widely known that Hollinger was up for sale and that potential buyers were getting scared away by news they heard on the inside. Then his COO (Chief Operating Officer) resigned, and Lord Black resigned some but not all of his positions - because he was getting secret payments. Then he had to sever ties with his holding company, and defend himself publicly. Now the board is investigating other payments to executives, and four more have resigned. As of the time I write this (Nov 24, 2003 11:11:07 AM MST), Lord Black has yet to resign - but you have to wonder what would make him write something defending Keynes (which is a worthy endeavor), and then get in a public snit about it, when he is apparently pursuing the worst sort of white collar barbarism? A psychiatrist could have a field day with this one.
Wednesday, November 19, 2003
Paul Krugman is a very famous economist, and a likely future Nobel prize winner (up until he came along there were pretty much three reasons for trade: lack of available resources, comparative advantage, and differences in proportions of factors of production ... Krugman thought up a brand new one: taking advantage of increasing returns to scale by selling your product in international markets). In 1994, he wrote an article for Foreign Affairs entitled "The Myth of Asia's Miracle" in which he used his big name to discuss some of the less well known research of others. They had used the Solow growth model and growth accounting to argue that there were broad similarities between the growth that occurred in the Soviet Union in the 1950's, the "Asian Tigers" in the 1980's (i.e., Hong Kong, Singapore, South Korea, and Taiwan), and China in the 1990's (the argument still applies today). The basic result is that these countries obtained high growth rates by marshalling inputs that had not been used efficiently in the past. Since you can only go from being inefficient to efficient once, these countries will only grow this high growth period once - and after that their growth rates must return to more reasonable levels.
Thursday, November 13, 2003
For my second exam in ECON 3020 this fall, I asked growth questions related to five articles from The Wall Street Journal. "An Ousted President Fears for Bolivia's Future" touches on how policies here are detrimental to property rights elsewhere. "Behind Surging Productivity, the Service Sector Delivers" discusses the difficulty in measuring productivity in service industries, and how services are increasing productivity in spite of this. "Republicans and Democrats Divide On How to Encourage Saving" compares policies to promote saving being proposed by Presidential candidates. More details about the Bush plan are in "Two Big Tax Free Savings Plans to Get New Push By the White House". Lastly, "The People's Republic May Neglect People By Starving Schools" draws a parallel between China's current underfunding of its schools and the underfunding by The United Kingdom in the 19th century that ultimately stifled growth there.
My former student, Lucia Olivera, works for the Joint Economic Committee of Congress now. She sent me this piece from The Economist entitled "The Stubborn Survival of Frustrated Democrats" about how hard tough it is for democracy to thrive in Latin America. Macroeconomists argue that democracy is a luxury that people acquire a taste for once their level of income reaches a certain level. Perhaps we should have told Latin Americans to get their economies working properly before we pressed this idea on them.
Garrett Hardin killed himself last month. He gave a snazzy title (the tragedy of the commons) to an idea that had been around in economics for a long time; that the absence of property rights is an invitation for people to abuse a valuable resource. The Wall Street Journal article entitled "The Tragedy of Garrett Hardin" points out how Hardin used this idea to justify his more Malthusian vision or the world - a concept I discuss in several classes when introducing economic growth.
On the same day in late September, The Wall Street Journal published three articles on ostensibly different topics that caught my eye because they were all broadly about who gives any of us the right to judge what other people do with their money. Envy probably has a lot to do with it. The article entitled "Red, White, and .... Green" discussed how this relates to how people view America, and noted that people will gladly settle for less if it is still more than everyone else has. The article entitled "My Economics" was a fairly straightforward political position piece by Arnold Schwarznegger that contained an astounding insight by Arthur Laffer that we ought to decide whether we want our tax system to make the rich poorer or the poor richer. I'm pretty sure our system is designed for the former, which says a lot about how envious we are. The third, entitled "Who Decides How Much Is Too Much? took apart the fiasco surrounding the retirement package of Dick Grasso - the former head of the New York Stock Exchange. He was forced out because of bad press surrounding the size of the package (about $180M for 36 years of work), even though the only people on the hook for paying him were the people who had agreed to that package. It may the ultimate in envy to be judgemental about a price for labor that two parties unrelated to you agree upon.
The World Bank (a traditionally liberal institution) has decided to join the move in the macroeconomic mainstream towards a focus on laws, conditions, and institutions, that are favorable towards businesses. They now have a website called Doing Business which allows you to research about 2 dozen business conditions for most of the countries on the planet. Two articles in the October 7th and 8th entitled "World Bank Faults Tight Regulation" and "World Bank Discovers the Market" discussed this change on the part of the World Bank.