Merton Finkler

Author: Merton Finkler

Surprise! Paul Krugman Begs to Differ.

For those of you who wish to see a response to Rajan’s  (and my) argument posted earlier today, Paul Krugman in a NY Times blogpost makes the standard Keynesian case for full fledged stimulus.  He even criticizes our hero Schumpeter.  The battlelines are drawn between short term and long term thinking.

Ultra low interest rates: At what cost?

Macroeconomic stabilization policy seems to have only two primary levers: interest rates and budget deficits.  Many  economists believe that we have used these tools to the limit and have not faced the structural changes (read microeconomic) our economy requires.  A cheap credit policy has fueled much of the growth of the past 25 years and especially in the past decade.  Consequently, when income generation becomes insufficient to pay the related debt service, our fragile economy stumbles.  We cannot continue to revert to cheap credit as the way to stable growth.

Raghu Rajan, in both an opinion piece in today’s Financial Times and in his marvelous book, Fault Lines, argues that ultra low rates (in both nominal and real terms) encourage allocation of capital into housing and cars but do little to help sustain long term economic growth.  In Chapter One  of Fault Lines, entitled “Let Them Eat Credit”, Rajan claims that United States policy makers (of all stripes) have used cheap credit as a way to assist low and moderate income groups with consumption to mask the growing income gap between these groups and higher income groups.  Abundant savings from  Asia in particular, as a response to IMF conditionality in the financial crisis of the late 1990s, has enabled the US to pursue such a low rate policy.  If Asians follow our advice and dramatically increase domestic consumption, the low rate policy will not be sustainable and the weaknesses our economy will become more evident.

Energy Independence: At What Cost?

Don Boudreaux at Cafe Hayek argues persuasively that energy independence and comparative advantage are not likely to be compatible for the U.S.  If we wish to specialize in energy production, it will be more expensive in terms of economic welfare than importation; thus, we must either accept a lower standard of living or import something else.  What makes energy so special that we should not trade for it?  Should we instead import more food, pharmaceuticals, or technology, for example.  In short, the doctrine of comparative advantage suggests that we specialize in things that we are particularly adept at producing and trade for other goods and services.

In his classroom talk in April, Yoram Bauman posed two questions

1.  Are you fearful that we will run out of energy (especially from carbon based sources)?

2.  Are you fearful that we will not run out of energy from carbon-based sources?

Higher prices can ensure that the first won’t happen but not the second.  Concerns raised by positive answers to the second question won’t be addressed until we have a price for carbon-based energy that is higher than for clean fuels.  Certainly, energy independence (i.e., no importation of carbon-based fuels) will lead to higher prices, but it also would be a very expensive way to achieve the result as the domestic price would have to rise enough to clear the domestic market.  It’s not clear, however, that this would be a price that internalizes the greenhouse gas effect.

Should the Government Target Specific Industries?

Since at least the era of Alexander Hamilton and Thomas Jefferson, economists and policy makers have debated about the appropriate role for industrial policy; that is, the use of subsidy, tax, and regulatory policy to allocate capital.  The alleged “success” of Japan’s Ministry of Industrial Trade and Industry in the 1950s and 1960s found many advocates for government directed allocation of capital and funding.  Most recently, Andy Grove, former CEO of Intel,  strongly advocated a targeted focus on manufacturing.  Many others, and the vast majority of economists, argue that  governments are not better than markets at allocating capital and that subsidies for some require higher taxes for others.  They also argue that entrepreneurial efforts are channeled at attracting politicians rather than producing new products and attracting customers.

The Economist recently completed an open debate on this subject.  I encourage all to read the two sides and see which you find most persuasive.

Henry George Rises from the Dead

Who is Henry George? you might ask.  A good question.  A simple answer would be a 19th century printer who believed that a single tax on land would be an effective social liberator.  As students of Urban Economics might recall, George argued that rises in land value (as distinct from the structures put on land) come largely from social rather than private investments; thus, such rises should be taxed and used to meet various public purposes.

In today’s Financial Times, Martin Wolf opines that we (at least policy makers in the US and UK)  provide both cheap capital and insufficient taxation on these “unearned” increments in land value.  Furthermore, he believes that such value increments should be taxed if we seek to avoid credit cycles of the sort we have recently experienced.  One might view existent policies as the opposite of  “think global, act local” since the resulting credit booms and busts (based on securitized loan packages sold to an integrated, world financial system) have spread well beyond their their initial homes.  “Freemarketeer” Wolf, acting as a reincarnated “socialist” Henry George, sees the need to halt these land and credit cycles with a land increment tax.

As noted in my comment on Michael Spence’s opinion piece, also in today’s FT,  in the previous LU Econblog entry, it’s not clear to me how political logic will help us to break these destructive cycles.

America Needs a Growth Strategy

Michael Spence, 2001 Nobel Prize winner and chair of the Commission on Growth Development established by the World Bank, has just authored a sobering editorial on the lack of a growth strategy in the United States.  Students in both Econ 200 and Econ 430 will  have the opportunity to read and discuss the summary report of the Growth Commission this fall.

Spence, similar to Raghu Rajan in the recently published book Fault Lines, argues that America’s social contract is breaking done.  That “contract” married a flexible open economy with the promise of improved living standards for the “motivated and diligent.”   Its foundation based on a stable, growing economy seems very much in question.  Economists debate about what the “New Normal” might look like, but most argue it won’t be as attractive as the old (or at least perceived old) normal.  They differ as to why things are coming undone and what one should do about it, but Spence argues persuasively that without well thought out and implemented policy, “the new normal may be as unpleasant as the journal.”

In my view, this means we must transcend the vacuous discussion that arises from Krugman vs. the Tea Party.  In a world of 30 second sound bites (except for vavuzelas and LeBron James announcements), it’s not clear how we will do so.

Regulatory Wishful Thinking or Long Live Pigou

Professor Gerard has posted numerous articles on regulatory policy,  some of which rest on the theme that regulators will be captured by the industries they are assigned to regulate.  Simon Johnson, in today’s   Economix  blog, focuses on both oil and financial regulation.  He argues that living wills, that is strategies businesses might design to deal with their own failures, are not the solution for either industry.  He notes that oil companies other than BP had similar plans for managing the risks of a major oil spill in the Gulf of Mexico.  In fact, many had hired the same consultant to write their plans.  Such plans demonstrated limited knowledge of the Gulf as well as limited preparedness.  Stated differently, they had very little incentive to write constructive plans.

If we want private companies to respond to potential catastrophes or even continuous negative externalities, we need public policy that encourages them to do just that.  Of course,  such public action requires that our legislators and the Executive branch need to both address the societal tradeoffs our nation must face and face-down the lobbyists who seek to postpone such action.  Perhaps our policy makers should be tested to see if they support the manifesto for the  Pigou Club or a bit smaller challenge, if they know Pigou’s contribution to welfare economics.

Chicago Management Consultant Firm Offers Summer Internship

Productive Strategies, a marketing and sales consulting firm in Chicago, seeks a summer intern. The firm works with small, private companies as well as large, publicly held companies – in a wide range of industries. The firm features a small group, about 12 in total, with 3-4 members located in one office in Winnetka/Northfield, Illinois about 15 miles north of downtown Chicago. It is looking for someone to assist in the Winnetka/Northfield office with marketing and sales efforts, as well as to participate in occasional client assignments. The internship offers an opportunity to attend classes that they teach on developing relationship and selling skills (for free). Interns should have good computer and data entry skills. The volume of expected work probably will not require 40 hours a week – but more like 25-30 a week – week to week the workload could vary. Our website (ProductiveStrategies.com) provides additional background information on what the firm does.

The firm prefers someone from the Chicago area, as it cannot provide housing. It would pay a modest stipend at the end of summer based on the amount worked and contributions made and is very flexible on when someone would start and stop, as well as on time away from work. Finally, Productive Strategies would like to emphasize that its work environment is very low key.

Those interested should contact Terry Franke, Lawrence alum.

Terry Franke

Productive Strategies

Two Northfield Plaza #365

Northfield, IL 60093

tfranke@productivestrategies.com

847-778-7015 direct

847-446-0008 x7 office

ProductiveStrategies.com

Gulf Oil, Energy Independence, and “Drain America First”

In a recent weblog, economist Jeff Frankel makes a strong case that the best way to gain energy independence – whatever that might mean – is to leave the oil in the gulf until a real emergency arises.  He notes that the “drill, baby, drill” advocates essentially want to drain America of oil before we buy from others.  This makes no economic or security sense.

What are Companies Good For?

In today’s Economix blog, Uwe Reinhardt addresses the time honored debate regarding the role companies play in an economy.  He contrasts the Neo-Classical view, with appropriate reference to Adam Smith, with communitarian views   expressed by many critics of capitalism.  He argues that simple ideological distinctions misinform rather than inform a discussion of how wealth is generated or destroyed by business.  Reinhardt writes superbly.  I encourage all to read his regular entries to the NYTimes Economics blog.

Internship related to Sports Economics

The opportunity below must surely be one that you devotees of sports would salivate over.  The WSDC seeks a student to do an economic impact study of the Badger State Summer Games to be held in the Fox Cities.  If you are interested, please contact Jackie Jensen (no relation I assume to the former Boston Red Sox right fielder) and let me know.

Wisconsin Sports Development Corporation has an opportunity for a student or class to gain real-world experience in conducting an economic impact survey of the 2010 Badger State Summer Games held in the Fox Cities during the weekends of June 18-20 and June 25-27.

Wisconsin Sports Development Corporation (WSDC) is a nonprofit 501(c)(3) charitable organization devoted to fostering participation, competition and memorable experiences through our events and programs that promote health, active lifestyles and a sense of community.  WSDC’s marquee event is the Badger State Games.  The philosophy of the Badger State Games is that everyone plays regardless of age or ability. The Games embody the values of participation and good sportsmanship. BSG is Wisconsin’s only Olympic-style sports festival and is truly a grassroots organization that relies on the dedication of thousands of volunteers and the support of corporate partners.

WSDC wishes to ascertain the economic impact the Badger State Games has on the Fox Cities area.  In order to do this the following steps will need to be accomplished (see attachments):

  1. Review past processes, tools, timelines and reports
  2. Revise, update or create new processes and tools
  3. Create a timeline for implementation
  4. Recruit and train volunteer staff as needed to implement the study
  5. Collect and analyze appropriate data
  6. Prepare reports and deliver presentations to various stakeholders – eg: BSG staff, board of directors, funding sources, and other constituents.

If you have a student or a group of students who would be interested in taking on this task, please contact Perron Nicholas at pnicholas@sportsinwisconsin.com or (608) 226-4780, ext. 238, for more information.

Jackie Jensen, SPHR

Director of Administration

Wis. Sports Development Corporation

(608) 226-4780, ext. 222

(608) 226-9550 – fax

A Modest Change to YOUR Future

Yesterday, Professor Gerard posted the course offerings for fall.  One of those, which should interest students who seek a broad based 200 level course will be the history of economic thought.  The registrar suggests that students should sign up for the actual course rather than for a tutorial. This will be possible after May 12th.  The course was  last taught by Professor LaRocque here in 2001.  We have resurrected the course number and title.  SO:  sign up for ECON 330 – The Evolution of Economic Thought after May 12th.  If you seek further information, please contact Professor Finkler.

Lawrence Emeritus Professor Returns to Teach History of Economic Thought

The Economics Department is pleased to announce that Emeritus Professor of Economics Jules LaRocque will return this fall to teach a course in his specialty: the history of economic thought (see description below). This course will only be offered in the Fall term at the 2:30 – 4:20 time slot on Tuesdays and Thursdays. Timing prohibited publishing the course in the official course schedule prior to the registration period; therefore, if you are interested, please see or send an email to Professor Finkler.  We are excited to provide this opportunity and encourage students to take advantage.

History of Economic Thought The course examines the origins and development of ideas pertaining to production and distribution of goods and services in ancient to modern civilizations. Special attention will be devoted to ideas (and their authors) that led to the emergence of market-oriented societies. Examples of such authors are Adam Smith, J.B. Say, David Ricardo, Karl Menger, Alfred Marshall, F.H. Knight, and J. M. Keynes. The Marxian and socialist challenges to the market-based ideas will also be examined.

The Fed’s Business Model Works

Today’s headlines reveal that the Federal Reserve Bank of the United States contributed its net income (PROFITS) of $47B to the Federal Government in 2009.  It is required to do so by law.  Those who go on the Chicago trip in May (or who read the article)  will learn that the Fed is a regular contributor to governmental coffers.   Furthermore, it’s not just seigniorage (for those of you in Econ 320.)