Merton Finkler

Author: Merton Finkler

Bilateral Trade Numbers Are Misleading At Best

On January 13, 2011, The Bureau of Economic Analysis in the the U.S. Department of Commerce reported that as of November 2010, the U.S.  trade deficit with China for 2010 amounted to $252  billion.  This number tells very little about the character of trade between the two countries.  It just captures the difference in final sales value of exports minus imports.   Pascal Lamy, director-general of the World Trade Organization, argues in today’s Financial Times that manufacturing products developed through a global supply chain of steps should be labeled “made globally.”  His comments include the notion that the Apple iPhone contributed $1.9 billion to the recorded US trade deficit with China, but that the value added in China from this product would come to only $73 million.  Other analysts have shown that the value added in China comes to less than half of the trade balance number published.

Furthermore, the Bureau of Economic Analysis published a report indicating that 55% of our imports are used in the U.S. to produce domestic goods and services.  Stated differently, these imports enable our companies and workers to be both productive and profitable.

Discussion of trade deficits without these detailed clarifications at best misinforms the public as to the economics of globalization; at worst, it encourages us to close our borders to (some) imports which would lead to both higher domestic prices and lower domestic output.  The effects on employment would be complicated but not positive in the aggregate.

The Messy Path to Creating New Jobs

Carl Schramm, in a current blog entry in Forbes magazine, argues that job growth comes from the creation of new firms. Schramm is the president of the Kauffman Foundation and a strong advocate for the education of as well as the creation of an economy that encourages entrepreneurs.  We have many politicians arguing for job creation but few who understand where jobs come from.

Is Facebook worth $50 Billion?

William Cohan (author of House of Cards and other books on the financial industry)  in today’s “Opinionator” in the New York Times opines that Goldman Sachs’ management of an expected IPO for Facebook reflects how the financial system has not really changed despite the most recent crisis.  Boom and bust cycles fed by cheap credit and poor incentives still rule.  Check it out.

Julian Simon vs. Paul Ehrlich: The “Bet” Revisited

In today’s New York Times, John Tierney not only revisits the famous bet between Simon and Ehrlich in 1980 but discusses the results of a bet that Simon’s wife and he placed with Ehrlich’s followers.  The question is an age old one: What will happen to the price of natural resources when economies grow?  Ehrlich argued that finite stocks of such resources would lead to rapidly rising prices.  Simon argued that human ingenuity and substitutes would keep such prices from rising very rapidly.  Ehrlich’s followers bet that the price of oil would rise to $200 per barrel by January 1, 2011 from $65 per barrel in August 2005.  Obviously, Tierney and Simon bet against.  You probably can guess who will win, but you should read the story anyway.

Mandated Health Insurance: the Big Tradeoff


David Leonhardt in today’s New York Times opines that the constitutional debate regarding the mandated insurance provisions of the health reform bill passed last March sends us back to many previous “constitutional” battles including those related to Social Security and Medicare.  Fundamentally, countries must set the boundaries for both risk taking and security provision.  He argues, in my view quite persuasively, that the security blanket of mandated insurance both encourages constructive entrepreneurship and discourages free-riding.  I wish that our public debate might take his arguments seriously.

The Moment of Truth

On December 1st, the President’s Commission on Fiscal Responsibility and Reform published its report on how taxes and spending patterns can be made sustainable.  For the most part, the report contains the recommendations of its two c0-chairs Republican Alan Simpson and Democrat Erskine Bowles.  The report garnered support from 11 of the 18 commission members.  I encourage everyone to at least peruse the report.  As noted in a November 11th  blog entry , it’s a serious attempt to change the unsustainable fiscal path for the U.S. Federal Government.

You Fix the Budget

 

Yesterday’s New York Time provided an opportunity for each individual to propose ways to close an estimated $400+ B Federal budget gap for 2015 and a $1.3+ B budget gap for 2030.  The exercise is structured in such a way as to show you how much “savings” is generated by each action.  For example, the complete elimination of farm subsidies would yield an estimated $14B per year.  As noted by many, including the co-chairs of the Presidents Deficit Reduction Commission (addressed in a previous blog entry), “fixing the budget” cannot be done without considering cuts in Medicare, Social Security, and Defense spending.  My first attempt can be found here.

The fundamental question, directly posed by Clive Cook in today’s Financial Times, is:  Will the President back the commission co-chairs, and thus demonstrate serious leadership, or will he – in the time honored tradition of political discourse – duck the issue?  Who will be the losers in this game of “duck, duck, goose?”

Business, Entrepreneurship, and Society Program

Last Friday and Saturday, I participated in a variety of activities related to the Chicago ACM program on Business, Entrepreneurship, and Society.  Two current seniors, Alex Chee and Cuong Nguyen, are enrolled in the program and have fascinating internships that they will tell us about when they return in January.

We visited the Industrial Council of Nearwest Chicago (ICNC), which has been serving business start-ups for 40 years.  The above building houses over 120 tenants that are in the early stages of business development.  ICNC owns and manages this 410,000 square foot space and supports the resident entrepreneurs with a variety of services including counseling and technical assistance, advocacy, recruitment, funding, and employee training.  We met with one firm (Souldier) that recycles automobile seatbelts into guitar straps (for famous and not so famous bands) and another (Aloft) that teaches how to do aerial acrobatics on silk ribbons hung from the rafters – an awe inspiring vision.

If you fancy yourself as an entrepreneur, seriously consider enrolling in this program.  You will find out whether such a lifestyle is a perfect fit for you.  If you have questions or seek more information about the program, come see me.

A Serious Deficit Reduction Plan, At Last

President Obama created a deficit reduction commission that has been asked to propose ways for the United States to bring down the (annual) deficit to GDP ratio from above 8% presently to 3% by 2015.  The two committee chairs,  Alan Simpson – former Republic Senator from Wyoming – and Erskine Bowles – former Clinton administration chief of state – have published a list of contentious ideas they believe necessary to achieve the intended target.  They have not avoided controversial programs such as Social Security, Medicare, mortgage interest rate deductions, and defense spending since they recognize that serious plans require serious discussion.

Their report must be made public by December 1st, and if it garners the votes of 14 of the 18 commission members, it must face an up-down vote in each house of Congress.  I find this effort the most interesting one related to politics since the Greenspan Commission to modify the Social Security program presented its report in 1983.  I wish them good luck.  They (and we) will need if we are to make serious progress and reducing future economic instability.

Not Everyone in the US Loves QE2

As a follow-up to Professor Gerard’s post, I  draw your attention to Tom Hoenig, President of the Federal Reserve Bank of Kansas City, who has been the lone dissenter on the Open Market Committee votes on monetary policy.  He fears the consequences of our short term reactive policy making.  His position parallels that of Raghuram Rajan, among others, who note that monetary policy has done all it can and that some of the potential consequences of further monetary easing are destructive both domestically and internationally.  The Chinese and the Brazilians aren’t the only ones yelling STOP!

The Fiscal Train Wreck at the End of the Tunnel

Courtesy of a former student of Professor Gerard, Lawrence faculty and students have access to the Roubini website.  I encourage you, especially those of you interested in either international economics or macroeconomics, to pay regular visits to the site.  Recently, Nouriel Roubini – after whom the site is obviously named – penned a short opinion piece entitled “U.S. Fiscal Policy:  A Train Wreck Down the Line?” which lays out some fundamental questions that our political structure has failed to address.  Although next year’s Congress will have different interests than the current group, Roubini’s concerns (and mine too) still obtain.  Check it out.

Economic Education: Film Creation/ Entrepreneurship Opportunity

The Federal Reserve Bank of St. Louis (which you know offers numerous publications that contain a fabulous array of macroeconomic data) recently announced a contest to produce a YouTube video that helps explain the factors of production in general and the role of entrepreneurs in particular to high school students.  For some of you, this is too good an opportunity to pass up.  Go to St. Louis Fed to learn the details.

The Great Depression vs. The Great Recession

Come one come all to Wednesday’s talk by Professor Finkler about parallels between the Great Depression of the 1930s and the Great Recession that was recently declared over.   The presentation will highlight the lessons to be learned from the Great Depression and to what degree we have learned them.  The talk will take place in Steitz Hall 102 at 4:30, Wednesday, October 20th.

Wall Street Incentives Have Not Changed

Despite 2,000 + pages of D0dd-Frank legislation and new  Basel III conditions,  NY Times columnist Willam Cohan, author of among other works House of Cards (The Rise and Decline of Bear Stearns), opines that few incentives have changed for the high rollers on Wall Street.  In short, he argues that Wall Street financiers are still playing with everybody else’s money but their own; so “heads I win, tails you lose” effects are still with us.  To cite, Steven Landsburg’s favorite definition of economics: “incentives matter; all else is commentary.”   I encourage you to read the details.

Tax Credits and Income Tax Exemptions are the “Hidden Hand of Government Spending”

Whether the government gives you a tax credit of $100 towards some specific expenditure or spends a $100 on that same item and thus reduces the out-of-pocket cost to you, the effects are the same:  1) a increased deficit to be funded, 2) distorted incentives.

Edward Kleinbard in the Fall 2010 issue of the journal Regulation argues that these incentives in 2008 amounted to foregone tax revenue of roughly $1.2 trillion per year which exceeds what was raised through the individual income tax ($1.1 trillion) and “is more than twice as much as all non-defense discretionary spending ($528 billion.)”

For example, mortgage interest rate deductions, health insurance premium deductions, and energy tax credits all distort our economic choices (often in regressive fashion) and deepen our budgetary abyss.  More of these, which seems the purview of both political parties, does not make our aggregate fiscal situation better, it just means that the day of reckoning when it comes, will be much more difficult than it otherwise might be.