…because I’m an economist and a mom–that’s why!

Yes, 2008 Was Exciting–But We’re Ready for a Happy New Year

December 31st, 2008 . by economistmom

(photo of the new New Year’s Eve ball to drop in Times Square tonight!)

Dave Barry summarized well the chaos and weirdness of 2008 in his Year in Review last weekend:

How weird a year was it? Here’s how weird: 

  • –O.J. actually got convicted of something. 
  • –Gasoline hit $4 a gallon — and those were the good times. 
  • –On several occasions, “Saturday Night Live” was funny. 
  • –There were a few days there in October when you could not completely rule out the possibility that the next Treasury secretary would be Joe the Plumber. 
  • –Finally, and most weirdly, for the first time in history, the voters elected a president who — despite the skeptics who said such a thing would never happen in the United States– was neither a Bush nor a Clinton.
  • Of course, not all the events of 2008 were weird. Some were depressing. The only U.S. industries that had a good year were campaign consultants and foreclosure lawyers. Everybody else got financially whacked. So, we can be grateful that 2008 is almost over…

    It’s been a great year of excitement and change for myself as well, and I’m very grateful for many good things that came to me in 2008 (this blog, and my connections with new and old friends through this blog, included).  But like Dave Barry and the rest of the country, I’m really ready to move onto 2009, and I look forward with a lot of optimism.  I’m hopeful that 2009 will be a happier year for most of us.

    Happy New Year!

    What Makes for “Worthy” Stimulus Spending?

    December 30th, 2008 . by economistmom

    Today I spoke with a reporter about the “Christmas wish list” of “ready-to-go” state and local spending projects presented by the U.S. Conference of Mayors.  She pointed to some projects on the list that have received lots of criticism from policymakers, for their seemingly dubious qualifications as “good stimulus”–such as a particular project in an Ohio city to get prostitutes off the streets.  But the reporter was asking me if the criticism of these projects was warranted from an economic standpoint.  What makes the prostitutes’ program or the polar bear exhibit a bad idea, economically, compared with other projects that sound more reasonable (justified, substantial, serious, and moral?)–such as, for example, mass transit, highway, and ”green infrastructure” projects?

    My quick response was that there’s not necessarily a strong correlation between what seems “worthy” from a moral or “smell test” (or “first blush“) perspective, and what is really “worthy” (i.e., worth it) from an economic perspective.  For example, in the case of the prostitutes project, I flippantly responded that the economic worthiness of the project depends on whether they might hire any laid off autoworkers to chase those prostitutes!  (Hmmm….)

    But seriously (I went on), a key question for all of this state and local spending billed as “stimulus” is whether and how quickly these initiatives can create or save jobs.  Is there a good matchup between the weakness in the local job market and the new labor demand that would be associated with the spending project?  And better yet, in the process of creating these new jobs (quickly), is there also good on-the-job training that would be provided, so that even after some of these jobs might go away, workers would be left in a better position in terms of their longer-term employment prospects? 

    For example, I have been wondering about what the Detroit area might come up with for their laid off autoworkers. Would it be possible to come up with “stimulus” spending that helps Detroit with both short-term jobs and longer-term “transformation” toward producing green (more sustainable) technologies?  As I look on the list of Detroit-area projects submitted by the mayors, I’m not sure I see very much of that longer-term vision, but I think in evaluating the worthiness of these projects we have to at least pay attention to the “bang per buck” measures–such as the (inverse of the) cost of the projects per job created (and the quality of the jobs and who would get those jobs)–and hope that the jobs claims in the report aren’t wildly exaggerated (although I worry why wouldn’t they be?).

    The Economist Magazine on Carbon Policy in the Year Ahead

    December 29th, 2008 . by economistmom

    The Economist’s “The World in 2009″ special issue is really great reading, and in this year’s issue they include a special section on the environment.  Deputy editor Emma Duncan leads off the section with “Wonderful, wonderful Copenhagen?”–suggesting that carbon policy is going to be a really “hot topic” (my pun intended) in the year ahead, especially here in America:

    The most important year for climate change since 2001, when the Kyoto protocol (which set targets for cutting carbon-dioxide emissions) was agreed, will be 2009. The first period of the protocol runs out in 2012. The deal to replace it is supposed to be done at the United Nations’ Climate Change conference in Copenhagen, which starts on November 30th 2009 and is due to end on December 11th. No deal means that mankind gives up on trying to save the planet.

    The accord needs to be a substantial one, not just a face-saving agreement to declare that the issue must be tackled. The rich world (especially America) needs to commit itself to legally enforceable carbon-emissions reductions for the second period of Kyoto, from 2012 to 2016 and beyond. The big emitters from the developing world, such as China, need to commit themselves to something substantive—not economy-wide emissions-reductions, but, for instance, carbon-intensity targets (cuts in carbon emissions per unit of GDP) or measures directed at the power sector in particular…

    What happens in Washington is most important. Progress on climate change is much likelier under the new administration than the old, for the new one is committed to introducing mandatory federal carbon-emissions cuts through a cap-and-trade scheme of the sort that operates in Europe. What is not clear, though, are the answers to the crucial subsidiary questions. Where do the cuts come from? And how big will they be?

    The amount of political capital the new president is prepared to spend on climate change will determine the answers to those questions. Plenty will be needed to overcome opposition from organised labour, which fears possible job losses resulting from the higher costs that carbon constraints are bound to impose, and from dirty industries, such as aluminium, cement, oil and carmaking, which fear the impact on profitability. The administration is likely to reach for “border adjustments” (tariffs on carbon-intensive goods from countries that America thinks are not doing enough to cut emissions) to help overcome objections from those quarters. It may disappoint greens by going for a system that includes a cap on the carbon price, and by setting the cap on emissions higher than environmentalists would like. And even with those compromises, getting legislation through Congress in time for Copenhagen will be exceedingly difficult.

    And The Economist’s energy and environment correspondent, Edward McBride, continues to worry about the inevitable political opposition that carbon policy will face, in his article “Fighting for the planet” (subtitle “So much to argue about in green politics”):

    The giddy price of oil subsumed most talk of the environment in 2008; in 2009 the price of carbon will be the most pressing question. In America, the new president has pledged to cut emissions by instituting a cap-and-trade scheme: expect a drawn-out battle in Congress…

    As with free-trade deals, the proliferation of regional and local carbon-trading schemes is likely both to spur efforts to reach a global accord and to complicate them. In America, ten north-eastern states have grouped together to form the Regional Greenhouse Gas Initiative [link added], a cap-and-trade scheme among utilities that starts running on January 1st. Opponents of emissions-trading will hold up every glitch as an example of how misguided the whole concept is; proponents will insist it proves emissions-trading is viable, whatever its flaws.

    Western states plan another, more ambitious programme, while Midwestern states are working on a third. To make matters even more complicated, several Canadian provinces plan to participate in the various American initiatives, in protest at the relative modesty of Canada’s own national scheme. Australia and New Zealand will try to link up their respective systems. And there will be a row, complete with legal battles, over the EU’s plan to levy a carbon tax on flights to or from Europe. As a negotiating stance, the regions and countries with more stringent policies will insist that national and global arrangements must not pander to the lowest common denominator. But they will also be quick to scale back their green ambitions if efforts to set up broader trading schemes founder.

    All this uncertainty will not be good for the carbon markets. Prices will be volatile, providing more ammunition to those who dislike the idea of emissions-trading…

    Which leads me to take notice of this point in Dan Rosenblum’s comment to yesterday’s post on gasoline prices:

    …you correctly note in your post that a high price and certainty are necessary. A cap-and-trade program, unlike a carbon tax, would result in serious price volatility. The result? Energy users would not have the price signal they need to encourage investment in energy efficiency and less carbon intensive fuels. For a more detailed comparison of carbon taxes and cap-and-trade, see the Carbon Tax Center web site.

    Economists (who naturally have a bad tendency to abstract from reality) tend to view a carbon tax policy as basically equivalent to a permits/cap-and-trade carbon policy where the tax rate happens to be set at the market-clearing price that would result at the quantity of permits provided, and where government receives the full market value of those rights to emit carbon (all of the revenue from the tax).  But of course, in practice that market-clearing price would be constantly moving around under a permits policy that would set the quantity, not the price.  A carbon tax policy, on the other hand, sets the price, but results in uncertainty about the quantity (the end result in terms of carbon dioxide emissions).  For a market-based strategy that will undoubtedly interact with the rest of the economy and its dynamics, however, as well as one dependent on continued political support (in these difficult, recessionary times), it strikes me that it’s probably more important to establish certainty about prices (economic impact) much more than certainty about quantities (environmental impact).

    Why We Need Certain and Higher Gasoline Prices

    December 28th, 2008 . by economistmom

    This cartoon by Richard Thompson, from Dave Barry’s excellent Year in Review, reminds me that the “gasoline price roulette” we’ve experienced this year has not been a good thing for Americans–even as we now enjoy sub $2/gallon prices (and as my family’s just made the road trip from Virginia to Ohio).

    Why not?  Because just as we were starting to adapt to the $4/gallon prices we saw in the peak of summer–by driving less and more efficiently, shunning gas-guzzling SUVs, and getting on waiting lists for hybrids–the larger forces of a deeper, world-economy-wide recession started to bring gasoline prices quickly back down.  And what happened?  Check out the official data from the Energy Department’s Energy Information Administration.  Here’s the plot of retail gasoline prices over the past couple years:

    Note the peak is July ‘08, and the far right trough is where we are now…

    And here are the plots of U.S. gasoline production and gasoline demand, over the past year (the yellow and red segments; the blue line compares to same months last year):

    The middle of the two graphs above show U.S. production (supply) and demand in July.  That yellow line shows that both did not rise during the peak summer travel period but instead remained flat.  (Contrast with the July-August period in 2007, the blue dotted line.)  And in September-October of this year, both dropped off dramatically, further widening the decline from the prior year.  But since this fall when gasoline prices started rapidly falling, gasoline demand has rebounded just as dramatically, wiping out nearly all of the early-fall decline, and U.S. gasoline production now fully matches its 2007 levels.

    Which is why I think–and I’ve said this before–our country needs higher gasoline prices, assisted by government policies that would more appropriately “price” the external costs associated with the use of fossil fuels, such as through a carbon tax or cap-and-trade program.  It’s not just a higher price we need, but a higher and certain price.  And it’s not just us stupid, near-sighted American consumers who need to be forced into the better behavior of consuming gasoline more efficiently (conserving), but also the not-necessarily-stupid-but-profit-seeking, near-sighted Detroit automakers who need to be “incentivized” into the better behavior of producing more fuel-efficient technologies and vehicles.

    I’m not talking about enacting and implementing a carbon tax now, in the midst of this awful recession.  But I strongly agree with Resources for the Future’s Richard Morgenstern, who recently argued (in “The Hill” newspaper) that the incoming Obama Administration must make an early and clear commitment to establishing a carbon-pricing policy that would take effect as soon as the economy begins to recover:

    Obama clearly supports reductions in oil consumption and an attack on global warming. But a chorus of voices wants him to set aside any significant initiatives in these areas while he struggles to pull the country out of recession. Green elements of the stimulus package, they believe, will provide sufficient push for low- and no-carbon technologies, thus obviating the need for early decisions on a cap-and-trade or other carbon-pricing regime. But announcing at the outset an explicit plan for carbon pricing is essential — for two reasons.

    First, setting a carbon-pricing target would strongly signal to both business and consumers that new technologies must be developed and adopted without delay. Without that price incentive, the advent of greener forms of energy will be postponed yet again.

    Second, setting a price on carbon emissions will assure a revenue stream to support future climate-related programs — and, quite possibly, other initiatives as well. The stimulus package cannot go on forever, and carbon revenues can give the federal government the wherewithal to fund future initiatives.

    Opponents of an early announcement on carbon pricing say it may worsen the recession. The reality is that any such scheme cannot be implemented immediately, given the need to develop legislation and subsequent regulations…the president could propose an explicit mechanism to postpone implementation in the event certain economic conditions are not met…

    [I]t is the best way to reduce uncertainty about U.S. climate policy. Without such directives, investors will continue to act as if carbon emissions are free…

    A cap-and-trade system will put a price on those emissions, creating an incentive to develop and adopt more carbon-efficient technologies — much like the recent run-up in gasoline prices shifted consumer purchases in favor of fuel-efficient vehicles. As the economy rebounds, the expectation that an already enacted carbon-pricing scheme will soon kick in will trigger green investments. Early action could be further encouraged by distributing allowances — bankable for future use in a carbon-pricing program — to firms that reduce emissions prior to program implementation.

    The way I see it is that one consumer’s gasoline bill is another automaker’s return on his green investment.  Detroit isn’t going to “transform” just because the government goes “poof”–and isn’t likely to reform efficiently just because the government says “jump.”

    Dave Barry’s Year in Review: Detroit Automakers’ Edition

    December 27th, 2008 . by economistmom

    Dave Barry’s Year in Review is out in the Sunday Washington Post magazine.  It’s all brilliant, but some of my favorite parts deal with Detroit’s “Big Three” (for which Dave Barry has a perhaps-more-appropriate name)…

    In March:

    In environmental news, Earth Hour is observed on March 29, when cities around the world display their commitment to conserving energy by turning out their lights for one hour. When the lights come back on, Detroit is missing.

    In April:

    In economic news, the price of gasoline tops $4 a gallon, meaning the cost of filling up an average car is now $50, or, for Hummer owners, $17,500. Congress, responding to the financial pain of the American people, goes into partisan gridlock faster than ever before, with Republicans demanding that the oil companies immediately start drilling everywhere, including cemeteries, and Democrats calling for a massive effort to develop alternative energy sources such as wind, the sun, tides, comets, Al Gore and dragon breath, using technology expected to be perfected sometime this millennium. It soon becomes clear that Congress will not actually do anything, so Americans start buying less gasoline.

    The economic news is also gloomy for the U.S. automotive industry, where General Motors, in a legally questionable move aimed at boosting its sagging car sales, comes out with a new model called the “Chevrolet Toyota.”

    In June:

    In economic news, Chrysler announces a plan to lay off workers who have not been born yet.

    And finally in December, my favorite of Dave Barry’s commentary on the automakers, because he relates it to the federal budget (as I like to do here on EconomistMom): 

    The CEOs of the Increasingly Small Three automakers return to Washington to resume pleading for a bailout, this time telling Congress that if they can reach an agreement that day, they will throw in the undercoating, the satellite-radio package and a set of floor mats. “We’re actually losing money on this deal!” they assure Congress. Finally, they reach a multibillion-dollar deal under which the car companies will continue to provide jobs, medical care and pension benefits, but will cease producing actual cars. The restructured operation will be overseen by the federal government, using its legendary skill at keeping things on budget.

    From Greg Mankiw’s Advice to a Young Economics Student

    December 26th, 2008 . by economistmom

    Despite Greg’s post on Christmas Day which was much more cynical than mine in his choice of a YouTube clip, today he gives some advice to a young econ student that I find much more “merry and bright” about our profession overall.  We are not always and all a disagreeable, dismal, disdainful bunch:

    The current economic environment is a particularly hard time to learn economics. There are a lot of topics about which economists agree, but the diagnosis and best remedy for the current economic downturn are not among them. It is therefore no surprise that your econ profs express disparate views about the appropriate policy in the current environment. Don’t read too much into this fact. I bet there are many other topics about which these economists would come to similar conclusions. Ask them about rent control, or international trade, or Pigovian taxes, for instance, if you want to find broad areas of agreement…

    [D]on’t expect to reach unequivocal positions easily. In my view, it is best to consider all knowledge as tentative. The best scholars maintain an open-mindedness and humility about even their own core beliefs. Excessive conviction is often a sign of insufficient thought, which in turn may be derived from a certain pig-headedness. Intellectual maturity comes when you can maintain the right balance between informed belief and honest skepticism…

    As I (today) try to work on writing about environmentally-motivated taxes (which qualify as the kind of “Pigovian” taxes Greg refers to above) as part of my contribution toward a bipartisan tax policy paper, Greg’s words are good motivation.  (More on my thinking about carbon taxes to come in the next few days.)

    Merry Christmas!

    December 25th, 2008 . by economistmom

    Merry Christmas to all readers who celebrate the holiday!  Last night as I was wrapping presents I was watching “It’s a Wonderful Life” on network TV, and thinking how the classic has a certain timeliness this season, with all that’s gone wrong in the economy.

    But as this Orlando Sentinel column by Rachel Inez Lane observes, maybe this season we have reason to be optimistic about the new year, as we can hope that somehow wrapped up in the new President, Administration, and Congress, there’s a little bit of “Clarence the Angel” to be found in the federal government:

    When George Bailey decides not to jump off that bridge, he returns home and discovers that everyone he had ever given a loan to has paid him back. The Baileys’ Christmas miracle comes when a bowl is filled with money. Clearly this may be construed as unrealistic, but people aren’t looking for economic theories or government bailouts in movies. They want magic.

    In the film’s economic utopia, did the Baileys’ community take only what it needed? Or was it that one banker didn’t abuse the power of loans for personal wealth? To the public, today’s government bailout may look like Clarence, George’s older, graying and out-of-shape Christmas angel.

    In recent years, some critics have said the movie has lost its original meaning because the historical context in which the film was made overwhelmed everything else, and we view this classic through a mythical past. But this year is different. We are in the midst of the worst recession in recent times. Americans may view the film with some of the immediacy of a Depression-era family.

    We can hope that next year more angels, such as Clarence, will win their wings by saving more families from economic hardships. But the only wings American families have seen for the past few years have been those flying away with their money and mortgages.

    If I were to create a Christmas movie today, I would show a working-class family trying to get through the hard times. I would return to the authentic meaning of movies such as It’s a Wonderful Life — that amid financial ruin, “true meaning” resides in family and hope.

    And that last point seems exactly the best one to focus on this holiday season–that for most of us, our most reliable “angels” (our “Clarences”) are found right within our family and friends, as this psychology blog notes.  Since I began this blog in May, I have made many new friends because of it, and I have grown closer to many old friends through it as well.  This Christmas I count my blessings in all of you and wish you the most joyous of holidays.  Despite that nasty economy out there, it’s really a wonderful life.

    Thank Goodness for Government…Work

    December 23rd, 2008 . by economistmom

    Over-the-year percent change in employment, United States and 12 largest metropolitan areas, October 2008 (BLS, click on chart for clearer view).

    Today’s GDP report shows that were it not for growth in the government sector, the economy would have shrunk by more than three times as much as it did–which was by 0.5% (annual rate) in the third quarter.  For those who know and love national income and product accounting (NIPA) or just feel like waxing nostalgic about your college intro econ class, here’s how the -0.5% decline in real GDP breaks down in terms of percentage point contributions (from Table 2 in the report), a la the famous C+I+G+(X-M):

    C (personal Consumption expenditures):  -2.75

    I (gross private domestic Investment):  +0.06

    G (Government consumption expenditures and gross investment):  +1.14

    (X-M) (net exports, or eXports minus iMports):  +1.05

    …which means that thus far in this recession, growth in government and net exports is offsetting most of the decline in consumption.

    Which reminds me how fortunate I am to live and work in the DC metro area, an area pretty much centered around federal government-related work.  Because “we don’t bend metal around here” (as a friend of mine puts it), we’re doing much better around here than in most other parts of the country.  Today’s Washington Post story by Annys Shin complains of the unusually “widespread pain” of this recession, explained by the geographic breadth of the industries most adversely affected in this downturn–some of which admittedly may never “turn back up”…

    Recessions can be notoriously uneven. They can wreak havoc with the livelihood of factory workers but not that of bank tellers or nurses. Whole industries can see jobs washed away forever, while others hum along and even grow.

    This time, however, the pain is more widespread, economists say…

    Another key difference with past recessions has been the downturn’s “serial nature”…

    In other words, the recession has not affected industries and regions at once, but has rolled out in spurts.

    Industries with some of the steepest job losses include construction, financial services, retail and manufacturing. The regional differences in job losses reflect how large a role those industries play in a given area’s economy.

    In her story, Annys brings up California, Michigan, and Texas–but she doesn’t mention the DC area.  Although the metro area economy isn’t exactly “booming” now, I know we’re still going to weather this recession a lot better than the rest of the country.  Just a quick look at the Bureau of Labor Statistics’ “Economy at a Glance“ data shows why this area is so much better off than, say, Michigan:  manufacturing jobs represent just 1.7% of total (nonfarm) employment here, but 13.7% of total employment in Michigan.  Government jobs (572,000 of them, at all levels) represent 21% of total jobs in the DC metro area.  And even though manufacturing jobs here have been declining recently, they’ve declined by a much smaller percentage than in Michigan or the rest of the country, because chances are pretty good that most of the metal we do bend around here, is bent for the government.

    Here’s the latest (October 2008) metropolitan area comparison of employment trends from the BLS, from which the figure above comes, which shows Detroit dead worst, and only the oil-producing areas of the country doing better than the DC area–as of the fall at least, when those Texas communities were still benefitting from high oil prices…  That’ll change, as the only part of our economy we can count on to grow over the next year is the federal government, or whatever the federal government will end up subsidizing.

    In the Rush to Rescue, Will Haste Make Waste?

    December 22nd, 2008 . by economistmom

    The Washington Post editorial board, tipped off by the wisdom of Alice Rivlin (see this story from Friday’s Post), is worried that in the rush and panic to throw massive amounts of money at our ailing economy, haste will make waste (emphasis  and notes added):

    That Mr. Obama is reportedly prepared for his plan to rise from as little as $670 billion to as much as $850 billion [over two years] because of additions from Congress only reinforces that fear.

    “We’re not intending to spend money lightly,” Mr. Obama said Friday while refusing to put a firm price tag on his stimulus package, the goal of which is to create or preserve at least 3 million jobs over the next two years. That may be, but we’ve seen this before. In fact, it was in late September, when the financial rescue plan, billed as desperately needed for the economy’s survival, was larded up with unrelated measures that couldn’t pass on their own. [Remember the Senate "sweeteners"?]  With every constituency that has gone begging for federal money for years now developing wish lists for Washington to consider, it could happen again. It mustn’t. We agree with Alice Rivlin, budget director under President Bill Clinton, that the best way to ensure [the stimulus is not "larded up"] is for Mr. Obama to pursue a smaller package that would inject cash into the economy almost immediately.

    Much of what Ms. Rivlin proposes appears to be in the larger plan Mr. Obama’s economic advisers presented to Congress last week. It includes increased money for food stamps, bigger block grants to states (in addition to an increase in the Medicaid match they receive from the federal government) and funding for “shovel-ready” infrastructure projects. There would be a reduction in withholding for income or payroll taxes, and unemployment benefits would be extended…

    In no way are we advocating that Mr. Obama abandon his larger plans for transportation and infrastructure, digitizing medical records, school construction and repairs, and energy efficiency. But as Ms. Rivlin told us, there shouldn’t be a “huge commitment to long-term building without a well-scrubbed long-term plan. What do we really need to spend the money on?” That kind of plan and the discussion it should entail should not be rushed through in the next two months. Mr. Obama has said that the economic crisis provides the nation with an opportunity to transform its economy. If it’s not done right, it will have been an opportunity wasted.

    In the rush to “rescue” the economy, we still have to worry about how wisely we’re spending the money (even immediately) and what we might be committing to over the longer run.  Because that money isn’t free–even at a 0% interest rate.

    You Know the Movie’s “Made It”…

    December 21st, 2008 . by economistmom

    when it makes it into the NY Times Sunday crossword puzzle.  The clue for “2 Down” in today’s (Sun., Dec. 21st) puzzle is “2008 documentary about the national debt.”  Of course, the answer is here.

    Congrats, Patrick:)

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