Happy World Series!

Interesting fact about Larry Summers and baseball, "in the sixth grade Larry created an analysis of baseball games that attempted to predict the probability of a team’s performance at the end of the season based on its position in the standings on the Fourth of July." [from the New Yorker]

Alan Greenspan also learned how to do fractions by studying baseball stats.

Let's go YANKEES, let's go!

Green bill, Greenspan, Green with envy.

Yesterday:
Yesterday, the Minister Counselor and I had lunch with two congressional staffers on the Ways and Means Committee. It was one of the more exciting days at work, and not just because we were at a restaurant! They talked mostly about the KORUS FTA, but I had a chance to ask some questions about the U.S. auto industry in general, and the politics surrounding the issue of free trade. Evan and Alex were both really nice and patiently answered all of my questions.
For example,
I was thinking that on the one hand, it is an awful time to approach the issue of free trade because people gravitate towards protectionist policies during recessions in an effort to boost domestic markets. On the other hand, it is a great time to ratify free trade agreements because the global community has become (painfully) aware of the degree to which our economies are linked. Paul Krugman didn't win the Nobel Prize for nothing, right?

However, President Obama seems to be preoccupied with Health Care reform and the Energy Bill, which are also really important.

I also met Edward Gresser yesterday! He made a really good point about how the U.S. has some contradictory policies when it comes to the auto industry. For example, there is a 25% tariff on light trucks, which acts as an incentive for automakers to produce more light trucks. However, the government is simultaneously trying to get automakers to produce more fuel efficient vehicles. Why not just get rid of that 25% tariff?

BTW, isn't it interesting that in 1930, there was a 70% tariff on magic tricks and practical joke items?! So silly!

In other news: Brad DeLong blogged about the Fed and Greenspan. Chanda and I love all things Alan Greenspan. We want to adopt him as our grandfather.

Today:
I finally finished a report that I have been working on for one of the diplomats at the Embassy. He's such an interesting character. I saw him one Monday and asked, "how was your weekend?" and his response was, "I went to an Aerosmith concert with my friend and we stayed out past 11 PM! I went because I don't know if I'll be able to go once I get a little older..."
HAHA. He's so funny!

Anyway, the report was on tax incentives that motivate employers to hire disabled workers. I won't bore you with the details, but basically, employers can receive tax credits for hiring disabled workers or for making their work place more accessible. The efficacy of these tax incentives are disputed, but there have been arguments that such incentives would distort the labor market and lead to" displacement" and "churning." Displacement is the discrimination against those who will not allow the employer to take advantage of disabled worker tax credits. Churning is the act of replacing older disabled workers with new ones such that the employer would qualify for more tax credits. However, in 2001, the GAO testified before the Committee on Ways and Means and stated that 93% of employers surveyed reported that displacement and churning have little to no cost-effectiveness. So, no such labor market distortions.

Someone at work today said, "I am amazed by the wonderful opportunities and programs that are available to the disabled people in the U.S. (compared to Korea.) But then I wonder, how can the same country have such bad health care?!"

Haha. I thought that was really funny.

Tomorrow:
Having dinner with DJ Nabs and his wife, Alaka, tomorrow! I can't wait to ask them about the IMF and the World Bank. They're so awesome. I'm jealous.

The Blame Game.

TIME magazine picked the top 25 people to blame for the financial crisis.

Of course Alan Greenspan is on the list, as are former Presidents Clinton and W. Bush. Phil Gramm took first place.

Bush is often credited with having shred the regulatory system. During the first presidential debate, Obama said: “The Bush administration has shred the regulatory system.” “Senator McCain thinks that regulation is always bad.”

But does Bush really deserve that much credit?

Although Obama sought to connect the current financial downturns to McCain and the Republicans' aversion to regulations with respect to the private sector, there is much evidence to suggest that the regulatory system has been railed against since the 1980s.

In response to the collapse of banks during the Great Depression, Congress passed the Glass-Steagall Act in order to separate the activities of investment and commercial banks. However, as international markets grew, Glass-Steagall became increasingly burdensome as it precluded companies from acquiring both the skills of investment banks and the capital of commercial banks. Under the Clinton administration, the Gramm-Leach-Blilely Act of 1999 was passed, repealing the Glass-Steagall restrictions and amending the Bank Holding Company Act [allowing inter-state mergers]. These, as well as the Commodity Futures Modernization Act [which allowed single-stock futures], allowed for banks to acquire significantly larger amounts of capital that could then be invested in mortgages. However, Gramm-Leach-Bilely had little effect on firms such as Bear Stearns and Lehman Brothers which continued to function solely as investment banks. The fact that they were the first to collapse suggests that the financial sector has been affected by factors other than the regulatory system, or lack thereof.

Furthermore, when capital income on corporate debt is taxed once while equity returns are taxed twice, firms are more likely to take advantage of this asymmetry by issuing more debt than they normally would. These highly leveraged firms, and their inability to "self-regulate," made the financial sector more fragile and more vulnerable to falling asset prices. Eliot Spitzer observes: "The reality is that unregulated competition drives corporate behavior and risk-taking to unacceptable levels. This is simply one of the ways in which some market participants try to gain a competitive advantage. As one lawyer for a company charged with malfeasance stated in a meeting in my office (amazingly, this was intended as a winning defense): "You're right about our behavior, but we're not as bad as our competitors." [also, does the last paragraph of the Eliot Spitzer article not make you really sad? it makes me really sad...]

However, more regulation has not necessarily proven beneficial to the financial system as Obama might suggest. Contrary to Obama’s claim that the Bush administration shred the regulatory system, the Bush administration was responsible for the Sarbanes-Oxley Act of 2002 which includes the much abhorred Section 404. This law requires companies and their auditors to assess the companies internal controls, and although the costs of abiding by this law have been high, the benefits are not easily measurable. As a result, foreign firms withdrew from American markets; the number of the top twenty public offerings in the U.S. dropped from eight to one between 1996 and 2006. Furthermore, although Sarbanes-Oxley attempts to eliminate a certain degree of risk, the decline in short term equity premiums might have induced firms to seek higher returns in riskier investments. Mortgage-backed securities may have been further proliferated by firms seeking to hold their advantage under SOX which already caused U.S. firms to realize a lower rate of return than foreign firms.

So was it all Clinton and Gramm's fault?

De-regulation under Gramm-Leach-Bliley may have allowed for such "sophisticated" and risky products to be created. However, as previously mentioned, the first banks to fall, Bear Stearns and Lehman, were little affected by GLB. Furthermore, as Bernanke stated the other day, such processes as securitization provide about half of the liquidity in our financial system.
Also, I would just like to point out that the President does not have control over the federal funds rate. The Fed is independent. As Professor Johnson tells us, when you say your prayers at night, give thanks for the independence of the Fed.

So maybe it was all Alan Greenspan's fault for keeping interest rates so low for so long?

Greenspan set the fed funds rate so low in order to avoid a "lost decade" similar to that of Japan in the '90s. Or similar to the Great Deflation [1870s-1890s] in the U.S.

Deflation:
"Too little money chasing too many goods."
Deflation is when you can get more goods per dollar than before. [opposite of inflation]
So during deflationary periods, debtors are hurt and creditors are helped. Debtors are repaying loans in deflated dollars [dollars that are now worth more]. Creditors are being repaid in dollars that are worth more. Debtors tend to already be poorer than creditors, so the poorer are screwed even more.
The wealthy also tend to have smaller propensities to consume [they're more likely to save than those who are poor. b/c if you're poor, you're living hand to mouth, spending whatever you earn on necessities.] Ceteris paribus, [all else constant], this would lead Y to [output, or aggregate GDP] to fall.
Japan addressed its "lost decade" with inflation targeting.

Ben Bernanke is really hoping for some inflation right now. Something like Dorothy's silver slippers...

Random thoughts
So my mom left for the Dominican Republic with her friends on Monday and it was her first trip without the fams and with a U.S. passport. Needless to say, she was really excited. I travel a lot more than my parents do - in planes, in cars. And my mom always tells me to call when I reach my destination. Usually I'm pretty good about remembering, but sometimes I forget and my mom will call me to yell at me. Then I get annoyed and say, "well, of COURSE I'm safe. What do you think happened, my plane crashed? Jeez." But the night before my mom left, I pretty much prayed my ass off [which means a lot coming from me b/c I'm not one of those ppl who believes prayer is a legit method of birth control or anything] and I couldn't fall asleep because I was so worried. And then I thought, it must be SO much worse for my mom when I travel, because I'm sure she loves me more than I love her. And I thought, OMG. I am NEVER forgetting to call my mom EVER again. So kids, call your parents when you get to your destinations. It takes 2 seconds.

The end.

Edit: Professor Johnson just assigned this reading for this week's p-set!
This sentence makes me sad: "[Fisher] was prominent among the 1,028 economists who in vain petitioned Herbert Hoover to veto the infamous Smoot-Hawley tariff of 1930."

Hindsight is 20/20.

Fair Inequality.

In the midst of the current macro-economic crisis, I have come across many angry people. Yes, modern finance is flawed, but what are the alternatives? [a question that Obama and his team will have to address] I also feel that much of people's anger is misdirected [towards Alan Greenspan, who at least had the courage to man up and apologize.]

Firstly, not everyone who makes a shit ton of money is corrupt/doesn't deserve it. Income inequality is sad, but is it unfair?

In "The Conscience of a Liberal," Paul Krugman argues that poor institutions are to blame and that "movement conservatism" has been contributing to income inequality. He gives the "Great Compression" as an example of how great institutions can make this world a happier, more equal place. Now, Paul Krugman is a Nobel Laureate, and I'm a half-person who only started taking Econ classes 2 years ago, so don't eat up everything I say here, Jess. Haha. But here's my response to Paul Krugman's view:

Although the “Great Compression” of World War II is largely attributed to such institutional changes as the creation of the NWLB, NIRA, a redistributive tax code, and the introduction of health care benefits, one can not argue that the inverse is also necessarily true.
The equality that is characteristic of the "Great Compression" can also be explained by simple supply and demand for unskilled vs. skilled workers.
During World War II, the composition of labor markets changed drastically as the relative demand for unskilled labor increased and the supply decreased. The egalitarian structure of society was retained even after the institutions of World War II were dissolved b/c although the relative demand for skilled labor increased after the war, the relative supply increased at a faster rate [Piketty, Thomas, and Emmanuel Saez. "Income Inequality in the United States, 1913-1998." Quarterly Journal of Economics CXVIII (2003): 1-37.]

Currently, DEMAND for skilled labor outpaces supply. The wages of American educated workers are some of the highest in the world as a result of increasing demand and increasing scarcity value. The richest 1 percent of wage earners received 80% of all income gains from 1980 to 2005 [Piketty-Saez]. The gap between the median earnings of men with B.A. degrees and that of all full-time male workers has also increased from 14% in 1967 to 120% in 2005 [Levy, Frank, and Peter Temin. "Inequality and Institutions in 20th Century America." National Bureau of Economic Research: 1-42.]

Globalization has also increased the elasticity of demand for low-skilled workers as firms gain access to foreign labor markets, thus decreasing the comparative viability of the domestic low-skilled labor force. And since labor is not subject to arbitrage to the extent that tradable goods are, institutions that skew the price mechanism [minimum wage laws] further exacerbate the loss of income accruing to low-skilled labor. Although minimum wage is meant to protect the lower income brackets, it actually creates excess supply of low-skilled workers in the domestic market and pushes firms to take advantage of cheaper low-skilled labor abroad. In 1974, a 25% increase in the minimum wage, from $1.60 to $2.00 was correlated with an increase in the unemployment rate in the U.S. from roughly 5.0% to 7.2% ["Why the Minimum Wage Law Causes Unemployment." NCPA. National Center for Policy Analysis. 18 Sept. 2008 ]
Edit: Larry Summers also finds that wages above market rate increase rigidity in the labor market/may increase long term unemployment.

Also, rent-seeking behavior is railed upon when observed in developing countries with corrupt gov'ts, etc. But how is the auto industry in the U.S. any different?
Subsidies and bailouts which also work contrary to market mechanisms, increase the opportunity cost of propping up U.S. industries that have become increasingly non-competitive at the global level. For example, in 1979, Chrysler faced financial difficulty as oil prices rose making its fuel inefficient vehicles unappealing to consumers. Congress and the Carter administration granted Chrysler an unprecedented subsidized loan which saved Chrysler; it has since been described as a case of moral hazard in which risky behavior can be defined as the absence of innovation. Furthermore, such subsidies and bailouts provide temporary solutions to the sectoral shifts that the economy must eventually address. As global markets lower the value of non-competitive U.S. sectors such as manufacturing, income inequality can only increase as wages in those sectors decrease. Innovation is the only way by which such “dying” sectors, which witness decreased productivity in the U.S., can achieve sustainability. [see Schumpeter for further inspiration] Since real wages reflect productivity, by addressing sectoral shifts in the economy we are pursuing policies that would mitigate income inequality.

Increased re-education and training programs for displaced workers as well as improvements in the education system for the future labor force will allow workers to take advantage of the sectoral shift as opposed to resorting to protectionist policies. During this transition, measures to decrease income inequality include less xenophobic views on imported skills and more means tested policies, such as the EITC that do not skew price mechanisms. Policies that take advantage of changing markets will allow the U.S. to continue to be viable in a global economy.
[Read "The Age of Turbulence" by Alan Greenspan for more on skill biased technological change. He's a great writer. It's a great book. He's so cute. When he first started working in D.C. he would go back to NYC on weekends to water his plants AND visit his mom. WHO does that?! ALAN GREENSPAN.]

So I think "Buy American" sucks and just keeps us from eating yummy Roquefort cheese, and I think rent-seeking industries should just get their shit together and step up.

I'm not saying I support inequality, and that I want some people to be way poorer than others. The purpose of this post was to get you to think about why inequality upsets you. Maybe the reasons will be a little different than what you thought before you read this post.

Special thanks to Chanda for contributing to research/creation of this blogpost. So, if you were bored, you can blame her. Haha. Just kidding.