Climate Change As A National Security Threat

There aren't enough blogs in the world to describe all of the ways in which America has suffered setbacks because of the last eight years. The visionless leadership at the top coupled with systemic introversion created problems only years of trying can correct. One problem that may be insurmountable is climate change. The impact on ecological balance is unmistakable, but the effect on the geopolitical balance maybe more immediate. Climate change causes extreme weather patterns that can throw the economies of many nations into turmoil. A severe drought in a lesser-developed, agrarian country can cause hardship, which leads to unrest and the toppling of fragile governments. Lawless environments are prime breeding grounds for young and disenfranchised youth. These areas become new recruitment sources for the radical organizations that thrive in periods of great vulnerability. These coteries point to the west as the cause of the disparate consumption of resources and followers begin to wonder why they bear the brunt of the residue. This further cements the disdain for all things American and compromises our already fragile global security. It's safe to say that while oil held the attention of the world and its armies in the 20th century, water will be the resource of contention in the 21st century. Access to and replenishment of potable water sources will be greatly influenced by climate change.

Math Killed Wall Street

The Gaussian copula function, the little formula that killed your 401k. Click on the title and read about the math problem that brought down the global economy.

Paul Krugman's take on the Obama plan and the current crisis

Paul Krugman on the Malaise of Nations
By TIERNAN RAY | MORE ARTICLES BY AUTHOR
Nobel Prize-winning economist Paul Krugman discusses why the U.S.'s balance-sheet recession could lead to many years of deflationary malaise.


PAUL KRUGMAN IS IN HIS ELEMENT. He was kind enough to expand upon his thoughts regarding President Obama's stimulus package and what changes may be in store for the U.S. and world economies in coming years in an e-mail exchange with Barrons.com.
Bio

Title: Professor, Economics and International Affairs, Princeton University; New York Times columnist; author of The Return of Depression Economics and the Crisis of 2008.
Age: 55
Education: BA, Economics, Yale University; PhD, Economics, MIT.

Barrons.com: What's the stupidest thing you've heard said about the current economic crisis and how to solve it? What's the smartest?

Paul Krugman: The stupidest is a very tough competition; I tend to think of whichever mind-numbingly stupid thing I've just heard, like [U.S. House of Representatives] Minority Leader [John] Boehner's statement that we shouldn't "reward" Fannie and Freddie by increasing their resources (he apparently doesn't understand the meaning of "government owned.") But I guess the statements from many players that the Obama plan is a spending bill, not a stimulus bill -- when spending is the whole point -- top the list.
The smartest thing probably comes from Richard Koo, [chief economist for Japan's Nomura Research Institute, part of Nomura Securities] who was one of the first to point out that this isn't just a housing crisis, or even a banking crisis -- it's a balance sheet crisis.

Barrons.com: You've written that the gap between the economy's potential shortfall in production over the next three years -- $2.9 trillion -- and the $800 billion in economic stimulus is a big problem. Why does this gap between production and bailout matter so much?

Krugman: My big concern here is that the economy digs itself into a deflationary hole, which is what can all too easily happen if you have a large, sustained output gap. Once prices start falling, and people start to expect continuing deflation, the balance sheet problems will become much worse than they already are, and much harder to resolve. Watching that happen in Japan is what led me to write the original, 1999 version of The Return of Depression Economics, and now the same thing is all too possible here.

Barrons.com: What's a worst-case scenario if this stimulus fails to kick-start a recovery, as you've argued?

Krugman: A lost decade or more. I don't think, even now, that we're headed for 20+ percent unemployment, Depression-style. But I can see a strong possibility of an economic and political trap: low investment and high savings thanks to deflation and a depressed economy, with effective government action blocked by a combination of concerns about debt and the widespread belief that we tried stimulus and it didn't work.

Barrons.com: Will the $80 billion in aid to holders of underwater mortgages make a material difference?

Krugman: It depends on the meaning of the word "material." It will help millions of families, and somewhat reduce the financial system's losses. It won't revive the housing market, nor will it end the banks' problems.

Barrons.com: Will we ever become a nation of savers again?

Krugman: Actually, we ARE becoming a nation of savers again -- which is part of the reason GDP is plunging. I think the asset wipeout will have a long-term impact on consumer behavior; remember, we had a 9% savings rate as recently as the 80s.

Barrons.com: There's been a dramatic collapse in asset values in the stock market, as measured by the decline in the P/E of the S&P 500. Do you think asset values will bounce back with an economic recovery, or has there been some fundamental long-term shift in asset values that will linger even after recovery?

Krugman: Believe it or not, housing prices are still above-normal, as measured either by the price-rent ratio or the price-income ratio. So housing prices won't bounce back. As for stocks, when I take [Yale University economist] Bob Shiller's data, which give prices relative to a long trailing average of profits, and update, I get a P/E right now of about 13, not so far from historical norms. So it's not clear how much bounceback we can count on, if any. Maybe the bull market was the aberration.

Barrons.com: You've advocated a stimulus for the U.S. along the lines of the Public Works project during the Depression. Assuming such a thing could produce another economic boom, what are the downside risks to a massive infusion of public money?

Krugman: Well, large-scale government borrowing does pose long-term fiscal risks; the U.S. has substantial room for additional borrowing, but it's not unlimited. Aside from that, I don't see big risks.

Barrons.com: One of the themes you explore in your writing is the notion that world economic relationships can change over the course of decades (e.g., from globalism to nationalism to globalism). What are a couple of the biggest economic changes you see playing out over the next ten years, and what might be their social impact in the U.S. and abroad?

Krugman: I think we're heading for a new regime of financial regulation, which might significantly reduce financial globalization, for both good reasons and bad: the good reason is that a lot of what looked like globalization was actually regulatory arbitrage, the bad reason is that governments that are bailing out financial system will tend to insist that the benefits stay at home. I don't think this will affect most Americans' lives much; but a lot of the highest incomes have come from finance, and the Masters of the Universe will definitely end up less masterful.
We're also, I think, going to see some significant reindustrialization, because the conveyor belt moving Chinese and other funds to America will be slowed if not shut down. This will mean a greater reliance on domestic production.
Mainly, though, how society changes will depend on the political response -- whether this really ends up being a new New Deal or just a slight course correction.

Barrons.com: What great books have you read recently that you can recommend?

Krugman: I just reread a good part of John Maynard Keynes's Essays in Persuasion, especially "The Great Slump of 1930," which is awesomely relevant right now. And while it has nothing much to do with the crisis, I'd highly recommend Dan Koeppel's Banana: The Fate of the Fruit that Changed the World, which tells you a lot about the history of globalization along the way.

Remembering The Dawn of the Age of Abundance

A recent opinion piece about the breadth of the psychological ramifications of this current crisis.

So, Obama Can't Monkey Around?

I can "monkey around", my life can be like a "barrel of monkeys", I can wear a "monkey suit", I can climb on the "monkey bars", I can swing like a "monkey"; but the most powerful man on the planet can't? Yikes, what does that make me...Mr. Universe? The flap over the NY Post cartoon is a sign that some people didn't get caught up in the wave of maturity that swept the nation last fall. We've looked past color and elected an African-American. You would think that Al Sharpton would be pleased that he's out of job? But no, Al made a name for himself keeping the racial divide open and he's not going to close up shop without a fight. I would bet that President Obama, in an objective moment over the economy, saw the humor in that cartoon. Or maybe he felt sorry and angered over the sub-text, the idiot who tried to domesticate a chimp in Connecticut. Maybe the next time we need an object to illustrate incompetence, we can caricature the image of Leslie Mostel-Paul.

News Flash: Economists Agree

The recent debate over the stimulus bill has lead some observers to think that economists are hopelessly divided on issues of public policy. That is true regarding business cycle theory and, specifically, the virtues or defects of Keynesian economics. But it is not true more broadly.

Here is the list, together with the percentage of economists who agree:

1. A ceiling on rents reduces the quantity and quality of housing available. (93%)

2. Tariffs and import quotas usually reduce general economic welfare. (93%)

3. Flexible and floating exchange rates offer an effective international monetary arrangement. (90%)

4. Fiscal policy (e.g., tax cut and/or government expenditure increase) has a significant stimulative impact on a less than fully employed economy. (90%)

5. The United States should not restrict employers from outsourcing work to foreign countries. (90%)

6. The United States should eliminate agricultural subsidies. (85%)

7. Local and state governments should eliminate subsidies to professional sports franchises. (85%)

8. If the federal budget is to be balanced, it should be done over the business cycle rather than yearly. (85%)

9. The gap between Social Security funds and expenditures will become unsustainably large within the next fifty years if current policies remain unchanged. (85%)

10. Cash payments increase the welfare of recipients to a greater degree than do transfers-in-kind of equal cash value. (84%)

11. A large federal budget deficit has an adverse effect on the economy. (83%)

12. A minimum wage increases unemployment among young and unskilled workers. (79%)

13. The government should restructure the welfare system along the lines of a “negative income tax.” (79%)

14. Effluent taxes and marketable pollution permits represent a better approach to pollution control than imposition of pollution ceilings. (78%)

If we could get the American public to endorse all these propositions, I am sure their leaders would quickly follow, and public policy would be much improved. That is why economics education is so important.

Note that the proposition about fiscal policy (#4) does not distinguish between taxes and spending as the best tool for purposes of macro stabilization. Maybe that question should be added in a future poll. I doubt, however, that the answer would make it onto this list of widely agreed upon propositions.

From His Lips to My Ears

I had heard rumor to the effect. I was fortunate enough last summer to be part of a small group tour of the Fed's FOMC meeting room. My colleagues and I sat at what we perceived to be the epicenter of power, where mighty titans move the world's markets isolated from the partisan currents outside the many windows. We were treated to an engaging discussion with a well placed economist in the Fed chain who had participated in many of the meetings at the wing of the Chairman himself. The Fed had recently gone through a leadership change and this gentleman had served many years under Alan Greenspan and was now learning the style differences of his new boss Ben Bernanke. He was surprisingly frank and willing to admit mistakes. One of the issues we raised was the length of time the Fed had kept interest rates suppressed in the early part of the decade; a move that many now think contributed to the housing flare up. His response was troubling because he declared that Congress never would have stood for a rate increase and was actually suggesting more deregulation and easier credit. My understanding has always been that a Central Bank is independent for the sole reason that politics and rational economic policy are often in conflict. We asked him to respond but the conversation didn't continue much longer in that direction. Last night, CNBC debuted a new documentary on the housing debacle called "House of Cards". To my surprise, one of the key interviews was with Alan Greenspan himself. The interviewer posed the same line of questions to him that we had pursued last summer. Without hesitation, he reiterated the identical position. Congress would have been outraged by a rate increase and we never would have gotten it through, were his remarks in paraphrase. As a student of this stuff, I have to say my mouth dropped open. I don't have much hope for an economy guided by the partisan sycophants in Washington. The Central Bank must regain authority and fed policy must lift itself above the political fray...or we are doomed. Clicking the title of this post will take you to a segment of the interview with Greenspan.

Convenient Conservativism

How duplicitous and downright appalling it is of the Republicans to be turning the fiscal conservative cheeks our way as they sit in opposition. The same people that presided or idled quietly while their party waged the eight most fiscally irresponsible years in our history. Now they rail at the idea of big spending by the new administration; left with no choice because of the mess it's inherited. Since when is a tax cut any less of a deficit maker than a spending increase? Plus, any intro economics textbook will tell you that the multiplier effect for spending increases is greater than it is for tax cuts. The Republicans need to sit down and shut up or President Obama should be forgiven for putting off his dream of coalition government. The arrogance of the Republican Party is astounding.

I Thought We Solved This Problem

The graphic above, though not as far reaching into history as I would have liked, indicates a strong and long track record of effective management of the economy since WWII. A greater role for the Fed in managing the money supply and an adequate job in fiscal management has developed long periods of relatively uninterrupted growth in the latter half of the twentieth century. Undeniably there were bumps; the 9% inflation in the seventies made it nearly impossible to guage risk and resolving the stagflation at the beginning of the eighties was a daunting and painful task. The budget deficits of the early nineties created the first cracks in America's edifice of solvency. With proper oversight and timely action, these obstacles became surmountable. It was foolish to ever believe that we had solved the business cycle, but it sure seemed like we had tamed it. Over the last eight years, the nation's good work and relationship with our uniquely American economic model has unraveled. The leadership failed us at every level. I often joked of George Bush's ambidexterity when he was Governor as the number of convicts executed under his watch made it seem as if the switches were pulled two at a time. Now I find he can sign a spending bill and a new tax cut into law simultaneously. Where was the foresight when it was suggested by him that it was in our national interest for everyone to own a house? Where were the intellectuals in his government to oversee the wild west mortgage machines of Fannie and Freddie? Who sat by and allowed mortgages virtually unsecured and fantasized to be bundled into prime rated securities and sold around the world? Who decided that it was ok for our rating agencies to "A" rate a security they didn't understand? Whose idea was it to burden an already unmanageable set of entitlements with an extra $400 billion of obligations through prescription drug care? And where was Alan the Maestro? Caught up in his own press I'm afraid or drunk on the power of the fiefdom he presided over. The autonomy of the Central Bank was washed away in wave of rabid deregulation by Phil Gramm and his cronies. The SEC was apparently run by the fourth Stooge Shep with the deft management of a FEMA director in a Louisiana storm. Gosh, could I go on. The point is that the impossible has been made possible and we let loose the volatility and improbability we thought we had boxed and put on display in the Smithsonian.

I'm Over Baseball

With the recent revelation of Alex Rodriguez's steroid use and the flurry of media activity surrounding him, it prompts the question from so many angles...why do we care anymore? Baseball has long lost the moniker of "America's Pastime" having been eclipsed in every way by the NFL. Steroids have been an integral part of the preparation for football for decades, we ignore them cause we love the hitting. When the "greatest generation" and their offspring retreat to their field of dreams, they will ascend embracing the remaining enthusiasm for the sport. Young men today watch UFC cage matches and disappear for hours in their violent gaming worlds. The elevated attendance numbers baseball has enjoyed recently will end this year, with the dampened economy and never recover. Soccer dominates little leagues and will continue as our population broadly diversifies.
Cheating is rife, in every profession. Cheating is so prevalent and we so immune that people can't be bothered with anything less than Madoff proportions. Do we truly have any disappointment left? Our President lies, our students plagiarize...we can blame it on unusual expectations and the pressures of competition, but it's more likely a product of convenience and indifference. The bitter disappointment of being a victim of cheating will only create more cheaters.
In the scheme of things, Alex Rodriguez is fairly insignificant, he never wore the cloak of role model well. Baseball, in general, has served up a rather paltry exhibit of role models for a long time. Anyway, he can be thankful that the economy has tanked and the world is on the precipice of disaster. That won't keep him on the front pages very long.

Servicing the Debt

The banks have to start lending again, but they're too encumbered with bad debt to take on more risk. Consumers need to start borrowing again, but the current debt service they shoulder won't allow the acceptance of more risk. The government wants to relieve the banks of their bad assets but there is no real way to determine the value of the assets to compensate them. If the "G" paid some estimation of today's fair market value, the banks would quickly find themselves insolvent. There has been little attempt to restructure loans or reevaluate terms on the commercial and consumer side. The current levels of debt service are completely debilitating and progress can't begin without some relief. Therefore, an active campaign to extend the conditions of loans at all levels is essential.

Sign of the Times

It seems there's one area of the economy reaping the benefits of hardtimes. There is no rest for the weary SPAM maker as Hormel sees sales of its iconic meat product spike. Click on the title to access a recent NBC news segment.

When Will it be a Depression?

The textbooks have told us that the traditional definition of a recession is two consecutive quarters of negative GDP growth. The GDP is a measurement of economic output whose levels are released every three months. If the numbers report a contraction in output in consecutive measurements, then we have a recession. It is now apparent that that is no longer the case. An organization known as the National Bureau of Economic Research is now the gatekeeper, and with a formula only known to them, will tell us when we formally welcome the arrival of a new recession. Their calculations and phrenologists told them that delivery occurred in December 2007. As the gloom spreads across the landscape and no industry seems untouched (save the SPAM factories churning out bricks of low priced pork parts at a torrid pace) is it time to begin sizing up the economy for a depression? The odd thing is that the word can't be found on the NBER website and economists have never reached consensus on a definition. The only one a few can remember was the "grand-daddy of them all". Do we have to sell apples on the street corner and ride the rails with our lives wrapped in a bandanna at the end of a stick to experience one? We have yet to reach a national level of double-digit unemployment, though there are pockets. We've only had a few dozen banks fail, not thousands, but when a bank fails in the 21st century it closes shop on hundreds of branches serving tens of thousands of people. Banks in the 1930s were often single small town money centers. There has yet to be a pall descending across the nation, but I'm convinced that the electronic age has created more isolation than connection. I'm not sure the average Joe is tuned into the calamity before us. Similarly to the 1930s, we wrestle with a new paradigm that we're uncomfortable with, this time Nationalization. In the thirties it was unbalanced budgets. We do carry the weight of the world we may leave our children. The multi-trillion dollar bill will be waiting for their arrival. When their crisis occurs, will there be the means to address it? I digress, but the market relies on faith and if we're bankrupt in that department, then it is a depression. The only answer is government stimulus, and the steely resolve of a new President. Without the luxury to worry about the future ramifications of our remedies, we have to apply it generously. Or people will be selling lattes on the corner to pay for the batteries to fuel their I-pods.

How Presidents Dealt With Past Recessions

Three economists explain what worked and what didn't. Click on the title to see an interactive graphic spanning presidencies over the last 50 years.

An incredibly scary account of the devastating housing collapse in Ft. Myers, FL

Click on the link to read a recent NY Times account of the devastating impact of the housing debacle on Ft. Myers, FL. President Obama will travel there on Tuesday, 2/10.

We're All Entrepreneurs

A Business Week article that speaks volumes to our students. Click on the title to access the story.

Who's To Blame?

It's been suggested that the current global crisis' origin stems from the recklessness occurring in American housing industry. And the root of the housing problems can be found in four U.S. states; California, Arizona, Nevada, and Florida. The actions of the principals in those states have resulted in the vast majority of foreclosures, bad loans, irresponsible governing, and overzealous building. Do you blame the builders who saw a bandwagon they wanted on? Do you blame the municipal, county, and state governments who permitted these dense tracts of housing to be built? They recognized a revenue stream that, in theory, would always appreciate. Or do you blame the citizens of these bloated communities who demand an ever expanding list of services and Jetson era public schools but are unwilling to foot the bill? The combination of community pressure to increase services while cutting taxes was never going to be sustainable. This is the same culture that turned the house into an idol to worship instead of a practical means to avoid the elements. Before we start placing blame on the greed of Wall Street and bankers or the blindness of government regulators, we must address our own responsibility.

It's All About Faith

Market Economics preaches the power of self-interest. The market will regulate as producers and consumers pursue their own interests and again convene at equilibrium. The problem is that it doesn't happen over night. At this moment, the natural tendency is to pull in the reigns on spending. The uncertain future demands that we wait on the sidelines until circumstances become more predictable. Unfortunately, that's the worse medicine for the economy as a whole. Consumers comprise 70% of the spending in this nation, so we have the power to move the globe or bring it to its knees. Very few of us have the resources to throw caution to the wind and spend for the good of the planet. It's at times like these that government intervention is the only answer. Apparently, the federal government fashions itself as a bottomless well and as long as the world accepts our debt instruments as the safest investment around, I guess it will continue to feel that way. The Feds have to create jobs, jobs generate wealth, wealth will spark confidence, confidence will define risk levels, risk taking will prompt investment. But it starts with faith.