Pissing Down Your Leg

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Archive for the ‘Recession’ Category

Time to Rescue the World

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Well, the world is going to hell in a hand basket today. Stocks are down 5-6% in one day after a horrible week last week. The unemployment rate is stuck over 9%, GDP is barely growing at all, and the administration doesn’t seem to have a plan. So here’s a plan.

It’s time for a little international intervention. And not with bombs, but with bulldozers. Let’s start with Haiti. The country is still trying to recover from its horrible earthquake and is struggling to do even the most basic tasks such as clear away the rubble. My suggestion is that as we wind down the wars in Iraq and Afghanistan, we send a new army of construction workers and engineers to clean up and rebuild Haiti.

Imagine that we send 100,000 workers and the needed equipment. They would be paid by the federal government and could also hire local workers. Ideally, these workers would be pulled from the unemployed (there should be plenty of construction workers), and be hired for at least a year. The cost of labor would probably be around $10-20 billion. The cost of materials (although I’m no expert) would be another $20 billion (with the requirement that they come either from American or Haitian companies). This would provide stimulus (and jobs!) for the economy.

And we wouldn’t need to stop in Haiti. If we can make that a success, we could move on to other countries that need our support. The end goal would be three-fold:

  1. Jobs for Americans.
  2. Good will for America.
  3. Better infrastructure for our neighbors.
Of course, we could also do the same thing in this country. Many parts of our infrastructure badly need maintenance and/or upgrades. The key is that we need to provide this stimulus in the form of jobs. So far the stimulus provided has done little to nothing in providing work for the unemployed.
Would this be a massive undertaking? Yes, of course. But we have 14 million unemployed workers. We need to create millions of jobs. This is the best way to start.

Written by Liam C Malloy

August 8, 2011 at 6:50 pm

Posted in Leadership, Recession

Krugman in 2012?

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The New York Magazine has a long piece on Paul Krugman’s lonely voice from the left. I’m a big fan of PK. While I don’t always think his political prognostications are correct (would HRC really have been better than BHO? I doubt it), his economic pronouncements are almost always right. With the left without a leader, should we start draftpaulkrugman2012.com? Probably not. I doubt he would make a good politician (and might not even make a good chairman of the CEA), despite the fact that he’s a better thinker on economic/social issues than anybody else currently around.

Recently I’ve been thinking about what the country does need in order to move farther left to a world with universal healthcare, stronger unions, a higher minimum wage, and publicly-financed campaigns. Many of us on the left felt that we were getting just the kind of politician that we wanted in Obama, only to be disappointed by his desire to lead by compromise, to be the grownup in the conversation.

  • You want a $1.2 trillion spending stimulus? How about we ask for $850 billion and then compromise by reducing that and making half of it ineffectual tax cuts.
  • You want to close Guantanamo Bay? Well, let’s release some of them, maybe try to get a trial in Federal court, and then back down and just keep the status quo.
  • You want to nationalize the banks that caused this financial panic in order to protect the taxpayers? Let’s just funnel them billions of dollars, reduce the industry’s competitiveness, and hope they can recapitalize through profits.
  • You want to worry about the unemployed and create some sort of temporary jobs program? Well, maybe I can get another year of extended unemployment benefits by agreeing to keep taxes on the rich at low levels.

The list goes on and on. I can sympathize with the President. I understand all too well the impulse to compromise somewhere in the middle when a decision has to be made. It makes you look reasonable, it allows you to avoid more overt confrontation, and it allows you to move to the next problem. But there are at least two large problems with this style of leadership.

First, the Republicans are better at this game. Like an intelligent child, they see that if you want to compromise as a way of resolving conflicts, they should ask for two hours of TV instead of one. They should suggest cutting the top marginal tax rate to 25% instead of 35%. Democrats, on the other hand, seem much more likely to actually propose what they want. When we have a compromiser-in-chief, we end up a lot farther right than we ever expected to.

The second problem with this kind of leadership is that it simply isn’t leadership. The platoon leader doesn’t say, “Ok, the captain says we need to take this hill, but Robinson here has some serious misgivings. I’ve decided we’re going to go halfway up and ask the enemy for a truce.” The parent doesn’t shouldn’t say, “If you don’t want to eat your broccoli you at least have to eat a piece of bread.” The CEO doesn’t say–well, you get the point.

The leader must lead. She must say, “This is the right way. Follow me.” If she runs into obstacles, she must fight through them. If she runs into a roadblock, she must scream and batter it until it is lifted or it crumbles. She may not always seem to accomplish as much as someone willing to compromise, but she will do more of what she believes is right.

And this is the type of president that Americans admire. FDR was a leader. So was LBJ. Carter was not a leader. Reagan (in his own wifty way) was a leader. George W. Bush (in his demented way) was a leader in a way his father was not. Eisenhower was perhaps the best leader we’ve had, even though he did it in a fairly quiet, unassuming way. I think one of the problems for Obama is that Bill Clinton was fairly successful as a compromiser. As he is the only Democratic president we’ve had in the last 30 years, there are not a lot of other role models.

But I can’t help but think that Clinton was fairly lucky. The economy was getting a fairly big productivity shock from the introduction of information technologies into more and more industries. That allowed him to cut back on spending and (modestly) raise taxes without any economic problems. Obama seems to want to take that blueprint and apply it to the current economic situation which, unfortunately, is completely different. We had a huge financial crisis followed by a very deep recession and an incredibly slow recovery. If he needs a role model, he should look to FDR.

Don’t get me wrong, FDR made as many mistakes as he had successes. But he lead the country through the Depression. He showed the people that he was on their side, that he was fighting for them, and that he would try anything that might work to get the country back on its feet. When conservative judges dismantled his New Deal legislation, he tried to pack the court. Sure, that was a mistake and didn’t work, but at least it showed he was serious. His one major mistake was compromising in 1937 and pulling back on his stimulus programs, pushing the economy back into recession.

Is there anyone on the left who can lead? I don’t see anyone. Our smartest and most successful politicians (on the left) seem to be compromising technocrats. And those farther left (Waxman, Kucinich, etc.) just seem a little too odd to appeal to the majority of Americans. Obama the candidate could lead. Obama the president does not seem able to.

Written by Liam C Malloy

April 25, 2011 at 4:51 pm

When Will the Golden Bubble Pop?

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So the NYT has a piece on how the price of gold has exceeded $1,500 an ounce. The article notes that while a nominal high, it was actually higher in real terms in the 1980s. I had been asked last Thanksgiving by a relative about the price of gold because a “friend” had invested heavily in gold and silver. I say now what I said then: It’s a bubble. And it’s going to pop.

But I was also a little curious. Gold, after all, while not completely useless, is basically only used for jewelry and other types of ornamentation. It’s not a really useful commodity like oil or silicon or corn. So why was the price so high? Why were Glenn Beck and others hawking it on TV?

The first thing I did was put together a graph of the annual price of gold going back to the 1950s, adjusting for inflation using the CPI.

Notice anything unusual? Well, the price of gold spiked from 1979-1982, hitting a high in 1980. Then it started spiking again in 2006 and 2007. To someone who spends a lot of time looking at unemployment numbers, this looked very familiar. After all, the highest unemployment rate since the Great Depression was in 1982. When you add the unemployment rate to the graph, you can see the correlation.

The correlation for these annual numbers is 0.6 which is fairly high when we’re talking macroeconomics. It also would seem to offer an opportunity for profitable arbitrage (although it’s hard to see from this graph if the price of gold is leading the unemployment rate or following it). But the one thing that seems to be clear from the graph is that when the unemployment rate falls, the price of gold is going to fall along with it.

If I’m correct in my surmise about the CES, then the unemployment rate may continue to fall substantially throughout the year. In real terms the price of gold fell from over $1,000 in 1982 to $650 in 1984, a 35% drop. If I was a rich risk-neutral investor, I would be shorting gold right now in a big way. Of course, timing the popping of a bubble is notoriously difficult and smarter people than I have lost their shirt trying to do it.

The sad thing is that the professional investors will no doubt get out of gold quickly when it starts to turn. It will be the smaller investors that will be left holding the bag of bullion. After all, the only people who are in gold right now must be the fools who invest in bubbles and the professionals who take advantage of them. And if you don’t know who the fool in the room is…

Written by Liam C Malloy

April 20, 2011 at 5:06 pm

Posted in Recession, Unemployment