By all accounts, President Obama's visit to China last week was pretty much a failure on all the major issues, which include China's contributions to climate change, nuclear weapons, and various aspects of the world economy. I will concentrate my discussion on two of the most important and closely [...]
Becker's analysis is impressive, but I hesitate to state with confidence that China would be better off to revalue its currency. As Becker points out, China has pegged its currency to the dollar at a rate of exchange that greatly undervalues its currency relative to ours. As a result China [...]
Japan spent the 1990s unsuccessfully trying to recover from a collapse of the Japanese banking industry caused by the bursting of a housing bubble, despite aggressive monetary and fiscal policies. As a result of those policies, Japanese national debt soared, but was financed mainly internally because of the very high [...]
Japan has had a very slow rate of growth in its GDP since 1991, averaging just a little over 1 percent. Given this slow growth, and the government's continued failed efforts to prop up their economy by running large fiscal deficits, the ratio of government debt to its GDP [...]
Last week two pieces of news about the American economy were disclosed, with important implications for where the economy is going. On Thursday, the Labor Department reported that during the third quarter of 2009, productivity jumped at the remarkable annual rate of 9½%. On Friday, the Labor Department also reported [...]
Becker is certainly right that growth in productivity is an important driver of economic growth. But we must consider the source of the growth in productivity in order to understand the conjunction in the last two quarters of rapidly rising productivity with rapidly rising unemployment.
If productivity growth is the result [...]
In October, the President announced that $13 billion (some commentators believe a more accurate estimate is $14 billion) of the $787 billion stimulus package enacted this past February would be used to pay every social security annuitant $250 in 2010, ostensibly to "compensate" for the fact that there will no [...]
The government's preliminary estimate of the growth in American GDP during the third quarter of 2009 is an impressive annual rate of 3.5%. This figure may be revised downward (or upward) as more data on the third quarter become available, but it surely definitely signals that the US recession is [...]
Longtime readers of this blog will be pleased to learn that this month sees its migration into book form. Uncommon Sense: Economic Insights, from Marriage to Terrorism, which collects what we believe are the best, most interesting, and most lasting posts from this blog. The posts selected for the book [...]
I sympathize with all the people who are upset by the very large bonuses, stock options, and other compensation received by heads of some financial institutions that ran their companies into the ground through bad investments. However, I also believe it is a big mistake to have a pay [...]
Limiting the compensation of a handful of employees at a handful of firms can't have any effect except to benefit the firms' competitors by making them more attractive places to work. The limitations are a form of scapegoating designed to appease public anger over the high incomes of financiers who [...]
Oliver Williamson, an economist who won half a Nobel prize last week, has made important contributions to a field of economics that is not as well known as it should be: "organization economics." This is a field, closely related to a branch of sociology called organization theory, to which pioneering [...]
Oliver Williamson's influential contributions to the theory of firms were the stimulus for our discussion topic this week of the analysis of organizations. Posner gives an excellent discussion of various factors that determine organizational structure and efficiency, such as conflicts between principles, like stockholders, and agents, like employees and managers, [...]
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[...]The worldwide recession has slowed the growth in the demand for cereals and other foods as many countries have experienced stagnation or contraction in their GDPs. Now that the recession appears to be over, world GDP will start growing again. Many are forecasting that this growth in world output, especially [...]
Becker is right to point out the difference in supply conditions between oil (and other minerals, but I will limit my discussion to oil) and agricultural products: it is cheaper to expand output of the latter than of the former. Hence as demand for oil and for food rise as [...]
The New York Times published an article last Thursday on the Swiss health care system, which can be viewed here: www.nytimes.com/2009/10/01/health/policy/01swiss.html?_r=1&em. The system is simple. There is no "public option," that is, there is no government health insurance program, such as Medicare or Medicaid. There is very little employer-provided health [...]
The Swiss health care system has several important properties that I (and many others) have been advocating should be incorporated into any reform of the US health care system. One major advantage of the Swiss system is that employer-provided health care does not receive any special tax breaks, whereas the [...]
The major American trade unions, including the United Automobile Workers, the United Steelworkers, and the Service Employees International Union, went all out in their support of Barack Obama during the past presidential election. They supplied money-said to exceed $400 million- and hundreds of thousands of volunteers working for Obama. It [...]
Becker is correct that the tariff appears to be a pay back to the unions for their strong support of Obama in the 2008 election. The significance of that support was amplified by a questionable feature of our political system. All but two states award all their electoral votes to [...]
We will not be blogging this week. We will next blog next Sunday, September 27.
[...]Vice President Cheney is reported (I don't know whether accurately or not) to have said that "deficits don't matter." Certainly the Bush Administration ran big ones, as a result of which the public debt (which is the national debt less federal liabilities to Americans created by the social security and [...]
Deficits arise when government spending exceeds the revenues raised from various taxes. Deficits add to the stock of government debt. In evaluating the consequences of deficits for an economy, it is first of all crucial to know whether the source of a larger deficit is greater government spending or [...]
On October 7, 2008 I wrote an op-ed piece for the Wall Street Journal ("We're Not Headed for a Depression") in which I said there would not be a depression, certainly nothing at all resembling the Great Depression of the 1930s. As the economy continued to decline after that' [...]
I am not bold enough to make forecasts about economic recovery, given the unusual economic situation that the country is in. The recovery may be fast or slow, shallow or steep, continuous or interrupted--and if fast and steep may set the stage for inflation and other economic troubles. So I [...]
We will blog on Tuesday or Wednesday of this week, rather than today.
[...]The Treasury Department in its "white paper" of June 17 recommended the creation of a "Consumer Financial Protection Agency," and later followed up with a detailed legislative proposal for a "Consumer Financial Protection Agency Act of 2009." The proposal is pending in Congress.
Although the Commission's remit would not be limited [...]
No doubt many consumers made mistakes in their credit decisions during the past few years, perhaps especially in the mortgages they chose. It is equally clear that many lenders wish they had never given the mortgages they gave since they lost their shirts by doing so. Does any of [...]
The cash-for-clunkers program of the federal government began in late July, and will end this evening. It provides a credit of from $3500-$4500 for anyone who trades in an older car to buy a new fuel-efficient car. When measured by its popularity, this has been a highly successful program, [...]
I agree with Becker that it's a silly program.
Like the bailout of the auto companies, the program had dual environmental and economic-recovery goals. The environmental goal, to reduce carbon emissions, was trivial; the aggregate improvement in gas mileage from the program is certain to be minuscule. The contribution to economic [...]
The focus of the Administration's health-care plan, and of its campaign to enlist public support for the plan, is dissatisfaction with health insurance. To see the problem--or whether there is a problem--compare health insurance to fire insurance. Almost everyone has fire insurance (even if he doesn't want it, invariably it [...]
In a recent post (see my discussion on July 28) I explained why the American health delivery system is superior in some important dimensions to health care in most other advanced countries. Americans have considerably longer life expectancies when they contract serious diseases, like cancers and heart conditions, than do [...]
We will be posting tomorrow (Monday).
[...]The latest output and unemployment figures for the United States indicate that the recession in this country is very probably finally over, given the usual definitions of the turning points of recessions. Aggregate output fell for the fourth quarter in a row during the second quarter of 2009, but the [...]
I see the economic situation somewhat differently from Becker. The least significant of our differences concerns nomenclature. Many economists describe any economic downturn less severe than the Great Depression of the 1930s as a mere "recession." The consequence is to lump together economic downturns of greatly varying severity. The current [...]
The biggest problem besetting the Administration's program of health reform is how to pay for it. The heart of the program is extending insurance coverage to tens of millions of people who at present are not insured. This will cost more than $100 billion a year just in subsidies, but [...]
The Growth in Obesity-Becker
The weight of the average male and female began to grow sharply around 1980 not only in the United States but also in all other developed countries. When average weight grows, the rate of obesity-usually defined by a biomass index (BMI) of over 30- grows at [...]
Many Democratic Congressmen, member of the Obama administration, and others writing about American health care envy the 'European" health deliver system since they attribute Europe's lower mortality rates, despite much lower per capita spending on health care than by the US, partly to the European model of health care delivery.'" [...]
Last December, the McKinsey consulting firm published a report which states that despite the much higher per capita spending on health care in the U.S. compared with peer countries, the longevity of Americans (even if only that of white Americans is considered) is lower than the average of the comparison [...]
College and university endowments have taken a big hit from the drop in the stock market and other asset markets. A drop of 20 to 30 percent is common, and there is suspicion that endowments that contain a significant proportion of assets that are not traded on organized markets, such [...]
The values of most university endowments have taken large hits during this financial crisis. The average decline since the real estate and stock market crashes began is probably over 20%, while the value of some endowments dropped by much more than that. Universities reacted to this severe shock with [...]
In late June the House of Representatives approved The American Clean Energy and Security Act. If the Senate approves a similar version, this would constitute the most important American legislation on overall control of carbon-emitting gases. The main provision of the bill is a cap and trade system, to begin [...]
The energy bill just passed by the House of Representatives and awaiting action in the Senate is extremely long and complex, and cap and trade is only one part of it; but like Becker I will confine my remarks to that part, and thus treat the cap and trade component [...]
The U.S. Senate is a very peculiar institution. It was not when it started. It was created to be a check on the popularly elected House of Representatives, but also on the President, through its "advise and consent" power--the President's nominees for officials had to be confirmed by the Senate.' [...]
The United States, as the name indicates, was formed as a confederation of independent states-initially only 13, but since expanded to 50. The first Federal government was based on The Articles of Confederation, but that was abandoned because it gave too little power to the Federal government. It was replaced [...]
Since the document laying out the President's financial reform package is 88 pages, I will concentrate my evaluation on a few basic issues. 1) Do the reforms rely mainly on regulatory discretion or on new rules? 2) Is there adequate attention to the issues raised by financial institutions being "too" [...]
I have blogged at considerable length about the July 17 report, see http://correspondents.theatlantic.com/richard_posner/, and also written a short op-ed on the subject, published in the New York Times on July 25 ("Our Crisis of Regulation," p. 21). I have emphasized both what seem to me fundamental failings in the report [...]
Warren Buffett, who is a wit as well as a multibillionaire, said with reference to the fact that Bernard Madoff's long-running Ponzi scheme came to light during the financial collapse of last fall that until the tide goes out, you don't know who's swimming naked. A year ago Becker and' [...]
According to data compiled by my colleagues Matt Gentzkow and Jesse Shapiro, the number of daily newspapers in the United States has been declining for more than 90 years, from a peak of about 2200 to its present level of about 1400. The decline started with the advent of radio, [...]
We will post on Tuesday of this week, rather than today.
[...]This week the Obama administration, acting through Secretary of the Treasury Geithner, appointed a pay czar to review, reject, and possibly set the pay of companies that received large amounts of federal assistance during the financial crisis. No appeals will be allowed from his decisions. The Czar, Kenneth Feinberg, will [...]
I agree with Professor Bebchuk of Harvard, and others, that there is a problem with the compensation of top executives at publicly held corporations (that is, corporations in which ownership is widely dispersed), so that control resides in the board of directors. The problem is that the individual directors do [...]
It is understandable why there is widespread concern with the American system of health care. The nation spends about 15 percent of its very large Gross Domestic Product on health care, which is almost twice as much per capita as the nations that we consider our peers spend, yet outcomes, [...]
The best way to evaluate America's expensive health care system would be to estimate the effects of different kinds of healthcare on the quality and quantity of health for individuals of various ages, incomes, races, and other categories. To my knowledge, no researchers have come close to doing this. Instead, [...]
The short answer is "yes", although not immediately, and not inevitably. My reasons for an affirmative answer are partly demographic and partly economic. Asia has a large fraction of the world's population, and their biggest economies are generally experiencing rapid growth as they narrow the gap in living standards with' [...]
I am less bold than Becker, and so I will make no predictions about the future of the wo rld economy. I do have some reservations about treating Asia as a unit, however. Even if one stops at the eastern border of Pakistan, the Asian countries are far from uniform [...]
Articles in the New England Journal of Medicine on April 30, and in the New York Times on May 19, discuss a proposal now before Congress to impose a tax on sugar-sweetened sodas in order to reduce obesity. Taxes are ordinarily intended to raise revenue, but some taxes, such as [...]
The number of overweight children and adults has grown sharply since 1980. The explanation is usually partly based on the increased availability of sodas and fast foods that have many calories. Also emphasized is the growing number of leisure hours spent at sedentary activities, such as watching television and using [...]
Posner and I decided to post again this week on the conservative movement because of the great interest in our discussion last week. I will try to respond to some of the thoughtful comments and criticisms, and clarify some of my claims.
I claimed in that post that the current Republican [...]
My post last week on the decline of the conservative movement in the United States received more than 200 comments. Many of them were very thoughtful, and many others were very shrill.
It is apparent that global warming, abortion, and guns, in approximately that order, arouse particular emotions among many passionate [...]
I sense intellectual deterioration of the once-vital conservative movement in the United States. As I shall explain, this may be a testament to its success.
Until the late 1960s (when I was in my late twenties), I was barely conscious of the existence of a conservative movement. It was obscure and [...]
The roots of conservatism go back to philosophers of the 17 and 18th centuries, such as John Locke, David Hume, and Adam Smith. They opposed big government, and favored private decision-making, primarily because they argued that individuals were generally better able to protect their interests than could government officials tied [...]
My book A Failure of Capitalism: The Crisis of '08 and the Descent into Depression was published a couple of weeks ago, but it had been completed on February 2. In order to bring the book up to date, reflecting events since then and also some fresh thinking and reading' [...]
Every century or so, a major flu pandemic (an epidemic with a global impact) occurs. The last one, the Great Pandemic of 1918-19, infected many hundreds of millions of people, and killed about 50-100 million men and women worldwide. The Asian flu of 1957 is estimated to have killed 2 [...]
As Becker points out, the potential costs of a lethal pandemic are astronomical. The Spanish flu epidemic of 1918-1919 killed tens of millions of people, and because of the extreme mutability of the flu virus it is entirely possible that an equally lethal strain may re-emerge. True, the death rate [...]
Even in a democracy, it is believed that certain government functions should be placed beyond the control of democratic politics. The usual example is the judiciary (though most state judges in the United States are elected, this is a considerable anomaly). But another example is the central bank, which in [...]
Most richer nations nowadays, and many developing nations, have "independent" central banks, such as the European Central Bank and the Federal Reserve Bank. "Independence" cannot be precisely defined, but it is supposed to indicate that the central bank of a country has the freedom to make decisions which the government, [...]
Repayment of Tarp Bank Loans-Becker
Six months ago essentially all large American banks and many smaller ones received loans from the federal government to help shore up their capital base as they tried to weather the financial storm. Some banks would likely have failed during the severe strains in the [...]
Last fall the federal government lent hundreds of billions of dollars to major banks and other financial intermediaries pursuant to a program called the Troubled Asset Relief Program (TARP). Some of the recipients, notably Goldman Sachs and JPMorgan Chase, want to repay the money. Essentially that means buying back the [...]
The Dow Jones Industrial Average peaked at 14,200 on October 9, 2007, fell to 9,600 on November 4, 2008 (election day), kept falling, to 6,400 on March 6, 2009, and since then has risen sharply, to 8,100. (I have rounded to the nearest hundred. I use movements in the DJIA [...]
It is very difficult for either amateur investors or even professional money managers to do better picking their own stocks than the performance of the major stock indexes, such as the US Dow Jones Industrial Average (DJIA) or the Japanese Nikkei Index. In fact, most investors in active funds do [...]
I reply to a comment on the following passage in my posting last week on housing: "The reallocation of income from consumption expenditures to very safe forms of savings reduces current consumption without increasing productive investment significantly, and so contributes to the depression." The commenter states: "surely much of the" [...]
The widespread and sharp rise in housing prices during the early part of this decade in the United States and many other countries is said to have contributed to the worldwide economic boom through wealth effects that induced greater consumption. Similarly, the still steeper fall in these prices during the [...]
The Federal Reserve's unsound monetary policy in the early 2000s pushed down interest rates excessively, resulting in asset-price inflation, particularly in houses because they are bought primarily with debt. Eventually the bubble burst and house prices fell precipitately; they are still falling.
Becker's interesting post argues that the boom and bust [...]
In my post on Sunday I gave an example to illustrate the Treasury's plan to buy the "toxic" assets of banks. Since I left a few quite important implications of the example unclear, this addendum will consider the same example in more detail.
Recall that the Plan would encourage hedge [...]
The Federal Reserve's unsound monetary policy in the early 2000s pushed down interest rates excessively, resulting in asset-price inflation, particularly in houses because they are bought primarily with debt. Eventually the bubble burst and house prices fell precipitately; they are still falling.
Becker's interesting post argues that the boom and [...]
One good aspect of the Treasury's plan to enlist the private sector in buying mortgage-backed and other bank assets is that it reduces the uncertainty-if it is implemented! - about what the government plans to do further in aiding banks. Starting with the vacillations of Henry Paulson, the former Treasury [...]
The Internet has produced revolutions in many kinds of behavior, such as greatly reducing the advantages from reading newspapers, but one of the most important is in providing easy access to various kinds of social interactions. The remarkable growth of social networking sites, such as Facebook and Twitter, reflect the [...]
Matching is a form of search in which the object is to create a relationship, such as marriage or employment (marriage could be regarded as a form of employment). Matching is more complex and often more protracted than most searching for goods or services because the stakes tend to be [...]
Of some $300 billion in annual American charitable giving, about 5 percent is spent abroad; almost 40 percent of that 5 percent is donated by the Bill & Melinda Gates Foundation, mainly for trying to alleviate Third World health problems (such as malaria and AIDS) and provide assistance to Third [...]
Pressures for both increased government and private assistance to poorer nations may well result from this recession because some nations that can least afford a setback may suffer the most due to reduced demand for their exports of commodities and other goods. In considering the topic of private charitable giving [...]
The severity of this recession has stimulated calls for greatly increased regulation of the financial sector, and for changes in some of the present regulations. Some new regulations are desirable, but the type of new regulations must be in response to a recognition that regulators failed in this crisis because [...]
Beginning in the 1970s, the banking industry was extensively deregulated. Other financial intermediaries, such as broker-dealers, hedge funds, and money-market funds, were permitted to offer close substitutes for services provided by commercial banks, and restrictions on banking were loosened so that the banks could fight back against their new competitors. [...]
Because of travel delays, we are unable to post today (Sunday). We will post tomorrow.
[...]The President on February 18 announced a $75 billion plan with the following elements:
1. Refinance. The government will allow Fannie Mae and Freddie Mac--the large, now governmentally controlled buyers and underwriters of residential mortgages--to refinance mortgages when the unpaid balance of a mortgage is between 80 and 105 percent of [...]
The housing market is in shambles as home prices continue to fall-so far the average house has fallen over 25 percent in value from its peak. New home construction has virtually stopped. Two causes of the bubble in both housing prices and construction are low interest rates that made durable [...]
During his confirmation hearing before the United States Senate toward the end of January, Secretary of the Treasury Timothy Geithner accused China of "manipulating" its currency. This is not a statement that helps to further China-US cooperation on trying to stimulate the depressed world economy and on other issues- Secretary [...]
I agree with Becker that China is not responsible for our current depression. It is true that China's trade imbalance with the United States--it exports much more to us than we to them, and so has built up huge dollar balances that it has invested in the United States, mainly [...]
We will not be blogging this week.
[...]The government has decided to impose a $500,000 ceiling on the senior executives of banks and other financial institutions that accept bailout money. This is a bad idea, though politically inevitable because of public indignation at financiers, thus illustrating a point I make in my forthcoming book about the depression--for [...]
Several big banks and other companies have badly fumbled their public relations during these difficult times, such as the big three auto makers who took their private jets to Washington to beg Congress for a bailout, or the board and CEO of Merrill Lynch that granted generous bonuses to their [...]
Every recession, including those milder than the current recession, leads to pressure to reduce spending on foreign goods by raising tariffs and other import restrictions. The avowed goal is to help domestic workers and businesses that are going through difficult times. Hostility to imports when unemployment is high and [...]
I have little to add to Becker's post, with which I agree. One does understand the support in Congress for adding "Buy American" provisions to the stimulus package now moving through Congress (the "American Recovery and Reinvestment Act of 2009," as it is called). Apart from the usual interest-group pressures, [...]
I have little to add to Becker's post, with which I agree. One does understand the support in Congress for adding "Buy American" provisions to the stimulus package now moving through Congress (the "American Recovery and Reinvestment Act of 2009," as it is called). Apart from the usual interest-group pressures, [...]
In 2007, the House of Representatives passed the Employee Free Choice Act, a law to promote unionism. The bill failed in the Senate because of Republican opposition. Obama in his presidential campaign urged passage of the bill, and with greater Democratic control of the Senate as a result of [...]
Unions strongly supported President Obama during the presidential race, and naturally they expect some pay back. A first step would be passage of the so-called Employee Free Choice Act that was supported by both President Obama and Vice-President Biden when they were in the Senate. This act would provide, [...]
Last week we blogged on how much stimulus to GDP and employment might be expected from a version of the Obama fiscal stimulus plan. I concluded that the amount of stimulus from the spending package would be far less than estimated in a study by the incoming Chairperson of [...]
Last week we blogged on how much stimulus to GDP and employment might be expected from a version of the Obama fiscal stimulus plan. I concluded that the amount of stimulus from the spending package would be far less than estimated in a study by the incoming Chairperson of [...]
Last week we blogged on whether a deficit-spending program--a stimulus package currently estimated to cost $825 billion--is appropriate to deal with the current economic crisis. I will not repeat the points I made. If there is a risk of deflation, and increasing the supply of money is not considered an [...]
I suspect that we have entered a depression. There is no widely agreed definition of the word, but I would define it as a steep reduction in output that causes or threatens to cause deflation and creates widespread public anxiety and a sense of crisis.
Suppose some shock to the economy, [...]
