Tax Deductions

"A man claimed $30,000 worth of business expenses for the costs of goods he was selling in 1981. The goods? Amphetamines, cocaine, and marijuana. The IRS disallowed the deductions because the man hadn't documented his business thoroughly, but a tax court overturned the decision based on his candid testimony about his business practices. Allowed to claim the deductions, he was then sentenced by a criminal court to four years in prison for possessing cocaine with intent to distribute it."

- Public Finance and Public Policy by Jonathan Gruber (M.I.T.)

Hyper-Inflation

What happened to all those people who were freaking out about out of control inflation/hyper-inflation? It must have happened by now: crazy people, Ron Paul, some economists, etc. have been preaching inflationary doom since the crisis began. The urgency the matter was discussed with made it seem as if it was our most urgent threat. One which they were happy to trade a slower recovery for.


But wait, its all come to nothing. Inflation[1] since the 2008 financial crisis has been low relative to the rest of the post Gold Standard world. In fact, 2009 actually saw a slight deflation[2] of the Consumer Price Index (CPI).  Here's what's happened to inflation since January 2008:

In the aftermath of the crisis, deflation was the proper thing to worry about as demand contracted. Then the CPI began to increase slightly, stagnated, and has now returned to a pretty much normal rate. And it seems all the people who were yelling about inflation have quieted down, hoping they didn't put their names on too many crazy opinion pieces. Here's a historic look at inflation going back to 1914:

As you can see, inflation has been rather tame in modern times and is certainly not out of control[3]. Given all of this, inflation, while it should be a medium run concern for the Fed, is not and has not been a threat to our economy. If you are curious to know the mechanics of  inflation click "read more"

The Washington Consensus

I am a fan of the Washington Consensus. The name conjures up horrible free-association images. And so the term has come to be used in a negative light in a context that has nothing to do with the original intent. The truth is quite refreshing: it is 10 points that the economist John Williamson came up with for what he viewed as the standard, uncontroversial consensus of economic policy.

1. Fiscal policy discipline, with avoidance of large fiscal deficits relative to GDP;
2. Redirection of public spending from subsidies ("especially indiscriminate subsidies") toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment;
3. Tax reform, broadening the tax base and adopting moderate marginal tax rates;
4. Interest rates that are market determined and positive (but moderate) in real terms;
5. Competitive exchange rates;
6. Trade liberalization: liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs;
7. Liberalization of inward foreign direct investment;
8. Privatization of state enterprises;
9. Deregulation: abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudential oversight of financial institutions;
10. Legal security for property rights.

Even when people know what it is, it can be viewed negatively. Admittedly, Williamson probably should have called it something else, the name insinuates that these are the edicts put forth and forced on the rest of the world from the United States. The target audience was Latin American governments, it was a strategy for escaping the middle-income trap that many of them had fallen into. But we would be much better off if we followed this advice too.

Point 9 is the most open to misunderstanding these days. Williamson explicitly states that deregulation should occur towards artificial barriers governments place on competition, and there is the obvious cut out for trying to avoid financial crises. If you are concerned about inequality, the influence of large corporations and the effects of large profits this kind of deregulation is for you. A competitive business will be more productive and less profitable. A competitive industry will produce goods at lower prices while employing more people.

Banking for the Poor

from Kiva on Vimeo.

Because of kiva.org anyone can be a banker for the poor, like that baller Muhammad Yunus. Though most likely he's better at it than you will be. But still, lack of access to credit and banking services is a cause of inequality and continued poverty. And this model didn't explode into a horrible recession. Plus loans are paid back around 98.9% of the time.

China's One Child Policy

I hear people, who consider themselves liberal (in the sense of believing in a free society built on individual rights and civil liberties) talk in an accepting manner about China’s one child policy[1] and correlated drop in children per woman. It starts with the logical argument that the increasing population places an unsustainable burden on the ecosystem of Earth. It ends with the acceptance that something needs to be done, so we might as well accept the policy’s benefits to us. This argument raises the question of how far away a poor and subjugated person has to be for us to comfortably ignore them.

My opinion is that the effect of the policy should not matter, such authoritarianism can't be justified. My argument is that it hasn’t even been effective. China has gone through a rapid birthrate drop, going from 5.91 children per woman in 1967 to 2.01 in 1993[2]. This is generally great news for the country and the world. However, the one-child policy was enacted in 1978, when total fertility had already dropped to 2.91. The majority of the drop occurred before the policy existed.

Not only that, but countries all around China have accomplished similar, and in many cases, larger, drops in total fertility, without a one-child policy. See the below graph (courtesy of gapminder.org).

It is important to note that all countries shown accomplished the transition while poor. When South Korea reached the replacement rate of births in 1983 (about 2.1), it had a GDP per capita of $5,373[3], poorer than China today.

There is a bit more to the story. One criticism of the one-child policy is that it has led to a sex ratio disparity[4] (117 boys per 100 girls in 2000); creating many negative social consequences. This unbalance infamously exists in India (whose total fertility dropped from 5.66 in 1967 to 2.69 in 2009) and many other Southern and Easter Asian nations. This would suggest the one-child policy is not to blame. The good news is that these problems have the same solution: education. Educating females leads to fewer kids and higher incomes, which eventually leads to people seeing how dumb and ignorant they were to value males more. South Korea has almost pulled this feat off. Its sex ratio disparity has declined from 117:100 in 1990 to a nearly normal 107.4:100 in 2005.

Vintage Defaults

The graph shown represents the performance of mortgages by year issued. The year issued is referred to as the “vintage”, like wine. The Y axis is the ratio of loans that defaulted per loan made. A normal curve, as displayed by 2001 – 2004, is a shallow logarithmic curve. Once the default rate for a vintage goes from increasing at an increasing rate to increasing at a decreasing rate it is considered “seasoned”. 2001 was a recession year, so it is a bit of a benchmark.

The problem clearly arises in the 2005 vintage, when the economy was doing relatively well; the Fed had started raising interest rates in mid-2004. In early 2006 it was clear something was wrong in the mortgage market; the line deviates from the normal curve and crosses above the 2001 line at an increasing rate. The mortgages from 2004 start to have trouble at this point too, as the 2004 line crosses above the 2002 line. So the problem should’ve been apparent. On the other hand sub-prime mortgages were only a market of $500 billion in 2005 (pretty small in the grand scheme of finance), the tools and connections that enabled the economy to rest on $500 billion of sub-prime equity are complex and opaque, and no one wants a bubble to end.

Understandable Sentiment

"When The Economist encountered him, outside a derelict Buddhist temple in a ger district…and later at the nearby police station, he had just been punched and robbed of his phone by friends of the friend he had lent it to… He was drunk… He was cradling a little street-puppy he had rescued from his muggers, knowing his grandmother would not let him take it home. He presented as forlorn a picture as could be imagined of the pain and dislocation of being caught between two worlds. But he said he had no intention of going back to Virginia."

The Economist Formatting Errors pt.1

January Jobs Report

The January Jobs Report has come out today. And in the context of the Great Recession and our terrible unemployment problem it is encouraging. 243,000 jobs were added, that is following an estimated 203,000 in December, up from 157,000 in November. The unemployment rate is now 8.3% A number in the mid 200,000s would be normal-ish in good times. The increasing number by month suggests an increasing momentum to economic growth. Also encouraging is that this decrease in the unemployment rate comes less from people dropping out of the labor force than December's figures.

The downside is that a figure over 200,000 is good, but not enough to quickly get unemployment down. After a recession one would expect job growth to be higher than normal as the economy catches up with its potential; that is not yet happening. Additionally, last winter there were encouraging jobs figures that burned out by the summer. And before that there was a period of stagnant or negative job growth following a short rebound out of the recession. So far no encouraging patch of job growth has been sustained. It remains to be seen if this time is different.

For Love of Statistics

gapminder.org. This site is wonderful. You can download the gapminder program for free. It is full of an overwhelming amount of statistics about as many countries as there are data for. The sources are all cited and even given measures of reliability. Graphs from this program will surely be featured later. Here is a great video showing both the capabilities of the program and the problem with heuristic based world-views.

Inaugural

I've been known to use any excuse to talk about anything even slightly relating to economics. I like doing it very much. Sometimes people listen, sometimes they pretend, and sometimes I pretend they are listening. I made this because it should make the whole process easier for us all.