ProfessorBainbridge.com

UCLA Anderson forecast is gloomy

The UCLA Anderson School economic forecast is out and it's grim reading:

The National Forecast

In his June 2011 report, UCLA Anderson Forecast Director Edward Leamer predicts “normal growth” for the U.S. economy through 2013, with “normal” defined as “3% GDP growth with payrolls growing at 150,000-200,000 per month and unemployment stuck at high levels.” But “normal” does not equate to a “recovery.” In the report, titled “No Recovery In Sight,” Leamer differentiates between normal growth and the type of growth necessary for real recovery from the recent recession. In a “recovery,” the economy would experience “5-6% growth with payrolls growing at 250,000-300,000 per month and unemployment falling noticeably.” The differentiation is not a matter of semantics. Leamer notes that a recovery is not simply a matter of the economy returning to where it was when the recession began; instead it’s a return to trend – a matter of the economy getting to where it would have been had there been no recession – and that requires more than 3% GDP growth.

...

The California Forecast

California’s forecast, authored by Senior Economist Jerry Nickelsburg, remains substantially the same as it was in March – a continuing period of slow growth with stress in the labor markets. In his report, titled “A Breather in the Process of Recovery,” Nickelsburg cites two key elements impeding California’s recovery. The first lies in the national forecast, which calls for slower growth in consumer spending. The second is a shift occurring in the residential construction sector.

The forecast calls for 1.7% employment growth in 2011, 2.4% in 2012 and 3.1% in 2013. Unemployment will continue to fall through the year, averaging 11.7% in 2011. Employment growth won’t push the unemployment rate below double-digits until the second quarter of 2013, reaching 9.2% by the end of that year. Real personal income growth is forecast to be 1.7% in 2011, and 3.3% and 3.8% in 2012 and 2013 respectively.

Preventing regulatory arbitrage

Jim Hamilton reports that SEC Chairman Mary Shapiro told Congress that she's trying to get foreign securities regulators to help prevent regulatory arbitrage:

SEC Chair Mary Schapiro said that the SEC has been actively engaged with international securities and market regulators through informal conversations and more formally through participation in various international task forces and working groups and encouraging coordination and limiting opportunities for regulatory arbitrage. In testimony before the House Financial Services Committee, she noted that the SEC staff has encouraged international securities regulators that are contemplating OTC derivatives market reforms to use the Dodd-Frank Act and its regulations as a model for developing robust and complementary regulatory regimes.

Because the OTC derivative marketplace already exists as a functioning global market with limited oversight or regulation, said the Chair, international coordination is needed to limit opportunities for cross-border regulatory arbitrage and competitive disadvantages, and to address unnecessarily duplicative and conflicting regulations.

What regulatory arbitrage means in this context is that transxaction planners will seek out the jurisdiction that allows them to raise the maximum amount of money at the lowest cost. Regulatory arbitrage wouldn't be a problem for Chairman Shapiro but for the fact that the Congress and SEC through Sarbanes-Oxley, Dodd-Frank, and the rest of our regulatory apparatus have created an incredibly onerous and costly system that discourages capital formation in the US and funnels investment to foreign markets  that are more competitive.

See my article Corporate Governance and U.S. Capital Market Competitiveness, which argues that:

During the first half of the last decade, evidence accumulated that the U.S. capital markets were becoming less competitive relative to their major competitors. The evidence reviewed herein confirms that it was not corporate governance as such that was the problem, but rather corporate governance regulation. In particular, attention focused on such issues as the massive growth in corporate and securities litigation risk and the increasing complexity and cost of the U.S. regulatory scheme.

Tentative efforts towards deregulation largely fell by the wayside in the wake of the financial crisis of 2007-2008. Instead, massive new regulations came into being, especially in the Dodd Frank Act. The competitive position of U.S. capital markets, however, continues to decline.

This essay argues that litigation and regulatory reform remain essential if U.S. capital markets are to retain their leadership position. Unfortunately, the article concludes that federal corporate governance regulation follows a ratchet effect, in which the regulatory scheme becomes more complex with each financial crisis. If so, significant reform may be difficult to achieve.

 

The Misery Index is back and rising

IBD:

Conceived by economist Arthur Okun in the early 1970s, the Misery Index simply adds together the inflation and unemployment rates to create an effective indicator of real-world suffering.

It gained notoriety under President Carter, whose growth-choking, easy-money policies pushed the index to its post-World War II high. Now, under President Obama's equally disastrous economic policies, the Misery Index is making its return.

The annual inflation rate for May climbed to 3.6% as price spikes spread beyond oil and food. At the same time, May's unemployment rate edged up to 9.1%, yielding a Misery Index of 12.7.

That marks the fourth straight monthly increase in the index, which is now 62% higher than it was when Obama took office, and 57% higher than it was when the recession officially ended.

Obama's Misery Index average of 10.37 is higher than George W. Bush's (8.11) or Bill Clinton's (7.8).

 

Miott Romney opens mouth, inserts foot

You'd think this was from the pages of The Onion, but it isn't:

Mitt Romney sat at the head of the table at a coffee shop here on Thursday, listening to a group of unemployed Floridians explain the challenges of looking for work. When they finished, he weighed in with a predicament of his own.

“I should tell my story,” Mr. Romney said. “I’m also unemployed.”

I know he was joking, but as Steven Taylor observes it's not very funny because:

1)  He seems to have a job, after a fashion:  running for president which includes donors paying for a lot of his expenses.  So really, “unemployed” doesn’t strike me as the appropriate term.

2)  His net worth, as reported in 2007, was $202 million.

3)  If he wanted a job, I expect he could get one.  Today.

Moreover, it's exactly the sort of idiotic comment we've come to expect from Romney. Remember when he said his sons were serving their country by campaigning for him?

He's going to self-destruct one of these days.

Quoted re New York's proposed anti-competition wine law

From an article by Mathhew Shaffer:

Bill A06884, introduced by Democratic assemblyman Robin Schimminger, would “amend the Alcoholic Beverage Control Law to insure that alcoholic beverages distributed in this state pass through those authorized to sell the product.” Specifically, it would “require the manufacturer of an alcoholic beverage to identity [sic] the entities that are authorized to distribute, at wholesale, the product.” This is being done in order to “protect against counterfeit or ‘grey market’ goods and would serve . . . in the collection of state excise taxes.”

Stephen Bainbridge, UCLA law professor and wine blogger, tells me that this will mean that “a limited number of wholesalers will be exclusively entitled to import wine into the state of New York.” In the past, wine retailers and restaurants could “do grey-market purchases, to bypass the big wholesalers, and buy directly from the winery, or go to the auction market or private collectors.” But if the bill passes, “every bottle of wine sold in New York has to go through a licensed wholesaler.” There are only five such in New York State, and they would control “the flow of inventory from producers to retailers.” ...

Bainbridge notes that “the limited extent to which there is a counterfeit-wine problem tends to be in very old, very rare, expensive collectible wines.” The demographic that consumes these wines is a narrow slice of the electorate and one that most New York voters would think, if they ever thought about it, does not require the Assembly’s special solicitude.

But even so, does this market require regulation and surveillance? It surely does. But that surveillance is done within the market — by connoisseurs who take steps to make sure they don’t get conned on a four-figure purchase, and auctioneers and collectors who carefully guard their reputations. Professor Bainbridge notes that “wineries are making much more sophisticated labels and bottles that are much harder to duplicate,” and requiring auctioneers to provide “documentation of where and when auctioned bottles were bought.” In other words, the market is policing the market.

Obama's ATM fable

If I've learned one thing in 20-odd years as a member of the legal academy, it's that you generally shouldn't take economic advice from constitutional law professors. Case in point, courtesy of ex-con law prof Barack Obama, as summarized by Jim Treacher:

Obama thinks ATMs cause unemployment—No, really, he does! That's not a joke headline. He said it out loud in front of the whole world and everything. On yesterday's "Today Show," Obama told Ann Curry his brilliant theory about why the economy hasn't been doing so well since he became president: "There are some structural issues with our economy where a lot of businesses have learned to become much more efficient with a lot fewer workers. You see it when you go to a bank and you use an ATM, you don't go to a bank teller, or you go to the airport and you're using a kiosk instead of checking in at the gate."

That's right, the Smartest President Ever just said innovation is a job-killer. His next step, presumably, will be to demonize the Republicans for making such deep cuts to the Department of Buggy Whips. Hey, why is the President of the United States blaming machines for unemployment . . . on TELEVISION? Doesn't he care about all those out-of-work town criers?

As The Economist's Democracy in America blog observed:

ATMs have not in fact displaced bank tellers. According to this 2004 Charles Fishman article in Fast Company:

At the dawn of the self-service banking age in 1985, for example, the United States had 60,000 automated teller machines and 485,000 bank tellers. In 2002, the United States had 352,000 ATMs—and 527,000 bank tellers. ATMs notwithstanding, banks do a lot more than they used to and have a lot more branches than they used to. 

More recently, the  Bureau of Labour Statistics reports there were 600,500 bank tellers in 2008, and the BLS projects this number will grow to 638,000 by 2018. Mr Obama clearly picked a poor example. It's worth noting that the advent of the ATM also created demand for ATM maintenance workers.  According to the BLS, there were 152,900 "computer, automated teller, and office machine repairers" in 2008. I'm not sure how many of these are in the ATM repair biz, but the BLS expects a mild decline in this line of work due to increasingly reliable machines and declining replacement costs. Evidently, the relationship between technological advance and employment is complicated.

Exactly. Technological change probably has eliminated some jobs, but I'm willing to bet that Obama's job-killing policies have done far more damage.

Banning naming stuff after congressmen

Prompted by this WSJ story:

A 2009 study of the EDA [Economic Development Administration] by the nonpartisan Cato Institute collected numerous government oversight reports and documented widespread abuse of taxpayer dollars. The study noted that Senate Majority Leader Harry Reid is familiar with the EDA process. In 2008, he hand- delivered a $2 million EDA check to the University of Nevada, Las Vegas (UNLV) Research Foundation to begin construction of the "UNLV Harry Reid Research and Technology Park."

Greg Mankiw proposes the following rule:

No institution receiving government funds should be able to name itself (or any part of itself) after any government official who had a hand in providing those funds.

As Mankiw aptly asks, "isn't it fair to say that Senator Reid received some nonpecuniary compensation from this recipient of government funding?" 

Althouse: Why would the No Child Left Behind emphasis on math and reading leave less time to learn history?

Althouse:

I'm reading this Wall Street Journal article about new history history test scores:

The overall lackluster performance is certain to revive the debate about whether history and other subjects, such as science and art, are being pushed out of the curriculum because of the focus on math and reading demanded under the No Child Left Behind federal education law. The federal law mandates that students be tested in math and reading.

Why is this even a conflict? To learn reading, you need reading material! Make the reading material nonfiction works about history. Problem solved.

Simple solutions are often best. I'm prepared to believe that No Child Left Behind was one of Bush 43's many mistakes. But I don't get why teaching math and reading forcecloses teaching history and science. Does it violate some sort of teacher union work rule?

Senator Joe Biden on the War Powers Act

Politico:

A bipartisan group of House members announced on Wednesday that it is filing a lawsuit charging that President Obama made an illegal end-run around Congress when he approved U.S military action against Libya. ... The suit comes a day after House Speaker John Boehner (R-Ohio) sent Obama a letter claiming that military action in Libya will violate the 1973 War Powers Resolution if it does not end by Friday, 90 days after it began.

When I read that, I had a vague recollection that then-Senator Joe Biden had been a prominent advocate of a Congressional role in the war powers debate (I'm not an international lawyer, but I play one on TV). I was right. back in 1988, Biden wrote an essay on the war Powers Resolution published in volume 77 of the Georgetown Law Journal, in which he compared his view of a shared Presidential-Congressional role with that of Presidential "monarchists" (pp. 370-72):

One view can fairly be labeled ‘monarchist.’ This model sees the President as having virtually unlimited authority to deploy and use the armed forces in pursuit of what he regards as the national interest. Monarchists concede that Congress can act to constrain the President, but they argue that the only congressional power relevant to warmaking is the power of the purse. In short, if the President starts a war to which Congress objects, Congress can always cut off the money to wage it. Certainly this is a clean division of labor. But what merits debate is whether it is a constitutionally mandated division of labor or even a desirable one considering its ultimate effect on American foreign policy.

The practical implications of the monarchist model are sobering. Congress will never fail to provide overall funding for the armed forces, and the President can veto military appropriations bills containing restrictions he finds unacceptable. Thus, under the monarchist model, in order to stop a President from using American forces in a particular way, Congress faces the task of passing a specifically restrictive law over his veto. Monarchists would thus grant a determined President a free hand so long as he sustains the support of one-third-plus-one in either house. Under this model, even if Congress eventually asserts its will by insisting that the President sign an appropriations bill with restrictive amendments, the role envisaged for Congress is purely reactive and negative—a role played only after a presidential policy has been unilaterally implemented and has gone awry.

The alternative view advanced herein is a ‘joint decision’ model. Its premise is that there are indeed limits on the President's independent power to commit forces to combat—limits that, while not precisely defined in the Constitution, exist nonetheless and may be delineated in codified, constitutionally sound procedure. In this view, the President draws his independent authority not from some robust concept of the President as an all-knowing and nearly omnipotent Commander in Chief, but from a more limited Executive responsibility to protect the nation and its citizens from immediate threats. Under the joint decision model, presidential power to use force in the absence of statutory authorization derives from the concept of emergency: the need to repel an attack on the United States or its forces, to forestall an imminent attack, or to rescue United States citizens whose lives are imperiled. Conversely, a policy involving a sustained use of force must derive from an affirmative decision of the entire government, including Congress.

Query: Did Libya attack the United States? No. Was Libya about to attack the United States? No. Were the lives of US citizens in peril? No. (If you want to say the same thing about Bush 41 and 43's wars on Iraq, you'll get no quarrel from me.)

By Biden's own test, accordingly, Obama must get Congressional approval of his Libyan adventure. Granted, Biden was highly critical of the War Powers Resolution. But he insisted on what he called "the sound constitutional principle that sustained hostilities should be based on affirmative and specific congressional approval." By any fair measure, Obama's Libyan adventure is now a sustained use of force that Congress needs to approve or, preferably, disapprove.

Clarence Clemons' stroke

From BruceSpringsteen.net:

By now, many of you have heard that our beloved comrade and sax player Clarence Clemons has suffered a serious stroke. While all initial signs are encouraging, Clarence will need much care and support to achieve his potential once again. He has his wonderfully supportive wife, Victoria, excellent doctors and health care professionals, and is surrounded by friends and family.

I thank you all for your prayers and positive energy and concern. This is a time for us all to share in a hopeful spirit that can ultimately inspire Clarence to greater heights.

-- Bruce Springsteen

Clarence's family appreciates your concern and wants to let you know that you can send him your wishes via e-mail to notestoclarence@clarenceclemons.com

Very sad news. The Big Man has been such a huge part of the soundtrack of so many lives.

How microcredit helps developing economies

From io9 (of all places):

Microfinance expert Dean Karlan has just published a study of the effects of microcredit, and while there are some advantages, they're definitely not what we originally thought. ... Karlan and his colleague Jonathan Zinman undertook a large study of 1600 individuals in the Philippines, randomly giving half of them small loans and tracking the progress of all of them over the next 11-22 months. Rather than seeing the businesses grow, most of them stayed the same size or even shrunk. The microloans didn't generate higher income, and the recipients wound up feeling less confident.

The benefit the researchers did find was that the people they funded had stronger risk management, and their families were better able to weather fluctuations in personal finance and unexpected expenses. They were then able to better rely on informal lending from other sources, and the ties between the individuals and their communities were strengthened.

While this is only one study in one country, it does paint a picture remarkably different from the one that the creators of these programs want us to see, where microfinance leads to small businesses growing stronger and more wealthy. Instead we see businesses stay the same size or even shrink, but cement their places in the community.

Very interesting.

How far back should cultural grievances go? Personally, I'm still mad about 43 AD

Richard Falk and Hilal Elver are fighting with The Economist over whether the latter erred by offering Turks advice on how to vote in the latter's recent election. In doing so, they explain:

Turkey‘s sensitivities are historically frayed by European penetrations of their sovereign space during the decades of Ottoman decline in the 19th and early 20th centuries, and the Turkish reaction reflected this sensitivity, not inappropriately, in our view.

This is the sort of multicultural crap Western academics have been serving up for years. "Post-colonial consciousness" is routinely served up on our campuses to justify or excuse bad conduct by dictators and mobs, but Falk and Elver take it to an extreme when they apply it to a country that by their own admission was "never actually colonized."

Indeed, not only was Turkey never actually colonized, it spent much of its history as an aggressor building up a massive empire, much of it at the expense of--and to the demise of--formerly Christian nations and communities.

So by Falk and Elver's logic, shouldn't I be able to claim that my "sensitivities [as an American of English descent] are historically frayed" by the Roman conquest of my homeland in 43 AD. Or that my "sensitivities [as a Christian citizen of the West] are historically frayed" by the Arab conquest of Alexandria--at the time, one of the great intellectual centers of Christianity--in 641? Or the Turkish conquest of Byzantium in 1453?

Should the fraying of those sensibilities be reflected, "not inappropriately," for example, in my reaction to the persecution being directed at my Christian brothers and sisters in Egypt by Islamists?

Or is that a cultural street that only runs one direction?

Toyota gets a partial win

Inside Line reports:

In a major victory for Toyota, the federal judge overseeing the multidistrict litigation over alleged acceleration defects in Toyota vehicles has drastically limited the number of claims against the automaker.

The ruling says that only California car owners — not those in other states — can take advantage of the state's favorable consumer-protection laws. The action drastically cuts the size of a potential class action against Toyota filed on behalf of consumers and calls into question speculation that the Toyota litigation could cost the automaker upward of $3 billion if it lost the federal case....

U.S. District Judge James V. Selna ruled on June 8 that consumers who relied on Toyota's guarantees of reliability and safety should not be allowed to pursue economic damages under California's state law if they lived or purchased their vehicles in another state. California laws could conflict with those of other states, said the ruling. In addition, California's statute of limitations for the economic-loss claims is more generous than many other states.

The suits stem from a recall of more than 8 million vehicles worldwide, mainly related to complaints of sudden acceleration. Toyota has used a NASA and National Highway Traffic Safety Administration study to argue that the lawsuits are without merit.

On May 13, Selna refused the automaker's request to dismiss the litigation, saying that Toyota owners had alleged enough facts establishing overpayment, loss in value or loss in usefulness with regard to the vehicles in question.

That last paragraph is the one that caught my eye. Basically what the judge is saying is that plaintiffs can prevail under California law against a mostly innocent manufacturer where negative publicity and resulting price declines are caused by an unholy combination of anecdotes about driver error, rapacious plaintiff lawyers, and an unscrupulous mainstream media. What a great state I live in!

Bruce Bartlett on how to grow the economy

It's a shame Bruce Bartlett seems determined to burn all his bridges to his former GOP mates, as he would make a splendid economic adviser whose presence on a campaign would give the candidate that hired him instant credibility with anyone retaining a lick of common sense about the economy. Case in point: his latest column dealing with Tim Pawlenty's absurd claim that tax cuts could produce 5% per year GDP growth:

The bottom line is that neither taxes nor spending by themselves are the most important government contribution to the investment climate; it’s the budget deficit. Consequently, a reduction in tax revenue which raises the deficit is unlikely to stimulate domestic investment because more money will have to be borrowed from abroad. Conversely, a tax increase dedicated to deficit reduction could well be stimulative, as was the case with the 1982 and 1993 tax increases. Contrary to Republican dogma, rapid growth followed on both occasions.

A big cut in the budget deficit would be destabilizing in the short-run, but a reduction in the long-term deficit would free up more national saving for private investment. But if taxes are cut at the same time, as Republicans insist, then the economic consequences are ambiguous. With federal taxes at a historical low – they are currently just 14.8 percent of GDP versus a postwar average of about 18.5 percent – it’s implausible to argue that further tax cuts will stimulate growth. Indeed, there is good reason to think that undermining the government’s ability to raise revenue will raise prospects for future deficits, which will drain saving from the economy and reduce investment. For this reason, I am also very skeptical of the idea just floated by the White House to further cut the payroll tax.

If we want to raise the long-term rate of growth, we have to go back to the textbook and increase saving and investment, channel more public investment into education and basic infrastructure, and do everything in our power to promote scientific research and technological advancement. It’s not sexy and it takes a lot of time, but it works.

Go read the whole thing.

One issue Barlett doesn't discuss is the impact that baby boomer retirements will have on the already low savings rate. What impact can we expect as boomers liquidate their retirement savings?

Private ordering of insider trading

In discussing Henry Manne's latest essay on insider trading, Entrepreneurship, Compensation, and the Corporation, about which I blogged here, Larry Ribstein observes that:

While many have criticized Henry’s theory over the years, nobody in the meantime has produced ... much evidence that insider trading hurts anybody other than information owners who ought to be able to license their employees to use it.   Maybe it’s time to give the idea some serious consideration.

I'm not so sure. Although I'm generally in favor of private ordering, there are cases where mandatory rules are appropriate. I explained why I thought insider trading was one such case in my post Why the insider trading prohibition is mandatory rather than just a default rule: