The Irony of the Strong Dollar

The dollar remains strong in the face of our economic woes in large part because our currency is viewed as a safe-haven in times of global financial crisis (such as now). The irony of this is that when you combine worldwide demand for dollar growth, and the worldwide tendency to hoard currency / save and not spend (on US goods or assets), what you get is the increased likelihood that the appreciated dollar will make our recession longer and harder than it might otherwise need be. Particularly if the recession improves faster abroad than in the US (which may be likely since the US was the major source of the downturn and the many other countries are only being affected indirectly)we may see some of our trading partners start turning, at least during some transitional timeframe, to countries with less expensive currency: only furthering our export issues.

Over time one would think the financial cloud would clear, spending would resume and dollars would be used for their purpose, but this won't happen over night. There will be a transition with x number of economically-improving countries that will shift from buying from the US to buying from cheaper-currency countries, and y number of less-improving countries that will continue to hoard dollar currency for a time.

Treasury Sec. Geithner believes in a strong dollar as a signal of confidence in the US market, but it seems that this is causally backwards. The strong dollar isn't signaling confidence, it's the already existent confidence in the dollar relative to other currencies that is causing the strong dollar. The sustained strength of the dollar will have little to no impact on US market confidence, particularly if the rest of the US data continues to plummet.

DeLong Clarifies

...What can I say, the man is on a role. It's refreshing to hear someone making sense in the econ profession.

Right Idea, Incomplete Reason

I like this post by DeLong. I think there is something to his point, though I think there's a much simpler reason why people against government spending may be incorrect, and it lies not in their assumptions about the velocity of money per se, but in their assumptions regarding the relationship between income and spending and the tendency to hoard in times of crisis.

The whole point of the Keynesian revolution was to point out that in a dynamic (time and reality based) model with inventories etc., income and output in a given period do not always have to equal spending. And that, even when they do become equalized, spending (or total demand)can have a positive effect on output precisely because complete crowding out at best takes a long time to occur and, more realistically, never happens.

This is particularly true now since a significant portion of money in the private sector is NOT being spent or loaned - it is being HELD. I don't know how many times I need to say this. Money being HELD is NOT being used for consumption or investment, by ANYONE - it represents idle capacity. So, it only makes sense that we allow our federal government who is WILLING to spend our money to borrow our money that we are not using, and spend it on projects that will benefit us both in the near term and in the future.

On Obama Allowing States to Decide Auto Emissions

Generally, while I think it's a step forward, I have to disagree that letting each individual state choose emission standards is the best idea or option. First, notice that those states like California, Vermont, Washington, etc. that are green-conscious in general. Most (other) states have, and always will, compete against each other for business-friendly and sales-friendly (for tax revenue)environment.

States currently fight each other over who has lower taxes, who can attract the most jobs, etc. States also will fight over who has the least burdensome emission standards. So, while some states or regions like California may increase standards, the nationwide average increase won't likely be as much as it could be if there were a national standard across the board. This will lead to some very large distortions.

Car companies are correct - this could lead to the most cost-effective outcome being that the same model of car is produced slightly differently in manufacturing and distribution clusters located in the midwest (sold in the midwest without heavy standards) than say in the Western or New England area where they have to sell to a large number of people with tougher standards.

What you'll end up with is akin to what Indiana ended up with when it allowed each individual county to set chose its daylight savings time and Eastern vs. Central time standard. What we have now is that the whole state is on the same page via daylight savings, but we still have the problem that there are many counties that are eastern time while their neighbors are central time - which still poses problems for businesses despite the adoption of DST.

A song for our times

I'd like to share this wonderful song - recorded by Ryan Stotland from Montreal. I think it's great - good synopsis about the financial crisis and just a well crafted and performed folksy-sounding song overall!

As an aside, I write and record music in my spare time too.... I'm wondering how many finance / econ junkies are out there that are 'secretly' amateur songwriters! If I find others I think I'll form a band. I mean there's the standup economist, why can't there be a kick-ass economics band! Jonas Brothers better watch out ;).

Smoking and Externalities

I think the current law in Indianapolis is fair - banning smoking except places like bars, clubs, bowling alleys (and casinos?)... these are places that if you patronize them or you work there, you should expect smoking as a part of the ambiance. I think this newer potential law is far too restrictive.

A better idea would be to, in conjunction with a ban containing the above exceptions, increase the cigarette tax statewide to a substantially higher level to be more in-line with other more progressive States' levels. Or, if the concertn is more targeted to the exceptions, add a specific tax to all cigarettes purchased at bars, casinos, clubs, etc. That would allow smoking to remain legal in those few places but also provide significant revenue to the State to counteract the negative side-effects on others. This is doubly true since I imagine the demand for cigarette purchases at these locations is quite price-inelastic (from my own observation).

Still Don't Think Those in the "Know" Are Too Optimistic?

"The Commerce Department said retail sales dropped 2.7 percent, more than double the 1.2 percent decline analysts expected."

-AP, 1/14/09

TED and Barron - How the Heck Are We?

Hat-tip to Mankiw on this optimistic note: the TED spread is now below 1! I had been tracking TED but stopped before the holidays and at that time it was still above 200 basis points and appeared to be growing. This is good news though other measures of uncertainty and the like, for example Barron's Confidence Index or the CitiGroup "Panic"/"Euphoria" Investor Model indicate the situation is still bad from an end-user (consumer and business investor) perspective.... But could there be an uptrend?

Posner redeemed!

Judge Posner has redeemed himself (from some of his past, shall we say, rants) in his recent blog post. Kudos.

Unemployed?

Official unemployment rate now stands at 7.2% for December, per BLS data released today. But, often lost in the numbers the rampant growth in the 'underemployed', which is just as disturbing:

"In December, the number of persons who worked part time for economic reasons (some-
times referred to as involuntary part-time workers) continued to increase, reaching
8.0 million.The number of such workers rose by 3.4 million over the past 12 months. This category includes persons who would like to work full time but were working part time because their hours had been cut back or because they were unable to find full-time jobs."

Also from the BLS

Obama's Speech

An excerpt from Obama's economic crisis speech to be given in short order:

"There is no doubt that the cost of this plan will be considerable. It will certainly add to the budget deficit in the short-term. But equally certain are the consequences of doing too little or nothing at all, for that will lead to an even greater deficit of jobs, incomes, and confidence in our economy. It is true that we cannot depend on government alone to create jobs or long-term growth, but at this particular moment, only government can provide the short-term boost necessary to lift us from a recession this deep and severe. Only government can break the vicious cycles that are crippling our economy –- where a lack of spending leads to lost jobs which leads to even less spending; where an inability to lend and borrow stops growth and leads to even less credit."

...It will be so nice to have a President that understands things again.

A Note on Hal Varian's View of Economic Stimulus

First, let me say I have a lot of respect for Hal R. Varian and I love his advanced micro text(s). That being said, he says:

"Ultimately, we want to end up with a significantly higher savings rate in the U.S. than we have seen recently. That means some other component of demand must increase to compensate for the reduced consumption. And the most attractive candidate by far is private investment."

Of course, in an ideal world and under 'normal' economic circumstances, private investment is the most attractive candidate, but as Hal even mentions, people and businesses and banks are hoarding cash. So tax incentives for investment can only go so far. Government spending is the only direct route to compensate for reduced consumption. And of course, it is no magic bullet either as even Obama says we will have huge deficits for years to come.

Finally, Varian's criticism of governement spending may not hold under an obama administration with a sympathetic congress. He says:
"it takes too long for the government spending to kick" and
"spending may easily focus on pork-barrel projects that have little inherent value"

... both of which Obama has directly commented on saying would NOT happen. And, given his political capital, there is reason to believe him.