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Thursday, July 22, 2010

Shirley Brown the Red Herring

I won't bother you with the fine details of this story.  If you haven't seen it, you're probably better off staying with the rock you've been living under.

Here's the skinny.  Shirley Brown works at the Department of Agriculture, an Obama appointee.  She's a black woman.  This is important, so remember that.  She gave a speech that was startlingly honest.  When a poor white couple came to the department for help, it gave her pause.  That's all.  Andrew Breitbart, Fox News, and Bill O'Reilly later, she was fired.

My issue is this:  Blacks in the America have cause for racism.  That doesn't make it right, but it is completely justifiable.  The reason why it's a problem because as a public official, her duty is to all Americans.  But, various American authorities have been viruluently anti-black since the country's inception.  Many of them had public heads who were completely open about their racism.

So for a blackwoman to feel two ways about helping a poor white couple, that's A-O-K.  She did help them, and the family went public, thanking her profusely for aid.

Here's the kicker, and this is what pisses me off.  Glen Beck and his ilk are the first to decry "white racism."  But "white racism" is a shield, a red herring, and blackhearted lie for what is actually racism against blacks.  These proponents, so vociferously defending the beknighted white class from their oppressors, are guilty of outright racism.  I don't care how many black friends they have.  No one can legitimately deny that minorities have it worse in this country than the white majority.  Are their poor whites?  Of course.  Do I feel for them?  Absolutely.  Would I like them to find government aid?  You bet I would.  But are they victims?  No.
Nixonland: The Rise of a President and the Fracturing of America
I'm still reading Nixonland.  Yes, still.  I hope to finish it before I finish my degree in three years.  That's my goal.  But Nixonland is a really prescient piece because it discusses exactly the last time the U.S. was this racially bestirred.  Yeah, whites today got it pretty good.  Equal housing laws are pretty good right now, no thanks to white racists who voted against the Fair Housing Act in 1968 (Title VIII of the Civil Rights Act) so there aren't any riots.  And ghettos, though still nasty, aren't even a quarter of what they looked like forty years ago.  But that doesn't mean we can't go back there.  And people like Glen Beck, Bill O'Reilly, and Andrew Breitbart are pissing gasoline on the hay in the barn.

And it will work.  The hate will build, and this laughably entitled "post racial era" will end in a heart beat as the violence escalates.

Freedom of speech doesn't give you the right to be an asshole.  Someone needs to put that on a bumpersticker for me.

Wednesday, July 21, 2010

For you deficit hawks

So, there is a great movement afoot to stymie macroeconomic expansionary policy for the remainder of Obama's term, and if, god forbid, a Republican takes office, clearly for his term (and one term it will be if they attempt to real in the deficit).

So the federal deficit stands at 13 trillion dollars.  Check out the linked site.  It's pretty amazing.  That's a pretty large number, and it's pretty scary for most Americans.  But for all the wrong reasons.  The reasons I've heard counted include inflation, China, bonds, and personal savings.  I'm going to handle some of these in this post.

Inflation--First of all, there's been almost no signs of inflation.  Infact, inflation rates were negative for much of 2009 and are hovering at 2% for most of 2010.  As Paul Krugman has pointed out ad nauseum, the real risk we run is deflation.  That's where prices get so low that production levels decline because firms no longer have the capacity to produce.  Deflation is a nasty spiral, and it's not entirely clear how to get out of it, once the spiral begin.  That's in comparison to inflation, for which we have a number of well practiced tools.  If that's the case, why are so many people worried about inflation?  Well, simple, when debts are so huge, it's been the practice of floating currencies to print more money.  By expanding the money supply, you can pay your debts, up until the point that your currency loses all value.  That's how Germany attempted to deal with WWI reparations.  But there are absolutely no signs of this happening.  2% inflation is exceptionally low.  Remember, in the recessions of the 80s, inflation climbed as high as 14%, in 2006, inflation was higher than it is now, at 4%.  The Taylor rule, pegs good inflation exactly at 2%.

China-Bonds--I'll handle these two together because they're related.  So, to raise the money supply, the Fed sells treasury bonds on the open market.  Commercial banks buy them, but also the central banks of other countries buy them too.  And, as you've no doubt heard, China owns a whole bunch!  Five years ago, they owned nearly 850 billion.  These fears about China have been going on for thirty years, and are a bad hangover from the Cold War.  The fact is, China's been a great bogeyman for U.S. politicians, particularly Republithugs, for years.  And I'm not really sure why.  Is it that they think China will invade?  Such a thing, while catastrophic if it occurred, is so unlikely as to be pure fantasy.  More likely, people are worried over the vast effects that the Chinese exert over our economy.  There are some major levers that the Chinese have, by owning so much debt, not to mention the equities they own in the country and the world, but the most troubling to U.S. politicians currently, is how they devalue their own currency.  So the aggregate demand equation goes as follows.  Aggregate Demand= C+I+G+(X-MI).  That is, Consumer Spending + Investment + Government Spending + Exports minus Imports.  The most popular way to stimulate demand is by becoming an export nation.  No one likes the government to spend, consumers always spend at the Marginal Propensity to Consume (MPC) which is directly related to their income (excepting cheap credit!).  Investment means, new houses and new factories, so it's hard to stimulate that (the only way is through tax credits, which might not accomplish anything anyway).  And that leaves exports.  And there are several ways to stimulate exports.  Have a cheap dollar, and have a cheap labor force.  China values its currency against the U.S. dollar.  But it does so at 8 to 1 (7 to 1 since mid 2009. )

But this nebulous fear of the Chinese, is just that, nebulous.  China doesn't want to change it's relationship with the U.S.  They've attained great wealth through us.  We are their biggest customers!  And if they undermine the U.S. capacity to repay it's debts, they'll be forced to take a major writedown.  A writedown that could destabilize their entire political system (already on the verge of destablizing).

Let's not talk about war.  It's silly.  Plus, both the U.S. and China have spent billions on war plans that will go into effect the minute hostilities break out anyway. 

All of this to say, don't worry about the deficit.  Worry about employment and economic change.

Employment speaks for itself.  The unemployment rate is bad, 9.5%, again worse in the 80s, and full employment is actually around 5% unemployment, but still bad enough to be a game changing issue this November. So new jobs need to be created.  And that means more stimulus.  People are fond of pointing to Japan's lost generation as a benchmark for when increased government spending did not raise aggregate demand--but Japan is very different from the U.S.  Moreover, Japan left its lost generation with state of the art urban areas, transportation of all varieties.  Whereas our infrastructure is still decaying faster than it can be rebuilt, despite the stimulus money already spent.  Moreover, why the hell is Obama building more roads?  Repair the existing, add a lane or two if you must, but the stimulus money really needs to come to expanding urban areas.  We no longer have a factory or agricultural based economy.  To be sure large percentages of our GDP come from those industries, but the largest stake came from our health and finance sectors.  These are urban professionals!

This is where we get down to the real problem here.  Change.  Nothing's changed.  The internet bubble is gone, so is the housing bubble.  How do we spur real change?  Innovation.  Where are the innovators?  They're going to business school instead of engineering school because the payoff's higher.  The U.S. should be dumping a load of stimulus funds on universities.  The coffers of the NIH and the WHO need to be replenished.  Disclaimer: I'm engaged to a graduate student, so I have a financial interest here.  But where is the next thing going to come from?  Not better coffee, not a new brand of food, not a new iPod, or iPhone.  It's going to be game changing when it happens, but it will only happen here if we invest in our human capital.

Enough.  I need to get to work.

Tuesday, July 20, 2010

Macroeconomics Post 3: The Role of the Federal Reserve

So the last chapter before the final was an illuminating one, in part because it dealt with one of the central debates of economic policy.  In the the common parlance of liberals and conservatives, the issue has been framed by conservatives as the role of "big government."  But, the book explains, this is a read herring.  The issue for Macroeconomists has nothing to do with the size of government, because that is fiscal policy--it's a different issue.  Most economists believe in the economy's auto-stabilizers like unemployment insurance and the graduated income tax.  The issue, says Baumol, is actually the degree to which the government attempts to regulate the economy, or to what degree the "self-corrective" market is allowed to be free.  This battle largely takes place at the Federal Reserve.

So the Federal Reserve can affect the economy in several ways.  1)  They can change the interest rate 2)  They can change the money supply.  There is a third way that is rarely used 3)  It can change the reserve ratio for banks.  The Big Debate in Macro is whether or not the Fed should worry about 1, or 2. 

Keynsians think the Fed should concentrate on the interest rate.  This keeps the interest rate relatively stable, and with several underlying assumptions, it helps expansionary policy work effectively to stimulate the economy.  The monetarists, lead by Milton Friedman and his ilk, believe that the key is actually the money supply.  They think the interest rate should be determined by supply and demand.  The key concern of the monetarists is inflation, and when the Fed lowers the interest rate, they expand the money supply--and chance inflation.  Now in practice this hasn't really been the case.  The correlation between low interest rates and high inflation hasn't really born out.  Even when adjusted for the "two year lag" that monetarists believe affect inflation numbers.

Anyway, economics is over now, but it was a fascinating class that I wish we could have gone more into depth on.  Next stop Forensic Accounting and Tax!

Wednesday, July 14, 2010

Art or Bonds?

Just a quick post here.  Planetmoney did a good little podcast on the economics of art selling.  As an art hobbyist, I found it intriguing because I do occasionally produce canvases, and I do occasionally have an opportunity to try and sell them.

The gist of the podcast is that the return on Bonds is always higher than the physical investment of a piece of art.  Well duh.  It turns out that one of the metrics of a how a painting is sold turns out to be popular swings in taste.  Though not surprising, this can have alarming effects on the price of your art investment.  A Van Gogh will always be worth millions, but if French Impressionism goes out of style, that could shave millions of dollars off your investment.  Whereas your investment in a bond is by its very nature a fixed investment.

There is one thing that they don't talk about in the podcast which surprised me.  Art is very fragile, and very space consuming.  One of the things we learn about in economics is that money, by it's very nature has to be fairly easy to store, and it has to be easily divisible and difficult to counterfeit.  There is a ton of risk in the art market that what you're buying is a fake, and moreover, if the housekeeper decides to dust the painting with dillouted ammonia, he'll destroy a 20m dollar investment in five minutes!  Your whole house could burn down and everything in it, and a bond will still retain its value, so long as the company, or government which backs it continues to exist.  It's funny too, because just the day before, "All Things Considered" ran its own podcast on the artmarket and they talked to an art seller whose client had had that very thing happen to him.  His housekeeper ruined his investment.

I am a nobody, and my art is only midling realism.  I paint mostly acyrylic and oil canvases between 8.5 x 11 and 30 x 40 inches.  In fact, a 30 x 40, canvas is the largest canvas I've ever worked on.  I may have the opportunity to sell some of my paintings fairly soon, so how would I price them?  And what am I likely to get for them?  So here, you have a piece that I have never shown before, that I am going to attempt to sell, it's an oil painting of a famous Japenese Garden in Florida.  It's 30 x 40 inches, and comes preframed, as in, I wanted to hang it myself and framed it to make it look nicer.  Cheap frame, but it looks good.  So how much, and what can I expect?  Well, the painting is only one of its kind.  Not easy to reproduce.  Even the cost of getting a lamine of the painting would be a good $100, though the price would then come down on each print thereafter.  Morevoer, getting it properly scanned at this point would require removing it from the stretchers which would damage the painting considerably.  Printing it based on a photograph?  Possible, but getting that well done would be fairly arduous as well, and lighting and veneer are critical issues.  What is this painting worth to me?  Well, two women in my life like it very much, and both would like to keep it.  But at least one wouldn't begrudge a little extra flow, and a little extra wall space.  Given that the painting took me three years to complete (long periods of no work done) my asking price is $2,000.  But, as with any work of art, I would expect to bargain on the price.  Is it worth 2,000?  Certainly, my name will never be worth anything, at least, not as a painter.  But sentimentally, the painting is definitely worth that much to me.  But I could piss $500 away in two weeks, and there I am, without one of the two oil paintings I've done.  Is that sentimentality worth a payment on my debt that would be negligable at best?  No.

Here's another one.  An oil 30x40 of the Rio Grande.  Also framed.  I have far fewer takers on this one, though as a painting I enjoy it more because of the feeling of space that the Rio Grande valley evokes.  Again, I'd ask for $2,000.  But neither of the two women in my life who wanted the first painting are particularly interested in this one.  Neither of them were cowboys for Halloween, I guess.  But I'd be more willing to part with this painting because it would make at least one of the women in my life very happy.  Particularly if I made a buck for it.  But here again, we come into some interesting economics about art.  I have a target audience for this, I know a guy who hails from this part of the world.  Would he be interested in a painting like this?  I have no idea, but if anyone would, it would be him.

Which leads me to the last topic for today.  Prices.  Prices are determined by the negotiations of buyers and sellers.  If there are no buyers for a particular asset, it's difficult to set a price.  This, we're told, is the reason why toxic assets had such variable values during the height of the crisis.  Or at least, that's what Planetmoney would have us believe.  But the avabilability of buyers and sellers is really only one aspect of price.  This is why so many long term investors, like those who buy and sell for pension funds, have such a negative feeling for shortsellers.  They aren't bothering to value an asset based on its actual worth or quality, but on speculation that the price will drop because of external market factors.  If the factors were internal, it would be a variant of insider trading.  If the perceived demand for my paintings is low, so is the value.  If the perceived quality of my paintings is low, so is the value.  But if the quality of my painting is perceived as really high, and demand is still low, then so must be, the price.