Friday, January 30, 2009

Right on.

Thanks to DFB field correspondant Bryan for this link.  Nice to remind yourself now and then that the world is not coming to an end. Go to this link and watch the video.

Wednesday, January 28, 2009

Oh. My. God.

I will now weep with joy.  I have found pork-vana.  Yes, that is a Italian sausage spread out over a woven mat of bacon, and then sprinkled with chucks of cooked bacon.  The two men (let's call them Jesus and Einstein) who thought this up then roll up the package and smoke it.  See more pictures here.

The only question is how soon I can convince Kirstin to let us do this. 

Tuesday, January 27, 2009

Stryke Me

Because I know you all read the last post and wanted to know exactly what a M1126 Stryker personnel carrier is:

They essentially took one of those duck-tour boats from Boston or the Dells and tricked it out with green paint, a bitchen stereo and a Browning .50 caliber machine gun. 

Accounting is not the same as Economics

This is probably self-evident, but violations of this seem to be sprouting up all over the place, often from respectable sources.  Brad DeLong does a much better job on savaging these people that I could do, so if you want red meat, head there. 

But here is the issue. Several economists have been arguing against the stimulus bill.  Now, there are valid reasons to be skeptical about government stimulus (as I pointed out a couple of days ago, the timing of the stimulus matters as much as the size).  But some people are proposing that stimulus will have zero effect on the economy because it will "crowd out" private investment and consumption.  This is a dumb reason to be skeptical about the stimulus plan.

What I just recently got through teaching my intermediate students was the national income accounting identity:
Y = C + I + G + NX
This is an accounting identity.  It says that GDP (Y) can be subdivided into four different buckets.  Consumption (C), Investment (I), Government Spending (G), and Net Exports (NX).   GDP is the value of all the transactions that take place in the economy.  Each of those transactions can be classified as either consumption (like buying a new jacket), investment (like buying a house), government spending (like buying a M1126 Stryker personnel carrier), or net exports (which can be negative, and would be if you bought a Sony 37" 1080p HD television but didn't sell anything to Japan in return).

There is nothing about the above identity that says GDP (Y) is fixed, constant, or unchanging. If there are more transactions in the economy, the GDP goes up, and by definition the sum total of C, G, I, and NX must go up as well. 

The government stimulus bill involves the government spending a lot money.  That is, it will buy more M1126 Stryker personnel carriers.  Thus there are more transactions in the economy, and - by itself - GDP will go up and so will G.  The identity will hold. 

Now, in addition to this initial increase in GDP from the new transactions, we can think of two follow up effects:
a) the increased spending on M1126 Stryker personnel carriers means that the manufacturer hires more workers and buys more machine tools.  These are new transactions in the economy, and GDP will go up even more.  The new workers will buy jackets and houses and Sony 1080p HD TV's.  The machine tool manufacturer will hire more workers and buy more paper clips.  More transactions, higher GDP.  And so on and so forth. 
b) the increased spending on M1126 Stryker personnel carriers is made possible by the government borrowing money.  This increased demand for funds from the financial sector drives up the interest rate (remember that interest rates are the price of borrowing).  The increase in interest rates means that fewer people like you or businesses like your employer will be willing to take out loans to buy things like cars, houses, and machine tools.  So we lose some transactions, and GDP would go down.

If a) dominates, then on net the government stimulus spending will raise GDP.
If b) dominates, then on net the government stimulus spending will lower GDP.
If a) and b) roughly offest, then GDP will be about the same.

The question of whether a) or b) dominates is open. One can have a legitimate argument about how businesses and people will respond to the stimulus, and whether the effect on interest rates will be big or small.

What you cannot do is say this:  "If G goes up, I has to go down by an equal amount to satisfy the accounting identity, and there is no change in GDP (Y)."  Why are you not allowed to say this?  Because the identity has nothing to do with how many transactions there are in the economy.  It is an ACCOUNTING identity.  If you buy an extra $5.12 soy mocha double-shot chai venti latte tomorrow, then tomorrow both sides of that identity get updated.  GDP goes up by $5.12, and consumption (C) goes up by $5.12.  Why? Because it is an ACCOUNTING identity.  Double entry, baby.  Debits must equal credits, so to speak. 

Making the above statement is the same thing as saying: "I conclude that the stimulus package will not raise GDP because I have assumed GDP will not change."  That is dumb.

Friday, January 23, 2009

Gift Ideas

If you want to get a really early jump on X-mas shopping for next year, don't miss out on these Christ-tastic items for your favorite zealot.

My personal favorite, the Jesus chair:

We're all gonna die! (part IV)

Consumer and business sentiment is really lousy right now.  Here are a few quotes from a Time magazine story on the recession:

"...why are Americans so gloomy, fearful and even panicked about the current economic slump?

..The slump is the longest, if not the deepest, since the Great Depression. Traumatized by layoffs that have cost more than 1.2 million jobs during the slump, U.S. consumers have fallen into their deepest funk in years. "Never in my adult life have I heard more deep- seated feelings of concern," says Howard Allen, retired chairman of Southern California Edison. "Many, many business leaders share this lack of confidence and recognize that we are in real economic trouble." Says University of Michigan economist Paul McCracken: "This is more than just a recession in the conventional sense. What has happened has put the fear of God into people."

...U.S. consumers seem suddenly disillusioned with the American Dream of rising prosperity even as capitalism and democracy have consigned the Soviet Union to history's trash heap. "I'm worried if my kids can earn a decent living and buy a house," says Tony Lentini, vice president of public affairs for Mitchell Energy in Houston. "I wonder if this will be the first generation that didn't do better than their parents. There's a genuine feeling that the country has gotten way off track, and neither political party has any answers. Americans don't see any solutions."

...The deeper tremors emanate from the kind of change that occurs only once every few decades. America is going through a historic transition from the heedless borrow-and-spend society of the 1980s to one that stresses savings and investment."

 Oh, by the way, this was from a story in Time about the recession in 1991.  You remember that one, don't you?  It was also the recession right before the longest post-war expansion in American history.

We always get over-optimistic when things are going well, and we always get over-pessimistic when things are going poorly.  The American way of life is not about to end.  We are not in the second Great Depression. We are in the midst of a bad economic downturn.  It will end.

So THIS is why they invented the internet....

Wednesday, January 21, 2009

Just in Case... thought that the world wasn't terribly interested in what the U.S. was doing, check out this collection of magazine/newspaper covers from around the world.

Radical Changes

HUGE blog re-design here at Deep Fried Bacon today.  It's a different world now that all the random crap is on the right, not the left.  If you are confused, give me a call and I'll talk you through the new design.

I hope you appreciate it - I spent probably 20 seconds deciding on which button to push in Blogger to pick a new template.  Whew.

Stimulus Bill

More details on the stimulus package are now floating around.  First, this blog has parsed the bill down to easily read web pages, and you can look for yourself on where the government would like to spend the money.  Kind of fascinating stuff.  One example - $1 billion in extra funding to the Census department.   Another that is good for me and other PhD's who want some grant money - $2.5 billion in extra funding to the National Science Foundation to support research.   One big item - $18.5 billion to the Energy Department for additional funding for renewable fuels.  I'm all for renewable energy, but this $18.5 billion is allocated in the space of one-half of one page.  In other words, it's not exactly clear what the Energy Department is going to do with the money.

One additional issue, brought up here.  The fraction of the stimulus bill that will actually be released by September 30th - about 14%.  The idea is to stimulate the economy NOW, not in a couple of years.  But the amount of spending that will occur NOW (say by the end of February) is almost zero. 

Given that current estimates have the recession ending in June or July of this year, this whole stimulus bill is starting to look like it is going to miss the boat.  Rather than tacking on an additional $825 billion to the national debt, why not narrow the focus a little?  Let's jack up unemployment insurance payments and other low-income assistance programs (WIC, etc..), as this can be done NOW simply by authorizing higher payments and allowing people to stay on the programs longer. 

Just a thought.

REALLY Big Public Spending Ideas

There is a lot of economic research that suggests that many countries are poor because they lack easy access to water transport.  If you can't cheaply ship goods to or from your country, you tend to be poor.  This is particularly acute in Africa, which has a number of landlocked countries, but also has very few easily navigable rivers.  (In comparison, consider the U.S.  You can take a steamboat from New Orleans to Minneapolis.  Also, look at a map sometime and count the number of rivers that run from the Appalachians down to the Atlantic.)

Anyway, some time back there was a plan mooted by some German engineers to create waterways across Africa.  This involved damming up the Congo river to create a gigantic mid-African lake which would then generate new rivers as it spilled over its surroundings.  The map is here (which I got from Chris Blattman's blog), and take a look at how ambitious their estimates of the water coverage were. 

Crazy, mayber.  But it would get around that whole landlocked thing.

Cool Picture

Here's a satellite photo of Inauguration Day in D.C.  The big dark clumps are people gathered around Jumbotron TVs to watch.

Friday, January 16, 2009

I will now drink more Heineken

Love. This. Ad.

Go Blue

I overlooked it this week, but the Michigan hockey team had a great pair of wins last weekend.  5-1 and 4-0 over what was a top ten ranked Miami of Ohio team.  This inched the Wolverines up to #6 nationally, and sent a message that Red is not going to stand for a middle of the pack CCHA finish.  But most importantly, notice who got the net-work in these two games: Bryan Hogan played all 120 minutes.  Billy Sauer sat the whole time.  Has Red settled on Hogan (the sophomore) over Sauer (the senior) as his go-to guy?  After the last few NCAA tournament meltdowns, I can't say I'd blame him.  In fact, I'd like to see this team get a chance at the title without looking over their shoulder to see if Sauer is breaking down every night.

By the way, the soph's continue to run this team.  Top scorers:
Caporusso - 28 pts (and the Cy Young leader with 18 G and only 10 A)
Palushaj - 27pts
Hagelin - 16pts
Langlais - 13pts

A Return to Sanity

Someone is finally willing to do something about the fact that we have been torturing people. A+ to Obama for not ignoring this in the face of the recession.

Blow Your Mind Stuff

So we may all just be a giant hologram created by the boundaries of the universe.  How cool is that?  Although I don't understand how we can't walk through walls, then.  Stupid reality.

Bad, bad balloon animals

Go here and watch the first video, just maybe wait until after the kids are in bed. It's an ad for condoms.  A European ad, so be prepared.

Then watch the "blooper" videos also listed on that page, which are actually funnier.

We're all gonna die! (part III)

Maybe not. There are some interesting graphs here from the Minneapolis Fed showing how the current recession looks relative to previous recessions.  It's not clear from these that the current situation is historically bad, although we have yet to actually reach the trough of this recession and don't have full information. Still, interesting stuff.

Wednesday, January 14, 2009

More Good News

These guys from Stanford are predicting that the economy will begin growing again in mid-2009.  The novelty of their analysis comes from examining the uncertainty that influences recessions. The idea is that the real problem in a recession is not some drop in aggregate demand or some failure in the financial sector, but the fact that firms become uncertain about the future.  With uncertainty, firms abandon plans to hire and delay their investments to the future. 

One way to measure the uncertainty in the market is to look at implied volatility in the stock market. Without going into technical details, you can back this number out by looking at how wildly the stock market swings on a day to day basis.  Their graph shows that while volatility spiked incredibly in late 2008, it has started to fall recently.

If it stays at this lower (but still relatively high) level, then their model predicts a recovery as firms (with more certainty) become willing to undertake new investments again.  If volatility were to fall even further, the recovery would take place even faster. 

This speaks to one issue with the stimulus bill. In some ways it is less important how big it is or exactly what it proposes to spend money on. What is important is that we enact it soon so that firms can observe with certainty what the government is going to do. The dithering is what hurts the economy, not the actual type or amount of spending.

Some good economic news

To bouy your spirits, there is some evidence that the financial sector is recovering.  The following link shows you the TED spread, which is roughly the premium that banks have to pay to borrow money on the open market.  Historically, this number is pretty low, meaning that banks lend to each other at about the rate they lend to the government (which is considered the safest borrower in the market). 

When the mortgage securities collapsed, banks became fearful of each other, and demanded huge premiums to lend money to each other.  You can see that in the graph around October last year when the TED spread jumps from 1% to nearly 5% (i.e. banks went from charging each other the Fed Funds rate +1% to charging each other the Fed Funds rate +5%).   This was due to acute uncertainty about whether other banks would pay the money back.

Now, the TED spread has dropped nearly back to the 1% level, meaning that banks are willing fund each other again. This is important because banks need to borrow from each other in the short run (and by the short run I mean overnight or for a week) to manage their cash flow (meaning that they sometimes borrow from each other so that they can lend money to "real" businesses).

So this is welcome news, and hopefully it means that credit to "real" businesses will pick up and allow firms to buy new equipment and make payroll payments, helping out the recovery.

Best Headline Ever?

"Sex offender who won Alaska lottery beaten with iron pipe"

See here

Monday, January 12, 2009

More Vegas, Less Wall Street

The origins of the recession lie in a systemic collapse of financial institution integrity. Some financial companies have literally gone out of business, and most others have suffered gigantic losses and are only now starting to resume their essential function of providing liquidity to companies.

In thinking about how we got to this point, I ended up asking myself this question: why don't we ever see casinos or bookies collapse?  Casinos and bookies do have bad days. Casinos and bookies have gone out of business before.  But you have never, ever, heard of a systemic collapse of the gambling industry.  It's useful to think about why this is the case.

Casinos make money by taking a percentage of every bet (the vig is the % of your winnings they get on a sports bet, the "vig" on table games is just the built in advantage they have on the odds). They do not charge by the transaction. In other words, one bet of $1,000,000 yields the same profit to the casino as 1,000 bets of $1,000 each. Wall Street got very rich by charging fees.  Your mortgage broker books a fee for every loan he originates. The investment bank books a fee for every mortgage-backed-security they package and sell. Their incentives were to maximize the number of transactions, regardless of the "vig".  Rather than loaning money at a higher rate than they pay on deposits (the boring old bank method of making money), Wall Street focused on maximizing fee income and, importantly, did not maintain a high enough margin on loans to cover losses. 

The comparison would be if a casino charged $1 per bet on the Super Bowl, but did not charge a vig. What would happen in the short run? The bookies would take as many bets as they could, ignoring their net position on the game (that is, they'd offer whatever line on the game that maximized the number of bets, rather than a line that kept their net position zero). That is, they would take 1,000 bets of $1,000 on the Packers (wishful thinking), and 500 bets of $1,000 on the Steelers. If the Packers win (and of course they would), the bookies would lose $500,000.  Prior to the game, though, they would have booked $1,500 in profit on the 1,500 total number of bets.

Wall Street got caught in this kind of trap. They took on thousands and thousands of bets (mortgages), booking a fee each time and earning big bonuses, but ignoring the fact that they were exposed to an improbably upset like the Lions winning the Super Bowl (the housing collapse).  Once the Lions actually won, Wall Street realized they had to pay off at huge odds and couldn't make good on the bets (Lehman goes down).

Casinos don't get into this trap because they do not charge by the bet, they charge as a percentage. They want to maximize the total number of dollars bet while keeping their exposure at zero. It is often mistakenly thought that casino's set the lines on football games like this: "The Packers should win by 7 points. Therefore we'll make the Packers 7 point favorites."  That is wrong.  Casino's set the line like this: "What line will make sure that the number of dollars bet on the Packers will exactly offset the number of dollars bet on their opponent?"  The whole point is that the casino does not care who wins.  They get the vig no matter what.

Wall Street got caught out by taking a huge bet on the continuation of the housing boom.  They had a betting interest in how the game turned out.  Casino's are smart enough to know that they cannot predict the outcome of sporting events.  Wall Street thought they were smart enough to predict the outcome of the economy.  Once the economy turned on them, Wall Street was stuck.

If you want to prevent some aspects of this from recurring, I think it would be wise to consider running Wall Street more like Vegas.

Friday, January 9, 2009

Be very careful, Santa

Little Ariel - here - has a few things to tell you about running a toy delivery system.

Why didn't I think of this?

Here is a website I wish I was in charge of.  Personal favorites: Sickatating Makeout Couple, Self-Important Bluetooth Guy, Too Much Cologne Guy

Tuesday, January 6, 2009

Christmas Cute

Here are the dorks wearing their new stripey outfits and striking a "Hannah Montana" pose (their words, not mine).  Notice Abby's lovely silver arm sling - very fashionable.

Nutcracker Cute

Long overdue, but here are the girls at the ballet.  We went to see the Nutcracker.  They (thanks to some timely M&Ms and gum) made it through the whole performance without complaint.  (I was more fidgety than they were. Seriously, how long can they just jump around?)

Um, what about the rest of us?

From here, I saw this quote from Patrick Ruffini

"The GOP's number one priority politically is to set into motion a series of events that will make Obama look more ineffective, partisan, and unpopular than he is today. Playing hard-to-get on the stimulus is one way to do it. And we need to set the stage for a unified and effective Republican opposition that will actually fight from top to bottom."

No one is suggesting that the Republicans should just roll over and play dead, but shouldn't the GOP at least give lip service to the number 1 priority be making wise decisions about how to lead the U.S. forward?  I don't give a crap who "wins" the policy arguments - I care that good, thoughtful, useful, limited policies are put in place.  If the Republicans are going to position themselves solely as the party that wants to make Obama look bad, then I have another reason (#156) to not go back to being a Republican.

Progressive Taxes

So while we are contemplating tax cuts vs. government spending for the big Obama stimulus package, the concept of progressive taxation keeps coming up.  Progressive taxation means that your tax rate goes up with your income. (Hence the 15% vs. the 28% tax brackets). 

Most people would argue that the U.S. has a progressive system, and that the rich are paying a higher proportion of their income in taxes than the poor.  This is true for federal taxes.  However, when you factor in state and local taxation, it's not as apparent. 

This post provides a graph of the share of income against the share of taxes paid.  In a perfectly flat tax system, the share of income would exactly equal the share of taxes paid.  In a progressive system, the richest group should pay a larger share of the taxes than their share of income (and vice versa for the poorest group).

The graph suggests only a very slight progressive nature in total taxation (although some of that may be due to the scale of the axes).  But it is not as clearly progressive as federal taxation alone.

I love my job...

...and I am apparently correct to do so.  The Wall Street Journal has a study of the best and worst jobs in America. "Economist" comes in at #11 out of 200 total jobs.

The criteria has to be based on independence and ability to direct your own work.  The #1 job is Mathmatician, 3rd is Statistician, 4th is Biologist, 7th is Historian, 8th is Sociologist, 12th is Philosopher and 13th is Physicist.  These are all largely academic jobs that you do if you've gotten a PhD.  You are likely to be considered the expert in what you do, and so your boss leaves you alone to do your work.  And I have to say that this is precisely why I became an economist in the first place - to be left alone to study what I find interesting.  That and I keep getting more free books from publishers (indescribably cool).

This turned out to be a good decision.  My original profession (so to speak) of "dairy farmer" comes in at #199, ahead of only "lumberjack". (I told you I didn't like it, mom).

Cool, but kind of eerie...

A man started taking one Polaroid instant picture a day, every day, starting in 1979 and lasting until 1997.  This post summarizes some of the work, and how the man's life evolved over the period of 18 years.  There is a link there to the full set of pictures, which I will warn you can destroy your entire afternoon if you get sucked in.

Back for more

Wow, didn't realize how long it has been since I posted up here. Well, now that the sinus infection to end all sinus infections has passed I think I'm back to normal (whatever that may mean).

Here's some quick fun, someone made a list of the worst 500 passwords you can set on any account you have.  #1?  Not surprisingly, "123456", followed at #2 by "password".  Very inventive (and reminiscent of Spaceballs, which I saw part of last night).

Not surpisingly, "asshole" and "fuckyou" made the list at numbers 48 and 49 (interestingly, right before "dallas", which I guess says something about that city).   Honestly, who makes "asshole" their own password?  Doesn't this scream out as some kind of self-esteem issue?