Duane Chapman

Somehow I missed the news that Duane Chapman died last summer — he was only 66 years old. Duane taught environmental economics at Cornell and did pioneering work on several fronts. It was from him that I first learned, back in the mid-1980s, about the importance of the environment-trade nexus; he was years ahead of that curve. He produced a powerful critique of a different sort of curve, Environmental Kuznets, showing that it is an artifact of looking at production rather than consumption footprints. His textbook, Environmental Economics: Theory, Application and Policy, failed to find its audience, but it was sprinkled with analytical gems found nowhere else. While his style could sometimes be a bit gruff, he was never less than warm and supportive to me. I’m grateful I had the opportunity to get to know him.

Fire Sale at Bear Stearns. Who's Next?

So, J.P. Morgan Chase has just bought Bear Stearns for $2 per share. BS's stock was at $30 per share on Friday and was as high as $170 per share at one point last year. This means JPM paid about $1 billion total for BS, less than BS's net income in some recent years. The only thing too bad about this, given BS's unwillingness to share any of the costs of stabilizing the markets after the 1998 LTCM crisis, is that about a third of the BS shares are owned by its employees, one of the major banks closest to being worker-owned. They are definitely taking a major bath.

Of course, the other question has got be, who's next? The Fed has now made two major innovative efforts to stabilize the markets in the last two weeks, but the TED spread has barely budged, and both Carlyle and Citigroup have been in trouble as well as BS. Major financial entities are hurting, and the dollar continues to fall while oil has now gone above $110 per barrel. The Fed is running out of arrows in its quiver.

Health Care Growth: Wasteful Bloat, Jobs Program, or Better Care?

This graphic shows that health care accounts for nearly half the increase in private sector jobs from March 01 to December 07. Questions: Does this increase translate into better health care or more bureaucratic bloat? Is wasteful health care the new jobs program?

Mankiw vs the Muggles

For those of you living on another planet, Muggles are the pathetic characters in the Harry Potter stories who have no magical powers. They are oblivious to the action going on around them. Mankiw, in his latest NYT column, contrasts Muggles to economists, who have magic to burn. The economists, it seems, understand the glories of free trade, while the uninformed Muggle-masses think that globalization is draining their wallet. This is reflected in politics, he says, where honest Republicans like McCain (to whom this column attempts a reposition) do battle with protectionist Democrats – who, with luck, are merely pandering.



I wish Mankiw all the best in his courtship of McCain, but the guy really doesn’t get it about trade. This is not a matter of free trade versus protectionism. OK, that archaic duality comes up periodically in a small way (like the recent spat over the Pentagon’s spurning of Boeing tankers), but it is not the main issue. There are two big facts that menace the US economy like twin Voldemorts, the long-term erosion of wages for most of the population and the buildup of massive current account deficits. These are almost surely related, though not in any simple way. Intensifying competition among the world’s workers has been great for investors, bad for wages, and poison for the US international position.

The question is not whether there should be trade or not, but under what rules it should take place. NAFTA was not a one-page flyer announcing free trade in North America. Renegotiating it to promote more equity and sustainability is not flat-earth economics. But above all, thinking that a trade deficit of 5+% of GDP, year after year, is rendered benign by the writings Smith, Ricardo, or for that matter Samuelson is to live in a world of magic, not reality. The Muggles are right.

Two Takes on Reining in Health Care Costs

In the U.S. doctors are cutting the price of medicine by reducing the doses that they offer patients. This tactic is understandable because some medicines cost several hundred thousand dollars per year.

In Thailand, the health ministry is recommending that the government ignore patents.


Zamiska, Nicholas. 2008. "Thai Ministry to Recommend Ignoring Patents on Cancer Drugs." Wall Street Journal (11 March): p. A 16.
http://online.wsj.com/article/SB120515886199824251.html

"Thailand's new health minister announced that he would urge the Thai government to continue to ignore patents on several cancer drugs, disappointing big pharmaceutical companies that had hoped Bangkok might roll back a policy of overriding patents in the name of public health."

"Ever since a bloodless military coup in Thailand in September 2006, the military-installed government had been battling big pharmaceutical companies, threatening to sidestep their patents on drugs for AIDS and other diseases if they didn't drop the price of their medications. The Thai government argued that since the country's poor population couldn't afford the lifesaving drugs, and the government didn't have sufficient funds to cover their cost, drug companies should put public health before profit and cut the cost of the medications."

Pollack, Andrew. 2008. "Cutting Dosage of Costly Drug Spurs a Debate." New York Times (16 March).
http://www.nytimes.com/2008/03/16/business/16gaucher.html?ref=business

"Cerezyme, used to treat a rare inherited enzyme deficiency called Gaucher disease, costs $300,000 a year. Sales of Cerezyme totaled $1.1 billion last year, making it a blockbuster by industry standards."

"Shauna Mangum, of Farmington, N.M., began treatment in 2000, at a cost of more than $400,000 a year. The next year, the premiums for everyone in her insurance pool went up by $180 a month."

Doctors are considering cutting the dosage to save money, setting off a strong debate about the practice.

The Role of Multinationals in the U.S. Economy

Michael Mandel, late of Dollars and Sense, may have returned to his roots, questioning the role of the multinationals, although suggesting that they have the potential to contribute to an economic recovery. He notes that the 150 U.S.-based nonfinancial multinationals cut more than 2 million jobs between 2000 and 2005, while they are hoarding more than $500 billion in cash.

A header describes the role of the multinationals as "exporting jobs, not goods."


Mandel, Michael. 2008. "Multinationals: Are They Good for America?" Business Week (28 February): pp. 41-51.

41: "the top 150 U.S.-based nonfinancial multinationals, which include the likes of Hewlett-Packard, Pfizer, eBay, and Sara Lee, had more than $500 billion in cash and short-term investments at the end of 2007."

41: "Figures collected by the Bureau of Economic Analysis suggest the multinational sector has in some ways been a drag on the U.S. economy since 2000. From 2000 to 2005, the last year for which full data are available, U.S. multinationals cut more than 2 million jobs at home, even as employment in the rest of the private sector grew -- and there's no sign the trend has significantly reversed."

The Return of Limits to Growth

We are now experiencing something that few remember occurred in the early 1970s, a simultaneous surge of both food and energy prices, which are interlinked, the era in which the book, The Limits to Growth came out to much attention. Grain prices more than doubled in late 1972 and remained high until 1975, with that runup preceding the quadrupling of crude oil prices that hit at the end of 1973, giving us the staglation of 1974 and after. What is going on today has come on more gradually, but combined with the financial market problems and the appearance of finally running out of any serious spare capacity in the crude oil sector, looks potentially a lot worse.

I note a similarity between The Great World Food Crisis of then and now, besides the role of rising energy prices. That is a surge of demand for meat, which is wasteful in terms of grain use. In 1972 it was Russia, with Nixon quietly approving a stealth major purchase of massive amounts of US grain by the Soviets as part of his early detente. The Soviets were interested in increasing the amount of meat in their diet and were also facing some grain shortage problems due to bad weather. Today, China in particular is buying more grain to feed a rising demand for meat, and we also have bad drought in Australia pinching supply, quite aside from all the assinine shifting of corn production to ethanol in Iowa driven by subsidies, and propped up by the presidential politics of having Iowa go first in the selection process.

The End of Historical Memory of the Great War

Yesterday word came that the last French veteran of World War I died at the age of 110. Less than a handful remain in the rest of the world, with only one in the US, 107-year old Frank Buckles of West Virginia. So, the last memory of the Great War is about to die out.

My point here is not to glorify it all, far from it. That war was a horror, if not as deadly as its successor, WW II. The literature inspired by it is one of horror and alienation: A Farewell to Arms, All Quiet on the Western Front, and even the more depressing war scenes from The Lord of the Rings (Tolkien served in the trenches of France then). My point is that we should fear that the consciousness of how horrible war is and has become should not fade, even as those who experience it die off.

HUH?

by the Sandwichman

"'The situation is very bad, the situation is getting worse, and the risks are that it could get very bad,' Feldstein said in a speech at the Futures Industry Association meeting in Boca Raton, Florida."

New York Times Financial Columnist Explains Why Runs are Impossible

Says Steven Weisman in today’s NYT: “The fear of some economists is that, as the dollar declines, there could be a panic sell-off. But most experts doubt such a panic would occur, because it would be in nobody’s interest, least of all investors who are holding dollar-based investments.” Someone should tell him that it is never in the interest of investors or depositors for there to be a run on a currency or a bank. But it is in their individual interest to get out ahead of everyone else. This is not to say that there will be a run on the dollar, but you might want to find a better reason than the notion that bad things cannot happen in capitalism because capitalists don’t want them to happen.

bubblicious gold!

Awhile back, I asked what the next bubble would be. The answer from Harper's magazine (thanks, Louis!) was clean energy investments. That may be true (or may not -- since it hasn't happened yet). But it's possible that we'll see a bubble before that eventuality -- in gold. This might be financed by the Fed's expansionary monetary policies (the efforts to save the U.S. credit markets) while spurred by fears of inflation.

Assume that a gold bubble has started, i.e., that recent price upsurges do not just represent a short-term blip. If anyone wants to wants to buy and hold gold for long periods as a hedge against inflation, it's then too late, since prices are too high.

The exception to this outrageous assertion would be if the end of the "long period" is (by coincidence) either at the peak of the bubble or some time after the bubble pops when gold prices start rising again. (Gold prices should be measured in real terms, corrected for the ability of gold to buy actual goods & services, by the way. It's only when real gold prices rise that they're a successful investment.) As the bubble grows, the "too late" verdict will become more and more true.

On the other hand, if anyone wants to speculate by buying now (when prices are low compared to the future peak) and selling right before or at the peak price, that actually encourages the bubble, by increasing demand.

We can tell if a bubble is actually happening if we start hearing about how "gold is a perfect hedge" or "you can't lose by investing in gold" or "gold prices have nowhere to go but up." These kinds of statements reflect the hopes of the aforementioned speculators -- and their later efforts to ensure that their speculation pays off by driving up gold prices further.

Of course, it's a big gambling game. The gold-bugs who win at the peak (buying low and then selling high) have to find others who are willing to buy at the high price. (These are called the "greater fools.") Note that the winners' loot corresponds to the losses of those left holding the bag: as the bubble pops, the sellers drive prices down, imposing capital losses on the late buyers.

(In addition, the "house" wins to the extent that there are brokerage fees in the gold market.)

Of course, gold pays no interest or dividends. That makes the popping worse, since the only way to win in a bubble is to grab for all the capital gains one can.
J.M. Keynes's "betting on a beauty contest" theory of bubbles doesn't add anything to this discussion (because, unlike corporate stocks & bonds, gold is a well-known asset). But his "snap" analogy does say something. It's more familiar to U.S. residents as the "musical chairs" analogy.

As people begin to think that the bubble is reaching its peak size, their fear that the music will stop heightens. However, because everyone wants to avoid sitting down until a second before the music stops, they hold on to their gold. Then, for some reason -- the scary sight of an advertisment for beer projected on the Moon? -- some people start sitting down. This causes a panicked rush to the chairs. In other words, everyone tries to sell, driving gold prices down steeply.

Jim Devine

Where's my Dutch pump when I need it?

I learn from NPR this am that a penny contains 1.7 cents worth of copper. I'm stoking up the furnace as I write!

On an unrelated topic, I'm waiting to see if Krugman is playing by Obama rules. Several times in past columns he has raked Obama over the proverbial coals for using Republican-sounding talking points in criticizing Clinton's health-care proposals and in calling for a fix for social security. Of course, Obama has never implied that any Republican candidate had a health-care plan that was preferable to Clinton's. Clinton, on the other hand, has said that she and McCain (and presumably Sinbad and Cheryl Crowe) have, while Obama has not, crossed the "commander-in-chief threshold." This is really inexcusable. Don't you think, Paul?

An Epidemic of Administrators

The increasing bureaucratization of education has now reached the tipping point where faculty represent less than half the full-time professional staff at Title IV institutions. I have not seen any data to be able to project when more than half of faculty time will be devoted to unproductive administrative duties, but what I noticed here is that that point will not be too far off in the future.

U.S. Department of Education. 2008. Employees in Postsecondary Institutions, Fall 2006, and Salaries of Full-Time Instructional Faculty, 2006-07, NCES 2008-172 (Institute of Education Sciences National Center for Education Statistics).

http://nces.ed.gov/pubs2008/2008172.pdf

Only 48.6 percent of full-time professional staff at Title IV institutions are faculty, indicating a surge in administrators. In public institutions, 51.1 percent, while the figure for private institutions is 44%.

That Talented Mr. Dorman

In the age of Google, our main competition is with ourselves, or, more precisely, with those who share the same name. In that context, I find myself several rungs below the esteemed Peter Dorman, professor of things ancient and Egyptian at the University of Chicago. Now his fame is destined to spread further, as he accepts the presidency of the American University in Beirut. From what I can see from afar, AUB’s star will also rise from its association with this highly accomplished archaeologist. My hat (the one in the photo) is tipped to both of them.

The Other Risk

All eyes are currently on US financial markets, where the Fed has offered to sink half its portfolio into mortgaged-based securities. And it is true that there is a risk that the spreading credit crunch could cause great economic trauma. But don’t forget about the dollar. It is now trading at over 1.55 to the Euro after another sharp bump, and no one thinks it has touched bottom. There is a second path to chaos: a potential run on the dollar. The two risks are related — the crunch could trigger a run — but not the same.

Update: Make that 1.56 to the Euro....and counting.



The nice thing about the Fed exchanging treasuries for MBS is that it is not expansionary monetary policy and need not be seen as inflationary. The not so nice thing is that $400B, the amount said to be in play, is tiny compared to the $10T or so in anticipated losses stemming from the collapse of the housing bubble. If fiddling with its portfolio is not enough and Plan B is for the Fed to flood the markets with money, expectations of inflation could be reignited, with further risks to the dollar.

So there are two abysses facing the US economy and not much policy space between them.