Will China's development destroy the world?

Um, maybe?

I'm not an expert on global warming, but I do think that of all the fossil fuels, burning coal is the worst for our environment, and China is burning a buttload of coal!

While coal consumption in the rest of the world grew somewhat slowly over the last 12 years, consumption in China more than doubled. China now burns almost as much coal as the rest of the world combined:

(clic the pic for an even more smoky image)

China is both the biggest coal producer AND the biggest coal importer.

Can it be that the biggest single problem facing the world is the need to find a much cleaner energy source for the developing world?

One thing is for sure: a rich world carbon tax is not going to do much, if anything at all, for the environment. Unlike acid rain, carbon dioxide emission is a global externality, not a local one.

The Ghost of Christmas Yet to Come: Sovereign Debt

From Chapter IV of "A Christmas Carol"

The Spirit stood among the graves, and pointed down to One. He advanced towards it trembling. The Phantom was exactly as it had been, but he dreaded that he saw new meaning in its solemn shape.
``Before I draw nearer to that stone to which you point,'' said Scrooge, ``answer me one question. Are these the shadows of the things that Will be, or are they shadows of things that May be, only?''
Still the Ghost pointed downward to the grave by which it stood.
``Men's courses will foreshadow certain ends, to which, if persevered in, they must lead,'' said Scrooge. ``But if the courses be departed from, the ends will change. Say it is thus with what you show me!''
The Spirit was immovable as ever. Scrooge crept towards it, trembling as he went; and following the finger, read upon the stone of the neglected grave his own name, Ebenezer Scrooge.
``Am I that man who lay upon the bed?'' he cried, upon his knees.
The finger pointed from the grave to him, and back again.
``No, Spirit! Oh no, no!'' The finger still was there.
``Spirit!'' he cried, tight clutching at its robe, ``hear me! I am not the man I was. I will not be the man I must have been but for this intercourse. Why show me this, if I am past all hope?''
For the first time the hand appeared to shake.
``Good Spirit,'' he pursued, as down upon the ground he fell before it: ``Your nature intercedes for me, and pities me. Assure me that I yet may change these shadows you have shown me, by an altered budget plan, one that raises taxes and cuts spending!''  


John Taylor's version here...

Nod to WH

Endogeneity & Furiousity

This morning, Tim Harford tweeted me over to this post by Owen Barder, along with the message that it,  "should make me furious".

It didn't.

The post complains that, "we (the US) waste our food aid budget". It shows that, in 2010, We sent $5 million in official food aid to Cambodia, but $3.5 million of that was actually paid out to US shippers.

The implication is that we have a fixed food aid budget that is exogenous, and if we could just stop wasting it on shipping (by sourcing the food closer to Cambodia, for example) the aid would be more effective.

Another way to look at the situation though, is to realize that the food aid budget is actually endogenously created in the sausage factory that is Congress.

US shippers and farmers aren't going to lobby for a food aid budget if they don't benefit from it. If shippers and farmers don't lobby and give contributions then the food aid budget will be smaller.

How much smaller? That of course is an empirical question, but given that Cambodians don't vote or lobby (as far as I know at least), zero is not a crazy guess as to the size of the food aid budget without the support of US shippers and farmers.

After all, when you ask the American people where to cut the budget, their first instinctive thought is "foreign aid", which many on them imagine is a large chunk of US expenditures instead of the pittance that it is.

Why does the OECD allow these freight costs to be counted as "aid"? That is a separate question, but in the elaborate kabuki dance of special interest money, it appears to be necessary that money flows not be plainly labeled.

A budget item simply giving money to shippers and farmers is perceived as unlikely to survive, so we call it aid and our pals go along with it. Either because other countries are doing the same thing, or because the OECD knows that calling a spade a spade might end up reducing, rather than increasing the actual amount of aid that is delivered.

We all know that the most effective use of $5 million in aid money is to simply give the money to the people who need the aid. The best our political system can do is, from the $5 million, get $1.5 million in in-kind aid delivered. And then of course the political system of the receiving country takes over, so the amount that actually gets to the intended recipients is going to be a fraction of that measly $1.5 million.

Yet we as a people continue to demand that our political system run more and more of our economy.

The election blues

We are besieged by messages about voting. It's our duty, don't you know. It's important, right?

After all, people will proudly parade around tomorrow wearing inane "I voted" stickers and buttons like they've accomplished something.

The closest we get to a negative message is some folks saying you shouldn't vote unless you are informed.

I'm here to say it's ok. If you don't want to vote, don't worry about it. It's not your duty and it's not important.

And I'd say that the more informed you are, the harder it should be to get out and vote.

Why?

Drone strikes, the TSA, the Patriot Act, Messiah complexes, the War on drugs, idiotic trade policies, idiotic immigration policies, a huge bloated military, arrogant intervention into areas where it doesn't belong, bills that run thousands of pages long, big policy changes slipped into law via reconciliation, an almost complete unwillingness to face some aspects of reality.

These are not bugs. These are not the flaws of one particular party. These are bi-partisan FEATURES of the Federal government in the 21st century, and few if any will change based on the outcome of this election.

About the only thing this election will settle is where our government will most keep sticking it's illegitimate nose.

The authoritarian streak in Washington grew under Obama and will continue to grow whether it's Obama II or Mittens at the helm.

So tomorrow, I'll be getting quizzical looks and hostile remarks from folks who see my home-made "I Didn't Vote sticker".

Tip-ped over

I know people, I'm the economics professor. I'm supposed to give answers instead of ask questions, but I'm afraid that all I have here is questions. Read on if you dare.

The 10 treasury bond is yielding around 1.7% (none of what follows relies on the exact values of the numbers).

The 10 year TIPS yield is around  -.7%.  So a common calculation of inflation expectations, so called break-even inflation is at 2.4%.

From this information, I arrive at two important (at least to me) questions:

(1) Is this a reasonable measure of inflation expectations and (2) If so, what does it mean about the economy?

I question (1) because of concerns about the lack of liquidity in the TIPS market, the old issues of market segmentation, and just generally because equilibrium conditions in financial markets that aren't enforced by pure arbitrage don't actually seem to hold in the data.

I did a bit of research and found a couple Fed branch bank papers on the topic (see here and here).  Both papers conclude (if I am reading them correctly) that the break-even inflation calculation of inflation expectations probably understates expected inflation!

So that leads to question 2. If Inflation expectations are above 2.4%, but the 10 year treasury is yielding 1.7%, why are people holding 10 year treasuries? Because the equilibrium real interest rate on safe securities is negative, like around -1.0%? 4 years after the crisis, risk aversion is so high that people are willing to accept a negative return for in exchange for safety? So either the supply of safe assets is very small, or the demand for safe assets is overwhelmingly high? 

If inflation expectations at the 10 year window are rising, but returns on 10 year treasuries are simultaneously falling, then the equilibrium real rate of interest on safe assets is getting lower and lower (in our case more and more negative).

Does this mean that 4 years after the crisis, people's willingness to undertake risky investments is actually falling? If so, isn't that a very bad sign for the direction of future economic activity?  The Baa seasoned bond yield is 4.9%. If inflation expectations are 3%, then the real return to capital is 1.9%?

Or does it mean somehow that the supply of safe assets is shrinking faster than the demand for safe assets is falling? Can we just blame Europe?

 

Or are we just making a big mistake in calculating inflation expectations?

 

 

(bad) news round up

1. Things are still getting worse in Europe. Looks like France is set to join the recession club.

2. Chinese stocks are tanking.

3. Is our sanctions working? Maybe not.

4. People are tweeting about owls. Yikes! We are doomed.

Escape velocity

We didn't reach it.

Revised numbers show GDP growth in the fourth quarter of 2011 was 4.1%, which fell to 2% in the first quarter of this year. Meanwhile the initial estimate of second quarter 2012 growth is 1.5%.

At least the rate of decline is slowing!

Even though I have eyes to see and ears to hear exactly how crappy a candidate Mittens is, it's hard for me to think Obama can win with an economy this bad.

Looks like Intraders have discovered Hibbs

On Intrade this morning, Obama's re-election probability is 47.9%, which is the low point for this contract:

This low-ish probability of re-election is now in line with what my main man Doug Hibbs has been predicting via his "Bread & Peace" model, namely Obama loses (Hibbs is predicting 46.2% of the vote for Obama):

(clic the pics for a more Romnian view)

Hibbs has been predicting an Obama loss since May, which is when the Intrade Obama contract peaked at 70% (due to his RIP OBL bounce).

All hail the Stormin' Mormon?

Hit the BRICs

This doesn't seem good:

(clic the pic for an even more depressing image)

Government by waiver

The Obama administration has really gotten into a groove with selective non-enforcement of unpopular laws. First Ms. Sebelius got the ball rolling with hundreds of waivers from the provisions of Obamacare. Now Arne Duncan gets his chance with the announcement that the Dept. of Education will selectively grant waivers from the consequences of not hitting the educational targets in NCLB.

Aaaargh!

They are giving waivers now for targets that come due in 2014!

Of course, "comply or face the consequences" is totally out of the question. Just ask Matt Yglesias:

"Simply refusing to grant waivers would be an unworkable non-starter. The issue is whether to just hand the waivers out, or to impose conditionality."

Anybody still think we can pass a bill now that actually would lock in long-term deficit reduction?

Anyone?

Bueller?

Barack Obama comes out of the closet

Wow. President O is planning to ask for $1.5 Trillion in new tax revenues with no changes to Social Security and perhaps no changes to Medicare either.

Finally the bullsh*t is over and the cards are on the table.

You know, if this doesn't kick-start the economy, I don't know what will!!

Grand Game: Obama's speech edition

Ok folks the transcript is here, and it's chock full of fun. Get to it!

Here is my absolutely favorite bit of economic illogic:

"Building a world-class transportation system is part of what made us an economic superpower. And now we're going to sit back and watch China build newer airports and faster railroads, at a time when millions of unemployed construction workers could build them right here in America?"

OMG, did you see what he did there? Did debt ceiling budget cuts include laying off professional speechwriters for the President? It's not clear what in the world he's trying to say here but there is no good interpretation.

In an homage to Tosh.0, let's see how many snarky comments I can fit in this blog post.

Mr. President, if China jumped off a bridge, would you jump too?

Mr. President, infrastructure is not a tradeable good.

Mr. President, can our unemployed workers REALLY build China's new airports "right here in America?"

Mr. President, is China really the best comparison country for the US?

Mr. President, do you really think your audience is that dumb?

Slogans entirely relevant to these troubled times

The (tea) party's over

The head tea-partier in charge, Mark Meckler, is a scary dude. Check out this snippet from a Q&A with him:


Is there any scenario where you think it would be OK to raise the debt ceiling?

"No".

What do you think is the ideal solution to this impasse right now?

"The ideal solution is to cut spending so that we stop spending beyond our means. The ideal solution is what you would have to do if you were in the same situation personally that the country is in. The ideal solution is what each of us as citizens have to do when we get in financial trouble personally or what companies have to do, or what states have to do or what cities have to do. Frankly, the only entity in our nation that continues to defy reality is the federal government. It’s just time to pay the piper".

So, Mr. Meckler is advocating a 1.6 trillion dollar cut in spending THIS YEAR out of a 3.8 trillion dollar budget? In other words around a 40% reduction in Federal spending this year?

That's really his solution to the issue?

Nowhere in the interview does Meckler say what he would cut to hit this kind of target. Those pesky details are left as an exercise for the reader I guess.

What a freakin' moron.

People, I am a big fan of small government and low taxes. I would welcome Federal spending being capped at say, no more than 20% of GDP (perhaps as an average over each presidential term). But you can't get from where we are to where I'd like us to be in one year. No way, no how.

This Meckler guy is a clown.

The spending cuts in the budget deal are a pitiful joke

A trillion dollars sounds like a lot of money, doesn't it? Well when it's (A) over 10 years and (B) from a spending level that is around 3.8 trillion for the current year, it's ez to see that a trillion dollars of cuts is a joke. Pro-rated, that's $100,000,000,000 cut each year from a level of $4,800,000,000,000. Which is 2% and change. Which is pitiful.

Plus, the cuts aren't cuts. Here's Ezra Klein on Harry Reid's cuts:

Reid’s plan includes $100 billion in savings from so-called “mandatory spending” like Fannie Mae and agricultural subsidies, $1 trillion in savings from winding down the wars, and $400 billion in reduced interest payments from cutting more than $200 billion in spending.

So a mere $10,000,000 per year of actual spending cuts while the rest comes from "winding down the wars" and reduced interest payments from winding down the wars.

Sweet baby Jeebus!

Ain't that just like a boss to totally fudge the numbers and con the shareholders?

Mungowitz is right. This is pro wrestling.

Facial expressions entirely appropriate for these troubled times

Wow, things are worse than I thought

The "Keil Institute for the World Economy" gave its "Global Economy Prize" this year to......

Jean-Claude Trichet!

I can only conclude that either (a) The Onion has hacked the WSJ or (b) the world economy is in very very very bad shape indeed.

JCT splains exactly what he's done to earn the prize:

"We have thereby been safeguarding the euro's purchasing power," Mr. Trichet said in Kiel. The ECB will continue to do what is necessary to deliver price stability, Mr. Trichet said. "There is no moment of complacency," he added. "We have to deliver price stability."

Previous winners of this prestigious prize include Herbert Hoover, Richard Nixon, Gordon Gono, Andrew Mellon and Georg Friedrich Knapp.

What Greg and Dan will be reading

Link is here. Note the endorsement by the mighty Jonathan Lethem.

Minnesota: Behold your Senator!

I expect moronic stuff like this from Senator Al Franken, but I am actually a little bit surprised at Ezra Klein's cheerleading.

Ezra, in his WAPO column proposes some "no brainers", proposed legislation that everyone should be able to agree on.

According to him, no-brainer #4 is the Franken-sponsored "Pay for War Act".

As Franken puts it, "war shouldn't add to the deficit".

Now, I'm guessing Al is opposed to the wars in Iraq and Afghanistan (me too!!), but that is just a completely idiotic principle.

People, in WWII the deficit reached 25% of GDP. Good thing for us Al Franken wasn't in office then!

"Gee whiz Hirohito, we sure don't like what you're doing, but we've about maxed out this year's tax revenues and hey, war shouldn't add to the deficit, so......."

Look at this picture and then reflect on the fact that Al Franken is a US Senator (clic the pic for a more glorious image)!

WWI and WWII stick out like wagging fingers rebuking Senator Al (and his boy Ezra).

If the US is in a war that poses a serious threat, we need to be able to spend whatever it takes to win. That's just common sense, as Al likes to say.

Trying to hamstring the future defense of this country as a reaction to the current situation certainly is a no-brainer, just not in the way Ezra means the term.

Markets in everything: doppelganger edition

Who wouldn't want this? a doll that looks like you and spews out pre-recorded messages of your choice (in your voice) to your kid, so it's like you are always around them.

Now, I admit that I am not a parent and haven't been a kid for a long time, but this product appears moderately creepy to me; a good way to drum up future business for psychologists.

Aren't kids supposed to be away from their parents at points in childhood?

Aren't independence, self reliance and self confidence valuable traits?

Are modern parents really this paranoid, smothering, and neurotic?

I guess the proof will be in the sales figures.

One thing is for sure though: Kids couldn't "play" with dolls like these in the kitchens of the 1950s!