Friday, October 31, 2008

Is it Time for a Con Con -- Part III

Editors note: I did a lot of work researching the Illinois Constitutional Convention; I'm going to post that research that I wrote up here. It should be about five or six parts in all. I'll do a post or two a day.
Part I is here
Part II is here

Gerrymandering: There have been few competitive races throughout the state over the years. Each party has drawn districts so that the Democrats have their seats and the Republicans have their seats. It has allowed the politicians to choose their voters. The 4th and 17th Congressional Districts are probably the most infamous cases of gerrymandering in the state. Supporters of such a change would scrap of the current method of redistricting and would most likely support one of two other systems: an independent redistricting commission or a system similar to that what Iowa uses where a “nonpartisan legislative staff develop maps for the Iowa House and Senate as well as U.S. House districts without any political or election data including the addresses of incumbents.”

Home Rule: One of the major reasons that the 1968 Con Con occurred was because the 1870 constitution, according to some, did not provide local governments enough autonomy. The state had been operating under Dillon’s Rule, which requires state legislative and executive approval for any changes local governments would like to make no matter how small. The famous example that was given in 1970 was that the City of Chicago had to get approval from Springfield to change the color of the lights on its squad cars. Home rule, which freed cities that had populations of 25,000 or more, was written into the 1970 constitution and it liberated cities from the child/parent relationship that had been created. It gave municipalities more authority to raise taxes and borrow money.

The Illinois Municipal League sees little reason to revisit the issue unless delegates want to lower the population threshold. However, the recent financial problems and the tax increases in Cook County and Chicago may, although unlikely, create a grassroots effort to rid the state of Home Rule and go back to Dillon’s Rule.

Open ballots access: If granted, open ballot access would give every person equal access to being on the ballot no matter what party affiliation. Right now, independents and other third parties are often required to obtain more than 10 times the number of signatures that established parties do.

Recall elected officials: According to recent polls, 2 in 3 constituents in Illinois would like the right to recall elected officials. However, the right to recall is denied to voters under the current constitution. Considering dislike with Governor Rod Blagojevich among citizens and the dysfunction in Springfield, the right to recall elected officials figures to be a popular means of selling the Con Con. A majority of states in the U.S. do not allow for the recall of statewide officials.

Selection of Judges: Currently judges are elected to the bench. However, there is a lot of support to change this system to one where judges are chosen by merit. There are quality concerns over electing judges and many feel that partisan politics plays too great of a role in choosing and electing judges. Also the amount of money spent on judicial races is concerning—millions are being spent on some of these races and people worry about where the money comes from especially since judges are expected to be neutral.

However, there would be resistance to changing from the current system to a merit system. In Cook County there is a laundry list of judges and the public does not know whom they are electing because there are so many. This has lead to some unqualified judges being elected. But downstate, the electorate is much more informed about their judges and would resist changing the current system.

If the Con Con changed to a merit based system it would most likely be based on what is called the Missouri plan. The plan calls for a non-partisan judicial commission who chooses three candidates to fill a bench seat. The governor then selects one of three candidates. Yet such a system would face a battle over who would select the commission. Also and whether the governor, legislature, or the state Supreme Court would be given the power to select the judges would have to be decided.

Thursday, October 30, 2008

Is it Time for a Con Con -- Part II

Editors note: I did a lot of work researching the Illinois Constitutional Convention; I'm going to post that research that I wrote up here. It should be about five or six parts in all. I'll do a post or two a day. Part I is here.

If a constitutional convention is called, the entire constitution would have to be rewritten. This obviously would have a major impact on the state and future governance. In effect, what calling a convention would do is open every political and policy topic up for debate. Calling for the Con Con could be the first step in opening up the political equivalent of Pandora’s Box. Some popular outcomes from the 1970 Constitution, like home rule, could be changed; while currently unpopular powers, like the amendatory veto, may not be amended. Opponents to the Con Con, like the Illinois Business Roundtable, say that “a constitutional convention cannot be limited to specific issues.” And they are right, as a single issues there appears to be little need to call for a convention. But when all the issues are taken as a whole, some voters may conclude that a Con Con would be the easiest way to fix all the problems the state is facing. The major issues that will be debated prior to the vote and if a Con Con is called are as follows:

Amendatory veto: This power given to the governor came up most recently when Governor Rod Blagojevich gave free rides to seniors during the CTA funding saga. The amendatory veto allows the governor to return a bill to the house it originated from with specific recommendations for change. According to the Constitution “The bill shall be considered in the same manner as a vetoed bill but the specific recommendations may be accepted by a record vote of a majority of the members elected to each house.” In effect, this allows the governor to initiate legislation independently of the legislative branch. “I think that power was abused though the years… I don’t think the governor is a legislator,” said Mike Lawrence the former press secretary to Jim Edgar. A bid to limit the amendatory veto was on the 1974 ballot; however, voters refused to limit the veto power.

Ballot initiative process: Illinois is considered to be a non-initiative state. An initiative is a public vote on a proposed amendment, law, or ordnance. The ballot initiatives from California are probably the most famous examples and there have been a wave of ballot initiatives concerning gay marriage in the last five years across the country. The gridlock in Springfield has created the perception that very little is getting done while the state faces increasing challenges. Many feel that citizens should be able to bring up solutions to these problems directly through ballot. However, the current initiative process in Illinois is limited and difficult—there has been only one successful ballot initiative in Illinois history, which was in 1980 and reduced the size of the state legislature from 177 to 118 members.

Cumulative Voting: Used by the state from 1870 until 1980, when the ballot initiative reduced the size of the legislature by a third it also eliminated cumulative voting. For those delegates who long for the days of cumulative they may fight for it to be used again in the state. Cumulative voting allows for multiple winners in an election and is used to foster proportional representation. The old three member districts had ensured each party had at least one seat—a few people feel that the move to the current system began “the consolidation of power among legislative leaders that has facilitated the current gridlock in Springfield.”

Education Reform and Property Taxes: In the upcoming months, expect to hear more about education than any other issue having to do with a potential Con Con. Illinois ranks 49th in the nation in the amount of funding the state provides for education. The state, on average, only covers 34 percent of the cost of educating a student (the national average is 50 percent). As a result, property taxes are extremely high—the ninth highest in the nation in 2005. This puts a heavy burden on local residents—especially seniors.

Currently in Illinois there are about 1,000 schools that are failing to meet the federal standards set out by No Child Left Behind. On top of that, eight in ten school districts are facing budget deficits and the number of schools on the financial watch list increases every year.

Reformers will want to lower the reliance and burden on property taxes and local taxpayers for education funding. They will probably fight for an increase in the income tax and take some of that revenue and place it towards education. Noting that Illinois has the second worst per-pupil-spending gap in the nation, others may fight for a property tax and education system like California.
Proposition 13 (or Serrano v. Priest) was a ballot initiative passed by California voters in 1978. The proposition capped property taxes at one-percent of the asset value of the property. The result has been two fold; funding responsibilities have become centralized making local governments more reliant on funds from the state, and education funding has also become both centralized and equalized. However, by making the state more responsible for education funding, it has reduced public school quality. California schools are now ranked among the worst in the nation. This may have driven families to send their children to private schools or find other means to improve local education.
The decision has been fiscally regressive and local governments, without the stream of revenue from property taxes, have turned to other means of taxation like sales taxes or fees. Proposition 13 has also made local governments more reliant on state funds, which has given the state more control over local matters.

Continue to Part III

Wednesday, October 29, 2008

Is it Time for a Con Con? -- Part I

Editors note: I did a lot of work researching the Illinois Constitutional Convention; I'm going to post that research that I wrote up here. It should be about five or six parts in all. I'll do a post or two a day.

Many people will say that the most important vote that Illinoisans will cast next month will be for President—Barack Obama, John McCain or a third party candidate. While others may argue that the race for the U.S. Senate seat between Dick Durbin and Dr. Steve Sauerberg is the most significant. But according to polls both of those races appear to be open and shut cases. Therefore, it may just be that the most important decision that the electorate makes is if we should, as citizens of Illinois, rewrite the Illinois Constitution. Every twenty years Illinois voters are given the opportunity to call a constitutional convention, and on November 4, 2008, the people of Illinois will have that chance for the first time since 1988.

Illinois has had four constitutions in its history—the original constitution of 1818, and then three rewrites 1848, 1870, and finally in 1970 (a convention was called in 1918 but the constitution was rejected by voters in 1922). The current document came about after a convention was called in 1968 due to the fact that the then constitution was seen as outdated and reflected a state that no longer existed. “In ’68 there was a long developed consensus to change the constitution,” says Jim Nowlan, a former member of the Illinois House of Representatives and Senior Fellow with the University of Illinois Institute of Government and Public Affairs. The 1970 constitution reformed may things including increasing the power of the governor and granting home rule to cities with a population over 25,000. The constitution also guaranteed freedom from discrimination on the base of race, color, creed, ethnicity, and sex, and revenue and finance articles were rewritten creating a flat income tax rate for both personal and corporate income.

The current Illinois Constitution has an automatic call for a constitutional convention every twenty years written into it, starting with 1968 the last time a convention was called. A super-majority of 60 percent of those voting on the question or a majority of total voters is required to call a convention. When the question was last on the ballot in Nov. 1988, voters rejected the question by a three to one margin (900,109 voting in favor of a convention, 2,727,144 voting against it and just over 1 million voters skipping the question).

If voters this time around decide to call for a convention, the General Assembly is required to call for and fund the constitutional convention. It would also set the date for the election of delegates and what type of election would take place—possibilities include a single general election or a primary followed by a general election. Whether candidates would run on partisan or nonpartisan ballot would also be settled by the General Assembly. Any person can run to be a delegate, however, candidates must be at least 21 and have resided in their district for at least two years (and be a U.S. citizen). Legislators most likely will not run, but chances are people close to them would run instead. In 1970, the delegate elections were non-partisan with a single general election. This prevented party insiders from capturing all the delegate positions. However, if it were a nonpartisan election, special interests groups would likely run their own candidates.

Two delegates from each of the 59 state senate districts, a total of 118 delegates in all, would then travel to Springfield and write a constitution, probably late in 2009 and into 2010. The new convention must meet within three months of the delegate’s election. After the delegates have finished writing the new constitution, it will be presented to the voters in a special election and must be approved by a majority of the voters.

The 1970 convention lasted nearly nine months and cost $13.9 million. Delegates were paid a monthly salary for what was typically a four-day workweek. Experts predict that a convention held today would cost $78 million.

The political scene in Illinois today is much different than it was in 1988. Voters are fed up with what is (or rather what is not) going on in Springfield. Recent budget crises at the state level and in Cook County have constituents frustrated. In Cook County, the sales tax was recently increased to the highest rates in the country. The legislature in Springfield appears too busy fighting amongst themselves to pass popular bills, like the ethics reform bill, and it takes far too long to pass necessary bills, like funding for the CTA. And when a bill is finally passed, the highly unpopular governor uses powers granted to him to not only veto the bill but also legislate from his desk by adding to the bill in consideration. To say voters are unhappy may be an understatement. “There was a positive attitude towards a Con Con,” Nowlan says about the efforts in 1968 but today there is a negative and sour outlook on the state government. Governor Rod Blagojevich was found to be the least popular governor in the U.S. this summer according to Rasmussen. And a recent poll in The Chicago Tribune had his approval rating at 13%.

Continue to Part II

Tuesday, October 28, 2008

McCain's Energy Plan -- Part III

Part I of the analysis on energy policy – How did we get here?
Part II of the analysis on energy policy – Obama’s plan

And finally, it’s the last time I have to write about a whole bunch of bad policies ideas that would, if implemented, only make things worse. Read McCain’s proposals in his own words here.

We all heard the chorus of Republicans at their convention chanting, “Drill Baby, Drill!” The idea behind this is that drilling offshore and in Alaska will lower our need for foreign oil and at the same time bring down the price of oil (by increasing supply). But let’s clear this up right away—it won’t. While both of those statements are technically true, the impact is extremely small. First, it will take years for that oil to reach consumers and more importantly, oil is traded on worldwide market. That means that oil from Nigeria, Saudi Arabia, Venezuela, Canada, etc, is bought and sold on the same market. If U.S. production was to increase and every other country was to keep output at their current level (or at least rising with demand) then yes, the price of oil would drop. But not a lot. “Drill baby, drill!” won’t have the impact that people seem to believe it will.

This isn’t to say that drilling offshore (or in Alaska) is a bad idea or bad policy—it isn’t. And McCain does support offshore drilling. However, there are some environmental concerns and of course there is always the risk of a spill or some sort of disaster.

Let me quickly go through the rest of McCain’s energy plan.
-- Unlike Obama, McCain is against ethanol, something that not only I’m in agreement with, but the quicker this country moves away from corn based ethanol the better (for reason’s I’ll chronicle another day).

-- McCain wants to build 45 new nuclear power plants by 2030. Nuclear power is cheap. But plants are very expensive to build, so McCain would probably be offering subsidies and tax credits to companies who build nuclear plants. And then there is the issue of what to do with the nuclear waste. No one wants the waste in their back yard because it’s radioactive thus disposing of the waste has been a problem for years. Burying it usually means it ends up in the water supply. Shooting it into space is very, very expensive and a launch failure would probably be a Chernobyl like disaster. So what it really comes down to is that we haven't really figured out what to do with nuclear waste. Anyway, here is some info on what France does with all their radioactive waste.

-- McCain also favors a cap-in-trade system to lower carbon output. A cap-in-trade system is fairly simple: the government creates credits or permits that allow a certain amount of carbon usage. It then sells those permits on the market to carbon producing companies (or speculators). But many economists prefer a carbon tax, were companies are taxed at a fix rate for the carbon they produce. (again, this would be a good post a few weeks from now).

Finally, McCain didn’t want Obama to be the only one with bad energy ideas. McCain has suggested suspending the tax on fuel. (Personally, I think it should be raised). This is a horrible idea because it would manipulate the price of gas. Supply is not being increased, however suspending the tax would lower the price of gas which would encourage driving, leading to an increase in demand… which only increases the price of gas. All the while, Uncle Sam is receiving less money but the oil companies are pocketing more (since the price of gas has increased). In other words, suspending the fuel tax would increase the price of gas and make Big Oil even richer while making the U.S. government poorer.

McCain’s energy plan isn’t as bad as Obama’s, but it is not as environmentally friendly and is very short sighted. Obama’s plans, for all its faults, does look a bit towards the future. McCain’s ideas aren’t exactly fresh, and while he gets major points for being anti-corn ethanol, there also isn’t a ton to really get behind here.

Thursday, October 23, 2008

Obama's Energy Plan -- Part II

Read it in Obama’s own words here. And I covered the back ground of the U.S. and energy policy yesterday.

Let’s start with the bad—Obama wants to increase the tax on oil companies and then take that money and give Americans a rebate to cover the increased costs of oil, gas, electricity, heat, air condition, etc. In theory this sounds great, a bit like Robin Hood even—the oil companies are reporting record profits, why not help out the very people they’re making their money off of?

Well here’s the catch—increasing the tax on oil companies will boost the price of production. All the oil companies will do is pass on their increased costs to the consumer AND the higher taxes will discourage investment which will lower domestic output—increasing the U.S.’ dependence on foreign oil and maybe even decreasing supply. The end result? Higher gasoline prices for consumers and the world. While in theory the government’s tax revenues should increase, Lord knows where and how that money will be spent, but if production drops eventually the increase in revenue will turn into a decrease.

Unfortunately, but not unexpectedly, Obama also supports the use of corn ethanol as an alternative fuel. At this point there is little reason to support corn ethanol—that’s a post for another day—but it’s not as efficient as other bio-fuels, it takes as much energy to produce as it saves, it uses a lot of water, and on and on.

His website also wants to put a million plug-in hybrid cars on the road by 2015. Sounds like a great idea and I’m sure GM is happy to hear that, but how will this be accomplished… well I’m not sure. He says he’ll hand out a $7,000 tax credit, but the odds of Congress approving that are pretty small. You know what, let’s give this proposal an OUTRAGEOUS CLAIM.

Is there anything good in Obama’s energy proposals? Well, he would like to raise fuel standards for cars, something that the U.S., because of the Detroit lobby, has been reluctant to do. While one could argue that the market and consumers have rejected more fuel-efficient cars for big SUVs, Greg Easterbrook wrote a very good op-ed about this very topic last summer and the relationship between building cars with better fuel-efficient and horsepower and fatal car crashes (which I can’t find but he touches on here). Sometimes it is necessary for the consumer to be regulated (Marshall Field be damned). Obama is also more likely to support and seek public transportation funding.

Although details are a bit sketchy, Obama would also like to invest about $150 billion of government money on scientific research—most of it going towards green collar jobs. Obama claims that this will create 5 million jobs, but I’m not sure were his team came up with number. Therefore I’m a bit skeptical.

Obama would like to up grade the electricity grid and make it more efficient for using renewable energy. And the same time, he wants 10% of all the U.S.’ energy to come from renewable sources by 2012. T. Boone Pickens is on board with this and it’s not a bad idea. The problem will be getting the funding—especially after the bailout and War in Iraq.

Finally, Obama does not want to drill off shore for oil, but reasons as to why this is remain unclear. Back in August he kind of sort of said he’d consider it, but that’s about it.

Overall, Obama’s energy policy leaves me with more questions than answers. Other than raising the fuel-standards for automobiles, it’s hard to find good policy in here. From a policy perspective, this is probably Obama’s weakest issue. But as you’ll see later, McCain’s isn’t much better.

Wednesday, October 22, 2008

Energy Policy -- Part I

This was supposed to be only one post, but as I began to write it, I realized it was going to take three different posts. Here is the first part sort quickly explaining the current status of energy policy in the U.S. and how we got here. Soon to follow will be each Obama and McCain’s policy proposals.

For the last 30 odd years, U.S. energy policy hasn’t really been an important political topic. But this summer when gas prices were about $4 across the nation people started complaining. And politicians started paying attention. And until the middle of September, energy policy was probably one or two of the more important issues during this election cycle.

So how did we get here—from energy policy being almost a second thought to an issue that had Republicans chanting “Drill baby, drill!” at their convention? Well, simply, oil is pretty expensive right now and has been for the last three years. I’ll skip as to why oil is so high right now (in four words? Blame China and India). But the increase of demand in emerging economies combined with a few natural disasters here in the U.S. (like Hurricane Katrina) oil and gas prices have remained surprisingly high. Even today, as oil has fallen about half since this summer, the price of a barrel of oil is still about 40% higher than it was on Nov. 1, 2004.

The effect of high gas prices hurts Americans because over the short term gas is inelastic. And seeing that wages have not risen at the same rate as gas prices, it cuts into people’s budget. As a result people spend less (in theory) on non-necessary (elastic) goods. This is in part why the U.S. economy has slowed down over the last year or so.

But there is another big effect to the high gas prices that has sort of been over looked. Since the U.S. government does not tax gasoline all that much (especially compared to Europe), it encourages people to drive. And since gasoline has been so cheap in the U.S., it has allowed people to move far from city centers or their place of employment. When you combine citizens driving with the limited revenue for the U.S. government from gasoline taxes, there is less of a demand and need for public transportation.

With so many Americans living in areas that are inaccessible to public transportation or have poor public transportation options, it has been difficult for them to cut back on driving. Demand for gasoline has dropped in the U.S., but it has been marginal. So people are paying about twice what they were for a gallon a gas today than they were four years ago. And they don’t like it. Thus people have paid attention to both John McCain and Barack Obama’s energy policy.

Saturday, October 18, 2008

A Quick Look at the Electoral College

I know this blog is about policy and I attempt to shy away from politics, but policy and politics are forever linked. So I thought a quick run down of the 2008 Presidential Election wouldn't be the worst thing in the world...

Things really don't look good for John McCain. Not is he running out of time what has to be more worrisome for his campaign is that the Electoral College is working against him at this point. Looking quickly at the 2004 map, Obama only needed to pick up 18 electoral votes. He has had a very safe lead in every single Kerry state but two—Maine and New Hampshire—however, Obama has opened up a ten point lead in New Hampshire and holds about a 5 point lead in Maine so he can probably count those eight electoral votes.

As for the Bush states, Obama is up by over ten points in Iowa. Those seven electoral votes now means he only needs 11 to win.

Obama is up about nine or ten points in New Mexico, also a Bush state. He can probably safely put those five electoral votes in his column. That means Obama only needs 6 to win.

Before, I move on, I should note that if Obama wins either Florida or Ohio he no longer needs to win Iowa or New Mexico—all he would have to do is hang on to all the Kerry states—and the election is over.

At this point, of all the Bush states that would considered a swing state this time around Obama would only need to win ONE of these states to secure the nomination:

North Carolina

And here is a quick run down of how Obama is currently faring in all these states (all figures are approx, though I erred on the side of McCain seeing that these states did go for Bush in 2004. All the polling information I looked up and found from

Colarado (Obama +8ish)
Virgina (Obama +5ish)
Florida (Obama + 4ish)
Ohio (Obama +3ish)
Missouri (Obama + 2ish)
North Carolina (Obama +2ish)
Indiana (Obama -2ish)

McCain has to win all seven of these states. No almost or maybe's, he has to win all seven states. If he doesn't, Obama will be President. And for that reason alone, even if McCain makes up the six or seven point points in national polls, I think we should all prepare ourselves for, what I believe, will be the first minatory elected to be head of state in a democracy. All Obama has to do is play it cool and not make a mistake—and seeing that he hasn't this entire campaign going back nearly two years—McCain can't really even hope for that. The only wild card that remains out there is catching/killing bin Laden in the next two weeks. However, I'm not sure that would be enough and maybe be viewed as highly cynical—or even a conspiracy theory—by many voters.

Of course there are always outside forces at play. The financial meltdown and credit crunch has tipped this election to Obama (along with strong Obama performances in the debates). Is there one out there? Time will tell, but things don't look good for John McCain.

Thursday, October 16, 2008

Sometimes Doing Something Is Better Than Nothing

Interesting tid-bit I ran across in the Economist this morning especially for those who don't think the bailout was or is a good idea:
Acting quickly also helps to cap the final bill for taxpayers. Sweden’s rescue of its banking system in 1992 pushed its gross public debt up to 73% of its GDP from 55% a year earlier. But the bad assets that the state took off the banks’ hands eventually turned a small profit. By the end of last year, Sweden’s public-debt ratio was 47% of GDP, well below international norms. Japan’s government, by contrast, allowed its bad-debt problem to fester. The fiscal support needed to prop up a struggling economy has led to a doubling of its public debt since the mid-1990s: it stood at 170% of national income by the end of last year.
Pretty much, doing nothing can have dire consequences. Many historians and economics believe that the lack of action by the Hoover administration in the late 1920s and into the 1930s only made the Depression worse. While FDR's New Deal programs had limited success, that may have been in part because it was too late—and it's hard to claim that the New Deal was a failure.

But one of the big criticism that I've come across concerning the stagnation of the Japanese economy since the early 1990s has been the lack of policy initiatives and action—and when they finally came their impact has been limited. Too little too late? The Nikkei 225 was at 18,650 at the start of 1995; today it sits at about 9,457 (losing about half of it's value).

Meanwhile, Sweden's quick response to crisis is probably part of the reason as to why we have not seen stagnation in their economy. (Sadly, I can't find a value for the OMXS30 from the mid-90s, but I'm pretty sure we'd see the OMXS30 up over the last 13 years or so).

While the bailout might not be ideal and it might now fix this countries financial problems quickly or completely, it is something. And historically, doing something has been much better than doing nothing.

Monday, October 13, 2008

Krugman Wins Nobel Prize in Economics

A year ago in my trade theory and policy class my professor mentioned how Paul Krugman had done a lot of work on trade patterns, but then stopped to write editorials for the New York Times. It was a back handed compliment, basically saying if Krugman had continued with his work he might have had a shot at a Nobel Prize in Econ one day. I'm not sure if you can call that University of Chicago arrogance or ignorance from my professor.

So with that snarky commentary two thoughts entered my mind:
1) Paul Krugman will never win a Nobel Prize.
2) Paul Krugman has done work that might have lead him to win a Nobel Prize.

I had never really considered that, in part because my econ back ground has been more recent, and because I don't handicap the Nobel Prize in Economics.

So I was surprised this morning to find out that Krugman had been award the prize. Congratulations to him.

What did Krugman win for? Good question... I'm not the perfect person to ask, and I would have to use a graph which really is no good on a blog, but here are a few explanations. Starting with the The Royal Swedish Academy of Sciences reasoning:
Traditional trade theory assumes that countries are different and explains why some countries export agricultural products whereas others export industrial goods. The new theory clarifies why worldwide trade is in fact dominated by countries which not only have similar conditions, but also trade in similar products – for instance, a country such as Sweden that both exports and imports cars. This kind of trade enables specialization and large-scale production, which result in lower prices and a greater diversity of commodities.
Ahh, what the hell, I'll take a stab at it in four sentences: "Traditional" free trade theory says that Country A will specialize in making guns (Brand L, M and N) if it has a competitive advantage over Country B, as a result B will make butter. What Krugman theorized is that Country B could gain a competitive advantage in making guns if it subsidized the process (brands X and Y)—and this is especially true of large or rich countries. As Country B makes more and more guns, this gives consumers a choice, or diversity, in the band of gun they can buy. Consumers like this because they have more choice, even if Country A only makes Brand L and M now, consumers now have more choices—L, M, X and Y.

And a few other blogs and articles that might help:
Blogging Stocks

Marginal Revolution (some really good links in here, and I'm going to add them to our policy blogs)

Time does an okay job at explaining everything.

And here is Krugman's blog.

And not to make myself or anyone else feel like shit, Krugman basically won for work he did when he was about 26 or 27 years old.

Sunday, October 12, 2008

McCain's Economic Plan

I covered Obama's play the other day, check it out here.

No intro today—reread the Obama one if you're dying for an intro—here is McCain's economic policy in his own words. I'll try to make it easy.

-- McCain will keep Bush's tax cuts on wages, capital gains, and dividends all of which are supposed to expire in 2010 (the top tax rate will stay at 35% and capital gain and dividend income will be taxed at 15%). This plan, while it would not discourage saving, would increase the gap between the rich and poor. The Tax Policy Center believes that the top 1% would see their incomes rise 2.2%. As I wrote while disusing Obama's plan, the Gini Index in the U.S. has continued to grow at a fairly quick pace over the last twenty years; slowing this down isn't the worst policy idea.

McCain would also cut the corporate tax rate from 35% to 25%, but would also get rid of some deductions. Corporate taxes are always somewhat miss leading... there are so many loopholes and deductions for corporations that it's hard to know what rate companies turely do pay.

Finally, McCain would allow companies to immediately write off the cost of new equipment. This would incourage investment and theoretically lead to higher producvity and thus growth.

Overall, McCain's tax policy is a pretty good plan for long term growth. But with the U.S. government already in debt and then involved in a costly war and now handing out over a trillion dollars to save Wall Street on top of this, McCain's plan does or says little about slowing down this debt. McCain has hinted at reducing spending (even talking about cutting defense spending in the second debate), but he hasn't provided any proposals to reduce spending. The Tax Policy Center estimates that McCain's policies would increase the debt by $758 billion in the next ten years.

-- McCain would increase the exemption for dependants from $3,500 to $7,000.

-- McCain has promised to balance the budget in his first term, but I'm not sure how he would do it with this policy and hasn't offered a credible means of doing so either. Plus, the Federal government doesn't really need to balace the budget for a bunch of macro reasons that I won't go into right now.

-- McCain has been a supporter of free trade while in the Senate and there is little reason to believe that he would stop being a supporter as President.

-- McCain's economic advisors are not as highly reguarded as Obama's team (here is some harsh treatment or if you have time here is a debate between advisors for both candidates). McCain's advisors, unlike Obama's team, does not feagure as many economists from academia. His team is headed by Carly Fiorina the former head of HP and Nancy Pfotenhauer who was a former director at Americans for Prosperity Foundation and has worked for Koch Industries, which does a little bit of everything but oil and energy are the biggest areas of focus in the past.

-- Like Obama, McCain has yet to say much about Medicare or Social Security.

Sadly, neither McCain or Obama has said too much about simplifing the tax code, which is currently a mess. Personally, I think tearing up the current tax code and rewriting it (like Congress did in 1986) would be a wonderful undertaking and something I would get behind.

-- Quick editorial note on McCain and his economic policy. McCain's economic proposals haven't hit home with the American voter. Obama's policies have a more populist tone them—but the reality is that they aren't all that poulist. McCain needs to do the same. If I were him or on his campagin, I would have been working hard over the weekend to roll out a new set of idea and proposals. Maybe concede to raising taxes on the rich, keep corporate taxes low, and find a deduction or two for the American worker. Oh and maybe get Micheal Phelps to pitch the plan for you.

Friday, October 10, 2008

Obama's Economic Plan

A Presidential candidate with an economic plans in a free market liberal democracy would seem like an oxymoron. After all, a free market has limited government intervention so how exactly could the President—or any politician—affect the economy?

If the last month has taught us anything it's that the United States is not a totally free market. Sure we aren't like the former Soviet Union or Cuba with a central planner who decided how many shoes to make, but government intervention in private corporations does exist. So while the President does not have as much control over the economy as voters may believe, he certainly does have tools that he can use that have some sort of influence over the economy.

To make this easy, I'll do each candidate's policies/proposals separately starting with Obama.

Obama has called himself a "pro-growth, free-market guy" and judging by his past and economic advisers there is little reason not to believe him. For starters, Obama taught at the University of Chicago Law School, which doesn't sound like a place that has anything to do with economics, but it has given the world a Nobel Prize winner in Economics—Ronald Coase. Obama has also surrounded himself with highly respected economists from academia—Austan Goolsbee, 37, a University of Chicago professor, Jeffrey Liebman, 39, a pension and poverty expert at Harvard University, and David Cutler, 41, a Harvard health economist.

The Economist ran a story last week about an (unscientific) survey of top economists in the U.S. and who they think would handel the economy better. Obama won hands down as most economists feel that "Obama has a superior economic plan, a firmer grasp of economics and will appoint better economic advisors."

So what is Obama's economic plan? You can look it up here, from his website, and I'll break it down bellow.

-- The first thing that jumps out is the $25 billion that Obama wants to spend on improving public infrastructure (think of roads, water pipes, rail roads, even broadband Internet, etc) arguing that doing so will also create jobs. There is a lot of truth to this, federal investment in infrastructure over the last decade has declined to the lowest levels since 1950. Hopefully there are not any more bridge collapses, like the I-35 bridge in Minneapolis last August, on the horizon, and the U.S. cannot afford a crumbling or outdated public infrastructure system. The U.S. economy, in part, runs on a fast, open, safe, and modern infrastructure . Investment in infrastructure to ensure that it continues to be the most efficient and a world class system isn't a bad idea. And yes, it will create jobs also.

-- Obama also wants to offer each family a $1,000 tax rebate (because of high energy costs). Personally, I'm a little more lukewarm on this proposal... but if you compare 2nd quarter spending in the United States to the soon to be released 3rd quarter figures, you'll see a growth in spending in the 2nd quarter and a huge decline in 3rd quarter spending (if August is any indication). Say what you will about those tax rebates back in the late spring, but they did have some effect on the economy—a good effect. Policy like this is not limitless and does stink of populism, but there are worse policy ideas out there.

-- Obama will keep taxes (i.e. the W tax cuts) at there current rate for anyone making less than $250,000 a year. For those making more, the income tax rate will rise from 33/35% to the Clinton Era 36/39.6%. According to economic theory we should see those who make over $250,000 to not work as hard, but there was little evidence of this being true during the 1990s.

I should also mention that the Bush tax cuts of the first half of this decade widened the gap in after-tax income between the rich and poor. The U.S. has seen its Gini Index increase in recent years (the Gini index is a coefficient that measures the gap between the rich and poor). The current gap is probably higher than most policy makers and economists would like to see. I personally would like to see the gap fall to where it was in the 1980s (or even lower) and Obama's tax policy should bring about a decrease in the U.S.'s Gini coefficient.

-- However, despite his claim of being a free market guy, Obama has opposed many of Bush's free trade agreements in the Senate. He has also had a protectionalist platform during the primaries and general election. More on this another day however.

-- Maybe the most interesting proposal is that Obama will keep the current rate of 15% in dividend and capital-gain taxes for anyone making less that $250 thousand. He would raise the rate to 20% for the "rich".

For a second pretend the stock market isn't falling tanking, keeping the tax rate low on investments is a good thing. For far too long the government has not encouraged Americans to save money, and while Obama is not proposing anything that would be an incentive to increase savings, keeping the tax rate at 15% for most Americans also would not be a disincentive.

As for how you feel about the increase on the wealthy, well that's up to how you take your politics. It's a disincentive to the rich to invest, but at the same time spending probably would not increase too much and we would most likely see the rich just shifting their investment patterns. (Also, let's face it, unless you put a ton of time and energy into the stock market, you're pretty much guessing; don't let anyone tell you other wise. So making money in the stock market is a little luck, should you be taxed for being lucky? Again, personal choice...).

-- Any senior citizen who makes less than $50 thousand a year would not pay income taxes under Obama's proposal. I'm not sure what percentage of senior citizens pay income taxes as it is, but this appears to be an obvious political poly to get seniors (who vote) to vote for Obama. I won't call it bad policy, but it's definitely not good policy.

-- Odds and ends... Obama will cut spending but he hasn't told us how... sadly, Obama has not reveled any plan on how to deal with Social Security, and the even bigger problem in the years to come, Medicare.

Over all, Obama's economic policy seems fairly level headed. It leans a bit to the left, but it is light on the side of bad policy and filled with some good ideas. And maybe the best thing about Obama's economic plans are the people he has surrounded himself with—these are economists than even those on the right will have a hard time disliking, let alone disagreeing with.

Thursday, October 9, 2008

The Future

I know there aren't many readers here and that's just part of starting a blog, but for those who do check this blog out once in a while, a programming note.

With the election coming up, I'm going to try and break down both Obama and McCain's policy positions on various issues like the economy, health care, trade, foreign policy, etc.

Also, being from Illinois, I may throw some stuff up there in the Illinois Constitutional Convention. But that depends if anyone picks up our work... so that might be more towards the end of the month.

So no big post today... no real observations on the stock market other than just remember it isn't the end all be all of the American economy. It is but one indicator. So don't completely panic... plus if you have any extra money laying around, you have to be feeling good about buying stocks... the question is just when.

Maybe the media really doesn't know anything

The comments from this L.A. Times blog post on Sarah Palin and the cover of Newsweek are fantastic. Enjoy.

Tuesday, October 7, 2008

The Blame Game -- Fannie Mae

As the financial/credit crisis continues to grow, the politicians in D.C. are pointing fingers faster than you can say Jack Robinson. It should come as no surprise—no one ever wants to take the blame for something like this.

The Republicans want to blame the Democrats and the Democrats want to blame the Republicans.

And the Presidential candidates would like to you to believe that the other guy and his party is at fault for this mess—if we had only listened to McCain or Obama then we would have avoided this entire situation.

But these are outrageous claims. Neither guy could have prevented this, mainly because they had no clue this was going to happen. In fact, in some cases Congress even encouraged this behavior—most infamously Fannie Mae and Freddie Mac.

The New York Times story this weekend does a wonderful job looking at what caused, Fannie in this case, the down fall of these two huge companies/institutions. And there is some amazing stuff in here:
Between 2001 and 2004, the overall subprime mortgage market — loans to the riskiest borrowers — grew from $160 billion to $540 billion, according to Inside Mortgage Finance, a trade publication.
That is a 337% increase.

Why? Why did everyone start handing out subprime mortgages in the early 2000s? That's a book someone is writing at the moment, however if you want a really good break down of the subprime disaster—This American Life did a fantastic job back in May. But 337% increase... that's just mind boggeling.

Back to the article, it goes on to talk about Angelo Mozilo, the head of Countrywide Fiancial, which was around this time the countries largest mortgage lender. It's this part that might be the most amazing:

Mr. Mozilo, who did not return telephone calls seeking comment, told Mr. Mudd [head of Fannie] that Countrywide had other options. For example, Wall Street had recently jumped into the market for risky mortgages. Firms like Bear Stearns, Lehman Brothers and Goldman Sachs had started bundling home loans and selling them to investors — bypassing Fannie and dealing with Countrywide directly.

“You’re becoming irrelevant,” Mr. Mozilo told Mr. Mudd, according to two people with knowledge of the meeting who requested anonymity because the talks were confidential. In the previous year, Fannie had already lost 56 percent of its loan-reselling business to Wall Street and other competitors.

So what happened it this: Greenspan kept interest rates low (another day), investors looked to other finacial products for their money, they found these mortgages to invest in, in the process Fannie was pushed aside as the investment banks got involved... which under pressure from both investors and the government then started taking on the same subprime loans as everyone else. And they knew it.

“Everybody understood that we were now buying loans that we would have previously rejected, and that the models were telling us that we were charging way too little,” said a former senior Fannie executive. “But our mandate was to stay relevant and to serve low-income borrowers. So that’s what we did.”

And with that Fannie and Freddie went down. Now, the advantage that Fannie and Freddie had over everyone else is that the government all but said that they were going to bail them out. Creating a moral hazard problem from way before this crisis even began.

So who is to blame?


Monday, October 6, 2008

Today's Downwards Turn in the Market

In talking to some friends this morning, most of them have had said sarcastically something along the lines of, "good thing we did the bailout."

The market dipped below 10,000 for the first time since 2004 thus making the bailout look foolish on the short term. Wasn't the bailout supposed to save the market?

Yes and no. The bailout was more to keep the credit markets up and running. Hopefully that has been solved, and I think it has. Because I noticed something interesting:

CME Group stock is up about 5% on the day (I'm writing this at about 2 p.m. eastern).

Why does this matter? Because CME Group about 85% of all derivatives trades (and a lot of swaps) happen at either the Chicago Board of Trade or the Chicago Mercantile Exchange. If investors were still worried about a credit cruch, I doubt CME stock would be up today since credit is needed to trade derivatives. Yes, part of the reason the stock is up is probably because of the first mover advantage that CME holds in the swap market, but investors are figuring that volume at the CME exchange will increase.

So, my thinking is, as pension funds sell off stocks, they're taking their money and investing it in other products. CME reported it's second highest volume month ever in September. What that means is that investors are trading other products—even though corn and oil are down today, maybe investors are shorting? I don't know first hand.

But I do know the CME stock is up and they had a huge volume month in September. That says to me that investors aren't as worried about a credit cruch today as they were last week. They're getting out of stocks because they see it as a bad investment (I'm sure not being allowed to short is playing a roll in all this). If investors were worried about credit, would we see CME stock up today? I doubt it, since if there was still major worries about a credit cruch, CME volume would decrease, thus cutting into CME's earnings.

If you disagree and think CME's stock being up is because of swaps, fire away. Policy is my thing, finance is something I only attempt to be rational about.