President says something silly

The President has received a lot of Republican "feedback" on his statement that, "Somebody invested in roads and bridges. If you've got a business—you didn't build that." Leaving aside the astonishingly inept phrasing, the President's larger point is not unreasonable.  If you own a successful business you do benefit from things the government provide (rule of law, security, infrastructure, healthy educated workforce, basic research, etc).  It is really the logic that flows from this obvious truth that differentiates the President form his Republican critics. The President appears to believe that success flows from what the government provides.  Therefore the government is justified in taking the fruits of that success. Republicans tend to believe what the government is a necessary, but not sufficient, condition for individual success (even if they don't generally state it in this way).  Therefore the government has only a limited claim on the earnings of successful individuals. Beliefs about the relative importance of government have broader implications. The President's apparent belief that prosperity flows from government, implies that more government equals more prosperity.  From this viewpoint the cost of government is almost irrelevant. The Republican view that things provided by government are merely one of the preconditions for prosperity leads logically to the focus on providing these things at minimum cost. Unfortunately, we're unlikely to see much thoughtful debate about the relative merits of these two viewpoints.   Hammering the President for the dimwitted quote above is much more fun.

How to become a billionaire

Interesting insight on how people become billionaires in different parts of the world. Many Americans appear to believe that they are the victims of a hopelessly corrupt economic system run by and for 1% oligarchs.  Before buying this narrative it might be a good idea to look at countries that actually have hopelessly corrupt economic system run by and for oligarchs.

Now look at Russia, where one hundred billionaires control fortunes worth an astonishing 20 percent of national GDP. Russia has nearly as many billionaires as China but they control twice as much total wealth in an economy one-fourth the size. Just as striking, Russia is missing not only a middle class but also a millionaire class; according to Boston Consulting Group, China ranks third in the world for number of millionaires, while Russia is not even in the top 15 for millionaires. The growing business influence of the state is reflected in the fact that 69 of those billionaires live in Moscow, the largest concentration for any city in the world. Protected by their patrons, the richest face little competition. Eight of the top 10 are holdovers from 2006. More than 80 percent of the wealth of Russian billionaires comes from non-productive industries like real estate, construction and especially commodities, namely oil and gas, in which political ties can sustain fortunes indefinitely. In no other developing nation is this share greater than 35 percent. Even in Brazil, a commodity economy at the same income level as Russia, the non-productive share of billionaires' wealth is just 12 percent.

 

Looking at the Money Supply

The following chart shows the growth in the broad money supply (M2) and BASE money supply as a percentage of M2 over the past 15 years.  BASE money supply is physical currency plus Federal Reserve accounts.  This is the portion of the overall money supply that the Fed directly controls. As you can see, M2 has been growing at a reasonably steady rate for the past 15 years.  BASE made up a reasonably constant proportion of M2 up until the end of 2008.  At that point the Fed had to dramatically increase the BASE money supply in order to keep M2 expanding at roughly the accustomed rate. There are a number of different ways of looking at this.  It could be that this is simply the new normal and the the Fed's balance sheet will henceforth make up a higher percentage of the overall money supply than has generally been the case. Alternatively, you could view the situation as essentially benign.  The Fed's balance sheet is relatively large because it had to respond to the crisis.  It will shrink over time as the economy recovers.  My guess is that this is Chairman Bernanke's preferred assessment. The pessimists among us tend to believe that quantitative easings are a bit like wars in the Middle East.  Much easier to get into than out of. I'm inclined towards pessimism.  There are very few free lunches in economics.  The Fed's extraordinary actions over the past few years may well have taken some of the bite out of the crisis, but my guess is that we pay for them through either inflation or uncomfortably tight monetary policy down the road.

Unfortunately Serious

James Fallows of the Atlantic has given seven reasons that Paul Ryan's budget proposal is neither brave nor serious.   I'll grant that 6 out of 7 are pretty solid.  The exception is:

3) A plan that exempts from future Medicare cuts anyone born before 1957 -- about a quarter of the population, which includes me -- is neither brave nor serious. See "canny or cynical: take your pick" above.

This may not be brave, but is definitely serious. Old people are numerous and prone to voting.  They also have a choice.  If you are in your mid-fifties or older today there is a reasonable chance that you will be dead before the country's fiscal situation implodes.  It therefore makes sense to veto any proposal that reduces benefits. There are plenty of voters under the age of 54, but they are in a very different situation.  Barring untimely demise, these Americans will live to see the nations fiscal Waterloo.  They therefore have an incentive to accept painful reforms in order to avert the otherwise inevitable disaster. The political reality is that no reform that adversely impacts current AARP members has any chance of adoption.  It is neither brave nor serious to ignore that fact.

Right Price?

I'm not sure exactly how they do it, but Goldman Sachs has an incredible ability to receive credit for being smarter than they probably are.  Consider this from the Wall Street Journal's Opinion page (gated):

In fact, the firm's real talent isn't knowing what the price will be, but what the price is. And Goldman clearly hit the mark with the $50 billion valuation implied by its $450 million investment in Facebook last week. The firm also rigged up a deal to make $1.5 billion in Facebook shares indirectly available to its well-heeled clients, and every sign is that the offer was oversubscribed.

If the offer was oversubscribed then Goldman clearly did not "hit the mark".  Having more willing buyers than shares to sell means the price was set to low and Goldman left money on the table - to the detriment of their clients, the existing shareholders of Facebook.

How can supposedly professional politicians be so shockingly bad at politics?

House Democrats have decided to make a great show of refusing to support the President's deal on extending the Bush tax cuts.  It is difficult to understand why any remotely competent politician would take on such a clearly untenable position.  The inevitable climb down is clearly going to be deeply humiliating. At the present time Democrats currently have two plausible alternatives:

1. Pass, however grudgingly, the President's tax deal
2. Dig their heals in and ensure that:
   1. The President is severely damaged (What use is a President who can't even rally his own party?)
   2. Democrats take the blame for everyone's taxes going (Can't avoid that when you willfully torpedo a bipartisan deal)
   3. The replacement deal to extend the Bush tax cuts will be done by the next Congress, in which Democrats will have even less leverage (Because that's what happens when you lose the house)

Since most Democrats are not actually certifiable, it is only a matter of time before they back down and take option 1. There are a fair number of people who seem to believe that, if they stick to their guns, house Democrats will somehow be able to negotiate a better deal.  This is pure fantasy.  The Democrats have precisely zero leverage in this situation.  Republicans already have a deal they like.  If the Democrats refuse to get on board they will be more than happy to blame Democrats for a tax hike, then force an even better deal next year. Since all of the above is obvious to pretty much everyone involved, the political tactics being employed by house Democrats seem thoroughly mystifying. The only explanation that makes sense is that this little piece of political theater is aimed, not at the general public, but at Democratic primary voters. Democrats who are losing their seats are taking the opportunity to position themselves as true guardians of the faith, just in case they want to run in 2012.  While those Democrats who survived the recent slaughter certainly don't want to open themselves to a potential primary challenge from the left by being seen as too willing support a deal that the folks who vote in Democratic primaries aren't too fond of. Everyone knows a climb down is coming, but precisely which Democrats are held responsible for this humiliation by the party faithful may have a big influence on a lot of Democratic careers.

Directorial Debut