Frank and Earnest

Funny stuff. I think the cartoonist was thinking of Alan Greenspan when this was drawn. I fear that Greenspan's statement implying that the free market did not adequately regulate itself in regard to CDOs might become license for over-regulation. As my University of Delaware Macro professor is fond of saying: The pendulum swings to far in both directions. There was probably too little regulation of the financial industry, but hopefully it does not result in too much regulation on the other side of this crisis.

A recession is when...

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Merry Christmas

Why Isn't GM Competitive?

Total compensation would include benefits as well as wages.



On his Blog, Nobel Laureate Economist Gary Becker explains the lack of competitiveness by GM not because of the skill level of American workers, but large differences in cost structure. In his words:

Nevertheless, I believe bankruptcy is better than a bailout for American consumers and taxpayers. The main problem with American auto companies is that during the good times of the 1970s, 1980s and 1990s, they made overly generous settlements with the United Auto workers (UAW) on wages, pensions, and health benefits. Only a couple of years ago, GM was paying $5 billion per year in health benefits to retirees and current employees because their plans had wide health coverage with minimal co-payments and deductibility on health claims by present and retired employees. In those days, the UAW was one of the most powerful unions in the US, and it bargained aggressively with the auto manufacturers, carrying out strikes when its demands were not met. When the American auto industry began to face tough competition from Japanese and German carmakers, they were saddled with excessive pay to their workers, and vastly excessive pensions and health benefits to their current and retired workers.

It is not that cars cannot be produced profitably with American workers: the American plants of Toyota and other Japanese companies, and of German auto manufacturers, have been profitable for many years. The foreign companies have achieved this mainly by setting up their factories in Southern and border states where they could avoid the UAW, and thereby introduce efficient methods of production. Their workers have been paid well but not excessively, and these companies have kept their pension and health obligations under control while still maintaining good morale among their employees. In recent years GM and the other American manufacturers have chipped away at their generous fringe benefits, but their health and retirement benefits still considerably exceed those received by American auto workers employed by foreign companies. As a result of lower costs, better management, and less hindrance from work rules imposed by the UAW, about 1/3 of all cars produced in the US now come from foreign owned plants.

More on Education

Because it became a campaign topic, it seems that education has become a popular conversation topic again. Below, I have a segment from this very interesting article, thanks to the Mankiw site for the linkage. It is true that income inequality seems to be a growing problem. The author gets to the root cause of income inequality, the growing income premium going to high skilled workers. Income redistribution solves the problem of poverty (lack of money), but does not get at the cause of poverty...low income. Education gives workers the opportunity to acquire the skills needed to earn a larger income.

The most effective anti-poverty program we could devise for the long run would have less to do with income redistribution than with ensuring that poor kids get a first-rate education, from preschool on. One recent study found that if American students did as well as those in several Asian countries in math and science, our economy would grow 20 percent faster.

So let’s break for a quiz: Quick, what’s the source of America’s greatness?

Is it a tradition of market-friendly capitalism? The diligence of its people? The cornucopia of natural resources? Great presidents?

No, a fair amount of evidence suggests that the crucial factor is our school system — which, for most of our history, was the best in the world but has foundered over the last few decades. The message for Mr. Obama is that improving schools must be on the front burner.

To Barack Obama, From Mankiw

Greg Mankiw writes a letter to President-Elect Barack Obama. It is fantastic, I would suggest reading the entire letter posted on the Mankiw blog. Here is what he has to say about Obama's economic advisors.


Listen to your economists. During the campaign you assembled an impressive team of economic advisers from the nation’s top universities, including Austan Goolsbee from University of Chicago and David Cutler and Jeff Liebman from Harvard. Your campaign’s director of economic policy, Jason Furman, is a smart, sensible, and well-trained policy economist. I know: He is a former student of mine.

Pay close attention to what they have to say. They will often give you advice quite different from what you will hear from congressional leaders Nancy Pelosi and Harry Reid. To make sure you hear the views of your economists, put them in offices close to yours. Tell your chief of staff to invite them to all the relevant meetings.

President Obama

Let's hope he lives up to the hype. Thanks to the Mankiw site for the picture.

End Adolescence?

Former Speaker of the House Newt Gingrich proposes a societal change in how we treat adolescence. In this BusinessWeek article he proposes to incentivize educational achievement and propel our young into adulthood at an earlier age.

In math and science learning, which are among the most important indicators of future prosperity and strength, America lags far behind such emerging powers as China and India. Studying to compete with Asian counterparts in the world market is going to keep U.S. teens busier than anyone ever imagined. This will require year-round learning, with mentors available online, rather than our traditional bureaucratic model of education. But we must go further, toward a dynamic, real-world blueprint for learning.

Indeed, going to school should be a money-making profession if you are good at it and work hard. That would revolutionize our poorest neighborhoods and boost our competitiveness.

The fact is, most young people want to be challenged and given real responsibility. They want to be treated like young men and women, not old children. So consider this simple proposal: High school students who can graduate a year early get the 12th year's cost of schooling as an automatic scholarship to any college or technical school they want to attend. If they graduate two years early, they get two years of scholarships. At no added cost to taxpayers, we would give students an incentive to study as hard as they can and maximize the speed at which they learn.

Once we decide to engage young people in real life, doing real work, earning real money, and thereby acquiring real responsibility, we can transform being young in America. And our nation will become more competitive in the process.

Should Everyone Vote?

Is it rational to not vote? Should everyone vote? As a social studies teacher it seems to be my role to encourage everyone to vote. Harvard's Greg Mankiw calls this logic into question. Read the story and comment. It seems more rational to not encourage people to vote and instead let each individual decide if he or she has the information necessary to make a good decision.

Tax Policy Reminder From Abe

Abraham Lincoln said, "You cannot help the poor by tearing down the rich. You cannot help the wage earner by hurting the wage payer."

Why America Needs an Economic Strategy

As we wait for election results and speculate of the economic ramifications of a change in administration, read Why America Needs an Economic Strategy, from the most current issue of BusinessWeek. The author, Michael E. Porter, maps out a strategy to make America more competitive in the global economy. I have a few questions about a few of the ideas, but it is a very thought provoking article. Porter has this to say about education:

A final strategic failure is in many ways the most disconcerting. All Americans know that the public education system is a serious weakness. Fewer may realize that citizens retiring today are better educated than the young people entering the workforce. In the global economy, just being an American is no longer enough to guarantee a good job at a good wage. Without world-class education and skills, Americans must compete with workers in other countries for jobs that could be moved anywhere. Unless we significantly improve the performance of our public schools, there is no scenario in which many Americans will escape continued pressure on their standard of living.

Economists for _______________.

Tomorrow is election day. Have you made up your mind? Economists have lined up behind their candidates. Check out the sites: Economists for McCain and Economists for Obama.