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Kudlow: Keep Cutting, Obama
Tweet Share on Facebook January 5, 2009 CommentLarry Kudlow likes the Obama business tax cut, but thinks the next president should go further:
However, as yet there is no Obama signal for the most powerful tax incentives that would slash the 35 percent top corporate rate to something around 20 percent. This should apply both to large C-corps and small-business S-corps. It would attract investment, improve future job creation, and relieve consumers who really shoulder the corporate tax costs. Additionally, full cash expensing for business investment write-offs would provide an even greater bang for the buck. So while the new tax-refund plan and faster depreciation are positives, they are still much weaker than a full-bore supply-side tax-rate reduction that could even morph into full-fledged corporate tax reform. Now we wait for a Republican response, which hopefully will be bold corporate tax reform as well as reduced individual tax rates (at least for the middle class).
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7 Reasons to Kill the Obama Stimulus Bill
Tweet Share on Facebook January 5, 2009 Comment (4)The great Arnold Kling takes the other side of the stimulus trade:
1. It is harder to spend larger amounts quickly and cost-effectively.
2. There is a greater risk that we will run into a "sudden stop," in which foreign investors are no longer willing to fund our deficits (this is Buiter's main worry).
3. There is a risk that the intergenerational transfer imposed by the stimulus (from our children to ourselves) is excessive, particularly in the context of other intergenerational transfers of the same sort.
4. There is a risk that fiscal stimulus, large or small, is actually ineffective, so that a large stimulus only means a large failure.
5. There is a risk that much of the spending will kick in after a recovery is underway.
6. The government's capacity to deal with an emergency, such as a major natural disaster or a foreign attack, will be limited, because its credit worthiness will be damaged.
7. There is a risk that government will absorb a permanently higher share of GDP. Policymakers will be reluctant to cut public spending for fear of causing a downturn. Moreover, it will be difficult politically to cut public sending.
I suspect that for some of the proponents of fiscal stimulus, the last point is a feature, not a bug. What they really are proposing is a permanent, Galbraithian shift from the private sector to government, in the guise of a large fiscal stimulus.
Overall, on close examination, the case for the large fiscal stimulus, like the case for the Paulson rescue plan, is really quite weak. However, the same elite groupthink that made passage of the Paulson plan inevitable probably also makes the passage of the stimulus package inevitable. Opponents of the stimulus plan will be mocked and vilified in the media, even though they may very well have logic on their side.
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Nope, McDonald's Isn't Making Us Fat
Tweet Share on Facebook January 5, 2009 Comment (42)Don't blame fast-food restaurants for why America seems so supersized. This new economic study from Northwestern University and UC Berkeley seems to disprove the the common nutritional myth:
The results find no evidence of a causal link between restaurants and obesity, and the estimates are precise enough to rule out any meaningful effect. Analysis of food intake micro data suggests that although consumers eat larger meals at restaurants than at home (even after accounting for selection), they offset these calories at other times of day. We conclude that public health policies targeting restaurants are unlikely to reduce obesity but could negatively affect consumer welfare.
Although restaurants conveniently deliver calories at a low marginal cost, they are only one source among many. While taxing restaurant meals might cause obese consumers to change where they eat, our results suggest that a tax would be unlikely to affect their underlying tendency to overeat. The same principle would apply to other targeted obesity interventions as well. For example, two recent large-scale, multi-state randomized trials of school-based programs that improved the nutritional content of cafeteria meals found no effect on student weight (Nader et al. 1999; Caballero et al. 2003). One principal investigator noted, in retrospect, that the intervention could not control what the children ate outside of school (Kolata 2006). Future research and policy proposals may find greater success if they are designed to account for the optimizing behavior of the targeted subjects.
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What Could Go Right in 2009 ... and Wrong
Tweet Share on Facebook January 5, 2009 Comment (1)Superstrategist Ed Yardeni takes a look at both sides of the economy:
Our wish has come true. We all wished that 2008 would end, expecting that 2009 has to be a better year. I am rooting for a better year this year than last, but there is still a long list of what could go wrong. Let’s start with what could go right:
(1) In the US, lower mortgage rates should fuel a refinancing boom which should lift consumer spending.
(2) Lower mortgage rates, if combined with more mortgage funding provided by the US Treasury, should increase home sales and stabilize home prices.
(3) Easier credit conditions thanks to government funding for auto loans should increase auto sales.
(4) The drop in fuel prices should also boost consumer spending. The unemployment rate should peak below 8%.
(5) Massive spending on infrastructure by the US government should offset weakness in such spending by state and local governments.
(6) The money supply is likely to grow rapidly. Indeed, M1 is up 16.5% y/y through the week of December 22, little changed from the prior week’s 17.9%, which was the fastest pace since 1987. M2 is up 9.6% y/y, the fastest since 2002.
(7) Stimulative monetary and fiscal policies overseas should revive global economic activity and US exports.
(8) Depleted inventories and improving sales could trigger a big jump in industrial production.
(9) Credit quality spreads should narrow significantly and rapidly as investors seek better returns than available in Treasury securities.
(10) Stock prices should rise 30%-40% in anticipation of better earnings during the second half of 2009 and in 2010.
(11) Inflation should remain subdued, as it typically does when productivity pops when the economy begins to recover.
Now let's review what could still go wrong this year:
(12) The credit crunch worsens. Corporations and municipal governments are unable to rollover their maturing debts. The jobless rate peaks between 10% and 15%.
(13) Home prices continue to fall in the US. Despite lower mortgage rates and more credit availability, would-be homebuyers are put off by mounting unemployment and falling home prices.
(14) Any windfalls from mortgage refinancing are saved rather than spent.
(15) Widespread deflation occurs and Treasury bill yields turn negative. The 10-year Treasury falls to 1.0%.
(16) Congress passes, and President Obama signs, the Card Check bill.
(17) The DJIA plunges down to 5000.In the first scenario, a V-shaped recovery during the second half of the year is likely to be followed by lackluster growth in 2010. During Japan’s “lost decade” of the 1990s, Japan’s economy remained depressed despite near-zero interest rates. The US economy should respond much better to near-zero interest rates because mortgage refinancing is a bigger deal here than it was over there. The second scenario is a depression: We all have lots of time to think about the meaning of life, and I go to see more movies, hoping I can find a job as a movie reviewer. Call me an optimist, but my subjective odds are 70% for the first scenario and 30% for the second.
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Obama Stimulus 2.0
Tweet Share on Facebook January 5, 2009 Comment (6)We are getting some more details on Barack Obama's stimulus/recovery package. (The WSJ's take is here. The NYT's take is here.) The big news is an increased emphasis on "tax cuts", to the tune of $300 billion over two years. Two aspects we have heard before, tax credits for middle- and lower-income workers, as well as a tax credit for businesses who hire new workers. New is a proposal to allow writeoffs for large and small businesses. From the WSJ:
As for the business tax package, a key provision would allow companies to write off huge losses incurred last year, as well as any losses from 2009, to retroactively reduce tax bills dating back five years. Obama aides note that businesses would have been able to claim most of the tax write-offs on future tax returns, and the proposal simply accelerates those write-offs to make them available in the current tax season, when a lack of available credit is leaving many companies short of cash.
A second provision would entice firms to plow that money back into new investment. The write-offs would be retroactive to expenditures made as of Jan. 1, 2009, to ensure that companies don't sit on their money until after Congress passes the measure.
Another element would offer a one-year tax credit for companies that make new hires or forgo layoffs, which could be worth $40 billion to $50 billion. And the Obama plan also would allow small businesses to write off a broad range expenditures worth up to $250,000 in 2009 and 2010. Currently, the limit is $175,000.
With all this talk of short-term stimulus, how fortunate that Stanford University economist John Taylor just a presented a paper on the wisdom of such policies. Here is a key portion:
There is little evidence that short government impulses will jump start an economy adversely affected by other forces. In the current recession, the economy has been pulled down by the housing slump, the financial crisis, and the lagged effects of high energy prices. Expectations of future income and employment growth are low because the effects of the financial crisis are expected to last for years into the future. Unless these effects are addressed, a short-term fiscal stimulus has little chance of causing a sustained recovery.
The theory that a short-run stimulus will jump start the economy is based on older “Keynesian” theories which do not adequately include, in my view, the complex dynamic or general equilibrium effects of a modern international economy. ... The problems with such models can be illustrated by again using the evidence from the rebates, and I believe similar problems arise when analyzing other stimulus proposals as well. For example, according to model simulations of Mark Zandi (2008), GDP would have risen by about a dollar and a quarter for every dollar of a refundable one-time rebate. But ... the impact was only a few pennies for each dollar and insignificantly different from zero in 2008.
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Yellowstone Supervolcano Earthquakes: Scientists React
Tweet Share on Facebook January 5, 2009 Comment (130)What is the meaning of the (suddenly quiescent) earthquake swarm at Yellowstone National Park? Here are takes from two more top volcanologists. First up is Stephen Self, who presented a report on the hazards from a supervolcano eruption to the British government in 2005 and does work for the U.S. Nuclear Regulatory Commission:
I think that it is part of normal background seismicity at a large caldera volcano such as Yellowstone. Such swarms probably take place every few 10s of years, but we have been monitoring these volcanoes at the present level for only about 10-20 years. Thus a swarm may seem new or unusual whereas it's really part of business-as-usual. It may signify magma moving around underneath, or hot water, but these movements take place intermittently and quasi-steadily for many 100s of thousands of years. If this swarm were followed quite quickly (months-years) by another, and then another, and the intensity and frequency was seen to rise, then a re-think of this opinion may be in order.
Next up is Bil McGuire of University College London, also considered one of the U.K.'s top volcanologists. He has appeared frequently in television documentaries both there and in the United States:
I have indeed been paying attention to the Yellowstone situation and there have now been more than 500 small quakes since December 26th. This is certainly somewhat unusual activity, compared to recent decades, but not particularly unusual for so-called 'restless' volcanic calderas such as Yellowstone. The Campi Flegrei caldera in the Bay of Naples, for example, experienced many thousands of earthquakes in the 70s and 80s, along with surface swelling of 1 - 2 metres, all without eruption.
At Yellowstone, the quakes may have a number of causes, including movements along an active fault or the fracturing of rock in response to the migration of hot water or magma. Even if the latter, however, the chances are that the magma will stay beneath the surface, cool and solidify. The last eruptive activity here was a good 70,000 years ago, so the annual probability of an eruption is very small, although a steam blast left a 5 km wide crater just 13,000 years ago. So-called super-eruptions have return periods of 600 - 800,000 years or so (the last was 640,000 years ago), so the probability of another super-eruption in any single year is extremely small.
Having said this, it is likely that another eruption will happen at Yellowstone sometime. Not only do we not know when this will happen, but we are also not well versed in differentiating the signs of unrest associated with the normal activity of the caldera from those that presage a forthcoming eruption.
And for those of you just tuning, here is the last bulletin from the Yellowstone Volcanic Observatory on Jan. 3:
Over 500 earthquakes, as large as M 3.9, have been recorded by an automated earthquake system since the inception of this unusual earthquake sequence that began Dec. 27, 2008. More than 300 of these events have been reviewed and evaluated by seismic analysts. Depths of the earthquakes range from ~ 1km to around 10 km. We note that the earthquakes extend northward from central Yellowstone Lake for ~10 km toward the Fishing Bridge area, with a migration of recent earthquakes toward the north. Some of the dozen M3+ earthquakes were felt in the Lake, Grant Village and Old Faithful areas. Personnel of the Yellowstone Volcano Observatory continue to evaluate this earthquake sequence and will provide information to the NPS, USGS and the public as it evolves.This earthquake sequence is the most intense in this area for some years. No damage has been reported within Yellowstone National Park, nor would any be expected from earthquakes of this size. The swarm is in a region of historical earthquake activity and is close to areas of Yellowstone famous hydrothermal activity. Similar earthquake swarms have occurred in the past in Yellowstone without triggering steam explosions or volcanic activity. Nevertheless, there is some potential for hydrothermal explosions and earthquakes may continue or increase in magnitude. There is a much lower potential for related volcanic activity.
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Sorry, Climate Change Wouldn't Hurt America's Economy
Tweet Share on Facebook January 4, 2009 Comment (27)One of the more sober arguments in favor of radical action to combat perceived climate change is that doing nothing would be economically calamitous. That was certainly the conclusion of the controversial Stern Report in the United Kingdom. Economist Nicholas Stern concluded that we should spend 1 percent of the global economy every year to avoid the worst effects of climate change. Now even if you take Stern's numbers as correct—and many think he wildly overestimates the economic risks of doing nothing—he still advocates spending $700 billion a year on the supposed problem. Failure to do so could risk global GDP being up to twenty percent lower than it would be otherwise.
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Yellowstone Earthquake Swarm: Latest Supervolcano Update
Tweet Share on Facebook January 4, 2009 Comment (164)The earthquake swarm beneath Yellowstone National Park seems to have subsided for now. At least that is what the public data from the Yellowstone Volcano Observatory are telling us about the supervolcano beneath the park. Now lots of my blog's readers have raised questions as to whether we are being told the truth by the U.S. Geological Survey. (This is my chat with the head scientist at the YVO, Jacob Lowenstern.) I have been in touch this weekend with experts from around the world. Here is some of what they are telling me. (More to come. And here is a nice, though dated, piece from the Financial TImes.) First up is volcanologist Dr. R.B. Trombley of the International Volcano Research Centre:
What does the earthquake swarm mean?
It is our opinion, and in agreement with Dr. Robert Smith of the University of Utah, that the current events are more of a major seismic event rather than a major volcanic event. The Alert Status of Yellowstone continues, at this time, to remain at the Green Alert Level. We do not anticipate the Alert Level to be raised at this time.
Given the current data, might the swarm be a prelude to a major seismic event ?
It could be but the swarming is too "isolated", i.e., it is near the lake area only basically.
What would be worrisome signs that that we might be headed to a major volcanic event ?
Much greater magnitude earthquakes, over a larger area of the caldera.The caldera is approx. 32 mi long by 8 miles wide. I believe the gratest quake so far has only been a 3.9 and all of the 'quakes so far have been from 1 to 10 km of depth.
I also talked to a top Hawaii-based volcanologist who was relucatant to go into specifics on the record since the scientist had only web data to go on, unlike the folks at the YVO. But I think these comments are pertinent:
Bob Smith, who is a seismologist and a great one, is a real straight shooter and is going to tell folks what he thinks, when he has enough information to think something. Ditto for Jake Lowenstern of the USGS. So I believe them when they say that they don't really know at this point what this swarm portends as Yellowstone is very seismically active. ... The odds of a big caldera forming eruption at Yellowstone are really infinitesimal during our lifetime. While the Discovery channel documentary did a fair job of portraying how an eruption might come down, it also did a better job of whipping up anxiety about a very unlikely event. You would be much more productive hiding in your closet avoiding lightning than worrying about a Yellowstone eruption. It's a wonderful thing to ponder and try to get a grip on some of the wild things that happen on our planet, but not something to stay awake about. The last rhyolite lava eruption was 80,000 years ago or so, that's 8 times as long as human civilization and represents roughly half the time modern humans have existed, just to put in perspective. Humans tend to be a bit egocentric thinking that all this stuff is happening to them personally, when it's just happening as part of nature. Anyway, Yellowstone while certainly doing stuff, is not in the same category of likely caldera eruption as Rabaul and Campi Flegrei. ... These quakes were much bigger than the Yellowstone swarm and many many more of them. And the final eruption from 2 volcanoes at the same time turned out to be relatively "small" though it buried the town in ash.
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Another View on the Economy
Tweet Share on Facebook January 3, 2009 Comment (10)Ugly news from the folks at Macroeconomic Advisers:
The latest economic data are consistent with our estimate that GDP declined at nearly a 6% rate in the fourth quarter and will decline sharply in the first quarter of 2009. However, some data — specifically on equipment investment and consumer spending — have been stronger than expected. On December 24 we updated our base forecast, which called for GDP to decline at a 5.8% rate in the fourth quarter (about ¾ of a percentage point higher than the 6½% rate of decline in our tracking estimate from December 16), followed by a 3.5% rate of decline in the first quarter. We assume that a substantial fiscal stimulus package will contribute to a gradual turnaround, with positive GDP growth beginning in the second quarter (1.0%). For all of next year, we forecast GDP to rise 0.4%.
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Earthquakes at Yellowstone Supervolcano: Update
Tweet Share on Facebook January 3, 2009 Comment (146)Here is the latest on the earthquake swarms at Yellowstone:
1) The Yellowstone Volcano Observatory put out an update yesterday evening
Yellowstone Lake Earthquake Swarm Update: 2 January 2008
The University of Utah Seismograph Stations reports that as of 1800 MST on 2 January 2009, seismicity of the ongoing Yellowstone earthquake swarm continues. Over 500 earthquakes, as large as M 3.9, have been recorded by an automated earthquake system since the inception of this unusual earthquake sequence that began Dec. 27, 2008. More than 300 of these events have been reviewed and evaluated by seismic analysts. Depths of the earthquakes range from ~ 1km to around 10 km. We note that the earthquakes extend northward from central Yellowstone Lake for ~10 km toward the Fishing Bridge area, with a migration of recent earthquakes toward the north. Some of the dozen M3+ earthquakes were felt in the Lake, Grant Village and Old Faithful areas. Personnel of the Yellowstone Volcano Observatory continue to evaluate this earthquake sequence and will provide information to the NPS, USGS and the public as it evolves.
This earthquake sequence is the most intense in this area for some years. No damage has been reported within Yellowstone National Park, nor would any be expected from earthquakes of this size. The swarm is in a region of historical earthquake activity and is close to areas of Yellowstone famous hydrothermal activity. Similar earthquake swarms have occurred in the past in Yellowstone without triggering steam explosions or volcanic activity. Nevertheless, there is some potential for hydrothermal explosions and earthquakes may continue or increase in magnitude. There is a much lower potential for related volcanic activity.
The University of Utah operates a seismic network in Yellowstone National Park in conjunction with the National Park Service and the U.S. Geological Survey. These three institutions are partners in the Yellowstone Volcano Observatory. Seismic data from Yellowstone are transmitted to the University in real-time by radio and satellite links from a network of 28 seismographs in the Yellowstone area and are available on the web.
Seismologists continue to monitor and analyze data from this swarm of earthquakes and provide updates to the NPS and USGS and to the public via the following web pages.
Information on U.S. earthquake activity including Yellowstone can be viewed at the U.S. Geological Survey web site: http://earthquake.usgs.gov/eqcenter/recenteqsus/.
Information on earthquakes can also be viewed at the University of Utah
Seismograph Stations web site: http://www.seis.utah.edu/.
Seismographic recordings from Yellowstone seismograph stations can be
viewed online at: http://www.quake.utah.edu/helicorder/heli/yellowstone/index.html.2) Here is an amazing attempt at visualizing the earthquake swarm.
3) Here is a bit of what Scientific American has to say on the topic:
In recent years, Yellowstone's caldera has been rising thanks to uplifting magma beneath it—leading to more cracks, hot springs and even more frequent eruptions of Steamboat Geysers. Paired with the earthquakes, such magma movement might presage an eruption—either big or small. Unfortunately, scientists can't really predict when the next such eruption will happen, and the range of possibilities is large: from later today to a million years from now.
How will we know if we should start worrying? The real warning signs will be rapid changes in the shape of the ground as well as volcanic gases leaking from the ground, neither of which have been sighted—yet.
"Eruptions are far enough apart that there is a very low probability of the next eruption happening in our lifetimes or anytime soon," Daniel Dzurisin of the USGS told me in 2006. "The flipside is: [Yellowstone] has been active for millions of years and it's going to erupt again sometime."4) Here is a Google Map mashup of the swarm.
5) Slashdot also has a very active discussion about the Yellowstone quakes.
