I usually tell students that just because we name things we buy more of when our incomes drop “inferior goods” does not mean that they are really inferior in some objective sense, and I use shoe repair services as a possible example.  Spam would not be a good example of this point.  I am not sure that my dog, who eats aluminum foil would even eat the stuff.

Well, here is an article from the New York Times by Andrew Martin about how the downturn in the nation’s economy is affecting Hormel’s Spam business.  This is the perfect story for understanding about how income affects the demand for an inferior good.

On the other hand, the recession has affected the demand for gasoline by pushing it down, which has pushed prices to half of their July levels.  Certainly, lobster qualifies as a normal good.  As we see in this article by Daniel Gross in August’s Slate, the price of lobster in Maine has fallen off a lot this year because of the recession pushing incomes down, and so, the demand for normal goods, especially luxury goods.  In some places in Maine, it was as inexpensive to buy a one pound lobster meal as a quarter pounder from McDonald’s.

My suggestion, is to go against the tide.  Go for the inexpensive lobster instead of the expensive Spam.

-MC

Regardless, this is what Inhofe said:

“It is just outrageous that the American people don’t know that Congress doesn’t know how much money he (Treasury Secretary Henry Paulson) has given away to anyone,” the Oklahoma Republican told the Tulsa World. “It could be to his friends. It could be to anybody else. We don’t know. There is no way of knowing.”

I can’t be certain, but it’s almost as if Inhofe was referring to Paulson’s “friends” in an off-hand manner. But I wonder, is there a simple rent-seeking story here? Paulson, after all, was an investment banker, starting at Goldman Sachs in 1974, and ending up its CEO in the late 1990’s. And, we know that the current crisis showed up in the investment banks, not the commercial banks. We even know that some in the commercial banking industry didn’t want any part of the bailout money.

Could the explanation for this bill be as simple as: investment bankers went to Paulson for help with their financial problems?

NM

Anyway, according to this AP article, “bailout fatigue” has set in on Capitol Hill. The article says:

The Senate Democrats’ measure would carve out a portion of the Wall Street bailout money to pay for loans to U.S. automakers and their domestic suppliers, but aides in both parties and lobbyists tracking the plan acknowledge they do not currently have the votes to pass it.

But why would automakers need a special loan package, direct from Treasury, when all the banks are now flush with excess credit? After all, the original bailout bill was (supposedly) passed so quickly to avoid the problem of non-financial companies being frozen out of the credit markets. If, even after all of these low-cost “injections” of capital, banks still won’t loan money to the car makers, maybe it’s not a good idea to loan them money?

I know, I know, I’ve heard all the “too big to fail” arguments; if GM and Ford fail, it’s not just those workers who lose their jobs, it’s the suppliers and dealers, etc. The problem is that we can make the same argument about any large industry – the airlines, the banks (I hate using that one), telecom – all of these industries have various suppliers and other businesses connected to them. If we just keep shoveling tax dollars into “troubled” industries, we won’t have industries, we’ll have large government agencies.

We simply have to realize that (1) we’re talking about using tax dollars to bailout private companies; and, (2) when we “bail out” companies in this manner, we’re prolonging the pain of business failure, not preventing it. It’s not like the U.S. car companies have been a glaring example of efficiency. These guys have been limping along for years.

Faced with serious competition from the Japanese in the 70’s, the U.S. automakers were forced to deal with (among other things) grossly underfunded pension liabilities. The “big 3″ became the “big 2,” and they’ve been trying to unwind those bad deals ever since. In fact, one of the reasons 401k plans (and defined contribution plans, in general) became prevalent is that corporate America realized they could not keep going with defined benefit plans.

Of course, if you have high fixed costs and a shrinking market share, you keep your debt down, right? Not these guys.

If you look at the balance sheets from Ford and GM for the last several years, you find debt-to-asset ratios near one (i.e., their total debt is at/above what their total assets are worth). Honda and Toyota, on the other hand, have debt-to-asset ratios near 60 percent.

What are some of the high fixed costs GM and Ford face? According to a Standard & Poor’s market report: “Even labor costs have become largely fixed because of union contracts, which may restrict layoffs or require automakers to pay certain laid-off workers benefits worth up to 95% of their take-home pay.” (I am unable to provide a link to non-subscribers.)

It’s bad enough that our government is seriously considering loaning billions of tax dollars to unproductive, highly levered companies. But it’s even worse when you compare the amount of the proposed taxpayer loan ($25 billion) to the market capitalizations of Ford and GM (approximately $4 billion and $2 billion, respectively).

What’s the market capitalization of Honda? Nearly $40 billion. Toyota? About $100 billion. Which one would be the better investment for your money?

NM

A little extra: For anyone interested, there’s a nice debate at The New Republic and the Corner (National Review); read both pieces to get both sides of the argument.

For instance, I’ve noticed that the U.S. financial crisis is now, supposedly, a leading cause of a global recession. This sort of story, being repeated all over the news, seems a bit peculiar to me. We don’t even have clear evidence that there was a credit freeze in the U.S., much less the entire world, but whatever happened has caused a world-wide recession?

Now, I’m not saying that there is no problem with the derivative securities tied to the sub-prime mortgages; that’s evident. But the notion that these derivative securities, tied to (mostly) a few parts of the U.S. housing market, could cause a global economic recession seems a bit odd. Maybe this scenario is possible, but we need to investigate the cause, not just repeat the mantra.

Yet, the story is getting repeated. In today’s Wall Street Journal, an economist from Wachovia Corp. says “It is clear that the combination of global recession and the global credit crunch is causing world-wide trade to dry up.” An early October article in the Economist is subtitled: At best, the world economy is on the brink of recession. The article starts off:

DEPRIVE a person of oxygen and he will turn blue, collapse and eventually die. Deprive economies of credit and a similar process kicks in. As the financial crisis has broadened and intensified, the global economy has begun to suffocate.

No wonder people dislike economists so much. Let’s assume, for the sake of argument, that we are in a global recession; that trade has slowed, people are buying less, and even investing less. Would the financial crisis be the only explanation? Could there be any other causes?

I had a talk with Morris Coats, and we came up with a brief list of possibilities concerning people’s expectations. In other words, perhaps we are witnessing a global slowdown right now because people expect:

- Higher taxes in the U.S.;

- More economic regulation (Obama promised to let the EPA regulate CO2);

- Less global trade (Obama promised to renegotiate Nafta unilaterally (or not));

- Obama to reinstate the ban on offshore drilling that was recently lifted;

- Democrats to nationalize the U.S. healthcare system;

- Democrats to take over 401(k)’s.

Or, perhaps investors are nervous because the U.S. government has started to nationalize the world’s most formidable financial industry and appears ready to nationalize the auto industry. Or, maybe people in foreign countries are doing worse because the U.S. has stopped importing cheap labor, relegating would-be workers to countries with few jobs.

All of this adds up to heightened uncertainty regarding a significant portion of the world’s commerce. Why would added uncertainty be a problem, you may ask? Here’s the basic story:

People invest based on the return they believe they will get over time (i.e., in the future); when something happens to make that future even murkier, they tend to require a greater return on their investment; If they don’t think they will earn that rate, they won’t invest; If they don’t invest, we end up with fewer goods, services, and jobs.

Financial crisis? Expectations? I suppose I’ll have to pick one, but I’d prefer to wait till the whole thing is over.

NM

On the positive side, we learn that the City has fined approximately 400 property owners nearly $3 million for failing to take care of their property during the three years since Katrina. Of course, there’s a negative side. WWL reports “…there are 358 properties owned by the city, just over half, 183, are labeled in-operational.” Don’t worry, it gets worse.

The City’s Department of Property Management is responsible for maintaining all city-owned buildings, but the person overseeing this department says that they can’t inspect all these properties because the department is understaffed. It turns out the Department of Property Management only has 80 people on staff.

Maybe Ed Blakely can help out by providing a complex mathematical model for scheduling blighted property inspections. The model could explains how to divide 358 by 80. The City paid him $150,000 per year, he should be able to handle this.

NM

(9) TROUBLED ASSETS.—The term ‘‘troubled assets’’ means—
(A) residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; and
(B) any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress.

So, basically, the bill gave Secretary Paulson the authority to buy anything he and the Fed Chairman decide they need to buy. The fact that the Treasury is buying stocks in companies doesn’t really require a renaming of the plan. Stocks, after all, can certainly be defined as “any other financial instrument.” Under the language of the bill, these actions are completely justified.

The bigger problem is all the “credit” we keep throwing at the “credit crisis.” According to this article, a New York research firm estimates the U.S. government has committed nearly $5 trillion to solving the crisis (so far). That’s a bunch of tax dollars, and represents about 40 percent of GDP. I’m sure 95 percent of us will get a tax cut pretty soon, though.

NM

A good answer seems to be: banks had a ton of “cheap” money to lend out. The logic is described nicely in this article, which a friend emailed me earlier today. (The article describes an interview with Ted Forstmann, the man behind a very successful private equity fund.)

Essentially, the government has subsidized lending, which means we get more of it than we would have otherwise had. If you’re running a bank, and you lend money to all of the borrowers you deem “good” risks, but you still have funds to lend, who will you lend to? That’s right, higher risk customers.

This is the sort of problem that gives economists a bad name. It is very easy to predict that too much money in the system will lead to some sort of crisis. It is very difficult, though, to predict exactly when it will show up. Of course, nobody pays attention to the practical economists who argue we shouldn’t be messing around with the money supply in the first place.

NM

It was easy to predict, for instance, that companies from other industries would soon have their hands out. Now, it seems that the U.S. automobile industry will be one of the first non-financial companies to line up for some tax dollars. Credit card companies, such as American Express, may also begin getting in on the act, though the line between non-financial and financial is a bit blurry for these guys.

I’ll even go out on a limb: the homebuilding industry won’t be too far behind. After all, an over-supply of housing is at the root of this crisis.

What’s really interesting is the legislative horse trading going on. Apparently, bailing out the automobile industry is going too far for some Republicans and Bush (though I am surprised to learn there is such a limit). The auto industry bailout is acceptable to the Democrats, though. So, something has to give, right? How about throwing a Columbian free trade agreement into the mix?

The Republicans want a deal, the Democrats don’t. Even though these two events - an auto industry bailout and a free trade agreement with Colombia - have very little to do with each other, it appears the Dems may be willing to cave on the free trade agreement as long as Bush caves on the auto industry bailout.

It’s interesting to observe the horse trading, but it’s impossible to ignore the reality: we’re on the verge of nationalizing the financial industry and the auto industry. For example:

To forestall a voter backlash, Obama aides and Ms. Pelosi separately made clear they intend to impose significant conditions on federal aid. Auto makers would have to offer the government equity stakes or warrants, one Obama adviser said, and would have to accept the same rules on executive compensation that financial-service companies have swallowed with the Wall Street rescue.

It is becoming clearer almost every day that the “financial industry bailout” is badly misnamed.

NM

Now, if only one of us knew what was going on with the financial crisis.

NM

Just to recap, we’ve had unprecedented stimulus policy in the last seven years. We’ve had rebate checks in 2001, 2003, and 2008. We’ve also had broad tax cuts (not just for the top bracket) during this time period. And, we’ve had an extremely accommodating Federal Reserve; that is, the Fed has been trying to get the economy going with monetary policy.

Yet, we hear constant chatter about how bad the economy is doing:

-The nation’s unemployment rate bolted to a 14-year high of 6.5 percent in October as another 240,000 jobs were cut, stark proof the economy is almost certainly in a recession.

-The jobless rate zoomed to 6.5 percent in October from 6.1 percent in September, matching the rate in March 1994.

-October’s decline marked the 10th straight month of payroll reductions, and government revisions showed that job losses in August and September turned out to be much deeper. Employers cut 127,000 positions in August, compared with 73,000 previously reported. A whopping 284,000 jobs were axed in September, compared with the 159,000 jobs first reported.

If you believe these measures are accurate, then you must have at least some doubt in the effectiveness of stimulative fiscal (not to mention monetary) policy. A basic thought experiment explains why this stuff may not work: if someone gives you $500, that does very little to change your long-term position in life. In other words, the $500 check does very little to help you provide for family beyond the current month.

These stimulus check are not about fixing and/or “managing” the economy. These checks are about buying votes. It’s no coincidence that Pelosi, not Harry Reid, has been preoccupied with sending out more checks – redistricting in the House will take place in 2010. As noted in this Weekly Standard blog post, redistricting “is the only time politicians chose the voters instead of vice versa.” Pelosi wants to do everything she can to add to her party’s lead in the House.