I Bought Nothing Today

I take that back. I spent $1.85 on a cup of coffee from Great Harvest Bread Company, but it wasn’t even that good.

The irony of our financial crisis is that we are being asked by our leaders to do the very thing that got us here in the first place: consume. Especially with it being the Christmas season, the time when many retailers get most of their revenue. They need our money in order to stay in business, but we don’t want to give it to them.

And with good reason.

Consumption has been the United States’ mantra for a long time. Today’s sad story about a Wal-Mart employee trampled to death in New York should serve as a poetic reminder that consumption can be deadly. I mean, we already knew it was deadly in the countries where our stuff is made. Working conditions in industrial cities in China are deplorable, equivalent to the turn-of-the-century textile mills and meatpacking plants that we know today only by reading Sister Carrie and The Jungle. It’s worse in African countries where wars are started by diamond companies so that they can get cheap diamonds to sell at huge profits to Western men whom they’ve convinced to spend 25% of their salary on an engagement ring. It’s rare, though, for the pain and suffering caused by American consumerism to occur here on our shores.

Consumers are not so worried now about having the nicest house, the newest car, or the most stuff. They have bills to pay. President Bush’s stimulus idea of last year — to give taxpayers between $300 and $600 in free money — did nothing to help the economy. That’s probably because most people who received such a check didn’t do what they were supposed to with it. President Bush wanted them to go out and buy cars, refrigerators, computers, but consumers wisely decided to save it, or use it to pay their credit card bills. The time is nigh for rampant consumerism, fueled by an advertising industry designed to convince people that they need things that they really don’t. “Black Friday” deals this year were all the more enticing because retailers understand they won’t make that much money this year. Nevertheless, they want to get rid of whatever they can. Which entices consumers to spend, which means they’ll use credit, which means we’ll end up right back where we started.

John Kenneth Gailbraith, in The Affluent Society, bemoaned modern economics’ emphasis on production and output as the sole indicators of a healthy economy. These metrics tell us how well businesses and the wealthy are doing, but not much else. Even Simon Kuznets, the inventor of GDP — that most favored of the statistics that indicate economic health — thought that “the welfare of a nation can scarcely be inferred from a measurement of national income.” GDP (Gross Domestic Product) is the total output of all the goods and services produced by an economy. It can be calculated using the income method, or the expenditure method, with the latter preferred due to its simplicity. GDP is consumer spending plus government expenditures plus capital investment, plus net exports (exports minus imports). GDP places an emphasis on making stuff and spending money. Critics of GDP correctly note that it does not take into account volunteer activity, non-spending production (like that of housewives who don’t work), the black market, happiness, recycled goods, or the quality of goods and services being produced. Annual GDP growth in the United States is about 3%, but how much of that is fueled by cheap crap from overseas? The mantra is that any production is good production, but we have seen that not to be always the case.

And unrestrained production is not sustainable. I used to roll my eyes at phrases like “sustainability,” particularly due to the frequency with which I heard the phrase, due to living next to Berkeley. Maybe it’s the stuff they put in the water in Alameda County, but over the last few years, I’ve come to understand what sustainability means. It means growing a rate that can be sustained over a long period of time, not growing so much that resources are exhausted. If you’re wondering what to get this year for the people on your Christmas list who are hard to buy for, here’s two ideas: a DVD of Dr. Seuss’ The Lorax, a copy of Ishmael, and a copy of Ecotopia. (Even better, get all this from a used book store.)

Environmentalism, consumerism, national security — they’re all intimately related. They all depend on us changing our habits, buying less, and if we do buy things, buy recycled and re-used things, so that more resources are not needlessly spent. Consumption is the way to get us out of this financial crisis, but it’s also the way to get us right back into it.

A Scottish Bounce? Labour Stuns the SNP

If British Prime Minister Gordon Brown completes an unbelievable rise from the realm of a political dead man walking, he’ll have his native Scotland to thank. In what was thought only months ago to be the last stand for the Prime Minister,  there came a resounding victory in the Glenrothes, Scotland by-election on last November 6th.  Of course, the electoral statement of Scottish voters is a reaction to the economic realities of the day. It is the end product, not the cause. However, it will nonetheless be remembered as a symbolic watershed moment if Mr. Brown is to complete an amazing Labour comeback in time for the general election, which could occur as early as next spring. While most opinion polls have shown the Tories up by least 10-15 percentage points for most of the calendar year, the most the most recent opinion poll shows the Tories clinging to a mere 41-35% advantage.

So what happened at Glenrothes?

The open seat was caused by the death of Labour MP John MacDougall, who won comfortably in his 2005 reelection bid. However, in 2007, the Scottish National Party (SNP) took over the Glenrothes council and won the nearby Scottish parliament seat of Central Fife. In general, the SNP’s rise over the past few years has been indirectly correlated with the fortunes of the Labour party. Labour had recently lost two safe seats, Crewe and Nantwich and Glasgow East, both in by-elections. In fact, SNP First Minister Alex Salmond’s rhetoric recently has been very confident about taking most Scottish seats in the next general election. What made this seat all the more symbolic is that Prime Minister Brown resides over a neighboring district. Glenrothes was seen by many for months as the possible impetus to finally overthrow the unpopular Prime Minister.

However, to the surprise of many, Labour candidate Lindsay Roy, who happens to be the headmaster at Mr. Brown’s old school, defeated the Scottish National Party candidate Peter Grant by a resounding 18 percentage points.

What likely caused this surprise Labour victory?

First of all, one shouldn’t discount former American Speaker of the House Tip O’Neill’s famous words that “all politics is local.” The local SNP-controlled council has made some unpopular decisions regarding taxes that undoubtedly didn’t help them at the polls.

However, I believe the larger lesson lies in the current financial crisis. Although Prime Minister Brown shares much blame in the lack of fiscal control during the boom times that is now somewhat impeding the actions of the government, he does have much credibility economic issues, being the former finance minister. With the financial crisis as his opportunity, Mr. Brown has begun to govern as a populist who is out to help the people from the excesses of the market (of course ignoring the fact that he certainly didn’t help to prevent these excesses). Bailout of banks? Of course. Overall, this bounce could likely recede as times continue to get tougher for several generations of British who have never collectively experienced tough times outside of the history books. Will Labour call an early election? Probably not.  My belief is that 2010 is a safe bet. However, one thing is clear–Gordon Brown and Labour are far from dead.

What about the SNP?

Simply put, regional parties and the sentimentalism that comes with talk of Scottish independence are great ideas in better times. However, in tough economic times, one must look at practicalities and absolutes, and not at historical idealism. How would an independent Scotland be fairing in the current economic crisis? Probably as well as Iceland, which has been a Scottish example for independence in better times. Of course Britain is not exactly in the best shape right now either, but its diverse economy has the ability to weather this shock much better than would an independent Scotland. Local rule for local issues? SNP control of local councils? Of course. However, sending regional-minded representatives to Parliament during a global economic downturn may not be as popular in the days ahead.

The Electoral College and Unemployment

Senator Obama retains a significant advantage in our latest electoral college projection. If the election were held today, we estimate that Obama would win somewhere between 318 and 378 electoral votes. Senator Obama’s current tipping point states are Colorado, New Hampshire, and Virginia. All three states are listed as “Likely Obama.” The bottom line is that if Obama wins either Colorado OR Virginia, he will become the next president.

State	Electoral Votes (EV)	Obama-McCain (%) (538 and Pollster)	Total Obama EV		State Unemployment Rate (%)
MN	10	7.75	255		6.2
NM	5	7.00	260		4.6
CO	9	6.25	269	Likely Obama	5.4
NH	4	6.15	273		4.2
VA	13	6.00	286		4.6
FL	27	3.65	313	Lean Obama	6.5
NV	5	3.00	318		7.1
OH	20	1.85	338		7.4
NC	15	1.30	353		6.9
MO	11	1.05	364	Toss up	6.6
ND	3	-0.35	367		3.6
IN	11	-2.35	378		6.4

As you see above, we also have included the unemployment rate of all competitive states. Since the financial crisis has changed the fundamentals of the race, we thought it was important to look at such an endogenous variable and how it could affect each competitive state. What’s interesting about these figures is that the jobless rate is much higher overall in “Lean Obama” and “Toss up” states than it is in “Likely Obama” states. While only one out of five “Likely Obama” states has an unemployment rate that is higher than the national average (6.1%), six out of seven more competitive “Lean Obama” and “Toss up” states have unemployment rates that are higher than the national average. This indicates the possibility of even further growth for Senator Obama among the states that are currently the most competitive.

Demockracy and Popcorn: Wall Street

In light of the recent financial crisis and turbulent markets, we’d like to recommend the 1987 classic, Wall Street. Wall Street stars Charlie Sheen as a young stockbroker (Bud Fox) who learns the ropes from a veteran broker played by Michael Douglas (Gordon Gekko). Gekko teaches Fox the gospel of greed and much more along the way.

Here is a very timely quote from Gekko (speaking to Fox):

The richest one percent of this country owns half our country’s wealth, five trillion dollars. One third of that comes from hard work, two thirds comes from inheritance, interest on interest accumulating to widows and idiot sons and what I do, stock and real estate speculation. It’s bullshit. You got ninety percent of the American public out there with little or no net worth. I create nothing. I own. We make the rules, pal. The news, war, peace, famine, upheaval, the price per paper clip. We pick that rabbit out of the hat while everybody sits out there wondering how the hell we did it. Now you’re not naive enough to think we’re living in a democracy, are you buddy? It’s the free market. And you’re a part of it. You’ve got that killer instinct. Stick around pal; I’ve still got a lot to teach you.

We highly recommend adding this movie to your Netflix queue:

Dow Below 10,000

On sharp declines resulting from European banking troubles, the Dow Jones Industrial Average fell below 10,000 for the first time since October 25, 2004:

From a historical perspective, it’s interesting to look back to 2000 when writers were predicting the index would climb in perpetuity. In fact, one author predicted the DJIA would hit 36,000.

We’ll bail out you and all your friends; want to buy some wooden arrows?

While all of America was busy with Sarah Palin and Joe Biden, the House of Representatives just passed the Senate’s version of H.R. 1424, the Emergency Economic Stabilization Act of 2008.

But that’s not all they passed.

Lawmakers in Congress, when faced with a do-or-die piece of legislation, restrained themselves and limited the legislation only to those things that were absolutely necessary to solve the current economic crisis.

Just kidding! H.R. 1424 has more pork than a Texas barbeque festival. Everyone in Congress saw this bill as a free lunch and packed it full of all the earmarks they could ever want, since the bill needed to be passed and the picayune portions couldn’t be debated, for the sake of time. Thanks, Congress.

The bill contains three divisions. The first is for economic relief. Fair enough.

The second division is a completely different piece of legislation, the Energy Improvement and Extension Act of 2008. It deals with energy emissions and renewable energy credits. How is this related to economic recovery?

The third division is even better. It is the Tax Extenders and Alternative Minimum Tax Relief Act of 2008. This bill is something Democrats have wanted for a long time; namely, increasing the exemption from the AMT, which was designed to catch those people who were using tax loopholes to avoid paying taxes. Unfortunately, the AMT has also ensnared middle-income Americans in its net. Good idea to give those people exemptions, but what is this legislation doing here?

And by the way, Division C doesn’t just deal with the Alternative Minimum Tax. Here are some other fun tax incentives that have been rolled into this absolutely necessary legislation:

• § 202 of Title II extends the exemption of school supplies purchased by elementary and secondary school teachers until 2009.
• § 308 of Title III increases the limit of the rum excise tax to Puerto Rico and the Virgin Islands.
• § 309 of Title III extends an economic development tax credit to American Samoa until 2010.
• § 310 of Title III extends expensability of mine safety equipment until 2010.
• § 311 of Title III lengthens the tax credit of “domestic production activities” in Puerto Rico until 2010.
• § 314 of Title III lengthens an Indian employment tax credit until 2010.
• § 317 of Title III increases the cost recovery period of a “motorsports racing track facility” to 2009.
• § 502 of Title V extends tax exemption for “qualified film and television productions” to 2009.
• § 503 of Title V exempts from excise tax “certain wooden arrows designed for use by children.”

Tracking Poll Update: Obama +7

Today’s tracking polls are important in that they are the first tracking polls to include only interviews conducted after the first debate on Friday.

9/30:

Gallup Daily: O+6
Rasmussen: O+6
Diageo/Hotline: O+6
Research 2000: O+10

Simple Average– O+7
Adjusted Average– O+6

Notice that today, for the first time, three out of the four tracking polls have exactly the same Obama advantage of +6, and therefore the adjusted average (excluding outlier trackers) of Obama +6 is a full percentage point different from the simple average of Obama +7. However, regardless of whether Obama’s lead is 6 or 7, trends have been moving wildly in his favor recently:

9/25: O+3.25

9/26: O+5

9/27: O+5.5

9/28: O+6.5

9/29: O+6.75

9/30: O+7

It is unclear how much of this movement is the result of the first debate, McCain suspending his campaign, and/or the crash of the financial markets. My guess is that the latter is having the most effect, but the other two factors are indeed interacting with this to create such a precipitous decline for Senator McCain.

In fact, for the first time, Pollster.com’s regressions shows a statistically significant 5 percent point lead for Obama with 95% confidence.

Here’s a look at the trends:

Trends:

Simple Average

9/8:M +2.0

9/9:M +2.0–Height of McCain’s convention bounce

9/10: M +1.4

9/11: M + 1.0

9/12 :M +1.0

9/13: M+1.5

9/14: M +0.25

9/15: Tied—Bounce is naturally fading back to a tied race

9/16: O +1.25

9/17: O+2

9/18: O+3.5—First tracking polls to include financial meltdown numbers

9/19: O+3.25

9/20: O+4

9/21: O+3.25

9/22: O+4—Race appears to be stable for the time being.

9/23: O+3.25

9/24: O+3.75

9/25: O+3.25

9/26: O+5–Stability ends. Majority of sample comes after McCain’s “suspends campaign.”

9/27: O+5.5—Complete sample comes from after McCain “suspends campaign.”

9/28: O+6.5

9/29: O+6.75

9/30: O+7–Complete sample comes from after the first debate.

Waiting For Clarity on the Bailout? Don’t Wait Too Long

I don’t want to sound too alarmist, but among the circle of economists whose countenance I keep, the question now is whether it will even matter in a few more days who wins this election.

A day in which all of the major US equity indices were down by amounts ranging from six to ten percent is a bad day on Wall Street in the eye of even the most un-astute follower of these things. However, what most people don’t realize is that every time an equity market loses value the margin traders in our midst must react by selling even more equities to cover their positions.

Therefore, tomorrow is the day to watch for a major sign: if equities are down another eight percent, there could be no coming back for the foreseeable future; there just isn’t enough liquidity to cover those kinds of positions. Two or three more days like this one and the banking sector will pretty much come totally unglued. A week of these kinds of losses, and–I never thought I’d say this–the question of whether Barack Obama or John McCain reaches 270 electoral votes will not make the slightest difference to the national agenda.

Bailout burns, markets crash

The bailout went down today thanks to a unique alliance between the far right and the far left.

Here’s a look at the vote by party:

Democrats: 140 For, 95 Against
Republicans: 65 For, 133 Against
Total: 205 For, 228 Against

When was the last time we saw a vote like this? It was probably when a bipartisan alliance came together to kill the immigration reform bill.

The markets responded to the defeat of the bailout bill with the largest one-day losses in history.

So, what’s next? Those who are against this clearly want different things. The left wants more regulation, the right wants less regulation, and the center wants to do something. Most agree that something needs to be done. But, most also agree that the current bill was ill contrived and not the appropriate solution.

Filed Under: Freedom Feed
Tagged: bailout bill, congress, defeat, Financial crisis, market crash, Wall Street

Breaking: Bailout Deal?

September 28, 2008 by Kevin Van Dyke, Editor · Leave a Comment 

That’s what the New York Times is reporting late Saturday/early Sunday.

More as the day goes on…

Filed Under: Freedom Feed
Tagged: bailout deal, Financial crisis

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