Wisconsin in the Red

The National Conference of State Legislatures budget update shows Wisconsin to have a $3.1 billion deficit for FY 2010. Which is about 20% of the budget.

Here is the Financial Times interactive map on state budget deficits.

If you click through, you will see that WI joins CA, AZ, NV, FL as being deep in the red. These states were some of the hardest hit by the drop in home prices.

While I am sure WI has been affected by falling home prices, it can't be to the extent of these four states, can it? How then have we gained membership in this budgetary rogue's gallery?

H/T @tac blog

Representative Jeb Hensarling Underestimates the Popularity of Vanilla

Representative Hensarling (R-TX) is a a member of Congress and a member of the Congressional Oversight Panel (the body set up to oversee the TARP program). He recently had and OpEd in the Washington Times denouncing the proposed Consumer Financial Protection Agency (CFPA). To some extent this is an act of airing the panel's internal squabbles since the panel chairperson, Elizabeth Warren, is an outspoken proponent of the CFPA.

Hensarling argues:

The CFPA will further harm consumers by stifling innovation. It is doubtful how many financial firms will choose to invest in research, development and consumer testing on new products, only to discover later the CFPA deems them to be "unfair" and thus unlawful. Had the CFPA existed 25 years ago, we would probably have no ATMs, frequent-flyer miles or debit cards. Functionally, a new federal bureaucracy will now be in charge of research, development and product approval for almost all new consumer-financial products.

No frequent ATMs, flyer miles, or debit cards would be bad, but on the other had we probably wouldn't have credit default swaps or liar loans either.

Seriously, with the CFPA no ATMs? And I thought all of the hyperbolic alarmists were Democrats. This sounds like one of those global warming screeds where Jamaica is going to be underwater and Kansas will be the Sahara in ten years if don't all stop mowing our lawns and exhaling. Now!

Here is Elizabeth Warren writing at The Baseline Scenario describing the CFPA and its goal:

The CFPA will not limit consumer choice. Instead, it will focus on putting consumers in a position to make choices for themselves by streamlining regulations, making disclosures smarter, and making financial products easier to understand and compare. The Agency will promote plain vanilla contracts—short, easy to read mortgages and credit card agreements. The key principle behind the new agency is that disclosure that runs on for pages is not real disclosure—it’s just a way to hide more tricks.

Memo to Hensarling: I like vanilla. A lot of people like vanilla.

Responsible people who spend the majority of their time working hard to provide for their families and have 2 or 3 or maybe even 5 mortgages over the course of their lifetime could greatly benefit from simple straightforward financial products that allow them to make good decisions. Good decisions which will, in turn, benefit society as a whole. While I believe the Republicans have abandoned much of free market philosophy to pursue a slavish devotion to corporations, they haven't given up this bedrock principle, have they?

But wait! Warren is for simplification, so is Hensarling. The Congressmen includes this in his piece:

Proponents claim disclosures for some financial products are too complicated for people to understand and that bad apples in the credit markets try to confuse consumers to make a quick buck. They are right.

That's why House Republicans have developed a regulatory reform plan that will simplify consumer disclosures and bolster the anti-fraud protection efforts of existing federal agencies. For too long, government mandates or lawsuit fears have encouraged companies to provide voluminous disclosure, often written in legalese.

So its agreed. Simplification and honest dealing are a good thing. It remains to be seen what version, if any, of financial reform on the consumer level is enacted: Warren's, the House Republican's, or some other version.

Given her history of advocacy on behalf of consumers and her forthright description of how the CFPA might work, I am hopeful that the end result will be closer to Warren's idea than any other.

I am willing to give the Republican plan a chance, but as of now the plan heralded by Hensarling is almost a complete unknown. If it turns out they are just serving up another of the 31 flavors of protecting wealthy and connected special interests rather than the American people, I'll have to pass.

I always liked vanilla.

Pelosi vs. Conyers

Here is Speaker Pelosi on CNN's State of the Union program from last weekend responding to a question about the possibility of doctors opting not to treat Medicare and Medicaid patients if the final health care reform bill reduces reimbursement rates:

Well, in the legislation and in our broader agenda here, we have initiatives to promote more doctors, especially in primary care, but perhaps if they're more familiar with what the bill actually does. And that's why we want to finish this third piece so that we can have a document that people can make judgments about. [EA]

And here, of course, is John Conyers, a Democrat from Michigan, assessing the chances that he, or other members of Congress, will actually read the bill:

“What good is reading the bill if it’s a thousand pages and you don’t have two days and two lawyers to find out what it means after you read the bill?”

So lawmakers won't be able to read and understand the bill, but doctors will?

Wisconsin Eighth Congressional District (WI-8)

The Sitemeter has shown several hits lately from folks searching on Wisconsin's eighth congressional district (guess it's never too early), so I thought I would put up some helpful links.

As of today, the OpenCongress Racetracker for WI-8 shows three Republican and one Democratic declared candidates. The Republicans are:

• Marc Savard - Savard for Congress
• Reid Ribble - Ribble for Congress
• Andy Williams - All I could find was Andy Williams on the Brown County Board site, so I'll link that. Memo to anyone from the Williams campaign: Do you have a website yet? I realize it is early, but I think that would be the minimum from day one of the campaign. I tried several variations on a google search, but couldn't find anything.

The lone Democrat is the current congressman, Steve Kagen. Here is Kagen4Congress, and The Official website for Representative Steve Kagen.

I contacted Kagen's Green Bay office today to see if they had any plans to hold public events during the August recess. They indicated that nothing firm had been set at this time.

Issues affecting the WI-8 are covered regularly on this blog and there is also good coverage at Lakeshore Laments.

If anybody has any additional links they would like me to include, email them to me.

How Many Toxic Assets Can I Get for $700Billion?

Apparently, none.

The plan last fall under Secretary Paulson, and then reiterated by Secretary Geithner again this spring, was to use the $700 billion in TARP money to purchase toxic assets in order to get them off of bank balance sheets. This was intended as a way to stabilize the financial sector; but for various reasons the purchases never took place.

The current consensus seems to be that the worst of the financial crisis is behind us and there isn't a need to buy these assets from the institutions holding them. If it wasn't the removal of these assets that helped the banks weather the crisis, then what was it? In this case I think blogger Matthew Yglesias gets it exactly right:

Rather than seeking congressional authority for vast new spending on recapitalization and pissing off wealthy financiers by seizing banks and firing people, they took the view that a strategy of regulatory forebearance and loose monetary policy would let the banks recapitalize themselves through profits.

And here's James Kwak at The Baseline Scenario:

If the banks can make money fast enough to compensate for the toxic assets they never got rid of – which is the administration strategy – then that is good in that it reduces the risk of another financial system panic.

I'm not quite cynical enough to suggest that Paulson & Geithner never intended to buy a single toxic asset. It seems more likely that while this plan appeared to be a great idea on paper, it just became entirely too complex to implement. Given that, and the fact that the Congress had already authorized a substantial sum of money with rules loose enough to allow them to change their plans, that is what they decided to do.

So if letting the banks recapitalize through profits ultimately works (and there is no guarantee that it will) then score one for the technocrats. What would the implications of this success be for future congressional intervention in matters economic or otherwise?

Perhaps most importantly, could the utter failure of the TARP to be anything like it was described during its consideration and passage into law serve as a cautionary tale for other legislative initiatives? What if the health care debate results in a law touted as providing universal coverage or bending the cost curve? How certain can we be that either stated goal will ever be accomplished?

At the very least, I think Secretary Geithner owes me something for the pixels I sweated over producing this description of the Public Private Investment Program (PPIP), a species that will probably never exist. Now I know how unicorn biologists feel.

One measure of racial equality in Wisconsin

Unfortunately it's a sad one. In a post on obesity, race, and region I came across this sentence:

Note that in Wisconsin the black and white overweight rates are almost matched.

At 62.1% and 61.3% respectively.

Via MR

From Nick Barnett's Twitter Feed

My oldest is the banana. Never been so proud.

Why Inflation May Be The Threat Of The Future

James Hamilton of Econbrowser from his chapter in The Road Ahead for the Fed:

The reason I find that loss of Fed independence to be a source of alarm is the observation that every hyperinflation in history has had two ingredients. The first is a fiscal debt for which there was no politically feasible ability to pay with tax increases or spending cuts. The second is a central bank that was drawn into the task of creating money as the only way to meet the obligations that the fiscal authority could not. Every historical hyperinflation has ended when the fiscal problems got resolved and independence of the central bank was restored.

Surely it is not far-fetched to suggest that the U.S. faces a profound political challenge in using spending cuts or tax increases to meet its current and planned fiscal obligations.

I think the current debate makes clear that we already have the first ingredient for a hyperinflation. It remains to be seen if we can avoid adding that critical second half of this recipe for disaster.

Why Inflation Is Not The Threat Now

I've mentioned once before Economist Scott Sumner's blog. Sumner blogs on monetary issues. Like the popular New York Times columnist Paul Krugman, Sumner thinks that the main threat currently is deflation, not inflation. Unlike Krugman, Sumner argues that monetary policy is still effective and can address the current crisis alone, without government spending (fiscal policy).

Unlike almost all other economic commentators these days, Sumner argues that currently and last fall the Fed was pursuing a tight money strategy.

Two items from Sumner's FAQ section on his blog:

2. But weren’t interest rates cut to very low levels?

Interest rates are a very misleading indicator of monetary policy. Both in the early 1930s and late 2008, falling rates disguised a tight money policy. The rates were actually falling for two reasons. Expectation of recession led to less borrowing and thus lower real interest rates. And inflation expectations also fell sharply.

3. But didn’t the monetary base increase sharply?

Yes, but this is also misleading for two reasons. During periods of deflation and near-zero rates, there is a much higher demand for non-interest bearing cash and bank reserves. In addition, last October 6th the Fed began paying interest on reserves, which caused banks to hoard bank reserves.

So low interest rates don't necessarily indicate an a loose monetary policy and even if the Fed pursues a money creating strategy, increased demand for holding cash can thwart this.

The label contrarian gets thrown around so much these days it's lost most of its punch. But the notion that recent monetary policy has been tight seems to be one of the few current views truly worthy of the description. Fed Chairman Ben Bernanke however, is doing what he can to make the contrarian label outdated. Writing in a Wall Street Journal Op-Ed he notes:

When the Fed makes loans or acquires securities, the funds enter the banking system and ultimately appear in the reserve accounts held at the Fed by banks and other depository institutions. These reserve balances now total about $800 billion, much more than normal. And given the current economic conditions, banks have generally held their reserves as balances at the Fed.

Bernanke goes on to argue that one way to control inflation, if and when it becomes the major threat, is through the payment of interest on bank reserves, encouraging them to hold cash rather than lend it out. The use of interest on reserves as a tool of monetary policy has been one of the major ideas of Sumner's blog.

But Bernanke is still talking as if we are in a period of loose monetary policy; for example he mentions, "[w]hen the time comes to tighten." When the time comes? We may be tightening now and not even realize it.

So if Sumner is right, not only is inflation not the current threat, but recovery could in fact be slowed or prevented outright. What if what looks like an expansionary monetary policy is, in fact, the exact opposite. It is difficult enough to determine the best policy approach to economic recovery; overcoming the fact that a policy may be doing the exact opposite of everything we think it is doing may be an insurmountable obstacle to recovery.

Liberal Bloggers Take On Mankiw, But Why?

Warning - Name dropping set-up. Just read to the end, I'll keep it short.

Liberal blogger Matthew Yglesias links to a post at The New Republic in which TNR's Jon Chait quotes another liberal blogger, Ezra Klein, on conservative economist and blogger Greg Mankiw. In the piece Chait refers to Mankiw as a, "poorly-informed pundit."

So you've got three stars of the left blogosphere in a coordinated attack on Mankiw. The thrust of the gripe: Mankiw is critical of Obama's health care reform and refuses to promote any of the as yet non-existent cost reduction measures. Here's Klein:

There are at least four ideas in the health-care reform debate that have the potential to deliver on long-term savings. Mankiw does not make mention, or even reference an awareness, of any of them.

Well, apparently Mankiw isn't the only one that hasn't addressed these since the bill that came out of the House of Representatives doesn't seem to address these either.

The director of the Congressional Budget Office recently said that in the House proposal he does, "not see the sort of fundamental changes that would be necessary to reduce the trajectory of federal health spending by a significant amount."

So why would these guys, who purport to care about meaningful health care reform, spend their time knocking Mankiw's take instead of working on the people that are going to, you know, actually craft and vote on the legislation?

Petri/Kucinich Alliance?

OK, not really, but Open Congress reports they agreed on this:

During the House Education & Labor Committee’s mark-up of the health care bill (H.R. 3200) today, Rep. Dennis Kucinich [D, OH-10] proposed and passed an amendment that would remove legal barriers barring a state from creating a Medicare-like single-payer health care system to guarantee insurance for all of their citizens.

Thirteen Republicans voted with Kucinich, including Wisconsin's own Petri.

This would allow states to create their own single payer health care systems.

Recent debates have largely turned on the question of whether or not the federal government should get involved in what is largely private enterprise (autos, banks, health care). There is another question, though, that in my mind is just as important.

We have many other levels of government in this country, some of which might be better suited to address the concerns of the citizenry. Maybe sometimes there is a need for government intervention, that doesn't necessarily mean it has to be the federal government.

OK, One More Lehman

One of the refrains that has been heard accompanying the string of government bailouts over the last ten months has been, "no more Lehmans." This refers to the Lehman Brothers financial firm which declared bankruptcy last fall after the federal goverment did not come to its rescue. An event which some see as a major contributing factor to the weak economic conditions since then. Hence the refrain.

True to their word, we really haven't seen any other Lehmans since then, but we just might.

News today has centered around the possible bankruptcy of CIT Group. That's C-I-T, not C-I-T-I, and that might be why they are allowed to fail. Dad29 had coverage of the potential CIT bankruptcy in response to my post on the federal bailout of GE Capital. CIT is a lender to many small and medium sized businesses, which would be negatively impacted by its failure.

Today, economist Simon Johnson covers CIT at his blog, The Baseline Scenario:

Traditionally, CIT provided vanilla loans to small and medium-sized business. “But under its current chief executive, Jeffrey M. Peek, a well-liked Wall Street veteran who lost out several years ago in a race to run Merrill Lynch, CIT made an ill-timed expansion into sub-prime mortgage and student lending” (NYT today).

What happens to CIT will help define exactly where we are with regard to “too big to fail.”

At the end of 2008, CIT had total assets around $80bn, which was about 1/10th the size of Goldman (and about 1/25th the size of Citigroup) and puts it just outside the top 20 publicly traded financial services company. Presumably, it just missed the cut for inclusion in the government’s recent “stress tests”.

So in this case, CIT is the quintissential marginal firm. Whether or not it receives a bailout should clearly indicate what the federal goverment thinks about which firms need to be saved given the current economic environment. Maybe.

Johnson, an MIT economist and former IMF official, is often pessimistic about the prospects for effective governmental intervention in, and reform of, the financial sector. On this story, he seems downright cynical as he ends on this note:

So then it all comes down to political donations. At least in terms of what is in the public record, Mr. Peek has not been overly generous, but he did give money to John McCain – and not to any Democrats. If this is in fact the limit of his recent contributions, I think you know the outcome.

Perhaps its the case that CIT doesn't represent the kind of risk that Lehman did. However, a seemingly haphazard approach to bailouts has its own kind of corrosive effect on the economy.

Stimulus Helps States Avoid the Tough Choices

At least that's how I see it. Liberal blogger Matthew Yglesias had a somewhat different take when he noted recently that, "that stimulus funds are sharply reducing states’ needs for tax hikes or budget cuts."

He goes on to say that since conservatives argue against raising taxes during a downturn, they shouldn't argue for budget cuts either since, in his words, budget cuts:

[H]ave the same pro-cyclical impact. I’ve heard people say that the problem with stimulus is that it ignores the need for the economy to make structural adjustments. But huge state budget cuts don’t make structural adjustments easier, they simply increase the quantity of structural adjustments that are needed.

Doesn't increasing the quantity of structural adjustments make these adjustments tougher in the future?

Federal stimulus money allowed states to continue spending beyond their means and left all of the tough choices for the future, like a time capsule filled with nothing but trips to the dentist you put off and all the vegetables you refused to eat as a child. Even here in Wisconsin, the budget in no way prepared us to face an uncertain economic future.

When it comes to state budgets, why should we put off structural adjustments? If the new equilibrium is simply less arts education in our public schools because property tax revenues have fallen sharply and are not likely to rebound any time soon, aren't we better off getting the art teachers out of the classroom now? They could start training for all of those healthcare IT jobs that are always being touted as sources of future employment and (!) ways to reduce healthcare costs. Maybe we could even pay for the training with that soda pop tax Yglesias is always pushing.

Cap & Trade Keeps Getting Better

Senatus reports a new development in the continuing saga of the cap & trade legislation:

A bill (S. 1399) introduced yesterday by Senators Dianne Feinstein (D-CA) and Olympia Snowe (R-ME) would “give the Commodity Futures Trading Commission full authority over markets that buy and sell pollution permits issued to companies as part of a climate change plan to cut greenhouse gas emissions,” Reuters reports.

It’s called the Carbon Market Oversight Act....

A press release issued on the bill states that it “is designed to prevent Enron-like fraud, manipulation and excessive speculation in the new federal, state and regional carbon markets that will be established by such a system.”

There was at least one Enron program that was supposed to be regulated by CFTC, but wasn't due to the ability of Enron to lobby (some would say bribe) powerful people to secure an exemption from oversight. We all know how that turned out, don't we.

Think of the opportunities for enrichment presented to the powerful and connected by a new and complex scheme of government mandated carbon emission levels, combined with government issued emission permits, traded on a governmentally regulated exchange. No doubt the folks at Goldman Sachs have already set up a war room from which to execute their strategy.

This is what is known as Regulatory Capture. For those of us that are doing neither the regulating nor the capturing, the end result isn't good.

Paul Ryan on Cap and Trade

Here's Wisconsin's own Paul Ryan speaking on the floor of the House regarding Waxman-Markey (Cap & Trade).



There really is no need to debate just how severe the problem of man made global warming is, or if it is even a real phenomenon, since the bill itself offers so little in that regard. Big sacrifices for little in return is a pitiful way to legislate.

One might wonder exactly what is the purpose of this bill if it offers so little in the way of reducing CO2 emissions worldwide. It would be crazy to suggest that the purpose of such legislation was to hamstring the US economy while those in the developing world were allowed to run free, wouldn't it? Is it really possible that there are members of congress so enamored with a vision of global equality of outcome that they would pursue such an agenda?

Where's my tinfoil hat?

Does the US subsidize European healthcare?

In the debate over healthcare, those in favor of a public program often refer to the success of the European system. Well Atlantic blogger Megan McArdle offers up some thoughtful points on just what drives the difference between the two approaches.

Of particular note was this:

we're still driving quite a bit of product innovation. Our messy, organic, wasteful, unfair, irrational system allows experimentation, and they cherry pick the best results. If we stopped doing this, their system would stop looking so good.

I've often heard the argument that massive American defense spending during the Cold War, including direct spending on the defense of European nations, helped to make the modern European welfare state possible. We paid for much of their defense, allowing European governments to spend money on domestic welfare programs. This is the first time I have seen the argument that the innovative nature of our healthcare system improves the systems of other nations. In essence, they get to free ride on our R & D. It's an intriguing thought.

One of the things that I often wonder about healthcare research is how much of it is driven by the desire for commercial success, and how much is driven by other factors? Not necessarily altruistic ones, but matters of professional prestige and plain old ego. The chance to save thousands (or even millions) of lives through a new procedure or drug seems like a pretty powerful incentive for medical researchers. Though such an incentive may not be enough for the people paying the bills during the years of research necessary to create such a breakthrough.

It appears that Jonas Salk was more interested in finding a cure for polio than profiting from a cure for polio.

Kagen Votes with Democrats 99% of the time

Congressional Quarterly has its analysis up of the voting records of the members of congress.

Their analysis shows that Kagen votes with Obama 88% of the time. This is not entirely surprising given the President's personal popularity.

More discouraging is his record on what CQ calls Party Unity. This is defined as voting with one's party on an item where a majority of Republicans oppose a majority of Democrats.

Kagen's Party Unity number is 99%. This may explain his recent inability to deviate from the party line when voting for cap and trade.

Kagen also scored a 97 on participation, which I give him credit for. It's clear he is in Washington to do business. Now if we could just get him to concentrate on the business of the people of Wisconsin's 8th congressional district.
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Here is the vote analysis for the complete House and Senate in case you want to check Baldwin, Kind, Petri, and others.