Notice a pattern here?

Today's NYT column by Tom Friedman rehashes some familiar themes from his World is Flat opus, including the impact of technology and globalization on labor markets.  But his last paragraph is thought-provoking:

Last week, the 32 winners of Rhodes Scholarships for 2011 were announced — America’s top college grads. Here are half the names on that list: Mark Jia, Aakash Shah, Zujaja Tauqeer, Tracy Yang, William Zeng, Daniel Lage, Ye Jin Kang, Baltazar Zavala, Esther Uduehi, Prerna Nadathur, Priya Sury, Anna Alekeyeva, Fatima Sabar, Renugan Raidoo, Jennifer Lai, Varun Sivaram.

And we want to still make it hard with foreign nationals with advanced degrees from US universities to put down roots here? 

Deadweight loss on Delta Airlines

I am sitting in the Delta Sky Club at JFK airport.  Made a business trip to Nice France this week to visit Skema Business School and was returning today with my colleague John McCreery.  Plane from Nice arrived early and as we cleared customs at 2:30 we saw there was a plane to Raleigh leaving at 3:10, well before the ticketed 7:02 departure on a later flight.  Immediately went to the Delta Sky Club where a very helpful person at the front desk told us we could book the earlier flight for $50 (all luggage was carryon, otherwise that would have been a deal killer).  But by then it was slightly less than 30 minutes before departure and she could not get into the system to book the flight.  She said to go to the gate and they would take care of the situation. 

The folks at the gate said we had to go to Customer Service, an obvious oxymoron for the Delta crew at JFK today.  There were at least eight people behind the counter but no one acknowledged our presence for at least a minute at which point we simply moved to the counter and asked for help.  The initial response, "We cannot do that."  In other words, just go away.  Then we explained the situation: plane does not leave for 25 minutes, we have no checked luggage, we are willing to pay $50 apiece to get home four hours earlier, and there are empty seats on the 3:10 plane (and who knows we could free up seats they could sell on the 7:02 plane).  Nope, "cannot do that." My take: these people did not want to be bothered to help anyone -- they seemed much more interested in visiting with each other. 

Finally asked to see a supervisor and she offered us a great deal: pay $250 apiece plus any difference in the ticket price that might be associated with a walkup fare.  (Delta management -- you might want to make sure your employees give consistent answers.)  At this point we were thoroughly disgusted and retreated to the Sky Club to watch football (Go Pack! Go Sparty!). 

This is a classic case of a deadweight loss, but it is not associated with government regulations or price ceilings.  We were ready to pay Delta for seats that were open but they would not sell them to us.  There really were no excuses other than Delta's thoroughly rotten employee/management culture at JFK. 

QE2 backlash overseas and at home

Things I thought I would never see: Brazil lecturing the US for printing too much money.  At last week's G-20 summit, President Obama received a considerable amount of criticism from his colleagues around the globe for the Fed's recent actions.  WSJ summarizes the concerns succinctly:

Printing more dollars, or cutting U.S. interest rates, tends to weaken the dollar and makes U.S. exports more attractive. The accompanying rise in the value of other countries' currencies tends to damp their exports and can fuel inflation or asset bubbles, as emerging-market officials note. U.S. officials maintain the Fed's action is about stimulating domestic demand, and that a weaker dollar is a consequence, not an objective.

There are two questionable links in this argument: will interest rates fall that much and, even if they do, will the lower rates have a sizable impact on the dollar's value relative to other currencies.  The value of the dollar also depends on the volume of transactions between the US and its trading partners and the relative prices of goods in the US compared to the rest of the world.  If goods in the US are cheaper (more expensive), that increases (decreases) the demand for the dollar and raises its value.  The economics profession has a justifiably humble record in predicting currency movements, so it is far from clear whether the dollar's value will be affected at all by QE2. 

On the home front, well known monetary economist Sarah Palin weighed in with her concerns.  According to the same WSJ piece, she asked Ben Bernanke to "cease and desist" QE2 and channeled her inner Marty Feldstein saying "It's far from certain this will even work." You betcha.

The deficit commission chairmen weigh in

This week we saw a draft list of recommendations for eliminating the federal budget deficit, issued by the deficit commission's co-chairs Erskine Bowles and Alan Simpson.  I must say, after producing this document and finding Randy Woodson, Erskine has had a pretty good year.  In broad strokes, the commission has dealt with the fundamental issue -- the structural deficit is four percent of GDP and to close that deficit we must generate more tax revenue and reduce spending.  Roughly half of the gap will be closed through each mechanism.  Major changes: elimination of most major tax deductions including those for mortgages and health insurance, higher gasoline tax, delay the age for Social Security eligibility, higher ceiling for Social Security payroll tax, and cuts in domestic and military spending.  On the plus side, dropping the tax deductions opens up the opportunity for significant decreases in income taxes with top rates of 23 percent for individuals and 26 percent for corporations.  The latter development would be especially helpful as the current 35 percent rate is one of the highest in the world.

What's next?  The bi-partisan commission has 18 members and 14 of them must agree to any final recommendations.  If they pass that first test, the Senate and then the House would consider enacting deficit-cutting legislation during the lame duck session coming up.  Nancy Pelosi already has told NYT that the initial recommendations are "simply unacceptable," but that won't matter as much when the new Congress takes office next year. 

Bernanke: What the Fed did and why

Op-ed on today's WP.  What keeps Bernanke up at night? High unemployment plus the fear that very low inflation might yet become deflation.  The Fed is going to buy an additional $600 billion of long-term securities which it hopes will lower long-term interest rates.  This should encourage investment by lowering the cost of capital through one of two channels.  First, with lower Treasury yields corporations and state and local governments also will be able to lower the coupon rates on newly issued bonds.  Second, bond prices will rise and thereby shift private investors to the stock market, raising stock prices and thereby making new stock issues more attractive.  Bernanke also thinks higher stock prices will raise consumption and stimulate the housing market. 

So what's not to like?  I see two issues: (1) long-term interest rates are already at historical lows, will making them even lower make that much difference (more technically, how elastic is corporate investment and housing to lower interest rates?) and (2) the stock market has seen this coming for some time, so any stock appreciation may have already happened (look at the charts for September and October).  Harvard's Marty Feldstein (who taught macro to Harvard PhDs when I was there) sees even more serious issues.  In a FT op-ed on Tuesday, he argues that easing now runs the risk of creating yet another bubble in asset prices that will deflate once interest rates return to normal levels.  What would Marty do? 

The truth is there is little more that the Fed can do to raise economic activity. What is required is action by the president and Congress: to help homeowners with negative equity and businesses that cannot get credit, to remove the threat of higher tax rates, and reduce the out-year fiscal deficits. Any QE should be limited and temporary.

The case for more stimulus

MBA 505 students are just starting the module on macroeconomics.  In the interest of balancing the link to Jeff Miron's article criticizing the stimulus packages, I am linking to a recent Paul Krugman column where he argues that the stimulus packages did not go far enough and much more stimulus is needed.  My students might want to start thinking about why two top notch economists can come down so differently on this issue.