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131. What Markets Are Saying

Author:
John H. Makin
Publication Date:
06-2005
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
Paul Samuelson once quipped elegantly that (falling) stock prices had predicted seven out of the last three recessions. There is indeed wisdom in the suggestion to ignore wiggles in the financial markets as indicators of the behavior of the real economy that produces goods and services.
Topic:
Development, Economics, and Government
Political Geography:
United States

132. The Difficult Search for "Neutrality"

Author:
John H. Makin
Publication Date:
05-2005
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
The Federal Reserve's measured move toward a "neutral" federal funds rate, the short-term rate that keeps the economy growing at about 3.5 percent, is a tricky process. No one knows with certainty what the neutral fed funds rate is, and it changes over time. As long as the Fed keeps raising rates and the economy keeps growing at or above trend, it is reasonable to infer that the neutral fed funds rate is higher than the current rate. The corollary to that proposition is that rates have to be boosted above the neutral rate, inducing an asset market collapse, a real economy slowdown, or both to infer that the neutral rate has been exceeded. It is beginning to appear as though the current rate of 2.75 percent is at or above neutral. If so, that would be about a full percentage point below what many were guessing.
Topic:
Development, Economics, and Government
Political Geography:
United States

133. Greenspan's Second Bubble

Author:
John H. Makin
Publication Date:
04-2005
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
I knew Alan Greenspan had his first bubble in late 1999 when cab drivers were too busy talking to their brokers on cell phones to talk with customers. The "cab driver test" flashed its second bubble warning light to me just recently when I arrived in Key West for the annual winter vacation with my family. Without any prompting, our cab driver told us of a Key West real estate market on fire. Condos that were selling a year ago for $600,000 could not be touched for $1 million today, while the units under construction were sold four times over before anyone even thought of occupying them. The old hotels were being torn down to be replaced by condos that were selling like hotcakes before construction had begun. Meanwhile, room rates and rental rates in Key West have hardly budged. The implied return on investment in real estate is tied to an expectation of ever-rising prices, not to income from property.
Topic:
Economics, International Trade and Finance, and Political Economy

134. Should Americans Save More?

Author:
John H. Makin
Publication Date:
03-2005
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
Alarmists who call for American households to save more point to a steady drop in the conventionally measured U.S. saving rate to about 1 percent at the end of last year and to a rise in household debt to a level well over 100 percent of personal disposable income. The current account deficit, our external deficit, measures national dis-saving at close to 6 percent of GDP. The federal government's budget deficit contributes about 4 percentage points to national dis-saving and it, too, is the subject of considerable hand-wringing by those who point to a need for higher U.S. saving at both the household and national levels.
Topic:
Economics, International Trade and Finance, and Political Economy
Political Geography:
America

135. Slower Growth

Author:
John H. Makin
Publication Date:
02-2005
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
The average forecast for 2005 U.S. growth is 3.5 percent, with some prognosticators hoping for 4 percent. This forecast is predicated upon the assumption that the economy is on a sustainable expansion path, where consumption will be supported by steady growth of employment and household incomes. The 3.5 percent growth forecast for 2005 is identical to the mean growth rate of the U.S. economy since 1947. However, there is good reason to believe that the consensus forecast is too high. This possibility has important consequences because U.S. growth must be sustained at least at average levels to avoid a sharp drop in global growth. There are no signs of higher growth in Europe and Asia. Growth in Japan is looking weaker, while Chinese growth is moderating.
Topic:
Economics, International Trade and Finance, and Political Economy
Political Geography:
United States, Japan, China, Europe, and Asia

136. What Determines Interest Rates?

Author:
John H. Makin
Publication Date:
01-2005
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
The pundits who have been predicting higher interest rates based on large U.S. budget and current account deficits have some explaining to do. Beyond the fact that very little systematic empirical evidence exists of a close link between deficits of any kind and interest rates, many high-profile commentators such as Robert Rubin and Pete Peterson, not to mention Pimco's Bill Gross, have consistently warned that long-term interest rates would rise as America's budget and current account deficits rose. Actually, U.S. longterm interest rates have been falling-from 4.8 percent in early June to 4.1 percent at year-end. Despite this stellar performance, Gross has even gone so far as to suggest that U.S. government liabilities should be downgraded from their top rating of AAA to AA.
Topic:
Economics, International Trade and Finance, and Political Economy
Political Geography:
United States

137. Head Start's Broken Promise

Author:
Douglas Besharov
Publication Date:
10-2005
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
For forty years, Head Start has sought to improve the life prospects of low-income children. Since 1965, about 20 million children have gone through the program at a total cost of more than $100 billion. Head Start was supposed to be reauthorized in 2003, but for two years Congress was immobilized as the Bush administration and its Republican allies pushed for what they saw as needed improvements in the program—while Democrats and the Head Start establishment argued that the proposals would hurt poor children. The impasse was broken earlier this year when key Republicans gave up their efforts to change the program. Committees in both Houses have now voted unanimously to expand eligibility for Head Start. The Senate bill would raise the income-eligibility cap from the poverty line to 130 percent of poverty (a roughly 35 percent increase in the number of children eligible for the program), and the House bill would allow programs to enroll more one-and two-year-olds, rather than their traditional target group of three- and four-year-olds (ultimately doubling the number of eligible children).
Topic:
Development, Economics, Education, and Government

138. Energy Conservation: An Economic Perspective

Author:
Robert W. Hahn
Publication Date:
10-2005
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
With oil and gas prices at record levels, Persian Gulf producers threatened by terrorists, and exploding demand from China likely to strain supplies for years to come, surely it is time for Washington to get serious about energy conservation. Well, yes . . . and no. While most economists (including me) are deeply skeptical about the value of government mandates for energy efficiency, in principle there is a case to be made for using taxes to “internalize” the costs of consumption that are not otherwise reflected in prices. But those costs are lower than you might expect—lower, perhaps, than the taxes currently charged at the pump. Moreover, while oil-security worries are now driving the calls for conservation, a careful look suggests that the neglected costs are actually related to traffic congestion and the threat of global warming. Taxing oil consumption (as opposed to taxing road use or carbon emissions) would hardly get to the roots of these problems.
Topic:
International Relations, Economics, Energy Policy, and Terrorism
Political Geography:
China and Washington

139. Why Is the World Bank Still Lending?

Author:
Adam Lerrick
Publication Date:
11-2005
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
World Bank money is building schools in China's impoverished western provinces, but the bill for interest charges is being mailed to the United Kingdom, attention Chancellor of Exchequer Gordon Brown. Mexico, Chile, and Brazil will soon be lining up for the same deal. This is but the latest scheme designed to preserve the World Bank's lending role at a time when the need and demand for its services are falling. Major middle-income countries, the cream of the bank's lending portfolio and where more than 80 percent of Latin Americans live, are curbing their borrowing and paying down their balances, setting off alarms at the bank. Net loan flows have shifted from a positive $10 billion in 1999–2001, to a negative $15 billion in 2002–2004.
Topic:
Debt, Development, Economics, and Third World
Political Geography:
China, United Kingdom, Brazil, Latin America, Mexico, and Chile

140. Milton and Rose Friedman: Liberty's Couple

Author:
Lawrence B. Lindsey
Publication Date:
12-2005
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
In the company of history's great revolutionaries, Rose and Milton Friedman stand out as clear anomalies. Diminutive in stature and modest in speech and manner, they cannot easily be imagined manning the barricades or hectoring the crowds from a soapbox. Most important, unlike other visionaries who sought to change the world, the Friedmans did not say, “Put us in charge of the government, and we will make your life better.” Rather, they argued that governments then in charge should get out of the way so that individuals could get on with the job of making their own lives better. Their 1980 book Free to Choose successfully instigated a revolution in public policy because it offered conservatives both a rhetorical weapon and a legislative program. Until then, the Left had a clear advantage on both scores. Rhetorically, the Left promised compassion and equality and packaged them with programmatic action in the form of ever-increasing government power. Those opposed to an ever larger and more intrusive state were thus forced to defend hardheartedness and inequality, and to oppose legislative change.
Topic:
Civil Society, Economics, Government, and Politics