Latest economics column

The economic clouds are gathering. The storm is approaching to level a devastating disaster not only on America but the world. Soup kitchens will have lines going around the block. Now a once roaring decade has closed with financial turmoil and the aftermath is perhaps a decade or more of misery.

If you are confused whether this is 2008 or 1932 you are not alone. In 1932 the United States had to choose between two equally bad candidates Herbert Hoover and Franklin Delano Roosevelt. In 2008, did America again have a choice between two equally bad candidates? The history still hasn’t been written. Yet, the truth is we have yet to hit the depression everyone has been panicking about. The current economic climate is not just "a mental recession" as one foolish adviser to Sen. John McCain said. The recession is very real. However, it is time for the media's and the fatalist’s view of the economy to come to an end. The fact is we know what caused the depression and though the current solutions are not perfect, the economy will bottom out and turn around much sooner than we expect.

There are a whole host of reasons why the Great Depression occurred, yet what many of us fail to realize is during that horrible period people were learning what happened and how to avoid another depression. The economists now know why the Depression was so long and so devastating: government intervention in the economy.

Let's look at a massive government expansion program - the New Deal. Five years into Franklin Roosevelt's presidency the unemployment rate was still at a scary 19 percent, according to the Bureau of Labor Statistics. This is admittedly better than 24.9 percent in 1933, the first year of Roosevelt's presidency, but that means there are thousands and thousands of willing workers who still could not find jobs.

Unfortunately, Roosevelt made a massive blunder during the New Deal named the National Industrial Recovery Act (NIRA). This allowed business owners with government support to act as cartels, brush away antitrust laws, set price floors and raise wages. In some cases, economists put the wages 25 percent higher than they otherwise would have been. Most people would think there is nothing wrong with raising wages, however, this act of legislation was only beneficial to those lucky enough to have a job in 1933.

The main economic problem with the NIRA is business worked with the government in setting prices and wages too high. When employing high wage workers, businesses have to cut back on the number of jobs available and that is exactly what happened. Two economists, Harold Cole and Lee Ohanian, demonstrated through economics that Roosevelt prolonged the Depression not shortened it.

The fact is unemployment did not reach adequate levels until 1942, after the United States joined the Allies in World War II. Roosevelt thought excessive competition among businesses was causing Americans to work less. When the NIRA allowed for businesses to fix the wages of workers it reduced competition between employers to provide jobs. The politicians and populists fail to understand that when the labor market is restricted employers stop hiring employees. Competition is the workers friend not the enemy.

Not only did the New Deal not end the Depression but Americans worked less. Cole and Ohanian wrote, "Total hours worked per adult, including government employees, were 18% below their 1929 level between 1930-32, but were 23% lower on average during the New Deal (1933-39). Private hours worked were even lower after FDR took office, averaging 27% below their 1929 level, compared to 18% lower between 1930-32."

This does not mean that Herbert Hoover could have ended the Depression either. He raised taxes and tariffs because he thought the national debt was more important than unemployment. By raising tariffs this reduced trade and isolated Europe from the United States. When trade decreases there are less jobs because there are no goods and services being exchanged, therefore less workers are needed.

For those of you who thought there was little choice between Obama and McCain, you should look to 1932 when the only choices were: making the Depression longer with Hoover's high taxes and tariffs or Roosevelt's restrictions on prices and wages. We all should be thankful that employment hasn't hit 25 percent and that we did not have to choose between two evils of equal magnitude. A depression is still far away thanks to our grandparents’ efforts. But it is time for a more realistic and pragmatic approach to fixing the economic crisis and it is called letting the free market work.

Kathleen Sebelius HHS

Obama would be better served by not nominating Kathleen Sebelius to become Secretary of Health and Human services.

Reason? Democrats in Kansas are precious. Senator Sebelius is better than Secretary Sebelius. Democrats are likely to pick up at least two more senate seats in the upcoming election especially with Sebelius.

Too bad Daschle turned out to be a failure for Obama because he really was the best person to push health care reform.

By the way, whatever happened to Sanjay Gupta? Oh yeah he supposedly accepted the Surgeon General job and nobody has noticed.

New Deal Prolonged the Depression

Restored my faith in humanity

I am just glad someone has common sense.

The Metropolitan's New Website

*I have done a lot of posts so make sure to check out the older ones.

Anyway, I am a writer for the Metropolitan (more commonly known as the Met).

It is a weekly publication that covers happenings on at Metropolitan State College of Denver where I am the beat writer for hockey and baseball. I am also the assistant sports editor. However, most importantly to you I also write regular economics column - I am an economics major not a journalism major.

You can check out the website which is updated weekly at http://www.mscd.edu/~themet/. Click on sports for sports articles and insight for my column. You can also scroll down to the bottom of any of my articles and click my name to see all of them.

* I might also be a regular guest on Metro's politcal radio program which you can access http://metradio.mscd.edu/

To give you a taste I will copy and paste this week's economics column:

Wednesday, February 11, 2009
Opinion

Robert Dran
rdran@mscd.edu

You can count me out of the populist rhetoric when it comes to executive pay. Surely taxpayers have a right to be angry at the use of their hard-earned money going to corporate bailouts. However, all the talk that executives are overpaid only covers up the government's inadequate management of the bailout. As much as us poor folk like to show malice to those richer than ourselves, there is actually no good economic reason for it.

Ironically, Obama's executive order to cap the salaries of corporate executives is the best way to end the bailout. This may sound odd at first, but there are solid incentives behind this argument. In order to end the government bailouts, there needs to be a disincentive for the companies to accept the bailout. Well, limiting salaries is a massive disincentive to receive government bailout money. The investors are better off kicking the bad executive out and bringing a good one on board to fix the company. The public's anger should be directed at Former Treasury Secretary Henry Paulson and Former President George W. Bush for encouraging bad management – not corporate boardrooms.

First, it’s probably best to explain why corporate executives get paid so much. The reason is there aren't a lot of executive quality people. For all the MBAs out there, there are still too few people with the skills and experience to run a multi-billion dollar corporation; therefore the supply of available corporate executives is pretty small. On the flip side, there are a lot of companies out there looking for good CEOs, so if you need some good management, you have to pay for it. In a free market, corporations punish other corporations for paying their executives too much or too little. Too much and the company is less efficient than its competitors. If they pay too little, then the executive has an incentive to leave for another company. As the saying goes, good help is hard to find.

Does this mean executive pay is always perfectly in line with supply, demand, efficiency and needs? The answer is no. The fact is when you are a corporate executive of a large company you are in charge of billions of dollars. So getting a few million to manage several billion really sounds like a pretty good deal. But if management fails to manage well, then it's the company's fault. It is not the government's responsibility to patrol every company to make sure they are not overpaying. In fact, the reason we have this financial crisis is that the government has gotten too involved with how the market works. Government promotes poor management of companies. One great example is the failure of the Securities and Exchange Commission to stop Bernie Madoff – the guy who made off with investors' money. Investors have the false belief that they don't have to monitor the company because the SEC is doing it for them while the SEC is actually in cahoots with Bernie rather than the investors they were "meant to protect."

So, you might ask, why do bad executives get paid so much money? Good question. Bad executives get paid a lot of money to leave companies – golden parachutes. If you are in a high-demand market, then you have the right to demand a certain amount of financial security. If things go wrong then the company simply pays you to go away. Executives have a lot of power, but they are responsible to their shareholders. However, if you have a bad executive and you fire him, instead of paying him to leave, the executive will fight and you get a lot of chaos and disorder, which is bad for the company. So instead, you pay the executive to go away and the shareholders can install a new executive. This works because the shareholders get a new man in charge with no boardroom fighting and the executive gets paid for his time and avoids a corporate war.

Who thought poor executive management could be solved through bribes? Just because there are bad overpaid executives out there, that does not mean there are monopolies – the government – needs to make things more efficient. The concept of large companies taking away jobs is simply incorrect. The fact is more than half of all jobs come from small business. Most sources of information put it at 80 percent of total jobs.

I will agree, though, taxpayer money going to bonuses for boneheaded executives is insulting. Nevertheless, this is not the corporation's fault: it is the government's. Paulson and Bush are the ones to blame for handing out this money. The bailout was a horrible idea. There is already the FDIC, which federally insures bank accounts in case a bank collapses. For you and me there is no reason to bail these guys out. Luckily, Obama is unintentionally killing the bailout with the limits on salaries.

Interesting Column

I tend to be a Fareed Zakaria fan. I highly recommend his book The Post-American World the book sounds like the end of the American Empire when it is in fact a book about how the Americans can live with the rise of other countries.

Anyway Zakaria has come up with quite a gem about Canada's banking system.

Obama really messed up

I have a hard time believing that Obama's appointments could have gone any worse.

Tom Daschle was a major blow to Obama's agenda. Though I find this to be a good excuse why the American tax system needs to be changed.

Treasury Secretary Tim Geithner was really lucky that we are in such a mess that Republicans and moderate Democrats thought any delay would be a catastrophe.

Governor Bill Richardson always struck me as a guy with several skeletons in his closet. Nevertheless, it would have been nice to use his experience.

Now we got Senator Judd Gregg which just goes to show that Obama was not suspicious enough of his nominees. The Obama crew should have interviewed the hell out of him. It seems to me that at this point to claim he just wasn't on board as an accuse is just pretty damn dumb.

At least Obama's crew kicked him to the curb in their press release.

Fivethirtyeight has a good blog on Gregg.

PA Judges

This is the worst thing I have heard in a long time

I can't believe that they can get only 7 years for this. It is times like these that make me question where or not we should have the death penalty.

Work load

Well I won't be updating the blog that much this week because I am writing three sports articles and a column for my college paper.

Once I am down to baseball and my economics column I will update more. Hockey season ends this week so I am doing two stories on them.