Jim Libby's Economic Policy Blog

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2011-07-03T05:39:00.000-07:00

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Saco River Chronicles 30 Minute Interview

2010-07-15T09:39:00.002-07:00

Watch an interview regarding my new book, Buxton, on Saco River Chronicles by clicking the title above.

2010-05-09T18:52:00.000-07:00

2010 GOP Convention

On Saturday, May 8, I had the pleasure of giving a speech at the Maine G.O.P. Convention.

Why Favor Private Enterprise? The Cases of the University of New England and Maine's Community Colleges

2010-03-19T17:30:00.000-07:00

One of my early lessons in economics class is to explain to students about the difference between to well-known terms: "crowding in" and "crowding out." When government expands programs that a private business is willing to offer, that is an example of crowding out. When government privatizes a function, the new private provider has crowded in. So the question that is often raised in economics as it pertains to the public dollar is, can a private enterprise provide this necessary function effectively?

For Maine citizens, the story of the University of New England (UNE) provides an excellent example of what can happen when government decides not to crowd out. A few years ago, I gave a speech at UNE. I was a member of the Maine Senate, considering a run for governor at the time. There were about 100 people gathered in a function room to hear my thoughts on economic development. I assume that many came to hear about how government could create jobs. They were in for a surprise.

I started with the story of UNE. They looked surprised, but interested. What could I tell them about their own institution that they did not already know? Soon they had their answer. The audience was interested to learn that I gained my finance degree from Nasson College, their old rival from Sanford that was forced to close its doors due to competition and a bad economy. UNE was called St. Francis College at that time, and St. Francis was in the same dire shape as Nasson. So my story began with a reminder of one of our former independent governors, Jim Longley. One major battle that he fought and won made him very few friends. The Maine Legislature decided that because Maine did not have a medical school, it was critical that government create one. So the bill was debated and passed. No more sending Maine students to Vermont or elsewhere for medical training. We need our own med school; end of story.

Well, not quite. Jim Longley governed in an era when resources were scarce (sound familiar?). Longley was convinced that the Legislature had made the wrong decision in their vote to establish a medical school in Maine, to be funded by the taxpayers. It was already difficult to fund the University of Maine System, as well as the many other state programs and holdings. So, in what had to be his most difficult decision, Jim Longley vetoed a medical school for Maine. The veto held.
As you can imagine, the room at UNE got really silent after I uttered the word, veto. I could hear an ohh...in the crowd. Suddenly the students, faculty, staff, and visitors at UNE realized, almost all at once, that had it not been for Longley's incredible foresight, the amazing success story at UNE would never have taken place. In fact, St. Francis may very well have met the fate that Nasson College lived in 1983. Its doors may have closed. Instead, UNE took up medicine, and the rest is history. UNE has a $100 million dollar yearly budget, and employs nearly 1000 faculty and staff according to their website. Could the Maine taxpayer have footed this bill and generated this success? I leave that up to you.

It's a lesson in private enterprise. It's somewhat ironic that I have two brother-in-laws who are trained physicians with a UNE degree. It's an incredible campus. From near bankruptcy to a Maine success story over the past twenty five years...all due to the fact that UNE was able to turn its curriculum to medicine in order to fill a void intentionally left by Governor Longley. Thanks Jim.

I had a lot of responses after that speech. All were positive. So here is my attempt at another story of government "crowding out."

Let's look at the Maine Community College System. When we read about it in the local newspaper, it sounds fabulous. Good leadership, an expansive network of campuses. A wide curriculum at a low cost. What could be better?

Well, we might want to ask, "what if Governor Jim Longley were still alive? What would he say?

My best estimation of his veto speech follows. We miss you, Jim.

Citizens of Maine. I am vetoing the bill that restructures the Maine Technical College System into a new community college system. With the help of my economic advisers, I have come to the conclusion that expanding from specific, technically-based degree programs to include a new general education curriculum may only serve to damage already-existing private organizations offering the same courses and degree programs. While subsidizing a community college will surely offer low-priced credits to the public based on the state's ability to set price, we estimate that the public dollars necessary to provide a community college system will lead to a severe impact on the private sector. Growth and development from the privates will be stunted.
Many associate degree programs currently offered by the privates are likely to be discontinued within ten years. Furthermore, there may be direct competition between the University of Maine System and the proposed Maine Community College System. While low-priced courses will likely cause successful growth in the student population for the new community colleges (we estimate as high as 10% per year growth in student population in community college campuses), the direct competition with the University of Maine System campuses would likely lead to sparse budgets, layoffs, and difficult times ahead for our already-existing University System. Rather than create a business climate that is hostile to both public and private enterprise, we hope to see more private opportunities for our students, so that the increased supply of offerings itself drives down tuition pricing. We fear that the establishment of a new community college system will instead cause both private institutions and the UMaine System to escalate their tuition far beyond the rate of inflation. In the long-run, even the community colleges will meet this pricing fate due to state budget and resource shortages. We should nurture, not starve our private partners. Some private campuses may even be forced to close, particularly small colleges such as Mid-State College in Auburn and potentially others. While this proposal may especially wreak havoc on smaller campuses such as Fort Kent and Machias, the larger institutions of Orono and Southern Maine will not be spared fiscal pain. Program consolidations and outright program eliminations are the likely result of a state budget spread too thin.

As history bears witness, let my veto of a state-wide medical school and the success encountered by the University of New England serve as a guidepost for those who would question my equally difficult decision to veto the creation of a Maine Community College System. I pledge to work to forward to the people of Maine an accessible system of higher education, including vigorous but niched technical college programs, based upon the creation of a better working partnership between existing private and public resources. The fostering of a more positive climate for private business development in Maine will lead to stronger job creation and a thriving economy, with bright prospects for higher education positioned at its very core.

Cash for Clunkers, Credit Card Legislation Fails to Look at Long-Run Economics

2009-08-03T05:33:00.000-07:00

Two recent developments in economic regulation point to Congress and the President as a source for problem generation rather than problem solutions.

The "Cash for Clunkers" program is being touted as a successful program, but further examination may cause people to think otherwise, at least in the long run. For example, after only one week, the President was forced to suspend the program, as it ran out of money to provide rebates to purchasers of automobiles. The rebates of $3500-$4500 to consumers who purchased more fuel efficient cars have been put on hold while Congress discusses dumping another $2 billion into the program. But at a rate of $1 billion per week, how long will that last?

What is being missed by many is not the fact that people have cashed in on "free" money, which they have. The economic question is, what is the goal of this program? If the goal is to breath short-term life into dealerships and the automakers, that's one thing. But if the goal is to help pull the U.S. out of the recession, that is quite another. The outcome of this program is sure to be a group of consumers who now find themselves in even more debt from the purchase of a new automobile...even at a discounted price. While the vehicle purchase may be a bargain in good times, additional debt is not a good idea for most people during a recession. In a recession, additional consumer debt will likely prolong the economic problem. The solution to lift the economy out of the morass is simple, yet difficult to achieve. U.S. consumers need to maintain a higher savings rate over a prolonged period of time. That outcome equals long-run additional buying power and the ability to sustain consumption, and therefore "demand-pull" and captial investment environments that will last more than just three weeks. Remember, this discussion does not even address the problem of a ballooning federal budget deficit, which is also a direct result of the Clunker's program. Taxpayers (you) are helping 250,000 people or so buy themselves a new car, with the result being that they owe more in loans, and you owe more in taxes. This is in a period where the unemployment rate is climbing and payrolls are being cut.

Developments with the "Credit Card Holders Bill of Rights" are just as perplexing to some economists. By passing legislation that does not go into effect until 2010, Congress and the President have, in effect, given the credit card industry a window in which to raise interest rates on consumers. A quick look at provider's credit card rates will prove that they have done just that. Consumers struggling to get their debt under control have seen their rates go up by 30-50% in some cases. The major credit card provider culprits will go unnamed in this article, but the bottom line won't. The outcome has been that consumers with balances are paying hundreds, even thousands more for purchases that they made months, even years ago. Many also face higher minimum payments and lower credit lines as well. Again, the question should revolve around the goals of this government program. Did a Congressional impact analysis reveal that these problems could occur? That is doubtful. And, could Congress and the President have left that 2010 window open intentionally to appease the credit card industry during the hearing process? Don't bet against it. So the outcome is this: consumers with revolving credit are under much more stress, not less.

The mentality of government appears to be that we should simply take the short-term approach and borrow our way out of problems. That should be no surprise, given the fact that Congress must be re-elected every two years. About one-third of Senators are up for election as well. Even the President's four year term leaves him looking over his shoulder at polling data. And with the Federal Reserve System more concerned about bank profitability than the sustainability of consumption (direct evidence: quantitative easing, discount window activity), my prediction is for a continued rocky road ahead. With a massive amount of treasuries being sold to finance bailouts, and the spectre of inflation resulting from an unprecidented quantitative easing operation (massive unchecked money supply creation last year), the pressure on the average person's budget could reach a breaking point sometime in 2010, when liquidity is stressed.

In the mean time, expect stock prices, oil and interest rates to continue to rise as a direct result of the quantitative easing, not due to added value. It will take more dollars to buy stocks and oil/gas simply because these auction-type markets are not very sticky. Inflation will rear its head in sticky markets later. Early inflationary markets (EIM"S) indicate to me that the recent stock market rally, which has been nice on paper for investors, is probably a false, inflation-induced event.

The country needs long-term economic thinking from its leaders. With our current system mired in short-term influences, it may take nothing less than a visionary to accomplish the task.

Buxton

2009-03-31T02:33:00.000-07:00

My new book, Buxton, is available now at Amazon.com and at my publisher's website, Arcadia.com, as well as Borders.com and Borders retail locations. Several other Maine retailers stock or can order this book.

Update: This book reached # 3 on the Border's softcover non-fiction bestseller list that appeared in the Maine Sunday Telegram on April 19, 2009.

For more details, visit: http://www.amazon.com/Buxton-ME-PHS-Postcard-History/dp/0738562157/ref=sr_1_5?ie=UTF8&s=books&qid=1240675019&sr=1-5#reader

Thumbs Up to the IMF

2009-03-24T17:04:00.000-07:00

A note of congratulations should be sent to the International Monetary Fund for the posting of the new Datamapper on their website. I sent them a note. If you have not been logged on lately, you should. This global information system is hard to beat. It is a powerful tool that is very easy to use.

The best part of the Datamapper is that you can hover over any part of a world map and with a quick mouse click you can immediately access reams of data on that country and quickly convert that data to a simple, easy-to-read graph. Site visitors can graph GDP over time for any country in the world. My International Trade and Investments class mapped current accounts last week with ease. One tool allows the user to download graphs and data onto a Word document for research reporting, etc. My Macroeconomics class is currently working on convergence demonstrations.

Seriously - this tool will make Excel look like ancient history in no time. Check it out. I can't believe that it is free.

Response to Student Question About Stimulus Package

2009-02-18T13:38:00.000-08:00

Adam Tudela, a first-year student at Thomas College, asks the following question...I thought that I would share this with readers of my blog:

Q: what are you thoughts on economic stimulus packages? Fundamentally, are they a good idea? Have they worked in the past?

In general, I believe that the stimulus is necessary. If one were to follow the theories of John Maynard Keynes (who believed that government should slow overheated economies and stimulate under performing ones), then the need for stimuli is equally counterbalanced by the need to slow overheated economies down (a de-stimulus) when necessary as well. Since neither the Federal Reserve System (via monetary policy tools of interest rates, the money supply, and the required reserve ratio) nor Congress/President (through tax and spending fiscal policies) did much to slow the progression of the commercial and residential real estate bubble and mortgage mess (along with the excesses in the futures market, particularly oil), I am left with little doubt that these two entities remain unable to properly manage the economy at the margins.

Having said that…I still have not given up on Keynes. We simply need more intelligent policy making. For example, in a good economy, a tax cut is not the best idea…but if President Bush wanted tax cuts to be a major element of his presidency, then he would need to have reduced spending at the same time in order not to over-stimulate an economy that was already producing above “full-employment” output (from 2005 through 2007). A side-benefit to this strategy is "crowding in," when private business sees opportunity to provide services to those who no longer are government dollar receivers.

Unfortunately, President Bush didn’t reduce spending, and now President Obama can’t. It appears to me that President Bush went the way of a cheap dollar, strengthening exports…that was an error in judgment only in not understanding that heavy war spending should not be combined with tax cuts and a weak dollar policy.

Today, to make things worse, the Federal Reserve (the entity with the power to “trump” congressional/presidential errors) no longer has adequate power, having flooded the market with dollars and pushing federal funds interest rates to zero in an effort to make up for their earlier lack of action.

Adam, to answer your question, a stimulus can work if properly timed. Some have worked in the past. President Kennedy timed an effective tax cut. President Regan cut taxes and spent more when it was needed. On the flip side, only Federal Reserve Chair Paul Volker successfully de-stimulated an inflationary spiral by raising rates to purposely escalate unemployment, thus taming inflation with tough love. Also, Alan Greenspan (to a lesser degree) deserves credit for understanding the psychology of the markets (his “irrational exuberance” statement popped a technology bubble). In our most recent downturn, we discovered that even the Federal Reserve System is influenced by the lobby (their own; banks wanted to continue to make record profits at the expense of good Keynesian policy).

The problem today is that the financial and real estate markets were allowed excesses without the boundaries that intelligently crafted laws and policies could have provided. What we now need to fear is either stagflation…the distinct possibility that the massive stimulus bill and other measures previously taken will cause inflation (price increases) even when there is low demand for goods and services; or, some new twist on liquidity driven by changes to money velocity and the overselling of government bonds to fund the stimulus. These issues are not the problem today…as we have lowering prices and rising unemployment causing a recession. In 18 months, you can expect inflation, unless someone calls the Fed to remind them of the Volker strategy. But who wants to put people out of work?

The Muliple Liquidity Trap Theory

2008-10-09T09:02:00.000-07:00

Illiquidity the Result of Poorly Managed Markets

James D. Libby, Ph.D.
Associate Professor and Chair
Business Administration Division
Thomas College

Wednesday, October 8, 2008, 9:09 a.m.

If you don’t believe that the current economic crisis could get worse, you may want to consider the recent reactionary policy of the United States Federal Reserve System.

Once again the Federal Reserve System has set precedents using its vast powers. In a coordinated effort with five other central banks around the world, the Fed has lowered its target for the federal funds rate, the key interest rate that it manipulates, by one-half of a percentage point, to 1 1/2 percent. It also lowered its own discount rate by 50 basis points. Just hours before this the Fed began to purchase commercial paper from private businesses around the country. Already, and for quite some time, the Fed has encouraged member banks to borrow directly from them at the discount window rather than through traditional means of bank-to-bank lending on the Federal Funds Market, which has contracted recently. What does all of this mean for the person on Main Street? The answer lies in one word: liquidity.

The implications of recent Fed actions, which represent monetary policy, coupled with last week’s bailout plan, authored and endorsed by President Bush and congressional leaders on both sides of the aisle, provides a bleak picture for two key economic mainstays: savings and investment. When Congress and the President authorized emergency fiscal policy actions, which the $700+ billion dollar Wall Street bailout represents, some on Main Street breathed a premature sigh of relief. Perhaps the 401K free fall is over, thought average Joe. After all, I am in it for the long haul! We can spend our way out of this problem! Unfortunately, this is likely wrong, and the reason for pessimism resides at the Fed’s doorstep. The problem is that the Fed is not reactionary at all. They are in business to apply Keynesian logic to smooth our country’s economic performance so that we can head off inflation, high unemployment and expensive real interest rates, among other things. They collect information and publish the so-called “Beige Book” of our country’s economic performance in order to analyze and act. And they have said all along that they believe that John Maynard Keynes was right to say that intervention into overheated or underperforming markets will save us from greater economic pain later on. The trouble is, someone fell asleep at the switch during the real estate bubble, which was an “overheat” in everybody’s view. And that someone, the Fed, is an organization that we all count on for our livelihoods.

So the recent action of lowering the discount rate, on top of buying commercial paper, on top of rescuing failing banks, on top of flooding the money supply with lots of dollars is like a recipe for a layer cake that has one key ingredient missing – you guessed it: the flour. In this case, I am using “flour” as a symbol for a simple concept that the Federal Reserve System has known about for years but has only recently provided lip service to. The liquidity trap is a situation in which the Fed’s application of lower interest rates no longer serves its purpose. It is a circumstance that could occur when the key interest rate is too low to make a difference by lowering it any further. That is precisely why some economists, including a few regional Fed presidents who were outvoted and ignored, have been advocating for interest rate increases since 2004 that would have put us in a better position to act when the bottom fell out of over-leveraged markets. We could have cooled the housing boom much earlier with this mechanism, which would have been a normal application of Keynesianism. This is a fact known by all. Now, without flour, the cake will not rise. So the question is, what is the Fed to do?

Fed Chairman Ben Bernanke is a bright individual. He and others understand the workings of Wall Street and its effects on Main Street. So, when the liquidity trap stared him in the face this week, he must have also understood the new phenomenon that the title of this essay suggests. There is a multiple liquidity trap within our economy and in the world’s economy, and that is new. This trap currently consists of the inability for the Fed’s open market operations to provide adequate liquidity, combined with bank hesitance to lend to each other for fear of not being able to cover their own obligations. Worse yet, banks fear that they might not even see repayment for loans that they have reserves to make. Banks hear that the F.D.I.C. might be undercapitalized and that there is a list of potential bank failures floating around. They also hear the faint sounds of a herd of depositors lining up at their windows. Only the small conservative banks have positioned themselves properly for this economic downturn, which may not meet academic the definition of recession but most certainly is one.

Other key ingredients to the multiple liquidity trap include the seizing up of the commercial paper and the inability for states and corporations to float bonds at reasonable rates in order to raise capital. And when Arnold Schwarzenegger speaks, people still listen. Investment dollars come from savings. If we have no savings and foriegn investors view our market as risky, where will capital come from? There is a long list of projects now put on hold as a result of the multiple liquidity problem.

So now the Fed has pulled out one of its last cards and played it. In a coordinated world-wide approach, a total of six central banks in a variety of countries lowered their own key interest rates in concert with the Fed. They too have had trouble baking cakes, so conventional wisdom dictates that the world compare recipes. When they compared their 3 X 5 cards, world leaders recognized that many of them managed their key interest rates at levels far above our current 1.5%. In other words, world leaders know that the United States is perilously close to the traditional definition of a singular liquidity trap, and they don’t like it. Our key interest rate is too low for another reduction to have an impact. These world leaders are in a position to say, “Ï told you so,” but at the same time, they see some of their own banks shuttered and businesses trolling for enough dollars just to buy inputs and make payroll. They have little choice but to go along with this first attempt at one-world Keynesianism. Some are wondering if the Fed will actually be forced to even go as far pulling out their final card, the lowering of the required reserve ratio, that paltry percentage at which banks are required to hold a level of reserves covering their obligations. Would such a move lead to a confidence shift and a depression-style bank run?

In the end, the average Joe will see his credit limit dry up and his rates rise due to incredible levels of demand for “coverage” dollars, coupled with Fed attempts at expanding the money supply. He is likely to see layoffs and wonder about his job. As a result, Joe’s belt tightening will likely be comparable to what banks and businesses are going through right now, which is not pretty. Since those institutions have no money in the mattress, should we be surprised that many consumers have not saved either? Notice that we all call ourselves consumers and not savers.

The conclusion that must be reached is simple. Market intervention using Keynesian logic is a responsibility that must have insulation from the tendency to let the good times roll for too long. The problem is a familiar one to all of us: greed. It would not have been easy to raise rates over the past three years, but some Fed presidents knew that we had to. That means that capturing minority thinking has to be a part of a broader re-evaluation of Fed policymaking. Responsibility for the current crises does not lie with an inability to foresee the multiple liquidity trap. Understanding the singular liquidity trap would have been sufficient.

James Libby holds a Ph.D. in Public Policy. He is a former State Senator and State Representative from Maine. He has authored several books and editorial content. He chairs the business department and teaches economics and political science at Thomas College in Waterville, Maine.