Saturday, January 26, 2008

Internet Effect in '08?

The internet was supposed to transform the political landscape in '04 after it propelled Howard Dean to the front of the Democratic Primary pack through small donations and passionately organized young people. As Dean imploded in Iowa and his volunteer army melted away or was absorbed by the Kerry campaign, the internet failed did not transform the general election. The most remarkable media event of the campaign was the Swift Boat Veterans for truth, which was more of a comment on campaign finance reform than changes in media.

According to MSNBC, of the top tier candidates McCain, Obama and Edwards are the biggest beneficiaries of donations under $200 with 31% of their total coming from the types of donors candidates most hope to reach online. Clinton, along with Romney and Giuliani has received less than 15% of her donations in amounts smaller than $200. That makes Obama the biggest winner in raw dollars, not even counting the alleged $500k he took in in one hour on the night of his SC win.

The most telling test of the internet's supposed transformative power may come in the next week. The big question, as put forward by a posting
on the Coldheartedtruth blog is will the Clintons' latest round of tactics pay off on Super-Duper Tuesday or are they playing with an outdated playbook which does not take into account a new demographic of high-information voters? That is, are we going go find out that the "Clintons still a step ahead, or have they fallen a step behind?"

Pew MediaSources has a very good study on the role of the internet in this election. 24% of Americans now say that the regularly learn something about the campaign from the internet, as compared to 13% in 2004. This growing participation is particularly significant when matched with Nielsen/Netratings data from the 2000 election which found that 86% of the online audience is registered to vote as compared to 70% of the U.S. population.

Perhaps unsurprisingly, young people are particularly active online with 42% of those 18-29 using the internet for campaign related information. The Obama campaign has shown eagerness to tap this demographic by setting up its own social networking software and given that almost 50% of 18-29 year olds voted for him in SC, his investment in this demographic is paying off.

But does it give him a chance at cracking new demographics given that internet usage is much lower among older demographics? Clearly, this is a problem particularly given that he trails significantly among both men and women over 65 (see below post.) A study from the University of Maryland tells us that women are also less likely to use the internet than men and usage declines with income which will make it particularly difficult to get to low income women where he trails significantly.

That said, there is room for expansion beyond his current base through the internet. While 18-24 year olds are very pro-Obama there is still significant support fo Clinton in the 25-29 demographic. Also according to the University of Maryland Latinos use the internet at a higher rate than all whites. Finally, women use the internet for communication (email) almost as much as men.

So despite some major blindspots (the over 65 set and low income women) the internet could offer a change of the rules that could eat into major Clinton constituencies. The next week may offer a test of whether they have taken it into their calculations.

Muddling the "Gender Gap"

Margie Omero at has interesting analysis on how the "gender gap" between Obama and Clinton is muddled by other demographic variables. Her analysis is based on a recent Pew poll that finds that Clinton leads among all voters over 50 (+26 among older women and +21 among older men) but the gender gap only really shows among younger voters where she leads by +17 among women and trails by -9 among younger men.

But the far more important predictors of support for Clinton are socioeconomic status and ideology. Men and women in households earning over $50,000 a year both favor Clinton to Obama by 41% to 36%. Clinton among all educated voters, by -3 among women and -9 among men.

Obama leads by +5 with liberal women but trails by -15 among liberal men. Clinton leads by +37 among non-liberal women but ties with Obama among non-liberal men.

So the picture is definitely too muddled to be simply summed up with "gender gap." But some of the sub-narratives do hold up. Hillary is strongest among women in households with less than $50,000 a year (+36) and is stronger among older voters. Meanwhile, youth, higher income, and higher education all play in Obama's favor. I can't say that I can make sense of the interaction between ideology and gender.

Tuesday, January 22, 2008

Wild and Woolly

The $145 billion stimulus plan Bush announced on Friday has failed to impress says the Washington Post:

Most world markets were digesting for the first time the Bush administration's proposal to try to stimulate the U.S. economy with tax benefits. (It was announced Friday, after Asian and European markets had already closed.)

Traders around the world seemed to have little faith that the plan would arrest the slowdown in the U.S. economy, even if some version of it is passed by Congress.

"Foreign markets are doubtful about the ability of Congress to move quickly, and foreign markets have watched the Federal Reserve move slowly in August, September, October and November," Kotok said. "So the concern from abroad is that the U.S. has been too slow and done too little and is now playing catch-up."

We'll see if a rate cut of 75 basis by the Federal Reserve, the largest in 18 years, will help. At any rate, the Fed is taking this seriously now.

I'm not sure how fair it is to declare this yesterday's declines to be a referendum on Bush's stimulus plan (which I have yet to thoroughly review) given that investors seeing a lot of risk out there. With Bank of America and Wachovia reporting very large declines in fourth quarter profits, and the Bank of China reporting exposure to U.S. subprime mortgage loans, investors are going into full panic mode.

Thursday, January 17, 2008

Bernanke on Board

Bernanke is backing a fiscal stimulus plan and President Bush is as well. That's as green a light as we're going to get. Now let's see if everyone can agree on what the package is going to look like.

Wednesday, January 16, 2008

New Perspectives on the Fiscal Stimulus

Everyone is getting in on the fiscal stimulus game. A brief survey...

The Congressional Budget Office (CBO) has weighed in with a well balanced and researched primer. Many of its conclusions are similar to the Brookings primer reviewed below so I will refrain from commenting further.

The Economic Policy Institute (EPI) provides an interesting reason to favor increased government spending over tax cuts in its plan. (Emphasis added)

Government spending is more effective than tax cuts in stimulating domestic demand for two reasons: a portion of the tax cut will be saved rather than spent immediately, and consumers are more likely than the government to spend on imports (rather than domestically produced goods). Approximately 10 cents per dollar of consumer expenditures will be spent abroad, while virtually every penny of investments in public infrastructure will be spent domestically.

The EPI also believes that this spending should satisfy unmet social needs. I think everyone agrees that this is a good principle but whether government or individuals best make this decision is a pretty fundamental ideological divide.

The Center on Budget and Policy Priorities (CBPP) subscribes to the timely, targeted and temporary goals for a stimulus pushed by Brookings. They do, however, cite work by Stiglitz and Orszag pointing to government spending being more effective than tax cuts, probably because the spending is direct as opposed to transfers to taxpayers who may end up saving.

Still, the CBPP points to broad-based tax cuts as an effective measure because they are easy and quick to implement. They also support state fiscal relief, strengthened unemployment insurance, and temporary increases in food stamp payments as effective measures.

In contrast to EPI, CBPP opposes new infrastructure investment as projects usually take months to get off the ground.

The Center for Economic and Policy Research (CEPR) is pushing a $600 tax cut for all taxpayers, $20 billion in tax credits for energy-conserving homes and businesses, $7 billion in public transit use subsidies, $3 billion in heating subsidies for low and moderate income families, and $25 billion in temporary relief for states and localities.

So that's quite a mix of options for you. Notably, with the exception of the EPI/CBPP differences on infrastructure spending, there appears to be pretty widespread agreement on what makes up an effective stimulus package.

Tuesday, January 15, 2008

Krugman and DeLong Enter the Ring

Paul Krugman wrote a piece for yesterday's NYTimes praising the stimulus plans of Edwards and Clinton and criticizing Obama's plan. As Obama's plan contains no alternative energy plan and includes cross the board tax cuts, he sees it as further to the right than the plans proposed by the other candidates.

That may be the case, but considering that this is a fairly technical economic issue "further to the right" does not constitute legitimate criticism of the policy. As I said in an earlier post (Fiscal Stimulus Showdown) alternative energy programs, while laudable in their goals, have yet to be shown to be an effective stimulus tool, read, they're probably going to take a while to implement. Broad-based tax cuts, while not as targeted as one would like, get money into people's pockets much more quickly.

Delong takes the same tack in attacking Krugman's rather shallow analysis of the stimulus plans in his blog. To be fair, he uses the same Elmendorf and Furman briefing I used as a jumping off point so perhaps this fight is really Krugman versus Brookings.

Universal Health Care Mandates

Theoretically speaking, the case for universal health care mandates is very strong. But as Robert Reich argues they are a silly thing to quibble over at this point in the campaign as the bickering takes the steam out of the common push for universal health care insurance. His most striking example is Massachusetts where 20% of the population is currently exempted from the mandate as the insurance is still too expensive for them.

Public's Agenda

In a new Washington Post-ABC Newspoll respondents think the country is on the wrong track. The Post attributes this and the presidents low approval rating of 32% to the fact that only 28% of respondents approve of his handling of the economy.

Monday, January 14, 2008

Clinton versus Obama, Stimulus Package Showdown

With the Democratic primary in full swing Senators Clinton and Obama have served up competing fiscal stimulus plans. Given my posting last week on fiscal stimuli, I thought a rough and ready analysis of their plans might be in order.

To begin, both their plans are roughly the same size, $70 billion and $75 billion for Clinton and Obama respectively. On the scale of things, $5 billion is not going to make a huge difference but it should be noted that they are both short of the $100 billion target proposed by Brookings panelist, on Wednesday (see below).

Round 1. Both the plans also contain $10 billion for an extension for unemployment insurance, an issue that the Brookings panelists were split on. Zandi of Moody's advocated the extension as a way to put money in the pockets of the unemployed (and thus support consumer spending) and Feldstein of Harvard opposed it because most workers tend to get a job of some sort when their benefits are close to running out. The real issue is whether the extension goes into a recovering economy, thus disincentivizing the unemployed from looking for available jobs. So, a debatable policy, depending on where you think the economy is going, but since they both
support it let's call it a tie.

Round 2. Both also take aim at the housing crisis. Clinton with a $30 billion fund to forestall foreclosures and help states and cities with associated costs, and Obama with a $10 billion fund for foreclosures and $10 billion to offset revenue lost by cities and states. Both emphasize helping the "respectable" people facing foreclosure but in practice it will be difficult to find the respectable ones, particularly in a timely enough manner to forestall an impending recession. Basically you have to choose between a bailout that helps everyone, or help for the respectable which ends up being a lot less of a stimulus.

The money to cities and states does make sense in that it prevents them from cutting programs and resources during a recession. So my guess is that the foreclosure fund is mainly a political move to show concern for people in mortgage trouble in swing states, not a technical economic one. As Clinton seems to focus on the foreclosure side, while Obama only places $10 billion in this category, I believe that Obama wins round two of the fiscal stimulus showdown.

Round 3. Clinton provides $25 billion in heating assistance for use by needy families this winter. If implemented quickly this would fulfill the necessary conditions (see post below) of timely and targeted. These people will quickly spend the money they previously used on heating on other essentials, thus stimulating the economy.

She also proposes $5 billion for efficiency and alternative energy. While a good idea, this does stray from the focus of a stimulus. While retrofitting public schools with more insulation might be a good investment it is not nearly as timely or targeted as giving directly to needy people who will spend every penny they get.

Obama's alternative is a $250 immediate credit to all workers and through offsetting the payroll tax another $250 supplement to low to mid-income seniors on Social Security. These programs would cost $35 billion and $10 billion respectively. The tax credit would be very timely in that it would go immediately into workers pockets and very closely matches the program proposed by Jason Furman at Brookings. Where it varies is that it would go to all workers who pay payroll tax, making it less than perfectly targeted.

The $250 Social Security supplement would be a very good stimulus. Low income seniors are highly unlikely to save, so this money will go straight back into the economy almost immediately.

So I think Obama slighty edges Clinton in round 3 as well. Obama wins the stimulus showdown in three rounds by a split decision!

Change versus Experience

I received my California absentee ballot and noticed that one of the myriad ballot initiatives would alter term limits. I would allow maximum of 12 total years in both chamber as opposed to the current limits of six years in the Assembly and eight in the Senate.

The whole point of term limits is to kick experienced people out, the underlying assumption being that long term exposure to power eventually corrupts. In California, term limits now mean that the Assembly acts as a training ground where legislators cut their teeth before going on to the Senate. But what is the right formula? Where do constituents get the most bang for buck with experience without being stuck with bad apples who have sold out to the status quo?

Obviously, California is still deciding, but I think this debate shines some light on the current change versus experience, Obama versus Clinton debate. We like our politicians to know what they're doing but when do they start to know too much? Do we need someone who knows the ways of Washington or someone who knows the ways of Washington must change?

An interesting experiment may be to look at the vote totals for each in term-limited states versus states without term-limits. Presumably the former will lean in favor of "citizen leaders" while the latter will lean in favor of "professional politicians."

Friday, January 11, 2008

A Stimulating Discussion, Fiscally Speaking

In response to growing interest in a fiscal stimulus by both the President and Congress, this Wednesday the Hamilton Project released a paper framing the "If, When, How" of fiscal stimuli and organized a high-powered discussion panel. The panel, moderated by former Treasury Secretary Robert Rubin, included the very respected Prof. Martin Feldstein of Harvard, Hamilton Project Director Jason Furman, former Office of Management and Budget Director Alice Rivlin, and Moody's Chief Economist Mark Zandi.

To get to the meat of the matter all of the panelists agreed that, if properly implemented, a stimulus in the range of $100 billion would be beneficial to the economy. (Furman would go a little lower than the others at $50-$75 billion, closer to Larry Summers' figures.) To justify this intervention, Feldstein and Rivlin pointed to falling home prices, rising foreclosures, the credit crunch, and financial institutions' general lack of confidence in current valuations because of their previous bad bets.

Zandi pointed to the fact that CA, AZ, FL, MI, and WI are already in recession and that these together make of 35% of U.S. GDP. Combine this with the fact that financial institutions have only written off one third of the $250 billion they are expected to lose and that rising gas taxes will effectively act as a $100 billion tax, and ouch!

While the loosening of monetary policy will be of assistance, Zandi contends that it will be less effective than usual as its primary conduit to the economy at large is through the currently turbulent housing market.

There was also agreement among the panelists over the rough outlines of how the stimulus should be delivered. The policy should be timely, targeted, and temporary. That is, implement it in time to forestall the depression, target those who will spend (generally the poor, but Feldstein contends that all Americans have such a marginal propensity to consume that it really doesn't matter who you give it to), and make sure that the stimulus doesn't become permanent policy. Feldstein and Furman agreed that a temporary growth in the food stamp program would give a quick and targeted kick to the economy (about 1% in annualized growth.)

So are we going to do this? Economists are always skeptical of the politics of fiscal stimuli since they are often implemented late and often hard to end. Well, Feldstein the economist was optimistic that a package could be arranged and Rubin the former political appointee was skeptical. I don't know the last time I saw an economist playing the optimist regarding a political situation. Can't say I know quite what to think.

Thursday, January 10, 2008

Who decides? A view from the trenches.

E.J. Dionne (pictured above with this blogger and his wife both of whom think he's wonderful) wonders whether the surprising Democratic primary results in NH where really so surprising.

Maybe the signs pointing to Hillary Clinton's victory in the New Hampshire primary were there all along, hidden in plain sight by the blur of Obamamania and a stack of flawed polls...

Just to be straight up about it, I have never been so certain and so wrong in many years of watching elections, anticipating as I did a solid Obama victory here. It's little comfort that the Clinton camp was surprised, too, as some in its ranks candidly acknowledged...

The campaigns -- and, yes, the media -- need to go back to the drawing board...

There are a lot of theories flying around about how Hillary pulled it off, but here's my take, built on rough theorizing among the foot soldiers of the ground campaign. It was not Hillary who pulled it off (otherwise wouldn't she have some explanation of what happened?) but rather New Hampshire voters who made a decision based on a number of complicated factors but most significantly the new polls. Some went over to vote for McCain, a lot of undecideds (of which there were loads) balked at deciding for the nation.

So it isn't back to the drawing board. Obama will keep with his message of unity that has finally paid off after six months of stagnation. Hillary will continue to try to cobble together ways to bank on her familiarity and technical knowledge of policies. And the press will continue to peddle silly theories. We've gone from the inevitable Clinton to the inevitable Obama to the comeback Clinton in a little over a month.

In the end, America is going to make a decision, and none of us, least of all this humble blogger, have any idea what it is going to be.

Tuesday, January 1, 2008

Behavioral Finance and Cultural Arbitrage

I have been reviewing materials from a seminar attended by one of my colleagues in the finance industry. It begins with an attack on the rational investor and goes on to discuss how trends can be used to predict market behavior. Not the stuff of a conventional economics education.

It throws away the myth that investors have great predictive powers over financial markets. In fact, most investors make winning trades a little over half the time. If this isn't bad enough (seeing as these people manage the funds that you plan to retire with) they often tend to be profit adverse and risk seeking.

The explanations for investors running away from profits lie in human psychology. People are more than happy to take profits wherever they come. After all, "You can't lose money by taking profits, can you?" Well yes, you can. If you sell your investment after a 10% gain yes you make money. But if your investment goes up another 20% after you sell you are giving up that money.

The psychology of losing is more interesting. For various reasons, loss of self respect, status, or even your job, people just don't like to admit when they've made a mistake. So they compound it and stick with their losses, hoping to turn them around. In the process they end up losing a lot more money than if they sold early at a small loss. The moral of the story: pick a trading strategy (trend, mathematical, or discretionary), set targets before you trade, and stick with 'em.

A last note which may or may not be relevant for those of you concerned with profits more than overt wonkiness. This paper holds that high and low prices, resistance and support levels, are fixed in investors minds by past trading patterns. It takes a minimum of THREE troughs or peaks to set these prices. Why three!?!

Well as my former anthro professor, the late Alan Dundes, would hold, this is for the exact same reason that God has a tripartite nature, everyone makes three points in their speeches, and every joke has three guys walking into a bar. For us, three is a 'native category' a basic cultural reference point. It's unit of measure that we all have agreed can size up all manner of otherwise noisy information. Why did we pass a 'Three Strikes and You're Out' law in California? Because we've all agreed that that is enough chances.

But go to China and you'll find a native category of five. So five people in the jokes, etc. This would suggest that Chinese traders would require more troughs and peaks before support and resistance levels are set. This points to a possibility of potentially identifiable widespread trading biases.