Sunday, January 31, 2010
Jeff Frankel says "Chile has important lessons for other countries struggling with fundamental long-term budget questions":
Achieving Long-Term Fiscal Discipline: A Lesson from Chile, Jeff Frankel: As Chile’s President Michelle Bachelet prepares to hand over power to her newly elected successor, she remains extraordinarily popular. It is worth reflecting on the fiscal aspects of her term in office, as Chile has important lessons for other countries struggling with fundamental long-term budget questions, which includes a lot of countries right now.
As recently as June 2008, President Bachelet and her Finance Minister, Andres Velasco, had the lowest approval ratings of any President or Finance Minister, respectively, since the return of democracy to Chile. There were undoubtedly multiple reasons for this, but one was popular resentment that the two had resisted intense pressure to spend the receipts from copper exports, which at the time were soaring along with world copper prices. One year later, in the summer of 2009, the pair had the highest approval ratings of any President and Finance Minister since the return of democracy to Chile. Why the change? Not an improvement in overall economic circumstances: in the meantime the global recession had hit. Copper prices had fallen abruptly. But the government had increased spending sharply, using the assets that it had acquired during the copper boom, and thereby moderating the downturn. Saving for a rainy day made the officials heroes, now that the rainy day had come. Chile has achieved what few commodity-producing developing countries have achieved: a truly countercyclical fiscal policy.
The two policy makers deserved a large share of the credit personally. ... But a large share must also go to institutions that had already been put in place by previous governments. It is these institutions that many other countries could usefully emulate.
Chile’s fiscal policy is governed by a set of rules. The first one is a long-term target for the overall budget surplus (originally 1 % of GDP, then lowered to ½ % of GDP). ...
Under the Chilean rules, the government can run a deficit larger than the target to the extent that (1) output falls short of potential, in a recession, or (2) the price of copper is below its medium-term (10-year) equilibrium, with the key institutional innovation that there are two panels of experts whose job it is each mid-year to make the judgments, respectively, what is the output gap and what is the medium term equilibrium price of copper. Thus in the copper boom of 2003-2008 when, as usual, the political pressure was to declare the increase in the price of copper permanent thereby justifying spending on a par with export earnings, the expert panel ruled that most of the price increase was temporary so that most of the earnings had to be saved. This turned out to be right, as the 2008 spike was indeed temporary.
Any country, but especially commodity-producers, could usefully apply variants of the Chilean fiscal device. Given that many developing countries are more prone to weak institutions, a useful reinforcement of the Chilean idea would be to give legal independence to the panels. There could a requirement regarding the professional qualifications of the members and laws protecting them from being fired, as there are for governors of independent central banks. The principle of a separation of decision-making powers should be retained: the rules as interpreted by the panels determine the total amount of spending or budget deficits, while the elected political leaders determine how that total is allocated.
The outside panel would play the role of the CBO in the sense that its job is to "score" the state of the economy (and/or components within it). Given that score, Congress could then impose rules on itself that force it to take particular actions depending upon what state the economy is in (e.g. reduce overall debt when the economy is operating at above average growth as determined by the panel, and allow the debt to increase when the economy is running at below average growth -- actions could key off of other variables as well). This is sort of like a Taylor rule for fiscal policy, but the independent panel would only determine the size of the gaps, actual policy actions would be carried out in Congress.
Would something like this help?
Paul Volcker summarizes his ideas for reforming the financial system:
How to Reform Our Financial System, by Paul Volcker, Commentary, NY Times: President Obama 10 days ago set out one important element in the needed structural reform of the financial system. No one can reasonably contest the need for such reform...
A large concern is the residue of moral hazard from the extensive and successful efforts ... to rescue large failing ... financial institutions. ... The phrase “too big to fail” has entered into our everyday vocabulary. It carries the implication that really large, complex and highly interconnected financial institutions can count on public support at critical times. The sense of public outrage over seemingly unfair treatment is palpable. Beyond the emotion, the result is to provide those institutions with a competitive advantage in their financing, in their size and in their ability to take and absorb risks.
As things stand, the consequence will be to enhance incentives to risk-taking and leverage, with the implication of an even more fragile financial system. ... That is why Adam Smith ... advocated keeping banks small. Then an individual failure would not be so destructive for the economy. That approach does not really seem feasible in today’s world, not given the size of businesses, the substantial investment required in technology and the national and international reach required.
Instead,... the ... implied moral hazard has been balanced by close regulation and supervision. Improved capital requirements and leverage restrictions are now also under consideration ... as a key element of reform.
The further proposal ... to limit the proprietary activities of banks approaches the problem from a complementary direction. ... The specific points at issue are ownership or sponsorship of hedge funds and private equity funds, and proprietary trading... Those activities are actively engaged in by only a handful of American mega-commercial banks, perhaps four or five. ...
Apart from the risks inherent in these activities, they also present virtually insolvable conflicts of interest with customer relationships, conflicts that simply cannot be escaped by ... walls between different divisions of an institution. The further point is that the three activities at issue ... are in no way dependent on commercial banks’ ownership. ...
There are a limited number of investment banks (or perhaps insurance companies or other firms) the failure of which would be so disturbing as to raise concern about a broader market disruption. In such cases, authority ... to limit their capital and leverage would be important... To meet the possibility that failure of such institutions may nonetheless threaten the system, the reform proposals ... point to the need for a new “resolution authority.” ... To put it simply, in no sense would these capital market institutions be deemed “too big to fail.” ...
I am well aware that there are interested parties that long to return to “business as usual,” even while retaining the comfort of remaining within the confines of the official safety net. ...
I’ve been there — as regulator, as central banker, as commercial bank official and director — for almost 60 years. I have observed how memories dim. Individuals change. Institutional and political pressures to “lay off” tough regulation will remain — most notably in the fair weather that inevitably precedes the storm.
The implication is clear. We need to face up to needed structural changes, and place them into law. ...
Update: Edmund Andrews:
Volcker vs. Volcker?, by Edmund L. Andrews: Paul Volcker lays out his argument in the New York Times today for "Volcker rule'' -- President Obama's new proposal to rein in "too big to fail'' institutions by limiting the size of banks and keeping them out of riskier businesses like proprietary trading, hedge funds and private equity.
But those who suspect that the proposal is window-dressing for the more tepid approach favored by Treasury Secretary Tim Geithner won't get much comfort.
Volcker starts off well... He even invokes Adam Smith ... as a supporter for keeping banks small. But then there is this jolt:
That approach does not really seem feasible in today’s world, not given the size of businesses, the substantial investment required in technology and the national and international reach required.
Huh? What about Obama's idea to limit the size of the banks, based on the size of their liabilities? Even if it was nothing more than a call to limit the biggest banks to their current size, where was that? Nowhere. Volcker simply pivots to the other proposal, on keeping banks out of prop trading.
I became even more suspicious by the way Volcker made only glancing reference to other key initiatives that could reduce TBTF -- namely, better capital requirements.
If you really want to rein in moral hazard and risk-taking associated with the implicit government backstop for huge institutions, then your most potent tool is to impose sharply higher capital requirements on the giants. Aligning the risks of size with much bigger capital reserves to offset that risk would be a huge disincentive for institutions to get as big as they possibly can. Structured properly, capital requirements could even induce banks to divest parts of their business before they become too big to fail.
But while there is constant lip service these days about tougher capital requirements, it is far from clear that the Obama administration wants to push that hard. And Volcker's rather off-hand reference isn't encouraging.
Volcker does make a spirited case for his other key structural proposal: prohibiting banks and bank holding companies from engaging in prop trading. But as the cliche goes, the devil is in the details and Volcker stays far away from any specifics.
Let me stipulate: I think Volcker sincerely wants to make big structural reforms, and he is clearly bolder than most of his colleagues. But it's much less clear what the Treasury and White House really want to do. Volcker is too polite to rail in public against the White House if he thinks the president isn't going as far as he himself would like. But that doesn't mean that doesn't mean that Obama's proposed rule is the same as the "Volcker rule."
I noticed the same thing, but let it pass without comment. More generally, I haven't understood why the left has so readily embraced Volcker -- after all he gained his reputation as a "hard money guy" by creating a recession to fight inflation and many people were quite unhappy about the loss of jobs at the time.
Saturday, January 30, 2010
Robert Shiller says pessimism is leading to a pessimistic outlook for economic recovery:
Stuck in Neutral? Reset the Mood, by Robert Shiller, Commentary, NY Times: The United States and other advanced economies may be facing a long, slow period of disappointing growth.
That is a widespread concern, as recent polls demonstrate. A USA Today/Gallup poll ... found ... that about two-thirds of Americans say they think that economic recovery won’t start for two more years, while 28 percent say it won’t begin for at least five years.
Among students of history, there are fears that we will suffer the type of chronic economic malaise that afflicted the world after the 1929 stock market crash, or that weakened Japan after the puncturing of twin stock and housing market bubbles around 1990. ...
The fears themselves are an integral part of the problem. Economists have a tendency to assume that everyone’s behavior is rational. But post-boom pessimism is a factor driving the economy, and it is likely to be associated with attitudes that may be enduring. ...
The present mood ... needs to be put into a longer historical context. After World War II, there was rapid growth in labor productivity until sometime around the early 1970s. But then there was a major break, roughly coinciding with three events of 1973-74: the oil crisis, a huge stock market tumble and the first significant depression scare since the Great Depression itself.
According to the Bureau of Labor Statistics, annual growth of business output per labor hour averaged 3.2 percent from 1948 to 1973, but only 1.9 percent from 1973 to 2008.
Ever since the long-term productivity slowdown became visible, the economist Samuel Bowles, now at the Santa Fe Institute, has said that its causes are to be found as much in the loss of “hearts and minds” of workers and investors as in technology.
This month at Yale, in lectures titled “Machiavelli’s Mistake,” he spoke of the error of thinking that a high-performance economy could be based on self-interest alone. And he warned of the overuse of incentives that appeal to individual gain.
The speculative boom periods that ended a few years ago carried us into such overuse, and today’s malaise is partly a result of our disorientation from that period.
In their coming book,... George Akerlof ... and Rachel Kranton ... argue that an economy works well when people personally identify with it, so that their self-esteem is tied up with its activities. ... [A] relatively uninterested, insecure work force is unlikely to bring about a vigorous recovery.
Solutions for the economy must address not only the structural instability of our financial institutions, but also these problems in the hearts and minds of workers and investors — problems that may otherwise persist for many years.
I don't know if "problems in the hearts and minds of workers and investors" -- workers in particular -- is the "heart" of the slow recovery problem. I always find Shiller's psychology-based explanations less than fully convincing, but listen anyway because he has a pretty good track record at predicting emerging bubbles. But I will say this. Aggressive, effective job creation policy by the government -- putting people to work -- would go a long way toward repairing any problems in the hearts and minds of workers.
As for investors, their hearts and minds would be best repaired through strong regulatory measures that prevent the type of behavior that got us into this mess, or that substantially reduce the consequences when hearts and minds work together to cause this to happen again despite our efforts to prevent it.
I think it's too soon to be talking about deficit reduction given the state of the economy, and particularly the state of labor markets, but there's no reason to let the people who do want to talk about it dominate the conversation.
We do need a plan to bring the deficit down in the long-run, but right now we need more, not less deficit spending, and there are job creation proposals currently under consideration by Congress that rely upon the ability to increase the deficit in the short-run (e.g. see here for Dean Baker's negative reaction to one recent proposal from the administration).
If we could talk about the long-run deficit problem without making it less likely that we will enact further job creation measures now, there would be no problem with the deficit discussions. But that's not the case. Even though the long-run problem -- health care costs -- is largely independent of short-run stimulus measures, i.e. the short-run stimulus measures contribute very little to the long-run problem, all of the discussion about the long-run problem make it much less likely that Congress will use deficit spending in an attempt to create jobs. People are confused about the nature of the problem, and Republicans opposed to more stimulus (or just saying no for political reasons) have no incentive at all to clear up the confusion.
So we really ought to be talking about short-run measures to increase deficit spending and create jobs, but Republicans have been successful at turning the conversation to the long-run, and the administration has played right into this strategy.
Stan Collender takes a look at recent Republican strategy on the long-run deficit issue:
GOP Doesn't Do Fiscal Responsibility, by Stan Collender: The following all happened just this week:
Item 1. The Conrad-Gregg commission, which needed 60 votes in the Senate, was defeated 53-46. The amendment creating the commission would have been adopted 60-39 if all of the GOP senators who co-sponsored the amendment voted for it. Instead, seven of the Republican co-sponsors withdrew their co-sponsorship the week before the vote and then voted against it.
Item 2. All Senate Republicans voted against re-establishing the pay-as-you go rules, which would have required that, with certain exceptions, any new mandatory spending or revenue legislation not increase the deficit. The rules were adopted with only Democratic support.
Item 3. With the Conrad-Gregg commission killed, congressional Republicans have been heavily critical of the commission the Obama administration may create by presidential order to consider ways to reduce the deficit. There are growing indications that the GOP House and Senate leadership, each of which would get to appoint three of their own members to the commission, may refuse to name any in the hope that the panel's deliberations will be stopped dead in its tracks without them or that the Democrats will proceed on their own. The stated reason for the GOP opposition is that there's no guarantee that a presidential commission's recommendations will be taken up by Congress even though there's even less of a chance if it's not created.
Item 4. Republican Chairman Michael Steele is saying so often that Republicans are against cuts in Medicare that it's starting to sound like a mantra. Add to that their stated opposition to revenue increases (see #1 above), military spending reductions, homeland security reductions, and the extremely low possibility that, if Medicare is too hot to handle, they'll go anywhere near Social Security, and the deficit reduction math becomes totally impossible.
What's most infuriating about this is that the GOP is even blocking what used to be the easiest thing for everyone to agree to do -- budget process changes. In fact, the saying among budget aficionados in Washington used to be that when Congress couldn't or wouldn't do anything about the budget, it did something about the budget process. Now, however, because of GOP opposition, even budget process changes that wouldn't impose any immediate changes in spending or revenues, are becoming, or have already become, impossible to adopt.
You can't get people all worked up about the deficit, and then block every attempt to deal with it, especially when your party has been behind some of those proposals in the past. Or so you would think. However, up until Obama met with Republicans yesterday, I would have expected the strategy behind the Republican opposition that Stan Collender describes to work no matter how transparent it is. It always worked before. But in listening to people talk about Obama's meeting with the Republicans, I am beginning to think that his appearance, and particularly his rebuttal, was more notable than people realize -- that Obama began to change the conversation in a way that identifies and portrays Republicans as the obstructionists they are. Am I nuts to think that?
Update: Brad DeLong:
Can Someone Please Tell Me How This Is Supposed to Be Good Policy?: There is about a 30% chance that the U.S. economy is about to start growing rapidly, with unemployment declining by a percentage point or two each year. There is about a 40% chance that we are about to start a recovery like or a little bit better than the "jobless recoveries" that have followed the last two (much shallower) recessions, with unemployment staying where it is or trending down slowly. And there is about a 30% chance that the unemployment rate is going to pause--and then start rising again in a double-dip recession.
The tools to fight a further rise in unemployment are threefold:
Banking policy--have the Treasury buy or guarantee risky financial assets in enormous amounts in order to boost asset prices and get businesses back into a position where they can profitably obtain financing for expansion.
Monetary policy--have the Federal Reserve goose asset prices by taking steps that lower real interest rates somewhere along the yield curve.
Fiscal policy--have the government spend money, either by hiring people directly or by buying things from private companies that then hire people directly.
The populist anger and fallout from the last set of banking policy interventions has taken the first of these off the table.
The current complexion of the Federal Open Market Committee has taken the second of these off the table.
And now Barack Obama is taking the third of these off the table.
Will someone please tell me how this is supposed to be good policy? ...
Friday, January 29, 2010
To state the obvious, this has not been a good year for labor:
Wage and Benefit Growth Hits Historic Low, Wall Street Journal: Wage and benefit costs, both before and after adjusting for inflation, grew more slowly in 2009 than in any year since the U.S. government began tracking data in 1982, as double-digit unemployment weakened workers' ability to command higher pay.
In the past 12 months, the cost of wages and benefits received by workers other than those employed by the federal government rose 1.5%, according to the Labor Department's employment cost index. In the same period, consumer prices rose 2.7%.
Adjusted for inflation, wages and benefits fell 1.3%... The inflation-adjusted cost of wages and benefits at the end of 2009 stood just 1.1% higher than at the end of the previous recession in 2001, the Labor Department said.
The Employment Cost Index measures the cost of labor independent of the influence of changes in compensation caused when high-wage sectors grow more or less rapidly than low-wage sectors. Unlike widely cited data on wages, the index includes the cost of benefits, which account for about 30% of total compensation costs. ...
Private employers' health-insurance costs rose 4.4% in 2009, after increasing 3.5% the year before. The 2009 increase, though, was the second-lowest rate of increase in more than a decade, according to the survey. The Labor Department noted that this reflects, in part, employers' reducing their contributions to employees' health insurance or switching to lower-cost health plans. ...
US GDP grew at a 5.7% annual rate in the 4th quarter of 2009:
US GDP growth fastest in six years, by Alan Rappeport, FT: The US economy grew at the fastest rate in six years during the fourth quarter, offering hope that the recovery is gaining sustainable momentum, official figures showed on Friday.
US gross domestic product grew at an adjusted annual rate of 5.7 per cent in the last quarter of 2009, the commerce department said, a sharp acceleration from the 2.2 per cent increase in the prior quarter. ...
Christina Romer, who heads President Barack Obama’s Council of Economic Advisers, called the report “a welcome piece of encouraging news”, but warned that there would be bumps ahead on the road to recovery. ...What's the main reason for the growth spurt?
Inventory liquidation slowed substantially during the quarter, as private businesses shed $33.5bn compared with $139.2bn in the third quarter. That added 3.39 percentage points to overall output.
Consumer spending, which typically accounts for about 70 per cent of economic activity, grew by a less-than-expected 2 per cent... GDP was boosted by a rise in non-residential fixed investment, which increased by 2.9 per cent after having fallen by 5.9 per cent in the third quarter.
Analysts were encouraged by the fact that growth advanced so quickly in spite of a slim 0.1 per cent increase in government spending. ...
The pace of growth is expected to slow in the coming quarters, however, as the build-up in inventories moderates and the impact of government stimulus measures fades. ...This report will give deficit and inflation hawks ammunition:
...“The hawks are starting to get a little more back into their hawking mode,” Mr Bethune said. “The biggest risk is that we tighten monetary policy too early and see a spike in interest rates.” ...And don't forget about jobs:
"While positive GDP growth is a necessary first step for job growth, our focus must remain on getting Americans back to work," Ms Romer said.
Paul Krugman predicted this GDP growth surge would come, and he warned us not to get too excited about it:
As expected, a big GDP number, signifying nothing much. It’s an inventory blip: topline growth at 5.7 percent, but only 2.2 of that is final demand.
Here's the warning itself:
Calculated Risk beat me to this: the economists at Goldman Sachs are now predicting 5.8 percent growth in the fourth quarter. But they also say that the headline number will be highly misleading: two-thirds of the growth will be an inventory bounce, with final demand growing only 2 percent. In short, it will be a blip.
CR does miss one small trick, however: he asks when we last saw growth that high combined with rising unemployment, and says 1981. That’s true. However, the last time we saw an initial report of 5.8 percent growth combined with rising unemployment is much more recent: the first quarter of 2002. The quarter’s growth was later revised down, but at the time there was much unwarranted celebration (unemployment didn’t peak until summer 2003).
So here comes the blip. Curb your enthusiasm.
Jim Hamilton is a bit more positive:
Just because the production gains can be accounted for in terms of slower inventory drawdown doesn't mean they aren't real, and doesn't mean they can't continue. I noted in July that we might expect inventory restocking to add 1.6% to the annual GDP growth rate for each of the first four quarters of the economic recovery, and we haven't even yet begun that inventory restocking process.But he's not sounding the all clear just yet:
The question, though, is what we'll see for the other components of GDP. Exports grew more than imports in Q4, with the result that net exports contributed 0.5 percentage points to that 2.3% growth in real final sales. That's certainly a very welcome development and a critical step for correcting the imbalances that have been very troubling over the last decade.
Government spending made no contribution to Q4 growth, which again is a consequence of the algebra of growth rates-- since real government purchases in Q4 were about what they had been in Q3, they made zero contribution to the growth rate, which is based on the change between Q4 and Q3. Fixed investment contributed 0.4 percentage points and consumption 1.4 percentage points to the 2.3% growth in real final sales and to the 5.7% growth in real GDP. Those are better numbers for consumption and fixed investment than we'd been seeing in the first half of the year, but not the sort you'd expect if a normal strong recovery was now fully in play.
Donald Marron breaks down GDP growth into its component parts:
- Brad DeLong: 5.7% Real GDP Growth Rate in the Fourth Quarter (Where Oh Where Is My Okun's Law? Department)
- Calculated Risk: A Few Comments on Q4 GDP Report
- Andrew Leonard: Economy surges, nation yawns
- Megan McArdle: Dude, Where's My Job? Graph:
My worry is simple. The Senate is about to take up the issue of what more can be done to help with job creation, and this report will give legislators unsure of how aggressively to pursue further job creation efforts a reason to come down on the side of doing very little, a mistake in my opinion. And it gives legislators opposed to further government help, or ideologically opposed to doing anything at all, the ammunition they need to resist any further fiscal policy efforts.
[Post echoed here.]
Is our political system capable of solving the economic and fiscal problems that we face?
March of the Peacocks, by Paul Krugman, Commentary, NY Times: Last week, the Center for American Progress, a think tank with close ties to the Obama administration, published an acerbic essay about the difference between true deficit hawks and showy “deficit peacocks.” You can identify deficit peacocks, readers were told, by the way they pretend that our budget problems can be solved with gimmicks like a temporary freeze in nondefense discretionary spending.
One week later, in the State of the Union address, President Obama proposed a temporary freeze in nondefense discretionary spending.
Wait, it gets worse. To justify the freeze, Mr. Obama used language ... almost identical to widely ridiculed remarks early last year by John Boehner, the House minority leader. Boehner then: “American families are tightening their belt, but they don’t see government tightening its belt.” Obama now: “Families across the country are tightening their belts and making tough decisions. The federal government should do the same.”
What’s going on here? The answer, presumably, is that Mr. Obama’s advisers believed he could score some political points by doing the deficit-peacock strut. I think they were wrong, that he did himself more harm than good. Either way, however, the fact that anyone thought such a dumb policy idea was politically smart is bad news because it’s an indication of the extent to which we’re failing to come to grips with our economic and fiscal problems.
The nature of America’s troubles is easy to state. We’re in the aftermath of a severe financial crisis, which has led to mass job destruction. The only thing that’s keeping us from sliding into a second Great Depression is deficit spending. And right now we need more ... deficit spending ... to bring unemployment down.
In the long run, however,... the ... budget outlook was dire even before the recent surge in the deficit, mainly because of inexorably rising health care costs. Looking ahead, we’re going to have to find a way to run smaller, not larger, deficits. ... The sad truth, however, is that our political system doesn’t seem capable of doing what’s necessary.
On jobs, it’s now clear that the Obama stimulus wasn’t nearly big enough..., we’re still facing years of mass unemployment. ... Yet there is little sentiment in Congress for any major new job-creation efforts.
Meanwhile, health care reform faces a troubled outlook. ...Democrats may yet manage to pass a bill; they’ll be committing political suicide if they don’t. But there’s no question that Republicans were very successful at demonizing the plan. And, crucially, what they demonized most effectively were the cost-control efforts: modest, totally reasonable measures to ensure that Medicare dollars are spent wisely became evil “death panels.”
So if health reform fails, you can forget about any serious effort to rein in rising Medicare costs. And even if it succeeds, many politicians will have learned a hard lesson: you don’t get any credit for doing the fiscally responsible thing. It’s better, for the sake of your career, to just pretend that you’re fiscally responsible — that is, to be a deficit peacock.
So we’re paralyzed in the face of mass unemployment and out-of-control health care costs. Don’t blame Mr. Obama. There’s only so much one man can do, even if he sits in the White House. Blame our political culture instead, a culture that rewards hypocrisy and irresponsibility rather than serious efforts to solve America’s problems. And blame the filibuster, under which 41 senators can make the country ungovernable, if they choose — and they have so chosen.
I’m sorry to say this, but the state of the union — not the speech, but the thing itself — isn’t looking very good.
Thursday, January 28, 2010
Here's my reaction to the vote to reconfirm Ben Bernanke as Fed Chair:
Andrew Samwick on Obama's the State of the Union speech:
One item that stood out as different was the acknowledgement that we are on our way to export-led growth, if we are to have growth at all. President Obama sounded like a good old-fashioned mercantilist with his claim that we would double exports in five years and support 2 million more jobs through those exports.
Export-led growth in what? Paul Krugman:
[I]t will probably be a long time before the trade deficit comes down enough to make up for the bursting of the housing bubble. For one thing, export growth, after several good years, has stalled, partly because nervous international investors, rushing into assets they still consider safe, have driven the dollar up against other currencies — making U.S. production much less cost-competitive. Furthermore, even if the dollar falls again, where will the capacity for a surge in exports and import-competing production come from? Despite rising trade in services, most world trade is still in goods, especially manufactured goods — and the U.S. manufacturing sector, after years of neglect in favor of real estate and the financial industry, has a lot of catching up to do.
Anyway, the rest of the world may not be ready to handle a drastically smaller U.S. trade deficit. As my colleague Tom Friedman recently pointed out, much of China’s economy in particular is built around exporting to America, and will have a hard time switching to other occupations.
The problem is that if (net) exports don't lead the way, then consumption or investment must fill the void if the private sector is going to take care of this on its own. But neither of those seems likely to grow fast enough to accomplish this, at least not anytime soon, and there's some question whether they will return to their pre-crisis levels, consumption growth in particular.
Paul Krugman's point -- the quote is from a bit over a year ago -- was that if consumption, investment, and net exports can't support the growth we need to maintain employment, then government must use aggressive measures to bridge the gap until the private sector can make the necessary adjustments.
The government did bridge some of the gap with the stimulus package, but unfortunately it didn't do nearly enough and much of the gap still remains. The gap will close by itself -- eventually -- but in the meantime people will have to contend with labor markets that are weaker than they needed to be.
It's not too late for Congress to do more, but even if it fully enacts the measures that are currently pending, once again it will be well short of what's needed.
Wednesday, January 27, 2010
Tim Duy reacts to today's FOMC meeting:
Dissent, by Tim Duy: The FOMC statement contained a mini-bombshell, the dissent of Kansas City Fed President Thomas Hoenig. I am skeptical, however, that this dissent is a significant shift in the policy environment. Instead, I view the statement as taking another baby step forward to a normalization of monetary policy now that the financial crisis has eased and that the economic environment has firmed. Many policymakers will simply find themselves increasingly uncomfortable holding rates at rock bottom levels while sitting on a bloated balance sheet -- regardless of the unemployment rate. Short of a significant reversal of recent economic gains, I would be hard pressed to see the Fed back away from a policy stance that is growing tighter, albeit slowly tighter.
The opening sentence of the statement maintains the position that the economy continues to strengthen while labor markets firm. Some may be surprised about the latter point given the disappointing December employment report. The Fed, however, will be expecting the road to sustained improvement to be bumpy; one month will not significantly impact their outlook given the sharp decline in the pace of job losses in the second half of 2009. The trend is clear. The Fed also upgraded slightly its assessment of business spending, consistent with data such as new orders for capital goods.
The opening paragraph, however, omitted mention of the housing market improvements as noted in the December statement. Are they less confident of a sustained rebound given the drop off that followed this summer's tax credit induced boom? Or do they just want to avoid mention of housing given that they intend to halt stimulus for that sector? In my opinion, of all the Fed interventions over the past year, the decision to acquire $1.25 trillion of mortgage securities is the most politically risky; more on that later.
Had meetings all morning, teach all afternoon, then have a seminar to go to, and I'm running late. So I'll turn it over to Brad DeLong for, as they say, this important message:
America’s Employment Dilemma, by J. Bradford DeLong, Commentary, Project Syndicate: There are always two paths to boost employment in the short term. The first path is to boost demand for goods and services, and then sit back and watch employment rise as businesses hire people to make the goods and services... The second path is not to worry about production of goods and services, but rather to try to boost employment directly through direct government hiring.
The first path is better: not only do you get more jobs, but you also get more useful stuff produced. The problem is that it does not take effect very quickly. ... Thus, policies ... needed to be put in place about a year ago... Some countries – China, for example – did, indeed, implement such job-creation policies a year ago and are already seeing the benefits. Others, like the United States, did not, and so unemployment remains at around 10%.
This is not to say that the Obama administration did not try to boost employment. A year ago, it set five policy initiatives in motion:
- Additional deficit spending;
- Recapitalization of banks...;
- Asset purchases by the US Treasury and other executive-branch entities to reduce the quantity of risky assets that the ... private sector was holding;
- Continued monetary easing via very low Federal Funds rates;
- Expansion of extraordinary policy interventions by the Federal Reserve.
The stress tests conducted by the US Treasury last year suggested that the banking sector had re-attained sufficient capital. And the Fed has continued its low-interest monetary policy.
But the dysfunctional US Senate capped additional deficit spending at $600 billion over three years – only half of the $1.2 trillion that was the technocratic goal. Moreover, the Fed became gun-shy and did not continue to increase its balance sheet beyond $2 trillion. ...
In short, perhaps two and a half out of the Obama administration’s five policy initiatives came to fruition..., such limited action was not enough to keep the US unemployment rate below 10% – or even set it on a downward trajectory.
This brings us to the present moment,... there is now a very strong case to turn the focus of the US economy from measures aimed at increasing demand to measures aimed at boosting employment directly...
In practice, that means that the government either hires people and puts them to work or induces businesses to hire more people. We are talking about either direct government employment programs, or large tax credits for businesses...
There is still time for a substantial shift in federal spending toward high-employment ... if Congress acts quickly. And there is still time for a substantial temporary and incremental new-hire tax credit...
But will Congress act quickly? Given the depth of political polarization in the US, and thus the need for 60 of 100 votes in the Senate to end a Republican filibuster, there is no sign of it being able to do so. ... Don’t hold your breath.
But don't quit pushing for more either.
One more quickie. Jonathon Gruber and Amy Finkelstein on health care reform: "Congress should still think big":
‘All or nothing’, by Peter Dizikes, MIT News Office: Just over a week ago, passage of a landmark federal health-care bill seemed a dead certainty. But the flip of a single U.S. Senate seat has changed all that, leaving the Democratic Party highly uncertain about how — or whether — to proceed. Given the current flux in Washington, a panel of MIT health-care experts assembled yesterday to assess the situation, often hammering home the idea that political half-measures will yield little in tangible health-care results.
“You can’t break this bill apart and have it work,” said MIT economist Jonathan Gruber. “It’s all or nothing at this point...”
Brown’s victory has caused multiple fractures among Capitol Hill Democrats. Some legislators want to drop the health-care effort entirely; others say Congress should only pass popular portions of it, such as making it illegal to deny insurance based on pre-existing conditions; and still others want to reconcile the existing, separate health-care bills already passed by the House and Senate.
Gruber made it clear he favors the last position, telling the audience the health-care plan is like “a three-legged stool,” and “doesn’t work unless you have all three legs.” Those three pieces are reform of insurance markets (including banning those denials of coverage based on pre-existing conditions), the existence of an individual mandate requiring everyone to have insurance, and subsidies to make insurance affordable for low-income people.
For instance, simply allowing people with pre-existing conditions to sign up for insurance, Gruber argued, would be ineffective by itself. In that scenario, more people with pre-existing conditions would have coverage, rates would rise and lead healthy people to drop out of the insurance markets, and to compensate for those healthy people dropping out, insurance companies rates would raise rates further.
This research finds evidence that financial firms that lobbied the most on mortgage lending and securitization issues (often successfully) took on the most risk, and experienced worse loan performance.
The conclusion to the article says that even though there's evidence that lobbyists contributed to lax lending standards, that doesn't necessarily mean that we should ban lobbying by financial firms. Why? The argument is that lobbyists may provide lawmakers with expertise and other information unavailable anywhere else, and that this can improve legislation and help to support financial innovation. So there are both costs and benefits. Thus, they say:
financial institutions may also lobby to reveal superior information on the mortgage lending market and gain support for innovation in financial services. In this view, lobbying serves a social purpose, and there may be better ways to contain risks than simply challenge lobbying.
But I'd turn that around and say "there may be better ways to reveal superior information on the mortgage lending market than to simply allow lobbying."
As to the "innovation in financial services" that lobbying supposedly helps to provide, even if lobbying does spur innovation, many people argue that the benefits of that innovation are small. If they're correct, and once you get past cash machines it's hard to think of financial innovation that has brought large benefits to society at large, it's not at all clear that the net social value of that innovation is positive. Whatever benefits may be present are more than offset by the costs associated with the innovation that contributed to the financial crisis:
Lobbying and the financial crisis, by Deniz Igan, Prachi Mishra, and Thierry Tressel, Vox EU: Should the political influence of large financial institutions take some blame for the financial crisis? In his speech at the 2010 annual meeting of the American Economic Association, Fed Chairman Ben Bernanke argued that, based on evidence of declining lending standards during the boom, “stronger regulation and supervision aimed at problems with underwriting practices and lenders’ risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates” (Bernanke 2010).
Why wasn’t financial regulation tightened before the crisis?
If regulatory action would have been an effective response to deteriorating lending standards, why didn’t the political process result in such an outcome? Questions about the political process, through which financial reforms are adopted, are very timely now that the US Congress is considering financial regulatory reform bills.
A recent study by Mian, Sufi and Trebbi (forthcoming) shows, for example, that constituent and special interests theories explain voting on key bills, such as the American Housing Rescue and Foreclosure Prevention Act of 2008 and the Emergency Economic Stabilization Act of 2008, that were passed as policy responses to the crisis.
A number of news articles have reported anecdotal evidence that, in the run up to the crisis, large financial institutions were strongly lobbying against certain proposed legal changes and prevented a tightening of regulations that might have contained reckless lending practices. For example, the Wall Street Journal reported on 31 December 2007 that Ameriquest Mortgage and Countrywide Financial spent millions of dollars in political donations, campaign contributions, and lobbying activities from 2002 through 2006 to defeat anti-predatory-lending legislation.
There has, however, been no careful statistical analysis backing claims that lobbying practices may have been related to lending standards. In a recent paper (Igan, Mishra and Tressel, 2009), we provide the first empirical analysis of the relationship between lobbying by US financial institutions and their lending behavior in the run up to the crisis.
There's always room for more debate on Ben Bernanke's reconfirmation:
The Quarrel Over Bernanke, Room for Debate: The Senate is expected to vote this week on whether to confirm Ben Bernanke to a second term as the Federal Reserve chairman. Though it appears that he will overcome a filibuster threat, opposition to Mr. Bernanke has grown, along with worsening jobs numbers and public anger over the Fed’s failure to regulate banks before the financial crisis. His Democratic and Republican opponents have criticized him as the architect of the Wall Street bailout and being out of touch with the woes of Main Street.
How much is Mr. Bernanke to blame for the regulatory failures, the weak recovery and high unemployment numbers? Could a new Fed chairman make a difference?
Tuesday, January 26, 2010
This is still hard to believe given the recent history of this state when it comes to taxes of any kind:
Oregon Voters Approve Tax Increase, by William Yardley, NY Times: Two ballot measures that would raise taxes on businesses and higher-income residents in Oregon appeared headed for approval late Tuesday.
The tax increases, which would raise about $727 million largely for public education and social services, were approved last year by the Legislature, but later put to a public referendum after opponents gathered signatures in a petition campaign.
The Legislature, controlled by Democrats, has already put the $727 million into the current budget. So if the ballot items, known as Measures 66 and 67, had been rejected, lawmakers would have been forced to hold a special session to find other ways to reduce spending or raise revenue.
Tax measures have frequently failed at the polls in Oregon, one of only five states without a state sales tax. ...
Experts noted that, given the broader recession and Oregon’s 11 percent unemployment rate, Measures 66 and 67 had been carefully drawn to focus on wealthier residents and businesses. Measure 66 raises income taxes on individuals who earn more than $125,000 and on couples who earn more than $250,000... Measure 67 raises taxes and fees on most businesses. ...
As I said here, it would be better if federal help had been available and we didn't have to raise taxes or cut spending in a recession. But there was no choice but to do one or the other (or some combination of both), and this was the best available option.
Update: Kevin Drum adds:
I await the immediate immolation of Oregon's economy. That's what happened to America after Clinton raised taxes on the rich, after all.
Greg Mankiw points to Thomas Cooley's discussion of Obama's proposed bank tax:
The Problems With The Bank Tax, by Thomas F. Cooley: Last week the Obama administration announced a plan to impose significant new taxes on banks. It was high political drama. ... The whole tone of the announcement was that of a trip to the woodshed for misbehaving banks. The tax was presented as ... punitive...
The problem here is not the taxes per se. It is that the administration elected to treat the imposition as populist political theater. In doing so it missed the opportunity to articulate a well-reasoned economic policy to deal with too-big-to-fail institutions. ...
Another problem with treating the tax as punitive rather than regulatory is that it gives the banks and other financial institutions the ammunition to fight it. This administration tends to treat too many of the economic problems it faces as political. They end up being far less effective.
There is a very sound argument for levying new fees on financial institutions. The financial system as it is currently structured is extremely distorted, and its distortions are due to the way the system was regulated and by the regulators' responses to the financial crisis. ...
It is now clear to almost everyone except the institutions themselves that we created a big problem. Firms that are deemed too big or too systemic to fail have a safety net. They can take bigger risks and make bigger bets, secure in the belief that the government (or taxpayers) will guarantee their liabilities if they fail. Not only does this create perverse incentives for the risks that they take, it lowers their cost of raising new capital.
In the heat of the financial crisis Henry Paulson, Tim Geithner, Ben Bernanke and others decided it was better to protect all of the troubled firms (except Lehman and Washington Mutual) rather than let them fail. ...
That was then. Now we must figure out how to undo the damage. In a more perfect world we would do three things: 1. modify the bankruptcy code and create mechanisms to allow for the orderly failure of these institutions; 2. impose a tax on them that is proportional to the risk to the system that they create; and 3. treat that tax as an insurance premium to cover the cost of future problems, just as the FDIC charges banks for deposit insurance. ...
An important flaw in the tax is that it is designed only to recover the bailout costs already incurred. It should be an ongoing charge for the insurance against risky behavior. There should be two parts to such a charge: A portion to cover the risk a firm creates for itself and its investors by taking on excessive leverage, and a portion to cover the risk that leverage creates for the system as a whole. Ideally what we want is a fund that can cover the costs of a shock to the system in the future without the involvement of taxpayers. ...
At the end of the day what we need are mechanisms to deter excessive risk-taking at the expense of the taxpayer. The proposed tax is a very imperfect step in that direction. But we should hope that at the end of the process of designing a new regulatory structure we will have a set of measures that protect the taxpayer from having to bail out the financial system in future crises. One lesson that history teaches us very clearly is that crises will occur.
Before I read this, I assumed I'd disagree strongly, but I don't -- I mostly agree. However, I don't think the recommendation that the administration focus on economics rather than politics is good advice.
The main reason he gives for this advice is that the the current strategy "gives the banks and other financial institutions the ammunition to fight" the tax. However, the banks are going to fight the tax in any case, and they can play the "victim of populist backlash" whether or not the administration specifically identifies the tax as punitive (e.g. "the Obama administration says it's for economic reasons, but this is nothing more than populist pandering resulting from fear of losses in November...").Why fight with just one hand when the other side will use both?
And anyway, what's wrong with saying that banks need to punished when the meaning of punished is to pay taxpayers taxpayers back? He objects that this was portrayed as "a trip to the woodshed for misbehaving banks," but isn't that how changing incentives works? Would bank behavior improve in the future if they weren't asked to pay for the damage they caused, if they weren't figuratively "taken to the woodshed"? How do you change incentives without the fear of a penalty (punishment) of some sort? How do you credibly establish that the penalty will be assessed in the future if it is not assessed now?
We're not even asking that banks and other financial institutions pay the full cost of the damage they caused, only the part that taxpayers covered. That is far, far short of the total damage.
I don't want politics to be used to implement bad economic policy as has clearly happened in the past, so I fully agree that the economic arguments need to be clearly articulated. Good economics is, or at least should be, a necessary condition before the political arguments are made. But good economics is not a sufficient condition for good policy, and the political arguments have a role to play.
[I'm not completely comfortable with this argument, so let me offer it as something to argue for or against rather than a solidly held position.]
Geithner: Dead Man Walking?, by Barry Ritholtz: As the pile of revelations regarding the NY Fed’s bailout of AIG gets deeper and uglier, the sense that Treasury Secretary — and former NY Fed President — is a short timer.
On the interview with Jim Bianco, he mentioned Geithner was a dead man walking — and He has been for sometime. The White House is just waiting for the right time to dump him.
That might be true — and changing the preserve the status quo parts of the Economic team is a good idea.
But what does that say about Summers? In some quarters, he is the most important person on the planet — Politico shows the President’s calendar everyday. He has a daily economic briefing at 10AM everyday when he is in town.
This briefing is run by Summers.
In other words, Summers controls the economic information flow to the President. With this as a job description, Treasury Secretary is a step down . . .
Summers is not the only person in the world with brains, but no matter his talents, appointing Summers as Treasury Secretary would be a political disaster. If Obama believes he is indispensable, better to give him an important role that is out of the public eye. That's essentially the job he has now, but he is still in public more than I think is necessary. I don't think it helps the administration on net.
As for Geithner, I'm not calling for his head, but I wouldn't step forward to defend him either (and I'd be interested to hear from the Internet's Chief Treasury Applogist Officer). In any case, I'd be surprised if the administration actually removes him.
Monday, January 25, 2010
Here's the administration's latest bright idea:
Obama Seeks Freeze on Many Domestic Programs, by Jackie Calmes, NY Times: President Obama will call for a three-year freeze in spending on many domestic programs... The officials said the proposal would be a major component both of Mr. Obama’s State of the Union address...Brad DeLong reacts (see here too):
Barack Herbert Hoover Obama?, by Brad DeLong: For some time I have been worried about fifty little Herbert Hoovers at the state level. Right now it looks like I have to worry about one big one...
What we are talking about is $25 billion of fiscal drag in 2011, $50 billion in 2012, and $75 billion in 2013. By 2013 things will hopefully be better enough that the Federal Reserve will be raising interest rates and will be able to offset the damage to employment and output. But in 2011 GDP will be lower by $35 billion--employment lower by 350,000 or so--and in 2012 GDP will be lower by $70 billion--employment lower by 700,000 or so--than it would have been had non-defense discretionary grown at its normal rate. (And if you think, as I do, that the federal government really ought to be filling state budget deficit gaps over the next two years to the tune of $200 billion per year, the employment numbers are more like 3.3 and 3.7 million in 2011 and 2012, respectively.) ...
As one deficit-hawk journalist of my acquaintance says this evening, this is a perfect example of the fundamental unseriousness of Barack Obama and his administration: rather than make proposals that will actually tackle the long-term deficit in a serious way--either through future tax increases triggered by excessive deficits or through future entitlement spending caps triggered by excessive deficits--he comes up with a proposal that does short-term harm to the economy as an alternative to tackling the deficit in any serious and significant way.
As another points out, it is hard to imagine a less competent legislative operation: it would be one thing to offer a short-term discretionary spending freeze (or long-run entitlement caps) in return for fifteen Republican senators signing on to revenue enhancement triggers. It's quite another to negotiate against yourself by attacking employment in the short term. ...
I can't disagree at all. This is pretty disappointing.
The long-term budget problem is due to primarily one thing, rising health care costs. Everything else is dwarfed by that problem. If we solve the health care cost problem, the rest is easy. If we don't solve it the rest won't matter.
This was an opportunity for Obama to explain the importance of health care reform and how it relates to the long-term debt problem. Why not emphasize this?:
Sam Stein: Orszag Calls Senate Health Care Bill Biggest Cost-Container Ever Considered: The health care bill before the Senate would cut costs and reform health-care delivery more than any piece of legislation in American history, White House budget director Peter Orszag declared on Wednesday. "The bottom line is the bill that is currently on the Senate floor contains more cost containment and delivery system reforms in its current form than any bill that has ever been considered on the Senate floor period," the Office of Management and Budget director told reporters...
Instead we get cheap political tricks that are likely to backfire. How will this look, for example, if there's a double dip recession, or if unemployment follows the dismal path that the administration itself has forecast?
This seems to be a case of the former Clinton people in the administration (or wannabees) trying to relive their glory days instead of realizing that those days are gone, the world is different now and it calls for different solutions.
I wasn't in favor of having so many Clinton administration people in this administration, and nothing so far has caused me to change that assessment. They're nothing but trouble.
Update: Here's an updated interpretation of the policy.
Given the importance of automatic stabilizers, why hasn't more attention been focused on how well our present set of automatic stabilizers has fared in this recession, and how we might do better?:
Paul Krugman's view on Ben Bernanke's reconfirmation as Fed Chair:
The Bernanke Conundrum, by Paul Krugman, Commentary, NY Times: A Republican won in Massachusetts — and suddenly it’s not clear whether the Senate will confirm Ben Bernanke for a second term as Federal Reserve chairman. That’s not as strange as it sounds: Washington has suddenly noticed public rage over economic policies that bailed out big banks but failed to create jobs. And Mr. Bernanke has become a symbol of those policies.
Where do I stand? I deeply admire Mr. Bernanke, both as an economist and for his response to the financial crisis. ... Yet his critics have a strong case. In the end, I favor his reappointment, but only because rejecting him could make the Fed’s policies worse...
Mr. Bernanke is a superb research economist..., his academic expertise and his policy role meshed perfectly, as he used aggressive, unorthodox tactics to head off a second Great Depression.
Unfortunately, that’s not the whole story. Before the crisis struck, Mr. Bernanke was very much a conventional, mainstream Fed official, sharing fully in the institution’s complacency. Worse, after the acute phase of the crisis ended he slipped right back into that mainstream. Once again, the Fed is dangerously complacent...
Consider two issues: financial reform and unemployment.
Back in July, Mr. Bernanke spoke out against ... the creation of a new consumer financial protection agency. He urged Congress to maintain the current situation, in which protection of consumers from unfair financial practices is the Fed’s responsibility.
But here’s the thing: During the run-up to the crisis, as financial abuses proliferated, the Fed did nothing. In particular, it ignored warnings about subprime lending. So it was striking that ... Mr. Bernanke ... gave no reason to believe that the Fed would behave differently in the future. ... As I said, the Fed has returned to a dangerous complacency.
And then there’s unemployment. The economy may not have collapsed, but it’s in terrible shape... Nor does Mr. Bernanke expect any quick improvement... So what does he propose doing...?
Nothing. Mr. Bernanke has offered no hint that he feels the need to adopt policies that might bring unemployment down faster. ... It’s harsh but true to say that he’s acting as if it’s Mission Accomplished now that the big banks have been rescued.
What happened...? My sense is that Mr. Bernanke, like so many people who work closely with the financial sector, has ended up seeing the world through bankers’ eyes. ... Given that, why not reject Mr. Bernanke? There are other people with the intellectual heft and policy savvy to take on his role: ...possible choices would be ... Alan Blinder ... and Janet Yellen...
But — and here comes my defense of a Bernanke reappointment — any good alternative ... would face a bruising fight in the Senate. And choosing a bad alternative would have truly dire consequences for the economy.
Furthermore, policy decisions at the Fed are made by committee vote. And while Mr. Bernanke seems insufficiently concerned about unemployment..., many of his colleagues are worse. Replacing him with someone less established, with less ability to sway the internal discussion, could end up strengthening the hands of the inflation hawks and doing even more damage to job creation.
That’s not a ringing endorsement, but it’s the best I can do.
If Mr. Bernanke is reappointed, he and his colleagues need to realize that what they consider a policy success is actually a policy failure. We have avoided a second Great Depression, but we are facing mass unemployment — unemployment that will blight the lives of millions of Americans — for years to come. And it’s the Fed’s responsibility to do all it can to end that blight.
I don't disagree at all with the pressure on the Fed to do more, unemployment is a big problem and I'm ready to give further easing a try (particularly since Congress has dropped the ball on additional fiscal policy to help with job creation). But I see this more as a disagreement over what type of monetary policy is best for unemployment now and in the future than I do as Bernanke taking the side of bankers over the unemployed.
Harold Ford thinks we should cut taxes and cut the deficit and that the federal government should shrink in size and create jobs.
And that's how stupid you have to be to write an op-ed for our elite papers.
Ford says voters are sending Democrats a clear message:
With one out of five Americans unemployed or underemployed, President Obama and the Democratic Party need to shift attention away from health care...
Yet what is the second of his four recommendations in the op-ed?:
Second, we should pass a more focused health reform bill...
The whole thing's a mess. For example, he mixes up short-run and
long-run problems, and he doesn't realize the different conditions that
existed when Clinton was in office as compared to now and what that
implies for deficit reduction policy.
Take his call for a "bold effort to create jobs." Besides his recommendation to shift attention away from health care reform by trying to pass a health care reform bill, his other three recommended policies are payroll and supply side tax cuts on business, immigration reform (to make citizenship easier, that's fine, but it won't help with jobs), and deficit reduction (which won't help with jobs either, and will likely reduce the level of social insurance worsening conditions for the working class and the poor).
So the proposal is, for the most part, for six months of payroll tax cuts
granted to a limited number of firms (those less than five years old), and the
same old tired set of supply side tax cuts that we always hear, most of which
only work in the long-run if they work at all.
To the extent that there would be any job creation effects from these tax cut policies, and some types of tax cuts could help a bit, they are likely to be more than offset by the deficit reduction and his other policy recommendations that work in the opposite direction. Does he really think voters will reward Democrats for making unemployment worse through deficit reduction? With friends like these, who needs Republicans?
Sunday, January 24, 2010
The Founders were deeply skeptical of corporations, by Michael Giberson: ... I ... want to pass along a useful bit of historical observation from Streetwise Professor:
Stevens noted that the Founders were deeply skeptical of corporations. Indeed so. Scalia noted that there are so many corporations them today. Also true. The interesting question is how we got from A (Stevens) to B (Scalia).The story is told in the North, Wallis and Weingast natural state book Violence and Social Orders I’ve blogged about several times, mostly in the context of Russia. The relevant chapter is primarily based on John Wallis’s work. The basic story is that hostility to corporations–reflected very well in Adam Smith’s Wealth of Nations–was due to the fact that historically, English corporations were created by the crown, and were essentially very profitable favors provided to the politically connected. They were, in NWW terms, part of the “closed order” of the natural state, in which access to certain contracting forms was limited to a select powerful few. This animus towards corporations was inherited in the United States, but in the early years of the 19th century, state legislatures confronting issues associated with the financing of new infrastructure turned the corporate form into a prop of an open order system in which this contracting form was made available to all. Rather than limit the right of incorporation to an elite, they made it available to everybody. The system changed from one in which legislatures had to grant every incorporation, to one in which pretty much anybody could incorporate if they met a set of general, universally applicable requirements. Hence, the proliferation of corporations.Thus, Stevens was historically right, but his inference was wrong. The kind of corporation that Adam Smith and the Founders detested was a quite different from the modern corporation that developed in the 19th century. The name was the same, but the entire conceptual and legal basis for corporations old and new were completely different. Indeed, almost inversions of one another. Indeed, the transformation of the corporation from a creation of the closed order to an essential element of the emerging open order explains the empirical phenomenon that Scalia cited.
I think a lot of apparently mysterious things about Ben Bernanke’s career can be solved if you just assume that Ben Bernanke is doing things that a conservative Republican would do because he is a conservative Republican. For example, remember when conservative Republican George W Bush was president and made Ben Bernanke chairman of the Council of Economic Advisors? And remember when Bush put Ben Bernanke in charge of the Fed? ... If it looks like a duck and quacks like a duck, then it’s probably a duck. ...
I note that liberals, in their condescension toward conservatives, sometimes wind up tying themselves into knots about guys like Bernanke. Bernanke is very smart and incredibly accomplished. Many smart liberals think conservatives are dumb. So if Bernanke is so smart, it must be that he’s not really a conservative! But no. Smart conservatives are a very real phenomenon. And in politics the general idea is to give positions of authority to well-qualified people who share your political objectives.
Liberals think Bernanke can't be conservative because he's smart? Let me suggest that the support for Bernanke among some liberals is not the result of unfounded prejudice that only Matt Yglesias is free of, it instead results, at least in part, from the opinions of people who have spend a lot of time with him.
What do those people think, people who have had plenty of time to observe how he walks and talks, and whether he quacks Republican?:
Fed Official Moves Up and Into Politics, by Edmund L. Andrews, New York Times: For years, some of his closest friends did not know that Ben S. Bernanke was a Republican. It is not that Mr. Bernanke has been shy about his views. As an economist at Princeton, he broke new ground on the causes of the Depression. And as a governor on the Federal Reserve Board since 2002, he spoke bluntly about weakness in the job market, the dangers of deflation, the impact of higher oil prices and the need for the Fed to reduce uncertainty by being more open. ... But now Mr. Bernanke ... is moving directly into the political arena, taking over next week as chairman of President Bush's Council of Economic Advisers. He is also on the short list of potential candidates to succeed Alan Greenspan as chairman of the Federal Reserve. The two jobs are related, if only because Mr. Bush will be looking to name a new Fed chairman that he knows well and trusts. Two other possible candidates to succeed Mr. Greenspan, who has been atop the Fed for nearly 18 years, are also former council chairmen: Martin Feldstein, who served under President Reagan; and R. Glenn Hubbard, who worked for President Bush from 2001 to 2003.
Mr. Bernanke built a sterling reputation while at Princeton, and has won widespread praise for his cogent analyses while at the Fed. But he has studiously avoided partisan political issues, at least in public. He has said little about issues at the top of Mr. Bush's agenda,... and his economic writing betrays few hints of political ideology. "If you read anything he's written, you can't figure out which political party he's associated with," said Mark L. Gertler, a professor of economics at New York University who has written more than a dozen papers with Mr. Bernanke. Mr. Gertler, who said he did not know his close friend's political affiliation until relatively recently, added: "He's not ideological. I could imagine Ben working with economists in the Clinton administration." Alan S. Blinder, a longtime colleague at Princeton who has advised numerous Democratic presidential candidates, also said he had worked alongside Mr. Bernanke for years without having any sense of his political views. "We wrote articles together and sat at the same lunch table thousands of times before I knew he was a Republican," Mr. Blinder recalled. ... Mr. Bernanke enjoys enormous credibility among economists in academia as well as on Wall Street..."I think Wall Street would be more comfortable with Bernanke as Fed chairman, if only because he isn't viewed as being ideological," said William C. Dudley, chief United States economist at Goldman, Sachs. The disadvantage is that Mr. Bernanke may not be able to build up close ties in the White House, where Mr. Bush's inner circle places high priority on personal loyalty and passionate support for the White House's policy goals. ...
There is this:
People who know Mr. Bernanke say he is entirely comfortable in supporting President Bush's economic policies. He has expressed little worry about the current budget deficit,... and he has supported Mr. Bush's call to overhaul Social Security. ...
I don't like the Social Security statement either, but in general I don't think we can explain Bernanke's monetary policy stance by blaming it on his being a conservative republican.
Does it even make sense to say Bernanke's economic policies have been ideologically conservative?
This charge that Bernanke is ideologically motivated is all about the fact that Bernanke has not gone above and beyond the massive bailout of the financial system that has distressed conservatives and endorsed aggressive quantitative easing. The idea is that quantitative easing - the purchase of long-term securities by the government - will bring down long-term real interest rates, which is then supposed to spur investment (despite the recession), which then in turn will increase employment (with a considerable lag). Despite the massive intervention that the Fed has undertaken so far - one that has not pleased conservatives at all - the fact that Bernanke won't take policy as far as some, but by no means all on the left think, causes him to suddenly be tagged with the ideological conservative label to explain this resistance?
Sorry, but it just doesn't fit. If you want conservative, listen to someone like John Taylor who would likely already be raising interest rates and winding down asset purchase programs. Listen to someone like former Federal Reserve Bank of St. Louis President William Poole who would have likely let the too big to fail banks fail, Main Street be damned, and elevated inflation over all other goals. Ideological conservatives in general, and the inflation hawks among them in particular, do not approve of what Bernanke has done. Go ahead and criticize Bernanke for his policies, I think there is a genuine debate about quantitative easing that we can have, and it could be that not moving more aggressively is, in fact, a mistake, but don't blame it on his politics.
If you disagree with current policy, if you think it should be taken further, then explain why (and Matt Yglesias has done some of that). But don't take the lazy way out and simply tag Bernanke with an ideological conservative label that doesn't fit, and then use it to explain his policies. If we really had an ideological conservative as Fed Chair, there would be no need to wonder about the underlying politics, there would be no "probably a duck" about it, those policies would likely mean much worse conditions in labor markets right now. I think more could be done to help labor markets with both monetary and fiscal policy (though I should add that I think fiscal policy is a much more effective means of increasing employment, and I'm skeptical about the degree to which quantitative easing would actually work). But I don't believe that the barrier to pursuing these policies is Ben Bernanke's conservative ideology. It's his economics, and he has done far more than most in his career to have those views respected even when you disagree with his conclusions.
Update: Let me add one other thing. The other charge leveled against Bernanke is that his own work supports quantitative easing, yet he resists this policy, so it must be that his political ideology is in the way. Conservatives tried this with Christina Romer and her work on fiscal policy, but she made it clear that she was well aware what her own work said, that her position was fully supported by and consistent with her economics, and she swatted that charge way rather easily.
Bernanke also understands and is well aware of his own work, and of course he knows it better than anyone else, the charge against him is that he is abandoning his own research to serve conservative ideological principles. But the simpler explanation, the one that is actually supported by his past and all the testimonial above about his lack of political passion, is that it is his economics - which has been updated as the crisis evolves and he learns more - that is driving his policy choices. And his economics is not particularly conservative, it's fully consistent with the work that appears in mainstream journals. Again, that's not to say that there is no dispute here, different assumptions lead to different conclusions and there is plenty of room to argue over the best policy. But I just can't agree with the charge that he has abandoned his own research to pursue an ideological course.
Update: On a related note, from Paul Krugman:
Know Your Feds, by Paul Krugman: I’m hearing a lot from people who want Paul Volcker as Fed chair. (Consider the joke about exemplifying too big to fail as having been made). There really is nobody with his stature (literally, as it happens) and moral authority. And he’s a powerful advocate of financial reform.
You should know, however, is that Volcker is usually a hard-money guy. I haven’t had an opportunity to ask him, but my guess is that he’s suspicious of quantitative easing, and would be more likely to side with the Fed’s inflation hawks than with those of us who think the Fed should expand its balance sheet, target higher inflation, and in general do whatever it takes to bootstrap ourselves out of the liquidity trap.
This isn’t a simple question of good versus evil. There are substantive policy disputes, and some very good people are, in my view, on the wrong side of some issues.
Here's the introduction to an analysis of Obama's bank reform proposal by Viral Acharya and Matthew Richardson:
Obama’s sweeping proposal for financial regulation took the world by surprise. Here two of the world’s leading professors of finance explain why it is step in the right direction from the standpoint of addressing systemic risk. They also point out a number of drawbacks that should be fixed.
And here's the analysis. As noted, in general they support the Obama bank plan, but there are caveats to that support. One place they differ a bit from other analysts is on the issue of bank size. They say there are significant economies of scale, and that it is scope rather than scale that matters most. That is, they argue that there is "little rationale for such hard restrictions on size. It is clear that for diversification purposes as well as efficient market-making or liquidity provision, firms need to be large." It is "the complexity of large financial institutions that seems a primary issue in resolving them efficiently, which can be effectively addressed through scope restrictions.":
Saturday, January 23, 2010
Some news about the deficit commission:
... Also on Saturday, Mr. Obama endorsed a bill scheduled for a Senate vote on Tuesday which would create a bipartisan budget commission and require that its recommendations for slashing deficits would get a vote in Congress this year. But he remained ready to establish a panel by executive order if the vote falls short on Tuesday, despite his support. ...
Brad DeLong explains why he thinks a deficit commission is a bad idea if you want to actually do something about the long-term budget problem:
Let's pick ten Republican or near-Republican senators typically called "moderates" (some of whom have retired since 2003): Collins, Domenici, Grassley, Gregg, Hatch, Snowe, Specter, Voinovich, Nelson, and Lincoln. Only two of them (Blanche Lincoln and Judd Gregg) opposed the unfunded Medicare Part D. Only one of them (Olympia Snowe) opposed the 2003 tax cut, even though it was very clear at the time that permanent (as opposed to temporary recession-fighting) tax cuts were the last thing that America needed. And none of them opposed the 2001 tax cut--even though Alan Greenspan was at the time wandering around Capitol Hill whispering that it was bad policy, and that we were very likely to rue the day it had passed.
So these aren't deficit hawks. These are something else--deficit chickens, deficit doves, deficit turkey-vultures.
Yet they are the kinds of senators who are the big boosters of the Commission. Senator Voinovich went to talk to Obama to urge him to support the Commission--very much like an arsonist pleading to be put in charge of the fire department. What did he say to the President? "Stop me before I legislate again!"?
The idea is that by voting for the deficit commission that they can insulate themselves against the charge of fiscal irresponsibility: "What do you mean I'm not fiscally responsible? I voted for the deficit commission!" And because the ability to vote for pointless deficit commissions exists, Collins, Domenici, Grassley, Gregg, Hatch, Snowe, Specter, Voinovich, Nelson, Lincoln, and all their ilk are under less pressure to actually do something to create an American government that lives within its means and has the means to live.
Richard Thaler on walking away:
Underwater, but Will They Leave the Pool?, by Richard H. Thaler, Commentary, NY Times: ...Why is the mortgage default rate so low? After all, millions of American homeowners are “underwater”... Yet most of them are dutifully continuing to pay their mortgages, despite substantial financial incentives for walking away...
Some homeowners may keep paying because they think it’s immoral to default. ... But does this really come down to ... morality? A provocative paper by Brent White, a law professor at the University of Arizona, makes the case that borrowers are actually suffering from a “norm asymmetry.” In other words, they think they are obligated to repay their loans even if it is not in their financial interest to do so, while their lenders are free to do whatever maximizes profits. ...
That norm might have been appropriate when the lender was the local banker. More commonly these days, however, the loan was initiated by an aggressive mortgage broker who maximized his fees at the expense of the borrower’s costs, while the debt was packaged and sold to investors who bought mortgage-backed securities in the hope of earning high returns, using models that predicted possible default rates.
The morality argument is especially weak in a state like California or Arizona, where mortgages are so-called nonrecourse loans. ... Nonrecourse mortgages may be viewed as financial transactions in which the borrower has the explicit option of ... walking away. Under these circumstances, deciding whether to default might be no more controversial than deciding whether to claim insurance after your house burns down.
In fact, borrowers in nonrecourse states pay extra for the right to default without recourse. In a report..., Susan Woodward, an economist, estimated that home buyers in such states paid an extra $800 in closing costs for each $100,000 they borrowed. These fees are not made explicit to the borrower, but if they were, more people might be willing to default, figuring that they had paid for the right to do so.
Morality aside, there are other factors deterring “strategic defaults,” whether in recourse or nonrecourse states. These include the economic and emotional costs of giving up one’s home and moving, the perceived social stigma of defaulting, and a serious hit to a borrower’s credit rating. Still, if they added up these costs, many households might find them to be far less than the cost of paying off an underwater mortgage.
An important implication is that we could be facing another wave of foreclosures, spurred less by spells of unemployment and more by strategic thinking. ... So far, lenders have been reluctant to renegotiate mortgages, and government programs to stimulate renegotiation have not gained much traction.
Eric Posner ... and Luigi Zingales ... have made an interesting suggestion: Any homeowner whose mortgage is underwater and who lives in a ZIP code where home prices have fallen at least 20 percent should be eligible for a loan modification. The bank would be required to reduce the mortgage by the average price reduction of homes in the neighborhood. In return, it would get 50 percent of the average gain in neighborhood prices — if there is one — when the house is eventually sold.
Because their homes would no longer be underwater, many people would no longer have a reason to default. ... Banks are unlikely to endorse this if they think people will keep paying off their mortgages. But if a new wave of foreclosures begins, the banks, too, would be better off under this plan. ...
This plan, which would require Congressional action, would not cost the government anything. It may not be perfect, but something like it may be necessary to head off a tsunami of strategic defaults.
I think that people in non-recourse states understood the option a bit differently. If medical costs wipe you out, if the demand for the widgets you produce falls permanently causing you to lose your job and also have trouble finding a new one, or if other things out of your control cause you to be unable to pay your mortgage, then you won't lose your car, furniture, heirlooms, etc. in a forced liquidation to pay of as much as possible of the remaining balance on the housing loan. Non-recourse protects you fro losing everything. But a change in the price itself wasn't part of the deal. You get to keep the upside, but have to eat the downside - that's how it worked and you knew that going in. At least, that's how I always understood the implicit deal (enforced in part by a fear of losing access to credit in the future, social norms, etc.).
If you were underwater and lost your job and had to move to get a new job, that was one thing, there was little choice but to default and use the protection embedded in non-recourse. But simply walking away when you were still employed and could still afford the mortgage was another. That wasn't the option embedded in the implicit contract. Following this implicit rule lowers costs for everyone, that's the sense in which, contrary to claims above, there's a financial incentive to follow this norm -- should I pay more for my loan so that you can speculate and then walk away from a bad bet (there are unrecoverable costs each time a default is socialized)? That's different than using non-recourse as a form of social insurance against contingencies beyond a household's control, and paying extra closing costs for that insurance.
The change in norm will occur when people begin to believe that they weren't just unlucky, but instead were duped or treated unfairly in some other way. If it wasn't just a bad bet, the kind you reluctantly pay when you lose, but was instead caused by some unfair factor that only becomes evident ex-post, then the norm begins to change as people begin to realize what really happened to them. They don't want to believe or admit to themselves that they were fooled into a loss rather than the victim of a fair bet, but that changes as the losses and resentment mount, and as the evidence that things weren't what they seemed comes into focus. And that does seem to be happening.
Axel Leijonhufvud has a proposal that attempts to overcome the "I win, you lose" nature of banking by imposing a double liability scheme that forces managers to pay for their own mistakes.
He does not believe that attempts to limit leverage, something I've been advocating, will be effective since the rules can always be "circumvented by highly motivated and very smart people." However, this objection applies to his proposal as well, something he acknowledges parenthetically toward the end of his argument. So do both, restructure banking pay along the lines suggested below or along the lines suggested elsewhere, and also impose rules that attempt to bound leverage. Then hope that these measures, in combination with other policies, will have the intended effects:
A modest proposal, by Axel Leijonhufvud, Vox EU: The crisis has shown that the commercial banks, the investment banks, the shadow banks, and sundry other financial institutions have assumed too much risk. It has also been demonstrated that when risks do materialise, the costs are borne by the taxpayers and the unemployed – not by bankers. The bankers have been playing “I win, you lose” with the general public. What happened to the capitalist system where everyone was supposed to pay for their own mistakes, not for those of others?
Jeff Sachs wants to improve the policy process in Washington:
Fixing the Broken Government Policy Process, by Jeffrey D. Sachs, Commentary, Scientific American: The breakdown of the Washington policy process has four manifestations. First is ... inability to focus beyond the next election. “Shovel-ready” projects squeeze out attention to vital longer-term strategies... Second, most key decisions are made in congressional backrooms through negotiations with lobbyists, who simultaneously fund the congressional campaigns. Third, technical expertise is largely ignored or bypassed, while expert communities such as climate scientists are falsely and recklessly derided by the Wall Street Journal... Fourth, there is little way for the public to track and comment on complex policy proposals working their way through Congress or federal agencies.
These failings take a special toll on the challenges of sustainable development because there is no quick fix... Instead of getting long-term strategies for adopting low-carbon energy sources, upgrading the power grid, encouraging electric transportation and so on, we are getting cash for clunkers, subsidies for corn-based ethanol, and other ineffective and highly costly non-solutions delivered by large-scale lobbying. ...
Some free-market economists say sustainable development should be left to the marketplace, but the marketplace now offers no incentive to reduce carbon emissions. ... When we let the private sector enter into public decision making, we end up with relentless lobbying, money-driven politics, suppression of new technologies by incumbent interests and sometimes miserable choices devoid of serious scientific content. How can business and government work together without policies falling prey to special interests?
First, the administration should initiate a more open, transparent and systematic public-private policy process in each major area of sustainable development. ... A high-level roundtable would be established in each area... The proceedings would be open to the public, Web-based, and available for submissions and testimony by interested parties. ... Second, the administration would prepare draft legislation, on which the experts on the roundtables and the general public would be invited to comment through Web-based submissions. Third, the congressional processes, too, would become Web-supported. Hearings and testimony would be open to the public, and Web sites would encourage comments and additional evidence.
These measures would infuse the policy process with vastly more accountability and technical expertise and would help keep the lobbying in check. They would open the policy process to the public to ensure ample and vigorous discussion. ...
Currently lobbyists are still allowed to contribute massively to congressional campaigns and to political action committees. ... A major step toward reform would be to prohibit campaign contributions by individuals employed by registered lobbying firms. ...
Even if this would fix the problem, can a broken policy process be used to fix a broken policy process?
Friday, January 22, 2010
- On Efficient Markets and Cognitive Illusions - Rajiv Sethi
- The Great Recession and the Great Depression - Peter Temin
- Glass-Steagall vs. the Volcker Rule - Economix
- The Living Standards of the Poor -- Part I - Progressive Fix
- Volcker Wins Confirmation - New York Times
- The Hypocrisy of Corporate Personhood - EconoSpeak
I didn't want to be right about this (video from 12/17/2009):
From Market Talk:
...It seems hard to believe that Congress would not approve the President’s choice for the Federal Reserve, but the uncertainty of it is hanging in the air, after the confirmation vote was delayed to next week. Some time next week. The Fed chairman’s term expires Sunday.
Let’s just say it wouldn’t exactly send the right message to the rest of the world, and the bond market especially, should Congress vote Bernanke out. You have to expect a good amount of this is just posturing, something Congress does better than any other group on the planet. But, you know, wars tend to start with a single, errant shot.
The latest spanner in the works came from Nevada’s Harry Reid, who said he’s still undecided about how to vote. Reid happens to be the Senate’s Democratic leader, so his voice carries some amount of water. The odds are still that he gets reappointed — a senior Senate Republican aide said it’s not an issue as at least four GOPers intend to vote for him — but even the fact that it’s being discussed just a week before his term ends should give you some indication of just how unsettled things are these days....
What a great time to give financial markets a big dose of uncertainty along with the potential shock of replacing the Fed chair.
Update: What happens if he is not reappointed before his term ends on 1/31/2010?:
The chairman and vice chairman of the FOMC are chosen separately from the main Board of Governors. At the first meeting of the year, the committee members vote for the two positions. The chairman of the Board is usually named chairman of the committee and the president of the New York Fed is traditionally the vice chairman. At next week’s meeting, the FOMC is expected to vote for Bernanke and William Dudley of the New York Fed to take those positions for 2010. Though Bernanke’s term as chairman of the Fed’s Board is up on Jan. 31, he retains his position as Fed governor and remains on the FOMC. As long as he stays on the Board of Governors, he can lead the rate-setting committee.
But things won’t be as stable at the Board of Governors. When Bernanke’s term expires on Jan. 31, Vice Chairman Donald Kohn is set to become acting chairman. Kohn remains in that position until Bernanke or another nominee is confirmed.
Update: Brad DeLong:
Don't Block Ben!, by Brad DeLong: I wish Boxer and Feingold had not done this:
Patrick Yoest and Luca di Leo: Boxer, Feingold Come Out Against Fed Chairman Bernanke - WSJ.com: Ben Bernanke faced ebbing support for a second term as Federal Reserve chairman as more senators adopted a populist, antibank stance even as the White House launched a public push to defend his candidacy. The erosion of support crossed party lines. Two Democratic senators facing re-election in November, Barbara Boxer of California and Russ Feingold of Wisconsin, on Friday joined two Democrats and an independent who previously announced their opposition. Ten Republicans say they, too, will oppose Mr. Bernanke.
Alarmed that there might not be the 60 votes in the Senate needed to extend Mr. Bernanke's term beyond its Jan. 31 expiration, the White House entered the fray publicly for the first time, with officials trying to win support among Democratic senators...
First, a correction to the story: it's not 60 votes, it's 51--for there are many more people who want to be on record as opposing Bernanke than who actually want the Federal Reserve to be headless on February 1.
Second, I think Boxer and Feingold have fallen into a trap. If Bernanke's nomination fails, it will be because of a combination of left Democrats and right Republicans. Why would right Republicans vote against the nomination of a Republican-appointed hard-money Republican? So that they can then vote against financial regulatory reform without taking political damage. "You are too friendly to the banks!" their opponents will say. And they will respond: "Oh yeah? Your president wanted bank-friendly Ben Bernanke to stay at the head of the Fed. AND WE BLOCKED HIM!!"
Boxer and Feingold, it seems to me, are enabling the future Republican ability to block financial reform without taking political damage from it.
So I find myself thinking about last August, and the Bernanke renomination:
Bernanke's Reappointment: David Wessel
Obama to Reappoint Fed Chairman Ben Bernanke - WSJ.com: President Barack Obama will announce Tuesday that he is nominating Ben Bernanke for a second four-year term as chairman of the Federal Reserve, White House Chief of Staff Rahm Emanuel said...
I think Bernanke is one of the best in the world for this job--I cannot think of anyone clearly better. He has made only one big mistake--buckling under to pressure from all those yelling at him for enabling moral hazard and not finding a way to takeover Lehman Brothers, and he is not going to make the same mistake again...
I am surprised that he is being reappointed. I would have thought that the combination of people angry because he has given too much public money to the banks and people angry because he didn't stop the recession would together make him damaged and that Obama would want to bring in a fresh face--never mind that Bernanke had no way to try to lessen the recession save by policy steps that inevitably involve giving money to the banks. It shows, I think, a seriousness about getting the policies right--or as close to right as we can--that I like to see in a president...
Update: See also Why Bernanke should be reconfirmed, by Jim Hamilton.
Update: Support from a staunch libertarian.
Some analysts have been hailing recent increases in part-time workers as good news since many of them will end up being hired permanently once firms realize the recovery is on solid footing. For example, Calculated Risk says:
The thinking is that before companies hire permanent employees following a recession, employers will first increase the hours worked of current employees and also hire temporary employees. Since the number of temporary workers increased sharply, some people think this might be signaling the beginning of an employment recovery.But, CR says, be careful:
However, there has been some evidence of a shift by employers to more temporary workers, and the saying may become "We are all temporary now!", so use this increase with caution.
In recent work, David Autor and Susan Houseman throw "cold water on the notion" that temporary workers turn into full-time workers, and they support the cautious interpretation CR talks about:
Temporary gains, by Peter Dizikes, MIT News Office: While the U.S. economy struggles, one form of employment is on the rise: Temporary jobs. In December, the country lost 85,000 jobs overall, but added 47,000 temp positions, according to the Bureau of Labor Statistics. Increasingly America relies on these contingent employees — or “disposable workers,” as BusinessWeek put it in a recent cover story.This made think I should reconsider some of the job creation strategies I've been promoting, but perhaps these results don't apply more generally?:
For many workers, these jobs are stop-gap measures, but social scientists have long floated another idea: That temp positions help low-skill workers to acquire experience and eventually join the permanent workforce in better long-term jobs. Now, a new working paper co-authored by MIT economist David Autor throws cold water on that notion. Not only do many temp employees struggle to find long-term or “direct-hire” work, the study says, but holding a temp job generally lowers a worker’s employment and income prospects over time.
“Temp jobs have some initial positive impact,” says Autor. “But not only do they end quickly, they tend to displace what a person would have done instead, either taking a direct-hire job or engaging in the kind of search that could lead to a direct-hire job.” ...
To be sure, a valid question is how broadly these findings apply, given Michigan’s acute economic struggles. However, as Autor notes, the study’s data starts when the state economy was growing in the late 1990s, then continues through the slump of the early 2000s and the subsequent rebound; it ends before the current recession began.
Moreover, Autor and Houseman believe there is no regional bias in the study because the overall figures for people finding both temporary and long-term jobs through Work First in Detroit closely match the equivalent data for other regions, including North Carolina and Missouri. The researchers also say temp workers fared no differently in the production-line jobs associated with Michigan than in the kinds of clerical jobs found everywhere.
But Autor gives an important qualification that may give some hope that these kinds of programs will be more effective when used to combat unemployment in a recession -- where many of the laid-off workers are skilled -- as compared to trying to find employment for low-skilled workers who experience extended unemployment spells:
“I don’t think it’s anything specific about Detroit, or the type of work in which temps are placed,” says Autor. “In terms of the external validity of the conclusions, my main concern is how this relates to a more skilled population. There we don’t have a clear answer yet.” It is possible that temp jobs for people with college degrees do lead to greater opportunities and earnings — something the researchers would study if the right data set presents itself, Autor says. Given the way America’s temporary workforce keeps growing, there may be plenty of those numbers for Autor to scrutinize in the future.
The the Senate health care bill is "much, much better than nothing":
Do the Right Thing, by Paul Krugman, Commentary, NY Times: A message to House Democrats: This is your moment of truth. You can do the right thing and pass the Senate health care bill. Or you can look for an easy way out, make excuses and fail the test of history.
Tuesday’s Republican victory in the Massachusetts special election means that Democrats can’t send a modified health care bill back to the Senate. That’s a shame because the bill that would have emerged from House-Senate negotiations would have been better... But the Senate bill is much, much better than nothing. And all that has to happen to make it law is for the House to pass the same bill, and send it to President Obama’s desk.
Right now, Nancy Pelosi, the speaker of the House, says that she doesn’t have the votes to pass the Senate bill. But there is no good alternative.
Some are urging Democrats to scale back their proposals in the hope of gaining Republican support. But anyone who thinks that would work must have spent the past year living on another planet.
The fact is that the Senate bill is a centrist document, which moderate Republicans should find entirely acceptable... very similar to the plan Mitt Romney introduced in Massachusetts... Yet it has faced lock-step opposition from the G.O.P., which is determined to prevent Democrats from achieving any successes. Why would this change now that Republicans think they’re on a roll?
Alternatively, some call for breaking the health care plan into pieces so that the Senate can vote the popular pieces into law. But anyone who thinks that would work hasn’t paid attention...
Think of health care reform as ... a three-legged stool. You would, rightly, ridicule anyone who proposed saving money by leaving off one or two of the legs. Well, those who propose doing only the popular pieces of health care reform deserve the same kind of ridicule. Reform won’t work unless all the essential pieces are in place. ...
So reaching out to Republicans won’t work, and neither will trying to pass only the crowd-pleasing pieces of reform. What about the suggestion that Democrats use reconciliation — ...which bypasses the filibuster — to enact health reform?
That ... may become necessary... But reconciliation, which is basically limited to matters of taxing and spending, probably can’t be used to enact many important aspects of reform... it’s not even clear if it could be used to ban discrimination based on medical history.
Finally, some Democrats want to just give up on the whole thing.
That would be ... utter political folly. It wouldn’t protect Democrats from charges that they voted for “socialist” health care... Congress ... already passed reform. All it would do is solidify the public perception of Democrats as hapless and ineffectual. And anyway, politics is supposed to be about achieving something more than your own re-election. ...
Now, part of Democrats’ problem since Tuesday’s special election has been ... waiting in vain for leadership... Mr. Obama has conspicuously failed to rise to the occasion.
But members of Congress, who were sent to Washington to serve the public, don’t have the right to hide behind the president’s passivity.
Bear in mind that the horrors of health insurance — outrageous premiums, coverage denied to those who need it most and dropped when you actually get sick — will get only worse if reform fails, and insurance companies know that they’re off the hook. And voters will blame politicians who, when they had a chance to do something, made excuses instead.
Ladies and gentlemen, the nation is waiting. Stop whining, and do what needs to be done.
Economics of Contempt has A Few Assorted Thoughts on Financial Reform. I wish I could disagree with his contention that the reform proposals from the administration represent little more than "a fairly transparent political stunt." Maybe I'll be pleasantly surprised, and I hope I am, but it's hard to be optimistic (and things like this don't help):
- The single best thing we could do for financial reform: Triple the budgets of all financial regulatory agencies. Immediately. Regulators are woefully understaffed; this is fact.
- Obama has proposed
banning banks' prop trading desks and internal hedge funds. I'm fine
with that, as long as it's done properly. From a P&L perspective, this
is obviously bad for the Street. From a public policy perspective
though, there's really no compelling reason why the banks need to have
prop trading desks or internal hedge funds.
But you can't simply prohibit banks from buying and selling securities for their own account, because that's precisely what market-makers do. Market-makers have to stand ready and willing to buy or sell securities for their own account, at firm bid and offer prices. If an investor is looking to sell a security, the market-maker will buy the security using its own capital, and hold it in inventory until an investor who's looking to buy the security surfaces. This is different from having a prop trading desk, which has no market-making obligations, and essentially acts as a hedge fund (except it has the not-insubstantial advantage of being inside the prime broker).
Some people will claim that it's impossible to distinguish between market-making trades and proprietary trades, but that argument is completely baseless. The banks themselves already distinguish between their market-making trades and their proprietary trades, as there's a whole different set of rules for proprietary versus market-making trades. So don't be fooled by that argument.
In any event, I don't even know why I took the time to write about this, because there's zero chance the proposals Obama announced today will ever be law. This was a fairly transparent political stunt — the White House needed to do something to take the media's focus off of health care 24/7, so they flew in Volcker and announced some proposals that sound good to the media. The two Senate staffers I talk to regularly both said their offices were basically ignoring Obama's proposals, because even if the White House fights for them (which they won't), Chris Dodd has no intention of inserting them into his committee's bill. I like how some people think Obama's proposals represent a fundamental turning point on financial reform, because....well, clearly this is their first rodeo. (Hence the uber-quixotic language they use to describe financial reform.)
This, from John Taylor, is just sad:
"[N]ot one counterparty, derivative counterparty to Lehman, filed for bankruptcy after the Lehman case. The major creditors who did not fail. So it's hard to find a direct knock on effects from that in the data."What?! First of all, Lehman's biggest derivatives counterparties — the other dealers — were virtually all bailed out by their governments. Second of all, there were lots of hedge funds that failed because of their open derivatives positions with Lehman, and especially with Lehman Brothers International (Europe). The fact that John Taylor didn't know about these hedge fund liquidations at the time doesn't mean they never occurred. They occurred. Oh believe me, they occurred.
Thursday, January 21, 2010
I missed this when it first came out earlier this month:
Prospects for Employment: Evidence from Prior Recoveries, by Eric S. Rosengren, President, FRB Boston
Unfortunately, the prospects for employment aren't so good:
To sum up my remarks and conclude, I think we can gain insights on this recovery from the experience and trends of the past. Certainly for economies that experience substantial financial shocks, recovery is normally quite slow. While inventory rebuilding will likely provide some spark, the strength of underlying demand as government stimulus subsides is an open question.
The employment picture overall has improved, and the outlook is certainly much brighter than one year ago. Layoffs are abating, although many firms are not yet ready to do new permanent hiring. Any significant hiring will likely have to wait while current labor resources are more fully utilized.
So it appears that this recovery will likely experience only a slow improvement in the employment picture, and that the unemployment rate will remain quite elevated during the early phases of the recovery. GDP growth is expected to be strong enough to produce some employment growth, but that rate of employment expansion will not likely be rapid enough to put a large dent in the unemployment rate.
Our research and analysis at the Boston Fed suggests that with significant capacity in labor markets, wages and salaries and the ability of businesses to increase prices are all likely to be restrained, resulting in little immediate inflationary pressures. In my view this should allow for accommodative monetary policy to continue to support the economy until the underlying demand of consumers and businesses becomes self-sustaining.
Here are a few graphs from the presentation:
Have recent political events helped the administration to finally realize that labor markets and the unemployed need more help? I wish I could answer with an enthusiastic, yes, the administration has learned this lesson. But while there's some evidence the administration recognizes both the political and economic importance of addressing the unemployment problem, we'll have to see how hard the administration pushes for proposals that might help create jobs or ease the consequences for those who cannot find employment despite their best efforts. (They could start by pressuring the Senate to quickly take up and act upon the very modest job creation bill the House has already passed. Until the administration at least does that, it's hard to take the proclamations about job creation seriously.)
Update: Paul Krugman:
A Note On The Economy: Quite aside from everything else going on, the economic recovery isn’t looking very good. Unemployment claims are stalled at a level that bodes ill for for the overall employment picture (don’t count on falling unemployment until that number falls well below 400,000). And the 10-year bond rate, which is my personal index of the market’s expectations about recovery, has been falling off again after rising for several weeks.
No reason to panic — but it does look as if this recovery is going to be jobless for quite a while.
Maybe there's no reason to panic, and perhaps it's too late to do much to boost employment at this point (though I think we should still try, and as just noted, we can still give more help through income maintenance and other programs to those who are trying to find work, but are unable to do so, and this will have indirect job creation effects). It's frustrating to watch the slow recovery of labor markets when there's something that could have been done about it if there had been a bit more panic about the coming unemployment problem months ago.
Oh, one more thing. Given the poor outlook for employment, why are we even talking about raising interest rates or balancing the budget now? It's too soon for that.
Just what we need, an increase in the ability of corporations to exert political influence:
Justices Overturn Key Campaign Limits, by Adam Liptak, NY Times: Sweeping aside a century-old understanding and overruling two important precedents, a bitterly divided Supreme Court on Thursday ruled that the government may not ban political spending by corporations in candidate elections.
The ruling was a vindication, the majority said, of the First Amendment’s most basic free speech principle — that the government has no business regulating political speech. The dissenters said allowing corporate money to flood the political marketplace will corrupt democracy.
The 5-to-4 decision was a doctrinal earthquake but also a political and practical one. Specialists in campaign finance law said they expected the decision, which also applies to labor unions and other organizations, to reshape the way elections are conducted. ...
Justice John Paul Stevens read a long dissent from the bench. He said the majority had committed a grave error in treating corporate speech the same as that of human beings. ...
[Here's more on this topic from a previous post.] If a legislator votes for health care reform, to limit greenhouse gases, to impose tough regulations on banks, etc., there is nothing to stop corporations from using their billions in profits to target that individual with a blitzkrieg of negative ads. Legislators from small districts cannot match the resources that corporations have at their disposal, and even legislators from large districts would be quite vulnerable. As Andrew Leonard notes:
If the president follows through on his promises to limit the size of financial institutions and to prevent banks from using federally insured deposits to make bets on securities, the banks will fight him with everything they've got. That much we already knew. But now the Supreme Court has handed Wall Street a huge club with which to thwack Obama or any other politician who dares to try to restrain the likes of JPMorgan and Goldman-Sachs. And you can bet they won't be shy to use it.
If we going to allow corporations to participate in this way, we also need accountability. It's bad enough to have a tilted playing field in favor of corporations when they are playing fair, but when they are allowed to make false charges against candidates or about issues and not be held accountable, that's a big problem.
Update: Daniel Greenwood, a professor of law at Hofstra University, emails his response to the decision. One part says:
...We need immediate action to reverse this decision. Even with the Supreme Court's appalling re-write of the First Amendment, the Congress and the state legislatures are free to change corporate law. Every state and the Congress should immediately enact legislation to guarantee that corporate decisions to affect government are made according to democratic and republican norms. This would do it:
This is one of several responses the White House is considering (though if they go this route, the White House version is unlikely to be this restrictive). Another potential response it to require the ad to include the CEO of the corporation saying that the company he or she represents paid for the ad, and that the company stands behind the message of the ad and the claims that it makes. This gets at the accountability issue, but I'm not sure it has much bite.Any corporate decision or expenditure that might affect the American political process, or the rules governing corporate behavior, which is made in this State or would affect the political process in this State, must be approved by a majority vote of every human corporate stakeholder who is a US citizen and might be affected by the decision or expenditure, including directors, managers, employees, human investors (or the human beneficiaries of institutional investors), customers, suppliers and taxpayers who might have to pay additional taxes to replace taxes corporate taxpayers avoid or to clean up messes that such decision might allow. The human beings involved may delegate this decision to elected representatives, including the board of directors of a corporation, so long as the elections of those representatives are held on a fair basis according to democratic norms including one human one vote, limited terms of office, and enfranchisement of all adult humans who are seriously affected by the representatives' actions.
Obama to Propose Limits on Risks Taken by Banks, by Jackie Calmes and Louis Uchitelle, NYTimes: President Obama on Thursday will publicly propose giving bank regulators the power to limit the size of the nation’s largest banks and the scope of their risk-taking activities...
The president, for the first time, will throw his weight behind an approach long championed by Paul A. Volcker... The proposal will put limits on bank size and prohibit commercial banks from trading for their own accounts — known as proprietary trading. ...
Mr. Volcker flew to Washington for the announcement on Thursday. His chief goal has been to prohibit proprietary trading of financial securities, including mortgage-backed securities, by commercial banks using deposits in their commercial banking sectors. ...[T]he concern is a new type of activity in which financial giants like Citigroup, Bank of America and JPMorgan Chase ... operate on two fronts. On the one hand, they are commercial banks, taking deposits, making standard loans and managing the nation’s payment system. On the other hand, they trade securities for their own accounts, a hugely profitable endeavor. This proprietary trading, mainly in risky mortgage-backed securities, precipitated the credit crisis in 2008 and the federal bailout.
Mr. Volcker ... has gradually lined up big-name support for restrictions on such trading. ... Under the new approach, commercial banks would no longer be allowed to engage in proprietary trading, using customers’ deposits and borrowed money to carry out these trades. ...
I want more details, these proposals don't exhaust the needed changes, and who knows what Congress will actually do -- I don't think we'll get anywhere near the amount of change we need when all is mostly said and little actually gets done -- but this is a move in the right direction. Too bad it didn't happen months ago. [dual posted]
John Taylor answers a few of my questions in one part of an interview at Big Think (transcript and video of entire interview, video broken into parts). My biggest disagreement with his answers comes when he says it's time to start "letting interest rates rise appropriately and reducing the amount of quantitative easing," a theme that appears repeatedly in his answers to my questions and to those submitted by others. It's far too early for that, and if anything the Fed should be doing more to combat the slow recovery of labor markets. Where we agree the most is when he says the most important unresolved questions in monetary economics are about the connections between the financial sector and monetary policy. [As a lead-in, Dean Baker asks the first question below, and my questions follow. Questions were emailed in advance of the interview.]:
...Question: Would you advocate an aggressive strategy of
John Taylor: Well, the question is; given that the Taylor Rule has large negative interest rates right now, would I want more quantitative easing? First of all, I don't think the Taylor Rule does show a large negative interest rates right now. That's kind of a myth. The Taylor Rule is pretty simple. It just says, the interest rate should equal 1 1/2 times the inflation rate, plus 1/2 time the GDP gap, plus 1. Well, if you plug in reasonable estimates for what inflation is and what the GDP gap is, I get a number that’s pretty close to zero. Not minus four, minus five, not numbers like that. So, in fact I would say the amount of quantitative easing could be reduced right now. I hope it is reduced in a gradual way. Some of the mortgage purchases I think could be slowed down and then actually reversed.
So, the question is a good one, and I'm glad it was asked because there is a lot I think, of misinformation out there about what the Taylor Rule says. The Taylor Rule is very simple, as I just mentioned. You can say it in a sentence and you plug in the numbers, you don't get minus five, minus six percent. You get something much closer to zero where the interest rate is now. Now, that of course has implications going down the road because it says, to the extent that real GDP picks up; I hope it does, or if inflation picks up; hope it doesn't. But if either of those occur, then you'd have to see interest rates starting to move above the zero to 25 basis point range. And if we don't then we're going to be back in the same kind of situation we were in 2002 through 2004, and that of course could begin to induce bubbles and we certainly don't want that to happen.
Question: Would quantitative easing speed the recovery?
John Taylor: No. I don't think quantitative easing at this point would effectively smooth the recovery. I think right now, based on historical experience, the interest rate is about where it is, it's not that we don't need a lot of quantitative easing. We've had some and I think the job of the Fed now is to bring it back. They're talking about doing that, which is good. But I think, for me, the most important thing now for policy to have a good recovery is to reduce this tremendous amount of uncertainty that exists with both monetary policy and fiscal policy and the uncertainty for monetary policy is, we don't know how rapidly the quantitative easing will be reversed. We don't know what's going to happen with interest rates. There is a lot of questions there. So I’d say, get back to the things that were working during the great moderation period, the '80's and '90's primarily, and that means letting interest rates rise appropriately and reducing the amount of quantitative easing; getting back to where it was through most of policy of the '80's and '90's.
Question: What is the most important unresolved question in monetary economics?
John Taylor: I think the most important unresolved question of monetary economics is the interaction between the financial sector and monetary policy. There's been lots of thinking about it over the years, some of it actually done here at Stanford, e.g. Gurley and Shaw. A lot of it done by Tobin at Yale, Ben Bernanke has done some of it. But I think the most promising part is the combination of the newest work on pricing of bonds and securities. A lot of it's done by [people who] combine that with monetary policy so that you have a sense of what's going to happen to longer term rates when the short rate is reduced. What's going to happen to credit flows and how much are credit flows going to impact the economy?
This crisis has been very clear in demonstrating that more work on the connection between the financial economics and monetary policy is needed. In fact, there's still a lot of questions out there in policy about whether the financial markets performed well, or not. It seems to me, if you look at them, they absorbed a tremendous shock from policies. It's effectively a panic induced by some ad hoc policy changes and they responded quickly and they responded in a way which has been smooth, as the markets themselves. The institutions, the financial institutions of course, have been in great difficulty, but the markets themselves have worked well.
So, to me, where we should focus our attention really is this connection between the financial markets, including the financial institutions and the monetary policy itself.
Question: How important is Fed independence?
John Taylor: I think we need to have both independence and accountability. They go together. It's not one or the other. So, in answer to the question, how important is Fed independence? I say it is very important, but it needs to be matched with accountability.
A lot of the concerns that you're seeing in the Congress, in the country about the Fed; the Ron Paul bill, I think that's a reaction to what looks like a very interventionist action by the Federal Reserve. Not a lot of descriptions of how it actually occurred, there's no reports on what's called a Section 13-3 Intervention. Section 13-3 of the Federal Reserve Act which allows for such actions, but there’s very little reporting on how it actually took place.
So, I think the best thing the Fed can do to get back some of its independence, and quite frankly, I think it's lost a little bit in this crisis. The best thing it can do is be very accountable about some of the interventions in Section 13-3, that's where most of the transparency concerns exist at this point, and then of course to emphasize that the policy that has worked most well was the policy of the '80's and '90's and when we got off track on that, things deteriorated.
I think that some recognition of interest rates being so low for so long in the '02 to '04 period by the leadership would be very important. It’s discussed in the Fed system, is discussed by other central banks, it's discussed quite widely, but some recognition of that seems to me would be important in terms of bringing back some of the independence that the Fed lost.
So, I think that independence, just to summarize, is really important, it's essential, we've seen evidence over time about how it is. But it has to be matched with a strong sense of accountability to the Congress and to the American people of what the Fed is actually doing. ...
Wednesday, January 20, 2010
A new paper from a new colleague:
Parental Job Loss and Infant Health, by Jason Lindo: Abstract While a number of papers have analyzed the effects of job loss on various measures of health, this paper is the first to explore the extent to which the health effects extend to the children of displaced workers. More generally, this research sheds light on the causal link between socioeconomic status and infant health, as job displacements can be thought of as providing a plausibly exogenous shock to income. Specifically, I use detailed work and fertility histories from the Panel Study of Income Dynamics to estimate the impact of parents' job displacements on children's birth weights. These data allow for an identification strategy that essentially compares the outcomes of children born after a displacement to the outcomes of their siblings born before using mother fixed effects. I find that husbands' job losses have significant negative effects on infant health. They reduce birth weights by approximately four percent with the impact concentrated on the lower half of the birth weight distribution.
The paper ends with:
...I have examined the impacts of husbands' job displacements on children's birth weights. My findings represent a nice parallel with Sullivan and von Wachter (2009). Whereas there is evidence that mortality improves during recessions (Ruhm 2000), Sullivan and von Wachter (2009) show that individuals' job losses increase their mortality. Similarly, while Dehejia and Lleras-Muney (2004) present convincing evidence that birth weights improve during recessions, I find that husbands' job displacements have a negative effect on birth weights.
Although these results chip away at the \why do birth weights improve during recessions?" question, much work remains to be done on this topic. My results indicate that some aspects of the macroeconomic conditions besides husbands' job losses must play a major role. In fact, these other aspects must play a role so great that they more than offset the negative consequences of husbands' job losses that I find. What might these things be? Dehejia and Lleras-Muney (2004) show that there is positive selection into motherhood during recessions. That is, that women who have children during recessions are the types who would always tend to have healthier children. Another possible explanation relates to work-induced stress. Specifically, infant health might improve during recessions because women are less likely to be working while pregnant. Similarly, women's increased work activity following husbands' displacements might play a role in explaining the accompanying decline in birth weights.
The results of this paper also shed light on the relationship between socioeconomic status and health. Like prior papers, one could think of the displacement as a plausibly exogenous shock to household income. In that sense, my results suggest that the positive cross-sectional relationship between income and infant health is indicative of the causal link. This in turn implies that policies that provide income support, in addition to increasing consumption, can be expected to have the additional benefit of improving health outcomes.
I'll just add, very briefly, that the results also have implications for the health care debate. Here's more from the paper, including a graph showing how income and birth weights are related:
- One More Thing . . . - The Baseline Scenario
- Consumption Prospects and Rebalancing - Econbrowser
- ‘We entered the crisis with an obsolete regulatory system’ - Money Supply
- The Big Picture - links
- Marginal Revolution - links
- Economix - links
- Credit Writedowns - links
- Free Exchange - links
- Market Talk - links
- naked capitalism - links
- FT Alphaville - links
- Brad DeLong - links