Sunday, February 28, 2010
Robert Reich is worried about the midterm elections:
The Enthusiasm Gap, by Robert Reich ...Dems are heading toward next fall’s mid-term elections with a serious enthusiasm gap: The Republican base is fired up. The Dem base is packing up.
The Dem base is lethargic because congressional Democrats continue to compromise on everything the Dem base cares about. For a year now it’s been nothing but compromises, watered-down ideas, weakened provisions, wider loopholes, softened regulations. Health care went from what the Dem base wanted — single payer — to a public option, to no public option, to a bunch of ideas that the President tried to explain last week, and it now hangs by a string... The jobs bill went from what the base wanted — a second stimulus — to $165 billion of extended unemployment benefits and aid to states and locales, then to $15 billion of tax breaks for businesses that make new hires. Financial regulation went from tough new capital requirements, sharp constraints on derivate trading, a consumer protection agency, and a resurrection of the Glass-Steagall Act – all popular with the Dem base — to some limits on derivatives and a consumer-protection agency inside the Treasury Department..., and it’s now looking like even less. The environment went from the base’s desire for a carbon tax to a cap-and-trade carbon auction then to a cap-and-trade with all sorts of exemptions and offsets for the biggest polluters, and now Senate Dems are talking about trying to do it industry-by-industry.
These waffles and wiggle rooms have drained the Democratic base of all passion. “Why should I care?” are words I hear over and over again from stalwart Democrats who worked their hearts out in the last election. The Republican base, meanwhile, is on a rampage. It’s more and more energized by its mad-as-hell populists. Tea partiers, libertarians, Birchers, birthers, and Dick Armey astro-turfers are channeling the economic anxieties of millions of Americans against “big government.”
Technically, the Dems have the majority in Congress and could still make major reforms. But conservative, “blue-dog” Dems won’t go along. They say the public has grown wary of government. ...
Anyone with an ounce of sanity understands government is the only effective countervailing force against the forces that got us into this mess: Against Goldman Sachs and the rest of the big banks that plunged the economy into crisis, got our bailout money, and are now back at their old games, dispensing huge bonuses to themselves. Against WellPoint and the rest of the giant health insurers who are at this moment robbing us of the care we need by raising their rates by double digits. Against giant corporations that are showing big profits by continuing to lay off millions of Americans and cutting the wages of millions of more... Against big oil and big utilities that are raising prices and rates, and continue to ravage the atmosphere.
If there was ever a time to connect the dots and make the case for government as the singular means of protecting the public from these forces it is now. Yet the White House and the congressional Dem’s ongoing refusal to blame big business and Wall Street has created the biggest irony in modern political history. A growing portion of the public, fed by the right, blames our problems on “big government.”
Much of the reason for the Democrats’ astonishing reluctance to place blame where it belongs rests with big business’s and Wall Street’s generous flows of campaign donations to Dems, coupled with their implicit promise of high-paying jobs once Democratic officials retire from government. This is the rot at the center of the system. ...
But our President is not comfortable wielding blame. He will not give the public the larger narrative of private-sector greed, its nefarious effect on the American public at this dangerous juncture, and the private sector’s corruption of the democratic process. ... He can be indignant– as when he lashed out at the “fat cats” on Wall Street – but his indignance is fleeting, and it is no match for the faux indignance of the right that blames government for all that ails us.
There are two ways to gain votes, one is to move the center in your direction, the other is to fire up the base and increase turnout. On many issues, these two goals work against each other -- satisfying the middle loses the base and vice versa -- but not always. There are issues that both the center and the base agree upon, and pursuing those issues is a win-win in terms of gaining the support of both constituencies. I think there was quite a bit of common ground between the middle and the base on health care, financial reform, and responding to the crisis, but for some reason the administration has not pursued these kinds of policies. Whenever push has come to shove, it appears to be the base that has been pushed out of the way. That would be fine, I suppose, if it was actually satisfying the middle and gaining more votes than are given up by ignoring the base, and pushing good policy forward, but that doesn't seem to be what's happening.
Maybe this is the answer:
American presidents with the greatest record of bipartisan legislative achievement, notably Franklin Roosevelt, Lyndon Johnson and Ronald Reagan, got their way by intimidating opponents, not by splitting the difference. As Machiavelli famously observed, it is better for a prince to be feared than loved. For all his intelligence, nobody fears Mr Obama...
I understand the argument that political realities forced the administration's hand, that his was all it could possibly do due to Blue Dogs, etc. But the political reality the administration faces is not exogenously determined, it is not something that must be taken as given when formulating policy. The political reality can be changed with effort. The administration's willingness to simply take the political constraints as a given rather than fighting through them is a big part of the problem.
Al Gore says "a hubristic 'bubble' of market fundamentalism" tilted the political playing field against action on global warming:
We Can’t Wish Away Climate Change, by Al Gore, Commentary, NY Times: It would be an enormous relief if the recent attacks on the science of global warming actually indicated that we do not face an unimaginable calamity requiring large-scale, preventive measures to protect human civilization as we know it. ... We would no longer have to worry that our grandchildren would one day look back on us as a criminal generation that had selfishly and blithely ignored clear warnings that their fate was in our hands. ...
I, for one, genuinely wish that the climate crisis were an illusion. But unfortunately, the reality of the danger we are courting has not been changed... In fact, the crisis is still growing...
January was seen as unusually cold in much of the United States. Yet from a global perspective, it was the second-hottest January since surface temperatures were first measured 130 years ago.
Similarly, even though climate deniers have speciously argued for several years that there has been no warming in the last decade, scientists confirmed last month that the last 10 years were the hottest decade since modern records have been kept.
The heavy snowfalls this month have been used as fodder for ridicule by those who argue that global warming is a myth, yet scientists have long pointed out that warmer global temperatures have been increasing the rate of evaporation from the oceans, putting significantly more moisture into the atmosphere — thus causing heavier downfalls of both rain and snow in particular regions, including the Northeastern United States. Just as it’s important not to miss the forest for the trees, neither should we miss the climate for the snowstorm. ...
The political paralysis that is now so painfully evident in Washington has thus far prevented action by the Senate — not only on climate and energy legislation, but also on health care reform, financial regulatory reform and a host of other pressing issues. ...
The decisive victory of democratic capitalism over communism in the 1990s led to a period of philosophical dominance for market economics worldwide and the illusion of a unipolar world. It also led, in the United States, to a hubristic “bubble” of market fundamentalism that encouraged opponents of regulatory constraints to mount an aggressive effort to shift the internal boundary between the democracy sphere and the market sphere. Over time, markets would most efficiently solve most problems, they argued. Laws and regulations interfering with the operations of the market carried a faint odor of the discredited statist adversary we had just defeated.
This period of market triumphalism coincided with confirmation by scientists that earlier fears about global warming had been grossly understated. But by then, the political context in which this debate took form was tilted heavily toward the views of market fundamentalists, who fought to weaken existing constraints and scoffed at the possibility that global constraints would be needed to halt the dangerous dumping of global-warming pollution into the atmosphere.
Over the years, as the science has become clearer and clearer, some industries and companies whose business plans are dependent on unrestrained pollution of the atmospheric commons have become ever more entrenched. They are ferociously fighting against the mildest regulation — just as tobacco companies blocked constraints on the marketing of cigarettes for four decades after science confirmed the link of cigarettes to diseases of the lung and the heart.
Simultaneously, changes in America’s political system — including the replacement of newspapers and magazines by television as the dominant medium of communication — conferred powerful advantages on wealthy advocates of unrestrained markets and weakened advocates of legal and regulatory reforms. Some news media organizations now present showmen masquerading as political thinkers who package hatred and divisiveness as entertainment. And as in times past, that has proved to be a potent drug in the veins of the body politic. Their most consistent theme is to label as “socialist” any proposal to reform exploitive behavior in the marketplace.
From the standpoint of governance, what is at stake is our ability to use the rule of law as an instrument of human redemption. After all has been said and so little done, the truth about the climate crisis — inconvenient as ever — must still be faced. ...
We have overcome existential threats before. Winston Churchill is widely quoted as having said, “Sometimes doing your best is not good enough. Sometimes, you must do what is required.” Now is that time. Public officials must rise to this challenge by doing what is required; and the public must demand that they do so — or must replace them.
The financial crisis might help to dissuade people of the notion that the market can solve the climate change problem by itself, and that it's best to let it do so.
I suppose the financial crisis could also convince people that the market can't necessarily prevent big meltdowns by itself, and that government can't stop meltdowns either. And -- thinking, for example, of unemployment -- it could show that once the government wakes up to the fact that a crisis has started, it will do far short of what's needed to counteract the effects.
We're all doomed.
Saturday, February 27, 2010
Andrew Samwick is frustrated with his party:
Dean Baker is frustrated with the media (surprise):
Have Republicans Forgotten the Purpose of a Political Party?, by Andrew Samwick: Leave aside the broader health care reform debate and what the Democrats want out of this process. Why are the Republicans not using their elected offices to advance policies that serve their own supporters?
Their main voting constituency is middle class (or higher) white families in the suburbs, particularly the husbands and fathers in that constituency. They don't face the raft of problems that others do in our society. But one big problem that they do face is that something beyond their control happens to someone in their family. Medical catastrophes have to rank high on that list -- they certainly do for me. If a member of my family were to be afflicted with an expensive medical condition, then I am financialy viable only for as long as I stay insured with my current employer. Put simply, there are gaps in private insurance markets that leave such families exposed. This is plain to see and should be the focus of Republican efforts on health care reform, along the lines that I have discussed over the past six months (most recently here).
Paul Krugman sums it up pretty well:What really struck me about the meeting, however, was the inability of Republicans to explain how they propose dealing with the issue that, rightly, is at the emotional center of much health care debate: the plight of Americans who suffer from pre-existing medical conditions. In other advanced countries, everyone gets essential care whatever their medical history. But in America, a bout of cancer, an inherited genetic disorder, or even, in some states, having been a victim of domestic violence can make you uninsurable, and thus make adequate health care unaffordable.
You don't succeed as a political party by denying other political parties the opportunity to craft policy that serves their constituents. You succeed as a political party when you craft policy that serves your constituents. Even naked self-interest by the two political parties should be generating better results than what we are seeing.
Dean Baker, Open Mic: Fannie Mae lost another $15 billion in the last quarter. The media has done a truly horrible job reporting on this loss and the losses from its sister institution Freddie Mac.
Fannie and Freddie buy mortgages from banks. This is all they do. If they are losing money, this means that they paid too much money to the banks for these mortgages.
This is exactly what the original TARP program was designed to do. The large ongoing losses at Fannie and Freddie mean that the Treasury Department is effectively running TARP through Fannie and Freddie. However, it is doing this with a complete end-run around Congress. There are no restrictions whatsoever on the Fannie and Freddie TARP money. The Treasury can give as much money to Lloyd Blankfein, Jamie Dimon and the rest of the banker crew with no accountability whatsoever.
It is interesting to ask where the Tea Partiers are on this one. Apparently they have no problem with "big government" handing tens of billions of taxpayer dollars to rich Wall Street bankers. They only get upset when they think that some of their money might be used to provide poor people with health care. There's nothing like principles in politics.
John Quiggin is frustrated with zombies:
Invulnerable zombies: the Efficient Markets Hypothesis. by Discussion on my last post on reanimated zombie ideas in economics touched on a lot of the themes I want to talk about in this one, about the efficient markets hypothesis and why this undead monster can never be laid to rest. (Warning: favorable references to Popper ahead!).
The ultimate zombie is one that is completely invulnerable. Neither special bullets nor hammer blows nor even decapitation can finally lay this undead being to rest. But dramatic logic requires that a zombie invulnerable to external threats must be subject to a subtle, but ultimately terminal, flaw that ends in its own destruction.
Ultimate zombies arise quite commonly in science and economics in the form of ideas that are immune from refutation. The classic examples arise from the popularized versions of Freudian psychology, centered on the Oedipus complex, named for the Greek tragic hero who unknowingly killed his father and married his mother. If a son hates his father, this is, obviously, evidence of the Oedipus complex. But, if he loves his father, this is explained as a repressed Oedipus complex. With rules like this, Freudian psychology can never be refuted.
But as a string of philosophers of science, being with the late Karl Popper, have shown, a theory that can’t be refuted by any conceivable evidence isn’t really a theory at all. All it says, in the end, is ‘anything can happen, and probably will’.
The global financial crisis, along with the earlier dotcom crisis has shown that, on any ordinary understanding of its terms, the efficient markets hypothesis can’t be right. Despite reaching a scale and sophistication unparalleled in history, global financial markets have shown themselves subject to the same manias, bubbles and busts that were seen in the Dutch tulip craze of the 17th century.
So supporters of the efficient markets hypothesis have sought a redefinition that would make it invulnerable to refutation. Their central argument is one that has already been discussed - if it is possible to diagnose the existence of a bubble, then it is possible to make arbitrarily large profits betting against it. And if someone like Warren Buffett has in fact done this, that can be put down to luck. Only if everybody can make money betting against the market can the EMH be wrong. But of course, it’s impossible for everyone to bet against the market – the market is just the aggregate of bets....
As far as macroeconomics is concerned, the experience of the Great Depression and of the current Global Financial Crisis ... is pretty strong evidence that neoliberalism is not the right policy, at least not for all occasions and not in the forms that prevailed in the 1920s or the 1990s.
But the ultimate response to this invulnerable zombie must be the same as Popper on Freudian psychology. If the Great Depression, the dotcom boom and bust and the current Global Financial Crisis are all consistent with the efficient markets hypothesis, the hypothesis can’t tell us much of interest about anything. At most, it says that even when markets are way out of line with economic reality, it is hard to exploit this fact to make a profit. Most of us (me and Krugman at any rate) already knew that, and confined ourselves to getting out of stocks when they seemed absurdly overvalued.
Update: Paul Krugman is also frustrated with the media:
You’re So Vain, by Paul Krugman: Jonathan Chait and Robert Waldmann, in slightly different ways, highlight a crucial dynamic in American political debate: the extent to which public figures are punished for actually knowing what they’re talking about.
It goes like this: Person A says “Black is white” — perhaps out of ignorance, although more often out of a deliberate effort to obfuscate. Person B says, “No, black isn’t white — here are the facts.”
And Person B is considered to have lost the exchange — you see, he came across as arrogant and condescending.
I had, I have to admit, hoped that the nation’s experience with George W. Bush — who got within hanging-chad distance of the White House precisely because Al Gore was punished for actually knowing stuff — would have cured our discourse of this malady. But no. Why not?
Chait professes himself puzzled by the right’s intellectual insecurity. Me, not so much. Here’s how I see it: in our current political culture, the background noise is overwhelmingly one of conservative platitudes. People who have strong feelings about politics but are intellectually incurious tend to pick up those platitudes, and repeat them in the belief that this makes them sound smart. (Ezra Klein once described Dick Armey thus: “He’s like a stupid person’s idea of what a thoughtful person sounds like.”)
Inevitably, then, such people react with rage when they’re shown up on their facts or basic logic — it’s an attack on their sense of self-worth.
The truly sad thing, though, is the way much news reporting goes along with the condescension meme. That’s Waldmann’s point. You really, really might have expected that the Bush experience would give reporters pause — that they might at least ask themselves, “Isn’t it my job to ask whether a politician is right, as opposed to how he comes across?”
But NOOOO! [/Belushi]
I'm frustrated with, among other things, Congress. "Action from Congress to stimulate jobs has been woefully inadequate."
What are you frustrated about?
Friday, February 26, 2010
Getting the last laugh is good for health:
Afflicting the Afflicted, by Paul Krugman, Commentary, NY Times: If we’re lucky, Thursday’s summit will turn out to have been the last act in the great health reform debate, the prologue to passage of an imperfect but nonetheless history-making bill. If so, the debate will have ended as it began: with Democrats offering moderate plans that draw heavily on past Republican ideas, and Republicans responding with slander and misdirection. ...
Republicans ... didn’t bother making a case that could withstand even minimal fact-checking. It was obvious how things would go as soon as the first Republican speaker, Senator Lamar Alexander,... right off the bat ... delivered a whopper, asserting that under the Democratic plan, “for millions of Americans, premiums will go up.”
Wow. I guess ... he wasn’t technically lying, since the Congressional Budget Office analysis ... does say that average payments for insurance would go up. But ... this would happen only because people would buy more and better coverage. The “price of a given amount of insurance coverage” would fall, not rise — and the actual cost to many Americans would fall sharply thanks to federal aid.
His fib on premiums was quickly followed by a fib on process. Democrats ... plan to use a ... process known as reconciliation. Mr. Alexander declared that reconciliation has “never been used for something like this”..., but reconciliation has, in fact, been used for previous health reforms — and was used to push through both of the Bush tax cuts at a budget cost of $1.8 trillion, twice the bill for health reform.
What really struck me..., however, was the inability of Republicans to explain how they propose dealing with the issue that, rightly, is at the emotional center of much health care debate: the plight of Americans who suffer from pre-existing medical conditions. In other advanced countries, everyone gets essential care whatever their medical history. But in America, a bout of cancer, an inherited genetic disorder, or even, in some states, having been a victim of domestic violence can make you uninsurable, and thus make adequate health care unaffordable.
One of the great virtues of the Democratic plan is that it would finally put an end to this.. But what’s the Republican answer? Mr. Alexander was strangely inarticulate on the matter... He offered no ... ideas...
House Republicans don’t have anything to offer to Americans with troubled medical histories. On the contrary, their big idea — allowing unrestricted competition across state lines — would lead to a race to the bottom. The states with the weakest regulations — for example, those that allow insurance companies to deny coverage to victims of domestic violence — would set the standards for the nation... The result would be to afflict the afflicted, to make the lives of Americans with pre-existing conditions even harder.
Don’t take my word for it. Look at the Congressional Budget Office analysis of the House G.O.P. plan. ... While some people would gain insurance, the people losing insurance would be those who need it most. Under the Republican plan, the American health care system would become even more brutal than it is now.
So what did we learn from the summit? What I took away was the arrogance that the success of things like the death-panel smear has obviously engendered in Republican politicians. At this point they obviously believe that they can blandly make utterly misleading assertions, saying things that can be easily refuted, and pay no price. And they may well be right.
But Democrats can have the last laugh. All they have to do — and they have the power to do it — is finish the job, and enact health reform.
We hear about Wall Street and Main Street, but not as much about the streets where people live, at least not much beyond all the foreclosed houses. And with unemployment as high as it is, and Congress doing little more than than tossing a few bones at the problem now and again, it's no wonder those streets are feeling overlooked and neglected. Maybe that's part of the problem Tim Geithner describes:
The president says somehow we've managed to create a situation where there's a large portion of Americans that think we are running a pro-business, pro-Wall Street policy. But the business community and Wall Street think we are like a bunch of socialists.
Well, we have been socializing Wall Street's losses, but I don't think that's what they're complaining about. In any case, Wall street and the business community aren't going to like this:
Plan to Seek Use of U.S. Contracts as a Wage Lever, by Steven Greenhouse, NY Times: The Obama administration is planning to use the government’s enormous buying power to prod private companies to improve wages and benefits for millions of workers, according to White House officials and several interest groups briefed on the plan.
By altering how it awards $500 billion in contracts each year, the government would disqualify more companies with labor, environmental or other violations and give an edge to companies that offer better levels of pay, health coverage, pensions and other benefits, the officials said.
Because nearly one in four workers is employed by companies that have contracts with the federal government, administration officials see the plan as a way to shape social policy and lift more families into the middle class. It would affect contracts like those awarded to make Army uniforms, clean federal buildings and mow lawns at military bases.
Although the details are still being worked out, the outline of the plan is drawing fierce opposition from business groups and Republican lawmakers. They see it as a gift to organized labor... Even as business groups press the administration for more details, they are denouncing the plan, tentatively named the High Road Procurement Policy. ...
One federal official said the proposed policy would encourage procurement officers to favor companies with better compensation packages only if choosing them did not add substantially to contract costs. As an example, he said, if two companies each bid $10 million for a contract, and one had considerably better wages and pensions than the other, that company would be favored. ...
For some conservatives, all the evil in the world can be traced to the "liberal permissiveness" of the 1960s. I hadn't heard this particular version of the story where the collapse of morals brought about the collapse of the financial system, but I should have known it was coming:
Did Woodstock hippies lead to US financial collapse?, by Mark Guarino, CSM: A new film is gaining traction among tea-party followers for suggesting that the collapse of the US financial system has roots dating back 40 years to the Summer of Love.
“Generation Zero,” a film set to premiere in March, examines what producer David Bossie says is a “historic perspective on a generational change” that led to the September 2008 bank collapse. Mr. Bossie says generational narcissism, as represented by the 1969 Woodstock Festival, is responsible for the excessive spending, mortgage crisis, and recklessness on Wall Street. ...
Citizens United, Bossie’s company, is no stranger to controversial topics that take aim at liberals or their causes. The company was at the center of a recent US Supreme Court case involving “Hillary: The Movie”... The high court overturned a provision of the McCain-Feingold law that barred the use of political advertisements created or paid for by independent parties. ...
Early this month, a screening of the film was warmly received at both the National Tea Party Convention and the Conservative Political Action Conference. From there, it was the subject of an hour-long special on FOX News hosted by Sean Hannity.
Bossie says the attention may mean an eventual theatrical release. ... The film, which features commentary from conservative pundits such as Charles Krauthammer, Newt Gingrich, and Dick Morris, offers no concluding message other than a plea to control government spending. ... “The political correctness of not wanting to say ‘no’ took hold not in 1999; it started in 1969,” he says. ...
Thursday, February 25, 2010
In a recent MoneyWatch post I said:
The release last Thursday of initial weekly claims for unemployment insurance showing 473,000 claims, an increase of 31,000 over the 442,000 claims the previous week, hasn't received nearly enough attention. Claims have been essentially moving sideways for several weeks now, and they are still far above the break even point at approximately 400,000 claims per week. The economy will continue losing jobs so long as initial claims stay above 400,000 per week. ...
Claims will be released on Thursday of this week, and I'll be keeping a closer eye on them than usual. If they continue to move sideways, it's time to worry.
I'd be less worried if it looked like a meaningful job creation package was about to emerge from Congress, but the proposals under discussion don't do nearly enough, and what little that has been proposed isn't happening as fast as needed. ... And while it's good that health care reform is coming back onto the front burner, that means that a job creation bill is unlikely to be the main priority for Congress in the near future.
Update: Maybe they were listening. If this bill does eventually pass, it will still be far, far short of what is needed, and much later than needed, but it's something. A meager something, but something nonetheless.
Here is Calculated Risk on today's release:
The DOL reports on weekly unemployment insurance claims:
In the week ending Feb. 20, the advance figure for seasonally adjusted initial claims was 496,000, an increase of 22,000 from the previous week's revised figure of 474,000. The 4-week moving average was 473,750, an increase of 6,000 from the previous week's revised average of 467,750. ...
This graph shows the 4-week moving average of weekly claims since 1971. ...
The current level of 496,000 (and 4-week average of 473,750) are very high and suggest continuing job losses in February. This is the highest level since last November.
Action from Congress to stimulate jobs has been woefully inadequate. Voters will be right to blame politicians for failing to address this problem. Policymakers certainly had plenty of warning it was coming, but they chose to put their heads in the sand and ignore it, or to avoid the difficult politics of job creation policies by cherry picking the data in a way that convinced them that recovery was just around the corner.
[Also posted at MoneyWatch.]
This is from Lawrence Mishel, president of the Economic Policy Institute, and David Walker, president and CEO of the Peter G. Peterson Foundation:
Address jobs now and deficits later, by Lawrence Mishel and David M. Walker: President Barack Obama is in a difficult position when it comes to deficits. Today's high deficits will have to go even higher to help address unemployment. At the same time, many Americans are increasingly concerned about escalating deficits and debt. What's a president to do?
The answer, from a policy perspective, is not that hard: A focus on jobs now is consistent with addressing our deficit problems ahead. ...
As in every economic downturn, federal revenues have fallen steeply because individuals and corporations earn less in a recession. High unemployment also results in higher expenditures for safety net programs, like Medicaid, unemployment benefits and food stamps.
Not surprisingly then, a huge recession can yield a huge deficit. Efforts to put people back to work and help restore the economy ... can also increase short-term deficits.
Though a concern, most of the recent short-term rise in the deficit is understandable. Furthermore, public spending can help compensate for the fall in private spending, and help stem the pain of substantial job losses. With more than a fifth of the work force expected to be unemployed or underemployed in 2010, there is an economic and a moral imperative to take action. ...
That’s why we agree that job creation must be a short-term priority. Job creation plans must be targeted... They must be timely... And they must be big enough to substantially fill the enormous jobs hole we’re in. They must also be temporary — affecting the deficit only in the next couple of years, without exacerbating our large and growing structural deficits in later years. ...
But ... short-term deficits ... should not be confused with the primary deficit challenge facing our nation: structural deficits. These deficits are projected to exist in coming years — even when the country is at peace, even when the economy is growing, even when unemployment falls. ...
While we address our short-term unemployment challenges, we must also immediately establish a path to address our large, and growing, structural deficits. ... Over time, Medicare and Medicaid will be the key drivers of these structural deficits. This is primarily because these programs’ costs tend to mirror overall cost increases for health care...
These structural deficits are too substantial to close the gap without addressing both sides of the ledger: spending and revenues. In doing so, it is important to distinguish critical and effective programs and tax policies from outdated and ineffective ones.
We must be careful to maintain the type of public investments that can help fuel broad-based economic growth while strengthening the safety net for our most vulnerable populations. And we should take into account growing retirement insecurity as employer pension systems erode and personal savings falter. People should be able to count on government benefits they are promised. ...
None of this will be easy... It will require hard choices, and an extraordinary process to engage the American people and to make recommendations to the Congress on budget controls, spending cuts and revenue increases. ... In the end, Congress must step up to the plate...
We must accept higher deficits in the short-term in order to put people back to work. At the same time, we must take immediate steps to agree on a path and a process for reducing the structural deficits that lie ahead. ...
I don't have any problems with this in principle, my concern is the call for immediate action on the long-term problem. I'm not sure that the short-term and long-term budget issues can be kept separate in the political and public debates. Attempts to deal with structural deficit problems -- even just plans for the future -- at a time when the economy is in a recession and needs to increase, not decrease the deficit makes effective policy responses harder. The time will come for an open, public debate about the long-run budget issues, but a time when increases in the deficit are needed to create jobs may not be the best time to take on the long-term budget challenge.
I posted this at MoneyWatch:
Health Care Reform: The Obama Compromise Proposal and the Likely Republican Response, by Mark Thoma: A discussion of the options for health care reform Democrats have before them, and the counter-proposals that Republicans are likely to offer. Many Republicans will oppose reform with little motivation beyond handing Democrats a loss, but some will be willing to offer their own ideas as counter-proposals to the administration's reform plan. Are the counter-proposals worth pursuing?
Wednesday, February 24, 2010
A quick post between classes -- the desire for equality appears to be hardwired:
Caltech scientists find first physiological evidence of brain's response to inequality, EurekAlert: The human brain is a big believer in equality—and a team of scientists from the California Institute of Technology (Caltech) and Trinity College in Dublin, Ireland, has become the first to gather the images to prove it.
Specifically, the team found that the reward centers in the human brain respond more strongly when a poor person receives a financial reward than when a rich person does. The surprising thing? This activity pattern holds true even if the brain being looked at is in the rich person's head, rather than the poor person's.
These conclusions, and the functional magnetic resonance imaging (fMRI) studies that led to them, are described in the February 25 issue of the journal Nature. ...
It's long been known that we humans don't like inequality, especially when it comes to money. Tell two people working the same job that their salaries are different, and there's going to be trouble, notes John O'Doherty, professor of psychology at Caltech...
But what was unknown was just how hardwired that dislike really is. "In this study, we're starting to get an idea of where this inequality aversion comes from," he says. "It's not just the application of a social rule or convention; there's really something about the basic processing of rewards in the brain that reflects these considerations."
I have to go teach my classes, but in case you want to talk about Ben Bernanke's testimony before the House Financial Services Committee today, here are a few links (there's not much discussion of the testimony on blogs yet -- I won't be able to update this, so please feel free to add additional links in comments):
- Bernanke's Monetary Policy Report to the Congress, and the accompanying Monetary Policy Report.
- Bernanke Forecasts Long Period of Low Interest Rates NY Times
- Bernanke defends Fed’s actions Financial Times
- Bernanke offers concessions Washington Post
- Bernanke: Low Rates Needed WSJ
- Bernanke Backs Audit of Fed Loan Programs, Naming of Borrowers After Delay Bloomberg
- Bernanke Discusses Fed Support for Housing Market Real Time Economics
Should traditional media by saved by the government?:
Don’t Save the Press, by Žiga Turk, Commentary, Project Syndicate: Throughout history, political leaders have supported existing communication technologies in order to defend the system in which they rule. Today, too, governments may be tempted to protect newspapers and public TV on the pretext of “saving democracy as we know it.” But efforts to block technological change have been futile in the past, and they would be unwise today. ...
Faced with an existential crisis as new technologies lure away their readers and viewers, traditional news media ... are increasingly turning to governments for help. But, such is the undertone, their cause is nobler. The media are a cornerstone of democracy. Left to the blogs and tweets, without journalists to report the news, how can citizens decide what politics to support?
Such thinking reflects an age-old fear: as Plato put it, citizens would get “information without proper instruction and, in consequence, be thought very knowledgeable when they are for the most part quite ignorant.” It is a fear that has echoed down through history ever since, from the Catholic Church cursing Gutenberg’s movable type to the Victorian bourgeois complaining of the newly discovered freedom of the press.
Political rulers, too, have never liked new communication technology, because the political system in which they rule is adapted to the existing technology. Scarcity of parchment required all decision-making to be concentrated in a court consisting of a handful of people. When cheap paper and printing presses – the first true mass-communication technology – challenged this system, the Catholic Church and the monarchs defended the parchment-based monopoly. They failed.
Health insurance markets are "highly concentrated," but that could change:
Bust the Health Care Trusts, by Robert Reich, Commentary, NY Times: My health insurer here in California is Anthem Blue Cross. So far, my group policy hasn’t been affected by Anthem’s planned rate increase of as much as 39 percent for its customers with individual policies — but the trend worries me, as it should everyone. Rates are soaring all over the country. Insurers have been seeking to raise premiums 24 percent in Connecticut, 23 percent in Maine, 20 percent in Oregon and a wallet-popping 56 percent in Michigan. How can insurers raise prices as much as they want without fear of losing customers?
Astonishingly, the health insurance industry is exempt from federal antitrust laws, which is why a handful of insurers have become so dominant in their markets that their customers simply have nowhere else to go. But that protection could soon end: President Obama on Tuesday announced his support of a House bill that would repeal health insurers’ antitrust exemption, and Speaker Nancy Pelosi signaled that she would put it toward an immediate vote. This is promising news. ...
Health insurers ... are making boatloads of money. America’s five largest health insurers made a total profit of $12.2 billion last year; that was 56 percent higher than in 2008... It’s not as if health insurers have been inventing jazzy software or making jet airplanes. Basically, they just collect money from employers and individuals and give the money to providers. In most markets, consumers wouldn’t pay this much for so little. We’d find a competitor that charged less and delivered more. What’s stopping us? Not enough choice.
More than 90 percent of insurance markets in more than 300 metropolitan areas are “highly concentrated,” as defined by the Federal Trade Commission... A 2008 survey by the Government Accountability Office found the five largest providers of small group insurance controlled 75 percent or more of the market in 34 states, and 90 percent or more in 23 of those states, a significant increase in concentration since the G.A.O.’s 2002 survey. ...
With size has come not only market power but political clout. Big for-profit insurers deploy enough campaign money and lobbyists to get their way with state legislators and insurance commissioners. ... These companies have even been known to press states to limit how many other health insurers they license.
And when they can’t get their way, insurers go to court. In Maine — one state that aggressively regulates rates — WellPoint’s Anthem subsidiary has sued the insurance superintendent for reducing its requested rate increase.
Political clout can be especially advantageous at the federal level, as the big Wall Street banks have so brazenly demonstrated. Over the past two and a half years, WellPoint’s employees and associates have contributed more than $922,000 to federal political campaigns, and the company has spent $7.8 million lobbying Washington policymakers... It should not be surprising that WellPoint was one of the leading opponents of the public insurance option, which would have subjected it to competition even where it had sewn up the market.
Antitrust is no substitute for broader health care reform, but it’s an important prerequisite. If a handful of giant health insurers are allowed to dominate the industry, many of the other aspects of reform (establishing insurance exchanges, requiring people to have insurance, even allowing consumers to buy insurance across state lines) won’t bring down the price of insurance.
Regardless of what happens at the White House’s health care meeting on Thursday, we’ve got to make sure health insurers compete for every one of our dollars. ...
The build up of excessive market power in some industries, and the failure of regulators to step in and do something about it based partly upon attitudes toward deregulation that began in the 1970s, has been frustrating to observe. But in financial, health care, and other markets that slowly seems to be changing.
If Congress cannot pass effective climate change legislation, many people hope that the EPA will step in and begin regulating carbon emissions. But given the EPA's estimates of the social costs of carbon emissions, would that do any good?:
Climate Change and the U.S.: Is the Environmental Protection Agency under-pricing carbon?, by Frank Ackerman: What will the US do about climate policy? The ongoing paralysis in Congress makes it clear that failure actually is an option. For those who long for success, the best hope may be EPA regulation of carbon emissions. Yet far from setting an ambitious new course, EPA may be ... effectively arguing, in opaquely technical language, that climate change isn’t such a big deal, so the right policy is to do almost nothing.
The story began when several states and environmental groups filed a lawsuit, Massachusetts vs. EPA, to force EPA to regulate greenhouse gases. In 2007 the Supreme Court ruled for the states, ordering EPA to determine whether greenhouse gases harmed the environment and public health. The Bush EPA ran out the clock, saying almost nothing on the subject, but Obama’s new EPA administrator, Lisa Jackson, swung rapidly into action. Last April, EPA declared greenhouse gases to be pollutants that endanger public health and welfare, qualifying them for regulation under the Clean Air Act. A proposal was published for comment in September... A final ruling is expected soon.
Buried in the 336-page EPA proposal is a short section on the “social cost of carbon” – the dollar value of all damages caused by emitting one ton of CO2. ... The higher the price, the more it’s worth doing to avoid them. That’s why the strength of US climate policy may depend on EPA’s social cost of carbon.
Every $1 per ton of CO2 is about a penny per gallon of gasoline, so $5 per ton would be a trivial price incentive of 5 cents a gallon. At $50 per ton, or 50 cents a gallon, you’d start to notice. An increase of $500 per ton, or $5 per gallon, would put us in the realm of gas prices in many European countries where people buy smaller cars and use public transportation a lot more than we do.
$500, though, isn’t in the running. In the September proposal, EPA offered a range of values from $5 to $56. It sounds to me like the high end was included to mollify critics, while the low end is what EPA’s economists prefer.
How could US climate policy shrink down to a mere nickel per gallon of gas? There are three steps in the construction (or constriction) of EPA’s social cost of carbon estimates; each of them draws on the narrowest and most dated version of climate economics. (For details, see my comments on the proposal.)
First, EPA only considers peer-reviewed economics articles – specifically, only the latest estimates from three simple models... The peer review criterion excludes the Stern Review, the massively researched, widely discussed study commissioned by the British government. Stern’s social cost of carbon estimate was $85 per ton, well above EPA’s recommendations. The focus on three models erroneously suggests that they represent the state of the art. In fact, each of the three contains hidden biases which serve to minimize climate damages...
Second, EPA considers discount rates of 3% and 5% for future damages. EPA’s proposal quotes, but ignores, an Office of Management and Budget recommendation to consider discount rates below 3% for intergenerational analyses. EPA cites five academic sources..., four of which recommend or use rates of 2% or lower. The lower the discount rate, the greater the weight of future damages, and the higher the social cost of carbon will be.
Finally, EPA mentions but fails to incorporate recent research by Harvard economist Martin Weitzman on catastrophic climate risks. As Weitzman demonstrates, the value of reducing catastrophic risk can, technically speaking, be infinite...
Controlling climate change is an experiment that we only get to try once. To have a good chance at a happy outcome, we’ll need to start with a much bigger number for the social cost of carbon.
[You can follow climate economics on Public Goods, the new blog just launched by my colleague Liz Stanton.]
Tuesday, February 23, 2010
Simon Johnson notes some the shortcomings of current legislative proposals for financial reform:
Prospects For Financial Reform, by Simon Johnson, Baseline Scenario: The best opportunity for immediate reform of our financial sector was missed at the start of the Obama administration. As Larry Summers and Tim Geithner know very well – e.g., from their extensive experience around the world during the 1990s (see Summers’s 2000 Ely lecture) – when a financial system is in deep crisis, you have an opportunity to fix the most egregious problems. Major financial sector players are always good at blocking reform – except when they are on the ropes. ...
Naturally, the Obama administration’s generally weak and unfocused financial reform proposals have morphed into generally weak and unfocused congressional bills. The overall narrative has been lost – despite moments of clarity from the president (e.g., when he spoke first about the Volcker Rules, but this was spun away within 12 hours by Secretary Geithner and others on the team). ...
Sadly, the consumer protection agency is likely to be gutted as the price of bringing Senator Corker on board. This is of course an affront to everyone who has been – and continues to be – ripped off by the financial sector. ...
Then he gets my hopes up a bit:
Some limited change may now emerge from the Dodd-Corker compromise. I expect we’ll see a version of the “resolution authority”... No doubt there will be some sort of “systemic regulator”...
Despite – or rather because – of all the arrogance and misbehavior among our more prominent financial players, we are making progress on the bigger agenda: Changing the consensus on what is regarded as safe and sound in all kinds of banking. ...
Very few people now claim that serious reform is only proposed by people carrying pitchforks; that myth is long gone. The middle of the consensus has started to move, against mega-banks and against dangerous overborrowing by the financial sector. This will be a long hard slog, but we are finally heading in the right direction.
And then I read this:
The Obama administration is backing off a plan to bar commercial banks from engaging in proprietary trading, favoring instead a watered-down version of a key tenet of the proposed “Volcker rule” governing how banks operate, according to people familiar with the situation.
Sources told The Post that instead of issuing an outright ban on prop trading — or trading done on behalf of only the bank itself — the White House will propose that federally insured banks keep higher cash reserves if they want to run such trading desks.
The about-face comes amid signs the administration faced an uphill battle selling lawmakers and Treasury officials on an outright ban.
So let’s get this all straight: the White House brings Paul Volcker on board last year because they needed somebody with some gravitas who commanded respect..., finally unleashing him last month on the banks with this Volcker Rule. Now they’re back-tracking on it?
Not that I want our colleagues upstairs at the Post to be wrong, but on this one I want them to be wrong. Are we to assume that the White House, with majorities in both houses, with half the country ready to tar and feather the bankers, with the obvious, desperate need for root reform after the worst financial crisis in 80 years — a near-total, self-inflicted meltdown caused precisely by a lack of regulations — can’t get its own proposals through Congress and the Treasury Department?
Is the banking lobby that powerful?...
That question will answer itself when we see what kind of reform emerges from the legislative process, but so far the answer appears to be yes.
Update: This comment came via email (from a trusted source):
Just saw your post on financial reform, and for what it's worth, it wasn't the Street that killed the Volcker Rule. It was the Senate. The Street (smartly, for once) largely hung back and let the Senate get rid of the Volcker Rule.
It's a lot of inside baseball, but the way the administration proposed the Volcker Rule essentially guaranteed that it would never see the light of day. It royally pissed off the Banking Committee members, because they'd been working in pairs on a bipartisan bill for months, with no inkling that anything like the Volcker Rule was in play. There's no way they'd ever agree to drop everything and revamp a key portion of their bill just to hand the President a political victory (on their political turf, no less).
The Banking Committee had also been considering the Frank-Treasury discussion draft from October to be "the administration's view," and it's a major legislative faux-pas to throw a new proposal in there so late, and so publicly. If the administration really wanted the Volcker Rule, they would've approached Dodd/Shelby (now Dodd/Corker) privately and haggled over the legislative language for weeks before announcing it. It's petty, I know, but that's the way it works.
FWIW, the most aggressive opponents of financial reform (by far) have been the insurance companies. They seem to be violently opposed to pretty much everything in financial reform.
The financial industry may not have been directly involved, but Senators attempting to get rid of the Volcker rule and other regulatory interventions will likely expect their reelection campaigns to be well financed by those they are defending.
The distribution of the benefits in the run-up to the recession as reflected in growing inequality has been widely discussed, as has the distribution of benefits in terms of various bailouts once the recession was underway. But what hasn't received enough attention is the distribution of the costs of the financial meltdown and the subsequent recession.
For example, the costs of unemployment are never distributed equally when downturns occur, the young and minorities in particular experience much larger employment shocks than, say, white middle-aged males. As noted below, blacks in many areas are experiencing unemployment levels that equal or exceed 20%, and the damage from the unemployment will be permanent, it won't go away if and when jobs return.
The recession is taking away opportunity for the young to gain employment experience, and many who are employed are working below their abilities in jobs they are likely to get stuck in for many years, if not forever. The recession is wiping out the accumulated assets of the unemployed as they try to bridge the gap until jobs return, and since many of these are older workers, this will have a large detrimental effect that lasts throughout their retirement years. Recessions cause skills to depreciate, there are psychological costs, there are costs to family members, the loss of a job generally means loss of health care, the costs to working class households go on and on.
And there are other ways in which the costs have been distributed unequally, and in many cases these have not been thoroughly examined. For example, there is evidence that minority groups were given higher cost and highly profitable mortgages when lower cost but less profitable loans were available. This also served to wipe out accumulated assets of minority borrowers in addition to all the other problems that come when a high cost mortgage cannot be paid.
The fact that many of the costs were concentrated among those least able to pay them stands in contrast to the fact that the bailout benefits were concentrated among those at the opposite end of the income distribution. Government transfers to compensate low income groups for the costs they were forced to pay but had no hand in causing, transfers that are financed by those who received the benefits during the bubble years and the bailout money when the bubble popped, seem more than justified.
Here's a description of one group that has been hit particularly hard:
Recession hits older blacks in what should be their prime, by Tony Pugh, McClatchy: America's economic recession has hit African Americans who are middle age and older much harder over the last year than it has the general public, according to a new survey released Tuesday by the AARP.
In telephone surveys, more than twice as many African Americans ages 45 and older reported having trouble paying their mortgage or rent, having to cut back on medications and having borrowed money to pay living expenses in comparison to the general population.
Twice as many blacks also reported losing a job and having a spouse who either lost a job or had to take a second job. Nearly twice as many blacks had difficulty paying for essential items such as food and utilities.
These older, established black workers also lost their job-based health coverage at higher rates, were more likely to raid their retirement savings prematurely and provide financial help to their parents and children more often than their age-equivalent peers, the survey found.
The data reinforces what many experts have said for months: that the recession is really a depression for many blacks, particularly in areas where black unemployment has surpassed or hovers around 20 percent. ...
The troubling findings paint a gloomy financial picture for African-American workers during what should be some of their prime earning years, said Algernon Austin, who heads the Race, Ethnicity, and the Economy program at the Economic Policy Institute ... said ... "These findings suggest we shouldn't be surprised if we see increases in poverty rates for blacks 65 and older in the coming years because a number of them are spending down their retirement income to try to get past this Great Recession," he said. ...
Richard Baldwin and Charles Wyplosz are less than impressed with Martin Feldstein's proposal to allow Greece to take a "holiday" from the Eurozone. They argue the plan is impractical, illogical, and dangerous (for another argument against Feldsteins's proposal, see For Greece, a “fiscal devaluation” is a better solution than a “temporary holiday” from the Eurozone by Domingo Cavallo and Joaquín Cottani):
How to destroy the Eurozone: Feldstein’s euro-holiday idea, by Richard Baldwin and Charles Wyplosz, Vox EU: Martin Feldstein never liked the euro idea (Feldstein 1997), and like many early doubters, he is back on the front line. His latest contribution in the Financial Times makes an apparently interesting suggestion. Greece should take a holiday from the Eurozone – leaving the Eurozone temporarily, issuing a new drachma to adjust its competitiveness, and committing to rejoin at a depreciated conversion rate. This, Feldstein claims, would eliminate its competitiveness handicap.
Feldstein is absolutely right that the real problem of Greece is neither its public debt nor its current deficit. The problem is the wage and price inflation that has knocked its economy so far down the competitiveness league tables. As such, Feldstein’s proposal is refreshing in the midst of the current mindless hype on Greek budgetary problems. But Feldstein’s proposal is not just impractical. It is dangerous, impossible and illogical.
I have argued many times that the Fed should have two roles. It should conduct monetary policy, and it should be the primary regulator of the financial system. However, not everyone agrees. When I was at the What's Wrong with Modern Macro Conference in Munich recently, I met Hans Gersbach -- we were on a panel together -- and he passes along his argument that monetary policy and banking regulation should be conducted by separate bodies:
Double targeting for Central Banks with two instruments: Interest rates and aggregate bank equity, by Hans Gersbach, Vox EU: The current crisis has placed a fundamental question at the centre of policy discussion: “Should monetary policy and banking regulation be conducted separately?” Opinions differ – see Adrian and Shin (2009), Goodhart (2008), and De Larosière et al. (2009).
- Brunnermeier et al. (2009) argue that central banks should be tasked with macroprudential regulation.
- De Grauwe (2007) argues that central banks should be responsible for the supervision of all institutions involved in the business of creating credit and liquidity.
- Linking both policy areas directly, however, might endanger the exceptional success of many central banks in creating low and stable inflation of the kind observable during the last two decades (Gerlach et al. (2009)).
There is thus a pressing need to clarify the objectives and instruments of central banks and banking supervisory authorities, and also to inquire how they should ideally interact. Here I present a new framework aimed at such a clarification.
Monday, February 22, 2010
Calling Karl Marx Sagan. Do the laws of economics hold in alternative universes? This won't answer or even ask the question of whether the laws of economics are universal in that sense, but it does wonder if life can exist in alternative universes where the laws of physics differ substantially from our own:
Life beyond our universe, by Anne Trafton, MIT News Office: Whether life exists elsewhere in our universe is a longstanding mystery. But for some scientists, there’s another interesting question: could there be life in a universe significantly different from our own?
A definitive answer is impossible, since we have no way of directly studying other universes. But cosmologists speculate that a multitude of other universes exist, each with its own laws of physics. Recently physicists at MIT have shown that in theory, alternate universes could be quite congenial to life, even if their physical laws are very different from our own. ...
It's time for Republicans to "put up or shut up":
The Bankruptcy Boys, by Paul Krugman, Commentary, NY Times: O.K., the beast is starving. Now what? That’s the question confronting Republicans. But they’re refusing to answer, or even to engage in any serious discussion about what to do.
For readers who don’t know what I’m talking about: ever since Reagan, the G.O.P. has been run by people who want a much smaller government. ... But there has always been a political problem with this agenda. Voters may say that they oppose big government, but the programs that actually dominate federal spending — Medicare, Medicaid and Social Security — are very popular. So how can the public be persuaded to accept large spending cuts?
The conservative answer, which evolved in the late 1970s, would be dubbed “starving the beast” during the Reagan years. The idea — propounded by many members of the conservative intelligentsia, from Alan Greenspan to Irving Kristol — was basically ... a game of bait and switch. Rather than proposing unpopular spending cuts, Republicans would push through popular tax cuts, with the deliberate intention of worsening the government’s fiscal position. Spending cuts could then be sold as a necessity rather than a choice, the only way to eliminate an unsustainable budget deficit.
And the deficit came. True, more than half of this year’s budget deficit is the result of the Great Recession... But even when the crisis is over,... rising medical costs will, unless something is done, lead to explosive debt growth after 2020.
So the beast is starving, as planned. It should be time, then, for conservatives to explain which parts of the beast they want to cut. And President Obama has, in effect, invited them to do just that, by calling for a bipartisan deficit commission.
Many progressives were deeply worried by this proposal, fearing that it would ... end up reviving the long-standing Republican goal of gutting Social Security. But they needn’t have worried: Senate Republicans overwhelmingly voted against legislation that would have created a commission with some actual power...
Why are Republicans reluctant to sit down and talk? Because they would then be forced to put up or shut up. Since they’re adamantly opposed to reducing the deficit with tax increases, they would have to explain what spending they want to cut. And guess what? After three decades of preparing the ground for this moment, they’re still not willing to do that.
In fact, conservatives have backed away from spending cuts they themselves proposed in the past. In the 1990s, for example, Republicans in Congress tried to force through sharp cuts in Medicare. But now they have made opposition to any effort to spend Medicare funds more wisely the core of their campaign against health care reform (death panels!). ...
What about Social Security? Five years ago the Bush administration proposed..., in effect means-testing retirement benefits. But in December, The Wall Street Journal’s editorial page denounced any such means-testing...
At this point, then, Republicans insist that the deficit must be eliminated, but they’re not willing either to raise taxes or to support cuts in any major government programs. And they’re not willing to participate in serious bipartisan discussions, either, because that might force them to explain their plan — and there isn’t any plan, except to regain power.
But there is a kind of logic to the current Republican position: in effect, the party is doubling down on starve-the-beast. Depriving the government of revenue, it turns out, wasn’t enough to push politicians into dismantling the welfare state. So now the de facto strategy is to oppose any responsible action until we are in the midst of a fiscal catastrophe. You read it here first.
At MoneyWatch, I argue that unless Congress can learn to walk and chew gum at the same time, which it's unlikely to do, a side effect of the renewed attention to health care reform may be less job creation and higher unemployment:
Update: Maybe they were listening. If this bill does eventually pass, it will still be far, far short of what is needed, and much later than needed, but it's something. A meager something, but something nonetheless.
The Fed's recent decision to increase the discount rate does not signal an intent to tighten policy:
The Fed's discount rate hike, econbrowser: The Federal Reserve Board announced on Thursday that it is raising the interest rate at which banks borrow from the Fed's discount window to 0.75%, a 25-basis-point increase, and intends to return discount lending primarily to the traditional overnight loans. "The rate hike cycle begins," declared 24/7 Wall St...
But I don't believe that's what the discount rate hike means at all. The Fed sometimes has used discount rate changes as a signal of its intentions for interest rates more broadly. But the Fed press release accompanying the move stated flatly that's not the case this time...
The same message was emphatically repeated in statements by Fed Governor Elizabeth Duke and Federal Reserve Bank of New York President William Dudley. Maybe you have a theory that the way the Fed communicates that it intends to raise rates is by denying that it intends to raise rates. If so, I can't help you. ...
The Wall Street Editorial page was upset because the move didn't signal an intent to begin raising interest rates sooner rather than later. The editorial page gang would also like to balance the budget beginning right now with spending cuts "to demonstrate that those who can be trusted with small things—cutting back what can be removed now—can be trusted with larger things." It's all part of their quest to repeat the 1937-38 experience.
Sunday, February 21, 2010
We need jobs, not deficit cuts, by James Galbraith, CIF: "Now that the immediate crisis has passed," Policy Network asks for "long-term strategies to shape our post-recession economies" and "to promote economic growth".
But the immediate crisis hasn't passed. It is not over for the jobless. It is not over for those losing their homes. It is not over for Greece, Spain, Portugal, or Iceland, facing ruin in the capital markets. ...
People need work. We face the challenge of climate change. The broad outline of a program is therefore plain. There is no mystery about it. In 1929, Keynes wrote, "there is work to do; there are men to do it. Why not bring them together?" Today as then, it is that simple.
Do we need to "rethink the relation between the market and the state"? A futile hope! Those who once thought the market could flourish without the state have either already "rethought", or they cannot think. They are our own Stanley Baldwins and when they discourse on this subject, "it not only is nonsense … but it looks like nonsense to any simpleminded person who considers it with a fresh, unprejudiced mind".
In the crisis, the financial sector collapsed. It hasn't recovered. ... In this situation, the state must act. It can act through the banking system by mandate, as it does in China and as it used to do in Japan and France. Or it can bypass the banks and go to work directly – as it did in America in the New Deal and as Keynes proposed for Britain in 1929.
A jobs program? Keynes again: "No, says Baldwin. There are mysterious, unintelligible reasons of high finance and economic theory as to why this is impossible. It would be most rash. It would probably ruin the country. Abra would rise, cadabra would fall… No, cries Baldwin. It would be most unjust… Unemployment is the lot of man… For the more the fewer, the higher the less."
The question facing world leaders today is not what to do. It is whether to do it. There are two goals to meet: full employment and sustainable energy. That's technically complex. But the complexities are complexities of engineering, organization and politics. They are not complexities of economics or finance.
The question is posed as though it involved deep questions and high obstacles, whose true nature the uninitiated cannot be expected to grasp. Thus the hue and cry over public debt and deficits – projected to be unsustainable – for reasons never stated – in the long run. Our papers and our television speak of almost nothing else. But if they are right – as all the voices of Wall Street and the City say – then how come the long-term interest rate on the government bonds of the rich countries remains so low? ...
In truth, the deficit/debt uproar is a deliberate effort to sidetrack attention, to defeat the will of the electorates in the US, as well as Greece among others, who stubbornly insist on effective action, economic recovery and financial reform. Those behind the uproar never foresaw the financial crisis. They never warned against the dangers of excessive private debt. Their interest is plain: they profit from private debts. So it pays to make believe that private is productive and public is sterile, that private is stable and public is not, when the reality is the other way around.
A final word from Keynes: "It may seem very wise to sit back and wag the head. But while we wait, the unused labor of the workless is not piling up to our credit in a bank, ready to be used at some later time. It is running irrevocably to waste; it is irretrievably lost. Every puff of Mr Baldwin's pipe costs us thousands of pounds."
Every day that goes by with unemployment higher than it needs to be means that people are struggling needlessly. People need jobs. And not at some point in the future when Congress gets around to it (if they ever do), this can't wait another day. It should have been done months and months ago.
Congress ought to have the same urgency in dealing with the unemployment problem as it had when banks were in trouble. Collectively the unemployed are too big to remain jobless, and the millions of individual struggles among the unemployed shouldn't be tolerated. But Congress doesn't seem to be in much of a hurry to do anything about it, or give any sign that it much cares.
Saturday, February 20, 2010
Robert Frank says climate change denialists are wrong when they assert that uncertainty translates into inaction:
A Small Price for a Large Benefit, by Robert H. Frank, Commentary, NY Times: Forecasts involving climate change are highly uncertain, denialists assert — a point that climate researchers themselves readily concede. The denialists view the uncertainty as strengthening their case for inaction, yet a careful weighing of the relevant costs and benefits supports taking exactly the opposite course. ...
The numbers — and there are many to choose from — paint a grim picture..., so it’s hardly alarmist to view the risk of inaction as frightening. In contrast, the risk of taking action should frighten no one. Essentially, the risk is that if current estimates turn out to be wildly pessimistic, the money spent to curb greenhouse gases ... would still have prevented substantial damage. ...
Moreover, taking action won’t cost much. ... In short, the cost of preventing catastrophic climate change is astonishingly small... The real problem with the estimates is that the outcome may be worse than expected. And that’s the strongest possible argument for taking action. In a rational world, that should be an easy choice, but in this case we appear to be headed in the wrong direction. ...
We don’t know how much hotter the planet will become by 2100. But the fact that we face “only” a 10 percent chance of a catastrophic 12-degree climb surely does not argue for inaction. It calls for immediate, decisive steps.
Most people would pay a substantial share of their wealth — much more, certainly, than the modest cost of a carbon tax — to avoid having someone pull the trigger on a gun pointed at their head with one bullet and nine empty chambers. Yet that’s the kind of risk that some people think we should take.
Bruce Bartlett counters "a number of conservatives" who "suggest that defaulting on the national debt wouldn’t be such a bad thing." But I think he takes this too literally, and in doing so misses one point of these suggestions. Those making the claims don't necessarily want default on the debt or believe that default will actually happen. The goal is to add to the deficit hysteria, to oppose tax increases with every ounce of effort they can muster, and force cuts in government programs that they oppose:
Another Dumb Right-Wing Idea: Default on the Debt, by Bruce Bartlett: Over the years I have heard a number of conservatives suggest that defaulting on the national debt wouldn’t be such a bad thing. Today Prof. Glenn Reynolds of the University of Tennessee Law School (better known as “Instapundit”) suggests the idea once again. Says Reynolds:“SO HERE’S A QUESTION: Would a default on Treasuries accomplish what the Balanced Budget Amendment was supposed to achieve, by forcing the government to spend no more than it takes in? With more collateral damage, of course. . . .”There are an absurd number of false assumptions and premises inherent in this point that I don’t have time to go through, but here are a few.
1. The Treasury can never default on the debt; it’s simply impossible. (Editorial note appended below.) Here are some reasons.-- First, unlike private borrowers who are constrained by the amount of interest they are willing to pay, the Treasury has no such constraint. It will always pay whatever the market requires, crowding out all private borrowing if necessary.-- Second, the Federal Reserve will always step in to ensure the success of a Treasury bond sale. Although by law the Fed cannot buy Treasury securities directly from the Treasury, it can assure primary dealers that it will soak up any excess supply in the secondary market.-- Third, long before we ever came even remotely close to a situation in which markets even suspected the possibility of default we would have economic conditions that would guarantee some sort of massive fiscal tightening. In particular, interest rates would be vastly higher than they are today, which would make even the most painful deficit reduction measures—crippling tax increases, in particular, as I have explained elsewhere—seem painless by comparison.
2. Even if the Treasury somehow defaulted—that is, failed to make a timely interest payment—it would not achieve what Reynolds and other conservatives wish: an end to all federal borrowing and de facto imposition of a balanced budget by cutting all spending in excess of revenues. Unless one also posits that all federal taxes would simultaneously cease, the Treasury will still have cash flow with which to make interest and other payments required by law.
Not being an expert on the law regarding federal spending I don’t know the precise priority of claims. But certainly, interest on the debt would be first in line for whatever cash flow the government had. That means that interest on the debt would have to be close to 100% of federal revenues before the possibility of default would occur.
Keep in mind also that the Federal Reserve is, in essence, the federal government’s bank. When one cashes a federal check, the Fed pays it from funds the Treasury holds on deposit. In theory, the Fed could simply decide to give the Treasury some float and continue to cash federal checks even if sufficient funds were not immediately available. Since the Fed turns over all its earnings to the Treasury anyway, it could call this float an advance to get around legal restrictions. Keep in mind also that given the Fed’s vast holdings of Treasury securities, with which it conducts open market operations, any rise in interest rates will necessarily increase the Fed’s income enormously.
3. The disruption to financial markets, commerce and the well-being of all Americans from a Treasury default are really beyond my ability to fully describe. But here are a few points to ponder. Interest rates would skyrocket to unprecedented levels, which would cause a collapse of private borrowing and massive capital losses for all bond holders, which include pension funds, insurance companies and foreign central banks, among others. It might be impossible for pension funds to make payments to millions of individuals depending on them for life itself.
The economy would really grind to a halt long before interest rates got so high that default was even on the radar screen. And insofar as the Fed was forced to monetize the debt in order to support the bond market it would lead to hyperinflation. Is Reynolds really willing to turn the U.S. into Zimbabwe just to make a point?
In conclusion, the idea that we should default on the debt rather than raise taxes to deal with a looming fiscal crisis is simply absurd and, frankly, irresponsible. But considering how many absurd and irresponsible ideas are now common currency among the sorts of people who read “Instapundit,” I have to worry whether dimwits like Glenn Beck, Sarah Palin and Michele Bachmann won’t soon be parroting the idea that a default on the debt is preferable to any tax increase whatsoever. This is an idea that needs to be nipped in the bud.
In my haste to write this post I forgot about the debt limit. If Congress failed to raise it then default becomes a realistic possibility because the Treasury would lose the legal authority to issue new bonds. Since the debt limit would have to be increased at some point lest the government fail to have the cash to make Social Security payments and such, the only consequence of this temporary default would be to permanently raise the Treasury's borrowing costs due to the addition of a risk premium.
Update: More from Stan Collender.
Friday, February 19, 2010
Jeff Sachs attacks the attacks on climate science backed by Exxon Mobile, the WSJ editorial pages, and others determined to stop climate change legislation:
The Phony Attack on Climate Science, by Jeffrey D. Sachs, Commentary, Project Syndicate: In the weeks before and after the Copenhagen climate change conference last December, the science of climate change came under harsh attack by critics who contend that climate scientists have deliberately suppressed evidence – and that the science itself is severely flawed. ... The global public is disconcerted by these attacks. If experts cannot agree that there is a climate crisis, why should governments spend billions of dollars to address it?
The fact is that the critics – who are few in number but aggressive in their attacks – are deploying tactics that they have honed for more than 25 years ... to stop action on climate change, with special interests like Exxon Mobil footing the bill. ... The ... same group of mischief-makers, given a platform by the free-market ideologues of The Wall Street Journal’s editorial page, has consistently tried to confuse the public and discredit the scientists whose insights are helping to save the world from unintended environmental harm.
Today’s campaigners against action on climate change are in many cases backed by the same lobbies, individuals, and organizations that sided with the tobacco industry to discredit the science linking smoking and lung cancer. Later, they fought the scientific evidence that sulfur oxides from coal-fired power plants were causing “acid rain.” Then, when it was discovered that certain chemicals called chlorofluorocarbons (CFCs) were causing the depletion of ozone in the atmosphere, the same groups launched a nasty campaign to discredit that science, too.
Later still, the group defended the tobacco giants against charges that second-hand smoke causes cancer and other diseases. And then, starting mainly in the 1980’s, this same group took on the battle against climate change.
What is amazing is that, although these attacks on science have been wrong for 30 years, they still sow doubts about established facts. ... The latest round of attacks involves two episodes. The first was the hacking of a climate-change research center in England. The e-mails that were stolen suggested a lack of forthrightness in the presentation of some climate data. Whatever the details of this specific case, the studies in question represent a tiny fraction of the overwhelming scientific evidence that points to the reality and urgency of man-made climate change.
The second issue was a blatant error concerning glaciers that appeared in a major IPCC report. Here it should be understood that the IPCC issues thousands of pages of text. There are, no doubt, errors in those pages. But errors ... point to the inevitability of human shortcomings, not to any fundamental flaws in climate science.
When the e-mails and the IPCC error were brought to light, editorial writers at The Wall Street Journal launched a vicious campaign... They claimed that scientists were fabricating evidence in order to obtain government research grants – a ludicrous accusation, I thought at the time, given that the scientists under attack ... have certainly not become rich relative to their peers in finance and business.
But then I recalled that this line of attack – charging a scientific conspiracy to drum up “business” for science – was almost identical to that used by The Wall Street Journal and others in the past, when they fought controls on tobacco, acid rain, ozone depletion, second-hand smoke, and other dangerous pollutants. In other words, their arguments were systematic and contrived, not at all original to the circumstances. ... Their arguments have been repeatedly disproved for 30 years – time after time – but their aggressive methods of public propaganda succeed in causing delay and confusion.
Climate change science is a wondrous intellectual activity. ... And the message is clear: large-scale use of oil, coal, and gas is threatening the biology and chemistry of the planet. We are fueling dangerous changes in Earth’s climate and ocean chemistry... We need urgently to transform our energy, transport, food, industrial, and construction systems to reduce the dangerous human impact on the climate. ...
Here's more from Jeff Sachs on this topic from Scientific American:
Breaking the Climate Debate Log jam, by Jeff Sachs, Scientific American: There is a growing possibility that the U.S. will pass no climate change legislation in this session of Congress... Several Democratic senators have already asked him to stop pushing for a bill in 2010, given the proximity to the midterm elections. ...
Perhaps the legislation can still narrowly pass, which at this point would be the best option. If it stalls this spring, however, the climate and the rest of the world can’t wait. A different approach is needed. Here are some components.
First, the Environmental Protection Agency has the mandate to move under the Clean Air Act. It could impose a timetable of emissions standards for electric utilities and for vehicles, which together account for around three fourths of carbon emissions. ...
Second, if cap-and-trade stalls, the administration and Congress should rethink their opposition to the much simpler option of a carbon tax. A predictable carbon tax ... might win broader assent as part of a package of deficit reduction.
Third, the public needs to hear a plan. The administration has embraced a goal of 17 percent reduction of greenhouse gas emissions by 2020, but it hasn’t told us how that would be achieved. The public is scared that even this modest goal would slam jobs and living standards. It’s time to spell out the changes in power generation, automobile technology and energy efficiency that can take us to our goals at modest cost and huge social benefit.
Fourth, it’s time to step up the response to the climate skeptics, who have misled the public. The Wall Street Journal leads the campaign against climate science, writing editorials charging that scientists are engaged in a massive conspiracy. ...
Let’s hear more from the president’s science adviser, John P. Holdren, Nobel laureate energy secretary Steven Chu, the National Academy of Sciences and other authorities. The public will learn to appreciate that the scientific community is working urgently, rigorously and ingeniously to better understand the complex climate system, for our shared safety and well-being.
It's hard to be optimistic that anything useful will happen.
The recent, large increases in health insurance premiums in California demonstrate the need for "comprehensive, guaranteed coverage":
California Death Spiral, by Paul Krugman, Commentary, NY Times: Health insurance premiums are surging — and conservatives fear that the spectacle will reinvigorate the push for reform. On the Fox Business Network, a host chided a vice president of WellPoint, which has told California customers to expect huge rate increases: “You handed the politicians red meat at a time when health care is being discussed. You gave it to them!”
Indeed. Sky-high rate increases make a powerful case for ... comprehensive, guaranteed coverage — which is exactly what Democrats are trying to accomplish.
Here’s the story: About 800,000 people in California who buy insurance on the individual market — as opposed to ... through their employers — are covered by Anthem Blue Cross, a WellPoint subsidiary. These ... people ... were recently told to expect dramatic rate increases,... as high as 39 percent.
Why the huge increase? It’s ... a classic insurance death spiral.
Bear in mind that private health insurance only works if insurers can sell policies to both sick and healthy customers. If too many healthy people ... take their chances and remain uninsured, the risk pool deteriorates, forcing insurers to raise premiums. This ... leads more healthy people to drop coverage, worsening the risk pool even further, and so on.
Now,... cash-strapped Californians have been dropping their policies or shifting into less-comprehensive plans. Those retaining coverage tend to be people with high current medical expenses. And the result, says the company, is a drastically worsening risk pool: in effect, a death spiral.
So the rate increases, WellPoint insists, aren’t its fault... Indeed,... there have been steep actual or proposed increases in rates by a number of insurers.
But ... suppose..., provisionally, that the insurers aren’t the main villains... Even so, California’s death spiral makes nonsense of all the main arguments against comprehensive health reform.
For example, some claim that health costs would fall dramatically if only insurance companies were allowed to sell policies across state lines. But California is already a huge market, with much more insurance competition than in other states; unfortunately,... competition hasn’t averted a death spiral. So why would creating a national market make things better?
More broadly, conservatives would have you believe that health insurance suffers from too much government interference. ... But California’s individual insurance market is already notable for its lack of regulation...
Finally, there have been calls for minimalist health reform that would ban discrimination on the basis of pre-existing conditions and stop there. It’s a popular idea, but ... a ban on medical discrimination would lead to higher premiums for the healthy, and ... more and bigger death spirals.
So California’s woes show that conservative prescriptions for health reform just won’t work.
What would work? By all means, let’s ban discrimination... — but we also have to keep healthy people in the risk pool, which means requiring that people purchase insurance. This, in turn, requires substantial aid to lower-income Americans so that they can afford coverage.
And if you put all of that together, you end up with something very much like the health reform bills that ... passed both the House and the Senate.
What about claims that these bills would force Americans into the clutches of greedy insurance companies? Well, the main answer is stronger regulation; but it would also be a very good idea, politically as well as substantively, for the Senate to use reconciliation to put the public option back into its bill.
But the main point is this: California’s death spiral is a reminder that our health care system is unraveling, and that inaction isn’t an option. Congress and the president need to make reform happen — now.
Alan Blinder on the relative merits of a new-jobs tax credit:
Getting the biggest bang for job-creation bucks, by Alan S. Blinder, Commentary, Washington Post: ...Broadly speaking, job-creating policies come in two varieties: general stimulus to boost growth and programs targeted specifically at job creation.
The first category follows the "build it and they will come" strategy: If you raise GDP, you will get more jobs. That's true. And it's the basic idea behind the Recovery and Reinvestment Act and countless other monetary and fiscal stimulus programs...
But there's a catch: That strategy is expensive -- ... it takes about $93,000 worth of garden-variety fiscal stimulus to create an average job.
The search for a cheaper way leads to policies specifically targeted at job creation. The two main options are direct public-service employment and a new-jobs tax credit. The Obama administration and several members of Congress have proposed the latter. If most of the new public-service positions are low-wage jobs, and if the tax credit is designed well, the per-job costs of these policies are comparable: $30,000 to $40,000. I would recommend doing both, targeting roughly a million new jobs with each program, at a budgetary cost of perhaps $70 billion. While 2 million more jobs won't end America's gaping shortage, it would make a significant dent. ...
Apart from outright fraud, there are three major ways (and many minor ones) for firms to exaggerate the number of new jobs they've created in order to receive the tax credit.
One is to both fire and hire. That problem is easily fixed by awarding the tax credit only for net increases in head count above some base, such as last year's employment. A second gimmick is to replace full-time workers with part-time workers. That loophole can be plugged by offering the tax credit only to firms whose total payroll costs, not just head count, rise. ... But doing so renders the tax credit irrelevant to many firms that slashed employment during the recession and cannot return to their 2009 payroll levels quickly.
New firms pose a problem because they had no employees last year..., if we allow new firms to claim the credit, clever executives will create new firms... Congress was aware of this concern when we last instituted a new-jobs tax credit, in 1977. It decided then to "split the baby" by giving new firms half the tax credit.
All these possibilities for gaming tell us two things. First, the legislation must be drafted with care. Second, the agency that administers the new-jobs tax credit must be assiduous about enforcement. But given the jobs emergency and the impending budget calamity, that doesn't seem too much to ask.
Thursday, February 18, 2010
At my blog at CBS MoneyWatch:
Here's something I wrote for Free Exchange's Round Table in response to a proposal from Daniel Gros and Thomas Mayer to create a European Monetary Fund:
So Alan Blinder, Larry Katz, and I made a few phone calls and sent out a few emails...
DRAFT DRAFT DRAFT DRAFT DRAFT
February 18, 2010
The. Hon Nancy Pelosi
Speaker of the House of Representatives
United States Capitol
Washington, DC 20515
The Hon. John Boehner
Minority Leader of the House of Representatives
United States Capitol
Washington, DC 20515
The Hon. Harry Reid
Majority Leader of the Senate
United States Capitol
Washington, DC 20515
The Hon. Mitch McConnell
Minority Leader of the Senate
United States Capitol
Washington, DC 20515
Dear Speaker Pelosi, and Messrs. Boehner, Reid, and McConnell:
A great number of different policy actions--including the American Recovery and Reinvestment Act, the financial rescue, and the extraordinary monetary policy measures taken by the Federal Reserve--have in their sum played an important role in changing the trajectory of the economy from one of terrible decline to one of growth. But with the latest unemployment rate at 9.7 percent, it is clear that additional emergency policy measures to jump-start job creation are still warranted.
A well-designed temporary and incremental hiring tax credit is a cost-effective way to create jobs, and could work well in the current environment. At a time when GDP is beginning to rise and demand is starting to return, private firms are likely to respond to such a tax incentive by hiring sooner and more aggressively than they otherwise would have done. Such a credit could thus help put Americans back to work more quickly than otherwise. And by targeting firms that are growing, such a tax credit supports the businesses most likely to lead the recovery of employment.
There are many ways to design an effective hiring tax credit, but in general the beneficial effects will be greater the stronger the hiring incentives and the lower the administrative burdens placed on firms. It is critical that such a tax credit be put into place quickly and that it is publicized widely. Firms will begin to accelerate hiring only when know they can count on such tax relief.
We judge that a well-designed hiring tax credit is a well-targeted and economically sound strategy for aiding job creation at this phase of the recovery, and so we support a well-designed hiring tax credit.
In our personal capacities, we are sincerely yours,
Robert Shiller says leadership matters, and lack of leadership in the past is making it harder for Obama to lead us out of the recession:
America is in need of a pep talk from its president, by Robert Shiller, Commentary, Financial Times: We expect our political leaders to manage the level of economic activity by employing fiscal and monetary tools ... to avoid recessions. However, in the aftermath of the bursting of the largest bubble in history,... we see that a social-psychological phenomenon, over-confidence, was not managed by leaders, and its subsequent collapse represents the deepest cause of the financial crisis.
We can imagine that words of warning might have been effective in stopping the bubble before it got so big. Alan Greenspan’s “irrational exuberance” speech in 1996 had a briefly chilling impact on stock markets around the world. However, in the years just before the crisis, leaders failed either to issue firm notes of caution or to restrain over-enthusiastic investment by changing economic incentives.
Now the danger is that we will languish in a period of under-confidence. ... In this uncertain economic climate, businesses are hesitant to invest and consumers reluctant to spend. ...
To what extent can leaders influence economic confidence? Successes in managing economic confidence are legendary, but rare. The most famous example is that of Franklin Delano Roosevelt... By the time Roosevelt took office on March 4 1933 the economy was at a standstill, with a quarter of the workforce unemployed. More than half the states had declared a temporary bank shut-down and there were severe restrictions on bank withdrawals in most of the rest.
In his March 4 inaugural address he took an already well-known phrase, “The only thing to fear is fear itself”..., and made suppression of fear and willingness to support the economy a moral obligation, for everyone. ... He started the tradition of connecting with his people with personal radio messages. They became called “fireside chats”, because they seemed like cordial one-on-one conversations.
These were enormously successful, attracting wide audiences. ... There is evidence that the public spirit that Roosevelt cultivated was central to the initial success of his plans for economic revival. ...
But such successes of national leaders in boosting economic confidence are rare. Roosevelt’s fireside chats started a tradition that has been followed by every US president since, but none has had as much success in influencing public opinion. Fireside chat pleas from leaders have mainly been effective during national emergencies. ... It is easy to see why it is hard for leaders to use such a medium to restrain the over-exuberant animal spirits that lead eventually to an economic crisis.
Both Barack Obama and Gordon Brown, the British prime minister, have been attempting the same moral rhetoric as Roosevelt used, though without as much impact. Mr Obama repeats the “fear is fear itself” line, and in one of his weekly addresses last year said: “Americans didn’t build this great country by fearing the future and shrinking our dreams.” ...
The 1933 Roosevelt example shows that such efforts can help. Leadership matters. But it can be effective only sometimes. And leadership in a crisis cannot undo all the damage of lack of leadership in the past.
Talk is nice, and cheap, but jobs are a better way of instilling confidence. Instead of simply telling people to cheer up, Obama should use his pulpit to target congress and insist upon a jobs bill.
This was suggested by Rajiv Sethi. It argues that maximizing the "moral hazard free lunch" does not require an explicit intention on behalf of agents to exploit the insurance protection offered by the knowledge that they are too big to fail:
Natural Selection, Self-Deception and the Moral Hazard Explanation of the Financial Crisis, by Macroeconomic Resilience: Moral Hazard and Agent Intentionality A common objection to the moral hazard explanation of the financial crisis is the following: Bankers did not explicitly factor in the possibility of being bailed out. In fact, they genuinely believed that their firms could not possibly collapse under any circumstances. For example,... Jeffrey Friedman has this to say about the actions of Ralph Cioffi and Matthew Tannin, the managers of the Bear Stearns fund whose collapse was the canary in the coal mine for the crisis:
“These are not the words, nor were Tannin and Cioffi’s actions the behavior, of people who had deliberately taken what they knew to be excessive risks. If Tannin and Cioffi were guilty of anything, it was the mistake of believing the triple-A ratings.”
This objection errs in assuming that the moral hazard problem requires an explicit intention on the part of economic agents to take on more risk and maximise the free lunch available courtesy of the taxpayer. The essential idea which I outlined at the end of this post is as follows: The current regime of explicit and implicit bank creditor protection and regulatory capital requirements means that a highly levered balance sheet invested in “safe” assets with severely negatively skewed payoffs is the optimal strategy to maximise the moral hazard free lunch. Reaching this optimum does not require explicit intentionality on the part of economic actors. The same may be achieved via a Hayekian spontaneous order of agents reacting to local incentives or even more generally through “natural selection”-like mechanisms. ...
Let us analyse the “natural selection” argument a little further.
Wednesday, February 17, 2010
Today is a teaching day for me, so time is short. I've been trying to find something to post that will spark a bit more conversation than what I've put up today so far, but haven't had any luck, so I'll have to leave it to you to roll your own in comments. Feel free to talk about whatever you want. If I find something between classes or during office hours, I'll post it, but for now I have to go talk about Jevons, Menger, and the marginalists, and then off to another class to talk about the mathematics underlying the New Keynesian model, and what it takes for the model to have a unique, stable equilibrium (i.e. the Taylor principle).
George Hall and Tom Sargent argue that the official calculation of net interest payments on the government debt "misreports government borrowing costs and leaves open the possibility of manipulation." Actual interest payments are lower and more volatile than official figures suggest:
Net interest payments on the federal debt: A flawed measure, by George Hall and Thomas J. Sargent, Vox EU: Net interest payments on the federal debt play such a prominent role in the Congressional Budget Office's (CBO) Budget and Economic Outlook: Fiscal Years 2010-2020 that a graph of the series illustrates the publication's front cover. According to this report, last year the Federal government paid $187 billion in net interest on $7.544 trillion of Treasury debt implying a positive interest rate of about 2.5%. Curiously however, 2009 was not a terrific year to be an investor of Treasury securities. Many Treasury Bond mutual funds lost money, with the benchmark Barclays US Treasury Bond Index fell by 3.9% over the year. Long-term bond holders were hurt particularly hard as rates rose imposing large capital losses.
How can it be that the government reports positive interest payments while its creditors claim to have lost money? It turns out that net interest payments on the federal debt as reported by the Treasury, National Income and Product Accounts, and CBO is a flawed measure of the government borrowing costs. As noted earlier by Robert Eisner (1986), Henning Bohn (1992) and others, the number the government reports as net interest does not correspond the interest payments economists put in the government budget constraint; instead it is the sum of all the coupon payments on the Treasury notes and bonds and the capital gains of the zero-coupon Treasury bills. This arithmetic mismeasures the government's interest payments by failing to account properly for real capital gains and losses government creditors receive due to changes in inflation, interest rates, and the maturity structure of the debt. Coupon payments should not be viewed as pure interest payments – they are part principal repayments, part interest payments.
To measure the government’s interest payments accurately, we have built our own accounting scheme using market prices and quantities held by the public for every marketable Treasury security since 1941 (Hall and Sargent, 2010). Our calculations take into account inflation, fluctuations in the term structure, and changes in the maturity structure of the debt.
In Figure 1 we contrast the Federal Government’s official interest payment series with our series using annual end of the year data from 1941 to 2008. We report both our measure of interest paid (the blue line) and the government's reported interest payments (the red line) as percentages of the market value of debt. Thus, both series can be viewed as rates of return.
Figure 1. A comparison of the official interest payments and our estimates of interest payments
Note: The blue line is our computed interest payments on the debt. The red line is the officially reported interest payments. Both series are reported as percentages of the total market value of publicly-held Treasury debt. The black line is the red line minus the inflation rate.
Computed correctly, the return on Treasury debt is lower on average and considerably more volatile than the official reported interest costs. The official interest payments average 5.8% of the debt while our measure of the real return on the debt averages 1.7%. If we subtract the inflation rate from the officially reported interest payments (the black line), the two series have roughly the same mean (2.0 versus 1.7).
In contrast to the officially reported net interest payment series, our measure of the return on government debt demonstrates some striking outcomes.
- First, there were large negative returns immediately after World War II as inflation surged with the lifting of price controls.
- Second, during the early 1980s, when, perhaps unexpectedly, Paul Volcker brought down inflation, bondholders – particularly long-term bond holders – received large positive returns. Many who point to the 1970s as a time during which the US was able to pay low returns to its creditors through inflation often fail to acknowledge the large returns many of those same creditors received when inflation fell in the early 1980s.
- Third, annual real returns became considerably more volatile in the two and half decades after 1980 – a period of low volatility in GDP growth often described as the Great Moderation.
The misreporting of government borrowing costs leaves open the possibility of manipulation. The government could drive its measure of net interest payments to zero every period by perpetually rolling over, let us say, zero-coupon 10 year bonds. Such bonds would never pay coupons and never mature – each period they would be repurchased as nine year zero-coupon bonds and reissued as fresh 10 year zero-coupon bonds. Though the government accounts would put interest payments at zero, in truth the government would still pay interest in the economically relevant sense determined by the government budget constraint.
Thomas Friedman calls for scientists to go on the offensive against climate change deniers and skeptics:
Global Weirding Is Here, by Thomas Friedman, Commentary, NYTimes: Of the festivals of nonsense that periodically overtake American politics, surely the silliest is the argument that because Washington is having a particularly snowy winter it proves that climate change is a hoax and, therefore, we need not bother with all this girly-man stuff like renewable energy, solar panels and carbon taxes. Just drill, baby, drill.
When you see lawmakers like Senator Jim DeMint of South Carolina tweeting that “it is going to keep snowing until Al Gore cries ‘uncle,’ ” or news that the grandchildren of Senator James Inhofe of Oklahoma are building an igloo next to the Capitol with a big sign that says “Al Gore’s New Home,” you really wonder if we can have a serious discussion about the climate-energy issue anymore.
The climate-science community is not blameless. It knew it was up against formidable forces... Therefore, climate experts can’t leave themselves vulnerable by citing non-peer-reviewed research or failing to respond to legitimate questions, some of which happened with both the Climatic Research Unit at the University of East Anglia and the United Nations Intergovernmental Panel on Climate Change.
Although there remains a mountain of research from multiple institutions about the reality of climate change, the public has grown uneasy. What’s real? In my view, the climate-science community should convene its top experts — from places like NASA, America’s national laboratories, the Massachusetts Institute of Technology, Stanford, the California Institute of Technology and the U.K. Met Office Hadley Centre — and produce a simple 50-page report. They could call it “What We Know,” summarizing everything we already know about climate change in language that a sixth grader could understand, with unimpeachable peer-reviewed footnotes.
At the same time, they should add a summary of all the errors and wild exaggerations made by the climate skeptics — and where they get their funding. It is time the climate scientists stopped just playing defense. The physicist Joseph Romm, a leading climate writer, is posting on his Web site, climateprogress.org, his own listing of the best scientific papers on every aspect of climate change for anyone who wants a quick summary now. ...
I don't think a panel of experts will help much, but it's a start. What's really needed is for a few key leaders on the right to act responsibly, acknowledge the problem, and commit to working toward a solution. But the chances of that happening are pretty slim.