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The Dallas Fed paints a relatively optimistic picture for the future of the economy (though the accompanying text is a bit more qualified):
Here's the forecast from the SF Fed. It's also relatively optimistic, but not to the same degree.
Posted by Mark Thoma on Wednesday, March 31, 2010 at 11:34 PM in Economics | Permalink Comments (16)
Posted by Mark Thoma on Wednesday, March 31, 2010 at 11:03 PM in Economics, Links | Permalink Comments (7)
Jeff Frankel does some research on behalf of members of the Tea Party. They might not like his results:
Red States, Blue States and the Distribution of Federal Spending, by Jeffrey Frankel: April 1 is Census Day. Evidently Glenn Beck and Michele Bachmann are encouraging Americans to boycott the census — to refuse to fill out the whole form. This protest follows from their small government ideology. ... They say they want a government that intervenes less in the economic sphere. Perhaps they don’t like the idea that the census numbers are used, among other things, to determine the allocation of federal spending across states, because they don’t think it is the business of the government to redistribute income. That is “socialism.” Even “Stalinism.”
A virtue of the Tea Party movement is that many of its members are engaging in national politics for the first time. It occurred to me that they might be able to use some help figuring out the lay of the land, and so I thought I would pursue a little research on their behalf. The question is geographical redistribution: which states receive subsidies from the federal government, and which other states are taxed to provide those subsidies. One might be able to sympathize with the feeling of those living in the heartland of the country that they should not have to subsidize the northeastern states or California... Given the big budget deficit problem that we will have to solve in the near future, knowing which states are receiving more than their fair share of handouts should help us know where to cut spending.
The accompanying chart contains 50 data points, one for each state. The data are from 2005, the most recent year available. One axis ranks states by the ratio of income received by that state from the federal government, per dollar of tax revenue paid to the federal government. Personally, I think the “red state / blue state” distinction is overdone. But to capture the widely felt tension between the heartland and the coastal urban centers, I have put on the other axis the ratio of votes for the Republican candidate versus the Democratic candidate in the most recent presidential election.
It will come as a surprise to some, but not to others, that there is a fairly strong statistical relationship, but that the direction is the opposite from what you would think if you were listening to rhetoric from Republican conservatives: The red states ... generally receive more subsidies from the federal government than they pay in taxes; in other words they are further to the right in the graph. It is the other way around with the blue states...
One reason is that the red states on average have lower population; thus their two Senators give them higher per capita representation in Washington than the blue states get, which translates into more federal handouts. The top ten feeders at the federal trough in 2005 were: New Mexico, Mississippi, Alaska, Louisiana, West Virginia, North Dakota, Alabama, South Dakota, Kentucky and Virginia. (Sarah Palin’s home state of Alaska ranks number one if measured in terms of federal spending per capita. Alabama Senator Shelby evidently gets goodies for his state, ranked 7, by indiscriminately holding up votes on administration appointments.) The top ten milk cows were: New Jersey, Nevada, Connecticut, Minnesota, Illinois, Delaware, California, New York, and Colorado.
Perhaps in determining how the federal government redistributes income across states one should view its role more expansively than is captured in the budget numbers. ... The four congressional districts that receive the most in farm subsidies are all represented by “conservative” Republicans, located in Nebraska, Kansas, Iowa, and Texas. (Michele Bachmann’s family farm apparently received $250,000 in such farm payments between 1995 and 2006.)
The most commonly ignored area of geographical redistribution is the federal government’s permanent policy of “universal service” in postal delivery, phone service and other utilities (electricity; perhaps now broadband…). Universal service means subsidizing those who choose to live in remote places like Alaska, where the cost of supplying these services is much higher than in the coastal cities. Perhaps they should move…
If I were cynical, I might suspect that the reason that Glenn Beck, Michele Bachmann, and some Republicans are not enthusiastic about getting the most accurate numbers possible, from the census and otherwise, is that they don’t want people to know who is getting federal handouts and who is paying. Probably they don’t want to know themselves.
[Click here for pdf enlargement of graph]Data sources: The Tax Foundation and Atlas of US Presidential Elections.
Posted by Mark Thoma on Wednesday, March 31, 2010 at 03:33 PM in Economics, Fiscal Policy, Politics | Permalink Comments (52)
I'm encouraged that at least one Federal Reserve policymaker (though not a voting member of the FOMC) is linking increases in the target federal funds rate, i.e. moving away from a zero interest rate policy, to improvements in the labor market. However, if expected inflation begins increasing, all bets are off.
That's the part that concerns me. How quickly will policymakers abandon efforts to stimulate employment by maintaining a zero interest rate policy if they start to get worried about inflation? What, exactly, is the tradeoff here? Will any sign of inflation whatsoever cause policymakers to panic and start aggressively raising interest rates even if unemployment remains elevated, or will concerns over employment cause them to be patient and accept some inflation in the short-run? Again, it's encouraging that employment concerns are coming to the forefront of the policy decision, but will those concerns carry sufficient weight if there are signs that inflation expectations are increasing? I'm worried that they won't:
Prospects for Sustained Recovery and Employment Gains, by Dennis P. Lockhart, President and Chief Executive Officer, Federal Reserve Bank of Atlanta: After the deepest and longest recession in the past half century ... the U.S. economy is now in recovery. Today I want to discuss the prospects that the recovery ... is sustainable—and the implications ... for perhaps the most vexing current problem coming out of the recession: unemployment. ...
The economy remains in a transitional phase from a period that depended on support of public sector programs to a period of resumed growth based on private spending. For the recovery to be sustained, we need consumers to consume and businesses to spend on inventory, investment goods, and human resources. Economic forecasts hinge on how formidable those positive forces will be and on the strength of countervailing headwinds.
Views about the economic outlook fall roughly into two narratives. The more optimistic scenario is a V-shaped bounce back from severe recession. ... By contrast, the second scenario is a relatively modest recovery, with slow reduction of unemployment. ... In ... Atlanta..., our outlook is closer to the second narrative.
Perspective on labor markets
As already suggested, an implication of this slow recovery scenario is the very gradual decline of today's unacceptably high rate of unemployment. ... Today, the rate stands at 9.7 percent, down from a high of more than 10 percent in October.
I view unemployment as a daunting economic challenge—and very likely a dominant political issue—of the period ahead. ... Today, there are about 130 million payroll jobs in the United States, and that number is about 8.4 million lower than at the beginning of the recession. ...
About 15 million people in the United States are unemployed. ... Also, underemployment is prevalent. The underemployed include both discouraged workers... as well as individuals who are working part-time but want to work full-time. The unemployment rate that combines the fully unemployed and underemployed workers is about 17 percent.
Another indication of underemployment is reduced hours of work. Average hours of work per week are still well below prerecession levels...
Despite the weak state of labor markets, there are signs that the worst may be behind us. The rate of job loss is slowing. The rate of decline in payroll employment has been close to zero in the last couple of months. Also, while initial and continuing unemployment claims are at historically high levels, both have fallen.
Another bright spot is temporary employment. The temporary services sector shed more than 800,000 jobs during the recession but has seen a notable increase since last fall. This improvement is noteworthy as temporary employment is often viewed as a leading indicator.
The normal state of affairs in the country's labor market is a dynamic mix of separations from employment and new job creation. There are two causes of separations—layoffs and voluntarily quitting a job, or so-called quits. ... Today's slow pace of employment gains is due more to the slow pace of job creation, not the high rate of layoffs.
Job gains, as conventionally understood, require two things: a vacancy and a worker able to fill that vacancy. For most of 2009, vacancies were relatively flat while unemployment continued to rise. This condition suggests the existence of what labor economists call "match inefficiencies."
There are two key types of match inefficiency. One is geographic mismatch. In 2008, the percentage of individuals living in a county or state different than the previous year was the lowest recorded in more than 50 years of data. People may be reluctant to relocate for a new job if the value of their house has declined. In addition, many who would like to move are under water in their mortgage or can't sell their homes.
The second inefficiency is skills mismatch. In simple terms, the skills people have don't match the jobs available. Coming out of this recession there may be a more or less permanent change in the composition of jobs. Skill mismatches require new training, and there is evidence that adult education institutions have responded to this need. For instance, officials at Miami-Dade College in Florida, which is the largest college in the country and a grantor of associate and vocational degrees, told us they have recently seen a strong increase in enrollment, especially of men in their 20s.
This evidence of retooling is encouraging, but, to be realistic, structural adjustment takes time. ...
All things considered, labor market trends appear to be headed in the right direction. But it's quite possible the recovery could be well advanced before any significant reduction of unemployment materializes. It's also quite possible circumstances justifying the start of a cycle of policy tightening will develop well before the unemployment rate has found a satisfactory level. ... So let me now comment on how I'm thinking about the relationship between the Fed's employment mandate and monetary policy.
Implications for monetary policy
As you know, monetary policy is highly accommodative. And I think this stance is appropriate at present. I continue to support ... a low federal funds rate target for an extended period. ... As long as inflation remains subdued and inflation expectations anchored, a key factor for me is improvement of employment markets.
Going forward, I will be looking for signs that employment gains are likely to repeat and accumulate and, once achieved, are likely to be durable.
What might such signs be? One indication would be that the process of job creation is improving. In January, we saw a sizable increase of job openings, according to the BLS. I'm looking for that to become a trend. A second sign would be a decline in the measured rate of underemployment. And the third sign would be a string of employment gains large enough to appreciably move the unemployment rate down over time.
There are hopeful, if tentative, signs of improvement in employment markets. We have a long way to go, and for that reason I believe it is premature to assume an imminent reversal of the Fed's accommodative policy. But you can interpret the fact that I am here discussing the conditions under which such a reversal will be appropriate as an indication of my conviction that we are, finally, moving in the right direction.
Posted by Mark Thoma on Wednesday, March 31, 2010 at 02:01 PM in Economics, Fed Speeches, Monetary Policy, Unemployment | Permalink Comments (19)
A reaction to today's ADP report showing the private sector lost 23,000 jobs in March, and what to expect when the BLS issues its employment report on Friday:
ADP Report Shows Private Sector Losing Jobs Last Month
I'm worried that distortions in the numbers that make conditions in the labor market look better than they actually are will give legislators the excuse they need to avoid taking up the question of what can be done to help with job creation.
Posted by Mark Thoma on Wednesday, March 31, 2010 at 10:23 AM in Economics, MoneyWatch, Unemployment | Permalink Comments (3)
The administration is supporting a significant expansion in offshore drilling for oil and natural gas:
Obama to Open Offshore Areas to Oil Drilling for First Time, by John Broder, NY Times: The Obama administration is proposing to open vast expanses of water along the Atlantic coastline, the eastern Gulf of Mexico and the north coast of Alaska to oil and natural gas drilling... The proposal ... would end a longstanding moratorium on oil exploration along the East Coast from the northern tip of Delaware to the central coast of Florida, covering 167 million acres of ocean.
Under the plan, the coastline from New Jersey northward would remain closed to all oil and gas activity. So would the Pacific Coast, from Mexico to the Canadian border. The environmentally sensitive Bristol Bay in southwestern Alaska would be protected... But large tracts in the Chukchi Sea and Beaufort Sea in the Arctic Ocean north of Alaska — nearly 130 million acres — would be eligible for exploration and drilling...
The proposal is intended to reduce dependence on oil imports, generate revenue from the sale of offshore leases and help win political support for comprehensive energy and climate legislation.
But ... it is no sure thing that it will win support for a climate bill... Mr. Obama and his allies in the Senate have already made significant concessions on coal and nuclear power to try to win votes from Republicans and moderate Democrats. The new plan now grants one of the biggest items on the oil industry’s wish list — access to vast areas of the Outer Continental Shelf for drilling.
But even as Mr. Obama curries favors with pro-drilling interests, he risks a backlash from some coastal governors, senators and environmental advocates, who say that the relatively small amounts of oil to be gained in the offshore areas are not worth the environmental risks. ...
It is not known how much potential fuel lies in the areas opened to exploration, although according to Interior Department estimates there could be as much as a three-year supply of recoverable oil and more than two years’ worth of natural gas... But those estimates are based on seismic data that is, in some cases, more than 30 years old. ...
Increasing the risks to the environment in an attempt to save the environment seems like a less than optimal strategy.
Posted by Mark Thoma on Wednesday, March 31, 2010 at 01:17 AM in Economics, Environment, Oil, Politics | Permalink Comments (62)
Posted by Mark Thoma on Tuesday, March 30, 2010 at 11:06 PM in Economics, Links | Permalink Comments (22)
Robert Reich says we don't need new legislation to stop deceptive accounting practices on Wall Street used to play "off-the-balance-sheet derivative games", there are already laws on the books that are supposed to stop this behavior. Unfortunately, the laws are not being enforced:
Fraud on the Street, by Robert Reich: The Securities and Exchange Commission announced Monday it had begun an inquiry into two dozen financial companies to determine whether they followed accounting practices similar to those recently disclosed in an investigation of Lehman Brothers.
Where on earth has the SEC been?
It’s now clear Lehman Brothers’ balance sheet was bogus before the bank collapsed in 2008, catapulting the Street and the world into the worse financial crisis since 1929. The Lehman bankruptcy examiner’s recent report details what just about everyone on the Street has known since the firm imploded – that Lehman defrauded its investors. Even Hank Paulson, in his recent memoir, referred to Lehman’s balance sheet as bogus. ... Its CPA, Ernst and Young, approved of this fraud against the advice of its own whistle blower, whom Ernst and Young fired.
Lehman’s practices couldn’t have been all that different from those of every other big bank on the Street. After all, they were all competing for the same business, and using many of the same techniques. Lehman was just the first to go under... In other words, the TARP covered the other bankers’ assets and asses. ...
Congress is now struggling to come up with legislation to stop this from happening again. And the Street is struggling to stop Congress. As of now, the Street’s political payoffs seem to be working. Proposed legislation still allows secret derivative trading in foreign-exchange swaps (similar to what Goldman used to help Greece hide its debt) and in transactions between big banks and many of their corporate clients (as with AIG).
But wait. We already have a law designed to stop this sort of fraud. It’s called the Sarbanes-Oxley Act of 2002. ... Sarbanes-Oxley ... was designed to stop this. It requires CEOs and other senior executives to take personal responsibility for the accuracy and completeness of their companies’ financial reports and to set up internal controls to assure the accuracy and completeness of the reports. If they don’t, they’re subject to fines and criminal penalties.
Sarbox is directly relevant to the off-the-balance-sheet derivative games the Street played and continues to play. No bank CEO can faithfully attest to the accuracy and completeness of its financial reports when derivatives guarantee that the reports are incomplete and deceptive.
So where has the SEC been?
I was on a panel a few weeks ago with a former chair of the Securities and Exchange Commission who was asked why the commission has so far failed to enforce Sarbox against Wall Street. He had no response except to mumble that legislation is meaningless unless adequately enforced. Exactly.
Bottom line: While financial reform is needed, there’s no reason to wait for it. Sarbox is already there. And even if financial reform is enacted without loopholes, there’s no reason to think it will be enforced if laws already on the books, such as Sarbox, aren’t.
Posted by Mark Thoma on Tuesday, March 30, 2010 at 04:05 PM in Economics, Financial System, Regulation | Permalink Comments (10)
Guess I should count myself as lucky -- I'm in a blue dot area. More here:
“Most U.S. metro areas actually experienced more moderate increases in house prices than the nation between 2000 and 2006. In fact, 249 of the 383 metropolitan areas tracked by the Federal Housing Finance Agency saw price increases below the national rate of 8.1% during the boom”... Many of these areas, in turn, didn’t experience the resulting bust.
The authors say a lack of nonprime lending in these areas played a prominent role in insulating them from the boom and bust. “It is likely that causation runs in both directions — an increase in nonprime lending led to more significant home price appreciation [in boom areas], and more rapid home price appreciation led to a rise in nonprime lending”...
Posted by Mark Thoma on Tuesday, March 30, 2010 at 02:52 PM in Economics, Housing | Permalink Comments (36)
Jeff Sachs is more hawkish than I would have guessed:
A frugal policy is the better solution, by George Osborne and Jeffrey Sachs, Commentary, Financial Times: Virtually all policy analysts agree that the path to renewed prosperity in Europe and the US depends on a credible plan to re-establish sound public finances. Without such a plan, the travails which have hit Greece ... will soon enough threaten the UK, US, and other deficit-ridden countries. In the recent duel of macro-economists, one camp has called for early budget consolidation... We agree. Others want more fiscal stimulus, delaying deficit reduction. We believe delaying the start of deficit reduction would put long-term recovery at risk. Such an approach misjudges politics, financial markets, and underlying economic realities.
Blaming our predicament on financial markets, as some in the second camp do, ignores the awkward truth that governments have enabled, if not enthusiastically promoted, recklessness, through chronic deficits and lax financial regulation. Our predicament, in this sense, is a political crisis at least as much as a financial one. We can’t expect “credibility” by succumbing to temptation just one more time. ...
Self-described Keynesians, including Paul Krugman, and Lords Layard and Skidelsky, see the financial markets as benignly ready to finance budget deficits, pointing to low market interest rates. By contrast, we believe financial markets are perfectly capable of getting spooked about the prospects of debt financing in the medium term. ...
The general notion that delay is beneficial in the short term because it provokes more spending today – irrespective of future debt burdens – is also wrong... If the starting position is a large structural deficit, further fiscal “stimulus” can darken consumer and business confidence by creating fears about future debt burdens. These fears may be translated directly into higher borrowing costs today for government and the private economy. ...
Sustainable recovery is a medium- and long-term project: investing in the next generation of technologies, workers, and families. Those who are hurt between the collapse of the recent bubble and the start of a new growth era must of course be protected. But it is naive to believe that governments can create high-quality, high-productivity jobs that last by inflating bubbles or digging ditches.
Government and the private sector will be complementary forces in a real, sustained, job-creating recovery. The new jobs must be largely in the private sector. But the public sector has a critical role in ensuring that the conditions for sustainable growth are in place. These include the regulation of and finance for modern infrastructure, high-quality education, pre-commercial innovation, and a world-class science and technology base. ...
Our priority should be a medium-term fiscal framework, with the first steps starting this year. That must be matched by improvements in the delivery of health, education, skills, and technology; social protection for those in need; and a decent regard for the long-term investments needed to rebuild an economy crushed by the bubbles of wishful thinking.
The economy is not yet ready for an increase in taxes or a cut in spending. Cutting the deficit too soon could undermine the recovery and send the economy back into recession. We'll get there soon enough, but we're not there yet.
Their solution might be "sustainable" if we had the social programs in place to automatically protect those "who are hurt between the collapse of the recent bubble and the start of a new growth era." But we don't, and we aren't going to get them anytime soon, so the protection must come from sustained government intervention.
How long should the help be sustained? With labor markets in such poor shape, it's too soon for government stimulus programs to be scaled back. If anything, more help is needed. Once labor markets are healthy, we can and should begin to wind down the stimulus effort and begin to address long-run deficit issues, but, again, we're not there yet.
Posted by Mark Thoma on Tuesday, March 30, 2010 at 12:51 AM in Economics, Fiscal Policy, Social Insurance, Unemployment | Permalink Comments (45)
Despite all the worries about inflation, the latest release of the Dallas Fed's Trimmed mean PCE inflation calculations (a measure of the core rate of inflation) indicates that inflation is still headed downward:
"The trimmed mean PCE inflation rate is an alternative measure of core inflation in the price index for Personal Consumption Expenditures"
Here are the recent data for the 12-month inflation rate (3/29 release):
| 12-month | |
| Mar-09 | 2.26 |
| Apr-09 | 2.24 |
| May-09 | 2.08 |
| Jun-09 | 1.94 |
| Jul-09 | 1.66 |
| Aug-09 | 1.60 |
| Sep-09 | 1.45 |
| Oct-09 | 1.51 |
| Nov-09 | 1.40 |
| Dec-09 | 1.37 |
| Jan-10 | 1.18 |
| Feb-10 | 1.04 |
Posted by Mark Thoma on Tuesday, March 30, 2010 at 12:51 AM in Economics, Inflation, Monetary Policy | Permalink Comments (28)
Posted by Mark Thoma on Monday, March 29, 2010 at 11:04 PM in Economics, Links | Permalink Comments (14)
Jeff Miron says "we should liberalize immigration because it will restrain the welfare state":
Immigration and the Welfare State, by Jeffrey Miron: Jason Riley has a nice column in today’s WSJ about the interaction between welfare and immigration policies. He correctly notes that immigrants to the U.S. do not come mainly for the welfare benefits, but he worries this could change as welfare policies, like Obamacare, expand.
I share Riley’s opposition to Obamacare, as well as his support for legal immigration. My one disagreement is his endorsement of the Friedman view on the relation between the welfare state and immigration:
In countries such as France, Italy and the Netherlands, excessively generous public benefits have lured poor migrants who tend to be heavy users of welfare and less likely than natives to join the work force. Milton Friedman famously remarked, “you can’t have free immigration and a welfare state.” There is a tipping point, even if the U.S. has yet to reach it.Riley and Friedman may be right, but my hunch is that they have the sequencing backwards: we should liberalize immigration because it will restrain the welfare state. The European examples that Riley cites might seem to argue against this view, but these countries still restrict immigration significantly. My claim is that major expansions in legal immigration would cause substantially diminished support for generous welfare spending.
On the run, so I'll have to let you take this on in comments...
Posted by Mark Thoma on Monday, March 29, 2010 at 03:33 PM in Economics, Immigration, Social Insurance | Permalink Comments (185)
De long view:
Taking Hope in the Long View, by J. Bradford DeLong, Commentary, Project Syndicate: In the United States, we sit in the midst of 10% unemployment. In some countries, fiscal policy is crippled by legitimate fears that more deficit spending will trigger government-debt crises. In many other countries, fiscal policy is crippled by confusion between short-term cyclical and long-term structural deficits.Meanwhile, banking policy is crippled by populist reaction against more bailouts, and monetary policy by a strange mindset among central bankers that fears inflation even as wage growth continues to drop. ...
It is time to calm down. And the best way to calm down is by taking the long view.
If all goes well in China and India in the next generation – and if nothing goes catastrophically wrong in the rich, post-industrial, North Atlantic core of the global economy – the next generation will reach a real milestone. For the first time, more than half of the world will have enough food not to be hungry, enough shelter not to be wet, enough clothing not to be cold, and enough medical care not to be worried that they and most of their children will die prematurely of micro-parasites.
The big problems for most of humanity will be to find enough conceptual puzzles and diversions in their work and leisure lives to avoid being bored, and enough relative status not to be green with envy of their fellows. And, of course, they will have to dispose of thugs who used to have spears but will now have cruise missiles and H-bombs...
How did this miracle come about?
Some say that it was ... the shift from a worldview that relied on prayer and the propitiation of spirits to one that relied on rational manipulation and management of nature and of society. But the Classical Greeks had natural philosophy, and the Classical Romans believed in figuring out what worked and applying it. Yet all they produced were some splendid works of architecture and infrastructure and a system of military training that spread their society beyond the Mediterranean.
Some say that the miracle stemmed from an agricultural revolution... But eleventh-century China had a bigger and earlier agricultural revolution than eighteenth-century Britain, and China would have to wait another millennium before emerging as a global power.
Some say that the European conquest of the Americas deserves the credit. But what was shipped back from America across the Atlantic to Europe ... was never real wealth. It was merely sterile gold and silver, some empty calories (in the form of sugar), and some psychoactive products –coffee, tea, chocolate, and tobacco.
Some say that it was the commercial revolution and the rise of the middle class that brought us to the brink of victory over scarcity. But Adam Smith in 1776, and David Ricardo a little later, looked forward to a future Britain that looked a lot like China – a full country with high agricultural productivity and a well-developed division of labor but a very poor peasantry and working class ruled by very rich landlords.
Or maybe it was the industrial revolution of the eighteenth century... But, as late as 1871, John Stuart Mill was writing that it was doubtful whether all of the industrial revolution’s inventions had lightened the day’s toil of a single worker.
Looking back, it is difficult to avoid the conclusion that it was at the end of the nineteenth century that something really special happened. That really special thing had three parts.
First, the advent of global communications meant that ideas invented or found or applied in one part of the world could be quickly made known to and adapted in other parts of the world, rather than waiting decades or centuries to percolate across the oceans.
Second, the coming of global transportation meant that any good idea could be put into practice to produce enormous profits as it was leveraged across the entire globe.
Third – and in large part a consequence of the other two – the rise of the professional inventor and the industrial research laboratory created a class of people whose business was not to make and apply a single invention, but to invent the process of continuous and constant invention and innovation itself.
Because all three of these developments occurred at roughly the same time, we had our critical mass and the chain reaction that has brought us here. Let’s hope that we can keep it in motion, and that we don’t spoil it by losing sight of what was really important in bringing it about.
When nearly 10% of the people are unemployed and government is looking the other way hoping it will somehow fix itself, I have no intention of calming down no matter how rosy the long view might be. It's nice that all these wonderful things are happening, and I also hope they will continue, or even accelerate, but that doesn't change the immediate needs one bit.
Calm down while people are struggling to make ends meet? I don't think so.
Posted by Mark Thoma on Monday, March 29, 2010 at 10:23 AM in Development, Economics, Unemployment | Permalink Comments (67)
Will Republicans dare to oppose financial reform?:
Punks and Plutocrats, by Paul Krugman, Commentary, NY Times: Health reform is the law of the land. Next up: financial reform. But will it happen? The White House is optimistic, because it believes that Republicans won’t want to be cast as allies of Wall Street. I’m not so sure. The key question is how many senators believe that they can get away with claiming that war is peace, slavery is freedom, and regulating big banks is doing those big banks a favor. ...
We have already ... stepped in to rescue troubled financial companies, so as to avoid a complete collapse. And you should bear in mind that the biggest bailouts took place under a conservative Republican administration, which claimed to believe deeply in free markets. There’s every reason to believe that this will be the rule from now on: when push comes to shove, no matter who is in power, the financial sector will be bailed out. ...
The only question now is whether the financial industry will pay a price for this privilege, whether Wall Street will be obliged to behave responsibly in return for government backing. And who could be against that?
Well, how about John Boehner, the House minority leader? Recently Mr. Boehner gave a talk to bankers in which he encouraged them to balk efforts by Congress to impose stricter regulation. “Don’t let those little punk staffers take advantage of you, and stand up for yourselves,” he urged — where by “taking advantage” he meant imposing some conditions on the industry in return for government backing.
Barney Frank, the chairman of the House Financial Services Committee, promptly had “Little Punk Staffer” buttons made up and distributed to Congressional aides.
But Mr. Boehner isn’t the problem: Mr. Frank has already shepherded fairly strong financial reform through the House. Instead, the question is what will happen in the Senate.
In the Senate, the legislation on the table was crafted by Senator Chris Dodd... It’s significantly weaker than the Frank bill, and needs to be made stronger.... But no bill will become law if Senate Republicans stand in the way of reform.
But won’t opponents of reform fear being cast as allies of the bad guys (which they are)? Maybe not. Back in January, Frank Luntz, the G.O.P. strategist, circulated a memo on how to oppose financial reform. His key idea was that Republicans should claim that up is down — that reform legislation is a “big bank bailout bill,” rather than a set of restrictions on the banks.
Sure enough, a few days ago Senator Richard Shelby of Alabama ... claimed that an essential part of reform — tougher oversight of large, systemically important financial companies — is actually a bailout, because “The market will view these firms as being ‘too big to fail’ and implicitly backed by the government.” Um, senator, the market already views those firms as having implicit government backing...: in any future crisis those firms will be rescued, whichever party is in power.
The only question is whether we’re going to regulate bankers so that they don’t abuse the privilege of government backing. And it’s that regulation — not future bailouts — that reform opponents are trying to block.
So it’s the punks versus the plutocrats — those who want to rein in runaway banks, and bankers who want the freedom to put the economy at risk, freedom enhanced by the knowledge that taxpayers will bail them out in a crisis. Whatever they say, the fact is that people like Mr. Shelby are on the side of the plutocrats; the American people should be on the side of the punks, who are trying to protect their interests.
Posted by Mark Thoma on Monday, March 29, 2010 at 12:09 AM in Economics, Financial System, Politics, Regulation | Permalink Comments (91)
Posted by Mark Thoma on Sunday, March 28, 2010 at 11:05 PM in Economics, Links | Permalink Comments (21)
I've been wondering about the validity of the claim that cap-and-trade is dead. Here's Robert Stavins on this issue:
Who Killed Cap-and-Trade?, by Robert Stavins: In a recent article in the New York Times, John Broder asks “Why did cap-and-trade die?” and responds that “it was done in by the weak economy, the Wall Street meltdown, determined industry opposition and its own complexity.” Mr. Broder’s analysis is concise and insightful, and I recommend it to readers. But I think there’s one factor that is more important than all those mentioned above in causing cap-and-trade to have changed from politically correct to politically anathema in just nine months. Before turning to that, however, I would like to question the premise of my own essay.
Is Cap-and-Trade Really Dead?
Although cap-and-trade has fallen dramatically in political favor in Washington as the U.S. answer to climate change, this approach to reducing carbon dioxide (CO2) emissions is by no means “dead.”
Posted by Mark Thoma on Sunday, March 28, 2010 at 02:07 PM in Economics, Environment, Politics | Permalink Comments (36)
Human capital: literal truth, fairy tale or myth?, by Frances Woolley:
Part I: Education
Every undergraduate student in labor economics gets told the story of human capital. Education and experience make people more productive. The skills so acquired are called “human capital.” This explains why some people earn more than others, and why some countries are richer than others.
Is human capital theory the literal truth? There is an element of truth in it. The typing skills learnt from Mr. Darby in grade 9 make me more productive than my hunt-and-pecking colleagues. Educating girls reduces fertility rates (pdf), promotes female autonomy, and has a host of other productivity-enhancing benefits. But there are many things that human capital cannot explain.
For example, if what is taught at universities actually makes people more productive, then simply taking university courses should be enough increase earnings. In fact, to get much of a payoff from university education, you have to finish your degree (the “sheepskin effect” ). One reason education pays is that completing a degree “signals” your ability, determination, competence and general stick-with-it-ness.
Perhaps we should think of human capital as a fairy tale, a reassuring bedside story. But the power of fairy tales is that they reflect certain elemental truths about the human condition. People who teach economics may find it deeply comforting to think that their pay is justified by their high levels of human capital.But human capital is more than a comforting story – it is a myth that shapes our understanding of the world and thus public policy. Ontario’s government is urging universities to increase retention rates, so everyone who starts university completes a degree. If the human capital theory is true, then this is sound policy: more students completing university means more human capital means a more productive economy. If, however, the value of university education is as a signal of ability, then one of the most important things that universities do is fail students. Unless some students fail, the ability to complete a university degree confers no special distinction on the graduate.
Whether or not human capital theory is true determines the best response to the demographic challenges much discussed this blog. If education makes people more productive, then more education can increase the productivity of our economy – possibly enough so that fewer workers are able to support the large number of pensioners. If, however, education is basically about sorting workers – if people are getting more and more degrees in hope of eventually capturing that one elusive stable professional job with benefits – then the best way of responding to the demographic crisis is to scale back post-secondary education. Doing so would effectively increase the size of the working age population substantially, easing demographic problems. ... [Part II: The experience part of the human capital equation]...
My case is unusual since I have a job in a university, but there is no doubt at all that education enhanced my productivity (i.e. that education was more than a signal to potential employers). If California had set tuition at just over $100 per semester at its state universities (colleges then), I'd most likely be selling tractor parts somewhere and hating it. That's what my grandfather did, that's what my dad did, and although my brother isn't in parts directly, he sells John Deere engines so he is involved in the tractor business as well (both my grandfather and my dad managed to work their way up to sales and, in my dad's case, part ownership and general manager toward the end of his career -- my brother and my dad have severe dyslexia, and they overcame much more than I did in achieving the success they realized).
I started working at the parts counter in tractor stores during high school, and I continued all through college to support myself. I hated that job, and it was all the motivation I needed to go to class every day and do my best (which did not rule out doing my share of partying -- I will be in surplus the rest of my life just from those four years...). I had a math professor who loaded his classes up in the morning, and was at the golf course by 1:00 every day (where his son was the pro). I had another who spent a lot of time hunting, fishing, and generally doing whatever he wanted with his free time. I looked at both of them, thought about the stupid tractor parts counter job I was doing and how bored I was with it -- how much I hated going there every day -- and thought "I can do that job." I can play golf every day, enjoy the outdoors, take summers off, etc. (When I showed up to work in the morning, I would write down the number 480 on a piece of paper -- that was how many minutes I had left until I could go home -- and then I'd write down and check off each minute one by one during the day. It was agonizing and counting every minute made it worse. If 15 minutes passed by without my checking off any numbers, a whole 15 minutes without thinking about getting out of there, I considered it a success. Occasionally, a whole hour might go by before I wrote down how long until the day was over, but that was rare. I remember thinking that all I wanted was a job where I wouldn't count the minutes from the time I got there until it was time to go home.) Somehow, though, during graduate school I became convinced that I was supposed to do research, not just play all day when I wasn't teaching, so I skipped the teaching jobs and took a position that required research. But I wouldn't be here without cheap tuition, the math guy who played golf every day -- I took every class I could from him and every other math class they offered that fit my schedule (when I found a good teacher I'd take every class he or she taught no matter what type of math it was), and all the economics I took from the professor who'd rather be hunting or fishing. And I certainly wouldn't be here without all the technical skills I learned (the computer science classes were very valuable). As I said, I have no doubt that my productivity was enhanced by going to college.
But I want to take on the basic premise that the purpose of an education is to enhance productivity, to prepare students for the workforce. That's part of it, certainly, though that is much more the case in professional schools that are attached to universities than in the universities themselves. I didn't just get technical skills from college -- math, computer science, etc. -- I got a liberal arts education (or, at least as much of one as you can get at a state institution charging $100 tuition). I learned things about the world and about ideas that I would not have learned elsewhere, things that helped me to think about and evaluate the world around me from new, different, and valuable perspectives. Even if I'd ended up back at the tractor store, and that was certainly a possibility since I got into graduate school by luck -- I only applied two places, Berkeley and Stanford, and got rejected at both places. (I didn't know how hard it was to get there from Cal State Chico and thought my grades/GRE/math training/letters would be enough, I was pretty naive at that time. I can still remember reading the letters on my front porch and feeling crushed.) A professor I was working for at the time helping with medical consulting (pricing of pharmaceuticals for Medicare) got me into Washington State with support after deadlines had passed. If that had not happened, and it was a bit of luck that it did, I wouldn't have gone to graduate school.
However, even if I'd ended up selling tractor parts, what I learned at Chico is something nobody could have ever taken away from me. We often forget about the education part of education and focus on the vocational training aspect, but to me the broad-based liberal arts education is one of the more valuable parts of the education I received. I tended to focus on economics, mathematics, and computer science. I only took courses outside those areas when I was forced to, and I am so glad they made me to take other courses. I loved geology even though I thought I'd hate it, psychology was surprisingly good -- I read the entire text after the course was over, I read most of the books for my undergraduate courses cover to cover at some point -- cultural geography was a surprise (lots of economics). Now that I think about it there were only one or two courses I didn't like and that was mostly because of the instructors.
I didn't always appreciate it at the time, but the general education part of the degree was of great value. That's one of the main reasons I wish I could have afforded to go to a better school than Chico. I doubt the technical training would have been any better, I made a conscious effort to cover all those bases and a motivated student could get what was needed without too much trouble, but the liberal arts part of the education would have likely been much better (and the opportunities for graduate study would have been considerably enhanced -- there are places you can't get to from Chico). I still have lots of holes in history, philosophy, the arts, religious studies, and so on that were left unfilled growing up in a small farming community with parents who never graduated from college. There were so many things I didn't even know I didn't know (though there are also insights that come with such an upbringing that cannot be learned in college or anywhere else, I think I understand things other people sometimes don't, so I don't mean to put down growing up in a small, farming community, not at all). However, even though Chico probably wasn't the best place in the world for a liberal arts educations, for me it was a great leap forward.
Given my background, and the near certainty that it was only the cheap tuition that saved me from a life I would have hated, I am very sad about what is happening to educational access in California and elsewhere. When I think of all the people stuck in their version of the job at the parts counter, people that could be doing so much more if the path were open to them, it makes me both sad for them and very, very appreciative that the state made it possible for me to find a way out.
I know there are many of you who don't see education the way I do -- as a ticket to someplace better and the only real chance I had -- but I believe education is the key to a better future and I will not give up trying to increase access to as many people as possible. I don't care at all if if dilutes the signal to employers, they'll just have to figure out some other way to cull the herd. The value of an education to an individual goes far beyond training for a job, and I see no reason to deny those benefits to anyone who has done the work required to prepare themselves for college level work.
Posted by Mark Thoma on Sunday, March 28, 2010 at 01:11 PM in Economics, Productivity, Universities | Permalink Comments (55)
I was surprised that arguments about the impact of health care reform on labor mobility got so little attention during the debate over the legislation. It's an important benefit to include in the evaluation of health care reform (I made this argument several times, and there were many others who made this point as well, but it never seemed to resonate):
Economy will get a boost from health care overhaul, by Mitchell Schnurman, The Fort Worth Star-Telegram: American companies can hire and fire workers with relative ease... Workers are free to move around, too, but for too many, health insurance has become a ball and chain. If they have a family or a pre-existing condition, it can be too risky to leave a big employer and join a small company, where coverage could be dropped at any time.
Health reform ... will change that... By guaranteeing access to affordable insurance, individuals will eventually gain as much flexibility as their employers, and that could usher in a new era of risk taking and innovation.
More people will be able to take a flier on a startup or join a small business. Entrepreneurs will find it easier to recruit talent, especially older workers. ...
One study reported that 1.6 million workers are "locked" into their jobs because they can't give up the benefits. Worries about health insurance reduce job mobility by as much as 50 percent, studies show, squashing opportunity and hurting efficiency.
Eliminate that friction, and guess who wins? Individuals and small businesses, which have ceded much of the labor market advantage to large employers that can afford to run the benefits gantlet.
"This is a big win for small businesses because they can be judged on the quality of their companies, not their health insurance," says John Arensmeyer, CEO of Small Business Majority, a nonprofit advocacy group.
Health reform is also likely to lower prices, or at least the pace of increases, for small companies. On average, small companies pay 18 percent more for the same coverage because they have less leverage with insurers. ...
By 2014, state and regional insurance exchanges will be in place, competing for millions of customers from small companies and the individual market. No one will be denied coverage, and rates are set within a narrower band. Over the next decade, changes from reform, including the exchanges, could save small businesses up to $855 billion, according to a study by Jonathan Gruber at MIT. ...
Large employers used to be known for stable work environments and generous pensions, and workers joked about the "golden handcuffs" that bound them. That's rare today except in government work. But health insurance remains a point of differentiation because big companies have the resources to manage it aggressively. ...
It's tough to compete for skilled workers when there's little prospect of getting insurance. Health reform levels the playing field. ...
One of the things that Republicans say they care about the most -- economic growth through the innovation that comes from small businesses -- will be helped substantially by the health care reform legislation Republicans did everything they could do to stop. That says something about what they really care about, and it does not appear to be small businesses or the uninsured.
When we talk about the net cost of health care reform, it's important to consider all of the costs and benefits. It's difficult to put a dollar value on mobility, but having observed people stuck in jobs they hate -- really hate -- just to keep health insurance, I'd guess it's worth a lot. And those benefits come on top of the $855 billion that small businesses stand to gain from this legislation, and come in addition to all the other benefits that come with health care reform.
When you hear about the net cost of health care reform in terms of what it will do to the deficit and the accumulated government debt, those are just the costs and revenues that the government must bear, it does not net out all the implicit and explicit benefits to the private sector that come from the legislation (implicit and explicit costs to the private sector should also be added in, but I'd argue that the benefits to the private sector very clearly exceed the costs). When the benefits accruing to individuals and small businesses are included, the gains from reform are evident.
Posted by Mark Thoma on Sunday, March 28, 2010 at 10:35 AM in Economics, Health Care, Social Insurance | Permalink Comments (13)
Richard Green is concerned about the old people of the future. Are they saving enough today?:
The long-term impact of the mortgage crisis--and why it keeps me awake, by Richard Green: My parent's generation behaved differently than mine in all sorts of ways. A paper of mine with Hendershott shows that they spent less, controlling for education, etc., throughout their life cycle than any other generation. One of the reasons for this is that they paid off their mortgages. According to the American Housing Survey, 70 percent of households headed by someone over the age of 65 have no mortgage at all. Loan amortization became a mechanism for forced saving, and as a a result, those born during the depression are in pretty decent shape financially. ...
My generation is different. Even under the most benign circumstances, we refinance in a manner that slows amortization. I refinanced ... twice to take advantage of lower interest rates--this was, of course, the right thing to do financially. But each time, the amortization schedule reset, and so it extended the period at which the mortgage would pay off. Now yes, one can take the money one doesn't put into home equity and put it in other savings vehicles, but it is not clear that everyone does that. Forced saving is slowed.
But this is not the worst of how people have handled their mortgages. A substantial fraction of borrowers pulled equity out of their houses, putting themselves on a lower savings path even in the absence of falling house prices.
I am going to run some American housing survey data on this, but it is hard for me to imagine that 70 percent of my generation will have no mortgage debt when we are elders. My parents' generation has used housing wealth to, among other things, finance long-term care. I hope I am missing something here, but the lack of housing wealth in the future could become yet another challenge as we seek to fund the needs of the elderly.
Posted by Mark Thoma on Sunday, March 28, 2010 at 01:08 AM in Economics, Housing, Saving, Social Security | Permalink Comments (23)
Posted by Mark Thoma on Saturday, March 27, 2010 at 11:03 PM in Economics, Links | Permalink Comments (23)
Menzie Chinn takes on Casey Mulligan (again):
Does Unemployment Insurance Necessarily Raise the Unemployment Rate and Decrease Employment?, by Menzie Chinn: Some analysts (e.g., most recently Professor Mulligan) have stressed the disincentive effects of unemployment insurance on the unemployment rate and the level of employment. I think it useful to consider the offsetting effects arising from various effects, and hence distinguishing between the two variables. In my view, the impact of UI is more complicated than it would seem at first glance, with UI potentially increasing employment while concurrently increasing the unemployment rate. In addition, according to newer research, even if UI extends unemployment duration, it still might be welfare-enhancing. In other words, some researchers appear to have had their worldview frozen in 1990. ...[...continue reading...]...
Posted by Mark Thoma on Saturday, March 27, 2010 at 11:54 AM in Economics, Unemployment | Permalink Comments (24)
This is from The Myrtle Beach Sun:
DeMint, Graham let S.C. down on health care overhaul, by Isaac Bailey, The Myrtle Beach Sun: Two South Carolina legislators had the opportunity to shape the historic health care bill President Obama signed into law on Tuesday... Because the Senate version of the bill was going to be the foundation of the law, Sens. Lindsey Graham and Jim DeMint were our only two politicians who could have forced even more conservative ideas into the legislation. ... Neither did. Both shirked their responsibility to the state to walk lockstep with the GOP.
There was little reason to expect anything different from DeMint, who represents the party's Rush Limbaugh-wing. He didn't begin the debate saying we must find a way to bring down S.C.'s high percentage of the un- and underinsured. He didn't say we must find a way to stem costs that are spiraling out of control, bankrupting hard-working people for the sin of getting too sick. He didn't say the days of uninsured families having to leave coffee cans decorated with a sick loved one's photo on convenience store counters must end. He didn't say that if reform included strong tort reform so doctors would no longer feel the need to perform unnecessary tests that he would vote for it.
Instead, he said reform's defeat would be Obama's "Waterloo", that it would break the president. Only after his comments ignited a firestorm did DeMint propose a policy that most experts considered laughable. He was focused on politics, not people.
Sen. Graham began the debate differently. He knew if nothing changed, our health care system would eventually bankrupt us, which is why he initially supported the bipartisan Bennett-Wyden bill. ... But the proposal went nowhere fast. Instead of Graham engaging in the fight to incorporate the best parts of Wyden-Bennett - or any other effective plan - he fell in line with the rest of the GOP caucus.
He, too, became more concerned about his party's positioning for November than the people he was sent to Washington to represent...
The most vulnerable South Carolinians ... needed Graham and DeMint to lead. ... They didn't. Instead, they stood for the petty and ignored the real needs of the people. History won't forget. And neither should we.
And, from the local paper this morning:
Move past ‘repeal, replace’, Editorial, Register Guard: Republicans are preparing to march into the 2010 election under the dubious banner of “Repeal and replace!”
It’s a losing strategy, one that GOP lawmakers should rethink before venturing too far down that road. The health care reform bill has been signed into law. ... The Republicans should turn the page on health care if they want to shed the “party of no” label that served both the GOP and nation poorly in the debate over health reform.
That doesn’t mean that House Minority Leader John Boehner and other Republican leaders should publicly embrace Obamacare. That’s unrealistic; their philosophical differences with Democrats on reform are too deep and broad, and Republicans resentment over President Obama’s historic achievement precludes even the pretense of a political truce.
But Republicans face long odds in any attempt to repeal and replace health care reform, and they know it. ... As Sen. Jon Kyl, R-Ariz., acknowledged, repeal “is not realistic because Barack Obama would veto the bill and we don’t have the votes to override it.”
For Republicans such as Boehner, Kyl and DeMint, “repeal and replace” is an election strategy and not a practical legislative goal. ...
Repeal-and-replace Republicans eventually must face the difficult task of explaining why their apocalyptic predictions — everything from the death panels to the dismantling of democracy — didn’t come true. In the months and years to come, many Americans, even those skeptical about the reform effort, will come to see the scare tactics as hyperbolic depictions of a bill whose moderate approach incorporated many Republican ideas.
Republicans have just suffered a devastating legislative defeat, and they are entitled to nurse their wounds. But the GOP’s political aspirations — and the nation’s interests — would be best served by full engagement on the many critical issues facing Congress, from financial regulatory reform to immigration to unemployment. ... Republicans remain fixated on their loss on health reform — so much so that some, including Sen. John McCain, R-Ariz., have publicly ruled out any bipartisan cooperation for the remainder of the current session.
The American people need — and deserve — a legislative process in which both parties are engaged and bring competing views to the table. By clinging to the cold corpse of the health care debate, Republicans will miss an opportunity to express a clear, compelling vision on other issues — a vision that could do far more to sway voters to their side this fall than continuing to flail away over health care. ...
While there is still time, Republicans should repeal and replace their catchphrase, and substitute another that bodes better for their party’s future.
There's an inconsistency between free market ideology and the need for reform in areas like health care and financial services. One of the first steps in reforming the system is to acknowledge that the market won't take care of the problems itself. Once that is acknowledged, i.e. that regulation is needed to fix these market failures, the only question is whether that regulation will be of the "market-based" variety or by edict (e.g. this is the difference between system of tradable carbon permits that allow least cost carbon reduction strategies to emerge and a government set emission limit for each industry which generally does not achieve ca4rbon reductions at least cost).
With Democrats mostly opposed to old fashioned edict style regulation -- with their willingness to embrace market-based solutions to regulatory issues -- and with Republicans unwilling to embrace anything that Democrats propose, there is little ground left for those Republicans who are willing to admit that markets sometimes fail to stand upon. Democrats have taken the middle ground -- market based regulation -- from Republicans. This leaves Republicans with a choice of going along and compromising (and thereby embracing proposals they have made in the past, e.g. the health care bill looks an awful lot like the health care program Romney put in place in Massachusetts), or standing in opposition simply because it is a Democratic proposal. The choice they've made, standing in opposition to everything, is a losing strategy that allows policy to be shaped entirely be the other side. It will be interesting to see if a fissure develops within the Republican Party over this.
Will Republicans be able to share the market-based regulatory ground Democrats have taken away? There are already signs that Republicans will work with Democrats on financial reform, but there were early signs of a bi-partisan effort on health care as well, so we'll see how this plays out. I think people are fed up with banks and want something to be done, and Republican attempts to block legislation won't play well with the public at all. So I expect the coalition of no to be broken -- some legislators will see that they cannot continue just saying no and expect public support -- but not without big fights within the Republican Party between the extremists and the centrists. If Republicans do move in this direction, and it's more likely they'll do so on financial reform than on climate change legislation, you'll see an attempt to reclaim these policies as Republican (here's a great example: Health Care Reform--A Republican Idea?). And given the administration's centrist tendencies, in many cases they'll have a pretty good argument.
Posted by Mark Thoma on Saturday, March 27, 2010 at 10:34 AM in Economics, Financial System, Health Care, Politics, Regulation | Permalink Comments (35)
Posted by Mark Thoma on Friday, March 26, 2010 at 11:03 PM in Economics, Links | Permalink Comments (10)
Is this meaningful?:
Obama Finalizes Arms Control Deal With Russia, by Peter Baker and Helene Cooper, NY Times: President Obama finalized a new arms control treaty with Russia on Friday that will pare back the still-formidable cold war nuclear arsenals of each country. ...
Posted by Mark Thoma on Friday, March 26, 2010 at 09:36 AM in Economics | Permalink Comments (49)
The transformation is complete: "today’s G.O.P. is, fully and finally, the party of Ronald Reagan":
Going to Extreme, by Paul Krugman, Commentary, NYTimes: I admit it: I had fun watching right-wingers go wild as health reform finally became law. But a few days later, it doesn’t seem quite as entertaining — and not just because of the wave of vandalism and threats aimed at Democratic lawmakers. For if you care about America’s future, you can’t be happy as extremists take full control of one of our two great political parties.
To be sure,... it’s been a hoot watching Mitt Romney squirm as he tries to distance himself from a plan that, as he knows full well, is nearly identical to the reform he himself pushed through as governor of Massachusetts. His best shot was declaring that enacting reform was an “unconscionable abuse of power,” a “historic usurpation of the legislative process” — presumably because the legislative process isn’t supposed to include things like “votes” in which the majority prevails. ...
What has been really striking has been the eliminationist rhetoric of the G.O.P., coming not from some radical fringe but from the party’s leaders. John Boehner, the House minority leader, declared that the passage of health reform was “Armageddon.” The Republican National Committee put out a fund-raising appeal that included a picture of Nancy Pelosi ... surrounded by flames, while the committee’s chairman declared that it was time to put Ms. Pelosi on “the firing line.” And Sarah Palin put out a map literally putting Democratic lawmakers in the cross hairs of a rifle sight. ... Democrats had a lot of harsh things to say about former President George W. Bush — but you’ll search in vain for anything comparably menacing, anything that even hinted at an appeal to violence, from members of Congress, let alone senior party officials.
No, to find anything like what we’re seeing now you have to go back to the last time a Democrat was president. Like President Obama, Bill Clinton faced a G.O.P. that denied his legitimacy — Dick Armey, the second-ranking House Republican (and now a Tea Party leader) referred to him as “your president.” Threats were common: President Clinton, declared Senator Jesse Helms of North Carolina, “better watch out if he comes down here. He’d better have a bodyguard.” ... And once they controlled Congress, Republicans tried to govern as if they held the White House, too, eventually shutting down the federal government in an attempt to bully Mr. Clinton into submission.
Mr. Obama seems to have sincerely believed that he would face a different reception. And he made a real try at bipartisanship, nearly losing his chance at health reform ... in a vain attempt to get a few Republicans on board. At this point, however, it’s clear that any Democratic president will face total opposition from a Republican Party that is completely dominated by right-wing extremists.
For today’s G.O.P. is, fully and finally, the party of Ronald Reagan — not Reagan the pragmatic politician, who could and did strike deals with Democrats, but Reagan the antigovernment fanatic, who warned that Medicare would destroy American freedom. It’s a party that sees modest efforts to improve Americans’ economic and health security not merely as unwise, but as monstrous. It’s a party in which paranoid fantasies... — Obama is a socialist, Democrats have totalitarian ambitions — are mainstream. And, as a result, it’s a party that fundamentally doesn’t accept anyone else’s right to govern.
In the short run, Republican extremism may be good for Democrats, to the extent that it prompts a voter backlash. But in the long run, it’s a very bad thing for America. We need to have two reasonable, rational parties in this country. And right now we don’t.
Posted by Mark Thoma on Friday, March 26, 2010 at 12:42 AM in Economics, Politics | Permalink Comments (77)
Posted by Mark Thoma on Friday, March 26, 2010 at 12:33 AM in Economics, Unemployment | Permalink Comments (101)
Posted by Mark Thoma on Thursday, March 25, 2010 at 11:31 PM in Economics, Links | Permalink Comments (8)
Bruce Bartlett on AEI's decision to fire David Frum:
David Frum and the Closing of the Conservative Mind, by Bruce Bartlett: As some readers of this blog may know, I was fired by a right wing think tank Called the National Center for Policy Analysis in 2005 for writing a book critical of George W. Bush's policies, especially his support for Medicare Part D. In the years since, I have lost a great many friends and been shunned by conservative society in Washington, DC.
Now the same thing has happened to David Frum, who has been fired by the American Enterprise Institute. I don't know all the details, but I presume that his Waterloo post on Sunday condemning Republicans for failing to work with Democrats on healthcare reform was the final straw.
Since, he is no longer affiliated with AEI, I feel free to say publicly something he told me in private a few months ago. He asked if I had noticed any comments by AEI "scholars" on the subject of health care reform. I said no and he said that was because they had been ordered not to speak to the media because they agreed with too much of what Obama was trying to do.
It saddened me to hear this. I have always hoped that my experience was unique. But now I see that I was just the first to suffer from a closing of the conservative mind. Rigid conformity is being enforced, no dissent is allowed, and the conservative brain will slowly shrivel into dementia if it hasn't already.
Sadly, there is no place for David and me to go. The donor community is only interested in financing organizations that parrot the party line, such as the one recently established by McCain economic adviser Doug Holtz-Eakin.
I will have more to say on this topic later. But I wanted to say that this is a black day for what passes for a conservative movement, scholarship, and the once-respected AEI.
Posted by Mark Thoma on Thursday, March 25, 2010 at 01:50 PM in Economics, Health Care, Politics | Permalink Comments (57)
My reaction to this morning's report on initial claims for unemployment insurance, along with a few qualifications to the numbers:
Initial Claims for Unemployment Insurance Decrease Slightly [link fixed]
There is also a reminder (illustrated with a graph of the employment to population ratio) of how far we have to go before labor markets are anywhere near back to normal.
Posted by Mark Thoma on Thursday, March 25, 2010 at 09:20 AM in Economics, Unemployment | Permalink Comments (9)
Martin Feldstein argues that the Euro is not overvalued relative to the dollar. If anything, he says, the euro will strengthen further in the future:
Is the
Euro Overvalued?, by Martin Feldstein, Commentary, Project Syndicate:
An American traveler in Paris or Berlin is continually struck by how high prices
are relative to those in the United States. ... To bring the cost of those goods
and services down to the level in the US would require the euro to fall relative
to the dollar by about 15%, to around $1.10.
It is easy to jump ... to the conclusion that the euro is overvalued... But that conclusion would be wrong. Looking ahead, the euro is more likely to climb back to the $1.60 level that it reached in 2008.
There are three reasons why the traveler’s impression that the euro is overvalued is mistaken. First, the prices that the traveler sees are generally increased by value-added tax (VAT)... Remove the VAT, which is typically 15% or more, and the prices in Europe are similar to those in the US.
Second, the goods and services that the traveler buys are just a small part of the array of goods and services that are traded internationally. ... To judge whether their prices are “too high” at the existing exchange rate we have to look at the trade balance.
Germany, Europe’s largest exporter, has a very large trade surplus... The other eurozone countries are not as competitive as Germany at today’s exchange rate. But the euro area as a whole nonetheless had a trade surplus of more than $30 billion over the past 12 months. And, with the euro down significantly relative to many other currencies over the past year, Europe’s trade balance can increase further in the months ahead. To limit that increase, the euro must rise.
This brings me to the third, and most fundamental, factor...: global economic conditions require the eurozone to have a substantial trade and current-account deficit so that it becomes a large net importer of funds from the rest of the world.
There are two reasons for this. First, the oil-producing countries and China will continue to export substantially more than they import. Their net foreign earnings must be invested in foreign countries’ stocks and bonds. While much of that investment will flow to the US, the surplus countries want to diversify... The eurozone provides the only large capital market other than the US for such investments.
But the eurozone can increase its inflow of foreign capital only if it has a current-account deficit... And that will require a less competitive euro... The flow of net export earnings from the oil producers and others into euros will push up the value of the euro...
Second, countries with large accumulations of dollar reserves will be shifting substantial fractions of those reserves into euros. Central banks in Asia and the Middle East have traditionally held their reserves in dollars. ... But ... countries with very large foreign-exchange balances are beginning to diversify their holdings from dollars to euros, a process that will ... inevitably cause the euro to rise relative to the dollar.
So, while I will continue to complain about the prices that I face when I travel in Europe, I understand that ... pressures ... will make European travel increasingly expensive in dollar terms.
Posted by Mark Thoma on Thursday, March 25, 2010 at 08:37 AM in Economics, International Finance | Permalink Comments (7)
China's not budging:
China Says It Will Not Adjust Policy on the Exchange Rate, by Sewell Chan, NY Times: Despite mounting pressure in Congress for the Obama administration to declare China a currency manipulator, the Chinese government is giving no indication that it will change its exchange rate policy.
After meeting with officials at the Treasury and Commerce Departments on Wednesday, China’s deputy commerce minister, Zhong Shan, told reporters, “The Chinese government will not succumb to foreign pressures to adjust our exchange rate.”
Mr. Zhong reiterated a statement this month by the Chinese premier, Wen Jiabao, who said he did not believe the currency, the renminbi, was undervalued. ...
Mr. Zhong said that “the basic stability of the renminbi” was generally beneficial, because “a great surge in the value of the renminbi would hurt the economies of developing countries, especially the least-developed countries.” ...
China’s position has raised the ire of members of both parties in Congress, who say that the exchange-rate problem is holding back job growth in the United States. Two senators, Lindsey Graham, Republican of South Carolina, and Charles E. Schumer, Democrat of New York, have introduced legislation that would effectively compel the Treasury to cite the Chinese currency for “misalignment.” The Treasury has not found China to be manipulating its currency since 1994...
With unemployment near 10 percent in the United States, Congress has seemingly run out of patience with that argument.
“We’re fed up,” Mr. Graham said on Tuesday. “China’s mercantilist policies are hurting the rest of the world, not just America. It helped create the global recession that we’re in. The Chinese want to be treated as a developing country, but they’re a global giant, the leading exporter in the world.”
The Senate bill would let the Commerce Department retaliate against currency misalignment by imposing duties or tariffs. “The only thing that will make China move is tough legislation,” Mr. Schumer said.
The two senators pointed to a new study by the Economic Policy Institute, a labor-backed research organization, saying the growing trade deficit between China and the United States resulted in the elimination or displacement of 2.4 million American jobs between 2001 and 2008. ...
Krugman on this topic: Taking On China, Chinese New Year, World Out of Balance, The Chinese Disconnect, More.
Posted by Mark Thoma on Thursday, March 25, 2010 at 12:27 AM in China, Economics, International Finance | Permalink Comments (37)
Posted by Mark Thoma on Wednesday, March 24, 2010 at 11:06 PM in Economics, Links | Permalink Comments (13)
Robert Reich is not very encouraged by the fact that global companies, Wall Street, and the wealthy appear to be doing better:
Recovery depends on Main Street, by Robert Reich, Commentary, Financial Times: Can the American economy recover if only its big global companies, Wall Street and high-income Americans are doing better, but its small businesses and middle and lower-income Americans are not? The short answer is no. ...
US companies have lots of cash... But this cash is not going into new investment. ... None of this is stopping supply-side fanatics from arguing government needs to cut taxes on big corporations to spur the recovery. Their argument is absurd. Big companies do not know what to do with all the cash they have as it is. They are not investing it in new plant or jobs. So why should the government cut their taxes and enlarge their cash hoards even more?
The picture on Main Street is the opposite. Small businesses are not selling much as they have to rely on American consumers and Americans still are not buying much.
Small businesses are also finding it hard to get credit. ... While big companies are finding it easy to borrow in the bond markets, smaller companies depend on bank credit, whose supply remains limited. ... This is a problem because companies with fewer than 100 employees accounted for almost half of net job growth during the last two recoveries...
Unemployment or fear of it continues to haunt the population. That is a major reason why consumer confidence is still dropping. There is also the extra need to save as boomers face retirement. Given all this, it is sensible for Americans to continue holding back from the malls, but this means a painfully slow recovery. ...
The economy shows signs of improvement largely because the government is spending huge sums and the Fed is essentially printing even more money. But where will demand come from when the stimulus is over and the Fed tightens? That question hangs over the economy like a dense cloud. Until there is an answer, a sustainable recovery for any other than America's largest corporations, Wall Street and the wealthy is a mirage.
I think it's an open question as to whether we are headed for a self-sustaining recovery, or whether we stay at the bottom of the valley for awhile waiting for the economy to take-off. With unemployment as high as it is, with labor markets as weak as they are, and with Congress seeming to forget about the unemployed as it pats itself on the back (or hurls insults) over health care reform and moves onto financial reform, it's fairly certain that labor markets will remain weak -- weaker than they would be if Congress would give them the attention they deserve -- for some time to come.
Posted by Mark Thoma on Wednesday, March 24, 2010 at 04:26 PM in Economics | Permalink Comments (55)
Mike Konczal says we need rules regulating leverage, discretionary authority isn't enough:
Putting Stronger Limits into the Dodd Bill, by Mike Konczal: ...Current regulators and industry leaders will tell us that the financial capital markets are up to The Swanson Code, the “I’ll know trouble when I see it” system; however we want there to be clear rules...
Ryan Avent and Kevin Drum both look at the Dodd Bill and are left a little worried about financial reform. ... Here’s one thing that is probably worrying them. This is language from the final House Bill, HR 4173 (giant pdf, page 44):
(3) LEVERAGE LIMITATION.—The Board shall require each financial holding company subject to stricter standards to maintain a debt to equity ratio of no more than 15 to 1, and the Board shall issue regulations containing procedures and timelines for how a financial holding company subject to stricter standards with a debt to equity ratio of more than 15 to 1 at the time such company becomes a financial holding company subject to stricter standards shall reduce such ratio.
Here’s the equivalent language from the Dodd Bill (giant pdf, starting page 25):
(2) DUTIES.—The Council shall, in accordance with this title….(H) make recommendations to the Board of Governors concerning the establishment of heightened prudential standards for risk-based capital, leverage, liquidity, contingent capital, resolution plans and credit exposure reports, concentration limits, enhanced public disclosures, and overall risk management for nonbank financial companies and large, interconnected bank holding companies supervised by the Board of Governors
In both bills, regulators have discretion in how to set limits, as determined by internal risk managers. In the House Bill though, there’s a strict limit: no systemically risky firm can have leverage greater than 15-to-1. In the Senate, the FSOC will make recommendations to the Federal Reserve. The Federal Reserve will do like, whatever it wants – it could follow the recommendations. Or it could not.
This solution in the House Bill is a satisficing solution – there are almost certainly firms that could handle being leveraged 16-to-1. However we don’t trust the regulators to be able to detect that firm and also not bend the rules for firms that couldn’t handle that leverage. So we write down a clear rule.
And these clear rules are exactly what the lobbyists are going to go after. ...
In this case, I like rules rather than discretion. One reason is to limit the damage that the next financial shock can do, with less leverage, there is less to unwind, and less overall damage. Strict limits on leverage help to set bounds on the damage that a financial shock can cause. But another reason -- making resolution authority credible -- is only indirectly related to leverage.
One of the things almost everyone agrees on is the need for resolution authority for large, systemically important banks. As Ben Bernanke recently said:
... because government oversight alone will never be sufficient to anticipate all risks, increasing market discipline is an essential piece of any strategy for combating too-big-to-fail. To create real market discipline for the largest firms, market participants must be convinced that if one of these firms is unable to meet its obligations, its shareholders, creditors, and counterparties will not be protected from losses by government action. To make such a threat credible, we need a new legal framework that will allow the government to wind down a failing, systemically critical firm without doing serious damage to the broader financial system. In other words, we need an alternative for resolving failing firms that is neither a disorderly bankruptcy nor a bailout. ...
But this must be a credible, time-consistent threat. That is, when the time comes to actually implement this policy and use the resolution authority, will the government actually do it, or will fears of what might happen to the financial system lead government regulators to the more familiar route of bank bailouts? I think this is a real problem (and one of the reasons over and above traditional worries about maintaining competitive markets why I'd like to see size come under more scrutiny -- how large do banks need to be in order to provide the needed financial services at the lowest cost?). But this is less likely to be a problem if the bank's leverage ratio is lower. With lower leverage, the fear of causing a wider panic when using resolution authority to "wind down" a bank that is in trouble is also lower, making such action easier to take.
Neither of the reasons given above for limiting leverage -- limiting the damage a financial shock can do and making resolution authority credible -- require rules rather than discretion to be accomplished. Discretionary authority can always choose to mimic the strict rule limiting leverage, so in theory discretion ought to be at least as good as a rule. But discretion has it's own problems, regulatory and ideological capture among them, and in this case I have more faith in a rule.
Posted by Mark Thoma on Wednesday, March 24, 2010 at 11:18 AM in Economics, Financial System, Regulation | Permalink Comments (20)
Politico's The Arena asks:
State AG's lawsuit against health care: Do they have a case?
Dean Baker responds:
What happened to the Republicans' opposition to frivolous lawsuits?
From what I've read, there are two points to make. First, it would be crazy to rule that the individual mandate (or any other component of the legislation) is unconstitutional. Second, we have four crazy justices on the Supreme Court.
Posted by Mark Thoma on Wednesday, March 24, 2010 at 09:07 AM in Economics, Health Care | Permalink Comments (82)
How much did executives at Bear Stearns and Lehman Brothers lose as a result of the financial crisis?:
Paid to Fail, by Lucian Bebchuk, Alma Cohen, and Holger Spamann, Commentary, Project Syndicate: ...Lehman’s executives made deliberate decisions to pursue an aggressive investment strategy, take on greater risks, and substantially increase leverage. Were these decisions the result of hubris and errors in judgment or the product of flawed incentives?
After Bear Stearns and Lehman Brothers melted down, ushering in a worldwide crisis, media reports largely assumed that the wealth of these firms’ executives was wiped out, together with that of the firms they navigated into disaster. This “standard narrative” led commentators to downplay the role of flawed compensation arrangements and the importance of reforming the structures of executive pay.
In our study, “The Wages of Failure: Executive Compensation at Bear Stearns and Lehman Brothers 2000-2008,” we examine this standard narrative and find it to be incorrect. We ... find that,... during 2000-2008, the top five executives at Bear Stearns and Lehman pocketed about $1.4 billion and $1 billion, respectively, or roughly $250 million per executive. These cash proceeds are substantially higher than the value of the holdings that the executives held at the beginning of the period. Thus, while the long-term shareholders in their firms were largely decimated, the executives’ performance-based compensation kept them in positive territory.
The divergence between how top executives and their companies’ shareholders fared raises a serious concern that the aggressive risk-taking at Bear Stearns and Lehman – and other financial firms with similar pay arrangements – could have been the product of flawed incentives. ...
It is important for financial firms – and firms in general – to reform compensation structures to ensure tighter alignment between executive payoffs and long-term results. ...
Had such compensation structures been in place at Bear Stearns and Lehman, their top executives would not have been able to derive such large amounts of performance-based compensation for managing the firms in the years leading up to their collapse. This would have significantly reduced the executives’ incentives to engage in risk-taking.
Indeed,... comprehensive and robust reform of pay structures ... could do a great deal to improve incentives and prevent the type of excessive risk-taking that firms encouraged in the years preceding the financial crisis... Reforms that redress these destructive incentives should stand as an important lesson and legacy of Bear Stearns, Lehman Brothers, and the crisis they helped to fuel.
Posted by Mark Thoma on Wednesday, March 24, 2010 at 01:20 AM in Economics, Market Failure | Permalink Comments (23)
Posted by Mark Thoma on Tuesday, March 23, 2010 at 11:04 PM in Economics, Links | Permalink Comments (22)
Bill Easterly emails to ask what I think of this:
Stop panicking: Capitalism repeatedly recovers from financial crises, by William Easterly: I am just beginning to dive into the awesome book by Carmen Reinhart and Ken Rogoff, This Time is Different: Eight Centuries of Financial Folly. Along with great analysis, they have some wonderful pictures, evidence, and data. What I say here is my own take on it.
First, financial crises are remarkably common. Their Figure 5.1 shows the number of countries that have defaulted on their external debt (one possible dimension of a financial crisis) over the last two centuries. The numbers come in episodic waves of defaults and involve a remarkably high number of countries in each wave:
Second, the global capitalist system does well in the long run anyway. Average per capita income in the world (a shaky estimate, but probably right order of magnitude) increased by a multiple of 12 over 1800-2008, despite repeated epidemics of financial crises.
The US is arguably the country with democratic capitalism the longest, and it also shows a steady upward trend from 1870 to the present, despite repeated banking crises (using those identified by Reinhart and Rogoff), with usually little effect of each crisis on output relative to trend (except for the Great Depression).
Reinhart and Rogoff calculate directly the growth pattern before and after crises in advanced capitalist economies, and growth does indeed recover quickly to the trend growth rate of around 2 percent per capita per annum. 2 percent per capita is roughly the same growth rate that increased US per capita income so much from 1870 to the present.
y-axis reads "Real GDP Growth (Percent)"
I don’t mean to minimize the short run pain that the current financial crisis has caused. It’s horrible. But there is no reason to panic about the long run growth potential looking forward.
The obvious rejoinder is Keynes’ “in the long run, we are all dead.” But we can’t ignore that Capitalism already survived repeated financial crises and has made us all vastly better off despite them. So here’s a counter-quote: “In the long run, we are all better off because our dead ancestors stuck with capitalism.”
My take is a bit different. The graph of per capita income from 1870 - 2008 seems to say we shouldn't worry that aggressive intervention to stimulate the economy will cause long-run problems. It may help substantially in the short-run, but the graph above indicates it's unlikely to have long-run consequences. So, I agree, let's not panic. Let's not panic and start reducing stimulus measures too soon, or be too timid with stimulative policies, out of fear it might harm long-run growth. As the Great Depression shows us -- a time when there were legitimate fears about capitalism ending -- the more attention we pay to the short-run problems that undermine support for capitalism, the better chance there is that it will survive in the long-run.
I should acknowledge the Reinhart and Rogoff finding that debt levels higher than 90% of GDP are associated with lower economic growth:
...[D]ebt burdens are racing to thresholds of (roughly) 90 per cent of gross domestic product and above. That level has historically been associated with notably lower growth.
While the exact mechanism is not certain, we presume that at some point, interest rate premia react to unchecked deficits, forcing governments to tighten fiscal policy. Higher taxes have an especially deleterious effect on growth. ...
Given these risks of higher government debt, how quickly should governments exit from fiscal stimulus? This is not an easy task, especially given weak employment, which is again quite characteristic of the post-second world war financial crises... Given the likelihood of continued weak consumption growth in the US..., rapid withdrawal of stimulus could easily tilt the economy back into recession. Yet, the sooner politicians reconcile themselves to accepting adjustment, the lower the risks of truly paralysing debt problems down the road. ...
But as Rogoff notes elsewhere,
Monetary policy has done what it can to limit damage. Fiscal policy I would also give high marks to. We moved in the right direction in as timely a manner as possible.
I am not as willing to give fiscal policy high marks. We could have, and should have, done more to help the economy, and it certainly could have been more timely. As for fears more aggressive intervention will lower long-run growth, so long as we have the discipline to exit from these policies gracefully -- to pay the bill for the stimulus package in the good times -- long-run growth should not be affected by aggressive intervention in the short-run.
I believe that when the time comes to pay for the stimulus package, we'll do the right thing, just as we've always done in the past (yes, I know I'm being Pollyannish). And, in any case, the long-run debt problem has little to do with the stabilization measures used to counter the effects of the recession. The growth in health care costs is the problem in the long-run, nothing else matters much in comparison. If we fix the health cost escalation problem, a much more aggressive intervention to help the economy could have easily been absorbed into the budget without creating problems. And if we don't fix the health cost problem, the size of the stimulus package is of little consequence by comparison.
Finally, on the general "stop panicking" message, when people are hurting -- and they are -- we ought to panic. Legislators have given little indication that the understand the urgency of the employment problem we face. We need more panic, not less, about the employment situation.
Posted by Mark Thoma on Tuesday, March 23, 2010 at 10:53 AM in Budget Deficit, Economics, Unemployment | Permalink Comments (63)
I was supposed to write a tax tip, but I didn't have any so I did this instead:
Tax Increases are Inevitable: What Types of Taxes will Change the Most?
Mine will be the "one of these things is not like the others" in the set of tips they are assembling.
Posted by Mark Thoma on Tuesday, March 23, 2010 at 12:24 AM in Economics, MoneyWatch, Taxes | Permalink Comments (28)
What do you think of this prediction?:
Will Retiring Boomers Lead to Too Many Open Jobs by 2018?, by Justin Lahart, Real Time Economics: Right now, there are about five times as many people looking for work as there are jobs to be filled. But by 2018, a new study argues America could be facing the opposite problem — more jobs than there are people to fill them.
It comes down to demographics, argue Barry Bluestone and Mark Melnik of Northeastern University in a study sponsored by the MetLife Foundation and think tank Civic Ventures, with retiring Baby Boomers leaving a huge number job vacancies in their wake.
The two project that by 2018 there will be 14.6 million new nonfarm payroll jobs, plus some additional jobs in farming, family businesses and so on. Meantime, with no change in immigration policy or labor force participation rates, there will only be about 9.6 million workers available to fill those positions, leaving a gap of more than 5 million jobs that are vacant.
For the moment many older workers, having seen their net worth wither, have been hanging on to their jobs. ... The study’s authors believe that in time, the problem won’t be older workers hanging on to their jobs past retirement age, but older workers not staying in the labor force long enough.
“Not only will there be jobs for these experienced workers to fill, but the nation will absolutely need older workers to step up and take them,” they write.
Posted by Mark Thoma on Tuesday, March 23, 2010 at 12:12 AM in Economics, Unemployment | Permalink Comments (51)
Posted by Mark Thoma on Monday, March 22, 2010 at 11:04 PM in Economics, Links | Permalink Comments (37)
David Beckworth:
Target the Cause Not the Symptom, by David Beckworth: Olivier Blanchard of the IMF recently made the case for monetary policy targeting a 4% inflation target instead of the standard 2% target. His main argument for doing so is that it would make the zero bound on the policy interest rate less of an issue. Here is how the Wall Street Journal summarized his view:
At a 4% inflation rate, Mr. Blanchard says, short-term interest rates in placid economies likely would be around 6% to 7%, giving central bankers far more room to cut rates before they get near zero, after which it is nearly impossible to cut short-term rates further.There was a lot of push back on this argument in the blogosphere from folks like Ryan Avent, Mark Thoma, and David Altig who countered that (1) the zero bound isn't really a constraint for monetary policy, (2) higher inflation will lead to increased relative price distortions, and (3) there is mixed evidence and thus less certainty on the benefits of higher inflation. While all of these points are valid, I think there is a more fundamental problem with Blanchard's view: inflation targeting at any rate is merely responding to the symptom not the underlying causes--shocks to aggregate demand (AD) and shocks to aggregate supply (AS)--of macroeconomic volatility. This is problematic because monetary policy can only meaningfully counter AD shocks and therefore, it must be able to discern which shock is driving inflation. Inflation, however, can be hard to interpret. For example, if there is a sudden burst of inflation is it due to a positive aggregate demand shock (e.g. sudden, unsustainable increase in household spending) or a negative aggregate supply shock (e.g. temporary spike in oil prices)? In the former case inflation targeting would act appropriately by reigning in excess spending while in the latter case inflation targeting would only make matters worse by further restricting economic activity. Rather than targeting inflation, then, monetary policy should directly target the underlying source of macroeconomic volatility over which it has real influence, AD. Doing so would have gone a long way in making the U.S. economy during the 2000s more stable, a point I have made repeatedly during this crisis.
The importance of targeting AD can easily be illustrated using an AD-AS model. Here I use the AD-AS model developed by Tyler Cowen and Alex Tabarrok in their new macroeconomic textbook. Their version of the AD-AS model places growth rates on the two axis rather than levels. Below is the model in equilibrium with an AD growth rate of 5% that can be split up into an inflation rate of 2% and a real growth rate of 3%. (Click on figure to enlarge.)
Now consider four shocks to the economy when monetary policy is solely targeting an inflation rate of 2%. First, let see what happens when there is a positive AD shock driven by say expansionary fiscal policy (click on figure to enlarge):
The positive AD shock pushes the economy beyond full employment, increases inflation to 3%, and real growth jumps to 4%. AD is now growing at an accelerated rate of 7%. Fed officials seeing the higher inflation tighten monetary policy to get back to 2% inflation and in so doing push the economy back to full employment. Here the 2% inflation target worked just fine and effectively served to stabilize AD at 5% growth.
Now consider a negative AD shock caused by say a sudden collapse in economy certainty (Click on figure to enlarge).
Posted by Mark Thoma on Monday, March 22, 2010 at 06:57 PM in Economics, Monetary Policy | Permalink Comments (12)
Phillip Lane of the Irish Economy blog notes a new IMF working paper on The Effects of Fiscal Stimulus in Structural Models. He says:
This new IMF working paper provides interesting analytical insights into the determinants of fiscal multipliers. Also striking is the set of co-authors: it represents a joint collaborative effort across the IMF, ECB, European Commission, Federal Reserve, OECD and Bank of Canada.
Here are a few graphs from the report (I went overboard and there are 14 graphs below, most are on the continuation page to save space and reduce load time).
Interestingly, from the point of view of stimulating GDP, there is little difference between government investment and government consumption, and both work better than changes in taxes and transfers (one exception appears to be "targeted transfers")
[Note: if you cannot read the graphs, the models used are the EC's Quest, the IMF's GIMF, the ECB's NAWM, the Fed's FRB-US, the Fed's Sigma, and the BoC's GEM -- see the paper for more details. There are separate graphs for each of the seven fiscal policy instruments, the experiments are both with and without monetary accommodation, and both one year and two year stimulus packages are considered. Apologies for the space between the headers and the graphs -- it's in the originals]:
Continue reading ""Effects of Fiscal Stimulus in Structural Models"" »
Posted by Mark Thoma on Monday, March 22, 2010 at 03:33 PM in Academic Papers, Economics, Fiscal Policy | Permalink Comments (1)
At MoneyWatch:
Note: The post was updated with two graphs from Ezra Klein showing coverage among various groups before and after reform.
Posted by Mark Thoma on Monday, March 22, 2010 at 11:25 AM in Economics, Health Care, MoneyWatch | Permalink Comments (38)
Joseph Gagnon has been frustrated with those of us who have not fully embraced further action by the Fed to lower long-term interest rates. Here's his description of some new research on this issue:
Monetary Policy Can Do More, by Joseph Gagnon, Peterson Institute for International Economics: A new study in which I participated has been posted on the website of the Federal Reserve Bank of New York. It documents how the Federal Reserve lowered long-term interest rates about 50 to 60 basis points last year through its purchases of $1.7 trillion of longer-term bonds. The study reinforces an argument I have previously made: that the Federal Reserve and other central banks can apply further monetary stimulus by lowering long-term borrowing costs even when short-term interest rates are stuck at zero. (For the wonkish, the effect appears to work though the term premium rather than through expectations of future short-term interest rates.)
The reduction in long-term interest rates applies not only to Treasury securities, but also to mortgages and corporate bonds. Households buying and refinancing their homes took out mortgages worth over $2 trillion in 2009 and they will save about $11 billion in interest payments each year because of the lower interest rates. With interest rates remaining low for new borrowers in 2010, these benefits will continue to grow and will help to support consumer spending and economic recovery. Thanks to the low interest rate environment, corporate bond issuance (net of redemptions) reached a record $381 billion in 2009, helping to finance a turnaround in capital spending late last year that exceeded most private forecasts.
With unemployment projected to remain far above most estimates of its equilibrium for the next few years and with core inflation having fallen to 1 percent over the past 6 months, the US economy clearly needs more of this medicine. As I argued last December, the Fed could push down long-term yields another 75 basis points by buying a further $2 trillion of long-term bonds. Current yields on 10-year Treasury notes, at 3.7 percent, are far above the zero rates on short-term Treasury bills. The benefits to the economy would be rapid and similar to those already observed from the first round of Fed purchases. Moreover, lower long-term interest rates and a faster recovery would also reduce our national debt.
Does additional Fed action mean that inflation is going to come roaring back? Not unless the Fed forgets everything it learned from the 1970s. But right now, inflation is below the Fed’s target of 2 percent and heading lower. The immediate problem is deflation. As Japan shows, acting too weakly against deflation is a serious error. Yes, the Fed may have to reverse course in a couple years, but that would be better than facing a decade of excess unemployment and entrenched deflation.
I have been working on a write-up of how the crisis will affect monetary and fiscal policy in the future based upon my discussion at the Kaufman Center's recent Economic Bloggers' Forum. Here's the draft version of what I wrote on this issue:
Quantitative Easing: Whether or not the Fed embraces more aggressive quantitative easing the next time a crisis hits depends critically upon how gracefully the Fed can exit from the policies implemented during this crisis. If, as I believe, the Fed can exit without an outbreak of inflation, then one conclusion that will most likely be drawn is that the Fed was way too timid with its quantitative easing policy. However, if inflation does turn out to be a problem, it will call the whole policy procedure used during the crisis into question.
I was among the people who (probably) had too much fear of inflation and hence was unwilling to fully embrace more aggressive policy (though I did give lukewarm support). The Fed's credibility is shaky, and I was worried that if there was an inflation problem, it would further undermine the Fed's credibility and cause Congress to take more control over monetary policy, something I thing would be a big mistake and lead to worse policy outcomes in future recessions. I was also skeptical that a fall in long-term real interest rates would induce much in the way of new investment and the consumption of durables due to poor economic conditions, so the benefits of the policy seemed small relative to the potential costs. As I said above, right now I don't expect inflation to be a problem, but the Fed's exit is just beginning, so we will have to wait and see.
Posted by Mark Thoma on Monday, March 22, 2010 at 09:00 AM in Economics, Monetary Policy | Permalink Comments (19)
This time, "blatant fear-mongering" didn't work:
Fear Strikes Out, by Paul Krugman, Commentary, NY Times: The day before Sunday’s health care vote, President Obama gave an unscripted talk to House Democrats. Near the end, he spoke about why his party should pass reform: “Every once in a while a moment comes where you have a chance to vindicate all those best hopes that you had about yourself, about this country, where you have a chance to make good on those promises that you made ... And this is the time to make true on that promise. We are not bound to win, but we are bound to be true. We are not bound to succeed, but we are bound to let whatever light we have shine.”
And on the other side, here’s what Newt Gingrich, the Republican former speaker of the House — a man celebrated by many in his party as an intellectual leader — had to say: If Democrats pass health reform, “They will have destroyed their party much as Lyndon Johnson shattered the Democratic Party for 40 years” by passing civil rights legislation. ...
I want you to consider the contrast: on one side, the closing argument was an appeal to our better angels, urging politicians to do what is right, even if it hurts their careers; on the other side, callous cynicism. Think about what it means to condemn health reform by comparing it to the Civil Rights Act. Who in modern America would say that L.B.J. did the wrong thing by pushing for racial equality? ...
And that cynicism has been the hallmark of the whole campaign against reform. ... For the most part,... opponents of reform didn’t even pretend to engage with the reality either of the existing health care system or of the moderate, centrist plan — very close in outline to the reform Mitt Romney introduced in Massachusetts — that Democrats were proposing.
Instead, the emotional core of opposition to reform was blatant fear-mongering, unconstrained either by the facts or by any sense of decency.
It wasn’t just the death panel smear. It was racial hate-mongering, like a piece in Investor’s Business Daily declaring that health reform is “affirmative action on steroids, deciding everything from who becomes a doctor to who gets treatment on the basis of skin color.” It was wild claims about abortion funding. It was the insistence that there is something tyrannical about giving young working Americans the assurance that health care will be available when they need it...
And let’s be clear: the campaign of fear hasn’t been carried out by a radical fringe, unconnected to the Republican establishment. On the contrary, that establishment has been involved and approving all the way. Politicians like Sarah Palin — who was, let us remember, the G.O.P.’s vice-presidential candidate — eagerly spread the death panel lie, and supposedly reasonable, moderate politicians like Senator Chuck Grassley refused to say that it was untrue. On the eve of the big vote, Republican members of Congress warned that “freedom dies a little bit today” and accused Democrats of “totalitarian tactics,” which I believe means the process known as “voting.”
Without question, the campaign of fear was effective... But the question was, would it actually be enough to block reform?
And the answer is no. The Democrats have done it. The House has passed the Senate version of health reform, and an improved version will be achieved through reconciliation.
This is, of course, a political victory for President Obama, and a triumph for Nancy Pelosi, the House speaker. But it is also a victory for America’s soul. In the end, a vicious, unprincipled fear offensive failed to block reform. This time, fear struck out.
Posted by Mark Thoma on Monday, March 22, 2010 at 12:36 AM in Economics, Health Care, Politics | Permalink Comments (138)
Posted by Mark Thoma on Sunday, March 21, 2010 at 11:01 PM in Economics, Links | Permalink Comments (8)
It's done:
House Approves Landmark Bill to Extend Health Care to Millions - NYT
But it's not done. Now we can start working on improvements to the bill.
Posted by Mark Thoma on Sunday, March 21, 2010 at 08:36 PM in Economics, Health Care | Permalink Comments (10)
Robert Frank argues that a consumption surtax for wealthy households that kicks in during good times will cause the wealthy to spend more during the bad times, and the additional spending during bad times can help lift the economy out of recession:
Hey, Big Spender: You Need a Surtax, by Robert Frank, Commentary, NY Times: Last year’s stimulus spending is running out, yet unemployment stays stubbornly near 10 percent. And as state and local governments keep cutting their budgets, the economy desperately needs an additional spending boost. Concerned about growing federal deficits, however, many in Congress appear reluctant to act.
Their worries are misguided. Yes, deficits are bad, but protracted unemployment is far worse. ... But an effective remedy is at hand. ... What I have in mind is a surtax on extremely high levels of consumption. It would be enacted right away, but not take effect until unemployment again fell below 6 percent.
More than 99 percent of households would be exempt from this tax, which would be levied only on families earning more than $1 million who consume more than $500,000 annually. ... Once consumption topped $500,000, the families would be subject to the surtax. Rates would start low but rise as consumption grew. ...
A progressive consumption surtax would produce immediate, off-budget economic stimulus by giving wealthy families powerful incentives to accelerate future spending. For example, a family that had been planning to build a new wing onto its mansion, or buy a yacht, would want to make those purchases now rather than be taxed on them later.
Stimulating a new luxury spending spree may not seem an ideal way to stimulate the economy. Far better, perhaps, would be for the government to repair dilapidated bridges and build high-speed trains. But unless someone can persuade 60 senators to support a huge new stimulus bill, this second option is foreclosed. Given our choices, it would be much better to provoke an additional burst of luxury spending than to let high unemployment linger for years. ...
If the surtax were phased in gradually, it would shift spending from consumption toward additional savings and investment. In the long run, higher investment would increase economic growth and boost earnings across the income spectrum. ...
More than a decade ago,... I received a warm letter from Milton Friedman, the late Nobel laureate, who was the patron saint of small-government conservatism. Mr. Friedman began by disagreeing with my contention that additional public investment would yield high returns.
He quickly added, however, that if the government did need additional revenue, a progressive consumption tax would be the best way to raise it. ...
Such a tax would not cause painful sacrifices because, beyond a certain point, additional consumption serves needs that are almost completely socially determined. When all C.E.O.’s build bigger mansions, for example, they are simply raising the bar that defines how big of a mansion a C.E.O. needs. If a progressive consumption surtax induced all of them to postpone those additions, nothing important would be sacrificed.
Political battles make it very difficult to use discretionary fiscal policy to fight a recession, so more automatic stabilizers are needed. Along those lines, if something like this were to be implemented to stabilize the economy over the business cycle, I'd prefer to do this more generally, i.e. allow income taxes, payroll taxes, etc. to vary procyclically. That is, these taxes would be lower in bad times and higher when things improve, and implemented through an automatic moving average type of rule that produces the same revenue as some target constant tax rate (e.g. existing rates).
The problem is that any rule can be waived by a future congress, and it is likely that whenever taxes are set to rise, a legislator would introduce a provision to suspend the increase (making an "it will kill job creation" or "it will lower economic growth" type of argument). But the fact that there is no way to bind Congress in the future does not mean we shouldn't try to do the right thing. It's also possible that the rule will be honored by Congress in the future, something that won't happen if we don't try to do something now, and it also changes the baseline upon which the actions of Congress will be evaluated.
In any case, it's hard to imagine anything like this will actually be enacted. But there is a need for automatic stabilizers that can overcome the political divisions that prevent effective fiscal policy responses to business cycle variation in the economy.
Posted by Mark Thoma on Sunday, March 21, 2010 at 09:18 AM in Economics, Fiscal Policy, Taxes | Permalink Comments (46)
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