« October 2010 | Main | December 2010 »

Tuesday, November 30, 2010

links for 2010-11-30

    Posted by on Tuesday, November 30, 2010 at 10:32 PM in Economics, Links | Permalink  Comments (39)


    The Bush Tax Cuts and Economic Growth

    The editors at MoneyWatch asked me to talk about:

    The Bush Tax Cuts and Economic Growth

    They also asked me to answer the question, "If the tax cuts didn't result in economic growth, then where did they go?"

      Posted by on Tuesday, November 30, 2010 at 12:21 PM in Economics, Productivity, Taxes | Permalink  Comments (51)


      "The Irish Banking Crisis: A Parable"

      Umair Haque:

      The Irish Banking Crisis: A Parable, by Umair Haque: Once upon a time, there was a country where bankers..., fed up with regulation, dissatisfaction, and downright hostility,... went on strike, not once, but three times.
      Here's what orthodox economics would have predicted for a country without banks: A collapse in the money supply, a credit crunch, a trade implosion, mass unemployment, an atomized GDP, and the gears of industry and commerce grinding to a crashing halt. Imagine all the veins in your body suddenly shrinking and collapsing ... and you might begin to see how economists conceive of banking shutdowns.
      This is no fairy tale, so we don't have to imagine what happened next. And what did come next was something really, really interesting — and just a little bit awesome..., the economy continued to grow. Though the money supply did contract sharply, neither trade, commerce, nor industry came to a grinding halt.
      How? People created their own currencies, to substitute for the collapsing money supply. ... The country in question was Ireland — today, in deep crisis because of profligate banks.
      So why were the Irish of yesteryear able to trade notes with one another, in lieu of credit issued by banks? Well, Ireland ... was ... characterized by intense, frequent, conversational personal contact: tight, dense, solid local knowledge circulating at high velocity within and across communities. Result? Borrowers and lenders could build solid microfoundations of trust. In other words, when you've been chatting with Bill every night at the local pub for twenty years, you probably know whether his note is a good bet or not.... Furthermore, if you're the publican, and you've been chatting with me and with Bill, then you're even better positioned to become a de facto arbitrator of notes — a bank. And that's exactly the role that pubs began to play. ...
      Now, here's what I'm not suggesting: that you or I extrapolate directly and naively from history. ... I'd suggest it's more like a parable — a tale that highlights deeper principles at play.
      It's not that Ireland can exit its troubles merely by vaporizing the banks, and letting pubs trade notes. Ireland 1970 is a far cry from the Celtic tiger of the 2000s. ...
      [When mega-banks] blow up..., people and societies are left holding the bag. ... The parable of the disappearing bankers gives the tiniest glimpse of a better way: a path to a smarter kind of growth, built on a different set of institutions — those that operate at micro-scale, instead of mega-scale, built on human relationships, instead of anonymous transactions, self-organizing, instead of "administered," and that have the humanistic and the meaningful, instead of soul-crushingly trivial, hardwired into their very DNA.
      Maybe, just maybe, banks need people a lot more than people need banks. Perhaps that's true for the whole imperious, plodding gamut of yesterday's zombie institutions, from corporations, to newspapers, to governments. Perhaps people and societies are a tiny bit more adaptive, resilient, intelligent, and creative than yesterday's institutions assume. And perhaps failing to recognize that is what's really at the root of this great crisis.

        Posted by on Tuesday, November 30, 2010 at 02:40 AM in Economics, Financial System | Permalink  Comments (33)


        "Administrative Measures are Not Effective in Controlling Inflation"

        The old raise the price by shrinking portion size trick:

        During the sixty years of the People's Republic, we have learned that administrative measures are not effective in controlling inflation. For instance, the government often forbids university canteens from raising food prices, so prices do not change. Instead the portions get smaller. Unfortunately the government is doing the same again.

          Posted by on Tuesday, November 30, 2010 at 02:40 AM in China, Economics, Inflation | Permalink  Comments (18)


          "And There, Lurking Among Dozens of Well-Intentioned Opinions, is a Troll"

          Comments on this, anonymous or otherwise?:

          Where Anonymity Breeds Contempt, by Julie Zhou, Commentary, NY Times: There you are, peacefully reading an article or watching a video on the Internet. You finish, find it thought-provoking, and scroll down to the comments section to see what other people thought. And there, lurking among dozens of well-intentioned opinions, is a troll. ...
          Trolling, defined as the act of posting inflammatory, derogatory or provocative messages in public forums, is a problem as old as the Internet itself, although its roots go much farther back. Even in the fourth century B.C., Plato touched upon the subject of anonymity and morality in his parable of the ring of Gyges.
          That mythical ring gave its owner the power of invisibility, and Plato observed that even a habitually just man who possessed such a ring would become a thief, knowing that he couldn’t be caught. Morality, Plato argues, comes from full disclosure; without accountability for our actions we would all behave unjustly.
          This certainly seems to be true for the anonymous trolls today. ...
          Some may argue that denying Internet users the ability to post anonymously is a breach of their privacy and freedom of expression. But until the age of the Internet, anonymity was a rare thing. When someone spoke in public, his audience would naturally be able to see who was talking. ...
          Content providers, stop allowing anonymous comments. ... In slowly lifting the veil of anonymity, perhaps we can see the troll not as the frightening monster of lore, but as what we all really are: human.

            Posted by on Tuesday, November 30, 2010 at 02:39 AM in Economics, Weblogs | Permalink  Comments (56)


            Expected TARP Cost: $25 Billion

            The estimated cost of TARP falls again:

            TARP expected to cost U.S. only $25 billion, CBO says, by Lori Montgomery, Washington Post: The Troubled Asset Relief Program, which was widely reviled as a $700 billion bailout for Wall Street titans, is now expected to cost the federal government a mere $25 billion...
            A new report released Monday by the nonpartisan Congressional Budget Office found that the cost of the program, known as TARP, has plummeted... "Clearly, it was not apparent when the TARP was created two years ago that the cost would turn out to be this low," the CBO report says. ...
            The TARP was conceived in the final days of the Bush administration and pushed through a reluctant Congress in less than three weeks. It is widely thought to have helped stabilize a financial sector on the verge of collapse, though it remains hugely unpopular with the public. ...
            All told, $389 billion has been distributed through the TARP, which expired in October. The CBO estimates that an additional $44 billion is still waiting to go out the door, primarily to troubled insurance giant American International Group and federal mortgage programs. That would bring total TARP outlays to $433 billion, of which about half - $216 billion - has been repaid. The rest of the TARP investments, meanwhile, have become markedly less risky, according to the CBO, and in many cases even profitable. ...
            While the cost of the TARP is coming in far below expectations, it is just one of several massive government programs aimed at propping up the financial industry. The Federal Reserve and the FDIC have together guaranteed billions of dollars in bank debt.

              Posted by on Tuesday, November 30, 2010 at 02:38 AM in Economics, Financial System, Policy | Permalink  Comments (15)


              Monday, November 29, 2010

              links for 2010-11-29

                Posted by on Monday, November 29, 2010 at 10:02 PM in Economics, Links | Permalink  Comments (42)


                "A Transparently Cynical Policy Gesture"

                I was trying to think of a succinct way to respond to Obama's plans to freeze federal pay. This expresses my sentiment fairly well:

                Freeze Frame: Yep, that’s exactly what we needed: a transparently cynical policy gesture, trivial in scale but misguided in direction, and in effect conceding that your bitter political opponents have the right idea.

                Update: I also like pgl's characterization of the policy:

                This strikes me as short-term fiscal restraint but not a really serious attempt to getting the long-term fiscal house in order. In other words precisely the opposite of what we should be doing while in a very depressed economy.

                  Posted by on Monday, November 29, 2010 at 12:47 PM in Economics, Politics | Permalink  Comments (61)


                  "Milton Friedman Would Have Supported QE2"

                  David Beckworth:

                  Case Closed: Milton Friedman Would Have Supported QE2, by David Beckworth: The debate over what Milton Friedman would say about QE2 can now be closed. Below is a Q&A with Milton Friedman following a speech he delivered in 2000. In this excerpted exchange with David Laidler, we learn that Friedman's prescription for Japan at that time is almost identical to what the Fed is doing now with QE2:...

                  David Laidler: Many commentators are claiming that, in Japan, with short interest rates essentially at zero, monetary policy is as expansionary as it can get, but has had no stimulative effect on the economy. Do you have a view on this issue?
                  Milton Friedman: Yes, indeed. As far as Japan is concerned, the situation is very clear. And it’s a good example. I’m glad you brought it up, because it shows how unreliable interest rates can be as an indicator of appropriate monetary policy.
                  During the 1970s, you had the bubble period. Monetary growth was very high. There was a so-called speculative bubble in the stock market. In 1989, the Bank of Japan stepped on the brakes very hard and brought money supply down to negative rates for a while. The stock market broke. The economy went into a recession, and it’s been in a state of quasi recession ever since. Monetary growth has been too low. Now, the Bank of Japan’s argument is, “Oh well, we’ve got the interest rate down to zero; what more can we do?”
                  It’s very simple. They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high powered money starts getting the economy in an expansion. What Japan needs is a more expansive domestic monetary policy.
                  The Japanese bank has supposedly had, until very recently, a zero interest rate policy. Yet that zero interest rate policy was evidence of an extremely tight monetary policy. Essentially, you had deflation. The real interest rate was positive; it was not negative. What you needed in Japan was more liquidity.

                  ...Thanks to Doug Irwin for locating this gem.

                    Posted by on Monday, November 29, 2010 at 09:12 AM in Economics, Monetary Policy | Permalink  Comments (45)


                    Paul Krugman: The Spanish Prisoner

                    Spain provides a lesson for those who believe that the Fed should pursue a "hard-money" policy focused on "keeping the dollar strong and fighting the imaginary risks of inflation":

                    The Spanish Prisoner, by Paul Krugman, Commentary, NY Times: The best thing about the Irish right now is that there are so few of them. By itself, Ireland can’t do all that much damage to Europe’s prospects. ...
                    But then there’s Spain. ... Like America, Spain experienced a huge property bubble, accompanied by a huge rise in private-sector debt. Like America, Spain fell into recession when that bubble burst... And like America, Spain has seen its budget deficit balloon thanks to plunging revenues and recession-related costs.
                    But unlike America, Spain is on the edge of a debt crisis. ... Why is Spain in so much trouble? In a word, it’s the euro. ...
                    Through the good years,... the Spanish government appeared to be a model of both fiscal and financial responsibility... But ... prices and wages rose more rapidly in Spain than in the rest of Europe... And when the bubble burst, Spanish industry was left with costs that made it uncompetitive with other nations.
                    Now what? If Spain still had its own currency, like the United States ... it could have let that currency fall, making its industry competitive again. But with Spain on the euro, that option isn’t available. Instead, Spain must achieve “internal devaluation”: it must cut wages and prices until its costs are back in line with its neighbors.
                    And internal devaluation is an ugly affair. For one thing, it’s slow: it normally take years of high unemployment to push wages down. Beyond that, falling wages mean falling incomes, while debt stays the same. So internal devaluation worsens the private sector’s debt problems.
                    What all this means for Spain is very poor economic prospects over the next few years ... and ... fears about Spain’s fiscal future.
                    Should Spain try to break out of this trap by leaving the euro...? ... Spain would be better off now if it had never adopted the euro — but trying to leave would create a huge banking crisis... — it’s hard to see any Spanish government taking the risk of “de-euroizing.”
                    So Spain is in effect a prisoner of the euro, leaving it with no good options.
                    The good news about America is that we aren’t in that kind of trap: we still have our own currency, with all the flexibility that implies. ...
                    The bad news about America is that a powerful political faction is trying to shackle the Federal Reserve, in effect removing the one big advantage we have over the suffering Spaniards. Republican attacks on the Fed — demands that it stop trying to promote economic recovery and focus instead on keeping the dollar strong and fighting the imaginary risks of inflation — amount to a demand that we voluntarily put ourselves in the Spanish prison.
                    Let’s hope that the Fed doesn’t listen. Things in America are bad, but they could be much worse. And if the hard-money faction gets its way, they will be.

                      Posted by on Monday, November 29, 2010 at 12:42 AM in Economics, International Finance | Permalink  Comments (54)


                      Sunday, November 28, 2010

                      links for 2010-11-28

                        Posted by on Sunday, November 28, 2010 at 10:01 PM in Economics, Links | Permalink  Comments (28)


                        The Administration's "Communication Problem"

                        I find it incredible and disturbing that on the eve of the recent election in which Democrats got trounced, the administration was still trying to figure out if the unemployment problem is structural or cyclical.

                        Even if you attribute a large fraction of the unemployment to structural factors, there is still plenty of cyclical unemployment left over to target with policy. For example, the SF Fed estimates that only about 1.25% of the rise in the unemployment rate is due to structural factors. The rest of the rise to nearly 10% is due to cyclical problems. Even if you attribute half of the rise in unemployment to structural factors, that still leaves between 2% and 3% of the rise in unemployment to cyclical problems. Since neither monetary or fiscal policy is likely to be large or aggressive enough to fully solve the cyclical problem, there's no need to have the debate. That is, any reasonable fiscal policy that the administration might have pushed for would not fully solve the cyclical unemployment problem, so there was no real need to debate this issue, particularly on the eve of the election. No matter how you slice it, the numbers indicate that we have a substantial cyclical problem, and the administration needs to try to do something about it.

                        Even the person who had a lot to do with the "it's all structural and there's nothing we can do about it" attitude that some people have, President of the Federal Reserve Bank of Minneapolis Narayana Kocherlakota, recently said  QEII  "should lead to less unemployment and upward pressure on prices." Thus, even he believes unemployment can be helped through policy action.

                        The administration needed to be out there pushing for employment policies, doing everything it could to signal to people that it was on their side, not the side of corporations and big banks. That requires that you figure out that you have a cyclical unemployment problem before the election is all but over, and that you begin pushing for solutions in public forums. That push needs to start at the very top with Obama, and it needs to be reinforced every single day by other administration officials. One mention by Obama in a Saturday address to the nation doesn't get the job done.

                        I understand that Congress may not have supported additional policy to try to stimulate employment, but the fight would have been worth it no matter the outcome, and with the administration actually leading rather than accepting defeat before the game has been played, the outcome may not have been as preordained as the administration seems to believe:

                        Obama could learn from Bush, by Richard Wolffe, Commentary, LA Times: The day before his party's shellacking in this month's elections, President Obama sat down with his economic team to examine the single most important issue for voters across the country: jobs.
                        But the question on the agenda was not how to accelerate the recovery or target job creation... The president had called the meeting to grapple with what he and his propeller-head economists have been debating for some time: the wonkish question of whether today's high unemployment rate is structural or cyclical. ...
                        Two years into this presidency, and many months into a sluggish recovery, may be a little late to try to agree on the root cause of today's high unemployment.
                        This lack of agreement on economic fundamentals is a primary factor behind one of this White House's most obvious failures: communications. As one senior Obama advisor told me the day after the disastrous midterms: "It was hard to find a single economic message when the economic team couldn't agree on a single economic policy." ...
                        However, a new economic team will not resolve the communications problems... In fact, the president has been frustrated by his communications strategy for most of the last year. ... Obama told me six months ago that poor communications had hampered his ability to execute his policies, and that was after several months of internal reviews.
                        But the White House has failed to realize that the communications problem is a symptom of Obama's problems, not a cause. ... As Vice President Joe Biden told me, few voters know who saved the teachers' jobs in their children's schools, while many employees had no idea they were getting a tax cut with the extra money in their paychecks. Both were in fact thanks to Obama's Recovery Act.
                        The lesson of 2004 is that the president cannot be an empty vessel for hope, no matter how big or small his own hopeful base. And if he doesn't fill the vessel with his own story of how and why he delivered on hope, then his opponents will fill it for him. ...
                        The pundits have prematurely written this president's obituary too many times before. ... Reports of Obama's political death have been greatly exaggerated. To prove the pundits wrong, he needs to take control of writing his own story once more.

                        As far as I can tell, this hasn't changed. The administration is still allowing the other side to take control of policy debates. We saw a brief flash of change on the question of whether tax cuts should be extended for the wealthy, but nothing consistent, and certainly nothing like the effort we are seeing from opponents.

                        Update: Brad Delong:

                        Can we please get the White House back on message? ...

                        Let me point out that I think that the senior Obama advisor quoted is a liar.

                        Given who they were and what I know of how they all think, all the members of Obama's original economic policy team--except, I suspect, Peter Orszag--did indeed have different views of what would be the best policy to try to generate jobs in the short run, but they all agreed that anything was better than nothing. (Peter thought, I think, that only policies that promised credible long-term deficit reduction were better than nothing.)

                        Update: Paul Krugman:

                        ...apparently Obama held a meeting ... to debate whether our unemployment problem is cyclical or structural.

                        What I want to know is, who was arguing for structural? I find it hard to think of anyone I know in the administration’s economic team who would ... deny that the bulk of the rise in unemployment since 2007 is cyclical. And as I and others have been trying to point out, none of the signatures of structural unemployment are visible...

                        More generally, I can’t think of any Democratic-leaning economists who think the problem is largely structural. Yet someone who has Obama’s ear must think otherwise.

                        No wonder we’re in such trouble. Obama must gravitate instinctively to people who give him bad economic advice, and who almost surely don’t share the values he was elected to promote. That’s what I’d call a structural problem.

                          Posted by on Sunday, November 28, 2010 at 10:17 AM in Economics, Unemployment | Permalink  Comments (81)


                          "Workers Must Work Longer for Less Because the Rich are Living Longer"

                          It's nice to see the local paper highlighting this side of the Social Security debate:

                          Washington elites making their move on Social Security, by Nancy Altman and Eric Kingson, Commentary, Register Guard: Alan Simpson and Erskine Bowles, the co-chairs of President Obama’s deficit commission ... released their proposal to reduce the federal deficit... In releasing their plan, the co-chairs went out of their way to make clear that they were proposing changes to Social Security “for its own sake, not for deficit reduction.” ... Simpson and Bowles just couldn’t keep their hands off the program.
                          One thing they propose is increasing Social Security’s retirement age to 69. ... Increasing the age to 69 would cut benefits by one-quarter from a decade ago, when the retirement age was 65. The co-chairs also want to increase the early retirement age to 64. ... As a new General Accountability Office report concluded,... Raising the early retirement age will shut out workers who are disproportionately low income and minority,... potentially forcing them to seek disability benefits or welfare. ...
                          Over the last quarter-century, life expectancy of lower-income men increased by one year, compared to five for upper-income men. And lower-income women have experienced declines in longevity. ... In effect, the Bowles-Simpson plan says to America’s workers that they must work longer for less because the rich are living longer.
                          In addition to raising the retirement age, the Bowles-Simpson plan would reduce benefits to ... future recipients ... by as much as 36 percent... Bowles and Simpson ... also propose cutting the cost-of-living adjustment for those now receiving Social Security. ...
                          For all the talk of polarization, the American people are clear... A recent poll ... found that 67 percent ... opposed cuts in benefits; 69 percent opposed raising the Social Security retirement age to 69. ... Some 66 percent ... favored doing away with the current cap on payroll taxes to fund Social Security. Currently, taxpayers are taxed only on their first $106,800... Simply requiring ... taxpayers to pay the tax on all their income would bring in enough revenue to allow benefits to be raised across the board and still have the program in balance for at least the next 75 years. ...
                           Despite the clear view of the American people, the elites in Washington seem to think it would be better to reduce benefits than to require the wealthy to pay the same percentage of their salaries into Social Security as everyone else does.
                          If politicians choose to cut Social Security benefits, when they could simply scrap the cap, we predict that this midterm will seem like a walk in the park compared to what awaits them in 2012.

                          [It's not even clear that all of the proposed changes are for Social Security's "own sake" rather than deficit reduction. The Government Accountability Office report referenced above indicates that increasing the early retirement age will actually have a negative impact on Social Security solvency.]

                            Posted by on Sunday, November 28, 2010 at 09:57 AM in Budget Deficit, Economics, Politics, Social Security | Permalink  Comments (44)


                            Saturday, November 27, 2010

                            links for 2010-11-27

                              Posted by on Saturday, November 27, 2010 at 10:01 PM in Economics, Links | Permalink  Comments (27)


                              Toles: There is No 'Rest of the Trick'

                              Tom Toles:

                              Toles2See also: Rising worker productivity, innovation boosts profits but may lessen hiring need, by Anthony Feld and Craig Torres (I think there's more to the delayed recovery of labor markets than just changes in productivity, but that's part of the story).

                              On the title, there is supposed to be a "rest of the trick," but it doesn't come until later. The idea is that the labor that is freed up from the increased productivity will be used to produce new goods and services thereby increasing the quantity and variety of the nation's output. In a dynamic, growing economy, even though there's a delay before the new jobs appear (and hence a need to help workers through the transition), the new jobs are supposed to be even better than the old ones. But as workers look forward, the fear is that that won't be the case. Workers who have lost jobs face an uncertain future where, if they can get new jobs at all, they are unlikely to pay as well or have the same level of benefits as the jobs they lost. New workers do not appear to have the same opportunities that their parents had, particularly workers without a college degree.

                              If workers could be assured that rising productivity would translate into better jobs and higher pay, the outlook would be different. But the last several decades of stagnant wages have undermined that promise. The growth that has occurred was not widely shared -- it did not trickle down as promised -- and the frustrations and uncertainties households have are understandable. It's a mistake to think that just because the economy starts growing again, all will be well. If the growth that occurs post-recession simply picks up where pre-recession growth left off, i.e. with income gains flowing mainly to the upper classes, and with even more income inequality than we have now, the frustrations and tensions will continue to build and our troubles will not have ended.

                                Posted by on Saturday, November 27, 2010 at 12:00 PM in Economics, Productivity, Technology, Unemployment | Permalink  Comments (56)


                                Holding Down the Economy for Political Gain?

                                I have been hesitant to embrace the idea that the GOP is intentionally trying to keep the economy from recovering in order to make political gains. Instead, I have taken the more charitable route of assuming the policies they are pushing arise from honestly held ideological differences. But if members of the GOP are willing to take positions that undermine national defense just to make political gains, why shouldn't I assume they'd be willing to do something similar to the economy?:

                                ...Indiana Sen. Richard Lugar ... has unapologetically backed Obama in support of START... In an attempt to rally bipartisan support for the treaty, the White House has enlisted the kind of GOP foreign policy wise men that Lugar exemplifies — among them former Secretaries of State Henry Kissinger and James A. Baker. But they have had no success with members of their own party, and it has left them scratching their heads over the source of the GOP opposition.
                                “It’s not clear to me what it is,” said Brent Scowcroft, a former national security adviser to President George H.W. Bush who noted that this START treaty is not very different from previous ones negotiated and ratified under Republican presidents. “I’ve got to think that it’s the increasingly partisan nature and the desire for the president not to have a foreign policy victory.” ...
                                In fact, Lugar has opposed most of Obama’s domestic agenda, voting against the Recovery Act, the health care reform bill, and financial regulatory reform legislation. But on START he is adamant.
                                “One of those warheads could demolish my city of Indianapolis. Now some Americans may have forgotten that, I’ve not forgotten that,” Lugar said... “At this point, I’m simply trying, in as civil a manner as possible to say to my colleagues, please do your duty by your country.” ...

                                  Posted by on Saturday, November 27, 2010 at 10:06 AM in Economics, Politics | Permalink  Comments (33)


                                  Friday, November 26, 2010

                                  links for 2010-11-26

                                    Posted by on Friday, November 26, 2010 at 10:02 PM in Economics, Links | Permalink  Comments (45)


                                    "Starve the Beast: Just Bull, not Good Economics"

                                    Bruce Bartlett says starve and feed the beast theory -- a favorite of Republicans -- is a "crackpot theory" that serves as a rationalization "for Republican budgetary irresponsibility":

                                    Starve the Beast: Just Bull, not Good Economics, by Bruce Bartlett: A prime reason why we have a budget deficit problem in this country is because Republicans almost universally believe in a nonsensical idea called starve the beast (STB). By this theory, the one and only thing they need to do to be fiscally responsible is to cut taxes. They need not lift a finger to cut spending because it will magically come down, just as a child will reduce her spending if her allowance is cut — the precise analogy used by Ronald Reagan to defend this doctrine in a Feb. 5, 1981, address to the nation.
                                    It ought to be obvious from the experience of the George W. Bush administration that cutting taxes has no effect whatsoever even on restraining spending, let alone actually bringing it down. Just to remind people, Bush inherited a budget surplus of 1.3 percent of the gross domestic product from Bill Clinton in fiscal year 2001. ...
                                    When Bush took office in January 2001,... He immediately pushed for a huge tax cut, which Congress enacted. In 2002 and 2003, Bush demanded still more tax cuts, even as the economy showed no signs of having been stimulated by his previous tax cuts. The tax cuts and the slow economy caused revenues to evaporate. ...
                                    Spending did not fall in response to the STB decimation of federal revenues; in fact, spending rose from 18.2 percent of GDP in 2001 to 19.6 percent in 2004, and would continue to rise to 20.7 percent of GDP in 2008. Insofar as the Bush administration was a test of STB, the evidence clearly shows not only that the theory doesn't work at all, but is in fact perverse. ...
                                    But there is a flip side to STB at work as well. If tax cuts starve the beast, then it logically follows that tax increases must feed the beast. This variation of STB was on full display in a Nov. 21 Wall Street Journal op-ed article by ... Republican operative Steve Moore ... and Ohio University economist Richard Vedder. The Moore-Vedder article argues strenuously that tax increases must never be considered no matter how big the deficit is. The reason, ... is that tax increases always feed the beast, leading to spending increases larger than the tax increase ...
                                    By this logic, the tax increase enacted in 1993, which raised the top federal income tax rate to 39.6 percent from 31 percent, should have caused a massive increase in the federal budget deficit. In fact, it did not. ... And contrary to another commonly-held Republican idea — that all tax increases reduce revenue via the Laffer Curve — revenues rose from 17.5 percent of GDP in 1992 to 20.6 percent in 2000. ...
                                    Starve the beast is a crackpot theory, and its flip side that higher taxes invariably feed the beast is no better. They are just self-serving rationalizations for Republican budgetary irresponsibility.

                                      Posted by on Friday, November 26, 2010 at 11:07 AM in Budget Deficit, Economics, Politics | Permalink  Comments (31)


                                      Feldstein: Quantitative Easing and the Renminbi

                                      Martin Feldstein says China will use QE as an excuse to accelerate appreciation in the renminbi:

                                      Quantitative Easing and the Renminbi, by Martin Feldstein, Commentary, Project Syndicate: The United States Federal Reserve’s policy of “quantitative easing” is reducing the value of the dollar relative to other currencies that have floating exchange rates. ... The Fed’s goal may be to stimulate domestic activity in the US and to reduce the risk of deflation. But, intended or not, the increased supply of dollars also affects the international value of the dollar. ...
                                      But the market forces that cause ... currencies to appreciate do not work on the renminbi, because China has only very limited capital-account convertibility. ... The Chinese government ... determines the renminbi’s exchange rate.
                                      So the relevant question is how the Chinese government will choose to respond to the Fed’s quantitative easing and the impact of the Fed’s policy on other currencies. Between 2008 and June of this year, the Chinese held the renminbi at a fixed rate of 6.8 to the dollar. In June of this year, the Chinese authorities decided to allow the renminbi to appreciate at a moderate pace...
                                      Indeed, in the five months since that announcement, the Chinese government has allowed the renminbi to appreciate by 3.1% – not much less than the average rate of appreciation that it allowed between 2006 and 2008. ...
                                      Chinese Prime Minister Wen Jiabao has stressed that China does not want more rapid appreciation of the renminbi, because of the potential adverse impact on Chinese exporters. Rising Chinese exports between 2006 and 2008, despite renminbi appreciation, suggests that this worry is misplaced or at least exaggerated. But it is clear that ... the Fed’s policy of quantitative easing now gives the Chinese scope for more rapid appreciation of the renminbi relative to the dollar.
                                      Greater scope for renminbi appreciation comes at a good time for China. A stronger renminbi would help to reduce rising inflationary pressure in China by reducing the cost of imports, which would also increase Chinese households’ real incomes – a key goal of China’s new five-year plan. ...
                                      In short, the Fed’s policy of quantitative easing is likely to accelerate the rise of the renminbi – an outcome that is in China’s interest no less than it is in America’s. But don’t expect US officials to proclaim that goal openly, or Chinese officials to express their gratitude.

                                        Posted by on Friday, November 26, 2010 at 11:01 AM in Economics, International Finance | Permalink  Comments (30)


                                        Paul Krugman: Eating the Irish

                                        Ireland's austerity measures -- which amount to punishing the public for bankers' mistakes -- aren't working:

                                        Eating the Irish, by Paul Krugman, Commentary, NY Times: What we need now is another Jonathan Swift. Most people know Swift as the author of “Gulliver’s Travels.” But recent events have me thinking of his 1729 essay “A Modest Proposal,” in which he observed the dire poverty of the Irish, and offered a solution: sell the children as food. “I grant this food will be somewhat dear,” he admitted, but this would make it “very proper for landlords, who, as they have already devoured most of the parents, seem to have the best title to the children.”
                                        O.K., these days it’s not the landlords, it’s the bankers — and they’re just impoverishing the populace, not eating it. But only a satirist — and one with a very savage pen — could do justice to what’s happening to Ireland now.
                                        The Irish story began with a genuine economic miracle. But eventually this gave way to a speculative frenzy ... financed with huge borrowing on the part of Irish banks, largely from banks in other European nations.
                                        Then the bubble burst, and those banks faced huge losses. You might have expected those who lent money to the banks to share in the losses. ... But, no, the Irish government stepped in to guarantee the banks’ debt, turning private losses into public obligations.
                                        Before the bank bust, Ireland had little public debt. But with taxpayers suddenly on the hook for gigantic bank losses,... the nation’s creditworthiness was put in doubt. So Ireland tried to reassure the markets with a harsh program of spending cuts... — ... those spending cuts have caused a severe recession...
                                        But there is no alternative, say the serious people: all of this is necessary to restore confidence. Strange to say, however, confidence is not improving. On the contrary: investors have noticed that ... austerity measures are depressing the Irish economy — and are fleeing...
                                        Now what? Last weekend Ireland and its neighbors put together ... a “bailout.” But what really happened was that the Irish government promised to impose even more pain, in return for a credit line ... that would presumably give Ireland more time to, um, restore confidence. Markets, understandably, were not impressed: interest rates on Irish bonds have risen even further.
                                        Does it really have to be this way? ...Ireland, say the wise heads..., must continue to inflict pain on its citizens — because to do anything else would fatally undermine confidence.
                                        But Ireland is now in its third year of austerity, and confidence just keeps draining away. And you have to wonder what it will take for serious people to realize that punishing the populace for the bankers’ sins is worse than a crime; it’s a mistake.

                                          Posted by on Friday, November 26, 2010 at 12:36 AM in Economics, Financial System | Permalink  Comments (99)


                                          Thursday, November 25, 2010

                                          links for 2010-11-25

                                            Posted by on Thursday, November 25, 2010 at 10:02 PM in Economics, Links | Permalink  Comments (7)


                                            "The Retreat of Macroeconomic Policy"

                                            Brad DeLong:

                                            The Retreat of Macroeconomic Policy, by J. Bradford DeLong, Project Syndicate: One disturbing thing about studying economic history is how things that happen in the present change ... our understanding of the past. For decades, I have confidently taught my students about the rise of governments that take on responsibility for the state of the economy. But the political reaction to the Great Recession has changed the way we should think about this issue.
                                            Governments before World War I – and even more so before WWII – did not embrace the mission of minimizing unemployment during economic downturns. There were three reasons...
                                            First, there was a hard-money lobby... Second, the working classes that were hardest-hit by high unemployment generally did not have the vote. ... Third, knowledge about the economy was in its adolescence. ...
                                            All three of these factors vanished between the world wars. ... Today, we have next to no hard-money lobby, almost all investors have substantially diversified portfolios, and nearly everybody suffers mightily when unemployment is high and capacity utilization and spending are low. Economists today know a great deal more – albeit not as much as we would like... And the working classes all have the vote.
                                            Thus, I would confidently lecture only three short years ago that the days when governments could stand back and let the business cycle wreak havoc... No such government today, I said, could or would tolerate any prolonged period in which the unemployment rate was kissing 10% and inflation was quiescent without doing something major about it.
                                            I was wrong. That is precisely what is happening.
                                            How did we get here? How can the US have a large political movement – the Tea Party – pushing for the hardest of hard-money policies when there is no hard-money lobby with its wealth on the line? How is it that the unemployed, and those who fear they might be the next wave of unemployed, do not register to vote? Why are politicians not terrified of their displeasure?
                                            Economic questions abound, too. Why are the principles of nominal income determination, which I thought largely settled since 1829, now being questioned? Why is the idea, common to John Maynard Keynes, Milton Friedman, Knut Wicksell, Irving Fisher, and Walter Bagehot alike, that governments must intervene strategically in financial markets to stabilize economy-wide spending now a contested one?
                                            It is now clear that the right-wing opponents to the Obama administration’s policies are ... objecting to the very idea that government should try to serve a stabilizing macroeconomic role.
                                            Today, the flow of economy-wide spending is low. ... Yet..., here we are. The working classes can vote, economists understand and publicly discuss nominal income determination, and no influential group stands to benefit from a deeper and more prolonged depression. But the monetarist-Keynesian post-WWII near-consensus, which played such a huge part in making the 60 years from 1945-2005 the most successful period for the global economy ever, may unravel nonetheless.

                                            I wrote about something similar here: The Return of the Laissez Faire Economy.

                                              Posted by on Thursday, November 25, 2010 at 09:36 AM in Economics, Macroeconomics, Policy | Permalink  Comments (81)


                                              Happy Thanksgiving

                                              A chance for me to say thank you to everyone who visits here.

                                              Thanks!

                                                Posted by on Thursday, November 25, 2010 at 08:31 AM in Economics | Permalink  Comments (20)


                                                Wednesday, November 24, 2010

                                                links for 2010-11-24

                                                  Posted by on Wednesday, November 24, 2010 at 10:02 PM in Economics, Links | Permalink  Comments (17)


                                                  Initial Claims for Unemployment Fall, But So Do Orders for Durable Goods

                                                  At MoneyWatch, I have a (quick) reaction to today's release of data on initial claims for unemployment and orders for durable goods:

                                                  Initial Claims for Unemployment Fall, But So Do Orders for Durable Goods

                                                  [Travel day today.]

                                                    Posted by on Wednesday, November 24, 2010 at 09:36 AM in Economics, Unemployment | Permalink  Comments (27)


                                                    "Effects of the Financial Crisis and Great Recession on American Households"

                                                    The conclusion to this paper by Michael Hurd and Susann Rohwedder is not very encouraging:

                                                    Effects of the Financial Crisis and Great Recession on American Households, by Michael D. Hurd and Susann Rohwedder, NBER [open link]: Introduction ...In this paper we present results about the effects of the economic crisis and recession on American households. They come from high-frequency surveys dedicated to tracking the effects of the crisis and recession that we conducted in the American Life Panel – an Internet survey run by RAND Labor and Population. The first survey was fielded at the beginning of November 2008, immediately following the large declines in the stock market of September and October. The next survey followed three months later in February 2009. Since May 2009 we have collected monthly data on the same households. ...
                                                    Conclusions The economic problems leading to the recession began with a housing price bubble in many parts of the country and a coincident stock market bubble. These problems evolved into the financial crisis. ...
                                                    According to our measures almost 40% of households have been affected either by unemployment, negative home equity, arrears on their mortgage payments, or foreclosure. Additionally economic preparation for retirement, which is hard to measure, has undoubtedly been affected. Many people approaching retirement suffered substantial losses in their retirement accounts: indeed in the November 2008 survey, 25% of respondents aged 50-59 reported they had lost more than 35% of their retirement savings, and some of them locked in their losses prior to the partial recovery in the stock market by selling out. Some persons retired unexpectedly early because of unemployment, leading to a reduction of economic resources in retirement which will be felt throughout their retirement years. Some younger workers who have suffered unemployment will not reach their expected level of lifetime earnings and will have reduced resources in retirement as well as during their working years.
                                                    Spending has been approximately constant since it reached its minimum in about November, 2009. Short-run expectations of stock market gains and housing prices gains have recovered somewhat, yet are still rather pessimistic; and, possibly more telling, longer-term expectations for those price increases have declined substantially and have shown no signs of recovery. The implication is that long-run expectations have become pessimistic relative to short-run expectations.
                                                    Expectations about unemployment have improved somewhat from their low point in May 2009 but they remain high: they predict that about 18% of workers will experience unemployment over a 12 month period. Despite the public discussion of the necessity to work longer, expectations about working to age 62 among those not currently working declined by 10 percentage points. In our view this decline reflects long-term pessimism about the likelihood of a successful job search.
                                                    The recession officially ended in June 2009. A main component of that judgment is that the economy is no longer declining. According to our data the economic situation of the typical household is no longer worsening which is consistent with the end of the recession defined as negative change. However, when defined in terms of levels rather than rates of change, from the point of view of the typical household the Great Recession is not over.

                                                      Posted by on Wednesday, November 24, 2010 at 12:45 AM in Academic Papers, Economics | Permalink  Comments (51)


                                                      "Hobbes in Context"

                                                      Daniel Little on Thomas Hobbes:

                                                      Hobbes in context, by Daniel Little: We often think of Hobbes as being an originator in English philosophy, a strikingly innovative thinker who burst on the scene with the first formulation of a social contract theory of government. And we sometimes think of his justification of absolute sovereignty as a fairly direct reaction to the disorders Britain experienced during its Civil War and Glorious Revolution.  Richard Tuck's Hobbes: A Very Short Introduction puts Hobbes into a much more nuanced position.

                                                      Fundamental to Tuck's approach as a historian of philosophy is to problematize the idea of "philosophy".  Rather than assuming that the subject matter and methodology of philosophy were fixed once and for all by some traditional authority -- perhaps Aristotle and Plato -- Tuck takes the position that thinkers have defined themselves in ways that have eventually come to be described as "philosophy," but that nonetheless cover a very wide range of intellectual approaches and concerns.  Here is a particularly striking set of ideas from Tuck's contextualization of Hobbes:

                                                      It is sometimes tempting to think that the heroes of the various histories of philosophy or ethics -- men as different as St Thomas Aquinas, Machiavelli, Luther, Hobbes, Kant, or Hegel -- were all in some sense engaged in a common enterprise, and would have recognized one another as fellow workers. But a moment's reflection reminds us that it is we who have made a unity of their task: from their own point of view, they belonged to very different ways of living and had very different tasks to perform. They would have seen themselves as intellectually kin to men who do not figure in these lists -- priests or scholars who had on the face of it no great philosophical interest. (1)

                                                      I think his point here is an important and insightful one: philosophy was reinvented in the Europe of the 16th and 17th centuries, and swerved dramatically away from ancient and medieval philosophy. It was a new project, motivated by different problems, assumptions, and goals.

                                                      Continue reading ""Hobbes in Context"" »

                                                        Posted by on Wednesday, November 24, 2010 at 12:24 AM in Economics | Permalink  Comments (9)


                                                        Tuesday, November 23, 2010

                                                        links for 2010-11-23

                                                          Posted by on Tuesday, November 23, 2010 at 10:03 PM in Economics, Links | Permalink  Comments (32)


                                                          Why Republicans are Wrong to Oppose Quantitative Easing

                                                          I have a new column on QEII: 

                                                          Faith in the Fed: QE2 Will Not Spur Inflation

                                                            Posted by on Tuesday, November 23, 2010 at 09:18 AM in Economics, Fiscal Times, Monetary Policy | Permalink  Comments (71)


                                                            "The Irrepressible 1930’s"

                                                            Should we really worry that Hitler is on the horizon?:

                                                            The Irrepressible 1930’s, by Robert Skidelsky, Commentary, Project Syndicate: The just concluded G-20 meeting in Seoul broke up without agreement on either currencies or trade. China and the United States accused each other of deliberately manipulating their currencies to get a trade advantage. The Doha Round of global trade talks remain stalled. And, amid talk of the “risks” of new currency and trade wars, such wars have already begun.
                                                            Thus, despite global leaders’ vows to the contrary, it seems that the dreadful protectionist precedent of the 1930’s is about to be revived. ... Substitute China for Britain and today’s eurozone for the gold bloc and the trend of events today has the same ominous feel. ...
                                                            The euro will become progressively overvalued, just as the gold bloc was in the 1930’s. Since the eurozone is committed to austerity, its only recourse is protectionism. Meanwhile, China’s policy of slowly letting the renminbi rise against the dollar might well go into reverse, provoking US protectionism.
                                                            The failure of the G-20’s Seoul meeting to make any progress towards agreement on exchange rates or future reserve arrangements opens the door to a re-run of the 1930’s. Let’s hope that wisdom prevails before the rise of another Hitler.

                                                              Posted by on Tuesday, November 23, 2010 at 12:48 AM in Economics, International Trade | Permalink  Comments (60)


                                                              "Good riddance CCX"

                                                              Does the closing of the Chicago Climate Exchange say anything about the viability of cap and trade?:

                                                              Good riddance CCX, by Gernot Wagner: The Chicago Climate Exchange, one of the first voluntary cap-and-trade programs, is shutting down next month. That's bad news for the planet, isn't it? Just take a look at today's Wall Street Journal editorial page for an apparent confirmation. There the news is being celebrated as "cap and retreat." Check.
                                                              That should indeed be confirmation enough. Sadly, what's good for the Journal tends to be bad for the planet. ... The full editorial is behind a firewall. That's just as well. The rest is as wrong as the beginning. ...
                                                              There's also a much larger point here. The CCX was voluntary. Companies volunteered to sign up. It doesn't take a Ph.D. in economics to realize that the only companies who sign up for reasons other than marketing purposes are the ones that have allowances to sell. Those that need to buy them, stay as far away as possible.
                                                              No market can operate under these conditions. If anything, it's surprising the market held up as long as it did—no doubt due to companies' willingness to write off their participation as a marketing expense. ...

                                                              CCX did provide some valuable lessons for participants. Chief among them, how to implement such a trading system internally, how to minimize emissions and make money, and whether and how it would be different from SO2 trading...

                                                              But CCX was never meant to be anything other than a precursor for a U.S.-wide system. ...

                                                                Posted by on Tuesday, November 23, 2010 at 12:45 AM in Economics, Environment | Permalink  Comments (7)


                                                                Monday, November 22, 2010

                                                                links for 2010-11-22

                                                                  Posted by on Monday, November 22, 2010 at 10:13 PM in Economics, Links | Permalink  Comments (34)


                                                                  Will the US Follow Japan?

                                                                  Via Tom Keene, here's a chart showing "deflation adjusted" real wages for Japan. The US has followed Japan in other ways, will real wages in the US do the same?:

                                                                  Japan-Real-Wages

                                                                  This is a killer chart of Chairman Bernanke’s worst nightmare. Well, at least one of them, vintage 2003. This is deflation-adjusted real wages for Japan. ... The real Japanese wage has tanked 6.5% or so in a decade-plus.

                                                                  Unless labor markets pick up soon, and most forecasts are for just the opposite -- a very slow recovery for employment -- this is something to worry about. [Also posted at MoneyWatch.]

                                                                    Posted by on Monday, November 22, 2010 at 04:42 PM in Economics, Unemployment | Permalink  Comments (40)


                                                                    "Call Their Bluff, Mr. President"

                                                                    David Cay Johnston urges Obama to call Republicans' bluff on tax cuts for the wealthy (there's quite a bit more in the original):

                                                                    Call Their Bluff, Mr. President, by David Cay Johnston, Tax.com: Will President Obama cave on yet another of his campaign promises, this time by giving in to Republican demands to extend all of the temporary Bush tax cuts? ...

                                                                    Republican congressional leaders have said they will let all of the Bush tax cuts expire unless the president bows to their demand that the top 3 percent of Americans be included in any tax cut extension. Obama should call their bluff.

                                                                    I don't think the Republicans are so stupid that they would let all the Bush tax cuts expire if they cannot continue tax cuts for ... the affluent... But let's assume that the Republican leaders on Capitol Hill are that dumb...

                                                                    This is a fight that Obama can win, and win handily, if he has the backbone to stand up for the vast majority and sound tax policies, and to take on the antitax billionaires who are piling up huge gains while unemployment, debt, and fear stalk our land.

                                                                    A sudden reduction in take-home pay in January would seriously damage our fragile economy, not to mention provoke widespread anger and fear. The economic news would be so awful that a president half as eloquent as Obama could easily focus attention on the Republican all-or-nothing tax policies as the cause of this universal pain.

                                                                    And like an extra cherry atop a sundae, the Republicans gave Obama a gift when they said they have no interest in renewing his $400 Making Work Pay tax credit. That statement alone lets the president paint Republicans as tax hikers who want to hit people who work, while shielding billionaires.

                                                                    Moreover, since polls show that hardly anyone knows about this Obama tax cut, which the administration calls the largest middle-class tax cut in history, promoting it would be like getting a second free cherry from the GOP.

                                                                    Can Obama do it? Back in September he spoke in firm language... Now Obama seems ready to give in to the hostage takers.

                                                                    Poll after poll shows less than 40 percent of Americans support extending the Bush tax cuts for all, and that support is highly concentrated among Republicans. ...

                                                                    By calling the Republicans' bluff, Obama can get us talking about taxes and the future of America, instead of protecting what the richest among us already have.

                                                                    The president could speak about Wall Street handing out record bonuses this year -- an estimated $144 billion to a relative handful of people... How about a presidential lecture on entitlements focused on Lloyd Blankfein, whose firm's bad bets taxpayers paid off at 100 cents on the dollar? ...

                                                                    The president could change the terms of our economic debate by talking about how much the vast majority props up many of those at the very top, starting with Blankfein. He could tell people about the trillion dollars a year of tax favors for corporations and the rich...

                                                                    Obama should explain how soak-the-middle-class and sink-the-poor policies damage economic growth. Obama could also talk about how America has stopped being number one in many other categories because of tax policies that are hollowing out our nation's economy and destroying the commonwealth on which private wealth building relies. ...

                                                                    By winning on tax policy, the president could then renew his push for the greatest single economic growth policy around: universal healthcare financed with taxes, which could free up 5 percentage points of GDP for productive purposes. ...

                                                                    In our zeal to reduce taxes, we have slashed food safety inspections... Obama could tell Americans that the ideology of tax cuts as the only economic policy means that America's rate of food-borne illnesses is now nearly 8 times that of Britain and more than 21 times that of France.

                                                                    The risk of dam collapses grows with each storm, and sooner or later many, maybe thousands, will die. Roads need repair. So do bridges and water pipes and public school buildings.

                                                                    If Republicans actually force a universal tax increase, the president could then focus attention on the effort by billionaire tax-favored Wall Streeters ... who profit from tax tricks...

                                                                    Calling the GOP's bluff would let the president raise the issue of whether we want to cut Social Security and Medicare benefits... Obama could read to people from 1950s newspaper stories about old ladies eating cat food. The president could stop in at food banks where families who worked hard and played by the rules were crushed by the machinations of Wall Streeters.

                                                                    He could talk about how a single working person making the median wage of just over $26,000 paid nearly a third larger share of her income in federal taxes than the top 400 taxpayers, who each made almost $1 million a day in 2007.

                                                                    And Obama could tell taxpayers about all those people with billion-dollar annual incomes who legally pay no current income taxes, while the rest of us get dinged before we get paid. ...

                                                                    The question on the table for Obama is this: Will you do the job you asked people to elect you to do? ... When it comes to taxes, will Barack Obama prove himself a profile in courage or a coward who lacks the courage of his convictions?

                                                                    I think Obama should propose using the revenue gained from allowing the tax cuts for the wealthy to expire to fund a temporary extension of the Obama tax cut. (this is the "Make Work Pay" tax credit referenced above).

                                                                    Though many people are unaware of it, the Obama tax cut that was part of the stimulus package is set to expire in December, and when it does taxes for the middle and lower classes will go up by $60 billion. For comparison, the tax cuts for the wealthy would be around $68 billion over the same time period, so the numbers are very close. Why not use the $68 billion to fund a temporary extension of the tax cuts for people who actually need the money rather than those who don't?

                                                                    One more question, though I think I know the answer. Why are Republicans so intent on extending the Bush tax cut for the wealthy permanently, yet they oppose a temporary tax cut for the lower and middle classes of roughly the same amount?

                                                                      Posted by on Monday, November 22, 2010 at 11:07 AM in Economics, Income Distribution, Politics, Taxes | Permalink  Comments (47)


                                                                      Paul Krugman: There Will Be Blood

                                                                      When push comes to shove, things could get ugly:

                                                                      There Will Be Blood, by Paul Krugman, Commentary, NY Times: Former Senator Alan Simpson is a Very Serious Person. He must be — after all, President Obama appointed him as co-chairman of a special commission on deficit reduction.
                                                                      So here’s what the very serious Mr. Simpson said on Friday: “I can’t wait for the blood bath in April. ... When debt limit time comes, they’re going to look around and say, ‘What in the hell do we do now? We’ve got guys who will not approve the debt limit extension unless we give ’em a piece of meat, real meat,’ ” meaning spending cuts. “And boy, the blood bath will be extraordinary,” he continued. ...
                                                                      Some explanation: There’s a legal limit to federal debt... And since nobody, not even the hawkiest of deficit hawks, thinks the budget can be balanced immediately, the debt limit must be raised to avoid a government shutdown. But Republicans will probably try to blackmail the president into policy concessions by, in effect, holding the government hostage; they’ve done it before.
                                                                      Now, you might think that the prospect of this kind of standoff, which might deny many Americans essential services, wreak havoc in financial markets and undermine America’s role in the world, would worry all men of good will. But no, Mr. Simpson “can’t wait.” And he’s what passes, these days, for a reasonable Republican.
                                                                      The fact is that one of our two great political parties has made it clear that it has no interest in making America governable... Elite opinion has been slow to recognize this reality. Thus on the same day that Mr. Simpson rejoiced in the prospect of chaos, Ben Bernanke, the Federal Reserve chairman, appealed for help in confronting mass unemployment. He asked for “a fiscal program that combines near-term measures to enhance growth with strong, confidence-inducing steps to reduce longer-term structural deficits.”
                                                                      My immediate thought was, why not ask for a pony, too? After all, the G.O.P. isn’t interested in helping the economy as long as a Democrat is in the White House. Indeed, far from being willing to help Mr. Bernanke’s efforts, Republicans are trying to bully the Fed itself into giving up completely on trying to reduce unemployment.
                                                                      And on matters fiscal, the G.O.P. program is to do almost exactly the opposite of what Mr. Bernanke called for. ... Right now, in particular, Republicans are blocking an extension of unemployment benefits — an action that will both cause immense hardship and drain purchasing power from an already sputtering economy. But there’s no point appealing to the better angels of their nature; America just doesn’t work that way anymore.
                                                                      And opposition for the sake of opposition isn’t limited to economic policy. Politics, they used to tell us, stops at the water’s edge — but that was then.
                                                                      These days, national security experts are tearing their hair out over the decision of Senate Republicans to block a desperately needed new strategic arms treaty. And everyone knows that these Republicans oppose the treaty ... simply because it’s an Obama administration initiative; if sabotaging the president endangers the nation, so be it. ...
                                                                      My sense is that most Americans still don’t understand this reality. They still imagine that when push comes to shove, our politicians will come together to do what’s necessary. But that was another country.
                                                                      It’s hard to see how this situation is resolved without a major crisis of some kind. Mr. Simpson may or may not get the blood bath he craves this April, but there will be blood sooner or later. And we can only hope that the nation that emerges from that blood bath is still one we recognize.

                                                                        Posted by on Monday, November 22, 2010 at 12:42 AM in Budget Deficit, Economics, Politics | Permalink  Comments (79)


                                                                        Sunday, November 21, 2010

                                                                        links for 2010-11-21

                                                                          Posted by on Sunday, November 21, 2010 at 10:02 PM in Economics, Links | Permalink  Comments (23)


                                                                          Unequal Marginal Sacrifice

                                                                          Brad DeLong:

                                                                          ...Simpson-Bowles is an average $7000/year tax cut for the top 1% and an average $600/year tax increase for the working and middle classes...

                                                                            Posted by on Sunday, November 21, 2010 at 08:44 PM in Budget Deficit, Economics | Permalink  Comments (13)


                                                                            "Can Employers Tell Employees What to Eat?"

                                                                            Is this okay?:

                                                                            Can Employers Tell Employees What to Eat?, Business Ethics Blog : All companies want their employees to be team players. But just how far can companies go in requiring that employees ‘toe the line’? Can that demand extend to cultural or religious or moral or dietary requirements?

                                                                            As a starting point, consider this story, from CBC News: No meat on menu for Montreal purse maker:

                                                                            A Montreal accessories company has taken its policy of using no animal products beyond the rack and has forbidden its staff from eating meat and fish at work.
                                                                            A former employee says the policy violated her rights as a non-vegetarian….

                                                                            ...So, is it OK for a company to require that its employees not eat meat? Now, to be more precise, the company in question isn’t forcing people to be vegetarians. It’s just insisting that they not eat meat on the premises. But still, the requirement is an imposition. If an employee loves bologna sandwiches, why should she not be allowed to eat them on her lunch break at work? On the other hand, it’s not exactly a brutal requirement: a place that forbids employees from eating meat is not exactly ipso facto a Dickensian sweatshop. Of course, you might say that the whole conflict could be avoided by careful hiring: only hire people who are willing to uphold the company ethos. But that still amounts to a form of discrimination — and we would still have to ask whether such discrimination is justified or not. Besides, we would still have to worry about cases in which an employee is a devout vegetarian at time of hiring, but then (for whatever reason) changes her dietary habits at some point after being hired.

                                                                            Whatever your instincts about this particular case, it’s worth performing a consistency test on your own conclusion. Try this: if you’re a vegetarian or vegan, and sympathetic to the company’s no-meat policy, ask yourself whether you would reach the same conclusion if the tables were turned, and a meat-packing company required employees to eat meat and forbade vegetarianism. (“Why would a vegetarian work at a meat-packing plant?” Well, times are tough. Stranger things have happened!) If, on the other hand, you think the company in the story above is engaging in unjustifiable discrimination, ask yourself whether you would reach the same conclusion if the company was one whose product embodied some value that you hold dear — something to do with your own religious or philosophical or political beliefs. ...

                                                                              Posted by on Sunday, November 21, 2010 at 02:10 PM in Economics | Permalink  Comments (35)


                                                                              "FDR, Reagan, and Obama"

                                                                              Obama is a "captive of right-wing mythology":

                                                                              FDR, Reagan, and Obama, by Paul Krugman: Some readers may recall that back during the Democratic primary Barack Obama shocked many progressives by praising Ronald Reagan as someone who brought America a “sense of dynamism and entrepreneurship that had been missing.” I was among those who found this deeply troubling — because the idea that Reagan brought a transformation in American dynamism is a right-wing myth, not borne out by the facts. (There was a surge in productivity and innovation — but it happened in the 90s, under Clinton, not under Reagan).

                                                                              All the usual suspects pooh-poohed these concerns; it was ridiculous, they said, to think of Obama as a captive of right-wing mythology.

                                                                              But are you so sure about that now?

                                                                              And here’s this, from Thomas Ferguson: Obama saying

                                                                              We didn’t actually, I think, do what Franklin Delano Roosevelt did, which was basically wait for six months until the thing had gotten so bad that it became an easier sell politically because we thought that was irresponsible. We had to act quickly.

                                                                              As Ferguson explains, this is a right-wing smear. What actually happened was that during the interregnum between the 1932 election and the1933 inauguration — which was much longer then, because the inauguration didn’t take place until March — Herbert Hoover tried to rope FDR into maintaining his policies, including rigid adherence to the gold standard and fiscal austerity. FDR declined to be part of this.

                                                                              But Obama buys the right-wing smear.

                                                                              More and more, it’s becoming clear that progressives who had their hearts set on Obama were engaged in a huge act of self-delusion. Once you got past the soaring rhetoric you noticed, if you actually paid attention to what he said, that he largely accepted the conservative storyline, a view of the world, including a mythological history, that bears little resemblance to the facts.

                                                                              And confronted with a situation utterly at odds with that storyline … he stayed with the myth.

                                                                                Posted by on Sunday, November 21, 2010 at 12:53 AM in Economics, Politics | Permalink  Comments (99)


                                                                                Saturday, November 20, 2010

                                                                                links for 2010-11-20

                                                                                  Posted by on Saturday, November 20, 2010 at 10:02 PM in Economics, Links | Permalink  Comments (16)


                                                                                  "Raise Retirement Age and More Become Disabled"

                                                                                  Raising the retirement age also raises disability applications, so this won't save as much money as many people think, and could even make things worse if the early retirement age is changed (the early retirement age is currently 62):

                                                                                  Raise Retirement Age and More Become Disabled, by Merrill Goozner: Most people are working and living longer, so it seems like a no-brainer to raise the retirement age to help close the long-term Social Security funding gap. But the move could backfire and not save as much as predicted. Why? Not all groups are able to work longer, a new report from the Government Accountability Office says.
                                                                                  “Raising the retirement ages would likely increase the number of workers applying for and receiving disability insurance benefits,” which also comes out of Social Security, said the report...
                                                                                  The report presented a sobering view of the health status of near-retirement age population. About a quarter of Americans aged 60-61 have a work-limiting health conditions, according to the report, and about two-thirds the ones who are still on the job report working in occupations that are “physically demanding.” Raising either the early or full retirement ages above where they are now would incentivize many more of those workers to seek disability coverage...
                                                                                  The report took a snapshot of those on the cusp of retirement, and found those reporting good or excellent health were twice as likely to have some college education, twice as likely to be working full-time, had twice the income and four times the wealth of those reporting poor or fair health. In other words, people who are the most dependent on Social Security for retirement income are the ones most likely to go on disability if denied early retirement benefits.
                                                                                  While raising the full retirement age would still save the system money, “raising the early retirement age would have a negative impact on (Social Security) solvency because disability costs would rise and expected total lifetime retirement benefits would not change,” the report concluded.

                                                                                  I'd prefer that we raise or eliminate the cap on Social Security taxes.

                                                                                    Posted by on Saturday, November 20, 2010 at 11:25 AM in Economics, Social Security | Permalink  Comments (31)


                                                                                    "Countrywide Routinely Failed to Send Key Docs to MBS Trustees"

                                                                                    Kate Berry of American Banker reports that B of A may have run into some new trouble regarding documentation that "could complicate attempts by the company to foreclose on soured loans" (via email from David Cay Johnston):

                                                                                    Countrywide Routinely Failed to Send Key Docs to MBS Trustees, B of A Employee Says, by Kate Berry, American Banker: Countrywide, the mortgage giant that's now part of Bank of America Corp., routinely didn't bother to transfer essential documents for loans sold to investors, an employee testified.
                                                                                    The testimony — which a New Jersey bankruptcy judge cited in dismissing a B of A claim against a debtor — could complicate attempts by the company to foreclose on soured loans that Countrywide originated...
                                                                                    The B of A employee's admission that the lender customarily held on to promissory notes could also undermine the industry's position that document transfers to securitization trusts are fundamentally sound.
                                                                                    O. Max Gardner, a North Carolina consumer bankruptcy lawyer who was not involved in the case, called the testimony "a major problem" for B of A, which acquired Countrywide ... in 2008. "These original notes were supposed to be transferred and delivered all the way up the line and for this witness to admit they were never transferred is pretty amazing," Gardner said. "I've never see this admitted anywhere." ...
                                                                                    Linda DeMartini, a supervisor and operational team leader in B of A's litigation management department, testified that "the original note never left the possession of Countrywide"... DeMartini "testified further that it was customary for Countrywide to maintain possession of the original note and related loan documents"...
                                                                                    Whether a servicer or investor has the standing to foreclose on a borrower has become a major issue... Adam Levitin, an associate law professor at Georgetown University, said in Congressional testimony Nov. 16 that ... "If the notes and mortgages were not transferred to the trust, then the trust lacks standing to foreclose"...

                                                                                      Posted by on Saturday, November 20, 2010 at 09:13 AM in Economics, Housing | Permalink  Comments (25)


                                                                                      Friday, November 19, 2010

                                                                                      links for 2010-11-19

                                                                                        Posted by on Friday, November 19, 2010 at 10:11 PM in Economics, Links | Permalink  Comments (37)


                                                                                        "Questioning a Payroll Tax Holiday"

                                                                                        Bruce Bartlett says a payroll tax holiday is a bad idea:

                                                                                        Questioning a Payroll Tax Holiday, by Bruce Bartlett: Pete Domenici and Alice Rivlin have proposed a one-year payroll tax holiday to stimulate the economy. I have previously explained why I think monkeying around with the payroll tax is a dreadful idea and won't repeat my argument here. Today, I just want to ask one question: What are the odds that Republicans will ever allow this one-year tax holiday to expire? They wrote the Bush tax cuts with explicit expiration dates and then when it came time for the law they wrote to take effect exactly as they wrote it, they said any failure to extend them permanently would constitute the biggest tax increase in history. Sadly, Obama allowed himself to fall into the Republican trap, but that's another story. My point is that if allowing the Bush tax cuts to expire is the biggest tax increase in history, one that Republicans claim would decimate a still-fragile economy, then surely expiration of a payroll tax holiday would also constitute a massive tax increase on the working people of America. And what are the odds that the economy won't still be fragile a year from now? Zero, I would say.
                                                                                        I respect Pete and Alice and know they are just trying, as are we all, to find something that will stimulate the economy that the Republicans will allow to take effect. But a payroll tax holiday is Pandora's Box and best left unopened. Republicans would prefer to destroy Social Security's finances or permanently fund it with general revenues than allow a once-suspended payroll tax to be reimposed. Arch Social Security hater Peter Ferrara once told me that funding it with general revenues was part of his plan to destroy it by converting Social Security into a welfare program, rather than an earned benefit. He was right.
                                                                                        In conclusion, the payroll tax holiday is misguided. The potential benefits are uncertain, but the dangers are not.

                                                                                        I agree with the worries about Social Security financing -- for those who want to scale back or eliminate Social Security, this would be seen as an opportunity to starve Social Security of finances, create a crisis, then argue for cutbacks. But there are ways to do this that don't involve cutting the payroll tax per se, so the political optics are different, yet amount to the same thing. For example, continue collecting Social Security taxes as before, but give workers a temporary rebate that is clearly designated as independent of Social Security taxes. I'm sure there are better ways to do it, but the point is that we can help workers without putting Social Security at risk.

                                                                                          Posted by on Friday, November 19, 2010 at 09:27 AM in Economics, Fiscal Policy, Politics, Social Security | Permalink  Comments (35)


                                                                                          Paul Krugman: Axis of Depression

                                                                                          What's behind recent attacks on the Federal Reserve?:

                                                                                          Axis of Depression, by Paul Krugman, Commentary, NY Times: What do the government of China, the government of Germany and the Republican Party have in common? They’re all trying to bully the Federal Reserve into calling off its efforts to create jobs. And the motives of all three are highly suspect. ...
                                                                                          It’s no mystery why China and Germany are on the warpath against the Fed. Both nations are accustomed to running huge trade surpluses. But for some countries to run trade surpluses, others must run trade deficits — and, for years, that has meant us. The Fed’s expansionary policies, however, have the side effect of somewhat weakening the dollar, making U.S. goods more competitive, and paving the way for a smaller U.S. deficit. And the Chinese and Germans don’t want to see that happen.
                                                                                          For the Chinese government, by the way, attacking the Fed has the additional benefit of shifting attention away from its own currency manipulation, which keeps China’s currency artificially weak — precisely the sin China falsely accuses America of committing.
                                                                                          But why are Republicans joining in this attack?
                                                                                          Mr. Bernanke and his colleagues seem stunned to find themselves in the cross hairs. They thought they were acting in the spirit of none other than Milton Friedman, who blamed the Fed for not acting more forcefully during the Great Depression — and who, in 1998, called on the Bank of Japan to “buy government bonds on the open market,” exactly what the Fed is now doing.
                                                                                          Republicans, however, will have none of it, raising objections that range from the odd to the incoherent.
                                                                                          The odd: on Monday, a somewhat strange group of Republican figures — who knew that William Kristol was an expert on monetary policy? — released an open letter to the Fed warning that its policies “risk currency debasement and inflation.” These concerns were echoed in a letter the top four Republicans in Congress sent Mr. Bernanke on Wednesday. Neither letter explained why we should fear inflation when the reality is that inflation keeps hitting record lows.
                                                                                          And about dollar debasement: leaving aside the fact that a weaker dollar actually helps U.S. manufacturing, where were these people during the previous administration? The dollar slid steadily through most of the Bush years, a decline that dwarfs the recent downtick. Why weren’t there similar letters demanding that Alan Greenspan, the Fed chairman at the time, tighten policy?
                                                                                          Meanwhile, the incoherent: Two Republicans, Mike Pence in the House and Bob Corker in the Senate, have called on the Fed to abandon all efforts to achieve full employment and focus solely on price stability. Why? Because unemployment remains so high. No, I don’t understand the logic either.
                                                                                          So what’s really motivating the G.O.P. attack on the Fed? Mr. Bernanke and his colleagues were clearly caught by surprise, but the budget expert Stan Collender predicted it all. Back in August, he warned Mr. Bernanke that “with Republican policy makers seeing economic hardship as the path to election glory,” they would be “opposed to any actions taken by the Federal Reserve that would make the economy better.” In short, their real fear is not that Fed actions will be harmful, it is that they might succeed.
                                                                                          Hence the axis of depression. No doubt some of Mr. Bernanke’s critics are motivated by sincere intellectual conviction, but the core reason for the attack on the Fed is self-interest, pure and simple. China and Germany want America to stay uncompetitive; Republicans want the economy to stay weak as long as there’s a Democrat in the White House.
                                                                                          And if Mr. Bernanke gives in to their bullying, they may all get their wish.

                                                                                            Posted by on Friday, November 19, 2010 at 12:33 AM in Economics, Monetary Policy, Politics | Permalink  Comments (90)


                                                                                            Bernanke: Rebalancing the Global Recovery

                                                                                            Ben Bernanke defends the Fed (text of speech):

                                                                                            Bernanke Faults China for ‘Persistent Imbalances’, by Sewell Chan, NY Times: Ben S. Bernanke ... plans to argue Friday that currency undervaluation by China and other emerging markets is at the root of “persistent imbalances” in trade that “represent a growing financial and economic risk.” ...
                                                                                            For the last two weeks, the Fed has been criticized for its Nov. 3 decision to inject $600 billion into the banking system through next June, resuming an effort to lower long-term interest rates. ...
                                                                                            Mr. Bernanke’s speech argues that unemployment in the United States is at “unacceptable” levels, and gingerly wades into the fiscal policy debate roiling Washington.
                                                                                            “In general terms, a fiscal program that combines near-term measures to enhance growth and strong, confidence-inducing steps to reduce longer-term structural deficits would be an important complement to the policies of the Federal Reserve,” Mr. Bernanke will say. ...
                                                                                            Mr. Bernanke’s remarks amount to an endorsement of crucial elements of President Obama’s economic approach. But that endorsement ... could further stoke criticism by Congressional Republicans, who say the Fed is defying voters’ skepticism about large-scale government intervention in the economy and setting the stage for inflation later, and by foreign officials, who fear the Fed is trying to weaken the dollar to make American exports more competitive.
                                                                                            Mr. Bernanke ... will reiterate his argument that the Fed felt compelled to act because inflation is so low ... and unemployment so high... “In sum, on its current economic trajectory the United States runs the risk of seeing millions of workers unemployed or underemployed for many years,” he will say. “As a society, we should find that outcome unacceptable.” ...
                                                                                            The text includes indirect responses to domestic and overseas critics. He intends to argue that the Fed “remains unwaveringly committed to price stability” and that buttressing growth is “the best way to continue to deliver the strong economic fundamentals that underpin the value of the dollar.”
                                                                                            The speech addresses the anxieties of Brazil, Thailand and other emerging economies, which fear that a surge of foreign capital will drive up prices and interest rates.
                                                                                            If exchange rates were allowed to move freely, Mr. Bernanke will argue, emerging markets would raise interest rates — and allow their currencies to appreciate — even as advanced economies like the United States maintained expansionary monetary policies. That would curb the emerging markets’ trade surpluses and shift demand toward domestic consumption and away from export-led growth.
                                                                                            Instead, Mr. Bernanke plans to say, currency undervaluation in big surplus economies has led to unbalanced growth and “uneven burdens of adjustment.” ...

                                                                                            Antonio Fatás wonders why the Fed seems "so obsessed with ensuring that inflation always stays at or below 2%." Allowing inflation to rise above 2% temporarily could help the Fed with its goal of spurring the economy and increasing employment:

                                                                                            How negative should real interest rates be?, by Antonio Fatás: Standard monetary policy is about setting short-term nominal interest rates. Most macroeconomic models assume that inflation is sticky (constant) in the short run and by moving nominal interest rate the central bank is actually setting the real interest rate and by doing so influencing spending (consumption and investment) decisions. Of course, these spending decisions might depend on long-term interest rates and therefore we also need to understand how short-term interest rates affect both nominal long-term rates and inflation over a longer horizon (where we cannot assume that inflation is constant).
                                                                                            We can use this logic to think about the most recent quantitative easing policies announced by the Fed. That's what Mark Thoma does very well ... in his blog. One issue that I am missing in his analysis is how we think about real interest rates (not just nominal) in the current context. This is very much related to the defense that some Fed officials have done over the last hours of their policies. For example, in his interview with the WSJ, Janet Yellen argues that QEII (the next round of quantitative easing) is not intended to raise inflation. That the Fed is happy with an inflation rate below but close to 2%.
                                                                                            I understand the importance of having a "low and stable" inflation target but we need to keep in mind that these targets should be interpreted in a medium-term framework, we are not asking the central bank to deliver a constant 2% inflation every month, quarter or year. And given that the Fed has refused to adopt a formal inflation target to keep its flexibility to set inflation on a short-term basis, why do they seem so obsessed with ensuring that inflation always stays at or below 2%? Even the ECB that is some times seen as putting too much emphasis on inflation has let the Euro inflation rate go above 2% during many of the months it has been in existence, so a little flexibility above 2% in the communications of the Fed might not hurt.
                                                                                            We can also think about what all this implies for real interest rates, by asking: what should the level for real interest rates be given current economic conditions? We know that with short-term rates at zero (and they cannot go lower) sending a strong message about inflation being below 2% sets a floor for how low real interest rates can go (the floor is -2%). Estimates of what the appropriate real interest rate is in the current situation (which tend to be made within the context of a Taylor rule) vary but some suggest that real interest rates might need to be even lower than that [By the way, I find this related post by Krugman very useful to understand the logic behind negative real interest rates].
                                                                                            In addition, we have the issue of the dynamics of expectations and actual inflation. It might be that Fed officials by sending a very strong message about not wanting to increase the inflation rate above 2% will keep inflation expectations low and actual inflation remains significantly lower than the 2% "target". My guess is that their conservatism when it comes to inflation is the result of the strong criticism that they have received (both at home and abroad), which has sent them into a defensive position where they need to reassure everyone that their current policies are not about raising inflation. But this might not be optimal, while anchoring long-term expectations of inflation around a low target is reasonable, there is nothing wrong in admitting that one of the goals of the current policy is to ensure that inflation stops falling and that we go back towards 2% or even higher in the short-term.

                                                                                              Posted by on Friday, November 19, 2010 at 12:24 AM in Economics, Monetary Policy | Permalink  Comments (43)


                                                                                              Thursday, November 18, 2010

                                                                                              links for 2010-11-18

                                                                                                Posted by on Thursday, November 18, 2010 at 10:02 PM in Economics, Links | Permalink  Comments (31)


                                                                                                Eggertsson and Krugman: Debt, Deleveraging, and the Liquidity Trap

                                                                                                Another quick one before I rush to my next class -- a new model from Paul Krugman and Gauti Eggertsson:

                                                                                                ...This column explains the core logic of a new model by Eggertsson and Krugman in which debt shocks and policy reactions can be examined. Relying on heterogeneous agents, the model naturally produces the paradox of thrift but also finds new supply-side paradoxes, those of toil and flexibility. The model suggests that most economists have been misthinking the issues and that actual policy in the US and EU is misguided.

                                                                                                Here's the column:

                                                                                                Debt, deleveraging, and the liquidity trap, by Paul Krugman, Vox EU: If there is a single word that appears most frequently in discussions of the economic problems now afflicting both the US and Europe, that word is surely “debt.” Between 2000 and 2008, household debt rose from 96% of US personal income to 128%; meanwhile, in Britain it rose from 105% to 160%, and in Spain from 69 to 130%. Sharply rising debt, it’s widely argued, set the stage for the crisis, and the overhang of debt continues to act as a drag on recovery.
                                                                                                The lack of formal theory
                                                                                                The current preoccupation with debt harks back to a long tradition in economic analysis, from Fisher’s (1933) theory of debt deflation, to Minsky’s (1986) back-in-vogue work on financial instability, to Koo’s (2008) concept of balance-sheet recessions. Yet despite the prominence of debt in popular discussion of our current economic difficulties and the long tradition of invoking debt as a key factor in major economic contractions, there is a surprising lack of models – especially models of monetary and fiscal policy -- of economic policy that correspond at all closely to the concerns about debt that dominate practical discourse. Even now, much analysis (including my own) is done in terms of representative-agent models, which by definition can’t deal with the consequences of the fact that some people are debtors while others are creditors.
                                                                                                New work that I’ve done with Gauti Eggertsson (Eggertsson and Krugman 2010) seeks to provide a simple framework that remedies this failing. Minimal as the framework is, I believe that it yields important insights into the problems the world economy faces right now – and it suggests that much of the conventional wisdom governing actual policy is wrong-headed under current conditions.
                                                                                                The model’s economic logic
                                                                                                We envision an economy very much along the lines of standard New Keynesian models – but instead of thinking in terms of a representative agent, we imagine that there are two kinds of people, “patient” and “impatient”; the impatient borrow from the patient. There is, however, a limit on any individual’s debt, implicitly set by views about how much leverage is safe.
                                                                                                We can then model a crisis like the one we now face as the result of a “deleveraging shock.” For whatever reason, there is a sudden downward revision of acceptable debt levels – a “Minsky moment.” This forces debtors to sharply reduce their spending. If the economy is to avoid a slump, other agents must be induced to spend more, say by a fall in interest rates. But if the deleveraging shock is severe enough, even a zero interest rate may not be low enough. So a large deleveraging shock can easily push the economy into a liquidity trap.
                                                                                                Fisher’s (1933) notion of debt deflation emerges immediately and naturally from this analysis. If debts are specified in nominal terms, and a deleveraging shock leads to falling prices, the real burden of debt rises – and so does the forced decline in debtors’ spending, reinforcing the original shock. One implication of the Fisher debt effect is that in the aftermath of a deleveraging shock the aggregate demand curve is likely to be upward, not downward-sloping. That is, a lower price level will actually reduce demand for goods and services.
                                                                                                More broadly, large deleveraging shocks land the economy in a world of topsy-turvy, where many of the usual rules no longer apply. The traditional but long-neglected paradox of thrift – in which attempts to save more end up reducing aggregate savings – is joined by the “paradox of toil” – in which increased potential output reduces actual output, and the “paradox of flexibility” – in which a greater willingness of workers to accept wage cuts actually increases unemployment.
                                                                                                Where our approach really seems to offer clarification, however, is in the analysis of fiscal policy.
                                                                                                Implications for fiscal policy
                                                                                                In the current policy debate, debt is often invoked as a reason to dismiss calls for expansionary fiscal policy as a response to unemployment; you can’t solve a problem created by debt by running up even more debt, say the critics. Households borrowed too much, say many people; now you want the government to borrow even more?
                                                                                                What's wrong with that argument? It assumes, implicitly, that debt is debt -- that it doesn't matter who owes the money. Yet that can't be right; if it were, debt wouldn't be a problem in the first place. After all, to a first approximation debt is money we owe to ourselves -- yes, the US has debt to China etc., but that's not at the heart of the problem. Ignoring the foreign component, or looking at the world as a whole, the overall level of debt makes no difference to aggregate net worth -- one person's liability is another person's asset.
                                                                                                It follows that the level of debt matters only because the distribution of that debt matters, because highly indebted players face different constraints from players with low debt. And this means that all debt isn't created equal -- which is why borrowing by some actors now can help cure problems created by excess borrowing by other actors in the past. This becomes very clear in our analysis. In the model, deficit-financed government spending can, at least in principle, allow the economy to avoid unemployment and deflation while highly indebted private-sector agents repair their balance sheets, and the government can pay down its debts once the deleveraging crisis is past.
                                                                                                In short, one gains a much clearer view of the problems now facing the world, and their potential solutions, if one takes the role of debt and the constraints faced by debtors seriously. And yes, this analysis does suggest that the current conventional wisdom about what policy makers should be doing is almost completely wrong.
                                                                                                References
                                                                                                Eggertsson, Gauti and Krugman, Paul (2010), “Debt, Deleveraging, and the Liquidity Trap”, debt_deleveraging_ge_pk.pdf.
                                                                                                Fisher, Irving, (1933), “The Debt-Deflation Theory of Great Depressions,” Econometrica, Vol. 1, no. 4.
                                                                                                Koo, Richard (2008), The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession, Wiley.
                                                                                                Minsky, Hyman (1986), Stabilizing an Unstable Economy, New Haven: Yale University Press.

                                                                                                  Posted by on Thursday, November 18, 2010 at 12:04 PM in Economics, Fiscal Policy | Permalink  Comments (47)


                                                                                                  Shiller: Shorting Fiscal Consolidation

                                                                                                  A quick post between classes -- Robert Shiller can't figure out why we want to cut the deficit when the cost of new infrastructure is so low, and the benefits are so high:

                                                                                                  Shorting Fiscal Consolidation, by Robert J. Shiller, Commentary, Project Syndicate: Real long-term interest rates – that is, interest rates on inflation-protected bonds – have fallen to historic lows in much of the world. This is an economic fact of fundamental significance, for the real long-term interest rate is a direct measure of the cost of borrowing... – and its levels now fly in the face of all the talk about the need to slash government deficits. ...
                                                                                                  Long-term inflation-indexed bond yields have fallen to around 1% a year, or less, in the United States, Canada, the United Kingdom, and the eurozone. Elsewhere, yields have been a little higher – around 2% in Mexico, Australia, and New Zealand – but still very low by historical standards.
                                                                                                  All these countries have shown roughly the same downward trend in real interest rates for many years, and notably since 2000. ... The low level of real interest rates does not appear to be due to the 2007-2009 financial crisis. In fact, there was a temporary upward spike in real long-term interest rates during the financial crisis in countries with indexed bonds. The rate has come down to low levels only during the period of recovery from the immediate crisis.
                                                                                                  Instead, low long-term real interest rates appear to reflect a general failure by governments over the years to use the borrowing opportunities that the inflation-indexed markets present to them. This implies an arbitrage opportunity for governments: borrow massively at these low (or even negative) real interest rates, and invest the proceeds in positive-returning projects, such as infrastructure or education. ...
                                                                                                  Surely, governments’ levels of long-term investment in infrastructure, education, and research should be much higher now than they were five or ten years ago, when long-term real interest rates were roughly twice as high. The payoffs of such investments are, if anything, higher than they were then, given that many countries still have relatively weak economies that need stimulating.
                                                                                                  It is strange that so many governments are now emphasizing fiscal consolidation, when they should be increasing their borrowing to take advantage of rock-bottom real interest rates. This would be an opportune time for governments to issue more inflation-indexed debt, to begin issuing it, or to issue nominal GDP-linked debt, which is analogous to it.

                                                                                                    Posted by on Thursday, November 18, 2010 at 12:02 PM in Economics, Fiscal Policy | Permalink  Comments (6)


                                                                                                    "When is Economic Growth Good for the Poor?"

                                                                                                    When and how does income growth "trickle down"?:

                                                                                                    When is economic growth good for the poor?, by Lane Kenworthy: In a good society, the living standards of the least well-off rise over time.
                                                                                                    One way to achieve that is rising redistribution... But there is a limit to this strategy. If the pie doesn’t increase in size, a country can redistribute until everyone has an equal slice but then no further improvement in incomes will be possible. For the absolute incomes of the poor to rise, we need economic growth.
                                                                                                    We also need that growth to trickle down to the poor. Does it?
                                                                                                    The following charts show what happened in the United States and Sweden from the late 1970s to the mid 2000s. On the vertical axes is th iencome of households at the tenth percentile of the distribution — near, though not quite at, the bottom. On the horizontal axes is GDP per capita. The data points are years for which there are cross-nationally comparable household income data.

                                                                                                    Both countries enjoyed significant economic growth. But in the U.S. the incomes of low-end households didn’t improve much, apart from a brief period in the late 1990s. In Sweden growth was much more helpful to the poor.
                                                                                                    In Austria, Belgium, Denmark, Finland, France, Ireland, the Netherlands, Norway, Spain, and the United Kingdom, the pattern during these years resembles Sweden’s. In Australia, Canada, Germany, Italy, and Switzerland it looks more like the American one. (More graphs here.)
                                                                                                    What accounts for this difference in the degree to which economic growth has boosted the incomes of the poor? We usually think of trickle down as a process of rising earnings, via more work hours and higher wages. But in almost all of these countries (Ireland and the Netherlands are exceptions) the earnings of low-end households increased little, if at all, over time. Instead, as the next chart shows, it is increases in net government transfers — transfers received minus taxes paid — that tended to drive increases in incomes.

                                                                                                    None of these countries significantly increased the share of GDP going to government transfers. What happened is that some nations did more than others to pass the fruits of economic growth on to the poor.
                                                                                                    Trickle down via transfers occurs in various ways. In some countries pensions, unemployment compensation, and related benefits are indexed to average wages, so they tend to rise automatically as the economy grows. Increases in other transfers, such as social assistance, require periodic policy updates. The same is true of tax reductions for low-income households.
                                                                                                    Should we bemoan the fact that employment and earnings aren’t the key trickle-down mechanism? No. At higher points in the income distribution they do play more of a role. But for the bottom ten percent there are limits to what employment can accomplish. Some people have psychological, cognitive, or physical conditions that limit their earnings capability. Others are constrained by family circumstances. At any given point in time some will be out of work due to structural or cyclical unemployment. And in all rich countries a large and growing number of households are headed by retirees.
                                                                                                    Income isn’t a perfect measure of the material well-being of low-end households. We need to supplement it with information on actual living conditions, and researchers and governments now routinely collect such data. Unfortunately, they aren’t available far enough back in time to give us a reliable comparative picture of changes. For that, income remains our best guide. What the income data tell us is that the United States has done less well by its poor than many other affluent nations, because we have failed to keep government supports for the least well-off rising in sync with our GDP.

                                                                                                      Posted by on Thursday, November 18, 2010 at 12:43 AM in Economics, Income Distribution | Permalink  Comments (57)