Monday, February 28, 2011
It tries to explain why, to quote Christina Romer, "Monetary policy makers are all hawks now."
Pain without Purpose, by Brad DeLong, Commentary, Project Syndicate: ...Today, we face a nominal demand shortfall of 8% relative to the pre-recession trend, no signs of gathering inflation, and unemployment rates ... at least three percentage points higher than any credible estimate of the sustainable rate. And yet,... somehow,... cures are now off the table. There is no likelihood of reforms of Wall Street and Canary Wharf aimed at diminishing the likelihood and severity of any future financial panic, and no likelihood of government intervention to restore the normal flow of risky finance through the banking system. Nor is there any political pressure to expand or even extend the anemic government stimulus measures that have been undertaken.
Meanwhile, the European Central Bank is actively looking for ways to shrink the supply of financial assets that it provides to the private sector, and the US Federal Reserve is under pressure to do the same. In both cases, it is claimed that further expansionary asset-provision policies run the risk of igniting inflation.
Yet no likelihood of inflation can be seen when tracking price indexes or financial-market readings of forecast expectations. And no approaching government debt crisis in the core economies can be seen when tracking government interest rates.
Nevertheless,... you hear presidents and prime ministers say things like: “Just as families and companies have had to be cautious about spending, government must tighten its belt as well.”
And here we reach the limits of my mental horizons as a neoliberal, as a technocrat, and as a mainstream neoclassical economist. Right now, the global economy is suffering a grand mal seizure of slack demand and high unemployment. We know the cures. Yet we seem determined to inflict further suffering on the patient.
Budget hawks are confused by the meaning of "putting children first":
Leaving Children Behind, by Paul Krugman, Commentary, NY Times: Will 2011 be the year of fiscal austerity? At the federal level, it’s still not clear: Republicans are demanding draconian spending cuts, but we don’t yet know how far they’re willing to go in a showdown with President Obama. At the state and local level, however, there’s no doubt about it: big spending cuts are coming.
And who will bear the brunt of these cuts? America’s children. ... Consider, as a case in point, what’s happening in Texas, which more and more seems to be where America’s political future happens first.
Texas likes to portray itself as a model of small government, and indeed it is. Taxes are low, at least if you’re in the upper part of the income distribution (taxes on the bottom 40 percent ... are actually above the national average). Government spending is also low. ...
But here’s the thing: While low spending may sound good in the abstract, what it amounts to in practice is low spending on children, who account directly or indirectly for a large part of government outlays at the state and local level.
And in low-tax, low-spending Texas, the kids are not all right. The high school graduation rate, at just 61.3 percent, puts Texas 43rd out of 50 in state rankings. Nationally, the state ranks fifth in child poverty; it leads in the percentage of children without health insurance. And only 78 percent of Texas children are in excellent or very good health, significantly below the national average. ...
It’s not a pretty picture; compassion aside,... how the state can prosper in the long run with a future work force blighted by childhood poverty, poor health and lack of education.
But things are about to get much worse. ... For months, Gov. Rick Perry had boasted that his “tough conservative decisions” had kept the budget in surplus while allowing the state to weather the recession unscathed. But after Mr. Perry’s re-election, reality intruded — funny how that happens — and the state is now scrambling to close a huge budget gap. (...achieved with an overwhelmingly nonunion work force.)
So how will that gap be closed? Given the already dire condition of Texas children, you might have expected ... high-income Texans, who pay much less in state and local taxes than the national average, to be asked to bear at least some of the burden.
But you’d be wrong. Tax increases have been ruled out...; the gap will be closed solely through spending cuts. Medicaid, a program that is crucial to many of the state’s children, will take the biggest hit, with the Legislature proposing a funding cut of no less than 29 percent... And education will also face steep cuts, with school administrators talking about as many as 100,000 layoffs.
The really striking thing about all this isn’t the cruelty — at this point you expect that — but the shortsightedness. What’s supposed to happen when today’s neglected children become tomorrow’s work force?
Anyway, the next time some self-proclaimed deficit hawk tells you how much he worries about the debt we’re leaving our children, remember what’s happening in Texas, a state whose slogan right now might as well be “Lose the future.”
Commodity Shock, by Tim Duy: How quickly the world can change. Just a few weeks ago, incoming data suggested room for optimism. And, in large measure, continue to do so. Regional manufacturing reports have been largely solid, while initial unemployment claims declined during the month, ending last week just a hair above the 400k mark. Even consumers appeared a bit brighter, with confidence rising to its highest level in three years (still low, but the right direction). To be sure, there were some setbacks as well. The revisions to 4Q10 GDP were disappointing, although I would still focus on the final demand figure rather than the headline. Non-defense, non-air capital goods declined sharply, almost erasing the previous month’s surge. But an up-and-down pattern has been a persistent feature of that data series in recent months, suggesting little to worry about in the context of other generally positive manufacturing indicators.
The rapidly evolving situation in the Middle East, however, threatens to unsettle this positive momentum as oil prices surge. Unfortunately, the suddenly choppy economic waters catch US monetary policymakers off guard, and it shows in recent Fedspeak. It appears that the Fed is stuck between two narratives, one in which the energy price shock turns inflationary given signs of economic improvement in recent months, and another in which oil undermines a still-nascent recovery. It is an unfortunate debate to have during this period of uncertainty and this early in the recovery.
The usual suspects seize upon recent data to argue for a new evaluation of the Fed’s large scale asset purchases. From the Wall Street Journal:
“Should economic prospects continue to strengthen, I would not rule out changing the policy stance to bring QE2 to an early close,” Federal Reserve Bank of Philadelphia President Charles Plosser said. “If the growth rates of employment and output begin to accelerate or if inflation or inflation expectations begin to rise, then it may be time to begin taking our foot off the accelerator,” he said.
Richmond Fed President Jeffrey Lacker continues along the same argument:
Lacker was asked if he would dissent against continued bond buying if he had a voting slot on the FOMC this year. He declined to say, but added he takes "very seriously" the Fed's pledge to continuously re-evaluate the program. Lacker said recent growth levels should have "tilted things in the direction in modifying the program," adding he believes QE2 has had a "minimal contribution" in driving the current recovery.
And, unsurprisingly Kansas City Federal Reserve President Thomas Hoenig continues to rail against the inflationary implications of Fed policy. More surprising is a bit of hawkishness from Governor Janet Yellen:
Yellen said “any increase that seemed to be sustained in inflation expectations or core inflation, that looked like we were getting pass through [from commodity price gains] that seemed to be sustained, would demand a response” from monetary policy.
She also said the Fed would have to be ahead of the curve and would need to move to tighten policy before inflation became an issue, repeating a mantra common to central bankers. She noted that, in past years, the central bank had enjoyed the “luxury” of unexpected commodity price gains not passing through to inflation in any significant fashion.
This suggests that Yellen is sympathetic to the notion that the recent economic upswing offers a path for commodity price gains to work their way to core inflation. Meanwhile, St. Louis Federal Reserve President Robert Bullard plays all sides of the table. Via (again) the Wall Street Journal, he raises the prospect of additional easing:
But while Bullard, a non-voting Fed member this year, said QE2 could be adjusted, he still said a third bond-buying effort is not totally off the table, given tensions in the Middle East and rising oil prices and ongoing concerns about the euro-zone debt crisis.
Still, this clearly is not the direction he is leaning:
For now though, “looking at the data today and the outlook, the natural thing would be to say either that we should pull back a little bit” on bond-buying, or just follow through with the program if the consensus is the economic outlook is not sufficient enough to end the program before June, he said.
I think it is somewhat silly to be discussing an early end to the LSAP as it only adds another layer of uncertainty on what was already an increasingly uncertain environment. Somewhat pointless as well – the end is fast approaching in any event. Indeed, I find the debate disappointing, albeit expected. Policymakers appear to have learned little from their failed exercise in hawkishness this time last year.
What should be our baseline expectation for policy at this juncture? First, the current LSAP policy concludes as planned, at least in magnitude. They could choose a more gradual end to the policy, but I am hard pressed to see a change in the ultimate amount given the time horizon (June will come faster than we think). Indeed, continuing high unemployment alone argues against meaningful alteration of the policy despite signs of economic health. Second, the oil price shock raises the odds for another round of easing. Simply put, the recent trajectory of commodity prices threatens to shift the story from a benign signal that the economy is on the mend to something much more dire. And much more dire generally induces monetary easing, not tightening.
Sunday, February 27, 2011
The GOP's plan to cut Pell Grants, Head Start, and other such programs won't do much to solve our budget problem, and it's likely to slow the economy's recovery. But it does help to complete the process of turning tax cuts for the wealthy into cuts to social programs:
The Budget Fight Continues, NY Times: In defense of their bill to slash federal spending by $61 billion over the next seven months, House Republicans claim they are trying to make the economy grow and create jobs. In truth, such deep and sudden cuts could derail the recovery, without ever addressing the real sources of budget deficits — mainly explosive health care costs and incessant high-end tax cuts.
The question is whether the Obama administration and the Senate can prevail against the false rhetoric. ...
In a recent report, economists at Goldman Sachs estimated that the House cuts would reduce economic growth by 1.5 percentage points to 2 percentage points in the second and third quarters of 2011. That would devastate employment. ... [Update: see here for corrections to these numbers.]
The cuts also would be off point. All of them come from discretionary spending, a sliver of the budget... Over the past decade, Pentagon spending has accounted for almost all of the increase in discretionary outlays... Aside from defense, there is not a lot to cut prudently.
Which leads to the strongest argument of all against the House Republican bill — most of the cuts would be counterproductive. Annual spending on education through high school is cut by 12 percent... (since the cuts would be squeezed into the rest of the current budget year, they are even deeper on an annualized basis).
Those cuts include reductions to Head Start that would remove 218,000 children from the program and cuts to elementary education that would hit 2,400 schools and nearly one million students. Pell Grants for college would also be cut by nearly $6 billion. Transportation investments would be cut by 9 percent, or $8.1 billion... Americorps and other community-service programs would be eliminated, although their benefit to society surely exceeds their $1.2 billion cost. Since national service programs are matched by $800 million from foundations and other sources, that would be lost, too. ... Financial regulators would endure deep cuts that would cripple their ability to carry out the Dodd-Frank financial reform law. That’s asking for another financial crisis.
Given the need to placate House Republicans, some cuts are inevitable. Senators can turn to President Obama’s budget for 2012 as a template for cutting while preserving priorities. It’s time for leadership.
Saturday, February 26, 2011
The Debate That’s Muting the Fed’s Response, by Christina Romer, Commentary, NY Times: ...Monetary policy makers are all hawks now. Even those who most emphasize the Fed’s role in fighting unemployment oppose policies that would raise inflation noticeably above the Fed’s implicit target of about 2 percent.
The real division is not about the acceptable level of inflation, but about its causes, and the dispute is limiting the Fed’s aid to the economic recovery. The debate is between what I would describe as empiricists and theorists.
Empiricists, as the name suggests, put most weight on the evidence. Empirical analysis shows that the main determinants of inflation are past inflation and unemployment. Inflation rises when unemployment is below normal and falls when it is above normal. ...
Theorists, on the other hand, emphasize economic models that assume people are highly rational in forming expectations of future inflation. ... For theorists, any rise in an indicator of expected or future inflation, like the recent boom in commodity prices, suggests that the Fed’s credibility is at risk. They fear that general inflation could re-emerge quickly, despite high unemployment.
Now, not every monetary policy maker fits neatly into these categories. ... But the main division is between the empiricists who say “inflation is unlikely at 9 percent unemployment” and the theorists who say “inflation could bite us at any moment.” ... Although the Survey of Professional Forecasters ... shows virtually no change in long-run inflation expectations since the start of the program, the theorists hold fast to their concerns.
As a confirmed empiricist, I am frustrated that the two sides have been able to agree only on painfully small additional aid for a very troubled economy. For a sense of how much more useful monetary policy could be, one can look to the Great Depression.
By 1933, short-term interest rates were near zero — just as they are today. As I described in a 1992 academic article, Franklin D. Roosevelt took the United States off the gold standard in April 1933, and rapid devaluation led to huge gold inflows and a large increase in the money supply. ... Expectations of deflation, which had been enormous, abated quickly. As a result, with nominal rates at zero, real interest rates ... plummeted. The first types of demand to recover were ones that were sensitive to interest rates. ...
The Fed could engage in much more aggressive quantitative easing, both in size and in scope, to further lower long-term interest rates and value of the dollar. It could more effectively convey to markets its intentions for the funds rate, which would also lower long-term rates. And it could set a price-level target, which, unlike an inflation target, calls for Fed policy to take past years’ price changes into account. That would lead the Fed to counteract some of the extremely low inflation during the recession with a more expansionary policy and lower real rates for a while.
All of these alternatives would be helpful and would retain the Fed’s credibility as a defender of price stability. And any would be better than doing too little just because some Fed policy makers believe in an unproven, theoretical view of how inflation works.
Since my views on monetary policy haven't always been reflected accurately when other people have characterized them, let me make them clear once again. I have never argued that monetary policy won't work at all when the economy is near the zero bound. What I have said is that monetary policy alone cannot close the output and employment gaps in severe recessions, and that fiscal policy has an important role to play in aiding monetary policy in spurring a recovery. I have called for more aggressive QE -- I was very clear that I did not think that QE2 was large enough or that is was done soon enough, e.g. I complained about the Fed waiting until the election was over before announcing the policy -- and I have also called for more aggressive fiscal policy. When I respond to those who call solely for monetary policy, it is not because I think that monetary policy won't work at all, it's because monetary policy alone is likely to be insufficient. We shouldn't take that chance.
From the very start of this crisis, I have called for a portfolio of policies as a response to our considerable uncertainty over both monetary and fiscal policy multipliers. My view is that fiscal policy is more powerful than monetary policy in severe recessions, but we don't know all that much about these multipliers in normal times, and we know even less about how they work in severe recessions (most estimates of monetary and fiscal policy multipliers come from models that don't connect the financial and real sectors very well, and hence miss a key transmission mechanism in this recession, and the studies use data that mostly come from normal times). The portfolio approach is useful when there is so much uncertainty over the effectiveness of policy because if one of the policies doesn't work as well as hoped, perhaps another will fill the void. In addition, to me it was also a case of asking which error is worse, overstimulating the economy and putting too many people to work too fast, or doing too little and enduring an "agonizingly slow recovery" to repeat a phrase I used often. I think the costs are asymmetric, that doing too little is a bigger error, so the response should be aggressive and it should involve all the tools at our disposal, i.e. it should involve both monetary and fiscal policy. We haven't done enough of either type of policy, and what we have done has been put into place much later than would have been optimal.
However, while I don't think we did enough, or did it fast enough, I also believe that what has been done on both the monetary and fiscal policy fronts has helped. The empirical evidence isn't all in and won't be for some time, but my reading of the evidence to date is that these policies helped to avoid a much worse outcome. (Even if, when summed across federal, state, and local levels, the net fiscal stimulus was relatively small, as appears to be the case, things still would have been worse without the federal stimulus offsetting the losses at the state and local level.)
Right now, we could use more of both types of policy, it's not too late to do more given the expectation that full recovery of employment is years away. Thus, I am also frustrated with the "painfully small additional aid for a very troubled economy," but my frustration is not just with monetary policymakers. Fiscal policymakers have also failed to do enough.
The real political math in Wisconsin isn't about the state budget or the collective-bargaining rights of public employees... It is about which party controls governorships and, with them, the balance of power on the ground in the 2012 elections.For all of the valid concern about reining in state spending..., the underlying strategic Wisconsin story is this: Gov. Scott Walker, a Tea Party-tinged Republican, is the advance guard of a new GOP push to dismantle public-sector unions as an electoral force. ...[A]ccording to ... GOP strategists and Gov. Haley Barbour of Mississippi -- who chaired the Republican Governors Association in 2010 -- the power and money of public-employee unions was the reason."We are never going to win most of these states until we can do something about those unions"... "They have so much incentive to work hard politically because they are, in effect, electing their own bosses -- the Democrats who are going to pay them better and give them more benefits. And the Democrats have the incentive to be generous."This is how top Republicans see the matter: a vicious cycle of union-to-Democrat-to-union power that they are determined to break.
Friday, February 25, 2011
The Contribution Scam: David Cay Johnston has a terrific piece up about the nonsense of comparing government workers to private-sector counterparts by claiming that the government pays for more of their benefits. As he says,
Out of every dollar that funds Wisconsin’ s pension and health insurance plans for state workers, 100 cents comes from the state workers.
How can that be? Because the “contributions” consist of money that employees chose to take as deferred wages – as pensions when they retire – rather than take immediately in cash. The same is true with the health care plan. If this were not so a serious crime would be taking place, the gift of public funds rather than payment for services.
Thus, state workers are not being asked to simply “contribute more” to Wisconsin’ s retirement system (or as the argument goes, “pay their fair share” of retirement costs as do employees in Wisconsin’ s private sector who still have pensions and health insurance). They are being asked to accept a cut in their salaries so that the state of Wisconsin can use the money to fill the hole left by tax cuts and reduced audits of corporations in Wisconsin.
The labor agreements show that the pension plan money is part of the total negotiated compensation. The key phrase, in those agreements I read (emphasis added), is: “The Employer shall contribute on behalf of the employee.” This shows that this is just divvying up the total compensation package, so much for cash wages, so much for paid vacations, so much for retirement, etc.
So the right question — the only question — is whether government workers are getting an overall good deal compared with private-sector workers. Why, then, are we hearing so much about the meaningless contribution comparison?
The answer is simple: it’s because doing the comparison right doesn’t yield the desired answer. The new report by the Times gets the same answer as other studies: low-paid government workers do a bit better than their private-sector counterparts, but others if anything do worse.
Luo and Cooper report this as a “mixed answer” — but in terms of the political debate, it’s a body blow to the union-bashers, whose whole position is that public-sector workers are welfare queens in Cadillacs. They need to show outrageous overpayment, not rough equivalence at best.
And so they turn to a meaningless comparison that, to the unwary, sounds as if it supports their case.
Yes, some public-sector workers are overpaid. So are some private-sector workers. Doesn’t anyone read Dilbert? But the whole idea that union excesses are at the core of state and local fiscal problems is false, and only deliberate obfuscation keeps that from being obvious.
Fourth quarter GDP was revised downward:
Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.8 percent in the fourth quarter of 2010, (that is, from the third quarter to the fourth quarter), according to the "second" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 2.6 percent...
The downward revision to the percent change in real GDP primarily reflected an upward revision to imports and downward revisions to state and local government spending and to personal consumption expenditures (PCE) that were partly offset by an upward revision to exports.
And Britain's economy shrank by more than initially thought:
Britain’s economy shrank more than initially estimated in the fourth quarter, complicating the task of the Bank of England as a split deepens among policy makers on whether to withdraw stimulus.
Gross domestic product fell 0.6 percent from the previous three months, compared with an initial estimate for a 0.5 percent drop, the Office for National Statistics said today in London. The statistics office said its “best estimate” for the impact of cold weather on the data remains 0.5 percent. The slump was led by construction and investment.
The American data helps explain labor market figures that looked unusually bad given growth. In both cases, the fiscal and monetary authorities should be asking themselves whether they've overestimated the performance of these economies and their ability to handle big, and largely unnecessary, short-term budget cuts.
Though certainly better than lower growth, a 2.6% growth rate is not much progress. It's basically treading water, though barely. To "recover" what was lost in the recession, including lost jobs, we need to grow much faster than that. Unfortunately for the millions of unemployed, problems at the state and local level are far from over, there are other headwinds working against growth as well (e.g. the prospect of higher oil prices, the end of the stimulus package), but policymakers have moved on to other things. And worse, the main topic presently, cutting the budget, works against the employment and output growth.
As I said earlier today, Republicans "do not intend to allow the budget deficit brought about by the crisis to go to waste," and that is true at both the federal and state levels:
Shock Doctrine, U.S.A., by Paul Krugman, Commentary, NY Times: ...Naomi Klein’s best-selling book “The Shock Doctrine” ... argued that ... right-wing ideologues have exploited crises to push through an agenda that has nothing to do with resolving those crises, and everything to do with imposing their vision of a harsher, more unequal, less democratic society.
Which brings us to Wisconsin 2011, where the shock doctrine is on full display.
In recent weeks, Madison has been the scene of large demonstrations against the governor’s budget bill, which would deny collective-bargaining rights to public-sector workers. Gov. Scott Walker claims that he needs to pass his bill to deal with the state’s fiscal problems. But his attack on unions has nothing to do with the budget. In fact, those unions have already indicated their willingness to make substantial financial concessions — an offer the governor has rejected.
What’s happening in Wisconsin is, instead, a power grab — an attempt to exploit the fiscal crisis to destroy the last major counterweight to the political power of corporations and the wealthy. And the power grab goes beyond union-busting. The bill in question is 144 pages long, and there are some extraordinary things hidden deep inside.
For example, the bill includes language that would allow officials appointed by the governor to make sweeping cuts in health coverage for low-income families without having to go through the normal legislative process.
And then there’s this... The state of Wisconsin owns a number of plants supplying heating, cooling, and electricity to state-run facilities (like the University of Wisconsin). The language in the budget bill would, in effect, let the governor privatize any or all of these facilities at whim. Not only that, he could sell them, without taking bids, to anyone he chooses. And note that any such sale would, by definition, be “considered to be in the public interest.”
If this sounds to you like a perfect setup for cronyism and profiteering ... you’re not alone. Indeed, there are enough suspicious minds out there that Koch Industries, owned by the billionaire brothers who are playing such a large role in Mr. Walker’s anti-union push, felt compelled to issue a denial that it’s interested in purchasing any of those power plants. Are you reassured?
The good news from Wisconsin is that the upsurge of public outrage — aided by the maneuvering of Democrats in the State Senate, who absented themselves to deny Republicans a quorum — has slowed the bum’s rush. If Mr. Walker’s plan was to push his bill through before anyone had a chance to realize his true goals, that plan has been foiled. And events in Wisconsin may have given pause to other Republican governors, who seem to be backing off similar moves.
But don’t expect either Mr. Walker or the rest of his party to change those goals. Union-busting and privatization remain G.O.P. priorities, and the party will continue its efforts to smuggle those priorities through in the name of balanced budgets.
This paper by Mark Aguiar and Mark Bils finds that "consumption inequality has closely tracked income inequality over the period 1980-2007":
Has Consumption Inequality Mirrored Income Inequality?, by Mark A. Aguiar and Mark Bils, NBER Working Paper No. 16807, February 2011: Abstract We revisit to what extent the increase in income inequality over the last 30 years has been mirrored by consumption inequality. We do so by constructing two alternative measures of consumption expenditure, using data from the Consumer Expenditure Survey (CE). We first use reports of active savings and after tax income to construct the measure of consumption implied by the budget constraint. We find that the consumption inequality implied by savings behavior largely tracks income inequality between 1980 and 2007. Second, we use a demand system to correct for systematic measurement error in the CE's expenditure data. Specifically, we consider trends in the relative expenditure of high income and low income households for different goods with different income (total expenditure) elasticities. Our estimation exploits the difference in the growth rate of luxury consumption inequality versus necessity consumption inequality. This "double-differencing,'' which we implement in a a regression framework, corrects for mis-measurement that can systematically vary over time by good and income group. This second exercise indicates that consumption inequality has closely tracked income inequality over the period 1980-2007. Both of our measures show a significantly greater increase in consumption inequality than what is obtained from the CE's total household expenditure data directly.
Why is this important? (see also "Is Consumption the Grail for Inequality Skeptics?"):
An influential paper by Krueger and Perri (2006), building on related work by Slesnick (2001), uses the CE to argue that consumption inequality has not kept pace with income inequality.
And these results have been used by some -- e.g. those who fear corrective action such as an increase in the progressivity of taxes -- to argue that the inequality problem is not as large as figures on income inequality alone suggest. But the bottom line of this paper is that:
The ... increase in consumption inequality has been large and of a similar magnitude as the observed change in income inequality.
Thursday, February 24, 2011
Jeff Frankel is unhappy with the accepted framing of the budget issue:
Democrats should not rise to the bait of “fiscal conservatives”, by Jeff Frankel: I never cease to be frustrated that the current public policy debate is described as a contest of ideas: fiscal conservatives versus liberals. It is not just Republicans or Tea Partiers who believe that they are fiscal conservatives... Democrats and liberals seem to accept this characterization at face value, as does most of the media.
The problem is that a heavy majority of the supposed fiscally conservative congressmen, although passionate about cutting government spending in the abstract, are in truth no better able to find specific dollars of budget cuts that they can support or defend to their constituents than are the Democrats. Factoring in their immutable desire to cut taxes, I believe that if the Republicans were in full control, we would have larger budget deficits in the coming years than if the Obama crowd retained power. This is what happened in a big way when Presidents Reagan and GW Bush took office promising to cut the debt while also cutting taxes. Spending, deficits, and debt soared during their terms, relative to their respective Democratic predecessors. There is no reason to think anything has changed.
The first thing the Republicans did after their congressional victories in the November election was achieve their precious extension of the Bush tax cuts for the wealthy. This extension will raise the budget deficit by more than all the domestic spending cuts that all of the Congressional freshmen have identified put together.
Next they turned to their campaign to kill Obamacare. It ... is ... surprising that the conservatives can continue to get away with simultaneously tarring the reform as “death panels” while refusing to acknowledge that it will cut costs. Their plans for going back to our previous health care system include suspending their own rule that bills that would increase spending ... must be paid for.
The zeal to cut funding for such tiny programs as the National Endowment for the Humanities and Planned Parenthood is accepted as evidence of the sincerity of the fiscal conservatives. I wish the Democrats would not fall for that bait. Their anguish over such cuts, while understandable, plays into the old narrative of big versus small government. ... The Right reacts to such liberal anguish with glee, while the Center infers ... that such cuts are part of a painful but necessary fiscal adjustment. Losing the center is no way to put together a political majority.
Yes, fiscal adjustment is necessary. I might even think that such cuts would be a price worth paying, if they were a proportionate component of a comprehensive plan to address the long-run fiscal situation. But they are nothing remotely like that. Rep. Paul Ryan’s supposedly tough long-term plan to cut spending doesn’t balance the budget until 50 years from now and runs up another $62 trillion in national debt in the meantime... Moreover..., the cuts that the House passed last week are not going to take effect anyway: the Senate and the presidential veto render them all but irrelevant. As usual, it is all about perceptions. I don’t think the perception should be that Democrats stand in the way of fiscal responsibility. So I would prefer to divert the narrative from the unenlightening and sterile debate of small versus big government, to the realities of arithmetic and history.
The White House has also played into this by proposing measures such as a government discretionary spending freeze that do little to change the long-run problem. These cuts give the impression that cutting the fat out of the budget is all it will take to bring it into balance when the problem is much larger than that and due mainly to expected health care cost increases. It also gives the impression that these measures are in response to pressure from Republicans further advancing the myth discussed above. The White House has not framed the budget debate in a way that takes control of the debate and points to the true problem. Instead, it has allowed the myth to persist that the problem is Democrats standing in the way of thrifty Republicans. Republicans aren't thrifty for the most part, they are ideological and this is a chance to pursue ideological goals of smaller government through a reduction in social programs. They do not intend to allow the budget deficit brought about by the crisis to go to waste -- this is a golden opportunity to eliminate or reduce programs they've wanted to get rid of for years. The White House needs to stop playing into this, and instead show leadership that reframes the problem in term that do not endanger programs that have little to do with our long-run problem. Unfortunately, instead of trying to change public opinion through leadership, opinion shaped by years of misleading rhetoric from the other side, they are taking perceptions of the budget problem as given and shaping their policies accordingly. That may win the next presidential election, but it's far from the best way to proceed.
Four Fallacies of the Crisis, by Jagdish Bhagwati, Commentary, Project Syndicate: The current twin crises in finance and the real economy..., and the interminable discussions about financial reform and the prospects for economic recovery, have spawned several fallacies that need to be addressed and dismissed. ...
Fallacy 2: Through monetary expansion, the US is manipulating the dollar’s exchange rate in the same way that it accuses China of manipulating the renminbi’s exchange rate.
The two cases are dissimilar. If one grants the premise that there is an insufficiency of aggregate global demand, the alleged Chinese undervaluation of the renminbi can, indeed, be seen as a beggar-thy-neighbor policy, which diverts inadequate world demand to Chinese goods at the expense of other countries.
On the other hand, the dollar’s weakening is a side-effect of US monetary expansion, undertaken after countries like China and Germany refused to spend more to increase world demand, and after no room remained for further fiscal stimulus. This is altogether different from a policy of weakening the dollar to divert inadequate world demand to American goods. ...
Fallacy 4: Forget about Keynesian demand management.
Some critics of Obama’s Keynesian stimulus spending, among them the economist Jeffrey Sachs, claim that what the US needs is “long-term” productivity-enhancing spending. But this is a non sequitur. As a Keynesian, I believe that the state paying people to dig holes and then fill them up would increase aggregate demand and produce more income. But Keynes was no fool. He understood that the government could eventually get huge returns if the money was spent on productivity-enhancing investments rather than on “directly wasteful” expenditure-increasing activities. The question, then, is simple: which investments offer the greatest economic payoffs? ...
When the government is deciding how to spend a given amount of stimulus money, a goal of maximizing long run economic growth would result in a different set of projects than a goal of keeping employment as high as possible until the economy recovers. The projects that increase growth the most five or ten years from now are not necessarily the same as the projects that provide the most employment support in the short-run.
We weighed stimulus projects mainly on their long-run growth potential, and the ability of a project to enhance long-run growth should certainly be part of the decision of which projects to pursue. But short-run employment support is a worthy goal as well, and this did not play a large enough role in the choice 0f how to spend the stimulus money.
How do Americans view "crude materialism"?:
Money and character, by Claude Fischer: One of the criticisms that foreigners (and many of us, too) have long had about Americans, going back to the earliest years, is how materialist and money-grubbing we are. ...
What appears to have changed historically is the growing distaste for open cash or crude materialism. It seems that, as Americans became more affluent over the last two centuries, as the middle class expanded, and as bourgeois sentimentality developed..., Americans became more uncomfortable with naked money, especially with mixing cold cash and warm relations. ... Some scholars have written about a “post-materialist” sensibility. As people became wealthier over several generations, they shifted their focus to “higher” things, like environmentalism, self-expression, and nurturing relationships. ...
Some observers suggest, however, that this post-materialist trend may have recently stalled or reversed. There are survey data indicating that American adults and American college students, in particular, have increasingly focused on money and material things since around 1970. One explanation — assuming that this change is real — is the increasingly visible widening of economic inequality since the ‘70s. ... Another explanation is that growing economic insecurity among middle class (and poorer) Americans since the 1970s — requiring, for example, more work hours from mothers — has necessarily and pragmatically re-focused Americans’ attention to money matters. “Higher” things may have to wait. ...
Wednesday, February 23, 2011
The Most Dangerous Union in the World, by Michael Perelman: Several commentators have remarked about the sudden outbreak of class struggle in the United States. I see the brutal behavior of the state and federal governments as an indication of the failure of class struggle.
Let me explain. Back in the 1960s, when United States was enjoying the so-called Golden of economic prosperity, profits were weakening. By the late 1960s, the organized right wing began to harness the energy of the tea party of the day, which took hold with the defeat of Barry Goldwater. Using its almost unlimited source of funding, wealthy businesspeople and corporations began to create a solid network of organizations to remake the country by undoing the gains made during the and New Deal, and even emulating the political landscape of the late 19th century. The Cato Foundation, the Heritage Foundation, right wing legal offices, and a host of other activist operations led a systematic assault on anything and anybody who seem to know represent a barrier to profit maximization.
This movement was extraordinarily successful, so much so that they even co-opted the Democratic Party, which had previously offered a meek resistance to business demands. By the 1990s, the results were clear to anybody who bothered to take notice of the economy. On the eve of the Great Recession, the results were so obvious that only the most stubborn ideologues could fail to see that virtually all of the economic growth since 1970 had been captured by a very small elite. I told this story in a book entitled The Confiscation of American Prosperity: From Right-Wing Extremism and Academic Economics to the Next Great Depression, published in 2007, just as the stock market peaked.
The ideological justification of this confiscation was that business prosperity would create a tsunami of productivity by following the right-wing regimen. The entire population would benefit.
Productivity did increase — not spectacularly — but which is still stagnated. Job security eroded. Protections previously guaranteed by regulatory agencies or the law quickly disappeared.
Despite the idea that the economy somehow suffered from an over burden of taxes and regulations, the more these hindrances to prosperity fell by the wayside, the worse the economy performed. Profits became concentrated in the financial sector, but much of the rest of the economy faltered.
Scapegoats had to be found. Already, during the Nixon administration, the right wing became adept at recruiting working-class support, using racism and cultural discomfort as fuel. Ironically, one of the first groups successfully recruited were craft unions, a minority of whose members attacked antiwar demonstrators. A parade of scapegoats march across the political landscape. Braless hippies, Blacks, unwed teenage mothers, welfare recipients, immigrants, and now public workers, especially teachers.
The results were always the same. The right would win more victories. The overall economy would still perform sluggishly. And the next scapegoat would step forward. Even when the culprit is obvious, scapegoats still must be found. For example, with the collapse of the financial scams in 2007, blame was shifted to Fannie Mae and Freddie Mac, and even more ridiculously to an obscure rule that had been passed two decades earlier.
Private-sector unions became virtually powerless on the national scene. In this environment, jobs disappeared. Disappointed union members would be vulnerable to the relative prosperity of public sector workers, who had pensions and medical coverage. Similarly, people who had lost their pensions to fraudulent banking schemes often became more upset with the relatively comfortable conditions of public sector workers.
One union stood out by its successes. It is not generally called a union, but so long as we can abuse reality by calling corporations people, we can call the Chamber of Commerce a union. This union is so powerful that the present United States must come before it as a humble supplicant. This union was at the forefront of the deconstruction of the New Deal.
The time has come to stop blaming the victim. Somehow, we have to learn to fight back in this one-sided class warfare. We have to learn to explain that more of the same medicine that made us sick is not going to cure us. We have to learn to identify the architects of this disaster — the political manipulators, the right wing foundations and their benefactors, and if we want to begin a legitimate fight against unions, let’s start with the Chamber of Commerce.
Austerity is the wrong answer:
Why Budget Cuts Don’t Bring Prosperity, by David Leonhardt, Commentary, NY Times: ...Germany’s economic growth surged in the middle of last year, causing commentators both there and here to proclaim that American stimulus had failed and German austerity had worked. Germany’s announced budget cuts, the commentators said, had given private companies enough confidence in the government to begin spending their own money again.
Well,... the German boom didn’t last long. With its modest stimulus winding down, Germany’s growth slowed sharply late last year, and its economic output still has not recovered to its prerecession peak. ...[T]he United States — where the stimulus program has been bigger and longer lasting — ... would now need to suffer through a double-dip recession for its gross domestic product to be in the same condition as Germany’s.
Yet many members of Congress continue to insist that budget cuts are the path to prosperity. The only question in Washington seems to be how deeply to cut federal spending this year. ...
The ... problem, however, is the fragility of the economy. Gross domestic product ... is still growing too slowly for companies to be doing much hiring. States, of course, are making major cuts. A big round of federal cuts will only make things worse. ...
Without the government spending of the last two years — including tax cuts — the economy would be in vastly worse shape. Likewise, if the federal government begins laying off tens of thousands of workers now, the economy will clearly suffer.
That’s the historical lesson of post-crisis austerity movements..., no matter how morally satisfying austerity may be, it’s the wrong answer. ... Our recent crisis serves up the same lesson. Germany isn’t even the best example. ...Germany’s turn to austerity has not been radical. Britain’s has been radical, with a tax increase having already taken effect and deep spending cuts coming. Partly as a result, Britain’s economy is now in worse shape than Germany’s.
“It’s really quite striking how well the U.S. is performing relative to the U.K., which is tightening aggressively,” says Ian Shepherdson, a Britain-based economist..., “and relative to Germany, which is tightening more modestly.” ...
For the sake of the economy, the best compromise in coming weeks would be one that trades short-term spending for medium- and long-term cuts. ... By all means, though, don’t follow the path of the Germans and the British just because it feels morally satisfying.
Millions of people remain unemployed. Until labor markets improve, job creation should be the first priority of Congress.
Tuesday, February 22, 2011
Unions: ...In general, union organization is not an easy thing in the United States, relative to what happens in other rich countries. Twenty two states, mainly in the south and in the middle of the country have right-to-work laws. In some states, state employees have much less power to form unions relative to what exists in the private sector. However, in Western Europe, unions tend to be relatively powerful. In Canada, labor law is much more conducive to union formation and power. For example, most (if not all) Canadian provinces do not allow the hiring of permanent replacement workers during a strike, and some will not permit the hiring of temporary replacement workers. Strikes of public service workers in Canada are infamous, from old-time disruption in the post office to more recent strikes involving garbage collectors and transit workers in Toronto. The difference in labor laws in Canada and the US is reflected in unionization rates. The US has a unionization rate of only 7% in the private sector, and 29% in the public sector. In Canada, the comparable statistics are 16% in the private sector and 71% in the public sector.
Now, if we believe Scott Walker, the Governor of Wisconsin, public spending in Canada should be wildly out of control. We know, of course, that government is doing much more redistribution in Canada than is the case generally in the United States. But in Canada actual expenditures of all levels of government on goods and services amounted to 21.2% of GDP in Canada in 2009, and 20.6% of GDP in the US. Not much difference there. Further, in spite of union power in the public sector, the Canadian federal government was able to turn around a deficit which had exceeded 5% of GDP in the mid-1990s. Before the recent recession, the Canadian federal government had been running surpluses for several years. ...
Are Teachers Overpaid In The US?, by Barkley Rosser: An ongoing meme of those supporting Governor Walker's efforts to crush public unions in Wisconsin is the repeated claims that public workers are overpaid. There is plenty of evidence that this is not so, even with their greater benefits, but I think another piece of evidence may be useful, a cross-country comparison of teacher salaries. This is important given that at the state and local levels, teachers are the most numerous of public workers, and it is hard to compare them with private sector equivalents, who are not that numerous at the K-12 level.
So, according to OECD data reported by the New York Times for 2007 at http://economix.blogs.nytimes.com/2009/09/09/teacher-pay-around-the-world , out of 33 OECD countries, the US is #26 in pay per GDP for primary school teachers with 15 years of experience. No, we are not overpaying our teachers, not at all.
OTOH, according to http://economix.blogs.nytimes.com/2009/07/15/how-much-do-doctors-in-other-countries-make , out of 18 countries listed for 2007, US general practitioners are #1 in pay per GDP. Big surprise.
While teachers are more likely to be publicly paid in all of these countries, doctors get a higher prooportion of their pay privately in the US than in these other countries, although a substantial proportion is public. Yet, as has been widely reported, life expectancy and infant mortality rates in the US are way below those of other high income countries. We overpay our doctors while underpaying our teachers, and more generally there is no reason to believe that publicly paid teachers are somehow ripping off their fellow citizens.
How long will it be until the Fed begins increasing the federal funds rate? Answers from Calculated Risk and the SF Fed's Glenn Rudebusch are summarized at MoneyWatch:
I also give an answer, though we all mostly agree (Glenn Rudebusch comes armed with lots of graphs).
Kash is back. So is William Polley:
Should losers from free trade be compensated?, by William Polley: It's been a while... far too long. Suffice to say that my day job has been keeping me very busy this year and has made blogging difficult. I want to rectify that, but it may be tough going for a while yet.
This, however, was enough to bring me back.
In their work, economists are typically are not nationalistic. National boundaries mean little to them, other than that much data happen to be collected on a national basis. Whether a fellow American gains from a trade or someone in Shanghai does not make any difference to most economists, nor does it matter to them where the losers from global competition live, in America or elsewhere.
I say most economists, because here and there one can find some who do seem to worry about how fellow Americans fare in the matter of free trade.
In a widely noted column in The Washington Post, "Free Trade's Great, but Offshoring Rattles Me," for example, my Princeton colleague Alan Blinder wrote:
I'm a free trader down to my toes. Always have been. Yet lately, I'm being treated as a heretic by many of my fellow economists. Why? Because I have stuck my neck out and predicted that the offshoring of service jobs from rich countries such as the United States to poor countries such as India may pose major problems for tens of millions of American workers over the coming decades. In fact, I think offshoring may be the biggest political issue in economics for a generation. When I say this, many of my fellow free traders react with a mixture of disbelief, pity and hostility. Blinder, have you lost your mind?
Professor Blinder has estimated that 30 million to 40 million jobs in the United States are potentially offshorable -- including those of scientists, mathematicians, radiologists and editors on the high end of the market, and those of telephone operators, clerks and typists on the low end. He says he is rattled by the question of how our country will cope with this phenomenon, especially in view of our tattered social safety net.
"That is why I am going public with my concerns now," he concludes. "If we economists stubbornly insist on chanting 'free trade is good for you' to people who know that it is not, we will quickly become irrelevant to the public debate. Compared with that, a little apostasy should be welcome."
What do you think?
This led Mark Thoma to wisely say:
Saying that everyone could be made better off with increased international trade is not the same as people actually being made better off. There are winners and losers from increased international trade, and while I agree that the gains exceed the losses in almost all cases, the gains haven't been distributed in a way that leaves everyone, or even most everyone, better off (see, e.g., widening inequality and where the costs of these kinds of adjustments fall). When some people are made better off and others made worse off at the same time, economists cannot say it is unambiguously better or worse. If we are going to make the argument that trade is good because everyone could potentially be made better off, we should do much more than we have to ensure that this potential is realized, i.e. that the gains from trade are distributed widely across the population rather than concentrated among a smaller set of winners.
Which in turn led Tim Worstall to reply:
But this argument then generally morphs into an insistence that we should not have free trade until that compensatory mechanism is put in place, so that, say, I, who will be gaining from that free trade will be compensating those who will lose from that free trade.
Hmm. But do you see what is implicit in that argument?
That there are gains that I am not getting, gains that are going to some other, as a result of our not currently having free trade.
This is obvious: if free trade benefits me and disbenefits you, then not free trade must disbenefit me and benefit you.
Which leads to the question: are you compensating me for those benefits you are getting and the disbenefits I am getting from the absence of free trade?
Where, in short, is my check from those benefitting from protectionism?
I'd like to see Worstall defend that one in front of a class of principles of econ students who have seen jobs in their towns go overseas or south of the border.
Seeing as how for the last 16 years I've been defending free trade to classes of principles students who have seen jobs in their hometowns disappear because of free trade, I feel like I can take a crack at this.
Blinder gets it absolutely spot-on. Print this one and post it on your wall.
If we economists stubbornly insist on chanting 'free trade is good for you' to people who know that it is not, we will quickly become irrelevant to the public debate.
That is exactly what 16 years of defending free trade to Midwestern college students has taught me. And since I have no desire to become irrelevant to my students, I have found it useful to focus their attention on what I was taught about free trade.
You see, it is the potential for a Pareto improvement that makes free trade desirable. There are winners and losers. But the winners gain more than the losers lose. So effect a transfer from the winners to the losers that still allows the winners to gain but compensates the losers for what they lost. Only then can you really say that free trade (with the compensating side payment) benefits everyone. If the compensation is not there, then I cannot unconditionally advocate free trade. I must call attention to the fact that some will lose. Call it professional ethics. ...[continue reading]...
Comments on Libya, or related issues?
Comments on Wisconsin, or related issues?
Monday, February 21, 2011
Here's a summary of Robert Stavins' summary of his recent article in the 100th anniversary edition of the AER, "“The Problem of the Commons: Still Unsettled After 100 Years” (I'm a proponent of the market-based approaches to regulation that he discusses):
Reflecting on a Century of Progress and Problems, by Robert Stavins: As the first decade of the twenty-first century comes to a close, the problem of the commons is more important to our lives – and more central to economics – than a century ago when the first issue of the American Economic Review appeared, with an examination by Professor Katharine Coman of Wellesley College of “Some Unsettled Problems of Irrigation” (1911). Since that time, 100 years of remarkable economic progress have accompanied 100 years of increasingly challenging problems.
As the U.S. and other economies have grown, the carrying-capacity of the planet – in regard to natural resources and environmental quality – has become a greater concern, particularly for common-property and open-access resources. In an article that appears in the 100th anniversary issue of the American Economic Review (AER) – “The Problem of the Commons: Still Unsettled After 100 Years” – I focus on some important, unsettled problems of the commons.
100 Years of Economic Progress and More Challenging Environmental Problems
Within the realm of natural resources, there are special challenges associated with renewable resources, which are frequently characterized by open-access. An important example is the degradation of open-access fisheries. Critical commons problems are also associated with environmental quality, including the ultimate commons problem of the twenty-first century – global climate change.
Small communities frequently provide modes of oversight and methods for policing their citizens, a topic about which Professor Elinor Ostrom of Indiana University has written extensively. But as the scale of society has grown, commons problems have spread across communities and even across nations. In some of these cases, no over-arching authority can offer complete control, rendering commons problems more severe. ...
A key contribution of economics has been the development of market-based approaches to environmental protection, including emission taxes and tradable rights. These have potential to address the ultimate commons problem of the twenty-first century, global climate change. [E]conomic theory – by focusing on market failures linked with incomplete systems of property rights – has made major contributions to our understanding of commons problems and the development of prudent public policies. ...
Although I hope you will read the full article – which is very accessible — I will summarize its conclusions here.
Problems of the commons are both more widespread and more important today than when Coman wrote about unsettled problems in the first issue of the American Economic Review 100 years ago. A century of ... increases in income and population have ... greatly heightened pressures on the commons, particularly where there has been open access to it.
The stocks of a variety of renewable natural resources – including water, forests, fisheries, and numerous other species of plant and animal – have been depleted below socially efficient levels, principally because of poorly-defined property-right regimes. Likewise, the same market failures of open-access – whether characterized as externalities, following A. C. Pigou (1920), or public goods, following Ronald Coase (1960) – have led to the degradation of air and water quality, inappropriate disposal of hazardous waste, depletion of stratospheric ozone, and the atmospheric accumulation of greenhouse gases linked with global climate change.
Over this same century, economics ... has gradually come to focus more and more attention on these commons problems... Economic research within academia and think tanks has improved our understanding of the causes and consequences of excessive resource depletion and inefficient environmental degradation, and thereby has helped identify sensible policy solutions.
Conventional regulatory policies, which have not accounted for economic responses, have been excessively costly, ineffective, or even counter-productive. The problems behind what Garrett Hardin (1968) characterized as the “tragedy of the commons” might better be described as the “failure of commons regulation.” As our understanding of the commons has become more complex, the design of economic policy instruments has become more sophisticated.
Problems of the commons have not diminished, and the lag between understanding and action can be long. While some commons problems have been addressed successfully, others continue to emerge. Some – such as the threat of global climate change – are both more important and more difficult than problems of the past.
Fortunately, economics is well positioned to offer better understanding and better policies to address these ongoing challenges. As the first decade of the twenty-first century comes to a close, natural resource and environmental economics has emerged as a productive field of our discipline and one that shows even greater promise for the future.
Unions act as a "counterweight to the political power of big money," so big money wants them out of the way:
Wisconsin Power Play, by Paul Krugman, Commentary, NY Times: Last week, in the face of protest demonstrations against Wisconsin’s new union-busting governor, Scott Walker — demonstrations that continued through the weekend, with huge crowds on Saturday — Representative Paul Ryan made an unintentionally apt comparison: “It’s like Cairo has moved to Madison.” ...
Mr. Ryan was more right than he knew. For what’s happening in Wisconsin isn’t about the state budget, despite Mr. Walker’s pretense that he’s just trying to be fiscally responsible. It is, instead, about power. What Mr. Walker and his backers are trying to do is to make Wisconsin — and eventually, America — less of a functioning democracy and more of a third-world-style oligarchy. And that’s why anyone who believes that we need some counterweight to the political power of big money should be on the demonstrators’ side. ...
The bill that has inspired the demonstrations would strip away collective bargaining rights for many of the state’s workers, in effect busting public-employee unions. Tellingly, some workers — namely, those who tend to be Republican-leaning — are exempted from the ban; it’s as if Mr. Walker were flaunting the political nature of his actions.
Why bust the unions? As I said, it has nothing to do with helping Wisconsin deal with its current fiscal crisis...; it’s about the power.
In principle, every American citizen has an equal say in our political process. In practice, of course, some of us are more equal than others. Billionaires can field armies of lobbyists; they can finance think tanks that put the desired spin on policy issues; they can funnel cash to politicians with sympathetic views (as the Koch brothers did in the case of Mr. Walker). On paper, we’re a one-person-one-vote nation; in reality, we’re more than a bit of an oligarchy, in which a handful of wealthy people dominate.
Given this reality, it’s important to have institutions that can act as counterweights to the power of big money. ... You don’t have to love unions ... to recognize that they’re among the few influential players in our political system representing the interests of middle- and working-class Americans, as opposed to the wealthy. Indeed, if America has become more oligarchic and less democratic over the last 30 years — which it has — that’s to an important extent due to the decline of private-sector unions.
And now Mr. Walker and his backers are trying to get rid of public-sector unions, too.
There’s a bitter irony here. The fiscal crisis in Wisconsin, as in other states, was largely caused by the increasing power of America’s oligarchy. After all, it was superwealthy players, not the general public, who pushed for financial deregulation and thereby set the stage for the economic crisis of 2008-9, a crisis whose aftermath is the main reason for the current budget crunch. And now the political right is trying to exploit that very crisis, using it to remove one of the few remaining checks on oligarchic influence.
So will the attack on unions succeed? I don’t know. But anyone who cares about retaining government of the people by the people should hope that it doesn’t.
What if Mitt Romney had won the 2008 presidential election?:
RomneyWorld vs. ObamaWorld, by Brad DeLong: Somewhere out there in the multiverse, beyond space and time ... is a place in which President Mitt Romney won the 2008 presidential election. ... What do the American economy and economic policy look like right now along that President Romney branch of the multiverse? Well, they look a lot like they look right here on earth.
President Romney would have provided support to troubled banks–capital injections and stress tests–but he would have avoided even a few targeted nationalizations of the banking system: he is, after all, a Republican.
He ... would most likely have reappointed Ben Bernanke and let the Federal Reserve proceed as it wished. On fiscal policy, Romney’s Chairman of the Council of Economic Advisers, Mark Zandi, and his National Economic Council Director Douglas Holtz-Eakin would have proposed a fiscal stimulus package that was 60 percent tax cuts and 40 percent spending increases. The Democratic Congress would then have bargained ... to produce a stimulus that was 40 percent tax cuts and 60 percent spending.
But, of course, all these policies are exactly what Obama and the Democratic Congress actually enacted. ...
On healthcare, Romney would have taken his signature Massachusetts health care reform and expanded it nationwide: we would have RomneyCare. But that is precisely what we do have.
I see only two key policy differences between RomneyWorld and ObamaWorld. Had Romney been elected President in 2008 we would not have repealed the military policy of “Don’t Ask, Don’t Tell.” And ... Elizabeth Warren would not now be Assistant to the President for Consumer Financial Protection.
Otherwise? As far as policy is concerned, we would be smack on the mark that we are on now.
But the politics would be very, very different.
Think, first, of the Republicans — their legislators and office holders, their spinmasters, stenographers, and intellectuals. All Republicans except a small grumbling fringe would be crowing about how ObamaCare — oops! I mean RomneyCare — is the golden mean between continued tolerance of a dysfunctional system and rash experimentation with overregulation. All would be saying that Republicans were able to get things done... Republicans would talk about how Romney had bargained the Dodd-Frank financial regulation into a form where it was ... a sober attempt to fence in a free-range system that had been out of control. ...
In that alternate RomneyWorld, professional bipartisans would be praising Romney for minimizing partisanship and working for sensible policies. They would praise him for aggressively expanding the deficit so that the government boosted aggregate demand in the depths of the downturn... And they would praise him for having taken major steps to control entitlement spending through the long-term cost-cutting and revenue-raising provisions of RomneyCare. But these professional bipartisans ... would be the very same people who in our world give Barack Obama no credit for either. ...
Democrats would have lamented Romney’s various half –measures ... to deal with the crises. But no cries of socialism, or vitriol about government takeovers, would have greeted RomneyCare. There would have been no winks and nods to assertions among a fevered base that the president is a usurper. ...
There would be no Republican senatorial candidates telling people that when their party loses an election, “Second Amendment remedies” may be necessary.
And, though it’s considered very impolite to say this out loud: quite possibly in alternate RomneyWorld our members of Congress would be less likely to get shot.
Sunday, February 20, 2011
For the past three decades, scientists and popularizers have tried to tell us that we and all other animals are inherently selfish, and that the evolution of morality is an almost impossible affair, since nature cannot provide the caring for others needed for morality. I call this "Veneer Theory," since it assumes that human morality and kindness is just a thin veneer over an otherwise nasty human nature. This is a position that goes back to Thomas Henry Huxley, a contemporary of Darwin, and has been repeated over and over even though Darwin himself disagreed. Darwin saw human morality as continuous with animal social instincts, and my own work is a return to Darwinian thinking. I am supported in this now by many recent studies that indicate that humans (and other animals) are far more altruistic and cooperative than was assumed. The field has radically changed in recent years. Psychologists stress the intuitive way we arrive at moral judgments while activating emotional brain areas, and economists and anthropologists have shown humanity to be far more cooperative, altruistic, and fair than predicted by self-interest models. Similarly, the latest experiments in primatology reveal that our close relatives will do each other favors even if there's nothing in it for themselves.
Angus at Kids Prefer Cheese:
However, he then makes an unsupportable leap to the following:Listening to the president, you might think that competition from China and other rapidly growing nations was one of the larger threats facing the United States. But the essence of economic exchange belies that description. Other nations are best viewed not as our competitors but as our trading partners. Partners are to be welcomed, not feared. As a general matter, their prosperity does not come at our expense
I do agree that China is not one biggest problems the US is facing, but not for the reasoning that NGM uses which is that all voluntary exchanges are mutually profitable (read the article, it's the only principle he speaks of before giving the quote I reproduce above).
People, the United States is not a person! Only in DSGE models do we assume that all individuals are identical! There is no "our" to which general statements can be attached.
Yes, going from autarky to free trade will raise the GDPs of both nations, but that is a very far cry from saying that a large number of individuals will not be made worse off in the process. I figure that NGM is familiar with the Stolper-Samuelson theorem, so I guess he is assuming the political process always provides adequate compensation for the losers??
Here's a case for free trade:Individuals should be allowed to contract with whoever they wish, without government interference based solely on geography.
Now, that is not much of an economic argument, but, to tell the ugly truth, THERE ISN'T MUCH OF AN ECONOMIC ARGUMENT.
Once you factor in agent heterogeneity, imperfect competition, increasing returns, and an arbitrarily large number of traded goods, the welfare economics of free trade is murky at best.
Here's a political economy case for free trade:Yes free trade has its losers and drawbacks, but the losses and distortions from free trade are far less than the losses and distortions from politicized, "managed", trade so free trade is therefore preferable.
Is there a bumper sticker big enough to hold that?
["I guess he is assuming the political process always provides adequate compensation for the losers??" That's the point I was making here.]
So, what's going on in the Middle East?
Saturday, February 19, 2011
The use of recession induced budget gaps as an excuse to target unions is spreading:
Wisconsin Leads Way as Workers Fight State Cuts, by Michael Cooper and katherine Seelye, NY Times: The unrest in Wisconsin this week over Gov. Scott Walker’s plan to cut the bargaining rights and benefits of public workers is spreading to other states.
Already, protests erupted in Ohio this week, where another newly elected Republican governor, John Kasich, has been seeking to take away collective bargaining rights from unions.
In Tennessee, a law that would abolish collective bargaining rights for teachers passed a State Senate committee this week despite teachers’ objections. Indiana is weighing proposals to weaken unions. ...
In many states, Republicans who came to power in the November elections, often by defeating union-backed Democrats, are taking aim ... at union power as they face budget gaps in the years ahead. ...
Robert Frank says taxing harmful behavior can help to solve the debt problem and increase growth at the same time:
Find the Taxes That Do Double Duty, by Robert Frank, Commentary, NY Times: ... Clearly, reduced spending alone can’t solve our deficit problem..., we must also raise additional revenue.
The good news is that doing so will not require difficult sacrifices from anyone. But it will require a Congress that is willing to redesign tax policy from the ground up. ...
A tax on any activity not only generates revenue, but also discourages the activity. The second effect, of course, underlies the claim that taxes inhibit economic growth. That’s often true of taxes on useful activities...
But the reverse is true when we tax activities that cause harm to others. ... Taxes levied on harmful activities ... generate desperately needed revenue while discouraging behaviors whose costs greatly outweigh their benefits.
Antigovernment activists reliably denounce such taxes as “social engineering”— attempts to “control our behavior, steer our choices, and change the way we live our lives.” Gasoline taxes aimed at discouraging dependence on foreign oil, for example, invariably elicit this accusation.
But it’s a strange complaint, because virtually every law and regulation constitutes social engineering. Laws against homicide and theft ... aim to control our behavior..., they are social engineering. So are noise ordinances, speed limits, even stop signs and traffic lights. Social engineering is inescapable... Only a committed anarchist could favor a world without social engineering. ...
Taxes are, in fact, a far cheaper and less coercive way to curtail such behavior than laws or prescriptive regulations. That’s because taxes concentrate harm reduction in the hands of those who can alter their behavior most easily.
When we tax pollution, for instance, polluters with the cheapest ways to reduce emissions rush to adopt them, thereby avoiding the tax. Similarly, when we tax vehicles by weight, those who can get by most easily with a lighter vehicle will buy one. Others find it cheaper to pay the tax.
The list of behaviors that cause undue harm to others is long. ... Taxing harmful activities is the best way to raise the revenue essential for reducing deficits. Only someone who thinks that people have a right to cause undue harm to others could object that such taxes violate anyone’s rights. And because such taxes make the national economic pie bigger, it makes little sense to object that we can’t afford them.
The new taxes should be phased in only after the economy is back at full employment. But even with federal taxes at their lowest level since the 1950s, we are unlikely to summon the political will to take that step until leaders stop insisting that all taxes are evil.
Libertarian types will often agree that a market failure exists, and that correcting it would enhance efficiency. But they will rarely agree that the government is the best solution to the problem even when the externalities impose large costs and the benefits of intervention appear to be relatively clear. The argument is that the government is almost always inefficient and incompetent relative to the private sector, exceptions are rare (or non-existent for the true believers), and by intervening the government will cause costs that exceed the potential benefits. This group believes that market failures are best corrected by the private sector in almost every case, and that this will happen automatically if the market failures are important enough. Thus, it's best to let the private sector fix this on its own.
So it's not as though the people who oppose taxes will, when told about this miraculous no cost strategy for raising revenues, suddenly see the light and favor a carbon tax. They won't be slapping themselves on the forehead and saying, "Doh! We could have had a carbon tax!"
And mention of a carbon tax brings up another point. Even when the externalities appear to be relatively clear, and hence the case for a tax hard to oppose, the objections will remain. If theory can't carry the day, and if the data work against you, then attack the data: There is no global warming, or if there is it's not caused by people. There is no growing inequality, it's a mirage due to bad data, or when forced to finally admit that the data say otherwise, it's not due to any type of market failure, it's a reward for talents and skills. You say firms are too large, e.g. financial firms, and have too much monopoly power? You want to tax size? That's because you are defining markets and products too narrowly. When the markets are broadened to a global scale, or products defined very loosely, the market power is not in evidence.
So while I have no disagreement with this, and wish that the government would move to tax obvious negative behaviors, those who oppose taxes will not admit that there is much benefit from the government intervening, but they will assert there are considerable costs. Again, when arguments are presented to them, they aren't going to suddenly realize that this is some magic way to solve our deficit problems. Don't get me wrong, this is a fight worth having, but it's not an argument that will be easily won no matter how obvious and compelling the arguments appear to be.
I didn't expect the recession to change the views of hard-core free-marketeers, but I did expect that people in general would be more receptive to arguments that free, unregulated markets are not always best. I thought more people would come to see that sometimes intervention is needed to ensure markets approximate the conditions needed to maximize social gains. But, disappointingly, with for example Republicans doing all they can to repeal new financial regulation and hardly any reaction from the public, it's not at all clear that has happened on a scale large enough to have a siginificant impact on public policy.
Friday, February 18, 2011
Ewe (grrr) Uwe Reinhardt:
How Convincing Is the Case for Free Trade?, by Uwe E. Reinhardt: “Emerging Markets as Partners, Not Rivals,” a fine commentary ... by N. Gregory Mankiw ... prompted me to ... visit one of the economic profession’s intellectual triumphs: the theory that every country gains by unfettered international trade. ...
In his recent commentary, Professor Mankiw explained the gains from trade even more simply than is done in textbooks. Your driveway is covered in deep snow. Its removal is worth $40 to you. The boy next door, currently engrossed with a game on his Xbox, would give up the game and shovel your driveway for any payment exceeding $20.
So if you pay him $30 to shovel your driveway, you will both be better off by $10. Overall social welfare is unambiguously enhanced. ... As far as economists are concerned, how can anyone argue with that? ...
Now let us think again about ... manufactured scarves. Just as you were about to buy a scarf from your neighbor on the left for $50, your neighbor on the right, also a manufacturer of scarfs, offers you an identical scarf for $35. Economists would consider that fair and efficient... – as, I am sure, would most Americans.
But many Americans might balk at the lower-priced scarf if it were offered not by an American but by a low-cost manufacturer in Shanghai or Bangladesh. This nationalist sentiment sets many noneconomists apart from most economists. In their work, economists are typically are not nationalistic. National boundaries mean little to them...
I say most economists, because here and there one can find some who do seem to worry about how fellow Americans fare in the matter of free trade. In a widely noted column in The Washington Post, “Free Trade’s Great, but Offshoring Rattles Me,” for example, my Princeton colleague Alan Blinder wrote:I’m a free trader down to my toes. Always have been. Yet lately, I’m being treated as a heretic by many of my fellow economists. Why? Because I have stuck my neck out and predicted that the offshoring of service jobs from rich countries such as the United States to poor countries such as India may pose major problems for tens of millions of American workers over the coming decades. In fact, I think offshoring may be the biggest political issue in economics for a generation. When I say this, many of my fellow free traders react with a mixture of disbelief, pity and hostility. Blinder, have you lost your mind?
Professor Blinder ... says he is rattled by the question of how our country will cope with this phenomenon, especially in view of our tattered social safety net.
“That is why I am going public with my concerns now,” he concludes. “If we economists stubbornly insist on chanting ‘free trade is good for you’ to people who know that it is not, we will quickly become irrelevant to the public debate. Compared with that, a little apostasy should be welcome.”
What do you think?
Saying that everyone could be made better off with increased international trade is not the same as people actually being made better off. There are winners and losers from increased international trade, and while I agree that the gains exceed the losses in almost all cases, the gains haven't been distributed in a way that leaves everyone, or even most everyone, better off (see, e.g., widening inequality and where the costs of these kinds of adjustments fall). When some people are made better off and others made worse off at the same time, economists cannot say it is unambiguously better or worse. If we are going to make the argument that trade is good because everyone could potentially be made better off, we should do much more than we have to ensure that this potential is realized, i.e. that the gains from trade are distributed widely across the population rather than concentrated among a smaller set of winners.
Paul Krugman says this much better than I did:
Willie Sutton Wept, by Paul Krugman, Commentary, NY Times: There are three things you need to know about the current budget debate. First, it’s essentially fraudulent. Second, most people posing as deficit hawks are faking it. Third, while President Obama hasn’t fully avoided the fraudulence,... he deserves much more credit for fiscal responsibility than he’s getting.
About the fraudulence: Last month, Howard Gleckman of the Tax Policy Center described the president as the “anti-Willie Sutton” ... because ... Mr. Obama has lately been going where the money isn’t, making a big deal out of a freeze on nonsecurity discretionary spending, which accounts for only 12 percent of the budget.
But that’s what everyone does. House Republicans ... focus solely on that same small budget sliver. ...
The whole budget debate, then, is a sham. House Republicans, in particular, are literally stealing food from the mouths of babes — nutritional aid to pregnant women and very young children is one of the items on their cutting block — so they can pose, falsely, as deficit hawks.
What would a serious approach to our fiscal problems involve? I can summarize it in seven words: health care, health care, health care, revenue.
Notice that I said “health care,” not “entitlements.” People in Washington often talk as if there were a program called Socialsecuritymedicareandmedicaid, then focus on things like raising the retirement age. But that’s more anti-Willie Suttonism. Long-run projections suggest that spending ... will rise sharply over the decades ahead, but the great bulk of that rise will come from the health insurance programs, not Social Security. So anyone who is really serious about the budget should be focusing mainly on health care. ...
What would real action on health look like? Well, it might include things like giving an independent commission the power to ensure that Medicare only pays for procedures with real medical value; rewarding health care providers for delivering quality care rather than simply paying a fixed sum for every procedure; limiting the tax deductibility of private insurance plans; and so on.
And what do these things have in common? They’re all in last year’s health reform bill.
That’s why I say that Mr. Obama gets too little credit. He has done more to rein in long-run deficits than any previous president. And if his opponents were serious about those deficits, they’d be backing his actions and calling for more; instead, they’ve been screaming about death panels.
Now, even if we manage to rein in health costs, we’ll still have a long-run deficit problem... So what should be done?
This brings me to the seventh word of my summary of the real fiscal issues: if you’re serious about the deficit, you should be willing to consider ... higher taxes. True, higher taxes aren’t popular, but neither are cuts in government programs. So we should add to the roster of fundamentally unserious people anyone who talks about the deficit — as most of our prominent deficit scolds do — as if it were purely a spending issue.
The bottom line, then, is that while the budget is all over the news, we’re not having a real debate; it’s all sound, fury, and posturing... And we shouldn’t indulge ... politicians by pretending otherwise.
The human and financial costs of the war in Afghanistan "are unacceptable and unsustainable":
The solution in Afghanistan: Get out, by James P. McGovern and Walter B. Jones, Commentary, Washington Post: No one, it seems, wants to talk about the war in Afghanistan. This week the House debated a budget bill that is touted as reflecting new fiscal restraint, yet borrows tens of billions more for the war. In an hour-long State of the Union address..., President Obama devoted less than one minute to the conflict. Given the investment and sacrifices our country has made for nearly 10 years, the phones in our offices should be ringing off the hook with calls from those who are tired of being told that the United States doesn't have enough money to extend unemployment benefits or invest in new jobs.
But by and large, Americans are silent. The war wasn't even an issue in the November elections... Whatever the reasons, there is no excuse for our collective indifference. At 112 months, this is the longest war in our history. More than 1,400 American service members have lost their lives...
This war has already cost us more than $450 billion; combined with the war in Iraq, it is estimated to account for 23 percent of our deficits since 2003. Where is the outcry from the Tea Partyers and the deficit hawks? Fiscal conservatives should be howling that this war is being financed with borrowed money. Those who support the war should be willing to pay for it.
And where is the liberal outrage? Those of us who are tired of being told that we can't afford green jobs, unemployment or health care should be screaming...
What are we giving up...? ...Joseph Stiglitz told the House Veterans Affairs Committee in September that the costs of Iraq and Afghanistan ... is likely to total $4 trillion to $6 trillion.
Simply put, we believe the human and financial costs of the war are unacceptable and unsustainable. It is bankrupting us. The United States should devise an exit plan to extricate ourselves from Afghanistan, not a plan to stay there four more years and "then we'll see." This doesn't mean that we abandon the Afghan people - rather, we should abandon this war strategy. ...
[From the Kauffman Survey of Econ Bloggers]
Thursday, February 17, 2011
Those who want to cut Social Security benefits because people are living longer, e.g. through raising the retirement age, assume longevity is independent of the Social Security system. That assumption may be false:
Study links social security improvements to longer life span, EurekAlert: ...According to a new study published in the Journal of Public Health Policy, Americans over the age of 65 experienced steep declines in the rate of mortality in the periods that followed the founding of and subsequent improvements to Social Security. The authors urge that as Congress and the President discuss changes to Social Security they consider the benefit of reduced mortality and improved health among older Americans. ...
Peter Arno, Ph.D., the study's lead author and professor and director of the doctoral program in the Department of Health Policy and Management of the School of Health Sciences and Practice at New York Medical College ... and his colleagues analyzed the effect of Social Security on mortality over the course of the 20th century. After controlling for factors such as changes in the economy, access to medical care, and Medicare, they found that although mortality rates for all adults fell during the 20th century, rates of decline for those 65 and older changed more than 50 percent in the decades following the introduction of Social Security in 1940. Rates of decline for the younger age groups remained virtually the same during this period. The trend was particularly pronounced following marked improvements in Social Security benefits between the mid-1960s and the early 1970s.
This finding supports earlier studies that have demonstrated that beneficiaries with higher lifetime earnings experienced lower mortality rates, and that higher supplemental security income benefit levels reduced mortality and disability for those recipients. Improved health status among elders could have other fiscal impacts, including lower Medicare costs.
Many policy-makers are proposing cuts to Social Security benefits as a way of addressing long-term federal budget deficits. "If policy-makers are going to have a well-informed discussion on Social Security, it is critical that they fully appreciate the program's role in improving the health and well-being of our nation's elderly," says Arno. "By not considering the benefits of reduced mortality and poverty reduction, policy-makers are grossly underestimating Social Security's benefits to society."
Cutting the lifespans of people who depend upon Social Security is one way to move the system back toward balance.
This is my preferred method of bringing the Social Security system back into balance:
Why Social Security Isn’t a Problem for 26 Years, and the Best Way to Fix It Permanently, by Robert Reich: ...Back in 1983, Alan Greenspan’s Social Security commission was supposed to have fixed the system for good – by gradually increasing payroll taxes and raising the retirement age. (Early boomers like me can start collecting full benefits at age 66; late boomers born after 1960 will have to wait until they’re 67.)
Greenspan’s commission must have failed to predict something. But what? It fairly accurately predicted how quickly the boomers would age. It had a pretty good idea of how fast the US economy would grow. ... So what did Greenspan’s commission fail to see coming? Inequality.
Remember, the Social Security payroll tax applies only to earnings up to a certain ceiling. (That ceiling is now $106,800.) The ceiling rises every year according to a formula roughly matching inflation.
Back in 1983, the ceiling was set so the Social Security payroll tax would hit 90 percent of all wages covered by Social Security. That ... Greenspan Commission’s fixes ... assumed that ... the Social Security payroll tax would continue to hit 90 percent of total income.
Today, though, the Social Security payroll tax hits only about 84 percent of total income. It went from 90 percent to 84 percent because a larger and larger portion of total income has gone to the top. ...
If we want to go back to 90 percent, the ceiling on income subject to the Social Security tax would need to be raised to $180,000. Presto. Social Security’s long-term ... problem would be solved.
So there’s no reason even to consider reducing Social Security benefits or raising the age of eligibility. The logical response to the increasing concentration of income at the top is simply to raise the ceiling.
Not incidentally, several months ago the White House considered proposing that the ceiling be lifted to $180,000. Somehow, though, that proposal didn’t make it into the President’s budget.
Even though "Social Security isn’t responsible for the federal deficit," the centrist hawkish types in Congress that will make a difference in votes on the budget seem determined to either cut benefits or raise the retirement age to show they are serious about the deficit. They've convinced the public that Social Security is a big part of the budget problem, even though it isn't, and now they're going to show how serious they are by creating real pain.
Why not raise the ceiling? Why doesn't that ever seem to be part of the discussion? For some, it's ideological. Anything that reduces the size of the Social Security program is agreeable. Cutting benefits or raising the retirement age scales things back while raising the ceiling maintains the current size of the program. For others, "fix Social Security" means quit making me (or my kids) pay for other people's benefits. Raising the payroll cap doesn't solve the problem this group has with the Social Security system. In fact, it makes it worse. Finally, it's probably no accident that the solutions being considered fall on the politically less powerful while raising the cap hits the politically well-connected.
But getting reelected is the primary reason politicians shy away from this solution. Obama is thinking ahead to the election in 2012, as are members of Congress. Raising the cap is a tax increase, and they are afraid of the politics associated with tax increases -- the courage to take on the political heat is missing. So even though raising the ceiling is the best way to go, it's just not going to happen.