Saturday, April 30, 2011
I've made this point many times as well, we need a better early warning system, and that requires better ways of measuring and assessing risk:
Needed: A Clearer Crystal Ball, by Robert Shiller, Commentary, NY Times: There were relatively few persuasive warnings during the 1920s that the Great Depression was on its way, and few argued convincingly during the last decade that the most recent economic crisis was near. ...
In fact, some people view the recent crisis as just another “black swan event”... But the theory of outlier events doesn’t actually say that they cannot eventually be predicted. Many of them can be, if the right questions are asked and we use new and better data. Hurricanes, for example, were once black-swan events. Now we can forecast their likely formation and path pretty well, enough to significantly reduce the loss of life.
Such predictions are a crucial challenge in economics, too, and they are why data collection ... can be very revealing. The Dodd-Frank Act of 2010 created a Financial Stability Oversight Council with a research arm, the Office of Financial Research... Perhaps these new organizations will improve our knowledge, mirroring the progress we have seen with hurricanes. ...
The Depression of the 1930s was blamed on a lack of knowledge, too... The government’s National Income and Product Accounts data began as a reaction to the Depression. ... The Federal Reserve started work on its Flow of Funds Accounts in the Depression as well. ...
Some financial economists have begun to suggest the kinds of measurements of leverage and liquidity that should be collected. We need another measurement revolution like that of G.D.P. or flow-of-funds accounting. ... The past suggests that this project will take many years to complete. But it will be worth the effort.
The WSJ's number of the week: "5.5 million: Americans unemployed and not receiving benefits":
Number of the Week: Millions Set to Lose Unemployment Benefits, by Mark Whitehouse, WSJ: ...The country’s unemployment rolls are shrinking... As of mid-March, about 8.5 million people were receiving some kind of unemployment payments, down from 11.5 million a year earlier...
To some extent, the shrinkage reflects a desirable reality: Some people are leaving the unemployment rolls because they’re finding jobs. The number of employed in March was up nearly 1 million from a year earlier...
Many Americans, though, are simply running out of time. As of March, about 14 million people were unemployed... At the time..., about 8.5 million were receiving some kind of unemployment payments... That leaves about 5.5 million people unemployed without benefits, up 1.4 million from a year earlier. ...
For the more than 4 million Americans still receiving extended benefits, the picture isn’t encouraging. ... They’ve typically been unemployed for at least 26 weeks, and may have been out of work for as long as 99 weeks, which for many people is the limit.
In the coming months, hundreds of thousands more will drop off the unemployment rolls. ... And unless Congress does something unexpected, more people with shorter bouts of unemployment will start joining them as the government phases out extended benefits next year.
And the effects of prolonged unemployment don't go away when things improve. Many of the people who "drop off the unemployment rolls" will be lost forever.
Helping people who, through no fault of their own, are unemployed and struggling to find employment when there are less jobs than there are people searching is not only the decent thing to do, it would also help the economy. If a big bank were to threaten the economy, we'd find the money to bail it out, and we could find the money to provide more help here if we had the will to do so. Instead, decent people with families to support, bills to pay, and so on are labeled as lazy leeches living off the system:
we’ve got a system where you can stay on unemployment for an awfully long time. And I think we need to create a system of decreasing benefits over time to encourage you to get a job. I think anybody who’s had an alcoholic in their life or somebody with a drug problem, realizes that until things get bad enough there’s no incentive to change. I think that we’re so generous in some of our social problems that people are unwilling to get a job outside in the heat.
This is the Say's law of jobs coupled with morality -- the supply of workers somehow creates a demand for them, it's the benefits that stop people from taking them -- and it's just as false here as it is more generally. There are not enough jobs, and ending unemployment benefits won't change that. We can always find someone who abuses any system, that's true in both the public and private sectors. But the vast majority of people still receiving help are struggling against a system they have no control over. They are trying to overcome problems they didn't create, and they deserve more help from the rest of us than they are getting. As noted here in a discussion of a poll showing that those doing well have a much more optmistic view of the economy than those who are still having trouble:
Rich people have seen more improvements than the poor in the last few years, considering factors like the rise in the stock market (which primarily benefits wealthier Americans) and the surge in commodity prices (which disproportionately hurt the poor).
And perhaps this explains some of the callousness -- I'm doing well why can't you? But I think it's more the idea that it's the "lazy others" that are having troubles, and hence don't deserve help (an echo of the deserving and underserving poor used in the past to determine who is worthy of help), a convenient belief if you are worried about being asked to help those who have not been so fortunate.
David Andolfatto continues his battle with Ron Paul and his supporters:
Ron Paul on Bernanke's Press Conference, Macromania: CNBC interview with Congressman Ron Paul yesterday (April 28, 2011); click here. The interviewer begins by quoting a statement Paul made after Bernanke's news conference:Bernanke continues to ignore his culpability for the inflation all Americans suffer due to the Fed's relentless monetary expansion.
Let's take a look at U.S. inflation since 2008. Here it is.
The average annualized rate of inflation over this time period is a dizzying 1.6%. Note the significant deflation experienced during the economic crisis. Ah, good times. The rate of return on your money was really high back then! I can recall clearly how savers were rejoicing...praising the Fed for the deflation.
PCE inflation measures the nominal price of a basket of consumer goods. You know, the stuff people buy to maintain their material living standards. This price index was actually falling in 2010. For better or worse, the Fed interprets "price stability" as 2% inflation. This explains QE2.
PCE inflation has recently jumped up to near 5%. This jump is attributable primarily to food and energy prices. Despite what some people like to believe, the Fed does not control food and energy prices (at least, not separately from other prices). Most economists attribute these relative price changes to geopolitical events and other temporary global shocks affecting the world supply and demand for food and energy.
It seems that what Congressman Paul means by inflation (judging by this interview) is "commodity price inflation." I think he must have in mind the price of commodities like gold. ...
Recent money supply and gold price dynamics seem to support Congressman Paul's hypothesis, which he states as some sort of obvious universal truth. But if this is so, then what explains the following data?
The graph above plots the price of gold and the (base) money supply over the 20 year period September 1980 to March 2001. As you can see, the Fed created a lot of money "out of thin air" over this 20 year period. The base money supply increased by over 300%.
Imagine that you are 50 years old in September 1980. Imagine that a trusted friend of yours--oh, let's say your doctor--convinces you to put all your savings into gold. The reason he offers is that the Fed is pursuing a policy of "relentless money expansion." He warns you that the money supply is set to grow by 300% over the next 20 years. So you listen to him.
You buy gold at $673 per ounce. And then you wait. You wait until you turn 70. And then you go to withdraw your savings. You discover that the gold price in March 2001 is $263 per ounce. That's a whopping rate of return of...wait for it... -60% over 20 years. That's a minus sixty percent. ... Viva la gold standard! ...
Friday, April 29, 2011
What I learned in econ grad school, Noahpinion: I always find it interesting that criticisms of economics education focus more on the graduate side than the undergrad. Consider this broadside by Brad DeLong and Larry Summers...
This is interesting because, as someone who never studied econ as an undergrad (I was a physics major), I learned everything I know about macro from my grad courses. If there is an aspiring economist out there whose understanding of macro has been hurt by an overly narrow graduate curriculum, it would be me.
So, what did I learn in my first-year graduate macro course at the University of Michigan?
My first semester, business cycle theory, was taught by Chris House (the second semester was all growth theory). We spent a day covering the basic history of the field - the neoclassicals, Keynes, Friedman, Lucas and the RBC people, and finally the neo-Keynesian movement. I recall reading the Summers vs. Prescott debate but not really getting what it was about. From then on it was all DSGE. We did the Ramsey model and learned about Friedman's Permanent Income Hypothesis. We spent a lot of time on RBC. We took a big break to learn value function iteration and how to numerically solve DSGE models by fixed-point convergence. Then we did Barro's model of Ricardian Equivalence, learned a basic labor search model, briefly sketched a couple of ideas about heterogeneity, touched on menu costs, and spent a good bit of time on Q-theory and investment costs. Finally, at the very end of the semester, we squeezed in a one-week whirlwind overview of Calvo Models and the New Keynesian Phillips Curve...but we weren't tested on it.
This course would probably have given Brad DeLong the following reasons for complaint:
1. It contained very little economic history. Everything was math, mostly DSGE math.
2. It was heavily weighted toward theories driven by supply shocks; demand-based theories were given extremely short shrift.
3. The theories we learned had almost no frictions whatsoever (the two frictions we learned, labor search and menu costs, were not presented as part of a full model of the business cycle). Other than Q-theory, there was nothing whatsoever about finance (Though we did have one midterm problem, based on House's own research, involving an asset price shock! That one really stuck with me.).
At the time I took the course, I didn't yet know enough to have any of these objections. But coming as I did from a physics background, I found several things that annoyed me about the course (besides the fact that I got a B). One was that, in spite of all the mathematical precision of these theories, very few of them offered any way to calculate any economic quantity. In physics, theories are tools for turning quantitative observations into quantitative predictions. In macroeconomics, there was plenty of math, but it seemed to be used primarily as a descriptive tool for explicating ideas about how the world might work. At the end of the course, I realized that if someone asked me to tell them what unemployment would be next month, I would have no idea how to answer them.
As Richard Feynman once said about a theory he didn't like: "I don’t like that they’re not calculating anything. I don’t like that they don’t check their ideas. I don’t like that for anything that disagrees with an experiment, they cook up an explanation - a fix-up to say, 'Well, it might be true.'"
That was the second problem I had with the course: it didn't discuss how we knew if these theories were right or wrong. We did learn Bob Hall's test of the PIH. That was good. But when it came to all the other theories, empirics were only briefly mentioned, if at all, and never explained in detail. When we learned RBC, we were told that the measure of its success in explaining the data was - get this - that if you tweaked the parameters just right, you could get the theory to produce economic fluctuations of about the same size as the ones we see in real life. When I heard this, I thought "You have got to be kidding me!" Actually, what I thought was a bit more...um...colorful.
(This absurdly un-scientific approach, which goes by the euphemistic name of "moment matching," gave me my bitter and enduring hatred of Real Business Cycle theory... I keep waiting for the ghost of Francis Bacon or Isaac Newton to appear and smite Ed Prescott for putting theory ahead of measurement. It hasn't happened.)...
But all the same, I absolutely don't blame Chris House for teaching what he taught. Our curriculum was considered to be the state of the art by everyone who mattered. Without a thorough understanding of DSGE models, a macroeconomist is severely disadvantaged in today's academic job market; if he had spent that semester teaching us Kindleberger and Bagehot and Minsky, Professor House might have given us better ways how to think about history, but he would have been effectively driving us out of the macroeconomics profession.
Thus, DeLong and Summers are right to point the finger at the economics field itself. Senior professors at economics departments around the country are the ones who give the nod to job candidates steeped in neoclassical models and DSGE math. The editors of Econometrica, the American Economic Review, the Quarterly Journal of Economics, and the other top journals are the ones who publish paper after paper on these subjects, who accept "moment matching" as a standard of empirical verification, who approve of pages upon pages of math that tells "stories" instead of making quantitative predictions, etc. And the Nobel Prize committee is responsible for giving a (pseudo-)Nobel Prize to Ed Prescott for the RBC model, another to Robert Lucas for the Rational Expectations Hypothesis, and another to Friedrich Hayek for being a cranky econ blogger before it was popular.
If you want to change economics education, it is to these people that you must appeal. The ghost of Francis Bacon, unfortunately, is not available for comment.
Did Keynes Support Having a "Central Plan"?, EconoSpeak: That he did is charged by "Hayek" in the freshly released "Keynes versus Hayek: Round 2"... However, I ... find it disturbing that increasingly Austrians and some others have taken to charging Keynes with having supported "central planning"... Is this correct? I think that the answer is largely "no," with it certainly being that answer if one means by that command central planning of the Soviet type that Hayek criticized in his Road to Serfdom (which Keynes praised, btw, when it first came out).
I think the strongest evidence for Keynes supporting central planning comes from two sources, which I shall quote. The first comes from his 1920s essay, "The End of Laissez-Faire," which has been identified as the inspiration for the movement for indicative (non-command) planning that was seen after WW II in such countries as France, Japan, India, South Korea, and some other places, although not UK or US.
After noting that uncertainty can lead to inequality of wealth and the unemployment of labor, he states: "I believe that the cure for these things is partly to be sought in the deliberate control of the currency and of credit by a central institution, and partly in the collection and dissemination on a great scale of data relating to the business situation, including the full publicity, by law if necessary, of all business facts which it is useful to know. These measures would involve Society in exercising directive intelligence through some appropriate organ of action over many of the inner intricacies of private business, yet it would leave private initiative and enterprise unhindered." (p. 318 from Essays in Persuasion)
One can argue that Keynes is offering a hopeless contradiction when calling for this "directive intelligence," probably the closest he came anywhere to command, with his simultaneous limit on that regarding leaving "private initiative and enterprise unhindered," this latter certainly not fitting with the full-blown command socialist model at all.
Regarding the information gathering, well, of course that is now generally done in most higher income economies, and many have argued that this was the essence of the indicative planning operations carried out in many countries, when they worked at their best, as some claim was the case in France in the 1950s, when businesspeople needed some sort of external push to revive their animal spirits, to use Keynesian language, and that seeing projections of demands by others helped provide this.
The other passage that some have pointed to as possibly suggesting a central planner tendency by Keynes comes from the final chapter of the General Theory, p. 378:
"Furthermore, it seems unlikely that the influence of of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment. I conceive, therefore, that a somewhat comprehensive socialization of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative. But beyond this no obvious case is made out for a system of State Socialism which would embrace most of the economic life of the community."
One can argue again here that Keynes is setting himself up for some sort of impossible contradiction, and Hayek may well have argued that such control of investment would lead to his road to serfdom slippery slope. However, it is clear from later passages that what Keynes had in mind was ultimately the control of the aggregate of investment rather than of its specific forms or details.
These almost certainly provide the strongest evidence for Keynes supposedly supporting there being a "central plan." But it looks at most, putting the two together, like one that involves lots of provision of information and data along with some sort of control of aggregate investment, while leaving most of the decisions up to "private initiative." This hardly constitutes a "central plan," and certainly not one of the sort that the actually existing Hayek criticized. ...
The recent focus on Ben Bernanke and the Fed, in particular what more could be done to help the economy and the unemployed, takes the pressure off of fiscal policymakers. But Congress also bears as much responsibility, or more in my view, for the slow recovery and the sorry state of the employment picture.
Fiscal policy was far from aggressive enough -- at best it offset declines at the state and local level leaving the net effect near zero -- yet people express surprise it wasn't able to do more. It was also too small, way too late, and it was not persistent enough. Declines in stimulus spending as the program ends are holding back economic growth at a time when fiscal policy ought to be aiding, not stalling the recovery.
Our long-run budget problem is mostly a health care cost problem, and we do need to fix this. If we address the health care cost problem, the picture improves and any worry about bond vigalantes showing up in the future mostly goes away. If we don't adress health care costs, the long-run budget remains problematic no matter what else we do. Given that reality, there is plenty of time, plenty of room, and plenty of need for more help from fiscal policy. This was always a battle that needed to be fought on multiple policy fronts, neither monetary nor fiscal policy alone, or perhaps even in combination, was going to be enough. We needed both monetary and fiscal policy to respond aggressively, and to continue to respond as long as needed, but both have fallen short and there is no sign of monetary and fiscal policymakers moving to make up lost ground.
Monetary policymakers are feeling the heat right now, at least I hope they are, but don't forget about fiscal policymakers -- they too deserve to be on the hot seat. I understand that with all the talk of austerity, the chances of more help from fiscal policy without some huge change in the outlook is next to zero. But maybe, just maybe, we can stop Congress and the president from repeating the mistakes of the past (and present in Europe) by moving to balance the budget before the economy can handle it? I'm hoping we can avoid premature austerity -- that will hurt, not help employment -- but I'm not counting on it. </rant, for now anyway>
Update: From the CBPP:
Brad DeLong on what is (and should be ) taught in economics programs:
Economics in Crisis, by J. Bradford DeLong, Commentary, Project Syndicate: The most interesting moment at a recent conference held in Bretton Woods, New Hampshire ... came when Financial Times columnist Martin Wolf quizzed ... Larry Summers... "[Doesn’t] what has happened in the past few years,” Wolf asked, “simply suggest that [academic] economists did not understand what was going on?”
Here is the most interesting part of Summers’ long answer: “There is a lot in [Walter] Bagehot that is about the crisis we just went through. There is more in [Hyman] Minsky, and perhaps more still in [Charles] Kindleberger.” That may sound obscure to a non-economist, but it was a devastating indictment. ... Summers then enlarged his answer to include living economists: “Eichengreen, Akerlof, Shiller, many, many others.” ...
For Summers, the problem is that there is so much that is “distracting, confusing, and problem-denying in…the first year course in most PhD programs.” As a result, even though “economics knows a fair amount,” it “has forgotten a fair amount that is relevant, and it has been distracted by an enormous amount.”
I think that Summers’ judgments are fair and correct. ... “We need to change our hiring patterns,” I expected to hear economics departments around the world say in the wake of the crisis.
The fact is that we need fewer efficient-markets theorists and more people who work on microstructure, limits to arbitrage, and cognitive biases. We need fewer equilibrium business-cycle theorists and more old-fashioned Keynesians and monetarists. We need more monetary historians and historians of economic thought and fewer model-builders. We need more Eichengreens, Shillers, Akerlofs, Reinharts, and Rogoffs – not to mention a Kindleberger, Minsky, or Bagehot.
Yet that is not what economics departments are saying nowadays. ...
[My response to Summers' talk was a post called Re-Kindleberger.]
Update: Roman Frydman emails:
I much appreciated and liked Brad Delong’s piece about Economics in Crisis and strongly agree with his appeal for the profession to resume treating history seriously. We clearly need the same discussion about the foundations of macro and finance theory. May I suggest the introduction to my recent book with Michael Goldberg, Beyond Mechanical Markets (Princeton University Press, 2011: http://www.econ.nyu.edu/user/frydmanr/books.htm for an argument that we badly need to rethink these foundations. The intro can be found at: http://www.econ.nyu.edu/user/frydmanr/Introduction.pdf.
I hope that this will help us focus on perhaps the most controversial aspect on what went wrong with economics and what we can do it about it.
Why won't the Fed do more to help the unemployed?:
The Intimidated Fed, by Paul Krugman, Commentary, NY Times: Last month more than 14 million Americans were unemployed by the official definition... Millions more were stuck in part-time work because they couldn’t find full-time jobs. And we’re not talking about temporary hardship. Long-term unemployment, once rare in this country, has become all too normal: More than four million Americans have been out of work for a year or more. ...
It all adds up to a clear case for more action. Yet Mr. Bernanke indicated that he has done all he’s likely to do. Why?
He could have argued that he lacks the ability to do more, that he and his colleagues no longer have much traction over the economy. But he didn’t. On the contrary, he argued that the Fed’s recent policy of buying long-term bonds, generally referred to as “quantitative easing,” has been effective. So why not do more?
Mr. Bernanke’s answer was deeply disheartening. He declared that further expansion might lead to higher inflation.
What you need to bear in mind here is that the Fed’s own forecasts say that inflation will be below target over the next few years, so that some rise in inflation would actually be a good thing, not a reason to avoid tackling unemployment. ...
The only way to make sense of Mr. Bernanke’s aversion to further action is to say that he’s deathly afraid of overshooting the inflation target, while being far less worried about undershooting — even though doing too little means condemning millions of Americans to the nightmare of long-term unemployment.
What’s going on here? My interpretation is that Mr. Bernanke is allowing himself to be bullied by the inflationistas: the people who keep seeing runaway inflation just around the corner and are undeterred by the fact that they keep on being wrong.
Lately the inflationistas have seized on rising oil prices as evidence in their favor, even though — as Mr. Bernanke himself pointed out — these prices have nothing to do with Fed policy. The way oil prices are coloring the discussion led the economist Tim Duy to suggest, sarcastically, that basic Fed policy is now to do nothing about unemployment “because some people in the Middle East are seeking democracy.”
But I’d put it differently. I’d say that the Fed’s policy is to do nothing about unemployment because Ron Paul is now the chairman of the House subcommittee on monetary policy.
So much for the Fed’s independence. And so much for the future of America’s increasingly desperate jobless.
Thursday, April 28, 2011
- Why Instapaper Free is taking an extended vacation - Marco.org
- How Bernanke Answered Your Questions - NYTimes.com
- Stephen Williamson’s Baffling Conjecture - Modeled Behavior
- The visible hand - MIT News
- How the Inflationistas Have Shaped Fed Policy - Kash Mansori
- Interview: Prof. Roger Farmer - Acemaxx-Analytics
This comes via Mike Konczal (who has additional comments):
Side note: Gagnon earlier in his talk said that “one of the biggest goals of QEI was to push down the mortgage rate to spark a refinancing boom to encourage households and enable households to reduce their expenditures and repair their balance sheets and be able to spend again. That worked not quite as well as we hoped because the administration’s program for getting underwater borrowers to borrow didn’t work and I think that’s a true disaster that has no excuse. I have nothing but incredible, there’s just, the blame the administration on not doing this is just incredible. This could have been a huge success. We got the lowest 30-year mortgage rates in history and we couldn’t take advantage of them to the extent that we could. We got about a trillion dollars in refinancing when we should have gotten two or three trillion dollars in refinancing.” I haven’t heard this critique before and I thought it was really interesting.
Good times just around the corner?:
U.S. Economy Slows: Gross domestic product, the value of all the goods and services produced, rose at an seasonally adjusted annual rate of 1.8% in the first quarter, the Commerce Department said Thursday in its first estimate of the economy's benchmark indicator.
The modest increase marked a significant slowdown from the economy's pace in the fourth quarter, when GDP rose by 3.1%. ...The data marked a setback for an economy still healing from a deep recession...
And, continuing a recent trend, inititial claims for unemployment insurance also increased to a level that, historically, is associated with job loss.
Brad DeLong also notes this passage from the FT:
Gross domestic product growth was also slowed by a “sharp upturn” in imports, falling exports and a steeper decline in government spending. Federal government spending sank 7.9 per cent, much faster than the 0.3 per cent decline recorded in the fourth quarter and local and state government spending fell 3.3 per cent, compared with a 2.6 per cent drop in the last three months of 2010. The pullback in government spending, particularly at the state and local level, “reflects the ongoing budget problems that will continue to be a drag on the overall economy for some time yet”, Mr Ashworth said...
And he comments:
Contractionary fiscal policy is contractionary.
The rhetoric of closed borders, by Giovanni Facchini and Cecilia Testa, Vox EU: Illegal immigration is widespread. In 2008, approximately 12 million immigrants lived unlawfully in the US, and large numbers of undocumented foreigners resided also in other advanced destination countries (Fasani 2009, Triandafyllidou 2010).
Understandably, illegal immigration has become a very prominent issue in the policy debate and a major challenge in the design of policies pursuing the control of the flows of migrants.
Let’s be clear on one thing. Illegal immigration can exist only insofar as countries restrict (according to some criterion) the number of migrants that they are willing to accept. If national borders were open, there would be no notion of illegal alien as such. This leads us naturally to two questions:
- Why do governments try to close (at least to some extent) their borders?
- And why do they fail to keep them “closed”?
The first point can be easily understood by considering the redistributive effects of immigration. Despite an overall welfare gain for the receiving country, the benefits of migration tend to be unevenly distributed. The crudest representation of the costs and benefits of migration for the receiving country (leaving aside the obvious important benefits for the migrants themselves) boils down to a very simple arithmetic. The downward pressure migration puts on wages means larger profits for firms’ owners employing “cheaper work” and lower wages for the workforce employed in such firms.
The crux of migration policy is striking a balance between these opposing interests: the fears of the numerous individuals (often the majority) who stand out to lose from migration (Facchini and Mayda 2008), against the pressures of organized pressure groups representing the firms who benefit from foreign work. This ultimately leads to a widespread use of restrictions to the free mobility of labor in order to achieve a desired migration target.
Wednesday, April 27, 2011
Here are some responses to Bernanke's Press conference from The Room for Debate:
- Ducking the Jobs Question: Mark Thoma
- Aiming for One Percent Inflation?: Brad DeLong
- Problems He Can't (or Won't) Solve: Megan McArdle
- Opacity Has Its Uses: Vincent R. Reinhart
- Clarity Helps in a Tough Job: Garett Jones
The Fed’s dual mandate requires it to pursue both full employment and price stability. Currently, however, the Fed is falling short on both of these goals.
Employment is far below its full employment level, and inflation is running below the Fed’s preferred range of 1.5 to 2.0 percent. Inflation is expected to rise a bit in the short-run due to rising commodity prices, but the Fed says it expects commodity price increases to be transitory.
Thus, none of the Fed’s forecasts show any long-run concern about inflation at all. The main question I wanted to hear Bernanke answer is, given that inflation is expected to remain low, why the Fed isn’t doing more to help with the employment problem? Why not a third round of quantitative easing?
Bernanke was asked this question, but his answer was unsatisfactory. The potential benefit of further policy moves by the Fed is higher growth and lower employment. The potential cost of more quantitative easing is inflation. So the decision on whether to provide more help to labor markets comes down to a comparison of the expected employment benefits to the expected inflation cost.
Even though there is no evidence of a problem in the Fed’s own projections, and the prices of long-term financial assets dependent upon future inflation show no evidence of inflation worries either, Bernanke nonetheless said that he believes the costs have risen relative to the benefits — that is, the Fed’s worry about inflation is standing in the way.
But I think there is something else behind the Fed’s reluctance to continue easing. The Fed first began seeing “green shoots” in April of 2009, a full two years ago. At every step since, the Fed has used the prospect of better times just around the corner as a reason to downplay the benefits of further easing.
But the growth of the green shoots has been stunted, or they have wilted away entirely. In retrospect, more aggressive action by the Fed was warranted in every instance. Perhaps this time is different — I sure hope so — but the recovery has been far too slow to be tolerable. Green shoots require more than hope, they require the nourishment, and with fiscal policy out of the picture it’s up to the Fed to provide it.
I am writing up my reaction to Bernanke's press conference, and it's basically the same as this. More later. I also did a video for CBS MoneyWatch discussing the conference and I'll post that as soon as it's available (Here's a link to the video).
Update: Here's Tim Duy's reaction:
Very High Bar for QE3, by Tim Duy: My first thoughts: The FOMC statement was consistent with my expectations, while Federal Reserve Ben Bernanke sounded slightly more hawkish than I anticipated. The latter confirms the view I took two weeks ago – near term inflation gains were not sufficient to justify altering the current policy stance, but would derail any additional increases to the balance sheet beyond June.
The FOMC statement itself was largely straightforward. Arguably a bit of a downgrade of the economy (as CR notes, the “firmer footing” language has disappeared) and a little more talk about inflation. The new economic projections reflected these alterations, with growth forecasts brought down to pretty much the same range when the Fed initiated QE2, while near-term headline inflation forecasts are higher.
The initial phase of Bernanke’s press conference was also in line with my expectations. He noted that the expectations for trend growth and the natural rate of unemployment were beyond the control of the Fed, while inflation was directly determined by monetary policy. He explained the reasoning for a positive rate of inflation, explicitly pointing to the concern about deflation, defined as falling wages and prices. This was, I believe, the last we heard about wages.
In response to the Q&A portion, he said the impending weak Q1 growth numbers are the result of transitory factors (defense spending, exports, weather), and “possibly less momentum.” The latter phrase was a bit disconcerting and should suggest a predilection toward additional asset purchases beyond June, but apparently the FOMC intends to focus on the transitory nature of the numbers. See again my earlier piece. When questioned about the timing of any exit, Bernanke explained the relevant factors, including the sustainability of the recovery, the strength of the labor market, the direction of inflation, and resource slack. Not surprisingly, he gave no timeline to tightening.
Regarding the end of QE2, he reiterated the “stock” view of the balance sheet. Essentially, the pace of accumulation is less important than the size of the balance sheet, and there were no plans to shrink assets. Indeed, he suggested the first step toward tightening would be to stop reinvesting assets as they mature or are redeemed. I thought he handled the Dollar questions well – throwing it back in the lap of Treasury Secretary Timothy Geithner and claiming, rightly in my opinion, that the best thing for the Dollar over time is that the Fed pursues policies that satisfy its dual mandate.
The most interesting comments came in response to questions about whether the Fed should do more to lower unemployment and if QE2 is effective, shouldn’t the program continue? Here was a more hawkish Bernanke. As I noted earlier, growth forecasts returned to the pre-QE2 range, which should be a red flag. Unemployment remains high, with only moderate job creation. Core-inflation remains low, while the impulse from commodity prices on headline inflation is expected to be temporary. Finally, he claims that QE2 was in fact effective. So why not do more? Because the Fed needs “to pay attention to both sides of the mandate” and the “tradeoffs are less attractive.” Much talk by Bernanke at this point about inflation expectations, and the importance of maintaining those expectations, and not much (none, I think), about the issue (or non-issue) of wage inflation.
Apparently the threat of headline deflation off the table, Bernanke is not inclined to pursue sustained easing despite low core inflation and high unemployment. Again, I am not entirely surprised, except that Bernanke appear to suggest we are much closer to an inflation tipping point than I would expect. He could have tempered these comments with a more forceful discussion of labor costs, but did not. It seems clear these comments were intended to calm the non-existent bond market vigilantes, but is it consistent with the outlook? Arguably, no. For what it’s worth, I think Bernanke appeared most uncomfortable during this portion of the conference.
Bottom Line: When I look at the revisions to the Fed’s outlook and listen to Bernanke, I get the sense that the basic Fed policy is summarized as follows: “The economic situation continues to fall short of that consistent with the dual mandate, we have the tools to address that deviation, but will take no additional action because some people in the Middle East are seeking democracy.”
Here's the FOMC statement. A quick reading doesn't reveal any surprises. Rates will remain at "exceptionally low levels for the federal funds rate for an extended period," QE will continue as scheduled, and long-term expectations of inflation are stable even though prices have ticked up recently due to oil and commodity price increases. The Fed doesn't explain why, if both inflation and employment are below target levels, QE3 is out of the question. It merely states that "The Committee will regularly review the size and composition of its securities holdings in light of incoming information and is prepared to adjust those holdings as needed to best foster maximum employment and price stability." If it's prepared to do so, why not take action?: Hopefully someone will ask something along those lines at Bernanke's press conference later today. It's likely fear of inflation in the future that is holding the Fed back, but I'd like to hear the basis for those fears:
Press Release, Release Date: April 27, 2011, For immediate release: Information received since the Federal Open Market Committee met in March indicates that the economic recovery is proceeding at a moderate pace and overall conditions in the labor market are improving gradually. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Commodity prices have risen significantly since last summer, and concerns about global supplies of crude oil have contributed to a further increase in oil prices since the Committee met in March. Inflation has picked up in recent months, but longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Increases in the prices of energy and other commodities have pushed up inflation in recent months. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations. The Committee continues to anticipate a gradual return to higher levels of resource utilization in a context of price stability.
To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and will complete purchases of $600 billion of longer-term Treasury securities by the end of the current quarter. The Committee will regularly review the size and composition of its securities holdings in light of incoming information and is prepared to adjust those holdings as needed to best foster maximum employment and price stability.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.
The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.
Austerity means less, not more:
UK, Not OK, by Paul Krugman: The bad GDP number for the UK isn’t a surprise — in fact, judging from market response, investors seem to have expected something even worse. Still, if you step back and look at what has been happening, it’s doubleplusungood: zero growth over the past 6 months, with every reason to be worried on the downside looking forward, as Cameron’s austerity bites deeper.
Jonathan Portes gets to the nub of it:
On fiscal policy, the message is that we should listen to economists, not credit rating agencies. Most mainstream economists argued that the impact of the government’s fiscal consolidation on confidence and consumer demand would be negative; so it has proved. …
In short, there is no confidence fairy... Portes hits, in particular, on a point I’ve tried to make a number of times, here and more recently here: right now, we’re living in a world in which basic economics points to conclusions utterly at odds with what Very Serious People are supposed to believe, in which radical outsiders base their views on standard economics while orthodox types turn to heterodox, highly dubious speculations.
Econ 101, buttressed if you like by fancier New Keynesian models, says that contractionary fiscal policy is, well, contractionary. Yet much of the world of movers and shakers bought into the exotic notion that expectational effects — the confidence fairy — would make contractionary policy expansionary. And they clung to this belief even as the supposed historical evidence in favor of expansionary austerity was thoroughly debunked.
And now we’re watching Econ 101 in the process of being confirmed. I wish I thought this would change anyone’s mind.
For many of the Very Serious People on the austerity bandwagon, tax increases that reduce the deficit are a bad idea, they think taxes should be even lower, it's spending cuts they are after. That tells us that the true agenda is something other than reducing the deficit or calling confidence fairies to stimulate the economy. The fairies are mythical, and so is the idea that the true goal is reducing the deficit. The deficit is just the means to an end of smaller government, social insurance in particular -- that's why tax increases that reduce the deficit aren't supported -- and if a slower recovery, higher unemployemt, and more insecurity (for others of course) is the price of reaching that goal, so be it.
Eric Schoenberg doesn't have a very large tax burden given his high income, and he says it doesn't take much effort to make this happen:
How I Paid Only 1% of My Income in Federal Income Tax, by Eric Schoenberg: In 2009, the median U.S. family had an income of just under $50,000, on which they would have paid roughly $2,761 (or about 5.5%) in federal income tax. I, by contrast, enjoyed an income of $207,415 in 2009, but paid only $2,173 (or 1.0%) in income tax.
In a recent newspaper interview, I mentioned my absurdly low tax rate to illustrate the extent to which the tax system is biased in favor of the wealthy (my income varies widely from year to year, but is typically north of half a million dollars). My point was that with our country facing frightening budget deficits amid an ever-widening income gap between the rich and everybody else, I consider it both unwise and unfair that a former investment banker like myself pays less in taxes than working Americans with far lower incomes.
Among the dozens of emails I received in response were many from people who assumed that rich people avoid taxes through complicated strategies devised by an army of expensive advisors (many correspondents asked for the name of my accountant). But under our current tax system, the rich don't need high-priced lawyers who exploit obscure loopholes; I wasn't even trying to minimize my taxes (and, in fact, could have paid zero tax if I was). ...
Quick Note on Inflation Expectations, by Tim Duy: The FOMC will render judgment on the economy today, followed by the inaugural post-meeting press conference by Federal Reserve Chairman Ben Bernanke. Policy is expected to remain essentially unchanged, with the large-scale asset program continuing through June. The FOMC statement will likely be similar to the last, maybe upgrading the state of the labor market but acknowledging weak first quarter data. I am curious to what extent they have adjusted their full year GDP forecast. Any downward adjustment would be further reason to maintain the current path of policy, and it is difficult to see reason for any upward revision.
The statement will likely maintain language on commodity prices, inflation, and inflation expectations – commodity prices are likely to have only a transitory impact on core-inflation, while expectations remain stable or anchored. Rates will be kept low for “an extended period.”
I am hopeful that the Chairman’s press conference will be illuminating but ultimately something of a nonevent – that the general consensus on the direction of monetary policy is consistent with that of the gravitational center of the FOMC, and thus Bernanke’s comments will be largely non-disruptive. Or at least it should be, as I anticipate we will learn that it was correct to heavily discount the more hawkish sounding regional bank presidents.
The Wall Street Journal focuses on the inflation expectations issue here and here. To be sure, I think the Fed is following this closely, but I think we should nuance the issue a little more carefully to account for a transmission mechanism from inflation expectations to actual inflation. I expect Bernanke would tie a discussion of inflation expectations to a discussion of labor costs. Vice Chair Janet Yellen did just that earlier this month:
In addition, the indirect effects of the commodity price surge could be amplified substantially if longer-run inflation expectations started drifting upward or if nominal wages began rising sharply as workers pressed employers to offset realized or prospective declines in their purchasing power…
…Consequently, longer-term inflation expectations became unmoored, and nominal wages and prices spiraled upward as workers sought compensation for past price increases and as firms responded to accelerating labor costs with further increases in prices….
…That said, in light of the experience of the 1970s, it is clear that we cannot be complacent about the stability of inflation expectations, and we must be prepared to take decisive action to keep these expectations stable. For example, if a continued run-up in commodity prices appeared to be sparking a wage-price spiral, then underlying inflation could begin trending upward at an unacceptable pace. Such circumstances would clearly call for policy firming to ensure that longer-term inflation expectations remain firmly anchored.
For a more immediate example of what this would look like, turn to recent stories from China like this:
China’s southern economic powerhouse Shenzhen said Thursday it would raise the minimum wage by 20 percent, following a similar move by Shanghai, as China continues to battle rising inflation and a labor shortage.
Sounds clearly like an economy in which inflation expectations have become unstable, to say the least. It is difficult to see a parallel to the current US situation – we don’t have a labor shortage, without which there is minimal upward pressure on wages, rendering senseless fears a wage-price spiral is imminent. I suspect Bernanke would agree with a similar line of argument, and it will be interesting if he explicitly cites unit labor costs.
Finally, the series of questions I would like asked: “What specific outcomes or goals did you expect when you initiated QE2? Have you reached those goals? If you haven’t reached those goals, are you preparing for QE3? Why or why not?”
Stephen Lubben of Credit Slips:
The Costs of Regulating Derivatives, by Stephen Lubben: So the outgoing chair of ISDA complains that banks will have to pass on the costs of Dodd-Frank to end users of derivatives. Undoubtedly the usual crowd -- primarily the WSJ op-ed page -- will run with this evidence of yet another hit to American competativenes coming out of Dodd-Frank.
But maybe we could stop and consider if this simply means that users of derivates will now incur the true costs of their trades, and will no longer be subsidized by the Treasury.
Tuesday, April 26, 2011
As I was searching for something else, I came across this post from July 2005 that I completely forgot I had written:
The Fed Should Take More Responsibility for the Housing Bubble: I didn’t find much in Greenspan’s testimony over and above what has already been noted here previously. ...
The acknowledgment that incoming data have indicated some downside risk is fairly new. ... The uncertainties he's referring to are rising input costs, particularly labor and oil, an increase in long-term interest rates, and the potential problems that could cause in the housing market.
It’s interesting to me that the Fed is not taking responsibility for the housing bubble even though monetary policy causing low interest rates had a hand in creating it. If, in fact, low interest rates have caused a misallocation of resources towards the housing sector such that there are now risks, and there's a case to be made that it has, then the Fed should be more active and forceful in dealing with and forestalling the potential consequences. That is, if Fed policy has enticed households to make decisions that put them at risk over the long-run, decisions they would not have made if the interest rate were at its natural level, then the Fed has a responsibility to do more than wash its hands of this sector of the economy and say its only role is to clean up after any crash that might occur. ...
Update #1: Clarifying a bit, I am ready to believe those who say there is no significant deviation from fundamentals and hence less to worry about than if it were a true bubble (except for some areas such as coastal regions), though there are risks and it is the Fed's hand in creating those risks that I am addressing. Nobody knows for sure how vulnerable this sector is so it is good policy to attenuate such risks to the extent possible.
My complaint is the way in which the Fed has disassociated itself from any responsibility for creating the environment that caused risks to emerge. For example, the Fed could be more aggressive on the regulatory front in an attempt to ensure that low interest rates do not induce excessive risk taking by households, especially those living near the margin that will be most vulnerable to increases in interest rates. It's really nice to get people into houses - I'm all for that, one hundred percent - but not if it causes financial distress and years of cleanup afterward (there's that bankruptcy bill thing as well) as households are induced to assume more risk than they can handle.
I suppose in the end we can say it's a free market and people should have known better, that they should have been more forward looking, but when prices are set below equilibrium in an attempt to stimulate the economy, market intervention to manipulate interest rates is present making the fundamentals themselves a result of policy intervention, and that has consequences. ...
Can't say I called the bubble, but I can say I called for caution and 'just in case' action.
I have a new column that explains why a voucher system for Medicare won't work:
After explaining the problems with vouchers, the column ends with:
We know what works for health care cost control. Other countries deliver universal care at a lower cost and similar quality, and I believe that once we’ve tried other avenues that fail, this is where we will end up. It won’t happen anytime soon, and there will be lots of false starts and dead-ends along the way –a voucher program, if pursued, is one of those dead ends. But the day will come when we realize that using successful systems in other countries as models for reform is the best way to provide universal access to health care at the lowest possible price.
Moderates? Republicans?, by Andrew Samwick: The way Ezra Klein tells it is largely the way I remember it, too. Antecedents of President Obama's policies -- an individual mandate in health insurance, cap-and-trade on emissions, and some willingness to raise taxes to close deficits -- can be found in Republican policies of the George H.W. Bush era. I supported them then and support them now, though in a way that comes from the right side of the political spectrum rather than the left. ...
I don't find Obama's policies to be beyond compromise. Transported to a different era, Obama would have been a Rockefeller Republican -- actively using the government's powers to try to solve public policy problems and willing to go to the voters to get more revenues to do so.
The place where I disagree with Ezra's reasoning is here:
The normal reason a party abandons its policy ideas is that those ideas fail in practice. But that’s not the case here. ...
Rather, it appears that as Democrats moved to the right to pick up Republican votes, Republicans moved to the right to oppose Democratic proposals.
...The first move to the right wasn't by the Democrats. It was by the Republicans on issues of tax policy. More recently, this dynamic has been at work -- on issues not related to tax policy, the Republicans are moving to the right to oppose proposals that were previously part of their platform.
What's left unexplained is why movements to the right by both parties -- and these aren't marginal moves -- haven't alienated the middle of the road, swing voters that seem to make a difference in elections. I don't think I have a good answer for why. In the present case, there is some voter remorse -- Obama is far more conservative than many thought -- but I don't think that explains the larger trend.
Deborah Potter via Richard Green:
Deborah Popper on "Subtracted Cities", by Richard Green: She writes about how shrinking cities can take control of their destinies, while being realistic about what those destinies imply:Detroit stands as the ultimate expression of industrial depopulation. The Motor City offers traffic-free streets, burned-out skyscrapers, open-prairie neighborhoods, nesting pheasants, an ornate-trashed former railroad station, vast closed factories, and signs urging "Fists, Not Guns." A third of its 139 square miles lie vacant. In the 2010 census it lost a national-record-setting quarter of the people it had at the millennium: a huge dip not just to its people, but to anxious potential private- and public-sector investors.Is Detroit an epic outlier, a spectacular aberration or is it a fractured finger pointing at a horrific future for other large shrinking cities? Cleveland lost 17 percent of its population in the census, Birmingham 13 percent, Buffalo 11 percent, and the special case of post-Katrina New Orleans 29 percent. The losses in such places and smaller ones like Braddock, Penn.; Cairo, Ill.; or Flint, Mich., go well beyond population. In every recent decade, houses, businesses, jobs, schools, entire neighborhoods -- and hope -- keep getting removed.The subtractions have occurred without plan, intention or control of any sort and so pose daunting challenges. In contrast, population growth or stability is much more manageable and politically palatable. Subtraction is haphazard, volatile, unexpected, risky. No American city plan, zoning law or environmental regulation anticipates it. In principle, a city can buy a deserted house, store or factory and return it to use. Yet which use? If the city cannot find or decide on one, how long should the property stay idle before the city razes it? How prevalent must abandonment become before it demands systematic neighborhood or citywide solutions instead of lot-by-lot ones?Subtracted cities can rely on no standard approaches. Such places have struggled for at least two generations, since the peak of the postwar consumer boom. Thousands of neighborhoods in hundreds of cities have lost their grip on the American dream. As a nation, we have little idea how to respond. The frustratingly slow national economic recovery only makes conditions worse by suggesting that they may become permanent.Subtracted cities rarely begin even fitful action until perhaps half the population has left. Thus generations can pass between first big loss and substantial action. Usually the local leadership must change before the city's hopes for growth subside to allow the new leadership to work with or around loss instead of directly against it. By then, the tax base, public services, budget troubles, labor forces, morale and spirit have predictably become dismal. To reverse the momentum of the long-established downward spiral requires extraordinary effort. Fatalism is no option: Subtracted cities must try to reclaim control of their destinies. ...
The diagnosis is easier than the cure.
Monday, April 25, 2011
The subtitle to this article by Joseph Gagnon and Gary Hufbauer is "How to Increase U.S. Employment Without Launching a Trade War":
Taxing China's Assets, by Joseph Gagnon and Gary Hufbauer, Foreign Affairs: For much of the past decade, the United States has begged, pleaded, and threatened China to change its disruptive currency practices, which artificially make Chinese exports cheap and foreign goods sold in China expensive.
Today, in the midst of prolonged economic weakness, with the U.S. trade deficit rising and unemployment persistently high ... legislative pressure is again growing to raise trade barriers against Chinese goods. ... The United States clearly needs to ratchet up the pressure on China... But what action can the United States take to persuade China to stop its harmful behavior? ...
A more productive course would be to tax Chinese currency manipulation rather than Chinese exports. In order to undervalue the renminbi against the dollar, China drives the dollar's value up by buying dollar-denominated financial assets, principally U.S. Treasury bills and bonds. To discourage China from doing so, the U.S. government should tax the income on Chinese holdings of U.S. financial assets. ... Such a tax is allowed under international rules...
Taxing Chinese assets would certainly raise hackles in China, yet Chinese leaders would have no way to retaliate in kind... By taxing the precise actions that cause distorted exchange rates, the United States would increase the incentive for China and other currency manipulators to allow the values of their currencies to reflect market fundamentals. ...
Free Exchange at The Economist asks (based on this article):
Are randomized trials likely to be an important part of future economics research? How meaningful and useful are the results of such studies? Can experimental economics be usefully and broadly applied outside the field of development economics?
Here's my response: The Structure of the Economy May Change Faster Than We Can Learn About It. Here are all responses (more to follow).
There is a plausible plan to a balanced budget that preserves the social safety net, but we aren't hearing much about it:
Let’s Take a Hike, by Paul Krugman, Commentary, NY Times: When I listen to current discussions of the federal budget, the message I hear sounds like this: We’re in crisis! We must take drastic action immediately! ...
You have to wonder: If things are that serious, shouldn’t we be raising taxes, not cutting them? ... Consider the Ryan budget proposal, which ... begins by warning that “a major debt crisis is inevitable” unless we confront the deficit. It then calls ... for tax cuts, with taxes on the wealthy falling to their lowest level since 1931.
And because of those large tax cuts, the only way the Ryan proposal can even claim to reduce the deficit is through savage cuts in spending, mainly falling on the poor and vulnerable. (A realistic assessment suggests that the proposal would actually increase the deficit.)
President Obama’s proposal is a lot better. At least it calls for raising taxes on high incomes back to Clinton-era levels. But it preserves the rest of the Bush tax cuts... And, as a result, it still relies heavily on spending cuts, even as it falls short of actually balancing the budget. ...
The ... only major budget proposal out there offering a plausible path to balancing the budget ... includes significant tax increases: the “People’s Budget” from the Congressional Progressive Caucus ... is projected to yield a balanced budget by 2021 ... without dismantling ... Social Security,... Medicare and Medicaid.
But if the progressive proposal has all these virtues, why isn’t it getting anywhere near as much attention as the much less serious Ryan proposal? ...
The answer, I’m sorry to say, is the insincerity of many if not most self-proclaimed deficit hawks. To the extent that they care about the deficit..., it takes second place to their desire to do precisely what the People’s Budget avoids doing, namely, tear up our current social contract, turning the clock back 80 years under the guise of necessity. They don’t want to be told that such a radical turn to the right is not, in fact, necessary.
But, it isn’t, as the progressive budget proposal shows. We do need to bring the deficit down, although we aren’t facing an immediate crisis. How we go about stemming the tide of red ink is, however, a choice — and by making tax increases part of the solution, we can avoid savaging the poor and undermining the security of the middle class.
Sunday, April 24, 2011
Daniel Little cannot understand why the majority of Americans seem to accept recent societal and political changes that tilt the playing field in favor of those at the top:
Inequalities and the ascendant right, by Daniel Little, Understanding Society: The playing field seems to keep tilting further against ordinary people in this country -- poor people, hourly workers, low-paid service workers, middle-class people with family incomes in the $60-80K range, uninsured people... 75% of American households have household incomes below $80,000; the national median was $44,389 in 2005. Meanwhile the top one percent of Americans receive 17% of total after-tax income. And the rationale offered by the right to justify these increasing inequalities keeps shifting over time: free enterprise ideology, trickle-down economics, divisive racial politics, and irrelevant social issues, for example. ...
Meanwhile, the power of extreme wealth in the country seems more or less unlimited and unchallenged. Corporations can spend as much as they want to further candidates -- as "persons" with freedom of speech rights following Citizens' United v. Federal Election Commission (link). Billionaires like the Koch brothers fund the anti-labor agendas of conservative governors. Right-wing media empires dominate the airwaves. Well-financed conservative politicians use the language of "budget crisis" as a pretext for harshly reducing programs that benefit ordinary people (like Pell grants). Lobbyists for corporations and major economic interests can influence agencies and regulations in the interest of their clients, more or less invisibly. And billionaire lightweights like Donald Trump continue to make ridiculous statements about President Obama's birth status.
The political voice of the right, and the economic elite they serve, has never been louder. And it is becoming more reckless in its attacks on the rest of society. Immigrants come in for repressive legislation in Arizona and other states. Racist voices that would never have been tolerated a generation ago are edging towards mainstream acceptability on the right. Self-righteous attempts to reverse health care reform are being trumpeted -- threatening one of the few gains that poor and uninsured people have made in decades. And the now-systematic attack on public sector unions is visibly aimed at silencing one of the very few powerful voices that stand in the political sphere on behalf of ordinary working people.
The big mystery is -- why do the majority of Americans accept this shifting equation without protest? And how can progressive political organizations and movements do a better job of communicating the basic social realities of our economy and our democracy to a mass audience? Social justice isn't a "special interest" -- it is a commitment to the fundamental interests and dignity of the majority of Americans.
I'm not so sure that it is being accepted. People feel powerless to do anything about it, so in that sense it is accepted as a reality that cannot be changed. But when I talk to people I get the sense that there is a growing sense of frustration that could, at some point, explode into something more forceful, a Tea Party of sorts. I'm not saying that will happen, or even that it's inevitable that people will rise up against this. People may simply come to see it as the unchangeable new normal that must be tolerated, like it or not (which is where the "political organizations and movements" mentioned above have a role to play). But I do think, more than ever, members of the middle class are wondering who is looking out for their interests.
Which is worse--theft of pizza or hiding almost $5 million from the IRS?, ataxingmatter: In California, I seem to recall, some unlucky (and probably bullying) soul went to jail under the three strikes law for stealing a slice of pizza.
Now, a member of the elite class can file a false tax return to defraud the government (and all honest taxpayers) by hiding $4.9 million in assets in a Swiss bank and not filing tax returns and information reports as required and what does he get? Possible maximum sentence under the sentencing guidelines was 20 years. He got: 24 months probation. the taxes due. a $940 thousand civil penalty. (The penalty charge is only 50% of the assets he had hidden in one year--2004, even though it ostensibly could be charged for more years.) And a $10,000 fine.
This guy was clearly engaging in intentional tax evasion. When the UBS case came to light, he moved a million of his stash to Lichtenstein, hoping to stay ahead of the law. (Lichtenstein was even better at banking secrecy than the Swiss.) Then he made regular trips back to his Swiss bank to take out bunches of travelers' checks, trying to empty out his account.
The case is United States v. Vogliano, S.D.N.Y., No. 10 Cr. 327 (sentencing 4/21/11). You can read the plea agreement here Download Vogliano SDNY No. 10-cr-327. 122210 plea agreement.
Will the lack of jail time make all those scofflaws who had gotten worried about their tax information coming to light in the UBS case decide it isn't worth worrying about? Probation, after all, is just checking in with someone to show you're still around. They're probably living in their multimillion dollar townhouse, so what's not to like. These days, the "greed is good" crowd doesn't seem to have much shame. He'll end up paying about a fifth of the assets he had socked away, though. That's something.
We hear a lot about how you can't tax the wealthy, and if you don't really try -- if defrauding the government isn't particularly costly if you get caught, or even profitable -- that's probably true. But the solution isn't to throw up our hands, conclude the wealthy are too crafty for the rest of us, and give up. The solution is to try harder (which won't happen if Republicans keep cutting the budgets of the agencies charged with enforcing tax law).
Jon Faust of Johns Hopkins Center for Financial Economics:
Reject Greenspan’s Bleak Vision, by Jon Faust: Alan Greenspan recently argued in the FT that the Dodd Frank Act fails to meet the test of our times. In defense of this view, Greenspan paints a disturbing view of the modern world as a financial dystopia in which humans are at the mercy of a financial machine they have built but can no longer hope to manage. Greenspan argues,The problem is that regulators, and for that matter everyone else, can never get more than a glimpse at the internal workings of the simplest of modern financial systems. ... With notably rare exceptions (2008, for example), the global “invisible hand” has created relatively stable exchange rates, interest rates, prices, and wage rates.
... Greenspan’s bleak vision, like Orwell’s before him, may prove correct. My view is that the financial crisis was not a sad by-product of modernity but rather a new episode in a very old story: systems that allow risk taking and innovation are inherently subject to periodic crises. We can surely avoid another crisis by outlawing all risk taking. The alternative is to strive provide a stable backdrop in which productive risk taking can flourish. The history of progress financial progress has, arguably, been one of generally increasing stability -- in economies where development has been allowed to occur -- supported by an evolving system of market and political institutions, laws and regulations.
Greenspan is right that the Dodd Frank Act, like every hasty response to upheaval, is grossly imperfect. The Patriot Act comes to mind. The Federal Reserve Act of 1913 was itself a crisis response and was substantially modified over more than 20 years before reaching the form we recognize today.
We should continue the job of reform and not surrender to Greenspan’s dystopian vision.
Greenspan is yesterday's news, and the substance of what he says won't have much impact on policy. But what he is arguing is notable because it represents a common point of view that Dodd-Frank will do little except reduce economic growth and, to the extent possible, it should be reversed.
And the financial industry is taking advantage of this. While our attention is diverted to other matters, e.g. protecting social insurance from the latest onslaught from the right, the financial industry is quietly -- and in many cases successfully -- pushing to ease the restrictions in Dodd-Frank (you can track changes to Dodd-Frank here). Too many people still believe that anything that's good for the bottom line in the financial sector is good for America despite recent evidence to the contrary.
I don't think we'll ever be able to completely prevent crises, but we can reduce the damage that a crisis can do, and we can make crises rarer than they've been recently. However, that requires doing things that the financial industry does not like. With both parties dependent upon financial industry money to fund their reelection campaigns, and with so much of this under the public's radar, it's not at all clear that Congress will take the steps that need to be taken, or even hold the line on the regulations that are already in place.
Saturday, April 23, 2011
Matthew Yglesias via Brad DeLong:
Have We Won the Empirical Debate About Economic Policy, by Brad DeLong: Matthew Yglesias:
Yglesias » Pity For The Rich: You can tell something’s happening in the economic policy debate when you start reading more things like AEI’s Arthur Brooks explaining that it would simply be unfair to raise taxes on the rich. Harvard economics professor and former Council of Economics Advisor chairman Greg Mankiw has said the same thing. And of course Representative Paul Ryan is both a fan of Books and a fan of the works of Ayn Rand. Which is just to say that we used to have a debate in which the left said redistributive taxation might be a good idea and then the right replied that it might sound good, but actually the consequences would be bad. Lower taxes on the rich would lead to more growth and faster increase in incomes.
Now that idea seems to be so unsupportable that the talking point is switched. It’s not that higher taxes on our Galtian Overlords would backfire and make us worse off. It’s just that it would be immoral of us to ask them to pay more taxes even if doing so would, in fact, improve overall human welfare.
If that sounds remotely plausible to you, you might have a lucrative career ahead of you working as an apologist for said Galtian Overlords. If not, then congratulations for possessing a modicum of common sense.
The immorality is based upon the idea that the wealthy earned every penny they received and it would be immoral to take it away and give it to those who didn't toil as hard, as effectively, or at all (you know, the people whose wages have not kept up with their productivity). The arguments against the idea that pay at the top reflects merit alone are well known -- the contention hardly passes the laugh test -- and I won't repeat them here. But anyone who thinks the reward for crashing the financial sector ought to be unimaginable wealth should rethink their ideas.
Let me focus instead on the opening paragraph:
The Ryan plan is based on three premises. First, our economy is headed for a predictable disaster because of the ruinous levels of government spending. (Standard & Poors’ decision this week to downgrade its outlook for U.S. debt only confirms this worry.) Second, we already have one of the highest corporate tax rates in the world, and we can’t load more income taxes onto entrepreneurs without expecting collateral harm to jobs and economic growth. Third, therefore, we must cut spending and reform entitlements, and this would necessarily affect the nearly 70 percent of Americans who take more from the government than they pay in taxes.
On the first point, it's debt, not spending, that is at issue. You can have high spending with little debt if you are wiling to collect the taxes to support it. In addition, the problem is mainly rising health costs, not spending in general -- so that's what we ought to be talking about. We shouldn't let deception over where the true problem is lead us to solutions that meet the ideological goal of Brooks and others of smaller government, but do little to help solve the main problem.
On the second and third points, the third follows from the second, but the evidence for the second proposition is shaky at best even given the narrow way it is stated (income taxes on entrepreneurs as opposed to taxes more generally). We can raise taxes on the wealthy without harming economic growth, particularly since we are taxing away income that was earned on some basis other than merit (and even if we do buy into the claim that it is all merit, would you work substantially less if the reward this year was only $16 million rather than $20 million?). There is no solid empirical evidence that suggests that changes in taxes at the rates we are considering would have any meaningful effect on economic growth and employment. Thus, it is not true that our only choice is to cut spending -- the cuts would be too large to be tolerable anyway -- tax increases must also be part of the solution.
We've heard versions of these arguments before. But the only thing that seems to trickle down after tax cuts at the top is the hole in the budget they bring about, and the desire to pay for those cuts through cuts to programs that provide important benefits to middle and lower income households.
Update: Paul Krugman has a slightly different take on this:
On Pity for the Rich, by Paul Krugman: Matt Yglesias has a good question, but I don’t think that I agree with his answer. He points out thatwe used to have a debate in which the left said redistributive taxation might be a good idea nd then the right replied that it might sound good, but actually the consequences would be bad. Lower taxes on the rich would lead to more growth and faster increase in incomes.
but that now the right seems fixated on the point that taxing the rich is unfair — they made it, they should keep it.
And he suggests that the right is, implicitly, conceding that trickle-down economics doesn’t work.
But my take is that what we’re looking at is the closing of the conservative intellectual universe, the creation of an echo chamber in which rightists talk only to each other, and in which even the pretense of caring about ordinary people is disappearing. I mean, we’ve been living for some time in an environment in which the WSJ can refer, unselfconsciously, to people making too little to pay income taxes as “lucky duckies”; where Chicago professors making several hundred thousand a year whine that they can’t afford any more taxes, and are surprised when that rubs some people the wrong way. Why wouldn’t such people find it completely natural to think that the hurt feelings of the rich are the main consideration in economic policy?
Don’t let banks gamble with taxpayer money, by Roger E.A Farmer, Commentary, FT Forum: The US is in the process of implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act. In the UK, the Vickers Commission has released interim recommendations to “ring-fence” the retail operations of banks from their investment banking activities. The Vickers report is a model of clarity and if the ring fence proposals are implemented, they will have bite. But there is already a push from Lloyds to weaken the proposals of the interim report and that is only the opening salvo. The pressure from financial institutions for lax regulation will be intense. That pressure should be resisted.
The proposed reforms of both the Dodd-Frank act and the Vickers report will increase the amount of capital held by financial institutions by reducing leverage. Increased capital requirements will reduce the probability that any given institution will fail but they will not eliminate the moral hazard problem created by implicit government support for large financial institutions. That requires a more radical reform of the kind I have argued for elsewhere. ...
Current opinion among financial regulators is that the problem of financial instability can be solved by imposing higher capital requirements on banks. But higher capital requirements cannot prevent banks from taking excessive risks. In the 2008 crisis, commercial banks speculated in the US housing market by buying low grade mortgage backed securities that were mistakenly rated as triple A by the US ratings agencies. Somebody was asleep at the wheel.
I am not opposed to financial institutions taking risk. Risk is an integral part of the engine of capitalist growth. But Barclays, and other deposit taking institutions, should not be allowed to gamble with private deposits that are insured by government guarantees. There is a strong case to be made that effective reform requires the complete separation of retail and investment banking. That separation should be accompanied by restrictions on the assets that can be held by any institution that relies on government guarantees. Restrictions of that kind were part of the Glass-Steagal act that led to 60 years of relative economic stability. Dodd-Frank and the Vickers report make significant steps towards restoring the protections of Depression-era legislation. In my view, they do not go far enough.
I am also of the view that higher capital requirements alone -- especially as proposed -- won't be enough to stop bank failures and threats of systemic meltdown. I also don't believe that resolution authority will fully close off one of the main channels through which systemic breakdown occurs, runs on the shadow banking system (Economics of Contempt disagrees, but I think that the uncertainty over whether resolution authority will stop a systemic breakdown will lead to runs on the shadow system at the fist sign of widespread trouble).
Higher capital requirements can reduce the degree of damage in a crash, e.g. by reducing leverage, but crashes can still happen. For that reason, the only way to effectively stop runs in the shadow system is to provide some sort of deposit insurance coupled with strict regulations on how much risk can be taken by these institutions (along the lines of how deposits are protected in the traditional system). We can separate retail and investment banking, impose higher capital requirements, and force firms to have explicit resolution plans in the event of failure, and this will help, but these measures can't always prevent bank runs and systemic failure in the investment banking sector (and hence does not eliminate the need for a bailout).
To stop runs in this sector, there are two main types of proposals, The first is to enhance the quality of the collateral held against deposits in the shadow/investment bank system -- the collateral plays the role of insurance and is intended to prevent runs. But since the value of these assets cannot be guaranteed a priori (even government bonds could be a problem in the right circumstances), full protection cannot be guaranteed and runs are still a problem. The second proposal is to provide explicit, government insurance on deposits in the shadow system along with strict limits on risk taking behavior. It worked in the traditional system, and it can work here too. The argument against this is that it will limit shadow bank activity so much that economic growth will be reduced. However, these fears are likely overblown and I'd like to see more discussion along these lines.
But the reality is that the government is not going to provide explicit deposit guarantees in the shadow system, and bank runs leading to systemic collapse will remain a possibility (despite claims that resolution authority will prevent this). Since crashes are still possible, we need to make them as mild as possible, and one way to do that is to impose leverage reducing capital requirements that are substantially higher than what is currently being proposed (unwinding levered positions is one of the big contributors to a downward spiral in the financial system). The requirements as currently constituted are too small, come online too slowly, and do not offer the protection we need. I doubt very much, however, that we will see any increases in these requirements. With the political power of banks we'll be lucky to maintain the increases that have been proposed. Thus, despite all the calls to shore up the financial system to prevent another crisis, critical vulnerabilities will remain.
Friday, April 22, 2011
This was suggested by Nicolas Lepage-saucier via email, along with the following comments:
The increasing inequality in the US in recent years is hard to deny. But what should we make of it? Lucas (2004) thinks it is unimportant:Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution...The potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production.
Richard Wilkinson begs to differ. I haven't found a nice presentation of his book, but his presentation is quite interesting:
[the talk begins at the 5 minute mark.]
I don't question the correlations. But causation? I suspect there is an underlying common variable: More compassionate societies care to improve social outcomes and one of these is to reduce poverty at the bottom of the distribution.
I am also hesitant to conclude that the correlations are causal, but what do you think?
Curious to hear your answers to this question:
I'm asking because it seems to me that there is far too much discussion of cutting services, and not enough about how to control costs without affecting services (e.g., using the government's purchasing power to reduce the amount the government pays for drugs, reducing the cost of insurance companies fighting over who pays bills, etc.). Costs that can be cut without reducing services need to come first, then, when those efforts are exhausted, we can think about the services themselves. But that doesn't seem to be how we are proceeding.
[Click on question to answer, and please remember, one comment per person so take your time and be sure you've covered all the points you'd like to make.]
Who is in the best position to make the difficult decisions that will be required to control health care costs?:
Patients Are Not Consumers, by Paul Krugman, Commentary, NY Times: Earlier this week, The Times reported on Congressional backlash against the Independent Payment Advisory Board, a key part of efforts to rein in health care costs. ...
The board, composed of health-care experts, would be given a target rate of growth in Medicare spending. To keep spending at or below this target, the board would submit “fast-track” recommendations for cost control that would go into effect automatically unless overruled by Congress.
Before you start yelling about “rationing” and “death panels,” bear in mind that we’re not talking about limits on what health care you’re allowed to buy with your own (or your insurance company’s) money. We’re talking only about what will be paid for with taxpayers’ money. ...
And the point is that choices must be made; one way or another, government spending on health care must be limited.
Now, what House Republicans propose ... is that we replace Medicare with vouchers that can be applied to private insurance, and that we count on seniors and insurance companies to work it out somehow. This, they claim, would be superior to expert review because it would open health care to the wonders of “consumer choice.”
What’s wrong with this idea (aside from the grossly inadequate value of the proposed vouchers)? One answer is that it wouldn’t work. “Consumer-based” medicine has been a bust everywhere it has been tried. ...
But the fact that Republicans are demanding that we literally stake our health, even our lives, on an already failed approach is only part of what’s wrong here. As I said earlier, there’s something terribly wrong with the whole notion of patients as “consumers”...
Medical care, after all, is an area in which crucial decisions — life and death decisions — must be made. Yet making such decisions intelligently requires a vast amount of specialized knowledge. Furthermore, those decisions often must be made under conditions in which the patient is incapacitated, under severe stress, or needs action immediately, with no time for discussion, let alone comparison shopping.
That’s why we have medical ethics. ... The idea that ... doctors are just “providers” selling services to health care “consumers” — is, well, sickening. And the prevalence of this kind of language is a sign that something has gone very wrong not just with this discussion, but with our society’s values.
Thursday, April 21, 2011
Do high income individual flee states with high tax rates? Apparently not:
Millionaires don’t flee from ‘millionaire’s taxes’, by Ezra Klein:
When anyone brings up new taxes on the rich, the big objections is that such taxes end up being counterproductive because the rich simply flee to places that don’t tax them. ...
A few years ago, New Jersey instituted a tax that raised rates on those making more than $500,000. Predictably enough, some clever academics swooped in to test the prediction that all the rich folks would leave. So how’d it fare? Poorly:The study found that the overall population of millionaires increased during the tax period. Some millionaires moved out, of course. But they were more than offset by the creation of new millionaires.The study dug deeper to figure out whether the millionaires who were moving out did so because of the tax. As a control group, they used New Jersey residents who earned $200,000 to $500,000 — in other words, high-earners who weren’t subject to the tax. They found that the rate of out-migration among millionaires was in line with and rate of out-migration of submillionaires. The tax rate, they concluded, had no measurable impact.
The study went on to conclude that “the policy effect is close to zero,” though if it exists for anyone, it’s for the over-65 crowd who live off their investments.
Update: See here too.
Do you think everyone really lived happily ever after?:
Should Sheila Bair be nominated to lead the Consumer Financial Protection Board?:
Sheila Bair for CFPB Director (Really), by Economics of Contempt: The White House is evidently having trouble finding a nominee for director of the Consumer Financial Protection Bureau (CFPB). The list of people who have passed on the job includes former Michigan Gov. Jennifer Granholm, former Sen. Ted Kaufman, Massachusetts AG Martha Coakley, Iowa AG Tom Miller, and Illinois AG Lisa Madigan.
Elizabeth Warren, who is currently setting up the CFPB as a “Special Advisor” to the Treasury Secretary, just can’t get the 60 votes required for Senate confirmation. She couldn’t get 60 votes last year, when there were 59 Dems in the Senate... So her chances of getting 60 votes now that there are only 53 Dems in the Senate are somewhere between exceedingly slim and none. Obama could technically recess appoint Warren, and while the chances of that happening have probably gone up, I’d still be very surprised if he did.
I think Obama should seriously consider Sheila Bair for the CFPB job. As a preliminary matter, she can definitely get 60 votes in the Senate. I know that Chris Dodd approached her last year about the job, and she said she wasn’t interested, but that was then. She still had a year left at the FDIC when Dodd approached her. Now, with only a couple months left at the FDIC, she might be more receptive. Plus, a personal appeal from the president is pretty hard to turn down. ...
I haven’t been the biggest Sheila Bair fan in the past, but I’ve more or less made my peace with Bair. I still think she’s a self-promoter, and cares too much about her image in the media. But, to her credit, when it comes down to brass tacks on issues that really matter, she always ends up doing/saying the right thing rather than the popular thing.
Bair is also fiercely territorial, which sometimes bleeds into parochial. During the financial crisis, this was supremely unhelpful. But I think this would be one of her greatest strengths as the CFPB director. Given the CFPB’s bizarre legislative structure, in which the Financial Stability Oversight Council (FSOC) can veto the CFPB’s rulemakings, you want a CFPB director who is territorial, and maybe even a bit parochial. ...
Why not make a recess appointment? Republicans might get mad, but nothing new there, they're always mad -- who would notice? And even if they did notice, so what?
Update: I received this comment via Twitter:
Same char 4 a man it's just alpha & a leader, but 4 a woman, disqualifications?
I think it's a good question.
Ryan-Republican Plan Requires Debt Ceiling To Be Raised By $6 Trillion, by Stan Collender: Over at The Washington Post, Matt Miller has a wonderful column that says what needs to be said about the current budget debate as directly and angrily as it can be stated: "“The House Republican budget adds $6 trillion to the debt in the next decade yet the GOP is balking at raising the debt limit."
...The new definition of chutzpah is Republicans who vote for the Ryan plan that adds trillions in debt and who then say the debt limit goes up only over their dead bodies!
...Matt suggests that Barack Obama should use as his mantra as he tours the country "...that we should lift the debt limit only by as much debt as is needed to accommodate Paul Ryan’s budget." Along the same lines, I don't understand why House Democrats didn't offer an amendment during the debate on the budget resolution last week that would have raised the debt ceiling by enough to accommodate the additional borrowing in the Ryan plan. That would have forced every Republican to vote on it rather than allowing them to avoid the issue.